Buffett: Lucky or Genius?

In this issue:
»  Warren Buffett is plain lucky!
»  All eyes on the Fear Index
»  Buy 'Nano' for an 18% discount
»  China slows on global worries
»  ...and more!

00:00

"Warren Buffett is plain lucky!"

...says a top-notch investment professional in an interview given to a leading Indian business magazine. He has termed Warren Buffett as an 'aberration'. "I think he is plain lucky and he has also bought a lot of rubbish," adds the gentleman.

Throughout the decades, there have been many of these types who have argued that while Buffett may have been a great investor before, he is on the decline 'now'.

And there have been lots of such 'nows'...including the time in 1988 when Buffett made his bargain-buy of Coca-Cola (the stock is up 10 times since then). He was criticized again in the late 1990s on ignoring the Internet's 'bright' future. People said he simply didn't get it anymore. And they are saying it again.

So, is Buffett an aberration? Or is he plain lucky? A track record of 43 years does not seem to suggest so! His company Berkshire Hathaway has generated returns of 21.1% per annum over a 43-year period between 1964 and 2007, almost double compared to 10.3% annual returns generated by the S&P 500 Index.

Now, that is not an aberration.

For those who are acquainted with value investing literature, Buffett has shown us why those who criticize him are wrong, in his speech 'Superinvestors of Graham and Doddsville'. There are too many instances of investing success emerging from a common background for the phenomena to be mere fluke, says Buffett enumerating several investor profiles.

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One would like to push the point further. There is luck involved in Buffett's success. But the luck is not that the composite technique of Benjamin Graham's and Fisher's works. The element of luck was actually Buffett's early surroundings. What if he did not have an inborn interest in arithmetic? What if his father weren't a stockbroker? What if Benjamin Graham never existed? What if Graham had never written 'The Intelligent Investor'?

An affirmative answer to any of these things would have materially impacted Buffett's investment success. But once he had the aptitude and the technique, his success was no fluke.

Buffett might also have been lucky with surroundings, and empowered with Graham's techniques, but the hard work was his own choice.

01:33

All eyes on the Fear Index

Can expressions be measured quantitatively? Yes, fear can be. And it is running high across the global financial system. The 'Fear Index' or the VIX (officially called the Chicago Board Options Exchange Volatility Index), which measures volatility is rising...and rising fast. A rising VIX is usually regarded as a sign that fear, and not greed, is ruling the market.

So how scared are investors? On October 17 (last Friday), the VIX rose to 70.33. This was the index's highest close since its introduction in 1993, and is almost 350% higher than its 52-week low level of 15.82.

As defined on The New York Times' website, "VIX measures the degree to which investors think stocks will swing violently in the next 30 days. It is calculated in real time throughout the trading day, fluctuating minute to minute. The higher the VIX, the bigger the expected swings - and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, collapsed, and after the 9/11 terrorist attacks."

02:05

In the meanwhile...

Fear is not what was seen across stock markets in Asia today. All key markets closed in the positive. Major gainers included the benchmark indices in Hong Kong (up 5.3%), Japan (3.6%) and China (2.3%). The Chinese markets were in fact trading almost 1% down in the morning on reports of its slowing economy.

As for India, the benchmark BSE-30 index closed with gains of almost 250 points, led by strong gains in technology stocks. The RBI, as an additional measure to ease liquidity in the system, cut its repo rate (as which it lends short term money to banks) by 1%, to 8%. Stocks in Europe have opened in the positive, seemingly on hopes that the crisis may be easing. But is it?

A descriptive chart posted on The New York Times talks about the US government's huge financial commitment as part of its initiatives to save the financial system from crashing. The total commitment adds up to, well, just under US$ 6 trillion.

Anyways, crude oil has bounced back to US$ 73 a barrel on expectations that the OPEC (Organisation of Petroleum Exporting Countries) will cut its production to rein in falling prices. Fears that turmoil in global financial markets will spark an economic slowdown across the world has helped push prices down from a record US$ 147 in July. Gold is trading at US$ 800 an ounce, up US$ 18 over its Friday's close.

02:51

Buy Nano for an 18% discount...

..but only if you are an American with a dollar income. How? It's very simple. Nano was called the "US$ 2,500 wonder" when it was launched in January this year. In rupee terms the car was priced at Rs 100,000. Now given the rupee's decline from 40 to almost 49 against the US dollar since then, the car can now be purchased for US$ 2,040, a cool 18% discount to the US$ 2,500 tag.

And as far as Indian buyers are concerned, they can take hope from the declining commodity prices. This is because the Tatas were always under pressure to make the car a profitable venture considering its highly competitive price tag. Then, when the commodity prices surged during the earlier part of the year, there were doubts whether the car will be a profitable venture. Now, with commodities retracting on the back of global slowdown concerns, the venture can well be profitable. And Indian buyers can expect that the Rs 100,000 tag will be kept intact when the car is commercially launched later this or early next year.

03:17

China slows on global worries

China is starting to slow down or so it seems. The country's GDP grew by 9% YoY in the July-September quarter, the slowest pace in five years. Bloomberg mentions that this underscores concerns that the spreading financial crisis threatens the economy that has been the biggest contributor to global growth over the past few years. China's growth in the second quarter (April-June) and first half (January-June) stood at 10.1% and 10.4% respectively.

Economists now expect Chinese policymakers to cut interest rates to stimulate the economy, especially by way of investment in infrastructure. China has in fact already cut rates twice in this year. Considering that China remains the world's biggest consumer of metals and food grains, its growth is very critical for boosting the world economic growth, especially that of its Southeast Asian peers who have grown strongly over the past few years by exporting their produce to China.

03:45

After all, Mr. Bush has some ideas

Apart from Warren Buffett, another American who is turning heads these days is President George Bush. He has indicated that he plans to organise a global conference for discussing the current financial crisis, where leaders from both developed and developing countries would be included. As reported on Bloomberg, the conference agenda will include ideas on how to prevent future crises in a way that preserves the free-market system. Mr. Bush talks about ideas for preserving the foundations of 'democratic capitalism'!

How ironical can that get? The man under whose aegis the US central banking regulators saw and perpetrated the ongoing financial crisis in the first place now wants to know from the world where he went wrong! And this is coming when his presidential term is about to end in a few months.

04:05

From whom to beg, whom to borrow?

The tie-clad men who sported a sophisticated look and went about globe trotting are now on the streets. We are talking about the bankers - both commercial and investment bankers. Probably, it was not that they were unaware of putting their foot in their own mouth. But they were too callous to care. And now they need to borrow...if not beg.

The latest to join this lineage is one of the world's largest banking and insurance company - ING Groep NV. The biggest Dutch financial-services firm will get a Euro 10 bn (US$ 13.4 bn) funding from the Netherlands government.

Readers would do well to note that ING, which traces its roots back to 1743 currently serves more than 75 m customers globally. It was amongst the 20 largest financial institutions worldwide at the end of FY08. The bank has more than 124,000 employees. Its 44% Indian associate ING Vysya Bank is grossly undercapitalised (CAR 10.4% in 1QFY09) and has been awaiting a fresh dose of capital.

Now if the parent itself is borrowing and begging, could there be a saviour? Are we staring at another distress in the Indian banking sector?

04:53

Today's investing mantra

"An investment in knowledge always pays the best interest." - Benjamin Franklin