Monday, March 2, 2009

Common Sense Trumps the Oracle

According to his Wikipedia entry, Warren Buffett was endowed with his "Oracle of Omaha" sobriquet by Alex Markels of U. S. News & World Report in a story that appeared in the August 6, 2007 issue. In our present circumstances it is easy enough to say that anything published on such an auspicious date in history would be fated to blow up in our faces; but it would be more productive to recognize that, in this year's annual letter to investors in Berkshire Hathaway, Buffett not only dispensed with the oracular but also owned up to his own errors, being direct enough to declare:

During 2008, I did some dumb things in investments.

While Buffett seemed to be as disposed to seek out targets for blame as the rest of the rich and mighty have been, he also recognized that this was a letter whose readers would benefit more from commonsense lessons learned, rather than the latest proclamations inspired by inhaling the fumes at Delphi. Indeed, one of Buffett's better punch lines came not from the Delphic Oracle but from the Trojan priest Laocoön, to whom Virgil (Aeneid, II, 49) attributed the famous warning about the Trojan horse:

Equo ne credite, Teucri! Quidquid id est, timeo Danaos et dona ferentes.

translated in its Wikipedia entry as:

Do not trust the horse, Trojans! Whatever it is, I fear the Danaans even [if] bearing gifts.

Buffett translated this into:

Beware of geeks bearing formulas.

This is certainly sound advice, even if we remember what happened to Laocoön when he threw his spear at the Trojan Horse. Personally, I would have preferred to dispense with the literary and boil it down to slightly more aggressive plain speaking:

If you don't understand it and no one can explain it so you do understand it, don't put money in it!

Unfortunately, my guess is that most Berkshire Hathaway investors really do not understand what Buffett does with the money they give him, no more than those victimized by Bernie Madoff understood what he was doing. The only real difference seems to be that Buffett can own up to circumstances when the news is bad (which was easier because Buffett only had to own up to making poor investment decisions, while it appears that the only thing Madoff did with the money he received was keep it for his personal use).

The Buffett lesson I most enjoyed, however, was the one about real estate investment:

Enjoyment and utility should be the primary motives for purchase, not profit.

My wife and I have tried to live by this rule for every real estate purchase we have made. (For that matter, in better financial times when we made some investments in art, the only thing that mattered, beyond whether we could realistically afford it, was whether or not we liked a piece well enough to live with it; and we have yet to sell anything we purchased, although one piece has been "banished" to my personal work-room!) Even our current place in San Francisco, purchased when our primary residence was still in Palo Alto, was selected for "enjoyment and utility" with an eye toward being a good place for our retirement years. That is basically what it has now become, and we did not need an oracle to endorse our decisions!

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