Berkshire Hathaway’s General Motors Test Drive

Berkshire Hathaway’s (BRK.A) (BRK.B) recent disclosure of its General Motors (GM) stake was largely eclipsed by the Facebook (FB) IPO that occurred in the same week. But the GM holding remains a puzzling news story for investors, one that still has many followers of Warren Buffett and Berkshire Hathaway scratching their heads and asking questions. Who Dunnit? And the Larger Questions At the outset, readers should note the GM stake is below the 300 million dollar threshold that generally triggers Buffett’s personal investment selection. This has been discussed in numerous reports including one in USA Today and a WSJ piece indicating the stake is the likely work of Berkshire deputies (e.g., Todd Combs or Ted Weschler). Berkshire Hathaway has long had investment decisions made by those besides Warren Buffett and Charlie Munger, most notably Lou Simpson, the longtime head of Geico investments. But interestingly, at least one Morningstar analyst notes neither Combs or Weschler have demonstrated a background in auto sector investments, so the pick is “anybody’s guess”. But the stock is now a Berkshire Hathaway holding, so the larger questions are now about the merits of the investment and whether it fits (or doesn’t fit) into Berkshire Hathaway’s holdings and investment strategy. Does GM Fit the Berkshire Hathaway Profile? A glance at Berkshire’s holdings reveal the new GM stake does not share a great deal in common with most of the other investments. In its recent 13-F statement, Berkshire Hathaway also disclosed a stake in Viacom (VIA) that squares with its past and present media holdings; and the recent newspaper purchases (from Media General), and the announcement of more to come, fit dead center into what Buffett calls his “circle of competence”, with a long history in the newspaper industry including The Washington Post Company (WPO), the Buffalo Evening News, and even Buffett’s youth as a top notch paperboy and circulation manager. Amid the Berkshire Hathaway’s holdings we see banks, credit cards, media/entertainment, leading retailers, and strong consumer brands. These are mostly the classics franchises with moats and stable (increasing) earnings. Then we find the world’s 2nd largest automaker (by sales), still relatively fresh out of bankruptcy. This is a capital intensive, cyclical manufacturing business in a highly competitive environment, sticking out like the proverbial sore thumb. Kissing Frogs Succession One possible theory on the GM holding may be found in a lesser known book about Warren Buffett, The Warren Buffet CEO by Robert Miles (2002). While less popular than the bestselling biographical works, this book details Buffett’s leadership and management style at Berkshire Hathaway. The theme is empowerment and freeing people to make decisions. The result is highly autonomous managers with long term perspectives. It could be Buffett must empower a potential successor to “kiss a few frogs” or, better yet, prove their acumen and gain experience to help prepare for the top spot(s) in the near future?

As the Berkshire Hathaway 2011 annual letter to shareholders states:

“As 2011 started, Todd Combs joined us as an investment manager, and shortly after year end Ted Weschler came aboard. Both of these men have outstanding investment skills and a deep commitment to Berkshire. Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.”

But putting a couple of hundred million at stake might be a bit of a costly succession plan. And no one knows more about opportunity costs and the importance of careful stock selection than Warren Buffett, an investor keen on “waiting for the right pitch” and using a “punch card” analogy, noting investors should only make a limited number of carefully selected investments in their lifetime. Hence there may be some juxtaposing of Warren Buffett’s management style and his investment philosophy at work in the incongruous GM holding. Regardless, investors have to wonder about the merits of GM and where it fits (or doesn’t fit) into the Berkshire Hathaway philosophy. Moreover, the stake came from Berkshire Hathaway’s people, its system and culture, so it may also be telling as a harbinger of the investment philosophy of potential successors and the direction of future investments. The pick may ultimately

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