Nearly everyone in the market pays some attention to Berkshire Hathaway's (NYSE:BRK.A) multi-billionaire chief Warren Buffett. However, Mr. Buffett is often quite cryptic about exactly what he is looking to do in terms of investments. Consequently, investors, financial journalists and commentators cannot wait to pore over the snippets of information that do come out in filings to the SEC, interviews and his annual letter to shareholders. (This esteemed investor rarely changes his long-term investing strategy, no matter what the market does. Check out Warren Buffett's Bear Market Maneuvers.)
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Given all those information sources, it looks like Mr. Buffett may have hit the "pause" button when it comes to buying stocks. His most recent letter really did not mention stocks to the same degree as in the past, and the most recent filings indicated that he sold eight stocks in the fourth quarter of 2010 while taking no new positions. Why might Mr. Buffett be staying away from stocks right now?
Go Big or Go Home
Warren Buffett has the same problem as many large fund managers - the larger the assets under management get, the harder it is to find meaningful new opportunities. What's more, Mr. Buffett is famous for a KISS-type methodology (Keep It Simple, Stupid) that argues against holding dozens and dozens of positions.
With something on the order of $30 billion to spend - closer to $20 billion now after the deal for Lubrizol (NYSE:LZ) - that limits his options. There are plenty of companies large enough for Buffett to invest in, but not nearly as many that are worth investing in and would make much of a positive change on Berkshire Hathaway's value.
Control Has Value
It might be a fruitful line of inquiry to wonder whether recent experiences have re-educated Mr. Buffett as to the value of having complete control over his investments. While many management teams have reportedly sought Buffett's opinions and advice during his time as an investor and/or run themselves in general accordance with his philosophies, others have clearly deviated from that approach.
Moody's (NYSE:MCO) proved to be a significant embarrassment to Berkshire Hathaway and Mr. Buffett's involvement in that company and its failed mortgage bond ratings earned him a trip in front of Congress to talk about the housing crisis. Likewise, Wells Fargo (NYSE:WFC) made a number of blunders throughout the housing bubble that cost shareholders billions. Perhaps even more famously, Kraft (NYSE:KFT) pursued Cadbury despite Buffett's (rare) outspoken criticism of the deal - he subsequently sold a chunk of his holdings.
This is not meant to suggest that Warren Buffet is flawless, or that managers working for him have not made embarrassing mistakes. At least in those cases Berkshire Hathaway could own the mistake and make corrections. Perhaps even more to the point, Buffett has long maintained that there is huge value in capital allocation and controlling all of a company (as opposed to owning an investment stake) gives him total control in allocating that capital. (They don't call him "The Oracle" for nothing. Learn how Buffett comes up with his winning picks. See Think Like Warren Buffett.)
Craven Boards and Unproductive Uses of Capital
The nature of boards of directors at many companies may also be playing a role in Buffett's desires to buy companies outright as opposed to investing in their equity. Buffett has long been a critic of the poor quality of many corporate boards and derided their generally fawning treatment of senior management.
While Buffett is something of a hypocrite here (Berkshire's board would not seem to meet his own standards of activism and independence), he has a point. The performance of Johnson & Johnson (NYSE:JNJ) management has been laughable, but the board still gave the CEO a bonus. That is admittedly just one example, but investors do not have to look hard to find examples of boards being happy to reward and condone poor results with ever-growing compensation packages.
On top of this, it would not be surprising if Buffett has issues with the capital allocation philosophies of many public company boards. Share buybacks are still in vogue across corporate America, due in no small part to the flexibility they give management. In contrast, Buffett is a long-term and hard-core fan of dividends. By buying a company outright, he himself can decide how best to reinvest or reallocate the capital thrown off by a business.
Sometimes the Market Is Just Expensive
More than two years into a recovery, it is not too hard to find arguments that the U.S. stock market has gotten too expensive and that investors have gotten too complacent. Consider the valuations on private companies like Groupon or Facebook and public companies like Salesforce.com (NYSE:CRM) or VMWare (NYSE:VMW) and things admittedly look a bit stretched. As a self-described value investor, it is not hard to imagine that Buffett has simply found that there are not any appealing bargains among the companies he considers to be adequate in size and quality.
In point of fact, Mr. Buffett's own recent shareholder letter may be highlighting this issue. In his talk of "elephant guns" and "itchy" trigger-fingers, he did indicate that there were potential deals that had gotten away from him. While it is possible that this refers to companies taking competing bids or refusing his overtures (Berkshire Hathaway does not do hostile bids), it may just as likely refer to deal prices that exceeded his estimates of fair value.
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The Bottom Line
If Warren Buffett is not buying stocks investors are wise to wonder why. Buffett was written off as out-dated and out-of-touch during the heights of the tech bubble and again during the housing bubble, but he is still among the world's richest people and many of the bubble-billionaires saw their wealth vanish. In other words, investors ignore him at their own peril. (The Oracle of Omaha's "Rip van Winkle" approach has served him well. Read on to learn more. Check out Warren Buffett's Best Buys.)
That said, there are several reasons that Buffett's position may not be all that bad for investors. There seem to be many fine companies trading at reasonable valuations that are simply too small to interest him. Likewise, investors should not underestimate the value of total control and his desire to buy 100% of a great company rather than 5% stakes in a collection of businesses he cannot control. Accordingly, investors should keep an eye on valuations and expectations, but not assume that Buffett is categorically negative on stocks in general.