No typo here. I do mean lost tycoon, not F.Scott Fitzgerald's The Last Tycoon, about his fictional movie mogul, Monroe Stahr. I'm bothered by Buffett’s final morphing into his staid money management construct, saddling himself with underperforming big capitalization properties like ExxonMobil, IBM and Wal-Mart.
Last year, Coca-Cola, his big long term winner rose just 7%, but this is forgivable because its low cost tax basis makes it prohibitive to bang out. Why reduce the Federal deficit single-handedly? Incidentally, the U.S. deficit now runs at a livable 4.1%, probably headed to 3% in a better economic setting. Coke declined 4% overnight on its disappointing yearend results.
When you parse last year’s performance of the S&P 500 Index, you find sizable disparity among the top 50 names. Properties like Google, Amazon, Walt Disney, Boeing and Gilead Sciences, soared to the moon, ranging upwards of 90%. Not ExxonMobil, Chevron, IBM et al.
I don't buy Buffett’s excuse that he eschews technology as unanalyzable. After all, he owns old technology as in IBM. I see nothing but trouble for old tech, including Cisco and Intel who must reinvent themselves fast or erode into “also-rans.”
I can understand Buffett’s reluctance to consider properties like Twitter, even Baidu and Priceline.com on a valuation basis, but not Facebook with a market capitalization approximating $150 billion, probably selling under 20 times next year's EBITDA to enterprise value.
Part of a money manager's job is to understand and form an opinion on new faces going public with sizable market capitalizations. The next big one is probably Alibaba, easily a hundred billion plus valuation prospect. Lemme point out Google, now third largest market cap in the S&P 500, is hard on the heels of ExxonMobil, a $400 billion property.
Google went public under a decade ago and has risen over 1,300%. My point is if you can analyze Comcast and DirecTV you could deal with Google. After rising over 50% last year, Google still sells under 20 times projected 2014 earnings power. Go! Google!
A fair question to put to Buffett is what does he see in stodgy, tired blue chips like Exxon and IBM? Exxon is finding it difficult to replenish its oil reserves, while it costs twice as much capital to do so vs. five years ago.
IBM is doing right to get out of hardware and build software capabilities in cloud computing and storage. But, it's late. Amazon now is number one and even Microsoft is a distant second. Meanwhile, it's difficult to grow IBM’s services business at more than a 5% annualized clip with price competition for large, long term contracts so contentious.
How to rate Buffett’s prowess as a money manager today? Well, first you look at the composition of this $100 billion portfolio. Some 40% dwells in financials, so this part should be measured against the Keefe, Bruyette & Woods large bank stock index. The remaining 60% clearly falls in the domain of the S&P 500 Index.
Without sufficient data to rate the couple of young money managers Buffett has surrounded himself with, I discount whether they have full or even sizable control of Berkshire’s open-to-buy for new positions.
When Buffett purchased the remaining outstanding stock in the Burlington Northern Railroad, I saw the opening gambit of his grand design. Why not sop up Berkshire’s tens of billions in open-to-buy with established GNP type properties? In short, this is his legacy once he's gone. Railroads and energy properties, even IBM and Wal-Mart aren't likely to entail huge financial risk and surely grow along with the country.
Maybe yes, maybe no. After all, the Pennsylvania Railroad and New York Central fell into receivership in the early sixties. IBM pre-Gerstner's arrival was headed for the manure pile. Currently, JCPenney is fighting for survival.
Absent astute management, balance sheet sensitive, anything can happen. Under Tom Watson in the sixties, IBM bet the company on the 360 computer introduction. They won primacy against feeble competition like Burroughs and Sperry Rand.
For rating Buffett, I'll give him a 60/40 ratio of the S&P 500 Index and a financial sector index of his choice. The deep basic is whether this is too conservative for such a world class investor. Absolutely not!
I too, hold 40% of my stock market money in financials, namely big banks like JPMorgan Chase, Citigroup and Bank of America. They are great hedges against escalating money market rates lurking out there next couple of years.
But, I own weighted positions in Amazon, Salesforce.com and Facebook, not to mention Gilead and Boeing. I rate myself against the NASDAQ 100 index which includes all these names, barring the banks.
This index levitated 40% last year and is ahead over 2.3% year-to-date. It's a good indicator of whether speculation is in the air. Hey, Byron Wien, when does the 10% down leg in the S&P 500 start? I'll give you a couple of more months to be right. Otherwise, go be right somewhere else.
At the risk of sounding revolutionary or at least non-establishment, I believe money managers in control of serious sums should be rated on an evenly melded ratio of 50% S&P 500 and 50% NASDAQ 100.
There's no excuse to have missed the recovery in Apple. (Go, Carl!) All thinking operators shoulda owned Google, Amazon, Facebook and Gilead and played the snapback in Microsoft over the past 12 months. Even in the NASDAQ Composite Index, the top five names comprise 25% of this index, including Facebook.
This is reality in the investment universe, at least in the USA. By rating managers 50% NASDAQ Composite or even the more extreme NASDAQ 100 you would force them to take a stand on critical investment issues like whether the Internet continues to grow apace and capture a bigger slice of the advertising dollar. So far it's happening. In the NASDAQ Composite, technology comprises 43% of the index and consumer services 20%. Financials carry just a 7% weighting.
Buffett doesn't want to play in this game, but so far he's missed a lot of the market’s dynamism. Maybe, he's waiting for the next financial meltdown. He handled himself again as a master macro player then, pumping blood into Goldman Sachs, Bank of America et al, exacting an enormous toll in interest rates and equity participation with warrants recently harvested.
Perhaps, Buffett no longer should be rated as a stock picker because a goodly portion of Berkshire’s $100 billion portfolio is sterilized goods. The danger in Berkshire Hathaway as an investment is it sells at a discount to asset value before long, even if Warren sticks around another 10 years. Last year, BRK rose 32%, at least keeping pace with the S&P 500 Index. The Keefe, Bruyette & Woods bank index, BKX gained 38%.
From all this emerges a bunch of disputable precepts:
- Nothing is forever in the investment world.
- There's no monopoly on brains.
- Growth stocks sport finite lives of 5 to 10 years.
- Growth stock investing is the “in” place to be. The frontier beckons, so keep a “Go West” attitude.
- Institutional money pools aren't rating money managers in a task fulfilling construct.
- The NASDAQ 100 is the best index to measure yourself against as a player.
- Discipline! Twitter and that feisty electric car maker may kill you on valuation, alone.
- Burnish your image too protractedly and you'll invite carping criticism.
- Understand all the macros. Politics leads economics ever since the Egyptian pharaohs. The Russians tried to bury Disneyland, but they failed. Khrushchev's GDP couldn't keep pace with U.S. defense expenditures, so we buried them and they imploded.
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Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Google, Amazon, Walt Disney, Boeing, Gilead Sciences, Facebook, Comcast, Microsoft, JPMorgan Chase, Citigroup, Bank of America, Salesforce.com, Apple and Goldman Sachs.
