Consider the big stock offering sold on Wednesday by Berkshire Hathaway, the conglomerate run by billionaire investor Warren Buffett. Buffett warned for weeks that Berkshire was overpriced, and that people shouldn’t buy the stock. He practically put a skull and crossbones on the prospectus. So what happened? The more Buffett bad-mouthed his stock, the more the public lusted for it. Investo bought $500 million worth-five times what Berkshire originally offered to sell. Think about it. Investors disregarded stockpicking advice from the person to whom they were entrusting money to pick stocks. Hello? And then the stock ran up 8 percent in its first two days of trading.
A little crazy, eh? But positively rational compared with some of the week’s other excesses. Among them: an insane Intemet-related run-up by tired old Zenith Electronics and a brief 3,000 percent run-up by an obscure penny stock that singlehandedly distorted the Nasdaq market’s volume numbers (box, page 43).
Berkshire, though, was clearly the main event. Buffett declined to be interviewed, but it doesn’t take a billionaire market genius to see that something very strange is going on. In fact, the story of Berkshire’s offering shows market excesses that make me very uncomfortable. Before 1 explain why, some disclosures. Berkshire owns about 16 percent of NEWSWEEK’S parent The Washington Post Company, Buffett is a member of its board and is close to its controlling Graham family. And I’ve known and liked Buffett and Berkshire vice chairman Charles Munger for about 20 years.
Back to Berkshire, which wasn’t exactly your normal stock offering. Not only did Buffett warn people to stay away, but the company’s reason for selling stock was odd. The offering was designed not to raise money but to off promoters who want to sell small investors securities tied to Berkshire stock.
Berkshire’s shares currently sell for about $35,000, which means that small investors can’t afford them. When the promoters refused abandon their plan, Buffett and Munger decided to dry up the pool of buyers looking for a $1,000 Berkshire investment. They did this quite cleverly, by creating Berkshire B stock, known as Baby Berkshire. Baby shares are equal to one thirtieth of a regular share, and were issued on Wednesday for $1,110. Berkshire kept making the offering bigger to meet demand.
The gestation of Baby Berkshire began not on Wall Street but in Annapolis, Md., with political consultant Michael Ford, who specializes in working for liberal Democrats. Ford, who owns three shares of Berkshire, decided he could do well by doing good. “I just wanted to let the average person buy a piece of the best investor of our time, and make a little money for myself in the process,” says Ford, who has worked for the likes of former California governor Jerry Brown and former presidential candidate Walter Mondale. However, he had never run anyone against Buffett.
Through political contacts, Ford met Samuel Katz, a Philadelphia Republican who specializes in financing sports arenas. This odd couple came up with something called Affordable Access Trust. The trust hopes to sell units to small investors, charge a fee and use what’s left to buy Berkshire shares. When he wrote Buffett of his plans, Katz says, Buffett went ballistic. Buffett felt the trust would gouge small investors and hurt Berkshire’s good name. What’s more, Buffett resents people’s poaching on his fame and expertise, and he was clearly worried that the trust’s buying would artificially inflate the price of Berkshire stock.
The trust asked to register $250 million worth of units with the SEC, even though Ford and Katz say they didn’t think they’d sell more than $35 million worth. How could a $35 million trust move a stock with a market value of $40 billion? Easy. Berkshire is very hard to buy. It has only 1.19 million shares, about 40 percent of them owned by Buffett. Many of the rest are owned by longterm holders who won’t let them go. Last year Berkshire’s trading volume was less than Peddling 45,000 shares, around 175 a day. Not being from Buffett’s world, Ford and Katz didn’t walk away when Buffett and Munger leaned on them. Katz, especially, seems to be having a great time. “I get to get into the ring with the richest man in the United States,” he says.
Ford and Katz claim they will float their trust, Baby stock notwithstanding. How? By offering a minimum investment of only $500, and a fee of only 2.75 percent. In fact, if the trust gets going-don’t hold your breath - it would be the cheapest way to invest a grand or so in Buffett. Buying $1,000 of trust units would cost only $27.50, less than the commissiorn a stockbroker would charge to buy a single Baby share. People who bought Baby shares in the offering paid no fee - Berkshire paid brokers $10 a share-but anyone who wants Baby stock now has to buy it in the market.
I think Ford was sincere about wanting to cut average folks in on Buffett’s action, and that Buffett was sincere when he worried about the small fry getting gouged and Berkshire stockholders being hurt.. But it’s disturbing to me that Buffett, whom I admire, has become such a cult figure that people would pay trust fees to buy his stock. He’s a good guy and a smart guy, but he’s no god. Even more disturbing than Buffett worship is the market’s disregard of Buffett’s warnings about Berkshire’s share price. When you read business histories, you say to yourself, “How could anyone be so stupid?” In a few decades, people may be asking the same thing about why Buffettmania overpowered good old-fashioned common sense despite the best efforts of the master himself.
title: “Buffettmania” ShowToc: true date: “2022-12-09” author: “Peter Campos”
It’s one of Wall Street’s strangest phenomena: the deification of this bushy-browed 66-year-old investor. For most of the year Buffett, worth $18 billion at last count, zealously guards his privacy. No interviews, no autographs, no entourage as he drives his Lincoln Town Car to work. But at Berkshire’s annual meeting a weekend-long event Buffett calls the Woodstock of Capitalism - he lets his flock worship at his feet. There’s much to celebrate. Berkshire, the former textile company Buffett runs as a quasi mutual fund, outperformed the S&P 500 last year for the 16th consecutive year, and many of the meeting-goers have made millions riding its soaring stock. Admirers wait for hours to shake Buffett’s hand as two beefy bodyguards keep watch. Shareholders keep their kids home from grade school to hear him opine about market valuations. Isn’t it all sort of . . . scary? ““Not at all,’’ Buffett told NEWSWEEK as he signed $100 bills for fans. ““They’re all just here for a good time.''
For diehard fans, the good times start on Saturday. A half dozen of the regulars on the America Online bulletin board devoted to Berkshire have agreed to meet at a pub. The meeting was arranged by an Omaha woman who recently appeared on their AOL board using the screen name ““Doshoes.’’ As the AOLers sip Cokes, Doshoes wanders in . . . with Buffett beside her. Doshoes, it turns out, is Buffett’s daughter Susie, who’s been quietly monitoring their chatter and giving printouts to Dad. Their hero spends a few minutes shaking hands before heading to Rosenblatt Stadium to throw out the first pitch (it’s low and outside). In the stands, AOL devotee John Gartmann stands in a long line to meet Buffett a second time. Complains his girlfriend: ““They’re like groupies around a rock star.''
The next morning the action moves to Borsheim’s, a local Berkshire-owned jewelry store. Shareholders fill the aisles while Buffett draws crowds outside. (Some disclosures here: among the attractions at Borsheim’s was a book signing by Katharine Graham of The Washington Post Company, NEWSWEEK’s parent. Berkshire owns 16 percent of the Post Company, and Buffett serves on its board.) Outside the store David Tunnell and four classmates from Harvard Business School are restless. For them the weekend is a sort of spring break for finance fanatics before they get their M.B.A.s next month. They hop into their minivan and cruise to Farnham Street in search of Buffett’s house. Pretending to be deliverymen, they ask neighborhood girls where the guru lives. They circle the block, eying the big brown house on the corner. Next stop: Buffett’s office building, where they pose for pictures before heading for cocktails.
A few hours later they’re at Gorat’s steakhouse. Shareholders ogle while the Buffett family munches T-bones and onion rings. J. P. Tann, a Singapore investment executive, has flown around the globe to meet his idol. Now he sits holding a menu just a few feet from Buffett’s table. ““I’m overwhelmed,’’ he says. A waitress interrupts his reverie to take his order. ““I’ll have Mr. Buffett’s favorite,’’ he says, ordering the T-bone. ““How do you want that done?’’ she asks. ““How does Mr. Buffett have his done?’’ After dinner a crowd gathers in the lounge to debate. How much will Berkshire stock drop when Buffett dies? (Twenty percent is a common guess.) How long will Buffett live? (Sixteen years, says one fan who’s consulted an actuary.) Last year the talk centered on a rumor that Buffett had cancer. ““His doctor says he’s got the body of a 22-year-old,’’ insists daughter Susie, who also denies a rumor that Dad recently had a face-lift.
The only health scare this weekend is Buffett’s voice. By Sunday night he’s hoarse from too much schmoozing with shareholders. On Monday morning before the annual meeting, his staff stockpiles the podium with hot cider. At 8:30 the Berkshire love-in begins. Giant-screen TVs blare ads for the companies that fill Buffett’s portfolio - Coca-Cola, Disney, Dexter shoes - along with funny filmed tributes from pals like Bill Gates and Tom Brokaw. In the lobby investors can shop for Ginsu knives, Geico car insurance and other Berkshire wares; outside the gate pro-life protesters gather to show opposition to Buffett’s donations to Planned Parenthood. At 9:30 Buffett and his vice chairman and sidekick Charlie Munger hit the stage to a standing ovation. For the next six hours they munch chocolates, sip Cherry Coke and answer questions from 7,500 investors.
Never mind that everything Buffett says is pulled straight from the gospel he’s laid out in 20 years’ worth of annual letters to shareholders, which Berkshire now sells in $15 bound volumes. Shareholders hang on every word as he repeatedly explains how he searches for undervalued companies with unassailable market positions. There are a few headline-making comments: Buffett says he’s against lowering the capital-gains tax rate and that he wouldn’t mind if the Dow dropped 3500 points. By midafternoon the crowd thins as Buffett launches into a windy explanation of the catastrophic-insurance business. Nobody bothers the tall fellow in the Mickey Mouse tie who wanders out to stretch his legs. (Isn’t his name Eisner?) The Harvard guys get restless and drive to the airport to find Buffett’s famed corporate jet, The Indefensible. Larry Oberman and Debbie Cohen depart for another spin through Borsheim’s to look at engagement rings. (They don’t buy.) Back at the auditorium the rest of the disciples disperse, their appetite for wisdom sated for another year. The lights go dim. Buffett has left the building.
