When it comes to investing, stick with what you know.
It’s the kind of plainspoken advice that Warren E. Buffett, the legendary financier, has been dispensing to investors for decades.
Buffett sat on the sidelines during the dot-com boom and bust because, he said, he did not understand the industry well enough.
On Wednesday, though, Buffett testified that he did not know all that much about the credit rating market, even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Service.
“I’ve never been to Moody’s,” he said at a hearing of the Financial Crisis Inquiry Commission. “I don’t even know where they’re located. I just know that their business model is extraordinary.”
Buffett’s remarks about Moody’s business could be interpreted as a rhetorical flourish meant to put distance between him and the company. He appeared under subpoena after declining an invitation.
Pressed to explain how it was possible that he did not have an intimate knowledge of Moody’s operation, Buffett offered the example of another of his holdings, Johnson & Johnson. Citing the recent recall of some of the company’s Tylenol products, he said that he did not know the inner workings of the drug maker’s labs but that he had faith in the company’s reputation.
Likewise, he said that Berkshire Hathaway had 260,000 employees and at least one of them was doing something wrong at that moment. He just wished he knew who it was.
Moody’s was the subject of the hearing as part of the commission’s examination of why rating agencies like Moody’s, S&P’s and Fitch gave top investment grades to mortgage-related bonds that were later downgraded to junk after the housing collapse. Berkshire owns about 13 per cent of Moody’s, down from about 20 per cent.
Appearing for two hours of questioning alongside Moody’s chief executive, Raymond W. McDaniel Jr., Buffett declined to say that McDaniel should have been fired for what proved to be inaccurate ratings.