This commentary originally appeared on Real Money Pro on Nov. 15 at 11:00 a.m. EST.Owning (or selling) a security is not synonymous with respecting (or not respecting) management and its past corporate accomplishments. If we distill owning equity to only one factor -- to me, is whether the forward-looking reward relative to risk in a company's share price is attractive. Case in point: Berkshire Hathaway ( BRK.A)/ ( BRK.B), which I sold yesterday. I, as most other professionals, worship at the altar of Warren Buffett. I have written voluminously about Berkshire Hathaway -- sometimes critical but often positive. I have studied Berkshire Hathaway over the years and have carefully read Whitney Tilson's comprehensive research and analysis on Berkshire. I even endorsed the back of Jeff Matthews' terrific book, Pilgrimage to Warren Buffett's Omaha. One can safely conclude that Buffett is the single greatest stock investor of all time, and his net worth reflects his past achievements. He also seems to be a genuinely great human being through his personal charitable efforts (his massive commitment to the Bill and Melinda Gates Foundation), and his arm-twisting of fellow billionaires in " The Giving Pledge" is an amazing accomplishment in its scope and likely ultimate impact. But the shares no longer have the appeal that they once did for several reasons, and I have sold my long position in Berkshire Hathaway.
Size Creates Its Own Performance Anchor; Investments May Become More PedestrianBerkshire's past growth and successes are one of its greatest enemies to future growth. Ever-larger investments/acquisitions are required to produce an impact and provide differentiated returns for shareholders. At the time of Buffett's acquisition of Berkshire Hathaway in 1965, the company's market value was under $20 million; it stands today closer to $190 billion. Yesterday's $10 billion investment in IBM ( IBM) is, to this observer, a reflection that larger deals are needed to move the needle and that more ordinary and plain vanilla investments will be the feature of Berkshire's portfolio strategy in the future. Vice Chairman Charles Munger has previously talked about the inevitability of less-than-special investments for the past two years or so. Moreover, size reduces the marginal benefit of preferential $5 billion PIPE deals (private investments in public entities) -- such as those previously effected by Berkshire Hathaway in Goldman Sachs ( GS), General Electric ( GE) and Bank of America ( BAC). I would add that the share prices of Goldman Sachs and General Electric have massively underperformed the markets after Berkshire purchased their preferreds, meaning that it was the sweetener (i.e., the attached warrants) that gave Berkshire Hathaway the true value to Buffett's investments in those companies.
Succession Brings Delegation, Diluted ReturnsBy all counts, Buffett is a clear-thinking, spry 81-year-old. But, given actuarial tables, his life expectancy is 92 to 93 years of age. Buffett recognizes the need to delegate investment and operating responsibilities in the passage of time. David Sokol was a big mistake, and I (and many) gave him a mulligan. Buffett has already hired two co-investment managers, Todd Combs and Ted Weschler, to help him with Berkshire's large portfolio. Will they do as well as Buffett? Probably not, as they are mere mortals, and with the benefit of hindsight and history, Buffett was a true investing immortal! What is almost certain is that Buffett's old black magic will not be easily duplicated by his appointees. Whitney Tilson expresses sensible reservations on Buffett's replacements:
Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. There's a high degree of prestige in selling one's business to Buffett. For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm.... Buffett's Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not.In the next several years, a CEO will likely be named. Again, some more balanced views from Whitney:
Most of the 75-plus managers of Berkshire's operating subsidiaries are wealthy and don't need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett's "halo" and superb managerial skills. Will this remain the case under his successors...? Buffett's reputation is unrivaled, so he is offered deals (such at the recent $5 billion investment in BofA) on terms that are not offered to any other investor -- and might not be offered to his successors.