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speedybure (< 20)




May 20, 2009 – Comments (3) | RELATED TICKERS: BRK-A , BRK-B

Warren Buffet, considered one of, if not the great investor of all time, has few but significant flaws with both his qualitative and quantitative analysis of securities. I'm not saying he is sub-par by any means, but rather a few small valuation measures would have prevented him from buying some of his... let me see awful stock picks. I am referring to the financial industry ex-( goldmansachs and G.E as I believe their were stong political forces at work there). 

1) To make this a short and informative post, I will list what warrent buffet looked for in a company 

A) Good company with a comparative advantage, good managment, easy to understand, earnings predictability, etc.

B) He like low debt, high returns on total capital (net income/(bv equity+ bv debt), high return on equity, efficient utilitzation of retained earnings,  consistent eps growth for 5-10 year and positive free cash flow.  So what's missing? - His investment in wells fargo, US bankcorp, AXP clearly shows 2 major flaws in the quanatitive analysis in addition to a violation of his own regards to the qualitative.

  i) He obviously didn't understand fractional reserve banking nearly well enough because his risk averse style of investing would have preventd him from purchasing financials. Sure they has all of the above characteristics and paid out excess profits if they couldn't get a better return on their investment. Althoug I'm a young man with exponentially far less funds than buffet, I had common sense to get 75% out of the market a few hundred points after the doe crossed 1200. I didn't know where the bubble was as the time, and found virtually no values in the market (Likely because I am extremely stringent). I say this because, The FED artificial manipulation of the Fed funds rate which indirectly effects the loanable funds market, caused the financial companies to act recklesslly (remember fractional reserve banking). In short, buffet didn;t practice what he preached. On one more note, it is virtually if not completely impossible to derive a positive value via discounted cash flow model. 

ii) To really understand a company, one must be aware and knowledgable concerning the economic landscape. Buffet obviously thought 97'-2007' was just a period of great economic growth and the conitinous national and consumer debt were sustainable with a rather low chance of substancial defaults. He was blind to the fantasy world financed by credit and foreigners and his actions showed no cause for concern whatsoever. Why Do I Think This? He would have sold or trimmed american express, wells fargo, USB, ETC. 

iii) Should he have incoporated the well known "magic formula" by Joel Greenblatt, he would have been forced to avoid all financial stocks to begin with. Not to dwell on this formula, but it is basically a measure of two things (earnings yield (Enterprise Value/ EBIT) & return on TANGIBLE CAPITAL( EBIT/(NET FIXED CAPITAL + NET WORKING CAPITAL). This metric would have ranked last of any industry, thus redirecting capital towards more favorable investments.  

CONCLUSION: I'm not ripping on Warren Buffet by any means, but rather pointing out the shortcomings of a few particular investments due to the fact he ignored his own investment philosophy and lacked one small but extremely telling measure of the quality of earnings.

3 Comments – Post Your Own

#1) On May 20, 2009 at 12:19 PM, OctoStalin (33.44) wrote:


It’s funny how every single person on the internet foresaw the banking crisis. 

Buffett sold Freddie Mac at almost exactly the right time, most likely because of subprime. Wells Fargo had little subprime exposure and neither did UBS. So he obviously understood the credit market, what your failing him for is not selling a RARE great business due to him trying to time the markets. Market timing is very unpredictable and mostly foolhardy, not to mention Buffett has almost never attempted it before. This makes your point pretty illogical.

Buffett seems to be one of the only guys who isn't so consumed by the recession they forgotten sound business.


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#2) On May 20, 2009 at 12:33 PM, dudemonkey (51.07) wrote:

Market timing is very unpredictable and mostly foolhardy, not to mention Buffett has almost never attempted it before.

I wanted to repeat this.  This is the missing piece in the OP's blog entry.  He's viewing Buffett's investment through HIS OWN lense rather than through Buffett's.

That's not a fatal mistake, it's just an indication that the OP is not Warren Buffett (none of us are) and may be better suited with a different investment strategy.  In fact, the OP might be better suited to TA and trading rather than investing.  Most people are.

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#3) On May 20, 2009 at 12:42 PM, speedybure (< 20) wrote:

If you havn't noticed, no one knows yet how many subprime loans are in existence? It all depends how you classifly subprime. What I was trying to convey, thats Buffet proclaims to invest in businesses which are easy to understand (the banking system i.e fractional reserve banking is impossible to forecaset as a huge factor that contributes to the business cycle). Of course wells fargo hasn;t shown its true colors, as the fed injected 800 billion into the banking system. As mentioned i nthe previous sentences fractional reserve banking then allows the overall banking industry to create 7.2 trillion dollars. We have yet to see how much more of this amount is used to cover loan losses than will likely accelerate as unemployment deepens and ARMS reset. You failed to mention american express, I don;t understand his rationale of sticking with it as opposed to mastercard or visa where they have no debt obligations, as the banks hold that liability. 

I think there are many investors just as good as Buffet i.e Jim Rogers, Joel GreenBlatt and others. I find it odd as well that buffet buys nearly 100% american equities while foreign stocks are far more undervalued.. but hey he doesn't need the money so that could account for it 

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