Billionaires Dumping Stocks...

Are we climbing a "wall of worry" or are we in store for a big stock market drop?  Only time will tell -- but here is an interesting article about some big names who have been selling into the stock market rally.


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Despite the 6.5% stock market rally over the last three months, a handful of billionaires are quietly dumping their American stocks . . . and fast.

Warren Buffett, who has been a cheerleader for U.S. stocks for quite some time, is dumping shares at an alarming rate. He recently complained of “disappointing performance” in dyed-in-the-wool American companies like Johnson & Johnson, Procter & Gamble, and Kraft Foods.

In the latest filing for Buffett’s holding company Berkshire Hathaway, Buffett has been drastically reducing his exposure to stocks that depend on consumer purchasing habits. Berkshire sold roughly 19 million shares of Johnson & Johnson, and reduced his overall stake in “consumer product stocks” by 21%. Berkshire Hathaway also sold its entire stake in California-based computer parts supplier Intel.

With 70% of the U.S. economy dependent on consumer spending, Buffett’s apparent lack of faith in these companies’ future prospects is worrisome. 

Unfortunately Buffett isn’t alone.

Fellow billionaire John Paulson, who made a fortune betting on the subprime mortgage meltdown, is clearing out of U.S. stocks too. During the second quarter of the year, Paulson’s hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase. The fund also dumped its entire position in discount retailer Family Dollar and consumer-goods maker Sara Lee.

Finally, billionaire George Soros recently sold nearly all of his bank stocks, including shares of JPMorgan Chase, Citigroup, and Goldman Sachs. Between the three banks, Soros sold more than a million shares.



Read more here:
http://www.moneynews.com/MKTNews/billionaires-dump-economist-stock/2012/08/29/id/450265

Buffett, Leverage, Beta, and Risk (AQR)

Pensions & Investments (P&I) published an interesting article about hedge fund AQR's research about Warren Buffett's success.  AQR says that Buffett's success comes from the usage of leverage on low-beta and high-quality stocks -- along with good risk management.

In particular, P&I reports:




For the 35 years of data studied, controlling for standard equity market factors such as company size, momentum and value did little or nothing to explain Mr. Buffett's success. However, controlling for low-beta stocks and high-quality stocks (defined as companies that are profitable, growing and paying out dividends) — when applied to systematic portfolios AQR designed to simulate Mr. Buffett's investment style — did manage to account for the bulk of his outperformance, according to the paper. 

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Betting Against Beta

led a growing number of money managers to launch low-volatility or managed-volatility strategies in recent years: that a portfolio of stocks with bottom-quartile beta can match or exceed the returns of the broader market with only a fraction of the volatility.

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 “betting-against-beta” version of that factor — which involves going long and leveraging low-beta assets while shorting high-beta assets — can produce “significant risk-adjusted returns.”

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AQR's argument that Mr. Buffett takes on considerable risk, meanwhile, isn't incorrect if the context is modern portfolio theory's definition of risk as a function of volatility, noted Mr. Hagstrom. However, Mr. Buffett would likely opt for his own context and argue that buying high-quality, safe stocks at low prices effectively reduces his risk rather than increases it, he added.

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Leverage, Risk & Return

With leverage a dirty word for many pension executives struggling with crisis-level funding gaps, the fact that Mr. Buffett is “a very big user of leverage” should serve as a reminder that the returns he enjoys aren't possible “without taking a lot of risk,” Mr. Kabiller said.

One period exemplifying that willingness to take — and bear — risk was mid-1998 to Feb. 29, 2000, the final stage of the Internet bubble, when Berkshire's stock price dropped 44% even as the broad Russell 3000 index was climbing 26%, according to AQR.

Diversified Investment Vehicle

Mr. Kabiller said Mr. Buffett's skill in structuring Berkshire Hathaway as an investment vehicle may be almost as important as his skill in making specific investments. In particular, the company's insurance affiliates accrue premium payments years before the policies pay out, strengthening Mr. Buffett's ability to maintain leverage in environments where less deep-pocketed investors would have to resort to fire sales, he noted.

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Access to Capital / Funding

... Mr. Buffett's “low-cost insurance and reinsurance businesses have given him a significant advantage in terms of unique access to cheap, term leverage.”

The float from that insurance business has provided, on average, 36% of the funding Berkshire Hathaway uses to lever up its portfolio, at a cost AQR estimates at more than three percentage points below the average T-bill rate.

Read more here:
http://www.pionline.com/article/20120820/PRINTSUB/308209983