By DAVE KANSAS April 30, 2008; WSJ
Even Buffett Isn't Perfect By Vahan Janjigian (Portfolio, 237 pages, $24.95)
The news on Monday that the Mars candy company had bought Wm. Wrigley Jr. Inc. for $23 billion, at a premium of more than $5 billion above the gum-and-confectionery giant's market value, might have prompted some observers to wonder about the wisdom of the purchase. But Mars's move came with perhaps the ultimate seal of approval for financial perspicacity: The acquisition was backed by the fabled investor Warren Buffett. The Oracle of Omaha certainly wouldn't get involved with the M&M's-maker if there was a chance that the deal might melt in his hands, right?
Vahan Janjigian isn't so sure. In "Even Buffett Isn't Perfect," the author takes a contrarian – or at least mildly dissenting – view of Mr. Buffett's investing acumen. Of course, Mr. Buffett and the shareholders in his company, Berkshire Hathaway, will hardly be surprised to hear about his imperfections. Unlike many wildly successful investors, Mr. Buffett actually admits to error. In two recent annual letters to shareholders, as Mr. Janjigian notes, he declared himself "dead wrong" about certain decisions.
And there have been memorable stumbles over the years: A Berkshire Hathaway investment in the retailer Pier I, in 2004, unhappily preceded a big drop in Pier I's stock; more famously, a stake in Salomon Bros. in the late 1980s and early 1990s, though it eventually made money, caused more headaches than it was worth. (Salomon eventually became part of what is now Citigroup.)
What's remarkable about Mr. Buffett is that he has made so few mistakes while building Berkshire Hathaway into a stock-market titan. He strongly prefers that the investments of Berkshire Hathaway be referred to as such rather than credited to himself alone. Still, in the popular imagination it would be hard to slide a piece of paper between Mr. Buffett and his company.
And it turns out that Mr. Janjigian's heart isn't really in showing us his subject's blemishes anyway. His book's subtitle is: "What You Can – and Can't – Learn From the World's Greatest Investor." The chapters boil down to this: Mr. Buffett is a genius; Mr. Buffett makes mistakes; Mr. Buffett is a genius. Sprinkled into the mix are Mr. Buffett's views on taxes (he doesn't mind most of them) and corporate governance (do-gooders often miss the mark) and a summary of his value-oriented investment philosophy: It focuses on a company's real, or "intrinsic," value rather than on its public market share price.
In search of things to complain about, Mr. Janjigian notes that Mr. Buffett has rightly had to adjust his corporate-governance policies to provide more transparency. He chides Mr. Buffett for backing the call to account for the cost of stock options more explicitly. He carps about Mr. Buffett's approval of the estate – or "death" – tax; and he dislikes Mr. Buffett's opposition to tax cuts, arguing that the current tax system unnecessarily costs investors money.
But Mr. Janjigian also sheds light on Mr. Buffett's magic. Mr. Buffett has two large advantages that the average investor doesn't have, advantages that are often overlooked by those who try to mimic him.
First, Mr. Buffett can secure favorable terms for large investments. He has struck several private deals with public companies – such as Level 3, a telecommunications company, and Williams Cos., an energy concern – that would not have been possible without the huge amounts of money that Berkshire can bring to any transaction. (In this respect, Berkshire resembles Wal-Mart, which wins favorable terms because of its enormous volume.) Companies are pleased to secure Berkshire's blessing, too, so they are especially motivated to cut a deal.
Second, Mr. Buffett has an unusual management style. He likes to acquire good companies with good managers and let them run their own show, without much interference. This strategy has helped him to make an inordinate number of investments in which a company's owners or managers have approached him, saying, in essence: "Let's make a deal." In recent years he has purchased Clayton Homes and Business Wire in this manner. In his folksy way, Mr. Buffett describes these deals as though they were struck over coffee at the local diner before the flapjacks arrived. But Mr. Janjigian notes that, behind all the Midwestern amiability, Mr. Buffett surely has sharp analysts combing through every detail.
Mr. Janjigian also helpfully notes what is at the heart of Berkshire Hathaway's business and investment firepower. For all the various companies owned by Berkshire – See's Candies, Dairy Queen, Borsheim's Fine Jewelry – the most important holdings in the portfolio concern the humdrummish business of insurance. Mr. Buffett loves insurance because he has effectively used the "float" – premiums paid on various insurance instruments – to make his winning investments. He has also shown that he can run a pretty canny insurance operation all by itself. After getting dinged by hurricanes in 2005, Berkshire has benefited from higher premiums and rather fewer hurricane problems.
In fact, the success of Berkshire's insurance business has left Mr. Buffett often musing that he doesn't know what to do with all his cash. Given that on Monday Berkshire put billions into the Mars purchase of Wrigley, the Oracle now will have something to chew on as he contemplates his next move.
Mr. Kansas is president of FiLife.com, a personal finance Web site owned by Dow Jones & Co. Inc. and IAC Corp.
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