Buffett (Not) Related to Recent Fraud

Though not before significant (and possibly total) losses to some investors. the SEC just reported that it caught a fraud early--something its workers should take great pride in.

The story, in short, is that a supposed international real estate firm claimed Buffett as an honorary chairman and Credit Suisse as a significant investor. These two names were enough for many people to invest substantial amounts of money with the company.

As one of the victims stated, "My analysis was that if IRH was good enough for an investment and endorsement by Warren Buffet[t] it was good enough for me."

The one hundred grand that this guy invested, along with hundreds of thousands of dollars of other victims, was wired to the Philippines--and the US government is hoping to get it back. The full story, including a statement by Buffett about his non-relation to the firm, is here.

Why mention it at The Guru Five? While wrong, I found the thinking behind the victim very interesting, because what he stated is remarkably similar to the process of many investors in choosing stocks owned by Berkshire or other investors.

You may have heard something like this before: "If Burlington Northern is good enough of an investment for Warren Buffett, it is good enough for me."

Now, investors can know with a great deal more certainty whether Buffett is actually invested in BNI, or Heebner in Morgan Stanley, and so on, but there are still serious problems with this type of reasoning.

The biggest problem results from the fact that the above investor "drops the context"--meaning he ignores the reality that the ongoing cash flow stream, other portfolio companies (which may or may not serve as hedges that offset a weakness in the business), and knowledge are going to be different in each case.

What is proper for one investor to hold, may not always be proper for another to hold.

Perhaps there are safer investments, with more upside, for the investor managing a smaller sum of money. Perhaps the super-investor is hedged via instruments or positions that aren't required to be reported. And perhaps the investment that another great investor picked isn't as safe for a person who knows nothing about it (and will act vastly different in light of new data, usually with horrible results).

In life, as in investing, thinking independently is a good thing. And, as the returns of some of the investors profiled here show, it is a virtue that (over the long term) is usually rewarded handsomely.