It’s remarkable how Warren Buffett has written 48 annual letters to Berkshire Hathaway Inc. shareholders, all gems of clarity, wit and wisdom. His just-released letter for 2012 continues the tradition but has something new to announce: for the first time, the company’s list of major investments includes selections from individuals other than Buffett.
The in-house investment managers allowed this privilege are Ted Weschler, 51, and Todd Combs, 42. The two currently manage a combined US$10 billion of Berkshire Hathaway’s money. If you’re into investing, or a Berkshire Hathaway shareholder, you’ll want to know more about them and how they invest.
“We hit the jackpot with these two,” writes Buffett in his latest letter. “In 2012, each outperformed the S&P 500 by double-digit margins. They left me in the dust as well.” One of them is likely to take over as chief investment officer after Buffett, 82, leaves the scene.
Let’s start with Weschler. Before joining Berkshire Hathaway in 2011 following a series of charity luncheons with Buffett, he ran a Charlottesville, Va.-based hedge fund that gained more than 1,200% over the 12 years to 2011. His investing style is early Buffett: he pores over financial statements and holds a concentrated portfolio of shares in out-of-favour companies, whose turnarounds he may actively bring about. One of his biggest payoffs was with chemical maker W.R. Grace & Co., which was labouring under the weight of asbestos lawsuits. The company recovered after Weschler met with the plaintiffs’ lawyer and worked out a deal in 2008.
Prior to joining Berkshire Hathaway in 2010, Combs ran a Greenwich, Conn.-based hedge fund that the Wall Street Journal reported earned a cumulative 35% from 2006 to 2010. He was prescient about the financial crisis and sold short several financial companies. Two companies on which he was bearish were mortgage insurers Fannie Mae and Freddie Mac. From 2002 to 2005, Combs analyzed financial stocks for a hedge fund that modeled itself after Buffett’s investment style.
However, Combs has relied more on short selling (although this may have been dictated by the dismal state of the U.S. financial industry), and when he buys a stock his holding period tends to be shorter than Buffett’s. He came on board after responding to Buffett’s “help wanted” request and going through an interview process.
Both hail from U.S. universities with top finance programs. Weschler’s alma mater is the University of Pennsylvania’s Wharton School. Combs’ is Columbia University, where he was one of the students picked for the prestigious Value Investing Program.
Interestingly, the performance of both as hedge-fund managers owes a lot to intimate knowledge of several companies gained while working in industries outside of investment management. One of Weschler’s first jobs, for example, was serving as an assistant to the CEO at W.R. Grace & Co. Combs started out as a bank regulator and then became a risk analyst at an insurer.
As Buffett’s recent letter to shareholders discloses, the biggest investment position that Weschler and Combs have is DirecTV. Both have contributed to building up the stake, at a cost of $1.05 billion (U.S.). With a current market value close to $1.15 billion (U.S.), there would appear to be lots more room for DireTV shares to appreciate. What might they see in the company?
DirecTV is a U.S.-based satellite television operator enjoying robust growth in revenues and earnings. While growth is modest in the U.S., it is rapid in Latin America—a market larger than North America by 100-million people. Moreover, cable/satellite penetration is still less than a third of the level in the U.S., and the dearth of cable and fibre infrastructure there means cable companies can’t easily increase market share. Yet valuation remains reasonable for DirecTV—perhaps because of uncertainty over risks such as the potential for fee increases from content providers and adverse currency fluctuations in Latin America.
Another holding of theirs over the US$1-billion mark (if positions in pension plans are counted) is DaVita HealthCare Partners Inc. Its “moat” is based on a life-saving dialysis treatment for people afflicted with kidney failure. Its stock shot up in 2012 by nearly 50%. Other positions that are likely the handiwork of the investing duo include: General Motors Co., WABCO Holdings Inc., Archer Daniels Midland Co., and VeriSign Inc.