The worst investment decision Warren Buffet ever made

Or: On Outperforming Warren Buffet

Warren Buffet is hailed as the best investor in the world. His net worth as an investor is generally regarded as proof.  I started 100% DIY investing in March 2006 when we transferred our remaining holdings from our full-service investment adviser to our discount brokerage. We are currently standing at 31% over book value. In the same period, BRK-A, Buffet’s holding company has gone from trading at US $90,625 to yesterday’s close at $103,000. That is a 14% gain. Does that make me twice as good an investor as Warren Buffet?

An article in Canada’s Globe and Mail recommends that individuals invest like Buffet. There are many articles of this kind floating around; Buffet is considered a prophet of investing, the Oracle of Omaha. I’ve also shared here some of my tips of investing and there is some overlap between the way the Buffet invests and my style.  Yet in the commentary section of the Globe and Mail article I wrote:

I cannot invest like Warren Buffet. He breathes and the market reacts. It is harder for him to buy shares on the open market too, since if he were to let it be known that he wanted a billion dollars of shares of something, the price would go up uncontrollably. That’s why he often buys preferred shares which aren’t available to guys like me. He can’t invest like me either. Unlike Buffet, whenever I buy something the price seems to go down immediately. I buy very small stakes in companies that I think have promise or which have good yield. But it’s too small for anyone to pay much attention. I like it that way.

So perhaps comparing myself to Warren Buffet is a bit of bravado on my part, a testosterone-filled pissing match. It’s not comparable at all because Buffet is investing billions and I’m like an ant crawling around the big toe of an elephant. And to be fair, there have been times when Buffet’s done much better. I’ve been lucky during this recession, I’ll admit it.

But there is a fundamental difference between Buffet style and mine. He is buying America whereas I’m shorting the US dollar and buying Canada–a strategy that may back fire according to Roubini; but I don’t think it will because all the trends in the US government until the 2010 election are inflationary. Ken Boessenkool in the Globe and Mail writes about Canada’s dollar, the loonie:

… perceptions of future investment returns on a country-to-country basis are often affected by large shifts in fiscal policy. Bad fiscal policy – in the form of unsustainable deficits and debts – will cause investors to expect increases in future taxes and lower rates of return. In that case, the relative attractiveness of that country as a place to work and invest will fall, driving down economic growth. In response to poor fiscal policy, a falling currency can provide the automatic stabilizer to lower growth rates resulting from rising deficits and unsustainable debts.

And this is exactly the picture we are seeing south of the border. Barack Obama has put the United States on a debt and deficit path that is far worse than Canada experienced in the early 1990s, when The Wall Street Journal called Canada an “honorary member of the Third World” and our dollar was flirting with historic lows.

Moveover, our world-view is informed by biblical conservatism. The Bible is a good guide to investing; it affirms risk taking, generosity, unselfishness and not allowing money take hold of you (I am of the opinion that selfish people make bad investors).  It also warns about indebtedness. In my view, the US government’s profligate debt-based spending is a path towards poverty that is immoral and self-destructive. This kind of behavior is not affirmed in the Bible at all.

Warren Buffet knows it is bad in the US. But perhaps he is in denial about the single worst investment decision that he ever made:  his ill-informed endorsement of Barack Obama for President. Ill-informed because had he paid attention to Obama, he would have known that he was a radical leftist–perhaps it is not too far to say that BHO is a Marxist given his background. He would have known also that BHO knows nothing about economics and has never been an executive of a company or any other entity which would have qualified him for becoming the CEO of the United States. The man who is famous for researching companies before risking billions failed to do his research into BHO and it is literally costing Berkshire Hathaway billions in market capitalization.

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Spreading the risk: Investment tips from an amateur

Early in 2005, I asked my investment adviser for suggestions regarding stocks I could buy in US dollars, and he didn’t come up with one.  When my wife asked to buy Catepillar, he said it wasn’t a good idea.  For these reasons, and because he also received 2% commission for every transaction, I decided to try a self-directed trading account (DIY, do-it-yourself). On November 1, 2005, I bought my first DIY stock, CAT, at $50 per share and sold it at $70 the following February.  That marked my beginning as an investor.  So I have an answer now to that thorny question, “What do you do?”  That question has been embarrassing since 1996 when I finished my doctoral studies.  As a biblical scholar, I’ve never had a full-time job in the field.  Rather, I’ve taught as an adjunct in Canada and as a visiting professor in Africa, I’ve continued my research in the Acts of Paul, I’ve been the director of a charitable project called the Barnabas Venture since May 2004, and I have been very active in my local church.  I do work for my wife’s company too, but only part time.  But imagine trying to explain all that to people.  Now I just say, “I’m an investor.”

Being involved in philanthropy, I’ve desired to increase our ability to be charitable.  This has been one of the driving factors in leading me into DIY; but also, in the last half of his life, my grandfather and role model, Wallace Wilkinson Dunn, Sr., was an investor.  An inheritance from grandfather paid for the first year of my studies at Cambridge.  My father, who received the bulk of grandfather’s estate, paid for the next two years.  Thus, I enter investing with full confidence that it can be done profitably.  Finally, when it comes to our retirement accounts and Tax Free Savings Accounts (TFSA, which is the Canadian equivalent of a Roth IRA), we dare not put them in fixed income with constant ebb of inflation taking away most of our gains.  So I manage all but one of our retirement accounts, TFSAs, and small but growing non-registered account.

This morning I sat down and made short list of my investment strategies which included the following points:

(1) Pay attention to the macro trends in the economy.  Information is key, but one must realize that much of the information out there is provided by incompetent writers or supporters of disastrous policies such as Keynesian economics (keyword, “stimulus”) and Obama’s presidency, which have led to huge budget deficits and inflation.  The conservative world view serves me well as an investor.

(2) Always maintain sufficient cash or credit instruments to take advantage of market downturns.  But I try always to maintain an extremely low debt to equity ratio (far below 1:1–the goal of a business is to be in business the next day–while failed banks like Bear-Stearns had ratios of 30:1).  The investments must also be able to pay for themselves through their dividends.

(3) Keep the watch list down.  It is very difficult for me to watch more than about 20 stocks.

(4) Specialize:  Most investors have their specialty, a nook where they have a better feel for the market.  Some are commodity traders; others trade gold or foreign currencies.  I trade in bank, oil and gold mining stocks.  I am not a competent in options or short selling.  I stay away from investments that I don’t understand.  That’s why I don’t do options trading, because I don’t understand them.  Not being an expert, I also have to depend on analysts at TD Waterhouse and Scotia iTrade to inform me if a stock is a “buy” or a “hold” or “sector outperform” or “underperform”.

(5) Spread the risk:  When we still had an investment adviser, he told us the story of how certain Nortel employees who lost their jobs also had retirement portfolios which were predominantly made up of shares and options in Nortel.  As a consequence, they were severely hurt by the demise of Nortel.  Once while in my bank, a representative mentioned that one would do well to buy, as she had done, bank stocks (which were at an all time low).  She had invested in TD Bank; I told her that she shouldn’t do that since she was employed by the bank.  Well she would have made money, without a doubt, because TD Bank is back up to $68 per share.  But it is necessary to maintain the principle of spreading risk which means that one should never have everything in a single sector or a single company (Don’t put all your eggs in one basket). My wife’s company is in aviation maintenance, so I have chosen never to purchase a stock related to that sector.  So Air Canada, Boeing, Bombardier are all on my never-buy list.

Obviously there is some tension between specializing/keeping the watch list down and spreading the risk.  Buying 100 stocks in several sectors effectively spreads the risk even more.  But I can’t know enough about every sector to manage that; so I am trying to learn more about the gold mining and oil and gas sectors to be able to trade and invest effectively.

In late 2008 and most of 2009, when people asked me what I do, I said I was an unsuccessful investor.  But today, thanks to the recent upswing in the market, I’m still investing, while many professional financial advisers are delivering pizzas, waiting on tables, driving taxi, or just sitting at home unemployed.  For that, I, a DIY amateur, am thankful

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Shorting the US dollar

A Canadian friend told me that he was thinking about taking a long position in GE.  It was at an all time low and evidently oversold at the time (under $7).  I warned him that stocks held in US currency were risky for Canadians because they would have to buy US currency at a high price but that, with the Obama government overspending and all, the US dollar was going to lose its value quickly.

GE hit its low in early March, and let’s say that my friend bought at $6.66, its closing price on March 6.  On that day, he would have paid about CDN $1.27 for every US $1.  So 100 shares would have cost him $6679.99 (which is inclusive of the $19.99 commission), or CDN $8483.59.  GE today is selling at $16.52 today.  If you add the three quarterly dividends (ex dividend date 17 Sept, 17 June, 17 March), he would be looking at a total of $16.82 per share or a phenomenal 152% rate of return.  But what is that today in Canadian funds?  $16820 = $17755 (1.056)  That is today in Canada, his investment has 109% rate of return, which is still wonderful, but as a result of the diminished power of the US dollar, much less than 152%.  But in the likely event that the US dollar continues to plummet, his return on investment will continue suffer in Canadian value.

I’ve taken short positions against the dollar by borrowing US funds to buy Canadian oil and gold companies (erf, abx: NY) .  Also, I will convert every penny of US funds that come in into Canadian until the currencies reach par.

Yesterday I learned that many investors are beginning to use the US dollar as the new “carry trade currency”.  I didn’t know what that meant so I looked it up.  It is a reference to borrowing currency that has a low interest rate, changing into a foreign currency and making investments in that currency (such as GICs or buying stocks).  Well, I guess my investment strategy is a trend rather than idiosyncratic.  I was basing this strategy on the fundamental conviction that US dollar, despite the current deflationary tendency, would suffer because of the Obama budget deficit.

Links:

Dollar is the ‘New Peso’

Is the Dollar Set to Become the new yen?

Obama budget and investment strategy

Obama’s mendacity has reached cosmic proportions.  The AP reports the extent of his new budget, a whopping 3 trillion dollars (cela veut dire $3,000,000,000,000 pour mes amis qui ne comprennent des chiffres en anglais!  Pour ceux qui sont en Afrique francophone, cela donne 1537770000000000 CFA selon le taux actuel).  This includes 1.75 trillion dollar deficit, which he repeatedly blames on the Bush administration by calling it the deficit that we’ve inherited.  Excuse me.  But you don’t inherit deficits but debt.  Deficit spending is a result of the current administration’s decisions.  But the double-speak rises to unbelievable proportions when he says,
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Obama and "investment" (Updated)

examiner.com)

Projected US Federal Budget Deficit (Source: examiner.com)

The stimulus bill has passed the Congress and awaits signing by President Obama.  The AP reports:

President Barack Obama, savoring his first major victory in Congress, said Saturday that newly passed $787 billion economic stimulus legislation marks a “major milestone on our road to recovery.”

Speaking in his weekly radio and Internet address, Obama said, “I will sign this legislation into law shortly, and we’ll begin making the immediate investments necessary to put people back to work doing the work America needs done.”

Now I have to say that the term “stimulus” is euphemistic for “wasteful government spending”.  But the term “investments” for this bill is ridiculous.  If the US government doesn’t raise sufficient money to cover this deficit, it will lead to inflation.  Inflation is form of robbery.  Do you have a savings account?  At 20% inflation like what we had during the Carter years (I was alive in those days, I remember it), your savings account will have lost 1/5 its value in one year.  In five years its worth nothing.

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