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Regarded as among the greatest investors all the time, Warren Buffett has a real-time net worth of $97.6 billion as of the first quarter in 2021, which ranked this 90-year-old man the fourth richest person in the world. The Oracle of Ohama also serves as a chairman and CEO at Berkshire Hathaway – a multinational conglomerate that operates over 60 subsidiaries globally.
Almost all traders know Warren Buffett started his stock-investing career at age 11. Many of them also wonder what else he and Berkshire Hathaway invested in afterward, or whether he gets involved in forex trading. This article would help answer those questions and disclose the secrets behind his success.
Is Warren Buffett a Forex Trader?
The answer is NO, or at least he does not engage in the foreign currency market in a speculation manner as you thought.
By definition, forex traders refer to those who speculate on the price movements of currency pairs to make money in as short a time as possible – speculators. Meanwhile, Warren Buffett is a staunch believer in the ‘value-based investing’ principle that appreciates the act of purchasing and holding instruments in the long run. In nature, this Oracle of Ohama is considered a conservative investor who values the commitment to holdings rather than the fashion of continuously getting in and out of the market. Therefore, trading seemingly counters his fundamental investment philosophy.
In the 2017 interview with Yahoo! Finance, he supposed that the oversight of most investors was making great endeavors to beat the market. With that said, he tried to deliver an obvious message that consistently picking up the times to purchase or vend was not a prudent decision for the majority of the ordinary population. Merely 1% of investors can pull this active investing style off.
This legendary investor also refused to have the Class-A stock shares (BRK.A) of his investment company split as he preferred to find like-minded investors who had the commitment to the company with extended investment horizons.
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Nevertheless, Berkshire Hathaway then discovered that some mutual fund managers built funds to buy its stocks and subsequently provided the mass with the stock shares of those funds. Concurrently, the funds imposed some charges for their services. Inevitably, Warren Buffett disliked seeing others trade the company’s stocks in that way, so he decided to offer Class-B shares (BRK.B).
The introduction of BRK.B allows smaller investors to purchase Berkshire Hathaway’s stocks at an affordable price and even split their shares further. At the time of writing, a BRK.A share has a value of $383,297 whilst that of a BRK.B share is solely $256.77 on the New York Stock Exchange (NYSE).
Once again, the fact that Warren Buffett is not a forex trader does not mean he took no position in the currency market. Berkshire Hathaway inherited a myriad of derivatives contracts shortly after the acquisition of General Re. As of December 31, 2003, its derivatives book entailed “$11 billion in foreign currency forwards, $333 billion in the interest rate and currency swaps, and $102 billion in the interest rate and currency options”, according to FT Alphaville.
The legacy portfolio had significantly dwindled over years. Until December 2006, the main contributors of Berkshire Hathaway’s derivatives portfolio were the equity inputs and credit default obligations. Meanwhile, interest rates-currency swaps wound down to merely $10 billion in size, followed by interest rates-currency options at $4 billion and foreign currency forwards just at $1 billion. In the annual report for the fiscal year 2020, Berkshire’s derivative contracts which are conducted by its subsidiaries mainly focus on equity index put options.
Inevitably, Berkshire Hathaway has so far been a multinational holding company. Not only does the US conglomerate have business transactions in foreign currencies, but it holds foreign investments in the common stocks of other multinational corporations. Thus this can be understood as a way Buffett and his company engaged in the foreign currency market.
According to the 2020 report, foreign currency exchange rate losses are recorded on non-US denominated liabilities that consist of €6.85 billion par in Euro-denominated debt, ¥625.5 billion par in Japanese yen-denominated debt, and £1.75 billion par in British pound-denominated senior notes of Berkshire Hathaway Finance Corporation (BHFC). Despite the volatility in exchange rates, Berkshire still decides not to hedge relevant risks by using derivatives contracts.
In fact, this is not the first time Buffett’s holding company has joined the currency market in that fashion. Back in 2002, Buffett invested in Euro-denominated bonds with high interests. Bloomberg News reported that in 2019, Omaha’s company employed banks to vend 20- and 3-year bonds denominated in Euros and Pounds for the first time. Also in September of the same fiscal year, the company participated in the Japanese yen-denominated bond deal of ¥430 billion. This move was predicted to open the debt issuance floodgate.
Indeed, coming to 2020, there was a global soar in debt issuance by firms struggling to survive a worldwide turmoil induced by the Covid-19 pandemic. The financial world noticed a new record of nearly 50 borrowers (or issuers) pricing roughly $117 billion in high-grade bond deals at that time. Concurrently, on April 9, Berkshire Hathaway’s 10-year notes were priced at a spread of 105 basis points, which over-doubled that of the similar-maturity ones in September 2019.
The above descriptions prove that with the long-term investment philosophy, Warren Buffett is not a forex trader. In other words, he is in favor of investing in financial products that bring accumulated profits instead of trading on them.
What is Warren Buffett Trading and Investing Strategy?
The previous part, to some degree, gives you some clues about the consistent investment strategy of this legendary man. Over years of stepping into the realm, Warren Buttett has adhered to the value testing model. Accordingly, his trading principles can be understood in several following tenets:
This Oracle of Ohama initially invested in the shares of big giants, typically Apple, Coca-Cola, American Express and Bank of America. In the 2002 annual report, he firmly recommends individuals to buy stocks from businesses that show their sustainable growth, good returns on capital, outstanding competitive strengths and operate with firm principles. He claimed that before investing in bonds and stocks, Berkshire Hathaway had to examine hundreds of securities to seek the very few ones with good risk/reward ratios.
Thanks to that tenet, Warren Buffett avoided the mega financial catastrophe caused by the dot-com tech bubble in the early 2000s.
Sharing with CNBC’s “On The Money” in 2017, Warren Buffett suggested investors should inject their cash in large companies through the S&P 500 instead of striving to find the right firm. For this reason, diversification is also a salient point in his investing strategy. Unlike other most successful investors like George Soros, the word diversification is differently defined by Warren Buffett. That is, this term must always pertain to his “value-based investing” motto.
Buffett advised Berkshire Hathaway trustees in the 2013 annual letter that 90% of the cash should go to the low-cost S&P 500 index fund such as Vanguard 500 ETF or iShares Core S&P 500 ETF, whilst the rest had better pour into short-term government bonds like US Treasurys. He even expected 90% of his wealth to be invested in index funds which he considers to give superior benefits to other instruments.
Diversification here also extends to other long-term investments. In the 2002 letter written to Berkshire Hathaway investors, Warren Buffett considered derivatives as “financial weapons of mass destruction” that could potentially cause lethal dangers. However, before this statement, Buffett shared that his holding company adopted derivatives to implement several investment strategies. Even Berkshire Hathaway was still a player in this derivatives game many years later.
Elaborating on those decisions, he wrote in the 2008 Berkshire Hathaway letter, “The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so.” Warren Buffett even believed that interim volatility or earnings in the balance sheet were not more important than greater returns on capital over the long haul. Thus, once again, regardless of investment product, what Warren Buffett always aims at is its financial benefits in the long run.
By 1951, Warren Buffett told a local paper that whether he made a purchase for socks or stocks, he favorably chose the high-quality ones when they were marked down. With that statement, he implicitly reminded us about the importance of the intrinsic value of an asset. This concept is described by Buffett at the 1998 meeting as the current value of cash flows that was going to be generated by any financial instrument between now and judgment day.
The calculation of the asset’s intrinsic value is not so simple as determining its market price. In the famous book Business Analysis and Valuation, co-authors Paul Healy and Krishna PalepuIn mentioned the use of the discounted cash flows model and the accounting earnings-based valuation model to gauge the intrinsic value.
Nevertheless, the reality proves its higher level of complexity. There is no precise figure but rather estimates. Bill Gates wrote in Harvard Business Review that whenever Buffet planned to invest in a firm, he would read all of its annual reports, find out the progress and strategies of the company. Buffett also spent time investigating the company thoroughly and acted deliberately. That is a way this legendary investor evaluated the intrinsic value of the firm.
Over many years of investing, Warren Buffett successfully built up his empire through multiple acquisitions of undervalued businesses and investments in stocks of numerous public companies. Despite some failures, he and Berkshire still reap significant achievements thanks to the compliance with the value-based investing model and longtime investment strategies.
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