- Buffett talks the talk, can he walk the walk?
- Buffett breaks the first rule of investing.
- Decision not to vote was a breach of fiduciary responsibility.
- Berkshire Hathaway has underperformed the S&P Total Return by 20% in the last 5 years.
By David Nelson, CFA
Every year around this time, Warren Buffett takes the stage at what has become the Wall Street equivalent to a Grateful Dead Concert. Fans and true believers flood into Omaha, NE to see the Oracle himself. Only this year, there was a dark cloud hovering over the event.
In a shot heard round the world, Buffett told CNBC host Becky Quick; "it's kind of un-American to vote no at a Coke meeting." He was of course explaining his decision to abstain from voting on Coca-Cola's (NYSE:KO) executive compensation package, even though he believed the plan was excessive.
I spoke to this issue just last week in my article, The C-Suite Conspiracy. I believe corporate governance could be one of the defining issues of our time.
There's no question that Buffett is a great money manager. He's an icon who's dominated the world stage for decades. He's an outspoken supporter on a host of populist issues, so it begs the question, how he can so blatantly defend his decision to not vote on such an important issue?
First Rule: Don't Get Emotional
One of the first rules of investing is, "don't get emotional about stocks." With comments like, "I love Coke, I love management and I love the directors," Buffett seems to have forgotten his roots. Those seem like pretty emotional statements.
In the past, he has rightly pointed out that stock option compensation is often a lottery ticket for management. As most of us know, it's a lottery all too often rigged in favor of management, who always seem to know the winning number.
Some with far more influence are also speaking out. Legendary investor, Carl Icahn's article, Why Buffett is Wrong on Coke, was featured in Barron's this weekend. He points out how in 2007, Buffett stated the only way to change excessive executive compensation is if large shareholders take a stand.
If that's true, then why is this issue not worth voting on? I discussed his failure on Friday with Fox Business host Tracy Burns and said, "I believe his son's place on the board is a contributing factor."
When asked, Buffett said he didn't want to "go to war" with Coke over this issue. He went on to say that "boards are part business and part social organizations." While I'm not surprised, I am appalled that he of all people accepts this as the status quo. The job of the board is to act in the best interest of shareholders. Not voting because you "love" management is not an appropriate response.
400,000,000 Reasons To Vote
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is Coca-Cola's largest shareholder with over 400 million shares and over 9% of the company. That kind of size would have an enormous impact on management decisions.
Berkshire Outperformance May Be Over
It's unlikely that any money manager can achieve the performance record that Buffett has amassed in his tenure at the helm of Berkshire Hathaway. Since 1980, shares are up over 66,000%. I think it's safe to say that the S&P hasn't fared as well.
1990-Present (Data from Morningstar)
However, when you look at the stock since 1990, we can see that over time the Alpha, or excess return, has steadily declined.
The Last Decade (Data from Morningstar)
In fact, over the last decade, the S&P 500 total return is equal to Berkshire performance, and in the last 5 years, has outperformed by almost 20%. Buffett's decision to not pay a dividend hasn't helped in the comparison. Compounded dividends over time add significantly to performance.
The Last 5 Years (Data from Morningstar)
It's clear that the massive outperformance Berkshire has enjoyed owed a lot to decades past. The Alpha has been steadily declining in the last 10 years. In addition, statements like "I will never sell Coke" are not what I want to hear from a professional money manager. You sell when your investment thesis changes or the reason you bought the stock no longer exists.
Coca-Cola's flagship product seems stuck in the twentieth century with a world slowly but surely moving to healthier lifestyles. However, this is a subject for another article.
Walk the Walk
Nevertheless, Buffett sits on a proud legacy with few if any equals. I believe this episode is not how he wants to be remembered. No one knows better than Buffett that you can't just talk the talk. You also have to walk the walk. Admit the mistake and move on. I'm confident he wouldn't lose a single supporter or fan.