gains for Berkshire Hathaway (BRK) on GE and BofA

Every investment company has to make public filings with the SEC that disclose its quarter-end investment positions.  Comparing the changes between filings allows anyone to see the investment moves of high-level professionals, even though this comes with a lag.

Recently, the press has picked up on the results of two investments made by Warren Buffett/BRK during the financial crisis.  He provided finance to Bank of America (BAC) and to General Electric (GE), two companies whose operations were under great stress because of recession.  As he has done in other instances, Buffett demanded, and received, a long-running option to convert what were essentially commercial loans into the companies’ common stock at 2008 prices, in the case of GE, and 2011 prices, in the case of BAC.

BRK and GE, BAC

BRK has recently cashed out of its position in GE completely and has converted the BAC preferred stock it bought into common.  Back of the envelope, here’s how Mr. Buffett made out:

–BRK lent GE $3 billion and received a total of $4 billion back, including the sale of all the stock bought through warrant exercise;  a gain of 33.3% over nine years, during which time the S&P 500 gained 250%+.

–BRK lent BAC $5 billion.  It has received about $2 billion in dividend payments and has a gain of about $11 billion on the BAC stock it now owns.  That’s a gain of 260% over six years, during which time the S&P 500 gained about 110%.

Together:  BRK lost $6.5 billion by its investment in GE vs. holding an S&P 500 index fund;  it has gained $8 billion vs the index so far on holding BAC.

evaluating results

A more interesting question:  did BRK do well or badly?

On GE, the answer is clear.  The investment did very poorly.

On BAC, the answer is also clear.  The investment gave BRK more downside protection, and higher income, than the common during a time when BAC was in hot water.  And it came just before BAC began its long run of outperformance against the S&P 500.   So this was a home run.

Regular readers will know that my overall view on Mr. Buffett is that he persists in using a manual typewriter in a Word (or Google docs) world.  You have to hand it to him on BAC.  But GE’s salad days were long gone when he put BRK’s money into it.

Uber and corporate control

Uber…

The continuing troubles at Uber have placed renewed focus on the dominant form of corporate organization among internet companies in Silicon Valley:  voting control concentrated in the hands of a small number of founding principals, with the vast majority of shareholders having little or no say in corporate affairs.

The companies in question have more than one class of stock.  The shares the public holds have either no say at all or, at best, a small fraction of the voting power each of the founders’ shares have.

Tech entrepreneurs didn’t invent the idea of multiple share classes.  Companies like Hershey, the NY Times or News Corp. have had this structure for decades.  And, yes, it does create problems.  Insiders are free to ignore the concerns of outsiders, who have little recourse other than to sell their holdings.  Of course, in the case of Uber, that’s easier to say than to do.

vs. GE

I think it’s striking, however, that the other prominent corporate name in the news today is GE, a company with a long history and a wide-open corporate register.  GE’s CEO, Jeff Immelt, is being forced to retire after 17 years at the helm–during which time GE has been a chronic underperformer.

I have some sympathy for Mr. Immelt, who, as far as I can see, inherited the terrible mess that his predecessor, Jack Welch, had created at GE by the turn of the century.  Even if we say Immelt’s first half decade was spent cleaning things up, though, it took a subsequent lost decade before the board decided to make a change.  And that is arguably only because an activist began to stir the pot.

…vs. J C Penney (JCP)

Then there’s the cautionary tale of JCP, where an investor group led by Pershing Square took control of the board a number of years ago.  The newcomers carried out a number of disastrous changes in JCP’s strategy that caused the firm’s profits–and its stock price–to crater.  They then convinced the board of directors to repurchase their stock at what I judge to have been an extremely favorable (for them) price–and disappeared.

In this case, having only one class of stock, and no dominant insider, worked to ordinary shareholders’ disadvantage.

my point?

To be clear, I’m not an advocate of having several share classes.  But I don’t think that’s the Uber problem.

As I see it, early investors backing Uber made a bad mistake in their assessment of the quality of the company’s management.  And by not providing enough mentoring they allowed a toxic corporate environment to proliferate.  The fact of multiple share classes makes it harder to rein in a renegade culture.  But take the multiple classes away and Uber would still have become what it is, I think.