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Another idiotic anti-Buffett article: the Toronto Star


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Here is another thoroughly disagreeable article about Buffett in the the Toronto Star. (http://www.thestar.com/Business/article/604619 ).

 

Now I read it, as I have heeded Charlie Munger's "command" to seek disconfirming evidence on things I believe.  This article's only "hit" for me is that WEB (surely) knew of Moody's papering dodgy CDO's with AAA ratings. That is a bit of a dilemma. But that is really the only nugget amongst the horse crap in that barn.

 

The reporter, if you can call him that, makes and uses all sorts of allegations and innuendos, most of which are either false or half truths.--calling Berkshire's businesses "motley", being too complex to understand, saying that Buffett violates his own governance stance and has "reneged" on name a replacement, calling WEB a "reckless punter".

 

FYI,  I have always had an idealized view of you guys, my northern neighbors; I have thought of Canada, as a home of civility and rationality, and decent heath care.  Well the Star is doing its best to disabuse me ;)

 

 

I debated even posting this claptrap, but I decided that nothing would be lost by supping with the devil so here it is:

 

http://www.thestar.com/Business/article/604619

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Berkshire is very miss understood, and articles like this make it worse. Alot of people claim to understand how Buffett thinks, and how Berkshire operates, but as Mohnish said "it's like peeling an onion" and it takes time to get layers of that onion to come off.... alot of people have not got past the first layer! Attend the Berkshire meeting and you probably know what I am talking about!

 

An example would be the "playing the tax code like a fiddle!" part of the article. Well Buffett said a couple years ago in his annual report(which I am surprised at how few actually put the time in to read it, but claim to know whether it is a good investment or not, or whether he is telling the truth or not.... laziness and ignorance) that he must not be doing a very good job as Berkshire Hathaway pays an incredible amount of tax a year! Just one example of the many, that are false and completely misleading in these article about Buffett and Berkshire!

 

If a person looks back in history though this should not come as a surprise. But again, Toronto Stars business is to sell newspapers, whether they are factual or misleading is irrelevant!

 

My favourite is still the article on Berkshire being on the hook for 45 billion, from the indices puts they sold.... they forgot to check that they had a notional value of 37 odd billion and for it to cost the full notional amount, they would have all had to go to zero! Complete stupidity!

 

One good thing about it is it gets Mr. Market fired up, the bad thing about it is alot of those people are very good people, that these kinds of misleading articles get them confused and scared causing them to make mistakes.

 

Kyle

 

Thanks for posting this though, always nice to keep up to date on the 'guru' bashing.... and laugh at the ignorance!

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My favourite is still the article on Berkshire being on the hook for 45 billion, from the indices puts they sold.... they forgot to check that they had a notional value of 37 odd billion and for it to cost the full notional amount, they would have all had to go to zero! Complete stupidity!

 

Terrific! I could own all the companies on the S&P 500 for free. Forget about value investing. Here comes free lunch investing!  8)

 

Cheers!

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Those that can...they do!  Those that can't...they write!  Let guys like Olive write what they want.  I remember Fabrice Taylor writing often about how Prem couldn't run an insurance company, yet Taylor ran his magazine "Frank" into the ground in less than a year.  Buffett is being treated about the same as when Jordan decided to take some time off and try his hand at baseball.  To the press, you're only as good as your last game, and it was an off year for just about every investor out there.  What did Jordan do when he came back after his stint in baseball?  He went out and won three more championships!  Cheers!

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Hey that's great!  Don't worry about people talking badly about Buffett or about Berkshire.  The more the merrier! It's likely to drive down Berkshire's stock price, which are certainly cheap right now, but I wouldn't mind buying more for less.  Those interested in a quick run down of Berkshire's Value PM me with your email address and I'll email you something I put together for a few of my clients. 

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I actually thoroughly enjoyed the article. It made me laugh a couple of times. Yes, it was one sided. But then, the 3 hours Buffett spent on CNBC could hardly be called good investigative journalism (and by the way, I watched all three hours and was glued to my TV!).

 

I recently purchased BRK.B shares representing (now) 12% of my investable net worth which says, I think, something about what I think about BRK's current share price, Buffet and the company's prospects over the medium term. Having said that, the Star article did touch on a couple of points that I do not have a good handle on:

1.) BRK after Buffett: I recently re-read Buffett's address to Notre Dame faculty in the early '90's (great, long article). Buffett repeatedly said private investors should sell to him because he would give his word to them and they would not have to worry about some other perosn or board changing the rules... etc etc. Unless BRK is able to replicate Buffett DNA to their senior team (when he is no longer around) I am not sure how things stay rosy. Imagine if Buffet had passed away last year (I do not mean to be morbid). Think for a second about what the short sellers could have done to BRK; it recently was donwgraded by Fitch with Buffet still behind the wheel. Berkshire after Buffett... if anyone has some insight (or is able to hekp me peel back the onion) I am all ears!

2.) Conglomorates: I apologize as this is tied to 1.). All these aging presidents love to work for Buffett. What do they do when he is no longer around? What do they do when their presidents walk away?

 

Bottom line is I just wonder if Buffett is, simply put, a genious. And when he is gone what remains is a solid conglomerate that will slightly overperform and then over time slightly underperform Mr. Market. What is in place today to ensure that they will continue to perform at Buffett's long term track record of about 20% per year?

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scorpioncapital, as I am sure you realized, I am trying to play devils advocate (somewhat). In the near term, yes, what Buffett built should continue to outperform the market averages. However, with Buffett gone it would not take much for a new leader (or two) to simply not meet (lofty) expectations and for things to start to unravel. I will be the first to admit that I do not have a great understanding of the inner workings of BRK. I just get the impression that Buffett is the man. PERIOD. He can handle the complexity (he has grown up with it... it is normal to him). I just can't wrap my head around how things carry on the same way without him. One would be silly not to expect some sort of underperformance from BRK after Buffett is gone.

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Guest JackRiver

ScorpionCapital

 

You hit the nail right on the head.  That's the thing a lot of people never really seem to get.  There are always these visions of how things eventually fall apart, but that notion is possible at any company or any group of companies.  There's no good reason to think that Berkshire will do any worse than the S&P 500, short term or long term, but put 70 or so operating units under one roof and all of a sudden people start salivating like dogs with dinner bells in a nauseating percussion of the world has to end sometime someday.

 

What's more, not only do these businesses operate by and large as separate entities, they also have built up cultures that function very well, selling products people will need and use for the next 100 years, and they do all this as efficient or more efficient than their individual industry competitors.  Unlike the majority of the S&P 500 companies there isn't some out of control dysfunctional orgy of corporate greed and bureaucratic derangement.

 

And finally, most of the time Berkshire doesn't trade at a premium.  There's this strange fantasy of a Buffett premium that some have built up over the years.  Too much of this business is now weighted to operating units to cling to that fallacy any longer.

 

For those trying to figure out what happens to Berkshires stock when the old man goes, like any company, you look at the earnings.  The price may drop because of the shock, but a price drop produces a higher earnings yield, and eventually people will realize that earnings yields are the same whether or not their attached to the Buffett name.

 

Viking, given that Buffett is usually hands off, I'm having trouble finding the logic that leads you to your conclusions.  You'd be better off asking your question with regards to underperformance of any number of other companies where a talented CEO is more hands on.  How do you make that logical connection with Berkshire with regards to underperformance?  If you can, take me through it.

 

Obviously you are just being silly about the 20% per year thing, right?  He's still here, and we ain't doing that honey buns.

 

Yours

 

Jack River

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Guest dealraker

One more time!  Just like Jim Cramer here is the rule of the game as far as financial journalism:  "Write anything, simply anything you can, to get someone to read it.  Our universe is excessively competitive and we need eyeballs so write to get attention.  Any attention is better than no attention."

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Guest ericopoly

Buffett has said that Berkshire could benefit from more leverage, but that he won't do it because these days many families have substantial amounts of their net worth in Berkshire.

 

Now, one of the nice things about that is the market seems to price Berkshire without taking this into account.  So I think a buyer today would wind up buying it for the same earnings yield that one would be getting if it were more leveraged... same returns but with less risk in other words.

 

I could be wrong, maybe the market would correctly discount it more if it had more leverage.  But I look at companies like Microsoft with tons of cash and no debt and it also seems to trade at an earnings yield discount relative to the market despite no financial leverage.

 

I guess perhaps right now risk-adjusted returns aren't being properly calibrated by the market and this is something that can be exploited to some degree.

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It is a myth that has been promolgated by the media that Buffet somehow runs a $130 billion company with something on the order of 250,000 employees. Anybody who can do that is not human :) He makes key capital allocation decisions for future income but even if he stopped doing that, the "tentacles" of Berkshire run deep and there are many people involved here. No single person is responsible for the money that poors into Berkshire everyday.

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Jackriver, do you not agree that many people have sold their businesses to Buffett over the years (Buffett, not BRK). They trusted and like the man. Yes, they are now part of the BRK umbrella but Buffett was the key.

 

I have worked for terrible bosses and I have worked for great bosses. Makes a big difference. Buffett looks to be about as good as it gets. My point is simple... if BRK gets another great manager (or two) to step into Buffetts shoes things will be fine. If they get an average to poor leader performance over time will suffer. I just do not see it as being a slam dunk that when Buffett is gone the company continues on its merry way. Note, I also do not see it is a done deal the company underperforms... I think the risk of underperformance increases. To me this is pretty straight forward and logical.

 

Regarding return, yes, 20% is not realistic (I used that number because that is close to the historical number)... 10%-12% is likely a much more realistic medium term number top use.

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Guest JackRiver

Viking

 

Just to be clear, nobody said anything about slam dunks.  The point I was making is there is no reason to conclude that Berkshire will eventually underperform a similar sized random selection of companies especially given the economics characteristics of the operating businesses at Berkshire.

 

I understand your point to go something like this, because Buffett is such a good manager and because the current managers are good managers then logic would suggest that given enough time you get a bad manager replacing a good one.  This equals a net negative for the business.  Maybe so, but I hope you can see that there is no real logic in this logic the same way someone flipping 10 heads in a row will not change the probability of heads on the eleventh toss of the coin assuming a fair sided coin.

 

And remember, we are talking about relative performance and not slower growth due to size.

 

It's a very tempting thing to want to apply to Berkshire the notion of trees not growing to the sky, but I don't believe that's the proper or relevant connection to make when one is comparing two relative things both of which are subsets of the same whole.  I think that is the mistake that people are making, but I'm far from perfect and open to logic that disproves my viewpoint.

 

To your point of people selling their businesses to Buffett and not Berkshire.  For this type of seller, someone more concerned about a home for the business than a premium price, what are the equally good alternatives that they had?  And why do you expect the spread between the alternatives to close completely when Buffett is gone?  That is to say, why will Berkshire not be a more attractive home than the alternatives?

 

Yours

 

Jack River

 

 

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Guest ericopoly

There are a few personalities in history that I want to read biographies on, among them Mellon and Morgan.

 

They were both of the character such that they were not after fast money, and they were not traders.  They claimed to make their decisions to lend not on the underlying business solely, but on the character of the persons running them.

 

From what little I've read of both men, they share many of the great character qualities of Buffett.  I learned a little bit about J. Pierpont Morgan when I read The Panic of 1907.  He played an important role in restoring confidence to the market, very active in getting the trust banks to pull together for a solution, injecting much of his own capital to help restore confidence.  You know, recently Buffett has been taking on shades of such a role:  The "Buy American, I Am" article, and the pleas for Americans to pull together and see this as a fight that we are all in together.

 

I am reading The Forgotten Man currently, and Mellon's name came up as a man of his word.  He would never take a large position in financing an entrepreneur only to forclose on him and steal his idea.  To people afraid he might do so, he would tell them that is not the Mellon way, and in doing so he would win the trust and business of others (similar to Buffett not playing gin rummy with businesses he has purchased).

 

So I wonder, did the cultures instilled by the great men of Mellon and Morgan have enough lasting influence to see to it that those two institutions are still surviving today, both being financial institutions of course and they made it through even the Depression.  Of course, they are both alive today.

 

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This angst about post Buffett Berkshire fate and performance has been addressed at every annual meeting in the last few years (following the  inevitable run by a truck question).  I remember Munger pointing out (in essence) that Buffett did not build this magnificent castle  without giving thought about its long term viability after his departure.  The key point though was that the Culture and blueprint are in place as a template for the continuation of future success.

 

Berkshire will continue to be  a great heaven for businesses and the allocation of capital machine will be functioning just fine (of course not as well as under the irreplaceable oracle). The insurance gold mine will operate under the same probabilistic prudence and appropriate reserves. And we therefore need not worry that BRK will continue to outperform the S&P 500 for the next decades to come.

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