Enough with the Buffett Critics

There always seems to be critics of Warren Buffett, including a recent piece on Seeking Alpha titled “Buffett’s Betrayal”, written by Rolfe Winkler. To all the critics, I say enough is enough.

Some of the critics suggest that Buffett’s support for the bank bailouts was for selfish reasons. To expand, the critics suggest that since Berkshire Hathaway (BRK.A) has large stakes in Wells Fargo (WFC), American Express (AXP), and U.S. Bancorp (USB) (among others), he was merely concerned with his own self-preservation.

Other critics comment on Berkshire Hathaway’s derivative positions, maybe suggesting Warren Buffett is somewhat hypocritical. To expand, Buffett is famous for stating derivatives were the equivalent of “financial weapons of mass destruction”, yet Berkshire Hathaway maintains billions of derivative positions on its books.

Of course, there is always the “Buffett has lost it” crowd. Buffett makes mistakes – the most recent example is his purchase of Conoco Phillips (COP). Buffett even acknowledged this purchase as a mistake.

I guess when someone is on top, there will always be critics and detractors. What are their motives? To make themselves look good by criticizing a legend? I don’t know.

But to address these critics, I would like to make the following points:

1) Clearly, the TARP program helped many banks survive, and in turn, helped Berkshire Hathaway’s financial portfolio. But if Buffett suggests that the banks should receive federal aid, does this imply his only incentive for those comments is the self-preservation of his net worth? Is there any possibility that Buffett believed that federal aid was the only measure that would have saved the financial system?

I personally believe that without government intervention, the banking system would have collapsed. Many financial experts believe this to be true. So because Buffett is in this camp, it means that he is only speaking for self-fulfilling reasons?

To keep this in perspective, Buffett has also commented that he believes in the estate tax (and a large one). Please keep in mind that as one of the wealthiest people in the world, a large estate tax in no way benefits his (and his family’s) future net worth – it does the opposite! In either case, it is almost a non-issue, as Buffett is giving a large portion of his net worth to charity.

Also keep in mind that there has been no better fiduciary leader of a publicly traded company (at least in my opinion). If someone can find a better caretaker of corporate assets, please let me know. And let’s also not forget that Buffett’s salary has approximately $100,000 to $200,000 over the past decade. Find me another CEO with that track record. To link Buffett with personal greed is a stretch.

2) Derivatives. Please keep in mind that more than anything, Berkshire Hathaway is an insurance company. So the fact that Berkshire Hathaway is involved with Credit Default Swaps is trivial. If Berkshire Hathaway loses money on these transactions, then they lose money. But unlike AIG, Berkshire Hathaway certainly didn’t bet the franchise.

Not even close. Berkshire Hathaway has also sold several billion dollars in put contracts (on various indices). For those individuals who aren’t familiar with Berkshire Hathaway, investment float has been a huge ingredient to Berkshire Hathaway’s success. Selling puts is just another way of increasing float.

My guess is that Berkshire will keep all the premiums written on these put contracts, plus all the related investment gains. Another potential big win for Buffett. Where will the critics be in ten to twenty years when the put positions are worthless?

Overall, the difference between Berkshire Hathaway’s derivative positions and other companies’ derivative positions is that Buffett and company know how to manage risk much better.

3) Buffett is washed up? This is crazy. I will only suggest the following points. One, Berkshire Hathaway may be the strongest company in America. Two, Buffett made greats deals with GE and Goldman Sachs (among others) by getting preferred shares in these companies. Quite honestly, I didn’t see anyone else doing these deals. Three, I still feel he is the best CEO out there. Again, find another leader that you would prefer running a major corporation. I bet this would be a small list.

Overall, I believe the critics of Buffett are merely seeking attention. I recently published a book on Berkshire Hathaway, and while researching the company, I was shocked how few companies there are that replicate Buffett’s business principles. If I were to criticize any major business leader, I would rather spend my time dealing with the Chuck Prince’s, Jerry Yang’s, and Martin Sullivan’s of the world (and I have written about these “leaders” in the past).

I am tired of the Buffett critics.

Comments

[Gardener:]

Some of us are tired of the reverential idol worship of investors who hang on his every utterance. His success is due to his original and independent thinking, something every Buffett watcher would be served in doing themselves.

Aug 13 01:31 PM

[update:]

Buffett is liberal scum.

Aug 13 01:33 PM

[The Hammer:]

Being a Buffett follower for many years, i have become disappointed in him. Besides parading across the tube with all the led women anchors on business shows, he should spend more time running the company. Yes he has made a number of mistakes.
He rarely criticizes anyone.....a true politician. He continues to favor continual bailouts eventhough future generations are getting raped.

"I personally believe that without government intervention, the banking system would have collapsed. Many financial experts believe this to be true.." many of these fionancial experts work for wall street ponzi banks and have a major vested interest in keeping the ponzi scheme alive. And many of these twits did not warn of this major financial mess when it was unfolding for the last decade or two. WHO cares what these twit experts say?

It remains to be seen whether it would of been better to let all these bloated financial institutions allowed to go belly up especially the smartest of them all. The govt could of easily backed savings accounts and deposits, money markets and kept the banks that were managed with appropriate risk alive to keep finance alive.

As regarding Buffett, he is not paying much if any estate taxes, he is giving it away so why does he give a damn if a parent wants to max their gift to their children. he has a personal accouint of over $300 mil or so so he is loaded even making 100k a year.

Aug 13 01:37 PM

[RonB:]

Excellent article. Buffett's wisdom and success provide great lessons for all investors.

Ron Beasley
rwbi.net

Aug 13 01:38 PM

[Vafer:]

you think Buffet making $100k a year is a lot? you're on the wrong planet.


On Aug 13 01:37 PM The Hammer wrote:

> Being a Buffett follower for many years, i have become disappointed
> in him. Besides parading across the tube with all the led women anchors
> on business shows, he should spend more time running the company.
> Yes he has made a number of mistakes.
> He rarely criticizes anyone.....a true politician. He continues to
> favor continual bailouts eventhough future generations are getting
> raped.
>
> "I personally believe that without government intervention, the banking
> system would have collapsed. Many financial experts believe this
> to be true.." many of these fionancial experts work for wall street
> ponzi banks and have a major vested interest in keeping the ponzi
> scheme alive. And many of these twits did not warn of this major
> financial mess when it was unfolding for the last decade or two.
> WHO cares what these twit experts say?
>
> It remains to be seen whether it would of been better to let all
> these bloated financial institutions allowed to go belly up especially
> the smartest of them all. The govt could of easily backed savings
> accounts and deposits, money markets and kept the banks that were
> managed with appropriate risk alive to keep finance alive.
>
> As regarding Buffett, he is not paying much if any estate taxes,
> he is giving it away so why does he give a damn if a parent wants
> to max their gift to their children. he has a personal accouint of
> over $300 mil or so so he is loaded even making 100k a year.

Aug 13 01:44 PM

[EddieTa:]

Good article. What is the title of your book?
www.examiner.com/x-794...

Aug 13 01:55 PM

[strawdog:]

Apparently the writer has fallen victim to the siren song of Buffett's carefully crafted homespun public image.

how about a fact based article linked to trustworthy news sources:

Not So Strange Bedfellows: The Warren Buffett - Goldman Sachs Love Affair
proudtoliveinamerica.c...

Buffett is an opportunist and yes his primary concern is to himself and his shareholders. The FED and the Treasury Dept needed his image to restore faith more than his money. He had them by the short hairs and drove a brutal bargain.

Aug 13 02:00 PM

[greedcanbgood:]

You know, I'm not a big fan of Buffett but you make some great points. I love this comment from strawdog, "Buffett is an opportunist and yes his primary concern is to himself and his shareholders." Isn't that a good trait for a CEO? Lest we forget that BH is not a non-profit organization. It's shareholders are counting on them to do well. Lets not also forget that one of his biggest positions (USB) didn't want or need the TARP finds and were among the very first to pay it back.

If the Fed and the Treasury needed his image, then so be it. Much of the market today is based on preception. You can argue whether not that that's a good thing but it's much bigger than Buffett himself.

Aug 13 02:11 PM

[The Hammer:]

vader you misinterpretated my statement. 100k is a bargain but he invests alongside sleezy firms like Goldscum craps. All I heard and read is about partnering with quality ethical people but then he goes invests with these slugs with our money? this investment helped keep the scum organization afloat. I would rather take a slight hit to my investment (brkb) than keep this sleezy firm (gs) in existence.
I consider some of his comments lately to be sexist also. If any other investors or commentator made the same comments they would be baked over the coals. He has been getting a free pass lately with some of his statements.

Aug 13 02:37 PM

[Johnc222:]

The United States Treasury should NOT be taking a divy from FRE to the tune of 1.1 Billion dollars. After all the Government did not invest in these Financials to make money. But, to support them through a savage downturn in the economy.

FRE would be far better off if Treasury converted the prefered into common shares. FRE would be far better off and faster to return to it's feet.

It like the Treasury is taking money from a cripple person.

Time to convert....Tim

Aug 13 03:11 PM

[secroot:]

buffett is a big boy---he will probably survive without your protection


On Aug 13 01:44 PM Vafer wrote:

> you think Buffet making $100k a year is a lot? you're on the wrong
> planet.

Aug 13 03:19 PM

[richjoy403:]

WB has earned our respect...but not our worship.

Does WB talking his book...yes (could you expect otherwise?)

There is (probably) not one person here with a long-term track record that could compare to his.

Has WB made some bad investments?...yes, and so have all of us. I suspect those who criticize WB do not hold themselves and others to the same high standards.

Aug 13 03:32 PM

[ebworthen:]

Remember, Buffet bought gobs of GE at $25 a share (ooops).

There were big wheel's just like him who lost their pants and jumped from buildings 1930-1932.

Aug 13 03:42 PM

[Dan Braem:]

Tough to address all the comments, but here it goes:

1) Without government intervention, many companies could not have raised the capital necessary to stay in business. Citi, Merrill Lynch, Wachovia, etc. Even Goldman Sachs and GE were in trouble, and needed to raise capital. It is hard for me to believe that anyone could debate this. When Buffett makes this point, why is it nothing more than stating the obvious?

2) To be clear, Buffett has not invested a lot of capital over the past several years b/c great value plays were not available. So he was super well capitalized coming into the crash. He was prophetic, everyone else was pathetic (AIG, C, etc.).

3) No one talked about derivatives, so I won't get into further detail.

I have written similar comments found in this article in other posts - no one has been able to provide a better CEO. Not one. Until I get a respectable list going, I don't even want to hear the critics. Eddie Ta - thanks for asking - there should be a link for the book next to the author's comments or on the author's bio on Seeking Alpha.

Aug 13 04:22 PM

[cyberfossil:]

Your last point about the "great deals" he made with GS and GE serves to prove the point of his critics. The preferred deal he made with GS was something unavailable to common investors and, at that $115 strike price, undermined and diluted the common shareholders of GS who were at $123 that day. He had the inside knowledge of the GS relationship with the Treasury and Fed plus the self serving encouragement of the bailout backing up his investment. So his elitism and cronyism plus the socialization of the risk assumed by the US government, not his genius, were the genesis of that easy payday.

Aug 13 04:48 PM

[SteveR:]

Dan,
Excellent article! I had a similar response to the Buffet Betrayal article. It sort of pushed me over the edge for a couple hours. I never could have articulated the points as well as you, so kudo's to you for that.

I love this, "while researching the company, I was shocked how few companies there are that replicate Buffett’s business principles".

The analogy I use is this. It's as if I am watching a basketball game in the 50's with Bob Cousy and the guys doing set shots and pivot moves and then Michael Jordan joins in and does these amazing dunks and moves and everybody stands around saying how crappy he is and keeps on working on their set shots, unbelievable.

I will offer a couple of my favorite CEO's that are close to Buffet but I still agree Buffet is the all time best. Both of them work for under 100K. One is Jim Sinegal at Costco. Both Buffet and Munger have given him praise in the past. The other is John Mackey at Whole Foods. I realize I am going to get ripped apart for this one, but much like Buffet, he is misunderstood after the whole yahoo board incident. I think Mackey's circle of care extends beyond Buffet's at the corporate level. He integrates the shareholders, employees, customers and suppliers. He is the most integral CEO on the planet IMHO.

Aug 13 05:04 PM

[Kirill:]

Buffet is a star, but as all of us sometimes he makes mistakes.
This platform is created to voice opinions. Indeed, the best of people here do voice theirs and have substantial arguments along with them.

Aug 14 08:58 AM

[buoy:]

"No one ever kicks a dead dog."

Aug 14 09:29 AM

[CaptainJJack:]

I own BRK, and while I do not idolize Buffet, I find the criticism of Buffet laughable. He is doing today what he has done for the last 30 years.

It was no accident that Goldman sought him out last fall, and they gave BRK a great deal..or...should I say, Buffet demanded a great deal.

Yes he had a lot of cash, but ask yourself why. Ask why Buffet has always been in a great position.

Once you answer to that, you will understand BRK, and once you understand that, you will understand why the critics will always end up wrong.

Aug 14 10:46 AM

[jadick:]

The problem with Mackey is one of ethics - he was caught publicly hyping his stock on bulletin boards under a false name, if I remember correctly. So much for maturity, not to mention lack of concern for his shareholders as a result of being caught at it.
Impulsive is not a trait I really want to see in CEOs of companies in which I've invested.

The bottom line on the Buffett deals with GE and GS is he made/will make BILLIONS for his shareholders.

jadick
louisville, ky

Aug 14 04:36 PM

[long_on_oil:]

Following Buffet is like watching TV. If you don't like what's on, turn the channel. If you are a Buffet fan and you can afford the stock, you probably do, so you have a dog in the fight. If you don't own BRK then why would you even care about WB?
I never owned any Enron therefore I did not give a tinkers damn for Ken Lay.
I own BRK and if Buffet displeases me I will sell, that is the bottom line.

Aug 14 06:24 PM

[SRL:]

Let's see...

His track superior track record dates back half a century.
Time and time again, for half a century, he has never failed to demonstrate anything other than the highest of moral and ethical standards.

He has never failed to admit a "mistake" and his rare "mistakes" are far outweighed by the quantity and magnitude of "successes." The best thing about his acknowledgment of mistakes is he does not do so solely on the basis of hindsight, but well details why the decision was bad at the time and should have been recognized as bad at the time. Life is a constant series of decisions usually based on incomplete and imperfect information. Nobody is immune from the risk of making a bad decision. Obviously, the key is to minimize bad decisions and maximize good decisions. That is what he does, has been doing for half a century, and continues to do so.

For years, the biggest "problem" at BRKB has been figuring out to do with all the free cash flow (that's free cash flow in real green dollars). During the crisis, it was BRKB that was sitting on billions of real green dollars and able to avail itself of opportunities presented when many panicked. There is an old cliche about keeping one's head when others are losing theirs.

To those who think his positions and actions might have been in the nature of self interest, take a look at the last Annual Report (Consolidated Statements of Cash Flows). Finance and Financial Products accounted for 3.7% of cash and cash equivalents. Besides, should a CEO make good deals or bad ones?

I may be a simpleton, but a half century of track record as the most successful investor of all time coupled with the penultimate of moral and ethical integrity is enough for me.

Aug 19 03:45 PM

[Dan Braem:]

SRL - you nailed it! You may have stated the obvious, but others fail to see what you illustrated. In my book "Building the Next Berkshire Hathaway" - I make it a point to note that Buffett was a wondeful hedge fund manager before Berkshire Hathaway. Then he did it again. To further the point, he turned his own private stash into millions.

I don't understand the criticism.


On Aug 19 03:45 PM SRL wrote:

> Let's see...
>
> His track superior track record dates back half a century.
> Time and time again, for half a century, he has never failed to demonstrate
> anything other than the highest of moral and ethical standards.
>
>
> He has never failed to admit a "mistake" and his rare "mistakes"
> are far outweighed by the quantity and magnitude of "successes."
> The best thing about his acknowledgment of mistakes is he does not
> do so solely on the basis of hindsight, but well details why the
> decision was bad at the time and should have been recognized as bad
> at the time. Life is a constant series of decisions usually based
> on incomplete and imperfect information. Nobody is immune from the
> risk of making a bad decision. Obviously, the key is to minimize
> bad decisions and maximize good decisions. That is what he does,
> has been doing for half a century, and continues to do so.
>
> For years, the biggest "problem" at BRKB has been figuring out to
> do with all the free cash flow (that's free cash flow in real green
> dollars). During the crisis, it was BRKB that was sitting on billions
> of real green dollars and able to avail itself of opportunities presented
> when many panicked. There is an old cliche about keeping one's head
> when others are losing theirs.
>
> To those who think his positions and actions might have been in the
> nature of self interest, take a look at the last Annual Report (Consolidated
> Statements of Cash Flows). Finance and Financial Products accounted
> for 3.7% of cash and cash equivalents. Besides, should a CEO make
> good deals or bad ones?
>
> I may be a simpleton, but a half century of track record as the most
> successful investor of all time coupled with the penultimate of moral
> and ethical integrity is enough for me.

Aug 21 01:41 PM