The math on Berkshire is staggering. An investor who would have invested $10,000 in Berkshire Hathaway when Warren Buffett took charge back in 1965 would be more than $50 million richer at its 1998 peak. Granted, since then that lucky investor has lost tens of millions.
What went wrong? Why can't it right itself? I'm going to suggest two things. The game and the opportunity have passed Warren Buffett by. I know. The former is cruel. As for the latter, even Warren Buffett himself will admit to that.
As a long-term investor Warren has a history of picking up great companies at great prices. Many of the companies remain great. Many of the prices do not. In 1988, Berkshire Hathaway bought into Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> at just two times sales. He won't get another shot at that multiple unless the stock drops to $15.
The few bargains Warren has found in recent years have been in sleepy industries like insurance and utilities. That hasn't helped. Since the GEICO and General Re acquisitions, the company has reported substantial insurance underwriting losses. While the company only had to increase the shares outstanding by 23% to pick up General Re -- the country's largest reinsurer -- it has cost the company plenty. Operating income fell during each and every quarter last year. Warren, you get what you pay for. You can make lemonade out of lemons but only if you have sugar water too. And, with Buffett's value style, I'm afraid that the price of sweet water has gone through the roof (property insurance claim on that roof notwithstanding).
It's not as if the company was in such great shape before the December 1998 acquisition of General Re. Operating earnings rose just 5% that year. If you back out the troubled insurance operations in 1999, earnings rose a scant $6 million over the first nine months of the year.
In today's market the companies with attractively low prices are usually that way because they are unattractive. But what is more alarming than the lack of present-day bargains for the company to peck at is that many of Berkshire's equity positions have grown to become unattractive investments at even more unattractive prices. Berkshire's largest holdings -- such as Coke, Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, and Freddie Mac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %> -- are trading near last year's lows.
In 1999's bull market, where everything but the kitchen sink ran buoyant, the value of Berkshire's equity investments eroded from $39.8 billion to $34.8 billion (through September). Because Warren bought into these companies so many years ago -- at a cost basis of just $10.7 billion -- there still lies $24.1 billion in unrealized taxable gains there. But it used to be more. Warren bought low but forgot to sell high.
There is more to Berkshire than lagging equity investments and insurance money pits. Warren has bought other companies outright. Stores selling jewelry and furniture. Candy and shoewear makers. Aircraft services and air compressors.
In a nutshell, Berkshire owns yesterday. It's a throwback to Anytown's Main Street -- where kids are thumbing through World Book Encyclopedias for research and hanging out at the Dairy Queen.
There is no today in Berkshire. There is even less of tomorrow. In a letter on the company's vanilla website, Warren admits that he is a "lifelong technophobe." He even invites readers to drop him a line, but "not e-mail though; I haven't made that much progress."
It paints a nostalgic, "Aw shucks" Norman Rockwell painting that would be cute if it weren't all too indicative of someone who, at 69, appears reluctant to appreciate why technology will continue to play an even bigger role in our lives ahead.
While many investors worry about the day when Warren finally hangs up his hat (and you saw how last week's rumors of an ailing Warren hurt the stock) my concern is that maybe he will have handed down too much. While Warren has been steadfast in his desire to only invest in what he can readily understand, he has missed out on the tech primers. Berkshire's holdings have been lapped by Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>.
There is no whirlwind of investing innovation here. The only blizzard one will find at Berkshire gets served up at the DQ. While reverence to Ben Graham is certainly noteworthy from a historical perspective -- and the same will naturally apply to Warren -- it is just not the direction the market has been taking recently. And that move is away from Buffett. Away from Berkshire.
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