In his introduction to the 2003 edition of the investing classic Common Stocks and Uncommon Profits, Ken Fisher, son of legendary investor Phil Fisher, said of his father, “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.”
The same argument is now being made with increasing frequency about 82-year-old Warren Buffett. Certainly, his mistakes appear to be accumulating.
The 2000 words taken in this year’s shareholder letter to explain Berkshire Hathaway’s dividend policy were uncharacteristically dry and it was hard to escape the conclusion that Buffett was protesting too much.
Berkshire Hathaway is sitting on more than US$40 billion in cash, US$12 billion of which will go to buying Heinz. But Buffett, like Apple, is unlikely to pay out the remainder as a dividend.
His argument is simple enough. The sharemarket prices Berkshire Hathaway’s dollars at more than a dollar in value. So shareholders are better off selling a portion of their stock than receiving a cash dividend.
The logic seems irrefutable. And, given the absence of franking credits in the US, sensible. It’s the approach Buffett has used to great success over his investing life. And he has done a better job of reinvesting capital than investors.
So why not let him continue to do so?
Because the market needs people like Buffett digging in the undergrowth, not “shooting elephants” like Heinz.
When Berkshire Hathaway was small and nimble, Buffett ferreted out attractive deals and delivered astounding returns. Now it’s huge and Berkshire’s cash pile is the ammunition for Buffett’s “elephant gun”.
He has to make massive acquisitions to have an impact on returns, and that increases the risk of one going wrong.
Even his shareholder letter acknowledges the problem: “Because of our present size, making acquisitions that are both meaningful and sensible is now more difficult than it has been during most of our years.”
Buying bigger, more marginal businesses increases the possibility of error. That’s why Buffett should return the cash and let investors ferret around in the undergrowth for themselves. They don’t need an elephant gun; he has no choice.
And yet Buffett adopts a course contradicted even by his own explanation.
His recent actions also suggest the lack of clarity that Phil Fisher saw in his father.
Buffett bought ConocoPhillips when the oil price was at its peak and lost more than 90 per cent of his investment in two Irish banks. By his own admission these purchases were “dumb”.
Then there were his comments about US bank Wells Fargo in 2009. It’s a “fabulous bank”, said Buffett at the 2009 Berkshire Hathaway annual meeting and on the following Monday Wells Fargo’s stock price soared 24 per cent. But on Tuesday it emerged that it was one of the banks likely to fail the US government’s stress test.
Wells Fargo might have had to raise capital but the Buffett-inspired share price rally offered the bank room to move.
The greatest threat to Berkshire investors may not be who succeeds the great man but how long he hangs around. At some point, Buffett’s remarkable cognitive abilities will deteriorate; they may have already done so.
Age catches up with us all. Buffett is acutely aware of that fact but craves adulation and being in the spotlight. How many people could make a dispassionate, conscious decision to walk away from a life that they love clearly as much as Buffett loves his?
I hope Buffett departs with his reputation intact. But with every year that passes with him in the corner office, the risk of him not doing so increases.
This article contains general investment advice only (under AFSL 282288).
John Addis is editor at Intelligent Investor. BusinessDay readers can enjoy a free trial offer and fortnightly podcast. For more Intelligent Investor articles click here.
The original release of this article first appeared on the website of Hangzhou Night Net.