Thursday, February 7, 2013

Legendary investor Warren Buffett may well have fallen short of following the adage 'Practice what you preach'. Indeed, Buffett is renowned for the investment gems that he doles out annually in the Berkshire Hathaway annual reports. One such was the importance of sticking within one's circle of competence. This means that investors should invest only in those businesses that they understand and stay away from those that they do not. But it now seems that he may have forgotten his own advice. And this has become apparent with none other than his investment in the credit ratings agency Moody's.

A few years ago, Buffett admitted in a Congressional hearing that he didn't know much about credit rating agency Moody's or the credit ratings market in general. Yet, as of September 30, 2012, Berskhire owns 13% stake in it. And the value of this investment has plunged. Berkshire is likely to have lost around US$ 291 m on the same. It is no secret that credit rating agencies have come under fire for their role in the run up to the global financial crisis. Moody's rival S&P in particular is being investigated for allegedly inflating its mortgage bond ratings. Moody's may not necessarily face the same problem. But we wonder why Buffett would choose to invest in a sector which is notorious for problems relating to conflict of interest.