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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