Tuesday, June 12, 2007

Berkshire Supporters and Buffett Make My Point

Every since my Berkshire (BRK.A) post last month, I have been seeing posts pop up around the internet about it. Most are incredulous that I could possibly for a second doubt Mr. Buffett. To a person their replies recite his track record despite my saying in my opening "No one will will argue or dispute his past success and what he has done for shareholders. Nor will anyone attempt to belittle the atmosphere and honesty in which he runs the organization and the culture he created." Yet all the replies documented a history I praised. Odd. Yet almost none addressed the actual substance of my post and when they did, they unknowingly reinforced my thesis.

After almost a month of begging those who commented and emailed to give me a rebuttal, only Andy Kern at Berkshire Ruminations took me up on my offer and I thought did an excellent job. I disagree with him, but he did an excellent job none the less. Most folks chose to hide behind a car and throw snowballs. OK.

Let's address one of those today. I tried to do it on their site but it seems they do not allow comments (at least I could not see where to place one) so it seems to be a bit of a soapbox rather than a blog (at least as I know them). I will preprint the entire post here: Title: Fear vs. Greed in Berkshire Hathaway Their comments are italicized

Every few years someone has the myopic hubris to write an article bashing Buffett's capital allocation ability and that's usually a decent sign that there's a good deal of irrationality in the air:

From ValuePlays: "In the past Buffett has said, "Wait for a fat pitch and then swing for the fences." Why isn't he doing that? Considering the investment possibilities Berkshire has, his recent investing record is one of bunts, not big swings. He has also said in the past "if you would not buy the whole company, why would you buy a single share"? Using his own logic, I have to ask, "Warren, if you are going to invest $160 million in Home Depot, why not $1 billion?" The theory still holds, if you would not buy 100 shares why buy one share and if you would buy one share, why not a hundred of them? An investment of less than 1% of his available cash is not "swinging for the fences."

Why isn't he swinging for the fences, Mr. Sullivan? Maybe...because he's actually waiting for a fat pitch before swinging!

The full context of Mr. Buffett's "fat pitch" analogy, excerpted from the November 1, 1974 Forbes interview is particularly interesting:

"I call investing the greatest business in the world," he says, "because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."

But pity the pros at the investment institutions. They're the victims of impossible "performance" measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000 fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'" Buffett claims he set up his partnership to avoid these pressures.

Mr. Sullivan, respectfully, it looks like you're the owner Mr. Buffett predicted a few decades ago would be saying "Turn in your uniform."

Posted by Shai Dardashti at 12:01 PM

Now, Mr. Dardashti unwittingly proved my very point. No, I would not be the owner saying "turn in your uniform". I would be the owner saying "Warren, if you are going to swing, swing for the fences!"

Far from "bashing Mr. Buffett's capital allocation" I instead begged him to return to the very style that he has trumpeted and made shareholders unbelievably wealthy.

Let's take his "waiting for a fat pitch" comment. If this is so, then how do we explain his recent investments in Wal-Mart (WMT), Sanofi-Aventis (SNY), Johnson & Johnson (JNJ) and Anheuser Busch (BUD) and Target (TGT)? There are more but this will suffice as he buys and sell securities in Berkshire's portfolio regularly now so is is not like he cannot "find value" out there. None of them made a dent in Berkshire's cash position or were substantial investments in the numbers of shares outstanding in any of the companies. All these are recent purchases (last few years), yet none of them follow the tenants both Buffett and Mr. Dardashti espouse above.

I will reiterate Buffett, "If you would not buy the whole company, why would you buy a single share?" It is clear Buffett sees or saw value in these companies when he bought shares. As a value investor, that is the reason he acts. If that is so, then these had to have been "fat pitches" or he would not have bought them, correct? According to his own words, that is the only reason to "swing", when you get a fat pitch. Now if they were fat pitches, why didn't he "swing for the fences"? Why? It is not a function of the number of shares available to buy as these all trade millions of shares a day. It is not a function of him running up against company induced limits like he did with his huge purchases of Coke (KO) and American Express (AXP) which make up over 30% of Berkshire's portfolio. It is just a function of him taking "half swings" at shares. This was my complaint in my original post. Why not buy 5% or 10% of WalMart? That would have been a move from the Buffet of old and he easily could have done it.

Maybe these were not "fat pitches"? Well then why would be buy them? That is the antithesis of everything he has ever said!!

Currently Berkshire holds almost 40 positions in publicly traded companies and it's main holdings have essentially been that way for almost 2 decades now and most new positions, despite the ability to purchase far more almost always amount to less than a 3% of Berkshire's portfolio, again, a BUNT. I am not saying to sell the core holdings, for tax reason alone that would be a unwise move, I am saying "if you are going to swing, swing for the fences". He has the ability but chooses not to.

Both Munger and Buffett have said their favorite holding period "is forever" yet again, recent actions contradict that as positions are trimmed every quarter.

I will conclude by letting Warren make my point. In his own words:

"Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts." Warren Buffett, 1978 Berkshire Hathaway Letter to Shareholders

"…if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness." Warren Buffett's comments at the 1996 Berkshire Hathaway Annual Meeting

"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as 'the possibility of loss or injury." Warren Buffett, 1993 Berkshire Hathaway Letter to Shareholders

That is the Warren Buffett I invested in and made wonderful amounts of money with. Warren today is contradicting Warren, it is not me saying it, it is him.

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