Taking Stock: Buffett and Berko

By Malcolm Berko

Dear Mr. Berko:
I am 86 and met you in 1959 when you were with Merrill Lynch, and you were a pretty sharp kid then. I also met Warren Buffett years later, and he was charming and pretty sharp, too. I’m still an active investor and wrote Mr. Buffett to ask what he thinks about this market, its players, all the new derivative products and the Goldman Abacus trade. I always admired him, but I don’t suppose he will answer because he is so busy. So I will put the same question to you.
C.S., Columbus, Ohio

Dear C.S.:
Wow! That’s the first time my name has been mentioned in the same paragraph as Mr. Buffett’s. And I do remember you because we had lunch the day I got fired from Merrill Lynch. Oh, well; getting canned was the best thing that ever happened to me.

When I was at Merrill Lynch, way back then, it was promoting its classy Monthly Investment Plan or MIP. The MIP encouraged investors to make regular commitments of $10, $15, $20 or more in various blue or pale blue chips. The MIP bought fractional shares and reinvested the dividend. Its motto was: “Investigate before you invest.” It gave Americans a feeling of confidence and satisfaction, like being comfortably filled with roast beef. But as Bobby Shafto once said: “Things were so different before they changed.”

Today, the stock market is controlled by “quants,” socially deviant MBAs whose computer programs instantly identify abnormalities in the normal course of price flow that, with the aid of supercomputers, are converted into profit opportunities. Those mega-billion-dollar trades that were wrapped with derivatives distorted the market in scope and duration on the upside as well as the downside. The quant-driven supercomputers generated Big-Bang, microsecond trades using algorithm derivatives based on price momentum rather than fundamentals such as revenues and earnings. Shakespeare’s famous line in “Henry VI,” “(K)ill all the lawyers,” should also include the quants.

This is not a stock market; it’s a colossal and perilous casino in the sky where the averages move 1,000 points in a day. This is not a venue for individuals to invest for their future because 80 percent of the transactions are dominated by hedge funds, insiders, institutional money, billionaire traders and investment bankers. This has become a market in which the masses are born saddled, bridled and ready to be ridden while the privileged few are born booted, spurred and ready to ride. And this is a market in which the privileged (Goldman, Merrill, JPMorgan, Bank of America and others) collectively made tens of billions of dollars last quarter using your tax dollars given to them by the government. And I don’t like it!

So now you know what I think about the market. Thankfully, my 52 years in the business have given me enough insight to dodge most bullets and walk safely between most of the landmines. However, most investors are not that lucky.

Yes, Mr. Buffett is a charming fellow. I know that between 2002 and late 2008, Mr. Buffett used some rather colorful un-Buffett-like language in his denunciation of derivatives. He even compared derivatives to venereal disease. But since becoming an $8 billion partner with Goldman Sachs, he has become a derivative enthusiast. He also approves of the Abacus trade in which Goldman suckered investors out of billions as that derivative based investment tanked. And why not? Mr. Buffett now has a lot of skin in the game. And don’t be mislead by his folksy charm, which, I’m told, is a carefully contrived image that polishes his public persona.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com. © 2010 Creators Syndicate Inc.