The weight of the evidence suggests that Warren Buffett has recently been swimming naked. He has lost his groove, and here is why.
"Even Napoleon had his Watergate."
-- Yogi Berra
• Style drift. In the process of establishing a large derivative position on the S&P 500 by shorting puts, Buffett has deviated from his long-established investment discipline of avoiding "market plays" and of avoiding "financial weapons of mass destruction" (derivatives). This "play" has led to continued, multibillion-dollar losses over the past few quarters. According to the recently released 10Q, Berkshire has lost a total of $9 billion on Buffett's short put position.
"Without a total and complete discrediting of the Buffett gambit (which I divine to be that the short term, which encompasses anything from five days to five years, is irrelevant) and a revealing that the pain in his view is irrelevance to be borne -- despite the losses of which he is only a handful of people who can sustain them, as he is 'the house'."
-- James Cramer, RealMoney
• Recent share acquisitions of Goldman Sachs (Stock Quote: GS) and General Electric (Stock Quote: GE) have been ill-timed. Buffett has convinced Corporate America (and Corporate Europe!) that he is a kind, avuncular sort, an easy and quick-to-deal-with investor of last resort. Toward that end, Buffett recently came to the rescue of General Electric and Goldman Sachs, investing $8 billion in both issues combined. While both investments were made on favorable terms -- they are both seriously underwater -- not too long ago Buffett purchased $5 billion of 10% preferreds in Goldman Sachs, with five-year warrants struck at $115 per share. At the time, Goldman was trading at $125; it now trades at $74 per share. Buffett also picked up $3 billion in 10% perpetual preferreds in General Electric, with warrants at $22.25 per share. At the time, GE was trading at $22; it now trades at $17 per share.
"In the long run, we're all dead."
-- John Maynard Keynes
• Buffett's notion of long term is now becoming a convenient shroud to poorly timed investments. A recent Forbes article outlined most of Berkshire's largest investments. Berkshire's list of longer-term holdings includes a great many successful positions based on relationship to cost, but the cost/market gap is rapidly closing. Importantly, over the last few years, the performance of many of these investments -- including Comcast (Stock Quote: CMSA), Coca-Cola (Stock Quote: KO), Kraft (Stock Quote: KFT) and U.S. Bancorp (Stock Quote: USB) –have underperformed the market dramatically. And some of the largest holdings -- such as American Express (Stock Quote: AXP), CarMax (Stock Quote: KMX), Conoco Phillips (Stock Quote: COP), Gannett (Stock Quote: GCI), Ingersoll-Rand (Stock Quote: IR), Moody's (Stock Quote: MCO), USG (Stock Quote: USG), WellPoint (Stock Quote: WLP) and Wells Fargo (Stock Quote: WFC) -- have been unmitigated disasters in 2007-2008.
Over time, Warrant Buffett has been the greatest investor extant. His long-term investment performance is unparalleled, but his performance over the past five years, and especially over the past year, is beginning to trail off badly.
In support, Buffett devotees and apologists cite his time frame. They universally say that Buffett's strategy is for the long term -- that Berkshire's short-term underperformance is irrelevant.
But is it?
Is the notion of long term now irrelevant, particularly given Warren Buffett's age and the likelihood that sooner than later he will be succeeded by one or several new individuals at Berkshire's helm? Is it irrelevant in our present and future dystopia, in a possible multiyear bear market or in an economy that faces headwinds we haven't seen in decades? Or is it just one of those tautologies that it is safe to buy in the long term?
The reality is that in recent years Warren Buffett has become an even better marketer than investor, with the benefit of his image and reputation accruing to Berkshire. He has cultivated an image of someone who started with nothing, even though he was the son of a well-to-do stockbroker who became a U.S. Congressman. Everyone thinks of him as America's Business Grandpa, but remember that he grabbed control of a textile firm and promised not to change anything. He did make changes, though, eventually using the textile company's cash flow for acquisitions, shutting down the factory over time.
In essence, Buffett has sold himself as a savior, or investor of last (or often first!) resort. As such, he has positioned himself to prosper in the form of getting beneficial terms in acquisitions (the most recent examples being Goldman Sachs and General Electric), a positive but still a shrewd "marketing" technique.
Perhaps Warren Buffett, not Sam Zell, is the real gravedancer!
I have concluded that The Oracle of Omaha has morphed into the Mozart of Marketing and has veered off his investment path in a style drift into derivatives (selling puts on the S&P 500). More importantly, his investment strategy, which served him so well over the years, has begun to noticeably sour and might not be suited for the future.
"What we have created is, to some extent, a cult."
-- Charlie Munger
Similar to Warren Buffett, I too have a reverence for logic. And perhaps Charlie Munger is right (though in a different context) in the quote above. Berkshire Hathaway might now be more of a cult than a superior investment vehicle.
Warren Buffett has lost his groove. The question is whether he will get it back any time soon.
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Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.