Monday, March 1, 2010
There Can Be Only One?
With the release of Warren Buffett's latest letter to shareholders (PDF), the Oracle of Omaha is in the news. Which brings up what strikes me as a huge oddities in American business: why is there only one Warren Buffet? There is no rocket science involved in Buffet's investment strategy, and in the aggregate his portfolio does significantly better than the S&P. Doesn't this point to a gigantic market inefficiency? Shouldn't other investors be able to engage in strategies similar to those adopted by Warren Buffett and reap long term returns while being significantly shielded from risk?
Posted by Nick Beaudrot at 3/01/2010 10:46:00 AM
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Since no one has said anything:
Big, swollen... egos. Idiots trying to be Wall Street Dude.
If I had any fuckin' money I'd just buy whatever Buffett was buying.
There are a number of people who do just that -- the Longleaf mutual fund guys, to whom Buffett referred clients when he shut down his hedge fund in the '60s, and Wally Weitz of Weitz Funds. Eddie Lambert of the ESL hedge fund (and CEO of Sears). Prem Watsa of Fairfax Financial in Canada, which is pretty much explicitly modeled on one of Buffett's core realizations (that a well-run insurance company makes a fantastic basis for a holding company in non-insurance interests, due to the negative-interest-loan-like status of insurance "float").
There are a couple of reasons why people don't just mimic Buffett. For one thing, there's not just one Buffett to mimic -- his strategy has evolved over the years. There was a huge pre-dotcom bubble in the sort of low-capital consumer goods stocks he favored in the '80s and '90s, but in the last decade or so he's shown a strong preference for owning whole businesses where he can allocate the capital. Mutual funds are explicitly forbidden from this sort of behavior. Despite his awe-shucksery, Buffett has had and continues to receive many opportunities that the average investor wouldn't have had access to. Buffett has made some enormously gutsy moves that the average investor definitely shouldn't (such as his massive investment in American Express after the Salad Oil Scandal threatened the company's existence; the payoff for Buffett was enormous, but this would be enormously foolish for someone who didn't have a thorough understanding of the risks and underlying financies). And there are just a lot more people putting eyes on the stock market now than when Buffett got started -- many of the mispricings and discontinuities he exploited, particularly in his hedge fund days, simply wouldn't exist today in any sizable manner.
There's a reason Buffett says most people should have most of their investments in broad, low-cost index funds.
Interesting stuff. It does appear that there are more value investors out there, and private-equity firms exploiting mispricing (KKR, Blackstone, etc.); we just don't hear about them.
Oh, and the fact that Buffett is so solvent means he can take risks lots of other people can. In that respect I get why Buffett is unique (or close to it). Still, I don't understand why more businesses don't try to be so solvent. I know in the 80s there was this trend that said "there are too many AAA companies out there; they shouldn't have so much cash holdings" or whatever, and while maybe at the time they were right, it still feels like we've gone too far in the other direction.
To play devil's advocate, Berkshire is (less so after the Burlington Northern purchase) quite overcapitalized -- this is fantastic in terms of financial stability, but not necessarily ideal for stockholders. Running a business with more long-term debt but increased payoffs to your shareholders isn't obviously the wrong decision for a lot of good companies. Obviously it can be terrible in times of unforeseen economic shocks (and one of Buffett's beliefs -- really more attributable to his partner, Charlie Munger, I think -- is that there are more unknown unknowns than people predict), but there's no immediate benefit to, say, Apple's shareholders in Apple's $25 billion dollars in cash on the books. Like Apple, Berkshire doesn't pay a dividend, and Berkshire doesn't even engage in stock buybacks (Buffett has now clarified/redefined his criteria for when he might consider a dividend, saying that he doesn't think that it's a good idea after having fallen below his earlier metric).
Nick, you're welcome to email me if you want my more detailed thoughts on the matter (I'm not an investment professional, just a computer programmer who owns some Berkshire stock).
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