A young guy from the U.K. has been writing me this morning. He has been making a case for why Buffett is the best investor ever. I have said, “Sure up until his bailouts and sweetheart government daddies helped save him in the Fall of 2008. If not, he was toast.” The young guy responded:
As regards the bailout, to be frank, if there wasn’t a bailout last year, it wouldn’t have been just BRK that went down the tubes - it would have been the entire global economic system. The disintegration of the banking system = no more credit = extreme deflation. Dunn Capital Management and every other business wouldn’t have been able to get short-term credit to pay its employees and suppliers. Asset prices would have gone into the abyss. If you think that trend followers would have made money in such conditions, remember that (a.) the rule of law and the enforceability of legal claims on assets may well have broken down, leading to civil disorder (b.) markets may well have failed to function, (c.) there would be no access to assets held by prime brokers, because they’d have gone down with the banks (see LEH). Basically anyone without tinned food and a log cabin in Montana would have lost under such a situation. BRK with its oodles of cash and AAA credit rating would have been one of the last to fail. My point is that you have to disassociate the investor and his record from the company - if for some reason Dunn failed under such a scenario, it wouldn’t reflect on Dunn as an investor, because we are talking about an event that has nothing to do with his skill as an investor. So, yes, maybe Buffett did manipulate the system to his advantage, but would we all honestly rather he hadn’t? Personally, I think this argument is rather overdone - the Fed and Treasury knew what happened in 1929, and there is no way, Buffett or not, they were going to let all the banks fail. I believe it is possible to replicate Buffett’s strategy - or at least its core - as much as it is any trend follower - buy companies with high free cash flow, strong franchises, little debt, during market crises when the P/E comes down below 15 or 20.
Bollocks. 100% bollocks. This is how the college text books will be rewritten to continue to salute “value” investing. They tell us the system would have crashed, but all we know now for sure is that the likes of Buffett and GS were saved. That is not a worthy investment strategy to follow.
November 24th, 2009 at 12:02 pm
What about the part of Buffett’s strategy where he calls and gets the President/Paulson on the phone during the Fall 08 when stocks are sinking? That is part of the plan we can all replicate too?
November 24th, 2009 at 1:47 pm
Michael, first of all, we should be grateful, that there are many different investing styles…
Replicating Buffet’s genius strategy, I think there is some point. However, this is best done buying his shares, because Buffet as you point out of course he has wires, possibilities, and conditions not available to the average investor. Maybe a good example is the Goldman investment somewhere in September 08 at around 135$ for the common stock. After that, the share dropped another 50+%.
Somebody who could stand the heat now has made some 40$ on 135$.
Now Buffet’s edge: guranteed dividend of 10% for 10 years on preferred stocks for pumping 5 billion USD into Goldman and an option to buy more stock at 115$ for another 5 billions for 5 years. Alone the premium for such an option is worth some $$.
November 24th, 2009 at 2:34 pm
Buffet “advices” b.s. is for gulliable sheep, what he does is nothing compared to what he preaches. He runs a hedge fund, he trades derivatives, he trades futures, he manipulates with his PR spins. I had learned what DOCTORED word means, it’s up to you to realized what that word means. Michael knows what doctoring means on TV, he had a first hand experience.
November 24th, 2009 at 2:57 pm
People also need to remember Buffett’s put positions. If the economy had collapsed and he held true to his buy and hold strategy then his cash could have been wiped out by the puts and he quite well could have had a negative net worth.
November 24th, 2009 at 4:07 pm
Buffet knew exactly where to put his billions to work in order to stabilize the economy. GS & GE. If either of these had gone belly up shortly after Lehman it might be been the death knell to Buffet’s short put bets.
November 24th, 2009 at 4:19 pm
The point here is simple: WB’s value investing bullshit is just that — bullshit! WB is a hedge fund who used a ton of different strategies to thrive and survive. I salute him! Just can we please stop teaching kids the spin artist crap about his success?!
November 24th, 2009 at 4:30 pm
Patrick, agree 100%. However, I would not expect anybody successful telling what he really (I mean really) does :-). At least, from my experience this is not very probable, happens not too often. I think, this is true competition, and to some extent we should welcome everybody following a different strategy.
November 24th, 2009 at 5:38 pm
Unfortunately, the Japanese went down the road of saving financial institutions and their markets are still down around 75% after 20 odd years. You have to let the bad fail and the good succeed, it is pretty much the fundamental cornerstone of evolution and our civilisation. History has shown that government intervention simply doesn’t work. By the way, I f****** hate Buffett and his constant spin.
November 25th, 2009 at 7:27 am
Ok. WB is a great investor, but you got to know that hi was extremely lucky and I think he knows that. In the recent years he has bean much more of a lobbyist than a value investor. I really think that he will keep making money for some time but I also think value investing will keep making less money as the time goes by. 2008 was the test of that strategy and I think that it failed to pass. I really think it doesn’t mean shit to know how is the CEO of the company ore how many cash the company have free tu use, if the trend is down that value is going down and there is nothing we or anybody can do. I strategy that buys something and that thing drops 50% and the strategy tells you that it is a much better deal to buy more because it is relatively cheaper, is bullshit.
Best
November 25th, 2009 at 10:53 am
When Buffett’s raking it in on the light years in the money, long dated puts he wrote THEN come and tell me what a great investor / trader he is. I still think there’s a great chance of irony that the man who warned derivatives are ‘financial weapons of mass destruction’ could actually prove that to be the case personally. On a side note, does anyone have any idea who was on the otherside of those puts? Because whats for sure is that Warren ‘AAA BKR’ Buffett was too blue chip to post margin like us mere mortals. Whoever it was must have been hurting real bad back in March, for what its worth, I’d guess GS, would anyone be surprised if thats who it was?
November 25th, 2009 at 11:43 am
Darran: GS was on the other side of the original puts, but the puts were then sold at a profit to pension funds before the announcement of the bailout.
November 25th, 2009 at 12:07 pm
When he made the loan to Goldman Sachs, he had inside knowledge the White House was going to unveil the bailout package for GS and other investment banks within a week. He was on the economic team for the next administration who were being briefed on emergency measures being advanced by Treasury.
November 25th, 2009 at 3:04 pm
Value investors wait for the long term fundamentals to change before exiting a position. And long term fundamentals take a long, long time to change while price can change very quickly. And if these guys wait for the fundamentals to change before cutting a loss or exiting a position they just may require a bail out.
Such value traps were the case over the last several years. And the great Warren Buffett was no exception.
November 26th, 2009 at 4:17 am
Hi Dan K, yes - but you’ve missed the point, whoever GS sold those puts onto posted margin. Those puts though went so far into the money that by March GS would have been owing the buyers margin which is fine providing the seller had to post the excess margin, which BRK didn’t. I wonder how much cash GS had to stump up to the purhcasers of those puts back in March.
November 26th, 2009 at 4:57 am
Warren Buffett is an icon like Colonel Sanders from Kentucky Fried Chicken. The only difference is that instead of licking your fingers with the Kentucky you might end up licking your wounds if Warren gets caught out with the next downturn when no cash is available.
November 26th, 2009 at 10:29 am
re #12 Lee… Isn’t that the same kind of insider trading that would land you or I in jail?
All is generally forgiven when the market is going up. People don’t care so long as we’re headed back to the 2007 highs. When the next leg down of the bear market occurs, GS, Buffett, the Fed etc. are all going to be in big trouble. Public sentiment will be so extreme that none of them will survive the angry herd. Buffett’s put option play will cost him everything and none of his powerful friends will be able to save him. The rich powerful oligarchs will commit fratricide and push each other under the bus while striving to become the final recipients of government largess just like in the Russian financial collapse. Powerful social forces will prohibit government from making another round of bailouts. Collapse and deflation will be the result. This isn’t doom and gloom. Such an event will wash the economic landscape clean and give future generations a more level playing field which is necessary for free market capitalism. You can’t make real progress when the system is plugged up by cronies stifling progress as a glance at a chart of the inflation adjusted DOW shows. There may have been a season for value investing but it sure isn’t now. Isn’t it interesting that the most powerful financial institutions generally want us ALL to be value investors, especially now?
November 30th, 2009 at 9:05 am
This is a great discussion regarding the value of Buffett’s strategy. Let’s face it, most investors can’t sit back and watch their portfolio lose 50% of its value. This is were trend following, even in its simpliest form, would have gotten the average investor out of being long the market before the decline in Fall 2008. Unfornunately, most investors do not have a time horizon extending to forever like Buffett. Who would not want to sell their holdings before a 50% decline so they can back them back a few months later at a reduced price?
December 1st, 2009 at 10:00 pm
Haven’t you heard the saying there’s more than one way to skin a cat. If anyone on this website has a better record of money making than WB let him/her cast the first stone. Regardless of how it is achieved trendfollowing, value investing, tealeaves or the stars it must be admired when done a scale such as WB. As for WB being lucky….when has applying brains, know-how, experience, foresight and courage become luck? As Lee Trevino said “the more I practice, the luckier I become”
December 1st, 2009 at 10:05 pm
Leroy, my issue is the bailout. WB is probably not here if not for that.
December 2nd, 2009 at 5:04 am
Agreed and I take your point. Hats off to him though for orchestrating a bailout that suited his needs. Perhaps lesser men would have fallen. By the way, I don’t subscribe to value investing but know plenty of people that live a very comfortable life through it application. As they say- more than one way to skin a cat.
December 2nd, 2009 at 4:29 pm
Leroy, I have nothing but admiration for Buffetts business and political skills. “Orchestrating a bailout” is a great skill, but it has nothing to do with value investing.
December 2nd, 2009 at 10:59 pm
Buffet it one of the greatest investors of our times. Bailout or not bailout, he followed his methodology when everyone was on panic mode, investing billions.
Who are the people here to judge him and say that without bailout he would had lost it. Maybe he will be further ahead. Michael Covel preaches that the future is uncertain and to just follow your investment/trading rules, didn’t Buffet do that?? He probably didn’t know the outcome of buying with certainty but from his experience he knew that he had to do it. Why people assume as factual that without the bailout Buffet would have lost it??
December 3rd, 2009 at 2:15 am
Andres you will find that some smart folks hang out here who are not very open to spin. You really think that is a plausible argument?
December 4th, 2009 at 11:46 am
Maybe he will be further ahead
Andres, why don’t you explain to us how someone who is short $5billion in far out-of-the-money index puts comes out ahead in the event of a complete market collapse.