Warren's Lost His Touch?!

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CBS Marketwatch (Nasdaq: MKTW) columnist Thomas Kostigen came out swinging in an article Monday, claiming that Warren Buffett, the second-wealthiest man in the world, isn't much of an investment strategist because his portfolio doesn't use some of the new trading techniques to juice up returns.

My first reaction to this: "And you are...?"

But that's not quite fair. Logic should float on its own merits, and Warren Buffett, despite his record, should not be immune to well-placed criticism. This guy is either making good points about why folks who own Berkshire Hathaway (NYSE: BRK.A) stock, priced at $92,000 a share, should be more critical of Buffett's management of their money, or he is not.

I vote "not." Further, I vote that Mr. Kostigen's logic is simply awful. I almost don't want to link to the story -- after all, the more people who read it, the more "rewarded" Kostigen will be for stirring up controversy. So let me say this -- being foolish in a high-profile way shouldn't be confused with victory.

In fact, he takes what have become pro forma warnings from Buffett "the next years we will be unable to do what we have done in the past" and claims that they are "sad admissions." This belies a rudimentary misunderstanding of Buffett's problem -- $80 billion in liquid assets means that Berkshire's options for investment are extremely limited. This isn't complicated. What also isn't complicated, and yet, our "sophisticated investor" seems to have missed in its entirety, is the core essence of what Buffett does: it's not enough to discuss an "equity risk premium." What a truly sophisticated investor does is look for situations where the reward substantially outweighs the risk. Getting compensated for your risk is easy -- being compensated even though you've taken less risk, now that's art.

Kostigen's core argument is that Buffett has built a safe portfolio, but that he ought to be disgraced for not using these advanced techniques to generate the largest potential return for his portfolio, including international equities, derivatives, "facile trading," and "dead-on forecasting." But I didn't even get that far into the article before coffee flew out of my nose. Really, Kostigen had me at "And his biggest claim to fame is: buy and hold, otherwise known as value investing." I seriously wondered at this point whether I was reading a farce, some faux naïf performance art extraordinaire. "Buy and hold" has very little to do with value investing. They certainly are not the same thing. Buying and holding Taser (Nasdaq: TASR), starting today, is a lot of things. It might even be smart, but value investing it is not. This statement, taken alone, is bafflingly ignorant of basic nomenclature.

Let's take these one by one.

• No derivatives. I love this one. Here's the thing. Berkshire is, at its core, an insurance company. A reinsurance company, actually. These are ALL derivative products. Buffett's core business is derivatives, and I daresay that he understands them better than most. Noteworthy, then, that he's bleeding off General Re's derivative book.
  
  
• Innovative structures. One need only look at the SQUARZ deal, in which Berkshire sold bonds to people that offer coupons not to the noteholder, but to Berkshire. File this under "customized securities," as well. Unprecedented. We also offer as evidence the announcement on Monday that Berkshire, White Mountains (NYSE: WTM), and others are buyingSafeco's (Nasdaq: SAFC) insurance operations, as well as his discussion of the Finova runoff in conjunction with Leucadia (NYSE: LUK). I'm sure these were drawn up in crayon.
  
  
• Facile trading. I'm wondering what Kostigen would call facile, since Buffett bought junk bonds in 2002 and unloaded them when everyone climbed aboard. Or his purchase of PetroChina (NYSE: PTR) -- surely that counts as "international?" Or this: Buffett generated $1.17 billion in trading gains by himself in 2003. Or foreign currencies in 2002?
  
  
• Deep research. Kostigen says that the traders topping Hulbert's returns are trouncing Buffett. I have one question -- how would they do allocating $80 billion? This is like marveling at how much more nimble a mouse is than a hippo. But does Kostigen really think that a man who can do derivative payoff ratios in his head really doesn't depend on his own deep research? Pah.
  

What I found most interesting about this article was Kostigen notes, without a hint of irony, that the last time Buffett took a great deal of flak was in 1999, when the media called him a has-been for not investing in technology stocks, which had done well at the time. Well, here we are, 2003 having just ended, and the segments of the market performing best are the ones with the junkiest fundamentals, and someone's squeezing a shot off at Buffett once again. If the Kostigen's salvo was well aimed, that would be one thing. But the scoreboard is siding with Buffett, so perhaps hammering him over the same issues today as 1999 might not be prudent.

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Bill Mann owns Berkshire Hathaway and White Mountains Insurance.