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Buffett, shmuffett

October 04, 2008 – Comments (5)

Berkshire's pop is driven by the psychological effect of Goldman and GE acquisitions, plus short-covering, rather than by fundamentals. The gain in market cap has far exceeded the actual potential gains on Baffett's investment.

The reality is that it's an insurance company trading at 20 times its operating cash flow. Every year it earns 10-12 billion dollars, mostly from its core insurance operations, and invests them into a handful of stocks chosen by the Oracle. It's a good strategy all right. The problem is that Berkshire is expensive. It's market cap is 214 billion dolalrs. Buffett may be a genius, but, having invested 5% of his market cap in admittedly very good companies, on admittedly excellent terms, he still cannot increase the fair value of Berkshire by more than 3-5%. Even if he sells his GS/GE investment at a 100% profit next week, he will have earned another 8 billion dollars - a pocket change for a 214 billion-dollar company.

I believe we're seeing something of a Buffett personality cult. You might say of course, "yes, there may be a cult, but there is also a personality". True, Buffett has been phenomenally successful. But I think signs are now emerging that the man is turning into a celebrity who makes hisa living by monetizing his reputation. GS and GE - was it a genius decision? Come on, I bought GE several days before Buffett, and GS was also high on my list (I ended up buying some in the $130-s, paying a small Buffett premium). Let's admit it, if Buffett buys Enron tomorrow, the stock of BRK-A will go up and 95% of commentators will say that they see it as an excellent choice, that they did not think much of this company before, but now that Buffett has invested in it, they can see the wisdom of this decision. In other words, we have come to the point where any decision by the Oracle will be met with apploase from the audience. 

Now, I see several troubling things about Buffett's recent performance.  Here is my short list of complaints.

1.  Buffett is making more public appearances than ever. He is hosting bigger and bigger annual shows in Omaha, giving more and more interviews, getting involved in political campaigning, showing up on TV, and seems to enjoy his moment of fame. Serious money tends to be made quietly.

2. Buffett is getting sweetheart deals, which every commentator agrees are only made possible by the eagerness of companies to get Buffett's rubberstamp of approval. This signals to me that BRK-A is becoming a different kind of business, the one selling its leader's charisma. That's clearly an unsustainable trend for any business that is run by two octagenarians, but especially for a business like BRK-A. Insurance companies should simply stay away from the fashion business.

3. Buffett has just bought two financial companies and then lobbied Congress to hand out free goodies to them. The reputation for integrity, which was supposed to be one reason we liked Berkshire, is now gone. After this sort of behavior, I will not be surprised to hear talk of management compensation, options, or new headquarter building on 5th ave.

With BRK-A looking slightly undervalued to fairly valued, it's time for some portfolio rebalancing. There are stocks offering better opportunity at the moment.