The Aleph Blog » Blog Archive » How Warren Buffett is Different from Most Investors, Part 2

How Warren Buffett is Different from Most Investors, Part 2

Before I begin this evening, let me simply say that where I find intelligence, I appreciate it, whether I agree with all the ethics of the situation or not.  Buffett is a bright guy, brighter than most.  I have *not* been shy to criticize Buffett when I thought there were ethical lapses — whether it was retroactive reinsurance, life settlements, David Sokol, or anything else.

The fifth way that Buffett is different is that Buffett was comfortable managing a company, rather than a pass-through vehicle like a mutual fund or a hedge fund.  That may sound trivial, but it is significant, because few investors do that.  The advantages are considerable.  You have permanent capital to work with, so you can focus on the distant future when times are bad.

The article that prompted this piece talked about how Buffett would “bet against beta,” and would invest in quality stocks.  These are the strategies that one can take advantage of if one has sufficiently long-term capital.  But I differ from the article, because value, betting against beta, and an emphasis on quality are not risk factors if you have a sufficiently long time horizon.  They are sources of alpha.  I disdain everything from MPT.  Real investing is finding companies that can compound free cash flow at above average rates.

I think that is a part of the problem with academic consideration of investing.  Typically they embed an idea that the investment horizon is short, which makes their ideas useless for long-term investors.

The sixth way that Buffett is different is that Buffett uses leverage (“float”) from the insurance companies to fund much of his assets.  The float has grown, but in an era of low interest rates, P&C insurance companies focus hard on making an underwriting profit.  In one sense, the low interest rate environment has made the P&C insurers and reinsurers to not be financials; they compete on underwriting, not investing.

The seventh way that Buffett is different, is that he doesn’t care what form the investment takes.  Buffett might say: “Stocks, great.  Convertible preferreds, even better.  Convertible bonds, yes.  Credit default swaps, only if I get to structure it, and same for selling options.  Private equity is fine; I will leave them alone, and capture the private equity niche of those who care about their corporate culture.” And more… he is a flexible guy, because he has a strong balance sheet behind him.

As for the robo-Buffett the academics create, well, hindsight is 20/20.  Who could have seen the relatively placid economics of the past 30+ years?  With that much foreknowledge, some private equity investors could have gone wild and done far, far better than that.

But Buffett had no roadmap.  He faced the same fog that we all do, but made robust choices that would do well against a fuzzy future.  As such, he deserves attention for his clever investing, because Buffett is different from the rest of us.

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One Response to How Warren Buffett is Different from Most Investors, Part 2

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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