Here's How Warren Buffett Disappointed Me

The Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) annual meeting is attended by throngs of Berkshire faithful. For some shareholders at the meeting, it's probably impossible for Berkshire CEO Warren Buffett to ever be wrong in their eyes. If we're being realistic, though, Buffett does indeed have his slip-ups. As partner-in-crime Charlie Munger put it:

"Just because Warren thought something years ago doesn't make it a law of nature."

With that in mind, I rounded up the team of Fools who attended this year's Berkshire meeting to ask in what ways Buffett disappointed them during the meeting.

Brendan Mathews: Toward the end of the meeting, a shareholder asked about IBM's (NYSE: IBM  ) moat. Warren basically sidestepped the question, saying he didn't understand IBM's moat as well as Coca-Cola's (NYSE: KO  ) . According to Buffett, He likes IBM's financial policies and thinks it will do well, but he feels more conviction in Coca-Cola, Wrigley, Heinz (UNKNOWN: HNZ.DL  ) , and Burlington Northern Santa Fe.

Considering the size of Berkshire's investment in IBM, I hoped for a better answer. I wish he had directly addressed the question, and said something like this:

IBM is a technology business, but it is somewhat unique among technology companies. It has strong streams of recurring revenue from service and software contracts that can extend up to a decade. It has very strong relationships with clients, and it is, by nature of the business, very hard to switch vendors. These switching costs, in addition to IBM's well-respected brand, gives IBM a unique amount of pricing power, and its earnings are much more reliable and predictable than with the average tech company.

Scott Phillips: There's something a little strange about deigning to criticize the world's greatest investor. He has more than 50 billion reasons (each of them a U.S. dollar) to suggest he's probably got more right than wrong! 

The man nominated to be the Berkshire "bear," Doug Kass, attempted to make a bet with Buffett and Munger, effectively asking for $100 million of Berkshire's money, with which to prove he could beat the market by acting as a short-seller -- with Kass' fees going to charity in their entirety if he lost the bet. Before Buffett could answer, Munger gave a succinct "no."

I don't blame Berkshire for turning Kass down, but I wish they'd thought to go one further -- to choose a time frame that was long enough to bear out the results, and have a friendly bet on the performance of the market against the return from Kass' fund. That would have put Kass well and truly on the spot, and I'll bet Buffett would have won.

Michael Olsen, CFA: When asked about ISCAR's competitive advantage, Buffett gave an uncharacteristically droning, almost evasive reply:

ISCAR has incredible competitive advantages. If you go back to 1951 in Israel, just go back to the prospects that were facing him (well-financed, entrenched competition). Most machine-cutting tools companies sell to heavy industry using materials shipped from China. A young man, at 25, creates ISCAR, with no locational advantage, and it becomes a great company to today. That's hard work and talent. ISCAR is one of the great companies of the world, and we feel very proud to be associated with it.

In things Buffett already knows: A good outcome doesn't mean all is well. Likewise, ISCAR's success isn't proof of a competitive advantage in and of itself. Buffett knows that. My best guess is that, in his attempt at distilling things, he boiled it down a bit too much.

Here's what I think he meant to say, and most assuredly knows:

In a relatively small worldwide market, where a continuous need to source tungsten exists (because blades wear quickly), ISCAR benefits from being one of only two players of scale. Its scale affords a critical supply-chain advantage, and incremental sales (of blades) are immensely profitable. Competitors just can't get a foothold, because of the cost of building a supply imprint. That, in turn, affords pricing power.

Matt Koppenheffer: I'll echo what Brendan said about IBM. Given that Buffett has made that company a "big four" holding at Berkshire -- joining the company's massive holdings in Wells FargoCoca-Cola, and American Express -- I had hoped that he'd have a better answer to the IBM-moat question. 

But since Brendan has already covered that, I'll add that I was also a bit bummed about Buffett's response to a question about the skills of Berkshire's insurance guru Ajit Jain. Buffett did a nice, folksy sidestep of the question, opting instead to quip that "if Ajit ever is not with us, we won't look as good," and "if he came in at 1965 instead of 1985, we'd probably own the world." Charming, but not terribly helpful in understanding what has made Jain so successful running one of Berkshire's key businesses.

The closest Buffett came to actually answering the question was this: "When people copy [Ajit], he comes up with something new." So we can at least take away that small tidbit -- that Jain is intellectually flexible and creative enough to find new avenues when his current ones get crowded.

Is it too late to buy it like Buffett?
Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2013, at 2:17 AM, sanmiiter wrote:

    This will be super-fall.

  • Report this Comment On May 12, 2013, at 3:33 AM, MotleyTools wrote:

    Invest in Bangladesh garment futures.

    There is money in them there tragedies.

  • Report this Comment On May 12, 2013, at 4:51 AM, yardomd wrote:

    My stocks portfolio composition grew 25% in the last 6 months. Can you make it better?

  • Report this Comment On May 12, 2013, at 5:37 AM, deepestvalue wrote:

    i was there for 100% of the meeting. Using 'disappointed' in the headline is misleading. Buffett was 90% as clear and forthright as ANYONE cound be. At 82 I will take that & you should too.

  • Report this Comment On May 12, 2013, at 8:35 AM, SkAtl wrote:

    No doubt that Warren Buffet is successful investor. However on personal front, he is on top of my list of folks who double talk. On one hand he wants more personal taxes, but he never pays himself any income. He has never declared dividend because that will generate income in his personal taxation which he do not want to pay. But then he would side with Obama and slash folks on their tax rates who pay "Double Taxes" on dividend income. First the company has paid taxes and then the individual is paying on dividend. I think IRS should start taxing companies who do not pay dividend to its shareholders.

  • Report this Comment On May 12, 2013, at 11:52 AM, yardomd wrote:

    Did you learn something new at Omaha? Warren Buffett was asked: How to distribute assets to the children. Answer: Rewrite the Will every 5 years, in consultation with the family, to make sure everybody gets what they want. This will avoid legal fighting after the parents die. Also, distribute and transfer the assets before death, to avoid the 50% Probate tax. This way children will learn how to manage and grow the family assets and pass them onto future generations. What a useful concept. My stocks portfolio composition grew 25% in the last 6 months. Primary concern is to teach the family how to keep it going.

  • Report this Comment On May 18, 2013, at 4:35 AM, CYU wrote:

    I asked the IBM question at the shareholders meeting and I was similarly perplexed at his answer.

    While driving around Omaha for the first time I got to thinking, "Did Warren just buy all the businesses that he liked in his neighborhood?" After seeing around the 11:30 mark of this interview ( with Charlie Munger I think I get it now. My theory is that BRK bought into IBM because they saw how Burlington Northern would have trouble running without IBM's services and couldn't see them moving off of IBM.

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