The World's Greatest Trader

There's a conflict bordering on acrimony between folks who identify themselves as "investors" and those who call themselves "traders." Really, it comes down this:

To invest is to set money aside in a security you think will appreciate. To trade is to scalp a buck here, a buck there. In trading circles, to call someone an investor is akin to fightin' words.

I have just learned of the greatest trader of all time. His name is Warren Buffett. Jesse Livermore, eat your heart out.

Berkshire's not-so-secret weapon
No, this is not a reprise of Monday's spoof earnings report. Warren Buffett is a masterful trader. The evidence for this comes from the just-released quarterly report from Berkshire Hathaway (NYSE: BRK.A  ) . The company had a great quarter, with operating earnings rocketing nearly 40% for the first half 2003, and insurance operations, including General Re, showing an operating profit.

Generally speaking, insurance companies do not make money on their underwriting, and it is not uncommon for a company's combined expense ratio to substantially exceed revenues taken in. But then there was this little gem (emphasis mine):

Cash Equivalents increased from $10.3 billion to $24.4 billion in the first half. These figures exclude cash held in Berkshire's Finance and Financial Products operations. About $9.1 billion came from the sale of virtually all of the long-term U.S. Government securities held in Berkshire's actively managed, fixed-income portfolio.

Berkshire's first half runs coincidental to the calendar year, so it ended June 30. Since the beginning of July (essentially, since the Fed announced that it would not target deflation by buying long treasuries), the yields on U.S. government securities have skyrocketed, meaning that their prices have plummeted. Already this quarter, that's more than 15%.

Some pundits are calling the bond collapse a more serious destruction of wealth than the stock market bubble. And yet, Warren Buffett rode the market up to its most frothy point, and then managed to sell off the vast majority of Berkshire's bond portfolio valued at billions of dollars (a) right before the crash and (b) without anyone noticing. Astounding.

Catch him if you can
Because that's the thing when you're Warren Buffett. You buy silver, and legions of others come in and buy it, too; because, after all, you must know something. This can be a blessing, certainly. One need only look at the stock-price jumps in Level 3 (Nasdaq: LVLT  ) and PetroChina (NYSE: PTR  ) to see what happens when the market learns that Warren Buffett has taken a stake. Not that Buffett gives a rip about what happens in the weeks after he takes a position.

But it's also a curse. Buffett doesn't have an account at Schwab where he can just type in "Sell $9.1 billion in treasuries at market. Enter." First, there just aren't many buyers of that size. Second, there are very few people who would want to be on the other side of a trade with him. Buffett's work to keep his moves quiet is legendary, but it's also necessary. Very few things move a market faster than word that Berkshire Hathaway is sniffing around.

So, how'd he do it? Once again, part of Buffett's genius is that his methods are hidden in plain view. He goes out of his way to tell the "truth and nothing but the truth." As for "the whole truth," well, you're on your own. And, of course, trying to duplicate his exact methodology is likely to prove folly, and you're sure as heck not going to find how he did it by looking at some chart, momentum indicator, or anything of the sort.

What you need is horse sense, discipline, and an ability to be anti-social. Oh, and a brilliant mind for numbers. But that can't be hard to find, right?

Do I detect a pattern here?
Were this Buffett's only recent "trade," you could just say "great luck." It isn't. In Berkshire's 2002 Annual Report we find this little gem (p. 60):

Pretax earnings from the finance and financial products in 2002 increased $497 million (95.8%) to $1,016 million... Under the current market conditions, BH Finance is expected to continue to produce significant earnings in 2003.

"BH Finance" at Berkshire is made up of General Re Securities, which lost $173 million; Xtra, with at most $50 million in earnings; and Berkadia, the joint venture between Berkshire and Leucadia (NYSE: LUK  ) , which owns Finova (OTC: FNVG) and gained $115 million. That's pretty much a wash. What's left in this group to account for the billion-dollar gain? Yep, that's where Warren Buffett accounts for his personal trading.

In one year, Buffett managed to trade his way to a billion-dollar gain. And in the next year, right before the bond market tanked, he unloaded Berkshire's entire position. Without anyone noticing. Keep in mind that whenever people point to the sclerotic old-school buy-and-holders of the world, the poster boy is Warren Buffett and his motley collection of businesses that he refuses to sell.

Yup, he's lost his touch. When it comes to trading, he's like Jim Brown, who played lacrosse while at Syracuse University and, some say, the best player who ever lived. And yet lacrosse wasn't even Brown's main pursuit. He did a few great things on the football field as well.

Warren Buffett is the best trader who ever lived, and that's not even what he does best.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann would like to buy a vowel. He owns shares of Berkshire Hathaway.The Motley Fool is investors writing for investors.


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