RealMoney
Warren Buffett: Value Investor or Daytrader?
Tuesday June 1, 11:14 am ET
By James Altucher, Special to RealMoney.com
Most people consider Warren Buffett to be the greatest value investor, defining value investing as a Graham-Dodd-induced idea of buying $1 for 50 cents. I'm going to go out on a limb here and say that most of Buffett's results don't come from value investing at all -- particularly not the Graham-Dodd style of value investing.
The valuation of Berkshire Hathaway (AMEX:BRK - News) has multiplied 1,000 times since 1976, but Buffett's two greatest stock picks, Gillette (NYSE:G - News) and Coca-Cola (NYSE:KO - News), are up 75 times and 92 times, respectively.
So how did Berkshire get such a good return? After all, its gains can't be remotely attributed to those of Buffett's greatest value picks. Over the past two decades, Buffett has dipped into quite different investment areas:
Commodities, via his 1998 foray into silver.
Fixed-income arbitrage, through his investment in hedge fund West End Capital, run by the son of Buffett's insurance colleague Jack Byrne.
Many instances of distressed debt.
PIPES (private investments in public equities), an investment technique impossible for the average retail investor to emulate.
Currencies.
Private equity (all of the operational companies under the Berkshire banner).
Technology (over the past few years, owning shares in telecom-services company Level 3 (NasdaqNM:LVLT - News) as well as debt and then shares of Amazon (NasdaqNM:AMZN - News) -- not quite an intrinsic value play).
In a sense, Berkshire Hathaway has been an aggregation of various hedge fund styles. Several points can be made about Buffett's investment style.
1. There are many instances of Buffett buying a stock and then selling it a year or two later.
Buffett has often said that his average holding period is "forever." For example, he bought Gillette in the '70s and, to his credit, still holds it many multiples later. After all, people will always shave, so Gillette's demographic is the roughly 2 billion citizens of this planet. How can one go wrong holding this stock forever? Similarly, he still holds Coca-Cola, a full 30 years after his first purchase.
However, every year in the Berkshire Hathaway 10K report, we can see the stocks that Buffett and Berkshire have bought or sold. There are many examples of stocks that Buffett bought one year and disposed of the year after. Some of those one-year holdings over the past 20 years include GATX (NYSE:GMT - News), Exxon (NYSE:XOM - News), Beatrice, Gannett (NYSE:GCI - News), PNC Bank (NYSE:PNC - News) and McDonald's (NYSE:MCD - News).
This only includes stocks we know about. Many investments, either because they were too small or because they weren't held long enough to be mentioned in an annual report, were never disclosed.
2. Value investing has changed enormously since Buffett first started investing, let alone when Graham and Dodd wrote their text.
If I want to sift through 6,000 stocks to find ones that fit some specific criteria about earnings, return on equity, price-to-earnings, etc., I can easily do so with any number of online stock screeners. Believe me, every value investor is doing that. The information arbitrage that existed in the 1960s and earlier is now completely nonexistent.
Buffett would spend hours going through Moody's reports on each stock, sifting for gold among the dirt. After spending hundreds of hours doing that (an activity that might now take one hour, tops), he would have to then figure out how to buy the shares he wanted. For instance, when Buffett was trying to buy shares of Dempster Mining, he had to drive to the town where it was based and convince locals to sell their shares to him. There was no liquid market like there is now. So when he bought the shares, he had to hold them for longer then he might've even wanted to. There was simply no way to dispose of them, and that includes the first 10 years he owned Berkshire Hathaway stock.
So value investing the way Buffett and Graham practiced it no longer exists right now. Thousands more mutual funds and hedge funds are competing for those arbitrage opportunities, not to mention retail investors with access to the Internet. And, I would argue, at most stages in Buffett's career, he was never really the value investor that most of his emulators try to be.
3. He played 'The Arbitrage Years.'
In some of his hedge fund years (from 1957 to 1971), more than half of his profits came from what he called "workouts," which were special situations, merger arbitrage opportunities, spinoffs, distressed debt opportunities, etc. Playing with semantics, we can argue that all of those opportunities represented "value" -- i.e., buying something that is cheaper than what it was worth, whether it was a spread between two securities, a distressed bond or a stub stock that everyone ignored. However, these situations are not usually described as value investing.
Is it possible to emulate Buffett's style and achieve success? As in any investment style, there have been many emulators, some successful and some who have failed miserably. However, I think the straightforward idea of buying broken companies that are worth double what one pays is much harder to do now than at any other point in history. To copy Buffett at this point, the average investor would have to be privy to opportunities that aren't typically open to retail investors.
Does that mean all hope is lost? No, but the next generation of Buffetts will have to blaze their own paths. |
