The high church of Buffettology is in an uproar this morning. It seems that hedge fund manager Dan Loeb of Third Point disparaged the Oracle of Omaha at the SALT conference in Las Vegas on Wednesday and the disciples are not amused.
Loeb said, "I love reading Warren Buffett's letters and I love contrasting his words with his actions." He went on to say that "I love how he criticizes hedge funds, yet he had the first hedge fund. He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself." While some folks may be upset by that, it's important to understand that every word is true. Buffett is a master of deception and always has been.
There are many examples of this in action. He criticized derivatives as weapons of mass destruction and not too long after that he sold way-out-of-the-money super-long-term puts on major global stock indexes.
He refers to the 20-hole punch card approach to investing in stocks: "You'd get very rich if you thought of yourself as having a card with only twenty punches in a lifetime, and every financial decision used up one punch. You'd resist the temptation to dabble. You'd make more good decisions and you'd make more big decisions." There is some wisdom in that but at the time Buffett himself was a pretty big trader in junk bonds and risk arbitrage situations. You are not Goldman Sachs' (GS) first call if you are not piling up some commission dollars in return.
Here is some more upsetting news for wannabes of Buffett and Berkshire Hathaway (BRK.A, BRK.B) Vice Chairman Charlie Munger. You cannot do what they do. They see special deals you will never see, such as Goldman convertible preferred and Bank of America (BAC). They're initial stake in Gillette was a special convertible issue that only they were able to buy. Berkshire posted no margin on the puts it sold. Try calling your broker to sell long-dated out-of-the-money puts with zero cash down and see who far you get.
You cannot do what Warren and Charlie do and if you follow their pithy advice, odds are you will not achieve the level of market success you are hoping to attain.
However, you can pay attention to what they did to get rich in the first place.
Buffett has said on a few occasions that if he had smaller assets under management he would use more of the Benjamin Graham approach to investing than the one he uses to invest the much larger asset base he has today. In 2005 he said, "The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access."
In his most recent shareholder letter he penned, "My cigar-butt strategy worked very well while I was managing small sums." He continued, "Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance."
Munger made similar remarks last year. He spent a few moments with value investor Mohnish Pabrai and afterwards Pabrai said, "I asked Charlie if he would still promote a buy and hold forever notion (see page 65 of his book) if he were running a small pool of capital. He said that he'd do it like he did when he ran his partnership - buy at a discount; sell at full price and then go back."
At the Daily Journal (DJCO) meeting earlier this year he told the audience, "If I had to manage $200 billion and were expected to beat the index I would not welcome the job. I think people who have a good chance of performing well are those who are willing to work in less efficient markets."
Another thing to consider about Warren and Charlie is that they are crash buyers of the first order. They are most active after huge declines. Munger put all his cash reserves at the Daily Journal into stocks in 2009 and as a result the stock has gone from under $50 a share to over $200 and book value has grown 29% over the past decade.
Buffett bought the bulk of his Coca-Cola (KO) stake in 1988 after the crash. In 1974, as the market collapsed under the weight of stagflation, he told Forbes that he felt "like an oversexed guy in a harem. This is the time to start investing." In 2009, as it appeared the world would end he was putting together those bank preferred deals that have earned him enormous profits.
Yes, Buffett is deceptive and no, you cannot do what he does today. However, you can greatly improve your results by doing what he and Munger did in the first place. Buy "cigar butts." Buy illiquid inefficient markets (sounds a lot like community banks doesn't it?) and hoard cash to put to work in a crash.