Naughty is Buffett’s Nature: Street Smarts for Main and Wall
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The Naughty trio’s breakout hit about other people's pr*p*rty opens presciently:
Army with harmony
Dave drop a load on 'em
Chairman-in-waiting Howard G. Buffett (son of Warren) and his experience marshalling an army of hominy (from his government subsidized maize farms) is not going to save Berkshire from itself. After the David Sokol scandal dropped a load on the investors there were no structural changes in how Berkshire operated and less indication that any will be forthcoming. According to Howard himself, “My dad has said to me what he would expect, and I think I can do it…My job is to make sure Berkshire doesn’t change. And that’s about all he’s said to me.”
Even more depressing for investors might be Howard’s response to his experience dealing with unhappy shareholders, “I hated that, but it was part of my job…You get these guys calling, they’re mad at you, they want answers and you know you can’t answer it.” Still, his experience as a corporate VP at Archer Daniels Midland could not have been all that stressful since he quit his job and abdicated his seat on the ADM board 24-hours after the FBI opened up their investigation into the company’s 1990s price fixing scandal.
Berkshire is Buffett – Warren Buffett, and the manner in which he has developed the firm requires another Buffett. Yet, by the family's own accounts, Howard the Younger is as divergent from Warren as Warren was from Howard the Elder. Sadly, in addition to overseeing his largely robot-serviced farmlands, giving away $50 million a year on philanthropy that perpetuates small-scale, uncompetitive farming in other parts of the world does not seem to be the best training for Howard Buffett, the next minister of culture at Berkshire.
Warren Buffet is as much preacher as he is bootlegger – which is not an uncommon game for large corporations that have run out of mojo. As Peter Schweizer, author of Do As I Say (Not As I Do), illustrates:
Wall Street was on fire, and Buffett was running toward the flames. But he was doing so with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money. As he admitted on CNBC at the time, “If I didn’t think the government was going to act, I wouldn’t be doing anything this week.” Buffett needed the bailout. In addition to Goldman Sachs, which was not as badly leveraged as some of its competitors, Buffett was heavily invested in several other banks, such as Wells Fargo and U.S. Bancorp, that were also at risk and in need of federal cash.
Buffett banks ended up walking away with over $95 billion in federal TARP money – and the TARP-assisted companies comprised 30% of Buffett’s public portfolio. So much for that old Buffet adage, “Any institution that requires society to come in and bail it out for society's sake should have a system in place that leaves its CEO and his spouse dead broke.” Unfortunately, it’s not his dead wife, but his live son that should give long-term investors pause.
Schweizer goes on to examine the federal politicians tied up in Berkshire and their relevant votes – not least of all Nebraska’s Sen. Ben Nelson, whose single largest holding is Berkshire stock. Of course, he was not alone among the distinguished gentlewhores from other great states:
Throughout the financial crisis and the debate over the stimulus in early 2009, several members of Congress were buying and trading Berkshire stock. Sen. Dick Durbin (D-Ill.) bought Berkshire shares four times over a three-week period in September and October 2008, up to $130,000 worth. He bought shares during the debate over the bailout, during the vote, and after the vote. Sen. Orrin Hatch (R-Utah) bought the stock, as did Sen. Claire McCaskill (D-Mo.), who bought up to $500,000 worth just days after the bailout bill was signed.
Buffett has always been a big fan of discounts. Considering Americans spend more than $3 billion a year on brushing their teeth, the returns on political cronyism still appear a bargain. Of course, “past performance is not necessarily indicative of future results,” and yet present practices have become unsettling – and common:
Sokol, who resigned amidst insider trading accusations, apparently bought shares in Lubrizol, a chemical company, and then encouraged his employer, Berkshire Hathaway, to buy a large stake in the company, thereby driving up the price of the stock. All Buffett did differently was use the federal government instead of a private company to boost the fortunes of certain stocks. This is why crony capitalism is so perennially attractive to financiers: It’s legal, and it’s often more remunerative than the illegal private-sector version might be. Because government officials are dealing with other people’s money, they are less likely than a private firm to drive a hard bargain.
Manipulating and using other people’s property has become a way of life at Berkshire. The firm spent $1.2 million on lobbyists in 2008, but after taking over the railroad company BNSF, its disclosed lobbying budget surged to over $10 million annually. Yet in his letters and public pronouncements Buffett continues to bemoan the “disadvantages” of companies with government subsidies. Still, with Berkshire’s fortunes sagging during the recession, his political entrepreneurship has generated the majority of the firm’s success.
With his membership in the billionaire boys club assured, the question is which clique does Warren Buffett belong in – the “market entrepreneurs” (industrialists that profit through private initiative) or the “political entrepreneurs” (robber barons that profit through government intervention). As it appears that Berkshire has mutated into the later, then long term investing (the old Buffett way) might not be the best bet an individual shareholder can make at the moment.
From reading Professor Burt Folsom’s descriptions of the railroad tycoons in Myth of the Robber Barons and Empire Builders, Buffett seems less and less like market entrepreneur J.J. Hill, founder of the Great Northern Line (now the 'N' in BNSF). Not only did Hill manage to build the first transcontinental rail line without any public money, but to this day he has one of the few transcontinental lines in the world that avoided bankruptcy (despite the Panic of 1893 which sent most of his competitors into receivership). However, Hill’s managerial style with its heavy emphasis on detailed operations contrasts sharply with Buffett’s reliance on political financing.
Hill’s contemporary Leland Stanford, decidedly in the political entrepreneurs category, seems to have much more in common with Buffett. Stanford’s decision to present himself publicly using faux sincerity and capitalizing on his state connections to garner his railroad ventures government subsidies and special protections ultimately retarded industrial development and kept prices artificially high. While it is too early to tell (and Buffett might not last long enough to know) if BNSF will go down the Stanford track, investors can divine the future from Berkshire subsidiary NetJets. Buffett appears to be doubling down on contacts with the Chinese military and special deals from Canadian manufacturers. However, Berkshire's tangible record reflects that it is not the most facile when it comes to increasing quality and lowering costs in the transportation sector (mark-ups yes, costs no). Although, maybe Hillian upstart SurfAir can.
Ultimately, when it comes to Berkshire Hathaway, there are fools, and there are Fools:
The [Motley Fool] company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.
At some point, investors have to decide when to take grandpa’s keys away, and when they do, they should ask themselves if the Next Buffett is a man they will fly out to Nebraska to see every year, absorb his wisdom, and trust him with more of their money.
Peace out, MFers.
Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.