Imagine a money manager who reported a return of more than 1,000% over a period of 10 years, beating the stock market nearly tenfold. And during that decade, there were 4 down years in which he claimed gains in each one, ranging from 10.4% to 22.8%. Moreover, when he pitched investors for money, he:
“…warned that he would disclose nothing about where their money was invested. He would give them a yearly summary of results, nothing more. Also, he would be ‘open for business’ only one day a year. On December 31, his investors could add or withdraw capital.”
Might you fear a Ponzi scheme of some sort? Wouldn’t the “too-good-to-be-true” results, plus the lack of disclosure and liquidity be red flags? What’s to stop the manager from reporting any kind of return he wants, using cash coming in from new investors to pay reported returns to investors withdrawing funds on Dec. 31?
That was the reaction I had when first reading the description of Warren Buffett’s investment partnerships from 1957 to 1967 on pages 60-94 of Roger Lowenstein’s Buffett: The Making of an American Capitalist (1995). So, while I’m willing to admit Buffett is a damned good stock picker (he was the only student that got an A+ from Benjamin Graham at Columbia University), I’ve always had a somewhat less breathless view than the adoring masses.
The annual pilgrimage to Berkshire Hathaway’s Annual Meeting is now on. Will it end up being the usual love-in, despite the recent scandal over David Sokol? He was the presumed successor to Buffett until he was banished for making several million dollars on his personal account “front running” shares in a company that he urged Buffett to acquire.
In the run-up to Omaha, some rumblings have been heard. For example, Reuters recently ran a piece, Is Warren Buffett’s Teflon finally wearing off? For one thing, the Sokol affair has led some Berkshire Hathway shareholders to sue the company for lack of fiduciary duty. Imagine that. Nevertheless, Lowenstein says: “I have no doubt that he’ll be regarded as the investor and probably the financier of the era. This incident sort of tells people that he’s human.”