The Berkshire Special 2018

Beyond the isms

Buffett is much more flexible on his views and philosophy than his followers believe

Warren Buffett will forever be the poster boy of investing for money managers. For a good part till the late ’90s, there were very few successful role models such as Buffett and Peter Lynch whom the investing fraternity could look up to and, hence, it’s not surprising that Buffett’s influence has been all-pervasive on investors of my vintage. Though over the past decade or so, we have had quite a few successful money managers and hedge fund managers coming into their own, yet the pilgrimage to Berkshire Hathaway’s annual meeting at Omaha by far remains the most venerated congregation of value investors.

While I have been investing in equities for more than two decades now, it was only in 2013 that I made my maiden visit to Omaha and 2018 happens to be the second year that I have attended the event. Being a fund manager for over 25 years is not easy and one can only sustain this enthusiasm if one enjoys the whole business of business and all facets of investing, like I do. Even if I did not own any stock in Berkshire (though I do) I would enjoy the whole show they put together where all their businesses come together in one big exhibition. The other reason for coming this time is that with both Munger and Buffett advancing in age, I felt that they may find it increasingly difficult in future to have the energy and enthusiasm and passion needed to have these full-day meetings that they conduct with such humour and wit on investing and life lessons. 

If one is seriously following Buffett and reads a lot (like I try to do), one may feel that there is nothing really new to learn at these meetings. The meeting is well covered and there is even a live telecast on Yahoo Finance but the difference is like seeing a live match versus seeing it on television. The meeting itself serves more as a reminder of what to do (believe in equities/believe in quality/buy good businesses/remain within your circle of competence etc.) rather than getting some immediate money-making idea. 

Over the years it has become clear how Chinese investors worship Buffett and also, more importantly, how they are dominating all facets of business. One can see hundreds of Chinese investors in the audience and this time more than 10% of the questions to Buffett and Munger came from Chinese investors. During the meeting it also emerged that Munger has been nudging Buffett to invest more in China. I own two Chinese stocks (Alibaba and Tencent) personally, but perhaps it is time to add a few more to the portfolio. India, unfortunately, seemed nowhere on Berkshire’s radar in terms of questions asked or even a word during the discussions (Buffett said that he will be happy to buy businesses in Germany, Australia, besides the US and China). On second thoughts, we don’t have to feel so bad for it is quite possible that our own Ajit Jain becomes the CEO of Berkshire in the future!

But, on a more serious note, I believe that while Buffett’s investing tenets are still relevant, somewhere the essence of his message is lost on the investing community. Every word that Buffett says is taken as the Gospel’s truth — investors have come to literally believe that what the Sage of Omaha says is exactly what they should follow. I believe that Buffett is much more flexible on his views and philosophy (as it should be for investing demands flexibility of thinking and adaptation to changing events) than his followers believe. For example, followers believe that Buffetism demands that all stocks be held for the super long term. Hughes, Liu and Zhang in a paper, studying data for Berkshire from 1980 to 2006, mention that the median holding period for Buffett over this period was one year and that 30% of the stocks were sold within six months and only 20% were held for more than two years. 

We know how Buffett argued multiple times that airlines is not a good business and now he is a major shareholder in all US airlines; that he does not buy tech stocks and then bought both IBM and Apple (of course arguing that Apple is not a tech stock) or that he thinks derivatives are an instrument of mass destruction and then buys/sells derivatives or buys a stake in Goldman Sachs, a significant user/dealer in derivatives. I like Buffett precisely because all his previous sayings do not prevent him from buying what he likes, except that this keeps his bhakts totally confused.

Similarly, investors also believe that Buffett makes concentrated bets and, therefore, swear by this portfolio strategy. Although Buffett did invest in a concentrated fashion early in his career it is also true that if he had done badly with those investments no one would have heard about him today. People forget that in Buffett they are looking at the winner of a concentrated portfolio strategy and that the invariable losers following this strategy are not heard of when they perform badly. 

While no one investor has had a major influence in the way I invest, definitely Buffett has shaped my investing philosophy. I also don’t buy cyclicals, don’t buy commodities, and prefer to invest in sustainable and easy-to-understand businesses.

Sometimes I feel Buffett is a victim of his own philosophy. In the AGM of 2017 and subsequent interviews that he gave, it was evident that he was really pained to miss Amazon for he kept praising Jeff Bezos as the best manager he has seen in his life and so forth. However, if you over-stress that you are a value buyer and don’t buy tech stocks it becomes difficult to make a 180-degree turn and buy Amazon. Anyway, looking at this unabashed recommendation for Bezos, I personally bought some more Amazon stock and I am grateful to Buffett for recommending Amazon and Bezos so heartily even though he found it difficult to pull the trigger himself. Putting it simply, one should not publicly over commit to a philosophy for you never know how it can bind you.

The writer is the founder of Helios Capital