A Master Class in 'Buffettology'
Parsing Warren Buffett (again)... Buffett's cash hoard isn't what you think... Imitating Buffett... Low-hanging fruit for corporate America... Social investing and other weasel words...
As one of Stansberry Research's resident value investors...
There's no way I (Dan Ferris) can keep a lid on my thoughts about Warren Buffett's 2024 letter to Berkshire Hathaway (BRK-B) shareholders. Buffett's annual letter, published Saturday, is a must-read for all investors. But it has a fanatical following among us value folks.
My colleague Corey McLaughlin did a great job of addressing the highlights of Buffett's letter on Monday. I urge you to read that Digest if you haven't already. Today, I'll cover some of the same ground, but in a different context. And I'll share the low-hanging-fruit opportunity Buffett has created for corporate America's leaders. If embraced, it could revolutionize the company-shareholder relationship.
But first, we need to take a look at one lesson from the letter that will shock some Buffett fans...
Buffett is no market timer...
The financial press and social media have been making a lot out of Berkshire Hathaway's record cash hoard. The firm has been selling equities for nine consecutive quarters and now has $334 billion in cash – an unprecedented 27% of Berkshire's assets.
I believe it's a contrarian sentiment signal... but it shouldn't be taken as any type of timing signal.
Rather than speculate on whether Buffett is a good market timer or take it on faith because he's an "oracle," Bob Elliott of Unlimited Funds studied Buffett's record of cash accumulation to test his timing prowess. His simple model showed that Buffett's timing has "meaningfully negative cyclical timing alpha."
In other words, Buffett is a lousy market timer, and that has cost Berkshire Hathaway some returns over the years.
On social media platform X, Elliott pointed out that raising too much cash too soon – before stocks get cheaper – is a classic value manager foible:
Market timing is a fools errand for the vast majority of long-term investors, and [Buffett] is no different. Data clearly shows investors are far better off focusing on *diversification* to improve returns rather than overweighting cash at various times.
So you definitely shouldn't view Buffett's record cash position as a market signal.
Buffett delivers a clue about Berkshire's mammoth cash position in his letter...
As he says:
We are impartial in our choice of equity vehicles, investing in either variety based upon where we can best deploy your (and my family's) savings. Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.
"Often, nothing looks compelling." While Buffett can't be lauded for his market timing, we can count on him to comment on market valuations and speculative behavior near big market peaks, as he did in his 1999 shareholder letter:
Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That's why we haven't added to our present holdings...
Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.
Buffett has repeatedly said he wants to buy great businesses he understands... which are run by great people... and have a clear competitive advantage. Then he wants to hold them, ideally, forever.
In his 2024 letter, Buffett says:
Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.
He also addressed the ultimate concern about holding too much cash for too long: inflation. As he says...
Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.
Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country's short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.
Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country's citizenry.
Buffett's letter is a typical example of his candor...
Several years ago, activist value investor Jeffrey Ubben said in an interview that he was surprised by how few investors attempt to imitate Buffett's tried-and-true strategy of finding great businesses and holding for the long term as they compound capital at high rates.
Buffett, one of the greatest investors who has ever lived, draws investors a road map every year in his annual letter... and yet few people seem interested in traveling his path to patient, long-term wealth creation.
I also find it surprising that more CEOs don't follow Buffett's lead with being candid with their losses and the risks and pitfalls of their businesses. No business is perfect (though some are wonderful, as Buffett has shown us over the years). Shareholders deserve as much information about risks, mistakes, and losses as they do about opportunities, effective operations, and profits.
In the opening paragraphs of the 2024 letter, Buffett addressed the reluctance of most companies to report bad news:
During the 2019-23 period, I have used the words "mistake" or "error" 16 times in my letters to you. Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observations in its 2021 letter. Elsewhere, it has generally been happy talk and pictures.
I have also been a director of large public companies at which "mistake" or "wrong" were forbidden words at board meetings or analyst calls. That taboo, implying managerial perfection, always made me nervous (though, at times, there could be legal issues that make limited discussion advisable. We live in a very litigious society.)
Despite our "very litigious society," Buffett has shown that it's possible to be candid without creating company- or career-ending legal troubles.
You would think more CEOs would embrace the opportunity to build credibility with investors. You don't usually come away from a Buffett letter feeling like he's hiding anything, unlike most CEO letters.
Imitating the straightforward language and valuable content of Buffett's letters must be some of the lowest-hanging fruit in corporate America today. The blueprint is sitting right there for anyone to study. If more CEOs imitated Buffett's example, it could build massive credibility for American businesses.
Politicians like Elizabeth Warren and Bernie Sanders seize every opportunity to complain about corporate greed and price-gouging, with plenty of voters nodding along. Maybe we'd hear fewer complaints about "greedy corporations" if more CEOs had sterling reputations for telling it like it is in language anyone can understand.
Everyone benefits when CEOs candidly explain how their businesses work, including how they set prices and, in some cases, how little profit they make. For example, Warren has complained about grocery stores' high food prices, despite the obvious culprit being government-fueled inflation. Grocery stores average less than 2% net profit margins in the U.S. Warren needs to read Bernard Mandeville's 1714 classic Fable of the Bees: Or Private Vices, Publick Benefits so she can learn how the greed she criticizes has done more good for poor people than all the holier-than-thou, do-gooding politicians in world history.
Berkshire has detractors just like every other business. For example, Native American tribal leaders disrupted the Berkshire meeting in 2008 to complain about a dam in the Klamath River Basin, which they claimed killed "salmon, jobs, [and] communities," according to a banner held up by protestors at the event.
It's impossible for any large corporation to avoid all negative attention. But Buffett has shown that you can still build a legacy of credibility while making shareholders wealthy. So I ask the CEOs of America, what's the hold up? Get your act together and start talking to shareholders like they're regular people, not Securities and Exchange Commission lawyers.
It's ironic that Ubben commented about few investors imitating Buffett...
Ubben founded ValueAct Capital in 2000. As the name implied, he bought stakes in businesses he thought were undervalued, then actively campaigned for change. That's the opposite of Buffett, who often makes clear in his annual letters (including the latest one) that Berkshire owns companies, but it does not manage them.
And the irony doesn't end there.
Ubben left ValueAct in 2020 to start a new firm, Inclusive Capital Partners. Ubben believed there was "societal good to be done" by investing in a portfolio of allegedly "socially responsible" companies.
"Socially responsible investing" is a meaningless weasel phrase. It's nowhere near Buffett's candid communication style.
The great Austrian economist Friedrich Hayek addressed weasel words like "social" in his 1988 must-read classic The Fatal Conceit: The Errors of Socialism. He even wrote a whole chapter on our "poisoned language."
Hayek suggests the term "weasel word" comes from a line in William Shakespeare's comedy As You Like It: "I can suck melancholy out of a song as a weasel sucks eggs."
Hayek explains that:
[A] weasel is alleged to be able to empty an egg without leaving a visible sign, so can these words deprive of content any term to which they are prefixed while seemingly leaving them untouched.
So Ubben still has plenty to learn from Buffett about how to communicate clearly with investors.
Inclusive Capital Partners failed three years later, as have numerous so-called environmental, social, and governance funds. Ubben's reputation helped him raise $8 billion to start Inclusive Capital... but it didn't help him overcome the lousy performance of his investments. Bloomberg reported In November 2023:
The firm's mission has been to generate profits from investing in companies that address societal needs with a focus on reducing negative external impacts... "In fact, it has been the exact opposite." Shares of companies seeking to cut greenhouse gas emissions, for example, have been "sold off" in the markets, it said.
The phrase "societal needs with a focus on reducing negative external impacts" shows that the firm was intended primarily as a very expensive virtue-signaling exercise.
The words 'societal' and 'social' are red flags most of the time...
"Social" is a popular weasel word often used to obscure the meaning of another word rather than clarify it. There is no such thing as "social investing," or "socially responsible investing," just as there is no such thing as "social justice" or "socially responsible jurisprudence."
Justice only applies to infringements against one's person or property, like assault and battery or a stolen watch. There is no other type of justice in the world. If you're born poor, it's unfortunate – not unjust. The justice due to financial scammer and serial pedophile Jeffrey Epstein's victims isn't social justice. It's justice, period.
People who use words like "social" or "socially responsible" are suggesting some type of moral superiority (a major red flag in every facet of life). They're trying to say they're investing to improve humanity... as if ExxonMobil's investments in oil and gas production and distribution haven't helped more humans than ever before achieve the highest standard of living ever achieved by mankind. You can say similar things about the production of steel, and cement or ammonia for fertilizer.
We also invest for financial reasons – like capital preservation, income, and capital gains – not "social" reasons (whatever that means). Otherwise, you're running a charitable operation.
And charity and investing don't easily mix. Trying to integrate charitable giving into the day-to-day operation of a business is probably a nonstarter.
Now, I don't mean companies that pledge a portion of profits to charity, like how food company Newman's Own donates 100% of its profits.
Instead, I'm talking about companies like Los Angeles-based TOMS shoes, which could not sustain a business model based on giving away a pair of shoes for every pair it sold. Selling shoes turned out to be far easier than giving them away in mass quantities. The company's website once noted, "giving is really hard," without spelling out why. Today, it pledges one-third of its profits to charity. In other words, it had to separate the business from the giving. It had to succumb to the irrefutable truth that you must do well before you can try to do good.
I've never seen Buffett mixing charity directly with business, even though his philanthropic endeavors are well known and frequently make their way into his shareholder letters. His energy companies operate wind and solar power facilities to get subsidies, tax breaks, and make money for shareholders – not to be "socially responsible."
It has become clear that "social investing" is a scam. For example, ValueAct Capital's flagship fund (not a socially responsible fund) has earned an incredible 40% per year since its 2000 founding. Ubben is one of the great fund managers of the past few decades. If he can't make "socially responsible investing" work, I doubt anybody can.
In short, language matters...
I urge every investor to read Buffett's annual letters. Let them be your gold-standard guide to reading other companies' shareholder communications. Notice when Buffett tells you things other companies don't. I'm willing to bet you'll gain massive insight.
At 94 years old, Buffett doesn't have too many letters left in him. But you can go to Berkshire Hathaway's website and get yourself a master's degree in "Buffettology" by reading every letter he has written since 1977.
Lawrence Cunningham's excellent collection of shareholder excerpts titled The Essays of Warren Buffett: Lessons for Corporate America is helpful in focusing on various topics.
Then you can work your way through the recently published Buffett & Munger Unscripted, which includes three decades of Buffett and former Berkshire vice chairman Charlie Munger's insights from Berkshire Hathaway shareholder meetings, edited by investment analyst and author Alex W. Morris.
Finally, read Hayek's The Fatal Conceit and be on the lookout for weasel words in corporate communications.
I promise you'll come away with a new respect for corporate candor and credibility. It'll help you spot the great businesses and avoid corporate weasels.
As for me, you and I both know I've been wrong plenty over the years. But I've been candid and unafraid of controversial topics.
I'm proud of Stansberry's well-developed reputation for frank, honest analysis and advice. There's always room for improvement, but we've learned from the lessons Buffett has been teaching us all these years. I urge you to do the same.
New 52-week highs (as of 2/27/25): AbbVie (ABBV), Alpha Architect 1-3 Month Box Fund (BOXX), Berkshire Hathaway (BRK-B), Brown & Brown (BRO), Gilead Sciences (GILD), and Rithm Capital (RITM).
In today's mail, feedback on tariffs, one of the subjects of yesterday's Digest, and some replies to yesterday's mailbag... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Dear Respected Stansberry Staff, [President Donald Trump] is NOT a 'protectionist'. Nothing could be further from the truth. He's trying like hell, and working from a completely screwed-up starting point, to create balanced, super/efficient, universally beneficial, free trade across the globe...
"He gets it that if America can clean up its own act (deregulation, wipe out corruption, improve our schools, destroy the victim culture, etc.) then our beautiful system and people will ensure that we're the greatest beneficiaries of world-wide free trade. We'll earn it.
"Every single thing Trump is trying to do fits together like a puzzle. He sees that and many Americans see that. But unfortunately, many don't." – Subscriber Russ L.
"Thanks, Corey. Navigating the divergence is impossible." – Subscriber Kevin B.
"I enjoy your daily column. It's about the only one I read clear thru to be honest...
"You failed to mention Pres. Trump says his main reason for tariffs is to get Canada and Mexico to do much better with getting illegal immigration solved. But, most importantly, and this includes especially China, is stopping the inflow of illegal drugs into the US. Most importantly fentanyl. China supplies Mexico with the chemicals to make fentanyl as reported in many sources. And Canada has been lax in stopping the drug from entering the U.S. as well.
"Look for more tariffs, IMO, coming against the EU and deservedly so. We are the sucker in the crowd. As reported, we run an almost 240 billion trade deficit with the EU... You have a very good column, and I enjoy it. Thanks." – Subscriber Steve H.
Corey McLaughlin comment: Thanks. Just one note: We did mention yesterday that the tariff threats are tied to stopping illegal drugs from crossing the U.S. border (a problem that is way overdue to be addressed head-on). Additionally, we said that's important to say because Trump's tariffs could be a starting point for negotiations on other items, among many countries – China included, as you note, Steve. Thanks for reading.
Good investing,
Dan Ferris
Medford, Oregon
February 28, 2025