Who's Afraid of Big, Bad Warren Buffett?

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Peter Brimelow

Feb. 22, 2010, 12:03 a.m. EST · Recommend (1) · Post:

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By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) -- Who's afraid of the big, bad Warren Buffett? One top-performing letter thinks he's WONDERFUL.

I've met superinvestor Warren Buffett only once. For reasons too complicated to go into, I had been dispatched by a media mogul of my acquaintance to a Manhattan cocktail party full of other media moguls. They were distinctly puzzled to find me there. In that kind of situation, you have to go on the offensive. So, spotting Buffett, presumably present because of his Washington Post stock position, I went over and asked him: What investment letters did he read?

Buffett hesitated for a second, and then wuffed dismissively: "None of them!"

I promptly lost interest in Buffett. I don't care how much money he's made. Mark Hulbert's work since 1980 clearly shows that there are inefficiencies in the financial markets. And some investment letters systematically benefit from them.

Ironically, this is in fact more or less what Buffett himself has always argued. Indeed, there are even several letters that focus on the very technique, fundamental analysis (assets, earnings, leverage), that Buffett has espoused -- for example, Charles Allmon's Growth Stock Outlook. ( See April 30, 2009, column.)

Moral: Not just financial markets, but also intellectual markets, are inefficient.

I don't know what Buffett and Charles Mizrahi, editor of a relatively new letter, Hidden Values Alert, make of each other. But Mizrahi is explicitly, even slavishly, devoted to Buffett -- to the point of leading each monthly issue with an apercu from the Sage of Omaha (and Laguna Beach, I learn from his Wikipedia profile. Hmmm.)

It's pretty interesting, actually. And it seems to be working.

Over the past 12 months, Hidden Values is up 80.38% by Hulbert Financial Digest count, compared to a gain of 34.93% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Over the past three years, all I have data for, the letter lost some ground, an annualized negative 1.7%. But that's much less that the negative 6.93% annualized for the total return Wilshire 5000. And it's striking for a service that eschews market timing, remaining fully invested at all times.

In the most recent issue of Hidden Values Alert, for example, Mizrahi writes, with his customary, commendable clarity, about "the three attributes Warren Buffett always looks for" in corporate management.

They are (1) "Are the managers rational?" (2) "Are they candid with shareholders?" (3) "Do they resist the 'institutional imperative'? Are the managers Lemmings or Leaders?" (That means, recently, did they buy mortgage-backed securities prior to the Crash of 2008?)

Which may sound subjective. But in Mizrahi's telling it seems to boil down to numbers -- above all, return on equity.

For example, discussing the Buffett concept of a company's economic "moat" provided by a technical competitive advantage, Mizrahi wrote: "In addition to following industry trends and corporate developments, I've found that looking at the return on equity (ROE) and net profit margins (NPM) of a company a few times a year will tip you off to the size of the moat. Is it increasing or decreasing?"

"Wall Street doesn't spend much time looking at the competitive landscape or discussing the economic outlook for a company in a certain industry. Instead, it seems to focus on quarterly numbers, which to me represent nothing more than noise. Every business will hit speed bumps and fall off into a ditch every now and then. Knowing that the companies you purchase have the edge, over time, will make all the difference in the world to your investment returns," Mizrahi wrote.

"Investing in businesses with an enduring competitive advantage is one of the cornerstones of successful value investing."

In Hidden Values Alerts' most recent issue. Mizrahi suggested two stocks for new investors: National Instruments Corp. /quotes/comstock/15*!nati/quotes/nls/nati (NATI 31.39, -0.13, -0.41%) (below $32.00), and Iconix Brand Group Inc. /quotes/comstock/15*!icon/quotes/nls/icon (ICON 13.58, +0.16, +1.19%) (below $12.25).

So Brimelow doesn't like Buffett because he doesn't read any newsletters, but Brimelow's career (from what I can tell) is made up of just parrotting what Mark Hulbert has said? Judging by Buffett's success, I'd say he doesn't need to read any newsletters. He appears to do pretty well by doing his own research. What's Brimelow's portfolio / success look like? Or Hulbert's, for that matter?"

- monahanks | 8:35 a.m. Today8:35 a.m. Feb. 22, 2010

Talk to this company's chairman and chief executive and you'd start to feel really good about where the economy is going.

1:24 p.m. Today1:24 p.m. Feb. 22, 2010 | Comments: 3

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