At the Fool, there are a lot of fans of Warren Buffett and his company, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B). Lots. And we don't always keep our heads about it either. Just speaking for myself, sometimes I'm much more like a preteen girl at a Justin Bieber concert rather than a sober journalist when talking about Warren Buffett.
Yeah, I went there.
So what happens when you're ready to hop on the bandwagon and become a head-over-heels Buffett fan, too? Well first you have to get schooled in how to brush off the inconsistencies in the Buffett/Berkshire story. Fortunately, I'm about to give you a head start in your studies by sharing three of the biggest seeming shortfalls of the Buffett/Berkshire story.
1. Warren Buffett buys simple, transparent businesses that are easy to understand and hangs onto them for a long time. He has a distinct distaste for the folks on Wall Street.
"Beware of geeks bearing formulas."… "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." … "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway." -- Warren Buffett
The haters would say that all of this was flushed with Buffett's investment in Goldman Sachs (NYSE: GS). Buffett, they'll claim, had no intention in holding Goldman stock over the long term -- it was simply a bet on the Federal Reserve stepping in and saving the banking system. Worse, these naysayers will continue, Buffett's association with Goldman harmed his reputation because Goldman is the quintessential Wall Street firm, profiting from the financial system's pain, oozing moral hazard, and even being charged with fraud.
What do you tell these Berkshire bashers? You tell them ... um, well, let's come back to this. Moving on.
2. In Buffett's eyes, the world would be a better place without derivatives.
"Derivatives are financial weapons of mass destruction." -- Warren Buffett
Our foes might claim that this is a very clear case of "do as I say and not as I do." They may follow that by opening Berkshire's 10-K and pointing to, "Our Consolidated Balance Sheets include significant amounts of derivative contract liabilities ..." How is it, those haters will ask, that Buffett can bash derivatives, but is OK with using them?
This one is easy to counter because the type of derivatives that Berkshire has on its books aren't the dangerous kind.
Wait, what's that you say? Aren't they still derivatives? Well, yes, but ... hey, who said you could interrupt anyway?
3. Reputation is everything. Damage your reputation and nothing else matters.
"It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction." … "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." -- Warren Buffett
This, of course, is the front on which Buffett is taking the most fire currently. By now even the folks living under rocks have seen smoke signals about heir apparent to the Berkshire throne, David Sokol, suspiciously buying stock in Lubrizol (NYSE: LZ) just shortly before convincing Buffett that Berkshire should take over the company.
What does this have to do with Buffett? Those on the opposite side of the Berkshire love story would claim that Buffett's response to Sokol's stock purchase has been wholly inadequate. By focusing on the legality of Sokol's actions and not taking a stronger stand to denounce what his left-hand man had done -- they claim -- Buffett completely undermined his exhortations on honesty, transparent business dealings, and the importance of reputation.
So how do Buffett fanboys like myself address these charges? Simple: Yell, "Hey, is that Charlie Sheen with a jar of tiger's blood over there?" and then bolt.
The biggest misconception of all
Of all of the seeming inconsistencies of the Buffett/Berkshire story, the biggest is probably Buffett's public image.
Thanks to plenty of help from the media, Buffett has become the ol' granddad of investing, giving out simple-as-pie one-liners and making it sound like building a billion-dollar fortune investing is as easy as tying your shoe (make two bunny ears, the bunny runs around the tree ...). And Buffett does all of this with a cheeseburger in one hand, a Cherry Coke in the other, and a reputation as stark white as an albino Arctic hare in the dead of an Alaskan winter.
For those who still believe in Santa and the Easter Bunny, I hate to break it to you, but that's a PR image just like the rest. Sure, I think Buffett is a swell enough guy -- but he's human like the rest of us and is very far from perfect. And as far as investing goes, while Buffett may shun overly complex situations and industries that he doesn't have expertise in, his extensive understanding of the areas where he does invest -- coupled with obvious natural gifts -- belie the difficulty in investing like Warren Buffett.
So will the most recent knock on Buffett/Berkshire shake me out? As a Berkshire shareholder, I'm dismayed about what Sokol did. As a Buffett fan, I'm disappointed that he didn't come out strongly against it. But I'll get over it. I'm invested in Berkshire because it's a great collection of companies and Buffett is a fantastic investor and businessman. If what I'm after are simple story lines and moral perfection, I'll stick to fairy tales.
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