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Tom Russo Reacts To Investors Questioning Buffett’s Reversal

Tom Russo, Gardner Russo & Gardner partner and portfolio manager, discusses shareholders questioning Warren Buffett’s investment strategy at Berkshire Hathaway Inc.’s annual meeting with Bloomberg’s Scarlet Fu and Caroline Hyde on “Bloomberg Markets: The Close.” (Source: Bloomberg)

price inelastic demand

Gardner Russo’s Tom Russo Reacts to Investors Questioning Buffett’s Reversal

[bufffett]

Q1 hedge fund letters, conference, scoops etc

Transcript

There’s so much to go through here. I guess the question I’d start with when we talk about craft times and we talk about some of the Berkshire’s other investments is can traditional consumer brands still carry weight in this era of technological change of Internet stocks because they don’t seem to be as durable as they once were. And that’s part of Warren Buffett’s investment approach.

Oh he’s always celebrated. Ever since the purchase of See’s chocolate the ability for a brand to deliver to the owner price inelastic demand. So the consumer will bear higher costs because they value the product. And that’s extremely valuable as an owner of a business. You have to however pay back in to the brands held at enormous amount of what you think is your profit. And the difficulty of why a firm like Kraft times might stumble in addition to the debt and leverage they took on is that the brands actually hadn’t been reinvested in heavily enough and they cannot be starved if necessary investment. The reinvestment. Today’s much easier for big companies like NestlĂ© because they can harness the power of Instagram Facebook and Google and they’re increasingly sending all of their spending over to those new platforms that really allow them to stay cheek by cheek with those startups that everyone is now over fearing because of the evidence of an old guard company like Kraft tines failure to reinvest enough to keep its brand healthy enough that price inelastic demand.

Interesting that you say over fearing Buffett himself at the event saying we’ve got some within that portfolio so some companies within that portfolio that will actually be destroyed by what happens in this world. Which companies do you think he thinks will be destroyed. And will he be enough to get out of them in time or pivot them.

You have such an interesting question. I mean it’s so easy to just simply say World Book Encyclopedia and move on because you know with Google being the answer of all all questions ultimately there really isn’t a role to play. Now they still offer it. But that would be something that would be very very increasingly irrelevant. I should think I don’t want to make anyone feel badly bent Berkshire. But the second question you if that’s an example of the first. The second question that you ask is what what do you do about it. Because Warren’s pledge to the people who sell him fabulous businesses often at below market prices is that he will lead the businesses alone. But if over time it turns out that because of the rot that takes place because of decay certain businesses decay. Others don’t. It often has to do with the reinvestment back into the business that some just do right. If those ones that have rotted teeth need to be trimmed Berkshire faces the prospect of having to act maybe against the wishes of the selling family and so there’s a possibility of some tension arising. I think it’s relatively small it affects a relatively small number of holding. There’s another example in Berkshire. Are they they own newspapers and they were expanding the newspaper business. And they’ve really I think finally throwing in the towel on that once cherished business for which Berkshire loves. I think they’re kind of moving away from that finally. So but technology can be aided tool to help develop new new consumers but it’s also disruptive against old franchises.

Tom I want to get your take on what Berkshire Hathaway does with its cash because what the U.S. stock market at record highs. How does Berkshire best deploy its capital does it wait for better entry points and in the meantime does it perhaps buy back more stock as Buffett has implied even with stock prices at these levels.

Great question because a couple of things first you saw just this past weekend. One alternative will be to continue to be a financier of choice. If someone wants to underwrite a 37 billion dollar equity portfolio so that it’s in its reporting at the end of each term it never goes down because it has been reinsure it against market losses. You wouldn’t go anywhere but to Berkshire. You’ll pay them five billion dollars for a 37 billion dollar face value and in a product like that because that’s what they got years ago no one else could get that those terms because they didn’t have the capital to pledge. They have the the credibility that they stay wholesome for the 15 years that that contract lasted. Berkshire sees these one off transaction. I’d say one that they did eight eight years ago made them 30 billion dollars and that was the lending through a preferred vehicle to Bank of America. That moment of dire most dire reputational weakness Berkshire came in and and and bought a preferred stock and was given 5 million warrants to buy this book. Bank of America shares at seven dollars they’re now at 30. And yet they’ve made nearly 25 billion dollars. See those opportunistic investments where Warren is the only person who can can write the check without a committee reviewing it and take it take it to great advantage. One there in the last area is to make investments in share repurchase. I think that’s a very exciting development. Berkshire spent a lot of time supporting Warren’s comment that he would spend up to 100 billion dollars at the right circumstances to buy back stock. But you can see with war and how special that relationship with this is investors because for every dollar he buys back attractively there’s a seller who could have got more if he waited right in theory. And Warren Warren Buffett goes to a huge lengths now to give the tools to those sellers to come up with a fair price so they know so they know what it is that they’re selling.