Lest my colleagues beat me to a pulp, I’ve had to compile this article in secret. Warren Buffett is an investing deity and no one, particularly no one in the The Intelligent Investor’s Buffett-mad office, is allowed to question him.
That attitude is understandable. You don’t become the world’s second richest person, from scratch, without doing something special. And I’m certainly in no position to throw stones.
But the Oracle turns 79 this year. His stock portfolio has just registered an abysmal year – his worst by a very large margin and even worse than the S&P 500’s 39% retraction. By his own admission he did some ‘dumb’ things, including buying ConocoPhillips when the oil price was at its peak and losing more than 90% of his investment in two Irish banks.
Those mistakes were, for mine, compounded by his blatant ramping of US bank Wells Fargo. For several weeks prior to – and, particularly, at – this year’s Berkshire AGM, Buffett was glowing in his praise (this interview with Fortune magazine sums it up best). It’s a ‘fabulous bank’ he was telling anyone who would listen, and he would buy the lot if he could.
On the Monday after the Berkshire meeting Wells Fargo’s stock price soared 24%. On the Tuesday, it emerged that – surprise, surprise – it was one of the banks likely to fail the US government’s stress test. Wells Fargo would have to raise capital. The Oracle of Omaha had an incentive to avoid a dilutive raising, which would impair the value of his original investment. But, fortuitously, the Buffett-inspired share price rally provided Wells Fargo with a higher share price to work with.
There’s an argument that what he was doing was simply smart manoeuvring. Which it seems to have been. But it’s out of kilter for the man who asks everyone else to tell it straight, and particularly cruel to the legion of followers who treat his word as gospel.
Berkshire has very clear plans for succession if Buffett gets hit by a bus. If he ‘drops dead tomorrow’ he told shareholders, the board of directors knows who the replacement is and they feel ‘very good about it’.
I’d feel pretty good about that were I a shareholder as well. Some very smart people have put a lot of thought into Berkshire after Buffett. But what if Buffett doesn’t get hit by a bus? What if he lives to be a hundred years old? This is the more important question for Berkshire shareholders, because at some point in the not too distant future, his remarkable cognitive abilities will deteriorate.
‘Stop before you get old’ admonished Ken Fisher (son of the legendary Phil Fisher) in his introduction to the 2003 edition of Common Stocks and Uncommon Profits. In a startlingly honest and emotive piece, Fisher catalogued his ageing father’s sad investing downfall.
‘There simply are no great octogenarian investors,’ explained Fisher. ‘In his latter years Father could talk well and think well, but he didn’t have the clarity for great decisions and his sales were poorly timed.’
Ultimately, age catches up with all of us. That’s something Buffett is acutely aware of. But for him, even more so than Fisher, walking away from Berkshire would be walking away from his life’s work. Buffett is Berkshire. And one of the most revealing things to come out of Alice Schroeder’s intimate biography, Snowball: Warren Buffett and the business of life, is that he craves adulation. He loves being in the spotlight and adores the 30,000-strong fan base that flocks to his annual ‘Woodstock for Capitalists’. Few people could make a dispassionate, conscious decision to walk away from a life that they love.
I owe Warren Buffett a lot. That might sound bizarre given I’ve shaken the man’s hand once in my life and he wouldn’t know me from a bar of soap. But my friend and business partner Greg Hoffman introduced me to him, through Roger Lowenstein’s The making of an American capitalist, when I was 19 years old. In turn I was introduced to Ben Graham, Charlie Munger’s incredible mind, Buffett’s letters to shareholders and an investing approach that simply made sense. In the years since, applying those principles has given me a substantial share portfolio and part-ownership and management of The Intelligent Investor. Above all, Buffett taught me that it’s possible to be a successful business person and behave ethically.
I hope he departs with that reputation intact.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.