Published On Wed Nov 11 2009
Now, why would a smart guy like Warren Buffett step on his own punch line, as they say of inept public speakers, by making the biggest acquisition of his career at the moment his Berkshire Hathaway Inc. was reporting a spectacular tripling in third-quarter profits?
Okay, acquisition announcements aren’t so easy to time. But announcing the purchase of Burlington Northern Santa Fe Corp. a couple of weeks before or after Berkshire’s third-quarter earnings report would have given the Street time for a thorough analysis of those third-quarter numbers.
Which I expect is what the “Oracle of Omaha” sought to avoid.
Because, you see, in this year’s third quarter, Berkshire generated 93 per cent of its profits from trading in derivatives and credit-default swaps (CDSs).
I hear what you’re saying. When it completes its $26 billion (U.S.) purchase of the 77.4 per cent of BNSF that Berkshire doesn’t already own, Buffett’s sprawling, oddball collection of businesses will employ about 240,000 people.
Yet, in its latest quarter, Berkshire derived almost all its profits from the activities of one man: Warren Edward Buffett.
Berkshire’s pipeline, furniture, bricks, Fruit of the Loom, Benjamin Moore and Dairy Queen businesses do not make bets with high-risk financial instruments. Only the Berkshire CEO, with his sole access to its cash flow, can and does do that.
Yes, this is the same Buffett, now that you ask, lauded for his prescience in having once describing derivatives as “weapons of mass wealth destruction.”
Except that among this decade’s most aggressive punters on high-risk derivatives is a certain revered stockpicker in Nebraska.
That derivatives and CDSs are dangerously volatile has been proven not just by the global financial system, which has nearly choked to death on them.
It’s been shown by the “Sage of Omaha,” who took a $1.3 billion loss on derivatives trading in last year’s third quarter. Early this year Buffett had to admit his stock-picking prowess also had failed him, to the tune of a $1.9 billion loss on ConocoPhillips Co.
Now consider the magnitude of those one-man losses as a portion of Berkshire’s total 2008 profit of $4.9 billion.
Berkshire is not a business. It’s one admittedly bright guy whose occasional personal slips routinely wipe out huge portions of profit.
To question Buffett’s ability to enrich Berkshire investors is to invite scorn, and I have the hate mail to show for it. Never mind that Berkshire’s astronomical book-value gains were piled up in the 1970s-1980s golden era of undervalued stocks.
What matters for latecomers to Berkshire stock is the here and now, which has not been so good. Year-to-date, Berkshire shares are up 6.9 per cent. You would have done better with the S&P 500 index (up 18 per cent) or much more focused conglomerates like 3M Co. (up 35 per cent), Siemens AG (up 22 per cent) or United Technologies Corp. (up 24 per cent).
Or with turnaround stocks Caterpillar Co. (up 33 per cent) or Ford Motor Co. (up 257 per cent). Or by investing not in Berkshire, but its portfolio of publicly traded firms: American Express Co. (up 110 per cent), Coca-Cola Co. (up 24 per cent) or Goldman Sachs Group Inc. (up 102 per cent).
I couldn’t agree more with the Buffett maxim that you don’t want to invest in a business run by somebody who gets out of bed one day and decides to cut costs.
But deep into this horrific recession, Berkshire had cut costs at its 80 or so diverse businesses by about 1 per cent. Only this month did Buffett vow to start doing some serious cost-cutting. “I don’t think Berkshire hit the reset button as hard as other companies” on cost-cutting, hedge fund manager Jeff Matthews, author of Pilgrimage to Warren Buffett’s Omaha, told Bloomberg News last week.
Could it be that Buffett was distracted, watching those derivatives bets like a hawk?
If he was an operating CEO, not a financier, Buffett, 79, would have been scrupulously monitoring his direct reports. Which, belatedly, he’s now trying to do.
In April, Buffett sacked the head of Berkshire’s underperforming 234-unit Helzberg Diamond Shops chain. In August, he eased out Rick Santulli, founder of Berkshire’s Net Jets fractional-jet-ownership business. That shocker, underreported in a Buffett-friendly business media, should have raised anew questions of CEO succession. Santulli has for years been among the handful of likeliest candidates to succeed Buffett.
A cold-eyed look at Berkshire always yields the same impression. Namely, of a conglomerate’s traditional failings: gains in one business wiped out by losses in another. Too many businesses to understand and properly manage. And in this case a controlling shareholder 13 years past most employers’ mandatory retirement age, who can’t quit because no successor could oversee the mad congeries of businesses Buffett has created.
Even he can’t.
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