What’s Wrong With Warren Buffett?

What’s Wrong with Warren Buffett?

Its that time of year again when the CEO of Berkshire Hathaway releases his famous letter to shareholders.  It always comes out to great fanfare, as most of the investment world holds him up on a pedestal.  He is unique in that he is not only considered the greatest investor of our age, but he also has a reputation for being a paragon of sound, ethical business practice.  He is a billionaire, finance guy who has gained the trust of the people!  However, not everyone is buying what Warren is selling.  There is small contingent of people who claim to see through his charming, folksy, good ole grand-dad veneer and see … something else…  a shark or a hypocrite at least.  Or, perhaps they just see someone who has carefully crafted a wholesome image in order to work the system unadulterated.

I do not agree with the arguments against Warren Buffett.  There is nothing that I’ve come across in all the literature from and about him to suggest that he is anything other than what we see – one the most transparent and sincere business leaders today.

It was the ‘sincere’ comment that drove the most derision.  The word’s use was intentional in that I believe his track record over 50 years of annual letters and interviews reveals someone who has been very upfront with his strategy, wins, and even his mistakes.  I mentioned that it was difficult to find any examples of him not acting in a manner consistent with his message.  “Au contraire!” came the replies.  So, let us examine the most common exhibits laid out by the Buffett critics.

“He argues that he should pay more tax, but takes advantage of capital gains tax and donations to private foundations to reduce his own tax burden.  If he thinks billionaires should pay more tax, why doesn’t he just write a check?” 

This is a popular criticism; however, I don’t think the logic holds up.  The nation’s tax revenue is in the neighborhood of $3.3 Trillion.  Even if he made a very large gift of a couple billion dollars it would not move the needle.  Another 500 of his billionaire friends all chipping in a little more just might.

And, Warren did offer to cut a check.  He said he would match any gift from any republican in congress (and triple the gift of anything from his pal Mitch McConnell).  There was only one such gift made, and Warren made good on his offer.  (link here).  The larger point though, is that he is making a recommendation on the tax system to help fix a problem.  It is not hypocritical to play by the rules of the game, while at the same time suggesting that maybe the rules should be changed.

“He calls derivatives ‘Weapons of Mass Destruction’ but he uses them in his own portfolio.”

Let’s examine the single most egregious case that people like to point out.  In 2008, Warren Buffett sold long-term ‘naked put’ options against many of the major stock indexes of the world.  Options are derivatives in that they ‘derive’ their value from the value of another asset, in this case, the global stock markets.  Buyers of put options are betting that the value of the underlying asset goes down.  So for people and institutions who have imbedded interests in stock, buying put options is a form of insurance.  Because, if your stocks go down, your put options will go up.

Berkshire Hathaway happens to be one of the largest sellers of insurance in the world.  Their reinsurance business (essentially insuring insurance or the things other insurers won’t touch) is consistently profitable because of their ability to accurately price risk.  The selling of naked puts is directly in their wheel-house.  Warren explained it all in his 2008 letter to shareholders.  I recommend you go back and read the entire report because, like all of his letters, it is a great lesson in finance, but here is the important bit.

Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives contracts (other than those used for operational purposes at MidAmerican and the few left over at Gen Re). The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault.

So, the world’s greatest investor and CEO of the one of the world’s largest and best insurance companies in the world, sells insurance-like put contracts and he is a hypocrite?  Finding value and pricing risk is what he does.  He criticizes the improper use of these instruments, and then takes the reader to school by explaining the correct use with full accounting, explanation, and accountability.  Again, hard for me to see the logic of this criticism.

“He tells ‘mom & pop’ investors to buy index funds.  He hates hedge funds, but has hedge fund managers running his investments.  Surely, this makes him a raging hypocrite!”

This is a ridiculous argument.   He is a professional investor, not ‘mom and pop’.  To suggest that he should align his investments with the advice he gives to novices, or vice-versa, is ludicrous.  They are not in the same realm of circumstance or sophistication.

His main beef with hedge-funds is that the fees over time will eat into returns.  He has expressed a dislike for Wall Street types due  “more money has been made on Wall Street through salesmanship than through any investment insight.” To say that it’s hard for retail investors to find honest, good, and cost-effective investment options should not be controversial.  To use his expertise to identify skilled investment managers, or employ complex strategies should not be either.

I know there are other criticisms but these are the most popular.  This post will paint me as cheerleading sycophant but I’m just calling it how I see it.  Warren Buffett is unique in achieving the level of success he has and doing so with such a sterling ethical record.  Any accusation of ulterior motives or self-dealing just is not borne out by the evidence.  Maybe he is who we think he is.  The kind old folk hero of investing.

So why the haters?  The Dallas Cowboys are my least favorite team in the NFL (next to the GreenBay Packers anyway).  I grew up in the 90’s when they were the dominant force in the league.  People would come to school with their Dallas Cowboy Starter Jackets on and rave about making another run at the SuperBowl.  I would say “I hate the Cowboys.  They aren’t even that good.”  Well my opinion was not borne out by the facts.  They were, in reality, that good.  They just won a lot.  Warren Buffett has a bit of the Cowboys effect, or the Yankees if you prefer.  There will always be a group that wants to see the tower crumble.

To use another sports metaphor, Warren Buffett has received a Michael Jordan effect.  Instead of getting foul calls going his way, he gets favorable deal prospects.  Banks that were struggling in the aftermath of the financial crisis, especially wanted to get an investment from Warren.  It was a great sign of strength to have the Omaha seal of approval.  So, of course, they would sweeten the pot.  And he has a fiduciary obligation to his shareholders to take advantage of that.  If it were anyone else it would be classified as a competitive advantage, so why should he turn away those deals?  There was nothing underhanded about any of them.

The bottom line is that Warren Buffett will go down in history with the reputation as one of the most astute, transparent, and ethical business leaders of our country.  It’s a reputation that any careful examination of the evidence suggests is deserved.

Well I hope I have exhausted everyone enough on this topic.  Now go read the latest letter to shareholders.  I know this post was likely higher on the priority list, and I appreciate that!


Until Next Time,

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.” – Warren Buffett