Has it really been five years already? Five years since the financial world was falling apart with the crisis created by the collapse of the housing bubble?
Back in those days all of the Wall Street firms were picking up the phone and dialing "9-1-1" to Warren Buffett begging for help in the form of multi-billion dollar capital infusions.
Because he is polite, Buffett took all of the calls but said "no thank you" to all of the Wall Street banks. All of them except for one. Goldman Sachs (NYSE:GS).
For Goldman, Buffett had some time and some cash.
Buffett's Berkshire Hathaway (NYSE:BRK.A) invested $5 billion in Goldman Sachs in the form of "perpetual" preferred shares. These shares carried a lovely 10% annual dividend, which for Berkshire amounted to about $500 million per year.
Additionally, Berkshire received warrants to purchase an additional 43.5 million shares at $115 per share with an exercise deadline of October 1, 2013.
The deal was a good one for Buffett as he received dividends as required on the preferred shares up to March 2011 when Goldman bought those preferreds back from Berkshire. For that early repayment, Berkshire received a $500 million bonus.
Today with the expiry date on the warrants approaching Goldman and Berkshire announced that the companies had struck a deal to retire the warrants. The specifics involve Goldman providing Berkshire with common shares rather than Berkshire actually exercising the warrants.
With the announcement of the deal Buffett indicated that Berkshire will become a happy long-term shareholder of Goldman Sachs:
"We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago," said Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway. "I have been privileged to have known and admired Goldman's executive leadership team since my first meeting with Sidney Weinberg in 1940."
The statement from Buffett that Berkshire intends to "hold" a significant investment in Goldman Sachs sent me scurrying through my Buffett files. And what I was scurrying to find was this quote from Buffett:
"I try and buy wonderful businesses that an idiot can run, because someday one probably will."
He has also described this principle as wanting to own businesses that can be run by "a ham sandwich."
With that in mind I have to say that the fact that Berkshire is going to hold Goldman Sachs for the long term is a clear violation of this principle.
Because if there is one company (or type of company) in the world where you do not want an idiot in charge it is a leveraged black box like Goldman Sachs.
No, when you invest in Goldman Sachs you are betting specifically on the brainpower of the people running the business.
And that got me to thinking, how many of Berkshire's top equity holdings can be run by a ham sandwich and how many of them are really bets on management rather than a business with an insurmountable moat?
Here is my take on the "big four" Berkshire positions as of Dec 31, 2012:
Position 1 - Wells Fargo (NYSE:WFC) - Berkshire Has $15.5 Billion Invested
I want to say that Wells Fargo could be run by a ham sandwich because of the competitive advantage it has over other banks because of its extremely low cost deposit base.
But then I think of the leverage involved in a bank and how having a 10% write down in assets could destroy all of the value of the equity in the business. Surely an overreaching "idiot" could inflict some serious damage if put in charge of Wells Fargo.
My verdict - Wells Fargo can't be run by a ham sandwich that makes for a violation of this Buffett principle.
Position 2 - Coca-Cola (NYSE:KO) - Berkshire Has $14.5 Billion Invested
This one is easy. Coca-Cola is the business that Warren thinks could be run by a ham sandwich. If someone were to give me a billion dollars tomorrow (I'm borrowing from Warren) there is no way that I could make a dent in the Coca-Cola brand name or profitability.
My verdict - Coca-cola can be run by a ham sandwich.
Position 3 - IBM (NYSE:IBM) - Berkshire Has $13.0 Billion Invested
Warren shocked a lot of people when he revealed that he had invested so much money into a technology company like IBM. With the size of the position clearly Buffett feels there is enough of a moat around IBM to own the shares for the long term.
Buffett explained his reason for buying IBM finally after 50 years of reading its annual reports as him finally coming to understand the "stickiness" of the IBM business model.
What I believe Warren was referring to is the fact that once IBM has gotten its hooks into the IT department of a company it is going to have a recurring revenue stream for a long time.
This creates the moat around IBM's business and to be honest a change in IBM's CEO likely wouldn't impact that much.
My Verdict - IBM's business actually could be run by a ham sandwich given how difficult and inconvenient it is to change IT service/system providers
Position 4 - American Express (NYSE:AXP) Berkshire Has $8.7 Billion Invested
Talk about your brand names! It is hard to rank American Express much lower than Coca-Cola when it comes to how strong a brand is.
Interbrand magazine actually ranks Coca-Cola as having the strongest brand in the world and puts American Express in at number 24. Not number two, but still very strong and the kind of business moat that a ham sandwich might be able to protect.
Not surprisingly IBM comes in at number three on that list.
My Verdict - I would feel comfortable with a ham sandwich minding the shop at American Express as the brand name is strong enough to do the heavy lifting.
I think the lesson for investors is that for the most part Buffett does have Berkshire's portfolio invested in companies that have incredible brand power or competitive advantages (like Wells Fargo's low cost deposit base).
Goldman Sachs might not quite fit the model, but for the most part the Berkshire portfolio is built on brand power and not on the people running the company.