It obviously took a lot for CIO David Rolfe of Westwood Partners to finally dump his Berkshire Hathaway stock, but the reasons ultimately got too overwhelming to resist.
To call Warren Buffett an investing legend doesn’t quite seem to describe the level of fame that he has achieved. Warren has held the title of the world’s wealthiest person, and has been in the top 2 or 3 richest people in the world for a long time now. He’s now fallen to fourth place but his personal net worth of $82 billion is still well up in the stratosphere.
Buffett’s company, Berkshire Hathaway, is also a legend, with a market cap of over $500 billion. Berkshire Hathaway was once a failing textile manufacturer and Buffet transformed them into one of the world’s largest companies. No one will doubt the staying power of both the company and the man, although some may wonder whether both have become too rusty and creaky.
Buffett really doesn’t get a lot of criticism and far less than you would expect given the circumstances. It wouldn’t even be unfair to look at the company’s two principals. Buffet at age 89, and his sidekick Charlie Munger who is now 95, and wonder if time is getting the best of them. It’s not their age here, it’s the erratic way that the company is being guided right now, although the two may be related and probably is to some degree anyway.
The fact that these two gentleman are still at it at the ages that they currently are might be the most impressive thing of all, but when we look at what they are doing and the results that they are getting, and we are honest in our assessment, as we must be, this leaves us shaking our heads.
This reminds us of sports stars who end up playing the game too long, to the point of failure, but even the biggest sports legends get sent packing when they really end up failing. When you own the company, there’s no one to send you home when you need to go, and things can get really ugly.
Buffett’s reputation still plays and counts for a lot it seems, as there are still lots of people who have remained faithful through thick and thin, and even in the thinness that we are seeing now. Even being a stone’s throw away from 90 hasn’t done much to dim the luster that many still paint him with, and feel that they must just defer to the legend even when he leaves the road and wanders off into the wilderness.
It’s not that Buffett isn’t beating the market anymore and has been behind during the entire 10-year bull run that the stock market has had, as there are lots of companies and investors that haven’t beat the market so that’s not even that remarkable. We still might want to point our fingers at anyone who is paid to beat the market and fails, but companies are a little different and we need to cut Mr. Buffett some additional slack here if anything, all things being equal.
The problem is that, as is so often the case, all things aren’t equal, and companies simply don’t hold $122 billion in cash. Given the nature of Buffett’s business, which relies on investing a great deal and always did, if we were in a bear market and he held that much cash, this would be worthy of much praise and we might even believe that this number should be higher.
Buffett is a champion of the long-term approach to investing and he would not be one to dump stocks just because the market is doing badly. It’s not that he doesn’t ever sell, but it is a rarity and it’s never based upon market conditions but instead a loss of confidence in the business itself that he has invested in.
What really stands out here is that he is sitting with that much cash in a bull market, because he can’t decide what to do with it. The official reason is that he does not see anything up to his standards, but you can set your standards way too high, and even insanely way too high it seems.
Investing Requires a Certain Thirst for Opportunity
In order to be a successful investor, there are several traits that are needed, and one of the most important ones is the ability to seek out opportunities and have the conviction to act upon them. This problem isn’t even about that, as we may even want to just defer to the Oracle of Omaha’s vast experience and judgement here.
The big problem though is that Buffett does not seem to understand that the risk of entering a position and the risk of holding a position are the same thing, and therefore a common risk appetite should apply, and needs to in order to even be sensible.
This is a mistake a lot of investors make though, thinking that the threshold for entering and holding are different, and would therefore hold stocks they would not buy right now. This really makes no sense but investors are guided by other forces often times, and to significant degrees.
It is the degree of incongruity here that is what is so massively wrong with the way things are run at Berkshire Hathaway these days, and perhaps nothing illustrates this quite like their position in Kraft Heinz.
This is not even about their choosing to continue to hold it, regardless of whether or not this is a good idea right now, because at some point a stock gets beat up so much that you just resign yourself to it.
It is the way that this stock has moved over the past 2 ½ years that has been so telling, going from almost kissing $100 a share to now only being worth little more than a quarter of that.
Kraft Heinz famously lost over $13 a share overnight earlier this year, and some may think that the trouble that Buffett has had with it may be due to this, an unfortunate circumstance perhaps, and even one that we may think was at least relatively unforeseeable. This isn’t the real story though.
$13 a share is a lot to lose, but this was just one bump among many during this time, even though it was a pretty hard one that really lifted you off your seat. The stock had lost half its value over a 2-year period at this point, and it was deserved as well based upon the company’s results, so this at the time was far too risky and has been for quite a while.
Once again though, we’re talking about a genuine legend here, and in fact if you ask people at random to name the best investor of all time, Warren Buffett may be the only name that they even come up with. This trade obviously ended in disaster, but to be fair, you can’t just look at one instance of a strategy, you need to see it in action over many instances.
Make no mistake though, holding Kraft Heinz below $75 was a clear mistake, and this could be used as a great example of when to short something. Things have just gotten worse and worse since. We know that Buffett’s pain threshold is quite high, but no one’s should be this high, because pain may be unpleasant but it is also very necessary to guide us.
There is a Lot to be Concerned About Here
What’s really on display here isn’t Buffett’s almost unlimited risk appetite with stocks he owns, it’s how this compares to his risk appetite for buying, which is virtually zero these days. This is simply not consistent and makes no sense at all actually.
This is a distinction that Buffett would have been able to make to some degree at least in his prime, and he certainly wasn’t known then to be afraid to invest, but to see him take on any risk on the one hand and virtually none on the other involves the breakdown of some pretty basic cognitive skills and should be a real concern.
The bottom line here is whether people want to be invested in a company that it both too afraid to buy even the best stocks out there and are also too stubborn to sell even the worst ones. This describes Berkshire Hatheway pretty well these days.
The stock has also been going downhill, as evidenced in its meager 2% return this year compared to the 20% return of the broad market. The deteriorating situation overall is like seeing a star performer on Wall Street relegated to a rocking chair and playing checkers. Even the checker playing may not last and we may move to an even more devolved state.
David Rolfe, Chief Investment Officer at Wedgewood Partners, has finally seen enough and liquidated all of his firm’s Berkshire Hathaway holdings earlier this year. From his remarks, it is easy to see that this has been a long time coming, and once the mystique of Warren Buffett finally toppled, reputation no longer clouded what has been a questionable recent history.
Rolfe does not mince words when he discusses his current view of Berkshire Hathaway. “Thumb sucking has not cut the Heinz mustard during the Great Bull Market of 2009-19.” He is critical of such things as the Kraft Heinz disaster, their selling IBM at the wrong time, and missing out on many great investments “that should have been in Buffett’s wheelhouse.”
He also cites Berkshire Hathaway’s poor performance this year relative to the market as well as all that cash that they currently hold. They aren’t buying much either, with only 2 notable acquisitions in the last 10 years.
$122 billion is a lot of cash for any company, a mind-numbing amount actually. Rolfe points out that they are only buying back less than 1% of their shares this year, involving only $5 billion, while the rest of the money sits idle instead of being used to invest in and increase the value of the company.
Berkshire Hathaway has stood out for its long-term success, but there is much wrong with it now and it starts at the head of the fish.
Buffett achieved his fame and wealth by putting money to work with sustained investing in a way that no one has been able to achieve. To go from this to sucking your thumb is a sad way to end the career of such a legend.