Reflections on Berkshire Eve

 | May 03, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

cag

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brk.a

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brk.b

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unp

I am in transit to the promised land for investors, Omaha, Neb., home of ConAgra (CAG), the Union Pacific (UNP) railroad, and, of course, that tiny local employer Berkshire Hathaway (BRK.A) (BRK.B)

 Fortunately, I brought a winter coat because the Midwest is getting socked with an unseasonably late snow storm, with several inches falling. The storm is timely as it reinforces the metaphor that Chairman Warren Buffett and Vice-Chairman Charlie Munger are in the winter of their careers. I am meeting a few members of my "cabal" here, as we have done every year since our first back in business school over 20 years ago. We don't have many meetings left, so all are must-go now. This one will be more entertaining than usual with Real Money superstar Doug Kass playing the skeptic to Buffett, while Buffett's adoring masses gaze on.

I will be reporting on the meeting, including a roundtable discussion with my other friends who are in attendance. But as we anticipate the meeting I must also offer a few skeptical tidbits. Neither I nor anyone can deny Buffett's record, and I give him full credit for it. But whether it is a stock, a person or an idea, whenever anything develops a huge cult-like following, you should step back and view the situation with a cold, hard, analytical eye.

Here are a few points to keep in mind, even as you enjoy the meeting and its spectacle.

First, Berkshire has created immense wealth for its shareholders, but not for society in general. Buffett will be the first to tell you that his best purchases come when Mr. Market offers to do something foolish. By definition, Buffett's purchases often (but not always) take advantage of the psychological weakness of others. By trading smartly, he has slowly accumulated the ownership of attractive assets for himself and the shareholders. Good on him. Because BRK has grown its product offering via acquisitions, however, it has not really done much for society that would not have happened anyway. If Buffett didn't buy See's Candy, we would all still be eating them. If Buffett did not buy GEICO, you would still be able to purchase a policy from them. If Buffett did not acquire Burlington Northern Santa Fe, you would still be able to ship by rail. Everything the Berkshire family offers to society would still be available to us if Buffett didn't own it. So how has society gained?

Second, Berkshire's returns are enhanced by secretly being a highly levered entity. Buffett eschews debt – smartly -- and has been a cash buyer of stocks and companies. Buffett's returns would have been very good over time under any scenario. But his status as the greatest investor of all time rather than "one of the great ones" is due to a savvy but opaque use of leverage. In this case, the leverage is not through debt but float.His insurance operations have generated a gargantuan pile of cash that he deploys into equities (unlike most insurance companies that only buy bonds); the pile of cash is known as float. Essentially, this is "other people's money". It is not owned by Berkshire, but passes through it for a time, and must eventually be paid back in the form of claims. In this way it is not much different than debt, other than having a variable coupon—often negative since BRK shows an underwriting profit—and the maturity date is unknown. If Buffett did not have the use of other people's money, his returns would have been good, but not as outsized as they were.

Third, Buffett is a smart man, but not God. His wealth has given him the pulpit to offer views on anything and everything. Unlike many Hollywood actors that get the same privilege because they look good, Buffett does remain somewhat restrained in promoting his viewpoint. Nonetheless, he has entered cult status and is highly influential. But being wired to take advantage of other investors' foolish trading decisions does not mean he has immaculate insight on political, moral, or other issues of the day. (Even economic issues -- being a great businessman does not necessarily give you understanding of the system as a whole, although I do think Buffett is pretty good on economics.)

Like you, I am happy to hear what he has to say on other issues, but in that context he is just a man -- and probably a man somewhat out of touch with how average people have to live their lives. Just saying. Take the other stuff with a grain of salt. The cult atmosphere can be intoxicating.

Tune in to TheStreet.Com, Real Money and Real Money Pro this weekend. We will have many great features from the meeting. By the way, about those other esteemed companies based in Omaha that I mentioned earlier -- ConAgra and Union Pacific. If you had to choose, would you rather have owned them or Berkshire for the last five years? Check the below chart.

ConAgra and the Union Pacific will not have 35,000 people at their annual meetings this year, but in terms of creating wealth for their shareholders, they are the kings of Omaha for the last five years, not Warren!

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