Wednesday, December 19, 2012

Book Review: Even Buffett Isn't Perfect

Even Buffett Isn't Perfect (2008) by Vahan Janjigian

Most books about Warren Buffett tend to focus on his long-term investing success and rarely offer much in the way of criticism. In contrast, the aim of this book was to discuss some of the inconsistencies and potentially problematic aspects of his approach to investing, with the goal of helping readers learn from Buffett's missteps. However, I was disappointed in how the author went about trying to achieve that goal.

A prime example is the first chapter, which discusses Buffett's views on diversification. The author argues that Buffett is inconsistent on the topic: Sometimes he has advocated that investors maintain a small portfolio of 5-10 stocks that they know really well, whereas there are other times he has advocated widespread diversification via passive investment in index funds. What the author does not seem to fully appreciate is that Buffett's views were addressed to different kinds of investors. If someone has the time, knowledge, and ability to thoroughly evaluate companies and actively manage a portfolio (which Buffett is capable of doing), then it makes sense to have a small portfolio that represents only the very best investment prospects. However, if an investor lacks those qualities and is not interested in active portfolio management, then it might make more sense to passively invest in index funds.

There are some other purported inconsistencies, such as whether Buffett invests more for value than for growth, and the extent to which he conducts due diligence when buying entire companies. The latter criticism is in reference to Buffett mentioning in letters that he has sometimes made acquisitions within a day or two of being contacted about the possibilities. In the last few chapters the author discusses Buffett in relation to corporate governance, stock options, and taxes, but these issues mainly serve as springboards for the author's personal opinions, which may or may not be any better than Buffett's. Overall, I did not come away with an improved understanding of Buffett's imperfections or how they might inform my investing strategy.

Note: I read this book in November 2012.

11 comments:

  1. DGM,

    I just got done reading "Tap Dancing to Work" and I thought it was fantastic. I'm personally a huge fan of all things Buffett, and am quite fond of him. So, I'm a bit biased.

    But, if you're a fan of Buffett I think you'd really enjoy that book. It's divided almost in thirds, with the first third being about Buffett the investor, the second third mainly about Buffett the manager and the last third primarily exposing Buffett the philanthropist. I think I'll write about it soon.

    The book actually has me quite excited about delving into philanthropy one day as well. Obviously it wouldn't be on the scale of Buffett, and would involve more time than money. But, the spirit is there.

    The article in the book that describes Buffett splitting a $11 billion stock certificate from the 70's so that he can give away money is really jaw-dropping. I couldn't imagine holding a piece of paper worth $11 billion.

    Best wishes!

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    1. Dividend Mantra: Thanks for your comment. "Tap Dancing to Work" is already on my reading list; it will probably be the first investing book I read in the new year. Based on your comment and the reviews about it, I think I will enjoy the book.

      I have not given much thought to philanthropy, although I do occasionally make small donations (maybe one or two per year) and it is something I will likely give more serious consideration later in life, depending on my circumstances at the time. That said, I give major props to Buffett, Gates, and others who have directed their massive wealth toward good causes.

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  2. The idea behind the book sounds very interesting because I think everyone can learn alot by looking at other peoples and their own investing mistakes. However if it is more of a biased piece and a springboard for the authors own personal opinions rather than looking at the facts then I don't think I'd be too interested.

    I am a big Buffett fan so I would be biased myself but I'm sure there are mistakes he has made in his investing career that we could learn quite a deal from.

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    1. DGSI: Thanks for your comment. I agree that the basic premise of the book is interesting and it had the potential to provide some useful insight for investors. I am also a fan of Buffett, though I agree that it would be informative to see a well-reasoned analysis of some of his less-successful investing decisions over his career.

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  3. It seems odd that the author would miss such a clear thing with regards to Buffett's views on diversification.

    As you point out, he was talking to different people. Buffett's favorite investment book was Graham's Intelligent Investor, which clearly outlines two types of investors (enterprising investors that want to put in more effort for better returns, and passive investors that want decent returns with little effort). Buffett would be keenly aware of that.

    As for due diligence: a) it really depends on the size of the purchase compared to the company already managed (like spending more time looking at the details of a car purchase compared to a restaurant meal) and b) anytime there's an agreement for an acquisition, it's tentative. He could agree to the acquisition in a day or two, but there are still people pouring over the financials to make sure everything is legit before finalizing the transaction.

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    1. Dividend Monk: You make good points. I also remember reading about Graham's different types of investors, and Buffett's views undoubtedly reflect some of that influence. I agree that Buffett's due diligence is more thorough than what might be inferred from some of his remarks in shareholder letters. If the author of the book had taken the time to interview Buffett about such issues (as far as I can tell, he did not), then perhaps that part of the book would have been different. While reading the book, there were several times when it seemed as though the author interpreted something (such as a quote) at a superficial level, when the underlying reality was likely more complex and could potentially result in a different interpretation.

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  4. I have a great deal of respect for Buffet as an investor. If somehow he were put in charge of our countrys finances, he would probably put us on the road to financially solid footing in very short order. But, does anyone here who has commented and loves Buffet own any of his stock? Probably not, because he doesnt pay a dividend. He buys lots of companies that do pay dividends, and reaps the rewards, but my beef with him is he doent share that with his shareholders. I understand he can put that money to better use than you or I can, and dont mean to disparage him, but doesnt that strike you as a tad inconsistent and hypocritical? Also, he hasnt been shy about helping his friends shield their capital gains from the incoming tax hikes he supports. http://www.huffingtonpost.com/2012/12/13/warren-buffett-buyback_n_2293794.html
    OTOH, I fully understand his quick responses on buyout offers. More than likely he has already studied the companies who came to him, probably realizing they would do just that long before they arrived at his doorstep. There are many good reasons to imitate the man and his investment practices, and very few to nit pick over. Im suprised someone wasted so much time and ink doing so.

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    1. High Yield Soldier: Thanks for your comment. I am not sure about the perceived inconsistency of Buffett with regard to dividends. He has long argued that Berkshire Hathaway does not pay a dividend because he thinks he can reinvest profits in various businesses in such a way that shareholders get a higher return than they would if they received those profits as dividends. Given that BRK is a holding company for over 80 businesses, it seems reasonable to think that a few of those businesses, especially those with the strongest growth prospects, could benefit substantially from that reinvestment. I think Buffett would apply this argument to other companies with managements who have demonstrated superior capital allocation in the past.

      Why, then, does Buffett buy the stocks of dividend-paying companies? I doubt it is because they pay a dividend per se, but because such companies tend to have many desirable characteristics that he seeks in an investment (e.g., good management, stable business model, steady cash flows, etc.). He invests to achieve a good long-term total return, and if dividends make up a part of that, then so be it.

      Thus, I think it is possible to come up with sensible reasons as to why Buffett will invest in dividend-paying companies but not have his own company pay a dividend. However, I would have to go back and re-read some of his writings to refresh my memory concerning his views on dividends.

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