Monday, October 20, 2008

Buffett versus Cramer

Two of the most widely-followed investment personalities were out with some fairly interesting articles late last week. The title probably gave away that I'm talking about Warren Buffett (the richest man in the world) and Jim Cramer (the whiniest man in the world). Buffett came out with a bullish long-term call on U.S. equities, and Cramer came out with an article that sounded a bit defensive and critical of Buffett's piece.

Before delving into the two articles, let's step back and consider which of these two professional investors is more worthy of our attention. I've applied my many years of objective security analysis to this question. The following is a summary of my conclusions:

  • Cramer has a goatee. I don't trust goatees. Lenin had a goatee. Alleged steroid user Mark McGuire had a goatee. Stoners Danny Bonaduce and Shaggy (of Scooby Doo fame) have goatees. Pee Wee Herman has a goatee. Colonel Sanders has a goatee (I'm a vegetarian). Count Von Count of Sesame Street has a goatee (pure evil).
  • One of them is intelligent, witty, and relevant. The other one is Jim Cramer.
  • Warren Buffett is the Warren Buffett of his time. Jim Cramer is the Jerry Springer of his.
  • If I were stranded on a desert island and had to take Buffett or Cramer with me, I'd pick Cramer. He'd be more likely to help me get over my aversion to cannibalism.
So, it's a tight race, but in the end I'm going to have to go with Buffett.

Buffett wrote an op-ed piece for the New York Times on October 16th that laid out the case for buying equities. In it, Buffett wrote the following:
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

...Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

...Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
So, we have Buffett saying that stocks look attractive for the long-term, and he's moving his money from Treasuries to equities at these levels. Importantly, he's emphasizing that he has no idea where stocks are headed in the short-term. Notice that he considers even one year to be a short time period, as do I. I have a hard time arguing with him since I turned positive (for the first time in years) on the market back on October 10th as the market was dipping below 8300. I'm sure Buffett is comforted by that.

In response to Buffett's op-ed, Cramer put out a piece entitled "Sure, Buffett Can Afford To Buy Here." Here are a few snippets from that article:

Great to see Warren Buffett buying here. Fabulous. He has a lot of firepower. He is right to buy American. And I want to go with him, except, he's been buying for awhile, and, more important, he can be down 20% to 30% and it doesn't matter.

Buffett emphasizes over and over again that he can't time the market. Over and over again, he makes the point that he is in it for the long term.

...So, let's do the math. Let's say he is as wrong in these new buys as he was in his General Electric buy a few weeks ago. If you use, for the sake of argument, the allegedly controversial call I made when the Dow was at 10,000 that you need to take as much money out of the market as you may need for a big purchase in the next five years, you will need to gain 37% in your stocks to get back to even. Thirty-seven percent.

Do you think that you will be able to make that back? Maybe if you are the house, like Buffett, maybe if you have a long-term time frame.

But that was never my point. My point was that, if you need that money in the short term, it is better not to have it in the market.

...These buys are of absolutely no consequence to him whatsoever. He may very well make fortunes on his buys. And he has waited until stocks are down.

But are you Warren Buffett? Are you as rich as he is that you don't need to worry about those big purchases? If you are, I say bombs away. Go with him.

If you are not, consider that, if you followed him with GE and then followed him today with this New York Times picks and those prices fell as much as GE did, you would be in a real jam.

So, Jim is basically saying a few things. First of all, don't buy stocks if they're going to fall. Ok...right. That's too ridiculous to even comment on.

Second, apparently Buffett is clearly an idiot for investing in GE too early. I'm a little confused by this. Buffett invested $3 billion in GE PREFERRED stock that will earn him 10% a year in this low-return, high-risk environment. GE can buy the preferred back from him after 3 years, but at a 10% premium. Buffett is also getting warrants to buy GE common stock at $22.25 at any time during the next 5 years. GE's stock is currently at $19.63, not terribly out-of-the-money. There is a very good chance that GE stock will be above $22.25 in the next 5 years. Even if it isn't, barring the unthinkable, Buffett is guaranteed at least a low-risk 10% return on this investment, yet Cramer is criticizing his timing on the GE investment? Amazing. You don't get those kind of terms from GE when everything is wonderful and their stock is rising, Jim.

Cramer states that if "you followed him [Buffett] with GE and then followed him today with this New York Times picks and those prices fell as much as GE did, you would be in a real jam." That is an apples to oranges comparison. Cramer is assuming you bought GE common when Buffett announced that he had bought GE preferred. Cramer should know better. These are two very different investments, and Joe Mainstreet never had the chance to invest in Buffett's GE preferred. You never were able to "follow" Buffett on this one. Had Buffett bought the common, then Cramer would have a more valid point. I discussed this issue more fully in my article, "My Take On Buffett's Take Of GE Stake".

Third, Cramer tells us not to put money in the stock market that we may need in the next 5 years. Buffett clearly isn't telling you to do otherwise. In fact, he repeatedly emphasizes that this is a long-term call, and with Buffett long-term probably means his next two reincarnations. Besides, am I the only one shocked that Cramer EVER thought it was a great idea to put money you really needed in the next 5 years into equities?!

Fourth, Cramer seems to be saying that we should discount Buffett's opinion because Buffett is wealthy and can therefore afford to be wrong. But doesn't Cramer often remind us how filthy stinking rich he himself is? So, if we shouldn't listen to Buffett because he's rich, doesn't it follow that we shouldn't listen to Cramer either since he's also rich? Or maybe he's saying we should pay more attention to the filthy rich rather than the fabulously rich. To follow that logic through, my stock market opinions are far more valuable than either of theirs, and the homeless guy who lives in the woods behind my gym must be an investment genius.

In all seriousness, I don't know one professional investor who pays any attention to Cramer. I know many who listen when Buffett speaks. If I'm interested in an intelligent and clear-headed investment opinion, I'll listen to Buffett. When I want to feel better about myself, I'll listen to Cramer.

Disclosure: The Rubbernecker is long Midwestern oracles and short self-promoters (unless they're writing a blog).

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.