No. of Recommendations: 26
Then GenRe deal was a disaster for Berkshire's growth rate but I think you're missing the main reason. In the intervening 25 years, Buffett has never invested the money. The cash pile has grown and grown. Any comparison to the "past" made by those who think the last 25 years are the past (not you) still don't understand this. When Buffett traded away 20% of Berkshire at the peak of the Great Bubble, it was a decent move. But, to make it work, he needed to put the money to work. I've seen you make the point that there's no way the GenRe deal could have been successful. But, I think you left out the following possibility. Run your numbers with the assumption that, say, by 2005, Buffett had put all the excess cash from GenRe simply in the S&P 500 index (I recall some saying the S&P was over-valued back then. But, the math says over-valuations only provide intermittent opportunities. I was talking to someone back then and pointed this out. He's not the brightest guy, it turns out, and when he realizes that he, gets aggressive. You know the type. He said: "I don't own Berkshire for it to invest in the index." Well, here we are 20 years later, and the cash has just piled up and piled up and for a lot of that time, the interest on the cash was less than the inflation rate. It has been an unmitigated "disaster" if looked at rationally.
If you've been hunting for elephants for 25 years and never bagged one, perhaps it's time to turn in your weapon and ammo. If, instead, you keep piling up more ammo, hundreds of billions of rounds, as you finally give up the hunt and hand it off to your protege, I think that says more about you than the rest of those watching from the kopjes.
The reason why Berkshire, pre-GenRe, performed so much better was because the float was invested in businesses and stocks, and provided enormous leverage on Buffett's stock picks. Post GenRe he's done the opposite and no matter how much time has gone by, the goalposts were shifted. This was about Buffett and not "us". I've never fully figured it out. And, psychoanalysis of the situation is likely useless. I'd guess, for a punt, that he has gotten more pleasure out of not being questioned -- I recall his recounting that the dividend proposal was shot down. He was very self-satisfied in that Sally Field academy-award-acceptance-speech-kind-of-way. She didn't really say it this way but it fits that moment: "You like me, you really like me."
Yes, Warren, we did and do like you. You are the best and we always liked you and always will. But, the same rules you used in the letters from the old days still apply. If Berkshire cannot beat the index, there's no great managerial performance happening. It is what it is. The counterpoint seems to be: "Well, but it is safer." How can that be? How can Berkshire be safer than owning the S&P500 index -- crucially, over the long-term -- if it is a component of the index. I'd love to see someone argue this. The safest bomb shelter is useless if the earth is destroyed. Berkshire cannot survive if the rest of the S&P 500 index goes to zero.
If I was lucky enough to live in a no tax world, the decision here is easy. All this said, perhaps just now isn't the moment. This downgrade is probably creating an opportunity (intentionally) for the smart money to move out of some of the high-flyers and into the post-Buffett Berkshire. And, Abel gets 5 years to solve the issue. He certainly won't be praised for running the cash hoard to $500 billion. And, if Buffett (and Munger) couldn't ever find an elephant, how will he. Tremendous pressure and not much upside here. It will be interesting.
