Thursday, May 9, 2013

Thematic Thursdays: Is Buffett Overrated?

Last weekend's annual love fest in Omaha was replete with the usual folksy antics - ukelele and song in hand - of one of world's wealthiest people: the Oracle himself. However, beneath this folksy exterior lurks a question, one that not I but none other Bill Gross of PIMCO raised in his excellent commentary a month ago: Is Buffett the beneficiary of a long term wave of credit expansion?

Here is the segment of Gross' commentary that I believe stands out:

"There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.” Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch."

Gross goes on to note:

"My point is this: PIMCO’s epoch, Berkshire Hathaway’s epoch, Peter Lynch’s epoch, all occurred or have occurred within an epoch of credit expansion – a period where those that reached for carry, that sold volatility, that tilted towards yield and more credit risk, or that were sheltered either structurally or reputationally from withdrawals and delevering (Buffett) that clipped competitors at just the wrong time – succeeded. Yet all of these epochs were perhaps just that – epochs. What if an epoch changes? What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered? What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well?"

Investment Strategy Implications

The point of this blog posting is simple: In this age of high frequency trading, short-termism has been taken to its latest zenith. However, like Elvis in Las Vegas, many investors have escaped this casino - they have left the building. Many believe that the odds are tilted against them. It's not your grandfather's stock market anymore. Yet, a certain grandfatherly figure has managed to find a way to tilt the odds in his favor. And while his success can be attributed to many factors, one of them appears to be the ability to identify longer-term trends and themes and then have the conviction to ride that wave.

So, while what another oracle once said, "What do all men with power want? More power.*", is true. What is also true is that, like the asset allocation decision and its performance impact on well-diversified portfolios**, longer-term trends and themes can be a most profitable strategy. But don't take my word for it. Just ask Buffett, Gross, and company.

*The Matrix Reloaded.
**85% of investment performance is attributable to the decision to be in or not be in the equity markets.


Thematic Thursdays is a product of Blue Marble Research Advisory and focuses on important global trends and themes impacting the global economy and markets.

On average, thematic issues are longer term in nature, transcending the business cycle in time and economic sector categorizations. However, many shorter term players in the financial markets use trends and themes as a staple of their investment strategy. Understanding how to incorporate thematic analysis - along with fundamental and technical analyses - is an integral part of the process that forms the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

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