QUALIPORT
The Contradictions Of Warren Buffett

By Maynard Paton (TMFMayn)
October 30, 2003

Warren Buffett is not Warren Buffett. In recent editions of Barron's and Fortune, the legendary US investor contradicts three viewpoints long associated with his long-term stock market approach. Here's a rundown of what Buffett has declared in the past, and what he's now saying:

1. Buy and hold forever

"One of the rules by which we run Berkshire Hathaway (NYSE: BRK.A) is that we do not sell businesses - or investee holdings that we have classified as permanent - simply because we see ways to use the money more advantageously elsewhere." -- Buffett 1991

Oh yeah?

From the Barron's article: "Berkshire has done very well with its Coca-Cola (NYSE: KO) and Gillette (NYSE: G) stakes, accumulated in the late 1980s. But Buffett says he erred by not selling them at their late 1990s peaks... "I made a mistake [in not selling them]... They achieved bubble prices", the Berkshire chief observes".

Coke is certainly a permanent investment, and so probably is Gillette. Apparently, Buffett only held on to these shares in the late 1990s because he was a director at both companies and therefore might have been deemed to hold insider information. Whatever, there was a definite inclination to 'take profits' on his 'buy and hold forever' franchises.

Conclusion: nothing's permanent.

2. Have-to-be-smart-every-day businesses

"Retailing is a tough business. During my investment career, I have watched a large number of retailers enjoy terrific growth and superb returns on equity for a period, and then suddenly nosedive, often all the way into bankruptcy.  This shooting-star phenomenon is far more common in retailing than it is in manufacturing or service businesses.  In part, this is because a retailer must stay smart, day after day. Your competitor is always copying and then topping whatever you do.  Shoppers are meanwhile beckoned in every conceivable way to try a stream of new merchants.  In retailing, to coast is to fail." -- Buffett 1995

Really?

Back to Barron's: "Buffett remains a big fan of Wal-Mart (NYSE: WMT), noting that one of his biggest mistakes was not buying the stock years ago because it look overvalued. "That cost us $8b", he says".

If there was one retailer that enjoys shooting-star qualities and has to stay smart day after day, it's Wal-Mart. Many years and $8b ago, it would have hardly fitted the traditional Buffett 'business franchise' mould. These days, the key to Wal-Mart's success remains its talented management, who still have to stay smart each day, every day, to counter the (increasingly desperate) competition.

Conclusion: have-to-be-smart-every-day businesses can make for good long-term investments (even if they appear overvalued).

3. Economic forecasts

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.  Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices... A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them."  -- Buffett 1994

Quite sure?

In Fortune, Buffett writes: "I'm about to deliver a warning regarding the US trade deficit and also suggest a remedy for the problem... Our trade deficit has greatly worsened, to the point that our country's "net worth", so to speak, is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble."

Buffett now says America's trade deficit is putting the US dollar in danger, yet he admits his record on macroeconomics is 'far from inspiring'. Back in 1987, he again expressed concern about a mounting US trade deficit, only for the American economy to thrive during the 1990s.

Conclusion: ignore economic forecasts and just buy fine businesses at sensible prices.

Summary

Buffett offers many paradoxes. As well as so-called permanent investments, a supposed aversion to fast-growing retailers and an alleged ignorance of economic issues, recent years have raised a few other inconsistencies to the accepted Buffett wisdom.

For instance, the old man has begun to dabble in junk bonds and commodities, and now reveals in Fortune that he's been buying up a few foreign currencies, too. Hardly the straightforward and common sense investments he tells his shareholders to seek out. Then there's the old valuation chestnut; he always referring to discounted cash flow calculations, but as Berkshire counterpart Charles Munger once admitted: "I've never seen him do one". And of course, a lot of his past common stock investments haven't been long-term holds, either.

In recent years, Buffett wannabes could justify a "do as he says, not as he does" approach to their stock market investing. But after the latest comments, even that waiver is becoming less appropriate. For sure, Warren Buffett is not Warren Buffett.

More: Barron's | Fortune | Berkshire Hathaway | Buffett On His Mistakes