Thursday, July 23, 2009

Not buy and hold

Warren Buffett may – at least in part to make management comfortable – state regularly that his favourite holding period for a stock is forever. And he is a darn good buyer of shares. His name is used to promote "buy and hold".

What is less well recognised is that he is a fantastic seller. In 2000 he disposed of very large shareholdings in Fannie Mae and Freddie Mac. The stocks nearly doubled after he sold them – so for a while it looked like his timing was awry.

In 2001 – and almost without comment – he sold a huge stake in Citigroup he obtained by buying convertible notes in Salomon Brothers in the 1980s. You can find no reference to his sale in the letter – but the Citigroup convertible is in the 2000 annual and there is no reference to it in the 2001 annual. He simply converted and sold. He certainly did not advertise the fact - whereas most financial market guys would be boasting that they scored the all time high price.

The profits locked in were huge.

Buffett invested a very large proportion of Berkshire in financial shares. When the bust came he owned American Express, Wells Fargo and M&T Bank. These look like ex-post winners.

Why am I writing today? Because Warren is selling his stake in the Moodys rating agency. It looks like he is rather late. The franchise has already been seriously impaired. Moodys gave its blessed AAA to lots of things that defaulted. Indeed it seems the Moodys AAA is cursed.

Still plenty of people think that there will be a role for rating agencies - and that Moodys end position - backed by regulation - is solid.

Be warned. Buffett is a very canny buyer of equities. He is even more canny a seller.


Alex C said...

Couldn't agree with you more. It would be interesting to see what happens with the Goldman and GE warrants, since the GS are in the money. As for a a case of bad selling, Mcdonald's (in 1996 or thereabouts) could be considered an example.

And when WEB's forced to raise cash, it was interesting that he sold off shares in Conoco and JNJ.

Anonymous said...

the new financial regulatory proposals in congress probably has something to do with moodys.

Felix said...

This is really typical buffet worshipping... instead of focusing on *why* he sold, just assume he is smart and sold 10 years early.

BTW buffet lost money for years on SSB. Buffet has the luxury to have a very (very) long horizon. Most fund managers do not.

To clarify, I think Buffet is a really smart investor. I just hate it when people blindly worship every move he makes.

Chip said...

@Felix: I worship his ability to handicap, not his actual bets. Highly likely that WEB is on the right-side of this bet.

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