Buffett: "Beware Of Geeks Bearing Formulas"

The New York Times reports:

• The renowned investor Warren E. Buffett chided himself and the business world at large in his annual letter to shareholders of his holding company on Saturday as he sifted through the wreckage of his worst year in four decades.

This excerpt reflects Buffett's view on one reason for the huge losses in mortgage-related securities:

• “The stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors,” he wrote. He went on: “These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford.”

• Also blissfully ignored, he wrote, were the perils of relying on mathematical models devised without worst-case situations in mind. Too often, he wrote, Americans have been enamored of “a nerdy-sounding priesthood, using esoteric terms such as beta, gamma, sigma and the like.”

• Some skepticism about these models is overdue, he added. “Our advice: Beware of geeks bearing formulas.”

For more, see In Letter, Warren Buffett Concedes a Tough Year.