Affordable Buffett

Warren Buffett fans finally have an easy way to invest in Berkshire Hathaway Inc. Offers have opened for the Global Masters Fund, which will invest 80% of the amount raised in shares in the vehicle the “Sage of Omaha” has steered for 40 years to a current price of $US84,000 ($A109,000) each '” at an annual compound growth rate of 21.9%.
For the 1% of Australian investors who still haven’t heard of Buffett, his great friend and financial partner Charlie Munger, or Berkshire Hathaway itself, the story can be told simply. As the son of a Nebraska sharebroker and congressman, Buffett was from early days a whiz with numbers. He raced through undergraduate study and after being rejected by Harvard’s graduate school as being too young, enrolled at Columbia where he topped an investment course run by Benjamin Graham, the austere author of the a seminal text on equities, Security Analysis.

Graham’s subject was “rational investing” which meant exactly that. Human factors were mostly excluded. It was all about assessing a company’s intrinsic value with asset ratios, consistent earnings records, interest cover and similar prudent criteria that, while not new, were to be applied rigorously regardless of fashion, personality and market whim.

This was a revelation to the first student Graham awarded an A . Buffett returned home and worked for his father for a while, but then went back to New York as a junior adviser in Graham’s broking business. Although a true believer in the strict value approach, he began to think his mentor’s high rationality left no room for human factors. Good managers made the numbers happen. Buffett accumulated a tidy pile in New York and then went home to put his own take on Graham into practice. With funds from aunts and cousins, he turned $105,000 into $5.2 million in five years and took 25% of any return of more than 4%.

Charlie Munger then appeared. Less folksy and more the intellectual, he brought legal training and sophistication; Buffett is your hamburger-and-soda type. The two clicked and formed a partnership that blew the socks off usual market returns. This alliance became Berkshire Hathaway, today’s $188 billion titan. Famous for its big holdings in Coca-Cola and Gillette, it is in reality a major US insurance holding company with a diversified investment portfolio attached. With funds generated from one of their early buys, discount auto insurer GEICO, they kept buying big positions with the intention of either owning '” if the company was their size; or holding bigger companies as if they were owners. The wholly owned fleet now covers retailing, shoe making, confectionery, aircraft leasing and flight simulation and the global re-insurer General Re. External holdings include 3.3% of Wells Fargo, 9.7% of Gillette, and 8.3% of Coca-Cola.

This then is the legend to which Global Masters offers the only practical entry from our side of the Pacific. At $A109,000 a share, even Global will only be able to buy up 380–400 Berkshire A class shares; the number depends on the success of a $60 million float comprising $1 ordinaries plus an attached $1 option. The minimum entry is $5000 and, after float expenses, the remaining asset value will be 97¢.

On-going fees are low at 0.85% pa, reducing to 0.65%. Growth Equities Corporation is the manager on a five-year contract, far shorter than some these days. Due to the Australian predilection for dividends and the different tax regimes, Global will set aside 20–35% of the funds raised to invest in cash and fixed interest so there is at least a dividend, even if it dilutes the Warren factor. One of the board members, Tony Lewis, is principal of bond specialist Lewis Securities so this cash and fixed interest part will have experienced oversight.

One reason to invest is the possibility of a part return of the $43 billion in cash Berkshire holds, but that is unlikely. Just as Buffett and Munger always say they will find it hard to replicate last year’s result, they often ponder on capital returns. It hasn’t happened so far but may as 10–20% gains in theory become a bigger hurdle each year when operating at this scale.

A more compelling reason is not just for the 22% compound growth record, but the sheer educational value. Global will be a microcosmic participant in the Buffett and Munger “universe”. Berkshire doesn’t just have an exceptional record, it is a philosophical leaning, even a commitment. US shareholders participate in an ongoing commentary, not just about the state of US business, with all its foibles and follies, but a broad dialogue about the nature, objects and ethics of capitalism.

Maybe they would raise an eyebrow at the tag “Global Masters”, but it is no hyperbole to say they are great teachers '” particularly Buffett. By all accounts the thousands who attend the annual meeting lap up every wisecrack and epigram. In the tradition of Mark Twain and Will Rogers, question and answer sessions are peppered with laugh-out-loud anecdotes and sharply drawn pictures of good and bad investment decisions, including Buffett’s own errors and misjudgements. (Buffett confessed after September 11 that he had been far too casual about terrorist risk.) He may be equally self-critical after this season’s hurricane damage is fully assessed.

This big exposure '” some would say over-exposure to re-insurance '” needs consideration. Perhaps the world has changed. After Hurricanes Katrina, Rita and Wilma, even Berkshire’s reserves might struggle to cope with the worst imaginable hurricane season, although in last year’s AGM Buffett anticipated the worst and said Berkshire could handle its 3–5% share of a $100 billion catastrophe. It certainly didn’t blink when writing a $2.2 billion cheque for the World Trade Centre.

His other concerns are well publicised: the potential for nuclear terrorism and a possible slump in the US dollar if the trade balance worsens. There are no wisecracks on these subjects. As for the mounting crisis in US energy, Berkshire may have struck out. The utility business Mid-America may have trouble passing on painfully high energy prices in electricity bills.

It can be also argued that Berkshire is just too idiosyncratic; far too dependent on the judgement of just two men (or actually three, since Buffett’s other great friend Bill Gates joined the board). This criticism is blunted by the way Buffett and Munger leave their business heads alone and heap praise upon them at every AGM. Succession planning or lack of it is also raised as an issue, but they both insist their principles are deeply ingrained. A successor will emerge in time. QBE supporters could also argue that its 20-year track record is even slightly better with a 24% compound growth rate and a total focus on insurance.

But whatever the reservations, investors know Berkshire is free of humbug and hypocrisy. No director options here, no tricky performance hurdles, no huge salaries for doing the bleeding obvious. A spade is always called a spade. And at the very least they can be watched for the moves they don’t make.

Some may complain that Berkshire didn’t invest in Google now that it is up fourfold, but the Amex holding is up sixfold and Wells Fargo more than seven fold. The recent investment in McLane Inc, which manages a major part of Wal-Mart’s logistics and stocking, is apparently booming. It has also gone into PetroChina, which in view of the weak global oil discovery rate, may prove as smart as buying Google.

Global Masters will be classed as a Listed Investment Company and will close in early December. Chasing down a prospectus may not be easy. It is not yet on the ASX’s pending IPO list. The chairman is Jon Addison, manager of the Meat Industry Employees Superannuation Fund. It’s worth a look. Whether they realise it or not, every second fund manager is now a Grahamite, but Buffett was the first disciple and may still be the best.

Richard Campbell is a stockbroker with Bell Potter Securities