Munger Defends Sokol in FT
Munger tells FT he doesn't think Sokol intended anything wrong. Says it was "optics." Differentiates his purchase of BYD from Sokol's of Lubrizol while saying they were alike in one respect (they both owned stock in a company Berkshire acquired).
> More than gentlemanly of Munger, after Sokol dragged him into the spotlight on CNBC. Nobody would be asking questions about BYD if Sokol hadn't raised it as an issue. BYD is not a valid comparison. Munger bought BYD years earlier; fully disclosed it; recused himself. I thought it was rather low-class of Sokol to make the BYD comparison, even if he was like the drowning guy who pulls anyone he can grab underwater with him.
> Look for more post-blowup damage control after this interview, in the form of support from whichever Buffett friends and any such media as can be found to assist. If past unpleasantnesses are a guide (General Re) only about 1% of the iceberg will be visible on the surface, so I would not jump to a whole lot of conclusions from what anybody says.
> In addition, public opinion is already quite firm. The question being asked is not "What more can Buffett & Co. tell us to convince us they're right?" but rather "When will Buffett reverse gears and do the right thing?" by saying he's reconsidered it and the stock purchases were inappropriate and didn't meet Berkshire's standard of behavior.
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Li Lu took the high road
I think Li Lu had a lot of courage in turning down BRK at Warren's terms. (I think when Warrens period is done, they will have a hard time retaining a low paid, high ownership crew.) Sokol would be more respected if he too would have stepped down when he had the urge years before. If you choose to work under the umbrella, you have to somewhat play by the rules.
Don't know about Charlie and his relationship with Warren and what he does on his own. I would guess that Warren was wanting to buy the rest of the Wesco shares to somewhat wind down what Charlie shares publicly. Warren likes to be the point of contact for the media. (no side shows)
Not too sure if Li Lu took
Not too sure if Li Lu took the high road.
According to the WSJ :"But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable."
BYD soared six fold after WB invested in it. So it is likely that Li Lu's performance is based on the fact that WB invested in one of his portfolio companies.
It is possible (likely?) that Li did not take the job because he would have been "outed." Would love to know Li's performance figures
a)B4 WB invested in BYD
b)Without BYD
Unlike most of the commentary
Unlike most of the commentary on this issue, I think its easy to agree with Munger's conclusion that Sokol meant nothing wrong. It is well documented that Buffett only acts on a tiny fraction of the deals presented to him, so its safe to assume that Sokol was thinking the same when he made the purchases. Its also not hard to imagine that Sokol is constantly bombarded with investment opportunity lists from investments banks, both as an individual and as a representative of Berkshire.
Similarly, if he thinks that the chances of Buffett buying a low, a passing remark regarding his involvement would have seemed reasonable at the time.
However once things get moving and Buffett indicates he is going to buy Lubrizol, Sokol's position becomes harder to defend. At that point Sokol should have made Buffett aware of the timing of his purchases and a solution could have been worked out.
To my mind, Sokol hasn't done this because in his own mind he believes has not done anything illegal (or wrong), but for some reason doesn't grasp the ethical conflict appearance of the trade. Because he believes he has done nothing wrong, he also doesn't foresee the ethical problem it creates for Berkshire and the furore its about to create. I know its hard to believe that he doesn't realise, but theres no other explanation, other than he's deliberately deceived Buffett. But surely thats impossible, because that would be suicide for Sokol's business career. (Certainly Sokol seems oblivious to the ethical conflict appearance when he is interviewed on CNBC).
Buffett on the other hand readily realises the issue, but is faced with a dilemma. How does he handle it in a way that is transparent, but doesn't throw Sokol to the wolves. (At this point, I think if Buffett thought Sokol had acted to deceive him, he "would" have thrown Sokol to the wolves, which clearly would have been the much easier option for Buffett to preserve his own reputation).
From here I think Buffett acts bravely by trying to be transparent without ruining Sokol's future, but unfortunately makes a mistake. At this point I think Buffett needed to tell Sokol that the situation was going to look terrible for both of them and that Sokol should return the money and apologise that he had made an error of judgment. Sure, the media would have still had a field day, but the reputation loss wouldn't have been as bruising as whats happening currently.
Of course everything is easy with hindsight.
Michael Steinhardt on CNBC
Alice, Two questions:
1) Did you see Michael Steinhardt's general comments (link below) regarding Buffett and the Sokol trade? What do you think about that? I could certainly see his point about philanthropy and how amazing Buffett has gotten other billionaires to give away their money.
2) As to Steinhardt's comments on Buffett & John Gutfreund, what do you know and think of John Gutfreund? (I don't know anything and don't have an opinion, I was too young back then and was not paying attention)
Here are the CNBC videos:
http://video.cnbc.com/gallery/?video=3000014541
ANSWER: I did see the comments. There's a bit of "revenge of the rich against the richer" in it but he makes some valid points. I have commented on the philanthropy as follows (to be succinct) the motivations are less important than the result. This is true of all philanthropy. If we want to get into dissecting the motives of philanthropists, it will not be a pretty picture for the most part -- sorry. Singling Buffett out as uniquely self-serving is a crock. If you really want to dig deeply into psychology, there is very little of what could be called pure altruism and to the extent it exists it is psychologically questionable. I don't want to get into a debate about this, only to point out the complexity of the subject and the folly of questioning the motives of those who do good deeds.
Did Warren actually beat the S&P 500 every year ?
Hi Alice,
In Michael Steinhardt's video on CNBC , he says "I am not too sure if Warren beat the S&P 500"
While this seems ridiculous on the face of it, there is evidence that Warren might not have actually beat the S&P 500 every year when he was running his partnership.
For instance, in his 1962 letter to his partners,he writes "Presently, we own 70% of the stock of Dempster with another 10% held by a few associates.With only 150 or so other stockholders,a market on the stock is virtually non-existent and in any case, would have no meaning for a controlled block.Our own actions in the market could drastically affect the quoted price.Therefore it is necessary for me to estimate the value at yearend of our controlling interest."
Then he proceeds to estimate the value of Dempster which formed a significant chunk of his holdings (21%) to arrive at his own performance record.
Isn't this mark to model accounting? Wasn't a large part of Warren's halo come from the fact that he beat the S&P 500 every year in his initial years? Was that halo justified considering Warren himself (and not any third party) estimated the value of his own holdings?
Would love to know your thoughts on this.
REPLY: Yes, it was the equiv. of mark to model. Yes, the early years were the key. There's no way to know whether he beat the S&P at stock-picking because he stopped presenting a performance record when he folded the partnership. Yes, the halo is justified regarding his ability to create wealth. No one else has ever made so much money for investors through capital allocation. There is plenty of public information (and a lot of information in The Snowball that is new) that if considered thoughtfully shows that Buffett's performance came from a combination of relentless drive, ruthless self-interest, boundless curiosity about a narrow subject, record-breaking parsimony, social climbing, complex financial maneuvers, occasional bullying, a keen understanding of the tax code, ceaseless study of financial and business arcana, the critical insight that running a hedge fund created low risk almost zero-cost leverage, the critical insight that insurance float created low risk zero-cost leverage, and the gradual accumulation of personal and institutional advantages from the repeated application of all of these things. I may have left a few things out, but this is the gist. Like most great performances, Buffett's success is to be admired for its scale, audacity, creativity, and ambition -- although not necessarily emulated in every respect.
Hi Alice, I remember reading
Hi Alice,
I remember reading in your book Warren mentioning "Its important to coattail other investors".For instance,he coattailed Pritzer in the famous cocoa beans investment.
Wasn't this a case of Warren coattailing Munger? He knows Munger is super smart and so followed him into this investment.
Munger convincing Warren to coattail him isn't new either. It was Charlie who discovered Blue Chips and then encouraged Buffett to follow him there. Knowing Charlie's deep knowledge of psychology, is it inconcievable that he "manipulated" Warren into investing in BYD? For example, in his press statement, he says that he knew he couldn't convince Buffett so he roped in Sokol (the latest Warren fixation). Comparing BYD's founder to Edison+Welch would have (like Pavlov's dogs) sent Warren salivating!
Another interesting point: BYD is the cornerstone of Lu Liu's investment success.Would BYD have performed spectacularly if Warren had not invested in it? If not, would Lu's partnerships done as well? If not,then isn't Lu an one trick pony..a trick which won't be repeated in the future?
As an aside,I loved your book the Snowball. I have read more than 300+ biographies and this ranks as the best. I think you are one of the smartest and honest analysts around and I am dying to get my hands on your new book. I wish you the very very best for your writings.
REPLY: Thanks for the insightful comments. Yes, I agree it is coattailing. It's probably true that BYD wouldn't has performed as well. Berkshire has benefited for at least a couple of decades from the halo effect. PetroChina was another good example. I would be concerned if Munger had bought it, then turned right around and convinced Buffett to buy. It's such a critical difference in these two situations and that is what people are focusing on. Meanwhile, the rest of you, coattail away.
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