A failure of good sense and judgment

The most damaging aspect of the Warren Buffett-David Sokol sharedealing episode to my mind is not the issue of who said what to whom and when, or even whether Mr Sokol’s behaviour was illegal: the latter’s actions surely fail in the court of good judgment, regardless of the precise legalities of the situation.

More worrying for any long-standing Buffett admirer is the evidence that his latest big idea was sourced from a list of potential targets supplied, in the first instance, by a corporate financier at Citigroup, from whom Mr Sokol originally got his idea.

By his own admission, according to the Berkshire Hathaway audit committee report, Mr Buffett admitted not knowing enough about the lubricants and additives business to form his normal, more or less immediate, judgment on the merits of a deal.

It was only after a couple of briefing sessions with the chief executive of Lubrizol that he felt sufficiently confident about the economics of the business to proceed with the company’s $7bn takeover offer.

Of course, nobody disputes that the ultimate decision on any Berkshire Hathaway acquisition is Mr Buffett’s, and his alone. But investing in a business he did not find himself, may not initially have fully understood, and using a shopping list prepared by an investment banker is questionable.

These revelations undoubtedly remove a little of the aura of sublime and effortless decision-making that has long surrounded the methods of the world’s greatest investor. It is further evidence, I suspect, of the way that Berkshire Hathaway’s size is now making it harder to find the deals Mr Buffett could once dream up from his own circle of competence.

Whether the long-term impact of the Sokol affair is serious or not depends, in my view, mainly on how well the Lubrizol takeover works out. If the deal turns out to be a turkey, the ramifications will be much greater than the short-term questions about Mr Sokol’s behaviour. By then the questions will be about Berkshire’s investment process and Mr Buffett’s usually superior investment judgment, not about the lesser issue of the initially indulgent way he appears to have treated his former underling, which comes as no surprise to anyone who has followed the man and his methods for any length of time.

● The latest Quarterly Letter, from Jeremy Grantham, founder and chief strategist of global asset manager GMO, warns of the risks of a quantum leap in the cost of natural resources and is one of his most powerful yet, but its forceful tone should not come as a surprise.

Although he has worked in the US for more than 40 years, Mr Grantham is fiercely loyal to his roots in the English county of Yorkshire.

His family came from Doncaster and for a short while he worked as a bedpan salesman for his stepfather’s medical equipment business, before moving on to Shell and Harvard Business School, and his subsequent career in investment management.

Throughout his life he has remained an advertisement for two qualities strongly associated with the county of his birth: outspokenness and a marked carefulness with money.

“By background I am both a Quaker and a Yorkshireman, which I like to call double jeopardy,” he told me a few years ago in an interview.

By that he meant that the spirit of “waste not want not, calling a spade a spade, not gilding the lily, and so on,” is ever present in his life.

His latest offering is notable because it contains a remarkable sighting for Grantham-watchers: a second “paradigm shift”, which if it proves true will have profound investment consequences.

This paradigm shift, the concept made famous by Thomas Kuhn, stands in opposition to the principle of “mean reversion”, the rock on which Mr Grantham’s style of value investing rests.

His research team at GMO has analysed every significant asset price bubble it could find in financial history, and claims to have found only one exception to the rule that bubble-priced assets must in due course revert to their longer-term mean.

The first paradigm shift was oil, which moved permanently to a higher price range after the 1970s. The new addition is, in effect, an extension of that idea. The supply of natural resources demanded by a growing world population, says Mr Grantham, is threatening once more to run up against the limits of human ingenuity. The result, he warns, will be an impending quantum change in their price – “perhaps the most important economic event since the Industrial Revolution” – although not, he suggests, before some kind of blow-out as China slows down and the wave of speculative interest in commodities comes juddering to a temporary halt.

The change may even be imminent – George Soros is reported to have sold all his gold and Goldman Sachs has turned bearish on commodities – but it is the fate of dyed-in-the-wool value investors such as Jeremy Grantham to be treated as Cassandras, however powerfully argued their long-term thesis may be.


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