Warren Buffett has made his money through a few businesses that aren't quite in ...

sumedh · on Oct 22, 2017

A follow up question would be, is he personally running the companies which you have mentioned and doing those "crimes" or covering up for them or is it the people who are actually running those companies doing it?

valuearb · on Oct 22, 2017

His job is to assess the long term value of the business, part of that is an evaluation of the content of managements character. He's bought at least a hundred businesses, and invested in hundreds of public companies. He's proven a great judge of character, but that doesn't make him perfect.

Clayton Homes makes mobile homes, which are super cheap homes for low income people. Their customers are poor credit risks and default frequently, so Clayton compensates by charging high interest rates.

So is Clayton preying on their desire to have a home?

Or is Clayton offering people who can't afford traditional homes the opportunity to have their own?

Should their customers instead save their money for many more years till they are able to afford a traditional home and improve their a credit score to get a better loan?

Critics of Clayton greatly over-simplify the ethics of its business and how it runs it.

valuearb · on Oct 22, 2017

LOL. Those are all clearly legal businesses. Warren's job is to find the highest return investments for his investors, not make fine ethical distinctions. And still, he refused to buy tobacco companies 40-50 years ago even though they perfectly fit his criteria for great investments.

In the case of Wells Fargo, Warren invested nearly 30 years ago, because it was a great business. 10% shareholders don't get to hire and fire management, or even pick board members. He's been very critical publicly of management and the board, going so far as to suggesting directors return 5 years of pay as recompense for their failures. He's also sold shares, which he almost never does in existing investments.

Maybe Davita is a loser, if so it won't be his first. He's been great at detecting management bullshit during his career, but he's not perfect, he has no supernatural lie detector. Guaranteed he didn't pick Davita because he thought they were misleading patients. Aside from the ethics, that's a horrible investment, you can't build a lasting business on fraud.

As far whether Buffett can ethically deploy the amount of capital Berkshire Hathaway has, it's a hugely silly question. BRK has $250 Billion in net capital. The S&P 500 comprises the largest 500 companies on the NYSE & NASDAQ exchanges, which have a total market value of over $20 Trillion. There are nearly 6,000 more public companies on those two exchanges alone, and that doesn't count thousands of companies on foreign exchanges, and tens of thousands of private companies Berkshire could purchase. Or the thousands of bonds and other fixed income investments that have billion dollar capacities.

In total his universe of possible investments is likely close to $100 Trillion, having capital comprising 1/4000th of that universe doesn't require making any ethical shortcuts. Buffet's large capital base is a hindrance to his returns but he doesn't care and never has. He no longer can achieve the 40% annualized returns of the Buffett Partnerships, or the 25% annualized returns of Berkshire when it was far smaller. But he's still beating the market by a substantial amount, and that's all he cares about.

Go read Barbarians at the Gate. Buffett was quoted about what a great business tobacco companies were. "It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty." But he passed on an opportunity to make a bunch of money off the RJR Nabisco takeover. "I'm wealthy enough where I don't need to own a tobacco company and deal with the consequences of public ownership".

And that was the 80s. He's far wealthier now. Some Buffett quotes.

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

"It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction."

"The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves - and the better the teacher, the better the student body"