Buffett: Wall Street has Turned into a “Casino Game”

Interesting comments from Warren Buffett on the current state of Wall Street (via DealBook).  Here are some key quotes:

“You can’t buy 10 percent of the farmland in Nebraska in three years if you set out to do it,” he said. Yet, he pointed out, he was able to buy the equivalent of 10 percent of I.B.M. in six to eight months as a result of the market’s liquidity. “The idea that people look at their holdings in such a way that that kind of volume exists means that to a great extent, it’s a casino game,” he said. Of course, unlike many investors, he plans to hold his stake in I.B.M. for years.

As we talked about the “good old days” — he spoke of some of his early friends who were successful hedge fund investors, like Julian Robertson, who founded Tiger Management — it became clear that he was less enamored of the investor class of the next generation.

When I asked, for example, if there were any private equity investors that he admired, he flatly replied: “No.”

When I asked if he followed any hedge fund managers, he struggled to name any, before saying that he liked Seth Klarman, a low-key value investor who runs the Baupost Group, based in Boston.

“They’re not as good as the old ones generally. The field has gotten swamped, so there’s so much money playing and people have been able to raise money by just saying ‘hedge fund,’” he said. “That was not the case earlier on; you really had to have some performance for some time before people would put money with you. It’s a marketing thing.”

Mr. Buffett says he now considered himself as much a business manager as an investor. “The main thing I’m doing is trying to build a business, and now we built one. Investing is part of it but it is not the main thing.”

Today, Mr. Buffett is particularly circumspect about the investment strategies that hedge funds employ, like shorting, or betting against, a company’s stock. He used to short companies as part of a hedging strategy when he ran his partnership, but now he says that he and Charlie Munger, his longtime friend and vice chairman of Berkshire, see it as too hard.

“Charlie and I both have talked about it, we probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult,” he explained, suggesting that the timing of short investments is crucial. “The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts.”

Read the full article here.  There are some good insights there.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. old warren should know that averaging down does not work, and if he methodology of analysis in discounting via value investing, he would be able to buy it at a better low, if he used volume analysis to identify accurate legit support levels. To much noise in the game for any real market efficiency anymore, its not the same as it use to be. Way more retail speculators forcing abritraguers to stay away from many trades, and they are loosing buying power to counter the noise for return to party plays.

  2. in the long run avargaing down always work if you invest in the market itself. the problem is how to have the money in order to average down during a downturn.

  3. wow, must have been the first time i´ve seen Warren mentioning shorting stocks. very honest and simple explanation why he doesn´t.
    good stuff.

  4. I’d say that current managers are not less gifted than those of yesteryear. What separates the old guard from the current managers is:

    a) more competition. The field of hedge fund managers is much more crowded, thereby being the potential for returns diminished.

    b) more challenging markets. It is different to ride the bull of the 80s and 90s and not to have to worry about MF Global, system collapse, etc., than the current environment. The tide is against stellar returns.

    Regards

  5. For me he still stands head and shoulders above the Industry,and his insights are typically excellent.

  6. ‘The field has gotten swamped, so there’s so much money playing and people have been able to raise money by just saying ‘hedge fund,’” he said.

    It’s amazing how much money is in the markets these days. I guess the word is ‘liquidity.’
    Lots of money creation has gone into markets and paper assets and not so much into the real economy.

  7. the guy that just happened to be in the right place at the right time [beginning of DOW secbull 1982] sobers up after 11 years of this secbear??????

    can it be??????

    manipulation???????

    i predict ole’ warren goes big into gold mining stocks in 1-2 years.

    not.

    he’ll just ride the 2013-14 final DOWsecbear capitulation all the way down.

  8. I don’t understand what you want to say. Mind to rephrase it in a more standardized version of the english language?

  9. “Lots of money creation has gone into markets and paper assets and not so much into the real economy.”

    Sure – investing in a market that is engineered to “always go up” is a much better proposition than investing in a business that may fail, or that may remain depressed in an environment that is full of persistent uncertainty.

  10. There is more than a kernel of truth toward Warren’s distaste for shorting. I mean where else can an institution of TBTF size bet against a company’s credit rating then take actions in the market (restricting access to capital on a refi lets say or line of credit) thus putting the company’s credit rating in peril and driving the CDS prices up.

    The market is messed up. Bad. We have seen it can happen to countries, let alone individual companies. All of it happening at the whim of a few morally and ethically bankrupt male 20 somethings who wouldn’t know how to fix a doornob let alone build a company.

    Of course it’s a sham! Welcome to the new millenium Warren!

  11. I’d love to know where your justification comes when Warren bought Berkshire in the early 1960’s…