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Phaedrus
06-06-2006, 10:39 AM
Over the 34 years from 1965 - 1998 Warren Buffett averaged 24% annual return and underperformed the S&P500 Index only 3 times. Impressive.

From 1999 - 2005 Buffett has averaged only 7% annual return, underperforming the Index for 3 of those 7 years.

It appears that Buffettology does not work as well as it used to.

Enumerate
06-06-2006, 10:44 AM
Phaedrus! What have you done?

The last thing we need is another thread on politics or religion.

(Buffetology, Buffetism ?!?)

Snow Leopard
06-06-2006, 10:48 AM
First you have a go at Snoopy and now Warren Buffet!
And you launch your threads in the NZX forum instead of the more appropiate Investment Strategies.

I wonder how worried Warren is with his 'underperformance'?

duncan macgregor
06-06-2006, 10:57 AM
PHAEDRUS, behave yourself, you and i both require his followers to make our systems work. Look at some of the underperforming dogs his disciples hold. In other words let sleeping dogs dream on.
macdunk

Enumerate
06-06-2006, 11:16 AM
THE BERKSHIRE PRAYER

Our Warren, who art fully invested
Cashflow be thy game
Thy returns will come
Thy portfolio will hum
With careful stock picking and long term investment

Let us reject interesting opportunities
Rather than over-leverage our balance sheet
As we shall construct our portfolio, for the long term

And lead us not into temptation
But deliver us from losses

For thine is the portfolio
The return
and the gain
for even and ever

Amen

craic
06-06-2006, 11:27 AM
A simple equation. Buffet makes lots of money - then people ask him how - then he tells them - then they are all chasing the same rabbit. Its the same problem that applies to all endeavours, for some to get rich, some must get poor. The secret of success on the markets is to know something that others don't know - and what has buffet got left? Every time he has f arted in the past few years, someone has an alysed it.

Enumerate
06-06-2006, 11:38 AM
The wonderful thing about the stock market is - wealth is being created by vibrant businesses - theoretically, everyone could get rich!

In this ideal scenario, of course, some would get rich faster.

What Buffett rails against is inept management and the Wall St trader mentality. Both of which cost investors money.

His system is to acquire a temprament to avoid the pitfalls in what historically has been a wonderful place to invest money!

Bel
06-06-2006, 12:00 PM
Top reply Enumerate. :)

lanenz
06-06-2006, 12:08 PM
quote:Originally posted by craic

A simple equation. Buffet makes lots of money - then people ask him how - then he tells them - then they are all chasing the same rabbit. Its the same problem that applies to all endeavours, for some to get rich, some must get poor. The secret of success on the markets is to know something that others don't know - and what has buffet got left? Every time he has f arted in the past few years, someone has an alysed it.
And the analysts will now probably realise that Buffet sh't stinks just like yours and mine.

The wonderful thing about the stock market is - wealth is being created by vibrant businesses - theoretically, everyone could get rich!Enumerate. This sounds just like MLM. If every jumps in then everyone can make some money. Its just that some will get richer quicker than others.

duncan macgregor
06-06-2006, 12:28 PM
quote:Originally posted by Phaedrus

Over the 34 years from 1965 - 1998 Warren Buffett averaged 24% annual return and underperformed the S&P500 Index only 3 times. Impressive.

From 1999 - 2005 Buffett has averaged only 7% annual return, underperforming the Index for 3 of those 7 years.

It appears that Buffettology does not work as well as it used to.

There is a very good reason for this poorer return if you think about it. The bigger he got the less his average. Before we critisize his methods, we should look at the bigger picture. A TA system is unworkable at his level. Phaedrus for instance regardless of how good an investor he might be, can never hope to compete with WARREN. The people that copy warren appear to miss the higher returns that the TA people acheive for a very good reason.
WARREN is to big to get out of a share, which is a great handicap, compared to our level of investing.
WARRENS disciples forget this and like him ride the share down without any sell system in place.
Take the good bits out of WARRENS methods and leave his handicaps we dont have them. There is nothing wrong with BUFFETOLOGY that a sell system wouldnt fix. macdunk

Halebop
06-06-2006, 12:33 PM
General Re was added in 1998. Buffett needed to change both General Re's investing and underwriting policies. Since insurance companies don't do much else besides invest and underwrite, this makes it a turn around situation. Turn-arounds are a hefty departure from the bulk of the previous 30 years.

In another departure, he bought into MidAmerican Energy and has continued to invest larger sums of money in the company since then. MidAmerican own real estate brokerages (which have probably performed well in this time) but mostly own energy related infrastructure assets and have continued to expand in this field. Buffett for many years avoided such assets due to their low and regulated returns. He historically said he didn't like the upside being so obviously capped nor the risk of regulatory change. Although he still partly expresses this view in his letters, he’s found himself willing to invest subject to using large amounts of non recourse debt (debt is another departure) and because he has to find a place to park his funds. While cash generation is good, growth will be modest by historical measures.

On the question of cash, the US$40b sitting on the balance sheet has been a drag as well. There could be any number of reasons why there is so much cash…

…Berkshire has been actively buying large cash generating businesses instead of listed stocks, many of these are trading at cyclical highs because of his exposure to the property / construction sector.

…Shares are at secular highs and valuations for good companies aren’t captured by demanding criteria. If a “crash” came that money would suddenly be seen as useful rather than an anchor.

…Berkshire’s size makes it difficult to find any sort of investment of a quantum that can make an impact on results. I think it’s worse than this. Berkshire is of a size that makes out performance, no matter the fantastic pedigree, either impossible or unremarkable even if achieved.

Overall I suspect he has departed from historical investing patterns, perhaps partly because of the quantity of cash he now has to invest. This makes out performance much more difficult and perhaps forces his hand towards areas he would not have previously considered (like non US based acquisitions, Silver, currency, MidAmerican etc). My instinct is that the company will continue to outperform but that results will be modest compared to previous decades. I’d be surprised if he hits his stated goal of 15% per annum. If he does all credit to him as that’s a big ask with so much money.

Enumerate
06-06-2006, 12:58 PM
quote:Originally posted by lanenz
This sounds just like MLM. If every jumps in then everyone can make some money. Its just that some will get richer quicker than others.


Well, the long term trend (the last 30,000 years; since recorded history began) has been one of compounding growth.

Probably for the next couple of billion years the earth will be a net gainer of energy (from the sun) and materials (condensed matter in the solar system).

If things are managed properly, the human race should do just fine until Sol expands and starts to burn helium (red giant).

Just remember, during the next couple of billion years, people (or what people evolve into) will still probably look to insurance companies for their risk mitigation and investment needs. (By then Warren will have the whole industry locked up.

On a serious note - economic growth differs from MLM not only in timescale. If you predicate growth on expansion to infinity of what is in reality a set of finite resources - you end up with problems (invalid boundary conditions on your growth equations).

The ecomonic growth model is different in another aspect. A finite human population will require finite resources to continue to exist. An economic system could grow forever as we start to sell each other insurance and MP3's downloaded from our web sites.

Then there is the potential of the stars ... 50 billion galaxies each with on average 100 billion stars. That is an aweful lot of insurance policies and MP3's ...

Snow Leopard
06-06-2006, 01:05 PM
There are lies, damn lies and statistics.

Choosing the two periods up to 1998 and from 1999 onwards is good for making the headline look the worst.

However it does have to be said that Berkshire Hathaway, although it is still outperforming the S&P500, has not shown such a significant advantage has it used to in the first twenty years.

Some figures for you to ponder: showing the annualised % gain for designated time periods
<pre id="code">
Period Berkshire S&P500 Outperformance
1965-1975 14.71% 3.65% 11.06%
1975-1985 32.97% 14.14% 18.83%
1985-1995 24.27% 14.86% 9.41%
1995-2005 15.20% 9.08% 6.12%
2000-2005 7.98% 0.54% 7.44%
</pre id="code">

Based on figures in the 2005 Annual Report (http://www.berkshirehathaway.com/2005arn/2005ar.pdf) page 3.

Heavy Metal
06-06-2006, 01:55 PM
Macdunk Craic et al have got it right - the more well known he became, the less he could outperform because everyone was copying his style.

The level of outperformance for Berkshire Hathoway in any given year will be inversely proportional to the number of books available about Buffett and Buffetology. Such books have proliferated since 1998.

lakedaemonian
06-06-2006, 02:03 PM
As mentioned, I think his scale holds back his potential performance.

If he were managing a "mere" 50-100 million or even 1 billion in cash/tangible assets I think he would stand a good chance of maintaining his historical average.

I expect his recent international "toes in the water" with PetroChina and that Israel tool company are his first truly international buys(other than US listed companies like Coca-Cola with significant international exposure).

I think a focus on international value will help him lift his future returns, but not to his historical average...especially if the US dollar takes a long, protracted nose dive down the gurgler like he has forebodingly warned about in Fortune in recent years.

If Buffett's converting his giant cash pile I reckon it's either because he's actually starting to pick up good miserly values, or its a defensive play that is not his optimal choice but seen as less costly if he sees potential big inflation on the horizon through those magic thick glasses of his.

bushbasher
06-06-2006, 02:13 PM
Well with US interest rates continuing to increase he could get close to 7% just on his $40BN sitting in the bank. Hail the Sage!

Dimebag
06-06-2006, 03:23 PM
Phaedrus,

If you have a careful read of WB's shareholder letters, you will see that for about 15 years, WB has been warning that "large capital bases eventually forge their own anchors", and that future performance must inevitably slow.

He talks about compounding, and eloquently states that "those who care to disagree ought consider a career in marketing but not mathematics". Yes, the BH machine is grinding down to a much slower pace, but with $100b under managemnet, is it really any wonder.

Buffett often says that "what isn't worth doing isn't worth doing well" and therefore refuses to consider opportunities below a particular size theshold. He talks about needing "elephants" these days to make a dent in performance, and often lamnets the fact that such large opportunities are exceedingly rare. He has also state that with a small capital base he is sure he could make 50% pa and I believe him.

Back in the 50s etc, he used to make 30-50% pa. He says "we weren't smarter back then, just smaller". Buffett's slowing performance shouldn't be any surprise, and no one has been more intent on warning his investors that that will be the case than Buffett.

I would also note that Buffett's legend extends well beyond is performance numbers of 20-30% pa, which are impressive, but hardly novel. What is most impressive about Buffett is that he has applied it with great consistency and great success for almost 60 years with an ever increasing capital base. Investors with good records come and go all the time - many will perform well for 5-10 years, but might get hit when things change. Relatively few can boast such consistency, and are a testiment to the timeless principles underpinning his methodology.

Buffett is also renowned for his principled methods, exemplary governance, and his piercing and prescient insights on a number of topics well beyond when things become more widely recognised. But most of all, its his ability to cling tenaciously to his principles when near term conditions might tempt one to change, over so many years. Everyone was labelling him out of date in 1998-2000, but he was validated yet again and, as Paper Tiger's figures show, is still outperforming handsomely.

Regards,
Dimebag

Dimebag
06-06-2006, 03:31 PM
Perhaps more than popularly recognised, much of Buffett's legacy and fame is probably attributable to his eloquent writings, which are now widely read. Below is an excerpt from his 2000 report - one of my favourates, and beautifully written. In it, he sums up his investment ideologies perfectly and why he preferred to sidestep the tech mania:


"Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was "a bird in the hand is worth two in the bush." To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota ¾ nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to "growth" and "value" styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component ¾ usually a plus, sometimes a minus ¾ in the value equation.

Alas, though Aesop’s proposition and the third variable ¾ that is, interest rates ¾ are simple, plugging in numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.

Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT ¾ Inefficient Bush Theory.) To be sure, an investor needs some general understanding of business economics as well as the ability to think independently to reach a well-founded positive conclusion. But the investor does not need brilliance nor blinding insights.

At the other extreme, there are many times when the most brilliant of investors can’t muster a conviction about the birds to emerge, not even when a very broad range of estimates is employed. This kind of uncertainty frequently occurs when new businesses and rapidly changing industries are under examination. In cases of this sort, any capital commitment must be labeled speculative.

Now, speculation ¾ in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it ¾ is neither illegal, immoral nor un-American. But it is not a game in which Charlie and I wish to play. We bring nothing to the party, so why should we expect to take anything home?

The l

Dimebag
06-06-2006, 03:34 PM
Perhaps one of Buffett's most enduring characterists too is his ability to realistically determine the extent of his abilities - which he decribes as his "circle of competence", and complementing this self-knowledge a discipline not to venture beyond its confines.

One of my favourate buffett quotes is something to the effect of "for most investors, it matters not how much they know, but how realistically they define what they don't know".

Here is a quote from his 1999 report, on the eve of the tech bust:


"We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can't -- not at least with a high degree of conviction. This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.

Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes or geological prospects. So we simply don't get into judgments in those fields.



If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries -- and seem to have their claims validated by the behavior of the stock market -- we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it's almost certain there will be opportunities from time to time for Berkshire to do well within the circle we've staked out.

Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That's why we haven't added to our present holdings. Nevertheless, we haven't yet scaled back our portfolio in a major way: If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.

We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it's the market's view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments.

If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American bu

trackers
06-06-2006, 04:29 PM
quote:Originally posted by lakedaemonian

As mentioned, I think his scale holds back his potential performance.

If he were managing a "mere" 50-100 million or even 1 billion in cash/tangible assets I think he would stand a good chance of maintaining his historical average.

I expect his recent international "toes in the water" with PetroChina and that Israel tool company are his first truly international buys(other than US listed companies like Coca-Cola with significant international exposure).

I think a focus on international value will help him lift his future returns, but not to his historical average...especially if the US dollar takes a long, protracted nose dive down the gurgler like he has forebodingly warned about in Fortune in recent years.

If Buffett's converting his giant cash pile I reckon it's either because he's actually starting to pick up good miserly values, or its a defensive play that is not his optimal choice but seen as less costly if he sees potential big inflation on the horizon through those magic thick glasses of his.


Not a buffetologist personally, but you've hit the nail on the head with this one.

Flying Goat
06-06-2006, 05:55 PM
[quote]Originally posted by Dimebag

Perhaps one of Buffett's most enduring characterists too is his ability to realistically determine the extent of his abilities - which he decribes as his "circle of competence", and complementing this self-knowledge a discipline not to venture beyond its confines.

One of my favourate buffett quotes is something to the effect of "for most investors, it matters not how much they know, but how realistically they define what they don't know".

Here is a quote from his 1999 report, on the eve of the tech bust:


"We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can't -- not at least with a high degree of conviction. This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.

Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes or geological prospects. So we simply don't get into judgments in those fields.



If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries -- and seem to have their claims validated by the behavior of the stock market -- we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it's almost certain there will be opportunities from time to time for Berkshire to do well within the circle we've staked out.

Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That's why we haven't added to our present holdings. Nevertheless, we haven't yet scaled back our portfolio in a major way: If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.

We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it's the market's view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments.

If profits do indeed grow along with GDP, at ab

Dimebag
06-06-2006, 08:00 PM
Thanks "Flying Goat".

A few great quotes from the 2001 excerpt which I particularly like:

"Nothing sedates rationality like large doses of effortless money"

"Speculation is most dangerous when it looks easiest".

Great stuff.

Re RPC - I can't comment much on specific stocks these days, due to my professional commitments. However, I can refer you to a past thread where, approximately two years ago, I compared the respective merits of RPC to CCP, and concluded that CCP was a much better opportunity.

http://www.sharetrader.co.nz/topic.asp?TOPIC_ID=18453&SearchTerms=RPC

At the time, CCP was $2.26 and RPC $0.39. CCP is now $6.56 and RPC $0.47 so that analysis would seem to have been validated, for the time being.

I haven't followed RPC closely since that point, but I suspect my initial judgement would still be the same today. I've been with CCP since $0.75 in 2001 and, despite lightening my holding by a third at $5.25 and $7.10, continue to rate the company very highly and intend to hold my remaining shares for the long term.

Regards,
Dimebag

Dimebag
06-06-2006, 08:10 PM
PS Interestingly, I concluded at the time that CCP were trading at 16.1x 2004 forward earnings. Notwithstanding CCP's increase in price from $2.26 to $6.56, CCP are currently only trading at 19.3x forward 2006 earnings.

So most of CCP's ascent has been due to large gains in eps, which I would say has in turn been driven by high levels of ROE. As discussed in the post, RPC's comparatively low ROE is probably what has inhibited its ongoing share price performance.

Cheers,
Dimebag

Flying Goat
06-06-2006, 09:29 PM
quote:Originally posted by Dimebag

PS Interestingly, I concluded at the time that CCP were trading at 16.1x 2004 forward earnings. Notwithstanding CCP's increase in price from $2.26 to $6.56, CCP are currently only trading at 19.3x forward 2006 earnings.

So most of CCP's ascent has been due to large gains in eps, which I would say has in turn been driven by high levels of ROE. As discussed in the post, RPC's comparatively low ROE is probably what has inhibited its ongoing share price performance.

Cheers,
Dimebag


Thanks for that. My favourite Buffet quote goes something along the lines of:

"It is not until the tide goes out that we see who has been skinny dipping"

Regards
FG

PS Does anybody know how to attach an image to their posting? I cannot work it out but perhaps that is becaus i'm using a Mac...

Westie
07-06-2006, 05:04 PM
at the risk of boring everyone to death with Buffett quotes, the man defends himself in this year's annual meeting:


quote:Our problem is that we’ve got so much to invest. We need to buy hundreds of millions of dollars to move the needle. That limits the countries where we have opportunities. We could only get $400 million into PetroChina—one of the top five oil companies in the world—even though we wanted more.

and


quote:I don’t think we’ll hit a home run under any circumstances. We need about $10 billion because of our insurance operations—we don’t scrape the bottom of the barrel. We reported $37 billion in cash at the end of March 2006. We’d be much happier if we had $10 billion in cash. We have a low probability idea that could take about $15 billion. Business opportunities come at intervals. We don’t like having excess cash, but we like even less doing dumb deals. It’s likely, but far from certain, that three years from now we’ll have significantly less cash and significantly higher earning power. You’re right to keep jabbing us on that. We’re the biggest player in the catastrophe [insurance] business in the world, and people come to us [because we have great liquidity].
Munger: [If you] go back to the Berkshire annual report [of] 10 years ago and compare it to today, you’ll see that we have put a lot of good stuff in the company.

duncan macgregor
15-06-2006, 02:46 PM
quote:Originally posted by Westie

at the risk of boring everyone to death with Buffett quotes, the man defends himself in this year's annual meeting:


quote:Our problem is that we’ve got so much to invest. We need to buy hundreds of millions of dollars to move the needle. That limits the countries where we have opportunities. We could only get $400 million into PetroChina—one of the top five oil companies in the world—even though we wanted more.

This has nothing to do with any of us we are in a completely different situation. His followers in this country tend to give their winnings back to the market. If ever i get filthy rich i might get tempted to read his books, but i wont be joining his losers club by reading them now.
Look at his investment in coke over the years or MVT and SNOOPY, two of his disciples and telecom. If you cant work out what race you are in, then how can you be a winner. macdunk

bushbasher
15-06-2006, 02:49 PM
Perhaps he should give it all away and start again....like Ron Brierley.

Halebop
15-06-2006, 03:52 PM
Duncan perhaps you should read one of the many books written about him. I've read a few recently but none of them seem to explain the qualitative tenets as well as Robert Hagstrom's Warren Buffett Way. I suspect this is where so many go awry because I read a lot of focus on valuation techniques in this forum but not very much concise detail about the qualities of the businesses involved.

This is how you end up having people argue the instrinsic valuation merits of dogs like OTI on the ASX and TEL on NZX with little comment on the consequence of risk and quality (and some considerable argument against comments offered by others).

I've got nothing against someone holding an investment through thick and thin. With a good company its proved a worthwhile strategy since the early 80s and to a lessor degree maybe the 50 & 60s. However, these long term investors have lulled themselves with a lack of historical context. Long term investing has worked because we have enjoyed a sustained period of economic expansion and stability and a Baby Boomn fed savings and productivity glut that has fed progressively higher valuations and greater tolerance for risk. This party will end one day with one problem or another... be it a speculative "Wall Street bubble" or less exciting but just as damaging inflationary pressures. Long term investing will prove to be what every other style of investing proves to be: appropriate only in the right environment.

Buffett watchers rarely comment that his best returns were derived when his activity was most frenetic.

Westie
15-06-2006, 05:12 PM
quote:many go awry because I read a lot of focus on valuation techniques in this forum but not very much concise detail about the qualities of the businesses involved.

Agree totally. I read a pretty poor (in terms of detail) book called "trade like Warren Buffett". It was interesting because it avoided analysing Coke et al & discussed Buffett's wide range of investments, preferred stock, bonds etc & emphasized that he often sold shares within a couple of years of purchasing, not buy & hold forever as the man himself claims. The main thing that stands out is that he lays his bets when the odds favor him hugely. That is the qualitative side HB mentions & i often see others failing to recognize. In fact, Munger says he rarely sees Buffett make a calculation on discounted cashflow etc

I once posted an article about investments Buffett makes in his personal (non berkshire) portfolio. They are mostly Ben Graham cigar butts. Someone posted that the returns weren't very good, only 12% or so. Completely missed the point that it isn't return, it the lack of risk that WB took to get the return that is important to the man.

But also agree with macdunk some. The books about Buffett's current style are largely irrelevant to us small investors. Getting hold of his letters from the days of his investment partnerships would be gold.

k1w1
16-06-2006, 12:41 PM
On the NZX at the moment I hold 3 stocks which I view as Buffett stocks. They all have a long term competitive market advantage,have a history of earning over 15% per year return on capital, and I view them as low risk. That is different from what a momentum trader such as Phaedrus would see as fitting his investment model as there have been periods when their share prices have not been in upward trends and currently this is the case for one of them. I think they would also fall foul of Snoopy as their dividends are not always strong due to accounting conventions so that his criteria may not be met.Macdunk would not hold them either.

Buffett's model does not worry about share price trend lines or even dividends. He looks for low risk businesses with a history of market advantage that are out of favour with the market and thus mispriced.He buys them and holds them as long as they remain low risk businesses with a competive market advantage. Maybe he could have done better with a different investment style as is suggested on this site but he and his investors remain confident with one which has stood the test of time. I am not suggesting that this is the only way or even best way to invest. It is just a style.

What companies on the NZX do you reckon I am talking about ?

duncan macgregor
16-06-2006, 12:49 PM
POT, NOG,ALF, I reckon that I gotcha KIWI.

COLIN
16-06-2006, 12:58 PM
IFT, GPG and POT.

Snow Leopard
16-06-2006, 01:30 PM
quote:Originally posted by k1w1

On the NZX at the moment I hold 3 stocks which I view as Buffett stocks. They all have a long term competitive market advantage,have a history of earning over 15% per year return on capital, and I view them as low risk. That is different from what a momentum trader such as Phaedrus would see as fitting his investment model as there have been periods when their share prices have not been in upward trends and currently this is the case for one of them. I think they would also fall foul of Snoopy as their dividends are not always strong due to accounting conventions so that his criteria may not be met.Macdunk would not hold them either.

What companies on the NZX do you reckon I am talking about ?

MFT, NZR, RYM

regards

Paper Tiger

Flying Goat
16-06-2006, 07:58 PM
quote:Originally posted by k1w1

On the NZX at the moment I hold 3 stocks which I view as Buffett stocks. They all have a long term competitive market advantage,have a history of earning over 15% per year return on capital, and I view them as low risk. That is different from what a momentum trader such as Phaedrus would see as fitting his investment model as there have been periods when their share prices have not been in upward trends and currently this is the case for one of them. I think they would also fall foul of Snoopy as their dividends are not always strong due to accounting conventions so that his criteria may not be met.Macdunk would not hold them either.

Buffett's model does not worry about share price trend lines or even dividends. He looks for low risk businesses with a history of market advantage that are out of favour with the market and thus mispriced.He buys them and holds them as long as they remain low risk businesses with a competive market advantage. Maybe he could have done better with a different investment style as is suggested on this site but he and his investors remain confident with one which has stood the test of time. I am not suggesting that this is the only way or even best way to invest. It is just a style.

What companies on the NZX do you reckon I am talking about ?


k1w1, is there are prize for thwe right answer?

Lets see, how about: PPL / RYM / AIA

Cheers
FG

k1w1
16-06-2006, 10:30 PM
Well there are probably other answers, which I would be interested to hear, but mine included NZR and RYM.

I hold IFT ( a proxy for POT) and MFT although I never saw them as having the same sort of market dominance as the above two which is why I haven't identified them as such.

However the controversial one will be my third one. I see VCT is a Buffett stock. Don't let the artificially low dividend and NPAT figures distract you from its essential characteristics.I am hoping that the market will eventually agree as they did with RYM and NZR.

duncan macgregor
17-06-2006, 07:55 AM
So thats it then KIWI, what a bloody let down. I actually thought we might be in for a treat to some new radical line of thought. macdunk

k1w1
17-06-2006, 01:44 PM
Oh yes, everyone is always posting on here what a great share VCT is, nothing new about that is there.

RYM and NZR have the runs on the board already. Don't need to say anymore about them as have already shown they are good picks.

I thought nominating VCT as an overlooked share that has Buffett characteristics was a bit different Macdunk. Dont see how NOG or ALF as nominated by you fit the bill. I have now completed my VCT buying and now move into long term hold mode.Will see if I am right or wrong in good time.

Did your method of stock selection get you into WHS, RYM, or NZR ? Mine did and at profits of 40%-100% on my entry prices for those holdings. What a bloody let down that has been!

Snow Leopard
17-06-2006, 02:40 PM
I wonder what the definition, in relation to public traded stocks, of Buffet stock actually is?
Anything that is undervalued by the market at the time of purchase is my take.
I had not actually read any book on Buffet until recently and that was published 12 years ago (the Warren Buffet Way, Hagstrom).
He bought GEICO when it was in trouble, basically because it had deviated from it core USP* and I believe he is still he is still unravelling the mess^ that is Gen Re.
Assuming that so far I have not missed the plot on the above book Buffet looks for good management and return on equity.
I am not convinced that VCT meets that criteria of the former and definitely does not really meet the latter because Vector have overpaid for recent acquisitions because of the lack of the former (you are allowed time-out to work that one out).
It is a utility prone to state intervention, was our Warren ever keen on these?
Stick to Mainfreight.

Discs:
VCT customer, had the opportunity to buy at IPO but felt that the dollars could be invested elsewhere in the long-term portfolio for better effect.
MFT and still see upside long term. but not currently a buy
RYM and ditto
No NZR
Think MacDunk was expecting too much.

*USP = unique selling point, if you don't know what that means it is important that you find out
^I believe I am being very restrained in my choice of language here

k1w1
19-06-2006, 10:02 PM
This is an extract from the 2005 Berkshire Hathaway Annual Report:

"Last spring, MidAmerican Energy, our 80.5% owned subsidiary, agreed to buy PacifiCorp, a major electric utility serving six Western states. An acquisition of this sort requires many regulatory approvals, but we’ve now obtained these and expect to close this transaction soon.Berkshire will then buy $3.4 billion of MidAmerican’s common stock, which MidAmerican will supplement with $1.7 billion of borrowing to complete the purchase. You can’t expect to earn outsized profits in regulated utilities, but the industry offers owners the opportunity to deploy large sums at fair returns – and therefore, it makes good sense for Berkshire. A few years back, I said that we hoped to make some very large purchases in the utility field. Note the plural – we’ll be looking for more..."

The difference between Telecom and Vector is that VCT like MidAmerican is already regulated as it is a true natural monopoly on electricity and gas distribution in Auckland and Wellington - it can not be unbundled to let someone else in to compete with it. Its pricing is based on a return on capital but that ignores the reality that its EBITDA/ Sales is in excess of 50%.Thats right. In an industry that is pretty much inelastic and immune to price signals, and without a competitor. Ten years from now, it will still be doing what it is doing today- and aiming to make the same government approved margins.

Profits and dividends are artificially low due to the amortisation regime that will change under incoming accounting regimes and reveal that profits are up 40% on pre NGC acquistion figures.

Fair returns on large sums deployed results in lots of free cash as Buffett realises. Thats why I see VCT as analogous to Buffett's purchase of MidAmerican- it is a good anchor when the market is underpressure and I view it as a part of a balanced portfolio playing the role that Telecom played in many investment fund holdings.

Halebop
20-06-2006, 12:38 AM
Buffett's view on MidAmerican is a 180 degree U turn on his long held view to avoid investing in regulated industries, particularly utilities. His reasoning relates specifically to the size of Berkshire Hathaway's cash pile and the fact the dividends in the USA are taxable and therefore it is inefficient to distribute the funds. He has been at pains to point out his growing investment in MidAmerican will result in lower than historical returns.

For a small New Zealand based investor these are less than compelling reasons to emulate his decision. The investment would need to stand on its own merits rather than anything "analogous" to Buffett's (no New Zealander has his cash pile or dividend problems). The returns of VCT are subject to regulation and can be impacted by a regulator.

duncan macgregor
20-06-2006, 09:05 AM
KIWI, Have you lost your marbles?. I thought you had more up top than buy into a share on a downtrend. Wait until it gets into an uptrend you flightless bird. Take your WARREN BUFFET books and burn them before you go broke. His position in the market is completely different to your position to copy him will be relegating yourself to underperform the market. If VCT comes right, and starts an uptrend, look at it then. Remember the sector first, the company second and, who cares about a balanced portfolio that is for the people that have no faith in their system. Far be it from me to skite about how much i beat the market as you do [ I am to modest KIWI you know that]. MACDUNK

k1w1
20-06-2006, 10:55 AM
Halebop I accept that Berkshire Hathaway has a huge pile of cash. I think that Buffett thinks that returning it to shareholders is an admission that they could do better with it than he could. This is anathema to him as if he believed it he should wind up the company and distribute the profits to shareholders.

There is more to such investments than just that dividends are taxable. I believe the objection is not solely due to practical difficulties. These can be solved eg he could if he wanted to return funds tax effectively eg by share buy back.

Instead I think he is believes that he can still utilise them effectively. What is significant is the use of significant funds to buy large regulated utilities. He trades off the higher rewards he forgoes for the stability which makes such stocks almost a hybrid with bond like certainty of returns yet upside to asset revaluation and revenue increase. T

he stability of such investments means that he holds them alongside cash, bonds and other equities. This is not just temporary. He intends to increase holdings. He is not alone.The growth in infrastructure investment is being funded in part by investment funds seeking stable low risk investments with reliable cash flows as an alternative to bonds and traditional stocks.

Thats what I think VCT is.

lone wolf
27-06-2006, 08:07 AM
After all these years of amassing his fortune, he is now going to give it all away to charity-not surprising given his relatively humble existence.Does anyone know any details on the lucky charity, apparently one that Bill gates founded?

ananda77
27-06-2006, 08:44 AM
...hope this piece of 'Buffettology' will capture the imagination and reach the minds of many ardent followers...

<center>http://img.villagephotos.com/p/2004-12/905046/BuffetCharity.gif</center>

Kind Regards

limegreen
27-06-2006, 10:22 AM
quote:Originally posted by lone wolf

After all these years of amassing his fortune, he is now going to give it all away to charity-not surprising given his relatively humble existence.Does anyone know any details on the lucky charity, apparently one that Bill gates founded?


The Bill and Melinda Gates Foundation
http://en.wikipedia.org/wiki/Gates_Foundation

They do education, health, and stuff.
Social conservatives not a fan, as some of the health organisations fund contraceptivey stuff, and it also gets up the nose of the anti-vaccine camp.
Also lots of computers, university scholarships etc. There are also details of the Buffett clauses there:

"On June 25, 2006, Warren Buffett, the world's second richest person after Gates, pledged to give the foundation approximately 10 million Berkshire Hathaway Class B shares (worth US$30.7 billion on June 23, 2006) spread over multi-year annual contributions.[4] Buffet set conditions so that these contributions do not simply increase the foundation's endowment, but effectively work as a matching contribution, doubling the money the Foundation disperses yearly: "Buffett's gift came with three conditions for the Gates foundation: Bill or Melinda Gates must be alive and active in its administration; it must continue to qualify as a charity; and each year it must give away an amount equal to the previous year's Berkshire gift, plus another 5 percent of net assets. Buffett gave the foundation two years to abide by the third requirement." [5] The Gates Foundation will receive 5% (500,000) of the shares in July 2006 and will receive 5% of the remaining earmarked shares in the July of each following year (475,000 in 2007, 451,250 in 2008, and so on).[6] [7]"

lanenz
27-06-2006, 10:37 AM
Ive seen the interview with WB and the Gates and it looks like they have found the answer. There is a message in there.

A noble gesture of a high order.

winner69
11-06-2010, 07:41 PM
Chris Lee doesn;t think much of Buffett's behavior at the Congress hearing about Moody's

Just as well Warren is super rich and it doesn't really matter whether he understands how ratings work or whatever ..... but his repuatation taking a bit of a hit anyway

Good piece Mr Lee
http://www.chrislee.co.nz/index.php?page=taking-stock

Lizard
11-06-2010, 08:17 PM
Ssshhhh! You know how much he hates being talked about on forums... full of defamatory idiots...
:p

h2so4
13-06-2010, 07:26 PM
Over the 34 years from 1965 - 1998 Warren Buffett averaged 24% annual return and underperformed the S&P500 Index only 3 times. Impressive.

From 1999 - 2005 Buffett has averaged only 7% annual return, underperforming the Index for 3 of those 7 years.

It appears that Buffettology does not work as well as it used to.

Well Phaedrus I think you are absolutely right. After all Buffett doesn't buy back his own stock, so I guess he sees no value there?

Enumerate
13-06-2010, 09:00 PM
Chris Lee doesn;t think much of Buffett's behavior at the Congress hearing about Moody's
Good piece Mr Lee


Yes, I agree - very good blog last week.

He makes some useful points about IFRS accounting rules. I would emphasize that large write downs followed by write backs is perfectly fine, as long as everyone understands the rules. I think there may be some confusion, in transition - which unfortunately corresponded to the GFC issues. IFRS is not going away - NZ GAAP may be "the good old days" - those days are over.

winner69
10-03-2013, 11:11 AM
Buffett sub par last year and even the guru has been sucked into relative performance

http://www.johnkay.com/2013/03/07/even-a-subpar-sage-is-pure-genius


Even a subpar Sage is pure genius
07 March 2013, Financial Times

Has the Sage of Omaha, now 82, lost his touch? In his annual letter to the stockholders of Berkshire Hathaway published last week, Warren Buffett admitted a “subpar” performance in 2012. He acknowledged that his next annual letter may show that, for the first time, his fund had underperformed the S&P index over a five-year period.

This year’s “subpar” performance represented an increase in the net asset value of his fund of only 14.4 per cent, 1.6 per cent less than the rise in the more excitable S&P. The anticipated deficiency in the 2009-13 result will arise because the figures for 2008 (when the index plunged but Berkshire’s NAV fell only modestly) will drop out of the five-year average. Meanwhile, the data for 2009 (when the index partially recovered but the Berkshire portfolio did not regain the value it had never shed) will remain in the calculation.

It seems that even Mr Buffett is being dragged into the wealth-destroying trap of judging investment skill by relative performance. In these terms, 1999 was his worst ever year. But his underperformance was a measure, not a criticism, of his skill. His rivals, seduced by fantasies of the “new economy”, would within a short time mostly relinquish more than all the gains they had made. I would not entrust a penny to a fund manager who did not underperform the market in 1999.

But the most remarkable thing about Mr Buffett’s achievement is not that no one has rivalled his record. It is that almost no one has seriously tried to emulate his investment style. The herd instinct is powerful, even dominant, among asset managers. But the herd is not to be found at Mr Buffett’s annual jamborees in Omaha: that occasion is attended only by happy shareholders and admiring journalists.

Still, the result of their attention is that more has been written about Mr Buffett than any other figure in the world of investment. Carol Loomis, who first wrote about him in Fortune almost 50 years ago, has recently collated a selection of his letters, which she co-writes. The lesson of this material is not only that there is nothing secret about the origins of Mr Buffett’s success, but also that there is nothing that is even difficult to understand.

Berkshire owns a number of insurance companies, which are strongly cash-generative, since the nature of insurance is that the payment of premiums precedes the payment of claims. These funds, and Berkshire’s retained earnings, are invested in a portfolio of wholly owned businesses and large holdings in some listed companies. The distinguishing characteristic of all these businesses is that they have sustainable competitive advantages: market positions competitors would find it difficult or impossible to reproduce. There is little portfolio turnover. The preferred holding period for stocks is, Mr Buffett has often said, for ever.

If he is a genius, it is the genius of simplicity. No special or original insight is needed to reach his appreciation of the nature of business success. Nor is it difficult to recognise that companies such as American Express, Coca-Cola, IBM, Wells Fargo, and most recently Heinz – Berkshire’s largest holdings – meet his criteria.

Which leads back to the question of why Berkshire has so few imitators. After all, another crucial insight of business economics is that profitable strategies that can be replicated are imitated until returns from them are driven down to normal levels. Why do the majority of investment managers hold many more stocks, roll them over far more often, engage in far more complex transactions – and derive less consistent and profitable results?

Partly the problem is the trap of short-term relative performance measurements – the distortion of perspective that allows a 14.4 per cent gain to be described as subpar performance.

But the deeper issue is that complexity is intrinsic to the product many money managers sell. How can you justify high fees except by reference to frequent activity, unique insights and arcana? But Mr Buffett understands the limitations of his knowledge. That appreciation distinguishes people who are very clever from those who only think they are.

Tags: Business, Competencies, Finance, Markets, Value


[ RSS feed for comments on this post. ]

BIRMANBOY
10-03-2013, 11:43 AM
What was interesting to me was he said he would consider buying berkshire Hath (his own shares) back if they were priced at 120% of book with the implication that at that price they were a great buy. I didnt see the entire interview on US biz channell squawkbox or something. May have gotten something out of context so correct me if necessary. He also said in big upyears for DOW Berkshire didnt compare so well but it was in the overall year after year that was important. Big bucks to get in that share.... USD156,186.00 per share and a spread last day between high and low of USD1386 QUOTE=winner69;397033]Buffett sub par last year and even the guru has been sucked into relative performance

http://www.johnkay.com/2013/03/07/even-a-subpar-sage-is-pure-genius


Even a subpar Sage is pure genius
07 March 2013, Financial Times

Has the Sage of Omaha, now 82, lost his touch? In his annual letter to the stockholders of Berkshire Hathaway published last week, Warren Buffett admitted a “subpar” performance in 2012. He acknowledged that his next annual letter may show that, for the first time, his fund had underperformed the S&P index over a five-year period.

This year’s “subpar” performance represented an increase in the net asset value of his fund of only 14.4 per cent, 1.6 per cent less than the rise in the more excitable S&P. The anticipated deficiency in the 2009-13 result will arise because the figures for 2008 (when the index plunged but Berkshire’s NAV fell only modestly) will drop out of the five-year average. Meanwhile, the data for 2009 (when the index partially recovered but the Berkshire portfolio did not regain the value it had never shed) will remain in the calculation.

It seems that even Mr Buffett is being dragged into the wealth-destroying trap of judging investment skill by relative performance. In these terms, 1999 was his worst ever year. But his underperformance was a measure, not a criticism, of his skill. His rivals, seduced by fantasies of the “new economy”, would within a short time mostly relinquish more than all the gains they had made. I would not entrust a penny to a fund manager who did not underperform the market in 1999.

But the most remarkable thing about Mr Buffett’s achievement is not that no one has rivalled his record. It is that almost no one has seriously tried to emulate his investment style. The herd instinct is powerful, even dominant, among asset managers. But the herd is not to be found at Mr Buffett’s annual jamborees in Omaha: that occasion is attended only by happy shareholders and admiring journalists.

Still, the result of their attention is that more has been written about Mr Buffett than any other figure in the world of investment. Carol Loomis, who first wrote about him in Fortune almost 50 years ago, has recently collated a selection of his letters, which she co-writes. The lesson of this material is not only that there is nothing secret about the origins of Mr Buffett’s success, but also that there is nothing that is even difficult to understand.

Berkshire owns a number of insurance companies, which are strongly cash-generative, since the nature of insurance is that the payment of premiums precedes the payment of claims. These funds, and Berkshire’s retained earnings, are invested in a portfolio of wholly owned businesses and large holdings in some listed companies. The distinguishing characteristic of all these businesses is that they have sustainable competitive advantages: market positions competitors would find it difficult or impossible to reproduce. There is little portfolio turnover. The preferred holding period for stocks is, Mr Buffett has often said, for ever.

If he is a genius, it is the genius of simplicity. No special or original insight is needed to reach his appreciation of the nature of business success. Nor is it difficult to recognise that companies such as American Express, Coca-Cola, IBM, Wells Fargo, and most recently Heinz – Berkshire’s largest holdings – meet his criteria.

Which leads back to the question of why Berkshire has so few imitators. After all, another crucial insight of business economics is that profitable strategies that can be replicated are imitated until returns from them are driven down to normal levels. Why do the majority of investment managers hold many more stocks, roll them over far more often, engage in far more complex transactions – and derive less consistent and profitable results?

Partly the problem is the trap of short-term relative performance measurements – the distortion of perspective that allows a 14.4 per cent gain to be described as subpar performance.

But the deeper issue is that complexity is intrinsic to the product many money managers sell. How can you justify high fees except by reference to frequent activity, unique insights and arcana? But Mr Buffett understands the limitations of his knowledge. That appreciation distinguishes people who are very clever from those who only think they are.

Tags: Business, Competencies, Finance, Markets, Value


[ RSS feed for comments on this post. ][/QUOTE]

_Michael
10-03-2013, 01:17 PM
Great article. Very true.

As long as he has his health I don't think Buffett will ever lose his grip.

People (mainly the day trading, herd following variety) say it every five or ten years...

Then they are always proved wrong when his long term strategies come through...

Major von Tempsky
10-03-2013, 02:49 PM
Has he lost his grip? Nope, he's already won and left all you "technical" analysis wallahs in the dust.

winner69
07-04-2014, 01:53 PM
Somebody else has worked out that Warren is just average at the moment, at least over the last 4to 5 years and its not bad luck

He has lost his alpha the story goes

http://www.nytimes.com/2014/04/06/business/the-oracle-of-omaha-lately-looking-a-bit-ordinary.html?ref=business

Probably something to do with the rise of index trading and efts. Interesting comment in article "True investing skill is so rare that the rest of us shouldn’t even try to emulate those who have it. "

Whipmoney
07-04-2014, 04:03 PM
Somebody else has worked out that Warren is just average at the moment, at least over the last 4to 5 years and its not bad luck

He has lost his alpha the story goes

http://www.nytimes.com/2014/04/06/business/the-oracle-of-omaha-lately-looking-a-bit-ordinary.html?ref=business

Probably something to do with the rise of index trading and efts. Interesting comment in article "True investing skill is so rare that the rest of us shouldn’t even try to emulate those who have it. "


Actually I suspect its more of a case of his "alpha" being inversely correlated with his portfolio size.. i.e. the bigger he grows the harder it is for him to make/maintain a high percentage return as his positions actively affect the security prices.

Trying to find 10%-20+% returns when you are investing hundreds of millions to billions is likely to be a billion times more difficult than doing it with $100m, $100k, $10k as you are competiting against the best of the best and your actions affect the market as a whole.

I believe stated somewhere that if you gave him back a portfolio of x size he believed he could generate 50%+ returns.


On a side note: George Soros actually outperformed Buffet by quite a significant margin over the long-term yet his name (or riches) wasn't quite as revered due to a simple function: time. Although both born in the same decade Warren got started sooner and those extra years made a significant different once you start compounding the billions.

Similarily so, Soro's alpha was probably more maintainable as he played in some very deep markets (Currency and Global commodities) in addition to his stock positions (both long and short).