Has Buffett Finally Checked Out of Berkshire?

by Jeff Reeves | May 21, 2012 10:21 am

Warren Buffett is arguably the world’s most famous investor these days. But recent moves by Buffett and his iconic Berkshire Hathaway (NYSE:BRK.A[1], BRK.B[2]) investment shop are turning heads for very different reasons.

In short, some on Wall Street are wondering whether Buffett has checked out completely and left Berkshire to the devices of others.

Consider that last week, Buffett’s Berkshire Hathaway bought 63 newspapers[3] for about $142 million. Some have simply called the move as some kind of contrarian investment in old media. Others say it is some kind of altruistic move that wasn’t meant to make money, especially on the heels of a $200 million purchase of Berkshire Hathaway’s hometown paper, the Omaha World-Herald, in November and Buffett’s longtime relationship with The Washington Post.

The experts I tend to agree with, such as media analyst Ken Doctor, simply think the deal is “more a feat of financial engineering than a newspaper deal”[4] because it includes a $45 million line of credit at 10.5% interest in exchange for warrants that would give Berkshire Hathaway ownership stakes. That kind of income generation machine certainly is much more in line with the BRK philosophy, even if the subject happens to reside in a dying industry.

But frankly, the move into newspaper investments is not interesting to me because of what Warren Buffett is buying and why. I’m fascinated with the fact it seems like someone other than Buffett is increasingly calling the shots.

First, a dirty admission: We in the media always skip over the fact that Berkshire Hathaway is the “investor” here, not Buffett. A quick glance of a story about “top Buffett stocks” makes it sound like Warren Buffett himself is throwing his nest egg behind the company, and that the investment was wholly his brainchild. That’s simply not true.

Buffett obviously is part of the conversation with all these moves, but investors who think these decisions are unilaterally made — with Warren Buffett telling a saluting Charlie Munger what the marching orders are — need to wake up.

Take the most recent disclosure of “Buffett stocks,” according to Berkshire Hathaway’s SEC filings[5] last week. BRK increased its holdings in IBM (NYSE:IBM[6]), Liberty Media (NASDAQ:LMCA[7]) and DirectTV (NASDAQ:DTV[8]). None of those picks fit the traditional mold of “Buffett stocks” — the solid, dividend-paying blue chips like Coca-Cola (NYSE:KO[9]), of which Berkshire owns a stunning 9% stake.

In fact, Kraft (NYSE:KFT[10]) and Procter & Gamble (NYSE:PG[11]) stakes actually declined in the first quarter. So much for low-beta consumer staples that throw off big income. These stocks increasingly are becoming a smaller part of the BRK portfolio.

Also interesting was news in February that Berkshire took a new stake in small-cap dialysis provider DaVita (NYSE:DVA[12]) — which only today announced a mammoth $4.4 billion acquisition of HealthCare Partners[13].

This is the most interesting development off all because it’s so out of whack with traditional Buffett lore. Remember, the value investing icon talks about buying stocks with a holding period of “forever” and being “fearful when others are greedy.” Buying into a small-cap health care stock months before it makes an acquisition? Something doesn’t fit here.

One could argue that it’s a move toward turnaround performance at Berkshire, and that new strategies are necessary for this market. Consider the recent returns of BRK as proof that something has to give.

Obviously underperformance won’t sit well with Berkshire’s investors or leadership, so some change in course should be encouraged.

But me, I think there is a much simpler answer than the 81-year-old Buffett trying to learn new tricks or protect his legacy. I believe he is increasingly stepping aside, both because of recent admissions that he is being treated for prostate cancer and because he has been at this game long enough that he is looking for a much-deserved break by delegating many responsibilities. That includes identifying individual stocks and setting big-picture strategies for BRK and its portfolio.

That’s not to say Warren Buffett doesn’t have pull or isn’t interested in the markets. I remain convinced he will have a hand in Berkshire until the day he dies. It’s in his blood. But recent Berkshire buys in media and tech companies[14] show others are trying their hand at leading BRK.

After all, the $142 million newspaper buy-in is really a rounding error on the Berkshire Hathaway balance sheet — maybe it’s someone’s shot at making a mark, proving investing acumen in a real-world setting. And maybe the DaVita buyout deal will turn out to be shrewdly executed, and whoever pulled the strings to make Berkshire a major shareholder in that small-cap health care stock will be cemented as the new leader. Same goes for stakes in IBM and others.

But don’t think for a minute that the next time a headline says “Buffett Stock XYZ Makes a Move” that it really is Warren Buffett pulling the strings.

Buffett will go down in history as one of the most iconic investors in history. But like Benjamin Graham and J.P. Morgan and all the others before him, Warren Buffett’s days as a Wall Street leader eventually will pass.

I’m not trying to be morbid here. I truly wish the Oracle of Omaha many more years of health and happiness. But all business leaders eventually step down, one way or another. And even though Buffett still holds the title of both chairman and CEO of Berkshire Hathaway, I think he already has one foot out the door based on recent moves in the BRK portfolio.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[15] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

Endnotes:
  1. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  2. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  3. Buffett’s Berkshire Hathaway bought 63 newspapers: http://investorplace.com/2012/05/warren-buffetts-shrewd-bet-on-newspapers/
  4. “more a feat of financial engineering than a newspaper deal”: http://newsonomics.com/berkshire-hathaway-media-group-financial-engineering-buys-time/
  5. Berkshire Hathaway’s SEC filings: http://investorplace.com/2012/05/berkshire-bets-on-gm-ups-wal-mart-stake/
  6. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  7. LMCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMCA
  8. DTV: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTV
  9. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  10. KFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KFT
  11. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  12. DVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVA
  13. $4.4 billion acquisition of HealthCare Partners: http://www.bloomberg.com/news/2012-05-21/davita-agrees-to-pay-about-4-42-billion-for-healthcare-partners.html
  14. Berkshire buys in media and tech companies: http://investorplace.com/2012/02/berkshire-media-warren-buffett-todd-combs-dtv-lmca/
  15. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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