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.
12 replies on “Berkshire Supporters and Buffett Make My Point”
Todd
I agree with the point you make. Most people who defend Buffett point to his track record, but do not address the substance of what you are saying.
Given the size of Berkshire and the growing cash generated by the privately-held businesses, the universe of possible fat pitches gets smaller and smaller, especially given the large PE funds.
Dan
dan,
thank you for reading. it is funny, unless you praise warren, you are accused of “bashing” him.
i just want warren to be well, warren..
Presuming you are NOT suggesting that BRK should take one big position in a single sub-company, you are forced to accept at least several holdings, each in equal share, or in different scales depending on the stregth of the conviction (and I’m sure you’ll accept that even for buffett, some situations are just a bit more certain than others).
Now if you are assuming buffett diverged from his style by holding some big wholly-owned subs, some small, few big stakes in public companies and a some more small public holdings – you are dead wrong.
This always was his way – from start. I’m talking the 50s here. Even then he openly stated he usually holds about 5-6 big ‘generals’ and about 10-15 small ones. Also, he used to hold about 5-10 ‘workouts’ (he stopped that, I admit) and some ‘controls’ (he’s turned big on the last type).
Hope this help…
anon,
thank you for reading..
i do have to disagree. Buffett in the past at several times has only held a handful of securities. I would say until the mid 90’s it was the majority of the time. these smaller # of holdings periods also coincide with the greatest gains in Berkshire stock. when he has held more, it was to receive annual reports (this was before the internet age). in these he usually bough only 100 shares.
when he bought AMEX, 40% of Berkshire’s equity portfolio was in that one stock. now, size does dictate he cannot really do that now, but, again, following his own statements, 3% of the portfolio is “dabbling” and “ineffective”.
I agree in principle with what your saying, and I have thought the same thing as a berkshire shareholder. However, one thing you must remember is he is not the only one making investment decisions. You’ve got to remember that Lou Simpson invests GEICO’s money (I believe all of it.) and if I’m not mistaken there are others within the businesses of berkshire that have the ability to invest on berkshire’s behalf. That being said, some of these positions that they are in have to be Buffett’s, which make me wonder what he’s thinking. I mean a great business at a pretty good price, not even a great one necessarily, has to be a better investment than bonds. My gut tells me that he really would like to spent $20+ billion on one deal, but those are not exactly easy to come by. Anyway, even as an avid Buffett fan, I hope that he does do more with that money in the future.
drew,
good comments. actually the real irony of Lou Simpson’s investments is that given the amount he has to invest, he actually make larger bets % wise than Buffett. the only $20 billion deal he will get is a private one because the bidding in the public market now is too fierce. that being said, $20 billion private companies are very rare..
it is a bit like his dream of playing baseball….
I’m not sure if it was this year’s meeting or last but the message is the same. Buffett was asked why he didn’t take larger postions (bigger swings) in some of the companies that he had positions in. His answer was that it takes a long time to slowly accumulate the shares without driving up the price and that once word gets out that he is buying shares it is almost impossible to continue to buy. In fact, Charlie mentioned at the Wesco meeting that it was the “cult” itself that made it so hard to buy large positions in publicly traded companies. Additionally, he is not willing pay the premium that private equity is willing to pay and therefor Berkshire isn’t as attractive as a suitor at this time.
i heard that too but when you consider some of the picks like walmart and target, that does not wash. they trade millions of shares a day and he usually has up to 6 months to establish a position..
just does not add up….
First of all, I want to apologize for the needlessly personal tone of the original message I posted. Todd, I’m sorry. I respect your opinion – and think you are on to something…
In short, here’s a few points perhaps worth adding to the larger framework:
1. The “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” comment was indeed from 1978. And, circa the late 1970s, the asset base of the Berkshire Hathaway investment vehicle was most certainly not in the double-digit billion dollar range.
2. Per the 1974 interview referenced in the response, it’s generally prudent to swing for the fences only when there’s a pitch that’s worthy swinging at. For a variety of reasons, it’s entirely possible that there simply aren’t such pitches for the Berkshire portfolio at the moment.
3a. So, naturally, that raises the “if it’s good enough for a 3% size — then why isn’t it a larger level…” debate. The most obvious answer might also be the most logical: Perhaps it is in fact good enough for a 10% level — but given the size of raw equity-energy needed to satisfy Berkshire’s needs…there might just not be enough shares out there to get to the larger level…at the price Berkshire is willing to pay.
3b. Alternatively, perhaps the allocation is indeed intentionally well below the “home-run swing” size, since it’s not intended to fly outside the park, but rather “bunts” just get on base. Along these lines, as I recall, Munger had a quote this year that was pretty much “now is not the time to be swinging for the fences” and when asked by a shareholder I’m pretty sure Buffett himself said something along the lines to have (unusually) low expectations for the recent allocations. Again, seems to indicate these just aren’t the same types of pitches Buffett was seeing cross his plate in 1974 (when the index was in a single digit PE multiple, if I recall correctly…)
===
Above all else, I remain a fan of your passion for value investing and wish you only the best.
shai,
all true, but his comment about holding 30, 40 or 50 stocks as being “madness: was made in 1996.
I am not yelling “swing”. i have no opinion as to whether he sees or should see value out there. but, he is buying so HE must see it.
what i am yelling is “if you are going to swing, then really swing”
the size argument holds true for many of the smaller market cap holdings but disappears when you consider Walmart, Tagert BUD and JNJ purchases
again, based on the comments he makes in every interview.
Let me give it a whirl. Let’s look at Buffett’s $1.5 billion purchase of JNJ for the first quarter of 2007:
Average trading volume: 11.89 million shares. To purchase JNJ without reporting it to the SEC (and tipping everyone off), Buffett must comply with the De Minimus provision of the Federal Securities Laws which state that he can not purchase more than 1% of the Average Daily Trading Volume (ADTV) of a company. For JNJ, 1% of 11.89 million shares = 118,900 shares. At $61 a share, that would be: $7.3 million a day that Berkshire could buy. 60 trading days in the three months: 118,900 shares x 60 days (=7.13 million) x $64 a share = $456.3 million.
Of course, every day that he bought 1% of the ADTV, the ADTV went up so he could acquire more and more – up to $1.5 billion in 3 months.
HD: He could buy up to 156,800 a day x $39 a share x 60 trading days: $366 million max – a little less than twice what he actually bought.
In 1988, when Buffett bought $592 million of KO, Berkshire was a $2.8 billion company – a 21% stake. Today, he couldn’t possibly put 21% of his $91 billion company into any one business. It would mean a $19 billion investment, snuck in at 1% of ADTV (or $321 million a day). No stock out there has an ADTV of $32.1 billion, let alone any stock he might want to buy.
As you can see, by virtue of law and size, Buffett can not make super large plays anymore. To do so would require him to report them to the SEC, tipping off investors and pushing the stock price to a level where he could no longer buy it. Imagine what JNJ shares would do if Buffett announced that he was acquiring $19 billion of its stock!
I would suspect that he will continue to quietly acquire JNJ so long as it stays within his target price range, which I figure is at or under $62.33 a share.
Food for thought.
Los Angeles private equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.