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Warren Buffett: The Ultimate Market Timer?

Warren Buffett: The Ultimate Market Timer?The idea seems crazy, but my friend who runs a value oriented RIA pointed it out to me and it seems that Warren Buffett has had some great market timing. My friend does not want to be named but I wanted to share some thoughts on the topic. I was going to do a formal write up but instead decided to leave it as our emails back and forth. The bold is my writing and the regular text is my friend. I also edited parts of the email to make the conversation flow better and took out parts not relevant to this topic. See below:

Does anyone know how Warren Buffett predicted the crashes in 69 (he closed his partnership), 87 (he wasn’t buying for Berkshire) , 00 (the famous speech) and 08 (he was 100% cash in his personal portfolio in 06-07)? In spite of his pretensions that he doesn’t predict these things he seems to have the best record in doing just that. He doesn’t use simple valuation methods by themselves. Benjamin Graham doesn’t have nearly as good of a record as WEB–Graham thought that the market was already overvalued in the 50’s! For example, WEB has said is that the Market cap/GDP ratio is the single best measure of market valuation. But it does not explain why he was not buying in early 1987. This measure does explain why he was so bullish on America in late 2008. I would like to know what else he goes by besides this ratio. He has dropped hints that he combines this ratio with the number of good deals that he finds on the stock market. In other words, when this ratio is on the high side AND there are no bargains then watch out. However, this does not completely explain 1999. There were plenty of bargains in microcaps then. So what is WEB’s system?

me: You make good points about Buffett but you really think he timed the market so well? I know that Berkshire had a huge cash load in the mid 00s while the bubble was building but if he knew a crash was coming it would have even been worth the taxes incurred to sell all or at least a significant amount of Berkshire’s stock portfolio, especially financials. Maybe Coke would be too expensive to sell because of the long holding period and it is less cyclical but why didnt he sell Wells Fargo for example? Buffett said that I think in regards to Market cap to GNP but either way it is very similar. Right now the market cap to GDP is 96 which is modestly overvalued but not super overvalued. Also if Buffett thinks that is the best measure in 87 it was not too high in fact it was low? Warren Buffett in my eyes is super hard to understand, Benjamin Graham is much easier to understand I personally think.

WEB times the market now with his personal portfolio more than with Berkshire’s portfolio. He wrote in one of the letters that he was not planning on selling his big positions even if prices went up out of hand. Also, in his personal portfolio he was 100% cash in 2007 while Berkshire was buying. I don’t know about his personal portfolio in 2000, although he made that famous speech a few months before the bubble burst. He is super careful never to say anything that will embarrass him later on, and therefore that speech was a good indication that he was pretty sure than the bubble would burst before 2009. When I say that Buffett timed the market very well, I don’t mean that he got it right to the day. He himself says that he cannot predict the short term.

Here is WEB record:
1955? Opens partnerships against Ben Graham’s advice.
1969: Closed partnership due to lack of bargains. The market went nowhere and then crashed.
November 1974: Great deals – Forbes interview. The market zoomed up.
November 1979: PUBLIC ARTICLE ANNOUNCING: Stocks on sale! The market did very well starting from 1981/2.
1987: Cash buildup in BRK portfolio. In BRK letter says that there are few good deals. Then came the ’87 crash.
November 1999: PUBLIC WARNING: Don’t expect the market to do well! And then the bubble popped.
2006: 100% cash in personal portfolio. No public warnings.
November 2009: PUBLIC ANNOUNCEMENT: Buy American, I am! Buys derivatives on the stock market index saying it will for sure be worth more in a decade. It has already paid off.
When he makes a public speech or writes a article, that means that he was pretty sure of himself. When he went against the advice of Benjamin Graham (who he highly respected) to open the partnership in spite of Grahams warning to wait for the market to cool down, that meant that he was pretty sure of himself. What were his timing signals? No bargains: 1969, 1987, 2006. Lots of great bargains: 1950’s, 1974, 1979, (2009?). In public he talks about valuation. But his timing device seems to combine valuation with a heavy dose of “# of bargains”.


It is amazing how accurate his personal portfolio has been with timing, I know you did not mean day but rather months or years. I still find it peculiar especially 87 since you can see from these charts below that market cap to GDP was quite low then, but who knows. He definitely has something about him that is hard to understand. I even ask people Buffett can buy outright maybe 100 companies  in America which company will he purchase next? almost no one can answer. Lubrizol was not on anyone’s radar to my knowledge.  On the other hand, everyone thought BNI was purchased at a hefty premium by any metric but it has turned out to be fantastic buy. I think besides Charlie Munger there is possibly no one who understands him 100%, although people like Walter Schloss probably understand him pretty well. And I am sure other people understand Buffett far more than me. I do not know why he would follow a different strategy for his personal portfolio than for Berkshire’s? 

7 Comments

  1. Error – buy American was 2008 nov not 09

  2. I don’t think Buffett has any secret “tricks” that he doesn’t share with the public. He’s just better at it then almost everyone else. I’m always surprised when people assume there’s a trick. We can’t learn to bat .350, or to compose like Mozart. And almost noone can invest quite like Buffett.

  3. Do you think that the ratio of Total Market Cap / GNP should be adjusted for government spending though to give a more accurate picture of valuations? Obviously government spending hasn’t stayed consistent through the ages so I would need to recreate the entire graph adjusted for gov spending.

  4. Good points but I present the following two points:

    1. I discussed tax consequences and WFC would have had less than KO which was held much longer.
    2. Buffett even admitted that not selling KO in 99/00 when it was extremely overvalued was a mistake. So it seems he would have considered selling it in hindsight.

  5. Current GDP and GNP is only about $250b differencehttp://bea.gov/national/nipaweb/TableView.asp?SelectedTable=43&Freq=Qtr&FirstYear=2009&LastYear=2011, I also am not sure where you got Govt. as 40% of economy, Govt spending as % of GDP is ~24 last I checked.

  6. Question. I just did a little research and noted that GNP = consumption + government spending + investment + net exports + net factor payments. So when you divide Total Market Cap by GNP its like comparing apples to oranges since Total Market Cap doesn’t include the government. So in order to appropriately do this calculation you would need to take out government spending thus increasing the percentage. Am I thinking about this correctly? Also I looked up off a website to see what percentage of our economy is made up of government spending and I got a rough estimate of 40% currently. Does this mean that in order to do the calculation you would take the current 94% and divide it by (1-.4) which is .94/.6 = 1.567 = 157%. Please tell me that I’m wrong because that would mean we are extremely overvalued and due to the stimulus, no improvement in unemployment and a stock market that is hugely overvalued. We may be in worse condition than before.

  7. <>  For a number of reasons, IMHO.  Buying and selling large stakes in KO, WFC, etc. when you want to own the business forever results in paying substantial tax consequences and adds risk to Berkshire being able to own those businesses again at lower prices.  How would he explain to shareholders that he sold KO, after owning it for decades, because he was hoping to buy it back at lower prices?  Berkshire is an investment vehicle managed for the long-term while his own personal portfolio is a trading vehicle.  In addition, Warren would rather make mistakes in his personal portfolio than with Berkshire – less people to explain too – and thus manages Berkshire with a more conservative, long-term view than his personal portfolio. 

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