Did Warren Buffett Break His Own Rules And Become An “Idiot?”

Warren Buffett is heralded across finance and business as the “smartest investor” of our lifetime. It’s a fair moniker given his track record for not only making solid investments in solid companies and management, but also what has seemed to be a bedrock of guidance and intuition via two of his most publicized maxims.

When it comes to money:

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.

When it comes to such things as product or business cycles:

The Three I’s: First come the innovators. Then come the imitators. And then come the idiots.

If one fully understands the overarching discipline and observational prowess that’s required to implement these in one’s business or financial life, it’s fair to say they may be the only two you’ll need. For if one incorporates them behind the golden rule of “Do unto others…” you have a very powerful trio based on simple principles for life and business that few can match when implemented. The only issue?

Just because one is far closer to the end, rather than the beginning, doesn’t mean there’s any accumulated protection for violating them. i.e., retribution is doled out the same for newbies, as well as the seasoned.

I believe Mr. Buffett is finding this out in spades.

2018 is turning out to be a year that has shocked most of the so-called “smart crowd” when it comes to both business and financial matters. For some it has not only shocked, but rather, has cut extensive lacerations going well past the point of skin deep superficial profits and lacerating arteries which are hemorrhaging principal.

At issue is this: It may only be the beginning. A beginning that people such as Mr. Buffett should have seen coming a mile away, for he is also known for not following the crowd and participating in what we all know as “bubbles.”

More importantly he is also well known, as well as self-professed, as someone who doesn’t invest in things he doesn’t know or can’t figure out.

Both tech and brokerage houses used to be places he would not fare, along with eschewing the idea that stock buybacks were a good idea. This allowed him to basically sidestep the entire dot-com crash, as well as much of the financial crash of ’08.

However, since then, he has not only dipped-his-toes as the saying goes, but rather, has dived right in body surfing with a merry cast of others on giant waves of Fed. produced liquidity.

Now, the waves are no more. Yet, what’s rather revealing this time is as the waves have vanished and the tide is receding it’s that other idiom Mr. Buffett is known for e.g., “You don’t know who’s swimming naked till the tide goes out.” that seems to be proving far more embarrassing.

It appears none other than Mr. Buffett himself has been caught swimming “naked.” (“naked” as in doing the same as the crowd, rather than his once investment prowess dictated)

And no one (especially Buffett devotees) wants to see an octogenarian “naked” regardless of their wealth or stature. And it will have a scarring affect. The reasoning is simple, and the example goes something like this:

“If Mr. Buffett bought into believing this was all real – what does this say about my investment allocations?”

This is how the psychology of the “market” can go from BTFD (buy the f’n dip) to sell everything overnight. i.e., “If Buffett can become an “idiot” what does that say about…” Are you seeing my point in the bigger picture here?

However, it may also explain the how or why when it comes to the perplexing motives behind one of America’s most prominent investing figures for suddenly contradicting his once proven maxims and violating them believing there would be no consequence. Again, the reasoning is simple:

This decade has been unlike any other in the world’s history. Never before have central banks not just openly intervened in markets, but also are now lauded and encouraged. 

This was once seen whenever it was brought up as “tin foil wearing nut job conspiracy type thinking” by Ph.d’s everywhere. Today?

It’s now taught in those same Ivy League schools as “prudent monetary policy.”

It appears Mr. Buffett has also bought into this as a “no-brainer” that it will/would go on forever. Or, said differently: He forgot the Fed et al. may create waves (i.e., “bubbles”), but the movements of the business cycle (i.e., tide) can be held back by no one.

It would also appear it is he that is now caught in a very dangerous riptide. An effect that he as a very experienced investor should have anticipated and stayed clear of. i.e., remaining on “the beach.”

For those that may need a bit of history (as in most of Wall Street’s “best and brightest” along with most 35 year olds and younger) Mr. Buffett retained his wealth while also deploying much of the same by not being sucked into two of the most explosive bubbles of the last 20 years. The first was the dot-com. And, of course, the second being the financial crisis of ’08.

He did this via two ways (over generalizations but not by much):

First:  He refused to invest in the tech space during its mania because, as he stated many times, he just didn’t get the business models. In the second he sidestepped much of the financial crisis because, much like the tech space of ’08, he stayed clear of the investment houses or brokerages. The reasoning? Hint: it sounded quite a lot like the first.

Yet, it was in the early aftermath of the financial crisis (or during, depending on perspective) that there was great fanfare publicized where Warren Buffett was to invest $5Billion in Goldman Sachs™. The reasoning was obvious: if you had “The Oracle of Omaha” investing in one of his most disliked sectors (e.g.,Wall Street) this would help the psychology of the market to possibly believe a bottom was at hand.

It seemed to work, for a while that is.

Actually, it needed to work, because Mr. Buffett was also partaking in (once again) something he once held up as “financial weapons of mass destruction” e.g., derivatives. Theoretically he was on the line for some $14Billion+ in losses.

But we all know what happened next don’t we? Enter: Congress with a $700Billion bailout package only to be backed stopped when it was shown not to be enough via one Mr. Ben “I have a printing press and I’m not afraid to use it” Bernanke.

And use it he did to the tune of $Trillions!

It should also be pointed out that it was precisely here, in the early stages of what is now known as QE (quantitative easing), that Mr. Buffett announced that he was breaking another of his “rules” and began a spree of buybacks of not only his own company, but seemed to be like a-moth-to-a-flame to any company that had cash-pile big enough (or credit line deep enough)  to engage in the buy-back mania of the past decade. Hint: IBM™.

This left many scratching their heads, that is, till we all found out last year that possibly the greatest inside information leak of the decade which resulted in a Fed. president suddenly resigning and needing to retire after it was found during an investigation that he had leaked information in 2012 about the Fed’s policy views for economic stimulus. i.e., The printing press was to remain printing till the cows came home or, the bulls reached nirvana. 

This in retrospect helps one understand, or possibly conclude, the reasoning behind what history will prove as the greatest malfeasance of corporate resources (i.e., cash or credit lines) to do what used to be something Mr. Buffett would vehemently argue against. e.g., stock buy backs.

Again, arguing against it was always the case Mr. Buffett himself would argue, that is until Mr. Bernanke made it extremely clear in Jackson Hole 2010 that his assertions to the “printing press” were bankable – literally.

Are you seeing a pattern here?

However, it would seem that “pattern” has now become a very expensive “should have known better” liability.

Not only has everything Mr. Buffett once eschewed become his now go-to investing model, but he seems to have accelerated it at the very worst of times.

It would seem Warren Buffett is finding out just how deep in the proverbial sea of central bank illusion he himself has been swimming.

In 2018 Mr. Buffett’s Berkshire Hathaway™ has not only bought back more shares of its own stock, but loaded up its position in not only tech (e.g., Apple) but Wall Street (e.g., Goldman) where all three are now well within the family of “buy back” leaders.

Coincidentally, precisely at a time that the Fed. has decided that QT (quantitate tightening) and raising rates would not only indeed continue, but that QT was in-fact going to be allowed to accelerate.

The resulting market mayhem shows the initial reaction. Key word “initial.”

So let’s take a step back here and look at the evidence for insight, if you will, and see if there’s anything we can garner out of any of the above, shall we?

Before the Federal Reserve (or all central banks for that matter) Mr. Buffett adheres to a set of rules or maxims that seem to be very well founded and produce great wealth for him and investors for decades.

Then, once the Fed et al. enter and completely adulterate, if not outright pervert the markets to such a degree that they now need to be classified when speaking as “markets.” Mr. Buffett apparently abandoned all his rules.

Rules by the way, that once guided him and rewarded his followers.

It now appears they’re all caught not just in a waning tide, but an outright riptide begrudgingly exposing that possibility that Mr. Buffett may have lost his own “trunks.” A “suit” by-the-way, which was once seen as his “suit of armor” of investing prowess.

Again, it seems those same followers or devotees following the much lauded “Buffett way” are themselves in concert if not swimming, but rather, are stampeding right off the proverbial cliff putting the leaders of tech into a Bear Market at best, or exercise in knife catching at worst.

The only thing that could make matters worse for Mr. Buffett’s once unassailable investing prowess is if he didn’t lighten up when the Fed. was publicly telegraphing all year that it was indeed sticking to its plan of raising rates and QT cycle for acceleration.

Oh, that’s right, he didn’t lighten up. He doubled down and invested even more in all the exact things he once so vehemently eschewed.

I’ll let you conclude for yourself from here.

© 2018 Mark St.Cyr