Dear Fellow-Investor.
We all make mistakes even if our name is Warren Buffett or George Soros. But when great investors such as Buffett and Soros make mistakes, the lessons for the rest of us are so much more interesting!
Both get far more decisions right than wrong. Buffett took over as the world’s richest man this year (2008)with a fortune of bn, while Soros managed to pull in .9bn as a hedge fund manager last year.
And new books that are coming out now cast some light on some mistakes.
Vahan Janjigian and Steve Forbes fouthcoming book “Even Buffett Isn’t Perfect” isn’t supposed to quite live up to the iconoclastic promise of it’s title. They conclude that Warren Buffet is one of the greatest investors – if not the greatest – of all times. But they identify one recurring problem with Buffett’s style of investing. He holds on to stocks too long regardless of price.
Buffett once said , “we have no interest at all in selling any good business that Berkshire (Buffett’s conglomerate holding company) owns and we’re very reluctant to sell businesses if they were at least producing some cash and had decent labour relations.”
For Buffett, his investments are almost like a marriage. Meanwhile, Vahan Janjigian and Steve Forbes prompts him with an old adage, “never marry a stock.” These attitudes can be reconciled because Buffett sees all investment decisions as though he is buying a business, rather than simply buying a stock, and takes very large stakes. Once invested, he is married to the business, not merely the stock.
For most it’s probably not so! If a very good business has become overpriced, most people consider selling it. The emerging discipline of behavioral finance – which uses experimantal psychology to explore investment decisions – suggests that far more mistakes are made in deciding when to sell a stock than in the much more widely discussed arena of deciding when to buy.
One of Buffett’s great stock picks was Coca-Cola, which he rode all the way up to it’s brief stint as the world’s largest company by market value, a distinction it reached a little more than a decade ago. But he still holds it, even though Coke has been outperformed by many rivals since then.
For Buffett, this might make sense. But the rest of us should develop a selling discipline. When a stock has become overpriced, we should sell.
As for Soro’s mistakes, he’s been honest enough to tell us about them. His forthcoming book “The New Paradigm for Financial Markets”, on the causes of the credit crisis includes an investment diary that started at the beginning of this year. Soros gave his prognosis for 2008 and explained his investment strategy to capitalize on it.
He then updated it every 2 weeks. The timing was fortunate: Soro’s diary took him through until the Bear Stearns sell-off in March. Soros was the first great “global macro” fund manager making big asset allocation bets. Most famously he wagered that the sterling would have to devalue in September 1992, forcing the UK government to leave the exchange rate mechanism.
Macro funds – which is a hedge fund that specializes in strategies designed to profit from expected macroeconomic events. ( Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy ). – did well in the first quarter of this year, making an average of about 10% while many other investors lost serious money.
But Soros reveals in his diary that he was only flat for the period. He failed to make money even though he was exactly correct in the way he assessed the global markets. In January, he predicted that the credit crisis was sever but that the acute phase would be contained because central banks would provide temporary liquidity. And that’s exactly what happened.
He also saw a bubble in China. So he started the year betting on the dollar and US and European stocks to fall. All correct calls! So how did he fail to make money? Timing was part of it. He was heavily invested in India and China on the theory that the bubble was in its early stages. But Indian stocks fell 20% in a few weeks during January, while the Shanghai Composite is now at half from its peak of last October.
Then there was Bear Stearns. His overall prediction on US financial services was uncannily correct. But on Friday, March 14, he bought Bear Stearns stock which closed the day at . The Federal Reserve had announced emergency funding and he assumed that Bear Stearns would be auctioned off to the highest bidder over the weekend.
Instead, Bear was forced into the arms of JP Morgan for a share. And Soros could have feared very much worse. His Bear shares were very well hedged in the credit market. But by March 20, his fund was “under water for the year”, albeit to a much lesser degree than many others.
There is a belief that times of turbulence are times of opportunity for those that see the big picture. And that perfectly describes George Soros. But if even he can fail to make money owing to slight errors in timing and slight misreadings of individual situations, the lessons for the rest of us is sobering!
Yours in Successful Trading
Ricky Schmidt
