Meet The Man Who Kicked Warren Buffett's Arse

I'm considering that as my new PR line - like it? I watched part of the CNBC interview with the Oracle from Omaha, and couldn't help but be a bit jealous - and peeved.

This is the same Warren Buffett who admits, in hindsight, to having made some colossal investment blunders in 2008. That resulted in the worst year ever for Berkshire Hathaway, which announced recently that it would make substantial cuts in staffing and production facilities at companies it owns.

He penned an op-ed piece in the New York Times in mid-October extolling Americans to "buy American" (stocks, that is). Now granted, he acknowledged that he was talking long-term; he plainly stated that he didn't know where the market would be a month or a year from the date of his piece. (The S&P was down 28.5% from the date of his editorial to March 6, a span of less than 6 months - and I'll explain why I picked the bottom on March 6, rather than today, momentarily.) Of course, he was jawboning, having made some equity investments himself in the previous days, hoping his sage advice would spur a rally that would make him money.

Me? I just had my best 12 months in the market, ever. To wit:

My wife's rollover IRA is up nearly 60% from just under a year ago. On March 12, 2008, convinced that the decline from the previous October's record highs was the beginning of a full-on bear market of drastic proportions, we sold her diversified portfolio of funds and bought two funds that were essentially leveraged bets that the NASDAQ and the S&P would fall. These funds are structured to return two times the decline in the underlying index. As a hedge, we put a small amount in a one-year bank CD at 3.40% - at the time, even though short-term rates were quite low (the Fed funds target was 3.00%, and less than a week later it was 2.25%), liquidity-strapped banks were paying up for CDs. Today, a one-year CD will earn 1.50%.

As for the significance of March 6, that's when we closed the last of those short positions. We had begun the previous Friday, when the S&P breached its November low, systematically taking 50% out of the funds (my wife's idea). We took a little more than 50% of the remainder out on March 2, when the index fell another 35 points (or about 5%), to just over 700. Then we closed it all out on March 6, since which time it's up about 40 points.

Did we time the exact bottom? Probably not. This is likely a dead-cat bounce we're seeing the last couple of days, and we'll probably get a new low at some point. But who cares? We're certainly closer to the bottom than to where we were last March 12 (1,309) - indeed, if that's not true, the bottom will be S&P 58. Not likely.

On those positions alone, the return was 51% over 51 weeks. Even if we missed the bottom, it's hard to feel bad about that. No point getting greedy, after all.

We'll come back to the IRA later, but for now, let's turn our attention to our daughter's college money. That was invested in a 529 plan in New Mexico. Why New Mexico? Because that state's was the highest-rated plan that would allow us to invest as aggressively as we chose, rather than forcing us to reduce risk as she grew older, like most plans (including that of our home state, Kansas). I didn't want the state to tell me what my risk tolerance was based on my daughter's age, I wanted to be able to time my moves.

In October 2007, knowing that she had less than two years until she started college, and believing that the record highs reached that month couldn't last in the face of the coming housing-bubble-collapse-driven bear market, we moved from the most aggressive stock portfolio in the plan to money market funds. As a result, we didn't lose a dime of her college funds. The money market returns haven't been stellar - especially now, with Fed funds at virtually zero and money market returns around a half-point. But a half-point up is way better than half the balance down.

As for my retirement funds, our choices are more limited. In March of last year - about the same time we made the IRA moves - we moved a deferred portion from a couple of equity funds to bank CDs. As a result, we averted losses of 67% through yesterday on one of those funds, and 45% on the other.

True, both funds were down from their peaks in 2007 - 5% and 12%, respectively. Still a timely move, I'd say.

My 401(k) was down a mere 5% last year. For that money, we moved - again in March - out of a diversified mostly-equity portfolio and into short-term government bonds, which had their best year since 1995. So the modest loss was a function of the equity funds' performance from January 1 through March, when we made the move into bonds.

By December, when the two-year Treasury yield had fallen to its lowest level since trading began in 1975, I figured the rally in short Treasuries was pretty much done - after all, when you hit record lows, and the funds target is zero, how much further can you fall? (Note that bond prices and yields move in opposite directions, so when yields go down, prices go up. The two-year yield fell about a full point from March through the December low, or nearly 200%. So the entire time I was long short-term Treasuries, their price was rising substantially.)

Also, with the TARP passed, a huge stimulus bill being discussed, and more bailouts to come, I knew the Treasury would be issuing huge amounts of debt, with fewer willing buyers - a phenomenon I've addressed at some length on this space - which means higher yields, and lower prices. So in December, I moved out of bonds and into money markets in the 401(k) - again, not sexy returns, but not losses either. Since the December low, the two-year yield is up 38 basis points (a basis point is 1/100 of 1%), or about 58%. So bond prices are lower.

Speaking of bonds, let's go back to my wife's IRA. As we began closing out the short equity positions, we rolled into a bond that shorts the 30-year Treasury bond. This one's leveraged 1.25 times, meaning that if the long bond loses X in value, the fund gains 1.25X.

The long bond yield hit its lowest point in history (the data was first recorded in 1980) last December. From the point we began buying the fund, the yield is up almost a half-point, or about 15%. Our blended return over the buy dates from that time is about 5.5% - not bad for a month and a half.

Again, bond yields and prices move in opposite directions, so a bet against the long bond's price is a bet that yields will go up. The December low was 2.52%, our initial buy-in was at 3.26%, and the current yield is 3.73%. Did we miss the bottom? You bet, just as we missed selling at the top of the equity market in October 2007. But consider this: the average yield on the long bond since 1980 is 7.42% - nearly twice today's yield. Even if you take out the high interest rates of the early 1980s, when then-Fed Chairman Paul Volcker was aggressively raising short-term interest rates to fight inflation, and just count the data from the stock market crash in October 1987, the average yield is 6.30%.

So it would seem the long bond yield has nowhere to go but up. Now, the Fed is going to keep the funds target near zero for a long time. But bond yields - especially long-term bond yields - are going to go up anyway, for a couple of reasons. First, massive issuance is coming to fund our record federal debt, and China's not buying anymore - again, I've harped on this plenty already.

Second, long-term bond yields have an inflation component baked in. And more and more pundits - including Warren Buffett - are climbing on my inflation-risk bandwagon.

So whether the long bond yield hits 6% this year, or two years from now, no matter - this fund will do better over that span, whatever it is, than will equities. (The fund's ticker is RRPIX, fyi.)

Besides outperforming Buffett, Bill Gross, Chief Investment Officer of Pacific Asset Management (PIMCO), who is considered the guru of bonds, missed last year's Treasury rally. I didn't.

So what's my point? Am I just patting myself on the back? Nope. I just don't know why CNBC wants to talk to guys like Messrs. Buffett and Gross when there's somebody out there who's made money - big money - in this market. In his annual letter to Berkshire Hathaway's shareholders, Mr. Buffett made this statement:

"By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game."

Or the flight path of an oncoming jet.

Well, not this winged creature. Sometimes you're the bird, and sometimes you're the jet. I guess I need to get myself an agent.