Do What Warren Does, Not What He Says

Warren Buffett’s letter with the 2016 Annual Report of Berkshire Hathaway came out Saturday morning. I rushed to open and read it like so many millions of investors to hear the pearls of wisdom from the “Oracle of Omaha.” Clearly Mr. Buffett along with Charlie Munger rate at the very top of the heap for superior market performance and for running what is now a huge conglomerate. Berkshire Hathaway is comprised of companies that fit their criteria for superior long-term growth and value creation. Without getting into a discussion of the company itself and all of Warren’s insights on the future of America, taxes, intrinsic value, share repurchases, GAAP and non GAAP earnings, etc., I’d like to focus instead on a few inconsistencies that I saw with what he said and what he does:

1.) Warren puts down active management for basically two reasons: they have as a group under-performed the indices over the last 9 years as well as charge exorbitant fees to boot.  His “hero” is Jack Bogle, founder of and retired Chairman of the Vanguard Funds, a family of low-cost index funds.

Let’s set the record straight: Warren and Charlie Munger along with Todd Combs and Ted Wechsler actively manage Berkshire’s portfolio which now exceeds $122 billion and is growing. They are the absolute opposite of an index fund and concentrate their bets. True active managers!

Berkshire has never reported ownership of any shares of index funds or ETFs. Clearly Warren believes that his team can outperform the averages despite their huge size through active, rather than passive, management. No one would question fees if the value created by the manager greatly exceeded the compensation.

2.) Warren long eschewed owning great brands with little or no cyclicality like Coca Cola, but his largest acquisitions now include pipelines, railroads, specialty chemicals, mobile homes, the Marmon Group, freight car construction and rental, and components to the airplane manufacturing industry amongst many others. He now even owns equities in airline stocks too, which he once hated. While there are no real “operating” synergies between all of these companies, there is one common thread, which also goes back to the first section and the last section and that is it is all about management. Warren and Charlie both agree to invest in superior managements first and foremost. So that takes me back to active vs. passive money management, which I discussed last week. It’s all about the manager. For instance, Paix et Prospérité has outperformed the markets by leaps and bounds over the last three years since I re-entered the hedge fund business to prove that investing, rather than trading, was the only way to create real wealth like Warren.

3.) Warren and Charlie were huge Hillary fans and put down The Donald every chance that they had during the campaign process. I find it fascinating that Berkshire committed well over $12 billion dollars of capital to the equity markets since the election, which does not include its former $4 billion, preferred equity position in Dow Chemical, which was converted into 6% of Dow’s common at year-end. Berkshire also owns $5 billion worth of a Bank America preferred currently convertible into common stock now worth over $15 billion. Clearly Warren and Charlie are optimistic about the future of America with Trump, his policies and his team leading the way. He did not make such a commitment after Obama won each time.

4.) Finally, I would like to mention Warren’s backing of Brazil’s 3G Partners, an aggressive investment-banking/private equity firm. There is no question that his commitment/financial backing has been a huge financial success to Berkshire with his current holdings worth over $29 billion in Kraft Heinz stock alone. 3G builds value by doing bolt on acquisitions and slashing costs, as there is little or no top line volume growth under their management. I don’t think that was on Warren’s list for successful investing. But 3G is certainly good at what they do and Berkshire has profited handsomely. The 3G culture is certainly not that of Berkshire.

While Warren is the eternal optimist, the Trump win had to play a role in Berkshire investing over $12 billion right after the election. He went so far to add to his airlines and tech exposure, which clearly benefit from an improving economy. Since Berkshire is in many regulated industries like finance, insurance, pipelines and railroads, it serves to be a prime beneficiary of tax reform and reduced regulations. Investing in Berkshire is clearly a bet on Trump and his team “Making America Great Again” and “America First.”

Listen carefully to President Trump’s Address to the Nation on Tuesday where he will formally present his agenda and vision for America to “Make It Great Again” with “America First.” Again the question to ask yourself is not if it will all happen but when. Be patient and don’t trade out of your positions based on every sniped of news. The trend is your friend, and reflation is the overriding theme.

So remember to review all the facts; pause, reflect and consider mindset shifts; adjust your asset allocation and risk controls; do first-hand independent research and…

Invest Accordingly!

Bill Ehrman
Paix et Prospérité LLC

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