February 24, 2018 / 5:58 PM / a year ago

Breakingviews - Buffett generational shift applies to investors too

Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women's Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque

NEW YORK (Reuters Breakingviews) - Most big investment managers don’t publicly compare the acquisitive desires of a chief executive to the sex drive of a “ripening teenager.” Warren Buffett isn’t the typical big investment manager, which is why Berkshire Hathaway has beaten the market for 36 of the last 52 years. Buffett still serves up the ample returns and folksy advice his fans love. But if a generational shift is underway, he is on the wrong side of it.

Hurricane damage caused Berkshire’s insurance business to post a pre-tax underwriting loss last year, the company said on Saturday, but it was the first one for 14 years. Its other invested companies grew their pre-tax profit by a decent if not fantastic 5 percent. Rising stock markets boosted the company’s holdings of shares from $122 billion to $171 billion – though with valuations high, Buffett left big deals to the ripening teenagers, as he put it in his annual letter.

In many ways the view from Omaha this year is the same as ever, which is what investors in the $500 billion conglomerate mostly want. Accounting gimmickry is irksome; America’s economic soil is “fertile.” Yet in the outside world, something has changed. BlackRock’s Larry Fink and Vanguard’s Bill McNabb have both called for a new approach to investing: demanding that companies do good and heal social divisions, even when doing so doesn’t seem to be good for returns. Buffett, in his annual letter, doesn’t go there.

Arguably, doing good is baked into the Buffett view of the world already. Companies that do harm to stakeholders are not likely to be good long-term investments. Berkshire Hathaway Energy, which makes up around 13 percent of the group’s earnings after excluding a $29 billion gain from the recent U.S. tax cuts, is focused on renewables, for example. That’s a shift that General Electric missed spectacularly. Berkshire Hathaway Energy’s code of conduct is a great example of prohibiting discrimination or harassment.

But notions of what’s now referred to as ESG – environmental, social and governance factors – are otherwise fuzzy in Berkshire’s universe. Kraft Heinz, an investment worth $25.3 billion to the company, prides itself for ruthless cost cutting, which hardly benefits communities. Buffett once praised the economics of tobacco – it’s addictive and costs almost nothing to make – though he then rowed back enough to say that he wouldn’t own an entire tobacco company.

Much ESG posturing by Berkshire’s rivals is, in fairness, just that. BlackRock and Vanguard are prepping for a time when markets don’t simply rise in sync, and attracting funds into passive products gets harder. Buffett, whose track record is long, active and obvious, doesn’t need the marketing boost. It sufficed that he won his 10-year bet that a batch of hedge funds couldn’t beat the market, and that the payoff more than doubled because the wager was switched from inflation-indexed Treasuries to Berkshire stock. The catch is that his likely successors, Ajit Jain and Greg Abel, named last month as the de facto managers of the company, don’t yet command the same status.

Of course, millennials may prove to be just as financially minded as their forebears. In that case, Buffett’s laser focus on long-term value, and penchant for saying what he thinks rather than what he thinks investors want to hear, is the right one. Either way, baby boomers will pile into Omaha in May to see Buffett in person for his annual meeting, just like they do every year. What’s less clear is whether his successors can lure their children with the same ease.


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