Buffett Biographer Alice Schroeder – Buffett Motto Is Do as I Say, Not as I Do

The last few years have been a struggle for investors in Berkshire Hathaway Inc. (BRK/B) Since the March 2009 market low, the Standard & Poor’s 500 Index has risen 80 percent compared with 44 percent for Berkshire, even though crashing stock prices and unprecedented volatility perfectly suited Warren Buffett’s investing style.


Now Berkshire stock hovers at about a 10 percent premium to the company’s estimated $110,000 per-share book value at March 31, 2012, (assuming the overall book value increases in a rising stock market by about $10 billion this quarter) and perhaps below a liquidation price. In essence, the market is placing no value on Berkshire’s prospects.


I believe two basic problems have brought Berkshire to this pass. First, Buffett’s investing record has been underwhelming for the past few years, except for special opportunities linked to his own reputation and relationships. Second, Buffett has lost stature because of the way he uses his role as a public figure. And both of these situations will be difficult to reverse.


As he has for years, Buffett wrote in his most recent shareholders’ letter, covering 2011 results, that he’s not going anywhere anytime soon. This used to give investors comfort; now it has them disconcerted. Buffett also wrote that his unnamed successor will take over “when a transfer of responsibilities is required.” Unless Buffett dies suddenly, this begs the question, “required by whom?” to which the answer is: Berkshire’s board. If the board handles its responsibilities well, then Berkshire stock, already cheap at $122,115, will turn out to be an even bigger bargain with hindsight.


Sweet Deals


During the financial crisis, Buffett cut some very sweet deals that made billions for Berkshire. He bought preferred stock from Goldman Sachs Group Inc., General Electric Co., Dow Chemical Co., Wm Wrigley Jr. Co. (to finance its sale to Mars), Swiss Reinsurance AG, and later, Bank of America Corp. He also made a deal to reinsure 20 percent of capital-starved Swiss Re’s business. He bought Burlington Northern Santa Fe Corp., which investors applauded as a savvy move.


These, unlike stock purchases, were classic “only Buffett” maneuvers, which arose partly from his relationships and reputation -- bringing home how dependent Berkshire was on Buffett’s deal-making ability at this crucial time.


Meanwhile, many of Buffett’s major stock picks for the past five years, like Johnson & Johnson, Kraft Foods Inc., ConocoPhillips, and Wal-Mart Stores Inc. have been lackluster.