The now annual auction for a lunch with Warren Buffett isn’t a bad bellwether for how the wealthy of the world are getting on. After all, is there a greater indulgence or status symbol than paying more than $2 million for lunch with an octogenarian?
The 12th annual auction, proceeds from which go to a charity called Glide Foundation, set another record last week, with $2,626,411 raised.
However, the big price doesn’t tell the entire story.
The auction attracted just two bidders who made a total of eight bids in what was described as a slightly lacklustre affair.
The final bid was actually $2,345,678, but the winning bidder – who is remaining anonymous – generously agreed to increase their pledge to $2,626,411, thereby beating last year’s record price by $100.
That’s hardly a sign that the rich suddenly have millions to splash around.
Nevertheless, the lunch package – the winning bidder will get to invite seven friends to lunch at the New York steak house Smith & Wollensky – is a prize many would give their right arm to win.
And surely the conversation at this year’s lunch will be more lively than ever. After all, Buffett has had a year with some major challenges, including the shock resignation of key Berkshire Hathaway lieutenant David Sokol who admitted to buying shares in a company called Lubrizol while promoting the company as a takeover target to Buffett and other Berkshire executives.
The scandal that erupted following Sokol’s departure – sparked by Buffett’s initial refusal to condemn the actions of the man once seen as his heir – was a rare misstep for the Oracle of Omaha.
And the incident would be top of the list of 10 questions I would ask Buffett if I could snare a seat at his high-priced lunch.
Buffett said at the Berkshire annual shareholder meeting in late April that he “pleaded guilty” to charges that his initial reaction to Sokol’s “inexplicable and inexcusable” behaviour lacked a sense of outrage. “Dave did a lot of good things for us over 10 or 11 years,” Buffett said.
That quote suggests Buffett is still misreading the reaction to the incident, which surely represents one of the biggest failings of governance in Berkshire’s history.
Buffett is famous for taking a very hands-off approach to management – he places a huge amount of trust in his key people. But did this management style lead to a lack of oversight that allowed Sokol to do what he did undetected? Has Berkshire put in processes and systems to ensure Sokol-like behaviour is prevented and detected in future? Or does the circle of trust just continue? There are interesting governance posers.
Much to the frustration of some investors and commentators, Buffett still refuses to nominate a successor. With Sokol gone, the field remains wide open. The frontrunners include Berkshire executives Greg Abel, CEO of MidAmerican, Matthew Rose, CEO Northern Burlington and hedge fund manager Todd Coombs.
At 80 years of age, Buffett shows no signs of slowing down. But some insight in the timing of his planned succession would be fascinating. Does he have a date in mind? Will he step away over a prolonged period or suddenly? A question unlikely to be answered, but worth asking.
Buffett painted his early-2010 purchase of rail company Burlington National as a giant bet on the US economic recovery and in this year’s $9.7 billion purchase of Lubrizol can be seen in a similar light. Both investments are essentially leveraged to the transport sector, which is of course one of the industries tied most closely to the economic cycle. Buffett said a few months ago the US economy was improving, but is the pace what Buffett was hoping to see when he bought Burlington?
The huge valuations placed recently on LinkedIn, Groupon, Facebook and Zynga have many wondering whether a new tech bubble is forming. He steered clear of the tech bubble in 1999 and 2000 (after being heavily criticised for sitting on the sidelines) and later likened the companies to “old-fashioned chain letters” designed for “making money off investors rather than for them”. It would be fascinating to hear if Buffett thinks history is repeating.
In his annual letter to shareholders, Buffett set out the simple criteria he has for deals, including the fact it’s got to be big (“At least $75 million of pre-tax earnings unless the business will fit into one of our existing units”) and simple (“If there’s lots of technology, we won’t understand it”). Berkshire has lots of cash at the ready, but the question is what sort of business will Buffett target? Will he look for a bargain in a “rust belt” industry like manufacturing? Or could there be opportunities in financial services as the economy finally starts gathering pace? Just a little hint could be worth its weight in gold.
Last week Berkshire Hathaway’s shares hit a 52-week low of $109,925 and according to the Wall Street Journal are down 15% since February. The Journal says the company is trading at 1.1 times its book value, which is much lower than the long-term average of 1.7 times. Are succession issues weighing on the stock? Or is the Sokol scandal still a problem? Or is this just a temporary blip?
We already know the answer to this one: financial services. Berkshire owns big stakes in Wells Fargo, American Express and recently added MasterCard to its portfolio. However, this is proving to be something of a drag – financial stocks in the US are down 7.9% this year, compared with a flat performance for the S&P 500. Is Buffett now looking at other sectors or themes that could deliver value?
Well it’s worth asking, isn’t it?
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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