Any other business | 7 May 2011

Warren Buffett isn’t always right – but he’s a $47 billion advertisement for optimism

The legendary investor Warren Buffett has taken more flak than seems necessary for his lapse of judgment over his former lieutenant David Sokol, who bought shares in a company called Lubrizol before recommending it to Buffett as an acquisition for the Berkshire Hathaway conglomerate. Having been tipped as a potential successor if 80-year-old Buffett ever retires from running Berkshire, Sokol resigned abruptly in March. Buffett’s comment at the time, ‘Neither Dave nor I feel his Lubrizol purchases were in any way unlawful’, was widely regarded as inadequate. Belatedly, he introduced phrases such as ‘inexplicable and inexcusable’, but the incident provoked whispers that the great stock- picker, hitherto a pillar of Midwestern principle in contrast to the sharks of Wall Street, is losing his touch. And that dampened the usually fun-filled Berkshire shareholders’ meeting in Omaha, Nebraska, last week.

That’s a pity, because Buffett is still worth listening to — for example, when he talks about why he prefers to buy shares in companies (or simply buy whole companies) with strong cash flows and hold them ‘for ever’, rather than following the fashion for gold. If you took all the gold ever mined, he said recently, it would make a 67-foot cube — and at a price above $1,500 an ounce, that would buy all the farmland in America plus ten companies the size of Exxon Mobil, still leaving you a trillion dollars of change in your pocket. ‘Or you could have a big cube of metal. Which would you take? Which is going to produce more value?’

Buffett’s greatest merit is his belief that the market system has rewarded him disproportionately for his work, and that he therefore has an obligation to invest in ways that, by directing capital towards well-managed companies, generate wider economic benefits.