In Defence of Buffett

In recent weeks, Warren Buffett had been criticised for not utilising Berkshire's cash hoard during the March correction, and hence missing out on its rebound. In fact, Ken Fisher (son of Phil Fisher, whom wrote the seminal "Common Stocks and Uncommon Profit." Ironically it was one of Buffett's favourite books) attributed it to Buffett's old age.  Selling all of the airlines holdings was puzzling, especially as he had made purchases on them just weeks prior.

It is true that Berkshire's performance in the last ten years were inferior to the index, and that Buffett, while managing Berkshire, has access to many deals that are not available to retail investors. However, in my humble opinion, Buffett had taught me things which I felt is still commendable and relevant. 

IMO, retail investors have a lot to learn from what Buffett did as an individual investor, and while managing the Buffett Partnership (BP).

1) Concentration, Conviction and Courage
As a young investor working/learning from Benjamin Graham, Buffett studied GEICO, and made a trip to the company to learn more about the business. Convinced that GEICO is a sound idea, he put 75% of his net worth into it. I am not sure if there are many people who can do this.

In buying GEICO, Warren Buffett shown that he is his own man, despite being told repeatedly by his idol and mentor, that "GEICO prices was too high."  

How many of you would have bought a stock at $19, and bought more at $8? This is what he did for Philadelphia Reading & Coal. When the price of a stock goes down after your first purchase, the discrepancy of value and price is now even wider, and your odds and risk is lower. This is what I learnt, but still have difficulty applying, because though the idea is simple, it takes a lot of courage.

2) Thinking Deeply
The Rockwood deal, as described in Alice Schroder's Snowball, was the the perfect example of how one should go beyond the obvious.

Rockwood was a company who had a large inventory of cocoa beans. At that time, the prices of cocoa beans shot up, but selling the beans would incur a huge amount of tax for the company. As such, they sought Jay Pritzker for advice, who spotted a loophole. Rockwood could avoid the tax by liquidating its butter-cocoa business and liquidating the cocoa beans.

Soon after, Jay Pritzker made an offer to all Rockwood shareholders. For surrendering every single share of Rockwood ($34 then), they would receive  $36 worth of cocoa beans. Hence the $2 arbitrage is riskless, and most money managers would settle for the 5.9% return (2/34). But Buffett had other ideas:

3) Avoid Questions that are "Too Hard"

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

Be it managing BP or Berkshire, Buffett avoid purchasing shares of business which he has little to no understanding. Word was that he avoided buying a certain bank just because he could not understand a small portion of its annual report. And banks are supposed to be something within his circle of competence... having such discipline is hard to come by.

With regards to his inaction during the selldown in March, it mirrored his decision not to buy any internet companies during the dot.com boom.

Even in Singapore, there will always be a company in focus, which might be in positive or negative light. It seems like one has to have some opinion of how that company will perform. 

Is SingTel going to recover to its earning ability of 2000s? I don't know.

Is SingTel able to earn sufficiently more than its dividend? I could tell the odds were not great. 

So I avoided the stock.

I have learnt not to be a smart-ass by just saying "I don't know." I will just wait for a simpler puzzle to solve-- and the stock market is not like a school examination. You don't get more marks for solving the harder questions.

4) Alignment with his clients' interest

In setting up the BP, his remuneration was as follows:

How many funds nowadays would do something like that? And how many open-ended funds would liquidate when they were still showing profits? Buffett did that in the 1969 when he felt that the market was overheated, and the opportunity of losing money for his clients is high.

5) Early Years Returns

Recent biases, such as Berkshire's underperformance to the index, is grave injustice to Buffett's ability, particularly when you study his BP's returns. Many of his ideas in BP, while in his own words, are not scalable for Berkshire, is still very much useful for the little guys like myself.

Any portfolio, especially a concentrated one, is capable of making 40+% and upwards of returns in a handful of years, but to do that over a decade, added to the pressures of managing other people's money, is the true hallmark of an investing genius. 

If you are keen to learn about his partnership years, Ground Rules is an excellent resource.

Conclusion

I don't really care if people thinks that value investing is dead-- in fact, it is to my advantage that I have it the room all to myself.

Value investing is simply sensible investing. There are multiple ways to determine the worth of a company, and it is not as simple as just looking at mathematical ratios like price-to-book. Having a sensible framework and an intellectual approach to investing, with a successful, consistent long term track record, is my objective.

I seriously doubt Buffett cares too much about what was said about him recently. A value investor that often seeks validation from others, is probably a poor investor.