Message vs Messenger

Tuesday of last week, in a post entitled Chart on Darden Restaurants, I delved into the concept of a speculator versus an investor. For those that missed it, here is what I wrote;

I have received some questions regarding my ever present blog ending missive. "Good speculating to you all and please don't ever, ever forget that "an investor is a speculator who made a mistake and will not admit it".

Translation: We are all speculators no matter what your perception of the term. We are engaging in a transaction that item X will rise or fall, period. Nothing more nothing less. The investor reassures his/her self that he is smarter, saner and more rational than the speculator whom he regards as a recklessly, impulsive gambler. The investor convinces him/her self that they have done more homework studying the "value" in item X and that they are long term investors. Based on this superior investigation the investor will hang on to a losing position or worse still, will dollar cost average that position, (that is buying more of said underwater position) rather than admitting the error of is his/her ways and exiting the position ASAP, thereby taking the loss now while it is small before it becomes breathtakingly enormous.

I note the following 'investors' of some infamy;

Nick Leeson of Barings Bank
Yasuo Hamanaka of Sumitomo Copper
Jerome Kerviel of Societe Generale
William Miller of Legg Mason
John Meriwether of Long Term Capital Management
Brian Hunter of Amaranth Capital

In an almost perfect bout of timing, it seems my friend, the trader, and fund manager Dennis Gartman, of the Gartman Letter has stirred up a proverbial hornet's nest with his untowards comments regarding 'the Oracle' Warren Buffett.

I do not know Mr. Buffett, nor have access to him like say a Becky Quick may have, but I do know Dennis. This is not an attempt to take sides as I take issue with friends all the time when I feel they are wrong or misguided, of that rest most assured.

At issue was an comment Dennis made, subsequent to a speech up in Oregon recently, when asked of Mr. Buffett's investment style during which the term idiot came up. Dennis has been pilloried by many in the blogosphere and mainsteam financial media for calling Buffett, or rather his strategy one of idiocy for riding this market down as he has.


First off , just a couple of introductory points.

1. I am not here to defend or promote either Dennis or Mr. Buffett, but rather to look at the issue, idiocy or not and come to a conclusion.
2. One does not have to be an idiot to act as one. We all, some more than others, have had our moments where we say "Gosh, I can't believe I did/said that".

So using some rough numbers, Berkshire shares, ticker BRK.B, (of which Dennis is short hedged by other longs mind you and which he has acknowledged) are down from a high of over $5000/share to a current level of $2800. This represents a decline of 44% even thought they have bounced from a low of $2300 previously hit.

Now I fully recognize the Oracle has his legions of devotees who worship and follow his every move. They will defend the legendary Buffett to the death and would likely follow him off the Golden Gate bridge were he to do so first. And with good reason, given his track record, but these Buffett defenders/Gartman attackers fail to address Buffett's actions, or inactions if you will in this regard and seem quite willing to give Buffett a pass, content with focusing on the messenger.

Gartman is spot on to point out that to sit and suffer through a decline like the one Buffett's shareholders have experienced of late is more akin to idocy than genius, even if it is the Oracle. Just because Buffett did it does not make it okay.

In his letter today (TGL), Dennis Gartman posted a defence of Buffett sent to him via an associate, whereby the excuse is given that the long term corp. tax rate of 35% was responsible as the stock would have to decline this much as to make any sales by Buffett worthwhile due to his low cost base on positions. Dennis does not reveal who wrote this but I would bet dollars to doughnuts it was written by another one of these Ivy League MBA Dr. Frankenstein genius' we have scurrying about the financial landscape.

Dennis goes on to ask the pertinent question his detractors seem to have missed,

"could Mr. Buffett not have hedged his positions via selling S&P futures?"

I would have taken it a step further and inquired as to the use of that new invention on the financial scene called the 'stop loss order'. I realise it is not as sophisticated a tool as a Harvard or Princeton MBA might prefer but it seems to work now and them.

In reality Mr. Buffett did the exact opposite to selling futures which would have been a hedge against a market decline. When the market was tanking, he was writing puts on the market indices, which is a derivative trade that is bullish. (Those wishing for more details of the joys of writing puts can refer to Victor Neiderhoffer's escapades some years back but again I digress.)

By effecting this strategy, a synthetic long, Mr. Buffett was effectively doubling down his already existing 'long' position. He was simply buying more of what was already moving against him, or as your broker would recommend averaging down.

You can refer to my list of 'investors of some infamy' at the top of the page to see how their attempts at this strategy of averaging down worked out. Peter Lynch of Fidelity Magellan fund fame had the humility to admit he had the mother of all bull markets as the fortunate back drop to manage money. Could Buffett simply be a similar beneficiary of this fortunate backdrop? Tis worth pondering.


Yes the market has bounced off the March lows, permanently or temporarily is subject to much debate. But is this double down style of managing money more appropriate for a casino visit or for the capital markets?


Maybe this will all work out for Mr. Buffett and his shareholders or maybe it won't. I can assure you this much, that if it does not work out for the best, Dennis Gartman's criticisms will look preposterously tame compared to the venom that will come out of the woodwork. If you doubt me, read some market history, in particular the history of some of the more venerable market oracles of days gone by. Names such as Richard Whitney, Charles Mitchell, Irving Fisher, among others.


Good speculating to you all and please don't ever, ever forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 3 units Ultrashort Real Estate ticker SRS @ $18.85 stop @ $16.28
Long 3 units Ultrashort S&P500 ticker SDS @ $54.75 stops @ $51.38/52.38/53.38
Long 1 unit Financial Bear 3x ticker FAZ @ $4.36 stop @ $4.46
Long 1 unit Ultrashort FTSE Xinhua 25 ticker FXP @ $13.30 stop @ $12.09
Short 2 units Wells Fargo ticker WFC @ $25.10 stop @ $26.26/27.41
Short 1 unit Autozone ticker AZO @ $157.95 stop @ $162.61
Short 1 unit Microsoft ticker MSFT @ $23.30 stop @ $24.61
Short 1 unit Aeropostale ticker ARO @ $35.00 stop @ $38.31