{"id":1064,"date":"2012-10-20T13:22:21","date_gmt":"2012-10-20T07:52:21","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1064"},"modified":"2012-10-20T13:22:21","modified_gmt":"2012-10-20T07:52:21","slug":"warren-buffett-does-not-practice-what-he-preaches","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/10\/20\/warren-buffett-does-not-practice-what-he-preaches\/","title":{"rendered":"\u2018Warren Buffett does not practice what he preaches\u2019"},"content":{"rendered":"
\nSatyajit\u00a0Das<\/strong>\u00a0is an internationally renowned derivatives expert.\u00a0His works include the best-selling\u00a0Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives<\/em>. His latest book\u00a0Extreme Money \u2013 Masters of the Universe and the Cult of Risk<\/em>\u00a0deals with the messy details of the 2008 financial crisis, the lessons from which have still not been learnt, feels\u00a0Das. As he puts it, \u201cWe keep repeating the same mistakes over and over\u2026The only lesson of history after all is that no one learns the lessons of history.\u201d\u00a0<\/strong>
\nIn this freewheeling interview with\u00a0Vivek Kaul,\u00a0<\/strong>he talks about how investing is never going to be the same again, why financial TV is pornography, and that Warren Buffett does not practice what he preaches.\u00a0<\/strong>The interview will be published in two parts. This is the first part.
\nWhy do you call \u201cfinancial TV\u201d pornography?<\/strong>
\nPornography is formulaic, explicit subject matter is depicted to sexually excite the viewer. Financial TV shares the characteristics of pornography \u2014 sleaze, intrusiveness and a desire to titillate and shock. It is a 24\/7 Joycean stream of consciousness, a financial noise machine with the inevitability and repetition of all sexual congress. No one seriously relies on financial TV for deep insight. If it is on TV, then it\u2019s already happened. It\u2019s entertainment. Attractive men and women cater to all possible proclivities in the audience. It\u2019s like wall paper or eye candy \u2013 pleasant but not essential. In dealing rooms, generally you don\u2019t even have the sound on, so it is like pornography in another sense \u2013 dialogue is superfluous. The only time financial TV is interesting is when I am invited on to offer my money making insights \u2013 buy low, sell high etc.
\n\"\"<\/a>
\nWhatever his record as an investor, there are differences between Buffett\u2019s pronouncements about the standard of conduct he requires of others and that he follows. Getty Images
\nYou say that investment genius was always little more than a short memory and a rising market? You write that the assumed sophistication of finance and financiers is overrated. Why do you say that?<\/strong>
\nInvesting is like captaining a cricket side \u2013 90 percent luck and 10 percent skill, in the words of former Australian Test captain Richie Benaud. But as he said, don\u2019t try it without the 10 percent! The last 30 years were an exceptional period of investment history which provided high returns for reasons which are unique to that period. The best investment strategy would have been to buy stock or real estate and leverage it up. Then go to sleep or play golf for 25 years. You would have been a rich man.
\nWhen people make money, they theorise too much about it \u2013 hence all the books about trading success. The latest fad is about explaining the trader\u2019s personality via his biology. Some research suggests that male traders perform better when they have elevated testosterone levels. As prices increase and decrease, traders experience chemical changes. Euphoria caused by boosted testosterone levels from successful trades drives higher risk taking. Losses or reversals increase levels of the defensive steroid cortisone leading to risk-aversion. The experimental data is thin.
\nCould you elaborate on that?<\/strong>
\nIf correct, you could take steps on banks and fund managers to manage risk. You could artificially manipulate the biology of traders and investment managers to improve performance. It is not hard to imagine a future where traders will need to have their supplements \u2013uppers and downers (in the old parlance) \u2014 at hand to improve trading, similar to the experience of competitive sports where drugs have become relatively commonplace to improve performance. It is also not hard to imagine internal risk mangers and regulators insisting on regular monitoring of hormone levels as part of the compliance regime, with attendant cheating.
\nIsn\u2019t that far fetched?<\/strong>
\nThis is not far-fetched. Already, organisations are adopting unusual initiatives to gain a critical edge. A trader at Steve Cohen\u2019s SAC Capital was allegedly forced by his boss to take female hormones and wear articles of women\u2019s clothing at work, leading to a sexual relationship between the men, one of whom was married. The bizarre behaviour was to eliminate the trader\u2019s aggressive male attitude, making him a more obedient and detail-oriented trader. How can you take an industry which actually does this seriously!\n<\/div>\n
\n
\nDoes Warren Buffett practice what he preaches?<\/strong>
\nTalking about Warren Buffett is like discussing the existence of God. He is either great or he is not (the minority view). I am an atheist. Whatever his record as an investor, there are differences between Buffett\u2019s pronouncements about the standard of conduct he requires of others and that he follows. While he dispenses finely crafted criticism of derivatives as weapons of mass destruction, Berkshire Hathaway (Buffett\u2019s holding company) makes extensive use of derivatives and invested in Salomon Brothers and General Reinsurance, both participants in derivative markets.
\nDuring the crisis, Buffett, a significant investor in Moody\u2019s, was silent about the problems surrounding rating agencies. Having uncharacteristically declined an invitation to appear in June 2010, Buffett testified before the Financial Crisis Inquiry Commission under subpoena. Buffett emphasised that he knew little about the rating process other than its profit margins. He had never visited Moody\u2019s offices, not even knowing where they were located. He also defended Moody\u2019s not acknowledging any failure or complicity of the agencies in creating the bubble. When Goldman Sachs was indicted for alleged violations in structuring and selling CDOs (collateralised debt obligations, a kind of security backed by loans and bonds), Buffett, a major investor in Goldman, defended the firm, its actions and its CEO.
\n\"\"<\/a>
\nSatyajit Das.
\nCould you tell us a little more about this?<\/strong>
\nCritics have frequently pointed out anomalies in the firm\u2019s corporate practices. Berkshire Hathaway\u2019s dual-class share arrangement gives Buffett voting control whilst owning 34 percent of the equity. Until a decade ago, Berkshire Hathaway\u2019s seven-person board of directors consisted of mainly insiders such as Buffett\u2019s son. The new \u2018independent\u2019 directors include Bill Gates, a close friend of Buffett, and his regular bridge partner, as well as co-investor in the Gates Foundation. Critics also pointed to that fact Buffett\u2019s partner Charlie Munger\u2019s family owned a 3 percent stake in BYD, the Chinese electric battery maker, before Berkshire bought a stake in 2008.
\nAs to his record as an investor, there are a number of interesting aspects. Firstly, what is the right benchmark to measure his performance against \u2013 it can\u2019t be the broad market index. Secondly, the source of his investment success is not that complicated. His main source of investment capital is the premium income from his insurance businesses (cash received today against a promise to honour a future contingent claim). This provides him with effective economic leverage (at low interest cost) to buy low beta assets. The strategy worked well but whether it will continue to work is more difficult. The past, as they say, is \u201canother country\u201d.
\nIn your book\u00a0<\/strong>Extreme Money<\/em>\u00a0you write \u201cArchimedes said, \u201cGive me a lever long enough and a fulcrum on which to place it, and I shall move the world.\u201d You paraphrase it to write \u201cgive me enough debt and I shall make you all the money in the world\u201d. Can you elaborate?<\/strong>
\nBorrowing amplifies economic growth. Debt allows society to borrow from the future. It accelerates consumption and investment spending, as borrowed money is used to purchase something today against the promise of paying back the borrowing in the future. Spending that would have taken place normally over a period of years is accelerated because of the availability of cheap borrowing. In this way, debt generates economic growth. In financial markets, debt and leverage amplify returns.
\nCould you explain this through an example?<\/strong>
\nAssume an investor uses $20 of its own money \u2013 equity \u2013 and borrows $80 (80 percent of the value) to purchase an asset for $100. If the asset increases in value by 10 percent to $110, then the investor\u2019s equity increases on paper to $30 ($110 minus the fixed amount of debt of $80). If the investor maintains its leverage at 5 times then it can buy $150 of assets (funded by $30 of equity and $120 of debt). If the investor can now leverage 6 times then it can buy $180 of assets (funded by $30 of equity and $150 of debt). The investor still only has his original $20 investment in cash, unless he sells the asset to realise paper gains, which can vanish.
\nBut now, this $20 supports even more debt, as much as $160 (the $180 of assets that the investor can buy if it leverages six times less its original investment). The real leverage is around nine times, which means an 11 percent fall in the value of the asset purchased can wipe out the investor\u2019s wealth entirely. Where the supply of assets does not increase as quickly as the supply of debt, the price increases allow the process to continue. In the period to 2007, the use of leverage, in different ways, to make money was rampant. Unfortunately, it was never real money. Of course, when prices start to fall the entire process operates in reverse.
\nThe interview was originally published on www.firstpost.com on October 2o, 2012.\u00a0http:\/\/www.firstpost.com\/economy\/warren-buffet-does-not-practice-what-he-preaches-496581.html<\/a>
\nVivek Kaul is a writer. He can be reached at\u00a0vivek.kaul@gmail.com<\/a><\/em>\n<\/div>\n
<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Satyajit\u00a0Das\u00a0is an internationally renowned derivatives expert.\u00a0His works include the best-selling\u00a0Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. His latest book\u00a0Extreme Money \u2013 Masters of the Universe and the Cult of Risk\u00a0deals with the messy details of the 2008 financial crisis, the lessons from which have still not been learnt, feels\u00a0Das. … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14,31,33],"tags":[962,1196,1275,3238,3961],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Business<\/a> Financial Crisis<\/a> Firstpost<\/a>","qubely_excerpt":"Satyajit\u00a0Das\u00a0is an internationally renowned derivatives expert.\u00a0His works include the best-selling\u00a0Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. His latest book\u00a0Extreme Money \u2013 Masters of the Universe and the Cult of Risk\u00a0deals with the messy details of the 2008 financial crisis, the lessons from which have still not been learnt, feels\u00a0Das.…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/1064"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=1064"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/1064\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=1064"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=1064"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=1064"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}