A critic of Guru Buffy

Well, As the author of the below article says : Talking about Warren Buffett is like discussing the existence of God. He is either great or he is not (the minority view). Below article mentions his shortcomings, at least one of which I underlined to discuss it in valuepickr, when reading his recent letters to shareholders, that is on his position on derivatives.

Let’s look at the points that Satyajit Das is making a little bit more closely.

1) While he dispenses finely crafted criticism of derivatives as weapons of mass destruction, Berkshire Hathaway (Buffettâs holding company) makes extensive use of derivatives and invested in Salomon Brothers and General Reinsurance, both participants in derivative markets.

Stupid argument. It is like saying you should not buy McDonalds stock because their products make people fat. Buffet is an investor, he reserves the right to buy where he feels he can make money. This is what Buffet has to say about derivative macro and micro risks - “_Many people argue that derivatives reduce systemic problems, in that participants who canât bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. On a micro level, what they say is often true. I believe, however, that the macro picture is dangerous and getting more so. _”

2) During the crisis, Buffett, a significant investor in Moodyâs, was silent about the problems surrounding rating agencies.

I think Buffet’s argument makes sense. He invested in Moody’s due the the huge moat and the margins of the business. Even after the fiasco with the ratings agencies, they have not been shut down or censured in any way. Their margins and business remains intact. Plus, Buffet should not be considered as a “moral” guru. He invests where he sees the money!

3) When Goldman Sachs was indicted for alleged violations in structuring and selling CDOs (collateralised debt obligations, a kind of security backed by loans and bonds), Buffett, a major investor in Goldman, defended the firm, its actions and its CEO.

Not something Buffet should have done. But here also caveat emptor applies. The other party of the transaction is equally to blame.

**4) Berkshire Hathawayâs dual-class share arrangement gives Buffett voting control whilst owning 34 percent of the equity.
**

Satyajit seems to be grossly ignorant of the history of BK and why there are 2 class of shares or conveniently misleading people.

It was created to stop unscrupulous mutual fund/hedge fund managers from creating a BK-only fund for those who could not afford to buy one share of BK independently. Also, anywhere in the world where there are dual class shares, the secondary shares have differing voting rights. e.g. would anyone call the Tatas unethical because they have floated a Tata Motors DVR?

5) Until a decade ago, Berkshire Hathawayâs seven-person board of directors consisted of mainly insiders…

It’s his company. He should get to decide who is on the board. Performance of over 40 years suggests that the board has more than adequately done its job. Also, it is not his fault the two of the smartest men of this millennium (namely, Munger and Gates) are his friends.

6) Secondly, the source of his investment success is not that complicated. His main source of investment capital is the premium income from his insurance businesses (cash received today against a promise to honour a future contingent claim). This provides him with effective economic leverage (at low interest cost) to buy low beta assets.

Two points on this one:-

i) It is absolutely right. Buffet’s quantum of money has been made on insurance float money and his net worth would not have been as much had he been investing his own money all the time.

ii) As for his investment record, it would have been as good if not better.

I am trying to make a difference in his performance record vs his networth here. Without the insurance business, he would not have been the world’s 2nd/3rd richest guy, but his record would have been as good.

P.S.: Interestingly, Satyajit Das says business TV is a pornography, but guess what makes the headline, Buffet!!! Is it becasue firstpost is owned by CNBC TV18??

Good replies, Abhishek. Completely agree. WB is the real guru…have learnt loads from him :slight_smile:

Thanks Ayush/Abhishek,

I myself is not against WB. In fact I am a big fan of WB, and his though process (I am in the process of reading his annual letters to share holders, have completed 7-8 recent ones, and planning to complete all of them in 2-3 months time, and put the summary in my blog, for everyone to read).

But at the same time, I don’t agree with him 100% of the time. I still can’t understand why a value investor play with derivatives, and his reasoning behind having them, and sometime his heavy rebuttals of the same derivative instruments. I am still can’t understand what is the point of gauging his investment success by increasing in book value as compared to market price of his stock. There are bunch of more small small stuffs that I still can’t understand. I am marking them in the hardcopy I have and will post in this forum to have a healthy discussion so that I can get my doubts cleared.

Frankly I don’t know who is Satyajit Das and what is his credentials. So I don’t give much value to his views. Having said that I posted the link, because few of the points he raised were matching with mine (especially on the derivative one).

I started this thread because I strongly believe in asking negative questions as a way to go deep into any subject. Being a good non-believer is a basic necessity for being an excellent believer/practitioner.

Satyajit is a good writer- I mean an entertaining one. I love reading him. Essentially he says future will not be a carbon copy of past- We all agree with him. We dont expect future to be a carbon copy of the past.

His comments on WB is not fair. We all know WB is not God, he has made mistakes in his investing career. In fact a well researched book "Even Buffet is Not Perfect"http://www.amazon.com/Even-Buffett-Isnt-Perfect-Can/dp/B002YNS1M0is already there to examine failures of the master investor.

Satyajit is trained in efficient market theory. I think he believes in EM theory more than the theory deserves. He says give me enough leverage, I will earn money- well LCTM had whole lot of leverage. Same is true for numerous hedge funds. I doubt any of them made money for investors. He says something about insurance float. There are many insurance companies with higher amount of insurance float- and they didnt create Berkshire- they asked for bailout (AIG).

Efficient market theory is great to explain failures. If your bet does not work, blame it on random walk. But why the hell you bet if you really believe in EMT!!!

Why aren`t we as rich as Warren Buffett?

I find the criticisms on Buffet outright silly. If someone cares to read through all his annual letters, he has clearly explained everything.

)- Why he considers the current derivative holding is NOT risky for Berkshire and what is the profit he is expecting out of current derivatives. And the fact that he has unwound many of the derivatives positions, which came in because of acquisitions. Does the critic even know what are the current derivatives held by Berkshire ?

)- Why he uses book value to measure the growth rate (His logic is very sound)

)- Why Berkshire “B” shares were introduced

)- For someone saying, Insurance business is not complicated - why don’t they run one and make money - who stops ? It is one of the most complicated business and the American insurance industry’s ROE leaves a lot to be desired. Forget free float and investment profit on the free float, many companies don’t even make an under writing profit consistently. Berkshire has “RUN” the insurance business outstandingly well. How about some credit ? They very well ‘earn’ their free float.

)- I remember he criticizing the rating agencies during the downturn (Sorry, I don’t recollect the source).

)- He discusses all his significant mistakes in his letters and by the tone, I can feel he does not feel very happy about those mistakes. Who feels happy about losing money ?

Lastly, for those who worry about Buffet not paying enough tax, most of his money will go to charity after his death. And for the extraordinary doubters, who ask why not when alive - he even has an explanation for that.

If someone truly cares, how about going through all his annual letters, security filings, his FAQ, lectures for MBA students and maybe even Snowball instead of reading half baked interpretations of poor souls ? Don’t forget Wesco annual meetings. Charlie Munger talks a lot about Buffet.

Warren Buffett dabbled in derivatives (wrote options) when he was offered terms that made the risks worth taking. Much like his supercat insurance, he took on the event risk associated with those derivatives because the premium being offered was more than what he thought was deserved for such an event’s chances of occurrence. It was more an insurance underwriting transaction for him than an investment. And he is a damn good insurer with Ajit Jain as his right hand in that business.

He was playing in his own comfort zone as he saw it. The instruments may have been different but not the essence of the transaction.