I have been discussing with a fellow investor about the merits of Warren Buffett's latest investment. About whether his best days are over and why he does not sometimes stick to the quotes that made him famous instead of apparently sounding more and more like a politician or a media celebrity. This was not a deep discussion and I hardly know anything about Heinz, besides the great taste of its ketchup. The comments below come from the accumulated knowledge gathered through the years.
Warren Buffett is a complex person and many of the things he preached are often taken from a time when his investment style was different than today. His investment philosophy cannot be categorized easily; he is way too complex for that and has opportunistically taken the best out of many investment styles. For all the value fanatics out there remember that he even said himself in his shareholder letters that he considers pointless the whole dividing discussion about value versus growth investment. It is understandable when you think that Philip Fisher, one of the investors who influenced him and Charlie Munger the most, was famous for being the father of growth and technological investments. It is also worth noting that "cigar-butt" investment, the one made famous by Benjamin Graham, was practiced by Buffett mainly in his early days.
Buffett notes that it was an error to buy control of Berkshire, which was then involved in the difficult textile manufacturing business. He admits that he bought the company mainly because it looked cheap, which was a mistake. Buffett said that "unless you are a liquidator, that kind of approach to buying businesses is foolish." He indeed had to act as a liquidator with Berkshire's textile operations, and he apparently did not enjoy it that much. He learned many times over, the hard way, to understand that "time is the friend of a good business and the enemy of a mediocre business." He provides an example on this lesson with Hochschild, a department store company. Buffett bought the company at a big discount to book value. It included hidden real estate value and a large inventory cushion. Initially he felt confident in the purchase, but three years later he felt lucky to be able to exit at a break-even.
The point is that through the years Buffett has continuously evolved — he has kept on learning and polished his investment philosophy. His example fits perfectly with what Charlie Munger said: "In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time - none, zero."
Buffett and Graham are much more complex than what is widely perceived. If you read, for example, Graham's "Memoirs" or Buffett's "Snowball," you will see that they have both been involved in all sort of things, such as:
- shorting stocksAnd so on... If you just read that list, would you a priori think that Buffett or Graham were involved in such activities?
- using leverage/margin
- using banks' cash as well as insurers’ float
- elaborated schemes to minimize taxes
- traded currencies
- bought what seemed to be extremely cheap companies
- bought what appeared to be expensive companies
- boring companies
- had at specific occasions an ultra concentrated portfolio
- were involved in activist investments
- were legally accused of manipulation to buy cheap companies
- practiced short-long paired trades
- bought distressed bonds
- traded cocoa beans
- worked as hedge funds, started without putting their own money
- bought airplane and private banking stocks
- bought technological stocks
- involved in restructurings
- created complex organizational structures
- bought penny stocks
- involved in big legal proceedings
- traded silver
- sold option puts on indexes and specific companies
What counts to me is more what I learned from Buffett through the years. I don't really care as much anymore about what he does. I "coat tail" him only if it makes personal sense. I think that his Conoco Philips investments, both the buying and selling, were done at the very wrong time. There are several things about which I don't agree with him. Specially in politics, political interference on the economy and taxes for the rich. If I could have it my way I would eliminate all taxes, specially to the rich. I'd cut the government size to 5% of what it is now. I would just leave a government in charge of making sure that private property is respected and personal security enforced. I would not allow to keep the status quo of a government whose main task is to legalize the expropriation of goods. I would privatize the issue of money and back it up by gold or a commodity basket, as proposed by Benjamin Graham. I would outlaw central banking and fractional banking while simultaneously really privatize (now they are controlled by the government) and deregulate all banks. I'm pretty sure that Buffett would be completely opposed to those ideas.
On a lighter subject now, regarding Buffett's latest actions: The good thing about Heinz (NYSE:HNZ) is that it still is a good business. Its brand has a powerful mind share, and such an image is almost impossible to take away from the social collective brain unless they really make many errors, for several years. Heinz will now be controlled by Jorge Paul Lemann, 3G's boss. And I trust that Lemann, by observing what he has already done, can continue to create value — like what he did with Burger King or how he built his global beer empire.
Heinz is probably now very different than what it will become in five years, after Lemann's touch. Note that Buffett bought half of Heinz and will have no control in it. It's a not a huge investment for him. He bought that half using debt he recently issued at record low interest rates. He is using historically ultra cheap debt to buy something sustainable with a much higher return than the debt interests. If interest rates go back up, as they should, he can always call back his bonds at a much lower face value.
Note also that Buffett today and since the last 10 years must be more diversified. The main reason is that he is a huge insurer, the biggest maybe in big catastrophe insurance. He indeed specializes, thanks to Ajit Jain, in big cat insurance and reinsurance. That is big one-time catastrophes (hurricanes, earthquakes). As such he cannot afford to be concentrated. Why? Because he is basically using float from insurance premiums to invest in what some may consider "risky" stocks.
That explains a big part of his great returns. He basically has free money, and most times better than free, to invest. That is equivalent to lots of leverage. The flip side to that is that regulators would not allow him to be too concentrated, and for a good reason. The insurance regulatory body considers investing in stocks risky by definition. Buffett knows that he must be ready to put a huge amount of money if a mega earthquake or a huge hurricane comes. And one big cat will come sometime, that's certain. That mere possibility alone forces him to have several readily available billions of cash in his balance sheet to cover the insurance of such a disaster. This situation was not the same 10 or more years ago.
With that said please note that even today, without accounting for his private investments, his portfolio of public stocks is very concentrated. It is hard to find other investors who have a public portfolio more focused than his. Just a handful of stocks compromise 80% of his publicly invested money.
In such a situation no other big insurer would invest as aggressively as Buffett. I guess he cannot afford the luxury of concentrating further. If he did concentrate more and his investments fell, some times all together, during a market crash, and at the same time there was a big catastrophe (I stress that eventually one big cat will come, don't forget) he could find himself in a tight position. And we all know that he does not like to depend on "the kindness of strangers" when he needs money. So he will probably not put himself in such a situation by over concentrating.
Of course he does not talk about this publicly. I do not think he would like to shed too much light on that subject. But if you think about it, this might explain why he currently must be more conservative than in his first days, when insurance was a minor or non-existant part of his investments.
All that I said above was not mean to sound critical. On the contrary, I utterly admire Buffett as an investor. I meant more to highlight how flexible he is and what are the underlying motives that influence his actions. He is the best investor I know; he is the one I have learned more from and to which I owe the vast majority of what I've gained investing.
Disclosure: long Berkshire Hathaway (NYSE:BRK.B)