From Berkshire’s Chairman’s Letter circa 1996:

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses “How to Value a Business” and “How to Think About Market Prices.”

Once you follow that bit of wisdom, you can start in on the derivatives racket too. Warren Buffett is one fantastic success story, but he is also a manipulative talking head with words flowing that don’t match his actions.

Feedback in:

Hi Mike, Enjoyed the new podcast. Have a point to make regarding Dalio or, for that matter, any investor: Literally every single investor seeks to capture tranches of total return trends. And total return trends are, of course, a direct result of trends in price plus reinvested income. Accordingly, all investment approaches, whether “fundamental”, “technical” or ouija board-oriented in how they frame their participation, seek to arrive at participating in chunks or tranches of positive return trends – Nothing more, nothing less. Some people – such as Dalio, Buffett – are very good at discerning (i.e., have unique intuition relating to) causal and/or correlation between some non-return metrics/conditions and return trends – but the gig is, nevertheless, about return trend participation. Whether the intuition of Dalio or Buffett would/will be successful in environments other than those in which they’ve participated is quite an open question. I’d most certainly give them better odds in other environments than I would the average investor but they also certainly are not infallible and their are environments where their intuitions would prove less than sharp (and I think they’d likely both acknowledge at least that).

Thanks,
Robert

You don’t know exactly what Buffett/Dalio do. Of course, we know that Buffett works a ton of derivatives, hot lines to the President, etc. That is far past the value legend. On other hand we know what trend followers do. That was my point.

It was but a few years ago deep in the throws of economic crisis that a sweet old man with ice cream appeared on the scene to save us all. He lovingly bet on GS, GE and BAC with terms no mere mortal could ever obtain. He was held out then by a fawning press as a noble do-gooder. Those were the days…

Note: Not a Buffett fan. See chapter “Oracle of Omaha” p. 157 of Trend Commandments.

You want to see some high level propaganda? From Yahoo:

In his annual letter to Berkshire Hathaway shareholders, Buffett said he is sure housing will recover eventually and help bring down the nation’s unemployment rate. But he did not predict when that will happen.

Investors eagerly await the letter from Buffett, 81, the so-called Oracle of Omaha, who built a roughly $44 billion fortune by following a steadfast, no-nonsense investing strategy.

High end derivatives trading? Currency trading? Government bailouts for your core holdings?

Those are no-nonsense?

So who wrote that drivel? Josh Funk, AP Business Writer:

“I cover business and agriculture in Nebraska, including keeping tabs on major companies based here such as Warren Buffett’s Berkshire Hathaway, Union Pacific and TD Ameritrade. I also cover major manufacturing companies Deere & Co. and Caterpillar. Plus, I write about real estate and home sales in the Midwest.”

Funk apparently lives in Omaha and has a background with the Boy Scouts. He is not an objective reporter, but rather a guy with an opinion.

There is this guy who is always touting Warren Buffett to me in email. I would think after years of apparently following my work closely, and writing me regularly, he might have a clue as to what trend following is, but not exactly. Big time blind spot. This in today from him:

Informative but overwhelming. I’ve always wondered what do you do when there are just as many bearish arguments as there are bullish arguments?

http://www.businessinsider.com/naufal-sanaullah-market-overview-2011-11

Can anyone else help this poor chap?

My post on Warren Buffett’s clear hypocrisy toward the use of derivatives brought this feedback in from one of his true believers:

Buffett hates toxic derivatives. He writes the most plain vanilla derivatives there are. Not only that he spent hundreds of millions of dollars to close down toxic derivatives when he acquired General Re, the derivatives he writes are probably less dangerous than the insurance policies Berkshire writes.

They served Kool-Aid in Jonestown…did you know? I love the phrasing he uses:

“hates toxic”
“plain vanilla”
“probably less dangerous”

From Bloomberg Nov 4, 2011:

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) said third-quarter profit fell 24 percent as derivative bets declined in value.

From BBC March 4, 2003:

Mr. Buffett argues that such highly complex financial instruments [derivatives] are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system. Some derivatives contracts, Mr. Buffett says, appear to have been devised by “madmen”. In his letter Mr. Buffett compares the derivatives business to “hell…easy to enter and almost impossible to exit”…

He might be rich, but let’s face it: he is one manipulative character.

Want to believe you too can trade Warren Buffett style?

Not exactly.

The Perils of Chasing Buffett lays out the benefits of being preferred.

Caught this excerpt from here:

NEW YORK (TheStreet) — Although Warren Buffett has never officially sat down to pen an official autobiography, droves of the Nebraska native’s fans and followers already know and take the investor’s pearls of wisdom to heart in their own investing endeavors. Although Buffett’s success has largely resulted from his skills as a stock investor, ETF investors can still use his lessons to their advantage.

When it comes to planning an investing strategy, Warren Buffett is famous for his interest in “boring” industries. Rather than diving into the latest fast-moving tech company or trying his luck with other risky firms and financial products, the Berkshire Hathaway chairman has opted to invest in firms that boast easy-to-understand business plans.

Is that the technique he used to invest in Bank of America? Not exactly. Buffett is not a boring investor. Far from it. An excerpt from my new book Trend Commandments:

***

In addition to the billions in options he wrote (more derivatives), Buffett’s own portfolio and insurance business were arguably at the heart of the Great Recession. It may be a stretch to say that the solvency of Berkshire was at risk in the fall of 2008, but just imagine how things would have unfolded if Goldman Sachs had failed. The dominoes in Buffett’s portfolio and behind Berkshire would have tumbled quickly.

A few years later, in 2011, Buffett was in India warning investors to avoid “long-term fixed-dollar investments” such as 10-year U.S. Treasury bonds. He worried that government actions were combining to dilute the value of the dollar. Buffett warned: “If you ask me, if the U.S. Dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years, or 20 years from now, I would tell you it will not.” Does that mean Buffett has been selling bonds? You bet. Amazingly, government actions he now critiques are the very ones that saved him.

However, Buffett sees it differently. He reflected on the chaotic times since 2008: “[My techniques] are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle. But all of those were old lessons, unfortunately. Even though I didn’t see it coming, those lessons which are timeless allowed us to in effect profit from it rather than suffer from it. Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles, you will do fine no matter what happens. And you don’t ever know what’s going to happen.”

It’s almost as if Buffett has become Jason Bourne—an amnesiac on the loose—without memory of how history has really unfolded. Add in his Goldman Sachs association and the David Sokol situation, a top executive of his who resigned under odd circumstances resembling insider trading, and in total over the last decade Buffett as the avuncular straight talker has become harder and harder to accept at face value. Long-time fund manager Michael Steinhardt was harsher: “[Buffett’s] reality is that he is the greatest PR person of recent times. And he has managed to achieve a snow job that has conned virtually everyone in the press to my knowledge…and [it] is remarkable that he continues to do it.”

As someone who grew up in the Washington D.C. area, I watched politicians use and/or abuse the system to their own economic advantage on such a regular basis that it was no longer considered unethical. In the fall of 2008, Buffet received political favors and influenced government in ways that no trend following trader ever could. It was wrong. Buying into the Buffet legend is not part of my ethos.

An excerpt from here:

Mr. Buffett’s investment reveals something both infuriating and scary. Bank of America has not been talking straight about its need for capital.

“You cannot have the largest bank in the country saying, ‘We don’t need the money,’ and then paying this kind of price to Warren Buffett for capital they say they don’t need, “ said Daniel Alpert, who runs the investment firm Westwood Capital.
“Industrywide, it’s a potential boomerang because we think, ‘Why should we believe any of these guys when they say they don’t need the money?’”

“We’ve been through a massive crisis in 2007 and ’08 where executives of major financial institutions tried to hide their insolvency,” he added. “They said, ‘No, no, a thousand times no, we’re fine.’ And then they were gone.”

Hmmm…

Buffett comment this week:

They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle. But all of those were old lessons, unfortunately. Even though I didn’t see it coming, those lessons which are timeless allowed us to in effect profit from it rather than suffer from it. Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen.

He knows how to spin a yarn. It’s almost like he has become Jason Bourne — an amnesiac on the loose.

From Taleb:

Asked…if returns such as those posted by Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett — who amassed the world’s third-biggest personal fortune through decades of stock picks and takeovers — are the product of luck or talent, Taleb said both played a part. If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter. “I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”

Much wisdom there.

From the wires today:

“OMAHA, Neb. (AP) — Warren Buffett’s company reported a 40 percent drop in second-quarter profit Friday because the improvement at Berkshire Hathaway Inc.’s operating companies couldn’t overcome $1.4 billion in paper losses on derivative contracts. Berkshire’s strong performances from its railroad, insurance and manufacturing businesses was overshadowed by the plummeting value of the Omaha company’s derivatives — many of which are tied to the value of four major stock markets.”

From Buffett himself in 2002:

“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

From Bloomberg recently:

“Buffett’s well known for his criticism of derivatives. Yet Berkshire in recent years has become a big player, with some $60 billion in derivatives contracts. Under any new derivatives regulation, Berkshire would be likely to have to produce collateral for new derivatives contracts it writes. This would limit the attractiveness of new derivatives deals for Buffett, who has boasted that Berkshire rarely does a deal that calls for it to produce collateral. But that’s not why Buffett has been pushing back against the financial reform bill in the Senate. Instead, Buffett says he’s concerned that the legislation would impose collateral requirements on existing contracts — which he says would be illegal. Sen. Ben Nelson, D-Neb., made the same case this week as he defected from the Democrats backing the financial reform bill. Whatever his logic, pushing back on derivatives reform has the interesting side effect of aligning Buffett, with his sterling reputation, with the widely derided Wall Street banks.”

Buy and hold? Buying strong businesses? Derivatives are weapons of mass destruction? Bailouts of many of the components of BRKA? Does anyone have the cajones to criticize Buffett? There has to be at least one emasculated weenie out there who will come on here and tell me that I can’t criticize America’s wealthiest just because he is rich. Right?

The Buffett myth is just that — a myth. If not for the fall 2008 bailouts, he would be on the senior circuit revising history along with Greenspan. Why my stark view on this lovely sunny morning in beautiful Southern California? Cause no matter how many books populate Amazon, all preaching about how you can become the next Buffett, they are all disingenuous fairy tales.

I don’t care much for the likes of GS and Buffett, but politicians are as bad. Here is the President:

“Put simply, Wall Street reform will bring greater security to folks on Main Street. My responsibility as president isn’t just to help our economy rebound from this recession; it’s to make sure an economic crisis like the one that helped trigger this recession never happens again. That’s what Wall Street reform will help us do. You’ll be empowered with the clear and concise information you need to make the choices that are best for you. Well help stop predatory practices, and curb unscrupulous lenders, helping secure your family’s financial future. With reform, well make our financial system more transparent by bringing the kinds of complex, back-room deals that helped trigger this crisis into the light of day. Well prevent banks from taking on so much risk that they could collapse and threaten our whole economy.”

That is a nonsensical statement designed only to get votes from people too dumb to know whether they are coming or going. Clear and concise information was ALWAYS there for Main Street to make a decision. The President’s statement is designed to absolve all blame from the millions of American idiots who took on massive debt of their own free will. Some new law will provide for the American family’s long term financial security? BS.

One of the great things about the meltdown of the last few years? Smart people, people with insights into government chicanery, people with insights into the hand selected winners — are all out in front of the story talking about it as it happens (and nailing the bad guys when appropriate). That’s awesome.

I think we have reached the point where it will be harder and harder for government favorites (for example, Buffett and Goldman) to cut slippery deals with no repercussions — ever again.

Too much light shines these days.

And that might be the silver lining in all of this.