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THE MANY MYTHS OF WARREN BUFFETT
24 February 2010 by Cullen Roche 57 Comments
Warren Buffett is the most glorified and respected investor of all time. And rightfully so. After all, he became the world’s wealthiest man by essentially picking stocks. But Warren Buffett is also remarkably misunderstood by the general public. I personally believe the myth of Warren Buffett is one of the greatest tricks ever played on the small investor.
To the average investor Buffett is a folksy frugal regular old chum who just has a knack for picking stocks. You know, he just picks those “value stocks” and let’s them run, right? Well, nothing could be farther from the truth and here we sit with an entire generation of investors fooled by the idea that value investing/buy and hold is the single greatest way to accumulate wealth. With the poor results of the last ten years investors have finally started to challenge this thinking.
To a large extent, the myth of Buffett has fed an investment boom as a generation of American’s aspire to make their riches in the equity markets. And who better to sell this idea than Wall Street itself? After all, a quick investment in Bill Miller’s Value Trust or the great Peter Lynch’s Fidelity Magellan (now essentially defunct) will get you a near replica of the Warren Buffett approach to investing, right? Not so fast.
Let me begin by saying that I have nothing but the utmost respect for Mr. Buffett. When I was a young investor I printed every single one of his annual letters (including his Buffett Partnership letters which can be found here) and read them page by page. It was and remains the single greatest education I have ever received. I highly recommend it for anyone who hasn’t done so. But in digging deeper I realized that Warren Buffett isn’t just this value stock picker that he is widely portrayed as. What he has built is far more complex than that.
In reality, he formed one of the original hedge funds (The Buffett Partnership Ltd) and used his gains to one day purchase Berkshire Hathaway. His evolution into the value investor we now think of today has been long in the making. Make no mistake, Buffett is a hedge fund manager. Yes, he comes from the ilk of the oft vilified and awful hedge fund clan. Today, he hides behind the curtain of incorporation, but in many ways Buffett hasn’t changed one bit since his Partnership days.
Buffett Partners is particularly interesting due to Buffett’s recent berating of hedge fund performance and fees. Ironically, Buffett Partners charged 25% of profits over 6% in the fund. This is how Buffett grew his wealth so quickly. He was running a hedge fund no different than today’s funds. And it wasn’t just some value fund. Buffett often employed leverage and at times had his entire fund invested in just a few stocks. One famous investment was his purchase of Dempster Mill in which Buffett actually pulled one of the first known activist hedge fund moves by installing his own management at the firm. Buffett the activist hedge fund manager? That’s right. He was one of the first. Don’t let the folksy charm fool you. His venture to purchase Berkshire Hathaway was quite similar.
Buffett likes for you to think that he just picks up an SEC filing, makes a phone call and seals the deal before he purchases a stock (and Wall Street wants you to think this as well), but Buffett is far more savvy than he leads on. This is exemplified by the complexity of Berkshire Hathaway. Berkshire Hathaway isn’t just your average insurance company. The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets. The myth that Buffett is a pure value investor is just that. And it has been fed to the public hook line and sinker by people who entirely fail to understand Buffett’s genius, but benefit from an investing pubic that continues to pour money into the “hold and hope” myth.
Berkshire has grown into one of the most complex financial businesses in the world. The investment portfolio he has become famous for is the equivalent of just about 25% of Berkshire’s market cap. His most famous holdings (Coke, American Express & Washington Post) account for roughly 10% of the total market cap. Interestingly, two of Buffett’s most famous investments weren’t traditional value picks at all, but distressed plays. His original investments in American Express and Geico occurred when both companies were teetering on the edge of insolvency. These deals are more akin to what many modern day distressed debt hedge fund managers do – NOT what Bill Miller and other “value” players do.
Make no mistake – this folksy frugal regular old chum is a killer businessman. Just look at the deal he struck with Goldman Sachs and GE in 2008. He practically stepped on their throats, demanded high yielding preferreds and the results speak for themselves. Of course, the deal was described by Buffett (all smiles of course) as a long-term value play. Right. If this same move had been achieved by a distressed debt hedge fund (which is a role Berkshire often plays) reporters would have described the fund manager as a thief who was attacking two great American corporations while they were down. But not Buffett, so long as he smiles, talks about Cherry Coke and makes himself sound like a regular old chum the public just smiles and looks for the next Coca-cola with the hope that they will be the next Buffett. Send your stock broker a check, Warren still believes in America!
The statistics behind Buffett’s success and wealth are another thing altogether. Warren Buffett is an outlier amongst outliers. Whether his investment decisions are that of genius or pure luck is something I’ll leave to the expert statisticians. What is undeniable is the myth that any small investor can become the next Warren Buffett by employing the techniques of Graham and Dodd. If only it were that easy.
Perhaps most interesting in the many myths of Buffett is his involvement in the bank bailouts. Clearly, Buffett had an enormous amount at stake in the financial crisis. Despite his repeated condemnation of derivatives, Buffett actually has a great deal at stake in the derivatives markets. In addition to the Gen Re business and the billions in options he has written on index put options, Buffett’s own portfolio and insurance business were at the heart of the crisis. I think it’s a stretch to say that the solvency of Berkshire was at risk in the Fall of 2008, but just imagine how things might have unfolded if Goldman Sachs had indeed failed? The dominoes in Buffett’s portfolio and behind Berkshire would have started to tumble quite quickly. Something makes me wonder if the lore of Buffett would have survived without government aid.
Not surprisingly, Buffett had a hand in the bailouts (but don’t let the mainstream media tell you that). During the height of the credit crisis, Buffett sent Hank Paulson an interesting letter which I have attached. The letter is priceless. Not only does Buffett again take potshots at hedge fund managers (those bastards and their fees!), but he describes personal conversations with Bill Gross and Lloyd Blankfein about how they would all contribute to the bank bailout. Of course, Buffett was talking his book. He knew what was at stake. But it all makes me wonder – was the great Warren Buffett bailed out? Did genius nearly fail? Or has the myth of Warren’s genius failed us all? I have no idea, but what I am certain of is that the media’s misportrayal of Warren Buffett has been astounding and perhaps even damaging to the small investor.
Warren Buffett is a great American and a great investor, but do your homework before investing in the stock market with the idea that you will one day sit atop the throne of “world’s richest man”. It just isn’t that easy despite what Wall Street will have you believe.
>>>>其實巴菲特最早是從對沖基金起家的，他的許多成名代表作(例如投資美國運通)，也並非他為人所稱道的傳統價值投資，更像是抄底的買法(瀕臨破產的公司)。2008雷曼次貸風暴，他投資高盛取得優先股也是一絕，當然最後他都把這些交易描述成價值投資，而世人也都普遍能夠接受...
比起遙不可及高深莫測的股神，我比較欣賞郭董的務實精神 |
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發表於 2011-7-20 19:13:18
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