Geoff Gannon March 24, 2007

On Billionaires, Their Buys, and Buffett

I recently read a post by Barry Ritholtz over at “The Big Picture“. It’s called “Investing Advice: If you are NOT a billionaire“. Ritholtz starts with a good premise: don’t try to “tag along” on stock market investments made by billionaires simply because they’re billionaires.

Unfortunately, his argument goes off the tracks pretty quickly. He singles out three billionaires: Kirk Kerkorian, Michael Dell, and Warren Buffett. Ritholtz has a point with Michael Dell, but the same point is applicable to an awful lot of insider buying at large, public companies.

As for Kerkorian and Buffett, I’m afraid I can’t find anything to agree with in those arguments. Regarding Kerkorian he writes:

He has a long and storied history as a corporate raider, greenmailer, etc. When one gets closer to the long dirt nap, one thinks of their legacy. For all we know, this GM bid was an attempt to improve his reputation.

I have to admit smiling when I read this, because about a year ago I wrote a post on some notable billionaires (from the Forbes list) that included a fairly long digression on comments made by bloggers about Kerkorian’s advanced age:

There’s been more than enough written about General Motors (GM) over the past year; so, I won’t add anything here. I will, however, mention that one point made by some blogs (and even some “mainstream” media sources) is nonsensical. It’s been written (presumably with a straight face) that Kerkorian can’t possibly be making a long-term investment in GM, because (at 89) he simply doesn’t have enough time left to see such an investment through.

The strongest argument against this line of reasoning is that making investment decisions based on your anticipation of imminent death is akin to making life choices based on the belief that you don’t have free will and all future events are predestined. In both cases, if your assumption is correct, you gain little or nothing. If your assumption is incorrect, you lose a lot.

Besides, all of this assumes you have no interest in leaving greater wealth behind (whether to charity or your family), which seems rather absurd. Kerkorian isn’t exactly forgoing his own enjoyment; he already has far more money than he could ever spend on himself (that would be true even if he were 29 instead of 89).

Also, it’s worth noting that Phil Carret lived to be 101. I don’t mean to suggest Kerkorian may live just as long; rather, I mean to suggest even at 89, you could be hanging up your cleats twelve years too early. To put that in perspective, if the average American male expected to die twelve years before he actually did, he would be planning to die around the time he would start collecting Social Security.

As a rule, investors who are as passionate as Kerkorian usually die long before they retire.

I don’t have anything more to say about Kerkorian. I do, however, have quite a lot to say about Warren Buffett, the billionaire with whom Ritholtz concludes his post:

Warren Buffett has made numerous advantageous deals, getting all sorts of preferences in the negotiated takeover terms that you don’t get.

If you like Buffett, (buy) Berkshire Hathaway — but don’t attempt to piggy back his trades, cause you get very different terms than he does.

These comments reminded me of the ones made by Ken Fisher in his latest book. So, I’ll deal with them both together.

Ken Fisher in the preface to his book, “The Only Three Questions That Count” goes on a rant about Warren Buffett not being a money manager. I was surprised by how misleading Fisher’s discussion of Warren Buffett was.

It’s misleading in that most modern of styles; it does not fabricate facts – it omits them. It is an argument formed from carefully selected points strung together without any reference to the facts weighing on the other side of the scales.

For instance, Fisher writes, “While he is a great man and a great success, he isn’t a portfolio manager and has no correctly calculated performance record over the past 35 years as a portfolio or money manager.” True. However, Buffett was a money manager – and he did have a “correctly calculated performance record” from 1957 – 1969.

During the life of Buffett’s investment partnership, the Dow provided an annual return of 7.4%, Buffett’s limited partners received 23.8% (after fees), and the partnership return (before Buffett’s take) was 29.5% a year.

If we take the partnership return (before Buffett’s take) as being the most representative measure of his skill, we find that in the thirteen years from 1957-1969, the partnership never had a down year and never underperformed the Dow. On both counts, Buffett went 13 for 13.

By 1969, Buffett had one of the best “correctly calculated performance records” of any money manager on the planet. That’s why he featured prominently in the 1972 book “Supermoney“. Buffett and Graham are essentially given a chapter of their own in that book. Buffett’s inclusion had nothing to do with Berkshire Hathaway.

At the time “Supermoney” was published, Buffett had yet to make his first stock market coup as Berkshire’s chairman – that would come a year later when Berkshire acquired its stake in the Washington Post Company (WPO). In Berkshire’s most recent annual report, it lists the Washington Post stake as $11 million at cost and $1.29 billion at market.

One of this site’s contributing writers, Max Olson, wrote an excellent (“reverse engineering”) piece on “Warren Buffett and the Washington Post“. Max cites Buffett biographer Roger Lowenstein when he writes that the market value of Berkshire’s investment in the Washington Post compounded at a 32% annual rate from 1974-1985. Berkshire’s own annual reports confirm this fact.

One good investment does not make a career. However, the Washington Post was a good investment (over the first ten years it was a great investment) and it was not made on especially advantageous terms.

In fact, by all accounts, the management of the Washington Post did not know who Buffett was until after Berkshire made the investment. Nothing was negotiated. Buffett did join the board, and in that capacity (and especially in his relationship with Katharine Graham) he had some influence on the Post’s corporate policies. But, there can be little doubt that the vast majority of the return Berkshire achieved from 1974-1985 was derived from buying a good business at a cheap price – something any individual investor could have done.

Finally, it’s worth noting that the returns mentioned regarding Berkshire’s investment in the Washington Post do not reflect any sort of leverage provided by insurance operations.

It’s an apples to apples comparison of the capital used to purchase the stock compared to the market value of those same shares years later. So, while it’s true that Berkshire has benefited enormously from the use of the float provided by its insurance operations, downplaying Buffett’s investing acumen because of his access to float is not defensible in situations where Buffett’s investment actually outperformed Berkshire’s own book value growth over a number of years.

That’s one reason (among many) that I object to Ken Fisher’s statement that “All you can see is how Berkshire Hathaway stock does which is largely driven by its insurance operations. For decades, Berkshire was a terrific stock and made money for lots of folks in the same way Microsoft or AIG did (or a lot of other great single stocks did). Many investors came to confuse Berkshire the stock with a portfolio, which it isn’t.

First of all, Fisher knows that you can see a hell of a lot more than what Berkshire Hathaway the stock has done. Berkshire presents its major stock positions both at cost and market. Since, in many cases, it reported the stake within a year of its acquisition (either in Buffett’s letter or in some other filing) anyone with internet access can estimate Berkshire’s return on each of its largest individual equity positions with a high degree of accuracy.

The one thing that these commentators (both Fisher and Ritholtz) are right to stress is that Berkshire isn’t simply a closed end mutual fund. The company’s book value reflects more than its activities in the stock market – including (to a greater extent every day) the importance of negotiated purchases of private businesses.

However, none of this makes Buffett any less of an investor or a stock picker. He is worth watching – not because he has compounded Berkshire’s book value at a phenomenal rate; but, because he is undoubtedly one of the world’s greatest living investors. His record before Berkshire supports that, his record at Berkshire supports that, and (from what little we know of it) his record outside of Berkshire supports that.

Simply put, if you were looking for the best man to manage any amount of money (whether $1 million or $100 billion) it would be hard to think of someone better than Warren Buffett. That’s why he’s worth watching. Not because he is a billionaire, but because he is a great investor – a great stock picker.

That’s enough complaining for one day. My apologies to Mr. Fisher and Mr. Ritholtz who both do what they do better than most. Of course, they are still wrong on this one.

I will follow up with another post on this topic tomorrow. Hopefully, I can give you some idea of what you should and shouldn’t do based on news of Berkshire’s activities in specific stocks.

Related Reading

On Forbes List of The 400 Richest Americans

Column: Warren Buffett and the Washington Post

On Misreporting Warren Buffett

On Posco, Berkshire, and Buffett

Against Mr. Lynn’s Buffett Bashing Phillipic

On Some Lessons from Buffett’s Annual Letter

What Would Buffett Do?