Buffett can pick stocks but he’s no entrepreneur
First published in the Sunday Times on 25th October 2015.
It is a blow when one’s heroes are revealed to have feet of clay. Over recent years I have come to the conclusion that Warren Buffett, the legendary investor and folksy mega-billionaire, is not the impressive man I once thought he was, but rather something of a fake and a hypocrite.
I discovered Mr Buffett after buying a copy of The Intelligent Investor about 30 years ago, when I was a City analyst. He wrote an excellent introduction to Benjamin Graham’s marvellous book. So I started following the shares of his company Berkshire Hathaway, reading his annual chairman’s statement, and in time became a fan of the “Sage of Omaha” for his self-deprecating wit, sound judgment and long-term perspective.
But I fear he has gradually lost the plot on what truly matters — integrity, for example. On taxes he is simply a phoney. He says, sanctimoniously, that the rich should pay higher rates of income tax, knowing the only tax that bothers him is capital gains tax. And he is a master at avoiding that. He has undertaken at least three huge share-swap deals — with Phillips 66, Procter & Gamble and Graham Holdings — that have enabled his company to save billions in taxes. According to Crain’s business magazine: “Mr Buffett, at his death, will most likely, relative to his wealth, be the lightest-taxed American in the history of the republic.”
Buffett has also been heavily critical of private equity and leveraged buyouts: he says they are short term and driven by financial engineering. Yet several of his largest bets have been partnerships with 3G, a Brazilian private equity firm in all but name. For example, Buffett and 3G bought Heinz and loaded it with $23bn (£15bn) in debt. Now his Brazilian partners are slashing costs to pay interest — limiting executives to 100 business cards a year and one printer per 100 staff. It’s hardly the sort of patient investment that grows enduring companies.
I am not a fan of 3G. It asked me to get involved with Burger King here; I said no because I think the business has many issues. It is also behind the bid for SAB Miller by AB InBev. This is a takeover that will do nothing for customers, job creation or consumer choice. It will lead to a quasi monopoly in the supply of beer.
The only possible rationale for the crazy price that 3G and AB InBev propose paying is yet another huge round of redundancies and brewery closures.
It is gigantism gone mad. Monolithic brewers such as AB InBev are under siege in countries like the US from innovative, independent craft brewers who are bringing back variety and quality to the market. So AB InBev’s answer is simply to smash together two beer multinationals and keep cutting costs.
I suspect the worship that Buffett receives from his armies of fans has distorted his judgment. Massive celebrity status normally warps personalities. His annual meeting is like a revivalist church service. Anyone receiving that much sycophancy is bound to start thinking he is untouchable.
Yet Buffett is at heart a financial engineer, not an entrepreneur or a true business builder. He has acquired well, and grown his company’s share price — but he has not invented anything, or even managed businesses directly. Much of the real wealth creation has occurred in companies where he was a passive owner — a fund manager, if you will.
That is not a shameful role, but these achievements hardly justify the extraordinary esteem in which he is held by so many. The number of books written about him is frankly sickening. His single real skill is stock picking; does that actually justify all the sycophantic drivel heaped on his head? Where are his years of public service? Is there much proof that he has ever done anything except for profit?
Moreover, his philanthropic behaviour is curious. He claims to have signed up for The Giving Pledge — where the world’s richest individuals commit to making huge gifts to charitable causes — and has been donating about 4% of his retained Berkshire shares per annum. But I’m surprised such an intelligent man has not been more active or imaginative in his philanthropic activities. As Buffett himself observes, he has not extinguished fires in burning buildings or treated the gravely ill. He has detected mispriced securities and placed incredibly lucrative bets on his observations. And ultimately that is why Buffett is feted like some god — it is because he is very rich.
All that adulation reflects rather a sordid side of US culture: the naked adoration of capital accumulation for its own sake. When educated, sophisticated and influential capitalists like Buffett fail to promote and practise the wider benefits of the capitalist system — like the payment of taxes, job creation and active philanthropy — they are letting down the cause of private enterprise.
He may be very wealthy but Buffett will suffer the same fate as almost all plutocrats: I suspect he will be forgotten soon after his death.