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Like Buffett, only better
Berkshire Hathaway's earnings tumbled 29% in 2005, excluding an accounting gain. So why follow Buffett? Here are two companies that play the same game but get better returns.
By Jon D. Markman
Oh, lords of the market, let this be the last straw. The last paean from the pious. The last time we must see simpering reporters, Rotarians and retirees blow kisses to a man once celebrated as the Oracle of Omaha but now best described as the Natterer of Nebraska.
Surely there was a time when Warren Buffett was a chief executive worth studying, and even investing alongside. But it sure seems like that time is long past, particularly in contrast to a couple of similar, but much better, conglomerateurs that Ill introduce you to in a moment.
Buffett released the fiscal 2005 earnings report of his holding company, Berkshire Hathaway (BRK.A, news, msgs), on Saturday, as well as an annual report and 22-page chairman's letter.
And when you get past all the juvenile humor, unseemly criticism of rivals, self-promotion and homilies, you are left with one impression: This is one heck of a way to disguise the fact that -- outside of an accounting gain -- earnings were down 29% in 2005. And that shares turned in a fifth-straight year of underwhelming performance in the only metric that investors truly care about: the advance of the price.
Did I say the stock price is all that matters? Gosh, that seems so craven. I am so sorry to bring it up. But that is what investors are paying him for, isnt it? To boost earnings in a way that encourages new buyers to be more aggressive than sellers, making the price go up?
That is why we buy most stocks. But Berkshire Hathaway is more a cult than a security.
Succession procrastination
Just read the 2005 report, and you will see that it is largely filled with boasts that the chairman has goosed book value by slapping together an insurance, retail, media and construction conglomerate that looks more like something the cat dragged in than a streamlined earnings machine.
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In one remarkable section of the letter, he brags that he bought a company a couple of days after receiving a fax proposal. Im sure there was a lot of due diligence done there. At least as much as he did before buying General Re, an reinsurance company whose out-of-control derivatives book, corrupt practices and mishandling of catastrophe-insurance policies has caused investors no end of pain and lawsuits.
So it should really come as no surprise that earnings were down at Berkshire this year. You would expect no different from an operation that appears to obtain no synergies by stitching together a hodgepodge of companies other than to have a chance to brag about what nice people it has brought into its corporate family, and to use their cash flow to make high-rolling gambles -- wrongly, as it turns out -- on the direction of the U.S. dollar. (I explained this in more detail last June in my column, "How Buffett tripped over the dollar.")
Its interesting that this lion in winter was finally prodded by his board to name a successor, a step he has long avoided. Yet Buffett still cant seem to stand the idea of sharing his spotlight of public adoration with another top executive, even if it is the sort of plainly sensible action that shareholders should expect from any leader. The suspense seems Shakespearean and way out of step with prudent corporate governance practices. It is clearly designed to ensure that they not step out of line.
Better than Buffett
Well, here is my suggestion for the first task of any successor, if he would like to continue the Shakespeare theme: He or she should rip like a Gulf Coast hurricane through the yard sale of a company that Buffett has laid out on his Omaha lawn and sell everything outside the areas in which the company is provably accomplished. Those would be vehicle insurance, candy and furniture retailing, and big-cap equity investing.
There are two very good examples for Buffetts successor to follow, if he wishes to take a similar but more successful path. And as an investor, you can get started right away by simply adding them to your own portfolio.
First is Leucadia National (LUK, news, msgs). This very low-profile company is sort of a New York version of Berkshire Hathaway -- only much, much more successful over the past one-, three-, five-, seven- and 10-year periods. What Leucadia does is, well, basically, anything its managers think will make them money. Its a diversified holding company that has had interests in telecommunications, health-care services, manufacturing, banking and lending, real-estate activities, winery operations, development of a copper mine and property and casualty reinsurance. While Berkshire Hathaway tends to buy best-of-breed companies and leave their managers alone, Leucadia buys assets that are out of favor or, in its words, disheveled in one way or another that makes them inexpensive. It then tries to improve their performance until they are the most efficient and productive in their sector.
You wont learn much about the company from its bare-bones Web site. Its press releases are terse recitations of facts, and its chief executive, Ian Cummings, never speaks to the media. According to its latest 13F-HR filing with the SEC, however, Leucadias publicly held investments include Accelrys (ACCL, news, msgs), FEI (FEIC, news, msgs), International Assets Holding (IAAC, news, msgs), Level 3 Communications (LVLT, news, msgs), ParkerVision (PRKR, news, msgs) and Veeco Instruments (VECO, news, msgs). Another recent filing reveals a new, 35 million-share position in Cresud (CRESY, news, msgs), an Argentine agricultural producer.
Second is Brookfield Asset Management (BAM, news, msgs). It is a holding company, based in Canada, with direct investments of $20 billion and a portfolio of funds under management of $7 billion. Assets include 70 office properties, 120 power-generating plants, thousands of acres of timber and a property development operation under the Brookfield brand name. It has a $14 billion market cap, and its shares are trading near an all-time high on improving volume. This is a great company to buy on dips.
Brookfield is up 1,015% in the past 10 years, while Leucadia is up 500% and Berkshire is up 159%. Over three years, the difference is just as dramatic, with Brookfield up 370%, Leucadia up 145% and Berkshire up 34%. Both of the smaller companies have disposed of key assets recently for large gains and are actively looking for new opportunities. My bet is that these much more modest operations will continue to outpace Berkshires returns by a significant amount with a lot fewer self-engrossing distractions.
Fine print
To learn a little more about Leucadia, visit its Web site. ... To learn more about Brookfield, which used to be called Brascan, read here. A couple of times in the past few years, I have written about Bruce Sherman as another value investor who has outshone Warren Buffett. According to the latest Nelson's World's Best Money Mangers report, Sherman's Private Capital Management was first among all Value Equity managers with a 20.2% annualized return. Last year was not so hot for Sherman, though, as he explains in his fourth-quarter letter to investors. ... I received a lot of very interesting e-mail about bird flu and water and will provide readers insights in a mailbag column in mid-April.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter and editor of The Daily Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.
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