Buffett’s Follies

Most books on Warren Buffett are hagiographies – excessively laudatory writings that fail to point out the shortcomings (admittedly few) of the world’s greatest investor. This book tries to set the balance right. At the same time, it is not a nit-picker’s list of complaints about Buffett’s investment approach. Unlike what the title may convey (the choice of title, I suspect, was driven more by the desire to attract attention and boost sales), the book is remarkably even-handed.

Most of us have formulated a number of heuristics (mental shortcuts) about Buffett — he is a value investor who invests only for the long term and prefers to hold a concentrated portfolio. The truth, as the author Vahan Janjigian (himself a reputed stock picker who oversees the Forbes Special Situation Survey and the Forbes Growth Investor newsletter) points out, is a little more nuanced.

Is Buffett truly a value investor as he is widely reputed to be? (Value stocks have low PEs; growth stocks have high PEs and investors expect their earnings to grow at a fast trot). Buffett’s mentors included Benjamin Graham and Phillip Fisher, and he did indeed have a strong value orientation at the beginning of his career. But over the years his approach has evolved. In later years of his career he has been known to pay a premium for high-quality stocks instead of going only for cigarette-butt type stocks (those trading at very low valuations but having only a few puffs of life left in them).

The insight that Janjigian offers is that Buffett prefers neither value nor growth stocks; what he likes best are undervalued stocks. He employs the discounted cash flow (DCF) methodology to find out a stock’s intrinsic value. If he finds the stock’s current price to be lower than its intrinsic value, he snaps it up.

Buffett is also known to favour the long-term buy-and-hold approach. In case of quality stocks, he does not sell them even when they become overvalued. Is this approach well-suited for ordinary investors? The latter, says Janjigian, would be better off booking gains in overvalued stocks and investing the money in undervalued ones.

More surprisingly, Buffett is also known to hold on to poorly-performing stocks. This approach, says the author, will serve ordinary investors poorly. Buffett can afford to do what he does because the massive resources he commands give him immense staying power. The large stakes he buys enable him to influence key management decisions. Ordinary investors do not enjoy such leverage, and so, says the author, they would be better off if they cut their losses and ran if a stock underperforms for a considerable span of time.

The book also dwells on the duds that Buffett picked up in his long investment career: Salomon Brothers, General Re, Net Jet, Import Pier 1, etc. The lesson for the reader is twofold: one, even as great an investor as Buffett cannot entirely eliminate the risk inherent in equity investing. And two, with his patient and long-term approach, Buffett managed to turn many (though not all) of these duds into profitable investments.

Avid Buffett fans should read this book for a richer understanding of his techniques instead of pigeonholing them into slots. The book’s key messages are that Buffett’s technique has evolved over the years; that he has a dynamic approach that adapts to circumstances; that demi-gods too at times make mistakes; and that one can have a great track record despite a few mistakes, provided one corrects them quickly and learns from them.