He owned 20% of Moody's while it was slapping triple-A ratings on CDOs comprised of subprime mortgages; he has ridden down a number of his holdings (both wholly-owned and publicly-traded) that are linked to housing; he didn't seem to suspect the mess BofA was taking on with its acquisitions of CountryWide and Merrill Lynch (or, if he did, he held on to his BofA stock anyway), etc.He then poses a question about Buffett's strategy and goes a good way towards answering it himself.
While I won't argue with those reasons here I would emphasize a different point. I think the reason Buffett and Munger didn't sell these companies--even though they might have known they'd be better off in a short-term financial sense--is the result of an explicitly-stated aversion to being seen as churners. Quoting Munger at last year's Wesco financial meeting:
We tend not to sell operating businesses. That is a lifestyle choice. We have bought well. We have a few which would be better if we sold them. But net we do better if we don’t do gin rummy management, churning our portfolio. We want reputation as not being churners and flippers. Competitive advantage is being not a churner.There are a few arguable things about using this quote here. For one, the quote is taken from a slightly different context--one involving operating businesses--but I would say Munger and Buffett apply the same thinking (even if to a lesser degree) in their stock portfolio. And for the same reasons.
Not being seen as churners--and earning their reputation as solid business partners--allows them to get many of the deals that they have gotten (and will get in the future).
The long-term effects of such a strategy are of course harder to point to than horrible-looking charts, and few people have thought to do so as a result, but this I think is one of their main reasons for staying in positions (even if they might find them overvalued at some point after they've been bought).
It's also a good example that in investing, as in economics, you have to look at what is seen and what is not.
Was Munger referring to Berkshire's portfolio of publicly-traded stocks or its wholly-owned operating companies? I can see the advantage of being a patient, long-term holder when it comes to the wholly-owned companies; Buffett has written about this in his shareholder letters: it makes BRK the preferred acquirer for closely-held companies where the owners don't want to see their business levered up and then flipped or broken up in a few years by private equity types. I can also see a similar advantage in rare PIPE transaction. But how does this help BRK when it's buying regular, publicly-traded stocks on the open market?
ReplyDeleteNope. As I said, in this quote he is referring to operating companies.
ReplyDeleteTheir same thinking--albeit to a lesser extent--applies to public stocks though. This is just a part of their style, something that Buffett has said more than once in his self-criticisms.
The reputation of being a solid business partner who isn't going to flood the market with shares once a certain return is achieved undoubtedly makes him one of the people that companies would like to sell preferred or convertible shares to.
And in the same token it probably helps him when negotiating the exact terms of such a deal.