Buffett Message Is ‘Do as I Say, Not as I Do’

Controversial article from Alice Schroeder (writer of the impressive book "The Snowball") in Bloomberg about Warren Buffett. One only has to read some of the comments to verify that many readers think she has gone too far.

I think she definitely has some valid points though, I also was not happy with the involvement of Berkshire Hathaway in several financial companies during the economic crisis of 2008/9, nor did I like how Buffett defended rating agency Moody's Corporation.

His big legacy is growing Berkshire Hathaway (together with Charlie Munger), the phenomenal success story, the way he build it up, the fact that he only takes USD 100K wages and no options under an ESOS scheme, and the fact that 99% of it will be given to charity.

Outperforming returns are diminishing compared to the S&P 500, but that was to be expected and was announced by Buffett in the past, Berkshire Hathaway is simply getting too big, meaning that investments in small and medium sized companies don't make sense anymore. In other words, his universe of potential investments has shrunk markedly.


http://www.bloomberg.com/news/2012-03-19/buffett-message-is-do-as-i-say-not-as-i-do-alice-schroeder.html

The last few years have been a struggle for investors in Berkshire Hathaway Inc. (BRK/B) Since the March 2009 market low, the Standard & Poor’s 500 Index has risen 80 percent compared with 44 percent for Berkshire, even though crashing stock prices and unprecedented volatility perfectly suited Warren Buffett’s investing style.

Now Berkshire stock hovers at about a 10 percent premium to the company’s estimated $110,000 per-share book value at March 31, 2012, (assuming the overall book value increases in a rising stock market by about $10 billion this quarter) and perhaps below a liquidation price. In essence, the market is placing no value on Berkshire’s prospects.

Alice Schroeder

Ben Baker/Bloomberg

I believe two basic problems have brought Berkshire to this pass. First, Buffett’s investing record has been underwhelming for the past few years, except for special opportunities linked to his own reputation and relationships. Second, Buffett has lost stature because of the way he uses his role as a public figure. And both of these situations will be difficult to reverse.

As he has for years, Buffett wrote in his most recent shareholders’ letter, covering 2011 results, that he’s not going anywhere anytime soon. This used to give investors comfort; now it has them disconcerted. Buffett also wrote that his unnamed successor will take over “when a transfer of responsibilities is required.” Unless Buffett dies suddenly, this begs the question, “required by whom?” to which the answer is: Berkshire’s board. If the board handles its responsibilities well, then Berkshire stock, already cheap at $122,115, will turn out to be an even bigger bargain with hindsight.

Sweet Deals
During the financial crisis, Buffett cut some very sweet deals that made billions for Berkshire. He bought preferred stock from Goldman Sachs Group Inc., General Electric Co., Dow Chemical Co., Wm Wrigley Jr. Co. (to finance its sale to Mars), Swiss Reinsurance AG, and later, Bank of America Corp. He also made a deal to reinsure 20 percent of capital-starved Swiss Re’s business. He bought Burlington Northern Santa Fe Corp., which investors applauded as a savvy move.

These, unlike stock purchases, were classic “only Buffett” maneuvers, which arose partly from his relationships and reputation -- bringing home how dependent Berkshire was on Buffett’s deal-making ability at this crucial time.

Meanwhile, many of Buffett’s major stock picks for the past five years, like Johnson & Johnson, Kraft Foods Inc., ConocoPhillips, and Wal-Mart Stores Inc. have been lackluster.

It used to be an “aha” moment when a Buffett stock pick was revealed -- his 1980s buy of Coca-Cola Co. caused such a sensation that trading in the stock had to be stopped. But the recent $10.8 billion International Business Machines Corp. purchase got only a yawn. The impression is that Buffett no longer buys based on the brilliant insights of yore, but rather, chooses conservative mega-cap stocks when they appear to be moderately priced bets.

Chances are that most of the stocks will work out OK, and that Buffett’s new asset managers -- Todd Combs and Ted Weschler -- will gradually take on more responsibility and add value. For several years, though, it would have been better to passively invest your money in an index (SPX) fund than to buy Berkshire shares, which has restrained investors from wanting to pay much more than book value for the stock.

Berkshire’s poor performance has meant something else -- that Buffett’s worst investing decision was to not repurchase Berkshire’s own stock sooner than September 2011, when he finally agreed to buy back company shares. Since then, the pace of repurchases has been a crawl. Yet Buffett has been table- pounding investors to buy Berkshire because, he says, it is significantly undervalued. He praised Jamie Dimon for buying back JPMorgan Chase & Co. stock. And he criticized the late Steve Jobs for not having taken his advice to buy back Apple stock when it was undervalued.

Diminished Stature
Overhanging Buffett’s public role in the past few years is the way Berkshire’s financial interests shaped his public statements. At a time of crisis, Buffett had the opportunity to put a capstone on his career as one of the greatest business statesmen in history. Instead, his stature is diminished. To wit: Buffett struggled to reconcile Berkshire’s sale of derivatives linked to market indices with his longtime criticism of leverage from derivatives, which was perceived as hairsplitting.

He often criticizes Wall Street yet defended Berkshire investments in Goldman Sachs and Moody’s Corp. before the Financial Crisis Inquiry Commission. He praised other banks that made bad mortgage bets, such as Bank of America and Wells Fargo & Co. He attacked Irene Rosenfeld, the chief executive officer of Kraft, for, in his view, overpaying for Cadbury Plc, literally at the same time that Berkshire, by his own admission, was paying a high price for Burlington Northern. Recently, Buffett took his audience aback by criticizing those who have lost homes to foreclosure, saying they victimized banks (that Berkshire has invested in) by profiting from earlier refinancing at cheap rates.

Another example of the statesman missing the mark took place on Oct. 17, 2008, when Buffett wrote a New York Times op- ed urging investors to buy American stocks, as he was. For decades, Buffett had avoided making market calls that required short-term timing of the market. This one was especially risky, coming only a month after Lehman Brothers Holdings Inc. had filed for bankruptcy and while the global economy was in a frightening tailspin.

To his credit, Buffett was trying to boost public confidence in the markets. At the time, though, Berkshire was selling far more equities from its portfolio than it was buying, including large stakes in Johnson & Johnson, ConocoPhillips and Procter & Gamble Co.

Buying Opportunity
Buffett later wrote that he would have preferred to keep those shares, which were sold to fund the GE, Goldman and other special deals. But investors who jumped into the market on his advice would have waited another nine months just to break even. They would have missed the market’s bottom in March 2009 -- the greatest buying opportunity in decades. Nor did investors have a way to participate directly in the special “buy American” deals Berkshire was getting.

The 2008 Berkshire stock sales were the beginning of a $10 billion-plus selling streak that continued through the end of 2010, when Buffett announced his “all-in bet on America” through the purchase of Burlington Northern. Because of the contrast between Buffett’s bullishness on stocks and the way he was putting Berkshire’s own money to work, Buffett appeared to be “talking his book” to pump up Berkshire’s value and his patriotic persona.

Now, Buffett is stumping for President Barack Obama and has made himself the poster boy for higher taxes on corporations and the wealthy, even while Berkshire has lobbied for tax breaks and is battling the Internal Revenue Service on tax assessments at its NetJets Inc. operation.

Buffett’s opinion on taxes is not new -- many people agree with it -- and he has every right to express it. Yet he is a huge beneficiary of low tax rates, which has spurred a torrent of hypocrisy charges. Buffett’s ubiquitous presence and inclination toward stunts hasn’t helped. It made international news when his secretary sat with Michelle Obama at the State of the Union address. Lately, he has switched to using his housekeeper’s taxes as his foil.

Senior business leaders are so incensed about Buffett’s visibility on taxes that it appears he is losing the support of a key constituency that was receptive to his broader and, arguably more important, ideas on capital management, philanthropy and corporate governance. Presumably, the Republicans are sharpening arrows to let fly at Buffett come this fall, which may further damage his credibility.

If Buffett wants to be a player in politics, he’s got every right. But it would be a shame if he forgot that his main legacy is Berkshire Hathaway. His lasting impact will come from focusing on the company and ensuring that the succession process takes places gracefully. That requires more than simply choosing a person. The transition of responsibilities also must be wisely managed.

There are many ways to execute this, and changes may be taking place already that aren’t visible. The stock price is sending a quiet signal that shareholders will welcome any news that lets them put a higher value on Berkshire’s future. Some shareholders are growing publicly restive. The AFL-CIO Reserve Fund submitted a proposal for a shareholder vote in May seeking more transparency about Buffett’s successors and regular updates to ensure the process will be board-driven.

Ultimately, it is Berkshire’s board that bears the fiduciary responsibility. For its members, this transition requires navigating one of the greatest governance challenges in business. The board holds Berkshire’s value -- and Buffett’s legacy -- in its hands.

Alice Schroeder: "Many Black Swans Make the Metaphor Meaningless"

http://www.bloomberg.com/news/2011-10-23/many-black-swans-make-metaphor-meaningless-commentary-by-alice-schroeder.html

Nassim Taleb believes in probabilities, not predictions, but at times it can be hard to tell the difference. “The real Black Swan event,” he said in June, “is that people are not rioting against the banks in London and New York.”

Taleb saw it coming, and his well-publicized remark may be the only reason Occupy Wall Street hasn’t been labeled a black swan. This once-rare bird, made ubiquitous by Taleb’s best- selling 2007 book of the same title, now appears so often after dramatic events, such as Occupy Wall Street, that sightings of it have become meaningless.

The black swan was meant to be a rallying cry for preparedness. Instead it has become the opposite: a loathsome excuse for lack of planning by those who should know better. We need to send the swan to a rear shelf in the closet of ideas to gather dust until an actual black swan appears.

In the past two years, the term “black swan” has been applied to the earthquake in Haiti, the deadly Russian heat wave, the Gulf of Mexico oil spill, the stock market’s “flash crash” of 2010, the volcanic eruption in Iceland that spread an ash cloud over Europe, the Standard & Poor’s downgrade of the U.S.’s AAA credit rating, the populist uprising in Egypt, and lawlessness in Mexico.

Trivialized

The black swan has been so trivialized that it was even used to describe the 2010 “snowmaggedon” winter storms in Washington. And, of course, the black swan has been blamed over and over for laying the egg known as the financial crisis. Some observers are convinced that when they look at the sovereign debt crisis unfolding in Europe, they see ebony wings.

Taleb’s book regaled readers with stories of a space- shuttle explosion, the rise of Adolf Hitler, World War II, the emergence of Islamic fundamentalism, and the stock-market crash of 1987. Yet none of these events, nor recent crises, fits his definition of a black swan: the “unknown unknown,” an outlier with extreme impact for which nothing in the past “can convincingly point to its possibility.” In fact, if you waited long enough, the odds of such things happening approach 100 percent.

Taleb knows there are fewer black swans than people think. But he disdains experts, predictions and theories of causality. This makes his concept slippery: If nothing can legitimately be forecast, then anything is a black swan.

To his credit, in a revised edition of the book, Taleb freely admits he took the black-swan metaphor too far. A philosopher challenged his definition, to which he responded, “Indeed, she caught me red-handed. There is a contradiction: This book is a story.” He added, “Ideas come and go, stories stay.”

Taleb has been vocal in denouncing the idea of the financial crisis as a black swan. To cover such foreseeable extreme events like these, he created a category of “gray swans.” But gray swans are drab. Nobody talks about them.

The last event that I would call a true black swan was Sept. 11, when both World Trade Center buildings were attacked and collapsed, against engineering expectations. Contrary to many claims, the terrible 2011 Japanese earthquake wasn’t a black swan, even though seismological models, as they always do, failed to predict its severity. Apart from the huge loss of life, economic losses are estimated in the hundreds of billions, yet the insurance industry will probably pay out only about $35 billion in claims. Insurers are aware these events can exceed model predictions by wide margins so they have limited their earthquake exposure and excluded nuclear losses from coverage.

Gray Swans

Likewise, many of the other black-swan disasters of the past few years that are really gray swans have resulted in unpleasant, but far from crippling, losses for the insurance industry. And when the day comes that a gigantic asteroid strikes the Earth; a New Madrid-fault earthquake levels much of the eastern U.S.; or a bioterrorist/cyberspace attack hits, the insurance industry will already have arranged not to pay the losses through policy exclusions.

There is a disconnect here, and a big one. If insurers can spot the risk of a gray swan, underwrite and even exclude it, why aren’t those who are exposed to the risk doing a better job of preparing?

Instead we are making matters worse. For one thing, it was only a matter of time before Wall Street would figure out a way to profit from gray swans. As of April 2011, about $38 billion had been raised by “black swan” funds designed to profit from extreme low-probability events. Are these funds a canny strategy or a wasteful form of hedging? Either way, their proliferation certainly brings Armageddon closer by creating counterparties for the kind of risky optimistic bets needed to cause it. Many other responses to the so-called black swan of the financial crisis have added to the moral hazard already in the banking system.

The “too big to fail” taxpayer guarantee and the lack of substantive financial reform are the worst offenses. This isn’t what should be happening. If there had been no way to duck accountability by calling the crisis an “unforeseeable” event, the public might have demanded real solutions earlier from its leaders. Without the excuse of the black swan, perhaps there would be less reason now for anyone to Occupy Wall Street.

(Alice Schroeder, the author of “The Snowball: Warren Buffett and the Business of Life” and formerly a top-ranked insurance analyst on Wall Street, is a Bloomberg View columnist. The opinions expressed are her own.)