In one sentence: Phil explains why 13F filings show only part of a hedge fund's picture (short positions are not reported) using the market-neutral "pairs" strategy, argues that real hedging is knowing value against price, and starts reading Berkshire's 13F to show why a guru's list needs filtering.
Key ideas
- What 13Fs leave out. Large managers report what they own, not what they have sold short. Phil says that may be half a hedge fund's book, so the visible list can mislead. [02:00–03:30]
- Short selling, in one example. Borrow shares, sell at $175, buy back at $100, return them and keep the difference. [03:00–04:00]
- Market neutral pairs. Buy the company you think is better in an industry and short the one you think is worse (the hosts use McDonald's and Sonic and say it's an illustration, not a view). The idea is to make money whichever way the market moves. [04:00–07:00]
- It is hard and can go badly. Danielle points out that losses on a short are theoretically unlimited. Phil's example: a takeover bid lifts the short side 50% while the long side falls 5%. He does not do this because valuing even one company is hard, and pairs need two right answers. [07:00–09:30]
- The market's setting at the end of 2017. Phil says that by historical measures stocks are expensive, held up partly by low interest rates, and that people are pushed into stocks and dividends because bonds pay nothing. Bitcoin is his sign of the speculation. [09:30–11:00]
- Hindsight about Bitcoin. Phil and Danielle disagree on whether it was reasonably predictable early. Danielle: the outcome was luck, as hundreds of coins failed. Phil: informed people could have thought it would survive, but "how do you figure out what it's worth?" is the catch. He says this is pure speculation. [11:00–14:30]
- A market is not an investment. Futures exchanges and banks making a market in Bitcoin make it tradable, but they would make a market in weather or horse races. "The fact that you can do it doesn't mean you're actually investing." [14:30–16:30]
- Two meanings of hedge. Buffett says Graham was the first hedge fund manager though Graham didn't short. Being hedged means knowing there's a big gap between value and price. Phil's version: "you've got reality and the market has an irrational picture of price". [16:00–17:30]
- Phil's curated guru list. His site's list has 46 managers he thinks invest in the Rule #1 style. Alan Mecham of Arlington Value Capital is the example: a young manager who had a positive return in 2008 without shorting, by holding cash and buying out-of-favour companies with a margin of safety. Figures are as Phil recalls them. [17:00–21:30]
- Why Buffett can't sell easily. Buffett's size and visibility mean selling a big long-held position such as Coca-Cola would itself send a signal, so you need to understand each manager's constraints. Index funds sell mechanically. [21:00–23:00]
- Reading Berkshire's 13F takes filters. Two portfolio managers (Todd and Ted, whose names Phil half-remembers; Todd Combs and Ted Weschler) run about $20 billion of the roughly $160 billion, which explains the long list of small positions. Combined positions (four airlines each at about 1.4%) add up to the sixth-largest holding. [23:00–26:30]
How it maps to RuleOne
- This is the cloning half of Radar: 13F buys are useful but incomplete (no shorts, up to 45 days stale), and you must apply the filters Phil lists: industry, combined category and percentage of the portfolio.
- The screen is long-only. It makes no pairs or shorts, and nothing here suggests it should.
Buffett, Munger and Graham links
- Graham's partnership and Buffett's account of it ("The Superinvestors of Graham-and-Doddsville", 1984) are what Phil is pointing to when he says Graham was a hedge fund manager without shorting.
- Margin of safety: Graham, The Intelligent Investor, chapter 20. Mecham's 2008 result is Phil's illustration, which is his account, not a verified record.
- Berkshire's multiple managers are described in Buffett's later letters (the hiring of Combs and Weschler).
Words to know
- Short selling: borrowing shares, selling them, and hoping to buy them back cheaper.
- Market neutral: a long/short pairing that tries to profit regardless of market direction.
- Hedge fund: a private fund, typically using shorts or leverage. Buffett's usage means being protected by value versus price.
- Combined position: several holdings in one industry added up.
Try this
On Dataroma or a similar free site, open Berkshire Hathaway's 13F. Group the holdings by industry and total each group. Write which category is really the largest, and compare it with the largest single ticker. Then check one of the top names on /stock/TICKER/ for its moat and margin of safety.
Check yourself
- Why can a 13F mislead about a hedge fund?
Answer
It doesn't include shorted companies, so you see only the long side. - How does a market-neutral pair make money?
Answer
It buys the better company and shorts the worse one in an industry, so the gap between them pays off whichever way the market goes, if the picks are right. - What's Buffett's sense of "hedged"?
Answer
Knowing the business is worth much more than the price you're paying, which protects you against the market's irrational prices. - Why does a long list of small Berkshire positions look un-Rule-#1?
Answer
Part of it is two other managers' money and part is combined positions in one industry, so the portfolio is more focused than it first appears.
Short quotes
"Just because there's a market doesn't mean it's an investment." (Phil, paraphrased from ~15:30, auto-transcribed)