The most damaging aspect of the Warren Buffett-David Sokol sharedealing episode, to my mind, is not the issue of who said what to whom and when, or even whether Mr Sokol’s behaviour was illegal – the latter’s actions surely fail in the court of good judgement, regardless of the precise legalities of the situation. The more worrying aspect for any long-standing Buffett admirer is the evidence that his latest big idea was sourced from a list of potential targets supplied, in the first instance, by a corporate financier at Citigroup, from whom Mr Sokol originally got his idea.
By his own admission, according to the Berkshire Hathaway audit committee report, Mr Buffett admitted not knowing enough about the lubricants and additives business to be ble to form his normal more or less immediate judgement on the merits of a deal. It was only after a couple of briefing sessions with the CEO of Lubrizol that he felt sufficiently confident about the economics of the business to proceed with the company’s $7bn takeover offer.
Of course nobody disputes that the ultimate decision on any Berkshire Hathaway acquisition remains Mr Buffett’s, and his alone. But investing in a business he did not find himself, may not initially have fully understood, and doing so from a shopping list prepared by – of all people – an investment banker? These revelations undoubtedly strip away a little of the aura of sublime and effortless decision-making which has long surrounded the methods of the world’s greatest investor. It is further evidence, I suspect, of the way that Berkshire Hathaway’s sheer size is now making it harder to find the deals Mr Buffett could once dream up from his own circle of competence.
Whether the long term impact of the Sokol affair is serious or not in my view depends mainly on how well the Lubrizoil takeover works out. If the deal turns out to be a turkey, the ramifications will be much greater than any of the short term questions about Mr Sokol’s behaviour, as by then the questions will be about Berkshire’s investment process and Mr Buffett’s usually superior investment judgement, not about the lesser issue of the initially indulgent way he appears to have treated his former underling, which comes as no surprise to anyone who has followed the man and his methods for any length of time.
Jeremy Grantham’s latest Quarterly Letter, with its warning of the risks of a quantum leap in the cost of natural resources in the years ahead, is one of his most powerful yet, but its forceful tone should not come as a surprise. Although he has worked in the United States for more than 40 years, Mr Grantham is fiercely loyal to his roots in the English county of Yorkshire. His family came from Doncaster and for a short while he worked as a bedpan salesman for his stepfather’s medical equipment business, before moving on to Shell and Harvard Business School, and his subsequent career in investment management.
He has remained throughout his life a walking advertisement for two qualities famously associated with the county of his birth: outspokenness and a marked tightness with money. “By background I am both a Quaker and a Yorkshireman, which I like to call double jeopardy” he told me a few years ago when I interviewed him. By that he meant that the spirit of “waste not want not, calling a spade a spade, not gilding the lily, and so on” is an ever present in his life. “I cannot even pay for dinner myself” he added. “My wife has to pay the check”. (You can read the whole article by following this link).
His latest offering is notable because it contains what for Grantham-watchers is a remarkable sighting: a second “paradigm shift”, one which if it proves to be true has potentially profound investment consequences. A paradigm shift, the concept made famous by Thomas Kuhn, stands in opposition to the all-powerful principle of mean reversion, the rock on which Mr Grantham’s particular style of value investing rests. His research team at GMO has famously analysed every significant asset price bubble it could find in documented financial history, and claim only to have found only one potential exception to the rule that bubble-priced assets must in due course revert to their longer term mean.
The first paradigm shift he found was oil, which moved up to new permanently higher price range after the 1970s. The new addition is, in effect, an extension of that idea. The supply of natural resources demanded by a growing world population, says Grantham, is threatening once more to run up against the limits of human ingenuity. The result, he warns, will be an impending quantum change in their price – “perhaps the most important economic event since the Industrial Revolution” – although not, he suggests, before some kind of blowout as China slows down and the current wave of speculative interest in commodities comes crashing to a temporary halt.
The latter may even be imminent – George Soros is reported to have sold all his gold and Goldman Sachs recently turned bearish on commodities in general – but it is the fate of dyed-in-the-wool value investors such as Jeremy Grantham to be treated like Cassandra, however well and powerfully argued their long term thesis happens to be.