Warren Buffett, the world’s most venerated and successful investor, is the first to admit that the mind-boggling wealth creation he has achieved with his investment vehicle Berkshire Hathaway over the years is due to the phenomenal growth of US companies in the last 50 years and the economic prosperity of the US after World War II.
What he does not say is that he and a small team of colleagues, since putting up shop more than 50 years ago, have outwitted the performance of American stocks by 2.5 million per cent – a triumph of stock picking over index investing, one could argue.
Since June 1990 the Standard & Poor’s index of the biggest US corporations has gained more than 300 per cent in value. Berkshire’s share price has multiplied in the same period from $7,100 to $304,115 at the time of writing, a gain of 4,183.31 per cent. Throughout the years Buffet has invested in businesses he “understood”, as he never grows tired of emphasising: everything from financials to Coca Cola to railways.
He was therefore late to invest in the new economy. Amazon and Apple were very recent investments, not so much driven by the wish to unearth hidden value but by the need to handle an increasing mountain of cash, parked predominantly in US treasuries.
For the whole of its existence Berkshire had religiously reinvested every earned penny, never paying dividends, never returning cash to his shareholders through buy-backs. The result is a problem we’d all wish to share: what to do with a wealth of $730 billion of assets, including $110 billion in cash and a daily income stream exceeding $100 million?
Good deals are increasingly hard to come by. And even a juicy 50 per cent return on a $1 billion investment would not visibly move the performance needle of Buffett’s investment empire. A change in accounting rules has more devastating effects on his balance sheet than an investment gone awry, which is rare at Berkshire: in the absence of profitable opportunities Buffett and his lieutenants prefer to stand by idly, sometimes even for years, hoarding cash rather than splashing it out on only moderately successful investments.
A growing dearth of large-scale investment opportunities led Buffett to partner with 3G Capital, a New York Private Equity company owned by Alexandre Behring, Jorge Paulo Lehmann and Bernardo Vieira Hees. The three Brazilians, who like Buffett only have a small crew of trusted employees, have spent $480 billion over the last years gobbling up assets all over the globe, owning Burger King, Kraft, Heinz and Anheuser-Busch InBev, the world’s largest beer brewer.
In 2017 the trio tried to take over the Anglo-Dutch consumer behemoth Unilever for $143 billion. The corporate raiders share Buffett’s belief in the indestructibility of strong consumer brands, but not so much his hands-off trust in existing management.
Once a company is firmly in their hands they replace management with their own mercenaries and extract profit with crippling cost cuts and by loading their prey with staggering debt. Loans are taken out to pay dividends rather than to invest in marketing or product development.
Food companies could be a good place to weather the storm. Yet it will be fiendishly difficult to separate winners from losers
With Buffett’s money and seal of approval the companies Heinz and Kraft were taken over and merged. Formidable brands like Philadelphia Cream Cheese, Heinz Ketchup, Kraft BBQ Sauce and Capri Sun juice were squeezed for every drop of profit. The thinking was that like Buffett, who lived for all his life on a diet of French fries, chicken nuggets and Coca Cola, people would cherish these brands forever and supermarkets would have no choice but to stock them at any price.
Well, it did not work out that way. Brands don’t flourish on a zero budget diet. Even food brands need nourishment, as it turned out. Without influencers, big ticket ads and permanent reinvention they turn stale pretty quickly. In the last 20 years consumers became more confident and more discerning. They realised that coffee could actually taste better than Maxwell House, that Capri Sun was perhaps not as healthy as freshly squeezed orange juice and that Easy Cheese was perhaps not quite cheese.
For those of us who have a hard time getting by, with stagnant wages and relentlessly rising living costs, our supermarket’s private labels offer a good alternative. It’s the same cornflakes, the same biscuits and the same washing powder we used to buy, just the brand has been replaced with the retailer’s logo. It would be foolish to buy yesterday’s brand more expensively when the same or even better stuff can be had for less money. For the affluent, organic, freshly made and artisan food will have increasing allure. Even environmental and governance issues are progressively influencing our shopping behaviour.
Brands dismiss such trends at their peril. We want less plastic, food less travelled, animals to be happy, and the planet safe. Once we eat less meat, the A1 Steak Sauce becomes redundant.
Food is a fashion item too. We want quality stuff competitively priced – once in while we may splash out on an expensive handbag but otherwise we prefer to shop at Zara’s. Brands which are neither exclusive nor wholesome will eventually lose out. The Kraft Heinz Company lost big time. The company is worth less today than its initial components.
3G had to write down $15 billion dollars brand value. Accounting irregularities further diminished trust in 3G’s managerial abilities. The stock is worth less than half its valuation at the time of the ill-fated buy-out and merger. Buffett lost $2.7 billion on the deal – a rare failure for the 88-year-old, who is used to lending billions in a blink: in times of distress to the investment bank Goldman Sachs at a whopping 10 per cent interest and at eight per cent to the oil company Occidental when it lacked the cash for the takeover of competitor Anadarko.
Shareholders of Unilever can rejoice that they have been spared the fate of Heinz Kraft. Their CEO Paul Polman had put up a fierce fight for independence, and Buffett demurred.
We retail investors will face difficult choices. Food brands are ‘defensive’ investments. They still carry the day even when the economy goes into reverse. We are increasingly confronted with the scares of a late-cycle bull market: a flat yield curve is indicating if not a crash then at least diminished economic activity in the future. The economic war the US is waging not only against China but, as it looks, against pretty much every other country on earth, is disruptive for supply chains and world trade. Technology companies, exporters and multinationals in general will be less profitable without the Chinese market.
Food companies could be a good place to weather the storm. Yet it will be fiendishly difficult to separate winners from losers. Will Benetton ever be successful again? Will Sony rise? Anyone remember Blackberry? Sadly, financial advice and figure crunching will only get you as far as screening past failures rather than predicting product appeal in the future. The possible success of a gourmet chocolate, a healthy insect snack or a plant-based meat substitute is, like the foodstuff itself, a matter of personal taste.
Investing in eatables companies is a little like investing in art. If you like it, stick to it. After all, this is what Buffett has done for his whole life. And he has fared way better than we ever could.
The next time you grab a hamburger try, perhaps, the Impossible Whooper. It looks like a burger, tastes like a burger. It even bleeds like a burger, albeit beetroot juice. It is totally plant-based, kosher, halal, does not deforest the Amazon and does not need methane-flatulating cattle cruelly slaughtered for human consumption. If you and few friends can swallow it, it is perhaps a good time to invest in Beyond Meat or Impossible Food.
If not, stick with Heinz Ketchup. It has been around since 1876. If we are lucky, 3G, groaning under a burden of debt, might be even forced to divest it.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com