I don’t blame Berkshire Hathaway Inc. (NYSE:BRK.A) for turning Kass down, but I wish they’d thought to go one further — to choose a time frame that was long enough to bear out the results, and have a friendly bet on the performance of the market against the return from Kass’ fund. That would have put Kass well and truly on the spot, and I’ll bet Buffett would have won.
Michael Olsen, CFA: When asked about ISCAR’s competitive advantage, Buffett gave an uncharacteristically droning, almost evasive reply:
ISCAR has incredible competitive advantages. If you go back to 1951 in Israel, just go back to the prospects that were facing him (well-financed, entrenched competition). Most machine-cutting tools companies sell to heavy industry using materials shipped from China. A young man, at 25, creates ISCAR, with no locational advantage, and it becomes a great company to today. That’s hard work and talent. ISCAR is one of the great companies of the world, and we feel very proud to be associated with it.
In things Buffett already knows: A good outcome doesn’t mean all is well. Likewise, ISCAR’s success isn’t proof of a competitive advantage in and of itself. Buffett knows that. My best guess is that, in his attempt at distilling things, he boiled it down a bit too much.
Here’s what I think he meant to say, and most assuredly knows:
In a relatively small worldwide market, where a continuous need to source tungsten exists (because blades wear quickly), ISCAR benefits from being one of only two players of scale. Its scale affords a critical supply-chain advantage, and incremental sales (of blades) are immensely profitable. Competitors just can’t get a foothold, because of the cost of building a supply imprint. That, in turn, affords pricing power.
Matt Koppenheffer: I’ll echo what Brendan said about IBM. Given that Buffett has made that company a “big four” holding at Berkshire — joining the company’s massive holdings in Wells Fargo & Co (NYSE:WFC), Coca-Cola, and American Express Company (NYSE:AXP) — I had hoped that he’d have a better answer to the IBM-moat question.
But since Brendan has already covered that, I’ll add that I was also a bit bummed about Buffett’s response to a question about the skills of Berkshire’s insurance guru Ajit Jain. Buffett did a nice, folksy sidestep of the question, opting instead to quip that “if Ajit ever is not with us, we won’t look as good,” and “if he came in at 1965 instead of 1985, we’d probably own the world.” Charming, but not terribly helpful in understanding what has made Jain so successful running one of Berkshire’s key businesses.
The closest Buffett came to actually answering the question was this: “When people copy [Ajit], he comes up with something new.” So we can at least take away that small tidbit — that Jain is intellectually flexible and creative enough to find new avenues when his current ones get crowded.
The article Here’s How Warren Buffett Disappointed Me originally appeared on Fool.com.
Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool recommends American Express, Berkshire Hathaway, Coca-Cola, H.J. Heinz, and Wells Fargo and owns shares of Berkshire Hathaway, International Business Machines (NYSE:IBM)., and Wells Fargo.
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