In his recent interview with Tobias, Christopher Bloomstran of Semper Augustus discussed the Misplaced Criticism Of Berkshire. Here’s an excerpt from the interview:
Tobias: What did you make of the most recent letter from Warren Buffett and Berkshire Hathaway?
Chris: I thought it was terrific. You’ve had a couple years now of the stock itself not doing very well, 2.4% last year. For the duration of my ownership of Berkshire, which goes back to February 2000, that was the year I attended my first meeting. We bought the stock after had been cut in half, following the Gen Re, I paid on the order of 105% of book. But if you go back for those that weren’t in the room, or who haven’t seen the transcripts, or the CNBC audio of the meetings, even Buffett was getting huge heat for not owning tech stocks and lagging, the NASDAQ was up at 84%, 87% in 1999. In ‘99, the Berkshire stock portfolio was down I believe, because all those Nifty 50, the reiteration of blue chips, Coca-Cola, which was 45%, the stock portfolio peaked. For the duration of my ownership of Berkshire, which is now 21 plus years, there’s just a lot of naysayers and critics.
A lot of it gets misplaced. I think there are a handful of people in the media that I think wrongfully point out the wrong metrics. I wouldn’t measure the stock price, and it’s not in Mr. Buffett’s control. It’s a little bit [crosstalk] formalities gone down the path of buying back shares. In my world, the business over the last couple of years compounded at its return on equity. I had 11% last year, and that’s with a decline a lot of the operating businesses. But the stock portfolio, thanks to Apple, has knocked the cover off the ball.
So, there’s a lot of misapplied negativity toward Berkshire, which I’ve always found terrific because to the extent, we have cash flows in or dividends in, or new clients with deposits, I’ve got to put money to work. I’m the odd bird that would rather have very cheap stocks all the time than expensive stocks. I think my buying over the years has been at very attractive prices. Price to book is the fashionable way it tends to get measured, and that’s not really how we look at it. The stock has generally been very consistently cheap, and it spent the majority of the 1990s very expensive.
The business had compounded at 25% a year for 30 plus years 35, 37 years, got very rich in ‘98. Berkshire bought a bunch of businesses during that decade using the shares as currency. He’d been an active buyer of the stock back in the 1970s and even the late 1960s, when it traded at less than book. Yeah, the 33-year period, we didn’t buy any shares back. With the exception of right at the bottom of the 1987 stock market crash. The stock has been cheap, but I think there’s been enough uses of capital, post the Gen Re deal.
Have they not done that deal, you wouldn’t own the utility operations, you wouldn’t own the railroad. It was that diversion of capital that’s allowed the emphasis on the stock portfolio to shrink materially. The last 12 years have been hell on active stock pickers, as you know. S&P is done 15% a year for the last 12, from the ‘08 low. Hardly an active manager, certainly those that that aren’t loaded into your more growthy businesses have lagged, but the Berkshire stock portfolio’s done 12 and a half over that period. Apple has been a huge save, investing $35-36 billion in it and turning it into $120 plus billion position has driven the bus so the stocks in the last two years of materially outperform the S&P, but you wouldn’t know it because the stock hadn’t done that well.
But that’s okay. If we’re really genuinely in repurchase mode, and I spent a lot of time in my letter this year talking about share repurchases, and the impact on how that works at Berkshire, we’d all rather have very inexpensive stock. Now, clients don’t want to hear that because everybody likes to look at their statements and see that they’re making money, but I’d far rather have the underlying business value compounding and the shares be cheap, which would give the Berkshires of the world opportunities to buy shares back if that’s the best use of capital. In Berkshire’s case, it’s a terrific use of capital.
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