Why is Buffett considered the greatest investor?

[gull]

[ QUOTE ]
In an interview with Buffett, I heard that he turned $100,000 into over $26M in just 9 years. If this is the case his average annual return was over 85% for that period of time!

[/ QUOTE ]

Not that it's relevant, but remember that average return is different from average annualized return.

[Ray Zee]

its those that put their oney into ventures and leave it there and let it compound that do the best. that is what buffet does. he finds undervalued things and buys and holds until the value is realized.

[Groty]

In my opinion, Buffett is the greatest investor of all time beause he understands risk better than anyone. He is often portrayed by the media as an equity value investor. He obviously is that, but he has demonstrated an ability through his entire career to spot market inefficiencies and mispricings of risk across many different asset classes and techniques.

When he was younger, he loved doing arbitrage trades (they are extremely low risk). He said in an interview with students from the Univ. of Florida (it was on Youtube a few months ago, not sure if it's still there) that he's done 300 different arbs during his career and that they've probably added, on average, around 2%-3% per year to his returns.

Here's my favorite example. When he was a student at Columbia, a cocoa company in Brooklyn had bought a bunch of cocoa and the price started to soar. If the company sold the cocoa on the market, the company would be taxed at what were then very high tax rates on the gain. But if they distributed the cocoa inventory directly to the shareholders, the company incurred no taxes and the shareholders would be taxed at much more favorable rates. So the company offered a strange, bizzare tender offer where stockholders could exchange their stock certificates for cocoa bean warehouse receipts. Buffett realized there was a discrepancy between where the stock traded and the amount he could realize by selling the cocoa beans he was entitled to receive if he exchange his stock for warehouse receipts. Back then, the capital markets weren't nearly as efficient or as deep as they are today, so the markets failed to adjust. Day after day, Buffett would buy the stock, exchange it into cocoa bean warehouse receipts, bicycle down to the cocoa exchange and sell the warehouse receipts. It was a virtually risk free way to print money and exploit an inefficient market.

More recently, in 2002, risk aversion was so high that credit spreads had widened out to beyond stupid levels. Buffet was a big buyer of distressed debt that was secrued by hard assets. It's not a huge risk to buy bonds secured by a pipeline (a quasi monopoly that generates highly predictable cash flows) yielding 15-20%.

About the same time, Level 3 brought a convertible bond deal to market with a conversion price significantly below market and it paid a big fat coupon (I think the coupon was 9%). Buffett took a big bite of that deal. He was effectively buying stock at a 20% discount to market AND being paid a 9% coupon to take the risk. By the way, news that Buffett was a big buyer of the LVLT convert sent the stock price soaring something like 200% within a few months. Buffet converted and made an absolute fortune on what was an extremely low risk deal.

A couple of years ago he sold puts on equity indices and took in option premia in the neighborhood of $1 billion. (The markets have gone straight up since then, so it looks like the option premium is just gravy for Berkshire shareholders).

Now he's devoting a fair amount of resources to underwriting insurance policies against catastrophic risks. Why? My guess is it is a complicated, illiquid market that has created an inefficiency between pricing and risk. Buffet intends to exploit the inefficiency.

[DesertCat]

[ QUOTE ]

A couple of years ago he sold puts on equity indices and took in option premia in the neighborhood of $1 billion. (The markets have gone straight up since then, so it looks like the option premium is just gravy for Berkshire shareholders).


[/ QUOTE ]

I think he was obligated to buy $12B in S&P 500 stocks. He'll sell similar puts all day. He wants to put $40B into the market, just not at todays prices. If you want to pay him to pick up quality stocks at a 20 or 30% discount to todays price, he'd be ecstatic.

Think about the other side of the trade. I believe some funds did this for a type of "portfolio insurance". Imagine the idiots, er, investors who are happy owning the S&P 500 at todays price, but want to dump their shares if the prices got 20% more attractive.

[yellowbastard]

DC,
What sources can I look at to read about the Buffett Partnership days?

[CrazyAce]

Groty and DC, where are you guys getting this info from?

Also, DC, if you don't mind, can you give a "for dummies" version of your most recent post? I follow it a bit, but a couple things are confusing

[yellowbastard]

[ QUOTE ]
Also, DC, if you don't mind, can you give a "for dummies" version of your most recent post? I follow it a bit, but a couple things are confusing

[/ QUOTE ]

Options trading is like buying and selling insurance on stock prices. In this situation, Buffett was selling insurance (also known as shorting put options) on stock prices.

Buffett is a selective contrarian investor which means he buys companies with strong earning potential when they are trading at very low prices. In the above situation, he would be more than happy to either 1) short puts (sell insurance) on US stock prices and collect the premium if stock prices increase or 2) happily buy these stocks if prices decrease and his put options get exercised.

The guys on the other end of the deal (the ones buying insurance on stock prices) are very short sighted and too overly concerned with short term fluctuations in their positions.

[DesertCat]

[ QUOTE ]
DC,
What sources can I look at to read about the Buffett Partnership days?

[/ QUOTE ]

Roger Lowensteins book "Buffett" is a biography so it covers the entire era.

[Groty]

I read about the cocoa bean story years ago. A colleague was obsessed with Buffett and he gave me a paperback collection of Buffett stories to read while on a plane on a business trip. All I can remember about the "book" was that it was a compilation of stories for a college business course. That was the first story I read and I was fascinated by it, so it stuck with me.

I know some of what Buffett was up to in 2002 because I was working at a hedge fund then and we were buying distressed debt as well. I remember talking to guys at another distressed debt shop who said they heard Buffett was getting active in the area. I dismissed it at the time. But when the prospectus for the LVLT convert was filed it listed the buyers and the trade rags and Bloomberg ran stories about it.

I'm pretty sure I learned about him selling put options on the indices from a Bloomberg article, but it may have been from his year end letters to shareholders, I'm not sure. That one stuck with me because of the magnitude of the commitment.

There's a cottage industry of Buffett watchers who watch his every move and then report on it. Bloomberg frequently has Buffett stories. Whitney Tilson is a value investor/Buffett fanatic who is frequently interviewed on Bloomberg/CNBC about what Buffett is up to. There are also tabs on his website that link to articles and commentary of interest to value investors, some of which will refer to Buffett.

[Dr_Jeckyl_00]

[ QUOTE ]
It's impossible to determine who the "greatest" investor is. It is possible to determine who great investors are though. Warren Buffet is on that list (as well was Peter Lynch.)

[/ QUOTE ]

I think is correct. It is all subjective... who is the best baseball player, football player, boxer, etc.

Buffet was a great investor (just as Soros, Lynch, Graham... and many others were/are) because they consistantly outperform certain important benchmarks like S&P 500, over a long period of time.