The billionaire stockpicker Warren Buffett has been stripped of his business empire's top-notch credit rating after a series of self-confessed "dumb" decisions contributed to his worst year in four decades.

The rating agency Moody's downgraded Buffett's Berkshire Hathaway investment company by two notches from triple-A to AA2. The setback is a blow to the prestige of the world's second richest man, who commands a vast following among private investors across the US.

Moody's said the capital cushion of Berkshire's core insurance operations had been eroded by 22% as its stock holdings lost value. Elsewhere in Buffett's sprawling portfolio, businesses tied to construction, retailing and consumer finance suffered a squeeze in the recession.

Moody's analyst Bruce Ballentine said the downgrade reflected "the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted recession".

Some of Berkshire's non-insurance businesses have not been spared in the US recession "which has caused a meaningful drop in earnings and cash flows, particularly for businesses tied to the US housing market, construction, retailing or consumer finance," Ballentine said.

"The downgrade of the parent company rating to AA2, from AAA, reflects the potential for further declines in the support available from these dual sources."

While Berkshire posted a net profit of $4.99bn for 2008, its assets have lost nearly a tenth of their value.

Berkshire has already lost its top credit rating at rival agency Fitch, which pointed to its reliance on its 78-year-old founder, known as the Sage of Omaha. The third major credit-rating agency, Standard & Poor's, has kept the company's top rating but put it on "negative" watch for a possible downgrade.

The investor has had to tell shareholders in his company that 2008 had been the worst year since he took the helm 44 years ago.

The Nebraska-based billionaire has businesses ranging from Fruit of the Loom underwear to Geico insurance, Justin Brands cowboy boots and Dairy Queen cafes. In Britain, Berkshire has a 4% stake in Tesco and owns Yorkshire Electricity and Northern Electric through a holding company, MidAmerican Energy.

Usually a consistent performer, Berkshire saw its book value drop by 9.6% a share in 2008, its worst performance since Buffett took the reins in 1965.

In his annual letter to shareholders in February, Buffett admitted he had done what he called some "dumb things" as the global financial crisis worsened, including errors of omission: "Sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."

Loss-making manoeuvres included buying stock in the energy firm ConocoPhillips just as oil prices peaked. Financial holdings such as US Bancorp, Wells Fargo and American Express have taken a battering from the credit crunch. Buffett also suffered an 89% loss after investing $244m in two unnamed Irish banks.

In Forbes magazine's annual rich list, Buffett has lost his spot as the world's wealthiest man to Bill Gates after seeing his personal fortune slump by an estimated $25bn to $37bn. Buffett, who cites Cherry Coke as one of his main vices, has pledged the bulk of his wealth to Gates' charitable foundation for healthcare in developing countries.

Moody's rating downgrade applies to Berkshire's long-term debt and to its insurance subsidiary, National Indemnity Corporation. Berkshire's short-term borrowing is unaffected and the group's other major insurers have suffered a one-notch downgrade.

Lower ratings are likely to make it more expensive for Berkshire to borrow and could affect the pricing of its insurance policies. Coincidentally, Moody's is 20% owned by Berkshire Hathaway, though Buffett has made it clear that he has no involvement in its management.

Tens of thousands of people are expected to flock to Omaha next month for Berkshire's annual shareholder meeting. Many of his admirers see themselves as long-term followers and are unlikely to be deterred by a single poor year.

Justin Fuller, a Chicago investment manager who runs a website called Buffettologist.com, said that ratings agencies were queasy about giving top-notch ratings after misjudging the banking crisis.

"The rating agencies have made a lot of mistakes over the last couple of years and now they've got an overly conservative mentality," said Fuller, a partner at Midway Capital Research & Management.

He said nobody, including Buffett, was immune from the downturn but added: "When people start to throw him under a bus and say he's lost his touch, that's usually a signal to me to be buying Berkshire Hathaway stock."