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Warren Buffett: Investor or Trader?


Earlier this week we learned that Warren Buffett's Berkshire Hathaway (BRK-A) recently backed out of credit-default swaps (CDS) in the municipal bond market. Berkshire terminated $8.25 billion in swaps that were not set to expire for another five years, according to government filings. The Wall Street Journal says Berkshire's move "raises a red flag," possibly signalling that the Oracle of Omaha is turning bearish on municipalities.

According to Lee Munson, head of Portfolio LLC and author of the book Rigged Money, Buffett is merely looking for a trade. "The dude still has $8 billion of exposure," notes Munson, "so he basically cut his exposure in half." The CDS amount to insurance against municipal bond failure. The idea of reducing exposure now would be to resell the contracts later at a better price. It's a position shift, not a sea change.

The move draws attention to an open secret seldom discussed at the Woodstock of Capitalism or in the more than 350 titles that pop up when you search for "Warren Buffett Value" on Amazon.com (AMZN). Warren Buffett built his legend with Buy and Hold, but his real gift is trading.

It's not just these CDSs that Berkshire is flipping. Last quarter alone BRK completely exited a 7.7 million share stake in Intel (INTC) it had initiated only last year and added to in February. Berkshire also added to Wells Fargo (WFC), sold some DirecTV (DTV), and got long Phillips 66 (PSX). Buffett rhapsodizes about "buy and hold forever," but his company has more than a hint of hedge fund to it.

The man who famously called derivatives "Weapons of Financial Destruction" in his 2002 letter to shareholders is the CEO of a company that lost $700 million on a derivative position betting against the stock market. It's a paper loss on a position Buffett believes will eventually be profitable. In effect the Oracle is short, wrong but confident — none of which you'll hear in his next paean to Cherry Coke.

The greatest trade Buffett has ever made is selling America the image of the avuncular billionaire, making shrewd deals from a mythical back porch in Middle America. It's a persona Munson dismisses as "a bunch of Dilly Bars."

What to take from the CDS reports? Buffett's taken off some exposure, but he's still in the game. This is just a savvy guy betting that the muni market gets worse — but doesn't collapse — over the near term. Everything else is just packaging.

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