Despite his sterling reputation among investors, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) investing chief Warren Buffett has come under fire over the past month.
Normally regarded as a logical and reasoned champion for the everyday investor, Buffett has taken hits from all directions. What exactly has turned the world against Buffett? And how did he respond?
Let's break it down.
1. Tough questions at the Berkshire Hathaway annual meeting
Every year, Berkshire Hathaway shareholders gather in Omaha for a weekend of stock talk, revelry, and celebrations of Berkshire's value investing prowess.That includes a closely watched Q&A session with Buffett and his right hand man, Charlie Munger.
This year, that Q&A session included some hard-hitting questions for the duo. Shareholders grilled them on the cost cutting and mass layoff practices of Berkshire Hathaway partner 3G Capital, the ethics of investments in products like Coca Cola (KO 1.55%) that are known to be unhealthy if consumed in excess, and potentially predatory lending practices at Berkshire subsidiary Clayton Homes.
In each case, Buffett and Munger answered thoughtfully, if not convincingly. They said that companies should only employ as many employees as needed, and in many cases management ranks had become bloated, justifying layoffs and reorganizations. Buffett recognized the changing consumer attitude toward sugary products like Coca Cola, saying that "no one does well ignoring consumers."
Buffett also vigorously defended the lending practices of Clayton Homes, crediting the company with giving lower income families the opportunity to own their own home. He also noted that the company also retains the majority of the mortgages it originates, meaning that the company can only succeed if borrowers are capable of repaying the debt.
2. Hedge fund manager comes out with guns blazing.
At the SALT Investment conference last week in Las Vegas, hedge fund manager Dan Loeb criticized Buffett, essentially claiming that Buffett doesn't practice what he preaches. The sentiment was similar to the questions Buffett faced at the annual meeting, except Loeb's comments didn't mince words. He said:
I love reading Warren Buffett's letters. ... And I love contrasting his words with his actions. I love how he criticizes hedge funds, yet he really had the first hedge fund. He criticizes activist investors, yet he was the first activist. He thinks we should all pay more taxes but he loves avoiding them himself.
Neither Buffett nor Berkshire responded.
3. McKinsey and Co. research questions the efficacy of Berkshire's investing partner, 3G Capital
A new study from the management consulting firm McKinsey and Co. circulated this month concludes that the aggressive cost cutting of buyout firms, namely 3G Capital, can potentially destroy long-term value.
The problem for Buffett is that he's aligned himself quite closely with 3G over the past few years, and if the conclusions in this study are true, that partnership runs in stark contrast to the long term philosophy he preaches.
Berkshire and 3G have together invested billions to buy iconic companies Heinz and Kraft, and merge Burger King with Tim Hortons.
Buffett says of 3G, "In terms of ability, in terms of integrity, every aspect of it. 3G has been a perfect partner."
The perfect partner of course would produce value over the long term, a fact that the McKinsey study puts in doubt. McKinsey points to another 3G property, AB-InBev (BUD +1.02%), as proof. Since 3G acquired Anheuser-Busch in 2009, the beermaker's market share has fallen from 42.9% to 40.5% in 2014.
McKinsey concluded that while the aggressive cost cutting does improve operating results in the short term, that improvement is outweighed by a reduction in future growth and potential risks to the brand's value in the marketplace.
Those types of long-term sacrifices stand in direct opposition to Buffett's philosophy of buying and holding companies for 100 years or more.
It's been a tough month, but Buffett's earned the benefit of the doubt
Could McKinsey's report be wrong? Sure. Could Dan Loeb's harsh words be driven by ulterior motives? Totally.
Is it really a bad thing that stockholders are asking tough questions at a company's annual meeting? I don't think so. Are there moments when Buffett may not practice exactly what he preaches? I'm almost certain there are.
Of course, Buffett's letters and teachings are aimed at everyday investors as much as anyone else. It makes sense that what may be the best approach for you or I may be a little different than what's best for an exceptionally sophisticated professional investor with billions and billions of dollars under management.
That's why it's healthy for Buffett to take some criticism every now and again. It keeps him on his toes, and it proves that we're paying attention and thinking critically.
