The Dark Side Of Warren Buffett July 31, 2007
Posted by Eric Schleien in Benjamin Graham, Berkshire Hathaway, Warren Buffett.
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Warren Buffett once said “It takes 15 years to build a reputation and 5 minutes to ruin it”. What Buffett doesn’t say is that sometimes he’s not the ethical good guy he makes him self appear to be. Buffett rather uses techniques from the book “The Art of Seduction” and instead of using them on women, he uses them in the business world — but he may use them on women too I just wouldn’t know. My inspiration to write this comes from a few value investors I talk to on a regular basis about their views on Warren Buffett as well as Berkshire Hathaway. First of all Buffett preaches a buy and hold mantra yet when he first started out he was anything but. Buffett was more similar to the corporate raider type investor than the passive Mr. Nice Guy that everyone makes him out to be. In the Buffett Partnership, he would liquidate companies and get companies to sell themselves for a premium to the market price but way below their fair and conservative intrinsic values just so he could make a quick buck. Buffett also has destroyed corporate cultures and has been awarded sweetheart deals to benefit himself. In this case I am talking about Solomon Brothers. After the Solomon Brothers bond scandal, Buffett was asked to be CEO to help the company which was in danger of going into bankruptcy. Buffett testified for the Senate and charmed his way through the testimony with his “ethical” persona. What people don’t realize was that his actions at Solomon Brothers was anything but ethical. The first thing Buffett did as CEO was fire everyone who was tied to the scandal at the firm which was the right thing to do. But with that he also changed the corporate culture from cut throat to Buffett like. This was a negative in my opinion. Then he is awarded preferred stock yielding 14% and is able to share in any upside of the common stock. After sucking cash out of the company he leaves as quickly as he came.
Buffett also talks about the importance of family. It is well known he disowned one of his relatives. On top of that, he had terrible relationships with his kids. And while he has never been divorced, he had a mistress and a wife at the same time.
Buffett is also clever in knowing that whatever he says goes. He always talks about how everyone is equal in the company since all shareholders should feel like partners. Partners usually have say in a company. In the case of Berkshire, whatever Buffett says goes because he has brainwashed value investors and Berkshire shareholders over the years to believe that whatever he says must be the right thing to do. I noticed this at the annual meeting this year when Buffett called a vote on whether Berkshire should get rid of their Petro-China stake. Buffett made a convincing argument that Petro-China has nothing to do with Sudan when anyone who reads the facts can see that is total bullshit.
Buffett is a smart guy and I’m sure realizes that Petro-China has ties to Sudan but Buffett is a smart man — a good debater as well. He knows how to be convincing on both sides of the argument. I also thought it was amusing that he said he was going to make it fair to the Sudan protesters. So what does he do — he calls a shareholder vote and before the vote makes his opinion on how he feels about the matter which right there is not fair. Whatever Buffett thinks is right is what people believe is right. Therefore by telling his shareholders what he believed was the right thing to do — he was essentially controlling the outcome of the vote. He knew he would win right from the beginning making the vote totally unfair.
Buffett has also caused something else to occur which I’m sure was not his intention. Berkshire Hathaway has caused a cult-like phenomenon to occur. While there are plenty of normal people who come to the Berkshire Meeting there are many people who live for this one weekend and it’s very similar of a cult. They worship Warren Buffett like as he is a god or a messiah. When I hear people talking about what Buffett’s kids are doing now or how Charlie Munger should never be bothered when reading his paper, it makes me realize how scary this phenomenon is. People obsess over Buffett and Munger and relate to them as if they know them personally. The fact is that if you let Buffett or Munger know that you know about their personal life they would be totally sketched out. I find Buffett cult followers believe whatever Buffett believes is right. When Buffett decided he wasn’t going to give to charity he was praised by shareholders. When Buffett decided to give to charity during his lifetime he was praised by shareholders. You see my point? I’m pretty sure Buffett could make a case for splitting Berkshire stock as easily as he could for not splitting it. While not being nearly as smart as Buffett I can tell you that Berkshire’s Class B shares are not day traded yet they are 1/30th the price of the A shares. Why not just do 1 for 30 stock split on the A shares? Again, catch my drift. The sad thing is is that I will be bashed for saying that yet if Buffett said it it would be praised.
To end this post I am only trying to make a point that Buffett isn’t always right and everything he does isn’t always the best decision. I personally think Warren Buffett is a really good person and that one could learn a lot from him. My point is that he is not perfect he is simply a human being like everyone who is reading this right now. While I may seem like I have written a lot about his negative traits this article would be at least 10x as long if I were to write about his positive traits. The point of me focusing on the negative side of Buffett is to show he isn’t perfect, that he isn’t god, the he isn’t all that he tries to make himself appear to be, that what he says his intentions are may not be his true intentions. To end this I will leave you ironically with a quote out of Buffett’s favorite book, “The Intelligent Investor”, “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it - even though others may hesitate or differ”. (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)”
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