Tag: berkshire hathaway

Could the Next Berkshire Hathaway Be a Meme Stock?
investing

Could the Next Berkshire Hathaway Be a Meme Stock?

SJLeave a comment

An investor being called “the next Warren Buffett” is a lot like an athlete gracing a magazine cover or a company slapping its name on a stadium. And it isn’t just a prelude to a stumble–compiling a track record as good and long the Oracle of Omaha’s is basically impossible.

But what about turning a company into “the new Berkshire Hathaway?” There are and have been a handful of stocks that have served investors very well as pools of patient capital such as insurer Markel, cable baron John Malone’s various entities and some now-defunct conglomerates with roots in the 1960s.

Before last week, money-losing videogame retailer GameStop seemed like a pretty unlikely addition to that short list. Its meme-inspired shareholders have the attention spans of fleas and the company’s C-suite resembles a revolving door as it heads for its sixth consecutive year of losses. 

Yet the board’s recent decision to allow Chief Executive and Chairman Ryan Cohen to invest the company’s cash in stocks–a step one analyst called “inane”–has invited Berkshire comparisons that aren’t completely off-base. The textile company that became Buffett’s investment vehicle was itself a lousy business. Buffett eventually threw in the towel on those operations, using the company’s excess cash to earn early investors 40,000 times their money.

Cohen certainly has a, um, different approach than Buffett, but he has shown a knack for buying low and selling high. He mainly bought his GameStop stake before “Roaring Kitty” helped send its shares to the moon, accumulating most of his 36.8 million shares in mid-2020 for about $30 million. Less than a year later, with the stock still elevated from a historic squeeze, the company sold a split-adjusted 20 million shares, raising $1.67 billion in an at-the-market offering to its enthusiastic retail investors. The stake owned by his holding company, RC Ventures, is still worth close to $400 million.

More recently, RC Ventures invested $120 million in Bed Bath & Beyond and pushed for changes and board representation. Individual investors dove in, despite the company’s well-documented risk of insolvency. Cohen then sold his entire stake months later for a quick profit of nearly $60 million prior to its bankruptcy filing.

Stocks tend to rise when news breaks of Berkshire taking a stake, but those gains pale in comparison to when a meme stock CEO makes an investment. For example, in 2022 nearly-defunct gold miner Hycroft mining surged by more than 600% after movie chain AMC Entertainment Holdings took a stake. So why not ride the coattails of an investor with social media street cred and an apparent Midas touch? 

An obvious reason is that convincing people to buy overvalued stocks isn’t an infinitely repeatable exercise. Buying undervalued ones can be, but it often takes years to be proven right. Attracting sufficiently patient shareholders has been challenging even for Buffett, who has been prematurely accused more than once of “losing his touch.” Is the YOLO trader crowd going to stick around after a few bad years?

If not, he needs different shareholders. But they’ll have to trust him. Cohen, who faces a Securities and Exchange Commission probe into his Bed Bath & Beyond trading, hasn’t been accused of wrongdoing. The fact remains, though, that in order to earn his big scores in publicly-traded stocks, thousands with less money and sophistication had to lose. That could make it hard both to raise more cash in public markets or to pursue the sort of handshake deals Buffett has made over the years.

Even after losing more than four-fifths of its value since its Jan. 2021 heyday, not a single analyst polled by FactSet recommends buying GameStop’s shares. Of course the lesson of the meme stock explosion was that the approval of serious people in boardrooms isn’t always necessary or even desirable to make money in the stock market. And don’t forget the people who earned some of those people’s ultimate compliment–comparisons with Warren Buffett–when riding high: Michael Pearson of Valeant Pharmaceuticals, Eddie Lampert of Sears Holdings and Sam Bankman-Fried of FTX.

So clearly Wall Street isn’t always the best judge of character. Even so, Cohen will have to put up some impressive gains to even enter that conversation and they’ll have to accrue to his public shareholders, not him personally.

The Curse of Star Managers
Columns · investing

The Curse of Star Managers

SJLeave a comment

I edit more and write less these days, but even when I do write I often forget to link to it here. I’ll try to be better in 2021.

One thing I wrote recently generated an unusual amount of reader email, split about 40-60 between congratulatory and outraged. I said that star fund managers are to be avoided and I used the example of Cathie Wood, whose main exchange traded fund at ARK Invest grew assets by 1,000% last year and gained nearly 160%. She bet big and won on hot stocks like Tesla and biotechs that benefitted from Covid-19 speculation.

I am apparently a misogynist or don’t understand her genius or both. Anyway, the evidence is pretty strong that jumping on the bandwagon once a fund manager graces magazine covers isn’t a great idea whether that manager has a “Y” chromosome or not. You can read more about managers like Ken Heebner and Bill Miller in my book.

The column starts out with a “famous last words” puff piece from The Motley Fool titles “Move Over, Warren Buffett : This Is the Star Investor You Should Be Following.”

So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the “Buffett is done” theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.

Ms. Wood is a savvy businesswoman, but is she a savvy investor? Stock picking skill is very rare and even harder to discern when the manager is riding a hot category. In a bull market propelled by dumb retail money, everyone is a genius. It takes many years to establish whether success is random. And, as I point out, star manager’s performance is often worse than random on the downside. The most promising active funds are those that lagged their peers recently or got a low rating from a firm like Morningstar.

Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds’ performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years—less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.

Anyway, the tone of the emails has made me more convinced that some investors in “disruptive innovators” have lost touch with reality. Congrats if you were early — the fund’s performance is pretty impressive (see chart below) — and be careful if you were late.