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What Does the Vanity Fair Article Tell Us About Warren Buffett?

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Geoff Gannon
Jan 12, 2011
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The February 2011 issue of Vanity Fair – the one with Justin Bieber on the cover – has an article about Warren Buffett . The author, Bethany McLean, asked Buffett questions for 11 hours.

Many of Buffett’s answers are familiar to anybody who follows Berkshire Hathaway (BRK.B, Financial). Some of the familiar ones are worth repeating. And there are a few new tidbits as well.

The article is notable for the way McLean sketches Warren Buffett rather than for the facts and quotes she provides.

I was expecting more news.

Buffett doesn’t normally sit down with print reporters. Carol Loomis is an exception.

He’s on TV a lot. Especially live TV. By doing that, he avoids being quoted out of context. Berkshire doesn’t release many statements. So, Warren Buffett is rarely heard in soundbites and quotes that have been edited down. There’s usually a full version of what he said available to the public.

Sitting down for a book or a magazine piece like this is different. The author throws out 90% of what you say. They write their own story around the 10% they choose to keep.

That can be frustrating for the interview subject and for folks who are really, really interested in what he had to say. But it makes for good reading for folks – like Vanity Fair’s readers – who’ve never read an article about Warren Buffett before.

Of course, if you’re reading this article, you aren’t one of those casual Buffett watchers. And you’ve probably heard some of what he said before.

Most of the article is about succession. What happens to Berkshire Hathaway after Warren Buffett dies?

“It would be his worst nightmare to have Berkshire Hathaway split apart after he’s gone.”

That’s Byron Trott – Warren Bufett’s favorite investment banker.

And here’s Buffett himself:

“There is no end point for Berkshire Hathaway. The important thing is not this year or next year, but where Berkshire is 20 years after I die. Not taking care of Berkshire would be like not having a will – cubed.”

That sets the tone of the first three-quarters or so of the article. At the end, the article heads off into a discussion of some criticism of Warren Buffett . That part of the article isn’t interesting for Berkshire Hathaway investors since it’s just about Warren’s op-ed piece, the bailouts, and how he feels about Goldman Sachs (GS, Financial) and Moody’s (MCO, Financial) morally rather than financially.

There are some interesting details even in that part of the article. Bethany McLean has a good grasp of who Warren Buffett is. The 11 hours she spent with him shows in the way she sums up the man:

“And that’s really the key to understanding Buffett’s stance: he’s not there to try to change people. When he supports Goldman and Moody’s he’s not so much ‘talking the book’, as critics contend – trying to inflate the value of his investments – as he is living up to Dale Carnegie’s teachings. ‘Praise by name, criticize by category,’ Buffett says.”

A lot of reporters miss the whole Dale Carnegie thing. Buffett trots it out in almost every long interview I’ve seen. He always says he learned more from the Dale Carnegie stuff than from most of his formal education. And that they should teach it in schools. Basically, the education of Warren Buffett – at least as he tells it – boils down to just his father, Dale Carnegie, Ben Graham, Phil Fisher, and Charlie Munger .

It seems like a silly thing to fixate on. But I was impressed to see a reporter use some of the Dale Carnegie material near the end of the article. It sums up Buffett well.

Just like this quote from Buffett early on:

“When I ask Buffett if all of his businesses are ‘A’ companies run by ‘A’ managers he shakes his head no: ‘There are things where I’ve had to get involved, but I’ve usually done it through other people.’ Buffett tells me. ‘Every time I am later than I should be. It’s the only thing about my job that I hate. I would give up a big percentage of my net worth if I didn’t have to do this. I hate it. Therefore, I put it off and I procrastinate.’”

That could describe so many instances at Berkshire. Now, there are two points to be made here. One is that this is part of Buffett’s personality. He hates confrontation. So he avoids it. It’s a weakness of his.

Fine. But there’s also a second point. Is Buffett’s extreme non-interference good or bad for Berkshire?

I think it’s very good for Berkshire. Not because of the direct outcome. That’s obviously negative. If Buffett doesn’t get involved when he should, that hurts Berkshire.

But, if Buffett is very rarely seen doing anything directly confrontational himself, it helps Berkshire buy businesses. The people who sell you a business don’t care whether it’s optimally efficient. They care whether you’re going to interfere or not. And Buffett doesn’t.

The article points out that Nebraska Furniture Mart has been slow to expand. Which is absolutely true. That’s a model that could easily be replicated a dozen times around the country without any harmful effects on the business. But it might have harmful effects on the family. It might be hard to bring in enough people in positions of real power and delegate authority to them. That might be hard. But rolling out the same stores in say 12 more markets. I’ve never understood why that couldn’t be done tomorrow.

The other example the article cites is NetJets.

Now, I’ve got to be honest here. I never liked NetJets. I never understood why Buffett bought it aside from the fact that: a) it had a wide moat, b) he loved the product, and c) it had the potential for a lot of growth.

Now, that all sounds good, but Buffett knew full well that you could have a, b, and c and still not be a terribly successful business.

For me, NetJets always seemed dangerously capital intensive. The industry is a black hole for capital.

NetJets won. It annihilated the competition. But NetJets would have been annihilated itself if it wasn’t borrowing against Berkshire’s deep pockets.

Here’s what Warren Buffett wrote about NetJets in last year’s shareholder letter:

“Over the years, it has been enormously successful in establishing itself as the premier company in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our dominance in the field remains unchallenged. NetJets’ business operation, however, has been another story. In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this condition.”

Now maybe Buffett did fail Berkshire’s shareholders by letting NetJets descend into that condition. I won’t argue with that. But I think there’s also a more basic problem, a problem that should have been easier to catch.

NetJets’ basic problem is that it only grows through investing more and more capital in the business. And then everybody’s behavior is tainted by the capital anchor they’ve already sunk into the business. That anchor leads to a lot of dumb decision making and a long-term outlook that to me always seemed decidedly mediocre.

Your profits were never going to head skyward while the amount of invested capital stayed the same.

NetJets is the anti See’s Candies.

See’s is a wonderful business that requires no capital to grow in dollar terms. It’s capable of triple digit returns on invested capital. However, it’s almost impossible to grow the business. The See’s name means nothing east of the Mississippi.

To me, it’s this difference between businesses like See’s and business like NetJets that threaten Berkshire’s next CEO.

Some businesses are not execution dependent.

Yes, NetJets went through a tough time and Buffett replaced the CEO, Richard Santulli. That can happen to any company.

It happened to Coca-Cola (KO, Financial). Warren Buffett basically removed Doug Ivester as CEO of Coke back in 1999. Ivester resigned. But that was after Buffett told Ivester he no longer had the backing of Coke’s biggest shareholder.

If you look back at Coca-Cola’s business results circa 1999, you’ll see they were nowhere near as perilous as NetJets.

Is that an unfair comparison?

Of course. There’s only one Coca-Cola.

But it’s businesses like NetJets that will present problems for Buffett’s successor at CEO. And I do worry as Berkshire buys 100% of utilities, railroads, etc. that Berkshire becomes a more execution dependent company.

It requires more management.

Then there’s the investment side. Here, too, I have some doubts. But, first let’s look at the way Bethany McLean explains Berkshire’s future investment arrangement in Vanity Fair:

“If Buffett and Munger don’t find anyone else, Combs could end up alone as C.I.O., but the idea is that he’ll share his responsibility with others. Buffett shows me a draft of this year’s annual report, which says Combs will be paid a salary and a bonus based on any returns over and above the S&P 500 returns; when other managers are hired, 80 percent of their bonuses will be based on their own returns, and 20 percent on the collective returns of the group, in order to encourage cooperation.”

My problem with this approach is that it goes against everything that made Buffett and Munger great. Dividing up the investment duties this way will make Berkshire more like other insurance companies. But Berkshire doesn’t pay out big dividends. It wasn’t set-up that way.

What Berkshire really needs are a few great, big ideas to buy and hold forever. Stocks like Coca-Cola.

This approach just seems like it will move Berkshire more in the direction of mediocrity. It will be more exposed to risks present in the S&P 500.

Those are my fears at least. That some of the defenses provided by business quality around both the businesses 100% owned by Berkshire and the stocks are coming down.

These dangers come from having too much capital. Once you reach a certain size you can’t buy much else besides utilities and railroads. You can’t buy much else besides a portfolio that looks like the S&P 500.

While I enjoyed the article, it did make me slightly less easy with Berkshire’s succession planning. The investment side will end up being a pretty big job unless Berkshire pays out very large dividends. And I don’t like the idea of having a committee of investors.

Maybe each CIO will be assigned his own fief to invest in. But there’s no hint of that in this article. Which means they’ll be overlapping in what stocks they can buy. That makes them a committee.

And a committee makes me nervous.

Of course the worst outcome is merely that Berkshire becomes more like other gigantic institutions.

There’s no reason to think the company or the stock will underperform blue chips generally.

But I still hoped Berkshire might stand apart more even after Buffett’s death.

This article made future Berkshire sound like a less special place than I hoped.

Talk to Geoff About Vanity Fair's Article on [url=http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett]Warren Buffett[/url]

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