Warren Buffett an ‘Idiot’?

Even the Oracle of Omaha Has Investment Regrets

May 09, 2019
Finance

SMITH BRAIN TRUST  It turns out, even the Oracle of Omaha has investment regrets. Famed investor and Berkshire Hathaway CEO Warren Buffett says he wishes he had bought shares early in some of the giants of tech, the so-called FAANG companies whose stocks have consistently outperformed the S&P.

Appearing on CNBC ahead of Berkshire Hathaway’s annual shareholders meeting in Omaha, Nebraska, Buffett said he’d been “an idiot” for not buying shares of Amazon when they were cheap.

To be sure, Buffett is far from an idiot.

“Warren Buffett has said many times that he invests only within his circle of competence,” says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business.

That circle, Kass says, covers about 20% of all listed securities, with much of it focused on the financial sector, food companies and consumer goods.

“Falling outside of this circle of competence are technology companies,” says Kass, who has studied Buffett’s investments and philosophy for more than 35 years. “Buffett acknowledges that he has no edge, no expertise, no reason why he would perform any better than anyone else in investing in technology companies.”

Those who do are likely to outperform the Oracle – at least in tech. And that’s why he has traditionally avoided tech stocks, with a few exceptions.

Both Buffett and Berkshire vice chairman Charlie Munger have expressed regret about not investing earlier in Google parent Alphabet, when shares could have been picked up for a sliver of the $1,170 they go for now. They both were aware of Google’s importance from its earliest days on the market, Kass says.

“I’ll give you an example,” Kass says. In 2005, less than a year after Google first went public, Kass traveled to Omaha with a group of Maryland Smith students, where they would have a private meeting with Buffett. Over the course of the conversation, Buffett would summarize Google’s economics and revenue sources.

Buffett did not feel comfortable investing in it then. And at the annual meeting, this past Saturday, Munger was asked again about this. His response? “We screwed up.”

Still, Kass notes, “they are not exactly running out to buy Google today.”

“With 20/20 hindsight, we can all look back at 2005 and say, ‘Gee, why didn’t we all invest in Google in 2005?’” Kass says. “But back then, there were other search engines and it wasn’t clear to everyone, though it likely was clear to some, that Google would not only dominate the search engine industry, but become a virtual monopoly in it.”

Omission vs. commission

Buffett has always said there are two types of investment errors that he has made – errors of omission and errors of commission.

“Google was an error of omission. He should have bought Google, but didn’t,” Kass says. “An error of commission, which did not come up during this annual meeting, came when he dabbled in technology in 2011, investing billions in IBM, and eventually selling at a loss.”

For an investor like Buffett, the loss is twofold. There’s the loss that’s realized with the decline of the share price. And there’s the bigger loss, says Kass, the opportunity cost of that capital. “Had he taken that same amount of money – about $10 billion – and invested it in the S&P 500, he would have doubled his money over the same time period.”

Win some, lose far fewer

“Most portfolio managers would be considered successful if they were right 70% of the time. Buffett is right 90% of the time. And that’s what makes him so unique – and rich,” Kass says.

Perhaps what also makes him unique, Kass says, is that he knows he can’t see and know everything in the market, and he nonetheless seems content with that.

“Once, in a letter to shareholders, he included a very interesting quote from Henry David Thoreau, which really does sum up investing very well. I love this quote and it has stayed with me for many years. The quote is: ‘It’s not what you look at that matters; it’s what you see.’ ”

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About the Expert(s)

David Kass

Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Sophomore Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), FOX TV, Bloomberg Radio, Wharton Business Radio, KCBS Radio, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by The Wall Street Journal, Bloomberg News, The New York Times and The Washington Post, where he has primarily discussed Warren Buffett, Berkshire Hathaway, the economy, and the stock market. 

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