Warren Buffet or George Soros, Why Hedge Funds Emulate Soros?
--Thoughts from reading Interview about “China Buffet” Mr. Duanyongping And My Personal Investing Experience with Him
In terms of investment performance, George Soros is not even close to Warren Buffet. But most institutional investors (particularly hedge funds) now days are more or less adapting a Soros-style investment strategy. As to individual investors, they are all over the places, ranging from buy-and-hold to swing trade to day trade or various combinations of them. According to a recent article from Bloomberg.com, “Institutional investing is undergoing radical change, according to Grossman. Ten or 20 years ago, money managers who'd been entrusted with people's retirement nest eggs refused to make risky investments or short stocks”. “``We think this artificial divide between long-only and long/short is one that's destined to become extinct over the next several years,'' Grossman says. Blake Grossman is the Stanford University-educated economist who runs Barclays Global Investors. By using his quants, Grossman has quietly transformed BGI from a firm built on index investing into one of the world's largest hedge fund managers.
Compared to Soros, Warren Buffet’s strategy is actually a lot of simpler and more intuitive: buy a few good and under valued companies in dirt cheap price and hold them. He doesn’t care about the stock’s price movements in the market afterwards or even stock market is closed for a couple of years, as he said once. Of course, when Buffet decides to sell, he will make sure that the market is open and the stocks are at record high prices, because most likely he has to dump his large holdings to non-Buffet style investors and/or speculators in stock market. In a sense, Warrant Buffet is a speculator as well, and one of the greatest speculators in stock market history. The challenge is, can you emulate him?
We all know that “by and hold” is not challenging, high-concentration or almost non-diversification is little bit challenging to mutual funds because of regulations, but not so much to hedge funds or individuals.. After all, few hedge funds or individuals can match Buffet in terms of amount of money under management. If Buffet can bet his house on a couple of stock, why you dare not to follow, assuming you know what stocks he picks at the time?
The challenging part is that we are not confident enough that those few stocks are absolutely winning bets and are worth betting with our houses. Of course, there is nothing absolute in stock market. What will happen to our houses if Buffet is wrong? We all know that Buffet, as well as his buddy Bill Gates had lost big amount of money in recent years in shorting US dollars. So, the so-called “Marco-investing” is probably not where Buffet has his edge. Buffet’s edge is really in evaluating individual companies, and picking diamonds from rubble. Investment edge, like any edge in a competitive business or profession, is something one has acquired over time with his talent, learning and experiences. If you don't have it, or just have one kind but not the other kind, it’s hard to copy if (or learn it over in a short time) from others. Buffet definitely knows how to value a company, but he doesn’t have edge in “macro-investing” like Soros does. When betting on currency, bonds, commodities or stock market indexes, you are playing with a set of macro economic and/or political variables and very often at international level. To learn how to play that kind of game, it’s not easy even for masters like Buffet.
Again, Buffet or Buffet-like investors’ edge is really in picking up good companies in extremely cheap prices. Please be noted that the word I used here is “companies” not “stocks”. Mr. Duan or “fastisslow”, Mr. "China Buffet" as he is called now (he spent more than $0.5M winning lunch bid with Buffet) ( http://blog.chinahr.com/blog/dream305/post/10788 ), said in a recent interview that the real test of Buffet or Non-Buffet investor is : Do you still want to buy a good and undervalued company even it is not listed or delisted in stock market? Buffet would, non-Buffet type investors would probably not. According to Mr. Duan, in his strategy (and Buffet’s strategy), the central concept is identifying a few undervalued companies, and spending most of your portfolio money buying them at extremely low price points, extremely low to the point that the stocks could be even de- listed. He bought NTES with $2M when the stock was under $1 back in 2002 due to a law suit and other reasons. His edge: He owns one of the few successful game console manufacturing companies in
As in any competitive business or profession, a person’s edge is also his core competence, on which he survives and prospers. It could be cold and brutal when you come out of your core competence. Later in 2003, Mr. Duan bet $1M on Fresh Choice, a chain restaurant company, when its stock was about $1.5, but with about $0.70 free cash flow a year according to its book. Mr. Duan thought he could recoup his investment in a couple of years easily. Fresh Choice actually closed its door in just a few months. Of course, Mr. Duan lost his $1M. No big deal, he donates about $1M a year anyway. Loss is loss, however, and it’s always bad and painful. I still remember the few thousand dollars I lost on WorldCom, when I bought the stock around $1 and the company later filed for bankruptcy due to fraud and other reasons and $1 subsequently became $0 in my statements. So when I read in UHAL’s message board about the feud and manipulation between father and sons of the owner’s family, I was a little bit nervous to buy the stock, partially due to the lingering bad taste in my mouth from WCOM.
Coming back to the title of this article, why hedge funds emulate after Soros, not Buffet, despite the fact that Soro’s investment return is not even close to that of Buffet? I guess the answer is, in addition to other reasons, those hedge funds managers probably know that for them, with Ph.D.s in education, skills and experiences in dealing with marco variables, they possess or can acquire Soro’s type edge. Buffet’s edge is not for them, even it is more profitable. So, as an investor, the critical question is not which strategy is better, Buffet or Soros? It is all about where is your own edge. Get an edge which suits you or sharpen it if you already have one. There is always a better lunch out there, but not necessarily ours. Losing this perspective and simply chasing after the better lunches, we could end up getting no lunch at all, losing what we could have in the first place, even it’s just a humble one. After all, a humble lunch is better than no lunch.
(Courtesy of "dividend_growth")
2002: 297M
2003: 825M
2004: 1839M
2005: -955M
2006: 240M
Net: 2246M pretax
