What is Buffett’s Ideology?

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.

8 Responses to “What is Buffett’s Ideology?”

  1. Victor Machado says:

    I am not a wizard in investing in fact I am less than an amateur. For long time I have been an admirer of Buffett success whishing be able to do like he does, (don’t we all?) but lately I have doubted very much Bufett’s idolatry and success. I think it is more a myth than a reality. Don’t take me wrong he has been very successfully in the market, but isn’t there an inside manipulation all around? He knows every important dude in the market business, he went to school with Secretaries of the Treasury, Directors of this and that agency, he owns Moody’s and others alike, controls Goldman, controls fathers and sons, mothers and daughters, and other major financial companies, some how has a big influence on the SEC. He often dines with all those gurus that know in advance if interest rates will go down or up in seven weeks, the CPI is going to be south or north, etc. all at the course of a fancy dinner while you and I (at least I) trying to figure out where the market will be when we finish our hamburger. Honestly I trust more your analysis and comments (and guessing) than the success of Mr. Buffett, special after knowing how good of a friends Mr. Buffett and H. Paulson (and others)are, and analysing his latest mistakes.
    Thank you for the fantastic, superb and (especially) honest job you been doing.
    Victor Machado
    Los Angeles, CA

  2. The much more interesting thing about Buffett is his out-integrity when it comes to providing investment returns. If you read his annual letters, they are filled with prideful statements about the returns the operating companies provide to BH. One the other hand, BH provides not one-cent of return/yield to its equity owners. Since, without a dividend, all that’s available is speculating on the BH stock. He like most of the financial world mis-uses the term investing/investor when the right term is speculating/speculation. And – by the way – Graham’s “value investing” is also spin for “low risk speculation.” I’m hoping that you bloggers who form DIV-net are the forum to begin to get the truth out. Without a dividend/yield return, a stock can ONLY be a speculation. The is NO investment.

    • Dividend Tree says:

      Robert,
      I also do not like BH shares because they don’t have dividends. Its the halo effect that has been built around BH that I do not like. It is a great holding company, but what’s in for me?

      On low risk speculation: If that’s the case then anything that is not sure (or has some risk) will be low risk speculation. Even the hard wall businesses are then low risk speculation. Isn’t it?

      Dividends provide a sense of involvement with the company, a sense that management shares their bounty, a sense that you are getting something back for remaining invested.

      Thank you for stopping by and leaving a thoughtful comment.

  3. Matt says:

    Buffett’s problem is in some ways that he has too much money; that there simply aren’t enough great companies, trading at a discount, with wide competitive moats, for the amount of money he has to invest.

    As far as his philosophy of stock estimation goes, though, remember what he said– the market is a voting machine in the short term but a weighing machine in the long term. He buys the companies that weigh the most when they’re voted for the least.

    • Dividend Tree says:

      Matt,
      Too much money is what I was attempting to highlight indirectly. Can’t Buffett invest a billion or two in good start up companies in US? Just imagine how many small startup can be promoted by 2 billion dollars! He gave GS/GE a boat load of money, same folks who at first place brought their own company down. Can’t he follow his own advise of buy America? He could find a small battery company in China, but not in US?

      My point is Buffett ideology is about ruthless business acumen on profitability! It is just not value alone.

      Thanks for stopping by. That was good discussion point.

  4. Social Media says:

    That is a pretty darn critic of buffett’s action. And coming from a no name person dividend tree. However, i can’t agrue the stuff, because it seems to be true….

  5. Jae Jun says:

    I admire Buffett greatly but I stopped following him for many of the reasons you put forward.

    A lot of his advice is for beginners and when I started out, it was the best advice. However, as time went by and I began to understand more, I realized that it was lacking a practical presentation of how to go about doing it.

    Investing in index funds, finding great boring businesses, get a company with great management etc is excellent advice that even I would dish out but wouldn’t follow.

    That’s where Graham did a fantastic job. Detailed everything from A-Z in value investing for people who just graduated the basics.

    But the point is that he does search for value opportunities that he can take.

    Jae Jun’s last blog post..EBITDA or FCF to Measure Cash Flow

    • Dividend Tree says:

      JJ: Thanks for inputs. “lacking practical presentation…” can also be interpreted as business acumen.

      Best Wishes,

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