Will the Real Mr. Buffett Please Stand Up?

As an investor who has to take responsibility for my actions, I seek out as much information as I can. Although I am willing to take in as much information as possible, I attempt to discern quality from the junk, critically analyze the information and questioning my assumption along with the author that I’m reading.

For this reason it did not go unnoticed when I read the October 16, 2008 New York Times op-ed piece written by Warren Buffett titled “Buy American. I Am.”

It turns out that in my zeal for seeking quality information, I found that Mr. Buffett had written an article in Fortune Magazine back in May of 1977 titled “How Inflation Swindles The Equity Investor.” If you didn’t know who the author was you’d probably think that the articles were written by two entirely different people.

In the article “How Inflation Swindles The Equity Investor,” Warren Buffett states in significant detail many reasons why and how inflation is the bane of equity investors. One such reason is that in order for companies to get through an inflationary period they are forced to issue new shares to service liabilities that had been accrued in prior years. This method of dealing with inflation was used to offset the payment of dividends.

In essence, a company would pay a dividend “…of $3.3 billion and asked investors to return $3.4 billion” (in the issuance of new stock). According to Mr. Buffett, the act of paying dividends and then issuing new stock exceeding the value dividend payments is among the problems that are part of the equity swindle. It should be known that Mr. Buffett’s article was extensive and left no doubt about the impact that inflation has on corporations.

Fast forward 31 years later, Mr. Buffett writes a concise op-ed piece in the New York Times titled “Buy American. I Am.” Published in the throes of a banking crisis, Mr. Buffett’s words were intended to provide assurance to a public that couldn’t trust either the banks, the government or regulators assigned to ensure stability in the financial system.

Mr. Buffett points out that government policy to deal with the financial crisis “…will probably prove inflationary and therefore accelerate declines in the real value of cash…”

Mr. Buffett goes on to suggest that individuals would be wise to invest in stocks.

I begin to wonder how an investor is supposed to make sense of the two articles. In the one case, Mr. Buffett offers an elaborate explanation for why equity investors are getting "swindled" during inflationary periods. In the other case, Mr. Buffett suggests that over the next ten years stocks will beat cash in a high inflation environment.

Is the only distinction that Mr. Buffett is making is the comparison between cash and stocks during inflation? If this is the case then we have to wonder which is the bigger swindle, cash that is being debased or stocks, where the management of a company can arbitrarily increase the number of shares denominated in a debased currency.

As far as I can tell, the last several months have had the largest increase in the issuance of secondary offerings (new stock) from major corporations. You'd think that Mr. Buffett would be speaking out about this based on his writings from the 1970s. I believe that I know which of the two articles is correct however, what is a person supposed to think when they hear the most successful investor in the world seemingly speak out of both sides of his mouth?

I'm guessing that Mr. Buffett isn't expecting us to remember what he said 31 years ago.

A patriot wraps himself around the flag to defend it; a scoundrel wraps it around himself to defend himself.

Sources:

• Ellis, Charles. Classics: An Investor's Anthology. The Institute of Chartered Financial Analysts. 1989. p. 483.
• Buffett, Warren. "Buy American. I Am." New York Times. October 16, 2008. accessed online August 21, 2009.

Comments

[bluesmoke:]

Mr Buffet is no fool. He is keenly aware that as a figurehead of capitalism he needs to keep the investing public in the dark. He, along with everyone else, is just trying to buy time. If the truth regarding just how precarious this economy was revealed too soon, look out below.

Aug 25 09:56 AM

[Tony Petroski:]

Nice going Dividend.

Enjoyable article.

Probably the answer to your question: "I begin to wonder how an investor is supposed to make sense of the two articles. In the one case, Mr. Buffett offers an elaborate explanation for why equity investors are getting "swindled" during inflationary periods. In the other case, Mr. Buffett suggests that over the next ten years stocks will beat cash in a high inflation environment."

The answer is that Mr. Buffett was an investor back then and now he is a politician. And he must give way to new blood.

Keep going Dividend.

Aug 25 10:11 AM

[John Galt:]

Also throw in that he was mainly buying bonds and convertable stock which would do well in a deflationary enviornment.

I recently sold some stocks to make a purchased BRK.B, a stake in Warren Buffets holding company Berkshire Hathaway, and I'll tell you why I bought in...

1. I view my investment as an investment in a mutual fund managed by the world's richest and most successful long term investor.
2. Buffet is diversified, and favors cash rich companies with a "moat". He's a conservative value investor but make no mistake, he will get greedy when others are fearful and fearful when others are greedy. Just because he's "conservative" or a "value" investor, doesn't mean that you can't get outsized returns. He also isn't scared to buy undervallued currencies ( Brazilian real ) etc when he sees opportunities.
3. Buffet has access to deals and information that you and I simply don't have ( like the GS and GE sweetheart warrents).
4. I lack financial exposure in my portfolio, and Berkshire is a well capitalized financial company (insurance), but also holds stakes in reginal banks with the buffet stamp of approval.

5. Buffet's recent investments favor my market outlook. Short term deflation ( he was buying bonds), but he also has longer term calls on the market with a portfolio of well capitalized stocks to go along with it. It was a no brainer for me.

$

Aug 25 10:12 AM

[EddieTa:]

Interesting article. The two opinion pieces definitely came to different conclusions, though it has been 32 years between articles, and much can change in that time.

Aug 25 10:16 AM

[JMBishop:]

Great commentary and archival research. What's good for Warren is good for Warren for now. He doesn't have much more time to enjoy his cherry Coca Cola and steak. We'd all be better off, if we followed our own well informed advice. A diversity of strategies by individual investors is the best cure for this currently overbought and highly manipulated market. Thanks!

Aug 25 10:32 AM

[chap08:]

There is no contradiction.

In the first article, he is comparing stocks during high inflation to stocks in other periods. In the second, he is comparing stocks to other investments.

Aug 25 12:29 PM

[conceptwizard:]

Here's Warren Buffett summing it up on CNBC:

"I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while.... I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true." "The economy is in a shambles". That's from the horse's mouth. Inventories are down 11 percent year-over-year, durable goods are down 10.4 percent y-o-y, industrial capacity is at record lows, manufacturing is still contracting, housing is in the tank, shipping and rail freight are scraping the bottom, retail is in a long-term funk, and--according to Krugman--the slight dip in unemployment was a statistical anomaly.

Aug 25 12:59 PM

[Dividend Inc:]

Greetings Chap08,

In the first article, Buffett is comparing stocks to other stocks in periods of high inflation along with other investment options.

Aug 25 01:52 PM

[Dividend Inc:]

Hello ConceptWizard,
I'm guessing that when Buffett makes himself available for CNBC to tell us what we already know then we're not really getting the best that he has to offer.

As quiet as its kept, when Buffett makes his paltry investments here and there, he isn't transmitting his investment genius. Instead, Buffett is reallocating what would otherwise be the speculative portion of his portfolio. As a percentage of his portfolio, Buffett cannot make any real investments in the fashion that he did when he started out.

I'm guessing that you're not fooled into believing that the current state of affairs is a permanent condition. Therefore, while Mr. Buffett tells us this condition is going to last through "...this year and probably beyond," when it changes Mr. Buffett will probably tells us what we already could surmise on our own.

It is clear that Buffett is an investment genius. However, what I like about him most is the wealth that he has amassed and not his faux folksy Greenspeak (tribute to the Maestro) used to disarm those who fawn over him without critically analzying the premise of his ideas.

Thanks for reading my article.

Aug 25 02:19 PM

[JohnnyJunk:]

The two pieces aren't contradictory at all. The only thing better to own than equities in an inflationary environment would be commodities. He isn't going to advise the average joe reading the WSJ to buy commodities. His Op-Ed in October was directly responding to the flight to cash. Over the next 10 years (or more) the more real wealth will be created in the stock market than in the cash accounts. That doesn't mean that inflation won't eat into the real growth in equities; it certainly will.

Aug 25 02:50 PM

[Dividend Inc:]

Tony,

I totally agree with your contention that Mr. Buffett is more politician than investor today. Mr. Buffett is among the plutocrats that have three levels of democracy and freedom, the first and most basic is his voting power. When voting doesn't succeed he can sway policy with his words. Finally, if that doesn't work then he can throw his financial largess at the problem as a last resort.

In any event, Buffett's form of freedoms exceed that of those who only have the ability to vote for the issues and politicians that they believe would be the best for our country. Although freedom isn't free for those whose sons and daughters fight for it, Mr. Buffett has a kind of freedom that I may never experience. For this reason, we all need to critically analyze where this guy is coming from since I didn't elect him to represent me but his actions and beliefs affect my personal and financial interests.

Aug 25 02:57 PM

[Jeopardy:]

good article, Buffett is known to give out recommendations after he already established his positions.

Aug 25 08:23 PM

[Moon Kil Woong:]

Buffet complains about inflation and government spending yet is the fierst one to snap up deals with the too big to fail banks to catch the government handout windfall. Obviously, morality plays very little when it comes to his investment perspective.

He should step down from the buly pulpit and keep focused on his wonderful investment track record. I respect him much more for that than his jabbering about what ails America as he dumps money in bad insurance companies and banks relying on government pork. Reformer he is not!

Aug 25 11:08 PM

[untrusting ...:]

Moon,
Well I don't know about the morality comment. Buffett has committed to giving the vast majority of his wealth to the Gates Foundation which is focused on world health issues, science , education, etc. A pretty moral position in our view. His heirs are getting relatively tiny fractions of his wealth.

As opposed to Dick Cheney, Lloyd Blankenfield, Henry Paulson, Larry Ellison, or virtually any other Wall Street fraudster or public company executive leech, Warren Buffett kind of looks like Mother Theresa or Joan of Arc.

Of course Warren Buffet is going to attempt to optimize his investments via Berkshire. That is his fiducary duty as the Chairman of Berkshire and is exactly what fiducary's are supposed to do. Anything less would put him in the category of the vipers and thieves typically associated with Wall Street and public companies of today. It is worth noting that no allegation of malfeasance, that we are aware of, has ever been levelled against Buffett or Berkshire. Quite remarkable given the massive frauds, illegal activities, self-serving deals, etc of a vast number of our other public companies such as Pfizer, Goldman, Haliburton, Moody's Tyco, Enron, Worldcom, and literally thousands of others.

If the rest of our US public companies and Wall Street were run anything like Berkshire, it is pretty unlikely that the US would be in the weak position that they are today.


On Aug 25 11:08 PM Moon Kil Woong wrote:

> Buffet complains about inflation and government spending yet is the
> fierst one to snap up deals with the too big to fail banks to catch
> the government handout windfall. Obviously, morality plays very little
> when it comes to his investment perspective.
>
> He should step down from the buly pulpit and keep focused on his
> wonderful investment track record. I respect him much more for that
> than his jabbering about what ails America as he dumps money in bad
> insurance companies and banks relying on government pork. Reformer
> he is not!

Sep 13 05:02 PM