Jake's View

Don't write off Warren Buffett, despite recent failures of judgment

PUBLISHED : Sunday, 04 May, 2014, 4:15am
UPDATED : Sunday, 04 May, 2014, 4:15am

Warren Buffett's failure to beat the stock market in four of the past five years has raised the issue of whether Berkshire Hathaway's 83-year-old iconic chief executive has lost his touch.

SCMP, May 2

It's a funny thing about people whose advice on the stock market is worth following that those who get it consistently wrong are more reliable than those who get it consistently right.

At a big investment bank I worked for we had a New York economist who liked to make market calls as well as put out reams of the usual Fed-watching blather. On Asia, at least, we never knew him to be right.

We valued his advice highly. If he said it was going up, sell it. It was sure to go down. If he said it was going down, jump in with both boots. It was sure to go up. Sadly, he eventually left us for a job in academia, or was it government? Same thing, really. But it was a loss. We never again had so reliable an indicator in Asian markets.

Warren Buffett is of a different class. He is the sort of guru who consistently gets its right. My rule in these matters still applies, however. Those who consistently get it right never do so quite as consistently as those who consistently get it wrong and now Mr Buffett has hit one of those slippery patches that prove it true.

I think the gurus who consistently get it wrong do so because they are utterly conventional in their thinking, and conventional thought in financial markets is already always in the price. I shall withhold judgment on the Marxist dictum that the truth is always revolutionary but there is certainly something to be said for it being non-conventional, at least in forecasting share prices.

Few humans, however, are consistently non-conventional in thought and I think gurus who get it consistently right do so mostly as a matter of character. Mr Buffett has so often been right about the US stock market because he is himself Mr USA.

He lives in a suburban standalone house at 123 Main Street (or something like it) in Omaha, Nebraska. His favourite drink is Coca-Cola, his favourite meal is a cheeseburger and he reclines after dinner (at 5.30pm) on a La-Z-Boy sofa. How more American can you be?

Thus, if he decides that it is time to buy Coca-Cola's stock, he does it in large measure because he is its archetypal consumer and innately understands this market. His character may be conventional but his thinking is instinctive.

He also researches his investment choices closely, of course. He is known to be a thorough reader of company accounts. But I think he succeeds mostly because a good match of personal and market character is a good formula for getting a market right. It is not as good as conventional thinking is for getting a market wrong, but very good nonetheless.

And where Mr Buffett finds himself out of character he routinely finds himself out of the winnings. He has proved himself a conventional thinker on Japan, for instance. Ouch for Berkshire Hathaway. Gurus should stick to what they know.

For a good instinctive American thinker on markets outside of America try the likes of George Soros in his prime. A refugee from Hungary with experience of the havoc that conceited bureaucrats can inflict on an economy, he has their measure in financial markets.

I saw him in action 20 years ago when he cleaned one of the world's biggest foreign exchange speculators, Bank Negara Malaysia, out of a multibillion-dollar bet on sterling. They still won't quite face up to that one in Kuala Lumpur.

But then Mr Soros allowed his funds to be one of the last and biggest buyers of the dotcom bubble in early 2000. A brilliant, instinctive thinker abroad, he turned a conventional thinker in markets at home and paid the price. He should have continued to match his markets to his character.

I think it's still too early to write Mr Buffett off. Age doesn't change character and instinct.