Should you follow Buffett and be greedy now?

February 4th, 2009

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One of our readers, in response to yesterday’s article (Future is bleak for conventional investing), said

Mr Contrarian, you?re stating to sound like mainstream press.
It may soon be time to turn contrarian on the Contrarian Investor.

As Warren Buffet pointed out: ?Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.?

Today, we cannot resist poking another fun at this Buffett cliché (“Be fearful when others are greedy and greedy when others are fearful”). Two years ago, we were very fearful when others are greedy. Today, others are fearful and we have not yet turned greedy. So, are we turning mainstream?

First, for those extreme Buffett devotees (we do not know whether this particular reader is one) who like to quote this cliché religiously, there are something they fail to understand about being contrarian- there is a difference between a contrarian and a reverse conformist. A reverse conformist blindly takes the opposite position of the crowd indiscriminately. The moment the crowd turns fearful, a reverse conformist immediately flips to greed. A contrarian, on the other hand, is someone who is prepared to take an opposite position at the right time. As we said in What is this publication all about?,

… if you want to achieve excellence in your investment endeavours, you have to be prepared, from time to time, to go against the prevailing market trend with strong convictions.

Second, being contrarian does not merely mean taking an opposite direction from the crowd on the same road. Sometimes it means taking a different road. Some Buffett devotees who adhere to this cliché religiously can only think in terms of investing in stocks (listed securities) of public businesses. In other words, they can only think of investments in the context of a financial market. In reality, stocks is only one road of the many roads available to the investor. That’s why we said in yesterday’s article that

For others, it may mean investing outside the financial system. For some people, they may no longer see it appropriate to call it ?investing.?

Our point in yesterday’s article is that to be a successful investor, one has to look beyond the conventional realm of the financial markets in today’s economic climate.

Third, some of these extreme Buffett devotees fail to see there is one major difference between them and Warren Buffett- he has the big money and influence to cut deals in order to acquire entire businesses outright. Many of these businesses are private ones and inaccessible from the stock market. Most investors, on the other hand, can only access publicly listed businesses from the financial markets. That in itself puts most investors at a severe disadvantage. Think about this: If you own a fantastic private business that fulfils the Buffett criteria, would you want to turn it public (especially in today’s economic climate) and subject your business under legal and institutional straits jacket and put it under the watchful public eye? If you are to turn your private business into a public business, will you ensure that you will get the better deal than the public? This is something that the Chinese Sovereign Wealth Fund had to learn the hard way when it purchased Blackstone.

Next, we may trust that Buffett to be a better businessman than us. But does that automatically mean that he has a good understanding of the macroeconomic environment? In fact, Buffett is a lousy economist. The biggest mistake a Buffett devotee can make is to believe that Buffett is good at everything and believes that his circle of competency is greater than it actually is.

Next, some Buffett devotees fail to see that he has a blind spot- Warren Buffett is an American patriot who has a biased view in favour of America.

Finally, take note of this: Warren Buffett has never experienced the Great Depression for himself. Neither has he experienced hyperinflation of Weimar Germany. All his life, he lives in America as an American. Today’s America is at a turning point and there’s no guarantee that it will return to the America that Buffett experienced all his life. As we said before in Listening to ?wise? heads can be dangerous,

The point is, no matter how experienced a ?wise? head is, his experience is still confined to either (1) a specific market or (2) a slice of time in history. That is, all the experience that a ?wise? head has is still limited in the bigger scheme of things. Therefore, to stop thinking and extrapolate blindly from this limited perspective into the general is a dangerous trap to base one?s investment decisions on.

For all you know, the panic of 2008 may be the event that becomes the undoing of Warren Buffett’s reputation as an investor.

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  • Pete

    I really like this article Ed, thanks.
    (nothing against people who like Buffett)

    Next, some Buffett devotees fail to see that he has a blind spot- Warren Buffett is an American patriot who has a biased view in favour of America.

    I agree with this. I remember hearing about Buffett being bullish on America, but without any sound reasoning. Whilst reasoning seems to dictate otherwise, it seems like that is one of Buffett’s shortcomings.

    And you make a really good point about him not being an economist. He has (had?) a great model for purchasing companies (mostly private ones as you assert) but this does not make him good at economics. Just because this model worked well for his lifetime does not mean it will continue on forever.

    Whether his model will work in a Depression is another question. Perhaps another country will take their turn in implementing it (not implying Australia)

  • Pete

    I really like this article Ed, thanks.
    (nothing against people who like Buffett)

    Next, some Buffett devotees fail to see that he has a blind spot- Warren Buffett is an American patriot who has a biased view in favour of America.

    I agree with this. I remember hearing about Buffett being bullish on America, but without any sound reasoning. Whilst reasoning seems to dictate otherwise, it seems like that is one of Buffett’s shortcomings.

    And you make a really good point about him not being an economist. He has (had?) a great model for purchasing companies (mostly private ones as you assert) but this does not make him good at economics. Just because this model worked well for his lifetime does not mean it will continue on forever.

    Whether his model will work in a Depression is another question. Perhaps another country will take their turn in implementing it (not implying Australia)

  • Barnaby

    I think you hit the nail right on the head with this one. I’ve heard so many experts advising people to buy into the fear, citing Buffet’s cliche time and time again. Interestingly though, I don’t think any of them were fearful when others were greedy.

  • Barnaby

    I think you hit the nail right on the head with this one. I’ve heard so many experts advising people to buy into the fear, citing Buffet’s cliche time and time again. Interestingly though, I don’t think any of them were fearful when others were greedy.

  • Sergey Stadnik

    Ok, Buffet’s way is dead, Marc Faber’s way is alive. So what’s the answer – invest in beer and prostitutes?

  • Sergey Stadnik

    Ok, Buffet’s way is dead, Marc Faber’s way is alive. So what’s the answer – invest in beer and prostitutes?

  • Pete

    Only slightly related question Ed, that I have been pondering for a while: What is China going to do in the GFC?

    Some thoughts:

    China has money, right? So it can also spend on stimulus and investments, etc. Perhaps it will:
    – buy Australian resource companies?
    – buy lots of resources, creating a mini-boom for Australia that is completely secular because it is based on sovereign wealth only?
    – buy lots of gold?
    – start some kind of subversive trade/currency war with the US?
    – import a lot of oil? (perhaps slowly?)
    – wait until Australia is just starting to get some momentum in our Depression and then hammer us by removing all investment and calling in all loans?

    Somewhere in the back of my mind I wonder…is it possible China will start another mini-resources boom in order to stimulate it’s own economy? I think we really need to consider where it will spend its money, if it will.

    Look, it probably seems clear that I have no clue whatsoever, but I am interested in what other people have to say about this one.

  • Pete

    Only slightly related question Ed, that I have been pondering for a while: What is China going to do in the GFC?

    Some thoughts:

    China has money, right? So it can also spend on stimulus and investments, etc. Perhaps it will:
    – buy Australian resource companies?
    – buy lots of resources, creating a mini-boom for Australia that is completely secular because it is based on sovereign wealth only?
    – buy lots of gold?
    – start some kind of subversive trade/currency war with the US?
    – import a lot of oil? (perhaps slowly?)
    – wait until Australia is just starting to get some momentum in our Depression and then hammer us by removing all investment and calling in all loans?

    Somewhere in the back of my mind I wonder…is it possible China will start another mini-resources boom in order to stimulate it’s own economy? I think we really need to consider where it will spend its money, if it will.

    Look, it probably seems clear that I have no clue whatsoever, but I am interested in what other people have to say about this one.

  • Hi Pete!

    Let’s open this topic for discussion here.

    Hi Sergey!

    About Marc Faber’s comment on the Warren Buffett, we were being flippant. But your question is what we will be writing about. Keep in tune!

  • Hi Pete!

    Let’s open this topic for discussion here.

    Hi Sergey!

    About Marc Faber’s comment on the Warren Buffett, we were being flippant. But your question is what we will be writing about. Keep in tune!

  • HiredGoon

    A bunch of soldiers are running across a field oblivious to the risk of mines. Suddenly someone is blown up – and everyone stops. Is the smart thing to do run forward just because it is the opposite of what everyone else is doing?

  • HiredGoon

    A bunch of soldiers are running across a field oblivious to the risk of mines. Suddenly someone is blown up – and everyone stops. Is the smart thing to do run forward just because it is the opposite of what everyone else is doing?