Warren Buffett, the Artist Formerly Known as … a Short Seller ?

Our one and only “Oracle of Omaha”, had some interesting things to say regarding the precarious activity a.k.a. short-selling:

Today, Mr. Buffett is particularly circumspect about the investment strategies that hedge funds employ, like shorting, or betting against, a company’s stock. He used to short companies as part of a hedging strategy when he ran his partnership, but now he says that he and Charlie Munger, his longtime friend and vice chairman of Berkshire, see it as too hard.

“Charlie and I both have talked about it, we probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult,” he explained, suggesting that the timing of short investments is crucial. “The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts.”

Michael Steinhardt, (who, to put it mildly, is no fan of Buffett) seems to agree:

“I shorted more stock than anybody else alive. But net-net over the years, I am flat on my shorts.”

LST believes both make great points; in fact, LST would posit (and occasionally has told others) that shorting is, on average, a negative carry proposition…as is buying insurance. Having said that, some of the greatest fortunes in modernity have been accumulated (and retained) via…short-selling (in some form or another). Also, based on Buffett’s comments, it’s clear that for the more astute investor(s), the accuracy and outcome of dodgy companies is quite high and clear (i.e. the 95% accuracy rate Buffett mentioned)… it is the consistent monetization, however, that is exceedingly difficult.

SOURCES

(1) http://dealbook.nytimes.com/2012/12/03/for-buffett-the-long-run-still-trumps-the-quick-return/

(2) http://www.reuters.com/article/2012/11/26/investment-summit-carsonblock-idUSL1E8MN5GA20121126