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Dec.16

12:27 PM ET

Tuesday, 16 Dec 2008

Warren Buffett: People Thought "I Was Doing Some Sort of Ponzi Scheme"

Posted By:Alex Crippen

Topics:Crime | Bernard Madoff | Warren Buffett

Companies:Berkshire Hathaway Inc.

"There were people in Omaha who thought what I was doing was some sort of Ponzi scheme."

That's Warren Buffett talking about his early days as a money manager in the late 1950s, before Berkshire Hathaway, as quoted by Alice Schroeder in her recent Buffett biography The Snowball. (Page 221)

It wasn't an unreasonable thought.

Buffett was less than 30 years old, and looked even younger than he actually was. One of his early investors recalls that he looked like he was 18. "His collar was open; his coat was too big. He talked so very fast."

And, writes Schroeder, this young, brash, "immature" man who no one knew very well was dictating "ground rules" for entry into one of his investing partnerships.

Buffett "wanted absolute control over the money and would tell his partners nothing about how it was invested... His solution to the problem of people being disappointed was that he wasn't going to give them the score after every hole, only once a year after playing eighteen holes. They would get an annual summary of his performance, and they could put money in or withdraw it only on December 31."

The performance of those partnerships, as reported by Buffett alone from his home office where he handled all the details himself, was consistently better than the stock market's returns.

Now, roughly 50 years later, we're hearing how there were many "warning flags" in the Bernard Madoff investment fraud, which may total as much as $50 billion. The returns were too consistent. Madoff was too secretive, working on a separate floor from the rest of the firm's operations. Some investors, they're now proud to say, stayed away because it just seemed too good to be true.

Life involves taking risks. The tricky part is deciding which risks are worth taking. You can think, and weigh, and investigate, but there's no certainty.

Warren Buffett created billions of dollars of wealth. Bernard Madoff, if his reported admissions prove to be true, has destroyed billions of dollars of wealth.

To their investors, both Buffett and Madoff appeared to be honest and trustworthy. In reality, only Buffett deserved that trust.

And that raises a question that's been knocked around by philosophers and playwrights for a very long time: Can we really know what's reality and what's illusion?

Ultimately, it's a matter of faith.

Current Berkshire stock prices:

Class A: [US;BRK.A Loading... () ]