Defending Warren Buffett

My friend and blogger colleague Cullen Roche at Pragmatic Capital posted a 7-point takedown of the deification of Berkshire Hathaway. It is a tongue-in-cheek post ostensibly teaching the reader “7 Easy Steps to Invest like Warren Buffett” while it sardonically catalogs the most well-known contradictions between Warren’s business style and his public statements.

As an unabashed fan of the Oracle and a firm believer that he is indeed “the Mozart of Investing”, I’ve offered up a point-by-point defense.

Cullen’s one of the sharpest knives in the draw, so it was not without trepidation that I embarked on this task. You’ll find my refutations below for each of his (italicized) statements, wish me luck:

***

1)  Talk all sorts of smack about hedge funds but first spend the initial 10 years of your career running a hedge fund that charges 25% performance fees on top of 6% gains.

Buffett eventually found that there was a better vehicle to align his interests with his those of his shareholders and the types of long-term investments he wanted to make. And so he abandoned the hedge fund structure and spent the next few decades urging others to do the same. Why is learning and evolving one’s business a negative? I spent my first ten professional years as a commission-based stockbroker charging 2.5% for buy and sell orders. And then when I realized how counterproductive a structure that was for my clients, I dashed my Series 7’s head against the rocks and left it to drown in the river. Warren wised up, too. This is not a negative, it is a positive. 

2)  Amass enough capital (by charging massive fees) to buy multiple entire companies.  Do it in a distressed debt/activist strategy, but later on spin it off as “value investing”.

In Warren’s youth, he was precocious and could even be vindictive, as he was in the case of the Berkshire acquisition. But are we to hold this against him four decades later? Is there any famous investor who can honestly say he is proud of every single moment of his career? Did not Mark Twain tell us that “a clear conscience is the sure sign of a bad memory”? If you’e going to make an omelette, you’ve got to crack a couple of eggs. Buffett had certainly cracked his share.

3)  Use your insurance arm (from the company you bought in a distressed debt play) as a massive cash flow machine in which you’re essentially a leveraged covered call option writing operation.

Buffett has told us that his preferred holding period for an investment is “forever.” Well, good luck finding a source of investment funs that aligns with this timeframe outside of the eternal cash flows of an insurance operation. And lo, doth my eyes deceive me or is that David Eimhorn’s Greenlight Capital also in the reinsurance business, through a Cayman Islands holding company no less! And hark! Is that Third Point’s Dan Loeb, also setting up a half-billion dollar reinsurance operation as well? They’re all doing it because it’s a good idea – given their investing style – to insulate their portfolios from the effects of un-sticky investor capital in times of turbulence.

4)  Tell the world that they should just buy index funds and then spend most of your time building a portfolio around individual equities.

Buffett (and Munger) have been explicitly clear on the index fund versus active management debate. They are dyed-in-the-wool believers that hard work and homework and good old fashioned common sense can combine to produce successful equity portfolios that beat The Street. Their own record proves that this can be done consistently over long stretches. But they’ve also made it clear that they don’t believe a majority of investors have what it takes and so they, rightly, recommend that people who are ill-equipped simply keep their risks spread out and their transaction costs and taxes low. How could this not be the sanest possible advice they could give to the masses hanging on their every word? What should they tell the average investor – to speculate?

5)  Tell the world that fixed income is dangerous while maintaining billion dollar positions in bonds.

When you run insurance businesses, energy utilities and over fifty private companies with ongoing expense and cashflow obligations, using fixed income to meet the periodic costs involved isn’t an option – it is a requirement.

6)  Constantly refer to derivatives as “time bombs” while maintaining billion dollar derivative positions.

Buffett’s derivative activities are tied to the reinsurance work he does and are largely a bet on future, long-term prosperity. He is taking the other side of the trade, in most cases, against those who would make the catastrophe bet. These long-term bets on the world’s future have been additive to returns and are not of the reckless variety of the timebomb contracts written by AIG and Wall Street last decade – bets which were unpayable by the underwriters as we eventually found out.

7)  Obtain a red phone to the US Treasury department so you can help them arrange a rescue plan that starts by rescuing your operation when it looks like the economy is collapsing.

The most powerful man in the financial markets and one of the world’s wealthiest is always going to be listened to by the pols. This is the way of thew world. J Pierpont Morgan, when he occupied a similar position of influence one hundred years ago, was actually picking presidents and deciding elections over cigars on Madison Avenue. So if anything, Buffett’s role, comparably speaking, is a benign and helpful one in times of distress. Don’t hate the player, hate the game.

***

Thanks again to my friend Cullen for laying out this list, the exercise was a fun one to be sure.

What do you guys think?

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. curly hair wig commented on Sep 18

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  2. bitcoin loophole review commented on Sep 27

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  3. immediate edge commented on Oct 01

    … [Trackback]

    […] There you can find 84497 more Info on that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  4. aaa travel agent commented on Oct 29

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  5. rbc account login commented on Dec 03

    … [Trackback]

    […] Read More Info here to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  6. 토렌트사이트 commented on Dec 19

    … [Trackback]

    […] Find More on on that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  7. www.costwatches.com commented on Dec 30

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  8. cbd for anxiety commented on Jan 02

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  9. digital transformation commented on Jan 15

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  10. wigs commented on Jan 23

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]

  11. DevOps commented on Feb 04

    … [Trackback]

    […] Find More Info here to that Topic: thereformedbroker.com/2013/05/27/defending-warren-buffett/ […]