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Does criticism of Buffett signal a market top?

27022019

Does criticism of Buffett signal a market top?

For 10 years now, the S&P 500 has been on a run, soaring from under 800 points to around 2800 points. But is this as good as it gets for now? Warren Buffett seems to think so. And criticism of his recent investment decisions could signal that the market is due a breather.

I remember vividly 1999 and early 2000. It was the Tech Boom 1.0 and internet stocks traded at infinite multiples of nonexistent earnings. AOL stock rose six-fold and Amazon soared 1,000 per cent. On the NASDAQ, the average first day listing premium for IPOs was in the order of 90 per cent. Yep, you read that right. It was heady stuff and I recall a client leaving the firm I was with because his adviser had sold him out of every new float on the first day. Even though he’d banked something like a 400 per cent return for the year, other advisers who’d kept their clients invested during 1999 had made a lot more.

In a November 1999 Fortune article Warren Buffett strongly implied that the market was too high. In 1999 Buffett’s Berkshire Hathaway had posted its worst relative return ever. Using Buffett’s favorite measure to gauge performance – per share book value – Berkshire’s book value rose just 0.5 per cent, while Berkshire’s shares had fallen more than 20 per cent. Meanwhile, the broad index as measured by the S&P 500, rose 21 per cent.

In other words, Buffett’s portfolio had underperformed by 20.5 per cent and an investor in the company might measure their underperformance that year at greater than 40 per cent!

1999 was the year that press and investment commentariat turned on Warren Buffett. The headlines creamed “Washed up”, ‘too old” “out of touch”, describing a man who had hitherto been seen as the world’s greatest investment mind, ever.

1999 was also the year in which Allen & Co’s Herbert Allen had invited a bunch of newly-minted tech titans to the famed annual Sun Valley Conference. As described in Snowball, “A new group of recently minted technology executives, filled with an unusual swagger, introduced themselves to people who had never heard of them a year before. Some displayed a hubris that was at odds with Sun Valley’s usual atmosphere, where a determined informality reigned and Herbert Allen enforced a sort of unwritten rule against pomposity, on penalty of banishment.”

At Sun Valley, it was the year that a panel, called “The Internet and Our Lives,” led a procession of talks about how the internet would reshape the communications business and how the formation of the information superhighway was equal in significance to the advent of the railroad in 1869. The old economy was dead, and the new economy was its murderer.

Warren Buffett was seen as part of the old economy, unable to understand the “new paradigm”. Of course, those like Buffett and Herb Allen had seen it before and sniffed at the idea of a ‘new paradigm’ likening it to ‘new sex’. “There just isn’t any such thing”.

That year Buffett gave the closing address and while many that attended saw him as having missed the boat and the technology boom entirely, he reminded them that, “There were only three ways the stock market could keep rising at ten per cent or more a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees and government and other things, rose above its already historically high level. Or, he said, the economy could start growing faster than normal. He called it “wishful thinking” to use optimistic assumptions like these.

He also reminded attendees that “It’s wonderful to promote new industries, because they are very promotable. It’s very hard to promote investment in a mundane product. It’s much easier to promote an esoteric product, even particularly one with losses, because there’s no quantitative guideline.

Today’s investors might like to think of Afterpay and Pushpay in Australia or Tesla in the US, which has a market capitalization of US$368,000 per vehicle sold, compared to GM at US$5000 per vehicle sold, Ford at US$5,600 or Mercedes at US$29,000 per vehicle sold.

Meanwhile Buffett has just reported a cash balance of US$132 billion, more than a third of the Berkshire Hathaway portfolio and easily its single biggest position. The cash probably helped Berkshire eke out a positive return (Buffett notes market to market accounting requirements now mean returns are more volatile) and outperform the S&P500, which declined 4.4 per cent.  But Berkshire’s return was nothing to write home about – per share book value rose 0.4 per cent.

More importantly, however, it seems the knives are out again. In a Bloomberg article published on the weekend, author Tara Lechapelle offers several pointed observations about Buffett and Berkshire:

“The company’s peculiar stock-picking moves in the fourth quarter, disclosed in a filing last week, added more intrigue: It bought shares of Red Hat, dumped its short-lived Oracle stake and cut back on Apple…Berkshire’s jumping in and out of software investments is something a Buffett follower would have never predicted just a couple of years ago.”

“And for an investor who has always preached about taking a long-term view, Berkshire also took a $US2.1 billion stake in Oracle in the third quarter, then sold it the next.”

“His annual letters … have become almost formulaic, usually repeating affirmations about the health of the US economy and conducting autopsies of past business decisions.”

“Speaking of Heinz, Buffett would also be well served by explaining his plans for Berkshire’s big stake in Kraft Heinz, a deal that he helped orchestrate that has turned sour.”

For mine, I can’t help but wonder whether any further criticism of Buffett may be an indication that we should be zigging when everyone else is zagging.

Montaka is short Kraft Heinz. This article was prepared 27 February with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Kraft Heinz you should seek financial advice

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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Comments

  1. Roger, at the risk of repeating myself from another post, Mr Buffett has said that there will be “A major catastrophe that will dwarf hurricanes Katrina and Michael will occur — perhaps tomorrow, perhaps many decades from now”.

    That’s great to say, but even a stopped clock is right twice a day, and he doesn’t actually give any indication of what said catastrophe might be, so altogether, it’s a fairly useless statement to make in that it adds no value. At least comment using something as a base from which to make your predictions !

    Coming out with statements like this doesn’t help his credibility and yes, the BH letters have been very “pedestrian” and Tara Lechapelle has it right. I thought I was the only person who thought like that.

    It’s fair enough to say that there’s no companies worth buying, that’s OK. It’s OK to provide an economic or political commentary, but he is the biggest proponent of treating the market as a case of “waiting and swinging for the fat baseball pitch” like Ted Williams, so this recent behaviour is at odds with that. People are fair enough to call him out on it.

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