More Warren Buffett Cornpone On CNBC This Morning

Warren Buffett appeared on CNBC this morning with plenty of his trademark cornpone and increasingly annoying guffaws.

This time he was spewing socialistic comments on taxing the rich, plus issuing ridiculous calls for higher taxes in general. Put Warren down as a limousine liberal. Would he have thought the same twenty years ago? More?

Absent on Buffett's part were such important aspects of the consequences of his views as the fact that taxing all of the income of the top 1% won't fund the government for even a year, if I recall Kyle Bass' analysis correctly. And there's the dangerously slippery slope which Buffett, having billions to give to charity, won't have to endure, i.e., how much 'more' is enough, and who judges that?

A young entrepreneur looking at confiscatorily high rates at the upper income ranges will likely behave differently than an old 'fat cat' like Buffett who has already amassed his fortune. Buffett's lifestyle won't be affected by almost anything the federal government does with tax policy, but that's not true for the younger, upcoming millionaires and billionaires of tomorrow. The more the chance to keep one's own earned money is reduced, the more the entire idea of the American Dream is subjected to socialism.

What's more sickening is that CNBC can't even dare to question Buffett's views, airing them with absolutely no critical challenges whatsoever. How about having Kyle Bass on the phone available to engage Buffett in defending his rank socialist views?

On the professional front, Buffett's big announcement was that he's accumulated about 5.5% of IBM's equity. Then he went on to babble about 11% of the firm's equity changing ownership in a year, and that turnover is so high these days. Of apparent note was that IBM is considered a technology company, which is a sector Buffett has historically shunned out of lack of understanding.

It was a charming throwback to antiquity when Buffett told how he actually read the recent annual report and, gosh darn it, liked what he read, so he bought 5.5% of the firm. And encouraged other investors to read that report, too!

Unfortunately, real investing is a bit more complicated than reading annual reports. At least it is if you plan on owning equities that constitute a portfolio which consistently outperforms the S&P500.

What Buffett doesn't seem to acknowledge, regarding the share turnover question, is that, in the decades since the Big Bang on the NYSE which cut brokerage fees, and the subsequent explosion of volume and mutual funds, people have access to cheaper professional management of their money. Especially via 401Ks invested with mutual funds. Buy and hold a la Graham and Dodd was conceived in an era of a 14% round trip charge on trades, versus flat dollar fees today.

The volatility and erratic performance that individuals might have to live with when investing on their own is probably less tolerable from a paid manager. Thus, more trading occurs in the quest for better returns all the time.

Now consider what Buffett reiterated this morning regarding his own holdings- Wells Fargo and BofA. They are erratic. Buffett no longer behaves like a typical manager, in that he doesn't even attempt to mitigate inconsistencies in his company's returns. While IBM has been moving toward being a consistently superior equity for years, BofA and Wells Fargo are not. BofA is a disaster, and Wells has tracked the S&P, meaning you'd be exposed to similar returns for far less risk by owning the index, rather than WFC. These price series are illustrated in the first nearby chart.

 I contend that if Berkshire's price charts were labeled Fund X and compared to other funds, Buffett's company would be judged inadequate, inconsistent and, at best, mediocre.

But being Buffett, people forgive performance lapses because they buy into a now decades-old performance that no longer exists.

A firm Buffett said he can't and won't buy- Microsoft- tells you something about his judgement.

Microsoft, as my prior posts have illustrated, has had a lost decade of flat returns. It's been a disaster. Yet Buffett claimed he won't invest because, as a friend of Bill- Gates, that is- he would be accused of having inside information. He didn't just bust out laughing at the prospect of throwing his investors' money away on a moribund has-been technology company if he bought shares of MSFT.

 To illustrate the inconsistency of Buffett's firm's performance, consider the next three price series charts. They compare BerkshireA with the S&P500 Index for the past 1, 2 and 5 years.

For the past year, the S&P has outperformed Buffett by 10 percentage points. For the past 24 months, they are even. For the past five years, Berkshire outperforms the S&P by 20 percentage points.

Berkshire has become something of a timing stock, at best. At worst, whether due to size of the portfolio, or Buffett's outdated selection strategy, it's simply seen its returned attenuating toward the index.

For what its worth, IBM has been near qualifying as an equity in my portfolios because of its increasingly-consistent relative performance on several key criteria. But, unlike Buffett, my strategy doesn't blindly hold for years. It continually assesses consistency of performance.

Of course, I'm not Buffett. As I noted earlier in the post, investors have long since given up measuring him by the same standard as they would other managers. Thus my point that if Berkshire were included as a choice among funds to choose, with its name changed, I doubt it would get the investment it does because it's affiliated with Buffett.

Frankly, anyone who would seriously consider investing in Microsoft would, on that basis alone, scare me off.

But that's the world according to Buffett. It's a different investing world with different rules. Performance doesn't matter as much as it does for lesser-publicized investment managers. 

IBM's Revenue Growth

Tuesday's Wall Street Journal reported on IBM's quarterly earnings announcement with the headline Worries Persist for IBM and the subheading Tech Bellwether's Profit up 7%, but Contracts Disappoint.

I've written in prior posts that it seems passe to consider IBM a 'tech bellwether.' Be that as it may, the firms nominal year-on-year revenue growth was only 7.8%.

My proprietary equity performance research found that earnings growth isn't significantly related to changes in total return. Which means that managers will do whatever they must in the near term to make earnings targets, thus making them meaningless as indicators. In this case, doing so led to profit growth which almost matches revenue growth. The latter qualifies for being a high growth rate, unless you're talking about a conventional slow-growth firm. Otherwise, it suggests economic weakness.

But revenues are a different story. And IBM's near-flat revenues growth ought to trouble those who monitor the US economy. If the firm is a bellwether, be concerned.

Whither Mark Hurd's HP?

Mark Hurd became CEO of HP just over three years ago, In that time, he has undeniably improved the operating performance of the firm, as well as its total returns.

When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.

After running somewhat similarly on a total return basis since 2003, Hurd's arrival at HP coincided with, if it didn't actually affect, Dell's steady negative total return performance for most of the years since. On that comparative basis, HP has clearly pulled ahead of its major PC manufacturing competitor.

Now, Hurd is buying EDS. Allegedly, he is fashioning HP into a firm capable of going after the likes of IBM and Accenture.

The trouble is, in my view, what the performance of IBM and EDS already appear to be. The nearby, Yahoo-sourced five-year price performance chart of HP, Accenture, IBM, EDS, Dell and the S&P500 Index tells a very revealing story.

Over five years, IBM's stock price is just even with the S&P, while EDS has been flat, while Dell has lost ground. So, from a performance standpoint, Mark Hurd has already done a better job for his investors than has IBM for its shareholders. And Hurd has clearly outperformed the still-struggling Dell.

HP has even outperformed Accenture (in the interest of full disclosure, a firm for which I once worked, when it was still Andersen Consulting) over the past five years, and since Hurd assumed command of HP.

So my question is,

"What does Mark Hurd intend for the EDS acquisition to do for HP shareholders?"

He's already outperforming current and future comparable firms- Dell, IBM and Accenture. And he's planning to acquire a firm whose own total return performance has been dismal.

From a Schumpeterian dynamics view, HP is bound, at some point, to meet, rather than exceed, investor expectations, and see its total returns flatten out. It might even be that this would occur within a few years.

The question is, will it have a better chance continuing to focus on excellence in its major businesses, which now feature personal computers, or does it need to risk diluting its focus by building up/entering the IT consulting services business?

In terms of competitive position, HP would seem to be at least temporarily advantaged in its current businesses. Consumer computing and the evolution thereof is going to continue to make the market leader serious money going forward. Whether the PC and laptop morph into new devices, or just get more involved, better, etc., HP could still seek to dominate this market.

By buying EDS and turning HP's attention to the business of cutthroat, big-contract consulting services, Hurd may well stumble into a hornet's nest of unrealized difficulty.

I don't know for certain, of course. But few business expansions of this type work out as well as the architects hope.

Mark Hurd has done a tremendous job truly 'turning around' HP after Carly Fiorina. He's brought it to a fine edge of dominance in its product markets, and in terms of shareholder return.

My proprietary research has shown that, on average, a company can outperform the S&P500 consistently for less than a decade. Things happen that eventually hinder its consistent, ongoing excellent total return performance- limits to growth, competition, regulation, or simply investor expectations catching up with the reality of the firm's performance.

The nearby 30+ year view of these same companies' equity price performances demonstrates, perhaps surprisingly, that Dell is actually still the best performer, despite flattening out for most of this decade. IBM and EDS, both around for decades, and the former, for more than the last decade, heavily into computer services and consulting, have nearly identical pre-dividend returns, slightly below the S&P.

Even allow for the maturity of the PC industry, I can't help but look at Dell's long term performance and wonder if HP's Hurd isn't unwisely taking his eye off of the more attractive segment, and potentially committing HP to a grueling, ugly slugging match in a business where differentiation is difficult, customers can be troublesome, and engagement costs can run amok.

Then there will be the internal management attention drawn away from the now-dominant PC business. And probably issues of succession as EDS takes on more importance in HP's fortunes going forward.

Mark Hurd has distinguished himself both at HP and with his former employer. His acquisition of EDS probably marks the largest risk he will have taken. Perhaps within a few years we'll see whether it has cost HP any ground in its consumer computer business, and whether Hurd has been able to prove the exception to Schumpeterian forces in business.