Tech Phobia May Topple Buffett

Berkshire Hathaway is feeling the bite of its chairman's aversion to the new economy. Will shareholders revolt?
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Warren Buffett

lives.

Yet even as unfounded rumors of the Oracle of Omaha's ill health are squelched, the chatter raises Buffett's profile while the price of

Berkshire Hathaway

(BRK.A) - Get Report

stock continues to slide. Since January, Berkshire Class A shares have slipped 15%, on top of a nearly 20% slide in 1999.

Rumors of Buffett's ill health surfaced last Tuesday in Internet chat rooms and pushed the stock into a near free-fall, reaching a multiyear low of 45,900 on Thursday afternoon. While Berkshire has never commented on rumors -- business or personal -- the company

broke its silence late Thursday.

"With the stock continuing to slide and no buyers stepping in, Berkshire had to say something," says longtime Buffett follower Robert Hagstrom, portfolio manager of the

Legg Mason Focus Trust

(which holds Berkshire stock) and author of

The Warren Buffett Portfolio

.

Omaha sources close to Buffett say he is in great health and likely "amused" by the hype -- but the rumors caused many shareholders to ponder a future without Buffett. "Is this a fire drill for what happens when Buffett's reign comes to an end?" asks Ted Bridges, principal of

Bridges Investment Counsel

, an Omaha money-management firm that holds a long position in Berkshire.

"This shows the brilliance Buffett brings to the table is important, and to say you can plug someone else into the job and nothing changes is thinking with your head in the sand." Many investors, including Bridges, think the stock could easily drop 20% or more when Buffett leaves his daily duties at Berkshire. "Life goes on -- it will just be a very different life."

Others are less sanguine, saying life at Berkshire with Buffett needs to change if the Oracle is to maintain his position at the apex of the investing world. Specifically, they point to Buffett's steadfast aversion to investing in the technology-driven new economy. "To say the game is over is a stretch, because it's not," says Bridges. "But the game is changing and shareholders should realize Buffett may not change with it."

Indeed, Buffett's phobia toward technology investments not only hurt Berkshire's performance last year, it is beginning to tarnish the company's long-standing outperformance of the broader market. Through January, Berkshire has underperformed the

S&P 500

since 1994.

That's not to say the performance isn't respectable: During that period Berkshire stock was up 214%, while the S&P 500 gained 238%. "If you bought the stock at the end of 1993, you have materially underperformed the broader market," says Bridges. "That is the longest period of time Berkshire has underperformed the index since Buffett took control."

In fairness, Bridges notes the stock outperformed the index during 95% of that period. "Unfortunately, it only takes a short jolt to upset the run." That jolt began in June of 1998; since its high of 84,000, Berkshire stock has slid over 35%, vs. a 32% gain for the S&P 500.

That said, Berkshire's extended lackluster performance is the result of the convergence of a number of events: hard times in the property and casualty insurance and reinsurance businesses which now dominate Berkshire's portfolio; the lagging performance of Buffett mainstays such as

Coca-Cola

(KO) - Get Report

,

Gillette

(G) - Get Report

and

Freddie Mac

; and the addition of a new brand of Berkshire shareholder resulting from Buffett's use of Berkshire stock as currency to purchase

General Re

in 1998.

Still, while Berkshire is quickly becoming more of a conglomerate of operating businesses, the perception remains that the stock is nothing more than a proxy for Buffett's investment picks. "The nature of Berkshire has slowly been changing for years," says Hagstrom. "While some understand that, most still view the company as a mutual fund with Warren at the controls."

Hagstrom dismisses as nonsense the notion that Buffett's stock-picking discipline has outlived its value. "His style is to think of stocks as businesses, maintain very low turnover and ignore blips in the market," says Hagstrom. "That is timeless. It worked 20 years ago and it will work 20 years from now."

Still, some suggest Buffett's application of his principles should be widened. Buffett maintains that technology doesn't fall within his "zone of confidence," and he can't find an advantage over the average investor who invests in technology stocks. Critics say now is the time for him to learn.

"It's the discipline vs. flexibility debate," says Bridges. "Recent events beg the question: Should there be some flexibility in that zone of confidence?"

Therein lies the real issue with Buffett's aversion to the new economy. While the companies may be engaged in businesses that aren't as easily understood as

Kirby

vacuums,

Geico

insurance or Classic Coke, they are ongoing enterprises that can be valued, they have management that can be assessed as well as future potential that can be evaluated. Arguably, Buffett's time-tested, management-focused methodology is among the best suited to identify long-term winners in emerging industries.

But Buffett remains on the outside of the new economic paradigm, a result of personal choice, not a lack of acumen. "It's not a question of his ability to learn, it appears to be an unwillingness to learn," says one Omaha investor who has watched Buffett over the years.

That stubbornness gives rise to skepticism that Buffett is slowly descending from the investment pedestal crafted by decades of unprecedented wealth creation for investors. And, at this year's Berkshire Hathaway annual meeting -- the May pilgrimage of Buffett's faithful to Omaha -- the six-hour question-and-answer session with shareholders could become a bit contentious.

"This may be the first time shareholders will be saying 'Give us a little more, Warren,'" says Bridges. Adds Hagstrom, "Warren knows this will be a difficult meeting."

Nevertheless, many long-term investors seem unfazed by the recent downdraft in Berkshire stock and even less concerned about the Oracle's health. "You can worry about 'what ifs,' but if you trust Mr. Buffett there is nothing at all to worry about," quips New Yorker Eiko Sato, a Berkshire shareholder since 1986.

At the 1998 annual meeting Sato presented Buffett with a replica New York license plate that said "BRK 70,000."

Shareholders who bought the stock at 1998 highs hope so. For, at these prices, Berkshire is no laughing matter.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.