11/19/08

You Don't Know Whether Buffett Lost His Touch!

Yahoo! Finance's front page has yet another article that has me infuriated. First it was the 29 year old housewife who is the paragon of a saver and early retiree. Now this.

The article in question asks whether Warren Buffet has lost his touch. It recounts what it calls three of Buffett's mistakes.

The first mistake, the article states, is Buffett's investment in Goldman Sachs (GS). Buffett invested $5 billion in the company in September, getting a 10% dividend. He also received the right to buy $5 billion worth of Goldman stock at $115 per share within the next five years. As Goldman was trading at $64 a share, the article concludes that Buffett lost over $2 billion.

I don't get it. Did Buffett exercise his warrants to buy $5 billion worth of GS stock? No. Did the warrants expire? No. Did he even pay anything for the warrants? So how did he lose money? (It actually shows how smart he is, not buying the common stock.)

What about the sum he invested in Goldman (and GE) preferred stock? Buffett is getting $500 million in dividends every year from GS. Excluding taxes, if GS survives and keeps paying, Buffett will get all his money back in ten years. If Goldman calls the shares (it has the option to buy the preferred shares back at a 10% premium), Buffett will make $500 million in addition to the interest payments he receives up to that point.

Buffett's second mistake, the article says, is that he thought that Congress' passing of the bailout bill would make his investment succeed. The S&P 500 is down 25% since Buffett lent money to GS, and 21% since the bailout was passed. Berkshire Hathaway's (BRK-A) stock is down 30% off its 52 week high, the article also notes. I'm not quite sure what Berkshire's stock has to do with the bailout or the Goldman investment (it's down for a number of reasons, including owning businesses that are exposed to the depressed housing sector), but the article's point is that Buffett made a mistake because the market is down since the bailout passed.

It's been only two months since the bailout has passed. While Paulson seems to change his mind every day about how to proceed, that doesn't mean the bailout and Buffett's investment are failures. Two months is not enough time to make a judgment one way or the other.

Buffett's third mistake, the article argues, is his NY Times op-ed. "'Buy stocks, cash is trash,'" the article paraphrases. Buffett's cash is trash philosophy did not fare very well, says the article. You see, over the last 10 years T-Bills have returned 30%. Thus, "If your money would have been sitting in cash for the past year, you'd be able to buy most everything on massive discounts."

I am shocked. Had the person who wrote the article actually read the op-ed, he would see that Buffett has been all in cash in his personal account for a long time. Now that stocks are trading much lower, and the government printing presses are running at full steam, Buffett thinks stocks will outperform cash over the next 10 years. He doesn't know if stocks will go up tomorrow, or a year from now. But he's going from all cash to all stocks if stocks stay at their current levels. He's doing pretty much what the article implies is the right thing. But that's his third mistake. Why? And anyway, (at least the article acknowledges that) it's been a month since the op-ed. We'll know in 10 years whether Buffett is right about stocks being better than cash.

The third mistake claim is just ridiculous. The first two claims are very common in the investing press. When someone's portfolio is down (no matter over how short a period), they're a fool. If they're up, they're a genius. You can't call Buffett a fool. So the next best thing is to ask whether he has lost his touch.

Has he lost his touch? Maybe. I don't know, and neither do you. It's only been two months! His investing horizon is years, decades. We can say he lost his touch if GS goes out of business or stops paying him dividends. That hasn't happened yet.

If Yahoo! keeps publishing such garbage, they might as well invite me to write for them.