Beware the Buffett Effect: Part II

By Bob O'Brien

I wrote an article a couple of weeks ago, in which I laid out some reasons as to why I thought that Warren Buffettt is very misinterpreted and misunderstood. Buffettt is indeed one of the greatest investors to ever walk the face of the earth, and his strategies and ideas carry tremendous weight. He influences the influencers and very often his beliefs are taken out of context and therefore misunderstood and lead to stock bubbles.

When you listen to Buffettt and talk about bonds, you would think they are the worst investments ever, and that everyone should be investing in 100% stock all the time. The truth of that matter is that Buffettt does not like bonds, but he is never 100% invested in stocks. Buffettt prefers cash over bonds, and when you step back for a second there is not a huge difference between bonds and cash when you are stock investor. Both have an inverse correlation to stocks and are relatively safe, but cash is even safer.

When it comes to market timing if you listen to Buffett you would think that he is dead set against it. Nevertheless, his fortune has been built on being patient and waiting for the market to take a big drop, and then going in and buying everything cheap. Is this not market timing? You better believe it is!

Market timing is really one of those things where most people are either on one end or the other. They either feel that is impossible or that is the only way to invest. Nobody can predict what is going to happen in markets consistently time after time, but when you close your mind to market timing you lose the flexibility necessary to be a good investor.

Buffett is much more of a mystery than he would lead people to believe, and although he called derivatives weapons of mass destruction he himself has owned them. If you are looking for black and white investing tips, Buffett is not the place to start, like he has said “Investing is not complicated, but it is far from easy’.

Original article

Comments

[whidbey:]

Buffet has tolerated bonds in his insurance investment portfolio, so he does not eschew bonds per se; they are part of his risk management in appropriate risks.

He sounds crazy because he is, but he is consistent in his approach to the market over time as near as I can tell. As I understand things his recent stock reallocation were based on market timing. He trades out of stocks with significant losses sometimes so he has be fallible.

His long term view is very unpleasant to deal with since he rarely shares anything on his strategy. I keep my BRK allocations low and so far? I am justified in being careful with his stock; in this market he has been an also ran. I am not a devotee of his.

Aug 17 06:05 PM

[denko:]

errata

derivatives weapons of mass destruction should be derivatives financial weapons of mass destruction

Aug 17 08:08 PM

[Tony Petroski:]

From the article: "Nevertheless, his fortune has been built on being patient and waiting for the market to take a big drop, and then going in and buying everything cheap. Is this not market timing? You better believe it is!"

Here, here. I'm tired of getting the Buffett quote which says "I don't know what the market is going to do tomorrow or next year, nobody does..."

It is Buffett, not Buffettt? I thought perhaps he felt he needed an extra tee.

Aug 17 09:42 PM

[Roger Schre...:]

Market timing is the key to investing. It always has been, it always will be. Sure it is tough. It is very, very tough, but if you work at it you can lower your risk (exposure) dramaticly and the benefits of good timing are the difference between success and total failure when you look at 2008. Many of our investors had double digit positive returns last year, all out strategies out performed the indices by huge margins in 2008. Not everyone can do this stuff. I can't hit a golf ball 300 yards, but I know some players can.... I can't fly an airplane but I can certainly find a pilot to take me where I need to go. You just have to be humble enough to let someone else take the wheel if you can't drive.

Aug 17 11:42 PM

[Dutchkees:]

There are a couple of things that Mr O,Brien mentions that I can not reconcile with statements or actions from mr Buffett (excuse my english, not my mothertongue):
"Buffett prefers cash over bonds" : Buffett needs to hold a certain level of cash(equivalents) because of the fact that he needs to be able to pay possible claims. As soon as he sees investment opportunities he will defenitely put the excess cash to work, and that includes investments in bonds (eg GE,Wrigley,DOW,SwissRe and in the past RJR Nabisco,WPPSP and more recently several high yielding bonds which he didn't specify further). This concerns corporate bonds. But there are times that he has held for many years government bonds in his (personal) portfolio (his words, not mine).

"his fortune has been built on being patient and waiting for the market to take a big drop, and then going in and buying everything cheap" : as Mr Buffett stated himself, he doesn't time the market but when he sees a stock that is attractive (based on his estimate of intrinsic value) than he will buy. The simple fact is that when markets are down, there are just more attractive priced companies available (his words, not mine).

Aug 18 06:26 AM

[cocomurph:]

Buffet doesn't time the market; he simply "times companies"...i.e. he waits for selected good companies to go on sale. It just so happens that this occurs more in down markets than bad. When good companies go on sale in great markets, he buys too.

Aug 18 08:03 AM