Two World Views: Buffett vs. Lahde

Let's play a little game of "Spot the Different Worldviews."

One comes from Warren Buffett, the world's second-richest man, universally known for his long-term approach to investing. The other is a farewell letter from a hedge fund manager who made a smaller fortune betting against the worst culprits in the subprime crisis.

By now you know that Buffett is considering going all-in on American stocks. He says now's the time for getting out of the terrible long-term returns all that cash on the sidelines will bring. A quick excerpt: 

I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now. 

Meanwhile, hedge funder Andrew Lahde, made famous for last year's massive bet against subprime lenders and its 1,000 percent return for his fund, is bowing out of the game completely. Counterparty risk is too hot, he says, and he sees nothing exciting about the future for stocks or America.

His goodbye letter, via the Financial Times's Alphaville: 

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG (AIG), Bear Stearns (BSC) and Lehman Brothers (LEH) and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America....

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life—where I had to compete for spaces in universities and graduate schools, jobs and assets under management—with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established. 

He goes on to call for the establishment of a new form of government, and, I kid you not, extols the virtues of hemp. Let's see that coming out of one of the annual reports from Omaha!

Comments

[investor88:]

Good contrast: long term Warren vs Hedge fund survivor mentality.

2008 Oct 19 08:35 AM

[glassbox:]

Do you think one can afford to be a hermit for ever? With all the right things that Ladhe thinks he has done over the last few years, I'm surprised that he is just prepared to sit and wait. I would think he would have moved on to more meaninful ventures or work. Certainly hope that he will see with gratitude the blessing he has had being intact with the current disaster and instead of sitting and waiting, do something good.

2008 Oct 19 09:25 AM

[bbzz24:]

'But most major companies will be setting new profit records 5, 10 and 20 years from now. '

i cant help but laugh at Buffett's long term view. at 80 to look at the potentials for personal investments 20 years from now... too optimistic ;)

2008 Oct 19 11:05 AM

[sancerre:]

Hopefully Lahde is the future and Buffet is the past.Tweaking Buffet's philosophy around a bit--- 'be fearful if you are a bull,be greedy if you are a bear'.Should work well for the next couple of years.

2008 Oct 19 11:38 AM

[PhotonJohn:]

I think that Buffett's press as of late are more philanthropic givings to the market as a whole. At 80 or so and the second richest man, what else is there? I think he truly loves and respects these companies and is doing what he can to boost them to unreasonable levels.

I do like Lahde's perspective that too many of these silver spoon babies have ruined truly great companies.

2008 Oct 19 12:25 PM

[rcraig:]

I at odds to determine if it is taking the the upper road or depression for the profits taken at others expense that has Ladhe siting on the sidelines. After all here in Bakersfield, California the FBI recently busted a few very successful business people who were involved in international drug smuggling and use. Seems to be a trend for people who are becoming successful at the expense of their employees to turn to drugs in an effort to subdue their emotional fits of concerns over how they are making their millions.
Buffet on the other hand is in conflict with his nature and apathy since his wife's death. If he truly wanted to give away his millions he wouldn't fight so hard at tax time to keep everything he earned. He would also be generous with his money and turn it over to the government for the good of the people. He could set an example for the socialist principles he and so many Hollywood elites beat the drum for.
Too bad these people can't live with their conscience. I can help them if they would send me just a portion of their millions they have. I would even send them a personalized thank you card, which more than they will get by giving away their money to the government, charity funds, or stting on it waiting to get rich sometime in the future.

2008 Oct 19 12:41 PM

[moonbat1775:]

Gee, Warren, you understand the boom-bust cycle well and have gotten rich off it. Have you ever considered that being so destructive it might have filthy roots?

Based on this article, I have more respect for Andrew Lahde.

2008 Oct 19 01:14 PM

[anarchist:]

I still think Buffett is making these statements about going "all in" U.S. stocks because of some patriotic notion or some special unknown government tax consideration. I think he sees a complete meltdown of the financial system and equities markets in the near future due to fear and panic and this is his way to avert such a meltdown. As one can see he is the toast of every financial news program so his thoughts and actions are followed by many and considered the "gold standard" of investing. At Warren's age and with his wealth he is less concerned about losing money in market - remember this move into U.S. stocks is in his private portfolio and, so far just a talking point in regards to the Berkshire funds than he is the Countries future.
Just a guess, no one has a crystal ball to predict the future - even Warren Buffett.

2008 Oct 19 02:01 PM

[ddavid:]

Not long ago - 3rd Qtr 2007 Warren thought the dollar was going to hell.
He suggested NOT to use Forex to hedge against the dollar fall but instead to buy good Foreign Stocks. That way he protects himself against the dollar, with the benefit of dividends & stock value. I'm very surprised he did an about face to invest here so quick. His favorite norm of operation is to purchase convertible preferred which pay high negotiated dividends. Also, by now at 80 I doubt Warren keeps large dollar reserves in his name, those investments have already been transferred to his Foundation and in Berkshire. Foundations pay salaries with which I'm sure he lives comfortably.
But I hope he is right, our corporations will disappear, especially if more shenanigans by hedge funds torch more institutions as they torched Lehman.

2008 Oct 20 08:15 AM

[francoisc:]

"our corporations will disappear, especially if more shenanigans by hedge funds torch more institutions as they torched Lehman."

Dispassionate insight is a virtue not many seem to possess... I still find it amusing how, between quasi-government excess lending, regulatory oversight failure of aforementioned, and banks' shortcomings in this current fiasco, folks still sheepishly tow the media line of blaming hedge funds (lets be frank - they are an easy political target because they were the only ones outside of the regulatory regime and most people dont understand them)

Almost certainly contributes to why Lahde feels that he has just had enough I imagine.

2008 Oct 20 09:15 AM

[carey_jim:]

Lahde is telling us what all the others have told us, from the time of the English, French, American and Russian revolutions, at least. The hats and accents have changed but the cast remains the same.

2008 Oct 20 11:21 AM

[JLarkin:]

Roubini on the causes (it's not just the ivy league):

The crisis was caused by the largest leveraged asset bubble and credit bubble in history. Leveraging and bubbles were not limited to the US housing market, but also characterized housing markets in other countries. Moreover, beyond the housing market, excessive borrowing by financial institutions and some segments of the corporate and public sectors occurred in many economies. As a result, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble and a hedge funds bubble are all now bursting simultaneously.

2008 Oct 20 04:14 PM