Warren Buffett, you've let us down. Sure, you're a brilliant and sage investor, which is why a simple lunch with you still goes for $2.6 million -- which someone paid earlier this month in a charity auction.
Now, I'm not so presumptuous as to try to instruct Buffett. He's the sort of maestro one learns from. (In fact, one of my best-read columns ever for this website is "10 investing basics from Buffett.")
With that in mind, here are a few investing lessons for Buffett -- from his very own rule book, which he may have misplaced of late.
Lesson No. 1: Invest in what you knowA key Buffett rule: When you don't understand how a company makes money, avoid it. Buffett calls this "staying within your circle of confidence." This philosophy famously had him mostly in safer stocks such as a decade ago when the tech bubble burst.
So Buffett's recent statement that he knew little about what went on at Moody's during the housing bubble is a real shocker. Buffett's company,, is a major Moody's stockholder. Critics say Moody's was complicit in the mortgage meltdown because it gave high ratings to dubious subprime-backed debt, stoking the lending machine that fed the bubble.
When asked by the Financial Crisis Inquiry Commission this month whether he was satisfied with internal risk controls and oversight by Moody's management, Buffett said he didn't know much about how ratings on mortgage-backed securities were done. "I have never been to Moody's," he said. "I don't even know where they are located."
That seems like a basic violation of his rule to know what you own, and it theoretically cost him $120 million. That's how much Buffett would have saved if he had sold his current 30.7 million-share Moody's position near the peak for the stock, above $60 a share in 2007, because he didn't know what they were doing. Instead, he held as the housing bubble popped. The stock recently sold for $21.
Buffett told the commission he mainly liked the company's pricing power from being one of a handful of companies offering debt ratings, an advantage the company still has, points out Todd Lowenstein, a co-portfolio manager of the HighMark Value Momentum Fund (HMVMX).
Buffett also said it's common for him to own companies without knowing the details of how they operate. "We own a lot of. . . . I don't know how they make Tide."
But with all due respect to the oracle, we all understand Tide. Rating high-risk mortgage-related debt instruments that even the experts didn't understand is a different thing.
Key takeaway: When you don't really understand what a company does, don't own it.