Author Topic: Wedgewood Partners on selling their BRK stake  (Read 10773 times)

wisowis

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Wedgewood Partners on selling their BRK stake
« on: October 12, 2019, 09:15:33 AM »
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We sold our multi decade-long position during the third quarter after first trimming the
position during the second quarter this year. We went into some detail in our change of
thesis on Berkshire in our last Client Letter. In short, Berkshire’s industrially/economically
sensitive businesses have slowed considerably over the course of 2019. Their utilities
business (Berkshire Energy) needs continued acquisitions to restart utility growth. In
addition, Warren Buffett’s cash hoard of +$125 billion continues to be a considerable
impediment of growth, rather than our previous hard expectation of a valuable call option
on opportunity in the hands of one of the most elite capital allocators extant. Further, the
efficacy of putting this cash pile to work (plus +$25 billion in annual operating cash flows in
Omaha) will be paramount if Berkshire Hathaway is to once again regain their former status
as a meaningful grower over just baseline U.S. GDP growth. Thumb-sucking has not cut the
Heinz mustard during the Great Bull Market of 2009 – 2019. The Great Bull could have been
one helluva of an astounding career denouement for Messrs. Buffett and Munger.

In terms of errors of omission by Buffett & Co. over the past ten years, a few stocks stand out
to us as considerable head scratcher errors that should have been in Buffett’s wheelhouse,
and should have been huge winners for Berkshire shareholders. The first stocks are
Mastercard and Visa. Buffett is incredibly well-versed in the payments processing industry
given his half-century knowledge in longtime holding American Express. These two stocks
should have been layups for Buffett. Mastercard and Visa have been massive wealth creators
during the Great Bull Market.

Indeed, since the Great Bull started back on March 9, 2009, Berkshire Hathaway B stock is
up a notable +269% through the recent ending 3rd quarter. Over the same time period, the
S&P 500 Index is up +370%. Mastercard is up a stunning +1,521%. Visa is up a near stunning +1,137%.
Not all is lost, though. Buffett’s two CIO lieutenants currently own both
stocks at a combined weight of just a thumb-sucking 1.50% of Berkshire’s current equity
portfolio. The current combined weighting should be 15.00%!.

Two other layups are Costco and Microsoft. Buffett has had at his disposal unrivaled expert
tutelage on each company in his hind pocket for years – but to no shareholder avail. Charlie
Munger has been a director at Costco for 22 years. Costco’s stock Great Bull gain is +522%.
Once again, not all is lost. Buffett’s lieutenants currently own a whooping 0.55% position in
Coscto.

More numbing still is Microsoft. Buffett first met Bill Gates nearly 30 years ago. They became
fast best friends. In 2004, Gates joined Berkshire’s board of directors. Buffett probably
spends more time talking with Gates (Gates Foundation and bridge playing too) each day
than he does with key Berkshire vice-chairman employees Ajit Jain and Greg Abel. Buffett
has long (and proudly) proffered his opinion that “technology” companies are far outside his
“circle of competence.” His more recent multibillion foray into IBM and Apple belie his longheld assertion.
In our view, if Buffett can endeavor to figure out the business models of both Apple and IBM enough to pour
multibillions in stock purchases, then figuring out Microsoft’s business model under sensai Gates
should have been Remedial Technology 101. Microsoft’s stock Great Bull Market gain is +657%.
A final lament, if Berkshire’s current Breaking Bad-style cash hoard represents stock market
timing, then shareholder-partners deserve to be informed of as much.

On this capital allocation front we have growing concerns. Buffett & Co. have repeatedly
stated their considerable disadvantage in competing against private equity (with levered
billions in tow) for acquisitions, yet Buffett & Co. continue to play this game – very un-Buffettlike, in our opinion.
Buffett has also repeatedly offered his opinion for a few years now that
if interest rates would stay at their current low levels then stocks aren’t (weren’t) expensive,
yet Berkshire’s equity portfolio on a net basis to total corporate assets hasn’t really grown
that much. (Our portfolio does though share Buffett’s success in his outsized Apple position.)
Last, despite Buffett’s share-buyback tutorials – and our perceived signaling – over the past
few years that he is open to large, accretive share repurchases, little has been done on this
front as well. (Buffett seems to abhor returning “capital paint” to shareholders while his
Berkshire canvas is still “in paint.”) Net-net, capital allocation needs to improve dramatically
in order to reaccelerate the current stasis of middling, GDP-like growth
. Recent billions in
capital investments in notable mistakes such as IBM, Lubrizol, Precision Castparts and Kraft
do not inspire confidence that Buffett & Co. are still at the top of their game. Any future
conviction of ours in Berkshire Hathaway shares will closely mirror that of Buffett’s own
conviction in Berkshire share buybacks.


stahleyp

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Re: Wedgewood Partners on selling their BRK stake
« Reply #1 on: October 12, 2019, 09:37:12 AM »
"Our portfolio does though share Buffett’s success in his outsized Apple position.)"

They're trailing the market pretty badly too (and a 1 star to boot from Morningstar) since the funds inception in 2010. Pretty crummy performance considering their fairly large Apple position. Does he talk about how his performance has trailed since he started the fund?

I think I might buy some more shares if this "analysis" is the current perception of Berkshire.

For the record, Berkshire has outperformed his fund by a slight margin over the past 5 years while his fund ranked in the bottom 93%.
Paul

John Hjorth

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Re: Wedgewood Partners on selling their BRK stake
« Reply #2 on: October 12, 2019, 09:56:46 AM »
Thank you for taking the intiative to this topic, wisowis,

Original source [<- Maybe not a bad thing to spend time on, if you're "Berkshire-bored" [ ; - ) ]]

- Among other things you'll miss out on if not grabbing the original source is a quite funny picture placed somewhere in the quotations made by wisowis! [ : - D]

- - - o 0 o - - -

No Wedgewood 2019Q3 portfolio data available right now on Dataroma, btw. I haven't checked if the 13-F/HR is available on SEC.
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Viking

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Re: Wedgewood Partners on selling their BRK stake
« Reply #3 on: October 12, 2019, 10:30:37 AM »
Interesting that they did not talk about what Berkshire is actually worth. Yes, the market appears to be underappreciating BRK and the share price has gone sideways for a few years. However, the value of the underlying business continues to grow nicely. BRK looks cheap today when compared to the overall market.

RichardGibbons

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Re: Wedgewood Partners on selling their BRK stake
« Reply #4 on: October 12, 2019, 09:15:31 PM »
Complaining about Berkshire not buying Microsoft is pretty silly considering that Buffett's made it very clear why he didn't do so. Considering his close relationship with Gates, Buffett doesn't want anyone to get the perception of any improprieties like insider trading.

If anyone doesn't understand this basic thing about Buffett after holding Berkshire for a couple decades, I'd be pretty skeptical about their understanding of both Berkshire and Buffett.

scorpioncapital

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Re: Wedgewood Partners on selling their BRK stake
« Reply #5 on: October 13, 2019, 12:30:16 AM »
He has some very good points..there are certainly several mid to large cap stocks within Berkshire competence that were not bought.
However....
Berkshire strikes me as conservative risk adjusted growth. As such I can't say the huge gains on what he didn't buy that was within the circle is not way ahead of itself and likely to drag while Berkshire can opportunistically catch up.
Large cash pile is not an impediment to growth IT is the engine of future growth (though a temporary impediment)
The underperformance to sp500 is more serious the longer it lasts. Either Berkshire stock zooms or sp Comes down alot. I suspect Berkshire is leveraged to financials while sp to technology. As such low rate environment is the cause. Should this even modestly reverse than sp500 may tread water or decline somewhat while brk would go up as it makes a fortune on banks making more interest margin profits. Just a theory. But it's possible.


Gregmal

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Re: Wedgewood Partners on selling their BRK stake
« Reply #6 on: October 13, 2019, 05:49:18 AM »
I think it's wise to look at what he is saying rather than what his track record is. The things he mentioned about Berkshire are true. And I also find it interesting, not really on what Warren has missed, but rather when we look at it in the context of everything else, such as his statements about rates staying low and stocks being cheap, combined with having exorbitant amounts of cash on hand, and delegating to Todd and Ted. Is it possible he just isn't really looking to make investments anymore?

John Hjorth

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Re: Wedgewood Partners on selling their BRK stake
« Reply #7 on: October 13, 2019, 06:34:34 AM »
Please take a look at the Dataroma history for Wedgewood, especially the evolution of portfolio value over time. It appears obvious to me, that Mr. Rolfe is experiencing the nightmare of a money manager working with non-permanent capital, combined with LPs reaction to historical lack of performance, thus pulling out. Please also note the relative position rank of Berkshire over time in the history.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

longinvestor

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Re: Wedgewood Partners on selling their BRK stake
« Reply #8 on: October 13, 2019, 07:14:07 AM »
Please take a look at the Dataroma history for Wedgewood, especially the evolution of portfolio value over time. It appears obvious to me, that Mr. Rolfe is experiencing the nightmare of a money manager working with non-permanent capital, combined with LPs reaction to historical lack of performance, thus pulling out. Please also note the relative position rank of Berkshire over time in the history.

Quite telling isn’t it? They have gone from a $7.5 B to a $1.2 B fund over the past 5 years and the need to sell winners explains why he’s talking his book. There’s recently reported Uber interest in BRK amongst the hedge fund community. Perhaps this tranche provides a big block of buyback opportunity over the coming years. I share Omaha’s distaste for the squatters. It won’t take too long of a time to shake them off.

wabuffo

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Re: Wedgewood Partners on selling their BRK stake
« Reply #9 on: October 13, 2019, 08:49:36 AM »
I don't want to pile-on Wedgewood.  But I don't agree that Berkshire Hathaway has underperformed the S&P 500 in recent years.   He/they arbitrarily chose the start of the current bull market in March 2009 to do their comparison - but I think that misses an important point.   Buffett is starting to acknowledge that his capital base and cash position are making it harder to achieve BRK's past results and he has signalled that he will take action to prevent underperformance. 

That is why starting in Sept.  2011, he formalized a buyback policy which has helped to put a floor under the stock and moderate its price declines.  He started at 1.1x Book Value, then raised it to 1.2x Book Value in Dec. 2012 and then finally went to a more unconstrained approach last year.   I would argue that this new capital policy means that one should look at BRK's record since 2011 vs the S&P 500.  From what I can see, how can one say that BRK has under-performed vs the S&P 500 through this period (until this year)?  It hasn't!

It's too early to panic because of a few Q's of underperformance in 2019.  Especially since Buffett will act if BRK's price/value becomes attractive.  We all may wish he was more aggressive with his buybacks so far - but I do believe that the presence of a significant repurchase program is a new factor that helps the stock from languishing the way Wedgewood fears it will. 

Of course, this performance reflects buy-and-hold since the end of 2011.  There's nothing that prevents someone from buying or adding to a BRK position during periods where it gets statistically cheap (like late 2008/early 2009, Aug-Sep 2011, or Q4 2015). In those cases, the investing record in BRK improves vs the simple buy-and-hold record.  I don't see how Wedgewood's investment in BRK has anything to do with their underperformance vs the S&P 500.

FWIW,
wabuffo
« Last Edit: October 13, 2019, 09:12:16 AM by wabuffo »