So David Weidner of Marketwatch recently put out his "10 Biggest Losers on Wall Street in 2011" List, labeling it a "countdown of the Street's biggest embarrassments, frauds, phonies, failures, and fools." You would think that a list like this would focus only on those who engaged in outright fraud --Jon Corzine at MF Global, anyone? -- or companies that saw spiraling stock prices with less than stellar fundamentals like Bank of America (BAC). But somehow Berkshire Hathaway (BRK.A) (BRK.B) Chairman and CEO Warren Buffett managed to make his way onto Mr. Weidner's list, with Mr. Weidner writing:
"It pains me to say it, but it was a terrible year for Buffett and Berkshire Hathaway Inc. The 'Oracle' did some of his traditional dealmaking, but he was also burned by David Sokol, who may or may not have been profiting from insider knowledge of the deals. The scandal was bad enough, but Berkshire investors can't be happy either. The stock is down nearly 9% year-to-date, compared with a roughly 4% decline in the S&P 500. Profit-wise, Berkshire is on pace to have its worst year since the financial crisis of 2008."
Personally, I hate seeing Warren Buffett put on the same list as Jon Corzine, banks engaging in malfeasance, and Galleon Group's former CEO Raj Rajaratnam who engaged in insider trading by receiving privileged information from Goldman Sachs (GS). These folks actually engaged in crooked behavior and got caught, Buffett's alleged sin is that the stock price of Berkshire shares went down 9%.
Let's take a look at Weidner's criticisms head-on:
1. The David Sokol scandal. Some of the people who are still upset with this act as if it was Warren Buffett who engaged in insider dealing, as opposed to one of his employees. This is particularly absurd considering that Berkshire is one of three giants in corporate America (along with General Electric (GE) and Johnson & Johnson (JNJ) ) that draws its strength from a particularly decentralized business model. Buffett grants his employees and managers a great deal of latitude, and most of them prove themselves worthy of the trust. Sokol took advantage of that trust, and he was fired. To me, that seems like a fair cause-and-effect relationship. A man who was presumably next-in-line to the Berkshire throne did something dishonest, got caught, left the company, and now his name comes with an asterisk attached.
2. The Decline of the Stock Price. One thing that Buffett has never done is gauge his success by the rise of stock market prices. During his over forty year stretch at the helm of Berkshire, he has always measured himself by the company's rise in book value. Buffett has always been more concerned with growing Berkshire's profit stream than worrying about the market's valuation of that profit stream. He has a great system in place where he can self-fund Berkshire's operations from his cash hoard and incoming profit stream. He can just go out and buy $10 billion worth of IBM (IBM) stock or add billions to his position in Wells Fargo (WFC) which is something that most companies cannot do. He can offer to buy Lubrizol without needing to take on any debt to finance the acquisition, meaning the profits from the company directly accrue to Berkshire's bottom line for further investment, without needing to use the money to pay off the loans (although sometimes Buffett takes on debt if he thinks the long-term interest rate is advantageous for Berkshire in light of future inflation expectations). This is a powerful cash-generating engine that Weidner's criticism does not adequately consider.
Long-term shareholders of Berkshire Hathaway do not own the company hoping to make a quick book. In fact, the company has the lowest percentage turnover of any company valued over $10 billion. When Buffett bought the Washington Post (WPO) in the early 1970s, it fell 35% further before giving Buffett a ten-bagger within fifteen years. Buffett has never judged himself by year-to-year performance, and Mr. Weidner would be better off looking at the foundation Buffett has been laying this year instead of focusing on the supposed disappointment of Berkshire's stock price. That way, investors could get an accurate picture of what Buffett is doing at Berkshire, instead of providing a misguided snapshot that sells the company short.