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The Truth Behind the Warren Buffett Trading and Investment Strategy May Surprise You

Warren Buffett
Warren Buffett

Warren Buffett is positioned as the single biggest proponent of value investing and buy and holding–accurate or not.

Like Sir Galahad, he has achieved his real Holy Grail, and I am the first to salute his immense success. However, can you achieve what he has via insurance companies and arcane tax advantages? No. He is the classic exception to the rule.

There is only one Buffett.

Unfortunately, many mistakenly assume Buffett is the simple buy and hold investor:

“Honey, Warren made all of his money holding Coke for 40 years!”

Uh, his $60+ billion net worth is far more complex than that.

For example, Buffett was once against financial derivatives:

“‘Things are less lucrative in the stock market. We have more money than ideas,’ he said, adding that 6 percent to 7 percent was a fair rate of return in the current environment. The company has more than $37 billion in cash to invest. One place the money certainly won’t go is derivatives. ‘There’s no place with as much potential for phony numbers as derivatives.’ Buffett’s billionaire vice chairman, Charlie Munger, couldn’t resist chiming in. ‘To say that derivative accounting is a sewer is an insult to sewage.’”

Sixteen days later, Buffett changed tune:

“Berkshire Hathaway Inc. announced today that it has sold $400 million of a new type of security, named ‘SQUARZ,’ in a private placement to qualified institutional investors…‘Despite the lack of precedent, a negative coupon security seemed possible in the present interest rate environment. I asked Goldman Sachs to create such an instrument and they responded promptly with the innovative security being announced today,’ said Warren Buffett.”

If Buffett was forthright at first, what made him change two weeks later and create an instrument so complicated and secretive not even his press release could explain it? Even more confusing is that Buffett contradicted himself a year later, lambasting with vigor his financial Frankenstein creation:

“Derivatives are financial weapons of mass destruction, carrying dangers, while now latent, are potentially lethal…We view them as time bombs, both for the parties that deal in them and the economic system.”

In 2008 the Warren Buffett investment strategy was again trading derivatives, and helping to promote government bailouts. Still today, in 2017, his firm maintains massive derivative positions. The Warren Buffett Trading legend of value investing or buy and hold as his strategy to make billions has permeated the public consciousness with books by the literal dozens. And when he launches a new derivatives strategy against his legend, no one talks.

Long-time fund manager Michael Steinhardt was the exception: “[Buffett] is the greatest PR person of recent times. And he has managed to achieve a snow job that has conned virtually everyone in the press to my knowledge…and it is remarkable that he continues to do it.”

Warren Buffett is an investing icon and deserves high praise, but unlike trend following, where there are examples of multiple trend following winners, there is only one Warren Buffett. It makes you pause. Is he the sole survivor?

A few years back, I sat down with a trend trader. He has a 30-year-plus track record making on average 20 percent a year. The topic of Warren Buffett came up. While he was very respectful of Buffett, he was bewildered how some could call his trend following trading luck, but those same people could see Buffett as skilled.

This trader pointed out the thousands of trades he has made. He noted his trend-trading peers also produced thousands of trades over decades. He saw it more logical to make an argument for Buffett’s success much more connected to luck given the relatively few leveraged trades that helped make him so astronomically wealthy: Coke, Gillette, American Express, Goldman Sachs, and Wells Fargo.

But give Buffett credit for this direct point about drawdowns: “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”


1. Since 1980 Berkshire Hathaway has had drawdowns of −51%, −49%, −37%, and −37%. In addition, Charles Munger Partnership dropped −31.9% in 1973 and −31.5% in 1974.

2. Buffett’s shady trading behavior is not new (PDF).