[Editor's Note: The following is a spirited point-counterpoint from our ongoing discussion of Berkshire Hathaway and legendary investor Warren Buffett. At issue is whether or not what Warren Buffett says matches up with what he does.]
The Dumb Ox: I'm an admirer of Warren Buffett as an investor, and lately I've been interested in him because I've noted some strong divergences between what he says -- and the public's perception of him -- and what he does. I don't know that this is a bad thing, but he's clearly a more complex person than his public persona seems to indicate.
For example, he complains about corporate empire-builders who hoard cash and don't distribute it to shareholders, but he sits on one of the largest cash piles in the world.
MCancel: My take is that Buffett's problem with corporate empire builders isn't that they hoard cash and don't distribute it to their shareholders but that they reinvest their cash at low rates of return. Buffett doesn't do this.
The Dumb Ox: If the issue is reinvesting cash at a low rate of return, a fair amount of money is carried on Berkshire Hathaway's (NYSE: BRK.A) books in cash and cash equivalents. How much is that earning? Another apparent divergence is the fact that one of Buffett's investing tenets is that you can enhance your performance by concentrating your investments. The problem is that Berkshire Hathaway is one of the most diversified companies in the world.
MCancel: I agree with you that Buffett has preached concentration. The problem is that Berkshire has a lot of capital to invest. In order to concentrate his holdings, he would only be able to invest in very large companies, of which very few are suitable candidates for purchase. Also, Berkshire has to invest all of the cash it generates, and often the original investments are not available at a satisfactory price, so the cash has to be invested somewhere else, leading to further diversification.
The Dumb Ox: Something else that's a little disconcerting is the fact that Buffett espouses a strong sense of responsibility to his workers, but will shut down an operation as soon as it starts costing him money.
MCancel: You're right, he will shut down an operation that is consistently losing money, which seems reasonable enough, but only if that business doesn't have a reasonable prospect of making a profit in the future. The thing I like about Buffett's approach is that he won't close a business even if the profits are very small, as long as Berkshire doesn't have to invest cash in the business to keep it going. I think this is out of his concern for the employees.
The Dumb Ox: Plainly Buffett gives troubled companies time to turn around (he presumably wouldn't have bought them if he didn't think they would), which is one of his strengths. The question is whether this is because he's worried for the workers or because he believes that giving talented managers a real chance to turn things around will yield him more money.
What about the fact that he's a champion of shareholder rights, but to protect his control of the business he creates an entire class of second-class shareholders with reduced voting power?
MCancel: Interesting, but I don't think his motivation was to protect the business. If I remember correctly, Berkshire was responding to shareholder concerns about not being able to give shares in Berkshire as a gift because it would exceed the $10,000 tax-free threshold. It was also to prevent companies from creating mutual funds that invest solely in Berkshire.
The Dumb Ox: Others have noted that the only reason for the reduced vote for B shares was to keep Buffett in control. This also presumably explains the fact that conversion works only one way -- you can turn A shares into B shares, but not vice-versa. Over time, Buffett's percentage of the vote will increase. All shareholders are equal, but some are more equal than others.
Let me close by saying that Buffett isn't merely Buffett, he's also the Buffett Myth. In this version he's not just the greatest investor of our time -- a modern-day Bernard Baruch -- he's the Oracle of Omaha, the homespun, honest, plain-spoken, friendly, unassuming Guy Next Door whose canny business sense and rock-solid integrity, always backed by a warm regard for other people, regularly trounces the evil speculators and layoff artists who dominate Wall Street. He emerges as a kind of capitalist Yoda who relentlessly battles the Dark Side (and drops pithy aphorisms his acolytes can argue over) while making untold billions doing it. A lot of people have invested a lot of emotion in that myth.
Now, the myth may be true. It derives in large part from Buffett's own writings about himself and his public statements. Everything we think about Buffett comes filtered through the lens of what he's said about why he's done what he's done. He's an extraordinary communicator; he has Lincoln's gift of the pithy phrase, the humble metaphor that exposes the silliness of a contrary position. The homespun living-in-the-same-house-I've-lived-in-for-50-years thing, for example, may be a real part of his character, but I suspect it's also been carefully cultivated. Real or not (or more probably, real but exaggerated), it has served him well; during the Decade of Greed (remember the '80s?), when people who made fortunes in the stock market were widely reviled, the most successful speculator of them all became a national icon.
[Editor's Note: We'll give The Dumb Ox the last word here, even though the debate has raged on in a much larger way than we can do justice here. For a great read, check out the discussion for yourself.]
The above was posted on the Berkshire Hathaway discussion board on October 03, 2001. It is a compilation of three separate posts by the authors and has been edited for format and style.
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