THE MANY MYTHS OF WARREN BUFFETT

Warren Buffett is the most glorified and respected investor of all time.  And rightfully so.  After all, he became the world’s wealthiest man by essentially picking stocks.  But Warren Buffett is also remarkably misunderstood by the general public.  I personally believe the myth of Warren Buffett is one of the greatest tricks ever played on the small investor.

To the average investor Buffett is a folksy frugal regular old chum who just has a knack for picking stocks.  You know, he just picks those “value stocks” and let’s them run, right?  Well, nothing could be farther from the truth and here we sit with an entire generation of investors fooled by the idea that value investing/buy and hold is the single greatest way to accumulate wealth.  With the poor results of the last ten years investors have finally started to challenge this thinking.

To a large extent, the myth of Buffett has fed an investment boom as a generation of American’s aspire to make their riches in the equity markets.  And who better to sell this idea than Wall Street itself?  After all, a quick investment in Bill Miller’s Value Trust or the great Peter Lynch’s Fidelity Magellan (now essentially defunct) will get you a near replica of the Warren Buffett approach to investing, right?   Not so fast.

Let me begin by saying that I have nothing but the utmost respect for Mr. Buffett.  When I was a young investor I printed every single one of his annual letters (including his Buffett Partnership letters which can be found here) and read them page by page.  It was and remains the single greatest education I have ever received.  I highly recommend it for anyone who hasn’t done so.  But in digging deeper I realized that Warren Buffett isn’t just this value stock picker that he is widely portrayed as.  What he has built is far more complex than that.

In reality, he formed one of the original hedge funds (The Buffett Partnership Ltd) and used his gains to one day purchase Berkshire Hathaway.  His evolution into the value investor we now think of today has been long in the making.   Make no mistake, Buffett is a hedge fund manager.  Yes, he comes from the ilk of the oft vilified and awful hedge fund clan. Today, he hides behind the curtain of incorporation, but in many ways Buffett hasn’t changed one bit since his Partnership days.

Buffett Partners is particularly interesting due to Buffett’s recent berating of hedge fund performance and fees.  Ironically, Buffett Partners charged 25% of profits over 6% in the fund.  This is how Buffett grew his wealth so quickly.  He was running a hedge fund no different than today’s funds.  And it wasn’t just some value fund.  Buffett often employed leverage and at times had his entire fund invested in just a few stocks.  One famous investment was his purchase of Dempster Mill in which Buffett actually pulled one of the first known activist hedge fund moves by installing his own management at the firm.  Buffett the activist hedge fund manager?  That’s right.  He was one of the first.  Don’t let the folksy charm fool you.  His venture to purchase Berkshire Hathaway was quite similar.

Buffett likes for you to think that he just picks up an SEC filing, makes a phone call and seals the deal before he purchases a stock (and Wall Street wants you to think this as well), but Buffett is far more savvy than he leads on.   This is exemplified by the complexity of Berkshire Hathaway.  Berkshire Hathaway isn’t just your average insurance company.  The brilliance behind Buffett’s investment in Berkshire is astounding.  He effectively used (and uses) Berkshire as the world’s largest option writing house.  The premiums and cash flow from his insurance business created dividends that he could invest in other businesses.  But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe.  Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets.   The myth that Buffett is a pure value investor is just that.  And it has been fed to the public hook line and sinker by people who entirely fail to understand Buffett’s genius, but benefit from an investing public that continues to pour money into the “hold and hope” myth.

Berkshire has grown into one of the most complex financial businesses in the world. The investment portfolio he has become famous for is the equivalent of just about 25% of Berkshire’s market cap. His most famous holdings (Coke, American Express & Washington Post) account for roughly 10% of the total market cap. Interestingly, two of Buffett’s most famous investments weren’t traditional value picks at all, but distressed plays. His original investments in American Express and Geico occurred when both companies were teetering on the edge of insolvency.  These deals are more akin to what many modern day distressed debt hedge fund managers do – NOT what Bill Miller and other “value” players do.

Make no mistake – this folksy frugal regular old chum is a killer businessman.  Just look at the deal he struck with Goldman Sachs and GE in 2008.  He practically stepped on their throats, demanded high yielding preferreds and the results speak for themselves.  Of course, the deal was described by Buffett (all smiles of course) as a long-term value play.  Right.  If this same move had been achieved by a distressed debt hedge fund (which is a role Berkshire often plays) reporters would have described the fund manager as a thief who was attacking two great American corporations while they were down.  But not Buffett, so long as he smiles, talks about Cherry Coke and makes himself sound like a regular old chum the public just smiles and looks for the next Coca-cola with the hope that they will be the next Buffett.  Send your stock broker a check, Warren still believes in America!

The statistics behind Buffett’s success and wealth are another thing altogether. Warren Buffett is an outlier amongst outliers. Whether his investment decisions are that of genius or pure luck is something I’ll leave to the expert statisticians.  What is undeniable is the myth that any small investor can become the next Warren Buffett by employing the techniques of Graham and Dodd.  If only it were that easy.

Perhaps most interesting in the many myths of Buffett is his involvement in the bank bailouts.  Clearly, Buffett had an enormous amount at stake in the financial crisis.  Despite his repeated condemnation of derivatives, Buffett actually has a great deal at stake in the derivatives markets.  In addition to the Gen Re business and the billions in options he has written on index put options, Buffett’s own portfolio and insurance business were at the heart of the crisis.  I think it’s a stretch to say that the solvency of Berkshire was at risk in the Fall of 2008, but just imagine how things might have unfolded if Goldman Sachs had indeed failed?  The dominoes in Buffett’s portfolio and behind Berkshire would have started to tumble quite quickly.  Something makes me wonder if the lore of Buffett would have survived without government aid.

Not surprisingly, Buffett had a hand in the bailouts (but don’t let the mainstream media tell you that).  During the height of the credit crisis, Buffett sent Hank Paulson an interesting letter which I have attached.  The letter is priceless.  Not only does Buffett again take potshots at hedge fund managers (those bastards and their fees!), but he describes personal conversations with Bill Gross and Lloyd Blankfein about how they would all contribute to the bank bailout.  Of course, Buffett was talking his book.  He knew what was at stake.  But it all makes me wonder – was the great Warren Buffett bailed out?  Did genius nearly fail?  Or has the myth of Warren’s genius failed us all?  I have no idea, but what I am certain of is that the media’s misportrayal of Warren Buffett has been astounding and perhaps even damaging to the small investor.

Warren Buffett is a great American and a great investor, but do your homework before investing in the stock market with the idea that you will one day sit atop the throne of “world’s richest man”.  It just isn’t that easy despite what Wall Street will have you believe.

 THE MANY MYTHS OF WARREN BUFFETT

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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57 Comments

  1. Peridotic says:

    Where did you get the letter better question who leaked it? No doubt Warren invests differently than his partnership days although he stays true with the value philosophy. The advice he gives to average investors is advice that would benefit them in the long run. Which is “Buy good companies at cheap prices”. He wouldn’t tell the average investors to get into bankrupt companies/ special situations. Nonetheless, the article is a great introduction about the modern day Buffett, though it seemed snappy at Buffett although I understand you admire him. But saying he got bailed out seems ridiculous he did call these derivatives “financial mass of destruction”, he did use them but did not over leverage in them. So I find that part ridiculous.

    • TPC says:

      I think Barry’s chart below (comment from Julius) shows that Buffett was indeed bailed out.

      • Peridotic says:

        I can see where you are coming from and reading Ritholz post it is no doubt interesting. I think Buffett only had his hand in the bailout because he wants America to do well and out of all of this he got some excellent deals.

        You didn’t answer my first question where did you get the letter?

  2. Julius says:

    This truely is an interesting article and letter…

    Another Source you could bring on is this: http://www.ritholtz.com/blog/2009/11/buffetts-bailouts/

    IMHO: Buffet = Welfare Queen..

    Thanks for the well written article

    Julius

  3. William Schraeder says:

    It is very frustating to see so many lemmings fooled by a criminal like Warren Buffet. Warren Buffet does not believe in capitalism, is a liar, a thief, and a two-bit criminal. Yes, he might be rich from the millions of lives he has destroyed, but he is not capitalist—-he is an anti-American, anti-Capitalist, anti-Constitution criminal who is glorified by a left-wing press and an ignorant public.

    Great, it really is that simple, see! Now we can move on and stop glorifying criminals, liars, and anti-capitalists who hate this country and support left-wing, progressive ideals.

    • JH says:

      What? If you’re going to say stuff like this, provide some evidence.

        • JH says:

          Okay, so you’re just an idiot.

          • William Schraeder says:

            And you must be a marxist/socialist that believes that the government and the elite should run everything—-okay, MOLON LABE

            • JH says:

              You don’t even understand the words you use. Marxist/Socialist ideology is completely OPPOSED to the elite running everything.

              Regardless, I am neither a Marxist or Socialist. I’m a fan of responsible capitalism, of which Buffett, rightly or wrongly, is considered to be a shining example.

              I was thinking you actually had something that supported the notion that Buffett is a “criminal”. Since when is backing a candidate “criminal”?

              Also, it’s patently ludicrous to think that he’s anti-Capitalistic. He’s an Uber-capitalist. How else do you think he got so incredibly wealthy? There are NO socialist billionaires.

    • npw says:

      but if we stop glorifying criminals who would we elect to public office?

  4. Kid Dynamite says:

    wow. insane letter. there was never any doubt that Buffet was talking his own book when he came out with that op-ed during the crisis talking about how cheap stocks were (which incidentally, ignited a monster rally) – but i didn’t know he was working to arrange government policy behind the scenes to bail out his own ailing investments!

    also, PC, you didn’t mention his greatest trade: it’s well known that Buffet sold a massive amount of long dated out of the money SPX puts – i think they were 10 year puts struck around 1000 (he did the trade when the market was much higher). The genius was that he had a clause in there saying that he didn’t have to post margin! Thus, when the SPX tanked to 666, he didn’t have to scramble for margin. Unfortunately, his counterparty, Goldman, did need capital which Buffet generously provided at steep terms (As you noted in the post)… brilliant! GS’s capital needs didn’t stem soley from this trade, but they definitely have hedges on against the trade that almost certainly don’t have the same “no margin posting” requirements as Buffet’s, and that would have required them to post massive margin as the market fell.

    • TPC says:

      No one reports this stuff about Buffett. He is the face of American Capitalism and is held on a pedestal. I don’t mean to imply that he is a bad person or not a great investor, but just because he lives in Omaha doesn’t mean he isn’t 100% Wall Street.

    • Oremus says:

      If Buffett sold a large number of Puts and then the market fell, he would
      have lost a LOT of money. The margin requirements for selling far-out-
      of-the-money Puts are very small, so his posting no margin was not really
      important, and becomes meaningless if the market tanked and he was short
      the Puts (i.e. sold them) and they were exercised (as they certainly would be)
      by the Put purchasers.

  5. van says:

    well done TPC

  6. Anonymous says:

    I generally agree with many of your points. However, you cleverly omit the fact that The Buffet Partnership Ltd. did not charge a management fee of any kind. This is an extremely important point in regards to your hedge fund argument. Warren is outspoken about outsized fees where the investment manager is paid regardless of performance. Warren didn’t earn a dime until his partners earned 6% (with a high-water mark). With the exception of Monish Pabria, who has admittedly copied Warren’s Partnership, no other hedge fund offers this type of structure… why do you think that is? Today’s hedge funds, by in large, are made more of the “heads, we win, tails, we still collect 2% with no high water mark”.

    • TPC says:

      Good point. I just wonder if Buffett would have said the same public comments when he was a young hedge fund manager – don’t invest with active fund managers and don’t fall for the high fees of funds.

      The point, whether I got it across or not, is that Buffett is not this adorable little country bumpkin that America has been led to believe he is. He is a money loving, killer businessman who just happens to work in Omaha. He is as Wall Street as it gets, but for some reason, he is viewed as being on the opposite spectrum from Goldman Sachs and other firms, when in reality he is no different.

      • William Schraeder says:

        Excellent point, TPC. The fact is Buffet manipulates the market through rhetoric just as the criminals at GS, JPM, and the Fed do—–Buffet is really no different in the big picture, he just doesn’t trade “high frequency”, but the lies that spew out of his criminal mouth are just as criminal and just as damanging to capitalism as the GS, JPM, and the Fed.

        In the end, Buffet, like JPM, GS, and the Fed, would sell his own mother on the street and whore out his wife and kids for a dollar—-he doesn’t care how many jobs he destorys or how many lives he destroys—he measures success in the world of “Buffet” and could not care less about what is good for capitalism and America. For that reason, Buffet is a traitor and a criminal and anyone that believes otherwise should do their homework on this “enemy of the state”!

    • John Doodle says:

      Perhaps not hedge funds, but all major private equity buyout funds have a hurdle, a clawback (which Buffet doesn’t have) and in return, they charge 1% to 2% management fee. Also Buffet charges 25% profit above hurdle, while most PE funds charges less, 20% in most cases.

      So TPC’s comparison to hedge funds might not be the most appropriate, but the point should not be missed – this chap uses leverage, derivatives, talsk his books, is a major part of the “establishment” (whether you call it wall street, 4th 5th branches of the Big Governemnt) is irrelevant.

  7. “He was running a hedge fund no different than today’s funds.”

    Except that he wasn’t charging fees. No capital gains, no pay. That is not true of most hedge funds.

  8. Anonymous says:

    As a Berkshire stockholder, I have no complaints about Buffett’s activity. He is a shrewd businessperson. He generally does follow value investing, but he obviously has capital advantages that nobody else enjoys. You are right, behind the folksy charm is a tough dealmaker. But some of that folksy charm is sincere according to people I know in Omaha.

    And Buffett even admits that Munger convinced him to modify his value investing stance. Snowball provides a pretty fair portrait of the man. He isn’t perfect, but he has always shared in the risk with his partners/shareholders. If the public wants to hold him on a pedestal and not recognize that his actions will be self serving, then they are foolish. I’ll hitch my financial wagon to Buffett before most other businesspersons.

    • TPC says:

      The article isn’t aimed at tearing him down. He is a great investor. He is a great man. But the general public has been fed this image of him that is simply not reality.

  9. Just wanted to say good stuff TPC, enjoyed your take and the points your highlight are very prudent. While I totally agree his performance fee incentive is right up the alley of modern hedge funds, he at least did not charge until after he had profited 6% for investors, so that’s admirable. And like another person pointed out, no management fee. But he was definitely on the ‘path to wealth’ at an early age. Cheers

    Jay
    @marketfolly

    • TPC says:

      Hey Jay. I think the point (which I may not have gotten across very well) is that Buffett is far more complex than he has been portrayed by the public. I know from personal experience that Buffett influenced my move into the investment business, but it wasn’t until some serious investigation that I realized he wasn’t the person we read about in the media every day. In fact, he is running a business that no one has been able to replicate – that’s how savvy and complex this guy is.

      Thanks for the comment Jay.

  10. Anonymous says:

    I have to say, this is one of the most important contributions that you have ever produced on this blog. It should be broadly disseminated, including the “mainstream” media.

  11. percolator says:

    Excellent post TPC.

    Warren Buffett disgusts me. He’s not only a hypocrite, but as Julius mentioned above a Welfare Queen. Pretty soon he’ll be spending his eternal afterlife in hell.

    • chris says:

      if hell is where you go when you pledge >$20B to charity, then count me in too, i’ll load up on my sunblock…

      • percolator says:

        Well, if it wasn’t for the taxpayer he would not have $20B to give away.

        Is it really charity when you rape the taxpayer for your own benefit and then give the money away to your pet causes?

        • chris says:

          “pet causes”? he has pledged the bulk to the gates foundation because it is run so well, and its primary objective is to eliminate preventable diseases among the poor. oh vay

          • William Schraeder says:

            Great—-Bill Gates can use that money to outsource more of America like he did with Microsoft jobs to India…..isn’t it wonderful how we idolize the very people that hate our country so much they seek to send all of our wealth, technical knowledge, skills, etc., over to other countries and then people celebrate it. Yes, it’s great that the Gates Foundation is sending money taken from U.S. citizens to other countries while our people are starving—-got to love progressives like Bill Gates and Warren Buffet…modern day progressives ideologoy is to bankrupt America and then do charity in foreign countries, then be celebrated by the very Americans they are taking from—-unbelievable.

            • vasra says:

              You sir are misguided.

              First you accuse your opponents of marxism and socialism.

              Then you don’t understand the people who make capitalist profits through efficiency gains.

              The world is not USA, money flows where it can make the biggest profits.

              We the citizens of USA have grown lazy, fat and complacent. We are being paid too much for what we do.

              The poor and emerging people of China, India, Vietnam, Bangladesh etc are working hard, for pennies, just like our forefathers did.

              They deserve the growth and capitalists are right to invest in them.

              You are yourself anti-capitalist and anti-competition if you do not understand this, and think there is something ‘special’ about USA as it now stands and it must be protected at all costs.

              In the world wide market, money is a force of nature. You can fight it, but in the end you will yield to it.

              We’ll meet China half way on our way to the bottom, when they rise and we fall. That’s when equilibrium have been reached.

              Till then, you just have to accept it.

          • percolator says:

            So Chris, you think its noble that Warren rips off the American taxpayer, skims some money off the top and then donates the rest to charity?

            Wouldn’t it be better if we just cut Warren out of the equation and have the taxpayers give their hard earned dollars directly to the Gates Foundation?

            By eliminating this middle man there will be more money to “eliminate preventable diseases among the poor”.

            Warren is nothing but a crony capitalist POS!

        • William Schraeder says:

          Excellent point Percolator—-I always get so disgusted and sick to my stomach when other people including the lamestream, corrupt media idolize and sensationalize people who give money to charity that they stole from hardworking people. It’s like you to someone’s house, burn their house down, then give them a tent and some food and you are a hero. Unbelievable how ignorant the average american is.

    • seekingdelta says:

      Hyperbole much?

      While Mr. Buffett’s action in the bailout-era have been a disappointment I still see him more as a shrewd / ruthless investor and not necessarily corrupt.

  12. quant.this says:

    Warren Buffet did not become the world’s richest man by picking stocks. This is a huge misconception. His success came from buying undervalued public and private business that were selling at a huge discount to their free cash flow, where he got control of that cash flow (by owning the majority of the company). He then used the cash from those investments to buy other businesses. He has managed to put himself in a net investment position all the time. As his cash flow grew, so did his investments and then started become more of a stock picker than a business buyer. Even if you followed his strategy, unless you controlled the business and the cash from that business, you would never meet his record.

    • chris says:

      he also understood well the concept of “float” provided by owning insurance companies

      • quant.this says:

        absolutely, when his cash flow grew and his investments got bigger and he got more comfortable investing, he figured insurance surplus portfolios would be a great source of investment capital for him. The rest is history.

      • William Schraeder says:

        He also understood the ponzi scheme, which is real simple. Sell S&P puts, use the premium received to pump the market higher virtually guaranteeing that since he and several banks “are” the market, they can control it and keep it going higher and higher regardless of fundamentals,etc. Yes, the who wins in this—-crooked CEOS who then take all of the profits that should go to shareholders and instead go to 100M salaries and other perks (planes, etc.) while shareholders get nothing but worthless paper riddled with crooked accounting.

        • Ron says:

          Interesting comment. I never fully understood the extent to which institutional investors could force the market in directions agreeable with their own interests.

          I have tried to inform myself about such things, but the subject is not easily penetrated, and I am not aware of anyone in the financial industry who actually has any interest in informing us little guys.

    • TPC says:

      That’s the moral of the whole story….

  13. Rhino says:

    I am glad to see someone describe Buffett as he really is. He is not a grandfatherly, warm fuzzy “aw shucks” kind of guy. He is the Great White Shark of Wall Street, only interested in profits at any cost, including that of his family (just read “Snowball” and you’ll understand).

    His fees for the Buffett Partnership were nothing short of outrageous and he really risked no capital of his own. In fact, he didn’t even invest his own money in his Partnerships but instead kept his monies separate. His fee structure of 25% of profits over a 6% threshhold needs to be taken into the context of the times: The high yield for the DJIA in 1956 (when he started his Partnerships) was 4.97% and the low was 4.41%. All he had to do was to generate a little more than 1% return over market yield to receive a fee. And this during a market environment when “Net Current Asset” stocks were plentiful and stocks in general were rising! This isn’t a “fee structure” as much as it is a robbery. Buffett’s partners no doubt did well, the handful that were lucky (and brave) enough to invest at the beginning, but nobody did better than Buffett himself.

    If he were starting his hedge fund today I think it would be a tough sell, plus the way he managed his accounts was riddled with conflicts of interest. Who would give a manager today a check for any sums of monies without some kind of oversight? Thank you, Mr. Madoff.

    Indeed, Buffett is a brilliant investor, and he was the right person, in the right place, at the the right time, and there never again will be another like him. He cannot be replicated, just as Lynch or Templeton cannot be. They all were/are unique talents. Each could have managed a fund of utility stocks and blown the DJIA away.

    Buffett is smart, but also lucky that the media turns a blind eye to how he makes profits. He gets deals that no one else can get, but the impact of those deals becomes smaller and smaller as Berkshire grows. Those who bought into the Berkshire myth over the past decade have already been disappointed by mediocre results. The value approach still works, but I do not think Berkshire does anymore. It is too big.

  14. Mike W says:

    Nice reality check regarding The Great One (who I also admire).

    Surprised no mention of the ukulele – would have fit nicely in your sentence as :

    “..so long as he smiles, talks about Cherry Coke and [plays his ukulele]…”

  15. anarkst says:

    “After all, he became the world’s wealthiest man by essentially picking stocks.”

    This is the ultimate “something for nothing” guy. He has billions by doing absolutely no productive labor. How’s that supposed to work?

  16. Dave Livingston says:

    Although the author of this piece has a point that Buffett invests differently than we’re frequently told that he does, I’m unimpressed by the mud-slinging for two principal reasons, 1) I personally have done not all that badly, albeit not wonderfully, investing using a buy & hold method, and 2), I’m put off by someone lacking the guts to fully identify him or herself, using only initials, in a piece such as this.

    Thirdly, I’m going to continue to purchase only those stocks I intend to hold until the day I drop dead,in keeping with Buffett’s advice. If TPC doesn’t approve of this, that’s tough! Indeed, I sold not a single share of stock or of a mutual fund all of last year. Granted, I took that approach largely because I didn’t want the tax man getting his greedy paws on my profits.

    • TPC says:

      Buffett’s shareholders have done very well over the years, but not due to buy and hold. As for your concerns:

      1) I am not giving you investment advice. If buy and hold suits your needs and risk tolerance then so be it. Congratulations on your investment success.

      2) As for my identity. Well, anyone with access to google can resolve the identity problem pretty easily. I am not nearly as anonymous as the name of the website would have you believe so if you want to “sling mud” over that then it is due to your own ignorance and nothing more.

      I’m glad you’ve found a strategy that suits your needs and helps you sleep at night. In the end, that’s the best an investor can ask for. We’re all different and have different needs. There is no holy grail. Not even Warren Buffett’s approach.

  17. G Rosenberg says:

    To Rhino: You said people who bought into the “Berkshire myth” over the last decade have been disappointed. I was an investor in the “Berkshire myth” a decade ago. I bought shares at ~45K and now hold them at over 115K. This performance came during a time period when investment in an S&P 500 index would have actually lost money. Why should I be disappointed?

  18. LocalHero says:

    This article is far too kind. Awhile ago, Stansberry & Associates did some number crunching & found that, if Buffet had just put his money in a plain old savings account (@4% interest), he’d be worth exactly the same as he is today without putting one dime into all of the fancy shell-games. So much for his investment acumen. He’s just another friggin’ fraud.

    • JH says:

      Stansberry and Associates are the frauds. Google their name, see what you find.

      That or just do the math yourself. 4% compounded annually over 60 years gets you about a 951% return. That’s only enough to make yourself a billionaire if you started with $100 million dollars (even taking into account the effects of inflation)

      Way to be lazy.

  19. Ron says:

    I am a novice, or worse, so I really can’t proclaim any special knowledge about investing generally. Basically, I am soliciting the opinions of those who read this column.

    Having read books, such as “Den of Thieves,” “Born to Steal”, etc., I can’t escape the opinion that the market isn’t an honest broker, that there are far too many people between an investor and his money, and the opportunity to steal from that investor occurs regularly, and it is acted upon by men such as Michael Milkin, Ivan Boesky and Dennis Levine.

    Am I wrong?

  20. Sankalp says:

    A good read. Explores the depths of Buffett’s accumulated wealth. Though I’m pretty sure that I have read somewhere before the personal hand of Buffett in all the bank bailouts. And I for one see nothing wrong with that. It is true that no one becomes a billionaire by buying and holding his position. Buffett is a master tactician and for that he’ll always have my respect. However I’d like to point out some fallacies in people’s arguments here:

    1. “Buffett made money by raping the tax-payer”.-> This is without a doubt a ridiculous claim. Yes the tax-payers bailed out the banks. But I hope you people realize that the money given is not charity. It is just a temporary loan which the banks and other organizations are supposed to return with interest. Many of them have already done so.

    2. Also what his fund charges over profits is entirely his prerogative. Calling it a “robbery” is completely unjustified in my opinion.

  21. Bobby Casey says:

    Of course Buffett invests different than the average investor, but to consider his original partnership analogous to a hedge funds seems a bit of a stretch. Buffett’s partnership only charge a fee if the fund returned over 6%, and then 25% of the gain above 6%. A hedge fund typically has the 2 and 20 rule, or 2% of assets 20% of the gain (total gain). Hedge fund managers get paid whether there is gain or not with the 2% of assets, then they get 20% of 100% of the gain. Buffett’s partnership only rewarded the manager (himself) once he delivered a better than 6% return. This is a much more equitable scenario and keeps the manager ‘in the game’ and not just a buyer of assets.

    The opposite side of the story is, Buffett is now limited to his buys. When he deploys capital, it is at a much larger rate than the small investor and therefore he moves markets. When he bought BNI, he had to bid nearly 50% above their current market price because he wanted to buy them out and deploy a huge amount of capital. But the little guy could have bought BNI at $65/share. His investment options are limited in this way. Of course he also has other options not available to the average guy like those GS preferreds.

  22. Andrew Peel says:

    Really great read. Warren Buffet has always been a bit of a mystery to me I found this helped me understand the man a lot better.

  23. Good article. First time I’ve read about Buffet from this perspective. And I always thought I was alone in my opinion. :)

    The real key to the success of Berkshire Hathaway is the insurance business. Think about a hedge fund being able to borrow virtually as much money as it wants, at excellent rates, and invest it. That’s Berskshire.

    The insurance business is used as a form of leverage. And massive leverage at that. Think of the insurance “float” as borrowed money. All the premiums taken will have to be paid back at some point in time. In a good year, if they make a profit in their underwriting, they in effect get paid to borrow money. In a bad year, they have to pay to borrow money (just like the rest of us). If they break even, then it costs nothing to borrow the money.

    With massive leverage like that, you don’t have to earn a lot on the investments, to make a lot of profit. Specially when you don’t pay much in interest!

  24. will says:

    Buffett has Aspergers, once you realize this it all becomes much clearer.

    He’s a tricky one…

Chart Of The Day

Rail Traffic Starting to Show Signs of Weakness

Rail Traffic Starting to Show Signs of Weakness

The trend in rail traffic has moderated substantially in the last few months as the 12 week moving average in intermodal traffic hit its lowest reading since 2011.  The current moving average of 1.34% is consistent with an extremely sluggish economy and one that has come well off the early boom period of the beginning [...]

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Market Indicators

China PMI Expands at Fastest Pace in 19 Months

China PMI Expands at Fastest Pace in 19 Months

More signs of stabilization in one of the world’s largest economies.   Today’s Chinese PMI rose to a 19 month high and solidly in expansionary territory (via Markit): After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing [...]

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Myth Busting

Social Constructs, Self Constraints & Monetary Myths

Social Constructs, Self Constraints & Monetary Myths

I really liked this piece by Paul Krugman on money in general.  Of particular importance is this paragraph: “For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be [...]

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How To

The Difference Between Central Banking and Market Manipulation

The Difference Between Central Banking and Market Manipulation

The kids are over on the internets using the Tweet machine to ask Ben Bernanke some questions.  There are also some adult questions mixed in there.  For instance, Jim Grant asks: “Could you help me understand the difference between central banking and market manipulation?”  Now, I’m no Ben Bernanke, but I would like to take a [...]

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