Breakingviews - Robo-Buffett no longer such a ridiculous notion

Warren Buffett, CEO of Berkshire Hathaway Inc, talks to a reporter in the exhibit hall at the company's annual meeting in Omaha, Nebraska, U.S., May 5, 2018. REUTERS/Rick Wilking

OMAHA (Reuters Breakingviews) - The 40,000 shareholders crowding Omaha’s CenturyLink Center for Berkshire Hathaway’s annual meeting Saturday didn’t come to hear about machine learning or smart beta. They’re here for Chairman Warren Buffett’s plain-speak – and maybe some See’s Candies peanut brittle. That’s probably fine for now. But the idea of a robo-version of the Oracle of Omaha is no longer a ridiculous notion.

As finance and Silicon Valley converge, Buffett’s old-world approach, honed over half a century, seems ever more anachronistic. Giant fund manager Pimco is poaching data engineers. Lazard Asset Management is pushing into “quantamental” strategies combining human stock-pickers with machines. Two Sigma, a $50 billion fund manager with around 1,400 staff, mostly data nerds, is now one of the world’s biggest quantitative funds. Buffett doesn’t even have a computer in his office.

Buffett’s dogged avoidance of that which he claims not to understand has worked to his advantage, mostly. He missed the excesses of the dotcom bubble – though his biggest holding is now Apple, and he increased his stake in the first quarter. And there’s no sign yet the armies of data scientists joining the investment industry will deliver. The Eurekahedge AI index – tracking funds that use artificial intelligence technologies – has made a 9.5 percent annualized return over the past year, compared with 8.7 percent for hedge funds overall. Berkshire Hathaway did twice as well. Over three years, Buffett and the bots delivered the same 10 percent annual return.

The rise of the machines could eat away at one Buffett advantage: the ability to avoid irrational decisions. Being rational, objective and dispassionate – picking wisely but selling only sparingly – is one of the pillars of Buffett’s investing style. His partner Charlie Munger expounds a complex system of human behavioral models, with the idea that if you can avoid the automatic biases and reactions of most people, you can outperform them. Buffett cautions against “getting excited at the wrong time.” That’s consistent with the premise of AI-based investing.

Berkshire has other durable defensive “moats.” Its insurance business provides both long-term funding through premiums and the ability to raise low-cost debt to leverage up Berkshire’s equity investments. The other is pulling power – Buffett’s clout allows him to cut deals other investors can’t, as he did in buying convertible shares in Goldman Sachs – or more recently, nudging chipboard company USG into talking with its unsolicited suitor Knauf. Moreover, he charges no fees to investors and has a tiny staff, with no human resources department.

Computers would also struggle to capture Buffett’s understanding of what makes people tick - a quality much on display in Omaha. Entertaining investors with barbecues, LeBron James and Katy Perry videos, and discounted cowboy boots, appeals to what Munger refers to as “the automatic tendency of humans to reciprocate favors.” It remains to be seen whether that inclination persists once Buffett, 87, and Munger, 94, retire. Even so, loyalty is something an algorithm hasn’t yet worked out how to capture.


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