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Warren Buffett: Why the oracle of Omaha is irrelevant – Olive
Published On Mon Feb 27 2012

By David Olive
Business Columnist

It will be awhile before I get around to reading the entirety of the latest letter to shareholders by the chairman of Berkshire Hathaway Inc. It was released on the weekend, and has been a must-read for decades. For some years now, Warren Buffett has not been relevant.

A multibillionaire will always command attention. But that status alone doesn’t make him or her more sagacious than the person does the oil change on your car.

The world’s most famous stockpicker has broken too many of the cardinal rules that earned him renown.

• Never buy bank stocks, Buffett for decades counselled us. And wisely, as it happens. Banks can too easily hide losses on their balance sheets, Buffett said. Ain’t that the truth, as we learned again in the global credit meltdown of 2008-09.

Yet Buffett in the past decade has taken a stake in about half a dozen of

America’s largest banks, including the vilified Goldman Sachs Group Inc. Other Buffett favourites include Wells Fargo & Co. (stock down 15 per cent in the past five years) and U.S. Bancorp (down 21 per cent).

• Buffett warned us off derivatives. During the meltdown he memorably labelled them “weapons of mass wealth destruction.” And ain’t that the truth, also.

But it was later revealed that Buffett has been quietly using Berkshire’s money to place massive bets on derivatives since the early 2000s. And he proved his point about their destructive power when Berkshire took a huge loss on them year before last.

• Never use your own stock rather than cash to finance acquisitions, Buffett used to preach, explaining how this dilutes the value of the buyer’s shares.

Yet Buffett’s been doing precisely that for more than a decade now.

Berkshire’s biggest acquisition, the $42-billion purchase of rail giant Burlington Northern Southern Pacific Co., was financed entirely in Berkshire stock. The resulting dilution is prominent among the reasons Berkshire stock has disappointed even its most ardent fans.

I’ve noticed that those fans have shed the cultlike adulation they once had for Buffett. It’s been years since my annual published doubts about Buffett’s enterprise have met with a firestorm of criticism.

The real issue here is that Berkshire’s conglomerate model doesn’t work. Never has, never will.

Yes, there is such a thing as the focused conglomerate. At United Technologies Corp., to pick an example, Otis elevators, Carrier air-control systems, Pratt & Whitney aircraft engines and Sikorsky aircraft are bound by their common R&D intensity and deep-pocketed institutional clienteles. (UTC shares have performed twice as well as Berkshire’s in the past five years.)

Buffett himself relentlessly preached focus in the decades. That was Berkshire, with its Niagara of cash flow from easy winnings in the grossly undervalued equities market of the 1970s and 1980s, was obliged to invest that cascade of rewards somewhere.

And so today’s Berkshire is a $160-billion (net assets) monster whose 70-odd operating businesses range from Dairy Queen to America’s largest natural-gas pipeline network, and from Benjamin Moore paints to the world’s largest re-insurance operation (best regarded as a black hole, since losses from claims arising from “super-cats,” or mega-force Acts of God, are impossible to predict.)

Berkshire also deploys an army of women to U.S. households each day to pitch utensils at house parties.

Buffett last weekend once again announced the naming of a successor to himself, succession being yet another drag on Berkshire stock. And Buffett once again didn’t deign to identify the individual.

Given that the last two most heavily rumoured replacements to Buffett were flame-outs, I have limited confidence in Buffett’s character-assessment skills in picking a wise replacement for himself.

If there’s anyone out there still planning the gift of a Berkshire share to the kids when they hit 21, stop it.

The following prosaic companies are among those that outperformed Berkshire over the past five years: IBM, McDonald’s, Coca-Cola, Magna, Ford, Caterpillar, jams and jellies maker J.M. Smucker Co. and even Canadian Pacific Railway Ltd., currently under siege from a U.S. “activist” investor for its subpar stock performance.

And in the contest between Dilly Bars and Timbits, the latter are the hands-down winner. Berkshire shares are up 12.4 per cent over the past half-decade. Shares of Tim Hortons Inc. have soared almost 48 per cent in that time.

And Tims has suffered a world of woes during that period, from high-level management turnover to throwing in the towel in New England, where it was outmuscled by regional incumbent Dunkin Donuts.

This is not a recommendation on Tims. It’s a warning that when a single-suited chain of coffee shops outperforms the world’s largest conglomerate, it’s time to give the conglomerate a pass.

http://www.thestar.com/business/article … olive?bn=1

Statistics: Posted by yoda — Mon Feb 27, 2012 1:08 pm