May 18, 2024

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Berkshire after Buffett: can any stockpicker follow the Oracle?

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Berkshire after Buffett: can any stockpicker follow the Oracle?

Warren Buffett’s deputies are trailing both their mentor and the market, according to a Financial Times analysis that examined the performance of the two men set to take over Berkshire Hathaway’s $354bn stock portfolio.

Berkshire will hold its annual meeting on Saturday without vice-chair Charlie Munger, whose death in November aged 99 has intensified questions over the future of the business when


Berkshire is the last great American conglomerate, with hundreds of subsidiaries fused with the backbone of the US economy. Its freight trains run over more than 32,000 miles of track. Its utilities provide power to 13mn customers and in Geico it owns one of the largest insurers in the country.

But one of the biggest contributors to Berkshire’s performance comes from stakes in a stable of blue-chip companies, including Apple, Coca-Cola and American Express.

Both Combs and Weschler were plucked from relative obscurity to help run this portfolio.

Combs’ background is insurance; the 53-year-old got his start at Progressive. An internship with Blue Ridge Capital, one of the “Tiger cub” hedge funds, led to a job at Copper Arch Capital before he we went on to found his own fund, Castle Point Capital, in 2005.

Weschler, 61, started out as a junior financial analyst at WR Grace before helping to start private equity group Quad-C Management, then launching his own hedge fund in 2000.

Like Buffett, they have described themselves as voracious readers, picking through newspapers, trade publications and company annual reports. In 2017 Combs said he got into the office at 7am or 8am and left 12 hours later, spending the day primarily reading.

In his previous job he often spent late nights poring over securitisation documents. “So it’s the puzzle,” he said last year. “It’s figuring out the puzzle. That’s where I get giddy.”

Weschler has described himself as a reader of “weird stuff” — such as trade publications Furniture Today and Uranium Weekly — in an attempt to gain an edge.

“One of the great mistakes of investing is people do end up reading the same thing,” Weschler said in 2022. “The only way you’ll have success in the stock market is if you have a variant perception, something different from the masses.”

Ted Weschler, pictured in Idaho, US, in July 2023
Ted Weschler has described himself as a reader of ‘weird stuff’ — such as trade publications Furniture Today and Uranium Weekly — in an attempt to gain an edge © Kevin Dietsch/Getty Images
Todd Combs
Todd Combs started at insurance group Progressive before success on Wall Street led him to found his own fund, Castle Point Capital, in 2005 © Drew Angerer/Getty Images

The two investment lieutenants also share a similar investing ethos with the man they are due to replace one day: finding good businesses with strong management teams that are trading at attractive prices.

In a new section for Security Analysis, the seminal work by Ben Graham and David Dodd that was republished last year, Combs described how he looks for a moat, a competitive advantage that would be hard for rivals to overcome. “Add on characteristics like low capital intensity, pricing power, recurring revenues, staying power, and the likelihood of long-term growth, and you have a great business,” he added.

For years after joining Berkshire, the pair would have lunch every Monday with Buffett, often joined by Tracy Britt Cool, another Berkshire alum. They would exchange notes on investments and talk shop. After the pandemic, that shifted. Buffett and Weschler still meet regularly in Omaha, but Combs began commuting to Berkshire’s insurance subsidiary Geico when he was appointed to run it in 2019.

Buffett has called the hiring of Combs and Weschler “one of the best decisions” he had made, describing them as both sound and brilliant.

They have the freedom to own their successes and failures, operating independently of Buffett, who still runs the vast majority of Berkshire’s portfolio.

“They don’t have to check with me before they buy or sell anything,” he said in 2017. “Sometimes they will have talked to me about something they are doing. Other times I will just look at the monthly recap I get and then see what they’ve bought or sold.”


How Combs and Weschler are performing, and how they invest, is top of mind for shareholders such as Christopher Rossbach, who invests on behalf of the investment management firm J Stern & Co. Rossbach believes it is critical to understand how the pair will “contribute to and take” Buffett’s investing legacy forward.

“Buffett has built an extraordinary track record of investing and he has laid down through his communications clear principles and guidelines that have guided generations of investors,” he said. “It is a huge responsibility of how that will be taken forward and it is very important for investors to understand.”

If the pair cannot match what Buffett did, it raises a question about both the company’s value and its reason to exist in a world where passive index funds are touted as safer, cheaper and more reliable than active fund managers.

In their early years at Berkshire, Combs and Weschler racked up some spectacular gains that allowed Buffett to praise them for leaving him “in the dust”.

Investments including Mastercard, Visa and healthcare company DaVita helped the two managers beat the S&P 500 in 2012 and 2013.

In the years since, however, their portfolios have more often lagged behind the S&P 500 and the performance of Buffett himself, who still runs about 90 per cent of Berkshire’s investments. It is something the billionaire acknowledged in 2019 when he said Combs and Weschler were a “tiny bit behind” the index.

“It has been a tough time to beat the S&P,” said Buffett, “but that’s the deal we’ve got with them”.

Buffett has long cared about beating the index. In his 1957 annual letter he set himself the ambitious goal of beating the Dow Jones Industrial Average by 10 percentage points a year. Before winding down his investment partnership, he had smashed that target: outperforming the market by 22 percentage points a year. During his career at Berkshire, he has outperformed the S&P 500 by more than 4.3mn percentage points.

Since the pandemic, his protégés’ record has deteriorated. In both 2021 and 2022 they missed the S&P 500 by double digits, according to the FT’s analysis; last year they also trailed the index.

Overall, according to the analysis, the pair have generated an average total annual return of about 7.8 per cent over the past decade. That falls short of the 12 per cent return of the S&P 500 and Buffett’s own 10.2 per cent gain. They have trailed the index in seven out of 10 years.

Their portfolios, worth about $27bn out of a total $354bn, excluding billions of dollars of pension investments for Berkshire’s employees, are up about 113 per cent over the past 10 years.

That trails a 165 per cent gain by Buffett over the same period and a 211 per cent total return by the S&P.

Berkshire declined to put Combs and Weschler up for interview or confirm which trades they made.

“I’ve never felt that it’s in the interest of Berkshire shareholders to talk about anything that we do that is successful and that we want to continue to do,” Buffett told the FT.

He added: “Both Todd and Ted have been invaluable to Berkshire, and our shareholders have profited significantly from their activities.”

The analysis found that Combs and Weschler also hold stocks for a shorter period than Buffett, who has said that he buys a stock typically believing that the “holding period is forever”. Buffett acknowledged that early in the pair’s tenure, telling a reporter “one of the two is more prone to move around in securities than I would be”.

Since 2010, Buffett sold his entire holdings in 63 positions with an average hold time of four years and three months. Combs and Weschler exited 48 stocks, holding for just two years and 10 months.

It also showed that Buffett ran a more concentrated portfolio, mainly due to Apple’s large showing. Combs and Weschler’s selection is still focused on about 24 securities at a time, though they range across more sectors of the economy than Buffett.


Buffett shunned technology stocks for most of his career, stating he is ill-equipped to assess their prospects and uncomfortable with their unpredictable cash flows and often brief lifespans so dependent on innovation.

In 2011, he made an exception for IBM, placing a $10.9bn bet on the IT group, which proved to be a failure. Berkshire had sold the stock within seven years, with the IT group’s share price lower and seemingly trapped in a cycle of declining revenues.

But in 2016, Combs or Weschler made an investment in a technology company that counts as Berkshire’s greatest stock trade of the past decade: Apple.

In the years that followed, Buffett waded into the same trade, convinced by the enduring consumer demand for the iPhone. Between them, Berkshire has spent about $40bn buying shares of Apple. At the end of last year those shares were worth roughly $175bn — more than a fifth of Berkshire’s total valuation — a mammoth sum even after the company has cashed out more than $16bn worth of the stock over the years.

Buffett has said “one of the fellows in the office” — referring to Combs or Weschler — initiated the investment in Apple. Calculating their exact returns is tricky, given Berkshire has traded in and out of the stock over the years, but the FT estimated they had in effect tripled their money on the investment by the end of last year. That includes an investment of about $1.6bn, and then realised gains of $2.5bn as they sold Apple stock in 2017, 2018 and 2019.

Apple shares have returned more than 600 per cent since they invested, including annual dividends. Berkshire reported it sold 10mn Apple shares at the end of 2023, although it is unclear whether it was Buffett or one of his deputies who cut their position.

Berkshire’s struggle to match the S&P 500 in recent years owes a lot to the tech-dominated rally. Without Apple the portfolio would have undershot the index by much more.

The pair have also profited from investments in DaVita, the $12bn kidney dialysis company where Berkshire owns a 41 per cent stake, a trade executed by Weschler, although over the span of the investment period it too has underperformed the S&P 500.

Combs’ picks in the financial services sector have been prescient, with Berkshire generating large gains on credit card processors Visa and Mastercard. Those mirrored an early Buffett success from the 1960s where he bought into American Express after its shares had halved following a fraud scandal; he tripled his money in just two years.

But their big bet on the cable industry, including in Charter Communications and Liberty Media, has weighed on their performance more recently as higher interest rates have hammered these highly indebted companies.

They also may have been behind the disastrous investment in Paramount Global, the entertainment company that owns MTV and CBS. Buffett has not specified who made the $2.6bn wager in 2022, and when asked about the trade at last year’s annual meeting, he did not take ownership of the bad bet, something he often does.

The stock has dropped more than 60 per cent since it invested and Berkshire recently started dumping its position at a loss. Combs was rumoured to be behind an investment in Viacom, Paramount’s predecessor, back in 2012, and even though the size of the investment would be quite large for one of the two managers, it is not out of the question given they also hold multibillion-dollar stakes in other businesses.

They were also weighed down by trades that they ultimately sold at a small profit, like their 2019 bet on luxury home goods retailer RH. The position in the middle of 2021 showed a mammoth paper profit — up roughly 235 per cent — as investors bid up shares of home decor companies in the midst of the pandemic. But as RH shares deflated, the decision by Combs or Weschler to add to the position and continue to hold on to the stock knocked their returns. They ultimately sold out last year.


In a world without Buffett, Combs and Weschler will still benefit from the company’s long-honed advantages, including something that hedge funds and private equity groups have been chasing in recent years: permanent capital.

The pair will not have to find willing investors to commit to a Berkshire fund, the type of effort that keeps giants such as Blackstone and Apollo on a fundraising hamster wheel.

Nor will they be pushed to make distributions to shareholders — Berkshire last paid a dividend in 1967 — or bow to a noisy activist investor if there is a long period of underperformance or a sudden shock.

That, historically, has allowed Buffett to make wagers and hold on to them even when the market turns decidedly against his positions, as it did after the oil embargo of 1973 and in 2008, when the financial crisis roiled markets.

They will also retain access to unfathomably cheap credit thanks to Berkshire’s insurance business, the firepower that makes the company so successful and one of the main reasons investors cite for keeping the conglomerate together.

Insurance customers pay premiums in a predictable stream of cash, which has to be deployed in liquid securities. Typical investors have to tap an investment bank for a credit line, paying fees to make investments with borrowed money. But so long as Berkshire’s insurance subsidiaries are profitable, the cost to tap those premiums for investments can be negligible.

Berkshire investors note that even if Combs and Weschler fall short of Buffett’s record, they are still likely to usurp the returns on corporate and government bonds, the investment of choice for rival insurers. That, shareholders highlight, is a point that is unlikely to be replicated and will give the company a reason for existing long past Buffett’s exit.

But the pair also face a structural disadvantage that Buffett did not have in his early years. Combs and Weschler will become some of the largest money managers on the planet when Buffett departs, with a vast stock portfolio bigger than any of Berkshire’s individual operating divisions.

Alongside Buffett’s chosen successor as chief executive, Greg Abel, they will also decide how a record $168bn cash pile is allocated, a sum so vast that the sprawling investment conglomerate could buy up all but a handful of companies.

It is a level of firepower that is unheard of on Wall Street and Buffett has lamented the dearth of long-term investment opportunities suitable for such large sums of money.

FT series

This is the first in a series digging into Berkshire, its rich success under Buffett and the management team that will one day lead the company into a new era.

The biggest fillip could come from a downturn. The era of low interest rates and booming US stocks has been bad news for Berkshire. Some of Buffett’s landmark trades have come during crises — such as investments in Goldman Sachs in 2008 — when rivals were unable or unwilling to jump in.

The company did not get the chance to profit from the coronavirus pandemic, as government intervention prompted a broad market rally and helped reopen capital markets. Investors say a more traditional slowdown may play in Berkshire’s favour.

A single decade may not be enough to judge Combs and Weschler’s performance at a company with a history of patient investing. Investors, though, are eager to hear from them.

“They are probably going to have to do that sit-down with [CNBC anchor] Becky Quick once a year and talk about their investment philosophy just so people get comfortable,” Jeff Muscatello, an analyst at Berkshire shareholder Douglass Winthrop, said. “Buffett has always been generous with his time . . . and they’ll need to pick up where he [leaves] off.”

But so far, all that Berkshire shareholders have to go on is a partial track record built over the past 13 years. On Saturday, as with every annual meeting since they joined Berkshire, Weschler and Combs are not expected to field questions in Omaha. Instead, they will be watching from one of the front rows as Buffett takes the stage.

For now, it is still his show.


Methodology

The FT reconstructed the company’s US stock portfolio starting in 2010, just before Combs and Weschler joined Berkshire, based on quarterly filings with the Securities and Exchange Commission.

The FT then used Buffett’s comments in dozens of interviews, speeches at annual meetings and media reports to determine which trades were his and which belonged to one of his deputies.

Financial information group Morningstar used this information to calculate the total return, including dividends, for each portfolio.

The analysis does not capture intra-quarter changes in holdings and only includes US-listed companies, though these represent the vast majority of Berkshire’s stock portfolio. The FT used end-of-quarter share prices reported by Berkshire to the SEC to calculate purchases and sales, which could understate the performance.

At times, Buffett has been explicit about who invested in what stock but in other cases we had to make an educated guess.

Smaller trades have generally been attributed to Combs or Weschler. But as their portfolios have grown, the size of an individual investment has become less informative as to whether it was made by Combs and Weschler or Buffett.

The FT cross-checked the portfolios it constructed with Buffett’s occasional disclosure of the size of Combs and Weschler’s holdings.

The portfolios derived from the analysis are larger than the amounts Buffett has previously indicated that the pair were managing.

It is possible that Buffett was making some of the smaller trades that the FT attributed to Combs and Weschler. It is also possible that Buffett invested in some of the same companies that Combs or Weschler had, like he did with Apple and Activision Blizzard.

Morningstar ran portfolios for Berkshire, Buffett, and Combs and Weschler through its database, which relied on individual stock weightings. It rebalanced each portfolio monthly, to better account for shifts in the weightings that took place between SEC filings. Once Morningstar had finalised its calculations, individual stock returns were back-tested against databases maintained by Bloomberg, LSEG and FactSet.

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