Buffett admits to "dumb" decisions; hints at Indian successor

Legendary investor Warren Buffett has blamed himself for making certain “dumb” investment decisions last year and has hinted at India-born Ajit Jain becoming the possible successor for his businesses. Warning that the downturn could well continue for a longer time, Buffett has said the economy would be in shambles throughout 2009.

“During 2008, I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. “Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action,” the much revered investor wrote in his annual letter to the shareholders.

Showering praise on Jain, who handles the reinsurance division, Buffett noted that there is no one like him and added that his business is “never the same”. “Ajit came to Berkshire in 1986. Very quickly, I realised that we had acquired an extraordinary talent. So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home.

“Of course, I knew the answer before writing. There isn’t anyone like Ajit,” Buffett said. A former McKinsey executive, Jain is looking after reinsurance division, “headquartered in Stamford and staffed by only 31 employees”. Noting that this business may be one of the most remarkable in the world, the billionaire investor said that it is hard to characterise but easy to admire.

“From year to year, Ajit’s business is never the same. It features very large transactions, incredible speed of execution and a willingness to quote on policies that leave others scratching their heads. When there is a huge and unusual risk to be insured, Ajit is almost certain to be called,” Buffett pointed out.

In a sign of the financial meltdown even hitting Buffett badly, Berkshire Hathaway, his holding company which manages diverse businesses, saw the entity’s net worth decline as much as 11.5 billion dollars in 2008. He pointed out that “a series of life-threatening problems within many of the world’ s great financial institutions was unveiled” last year.

Asserting that the economy would be in “shambles throughout 2009 and, for that matter, probably well beyond, the legendary investor said that conclusion does not tell us whether the stock market would rise or fall. Buffett noted a major mistake was buying ConocoPhillips shares when oil and gas prices were near their peak. “I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year… Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars,” he said.

According to him, “other already-recognisable errors” committed include buying shares of two Irish banks’. “During 2008, I spent 244 million dollars for shares of two Irish banks that appeared cheap to me. “At year end, we wrote these holdings down to market: 27 million dollars, or an 89 per cent loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes unforced errors,” Buffett said. He noted that derivatives are “dangerous” and that they have increased the leverage and risks in the financial system.

On derivatives contracts, Buffett said they go unsettled for years, with counterparties building up huge claims. “A frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in hands of a few large dealers who are apt to be highly-leveraged in other ways. “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with,” he added.

Source..