Can Gordon Gekko Teach You as Much as Warren Buffett?

by James Brumley | May 11, 2012 8:47 am

With Berkshire Hathaway’s (NYSE:BRK.A[1], BRK.B[2]) earnings growing by 67% last quarter on a year-over-year basis, has Warren Buffett re-established himself as the world’s best investor? Possibly. And any help to that end that Berkshire’s income results didn’t offer, the annual shareholder meeting last week surely served up — offering investors a warm ‘n’ fuzzy feeling that makes the guy come across more like a noble grandfather and less like a fund manager.

To put it in pop-culture parlance, he and Gordon Gekko (yes, the corrupt villain in the duo of Wall Street films) are at extreme opposite ends of the spectrum, whether you’re talking about morality, or strategy.

But have you ever really stopped to take a look at his philosophy and trading activity? I mean, have you really dug deep and thought about how what Buffett is saying versus what he’s doing — and what he’s doing versus what you could do on your own — could be radically different from one another? Frankly, the guy might be able to learn a thing or two from Gordon Gekko, at least in the trading sense. And if you look really close, you might find Buffett has actually borrowed a few ideas from the Gekko playbook.

Undoubtedly, the mere comparison of a vile, fictional movie character and a real stock-picker who has (amazingly) not once drawn regulatory scrutiny will inflame Buffett fans. That’s not the point. I like and respect Buffett quite a bit, so please put away your pitchforks. This is just an exercise intended to make us all think, using three simple talking points.

1. Contrary to what he says, Warren Buffett’s favorite holding period isn’t “forever.”

His point is well-taken — we should all stick to stocks we’re willing to hold forever, and just let them brew. It’s a theoretical idea, though, and not one even he actually applies consistently.

Case in point: Bank of America (NYSE:BAC[3]). Buffett swooped in and bought 9.1 million distressed common shares in 2007, sold some in 2008, and sold the rest in 2010. Were it just a “throw a lifeline” trade designed to be short-term, that would be one thing. But it wasn’t. Buffett admitted he was impressed by the growth that Bank of America’s then-CEO Ken Lewis had managed to foster. Granted, nobody could have seen the storm that was coming in 2008. The economy was on the mend by 2010, though, yet BAC wasn’t.

For those of you doing the math, three years is a lot less than “forever.”

Don’t get me wrong: The Oracle of Omaha probably made the right choice in letting go of BofA, even at a 57% loss on the whole trade. He just probably should have done it sooner. Even Gordon Gekko dumped Bluestar Airlines as soon he realized a loss was unavoidable.

2. Despite the fact most of his buys and sells are in the same common shares you and I trade, Buffett has access to privileged deals most investors could never get.

Once again, Bank of America is one of them. Though Buffett sold his common shares by the end of 2010, he’s now holding $5 billion worth of preferred shares that (1) pay a 6% dividend, (2) include 10-year warrants for 700 million shares of common at $7.14, and (3) can be bought back by Bank of America at any time, but for a 5% premium. Not bad.

To be crystal clear, I don’t begrudge the guy’s opportunities. He has earned billions of dollars, and if nobody else is stepping up to fill a void, more power to him. In this case, though, average investors never even got a chance to fill BofA’s void. The Bank of America deal was specifically put together for Berkshire, and you — as an average investor — can’t get into the same deal.

In other words, Buffett doesn’t always have to play with the same deck of cards the rest of the market’s players do. Tilting the playing field makes it much easier to beat the market. Don’t believe it? Just ask Gekko (though he did it illegally by using insider information). Ergo, Buffett might not be a reasonable yardstick for you.

3. Though not explicitly, Buffett gets emotional — in a business-minded way — about investments, breaking Gordon Gekko’s No. 1 rule, “Don’t get emotional about stocks.”

This snippet from the most recent letter to shareholders raises the red flag.

“Berkshire’s newer shareholders may be puzzled over our decision to hold on to my mistakes … Any management consultant or Wall Street advisor would look at our laggards and say ‘dump them.’ That won’t happen. For 29 years, we have regularly laid out Berkshire’s economic principles … Number 11 describes our general reluctance to sell poor performers (which, in most cases, lag because of industry factors rather than managerial shortcomings). Our approach is far from Darwinian, and many of you may disapprove of it. I can understand your position. However, we have made — and continue to make — a commitment to the sellers of businesses we buy that we will retain those businesses through thick and thin.”

Admirable. And in the grand scheme of things, it’s not a bad thing to be unwilling to cut losers loose right away. If Berkshire were to start doing so, it might make it very tough to entice other corporations into agreeing to slide under the Berkshire Hathaway umbrella in the future.

It raises a question, though — where’s the line drawn between being committed to your acquired companies, and doing good for your current shareholders who can’t wait forever for an investment to start paying off?

Remember, he’s playing with other people’s money and has enough of his own that he doesn’t have to worry about paying the mortgage or funding his retirement; he can afford for Berkshire to have a holding period of “forever” (even if only philosophically). But for the 98% of us that have to retire on our investments at a particular point in time — and who might be Berkshire shareholders — we can’t necessarily afford to be that patient just so Buffett can demonstrate his commitment.

The Final Word

Again, none of this is intended to hammer the Oracle. At the end of the day, the guy with the most money is the de facto smartest investor, and that’s Warren Buffett.

The intent is simply to point out how some of the advice Buffett is dispensing — the advice many of you are following — isn’t necessarily the same advice Buffett is following. Buffett does well because he can do deals you and I can’t, and he can afford a few years of minimal capital appreciation, living on dividends alone. Unless you’re already a billionaire and can do the same, you might want to start thinking a little Gekko-ish too.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. BRK.A:
  2. BRK.B:
  3. BAC:

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