In this post, I am trying to take a contrarian viewpoint, and hopefully initiate a debate. I am asking few questions:
- Is Buffett ideology more than mere value investing?
- Are we individual investors falling into the value trap?
- Do we individual investors fail to realize or fail to put Buffett’s ideology in proper context?
First: Value investing is all about attempting to estimate value of a given business, and hence the stock price. Most of you will agree that estimating value is a very subjective process. With the same set of upfront information, seasoned professionals and many of us will come up with different value for the same business. If value investing was that simple and easy to determine, won’t all value investor have excellent portfolios? So does value investing also comes with gut feeling about future business prospects? What about asset allocation and diversification? When I looked into BRK’s portfolio in 3Q2008, it did not seem to follow any boiler plate formula or general guidelines of asset allocation or diversification. Does it mean Buffett’s ideology is more than mere value investing?
Second: Are we falling in the same trap as majority of us retail/individual investors? For a moment, let us ignore what other writer’s and commentators have written about Buffett. If we read Buffett’s own comments then we will note that he is an advocate of index investing. He has said many times that individual investors should not try to time the market or attempt to beat the professional. Checking his own verbatim in various interviews or column’s, we will find that he advises individuals to simply invest in low cost index fund and forget about it for next 10+ years. So is value investing only for professional with huge resource base?
Third: I agree that Buffett first thinks about business and management team. But we fail to realize that Buffett ideology has been built over the period of last 30 to 40 years. He has lived in an era of unprecedented growth in US economy. The growth in US economy was driven by baby boomers. I do not know what is in store for future, but it is likely that similar level of growth may not return again. Ever since 2000 the US economy has been floundering; I do not recall that Buffett has done anything worth a significant note within the realm of traditional US-based investing. In this era, until most recently, Buffett was holding on cash of more than USD 40 billion. Buffett’s huge winners came early this decade but in Brazil and China. Does that mean there have been no value based opportunities in US?
Fourth: On one side Buffett proclaims derivatives as weapons of mass destruction, while on other hand he himself has been dabbling in derivatives. Re-insuring already insured muni bonds! Collecting insurance premiums on stock indexes and bonds in the form of derivative contracts! Buffett’s stake in Credit Default Swaps and Currency Swaps! SEC asking BRK on how it values its derivatives! Are these examples of value investing within derivatives domain?
Fifth: In Oct 2008 Buffett proclaimed buy America, while at the same time during 4Q2008 and/or 1Q2009 BRK offloaded significant position of his holdings in landmark US companies. Buffett is using BRK’s cash to invest in instruments which are not available to general public. Remember his preferred share at fixed 10% interest rate both in Goldman Sachs and GE! So Buffett is taking advantage of huge cash and public stature to step on common shareholder dividends of less than 5%? Or does this mean there are no value investment opportunities even with markets down by more than 50%?
Don’t get me wrong, I admire Buffett, I like his value investing practice, I envy his business acumen, I am amazed by his humbleness, I love this simplicity, and I have lot of respect for him. There is nothing wrong in what Buffett is doing. He is doing what he is supposed to do. Make profits for BRK’s shareholders. And I must say he leaves no stone unturned to do that, even if it means moving away from his own teachings. Since he is not investing in common shares, does this mean there is no value in traditional US markets?
We need to put Buffett’s success in proper context. We need to realize that Buffett ideology has been built over last 30-40 years, which in itself was altogether a different era. Buffett’s ideology seems to be more than mere value investing. It is value investing accompanied with shrewd business acumen. Value opportunities can be anywhere; national, international, traditional stocks, bonds, derivates, currency, etc. You need business acumen to identify them and follow your value guts.
What do your little grey cells tell you? I would like to know so leave your thoughts in comments section below.