Omaha, NE – World’s Most Successful Investor Warren Buffet: I Was Dumb

Omaha, NE – Billionaire investor Warren Buffett admitted to doing some “dumb things” in 2008 – the worst year for his Berkshire Hathaway conglomerate in the 44 years he has run it.

A brutal stock market decline amid a teeth-gnashing recession pushed Omaha-based Berkshire to a 96 percent drop in profits, its fifth straight quarterly earnings decline.

In his much-anticipated letter to shareholders yesterday, Buffett, known as the Oracle of Omaha for his decades-long record of picking value investments, said buying shares of oil producer ConocoPhillips when gas and oil prices were at their peak was perhaps the dumbest move in 2008.

Berkshire bought 84.9 million shares of ConocoPhillips at about $82 a share – it closed Friday at $37.25, costing Buffett a paper loss of $2.6 billion.

“I still believe the odds are good that oil sells far higher in the future than the current $40-$50 [per barrel] price,” Buffett wrote in the letter. “But so far I have been dead wrong.”

In his usual folksy writing style, Buffett, as is his annual custom, explained to shareholders over 21 pages his investment philosophy – “When investing, pessimism is your friend, euphoria the enemy.” He also isn’t shy about admitting mistakes.

For example, in discussing Berkshire’s buying and selling of derivatives, the seemingly indecipherable risk insurance product, Buffett told shareholders: “In last year’s letter, I told you I expected these contracts to show a profit at expiration. Now, with the recession deepening at a rapid rate, the possibility of an eventual loss has increased.”

In addition to Berkshire and the performance of its insurance, energy, retail, jet-leasing and other units, Buffett, the chairman, president and chief risk officer, took time out to chide private equity firms, mortgage brokers, non-banks that have converted into banks to gain low-cost federal financing, monoline bond insurers and a host of other companies that helped bring about or are, in his view, gaining an unfair advantage during the recession.

On private equity firms: “[A] name that turns the facts upside-down. A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing.”

* On Washington’s rescue of Bear Stearns: “Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”

* On past White House administrations’ goal of increasing home ownership: “Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be that ambition.”

* On mortgage brokers who gave no-money-down loans: Home purchases should involve an “honest-to-God down payment of at least 10 percent. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence, even if its value today is less than the mortgage.”

After taking his licks last year, Buffett looked ahead to 2009 and said he expected the economy will be “in shambles” for the rest of this year as Wall Street banks continue to take losses tied to reckless loans made during the housing boom.

Despite Berkshire’s poorest-ever performance in 2008, the 78-year old investor was still able to beat the S&P 500 Index, as he has in all but six years since he took over management of Berkshire in 1965. Over that span, shareholders have pocketed average annual returns of 20.3 percent.

So while Buffett may have posted just his second down year over that span, don’t expect angry shareholders to storm the annual meeting on May 3. In fact, Buffett recently implemented a lottery system this year to ensure that the tens of thousands of investors who trek to Omaha aren’t stampeded when the doors to the meeting open at 7:30 a.m. that morning.

Berkshire shareholders, like brides-to-be at the Filene’s Basement annual mad-dash for discounted wedding gowns, often rush to be at one of the 12 microphones in the arena – the better to be in position to lob fawning questions at the Oracle.

“This is not desirable from a safety standpoint,” Buffett wrote. “At age 78, I’ve concluded that speed afoot is a ridiculously overrated talent.”