New York Times columnist Neil Irwin offers an interesting take on the success of Warren Buffett's Berkshire Hathaway.
Academic experts agree that conglomerates are "an awfully inefficient way to organize businesses," he writes. Yet Berkshire, one of the biggest conglomerates of them all, is a raging success. So what gives?
Buffett essentially said in his annual shareholder letter http://www.berkshirehathaway.com/letters/2014ltr.pdf last weekend that Berkshire is "better at deciding the appropriate allocation of capital among different potential investments than the entire infrastructure of the modern financial system," Irwin explains.
Buffett cites another reason for his company's success too in the letter. "We are now the home of choice for the owners and managers of many outstanding businesses," he notes.
Irwin's translation: "If you are a family looking to cash out of a business but want to leave the company intact and keep longtime employees in place to run it, selling to Berkshire Hathaway looks mighty attractive."
Meanwhile, Buffett offered a spirited defense of Berkshire's investment in IBM during an interview on CNBC.
The company's earnings have sagged, and its stock has generated a negative annual return of 4.7 percent over the last three years. Buffett's Berkshire Hathaway owned 7.8 percent of the company's shares as of Dec. 31.
"It's been doing exactly what I like ever since we started buying it a few years ago,"
Buffett tells CNBC. "People have this misconception that when we buy a stock, we want it to go up. That's the last thing we want it to do."
He may be referring to the fact that until Berkshire is finished buying shares, it wants the stock price to fall, so it can buy at lower levels.
"There were 1.16 or 1.17 billion shares outstanding when we started buying and a fair number of options out there — maybe 40 million shares or something like that. That overhang has been reduced significantly and the number of shares is 990 million," he explains.
"I actually wrote a couple of years ago when we bought it that the best thing that could happen is if the stock did nothing for five years because they [IBM] were going to buy back a lot of stock. And the cheaper they bought it, the more shares they bought." This has the result of increasing the stake Berkshire has in the company.
If a company is buying its own stock, as most of the companies Berkshire invests in are doing, "our interest in the company is increasing day after day and if the company is buying it, we're not laying out a dollar. If we're buying it we're laying out some money, but we're buying it cheaper. And I like buying anything cheap," Buffett notes.
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