Warren Buffett Sounds Like A Hypocrite Because He Just Doesn’t Think Very Highly Of You

Dan Loeb recently drew attention to the many ways in which Warren Buffett contradicts himself and it became a pretty popular little quote. It became popular, I think, because there is a great deal of truth behind it. This is especially true when it comes to Buffett’s advice on investing.

Warren Buffett famously tells us to, ‘be greedy when others are fearful and fearful when others are greedy.’ Then he tells us not to try to time the market.

He tells us to evaluate stocks and bonds and put money into whichever offers the greatest prospective return. Then he says, ‘Screw it. Just put all your money in the stock market.’

He tells us that a “margin of safety” is the most important concept in investing. Then he says, ‘Never mind all that. Just buy stocks today at the prevailing price and focus on the very long-term.’

He tells us the best returns are to be had by owning only the highest quality companies. Then he says, ‘Forget that. Just buy an index fund.’

So what the heck is going on here?

I think part of it is his evolution as an investor. He started out managing a small amount of money which allowed him to take advantage of special situations and things that just aren’t possible when you’re managing over a hundred billion dollars. Now that he is almost forced to become a closet index fund manager, he has modified his philosophy to suit his situation.

The bigger reason, though, that I believe Buffett contradicts himself like this in public is he just doesn’t think you’re capable of becoming a “superinvestor” in the first place.

It’s very difficult to be “greedy when others are fearful.” It’s just as hard to be “fearful when others are greedy.” It takes a great discipline to be able to shut out the crowd and focus on what truly matters. This is an ability most people just don’t have – which is why there is a herd mentality in the first place.

It actually doesn’t take much specialized skill at all to evaluate stocks and bonds to determine which is more attractive at any given time or to recognize opportunities that offer a “margin of safety.” It does take discipline, though, to be able to take advantage of these opportunities when the crowd is screaming, ‘you’re wrong!’

Buffett clearly believes you’re not capable of this sort of discipline. And, based on how most of you have behaved over the past 20 years (see the dot-com and real estate bubbles), he’s probably right. For this reason, he hedges all of his advice and dumbs it down so that you don’t hurt yourself too badly. In the end, Buffett sounds like a hypocrite because he just doesn’t hold a very high opinion of you.

Now if you disagree and want to learn how to be a “superinvestor” like Buffett, I suggest you start right here. And pay no attention to Buffett’s dumbed down advice… unless, of course, you prefer to run with the crowd.


Welcome To The Everything Bubble

This post first appeared on The Felder Report Premium on May 2nd:

Everything is overvalued. Stocks are extremely overvalued. An incredible amount of bonds have negative yields; how much more overvalued can they get? Investment-grade and high-yield credit spreads are near all-time lows on top of some of the lowest rates we’ve ever seen! Prices for high-end real estate, art and other collectibles are off the chart. I’ve thought of calling this the “everything bubble,” because looking at each one on its own (outside of small cap stocks which are largely obscured from view) there’s no obvious bubble similar to the dotcom or real estate bubbles. But taken together we’ve never seen anything like this ever before.

I believe the real problem lies in the growth of “price-insensitive buyers,” as GMO recently labeled them. I’ve also called them “value agnostic.” Ultimately, there’s a growing class of investors (though I believe they don’t deserve that term) who are buying assets like stocks and bonds regardless of their valuations. They will buy stocks to the moon simply because their methodology dictates they do so. I’m referring mainly to so-called “passive” investors here.

Then we also have investors who will buy bonds no matter how negative they get because their methodology dictates it. Just look at pension funds, insurers and central banks. Their policies ensure they continue buying bonds even when that means locking in deeply negative returns over long periods of time.

The incredible growth in this class of price-insensitive buyers is responsible for the everything bubble. Just think about the growth of passive investing over the course of just the past five years or so. Buy and hold has gone from being mocked and disparaged only five years ago to the most popular investment style there is. Witness the growth of robo-advisors as evidence. And how long have central banks been buying assets? It’s only been over the past five or six years. This is a wholly new phenomenon in the markets and it’s now become a huge segment.

Make no mistake. The incredible growth of “value agnostic” investors is just another form of mania pushing asset prices to extremes. These investors use their returns over the past five years as proof that their methodology has merit when simple common sense shows that you can’t possibly be an investor while denying the definition of an “investment,” as Ben Graham defined it:

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

Buying stocks or bonds today provide neither “safety of principal” nor “adequate return.” In fact, these “price-insensitive buyers” don’t even attempt to begin any sort of “thorough analysis.” For this reason they are nothing more than speculators. That they believe themselves to be otherwise despite the obvious fact that they are just the opposite may be the surest sign there is that this is indeed another mania. Sadly, it will only be evident to them in hindsight.


Why A Stock Market Crash May Once Again Be Inevitable

Don’t confuse brains with a bull market. -Humphrey B. Neill

Spending as much time as I do on social media, namely Twitter and StockTwits, I’ve been absolutely astounded by how many traders have begun to “confuse brains with a bull market.” We joke about it on these platforms but there is an amazing amount of hubris out there right now.

One of my favorite investing quotes comes from an interview Paul Tudor Jones gave just after the financial crisis had ended:

Clearly, many fundamental investors were caught off guard by the crisis. Stocks they thought were cheap in 2007 got far cheaper over the coming couple of years. Being unable to “read the tape,” these investors suffered the full force of the stock market crash.

As a response to this failure, many investors have seemingly tried to adapt by becoming “tape readers.” Most notably I have seen an explosion in the number of traders calling themselves, “trend followers.”

Now I have great respect for trend-following. Some of the greatest investors on the planet are trend followers, employing a very simple yet very effective and intuitive strategy across a wide variety of markets.

That said, the problem with most of these newbie trend followers is they ignore one of the key components of the strategy: diversification. They are involved only in one asset class, the stock market. Though they respect the trend, they don’t appreciate just how exposed they are to liquidity risk right now, something experienced trend followers ameliorate by broadening out into as many uncorrelated asset classes as possible.

Emboldened by 3+ years of very low volatility, these traders have become the exact opposite of what PTJ was referring to. Their inability to understand the fundamentals, relying solely on the trend, puts them at great risk, especially in an environment of problematic liquidity.

As I’ve demonstrated over the past several months, this stock market is one of the most overvalued, overbought and overbullish in history. Julian Robertson, Stan Druckenmiller, Ray Dalio, Mohamed El-Erian and other super-investors have recently warned about this in one way or another.

However, when I have shared the their concerns via social media, I’m regularly met with dismissal or disdain. These trend followers have become so emboldened by the bull market that they now believe their brains to be even bigger than these giants of the industry.

I have been bearish but have avoided using the “c-word” until now because crashes, by their nature, are impossible to predict. But the hubris on display in the market by those who believe themselves immune to these massive risks has me wondering if some sort of liquidity event in the stock market isn’t inevitable.

If everyone is a trend follower and the stock market begins to sell off, how can everyone get out at the same time? And in a market already plagued by severe liquidity challenges? It seems to me that there is a lesson here that should have been learned a long time ago.

The quote above comes from a fantastic piece Mark Yusko recently wrote about his personal experience with Julian Robertson, who recently said it is, ‘not at all ridiculous to expect another 2008-style decline in the stock market.’

To turn the PTJ quote on its head, counting on being able to sell once it’s clear to all that the trend has shifted may be precisely how those in the trend following space get annihilated in the future. Certainly, we have seen this movie before. Doesn’t anyone else remember “portfolio insurance”?


Ten Years Gone

Ah, but I was so much older then, I’m younger than that now. -Bob Dylan, “My Back Pages”

10 years ago today I started this blog, originally titling it after Dylan’s famous song. At the time I saw it as an opportunity to try to warn people about the brewing bubble in real estate. I was early but nobody really wanted to listen anyway. They were just having too much fun. That’s one major lesson I’ve learned since then: people only change – their ideas, perceptions, attitudes and behaviors – once THEY decide to do so. The most persuasive and logical argument in the world is no match for a man on a mental mission.

The blog eventually evolved into a way for me to explore things I was learning and observing. Writing is a great way, maybe the best way, to do this. There’s just something about getting the ideas out of your head and putting them into words. You’re forced to really examine and refine them in the process. This process has been very valuable to me over the past decade just as an intellectual exercise.

Finally, the blog has now attracted a community of folks searching for the same thing: truth. (I know it sounds corny but it’s true. And, ironically, this was part of the motto of my old firm). I’m only interested in zeitgeist from a contrarian perspective. I’m far more interested in what really matters, what’s really going on and what to do about it. Through the blog I’ve come across a variety of likeminded individuals that have exponentially enhanced this thing as an intellectual exercise.

So, to all of you who have been reading, sharing and contributing, thank you. I’m grateful.


Why Record-High Margin Debt Should Make You More Cautious

It’s recently become popular to dismiss the record level of margin debt in the market as meaningless. Notable bloggers like Josh Brown, Barry Ritholtz and Chris Kimble have all written some sort of “it just doesn’t matter” commentary recently. Barry went so far as to call it, “statistically bogus.” To me, this sounds like just another version of, “it’s different this time.”

Here are the real statistics: Over the past 20 years, the level of margin debt relative to the economy has had nearly an 80% negative correlation to future 3-year returns in the stock market. What this means is, the higher the level of margin debt relative to GDP, the lower the returns for the stock market over the coming 3 years and vice versa. “Statistically bogus?” I think not.

Screen Shot 2015-05-06 at 10.06.28 AM

So what is the current level of margin debt suggesting for the next 3 years in stocks? Considering that margin debt-to-GDP is near an all-time record high, it forecasts returns over the coming 3 years could very well be as bad as any bear market we have witnessed over the past 20 years. Specifically, it forecasts a negative 3-year return of 50%. Maybe this is one reason Julian Robertson recently said it’s not “ridiculous” to expect another 2008-size decline in the stock market.

Screen Shot 2015-05-06 at 9.46.52 AMNow I’m not saying that this one indicator should be relied upon on its own in making investment decisions. 20 years of data is not much and it’s only one of many valuable indicators. But to call it meaningless is either willful ignorance (aka, cognitive dissonance) or disingenuousness.

Because it is statistically significant, it is very valuable in, as Howard Marks says, “having a sense for where we stand.” From The Most Important Thing:

As difficult as it is to know the future, it’s really not that hard to understand the present. What we need to do is “take the market’s temperature.” If we are alert and perceptive, we can gauge the behavior of those around us and from that judge what we should do… Simply put, we must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious.

In my view, margin debt is a very good way to “take the market’s temperature.” The extreme level of margin debt-to-GDP clearly shows investors have become “recklessly confident.” Prudent investors should react by becoming more cautious. And, from a contrarian standpoint, the fact that popular bloggers are dismissing this idea despite its mathematical validity adds an exclamation point to that idea.