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Posted 5/15/2006
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Lessons from Buffett on investing vs. speculating
Folks have learned a lot (and made a lot of money) by mimicking the investments of the Oracle of Omaha. But there are also lessons to be learned from his speculative forays.
By Bill Fleckenstein
Earlier this month, Berkshire Hathaway held its annual fest, and, as always, some of Warren Buffett's comments are worth discussing.
Buffett noted that he is still extremely bearish on the dollar, though he has reduced Berkshire Hathaway's (BRK.A, news, msgs) foreign-exchange position yet again. At peak exposure, Berkshire held approximately $22 billion in foreign currencies. The position is now down to about $5.5 billion, and thats down from about $13.8 billion a year ago. (That does not count the $5 billion it just spent acquiring ISCAR Metalworking, an Israeli company.)
Buffett also announced what those of us close to the silver market have known for some time -- that he no longer had a silver position. In addition, he noted that he hadn't made much money on the trade.
A walk off the wild side
I don't think it's debatable that Warren Buffett is the Albert Einstein of investing, with one of the finest (if not the finest) business minds we'll ever see in terms of distilling a business down to its essence. However, there is a major difference between what he usually does and speculating, which, almost by definition, is what you're doing when you own commodities or currencies.
Related news and commentary on MSN Money
Perhaps that explains why Buffett is walking away from the foreign-exchange market at a time when he appears to have the wind at his back again. It may also explain why he walked away from silver.
When Buffett first purchased silver, I remember thinking that he was entering into this as a hedge against many of the macro-negatives that were ultimately going to unfold. (When he waded into the foreign-exchange market some years later, I was even more convinced that his initial idea on silver was a variation of a foreign-exchange position.) My guess is that once he had the silver position, the fact that there really are no fundamentals, in the business sense, perhaps caused him to become unhappy with it -- especially during periods when it went against him. So, he jettisoned what would have become a huge win before it began to really "work."
Similarly, the foreign-exchange market is currently, in essence, a greater-fool game, as the three major currencies (the yen, euro and dollar) all have their warts. Though I have owned the euro and yen until very recently, they're only less bad than the dollar. In fact, their major claim to fame is that they're simply not the dollar. Perhaps, as that trade went against Buffett for a time, he found it uncomfortable (or distracting) to hold positions of that magnitude -- even though he will eventually be hugely correct about the dollar
None of this is meant as any criticism of Warren Buffett whatsoever. It's just to note that even the world's greatest investor might experience some difficulty when speculating, even when he is right!
'Evils' that lurk in the speculative swamp
Which brings us to the important moral of this story: People must understand whether what they're involved in is speculating or investing (regardless of asset class), as the techniques and mindsets required are different.
That's one of the reasons why I caution folks who are inexperienced not to sell short. Short-selling is a cross between investing and speculating. You need the research of a fundamental investor, but you also need the trading techniques of a speculator. (As Buffett cautioned: "It's still a tough psychological game to play.")
If you don't know whether you are acting as an investor or a speculator, rest assured, Mr. Market will exact a rather large tuition as he teaches you the difference. I know. He initially took my money while making me don a dunce cap.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
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