This is going to be a weird question, and probably make me look like an idiot, but it stems from the fact that everyone talks about "diversification" but never defines it or measures it. Here goes:

Doesn't the fact that BRK.B has a single price at any moment in time mean that it is not diversified? If you overpay for BRK.B, you're overpaying for the whole thing. Diversification does not protect you. Whereas if you buy 150 independent securities each at their own price, it is less likely that you would overpay for some and underpay for others. So, here, diversification does protect you.

This question may be a little too philisophical for this thread, I realize...

To me diversification is a risk management term that has very little to do with valuation. That being said I think there is merit to how you're looking at this.

I guess potentially overpaying for a company is a huge risk factor. That being said what price you pay for something is actually the variable you have the most personal control over as an investor- which is why you can see better returns with less volatility by doing your own valuations and investing accordingly.

Accurately valuing things is the challenging part of investing fwiw- and it's what I'm devoting a ton of time to learning.

Just my view of diversification..
There are many types of diversification,
OP (to my understanding) did not diversify the buying of shares over time.
BRK.B owns many other businesses so the investment IS diversified geographically and in different business sectors.

Yet BRK.B is a single company so the investment is NOT diversified in a sense that should BRK.B plummet it would cripple (60% net worth loss) the OPs financially. (Enron, Maddof, Berlin wall, Lehman Brothers, etc.)

It's worth mentioning that BRK falling in value dramatically is pretty unlikely. If it plummets in value dramatically when WB dies then it'll be a tremendous opportunity imo. I honestly feel like that company has a lot less inherent risk than the stock market as a whole. It's just that well put together, it's like the financial equivalent of the Roman empire after Augustus- so well constructed that it can survive quite a few disasters (and disastrous leaders even) and remain mostly intact.

1. Falling in value is not the only thing you want to avoid. 20 years of flat returns is also something you'd like to avoid.

2. I agree that WB is not the end all and be all of Berkshire Hathaway. I think WB is a genius, but still vastly over glorified, especially as a stock picker. I have read "The Intelligent Investor" and at least three books about Buffett and his philosophy, so my opinion of Buffett is not entirely uninformed. Also, I owned couple of shares of BRK.B for a couple years and I read at least two annual reports.

3. The Roman Empire analogy is apt. The Roman Empire certainly did survive some disasters and some horrible leaders. But it did eventually crumble. Similarly, diversification is not as solid a fortress as people think.

If you'll allow me to oversimplify to make a point:

The Bush family is buying land near aquifers in Ecuador. Russian billionaires are buying land and houses in the mountains in New Zealand. Now that's diversification! Owning a candy company AND an investment bank, that's not really diversification.

"I read at least two annual reports"

Wow, don't kill yourself with all that reading. You must have spent, what, 3 whole hours reading BRK annual reports??? And yet you claim that Buffett - who has likely spent over 100,000 hours during his lifetime reading annual & other reports of different companies and making thousands of investment decisions based on that research - is OVERRATED as a stock picker!?!?!? That's rich.

In theory, I see the point your making.

I did not buy much stock over time, and bought it all over a course of 1 month, and averaged out my price at 20% premium to their published book value. Today my securties are worth less than what I paid for it, but that doesn't bother me much.

With regards to diversification, total possible downside, I offer my approach below. This is not all theoretical, and has some flaws in it.

I am looking at the price fluctuations of it's book value published each year by BRK, and then the fluctuations on the market premium to that book value.


With regards to the book value published by BRK, they drastically under-represents it's book value compared to it's true intrinsic value, and the market price should reflect a premium on the published book value that for years to come. I really don't see market price=published book value for the next 10 years(even though it is very close right now). Even if it does, I don't see is sustaining those levels for very much time. This assumption is very subjective. But due to this belief I have, I think I have very limited downside at these levels(20% premium I paid), even more so than investing this in a S&P index fund.

Second, the fluctuations on the book value over the past 40 years have a lower variance, than S&P 500 fluctuations. Parlaying the above analysis against each other, allows me to believe I have fairly limited downside, with the E(V) for much bigger gain than the S&P for years to come.

That is what I claim.

worst. logic. ever.

I don't know... I think Central Limits logic is almost as bad.

What is my logic? I doubt you understand it.

WB is the best stockpicker in the history of modern stock markets. Hard to overrate that- that's my primary issue with your statement.

There's also your assertion that BRK could have 20 years of flat returns. That would be hard to manage even with mediocre management. You clearly don't understand BRK as a company and how it's designed. (Maximizing cash flow and ROI on a vast scale to the point where it's current components will continue to have excellent returns for the forseeable future- that's the 'moat' that everyone keeps talking about)

Your diversification argument is kind of silly. In the modern world different business sectors are definitely more important than geographical location.

I don't think he is the best. I think he is the second best. Therefore, he is overrated.

Ridiculous. A meteor could hit Omaha, Nebraska. Sea levels could rise 6 inches. A terrorist could detonate a nuclear bomb on Wall St.

I recommend "Wealth, War, and Wisdom" by Barton Biggs. It could change your mind.

http://investorcentric.blogs.nuwirei...is-better.html

TUESDAY, SEPTEMBER 28, 2010

Soros Versus Buffett: Who Is The Better Investor?
Posted by: The Capital Spectator @ 5:56 AM 0 comments | links to this post

Warren Buffett and George Soros are among the greatest investors of all time, but who is better? According to Nassim Taleb, Soros's performance required more skill, however James Picerno says that it is difficult to know this without a reliable beta for Soros's investments. See the following post from The Capital Spectator.

Who has more talent for minting alpha? Warren Buffett or George Soros? Nassim Taleb, author of The Black Swan, thinks Soros has the edge.

“I am not saying Buffett isn’t as good as Soros,” Taleb explained at a conference last week, according to Bloomberg News. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”

We should create a risk thread.

Personally I think most diversification ideas are confusing and people screw up the application of the idea constantly.

I don't have a dog in the fight so I am just writing this for my own clarity:

So you picked one author who clearly states two investors may be on equal footing after taking different approaches and then explains the approaches and why it is impossible to tell which is better. The methods described being that of a stock picker vs a "jack of all trades" investor/businessman and you make it your definitive statement for claiming the former is in inferior and over rated stock picker?

Sorry Bro, it just doesn't scan.

At least you did offer me more incentive to read up on Soros's methodology as well as WB's and hope to become even a small fraction of the investor either one of them are.

BRK has been investing heavily in energy and it just bought a f*cking railroad. I love BRK and Buffett but I'm worried they're going to sink all the cash flow in these businesses (probably not a terrible idea).

Soros and WB's methodology is much closer than people think. Soros just trades more often than WB. WB could do what Soros does- but I think he's done quite a bit better doing it his way.

It doesn't really matter how good someone is. If people think he is better than he really is, then he is overrated.

Okay, now I'm going to make a second argument.

Buffett isn't a stock picker so much as a person who buys businesses. Some of the reason the businesses he buys do so well is because he works with or replaces the management and Buffett is an excellent manager. So, some of the expertise that is attributed to his stock picking, I attribute to his management. Hence, my statement that he is over-rated as a stock picker.

Lastly, the single greatest source of Buffetts wealth is his ownership of Geico. The insurance business is despicable and this country really needs to change the laws (see "The Invisible Bankers" by Tobias). So, sure, he became the richest man in America. But its due more to his ownership of Geico than to his ability to identify undervalued securities.

Not true. Soros has gone long and short all kinds of assets and had a return higher than Buffett when he was trading(I believe he returned 35% yearly). While Buffett made the vast majority of his money being long stocks

Tldr: everyone thinks discostu940 is ******ed, except for discostu940, who thinks his move is a genius one.... can we close this down now?

fyp

The End

"Buffett isn't a stock picker so much as a person who buys businesses."

There's no difference between the two. When you buy a stock you are buying a part ownership interest in a business.

"Some of the reason the businesses he buys do so well is because he works with or replaces the management and Buffett is an excellent manager. So, some of the expertise that is attributed to his stock picking, I attribute to his management. Hence, my statement that he is over-rated as a stock picker."

His returns were BETTER before he became actively involved in managing business. He made 50% annual returns when he was in his 20s, without participating in management at all. The reason his returns have declined over time is due to the drag of size, not a decline in his stock picking ability - his investment universe is now limited to extremely large companies (small companies, even if they had great returns, would not move the investment needle at Berkshire anymore). Second, most of the time when he buys a business he leaves it alone - he only gets involved if there is a major problem (e.g., NetsJets during the financial crisis or Solomon when it almost imploded).


"Lastly, the single greatest source of Buffetts wealth is his ownership of Geico. The insurance business is despicable and this country really needs to change the laws (see "The Invisible Bankers" by Tobias). So, sure, he became the richest man in America. But its due more to his ownership of Geico than to his ability to identify undervalued securities."

GEICO is worth, what, a maximum $15B as a stand-alone business (i.e., slightly more than Progressive [PGR])? BRK's market cap is $188B. So GEICO represents less than 8% of BRK's market cap (and, hence, only 8% of Buffett's wealth). BRK's KO stock is worth $13B, almost as much as GEICO. BRK paid $26B for Burlington Northern [plus $10B in assumed debt], so that investment is worth way more than GEICO. So I think you need to rethink your statement, to say the least.

Maybe you could do a little reading-up on Buffetts relationship with GEICO. If you think GEICO is just a small piece of his success, you are drastically wrong. See below...


“The Investable Float”
A Money Lesson

One of Buffett’s early epiphanies about how to use other people’s money to make millions for himself and his investors, came with his introduction to the insurance indus- try. Sometime in the 1950s he noticed that his mentor, Benjamin Graham held lots of stock in an insurance company named GEICO — where Graham would also serve as chairman. Buffett decided to visit GEICO’s offices one weekend, and by chance happened upon a rising officer of the company who pro- ceeded to give him a crash course on insurance.

Buffet learned about GEICO’s nice little corner of the insurance world, where it sold insurance to a group of statistically safe drivers – govern- ment employees – and sold to them direct by mail. By doing so, it cut out agent commissions and made low-priced policies possible, while the pool of generally safe drivers it selected kept claims and pay outs low. But the big thing that Buffett learned about the insurance industry that day, and GEICO in particular, was the horde of ready cash that insurance companies could gener- ate. Lots of liquid cash coming in from premiums that was not needed to cover a low outlay of costs for claims. This was big-time money – “the float,” the difference between money in and demand on money out; money that could be used for other things, like investing. The benefits of the insurance company “float” were real and could translate into buying leverage and big profits for a studious investor. Buffett, then still in graduate school, invested a portion of his savings in GEICO. And throughout his investing career thereafter, insurance companies would become a key part of his investment strategy, making minimal profits on insurance underwriting, but using the “insurance company float” to leverage hundreds of millions for other investments and continuing profits elsewhere.

To downplay the importance of insurance and reinsurance in the growth of Berkshire is basically saying you have no idea just how crucial it is/was. Berkshire wouldn't be anywhere near the size it is without the insurance companies.

The value of a holding does not represent the value it provides or has provided.