Warren Buffet, the world’s second wealthiest man, built his 44 billion dollar fortune by investing in simple, well run and honest companies. How would Buffet, known as the Sage of Omaha for his financial wisdom, have fared in South Africa?
Buffet bought the struggling Omaha-based textile company Berkshire in 1965 by buying companies such as Coca-Cola, Procter & Gamble and Gilette, and turned it into a giant worth around 140 billion dollars.
“When Berkshire buys common stock, we approach the transaction as if we were buying into a private business,” Buffet says.
Berkshire has been praised for its corporate governance in an era when a number of companies around the world, such as Enron, Arthur Andersen and Parmalat have been accused of crooking their books and defrauding shareholders. Would Buffet have been able to spot a Brett Kebble company, or a Leisurenet or a Tigon?
Mining magnate, Kebble, was assassinated in 2005. He is accused of defrauding shareholders of millions of rands. The directors of fitness company Leisurenet and financial services company Tigon have also been accused of defrauding their shareholders. Asset manager Piet Viljoen of Regarding Capital Management has been to a few of Buffet’s annual general meetings in the United States and tries to follow his investment philosophies.
Like Buffet, he invests for the long term and he keeps his approach honest and simple.
Viljoen says Buffet takes various factors into account before he buys into a company.
“There are any number of signs of whether there is a problem with the company or not,” Viljoen says.
“Numbers always tell a story. Buffet would closely examine about four or five years worth of annual reports before he decided to pick up the phone and contact the CEO or owners of the company. If there were any discrepancies he would pick them up.”
Buffet looks very closely at a company’s’ annual report. Does it bleat about its earnings before interest, tax, depreciation and amortization and fill the report with footnotes?
When an executive can accurately predict his future earnings for the year, it strongly suggests that something is being manipulated somewhere, Buffet says.
The US company Enron, whose management stole millions of dollars from shareholders, showed many of these signs.
Something else Buffet looks at is the frugality of management. Is it filled with spendthrifts? Does the management award itself excessive salaries and over inflated bonuses and share options? In 2003 Buffet’s salary was a mere 100,000 dollars. That year the average compensation for a chief executive officer was two million dollars.
He continues to live in the same house in Omaha he bought in 1958 for 31,500 dollars. Once he was reported to have made his daughter write him a cheque for 20 dollars when she borrowed money to pay for her airport parking. Despite his frugality, he is generous. In July Buffett said he would about 37 billion dollars to foundations run by his the Bill Gates and by the Buffett family. His announcement was hailed as the biggest-ever single act of philanthropy in the United States. Buffet would most likely have seen straight through Kebble just by looking at his flamboyant lifestyle. Viljoen says there are various signs, “each with a peculiarity of its own” that tell an investor whether or not the company is worth investing in.
“The reputation of a management is very important in an investor’s decision making process,” he says. “But sometimes gold plated taps in boardrooms and management driving fancy cars doesn’t always tell the whole story. There is no real checklist. Sometimes you can pick it up, sometimes you can’t.” Which South African companies would Buffet chose to buy for Berkshire Hathaway?
Viljoen says Buffet would pick simple brand companies like Tigerbrands, or beverage and media businesses.
Andrew Dalby, an investor with the Marriott Unit Trust Management Company, says in South Africa most of the larger companies tend to show strong corporate governance and ethics that would get Buffet’s stamp of approval. He mentions Standard Bank as an example and Bidvest. A number of the larger property companies are also very honest, he says. “If you look at the track record of some South African companies and use corporate governance checklists as a guide, then you can use Brian Joffe (Bidvest CEO) as an example,” Dalby says. “He is very talented entrepreneur.”
Dalby says that it is impossible to tick every little corporate governance box when deciding to invest in a company. “If you look at Enron, that company probably passed all the corporate governance checklists and it could be listed, but in the end it was run by a bunch of crooks. In the end, you have got to trust the management. And as a shareholder I want to know that I am going to get money back.” – Heartlines Features
By Stuart Graham