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NewAlchemist (69.13)

Top Arguments Against Buffett's Berkshire Hathaway

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March 20, 2013 – Comments (9) | RELATED TICKERS: BRK-B , GS

Last week 16 Fool analysts revealed their top 2 holdings.  Berkshire Hathaway came out as the most widely held stock.  I am here to offer a contrary point of view.

Buffett has amassed an unbelievable record of growing a business into an Empire.  From 1965-2012, Berkshire has a compound annual gain of 19.7% per year in book value compared to the S&P 500’s 9.4% gain per year.  That’s a 586,817% gain compared to a 7,433% gain!  This record of success might never be duplicated again and certainly not at Berkshire.  Buffett can’t manage this company forever, he’s currently 82 and Charlie Munger is 89.  The problem is that the average American male life expectancy is around 75 years depending on your source.  If you are 25 to 35 and plan on holding for the long term, understand that the vast majority of Berkshire’s future will be in somebody other than Buffett’s hands.  You aren’t betting on Buffett you are betting on Todd Combs, Ted Weschler and Ajit Jain.  His hand-picked successors might very well turn out to be great managers but the odds say they won’t be anywhere near as good as Buffett.

Last year Bill Gross pointed out part of the secret sauce that made Berkshire so successful.  If you’ve ever read a Buffett letter to shareholders he goes out of his way to positively highlight his float from GEICO and other insurance subsidiaries.  Bill Gross called it “free float”.  In layman’s terms customers pay their GEICO bill today and GEICO pays out claims tomorrow (if ever).  In the meantime Buffett is investing the money and it isn’t chump change.  In 2012 Berkshire’s float was over 73 billion dollars.  His insurance float is the opposite of borrowing money and is more like getting paid free temporary money.  In a zero interest rate environment this advantage is negated, in a 7% interest world Buffett has a huge advantage.  Free float plus sound investment decisions have acted as a compounding machine making Buffett one of the world’s richest people.  Maybe coincidence but so far Berkshire has trailed the market under a zero interest rate policy.

Size Matters.  There are advantages and disadvantages to running a 250 billion dollar company.  On the plus side Buffett gets to meet with the President and top CEOS.  He gets to buy entire companies and run them autonomously without angry boards and angry shareholders complaining about short term performance.  People call him directly and offer him sweetheart deals as Goldman Sachs did in 2009.  Buffett also has immediate access to CNBC to promote his views.  Some people will buy a stock just because Buffett bought it creating a Buffett put.

The big negative to running a huge conglomerate is that it limits his investment universe.  Buffett is handcuffed in what he can and can’t buy.  Berkshire is so large that smaller stocks and smaller positions won’t dent performance.  In the past Buffett said that if he had less money he'd run Berkshire completely differently by owning smaller companies that were more undervalued than his current holdings.  This makes the Berkshire successors’ jobs that much more difficult.

Buffett himself isn’t as optimistic about Berkshire’s future.  On page 3 of most recent letter to shareholder he shares this prediction,

Charlie and I believe the gain in Berkshire’s intrinsic value will over time likely surpass the S&P returns by a small margin.  We’re confident of that because we have some outstanding businesses, a cadre of terrific operating managers and a shareholder-oriented culture.  Our relative performance, however, is almost certain to be better when the market is down or flat.  In years when the market is particularly strong, expect us to fall short.

Whenever somebody has anything but praise for Buffett the Buffett-ites come out and smear the speaker.  I am not a hater, I own small stake in Berkshire that I’d like to sell out of in an opportune time.  I don’t have any other exposure to the financials so it might not hurt holding some BRK-B in the short term.   I also have a personal preference to companies who pay dividends for a number of reasons but I am willing to make exceptions.  If you needed income and owned Berkshire in a taxable account you would have to sell shares creating a taxable event.  Some might point out the obvious cure to the problem - never sell shares - but that's not always a reality for working people that aren't millionaires and billionaires.

Berkshire has trailed the market in 3 out of the last 4 years.  Buffett himself only expects to surpass the market by a small margin.  Would a 25-35 year old Buffett invest in Berkshire?  Of course not and he’s said in the past that if he had less money he’d manage his money completely differently.

With investing you want to invest for the future not the past.  Buffett made his money and created his legacy.  The people that invested with him early on made a lot of money.  A 2013 long-term Berkshire investment is more of a bet on his successors than him.  There is a decent chance that you’d be better off owning a low cost broad market index fund (that pays dividends) than owning the mega conglomerate Berkshire Hathaway.

 

 

 

 

 

 

 

 

 

 

9 Comments – Post Your Own

#1) On March 21, 2013 at 10:55 AM, L0RDZ (81.89) wrote:

I'm not  a  B   fan...   I  think  he's  actually  the biggest  hippo crit.....   and I spelled  it  like that on purpose.

I'm  tired  of   listening to  all  the excuses  and  what  if's

How  he  could  or  would  be  better  had  he  simply  not  had  been  held  down  by  all  the  billions  and billions of  dollars...

You'd  figure  someone  with  so  much  would  have  retired  much sooner  and   maybe  would  share  his  fortune and luck.

But all I see  is  materialistic  greed,  not  in  bling  or  having  the  best  of  clothing,  but  greed  in   wanting  to  continue to impose  his  philosophies  upon  others  who  maybe  don't  have armies  of   accountants, lawyers,  analysts,  and servants  to  provide  him  his  advantages.

I'd swear  I'd  probably  die  if I was  to hear  him actually  pick up  the check  and  write  his uncle  sam  a   thank you  check.

Or  maybe  call  a  Lord  who's  maybe  down on his luck  and  was  to   throw  around  some  of  the money  he  was  blessed into  taking.

 

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#2) On March 21, 2013 at 11:35 AM, honkonbobo (< 20) wrote:

"With investing you want to invest for the future not the past.  Buffett made his money and created his legacy."

He also built a diversified fortress of a business that will reap the benefits of his work for long after he is gone.  Why wouldnt a 25-35 year old want to own a part of that?

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#3) On March 21, 2013 at 12:07 PM, NewAlchemist (69.13) wrote:

honkonbobo,

Most people own Berkshire because of Buffett and his long record of success.  Buffett won't be managing Berkshire forever, and even he only predicts slightly outperforming the market.  So in the good scenerio you slightly outperform the market, in the bad scenerio what happens?  What happens if there are a few horrible natural disasters he's insuring against, or if his derivatives go wrong?  If you want diversification what is more diversified than a broad market index fund? 

If an index fund isn't for you why would you want a stock that might only slightly outperform the market with more risk than the market?  

Will Berkshire go up over time?  It should but so should the broad market.  The broad market index fund will also pay dividends.  Most 25-25 year olds are not independently wealthy.  They might need their investment capital some time in the future.  That would require selling shares and paying taxes.

"But Buffett shouldn't pay dividends because he's a better capital allocator than I am".  OK.  If you don't want the dividends then just keep your shares in an IRA and use a DRIP program or buy more shares when he pays a dividend. 

If you are a young investor you aren't investing in Buffett but a huge conglomerate that will be run by Todd Combs, Ted Weschler and Ajit Jain.  The company can't just be run on auto pilot and his managers already show different style.  Do you think Buffett would have made a huge investment in DirecTV?  This stock pays no dividends, has more risk than the market and according to Buffett has limited upside.  There are better options.

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#4) On March 21, 2013 at 2:31 PM, reddingrunner (95.12) wrote:

these are the top arguments against?  hmmm, maybe i should look more closely at Berkshire.

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#5) On March 21, 2013 at 2:43 PM, reddingrunner (95.12) wrote:

I used to be a pastor and I was always amused by the argument that Jesus was a great guy but his disciples came along and ruined it all after He was gone.  It assumes that when it came to choosing his successors, Jesus was a lousy judge of character.  Likewise, this argument assumes that Buffet is not a good judge of investment talent and probably chose people who will prove to be average or worse.

Which index fund are you confident will beat BH over the next ten years with less risk? 

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#6) On March 21, 2013 at 4:12 PM, NewAlchemist (69.13) wrote:

reddingrunner,

There is a Buffett premium.  Last year he was diagnosed with state 1 prostate cancer and shares of Berkshire immedietly took a hit.  When he retires (voluntarily or involuntarily) the stock will take a hit.  Warren would probably tell you that's a good buying opportunity but a lot of people will jump off the wagon.

It's not that his successors will be bad but they have a harder job than he did.  This isn't 1965 and they aren't managing 5 million dollars in investments.  They are taking billion dollar positions in stocks and buying entire companies.  They already appear to have differences in style by buying a company like DirecTV.

 What index fund am I confident will beat BH with less risk?  

I don't like the question.  Berkshire has limited upside and a lot more risk than the market.  Beta is not a measure of risk.  Berkshire might decline less than the market on down days but that does not make it less risky.  What happens if a few mega hurricanes, earthquakes, or tornados hit?  We've had less hurricanes than predicted over the last 7 years or so.  What happens if the derivaties go wrong?  What if you want more Tech or Foreign exposure?  I also find it interesting that he's trailed the market 3 out of the last 4 years under ZIRP.  What happens if rates stay low longer than people think ala Japan?

Berkshire might outperform the market but from a risk adjusted perspectivei it's not worth it.  From a practical standpoint it's not worth it for most people either.  "Never sell your shares" sounds great when Buffett says it but that's not practical for most working people.  

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#7) On March 21, 2013 at 4:39 PM, Mega (99.97) wrote:

Shareholders having control of when to take capital gains is better than not having control of dividends. Arguing against that is like arguing against gravity or the sky being blue.

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#8) On May 09, 2013 at 3:34 PM, JohnCLeven (74.60) wrote:

I can't think of anything less risky than buying a piece of a diversified collection of solid operating businesses, that consistently gorw and funnel excess cash into consistently successful new investments, selling at 1.3 or 1.4 x book value. Standard Oil did quite after Rockefeller, and so too will Berkshire after Buffett/Munger. 

Berkshire's upside may be limited, but your downside, in a long term scenario, is virtually guaranteed to be in the mid single digits, at least.

Berkshire may not outperform (although I think it probably will outperform) but you odds of experiencing permanent loss of capital are as low as you will likely see in any investment. 

p.s. look at DTV's buyback history over the past 7 or 8 years.

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#9) On May 09, 2013 at 3:35 PM, JohnCLeven (74.60) wrote:

grow*

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