Thursday, January 29, 2009

"Buffett's Strategy is Stale"

That was the title of Doug Kass's column yesterday on Excerpt:

Over the past week, I have outlined the potholes in Berkshire Hathaway's investment portfolio and the sharp drop in market value in some of Warren Buffett's largest holdings.

It was not my intention to overly dramatize the short-term miscues nor was it my intention to understate the remarkable long-term investment achievements of Warren Buffett. It was my intention to underscore that the strategy of investing in companies that have apparent moats to protect their business -- and these moats have been so dear to Buffett's investment strategy over multiple decades -- could either:

* have been abandoned by the Oracle of Omaha, owing to his reluctance to alter/sell off his strategic and principal holdings and maintain a tax-efficient portfolio approach; or

* have been influenced by his mistaken analysis of the changing competitive landscape facing some of his portfolio companies (in other words, the moat has been flooded!).

Kass goes on to offer American Express as an example of a Berkshire holding with a putative moat whose product has become commoditized, and he estimates Buffett's long term average annual return on his American Express to be about 2% per year. In his previous column (the same one he links to in the above excerpt), Kass argued that the banks in which Berkshire holds large positions no longer have moats either.


JK said...

Kass had been warning about Berkshire for some time, and put his money where his mouth is by successfully shorting Berkshire shares at their highs. The best contributor to, and one of the best financial columnists overall, IMO.

DaveinHackensack said...

I sold half of my b-shares last summer. I wish I had sold the other half too. On the plus side, Berkshire has a stable of cash-generating private companies, and Buffett has that cash horde with which he can make opportunistic investments in this market, but a lot of his current holdings are levered to finance or housing. Then there's the buy and hold forever strategy with companies in declining industries like WPO, etc. Maybe Buffett will end up pulling some coup this year though. Who knows.

JK said...

Berkshire is a healthy company of course, just one that isn't doing as good in this environment. I don't own any Berkshire because I expect Warren to croak in the near future. I'm sure when that happens, the PPS will plummet and probably give a lower price than any time I can buy shares before he passes.

DaveinHackensack said...


I'm not sure if your morbid strategy makes sense, for a couple of reasons. First, I think the market may have already priced in Buffett's age. Second, there's the possibility that he could announce a highly-respected, relative young successor, before he leaves the scene, and that might boost the stock.

The big concern that Kass brings up though is that BRK might start trading at a discount to book, similar to how some closed end funds trade at discounts to NAV. In BRK's case though, this would be an even bigger discount, because a lot of its privately-owned companies are worth more than they are listed on the books, where, if memory serves, they are valued at their acquisition cost.

JK said...

Perhaps it won't work. But I'm not in a rush to buy Berkshire anyway. My suspicion that the PPS will plummet on Warren's demise is just a suspicion. If there is a panic, then I'll take advantage and sell on an appropriate bounce. If not, no biggie.

I doubt think a young successor will have much success that Warren hasn't been able to have at Berkshire. If he appoints a successor and steps aside ahead of time, great....but there is also a strong possibility that he'll have an unexpected heart attack or something that catches the market by suprise.

DaveinHackensack said...

He does like his cheeseburgers, but knock on wood he lives a long time. He seems to have better genes WRT digesting cheese burgers than his son Howard though.

Do you think that when Pabrai takes his afternoon naps he ever dreams of being offered the big job? If it were my call, I'd try to get Tom Gaynor of Markel to handle the publicly-traded portfolio and then find a highly-respected private equity guy to handle the acquisitions of privately held companies (maybe Romney? -- he seems to be free). Then maybe someone else, a macro guy, to handle special situations. Then you'd need someone else to sign off on the overarching allocation decisions, between privately held companies, the publicly traded portfolio, and the special situations. Maybe Buffett's son Howard, his designated successor as chairman of the board.

JK said...

Pabrai probably actively jacks off to that fantasy in the shower, lol.

Maybe Warren will hire BillyTickets. ;)

I used to own MKL, and trade it, but dumped it when I saw the insurance start to struggle. Plan on entering back into it at some point, solid company.
I highly doubt Warren would pick Romney for anything, however!