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

March 20, 2012 | About:

Buffett’s biographer scorned is out with another article on the man who helped fatten her bank account.

Alice opines that the reason that Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)’s shares are so cheap is due to:

1) Buffett’s investing performance over the past few years being underwhelming.

2) Buffett losing stature because of the way he uses his role as a public figure.

Predictably most of the article does not portray Buffett very favorably.

I understand that Alice has had her feelings hurt by the way Buffett reacted to the publication of “Snowball,” but I sure wish she would let it rest. Like every other human on this planet Buffett isn’t perfect, but since he is going to leave about $50 billion or more for the betterment of society I don’t think he is so bad.

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.

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Rating: 3.6/5 (11 votes)


Jrwoocher - 5 years ago    Report SPAM

Excellent article.


Joliveras33 - 5 years ago    Report SPAM
This is comment in Bloomberg. I think it's brilliant:

spirach2 3 days ago Collapse

Wow. Where to begin?

You claim Buffett's "investing record has been underwhelming for the last few years."

Then, in the next moment, you admit it's actually been very good, but only because of 'Special Opportunities,' which we should discount somehow, because it was only Buffett's 'stellar status' that allowed him to make those deals.

In the next second, you tell us that the other 'big problem' with Berkshire right now is that "Buffett has *lost stature*" because of his statements on taxation and other public policy issues.

So, BRK's awfully cheap (you said so), except that it's a lousy investment now because Buffett doesn't know how to invest any more, except that his recent results have actually been very good, except that we should *ignore* all the good results, because they only came from Buffett's 'special status,' except that Buffett *has* no status any more, because he's frittered it away by expressing his opinions on matters of public policy.

So that's why BRK's a lousy investment now.

(Sorry, I'm pausing to scratch my head for quite a while after just your first three paragraphs.)

Let me take another crack at it:

So, Buffett's investing results in the last few years have been excellent.

He's made Billions for shareholders with the Preferred deals with GS, GE, Dow, Wrigley, Swiss Re, and BAC.

He'll most likely make even *more* Billions with the warrants obtained in those deals.

He's made a *Mint* on the Burlington deal, which has probably added something like $20B of value to BRK in just the short time since the deal was concluded.

But you say we should *ignore* ALL those results, since he only was able to make them because of his legendary status and reputation --even though those deals will continue to flood BRK's coffers with additional Billions for many years to come-- and only look at his common stock purchases in the period.

His *biggest* stock-purchase by far, in this period, is his IBM buy. This has *already made BRK over $2B in the few months since it was done.

But you somehow attempt to portray it as a failure, because, in your words, "it got only a yawn."

*You* may be yawning, Alice. Nobody else is. IBM's up about 25% (or close to that) since Buffett's buy. If anything, he looks like a genius right now.

You contrast it with his famous KO purchase of the 80's. It's difficult to tell *what* you're thinking here.

They're actually very similar. Both were huge open-market common-stock buys of boring, established, 'mature,' mega-caps considered by most to have seen their best days.

Both were derided as 'overpriced.'

KO, of course, turned out to be a monstrous home run for BRK, as Buffett foresaw the coming explosion of international growth that no one else did --and IBM looks, already, like it may be a gigantic home run as well.

So, your point, as best I can make it out, is that we should *ignore* the gigantic profits he's made on the Preferreds, *ignore* the even larger profits he's making on the Warrants, *ignore* the truly Gigantic gains he's made from Burlington, *ignore* the massive gains he's *already* made on IBM...

... and only look at a handful of *much* smaller stock investments he's made that haven't worked out that great --thus far.

And then we can claim that his results are 'underwhelming.' Is that about it?

Interesting approach.

You know, I think you may have something there. If we ignore the 90% of his investment results that have been hugely successful in the last few years, and only look at the 10% that have been mediocre...

... well, what do you know? You're right, he starts to look pretty mediocre.

It only gets better from there.

Next you explain that Berkshire's done poorly lately, because Buffett has squandered his legendary status and reputation by choosing to exercise his First Amendment rights (and, some would say, his obligation as a citizen) to express his views on some important public policy issues.

Why Buffett should be enjoined from expressing some simple, clear, reasonable, and eminently responsible points about the U.S. tax code is unclear.

Even less clear is what that *possibly* has to do with the valuation of BRK's stock.

You raise, once again, the truly idiotic canard about Buffett's 'hypocrisy' on 'Derivatives,' when we both know you can't possibly be ignorant enough to believe it actually has even a smidgen of substance.

If either of these has had an impact on the performance of BRK's stock-price in recent years, that demonstrates nothing but the fact that investors are apparently too dumb to buy stocks based on their valuation and the prospects of the company they represent.

At this point (I guess because you were running out of things to say) you resort to the dumbest of the dumb empty-headed charges commonly leveled against Buffett by idiots.

"Yet he is a huge beneficiary of low tax rates, which has spurred a torrent of hypocrisy charges."

Yes, Alice, it has. One small problem, though. Those charges are so monumentally stupid, that only an idiot --or someone with a bald-faced agenda-- would be shameless enough to repeat them without explaining how nonsensical they are.

You *know* that, as I do, but you repeat them anyway. You should be embarrassed.

Your point about Buffett's approach to buybacks is one I happen to agree with.

(I think it may be the only reasonable claim you make in the entire piece.)

The rest of your essay amounts to a junior-high-school exercise in failed logic, self-contradiction, and transparent bias.

--Buffett's results have been lousy lately, so that's why BRK stock has lagged.

--Well, they've actually been superb, but he shouldn't get any credit, since he only got them because of his great reputation.

--And he's lost his great reputation, which is why his results have been lousy.

--BRK stock is terribly undervalued, because everything was due to Buffett, and he'll be gone soon.

--But no one thinks Buffett has any value anymore anyway.

--And the new investment managers will "add value," but no one cares because Buffett's still there.

Basically, we shouldn't attribute any value to Buffett, because he can't invest anymore, except when he gets a 'sweetheart deal.'

And we shouldn't attribute any value to those 'sweetheart deals,' because Buffett will be gone soon

(even when those deals will contribute huge value with or without him).

And we shouldn't attribute any value to Buffett's 'non-sweetheart deals' --even when they've been hugely successful-- because no one cares about Buffett anymore.

But we can't attribute any value to Buffett's investing successors --even if we think they'll be great-- because Buffett's still around.

And, in any case, none of it matters, because rich Republicans are very angry at Buffett, because he thinks a progressive tax code is a good idea.

So, basically, we shouldn't attribute any value to Berkshire, period.

Really, Alice?

You're trying so hard to come up with reasons to bash Buffett, you're embarrassing yourself.

You think you're given some cover by the under-performance of the stock, but it's not working.

You had the training and the tools of a good and serious analyst.

You should be using them to explain the vapidity of the Market, and the mistakes in its thinking --like you did so well in your Berkshire-valuation analysis that attracted Buffett's attention in the first place.

Instead, you've tossed that away, and turned yourself into a cheap attack-dog, in the service of an unending personal vendetta.

All because you're upset that Buffett didn't like your book.

It's embarrassing, and it's sad.

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