Buffett Criticizes Hedge Funds in Omaha

By Philip Klein (2004.05)

OMAHA, Neb. (Reuters) - Warren Buffett on Saturday criticized hedge funds and warned of the dangers of derivatives and looming inflation in front of nearly 20,000 shareholders who trekked to Omaha, Nebraska for the annual meeting of his Berkshire Hathaway Inc.

Buffett, the world's second richest person, took questions from shareholders for nearly six hours along with his longtime partner, Charlie Munger. He also responded to shareholder groups who criticized his role on the board of directors at Coca-Cola Co.

Buffett called hedge funds a "fad" that was more about Wall Street marketing than sound investing.

"People that are now investing in hedge funds in aggregate are going to be disappointed," Buffett, who is known as the "Oracle of Omaha," said. The fees that hedge fund managers charge were unfair, he said.

Buffett said he was seeing inflation 'heat up' in the United States. Berkshire owns dozens of businesses including insurer GEICO, apparel maker Fruit of the Loom and ice cream chain Dairy Queen.

He told shareholders the companies that will be best suited for this environment will be ones that either have unique products and services or are less dependent on purchasing inflation sensitive goods.

Buffett responded to critics, California pension fund Calpers and shareholder advisory group ISS, who argued for withholding votes for him on the Coke board because ice cream chain Dairy Queen and food distributor McLane do business with the soft drink company.

Buffett, an advocate of boardroom reform, said that while their intentions may be proper, these shareholder groups have taken too technical an approach to corporate change.

"The problem is a checklist," Buffett said in an interview with Reuters before the meeting. "The idea that you do a little business with Coke, and it doesn't matter that you own 200 million shares." Berkshire's ownership represents 8.2 percent of Coke.

He later addressed the issue in his remarks to shareholders, saying, "a checklist is no substitute for thinking."

He also told Reuters that the Coke board would soon conclude the search for a replacement to retiring Coca-Cola Chairman and Chief Executive Doug Daft, which has entered a third month, making some investors jittery.

"That will be resolved fairly soon," Buffett said.

In his remarks to shareholders, he used the example of the $6 billion accounting scandal at mortgage financier Freddie Mac to demonstrate the risks of derivatives.

Despite having intelligent board members, being chartered by the U.S. Congress, and being followed by dozens of Wall Street analysts, he said Freddie Mac could not get a hold on the complexity of these financial instruments.

"Sometime in the next 10 years you will have a huge problem that will either be caused by or accentuated by people's activities in derivatives," he said.

Buffett said that the larger Berkshire gets, the more difficult it is to find places to park its money.

"It gets harder all the time to deploy all the funds that come into Omaha," Buffett said. The company was sitting on a stockpile of $31 billion in cash at the end of 2003.

Buffett told the audience not to rely on financial consultants and was especially critical of those who advise some sort of specified 60-40 percent split between stocks and bonds.

"It's nonsense," he said. Instead, Buffett advised the audience to seek out bargains no matter what type of investments they are.

Buffett, whose net worth was estimated by Forbes at $42.9 billion, reflected on some of his mistakes. He said by being trigger shy on buying into Wal-Mart Stores Inc., he cost Berkshire $10 billion.

"If every shot was a hole in one it wouldn't make the game very interesting," Buffett said. "You have to hit balls in the woods a few times."