Why Yahoo Finance Is Wrong About Buffett

Yahoo! (YHOO) Finance's front page has yet another article that has me infuriated. First it was the 29 year old housewife who is the paragon of a saver and early retiree. Now this.

The article in question asks whether Warren Buffett has lost his touch. It recounts what it calls three of Buffett's mistakes.

The first mistake, the article states, is Buffett's investment in Goldman Sachs (GS). Buffett invested $5 billion in the company in September, getting a 10% dividend. He also received the right to buy $5 billion worth of Goldman stock at $115 per share within the next five years. As Goldman was trading at $64 a share, the article concludes that Buffett lost over $2 billion.

I don't get it. Did Buffett exercise his warrants to buy $5 billion worth of GS stock? No. Did the warrants expire? No. Did he even pay anything for the warrants? So how did he lose money? (It actually shows how smart he is, not buying the common stock).

What about the sum he invested in Goldman (and GE) preferred stock? Buffett is getting $500 million in dividends every year from GS. Excluding taxes, if GS survives and keeps paying, Buffett will get all his money back in ten years. If Goldman calls the shares (it has the option to buy the preferred shares back at a 10% premium), Buffett will make $500 million in addition to the interest payments he receives up to that point.

Buffett's second mistake, the article says, is that he thought that Congress' passing of the bailout bill would make his investment succeed. The S&P 500 is down 25% since Buffett lent money to GS, and 21% since the bailout was passed. Berkshire Hathaway's (BRK.A) stock is down 30% off its 52 week high, the article also notes. I'm not quite sure what Berkshire's stock has to do with the bailout or the Goldman investment (it's down for a number of reasons, including owning businesses that are exposed to the depressed housing sector), but the article's point is that Buffett made a mistake because the market is down since the bailout passed.

It's been only two months since the bailout has passed. While Paulson seems to change his mind every day about how to proceed, that doesn't mean the bailout and Buffett's investment are failures. Two months is not enough time to make a judgment one way or the other.

Buffett's third mistake, the article argues, is his NY Times op-ed. "'Buy stocks, cash is trash,'" the article paraphrases. Buffett's cash is trash philosophy did not fare very well, says the article. You see, over the last ten years T-Bills have returned 30%. Thus, "If your money would have been sitting in cash for the past year, you'd be able to buy most everything on massive discounts."

I am shocked. Had the person who wrote the article actually read the op-ed, he would see that Buffett has been all in cash in his personal account for a long time. Now that stocks are trading much lower, and the government printing presses are running at full steam, Buffett thinks stocks will outperform cash over the next ten years. He doesn't know if stocks will go up tomorrow, or a year from now. But he's going from all cash to all stocks if stocks stay at their current levels. He's doing pretty much what the article implies is the right thing. But that's his third mistake. Why? And anyway, (at least the article acknowledges that) it's been a month since the op-ed. We'll know in ten years whether Buffett is right about stocks being better than cash.

The third mistake claim is just ridiculous. The first two claims are very common in the investing press. When someone's portfolio is down (no matter over how short a period), they're a fool. If they're up, they're a genius. You can't call Buffett a fool. So the next best thing is to ask whether he has lost his touch.

Has he lost his touch? Maybe. I don't know, and neither do you. It's only been two months! His investing horizon is years, decades. We can say he lost his touch if GS goes out of business or stops paying him dividends. That hasn't happened yet.

If Yahoo! keeps publishing such garbage, they might as well invite me to write for them.

Comments

[Eskin:]

I'll be the first to tell you that you are soon going to be invited =)

I actually read that article as well and thought something was a little sketchy about it. After all, Buffett's investments in preferred shares, considering the companies remain intact, are very comparable to investing in cash since the return is at a guaranteed rate.

either way, it's great to see this website still has some logical authors.

Great article

2008 Nov 20 02:42 AM

[Steven Hansen:]

personally, i wish everyone would lay off of buffett positively or negatively. he deals in an arena different than small investors and even many funds. his windows to buy are different than ours. his opportunities are now. market bottom, market go lower - not much of a problem. he does not have cash flow issues. i like to read about his market moves. but when somebody gives an opinion of his moves they are trying to put themselves in his league - and there is nobody in his league.

2008 Nov 20 04:34 AM

[Swiss Investor:]

Of course Buffett has lost his touch! As he did in the 60ties and in 1999/2000...

I really don't get why everyone always wants to second-guess Buffett.. of course he makes mistakes, but he is never ever gonna "lose his touch". With his margin of safety, his "mistakes" usually about break even over the long term.

2008 Nov 20 06:15 AM

[Carousel:]

Lest you shoot the messenger, AGAIN, let me point out who actually wrote the story: One Simon Maierhofer of ETFGuide.com.

Fixed your own flawed story, and figure out who is really at fault. And to think Seeking Alpha publishes such poorly researched material!

2008 Nov 20 10:21 AM

[Mastery:]

A) Exchange traded Goldman Sachs Preferred stock is down about 30% in value since Buffet invested - see NYSE listed GS-B This means that a five billion investment in GS prefs made then might indeed therefore now be said to have lost 30% of its value as measured against the market performance of pref shares..
B) Even if the warrants were purchased as part of a package in combination with the pref shares they still had some value. To suggest WB bought them for free is ludicrous. GS is not in the business of giving away options on its equity for free! Looking at traditional Black Scholes models to value this it has indeed lost half its value.
I think it therefore entirely reasonable to say that Buffet is down $2 bln on his $5bln investment on a mark to market basis.
What is also ignored in this discussion is the huge number of put options Berkshire Hathaway wrote on Stock Indexes in 2007 - see the 2007 letter to investors. If these are properly marked to market they must be costing Berkshire billions and billions. What about the other 94 derivatives such as credit default swaps. Was this the reason for Buffets very public announcement of investment in GS - was this an alternative to putting up margin?

2008 Nov 20 11:02 AM

[Mastery:]

A) Exchange traded Goldman Sachs Preferred stock is down about 30% in value since Buffet invested - see NYSE listed GS-B This means that a five billion investment in GS prefs made then might indeed therefore now be said to have lost 30% of its value as measured against the market performance of pref shares..
B) Even if the warrants were purchased as part of a package in combination with the pref shares they still had some value. To suggest WB bought them for free is ludicrous. GS is not in the business of giving away options on its equity for free! Looking at traditional Black Scholes models to value this it has indeed lost half its value.
I think it therefore entirely reasonable to say that Buffet is down $2 bln on his $5bln investment on a mark to market basis.
What is also ignored in this discussion is the huge number of put options Berkshire Hathaway wrote on Stock Indexes in 2007 - see the 2007 letter to investors. If these are properly marked to market they must be costing Berkshire billions and billions. What about the other 94 derivatives such as credit default swaps. Was this the reason for Buffets very public announcement of investment in GS - was this an alternative to putting up margin?

2008 Nov 20 11:02 AM