Norman Pearlstine, the vice chairman and longtime editorial soul of Time Inc., which publishes Fortune, once said that every feature story fit into one of three archetypes: “How the Mighty Have Fallen;” “David v. Goliath,” or—referring to stories that go against the trend—“The Hole in the Donut.”
He might have added a fourth: “Take-downs of Warren Buffett.” Ever since the Omaha investor was discovered to be human, reporters have churned out stories claiming that Buffett is (a) just plain lucky; (b) not as good as his record; (c) a hypocrite; (d) over the hill; (e) exploiting an unfair advantage; (f) a monopolist; or (g) some or all of the above.
One of the worst of the genre, “Don’t Buff it up: The other side of Warren Buffett,” appeared in The Economist earlier this month. While journalists, of course, should treat Buffett as skeptically as they do other public figures—and criticize unreservedly where it is warranted—The Economist article would seem a transparent attempt at fault-finding.
“Mr. Buffett is not as saintly as he makes out,” the magazine writes. (The article, like most in The Economist, does not carry a byline.) “He has to act in his own interests, and he does so legally, but if all companies followed his example America would be worse off.”
It is hard to conjure a sentence that would more grievously mislead business students or young executives. In the postwar era, American business has racked up an average return on capital of about 10% annually. Berkshire Hathaway, in the 51 years since Buffett has been in command, has compounded its book value at 19.2% annually. That enormous gap, sustained over half a century, represents a standard of out-performance that has no close rival and probably never will.
Buffett achieved that record without embracing the tightrope-walking risks, the ethical shortcuts, or the death-by-slow-obsolescence that have undone so many big corporations (of the 30 companies in the Dow Jones Industrial Average when Buffett took the helm at Berkshire, only three remain.) And his stock price has vaulted from $18 a share to $223,000. Had the Dow advanced in the same proportion, the index would not stand at 18,500, as it does today, but rather at 11,534,000. This is the executive whom The Economist paints as a “far from a model for how capitalism should be transformed.” (Disclosure: I’m not a disinterested writer; I own stock in Berkshire, both directly and via Sequoia Fund, of which I’m a director.)
The magazine’s first specific point is that Buffett, despite an “oft-expressed sympathy for workers,” has partnered with 3G, a Brazilian buyout firm, in acquiring and then imposing layoffs at Kraft and Heinz.
This supposed hypocrisy is, in fact, no hypocrisy at all. Buffett certainly has liberal political opinions. He favors progressive tax rates, a hefty inheritance tax and an expanded Earned Income Tax Credit. And he supports government spending on common goods—public schools, for instance—that he thinks will promote more opportunity for all.
The first thing to note is that these opinions are irrelevant to Buffett’s value as a business model. Sam Walton may have never voted for the same political candidate as Buffett, but he ran Walmart according to much the same long-term, fundamentals-based, stick-to-your-knitting strategy. Both leaders are widely emulated, both for good reason.
The second point is that Buffett’s “sympathy” for “workers,” to use The Economist’s barbed language, neither now or ever extended to padding the payroll with redundant employees. The very first business of Berkshire, textile production in New England, was one that Buffett shuttered because it didn’t produce a sufficient return. Indeed, Buffett’s relentless pruning of expenses is a reason for Berkshire’s continued success. And advocacy of an ample government safety net is not inconsistent with hard-headed capitalism—it is a necessary and humane corollary.
Similarly, the magazine claims that Buffett is inconsistent in arguing for a liberal tax policy while Berkshire, last year, rated 10th among the 10 most profitable U.S. companies in terms of taxes paid as a percentage of profits. However, Berkshire ranked third in terms of taxes as a percentage of cash flow. (Buffett told me the first ratio was depressed due to the accounting treatment of the merger of its Heinz partnership with Kraft. The transaction required Berkshire to write up its investment by $6.8 billion, a phantom “profit” that did not generate any cash.) In any case, there is, again, no inconsistency—and no faulty model—in advocating a fairer (and in the corporate world) simpler, tax code, while minimizing taxes under the prevailing system as it stands. Buffett has never said that he alone should pay higher taxes.
Too cozy with Wall Street?
A third point is that although Buffett is a frequent critic of Wall Street, Berkshire acquired a stake in Goldman Sachs during the 2008 panic, and has large financial businesses of its own. If The Economist finds Buffett’s financial sermons preachy, his folksy annual letters hardly detract from Berkshire’s value as an exemplar. Consider that Berkshire’s financial units are prudently run, not dependent on short-term debt, and have never been vulnerable to a panic. Is that not a model worth emulating? Moreover, Buffett’s actions in 2008 were exactly those of a patriotic capitalist. He invested precisely at the bottom—a signal to others that the panic wouldn’t last. And he did so carefully—eschewing Lehman Brothers, which he also considered, for a Wall Street firm that, while under stress, was fundamentally sound.
The weirdest of The Economist’s arguments is that Buffett is an oligopolist who favors safe and supposedly ossified franchise businesses at a time when America needs more derring-do. “Economic growth suffers as a result,” the magazine says. This criticism implies that investors should attempt to place funds where pundits, or maybe politicians, think they are needed. If you believe in Adam Smith—and The Economist has, ever since James Wilson, a Scottish hat-maker and proponent of free trade and other liberal ideas, founded the magazine in 1843—allocating capital is a job that is best performed by the market. Thanks to the workings of the Invisible Hand, society is served when investors deploy their funds where they envision a high return at reasonable risk. Buffett has been doing it for six decades (he started in the 1950s, with his own investment partnership, before gaining control of Berkshire).
He is not perfect, and should never be thought so. The Economist is right to chastise Buffett for installing his son, Howard, on Berkshire’s board, and for proposing him as eventual non-executive chairman. That bit of nepotism is not good corporate governance. Beyond that, Buffett has made his share of mistakes; and now and then he has changed his mind. Companies in which Buffett has invested have not always followed his ideals—see Coca-Cola’s outsized compensation in the 1990s—but since Buffett has invested in hundreds or thousands of securities, that is hardly a surprise. In general, the businesses that Buffett controls (those that Berkshire wholly owns) have been remarkably free of scandal, and have operated in sync with Buffett’s philosophy and values.
Buffett is no abstract philosopher. He is a working capitalist and executive. His annual letters represent his thinking– his philosophy, if you will – in its purest form. His business career – his adaptation of that credo to, now, nearly one hundred tangible, workaday companies – is necessarily messier, although in Buffett’s case, it is not very messy. To suggest because the one does not precisely mirror the other that Buffett’s reputation is rooted in hypocrisy is the opposite of intelligent journalism. And to portray his example as deleterious is beyond belief.
Roger Lowenstein is the author of Buffett: The Making of An American Capitalist and, most recently, America’s Bank: The Epic Struggle to Create the Federal Reserve.