Is Warren Buffett blind to tail risks/risks of ruin?

[Sig]

You guys are missing my point, it's not about me being paranoid about tail risks, its about the following:

Buffett owned "nothing but goverment bonds" all the way to 2008. Then, he took all of that and put into stocks. Clearly there was a 'risk management' of some kind that made him avoid stocks before 2008, perhaps he was being guided by utility (he wanted to ensure he was going to remain wealthy no matter what) or by something else, some sort of tail risk avoidance. Even though he found plenty of cheap stocks before that (and he bought them through Berkshire but NOT with his personal account), and he hates cash long term, YET he STILL avoided stocks with his personal account for YEARS.

But in 2008 that changed, valuations improved and he went "all-in", but as I have argued using Taleb's and the Kelly formula, in most instances more benefits (returns) do NOT warrant one throw caution at the wind like that. He junked his risk management either because:

1)He was being guided by something else, perhaps the deside to maximize Fame/Reputation rather than risk adjusted wealth
2)His is blind to tail risks and simply doesn't believe he can be wrong about the US, no matter what is thrown at the country. So perhaps he thought "ah, I was being paranoid about holding all these bonds, US will come back from this, no need to insure against something that I was insuring before, that was silly"

Either he made a "mistake" before 2008, or he made a "mistake" after it. The way he behaved does not look consistent

Or he grew and matured and realized that his personal wealth wasn't all important anymore and optimizing his tail risk avoidance wasn't the most important thing going on in his life. You can change your strategy based on a change in your outlook in life and you weren't by definition "wrong" either way. Happens to most of us as we get older.

Also, it's very possible that he's far craftier than we give him credit for. The U.S. economy was in a tailspin and he had billions in Berkshire Hathaway and his foundation at risk. He is hands down the most respected money manager in the world. It means a great deal when he puts down all his money on the U.S., he actually has the ability to move markets with that kind of move by changing everyone's perception of how much confidence they should have in the U.S. economy at a time when there was a high level of irrational fear. Perhaps he was just signaling that the U.S. economy had his full faith and trust in the strongest possible way, in hopes that it would become a self-fulfilling prophecy of a sort for the entire economy. At the same time, that was a relatively minor investment given the giant tail of his other investments he was swinging with it.

 

[Daal]

Or he grew and matured and realized that his personal wealth wasn't all important anymore and optimizing his tail risk avoidance wasn't the most important thing going on in his life. You can change your strategy based on a change in your outlook in life and you weren't by definition "wrong" either way. Happens to most of us as we get older.

Also, it's very possible that he's far craftier than we give him credit for. The U.S. economy was in a tailspin and he had billions in Berkshire Hathaway and his foundation at risk. He is hands down the most respected money manager in the world. It means a great deal when he puts down all his money on the U.S., he actually has the ability to move markets with that kind of move by changing everyone's perception of how much confidence they should have in the U.S. economy at a time when there was a high level of irrational fear. Perhaps he was just signaling that the U.S. economy had his full faith and trust in the strongest possible way, in hopes that it would become a self-fulfilling prophecy of a sort for the entire economy. At the same time, that was a relatively minor investment given the giant tail of his other investments he was swinging with it.

Yes, its possible that it was part of the idea, to buy stocks and try to pump them to "create confidence". His GE and GS investments could also have been part of the "act". But still, those things are still 'benefits', one can keep adding benefits and still it doesn't warrant an 'all-in bet'. The fact that one needs to call the NYT in desperation to try to pump a market, shows that the win % is indeed NOT super high. There is a lot of uncertainty and risks involved. Either he made a "mistake" before 2008 or during/after

 

[Sig]

Yes, its possible that it was part of the idea, to buy stocks and try to pump them to "create confidence". His GE and GS investments could also have been part of the "act". But still, those things are still 'benefits', one can keep adding benefits and still it doesn't warrant an 'all-in bet'. The fact that one needs to call the NYT in desperation to try to pump a market, shows that the win % is indeed NOT super high. There is a lot of uncertainty and risks involved. Either he made a "mistake" before 2008 or during/after

When the country you love and truly believe in is in the middle of a confidence crisis that could result in a financial meltdown that would result in a lasting depression and a huge amount of misery for millions, and you are one of the few people who could do something to stop it, is that just a 'benefit' and not worth doing because a formula says it isn't? Add to that the fact that you have billions in other funds that you could leverage by a relatively small (for him) show of confidence. At some point the real world intercedes here my friend. Some people do things for non-monetary reasons and would do the same again if given the chance. That's not a 'mistake', it's being a human. Not everyone lives via spreadsheets and formulas during extreme events, thank god!

 

[Daal]

When the country you love and truly believe in is in the middle of a confidence crisis that could result in a financial meltdown that would result in a lasting depression and a huge amount of misery for millions, and you are one of the few people who could do something to stop it, is that just a 'benefit' and not worth doing because a formula says it isn't? Add to that the fact that you have billions in other funds that you could leverage by a relatively small (for him) show of confidence. At some point the real world intercedes here my friend. Some people do things for non-monetary reasons and would do the same again if given the chance. That's not a 'mistake', it's being a human. Not everyone lives via spreadsheets and formulas during extreme events, thank god!

I understand, that's why I put mistake in quotes. Sometimes people might want to maximize wealth, sometimes utility, sometimes (perhaps) other people's (the country) wealth/prosperity. Those are all valid uses for money, but I do find extremely interesting how that 2008 piece, which is widely seen as a great money making call, likely had nothing to do with maximizing wealth because its a "mistake" in the math/kelly sense which actually minimizes wealth growth

 

[Maverick74]

I understand, that's why I put mistake in quotes. Sometimes people might want to maximize wealth, sometimes utility, sometimes (perhaps) other people's (the country) wealth/prosperity. Those are all valid uses for money, but I do find extremely interesting how that 2008 piece, which is widely seen as a great money making call, likely had nothing to do with maximizing wealth because its a "mistake" in the math/kelly sense which actually minimizes wealth growth

Buffet is very close to the Fed and the government. He knew the bailouts were coming and he knew QE was coming. Remember the government approached him to bailout Bear Stearns and he passed but did invest heavily in Goldman. Based on what he knew, it was a slam dunk trade. At the very least, there would be enough bailout money and QE for him to bail out if he was wrong. It's not like the guy jumped into the abyss.

 

[comagnum]

Buffet is no babe in the woods when it comes down to market panics and knows, as does many pro traders & savvy investors, there are certain times when the risk/reward is at extremes and you just have to get long and lean hard with size as the turn unfolds. When a president tells the public now is a good deal it is time to buy - it can be the ultimate buy signal. In the post 911 if you would have listened to Bush when he urged the public to get back into the market you would also have timed the bottom perfectly, making a killing in the proceeding months before the next bear down leg sent the market to new lows.


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[jj90]

But in 2008 that changed, valuations improved and he went "all-in", but as I have argued using Taleb's and the Kelly formula, in most instances more benefits (returns) do NOT warrant one throw caution at the wind like that........Its possible that he wasn't aware that more benefits don't change the decision (or position sizing) much but I doubt, he is quite familiar with the Kelly formula and met personally with many people who swear by it (Thorp etc)

Daal, not everything is about reducing things to an equation. How did you make your outsized bet on EWZ and risk early last year? Did you actual follow a formula or did you simply say, this is ridiculous I'm putting 20% at risk.

 

[JackRab]

Why do you have to be consistent in your trading/investing? In trading I kinda get, if you're on a certain strategy that works... don't change it.

But in (long term) investing, you certainly want to change with the tides a little bit. Especially when there's blood in the water and there are bargains. You cannot get the timing correct, but if not leveraged and are in it for the long term, you don't have to.

Fuck man... if he really sold 10yrs+ index vols at 35... that's just a good trade...

 

[newwurldmn]

Why do you have to be consistent in your trading/investing? In trading I kinda get, if you're on a certain strategy that works... don't change it.

But in (long term) investing, you certainly want to change with the tides a little bit. Especially when there's blood in the water and there are bargains. You cannot get the timing correct, but if not leveraged and are in it for the long term, you don't have to.

Fuck man... if he really sold 10yrs+ index vols at 35... that's just a good trade...

You could take the 1250 worst spx days in the last 75 years and that doesn't even come up to 35 vol!

 

[Daal]

Daal, not everything is about reducing things to an equation. How did you make your outsized bet on EWZ and risk early last year? Did you actual follow a formula or did you simply say, this is ridiculous I'm putting 20% at risk.

It was 15% and its far from being oversized. Oversized would be 30-40%+. 10-20% is actually quite standard