MYTHS ABOUT WARREN BUFFETT, Part II

MYTHS ABOUT WARREN BUFFETT, Part II


Myth #8: Warren can't maintain his CEO talent pool.

With more than fifty CEOs and adding, on average, four more each year, some people think it is impossible for the world's best investor to also be the world's best manager. Yet on average, the CEO of a top-fifty company will last only six years, in contrast to a Buffett CEO, who has been managing for the past twenty-three years and counting, because there isn't a Berkshire-mandated retirement age. Warren manages his businesses as though he is acquiring a small portfolio of businesses. The original managers forget that they sold their business to him, and Warren forgets he bought it.

He has never lost a CEO to a competing enterprise. He's only lost a CEO to either retirement or death.


Myth #9: Warren invests differently today than when he first started.

This is a myth, because he's still interested in simple businesses with quality management with little debt at a favorable price. Still today, he's attempting to invest or buy a dollar of assets for 50 cents, to find a quality and predictable investment selling at a fair price.


Myth #10: Warren can analyze the market for you, so you can buy what he's buying and you will have the same returns.

Well, unfortunately, Berkshire Hathaway is no longer a quasi-mutual fund; instead, more and more of its net worth is now in wholly owned companies that are not for sale for any price. Warren is a business analyst, not a market analyst, so he can't help you much in interpreting the market.

Even those who think they can buy the same stocks as Warren has purchased miss the most important lesson-- the principles employed to value and purchase stocks, not the specific stocks. Unfortunately, many people think if they buy the same stocks as Warren Buffett, they will get the same returns. Yet this is a myth, because he purchased these stocks many years ago, and to buy them now would be buying them with a different valuation.

Moreover, Warren buys things that you can't buy. He'll buy a preferred stock that pays a dividend and can be converted later into common stock. He buys businesses that can pay him in the form of earnings from his investments, with which he can then use to buy even more businesses. The ordinary investor can't replicate that, but what you can do is invest in value companies and attempt to do what he does-- buy a dollar in assets for 50 cents, buy companies with stable and predictable earnings, and buy for a low multiple of earnings.


Myth #11: Warren measures his success based on the changes in the price of Berkshire Hathaway stock.

Indeed, he did originally pay $7 a share for his stock and it's now currently selling in excess of $80,000. But even if it were selling for $700,000 per share, it would not affect him one way or the other, because he never intends to sell a share of his stock. He measures himself with what is going on inside the business and what he has control over. Annual changes in book value (assets minus liabilities) and CEO retention are his simple measures.

Warren does want his partners to do well over the time period they have been invested and therefore he does wnt the long-term stock price to eventually reflect the changes in Berkshire's intrinsic value.


Myth #12: Buffett doesn't invest in technology because he doesn't understand it and has failed to change his investment style.

Actually, he knows a lot about technology and most days plays bridge online, often with technological guru Bill Gates. He regularly does research on the Internet to find out as much as he can about potential investments. He routinely reads the next day's Washington Post after 9pm the night before. He buys his books on Amazon and agreed to have lunch with the winner of a charity auction on eBay. Berkshire owns one of the world's most sophisticated flicht service companies in the world loaded with the most advanced technologies. Technology or not, Warren doesn't invest in any company that doesn't have any earnings because he can't value them.


Myth #13: Buffett doesn't split his stock because he doesn't want to make it available to the average investor.

Not true. He created and offered the B class shares at the end of 1995 that trade on the NYSE for one-thirtieth the price and economic value of A class shares. With A shares then trading for $30,000 each, Berkshire offered B class shares for $1,000 each. Splitting his stock would attract traders, instead of owners. Attracting owners is part of the corporate culture that will last beyond Warren's death.

Myth #14: Dividends are an excellent way to return capital to investors.

On the contrary, Warren thinks dividends are a poor way to return capital to his partners-- that dividends are taxed twice, once at the corporate level and again at the individual level. Why take capital out of the hands of the world's greatest capital allocator? He believes it would be better to reinvest that capital back into acquiring more businesses than it would be to subject them to double taxation. Certainly some businesses that do not have the Berkshire business model should consider buying back their own stock, if it is attractively priced, or returning the capital and earnings to its shareholders if it is in a mature cycle and further investment will not grow the underlying enterprise.


Myth #15: Buffett's holding company will diminish after his death.

With a horizontal organizational structure, without a large headquarters staff, without vice presidents, without divisions, without meetings or budgets, Buffett's successors will have the simple task of keeping the culture alive for many succeeding generations of shareholders, employees and customers. Upon his death, his job will be divided into three: one CEO will be in charge of operations (the other CEOs), another CEO will be in charge of capital operations, and a third, most likely a Buffett family member, will become chairman of the board to ensure the corporate culture stays in place.

Decisions and teh corporate culture are cumulative in nature and are not easily changed or reset back to zero when the architect of them passes the baton to succeeding managers. In the next chapter, we discuss the designated backup to Warren on the investment side of Berkshire.



Credits: These 15 Myths of Warren Buffett are extracted from Warren Buffett Wealth by Robert P. Miles, 2004.

POSTED :03 Feb 2006