by Jeff Matthews , author of the definitive journey to the heart of Berkshire Hathaway, 'Pilgrimage to Warren Buffett's Omaha.'
Asked by an audience member if returns such as those posted by Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett…are the product of luck or talent, Taleb [Nassim Nicholas Taleb, author of “The Black Swan”] said both played a part.
If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter.
“I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”
—Bloomberg Businessweek, September 25, 2010
Far be it for we here at NotMakingThisUp to take on the author of “The Black Swan,” which is almost certainly the most timely cautionary thesis ever printed, warning as it did of the higher probability of random, dramatic, unforeseen, global cataclysms than most investors believed possible, just a year before the subprime mortgage crisis triggered a systemic risk of near-death proportions.
But Taleb’s comments, reported this week by the alliterively named “Bloomberg Businessweek,” during a speech in Montreal—comments that echo earlier statements by Taleb that “Soros has 2 million times more statistical evidence that his results are not chance than Buffett does,” whatever that actually means—deserve a quick look, if for no other reason than they are the stuff of urban legend.
And it is a legend believed by more people than you might think.
Specifically, the urban legend surrounding Warren Buffett—about whom we took a very clear-eyed look in “Pilgrimage to Warren Buffett’s Omaha” (McGraw-Hill 2008), including issues never before examined in the extensive literature on Buffett and his investment style—is that Warren Buffett was more lucky than smart.
It is a legend that comes up at least once every time we give a speech. Some skeptical guy (it’s always a guy: women love Buffett) who dislikes the personal politics of The Oracle of Omaha and is hoping to find a reason to believe his investment results are a sham, will be sitting there frowning, arms crossed, waiting for a chance to ask a question…and his question will always be along the lines of whether Buffett is really as smart as the masses make him out to be, and isn’t most of Buffett’s success is owed to his luck at coming of age as an investor in the right place (America) at the right time (post-Great Depression), and where does Buffett get off going around lobbying for higher taxes anyway?
Now, Taleb has added a sort of statistical patina to the urban legend of Warren Buffett, by claiming that Buffett’s buy-and-hold investment strategy possesses a “randomness,” and that this randomness makes his returns suspect.
George Soros, on the other hand, “made a lot more decisions” than Buffett, according to Taleb (trading currencies as well as stocks, and also engaging in arbitrage), which would indicate that Soros’s returns are less random, and therefore more due to brains than luck; Buffett’s more random, and therefore more due to luck than brains.
The howler here, as anyone who has studied Buffett over the last few decades, is evident immediately, in the line about Buffett making “fewer decisions” in his career—the fallicay being, of course, the notion that buying (or shorting) something is the only act that involves a decision.
For if Warren Buffett has demonstrated anything, it is that deciding not to buy (or short) something is also a decision—and frequently a harder decision to make than writing a trade ticket and going along with the mood of the market.
Indeed, the reason Buffett left New York City for his native Omaha after working with Ben Graham in the 1950s was precisely the issue that, as he once put it, the closer to Wall Street an investor was situated, the more “stimuli” hit the investor, encouraging all sorts of decisions that were not necessarily productive or likely to be profitable.
When asked why he moved back to Omaha, Buffett once said, simply, “It’s easier to think here.”
And that thinking led to extraordinary results—results that everyone accepts but few people actually grasp.
How good has Buffett been? Well, you can read the graphic facts for yourself in “Pilgrimage to Warren Buffett’s Omaha,” but consider that the S&P 500 closed at 89.66 on the day Buffett took control of Berkshire Hathaway (May 10, 1965) and today stands at 1,148—a 13-fold increase excluding dividends
Meantime, a share of Berkshire Hathaway has risen from $18 that same day to $124,850—a 6,936-fold increase, and purely from price appreciation, since Berkshire doesn’t pay dividends.
As for Taleb’s charge that Soros is more facile than Buffett for using currencies and arbitrage in his bag of investment tricks (“he did everything”), this actually says more about Taleb’s spotty knowledge of Buffett’s investment history than it does of Soros’ abilities, great though they may be.
For not only has Buffett bought and sold currencies—his U.S. Dollar short early last decade was a money-maker for Berkshire, as was his long position in the Brazilian Real a few years back—but he has bought and sold commodities such as oil and silver, and frequently engaged in billion-dollar arbitrage deals such as RJR Nabisco.
Indeed, Buffett once arbitraged a chocolate maker’s stock by selling cocoa beans on the open market, marking his first encounter with the Pritzker family, from whom decades later he purchased, lock-stock-and-barrel, an industrial business—something Soros has never done. So much for Buffett being a mere buy-and-hold equity investor.
Oh, and as far as shorting stocks goes, well, back in his hedge fund days (yes, Buffett ran a hedge fund before taking control of Berkshire) the Oracle of Omaha once borrowed and shorted the entire stock portfolio in Columbia University’s endowment.
Lucky? Sure. Smart? Surer.
Jeff Matthews
I Am Not Making This Up
Jeff Matthews is the author of the definitive journey to the heart of Berkshire Hathaway, 'Pilgrimage to Warren Buffett's Omaha.'
