Hedge fund manager Whitney Tilson commented on his holding Berkshire Hathaway (BRK.A) in his fund T2 Partners’ monthly letter to shareholders, with of course reference to the David Sokol affair:
Berkshire dropped 2% on the last day of the month due to the resignation of David Sokol, who had been widely believed to be Warren Buffett’s heir apparent. We were surprised and disappointed by the news for two reasons: First, Berkshire is losing a seasoned executive who’s done an excellent job managing MidAmerican Energy, Johns Manville and NetJets. As Buffett rightly noted, his “contributions have been extraordinary.” Second, we think much of the widespread criticism directed at Sokol regarding his stock trades in Lubrizol is justified. At the very least, he exercised very poor judgment, both in buying the stock when he did and then failing to fully disclose to Buffett the size and timing of his purchases. He then exacerbated the situation with his unapologetic appearance on CNBC the day after the news broke.
We do not, however, believe that Warren Buffett deserves the criticism that he has been receiving and are confident that, once the media frenzy subsides, his stellar reputation – and Berkshire’s – will remain intact because he didn’t do anything wrong. While Buffett, with the benefit of hindsight, no doubt wishes he’d asked Sokol more questions about his “passing remark” about his position in Lubrizol, it likely never even crossed his mind that the answer would be anything like, “I bought $10 million a week ago.” The reasons behind Sokol’s actions are a mystery to us, but let’s be clear: it is he, not Buffett, who bears responsibility for what has transpired.
Berkshire has always operated according to what Munger calls “a seamless web of deserved trust.” Over time, this strategy has served the company and its shareholders extremely well. Unfortunately, on rare occasions – and this is one of them – it causes problems.
As investors in Berkshire Hathaway, what we really care about is the company’s intrinsic value – and we think that it has actually risen over the past month because the positive impact of the Lubrizol acquisition – namely, more than $1 billion of pre-tax earnings – far outweighs any negative impact from Sokol’s departure and the controversy surrounding his stock trades. Even more importantly, Buffett is at the top of his game and in excellent health, so we think it’s highly likely that he will continue to run Berkshire for at least the next five years, if not the next 10. Thus, the resignation of a potential successor at this point is almost irrelevant. In any case, the company has a deep bench of seasoned managers. The media frenzy around Sokol will soon pass and investors will then refocus on what really matters: the $1 billion per month (and growing) that is pouring into Omaha for Buffett and Munger to allocate.
Our slide presentation on Berkshire Hathaway, in which we peg the stock’s intrinsic value at nearly $170,000/A share (prior to the Lubrizol acquisition) vs. March’s closing price of $125,300, is posted at: www.tilsonfunds.com/BRK.pdf.
Covestor model portfolios that contain BRK.A or BRK.B at the market close on 2/28/2011:
- Suncoast Equity from Suncoast Equity Management
- Buffett Plus from Robert Foo
- Long-Term Conservative from Ryan Lee
- Performance with Protection from Leif Eriksen
- Long-Term Value from Sreeni Meka
T2 Partners LLC letter to shareholders, dated April 7, 2011