Activist Hedge Fund Manager Dan Loeb Slams Billionaire Investor Warren Buffet and Backs it Up by These Facts.
When billionaire hedge fund manager Daniel Loeb lashed out at Warren Buffett at an industry conference, it was fairly apparent he had been harboring some pent-up feelings that he could no longer contain. When asked an innocent question about the investing books he likes to read, the mention of Buffett sent Loeb into a rant that left no question as to his feelings.
He began his brief tirade diplomatically by saying that Buffett “has a lot of wisdom, but I think we need to be aware of the disconnect between his wisdom and how he behaves.” He then went on to point out the hypocrisy of his statements. “I love how he criticizes hedge funds, yet he really had the first hedge fund. He criticizes activists. He was the first activist. He criticizes financial-services companies, yet he likes to invest with them. He thinks we should all pay more taxes, but he loves avoiding them.” Buffett has yet to respond to Loeb’s observation; however, there may be more truth to Loeb’s claims than he would like to admit.
Buffett’s History of Trash Talking Hedge Funds
Buffett has made no secret about his disdain for hedge funds. He has repeatedly criticized the industry over its high fees and compensation structures for hedge fund managers, complaining they are paid for non-performance. He has also come down on the aggressive hedge fund strategies that introduced high-frequency trading and short-term volatility into the markets. His criticism of the aggressive tactics of activist investors also did not endear him to Loeb.
It is not just Buffett’s rhetoric that has raised the ire of hedge fund managers. In 2008, he made a charity bet with a hedge fund manager for $1 million of his own money that a low-priced index fund tracking the S&P 500 could outperform a portfolio of hedge funds over a 10-year period. The winner of the bet gets to select a charity to receive the money. Recently, at his 2015 annual shareholders meeting, he disclosed that the Vanguard 500 Index Fund has gained 63.5% while the hedge fund portfolio is up just 19.6%. It’s not difficult to imagine that hedge fund managers everywhere are seething over Buffett’s joy.
Is Loeb Right about Buffett’s Hypocrisy?
Loeb is a student of investing and, despite his comments, he is an admirer of Buffett. His claims were not pulled out of thin air. Upon closer examination of his claims, a case could be made that Loeb was more right than wrong with most of them.
Buffett as a Hedge Fund Manager
With regards to Loeb’s claim that Buffett was one of the first hedge fund managers, he is most likely referring to Buffett Partnership Ltd., which Buffett started in the early 1960s on behalf of a group of limited partners that included family members. It was structured like a hedge fund, with Buffett keeping a quarter of the profits based on a performance threshold. Buffett dissolved the partnership in 1969.
Buffett As an Activist
Some of Buffett’s earliest investments were large stakes in companies in which he took active roles in influencing management policies. His first was Dempster Mill, a manufacturer of farm equipment and water systems. He started acquiring the stock at $18 a share when he valued the company closer to $72 a share. Buffett sat on the board of directors, and when he became frustrated with the company’s profit picture, he increased his stake to 70% and had the management team replaced.
In 1965, he bought a majority stake in Berkshire Hathaway, which, at the time was a struggling textile mill. He appointed himself director of the company with the intent of turning it around, but it eventually closed. Buffett turned the company into a holding company, Berkshire Hathaway Inc. (NYSE: BRK.A), which now has assets of more than $350 billion.
There have been a couple of other companies in which Buffett exerted financial influence. The key difference between his activism and Loeb’s is that Buffett never expected to sell his stakes immediately. He has always been a buy-and-hold investor.
Buffett’s Love of Financial Companies
Buffett has often criticized banks and other financial institutions as being full of “a lot of mouths with expensive tastes” who engage in financial engineering to inflate earnings artificially. The hypocrisy seems almost laughable, considering some of Buffett’s largest holdings are banks.
Buffett made a huge investment in Bank of America Corporation (NYSE: BAC) at a time when the country was threatened by the nefarious activities of some investment banks and the unsound lending practices of the major banks. In exchange for a $5 billion infusion, Buffett received $5 billion of preferred stock plus 700 million warrants to purchase Bank of America common stock at $7.14 per share. As of Feb. 16, 2016, the stock is worth $12.24 per share. In addition to the $300 million in annual dividends he has collected, his investment in Bank of America is now worth more than $11 billion.
Buffett the Tax Avoider
Buffett has repeatedly said that he and other billionaires should pay more taxes. However, between his personal income and Berkshire Hathaway’s income, he has readily found ways to avoid paying any more taxes than is absolutely necessary; as he has lamented on many occasions, he pays taxes at a lower rate than his secretary.
His economic patriotism doesn’t seem to extend to his business dealings, either. Not long after he publicly criticized companies that practiced tax inversion, he championed a deal in which a Canadian company, Restaurant Brands International, Inc. (NYSE: QSR), bought Burger King.
For all the disparagement and criticism Buffett has laid upon the hedge fund industry, there has been little if any response. Loeb may have expressed what many hedge fund managers have been feeling for a while. The truth in Loeb’s remarks may have cast doubt on Buffett’s credibility.
Read More: Investopedia