Warren Buffett (Trades, Portfolio) is widely considered to be the greatest investor of all time, having generated returns of around 20% per annum for his investors throughout his career.
Buffett gets a lot of attention for this record, but there is one investor that is often overlooked when people discuss the best money managers of all time.
A great cable investor
This individual is John Malone, the former CEO of Tele-Communications Inc. and controlling owner of Liberty Media Corp. While he may not be considered an investor, he still has generated outstanding returns for his shareholders over the years.
At the end of 2018, a Barron's article highlighted the fact that since May 2006, when Liberty Media took its current form, an investment in the business has returned 24% annually, compared to an annual return of 10.8% for a similar investment in Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) over the same period.
The article goes on to explain that while Buffett might have lagged over the past decade, his long-term performance leaves Malone in the dust. Specifically, the article notes:
"Berkshire’s long-term returns put it in a league of its own. Through the end of last year, Berkshire has returned a stunning 20.9% annualized since CEO Buffett took the reins in 1965. Berkshire’s class A shares, which are up $1,395 at $324,495 Tuesday, have soared from around $20 in 1965, a rise of more than 15,000-fold."
These numbers suggest the Oracle of Omaha has outperformed Malone significantly over the long term, but how accurate is this statement?
Calculating the long-term gain
Malone's long-term returns are more difficult to gauge because he has bought and sold many different businesses throughout his career. Buffett has worked tirelessly to increase the book value of Berkshire Hathaway, while Malone has decided to unlock a significant amount of value by buying and selling businesses.
Indeed, according to the "The Outsiders" by William Thorndike, if an investor had invested $1 with Malone when he took over Tele-Communications in 1973, by the time the company was sold in mid-1998, that dollar was worth $900 and had grown at a compound annual rate of 30.3% over that period. If you take that $900 and then invested it in Malone's Liberty in 2006, it would be worth $11,893 today.
These are only rough numbers, but they imply a compound annual growth rate of more than 23% -- better than Buffett.
These figures might suggest Malone has created more value than Buffett over the course of his career, but his tactics for creating wealth are incredibly unconventional. For example, Malone has avidly used spinoffs, tracking stocks and debt-funded buyouts to help drive growth. These have created value, but they have also created an extremely complicated corporate structure that few apart from Malone understand.
Also, where Buffett has created value with his investing prowess, Malone has been helped by Wall Street's greed. He has only been able to execute the complicated corporate transactions and borrow tens of billions of dollars thanks to the help of innovative investment bankers who have collected big fees along the way.
This is by no means a swipe at Malone; I just think it is essential to consider all the factors in the equation.
Malone is an exceptional business manager. However, he has also made outstanding use of complex financing arrangements, which have enabled him to achieve the goals he has set out.
Complex business
In some respects, it is these complicated structures that have also prevented investors from profiting along with the billionaire. Malone has had an exciting investment career and created a lot of wealth for himself at the same time, but it may be more sensible to study the fundamentals of the companies that have helped him achieve this rather than his actions in themselves.
Cable and media assets are unique in their cash generation and tax benefits, in much the same way as insurance companies have the added bonus of a float. It is clear that being involved in unique businesses has helped both Buffett and Malone.
Disclosure: The author owns shares of Berkshire Hathaway.
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