As a disciple of value investing, I have followed Warren Buffett (Trades, Portfolio) for many years. Benjamin Graham's original value investing framework includes the concepts of intrinsic value, Mr. Market and margin of safety. Buffett expanded the framework by adding two important elements, circle of competence and economic moat. In my transformational journey from a deep-value investor to a quality business investor, I have benefited enormously from Buffett's teaching. At this stage, the more I observe Buffett's actions, the more I realize there are many untold secrets that contributed to his remarkable investment career. In this discussion, I will cover a few.
The importance of complete information
In a previous article, I discussed the importance of seeking complete and accurate information. I mentioned that while public information is accurate, it is very often incomplete. The best investors always seek both accurate and complete information. Buffett certainly does so.
However, when answering shareholders' questions regarding how much he relies on public information versus private information, Buffett always emphasizes the importance of public information. For instance, in the afternoon session of the 2003 shareholder meeting, he said: “I find —everything we do, pretty much, I find through public documents…We do not find it particularly helpful to talk to managements. You know, managements are not the best reporting parties in most cases. The figures tell us more than a management does. So we do not spend any real amount of time talking to management.”
In reality, it is clear that Buffett relies heavily on non-public information in many of his investment decisions. Throughout his career, he did a fair amount of scuttlebutt research. It is true he spends less time visiting companies and speaking to customers and suppliers, but he still searches for non-public information in other ways. For instance, when Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) invested in IBM (IBM, Financial), Buffett spoke to many of its managers to understand its competitive advantages.
Buffett also spends a fair amount of time talking to managements. For instance, Buffett has publicly said that he spoke with GM's (GM, Financial) Mary Barra, Coca-Cola's (KO, Financial) previous CEO Muhtar Kent, Occidental Petroleum's (OXY, Financial) Vicki Hollub and, of course, Apple's (AAPL, Financial) Tim Cook, while Berkshire hold significant stakes in these companies.
Therefore, while Buffett's advice to shareholders is to rely on public documents and not to talk to management teams, his actions suggest the opposite. One way to explain this inconsistency is that for non-professional investors, getting access to management team and complete information can be impractical. Therefore, Buffett simply offered practical advice.
The importance of great timing
The second secret Buffett never told is his uncanny skill of timing the market as well as individual investments. In all public interviews, Buffett has said never to time the market. But he has made quite a few timing calls in his career, including shutting down his partnership in 1969, calling the internet bubble in 1999 and writing an op-ed in The New York Times in 2008 to buy U.S. equities. To be fair, Buffett did say that timing the market in general is futile, but sometimes the market's valuation is so extreme that it is easy to call the timing.
Buffett has also been remarkably successful in his timing of purchasing individual stocks. For instance, after Berkshire bought the big chunk of Coca-Cola in 1988 and 1989, the stock took off. Similarly, after Berkshire acquired a big stake in Apple, from 2016 to 2018, its shares also rose significantly. His investments in Bank of America (BAC, Financial) and Goldman Sachs (GS, Financial) were also very timely.
Most recently, there have been plenty of reports lauding the success of Berkshire's investments in Japanese conglomerates, but those Japanese conglomerates have been cheap for many years. Why did Buffett start investing in them in August of 2020 and not earlier?
Of course, there are many instances where Buffett's purchasing decision is too early. For example, Berkshire's investments in Washington Mutual and BYD took a while to work. But in most cases, his timing has been extraordinarily good. Yet, he has never publicly revealed his secret of when to pull the trigger.
The importance of macroeconomic factors
Another untold secret of Buffett's investment success is his ability to evaluate macroeconomic factors. In public, Buffett has said he does not pay any attention to macroeconomic factors and his investment decisions are not affected by macroeconomic factors. But plenty of his past actions suggest that macro factors are very important in some of his investment decisions.
For instance, in his 1997 letter to shareholders, Buffett disclosed that Berkshire has made three unconventional investments – oil, silver and long-term, zero-coupon obligations of U.S. Treasury bills. All three investments require significant macroeconomic judgement. More recently, Berkshire's exit of the airline investments and purchase of Occidental Petroleum also involved a fair amount of macroeconomic predictions. One can argue that Berkshire's sale of banks is also a combination of both micro and macro factors. It seems like Buffett does take macroeconomic factors into consideration during his decision-making process. But again, he never reveals the details.
Conclusion
Buffett is undoubtedly the best value investor in the world. His teaching has inspired and benefited value investors around the world. However, handicapping him is not that easy. It is perilous to take Buffett's words dogmatically. Therefore, value investors should take some of Buffett's words with a grain of salt and observe his actions in order to gain a better understanding of his investment skill.
