It's Tough to Grill a Hall of Famer

 | May 05, 2013 | 10:33 AM EDT
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In the end it is difficult to criticize a team led by Babe Ruth and Ted Williams, even if you are a close relation to Sandy Koufax.

I think that's the takeaway from the brilliant decision by Warren Buffett and No. 2, Charlie Munger, to invite a less-than-idolatrous relation to Koufax, Doug Kass, to the Berkshire Hathaway (BRK.A/BRK.B) annual meeting. Doug is a professional investor on the dais, who has been a bear more than a bull -- and who is short a stock that, alas, is not a great short.

I myself didn't like to short on valuation, and I don't think Dougie even implied for a moment that the stock was overvalued. He was far more respectful than that. Anyway, that would be more an attack on the investors in the room, not Buffett himself.

Instead the focus, correctly, was on hunger. Do they still want to beat the market as they once did? That's logical in terms of size, given Berkshire's immense numbers of disparate businesses under one roof, and in terms of succession. You are certainly not getting in early when it comes to either Buffett or Charlie Munger.

I thought they answered all the answers in a perfectly fine matter. They have always said it's not as easy as it had once been. They have always said that their balance sheet and reputation allows them to do deals others can't. But what matters is knowing whether those deals are any good. They have always said there is a succession plan, but that it is none of your business.

First, let me say, I like these guys and I like their company. I have always been envious of them and what they have built, and I choose that word "envious" carefully because it means any criticism stems from jealousy.

But I know that Babe Ruth struck out too much and that Ted Williams had his own bizarre succession plan, and even though that was off the field, it still might have merited conclusion. What was terrific about Doug was that he was willing to ask anything cogent at all. I know that if I had a chance to be on a panel specifically in order for me challenge one of my heroes, Mike Schmidt, I would politely decline. I have nothing even remotely tough to ask him.

However, I was a money manager and, as I indicated earlier, in my Heinz (HNZ) piece at the start of this weekend, trying to be like Buffett now is not really possible. You can only be like Buffett now if you had been Buffett then.

Parse it out for a second. He got the terrific deals with Goldman Sachs (GS), General Electric (GE) and Bank of America (BAC) now because of what he had done then. Goldman, GE and BofA were willing to pay him exorbitant prices for money because it was worth it. You don't short a company that got Buffett money, because Buffett didn't have to do the deal. So those respective CEOs -- Lloyd Blankfein, Jeff Immelt and Brian Moynihan -- knew that the heat would be off them for even taking the investment.

That's a terrific use of a brand name that had been cultivated for many years. Longevity plus record plus money equals imprimatur that works for everyone.

As a former money manager, I can tell you that model doesn't work for anybody else, and it is a testament to an outfit that does far fewer things wrong than it does right. Still, 99% of the other managers out there would kill to be in a position that would allow them to make loans to shaky customers that are no longer shaky because they took the loans from that particular sui generis bank.

Doug interrogated them on that issue politely enough, asking if that deviates from their style. But, of course, this is Babe Ruth you are talking to, and that's like asking if getting on base by a walk deviates from his style of getting on base by hitting a single.

The idea of breaking the company up, and whether the parts are worth more than the whole, is an exceptionally difficult question here. Lots of people love to invoke the breakup of Teledyne as an example of how you can bring out value, and that perhaps Buffett should do so.

But I think the issue isn't the break-up because, frankly, again, a company run by Babe Ruth isn't going to be valued as well as multiple companies owned by a lot of guys who aren't Hall of Famers. The Hall of Fame patina makes the company worth more than it is simply because, separately, there may not be as much value there as we think.

Think of it like this: I like the insurance business, but it carries a low multiple, lower than Berkshire. I like the pipeline business, but the markets are valuing them as yield plays these days. Under someone else, maybe the pipelines could offer a good yield and trade higher? Burlington? We need more rail stocks for certain. Housing? It's just now starting to come back. I can make a case for these companies being worth a little more separately, but I would like to see what happens after Buffett retires to see if the air goes out of the stock, and then it might be worth breaking up.

Let's also respect the house. It wasn't as if Doug could sit there and ask the Oracle whether he feels badly about blasting Irene Rosenfeld for Kraft's (KFT) split-up, even though that's now looking like a pretty darned smart move. Nor could he say, "Hey, Warren, what was the deal with that guy Sokol who seemed to violate all of your ethics? I mean, are you that smart if that could happen?"

Instead it was just a polite series of inquiries that, in the end, amounted to the correct bill of particulars you would ask of any man who is both a CEO and a fund manager: Can you keep delivering as you have done, or is it too late to be with you?

The answer is, no, it is never too late to bank with Ruth and Williams, as long as they are playing.



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