Behind the BRK-A: Buffett, Please

By Nick Slepko - May 14, 2012 | Tickers: BRK-B, BRK-A | 0 Comments

• Email
• Print

For Buffett, it really is all about the Benjamins – Graham and Franklin.  For other investors this is not a bad thing – until Warren starts grabbing bling that doesn’t belong to him.  More important, since the recession began, Buffett’s behavior (and results) have begun to change.  However, some observers believe there has been no change – it’s just that his behavior has become more noticeable.

Buffett’s biographer Alice Schroeder (estranged due to her not wanting to “mommy” Warren during her research) writes about how Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) subsidiary NetJets offers detailed insights into how Buffett dissembles and concludes:

While incomplete, it should be clear from this history that it is very difficult to draw much in the way of meaningful conclusions about NetJets from what has been disclosed. However, the numbers and disclosures do tell something of a story if compared to the industry's trends. For one thing, even with cost-cutting and writedowns, the earnings turnaround has been very rapid considering the revenue numbers and the industry's continuing woes. In addition, it's hard to avoid the conclusion that numbers that emphasize whatever point Berkshire wants to make are disclosed and those that do not emphasize this point are omitted. As a former analyst, I certainly can say as a simple matter of fact that these are some of the least consistent disclosures I have ever analyzed.

Of course, I am writing only about NetJets here because that is the topic at hand. If you analyze other Berkshire subsidiaries whose fortunes have been "mixed," however, you will find exactly the same pattern. This is not an isolated example.

Schroeder’s fellow Big 4 accounting refugee and equally astute analyst Francine McKenna produces an even more systematic analysis of the intrinsic cracks in Buffett’s Conglomerate of Babel.

Both analysts’ findings are best illustrated by Buffett’s political initiatives which show how he talks one game while playing another.  Buffett’s political activities reveals his need to be liked by the public and his intimates more than a keen sense of cost-benefit (or long-range planning – or maybe it actually reflects his inner robber baron).  His $50 million spent in support of unilateral nuclear disarmament has yet to pay dividends, and setting aside the knock-on effects of discouraging economic activity, the Buffett Rule would raise less than $5 billion per year – a mere fraction of the annual $30 billion in farm subsidies that go to people like his farmer son (a former Archer Daniels Midland spokesmodel).  Another recipient of the farm subsidies is Berkshire’s MidAmerican which is also lobbying for a $3.4 billion subsidy from the Department of Energy, while NetJets, perennially troubled but much beloved by Buffett, is fighting a $366 million tax bill.  According to the fiscal watchdogs over at Reason magazine, "Berkshire Hathaway firms received $95 billion in TARP money...[and] TARP-assisted companies constituted a whopping 30 percent of Buffett’s publicly disclosed stock portfolio."  Tangly.

Each year Buffett puts on a self-described “circus” which typifies the mockery that shareholder meetings have become in America.  While his Woodstock for Capitalists is a great corporate party, it is a far cry from a forum designed to influence the decision-makers or even extract basic information like who will be running one of the world’s largest corporate entities.  Even the Geneva Convention affords participants the right to such basic information.

The question for Buffett observers is no longer, “If I apply his principles, can I reap his rewards?”  Over the last several years it has become clear that his principles no longer apply to his current approach, so for those who choose to just buy Berkshire shares and go along for the ride the question really is, “Who at the conglomerate has the same track record as Buffett?”  Whether the secret to Buffett’s investing coups is cronyism or critical analysis the answer is the same: No one.  However, even if Buffett does choose wisely, the scenario remains:  When He-Who-Must-Not-Be-Named is revealed, undoubtedly some of the other key lieutenants will move on – just at the moment when the loss of Buffett will require Berkshire to summon the strength of all those left in the post-Buffett era to ride out the disruption until they can score a few points to mitigate the lemming rodeo that is sure to ensue. 

Of course, a quick look at his politics and pronouncements telegraph the reality of the Buffett succession to the world – he doesn’t really believe anyone will be able to replace him.  Dick Patten of the American Family Business Institute illustrates the conundrum created by years of applied Buffettology:

…Mr. Buffett benefited tremendously from [the] death tax. In fact, the tax is critical to two of the three legs that make up Mr. Buffett’s financial stool…First, he’s made substantial investments in major corporations that he believes will appreciate; second, he operates a huge casualty and life insurance business which provides massive reserves of cheap capital to support his other two investing activities; and third, he purchases family owned businesses at fire sale prices. The last two practices are directly dependent on the death tax, and it’s unlikely that Mr. Buffett would be the world’s second richest man without it.

Next in Behind the BRK-A: Warren’s Run
Previously in Behind the BRK-A: Directorships & Double Standards

• Email
• Print
• Feedback