MorningWord 10/2/14: Omaha Stakes, Buffett’s risk management is a lot different than yours

by Dan October 2, 2014 9:33 am • Commentary

The front page of CNBC.com from a few minutes ago:

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The caption could have easily read “nothing to fear here, everyone back in the water’.  I know a lot of you are in love with Warren Buffet, and what’s not to love about the folksy billionaire.  But his hokey calm, 3% off of the all time highs in the S&P500, is a bit hard to take in my opinion.  I get it – he is not a believer in market timing, he looks for value without any real time horizon.  I would make one important distinction between you and Warren.  He knows that he can do no wrong, and with his time horizon and deep pockets he doesn’t ever have to be wrong.  Us mere investing mortals have to be mindful of such mundane things as risk management and importantly preservation of capital.

And let’s be honest, Buffet is likely buying low beta, high quality, cheap, but under-appreciated stocks, which will likely be down in line with the market, or less so in a sustained sell off.   It’s also important to note that where Buffet adds significant beta over time to his public equity portfolio are the sweetheart deals that he gets during a crisis when he is the investor of last resort (See GS and BAC investments during our financial crisis and that of Europe in the last 5 years).

Here is a list of of six investments since 2008 that reaped almost $10 billion in gains as Oct 6th, 2013, Per the WSJ:

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After yesterday’s 1.3% sell off, we might have just seen the tip of the iceberg, or we may be back to new highs in a matter of days.  Unfortunately my crystal ball is in the shop and I don’t know just yet how this resolves itself.  But I will tell you that your investing and trading needs to fit your own risk management program, and don’t let the calm of the most successful (aging) investor of our time keep you from making prudent decisions with an eye towards capital preservation.  That being said, don’t read this post to be a suggestion to peel out of equities that you own and like.  The main point here is to not take Buffett’s buying as a cue to get longer at a time where it may make sense to be a tad more cautious than normal on this dip as the divergences and negative headlines seem to be piling up.

One last point – I have lived through two 50% peak to trough draw-downs since 2000, and both came after what I would call a sentiment top.  Meaning a portion of the market kept going higher after it became apparent that the exuberance could not last. I suspect that many investors who got longer after the sentiment top ended up selling that portion of their holdings when the despair was at its heights, near the lows (October 2002 and March 2009). Those are the sort of mistakes that will impair performance for years to come.