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Buffett: I Was Wrong on Anheuser-Busch
Thank you Owen, I think you're very likely right. I consider myself a Buffettologist but I'm not an expert in his risk arbitrage moves. As I think back, I remember that he only invests in announced deals, which kept him out of a lot of activity during the 80s. He also made a good living as a "white knight" during that period to managements faced with hostile takeovers. It's a short step from that to realize that he knows a lot about how managements can behave under these circumstances, even those who seem defenseless. Buffett can evaluate a lot, but he probably can't evaluate management irrationality, especially when it's mixed up with patriotic nationalism and King Lear-like family psychodrama.
If anyone's interested, Buffett goes into some detail about one of his arbitrage investments (Arcata) in his 1988 letter to shareholders:
Aug 26, 2008. 11:25 AM
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Money Managers and the Berkshire Hurdle
Thank you for your comments--I agree with you. The point of my post was not to argue that it's impossible for a hedge fund to beat Berkshire Hathaway. There are several good arguments why you can and you've just made some of them.
The point of my post was to make this issue part of hedge fund manager due diligence. I imagined myself interviewing a potential hedge fund manager who calls himself/herself a Buffett acolyte, as many do. I ask the magic question--"Why shouldn't I just invest in Berkshire instead of you"--and see what happens. Like the "Why are manhole covers round?" type questions they ask in Google interviews, the point of the question is really to see how the person thinks:
If the answer is some version of "We're not competing with Warren Buffett" then I make my snappy "Well I am, if I invest with you" comeback, and conclude in my head that this person is not thinking from the point of view of a principal--the guy with the money and all the options in the world as to where to put it. Also, it's likely that he/she has not internalized the fact that in order for the limited partner to beat Berkshire--i.e. after all fees and taxes and adjusting for risk--the GROSS returns of the hedge fund must beat Berkshire's by a very significant margin.
If the answer is "Berkshire is too big now to outperform" but then I find out my guy wants to be a $15bn hedge fund manager, or if I find out his fund is loaded with mega-cap names that negate this size advantage, then I would scratch my head a little.
If the answer is "Berkshire is overvalued" then I get to ask "Why do you think that?" As a self-proclaimed Buffett acolyte, my interviewee should be an expert on the subject.
If the answer does not include some discussion of risk, especially some acknowledgment of the fact that a 10% Berkshire return is "worth more," on a risk-adjusted basis, than the same 10% from a hedge fund that employs leverage itself and owns positions in highly-leveraged companies, then I've learned something important there.
Aug 18, 2008. 08:44 AM
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