These Warren Buffett Moves May Not Have Made Sense, But They Paid Off Big Time

Berkshire Hathaway CEO Warren Buffett has made a career out of saying one thing, only to do the opposite years later. It may sound like he's being hypocritical, but he's really just willing to be flexible. Berkshire Investors should thank him.

Aug 18, 2014 at 11:00AM

Buffett Fool Annual Meeting

If you think that Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) CEO and investing legend Warren Buffett has created billions in personal wealth for himself and Berkshire's shareholders by remaining steadfast, and sticking to the same process for decades, you're dead wrong. As a matter of fact, Buffett has been downright hypocritical at times, both with his actions and his expectations of companies that he invests in. 

The funny thing about it? Berkshire shareholders shouldn't be disappointed or leery of Buffett's hypocrisy: they should thank the man. As a matter of fact, every investor out there can learn a valuable lesson from Buffett in this regard. Let's take a look at Buffett's three most "hypocritical" moves, and see what we can learn about being better investors. 

#1. Stock splits 

Coins Pd

From the Buffett's letter to shareholders in 1983 (emphasis mine):

We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree.

In 2009, Berkshire Hathaway's "B" shares were split. Each "B" share became 50 shares after the split was complete. More than a quarter-century after a rather clear position on stock splits, Buffett broke his own rule. 

Here's why you should thank Buffett

Bnsf Hauling Siemens Props

Source: BNSF Railways

The 2009 stock split was done in order to accommodate shareholders of Burlington Northern Santa Fe Railways, of which Berkshire was acquiring the remaining 77% that it didn't already own. A number of BNSF's largest investors insisted on getting at least some Berkshire stock as part of the deal, which at $34.5 billion in stock, cash and debt, is still Berkshire's largest investment. 

Since Berkshire acquired BNSF, it has generated more than $14 billion in net income. In 2013, BNSF's net income of $3.8 billion was almost 20% of Berkshire's total profits for the year.

#2. Using stock to buy companies 

Burning Money Crop Flickr
Source: Flickr

Buffett has long been opposed to issuing Berkshire stock to use as currency to make acquisitions. He has typically said this is because Berkshire's shares are worth more than market value, weakening the rate of return by overpaying for assets. However, the BNSF opportunity seemed to change Buffett's tune here. Berkshire issued new shares, diluting investors a whopping 5.5% in order to buy BNSF from its shareholders. 

Why you should thank Buffett for this, too
In short it's the BNSF acquisition again. Since acquiring BNSF, the $14 billion in profits it has generated would have been enough to do any of the following:

  • Buy the $10 billion stake in IBM.
  • Cover the $12 billion stake in Heinz ($8 billion of which pays a whopping 9% annual return).
  • Cover the combined stock investments of Ted Weschler and Todd Combs (who have both outperformed the market and Buffett, since joining Berkshire. 

#3. Stock Buybacks

Coca Cola Buffett Ko Michael Pugh
Source: Coca-Cola

Buffett has long supported share buyback programs at companies that Berkshire has held stock in, while being reticent to buy back Berkshire shares. From the 1990 shareholder letter:

"When Coca-Cola uses retained earnings to repurchase its shares, the company increases our percentage ownership in what I regard to be the most valuable franchise in the world."

From the 2011 shareholder letter (emphasis mine):

In the end, the success of our IBM investment will be determined primarily by its future earnings. But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.

The reality is, Buffett has never been opposed to buying Berkshire shares; but only under very specific conditions:

  • Shares must be at a strong discount to intrinsic value (specifically below 120% of book value).
  • Berkshire's liquidity won't be significantly reduced by share buybacks. 
  • They represent the best return for shareholders versus potential acquisitions or investments. 

Thank Buffett for the outperformance 
Since the buyback program commenced, Berkshire's stock has outperformed the market by a decent clip:

BRK.B Chart

It's not really hypocrisy...


...its mental flexibility. 

Warren Buffett has very few "hard and fast" rules, and he's willing to change course in order to get the best return for Berkshire shareholders. As much as anything else, this is why Berkshire Hathaway has grown per-share earnings nearly 20% annually since 1970, and been one of the greatest investments of the past century. While having a plan is important, and being steadfast at times makes sense, the lesson we can all learn is that different situations can mean different decisions. 

Berkshire's acquisition of BNSF Railways essentially led to Buffett's realization that all three of these things were worth doing differently than he'd done them in the past. And for that, Berkshire is in better shape, and its shareholders owe the Oracle yet another great big "thanks." 

Warren Buffett: This new technology is a "real threat"
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Jason Hall owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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