Warren Buffett looked confident and gracious when he invited hedge fund manager Doug Kass to join a panel and ask questions at Berkshire Hathaway Inc.'s annual meeting on the weekend. Mr. Kass is a notable bear on Berkshire Hathaway, having sold the stock short in an effort to profit if the shares fall – so his question was unlikely to flatter.
Apart from the noble optics and the desire to spice things up, Mr. Buffett was also acting on a belief that investors perform better when their assumptions are challenged, his own included. But it is unlikely that Mr. Kass will take Mr. Buffett's game up a notch.
While hearing different opinions is good in theory, the extent to which we act on these opinions is unclear. Unfortunately, the harshest critic we can face in the investing world is likely not a person at all, but rather the objective numbers that describe our performance.
In the case of Mr. Kass, he certainly gave Mr. Buffett a bigger challenge than some of the usual lobs sent his way. He asked how Mr. Buffett's son, Howard, is the most qualified person to be chairman of Berkshire when the senior Buffett is gone. And, whether Berkshire Hathaway's habit of buying "pricier and more mature businesses" doom it to lower future returns.
But the questions failed to rattle Mr. Buffett, who concluded: "You haven't convinced me to sell the stock yet, Doug."
Indeed, Berkshire Hathaway's performance numbers are probably too strong to accept much criticism in any serious way. As blogger Jeff Matthews, who attended the annual meeting, put it: "It is, of course, a very good year for Buffett to include a short-seller on his panel, because so very little has gone wrong for Berkshire lately."
The share price alone has risen more than 33 per cent over the past year, beating the S&P 500 by 13 percentage points after you factor in dividends (Berkshire pays none). How do you criticize that?
But as Jason Zweig suggested in his excellent Wall Street Journal article on Mr. Buffett's decision to include Mr. Kass at the annual meeting, strong performance can overstate our abilities as investors: "When markets are around record highs, as stocks and bonds alike are today, those rising prices inevitably lead to overconfidence and complacency."
So kudos to Mr. Buffett for playing host to criticism – but you have to wonder if his confidence to face such criticism is in fact a sign of too much confidence.
Criticism is far more potent when the performance numbers no longer flatter. Poor performance is unlikely to hit Mr. Buffett in his lifetime, at least for long. But it hits just about everyone else.
For individual investors who can't call in Mr. Kass at such times, the best bet is to stick to a plan – one that incorporates a strict breakdown of asset allocation. When stocks rise, the plan will beckon you to sell in order to maintain your allocation to equities. And when stocks fall, the plan will beckon you to buy. All you have to do is listen.