🖤 Donations of all sizes power our public service journalism Give Now
Easy Street

Warren Buffett: Even Oracles Have Their Secrets, And the SEC Lets Them

Heidi Moore Nov 8, 2011

Warren Buffett gets a lot of attention as an investor. His folksy communication style, long, chatty investment letters, vocal disdain of Wall Street and sterling reputation have served him well, bolstering his enviable mythology. His “nothing to see here, folks” straightforwardness carried him largely unscathed through even a big insider trading scandal early this year, when his deputy David Sokol admitted to buying shares of a company before his boss did.

But even though Buffett often makes a show of despising Wall Street’s methods, he’s not averse to partaking of them. For instance, he derided derivaties as weapons of mass destruction, but he dabbled in them enough to lose nearly $2 billion on derivatives bets this quarter, even though Berkshire Hathaway recorded a profit for the quarter.

And he advocates transparency, but Buffett frequently asks regulators to cut him a break by allowing him to hide some of his bigger stock moves. (I did a report on that today here). The Securities and Exchange Commission is usually hesitant about granting anyone a break, but since Buffett really can move markets, he does pretty well when he asks for privacy – in fact, about half the time when Berkshire Hathaway files its investment reports, the company omits some information according to University of Maryland business professor David Kass.

Berkshire has been playing its cards closer to the vest to prevent copycat trades. In the first and second quarters of this year, Berkshire blocked some of its investments from appearing in its public 13F filings of its investment positions. The SEC allows some companies to get exemptions from disclosing their investments for up to a year, particularly when those companies are accumulating big blocks of stock and want to keep their edge over other investors.

This year Berkshire has called on that privacy in every quarter so far. That makes it hard for Buffett-watchers to get a good read on the investment strategy of Buffett’s successors – if the firm is hiding the trades that can really move markets, it’s hard to tell what Berkshire Hathaway’s view of the world is.

It complicates matters that not one, but two people from the infamously secretive world of hedge-funds as his successors: Todd Combs and Ted Wechsler.

Hedge funds are just this: experts who manage other people’s money, but mainly if those people are wealthy enough to pay giant fees. That includes rich families, big pension funds or college endowments.

One characteristic of the hedge fund world is that it’s populated with investors who despise revealing any aspect of their investing plans. There are thousands of hedge funds, so to fend off the competition, they like their investors to think that they are each beautiful and unique snowflakes, with wildly divergent and “proprietary” strategies and no two funds exactly alike. The difference in hedge funds can only be described, in civilized conversation, in terms of the putative brilliance of their respective fund managers.

This works fine for hedge funds because almost all of them are private, with private investors. They can take risks and lose money and make it all up within the year. But history shows that when public firms – including banks and money managers- try to act like hedge funds, disaster soon ensues. MF Global, for instance, took giant risks with its own money, using a lot of leverage, and within months ended up in bankruptcy. To a lesser extent, a lot of banks acted like hedge funds by using their “proprietary trading” arms, which made bets on mortgage derivatives using their firms’ “own” money. Of course, when those bets failed, the banks didn’t pay with their “own” money; they made good with taxpayer money.

All of which generally supports the idea of leaving hedge-fund type investing, with its secrecy and its bold risks, to hedge funds. Berkshire Hathaway, an admired conglomerate that carries Buffett’s longtime reputation for transparency, made its name as a value investor that held on to stocks for a long time – so it didn’t care that a lot of people might pile in or leave a stock in the short term. With two hedge-fund managers at the helm, will Berkshire turn a closer eye on the short term?

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.