Score Another ‘Wolf’ for Warren Buffet!!!

Re(1): ‘Why I'm not buying the U.S. dollar’, Fortune, Warren Buffet, 2003/10/26
Re(2): ‘Giving more than Buffett and Gates combined’, MarketWatch, 2006/07/25
Re(3): ‘Berkshire Profit Rises 62%; Buffett Cuts Currency Bet’, Bloomberg, 2006/08/05

Oh, woest me…

The epitome of value investing loses a cool billion speculating in the currency markets!!!

I was waiting for this. I was flabbergasted in 2003 when I read Warren Buffet was going to short the dollar inside his Berkshire Hathaway investment fund. He was the stable voice in a market of bombastic Dot.Com morons throughout the late 90’s. But, his BDS got the best of him and the drool on his balance sheets smudged the vitality of the American economy. His smoke tarnished glasses glistened at the vigor of the French and German economies…

Let us look at his reasoning and prognostication - oh my, we have had quite a few brilliant psychic seers recently, haven’t we!.

Obviously, one has to simplify a vast, dynamic, and growing economy to really study it – so let us use the Communist zero sum macro-economics model:

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Ah, that simplifies the equation. There are no goods other than land and food. There are no requirements for services such as blacksmithing or oil exploration or software development. We can narrow a 13.5 Trillion dollar economy to land and food!

And, after Thriftville starts selling surplus food to the LOPs (Low Output People) in Squanderville an imbalance occurs – resulting in Thriftville citizens actually owning hard assets in Squanderville! And, now:

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

In effect, Mr. Buffet invested in the Euro. He invested in the dynamic French and German economies. He invested billions and billions against America and against the Dollar just when his Value Investment strategy would have netted him billions. Just when the Evil BusHitler’s tax policies revitalized the concept of value investing (see tax treatment of dividends) the key proponent of value investing started dabbling in futures and options. Missed it by t-h-a-t much…

He was right about one thing though:

I will close by reminding you again that I cried wolf once before. In general, the batting average of doomsayers in the U.S. is terrible. Our country has consistently made fools of those who were skeptical about either our economic potential or our resiliency. Many pessimistic seers simply underestimated the dynamism that has allowed us to overcome problems that once seemed ominous. We still have a truly remarkable country and economy.

It was probably wise for him to donate much of his life savings to the Bill & Melinda Gates Foundation donor-advised charity fund. His remaining assets can thus be invested conservatively using value funds and bonds – and, thus, be saved from the grasping claws of a BDS infected currency speculator!!!

But, BDS strikes when he invests other people’s money… He is one citizen of Squanderville who is wisely purchasing assets in Thriftville:

Buffett, the company's 75-year-old chairman and the world's second-richest man after Microsoft Corp.'s Bill Gates, acquired his first company outside the U.S. in July with the $4 billion purchase of an 80 percent stake in Israel-based toolmaker Iscar Metalworking Cos. As Hezbollah fighters launch rockets within range of Iscar's plant in Tefen, Berkshire faces new risks.

"Berkshire is subject to increased risks from unstable political conditions and civil unrest in international markets,'' the company said in the filing. With the Middle East
in new turmoil, "business operations could be adversely affected directly through the loss of human resources and destruction of production facilities.''

At least he knows when to cut his losses:

Berkshire cut its currency contracts by $4.2 billion during the quarter to $1.2
billion even as the U.S. Dollar Index, used to measure its value against six
major currencies, fell the most in 18 months. Buffett, who had as much as $21.8
billion in contracts in 2005, told investors in March he would acquire interests
in companies outside the U.S. instead.

Mr. Buffet, if I may be of some assistance… I am not a doctor of finance but I play one at the workplace! Invest conservatively in value and safety. Stop seeking speculative returns. End your search for greener and safer pastures – cast your eyes instead upon the ground on which you stand. Take off those smokey glasses and mop the sweat off your brow. BusHitler will be gone in less than three years!!! Take the long view.

There is hope.
In the end, it was tidy of Mr. Buffet to cut his losses just before the Billion mark.
We will call that a moral victory of the sort being won by al-Qaeda and Hezbollah!!!

Yuk, yuk…

Schadenfreude…

Oh, how the mighty have fallen!

Now, can we have a peek inside George Sorros’ balance sheets?