Buffett’s protégés are a chip off the old block. You may have noticed that Buffett’s acquisitions and stock picks over the past decade follow the same amusing pattern. It goes something like this:
Buffett buys something.
Market gurus immediately hit the air waves with one of three story arcs:
- “Warren Buffett bought Company X! We have absolutely no idea why, but we’re going to bloviate over it anyway because it’s either that or dead air.”
- “Warren Buffett bought Company X? That stock is BORING. He must really be losing it in his old age.”
- “Well, of course Warren Buffett bought Company X. Company X is the most wonderful thing since sliced bread! What do they make, again?”
- Three months and 10,000 pages of analysis later, investors realize that Company X has some outstanding competitive advantage that everyone overlooked before.
- 6-18 months after that, investors realize that Company X exploits several well-known and documented demographic and/or policy shifts. This information was widely available to the investing public at the time but its importance was downplayed by the market.
- Everyone agrees that Warren Buffett a raving genius until his next big purchase, after which the cycle then repeats itself.
As it happens, the picks of Buffett’s protégés exhibit many of the same attributes.
Take Chicago Bridge & Iron Company N.V. (NYSE:CBI), for example: US regulators are preparing to approve as many as 20 liquefied natural gas plants for exporting LNG to more profitable markets abroad. This ruling has been anticipated for some time, though you wouldn’t know it from the analyst coverage. Berkshire Hathaway Inc. (NYSE:BRK.A) now owns 6.1% of the company.
Or take Ted Weschler’s pick, DaVita HealthCare Partners Inc (NYSE:DVA). Growing obesity rates have been trumpeted non-stop by the media for decades. In 2012, the issue took center stage in Washington with the report that 27% of 17-24 year olds could not pass an army physical due to weight concerns. Yet, few investors drew the obvious connection between America’s obesity problem and diabetes and from diabetes to dialysis. DaVita HealthCare Partners Inc (NYSE:DVA) is currently Berkshire’s fastest growing equity position.
These picks aren’t so much a display of dazzling insight as a willingness to disagree with the consensus opinion on prospects that already exist.
Conclusion
Evaluating Berkshire Hathaway Inc. (NYSE:BRK.A)’s intrinsic value according to Ben Graham principles without taking into account how Warren Buffett has refined and expanded Graham’s theories is like looking at Einstein’s General Theory of Relativity from a Newtonian point of view. For decades, many physicists did exactly that, only to be proven exactly wrong. Such intellectual fossilization deserves a standing ovation from Berkshire shareholders. Without it, we might be back to the bad old days of the Buffett Premium.
And then where would we be?
The article 5 Reasons Why the Bears Are Wrong About Berkshire Hathaway originally appeared on Fool.com and is written by Jessica McCann.
Jessica McCann has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Jessica is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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