In a conversation with friend Carol Loomis at the Fortune Most Powerful Women event Monday, Warren Buffett (Trades, Portfolio), CEO of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), spoke out about the increase in investing activistm in recent years, saying he had “zero interest” in participating.
Buffett said a portion of the activism “makes sense, in certain cases,” such as when corporations are mismanaged to the detriment of shareholders. The bulk of it didn’t fit into that category, though, he said.
“The bulk of activism just wants a quick hit. They want the stock to go up next week and at Berkshire I’ve always said we run the company for the shareholders that are going to stay, not the ones that are going to leave,” he said.
2014 continued a four-year trend of increases in publicly active activists, up to 203 from 160 in 2013, while companies publicly subjected to activist demands also reached a five-year peak of 344, up from 291 in 2013, according to a review by Activist Insight.
Headlines have also been dominated by public offensives by prominent head fund managers against major companies, such as Carl Icahn (Trades, Portfolio) with Apple (AAPL, Financial), Daniel Loeb (Trades, Portfolio) with Sony (SNE, Financial) and Bill Ackman (Trades, Portfolio) with Herbalife (HLF, Financial), among many others. The investors have often used traditional media, social media and public correspondence to clash with targets to receive demands such as board seats, break-ups and management changes.
But the companies targeted because they appear undervalued don’t always need the changes activists push for, Buffett said, citing examples from his own investing history.
“The finest companies in America many times are selling at a discount for what they are worth that moment," Buffett said. "When I bought the Washington post company in 1973 – bought stock in it – it was selling at one-fifth of what the properties were worth. Cap Cities at the same time was selling at a fifth of what the properties were worth. They were both wonderful companies. But the whole market was depressed. So any time a stock is selling below what could be realized for it is not a reason to go out and sell the business. The activists want that to happen, and of course they’ve attracted more money for management.”
Buffett saw more money for management and its impact on the funds’ bottom lines as the primary driving force behind the trend.
“[They’re after] Publicity. They’re after results to some extent. And they’re after attracting more money. I mean, these guys get paid very often on something that’s both fee based on assets managed and performance. And if you can get $20 billion under management and you charge 2 and 20, the 20 doesn’t really get to be that important – the 2 is $400 million a year."
“And different styles become popular from time to time, and as soon as they do people rush in to say ‘that’s my style’ so that they’ll attract management."
Ultimately, activism would disappoint investors eager to join the next big trend rather than looking at the quality of the manager, he said.
“When people start assuming good results are attractive with a form as opposed to the ability of the person running it, but they think the form itself will create wonderful results, everybody’s going to take that form,” Buffett said.
“Because there’s a lot of money out there, and they’re willing to pay a lot of very high fees for the promise of performance, and you don’t really have to ever particularly deliver – the promise will last long enough to get you rich and your children rich and your grandchildren rich, so it’s nice if you perform on top of that. Right now, particularly in the last two years, activism is a saleable form, and therefore it gets sold, and Wall Street sells it.”
While profitable for several years, activist hedge fund returns have dulled more recently. The HFRX Activist Index, which looks at more than 70 firms, fell 2.6% year to date, versus 2.97% for the S&P 400 Index, after returning 8.47% in 2014, below 11.4% for the S&P, and 19.2% in 2013 when the S&P gained 29.6%.
See Buffett’s stocks at his portfolio here. Not a Premium Member of GuruFocus? Try it free for 7 days here!
