Nobody's Fool

By Eric J. Fry

Is Warren Buffett lazy? Or foolish?

Why else would he allow more than $40 billion dollars to
pile up on the balance sheet of Berkshire Hathaway? Why
else would he refuse to buy any of the stocks that Wall
Street’s finest minds recommend?

It’s possible, of course, that the Oracle of Omaha is still
as shrewd as ever. So let’s examine, one by one, the
possible explanations for his investment IN-activity.

Explanation #1: Buffett is lazy. Maybe so. He certainly
deserves to lean back in his chair and kick his feet up on
the desk for a while. The 74-year old multi-billionaire has
amassed more than enough money for one lifetime. In fact,
he has amassed more than enough money for about 1,000
lifetimes (even after taking into account the effects of
inflation over an 80,000-year span). So why should he
bother with the daily grind of buying low and selling high?

The answer is that he probably shouldn’t bother, but he
does. He continues to explore for investment opportunities
and continues to chastise himself publicly when he fails to
find them. “My hope was to make several multi-billion
dollar acquisitions that would add new and significant
streams of earnings to the many we already have,” Buffett
confessed in this year’s letter to Berkshire shareholders.
“But I struck out. Additionally, I found very few
attractive securities to buy…”

By Buffett’s own admission, he no longer expects to produce
the stellar results of his earlier years, but not for lack
of effort. He still shows up at the ballpark every day
ready to play. “Overall, we are certain Berkshire’s
performance in the future will fall far short of what it
has been in the past,” Buffett writes, “Nonetheless, [Vice
Chairman Charlie Munger] and I remain hopeful that we can
deliver results that are modestly above average.”

So you see; the man is not lazy or indifferent about the
company he oversees.

Explanation #2: Buffett is foolish. This explanation seems
less plausible than sloth. Smart people sometimes do stupid
things, even very smart people. As Buffett recently
confessed, “I made a big mistake not selling several of our
large holdings during The Great Bubble.”

But despite Buffet’s occasional lapses into mediocrity, he
has amassed an unparalleled investment record over the last
40 years. It would have been impossible to hide foolishness
for so long. Over longer time frames smart investors tend
to demonstrate their intelligence as undeniably as stupid
investors demonstrate their incompetence. Since 1965,
Buffett has delivered an average annual gain of nearly 22%,
or more than double the annual returns of the S&P 500 over
the same time frame.

Hmmm…this does not seem like the handiwork of a foolish

Explanation #3: Buffett remains a shrewd – if inactive –
investor. This is the Rude Awakening’s preferred
explanation for Buffett’s seeming indolence. The man is
disciplined to a fault – investing only when superior
opportunities present themselves and abstaining when they
don’t. Unfortunately, Buffett hasn’t been finding anything
he considers worth buying.

In fact, as the chart below illustrates, Warren and Charlie
haven’t been finding a heck of a lot to buy for many years.
Back in 1994, cash was a nearly invisible asset class on
Berkshire’s balance sheet, while equity investments were
equivalent to 128% of book value. But cash has been piling
up ever since, as the relative size of Berkshire’s stock
investments has steadily decreased. This year, for the very
first time, Berkshire’s cash exceeds the stated value of
its equity holdings. With the benefit of hindsight, we see
that Buffett was prudent to reduce his equity allocation
into the booming stock market of the late 1990s, and was
equally prudent to increase his cash allocation as share
prices fell from the 2000 peak.

Buffett admits that Berkshire’s growing wad of cash is
burning a hole in his trousers, but he ain’t buyin’ just
for the sake of buying. “What Charlie and I would like is a
little action now,” Buffett writes in his annual letter.
“We don’t enjoy sitting on $43 billion of cash equivalents
that are earning paltry returns. Instead, we yearn to buy
more fractional interests similar to those we now own or —
better still — more large businesses outright. We will do
either, however, only when purchases can be made at prices
that offer us the prospect of a reasonable return on our

Sounds like a reasonable explanation to us, particularly in
light of the fact that Buffett has often sat idle for long
periods of time. 15 years ago, for example, a slightly
younger Warren Buffett boasted in Berkshire Hathaway’s 1990
annual report,  “Lethargy bordering on sloth remains the
cornerstone of our investment style: This year we neither
bought nor sold a share of five of our six major holdings.
The exception was Wells Fargo…We welcomed the (Wells
Fargo) decline, because it allowed us to pick up many more
shares at the new, panic prices…The most common cause of
low prices is pessimism – sometimes pervasive, sometimes
specific to a company or industry.  We want to do business
in such an environment, not because we like pessimism but
because we like the prices it produces.  It’s optimism that
is the enemy of the rational buyer.”

Buffett’s aversion to optimism may also explain why he is
not dabbling in the real estate market either.

“Notice that Buffett is not investing in real estate,”
observes Susan Walker, in an insightful article for Fox
News, “an all-too-tempting alternative for regular folks
who have some money they would like to invest but who don’t
trust the stock markets. In fact, as the most recent issue
of ‘The Elliott Wave Financial Forecast’ points out, many
people are ‘now captivated by the concept of easy wealth
through real estate…According to the National Association
of Realtors, a stunning 25 percent of the 7.7 million homes
sold in 2004 were purchased strictly as investments.'”

Perhaps Buffett has observed sometime during his lifetime
that real estate prices – like stock prices – do not always
go up. Perhaps too, he has noticed that real estate prices
are already falling in some parts of the country.

“Total U.S. home sales dropped dramatically by 9.7 percent
from December 2004 to January 2005 (before revisions),”
Walker notes, “even as median sales prices on new U.S.
homes plunged 13% from $229,700 to $199,400. That decline
in the median sales price was the largest one-month fall in
the history of the data, which goes back to 1963.”

“So here’s the most under-asked question of the year,”
Walker concludes, “If Warren Buffet isn’t putting Berkshire
Hathaway’s money in stocks [or in real estate], can this be
a good time for anyone else to do it?

Good question, Susan.

Did You Notice…?
By Dan Ferris

This is another one of those times when I should probably
keep my mouth shut.

But my job is to provide you with investment research and
insight, and so I must tell you my latest secret.

I discovered the secret while reading a transcript of one
of Berkshire Hathaway’s shareholder meetings, held each
year in Omaha, Nebraska. The secret was uttered by – who
else? – Berkshire Hathaway’s Chairman and CEO, Warren

He was talking about the investment legend Phil Fisher,
author of the classic “Common Stocks and Uncommon Profits,”
and “Paths to Wealth Through Common Stocks.” (Buffett and
his partner, Charlie Munger, both credit Fisher’s work for
shaping their investment philosophy.)

In response to a question from a shareholder at the annual
meeting, Buffett let the secret out with this statement:
“As with Ben Graham, you could really get it all by reading
the books.”

Did you hear that? The greatest investor on earth just said
that you can learn everything you need to know to make
plenty of money investing simply by reading a few well-
chosen books.

Based on his comment at the shareholder meeting, Buffett’s
list of essential investment books would have to consist of
the following four titles:

If you’re interested in these books, I can save you some
time. Read Fisher’s book, Common Stocks and Uncommon
Profits, first. It’s the shortest and easiest to read of
the four. In it, Fisher lists 15 questions you should ask
before you make any investment. Most of them are questions
geared toward establishing the effectiveness of management
and whether or not the company has a sustainable
competitive advantage. You’ll recognize those items as
cornerstones of Warren Buffett’s strategy.

After Fisher, you can dive into “The Intelligent Investor,”
by Ben Graham. But don’t be intimidated by this 300-page
investment tome – there’s a short cut, according to Buffett

In Buffett’s preface to the 1973 edition of “The
Intelligent Investor,” he writes, “If you follow the
behavioral principles Graham advocates – and if you pay
special attention to the invaluable advice in Chapters 8
and 20 – you will not get a poor result from your

You got that? Read chapters 8 and 20 and you probably won’t
do too badly in the market. And you might even make a buck.

In Chapter 8, Graham summarizes his essential message as
follows: “The investor’s primary interest lies in acquiring
and holding suitable securities at suitable prices. Market
movements are important to him in a practical sense,
because they alternately create low price levels at which
he would be wise to buy and high price levels at which he
certainly should refrain from buying and probably would be
wise to sell.”

Chapter 20, entitled “‘Margin of Safety’ As The Central
Concept of Investment” puts a little more meat on the bones
of Graham’s risk-averse investment process. It is, in my
opinion, the single most important piece of investment
wisdom ever written. Here’s the definition of a margin of
safety, by the man who introduced the concept (you’ll find
it on page 278 of the 1973 edition):

A margin of safety occurs, “for example when a company has
outstanding only common stock that under depression
conditions is selling for less than the amount of bonds
that could safely be issued against its property and
earning power.”

A few pages later, Graham tells you why you need a margin
of safety: “It is available for absorbing the effect of
miscalculations of worse than average luck.”

So don’t take it from me. Take it from Warren Buffett, the
world’s richest non-computer geek. You can learn everything
you need to know to make a ton of money investing, simply
by reading four books that are widely available, or at
least two chapters of one book.

Dan writes a newsletter called Extreme Value in which he
writes about companies that are worth more (when you add up
their cash, land, and other assets) than their listed value
in the stock market. This method of investing is what made
Warren Buffett the second richest man in the world…and
what makes Dan’s portfolio exclusively packed with winning

Extreme Value Investing

And the Markets…

ThursdayWednesdayThis weekYear-to-Date
DOW 10,504 10,541 61-2.6%
S&P1,181 1,181 9-2.6%
NASDAQ1,999 2,006 8-8.1%
10-year Treasury4.49%4.55%-0.110.27
30-year Treasury4.76%4.80%-0.09-0.06
Russell 2000615 615 0-5.6%
Gold$428.65 $426.35 $3.70-2.0%
Silver$7.13 $7.12 $0.214.6%
CRB313.57 311.02 6.6910.4%
WTI NYMEX CRUDE$55.40 $53.99 $0.5627.5%
Yen (YEN/USD)JPY 107.18 JPY 107.54 -0.82-4.5%
Dollar (USD/EUR)$1.2962 $1.2916 -224.4%
Dollar (USD/GBP)$1.8895 $1.8788 -2021.5%
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