Legendary investor Warren Buffett's real lesson is the one you never learnt

Law 3: Conceal Your Intentions – Robert Greene, The 48 Laws of Power 

We admire in people the qualities that we lack in ourselves. At least, I do. My admiration for Warren Buffet has less to do with his investment record, and more to do with his being an — but with a wily old coyote like Buffett, you can never be sure — unintentional doppelganger of Rollie Tyler, the central character in the 1986 thriller, F/X, also known as Murder by Illusion. Tyler is a special effects expert who has to use all his nous to keep his adversaries, and the movie’s audience, guessing about what he truly is doing. 

Tyler’s sleights were many. So are Buffett’s.  While long professing that derivatives are “weapons of mass destruction”, he has himself been one of the most prolific users of derivatives in America.  

While telling us that stocks should be held for the longest time — and of course he has held quite a few for a very long time — based on some data it turns out that his average holding period is around 2 years. I have personally held derivative positions longer. He has never liked commodities. But he has bought plenty of oil producers. And a long-forgotten subtext of his storied life has been his Hunt Brothers-type (failed) cornering of the silver market in the ’90s. 

But all this is okay. Maybe he read Robert Greene more diligently than I did.  

What got me really thinking (that dark art that we all forget in a bull market) was a lazy Monday morning’s eyeballing of his investment  record.  

I am not sure who coined this very perspicacious line, “Time in the market is more important than timing the market”, but it sounds very Buffett-esque. What it basically means is that you should always remain invested and never sit on (substantial) cash .  

Indian asset managers have taken the IPR to this line, and it is sprinkled munificently over every single fund manager podcast or financial TV’s inedible programming (the only thing that runs it close is “Believe in the India story”). It is a worthwhile pilgrimage to see whether Buffett actually ate his own cheeseburgers. 

Table 1 is pretty much where the Buffet story gets burnished and dissected simultaneously: the Berkshire stock has delivered 18 per cent over 46 years.  But an exegesis of this 18 per cent reveals the truth: Buffett’s outperformance comes overwhelmingly from getting bear markets right. He trounces the S&P 500 in negative years, which more than makes up for an okay-ish performance in bull market years, barring his quite extraordinary 1980s streak. 

Table 2 does a vivisection of his bear market homeruns: With one exception – 1990 – Buffet beats every bear market at a canter. The real question to ask at this point is: What triggered this “sit out the bear market” strategy? That comes up in Table 3. 

Table 3 shows that moment of fracture in his philosophy — 1990. Buffet played the post-1981 bull market as Sunil Gavaskar played his 1971 debut series against the West Indies: 774 runs, average 154.  

But like Gavaskar against a demonic Dennis Lillee in Australia immediately thereafter in the Rest of the World XI vs Aussies series (144 runs, average 18), Buffet came a cropper in 1990. 

Buffett came in fat and lazy after 8 years of easy wins. The market pounded him into a Round 9 knockout: He lost 23 per cent when the S&P 500 delivered its first, minorly negative year since 1981.  

That’s when it dawned upon Buffett that market timing is not everything. It’s the only thing. Losing less in a bear market is the key to the Escape Room jail break. Post that knockout, Buffett got every single bear market right, right down to the current one.  

Buffett realised, as any investor with some unromantic thinking will, that consistently beating a bull market is an impossibility.  The only way you can beat the market is to take a bet opposite to the market, or else you are destined to be, at best, a market performer. And that away-from-market bet is cash or its cousins. Done wrong, you run a career risk bigger than John McCafee’s. Done right, you look like Aditya Puri exiting HDFC Bank at the very peak of the HDFC Bank bull market.  

At no other time has this strategy of taking cash calls and indulging in that abhorrent voodoo of  “market timing” been more consequential and germane for investors as in the past 2 years in India.  

Remaining fully invested in Indian equities has meant giving up on massive bull markets in gold and silver. 

Not sitting on cash or diversifying into non-equity assets has cost 2 years of negative real and nominal returns.  

Let’s understand why getting cash decisions right is momentous. Cash breaks the illusion of constant opportunity.  

The incontrovertible truth is that as bull market peaks, you run out of sensible, defensible opportunities. That’s how you judge that the bull is heading to its maker.  

Markets seduce you into thinking: “I must always be doing something.” Cash is your protest against that. Cash protects you from forced narratives. 

When you’re fully invested, you must always believe the market will go up. Cash lets you buy an antidote to this: intellectual honesty. And finally, constance of anything, degrades. That’s why interval training works way better than steady running. That’s why intermittent fasting works way better than eating many small meals. 

Intermittence generates regeneration. Cash at tactical times is that intermittence that regenerates your portfolio when everybody else’s is heavily diabetic because of the abundance of the bull market.  

Cash fights entropy. It’s clear: The disrobed, nettlesome investment truth is that the only way to handily beat the market over decades is to time the market. 

Being always in the market is exposing yourself to the market's acid in bear markets, that takes away all the collagen accumulated in bull markets. 

Generating 20-30 per cent alpha in bull markets is a near impossibility. But sitting out a bear market, delivers you that quicker than Blinkit. Sitting out a bear market makes you start the next bull market at Mile 13 even as other runners are in the hospital, and not even at the start line. Not losing 30 per cent puts you 50 per cent ahead of the pack.  

In India, the illusory investment gnosis totters  on this narrow mountain top: Always think aggressive. Don't you ever think defensive. Of course, there is the vested interest of the entire money management ecosystem investing you in this over-simplified thought.  

Reality is: Offence gets you the cheers. But defence gets you the years. Think Srikkanth and, again, Gavaskar.  

Ergo, as proven with data from the Oracle himself, timing the market beats time in the market hands down.  

As a corollary, this will make you feel like you just discovered your spouse was cheating on you: Not only is Buffett a market timer, Buffett is a bear in the hide of a bull. His bearishness has earned him permanent returns. His bullishness has earned him eternal relevance. Combined, it has earned him the rights to Law 3: the Perfect Deception.  

Why isn’t market timing done by investment managers? Because timing the market successfully is the equivalent of producing an offspring that combines Bradman, Christopher Nolan, Messi, Da Vinci, John von Neumann and Sachin.  

There's another problem: We have been told by plenty of Indian fund managers that "optimism" is almost the only key ingredient to making a lot of money. Maybe, but critical thinking, also known as negative thinking, prevents plane crashes, hospital deaths, cyber attacks. It prevents permanent loss of capital too.  

True investment genius isn't so much about getting bull markets right. Most do. Oraclehood is conferred only when you get bear markets right.  

That's Buffett’s cloaked edge that nobody told you about. And anybody with that wizardry won't be wasting his time managing your money for 1 per cent per year. 

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The writer is an investor &  founder of GQ FinXRay, an AI company