Monday, November 14, 2011

More Warren Buffett Cornpone On CNBC This Morning

Warren Buffett appeared on CNBC this morning with plenty of his trademark cornpone and increasingly annoying guffaws.

This time he was spewing socialistic comments on taxing the rich, plus issuing ridiculous calls for higher taxes in general. Put Warren down as a limousine liberal. Would he have thought the same twenty years ago? More?

Absent on Buffett's part were such important aspects of the consequences of his views as the fact that taxing all of the income of the top 1% won't fund the government for even a year, if I recall Kyle Bass' analysis correctly. And there's the dangerously slippery slope which Buffett, having billions to give to charity, won't have to endure, i.e., how much 'more' is enough, and who judges that?

A young entrepreneur looking at confiscatorily high rates at the upper income ranges will likely behave differently than an old 'fat cat' like Buffett who has already amassed his fortune. Buffett's lifestyle won't be affected by almost anything the federal government does with tax policy, but that's not true for the younger, upcoming millionaires and billionaires of tomorrow. The more the chance to keep one's own earned money is reduced, the more the entire idea of the American Dream is subjected to socialism.

What's more sickening is that CNBC can't even dare to question Buffett's views, airing them with absolutely no critical challenges whatsoever. How about having Kyle Bass on the phone available to engage Buffett in defending his rank socialist views?

On the professional front, Buffett's big announcement was that he's accumulated about 5.5% of IBM's equity. Then he went on to babble about 11% of the firm's equity changing ownership in a year, and that turnover is so high these days. Of apparent note was that IBM is considered a technology company, which is a sector Buffett has historically shunned out of lack of understanding.

It was a charming throwback to antiquity when Buffett told how he actually read the recent annual report and, gosh darn it, liked what he read, so he bought 5.5% of the firm. And encouraged other investors to read that report, too!

Unfortunately, real investing is a bit more complicated than reading annual reports. At least it is if you plan on owning equities that constitute a portfolio which consistently outperforms the S&P500.

What Buffett doesn't seem to acknowledge, regarding the share turnover question, is that, in the decades since the Big Bang on the NYSE which cut brokerage fees, and the subsequent explosion of volume and mutual funds, people have access to cheaper professional management of their money. Especially via 401Ks invested with mutual funds. Buy and hold a la Graham and Dodd was conceived in an era of a 14% round trip charge on trades, versus flat dollar fees today.

The volatility and erratic performance that individuals might have to live with when investing on their own is probably less tolerable from a paid manager. Thus, more trading occurs in the quest for better returns all the time.

Now consider what Buffett reiterated this morning regarding his own holdings- Wells Fargo and BofA. They are erratic. Buffett no longer behaves like a typical manager, in that he doesn't even attempt to mitigate inconsistencies in his company's returns. While IBM has been moving toward being a consistently superior equity for years, BofA and Wells Fargo are not. BofA is a disaster, and Wells has tracked the S&P, meaning you'd be exposed to similar returns for far less risk by owning the index, rather than WFC. These price series are illustrated in the first nearby chart.

 I contend that if Berkshire's price charts were labeled Fund X and compared to other funds, Buffett's company would be judged inadequate, inconsistent and, at best, mediocre.

But being Buffett, people forgive performance lapses because they buy into a now decades-old performance that no longer exists.

A firm Buffett said he can't and won't buy- Microsoft- tells you something about his judgement.

Microsoft, as my prior posts have illustrated, has had a lost decade of flat returns. It's been a disaster. Yet Buffett claimed he won't invest because, as a friend of Bill- Gates, that is- he would be accused of having inside information. He didn't just bust out laughing at the prospect of throwing his investors' money away on a moribund has-been technology company if he bought shares of MSFT.

 To illustrate the inconsistency of Buffett's firm's performance, consider the next three price series charts. They compare BerkshireA with the S&P500 Index for the past 1, 2 and 5 years.

For the past year, the S&P has outperformed Buffett by 10 percentage points. For the past 24 months, they are even. For the past five years, Berkshire outperforms the S&P by 20 percentage points.
Berkshire has become something of a timing stock, at best. At worst, whether due to size of the portfolio, or Buffett's outdated selection strategy, it's simply seen its returned attenuating toward the index.

For what its worth, IBM has been near qualifying as an equity in my portfolios because of its increasingly-consistent relative performance on several key criteria. But, unlike Buffett, my strategy doesn't blindly hold for years. It continually assesses consistency of performance.

Of course, I'm not Buffett. As I noted earlier in the post, investors have long since given up measuring him by the same standard as they would other managers. Thus my point that if Berkshire were included as a choice among funds to choose, with its name changed, I doubt it would get the investment it does because it's affiliated with Buffett.

Frankly, anyone who would seriously consider investing in Microsoft would, on that basis alone, scare me off.

But that's the world according to Buffett. It's a different investing world with different rules. Performance doesn't matter as much as it does for lesser-publicized investment managers. 

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