News & Analysis
Don't Be Like Buffett?
Don't follow Buffett because you can't ... Decoder (2:41) ... Warren Buffett's approach to investing isn't rocket science but it's almost impossible for individual investors to duplicate because he uses leverage and a long-term approach that most people lack the will to follow. – Reuters
Dominant Social Theme: As an investment genius, Buffett's strategies would have worked any time.
Free-Market Analysis: This is a very interesting video, below, because it makes points we've made about Warren Buffett and similar great stock-pickers, but we'll stick to Buffett.
We certainly don't subscribe to the video's sentiment that Warren Buffett is "awesome." In fact, this is a dominant social theme amply purveyed by Reuters, which is that certain people are "investment gods."
When you actually examine what they're doing, however, it soon turns out that for the most part they simply have access to superior capital and insider facilitators that can provide them with uncommon leverage and contacts. This is certainly the case when it comes to Buffett.
The powers that be, of course, revel in such individuals. People like Buffett reinforce the "expert" meme – that certain people simply have expertise not available to others.
This is part of a larger dominant social theme – that some people are simply superior and exceptional and thus generally born to rule.
This is a Platonic approach to society and its functionality. Unusual people are very important to this worldview, as it reconfirms the idea that some should lead and others should be led.
This is, however, a very simplistic view of life and social structures. Certain people may have a talent of skill, but it does not follow therefore that societies should be organized in vertical arrangements.
Nonetheless, that's one reason Buffett gets to so much publicity. He's useful to the powers-that-be that want to organize society along technocratic lines where "experts" run various parts of society because they simply know more than others.
Within this context, Buffett is certainly a technocratic investor, someone who we are supposed to perceive is head and shoulders above "regular" investors.
Again, while some of the common wisdom regarding Buffett is no doubt correct, other aspects are overblown. Stock picking is not impossible, of course, but it ought to be considered within a business cycle environment.
Business cycles are very important. Just remember that central banks inflate by overprinting money. During the "boom" phase of money printing, it is easy to make money in a lot of ways. During the "bust" phase, blue chip stock markets tend to stagnate.
That's when stock picking probably becomes more important, along with choosing your asset class. In this kind of environment, (the one we are in today) small stocks are probably better than large stocks, in the short-term anyway, and stocks that tell us an exciting or convincing story may stand out from the rest.
But leaving aside these considerations, we should always keep in sight the idea of how assets support investing. Now, there is considerable controversy about what is called Modern Portfolio Theory but nonetheless, it seems to show pretty conclusively that the asset class provides us with a major part of the return.
Get the asset class right! It really helps. It's a little bit like having been invested in gold from the early 1980s to the early 2000s. Good luck to you! But if you invested in gold, silver and paper variants thereof in the 2000s, you could hardly lose. Likewise in the 1970s.
And how about Buffett? True, he started investing in the 1970s but most of his big gains came in the 1980s and 1990s. You couldn't find a better time to be a stock-picker than in those decades. In 1980 the Dow was around 750. In 2000 it was at nearly 12,000. That's a huge accrual, percentage-wise. Good time to be a stock-picker.
In 2008, Buffett's portfolio slumped by over 30 percent. What people forget is that if the Federal Reserve in particular hadn't loaned out some US$15 trillion to keep the system going worldwide, it would have frozen up and Buffett along with most other investors would likely have lost everything.
So even top traders like Buffett can't foresee everything. Other things to keep in mind about Buffett... He uses enormous leverage in his investments and he borrows at very low cost using the facilities of his OWN insurance companies. It's like he owns a bank.
Also, he likes to invest in brands and large companies, which brings us back to the asset class again. Large companies tend to track the asset class. That's why Buffett did so well in the bullish 1980s and 1990s.
But in the 2000s, as in the 1970s, investors who focused on smaller stocks and gold stocks tended to do better.
You can see the Buffett video here: http://www.reuters.com/video/2012/08/24/reuters-tv-dont-follow-buffett-because-you-cant-reu?videoId=237228771&videoChannel=117772&refresh=true