Saturday, March 02, 2013

Buffett’s Lament; or, Don't Let The “Uncle Warren” Stuff Fool You


  Well Warren Buffett’s latest chairman’s letter is out, and it is, in a word, boring.
  But boring in a good way. 
  Unlike two years ago, when a supposed successor to Buffett’s throne flamed out (spectacularly—ed.) and last year, when Buffett finally announced that there was indeed an identified, board-approved successor (for more on this see “Warren Buffett’s Successor: Who It Is And Why It Matters,” just out on Kindle—ed.), there are no dramas this year.  Just a lot of good news.
 He tells us the biggest profit engines at Berkshire—the railroad and the energy utilities—are growing nicely and sucking up a lot of cash destined to earn a very decent return, which makes Buffett happy.  (Anybody else notice the railroad now carries “15% of all inter-city freight in the US,” according to Buffett—distinctly higher than the 11% figure he quoted two years ago?—ed.)
  And most of the smaller businesses—from boxed-chocolate maker See’s Candies to McLane, a distributor of everything from beer and wine to gum (it also happens to be the largest tobacco distributor in the US, despite Buffett’s revulsion towards that product—ed.) seem to be doing fine, too, although Buffett says next to nothing about them.  
 Rather, he can’t wait to talk up his two eventual replacements as Chief Investment Officer at Berkshire, Todd Combs and Ted Weschler, who each beat the S&P 500 by over 10% in 2012, which “left me in the dust,” Buffett complained (in a humorous way—ed.)
 Also, the insurance businesses, which constitute the heart if not the soul of Berkshire Hathaway, “shot the lights out,” in Buffett’s words.
 Plus he gives the usual shout-outs to various Berkshire managers, not to mention the usual self-reproach for seeming ‘bad’ news—which in this year’s letter starts with the disclosure that Berkshire didn’t outperform his standard measuring stick, the S&P 500, resulting in the bizarre circumstance of a CEO whose company increased its after-tax net worth by $24 billion calling the numbers “subpar.”
  He predictably griped about not bagging any major acquisition “elephants” as hoped (although he did snag Heinz after the year finished—ed.) and gave his standard and oft-repeated “America’s best days are ahead of us” cheerleader pitch (including the normal sniping at lesser CEOs—ed.).
 There is also a classic Buffett primer on the merits (actually, in this case, demerits—ed.) of paying dividends; as well as a long and unconvincing defense of his recent, renewed foray into newspapers (to paraphrase, ‘it isn’t costing us much, and by gosh it’s good for America’—ed.).
 But the best part of the letter—the part that gives the reader the greatest insight into the mind of Warren E. Buffett—is not the railroad stuff or the insurance stuff or even the invitation to host “a credentialed bear on Berkshire, preferably one who is short the stock,” in order to “spice up” the Q&A session at the Berkshire shareholder meeting (poor bastard—ed.).
 No, the best part of the letter is Buffett’s lament that his record of beating the S&P 500 over five-year periods, which he first brought up in the 2011 letter, is endangered:
 “To date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch… But the S&P has now had gains in each of the last four years, outpacing us over that period.  If the market continues to advance in 2013, our streak of five-year wins will end.”
  The fact that a guy who, with the help of Charlie Munger’s key insight on the importance of buying good businesses rather than cheap stocks as well as the hard work over many years by a lot of smart managers who could have made themselves far richer working on their own, has compounded the net worth of a company 19.7% a year for 48 years (when you compound something nearly 20% a year for 48 years, it adds up to a lot…like, 586,817%—ed.) worries about a 43 period “streak” of five-year wins against the overall stock market, tells you everything you need to know about what it takes to create a track record like Warren Buffett (a flat-out competitive instinct that never quits—ed.)
 So don’t let the “Uncle Warren” veneer fool you.  He set out to be the richest man in the world, and he made it, but not by sitting back and spouting homespun pearls of wisdom: it was by outworking—and outthinking—everybody else.
 And doing that every day, of every week, of every year.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at Amazon.com

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4 comments:

Colin P said...

I don't think they'll find a Berkshire skeptic that's compitant and willing to take on Buffett on his home court. Partly, I think this is only being done so that Buffett can quip, "We issued an open invitation to bears to challenge management's decisions from the past year...(pause, smile knowingly at the favorable crowd) ...and we couldn't find any." He knows to never show up to the fight to which you've been invited. But I could be surprised.

Also, did anyone think that in Buffett's last interview on CBS Sunday Morning, he looked like he had aged considerably? Hopefully, I am wrong and it's just me who thought that.

Colin P

Colin P said...

And I am 100% wrong on Berkshire's ability to find a bear. Doug Kass, this comes as a surprise. I guess I underestimated the confidence Wall Street managers have in themselves, which seems terribly short sighted in hindsight.

Bob W said...

Regarding your comment:

"No, the best part of the letter is Buffett’s lament that his record of beating the S&P 500 over five-year periods, which he has never before discussed publicly, as far as we can recall, is endangered . . ."

You need only have read as far as page 6 of last year's letter (2011) to encounter the following discussion:

"We’ve regularly emphasized that our book-value performance is almost certain to outpace the S&P 500 in a bad year for the stock market and just as certainly will fall short in a strong up-year. The test is how we do
over time. Last year’s annual report included a table laying out results for the 42 five-year periods since we took over at Berkshire in 1965 (i.e., 1965-69, 1966-70, etc.). All showed our book value beating the S&P, and our
string held for 2007-11. It will almost certainly snap, though, if the S&P 500 should put together a five-year winning streak (which it may well be on its way to doing as I write this)."

Any other nominations for the best part of his 2012 letter?

Bob W

Jeff Matthews said...

Thanks Bob, we stand corrected and made the change. The point, however, that beneath the folksy veneer, Buffett is as competitive as they come, is still the point.

Thanks,

JM