Berkshire Hathaway to Benefit from AT&T deal

Every year investors make the pilgrimage to Omaha, Nebraska in order to attend the annual meeting at Berkshire Hathaway. During the event there are roughly 30,000 people cramming into the Century Link Center each year, where Charlie Munger – Warren Buffett’s right-hand man – and the Oracle of Omaha himself answer shareholder questions for a six-hour session. People can ask questions about anything. You could ask about pop culture, politics, sports or business because everything is fair game.

Buffett does not really answer two specific questions to anyone’s particular satisfaction, and they are: When will the 83-year-old Buffett retire and who is going to replace the magnanimous investor?

Ted Weschler and Todd Combs have significantly raised their chances if judging by AT&T’s planned acquisition of DirecTV for $48.5 billion. The portfolio managers at Berkshire Hathaway have purchased 34.5 million shares of DirecTV since 2011, at prices much less than Monday’s closing price of $84.65 per share, and even further less than the AT&T cash and stock offering of $95 per share in order to purchase the satellite company.

To put it a different way, Berkshire Hathaway is making a killing off of this deal.

“DirecTV has worked out real well for them,” Donald Ingham says, and he is a Tenth Avenue Holdings portfolio manager who follows Warren Buffett closely. “Berkshire is getting a full price for the business from AT&T.”

If you do not believe that one great deal makes Weschler and/or Combs the potential successor for Buffett, understand that these guys have been kicking butt. They both beat Buffett’s picks and the S&P 500 last year.

“I must again confess that their investments outperformed mine,” wrote Buffett in his most recent letter to shareholders. “Charlie Munger says I should add ‘by a lot.’ If such humiliating comparisons continue, I’ll have no choice but to cease talking about them.”

“Todd and Ted have also created significant value for you in several matters unrelated to their portfolio activities,” continued Buffett. “Their contributions are just beginning: Both men have Berkshire blood in their veins.”

Portfolio Manager Confidence

The deal with DirecTV shows that he did not put misplaced confidence in his portfolio managers. For starters, Buffett would never purchase shares of DirecTV on his own. Buffett is quite famous for avoiding technology stocks altogether. Some people may make the case that Verizon (another Berkshire Hathaway holding) and DirecTV act more like utility companies, and the shifts in the way that people now consume media make them more akin to Netflix than PG&E.

Buffett gravitates more naturally toward “mature” undervalued industries with business models that he can easily understand, such as Burlington Northern Santa Fe for railroads, Geico for insurance, Coca-Cola for pop and the Omaha World-Herald for newspapers.

Buffett has given Weschler and Combs free reign as to how they manage their $7 billion Berkshire Hathaway portfolio. Given the DirecTV success, expect the company to begin moving further into buying stocks outside of the comfort zone of Warren Buffett.

“DirecTV makes them look a lot better in the eyes of Buffett,” said University of Maryland professor of finance David Kass. “They are proving themselves over and over again.”

Wider Stock Range

No one is saying that Berkshire Hathaway is going to buy shares of Facebook or Google anytime in the near future. But the success of Weschler and Combs suggests that Buffett can no longer ignore the overall stock universe forever, especially as the high-tech firms in Silicon Valley account for a much larger stake of the economy in America.

“In years ahead, Berkshire will buy stocks that Buffett would never touch,” said Kass. “It’s unlikely Buffett would have invested in DirecTV. Buffett is preparing investors for a transition” to a time when he is no longer calling the shots in the near future.

Throughout the years, there has been no shortage of amateur and professional investors looking to mimic the no-frills, just the facts stock picking strategy of Warren Buffett. In his typical style of self-deprecation, he encourages everyone to believe that anyone could technically replicate his success.

“You don’t need to be an expert in order to achieve satisfactory investment returns,” wrote Buffett. “But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no.’”

That sounds great in theory. But the truth is there is only one Warren Buffett, so his success and strategies will likely go with him when he finally calls it a day.

So it’s not surprising that Buffett is going to open up Berkshire Hathaway to alternative approaches to investing, like those of Weschler and Combs.

“You are starting to see some personalities emerge,” said Ingham. “Once Buffett retires, you will likely see two, three, four people run Berkshire Hathaway instead of one.”

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