LONDON — Earlier this year it came to light that Warren Buffett has not managed to bag himself an elephant in three years. Blaming fierce competition from private equity firms for over-inflating prices, Buffett has kept his wallet firmly in his pocket. It has raised the question whether Buffett has lost his mojo. Early in May, his faithful 40,000 investors will travel from all over the world to Berkshire Hathaway’s annual meeting. Flanked by Charlie Munger, his vice-chair, Buffett’s message will be “Keep the faith… opportunities will come”. As he told the Financial Times in an interview, “if you played golf and hit a hole in one on every hole, nobody would play golf, it’s no fun. You’ve got to hit a few in the rough and then get out of the rough… that is what makes it interesting.” – Linda van Tilburg
By Thulasizwe Sithole
Warren Buffett, the legendary investor and world’s third richest man worth $86bn recently told the Financial Times that he was “having more fun than any 88-year-old in the world.” In a career spanning 54 years his investment success rate is “oceanic”. He has outpaced the S&P 500 “by almost 2.5m percentage points” defying the odds of generations of Wall Street investors. But in the past ten years, the icon has had less success. When you look at a dollar invested in Berkshire a decade ago, it would now be worth $2.40 which is less than an S&P tracker fund, which would now be worth $3.20.
Buffett is not a flashy billionaire. He occupies the same desk that he inherited from his father and has the casual image of “aw-shucks, Midwest-wholesome” man who played the longer game with a “simpler, purer version of capitalism.” His offices are not remarkable and his staff members are casually dressed.
So why has the 88-year old Buffett not retired? He stays at the helm of his company, Berkshire, because that is what he has liked doing since he bought his first shares in an oil company at the age of eleven. “It’s because I love what I do and love the people I do it with. I’ve got 25 people out here. We go to baseball games together. They try and make my life good, I try and make their life good.” This image of a “plain-dealer persona” is why Buffett is trusted by politicians, businessmen and regulators. He fetches guests from the lobby in “a baggy pinstripe suit” looking more like somebody’s granddad than a business tycoon.
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His philosophy is that he carefully manages expectations. When Berkshire’s shares received a bruising from tech shares in 1999, his cautious response was that he expected that Berkshire’s value would be “modestly” more than the growth in the S&P over ten years. In a letter to investors, he said he was backing his conviction with the company’s own money. This is a constant theme; Buffett does not want to promise too much but he has often delivered much. In the decade after 1999, the shares of Berkshire climbed by “almost 80%, while the S&P fell.”
But this is not where Buffett is now; he has “had a long stretch of underperformance and the competition for his favourite kind of asset is fierce – “big companies that are easy to understand but hard to dislodge from the competitive positions.” He has since adjusted his outlook on the chances of Berkshire outperforming the market to “very modest”. So why would shareholders prefer Berkshire Hathaways if they can make more money elsewhere?
There is regular speculation in the media that Warren Buffett might have lost his touch, especially when something happens to one of the companies in the Berkshire stable such as IBM or Kraft Heinz. The FT believes that “the brilliance of the modern Berkshire…is that there is not really any touch to lose.” His latest stock idea is to buy Apple, which cannot really be described as stock picking. When you buy private companies it is not about selecting the good ones, “it is waiting until a good one comes up for sale.”
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Buffett believes that most companies he prefers to buy, have similar characteristics to his own company. It is interesting and “does not require a genius to run it.” He has an interesting philosophy about very bright people and business saying if a businessman’s IQ is higher than 130, he should sell the rest as it could be a disadvantage in business.
The FT uses the analogy of the fairy tale of the magic porridge pot to illustrate that Berkshire is a product of its own success. Money keeps rolling in, $100m a day from “subsidiaries, dividends from its shares, interest from its treasuries”. “With $700bn in assets, $112bn of that in cash and cash-like investments, only vast investments can meaningfully improve Berkshire’s profits.”
Buffett is also not interested in companies in need. He prefers buying companies where there is a personal reason for selling. Much has been written recently that it has been three years since Buffett managed to bag himself an elephant. This is due to unprecedented competition from private equity firms. He told the FT that private equity firms have $1.2trn of committed capital plus an equal of debt that can be used for investments.
“It’s very, very, very hard to make deals in a world where you’ve got $1trn-plus of money, plus just the normal animal spirits of corporate leaders and everything else, and accessibility to extraordinarily cheap money,” he says. When Buffett did team up with Jorge Paulo Lemann of private equity group 3G to buy Heinz and merge it with Kraft two years later, Berkshire had to take a $3bn write-down on its investment after a shift in the market. Buffett does not distance himself from 3G saying the problem was “not under-investment, but overestimating the strength of Kraft Heinz brands and their power with retailers.” This probably could land in a third tray that Buffett has on his desk with the usual in-and-out trays, which is labelled, “too hard.”
There are those that think a next financial crisis would benefit Berkshire as Buffett managed to provide capital during 2008 and 2009 to Goldman Sachs, among other financial institutions – it is known as “Friday-night-money” and paid a 10% yield. Buffett believes a time may come again when companies will be calling him again as it is a place where they could get “$10 or $20 or $30bn, and it’s done.” Buffett believes that conditions of “extreme overvaluation or undervaluation” exists today in the same way it did half a century ago. “People get smarter but they don’t get wiser. They don’t get more emotionally stable.”
Buffett is in no mood to quit although he wears a hearing aid. He says he believes he is having more fun than any octogenarian in the world. Speculating on whether somebody would be able to fill his boots, Buffett rejects the idea that his company “is powered by his brand.” He believes he has created a community of people who thinks like him.
