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Oct.27

10:59 AM ET

Monday, 27 Oct 2008

WSJ to Warren Buffett: "Time to Get a New Crystal Ball"

Posted By:Alex Crippen

Topics:Derivatives | Investment Strategy | Stock Market | Warren Buffett

Companies:Berkshire Hathaway Inc.

Warren Buffett: Bad Timing?
Warren Buffett has gotten greedy too quickly while everyone else takes too long to become fearful, suggests the Wall Street Journal in today's "Heard on the Street" column.

Under the headline Even the Oracle Didn't Time It Perfectly, Peter Eavis writes that while Buffett has won "plaudits for some canny deals," there's also an "unnerving pattern emerging."

"Mr. Buffett looks to be committing his capital too early. On some bets, waiting might have gotten him better terms or more attractive entry prices."

"Time for the Oracle to get a new crystal ball," according to Eavis.

He acknowledges that Buffett doesn't try to time his investments too closely, and says he's not launching a "cheap gibe" based on the S&P's 7 percent decline since Buffett's 'I'm Buying U.S. Stocks' op-ed piece in the New York Times on October 17.

Instead, Eavis focuses on two bets Berkshire Hathaway has placed on derivatives.

In one, Berkshire received large payments to provide default protection for "certain junk-rated corporations" in North America. The company has already booked hundreds of millions of dollars in mark-to-market losses on its exposure to these credit default swaps. "Berkshire more than doubled it notional exposure on these CDS to $8.8 billion between the end of 2006 and the middle of this year."

Eavis predicts, "Given the deterioration in the credit markets, the third quarter hit on them could be large."

(Mark-to-market means the contracts are valued at what they would sell for in the current marketplace, even though Berkshire isn't selling them now. Those mark-to-market losses remain theoretical unless and until the contracts are actually sold or there's a default, but they still must be reported as losses in Berkshire's quarterly earnings reports.)

Berkshire's other growing derivatives bet involves very long-term options that will become profitable if four stock indexes around the world go higher over a period of years. Eavis notes that Berkshire added to its positions last year and into the first half of this year. Again, Buffett expects they'll make a lot of money eventually, but right now they're not much all that much.

Eavis argues that the trades suggest Buffett "was relatively comfortable about the prospects for U.S. corporations and global stocks at a time when some were predicting a bust."

While there may indeed be long-term profits, Eavis writes that Buffett has tied up money that could be have used for trades that would generate larger profits more quickly.

MORE DOUBTS ABOUT THE ORACLE

While the Journal is a high-profile skeptic, there's are other Buffett-doubters out there, especially when it comes to his public call to buy U.S. stocks now.

A common theme is that as a billionaire, Buffett can afford to put his money down now and wait for the profits, which could be years away. The rest of us have more pressing problems.

In the Times of London, Jennifer Hill argues that Buffett Is Wrong: The Market Madness Is Still Far From Over.

In Canada, the National Post's Diane Francis echoes the sentiment with Buffett Is Wrong: Avoid Stocks and Buffett Is Wrong: Part II.

On Seeking Alpha, Brian Keith Anderson lists 5 Reasons to Ignore Buffett and C.S. Jefferson asks "What If Warren Buffett Is Wrong About the Markets?"

There are also defenders, of course, including the often pessimistic Doug Kass, who made a profitable short-term bet against Berkshire Hathaway's stock price this year.

The key question, as it often is when talking about Warren Buffett and his famously long-term view of things, is whether an investor sees enough future pleasure to overcome pain in the present.

Buffett's investing record suggests we should be looking very carefully.

Current Berkshire stock prices:

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