Warren Buffett's assertion last week that he basically didn't have a clue why his deputies had invested in Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) puts into perspective how little the financial experts really know about the stocks they recommend or actually buy and sell.
The story began when Berkshire Hathaway, controlled by Buffett, reported its 2017 results last month, revealing that in the fourth quarter it had taken a substantial position in Teva, buying a 1.8% stake in the troubled Israeli pharmaceutical company for $385 million.
In the immediate aftermath of the news, Teva's share price was up an astonishing 13% as investors decided that the "Oracle of Omaha" had seen something they had clearly missed. The fact that Buffett had just set up a healthcare venture with Jeff Bezos and Jamie Dimon, designed to lower healthcare costs, persuaded many that Teva was all part of this plan.
The analysts, financial media and professional stock-pickers and fund managers who pushed the share price up so dramatically all jumped to the mistaken conclusion that Buffett personally, rather than Berkshire Hathaway senior executives, had invested in Teva.
The analysts speculated that Buffett believes in Teva CEO Kare Schultz's ability to revive Teva. US financial pundit Jim Cramer, after heaping scorn on Teva as a "second rate generic company" and the "worst of the worst" told us that, "It makes me say reopen that file, maybe they have more than we thought. Buffett does not approach any large buy lightly."
Except that, we soon learned, Buffett does not approach every Berkshire Hathaway investment at all. When CNBC interviewed Buffett last week about his healthcare venture and asked him if Berkshire Hathaway's investment in Teva tied in with this plan he said that that would be, "the last thing on my mind." Buffett added that he had no idea why the position was taken. He said that one of his investment deputies bought Teva and the investment deputy didn't tell him and won't if he sells it. Still, perhaps Buffett's deputies are hand-picked, seasoned professionals with the Midas touch of their boss.
Nevertheless, what is most worrying here goes well beyond Buffett and Teva and to the very heart of stock market investment decisions.
Israeli Nobel Prize Economics laureate Daniel Kahneman in an essay entitled "The Illusion of Stock Picking Skill" in the book "Thinking Fast and Slow" laments that an entire industry is built around an illusion of skill. He cites research studies that most alarmingly found that individuals would do as well to stick a pin in stocks and then invest in them, rather than to pay hefty management fees to the skilled professionals who actually choose their investments.
Kahneman attributes this to the innumerable imponderables that make any stock investment a gamble. But in this instance, the "imponderable" was the fact that Buffett had not personally decided on the Teva investment. One might have thought that in their research over the years at least some of the experts would have obtained the information on how Berkshire Hathaway and Buffett operate when it comes to investment decision making.
Published by Globes [online], Israel business news - www.globes-online.com - on March 2, 2018
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