The Oracle Nobody Knows
There are many secrets to Warren Buffett's legendary investing success. But one that never gets mentioned is the fact that Buffett, like the GEICO geckothe lovable lizard that's become the logo for the Berkshire Hathaway-owned insureris a real chameleon.
The true believers don't like to hear this. What they like to focus on is the folksy, "keep things simple" Buffett who made $50 billion by seeking out high-quality companies that are on sale, with the hope of holding them forever.
But if you've ever closely read Buffett's famous Berkshire Hathaway shareholder letters, you should be familiar with another sideor sidesto the Oracle of Omaha.
For starters, there's the aggressive Buffett. In his 2003 shareholder letter, Buffett, who's not known for being a gunslinger, disclosed that he invested more than $600 million of Berkshire assets in a hedge fund called Value Capital, an investment that later led to a $33 million pretax loss in 2005. Never mind that Buffett has been publicly critical of hedge funds in the past.
Then there's the opportunistic Buffettwilling to pounce on a quick trade. Even though he is notoriously averse to technology stocks, Buffett did bet in 2002 on junk bonds issued by companies like Amazon.com and Level 3 Communications. That year, when junk bonds looked cheap, he bought up $8 billion worth of them in all.
Side bets. There's also the exotic Buffett. Outside the spotlight that shines on his portfolio of blue-chip equities and his assortment of quaint businessessuch as Dairy Queen, Fruit of the Loom, and See's CandiesBuffett is plenty willing to invest in highly complex assets that most Buffettheads wouldn't dream of going near. For instance, Buffett admitted in his most recent shareholder letter that Berkshire has entered into currency-related derivative contracts as a play against the U.S. dollar, which he thinks is headed lower. Yet he once called derivatives "financial weapons of mass destruction."
This brings us to perhaps the most important "other side" of Buffettand that's Buffett the futurist. Granted, Buffett may not look the part, given his ownership of old-fashioned, low-tech companies. "Most people make the mistake in thinking that Warren Buffett is a value investor," says James Altucher, founder of the financial website Stockpickr.com and author of Trade Like Warren Buffett. "Buffett is what I would call a demographic investor. He looks for broad demographic trends that reach out over not just the next six months or six years but over the next 50 years."
Buffett's recent purchases of healthcare stocks like Johnson & Johnson and Sanofi-Aventis are a bet on the aging of the baby boomers, Altucher says.
Even Buffett's foray into the humdrum world of railroadsBurlington Northern Santa Fe, Norfolk Southern, and Union Pacificmay actually be a bet on rising China and its need to import agricultural commodities from the American Midwest. That food must be shipped west before it can make its way to Asia.
A more direct China play is his $3.3 billion stake in PetroChina, a huge Chinese energy concern, and his relatively new position in Posco, a South Korean steel manufacturer that is benefiting from China's buildout.
There's more to Buffett than even his most loyal followers let on. "He's not just about buying [stocks with low price-to-earnings ratios] and letting them ride," Altucher says. In fact, the secret to Buffett's success may not rest in his trademark discipline but rather in his flexibility and willingness to see value in all sorts of different assets.
This story appears in the August 6, 2007 print edition of U.S. News & World Report.