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.