Monday, January 19, 2009

Warren E Buffett

It's Official: Warren Buffett is Losing His Touch

First let me say that I consider Buffett the best stock picker in history, he’s no doubt richer than any of his critics. I usually think the folks who say Buffett is losing his touch as morons without a clue. But the facts have changed; a simple example is Buffett’s investment in Bank of America. During Q2 2007 Buffett bought 8,700,00 shares of BAC at an aprox avg of $49, he rode them all the way down to
Aprox avg of $30 in Q3 2008 when he sold 3,700,000 shares. He still has 5m shares but Q4 data is not out yet, I would not be surprised to find out he sold out all his position at a large loss. We heard the Buffett minions claiming he saw the crisis coming, yeah right, except he didn’t. All he had was a few unkind words about derivatives in 2003, he had no clue of the implications of a housing bust would have in his portfolio and the bad shape of the US banking system.

The two largest positions at Berkshire Hathway are Coke and Wells Fargo. Buffett has about $10b invested in a company (WFC) who, contrary to what the optimists say, did plenty of bad lending and is trading at unreasonable valuations compared to its peers. I don’t care who manages Wells Fargo, the US economy is bigger than any CEO, specially one who lies about the quality of his performance. Buffett is also long USB, who’s tanking along with the banking sector. Buffett not having sold WFC is like his mistake of not having sold KO during the 90’s stock bubble, banking will be an utility business from now on
The ROE(return on equity) of banks should lag significantly of the average US corporation for the next 10 years, their stocks should lag the averages as well, there is very little reason to be long of banking for the long-run, it doesn’t matter who is managing, you are just giving up better more profitable opportunities out there that are less levered(Not to mention the risk of outright nationalization of certain US banks which will send shares of ALL banks plunging as the market demands lower multiples for bank shares)

Buffett also made investments in GE and GS as an indirect bet they were too big to fail(although he doesn’t admit that, he only claims the GS ‘this or that might happen but they will still be around’ which I take as a cowardly way of saying they are too big to fail), while the preferreds will probably survive its likely his warrants in GS will expire worthless, in GE that risk is also significant

And then there is AXP, I have outlined some reason on why I speculate the US credit card lending industry is in for a nasty hard landing, I haven’t done much research on AXP lending standards but I would not be surprised if they are WFC type liars as well.

You just can’t take the word of management and even if you do in this cycle FICO scores are getting meaningless. Any company who’s levered long US Credit is in risk of blowing up, so my point is that I don’t know if AXP(the common stock) can survive but neither does Buffett, Buffett uses a Value At Risk type mentality in order evaluate some companies which I believe is very dangerous in this environment.

It goes along the lines ‘these guys had a moat in the last 20-30 years, this will likely continue forever’(I can already hear the buffettologists taking issue with this simplification but its essentially the method he uses), this type of mindset lead people to lending to US Real Estate on the expectation that home prices couldn’t fall. The credit card lending industry had the winds of a credit bubble (allowing debt consolidation helping people to pay off their credit cards and helping the ponzy economy to grow) and asset bubble(providing people with means for servicing, paying off credit card debt and allowing the ponzy economy to grow) on their backs for decades, all of that now is gone and my point is Buffett doesn’t have any idea what kind of landing the credit card industry will have. I don’t either, although I speculate it will be a very hard one. But for Buffett to use the type of rear view mirror looking ‘Value At Risk’ as his ‘margin of safety’ and not having sold out AXP before was too late shows he is not sharp these days

Again, Buffett is a hell of a micro analyst. He can analyze company specific issues like no one else can but he has a hardcore belief that you cant predict macro events(why he doesn’t tell that to my banker) or outside the company changes(like regulatory change) and this has lead him to hold 31%(his 2nd largest sector) of his $70B stock portfolio in Financials as of Q3 2008(on top of his financial private company portfolio which he cant sell but he could hedge) just about the time the financial bubble is bursting, he is good at changing his mind, so far he has failed to change about this one. I understand he is not a trader but the amount of fundamental change for the long-run ROE of financials has been massive yet he doesn’t seem worried, after all “they have done so well in the last 20 years”

1 comment:

  1. Agreed. Buffet is a socialist tool


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