Wedgewood Partners on selling their BRK stake

[wisowis]

We sold our multi decade-long position during the third quarter after first trimming the

position during the second quarter this year. We went into some detail in our change of

thesis on Berkshire in our last Client Letter. In short, Berkshire’s industrially/economically

sensitive businesses have slowed considerably over the course of 2019. Their utilities

business (Berkshire Energy) needs continued acquisitions to restart utility growth. In

addition, Warren Buffett’s cash hoard of +$125 billion continues to be a considerable

impediment of growth, rather than our previous hard expectation of a valuable call option

on opportunity in the hands of one of the most elite capital allocators extant. Further, the

efficacy of putting this cash pile to work (plus +$25 billion in annual operating cash flows in

Omaha) will be paramount if Berkshire Hathaway is to once again regain their former status

as a meaningful grower over just baseline U.S. GDP growth. Thumb-sucking has not cut the

Heinz mustard during the Great Bull Market of 2009 – 2019. The Great Bull could have been

one helluva of an astounding career denouement for Messrs. Buffett and Munger.

 

In terms of errors of omission by Buffett & Co. over the past ten years, a few stocks stand out

to us as considerable head scratcher errors that should have been in Buffett’s wheelhouse,

and should have been huge winners for Berkshire shareholders. The first stocks are

Mastercard and Visa. Buffett is incredibly well-versed in the payments processing industry

given his half-century knowledge in longtime holding American Express. These two stocks

should have been layups for Buffett. Mastercard and Visa have been massive wealth creators

during the Great Bull Market.

 

Indeed, since the Great Bull started back on March 9, 2009, Berkshire Hathaway B stock is

up a notable +269% through the recent ending 3rd quarter. Over the same time period, the

S&P 500 Index is up +370%. Mastercard is up a stunning +1,521%. Visa is up a near stunning +1,137%.

Not all is lost, though. Buffett’s two CIO lieutenants currently own both

stocks at a combined weight of just a thumb-sucking 1.50% of Berkshire’s current equity

portfolio. The current combined weighting should be 15.00%!.

 

Two other layups are Costco and Microsoft. Buffett has had at his disposal unrivaled expert

tutelage on each company in his hind pocket for years – but to no shareholder avail. Charlie

Munger has been a director at Costco for 22 years. Costco’s stock Great Bull gain is +522%.

Once again, not all is lost. Buffett’s lieutenants currently own a whooping 0.55% position in

Coscto.

 

More numbing still is Microsoft. Buffett first met Bill Gates nearly 30 years ago. They became

fast best friends. In 2004, Gates joined Berkshire’s board of directors. Buffett probably

spends more time talking with Gates (Gates Foundation and bridge playing too) each day

than he does with key Berkshire vice-chairman employees Ajit Jain and Greg Abel. Buffett

has long (and proudly) proffered his opinion that “technology” companies are far outside his

“circle of competence.” His more recent multibillion foray into IBM and Apple belie his longheld assertion.

In our view, if Buffett can endeavor to figure out the business models of both Apple and IBM enough to pour

multibillions in stock purchases, then figuring out Microsoft’s business model under sensai Gates

should have been Remedial Technology 101. Microsoft’s stock Great Bull Market gain is +657%.

A final lament, if Berkshire’s current Breaking Bad-style cash hoard represents stock market

timing, then shareholder-partners deserve to be informed of as much.

 

On this capital allocation front we have growing concerns. Buffett & Co. have repeatedly

stated their considerable disadvantage in competing against private equity (with levered

billions in tow) for acquisitions, yet Buffett & Co. continue to play this game – very un-Buffettlike, in our opinion.

Buffett has also repeatedly offered his opinion for a few years now that

if interest rates would stay at their current low levels then stocks aren’t (weren’t) expensive,

yet Berkshire’s equity portfolio on a net basis to total corporate assets hasn’t really grown

that much. (Our portfolio does though share Buffett’s success in his outsized Apple position.)

Last, despite Buffett’s share-buyback tutorials – and our perceived signaling – over the past

few years that he is open to large, accretive share repurchases, little has been done on this

front as well. (Buffett seems to abhor returning “capital paint” to shareholders while his

Berkshire canvas is still “in paint.”) Net-net, capital allocation needs to improve dramatically

in order to reaccelerate the current stasis of middling, GDP-like growth. Recent billions in

capital investments in notable mistakes such as IBM, Lubrizol, Precision Castparts and Kraft

do not inspire confidence that Buffett & Co. are still at the top of their game. Any future

conviction of ours in Berkshire Hathaway shares will closely mirror that of Buffett’s own

conviction in Berkshire share buybacks.

[stahleyp]

"Our portfolio does though share Buffett’s success in his outsized Apple position.)"

 

They're trailing the market pretty badly too (and a 1 star to boot from Morningstar) since the funds inception in 2010. Pretty crummy performance considering their fairly large Apple position. Does he talk about how his performance has trailed since he started the fund?

 

I think I might buy some more shares if this "analysis" is the current perception of Berkshire.

 

For the record, Berkshire has outperformed his fund by a slight margin over the past 5 years while his fund ranked in the bottom 93%.

 

[John Hjorth]

Thank you for taking the intiative to this topic, wisowis,

 

Original source [<- Maybe not a bad thing to spend time on, if you're "Berkshire-bored" [ ; - ) ]]

 

- Among other things you'll miss out on if not grabbing the original source is a quite funny picture placed somewhere in the quotations made by wisowis! [ : - D]

 

- - - o 0 o - - -

 

No Wedgewood 2019Q3 portfolio data available right now on Dataroma, btw. I haven't checked if the 13-F/HR is available on SEC.

[Viking]

Interesting that they did not talk about what Berkshire is actually worth. Yes, the market appears to be underappreciating BRK and the share price has gone sideways for a few years. However, the value of the underlying business continues to grow nicely. BRK looks cheap today when compared to the overall market.

[RichardGibbons]

Complaining about Berkshire not buying Microsoft is pretty silly considering that Buffett's made it very clear why he didn't do so. Considering his close relationship with Gates, Buffett doesn't want anyone to get the perception of any improprieties like insider trading.

 

If anyone doesn't understand this basic thing about Buffett after holding Berkshire for a couple decades, I'd be pretty skeptical about their understanding of both Berkshire and Buffett.

[scorpioncapital]

He has some very good points..there are certainly several mid to large cap stocks within Berkshire competence that were not bought.

However....

Berkshire strikes me as conservative risk adjusted growth. As such I can't say the huge gains on what he didn't buy that was within the circle is not way ahead of itself and likely to drag while Berkshire can opportunistically catch up.

Large cash pile is not an impediment to growth IT is the engine of future growth (though a temporary impediment)

The underperformance to sp500 is more serious the longer it lasts. Either Berkshire stock zooms or sp Comes down alot. I suspect Berkshire is leveraged to financials while sp to technology. As such low rate environment is the cause. Should this even modestly reverse than sp500 may tread water or decline somewhat while brk would go up as it makes a fortune on banks making more interest margin profits. Just a theory. But it's possible.

 

 

[Gregmal]

I think it's wise to look at what he is saying rather than what his track record is. The things he mentioned about Berkshire are true. And I also find it interesting, not really on what Warren has missed, but rather when we look at it in the context of everything else, such as his statements about rates staying low and stocks being cheap, combined with having exorbitant amounts of cash on hand, and delegating to Todd and Ted. Is it possible he just isn't really looking to make investments anymore?

[John Hjorth]

Please take a look at the Dataroma history for Wedgewood, especially the evolution of portfolio value over time. It appears obvious to me, that Mr. Rolfe is experiencing the nightmare of a money manager working with non-permanent capital, combined with LPs reaction to historical lack of performance, thus pulling out. Please also note the relative position rank of Berkshire over time in the history.

[Guest longinvestor]

Please take a look at the Dataroma history for Wedgewood, especially the evolution of portfolio value over time. It appears obvious to me, that Mr. Rolfe is experiencing the nightmare of a money manager working with non-permanent capital, combined with LPs reaction to historical lack of performance, thus pulling out. Please also note the relative position rank of Berkshire over time in the history.

 

Quite telling isn’t it? They have gone from a $7.5 B to a $1.2 B fund over the past 5 years and the need to sell winners explains why he’s talking his book. There’s recently reported Uber interest in BRK amongst the hedge fund community. Perhaps this tranche provides a big block of buyback opportunity over the coming years. I share Omaha’s distaste for the squatters. It won’t take too long of a time to shake them off.

[wabuffo]

I don't want to pile-on Wedgewood.  But I don't agree that Berkshire Hathaway has underperformed the S&P 500 in recent years.  He/they arbitrarily chose the start of the current bull market in March 2009 to do their comparison - but I think that misses an important point.  Buffett is starting to acknowledge that his capital base and cash position are making it harder to achieve BRK's past results and he has signalled that he will take action to prevent underperformance. 

 

That is why starting in Sept.  2011, he formalized a buyback policy which has helped to put a floor under the stock and moderate its price declines.  He started at 1.1x Book Value, then raised it to 1.2x Book Value in Dec. 2012 and then finally went to a more unconstrained approach last year.  I would argue that this new capital policy means that one should look at BRK's record since 2011 vs the S&P 500.  From what I can see, how can one say that BRK has under-performed vs the S&P 500 through this period (until this year)?  It hasn't!

It's too early to panic because of a few Q's of underperformance in 2019.  Especially since Buffett will act if BRK's price/value becomes attractive.  We all may wish he was more aggressive with his buybacks so far - but I do believe that the presence of a significant repurchase program is a new factor that helps the stock from languishing the way Wedgewood fears it will. 

 

Of course, this performance reflects buy-and-hold since the end of 2011.  There's nothing that prevents someone from buying or adding to a BRK position during periods where it gets statistically cheap (like late 2008/early 2009, Aug-Sep 2011, or Q4 2015). In those cases, the investing record in BRK improves vs the simple buy-and-hold record.  I don't see how Wedgewood's investment in BRK has anything to do with their underperformance vs the S&P 500.

 

FWIW,

wabuffo

[John Hjorth]

This is a great take on the whole market price situation for Berkshire over time, wabuffo,

 

Thank you for sharing.

[Munger_Disciple]

Based on my calculations Berkshire stock price roughly matched the S&P 500 index over a 10-15 year holding period (end date being 10/11/19). For a saver in taxable account, Berkshire is still a better holding than the index because no dividend taxes are payable. Thus Berkshire is a tax efficient alternative to the index. While Berkshire could outperform the index say in the next 5 years if there is "turbulence", very long term results are likely to match the index going forward.

[CorpRaider]

"extant"....<click>.

[LongTermView]

Complaining about Berkshire not buying Microsoft is pretty silly considering that Buffett's made it very clear why he didn't do so. Considering his close relationship with Gates, Buffett doesn't want anyone to get the perception of any improprieties like insider trading.

I agree the part about Microsoft was pretty silly.

[maxthetrade]

Complaining about Berkshire not buying Microsoft is pretty silly considering that Buffett's made it very clear why he didn't do so. Considering his close relationship with Gates, Buffett doesn't want anyone to get the perception of any improprieties like insider trading.

I agree the part about Microsoft was pretty silly.

 

Well, I like Rolfe and I think Wedgewood is one of the better active managed shops out there but I have to agree that the comments about Buffett not buying MSFT is a low point and pretty disappointing. Buffett said several times publicly that he won't buy MSFT because people would assume he has insider knowledge. Most people wouldn't care but Buffett has his own standards and they are above almost anyone I can think of (including my own ;-))

BTW, I bought a ton of MSFT leaps early in 09 only to sell after a quick 50% gain in the stock, I missed the subsequent quadruplicaton of the stock, too damned bad ;-)

 

[Gregmal]

Are people really OK with writing off Warren missing super obvious investments simply because "he didn't want people to think" this or that? Who cares what people think? People can correctly or incorrectly think whatever they want that has zero to do with his responsibility and duties to shareholders....

 

Frankly I dont even think it is that, regardless of what he says. I mean what about Costco?? His best bud has long owned it and its something that at his sharpest, was right in the wheelhouse. Whats the excuse there?

 

I mean, I've been reading these threads for a while and the degree to which people are giving passes here is outrageous. Even back with the "oh he's not being more aggressive with the buybacks because he wants to give every single last shareholder a perfect warning and doesn't want to take advantage of anybody..blah, blah, blah" nonsense. Where does it end? How is it not completely unacceptable for somebody with a fiduciary responsibility to continuously make excuses for crossing off more and more investment opportunities when by both his own admission, and the observations of any rational person, he's already significantly limited by size in terms of what he can invest in, in the first place? I dont think I'd have a single investor if I said, I'm automatically not really able to buy 90% of companies out there, and oh guess what, because of my moral perception cross off 2% more, and then because I am worried about what people think of me I'll eliminate another 5%. 

[Mephistopheles]

I agree Gregmal regarding MSFT.

 

I've always thought that the reason he never bought MSFT was because he didn't think it had a durable competitive advantage, but in order to not offend his friend Bill he gives this excuse.

 

I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason.

[Spekulatius]

1)  Warren lost his edge in public markets in the late 90’s and I think he knows it too. He still has an edge in private deals. 

2) He has become a closet market timer. This has to do with 1). That’s why most of his cash deployments will be in some sort of market dislocation, when there are pitches that are obvious to him.

3) It’s still a much better situation than FRFHF, where they lost their edge investing, but don’t acknowledge it.

[chrispy]

Berkshire invested in AMZN and JPM. I do not hear any concerns about insider trading. What is so much different about MSFT?

[RichardGibbons]

I agree Gregmal regarding MSFT.

 

I've always thought that the reason he never bought MSFT was because he didn't think it had a durable competitive advantage, but in order to not offend his friend Bill he gives this excuse.

 

I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason.

 

Yeah, I think that some people care a fair amount about integrity and other people don't at all and will do what they can get away with. What's more, I think it's hard for both types of people to believe in their hearts that the other side truly exists. (You can see this in the comments here: "I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason." Similarly, I have a hard time believing anyone would even consider selling their integrity when they have literally no need for the money.)

 

As for the argument "who cares what people think--it doesn't have anything to do with responsibilities to people and shareholders", I find the argument pretty weak.

 

First, Buffett isn't Berkshire shareholders' bitch. He has no responsibility to destroy his own reputation--or compromise his integrity--to make money for shareholders. To me, this point is sufficient to refute the argument.

 

Second, displaying a lack of integrity could hurt his business. One reason people sell private companies to Buffett is because they believe he'll act with integrity in his dealings. Not everyone's trying to maximize their own profit, particularly when they're thinking more about their own legacy and the outcome for their company and it's employees.  If Buffett were viewed as someone lacking integrity, some people might decide not to sell to him the company they've spent decades building. That would hurt Berkshire.

 

(Chrispy, the difference with Microsoft is that Buffett is good friends with Gates, but not good friends with Bezos or Dimon.)

[Guest longinvestor]

I agree Gregmal regarding MSFT.

 

I've always thought that the reason he never bought MSFT was because he didn't think it had a durable competitive advantage, but in order to not offend his friend Bill he gives this excuse.

 

I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason.

 

Yeah, I think that some people care a fair amount about integrity and other people don't at all and will do what they can get away with. What's more, I think it's hard for both types of people to believe in their hearts that the other side truly exists. (You can see this in the comments here: "I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason." Similarly, I have a hard time believing anyone would even consider selling their integrity when they have literally no need for the money.)

 

As for the argument "who cares what people think--it doesn't have anything to do with responsibilities to people and shareholders", I find the argument pretty weak.

 

First, Buffett isn't Berkshire shareholders' bitch. He has no responsibility to destroy his own reputation--or compromise his integrity--to make money for shareholders. To me, this point is sufficient to refute the argument.

 

Second, displaying a lack of integrity could hurt his business. One reason people sell private companies to Buffett is because they believe he'll act with integrity in his dealings. Not everyone's trying to maximize their own profit, particularly when they're thinking more about their own legacy and the outcome for their company and it's employees.  If Buffett were viewed as someone lacking integrity, some people might decide not to sell to him the company they've spent decades building. That would hurt Berkshire.

 

(Chrispy, the difference with Microsoft is that Buffett is good friends with Gates, but not good friends with Bezos or Dimon.)

 

+1

 

I share your thoughts re: integrity.

 

But, this message board is literally filled with folks who have trounced the index, Buffett and virtually stand alone by way of performance. Based on reported performance here over the past decade. Give it another decade and the world should stop listening to Buffett’s words.

 

Who knows if I will do so myself but for now, Buffett and Munger are on top of my reading list.

[Read the Footnotes]

We are at a point in the markets that might prove to be the end of one of the longest and worst time periods for the relative performance of value investors. To abandon Warren Buffett or any value investor at this point may say more about the person removing their funds than about Warren Buffett or any other (formerly) great value investor.

 

One qualitative indications of this situation is that Justin Sun, a cryptocurrency promoter paid $4.6 million to have lunch with Buffett in order to explain to Buffett how he was mistaken about cryptocurrencies. He sought media attention and talked about how he was going to educate Buffett. Almost immediately after attracting attention to himself, he was investigated, accused of fraud and criminal activity, and his business seemed to collapse. As far as his coin, it has fallen from an all-time high last year of 0.22 USD to 0.016 USD today. So much for TRON being a store of value. It looks like Buffett's statements that cryptocurrency is a "gambling device" or "rat poison squared" are more likely to stand the test of time.

 

People who claim that he has lost touch risk eventually looking like the people who said the same thing in the late 1990's. It's hard for anyone pursuing a sound, conservative policy to look good on a relative basis when surrounded by bubbles inflated by easy money monetary policy.

[Gregmal]

I agree Gregmal regarding MSFT.

 

I've always thought that the reason he never bought MSFT was because he didn't think it had a durable competitive advantage, but in order to not offend his friend Bill he gives this excuse.

 

I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason.

 

Yeah, I think that some people care a fair amount about integrity and other people don't at all and will do what they can get away with. What's more, I think it's hard for both types of people to believe in their hearts that the other side truly exists. (You can see this in the comments here: "I don't believe that the shrewdest investor of all time would pass up on an opportunity for such a stupid reason." Similarly, I have a hard time believing anyone would even consider selling their integrity when they have literally no need for the money.)

 

As for the argument "who cares what people think--it doesn't have anything to do with responsibilities to people and shareholders", I find the argument pretty weak.

 

First, Buffett isn't Berkshire shareholders' bitch. He has no responsibility to destroy his own reputation--or compromise his integrity--to make money for shareholders. To me, this point is sufficient to refute the argument.

 

Second, displaying a lack of integrity could hurt his business. One reason people sell private companies to Buffett is because they believe he'll act with integrity in his dealings. Not everyone's trying to maximize their own profit, particularly when they're thinking more about their own legacy and the outcome for their company and it's employees.  If Buffett were viewed as someone lacking integrity, some people might decide not to sell to him the company they've spent decades building. That would hurt Berkshire.

 

(Chrispy, the difference with Microsoft is that Buffett is good friends with Gates, but not good friends with Bezos or Dimon.)

 

+1

 

I share your thoughts re: integrity.

 

But, this message board is literally filled with folks who have trounced the index, Buffett and virtually stand alone by way of performance. Based on reported performance here over the past decade. Give it another decade and the world should stop listening to Buffett’s words.

 

Who knows if I will do so myself but for now, Buffett and Munger are on top of my reading list.

 

And the hyperbole is great and all, but, it completely avoids addressing the real issue. The integrity argument doesn't really add up for somebody who has used it as their main crux for not making an investment. Is the public perception that, let me get this straight, he is trading off inside info from Gates, really any more reality based than the negative perception of helping to bail out the horrible big banks that robbed hard working everyday Americans during the housing crisis? Or you know, disagreeing with Muhtar Kent and that horrendous Coke compensation plan, but letting them go ahead with it anyway? Or the nepotism argument he makes while having Howard on his board? I'm not saying he doesnt have a right to do these things or even that I think he shouldn't, but its just a bs argument that of all things, two of the wealthiest and (as far as we know) most philanthropic people the world has ever seen, would collude to trade Microsoft stock! LOL, GTFO. Not to mention, Buffett rarely even trades! I'm calling bs here and I think most objective folks are too. But...

 

Lets stretch the logical interrogation a little further.

 

Buffett has said, numerous times that stock are fairly valued here, and actually very, very cheap if indeed these rate levels are permanent. I remember him, perhaps using some hyperbole but nonetheless making the claim that the Dow should be at 100,000 if 2% rates were permanent. Yet for years we've been rates stay around there, and now on the horizon are FURTHER RATE CUTS! And yet, Warren hasn't bought a stock in ages and his largest position, by far, is CASH!

 

My objective is not trashing Buffett; I'm looking to be an honest investor and not just make excuses for nonsense I would not tolerate from other portfolio companies. I dont know why this is so hard for people. Buffett's decision making prowess has not exacxtly been up to par the past half decade or so, maybe longer. I dont know why people would rather hear glowing things about their investments than get cold, hard, pushback from opposing viewpoints....

 

[Mephistopheles]

 

(Chrispy, the difference with Microsoft is that Buffett is good friends with Gates, but not good friends with Bezos or Dimon.)

 

Todd Combs is on the board of JPM just like Gates is on the board of Microsoft. Buffett is friends with Dimon, who are we to say how good of friends they are? Buffett, Bezos and Dimon I'm sure are friendly given the healthcare initiative.

 

Combs is on the JPM board and BRK owns JPM. Neither Buffett, Combs or Weschler are on the MSFT board. I think illegal insider trading is more likely with JPM stock than with MSFT stock.

 

We're splitting hairs if we're comparing the quality of the friendships in determining whether they should invest or not.

[Mephistopheles]

FWIW, it appears that Buffett is friendly with Tim Cook too. Remember, they had a conversation re: use of all that cash at AAPL, and Buffett advised Cook to repurchase shares? And then all of a sudden Buffett has a $50 billion position in the stock...