I am a complete sucker for investment books. My wife accuses me of owning several thousand books that have essentially the same title, usually some variant of Value Investing, valuation, or intrinsic value, or securities analysis. Of course, I have every Buffett or Munger book known to man as well as everything about or by Benjamin Graham.
Vahan Janjigian, a fellow CFA, is executive director of Forbes Investment Advisory Institute and publishes a number of newsletters with Forbes. He also has a blog and serves on the investment committee of a large RIA. Dr. Janjigian's book is a gingerly attempt to criticize some of Buffett's mistaken investments, and controversial points of view. I think the book is more successful with the latter than the former.
Janjigian admires Buffett's discipline and capital allocation methodologies. He admires Buffett's ability to manage executive talent. His last sentence in the book summarizes his viewpoint,
Based on the evidence, it is certainly fair to conclude that WB is one of the greatest investors-if not the greatest investor-of all time.
So where are Buffett's mistakes? Janjigian criticizes Buffett's views on taxation, especially those on estate taxes. I agree with Janjigian that there is an irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations. Evidence of avoiding income taxes is evident throughout
Like any investor, Buffett has made some mistakes. This is not a perfect game, but rather one where investors should attempt to understand the downside risks in making an investment. The outcomes can be highly uncertain, the future always is hazy and usually, initial assumptions are plain wrong, either on the optimistic or the pessimistic side of expectations.
Janjigian addresses the Buffett diversification versus concentration question. Buffett believes that if you can't invest enough money to have some say in how the company's capital is to be deployed, you are better off diversifying your portfolio.
This is simply not true. Most Buffetteers and wannabes certainly attempt to focus their portfolios. Warren Buffett does not say not to diversify, in fact, for the average investor who is not inclined to do sufficient due diligence, diversification is a salvation. For many professional portfolios, the great bulk of the portfolio is indexed. However, in cases where one has specialized knowledge or skills, satellite investments outside the cord index are made and should add performance. Diversification is a protection against ignorance. If one is able to do due diligence, and select successful businesses at reasonable valuations, diversification will not serve you other than to reduce volatility and an unfortunate corollary, reduce returns.
Janjigian does a decent job in discussing attributes of diversification in a non-mathematical approach to statistical correlation. This is one of the strongest elements in this book.
Much of the rest of the book is, in my view, completely obvious. Buffett buys stocks cheap, not cheap stocks. Successful investors must be able to distinguish between great companies and great stocks. Janjigian has an amazing grasp of the obvious and adds little insight into valuation of growth stocks. There are far better sources than this book for this element.
He addresses the fact that value works over the long run but growth or rather momentum can work over the short run. Buffett never trashes growth but views it as a partner in helping undervalued stocks recover when growth becomes temporarily disrupted. Other than Buffett's famous comments about lemmings, he has never discussed momentum investing per se, at least to my knowledge.
Janjigian makes some dangerous statements about PIPE stocks indicating that Warren Buffett has been successful in buying special issue "Private Investment in Public Equity" holdings such as Salomon Brothers or US Airways (LCC). True, these had special terms that a large buyer can extract but it is misleading to believe that what some brokers present as PIPEs will offer the average investor better returns. Most PIPE offerings are made in very small cap, highly risky businesses. He does suggest that the best access to such investments is through a hedge fund or through Berkie itself.
He makes the point that unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer rather than a business buyer.
The argument that managements will rarely listen to outside advice is humbling for both institutional and retail investors. However, retail investors and small institutional investors can be very successful in motivating and organizing larger investors to add pressure to a board. The principle of thinking long term as an owner of a business rather than a punter of stocks is an important part of any real value investor's credo.
I have had former business partners who "played" stocks rather than owned businesses and who were looking for trends rather than valuation rationales for stocks. I have had investee company managements who have indicated that I should just sell the stock if I didn't like what they are doing. If the business has a strong moat that is not being defended, get rid of the management but hang onto the business. His advice is ill conceived at best in this topic.
Swinging for the fat pitch is Warren Buffett's approach. Warren Buffett does not suffer from analysis paralysis and he believes that some of Warren Buffett's recent deals have had inadequate due diligence. Sometimes the obvious should not take very long!
Warren Buffett readily admits to being "dead wrong." Salomon was a mistake that took an extraordinary amount of work to escape. Gen Re was much worse with poor judgment on Warren Buffett's part re underwriting discipline and the derivatives book of GenRe securities. NetJets capital intensity does not seem to fit the usual Buffett textbook. Pier One had no moat. These were all mistakes. He actually misses the most egregious errors that I recall, namely Dexter Shoe, which gave away 1.6% of BRK, or about $3.5 Billion in value for what is now a tiny fragment of H.H. Brown Shoe Group, another BRK subsidiary Dexter, which Buffett calls his worst mistake. He doesn't even address this.
There have been others. Warren Buffett was the largest investor in Handy and Harman, the silver processor and refiner. Unfortunately, it was also an auto parts supplier and metal bender. Buffett's endless fascination with silver attracted him to H&H. H&H ultimately merged into WHX, which went chapter 11 in 2003. Berky had escaped H&H many years before this ignominious end.
He dislikes Warren Buffett's views about corporate governance. It is incorrect to say that Buffett opposes employee stock options. He faulted the accounting, as well as the low hurdles that most company's managements clear to get them. In many cases, the only requirement for managements to achieve is respiration, and there are even cases where compensation continues into the after-life!
The composition of Warren Buffett's board has been controversial in the past. It certainly was not independent since historically, Warren and Charlie, Susan and Howard Buffett; Malcolm Chace and Walter Scott were old business cronies; Ron Olson was a partner in Munger's old firm. However, Janjigian missed the most obvious point, Buffett for most of the time that he was involved in BRK owned over half the stock. It was absolutely iron clad clear that management's interests were aligned with shareholders. Unlike most public corporations, management owned most of the stock. The role of the board is not to protect minority shareholder interests but rather to ensure that shareholders' interests are protected. He misses this point.
The key takeaways after each chapter provide an excellent summary of each chapter. The final chapter, "Conclusion" successfully highlights the important points.
The bottom line is :If you are looking for advice to imitate Warren Buffett's investment style, then this is not the best source of information. If you are looking for a comprehensive list of Warren Buffett's mistakes in judgment, this is incomplete. If you are looking for views on taxation contra to those of Warren Buffett, read Steve Forbes rather than Vahan Janjigian's book.
Dr. Janjigian has attempted to provide an antidote to the usual glorious heaping of praise that most Buffett books (and CNBC coverage) provide. The reality is that nobody walks on water (or parts the sea depending on your point of view.) Even great investors frankly screw up royally. However, the incidence in the case of Buffett is remarkably low; the damage is a scratch or fender bender rather than a complete wreck. All of us should be so fortunate, or disciplined!
Even Buffett Isn't Perfect, by Vahan Jahigian (2008: Penguin Books, 256 pp. hardcover, $24.95)