DealZone

How to get a job in business? Short Buffett

March 17, 2010

Raj Rajagopal will graduate from business school in May and he’s currently looking for a job. But don’t expect the Cornell University student to get a call anytime soon from Warren Buffett.

That’s because Rajagopal recently put together a report in which he recommended selling shares of Buffett’s Berkshire Hathaway in part because “adoration is not an investment strategy.” In short, Rajagopal said anyone who sinks money into Buffett’s empire is chasing past returns and buying shares “at the tail end of his career.”

Rajagopal’s 15-page presentation is making the rounds on Wall Street and being circulated by some hedge fund managers who aren’t particualy big fans of the so-called Oracle of Omaha.

The presentation points out some common criticism of Buffett’s company, including the failure to develop a clear succession plan and the firm’s seeming reliance on a handful of individuals to make investment decisions.

But the report prepared by Rajagopal, who was a former Wall Street analyst according to his blog, also accuses Buffett of being a bit of a hypocrite on the subject of derivatives. He notes that Buffett famously decried derivatives as a “financial weapon of mass destruction,” yet continues to use them as part of Berkshire’s investment and hedging strategy.

Rajagopal, who could not be reached for comment, also blasts Berkshire’s most recent big deal–the $34 billion acquisition of railroad giant Burlington Northern. He said Buffett overpaid for a “boring” regulated utility company.

But what’s more likely to grab attention are some of the sharp zingers aimed at Buffett and his financial empire.  One such line is: “The buffet is cold, stale and ending (pun intended).”

Clearly, Rajagopal isn’t interested in getting invited to any dinner parties hosted by Buffett–something the legendary investor has been known to do with people who send him investing tips.

Comments
25 comments so far | RSS Comments RSS

Unfortunately, Mr. Rajagopal’s short thesis is seriously flawed. For a contrary view, see the following article:

http://www.rationalwalk.com/?p=5822

Posted by rnagarajan | Report as abusive
 

Raj Rajagopal doesn’t sound any different than Jim Cramer, who recently appealed to sell “block” of shares in Kraft Foods; while Kraft was pursuing the take-over of Cadbury.

Posted by Jane10 | Report as abusive
 

Notice that the previous post refers to an article posted on an extremely biased Website that does not admit any comment or reply… This is indirect censorship and it should not be tolerated by Reuters.

Posted by FSLreader | Report as abusive
 

We have no reason to believe Buffett has not got a more time at the helm, and he has something a recent graduate DOESN’T have – EXPERIENCE. For an investor who looks to the long-term returns, lightning-fast reactions aren’t necessary – what matters is a sound mind and a willingness to learn. And just because he doesn’t publish his preference for successor, does not mean he has not made any preparations… It probably just means he’s biding his time and gathering as much information as possible before making his final judgment.

It has been said – “You young folks should remember that we old folks know more about being young than you do about being old.” Rajagopal would do well to remember this.

Posted by compsci | Report as abusive
 

Someone at the beginning of his career criticizing another at the end of his? I mean has he made his first million from investments yet? Seriously, what is this article doing on this website?

Posted by Tical | Report as abusive
 

Tical, so according to you, I have to be older and richer than George Bush Jr. to criticize him and his policies. I am sorry but your comment doesn’t make any sense. Good advice can come from any where, Rajagopal doesn’t have to make a million before he can find flaws in Buffett!
He should be judged based on what he is suggesting, not where he is coming from and who he is criticizing?

Compsci, Warren Buffett wasn’t always old and rich….Wikipedia tells me he used to sell gum and magazines from door to door. I am sure he took some oldies down on his way to becoming a billionare.

Remember old ideas have to challenged by young blood in order for the society to find a new and better direction.

Posted by reusam | Report as abusive
 

Unimpressed with the “Rational Walk” rebuttal.

Posted by Medici | Report as abusive
 

“Notice that the previous post refers to an article posted on an extremely biased Website that does not admit any comment or reply… This is indirect censorship and it should not be tolerated by Reuters.”

If Mr. Rajagopal wishes to rebut my review of his thesis on my website, The Rational Walk, I would be pleased to offer him that opportunity and will print his comments in full along with my response.

http://www.rationalwalk.com/?p=5822

Posted by rnagarajan | Report as abusive
 

Mr. Rajagopal may compare his own experiences in Cornell University, although he’s yet to graduate, with that of Warren Buffett, after August 1947, when he joined Wharton Business School and his nostalgic(?) experiences there, and our graduate student may read it from Mr.Lowenstein, Roger’s book on ‘Buffett’, wherein he wrote:
‘His professors had fancy theories but were ignorant of the practical details of making profit that Warren craved.’
So, an accredited graduation, from Cornell or any business schools, by itself won’t make one a successful investor.

Posted by Jane10 | Report as abusive
 

Calling a business boring is dumb. If it makes you money it makes you money. If you overpay, that’s another thing.

Of course, if you put money into hot hands, and the hands disappear, what do you do? That is a valid criticism.

Having a few key people make investment decisions is not necessarily a bad thing. Layers of bureaucracy doesn’t help with making swift and profitable business decisions. It usually increases risk aversion to an intolerable level.

Buffet makes money. To paint him as incompetent is a caricature that exaggerates the flaws without contrasting them with the more subtle beauty that belies what is at times a sophisticated art form.

The paper, circular, manifesto, whatever it is besides a company analysis, has the ring of angry gossip. Although I question where the anger came from, I would be more inclined to question the person or group that would hire someone capable of making such one side comments in such a public forum.

Posted by odaselementales | Report as abusive
 

BBC News – Cornell University on alert after suspected suicides

I am not saying, but it could happen.

http://news.bbc.co.uk/2/hi/americas/8573 343.stm

Posted by tmarket | Report as abusive
 

Buffet is a smart guy who has gotten so darn lucky…

Posted by Story_Burn | Report as abusive
 

It is not Buffet’s way to buy “sexy” companies. Considering Burlington Northern “boring”
and therefore unattractive is very much against the grain of Warren’s strategy. Is Dairy
Queen “sexy” ?
It is very easy to find faults in people who are successful. Does Mr. Rajagopal have a multi decade tract record of investment success ? I think not, and until he can show some “proof in the pudding”, I think he should keep his mouth shut. The naiveness and arrogance of young turks in their twenties can at times be so annoying. They are all out for a quick, large, short term gain.

Posted by michaelmoore | Report as abusive
 

I sort of agree.. I have followed Buffet for some 30 years making suggestions through Denham, former Chairman of Salamon Bros. I even tried to sell his preferred stock position some 20 odd years ago to UBS..Buffet is the best “risk insurance” man. His “pricing” is on a negative payout basis, meaning 95% of the premiums he collects are pocketed and never paid out. It is this “free cash” that he invests in preferred stock of GE, GS, and equity in Coke et al.. No one comes close.. He only takes equity risks in staid businesses that he understands.. Derivatives the paper criticizes he profits from collecting premiums. He does not delegate because he cannot find someone with his knack for “pricing” insurance products… save one.. perhaps… that Indian he hired a few years ago..

Posted by Bludde | Report as abusive
 

Although this may not be politically correct, I might also add that that this kind of investment savvy is typical of the child of a first generation immigrant.

Posted by michaelmoore | Report as abusive
 

@Reusam, It’s easy to criticize anyone you want, especially after the facts. So yes, I prefer criticism from the experienced. Tell me more about what you did differently, not what you would have done.
No one is perfect so you can find flaws in even the best of us. The question is how does Mr. Buffett fare relative to his peers?

Posted by Tical | Report as abusive
 

Could he be right? Berkshire, papa or baby could find themselves holding shards of glass against the tight skin of the economic bubble. the wealthy will sell to hold onto the persona of wealth.

Posted by Rottin1 | Report as abusive
 

Who the heck is Raj Rajagopal and why do we care? Why did Reuters choose to give a college graduate media exposure. As far as I’m concerned his comments aren’t newsworthy. I’d rather here what a Professor or an experienced investor has to say. I think Raj is simply trying to get attention so he can get a job. However, I’m more concerned as to why Reuters feels he deserves media attention. So what if he has a blog, thousands of graduates from Cornell have blogs. I hope favoritism isn’t involved here.

Posted by Blackbird1996 | Report as abusive
 

2nd Amendment. would you prefer censorship?

Posted by Rottin1 | Report as abusive
 

@Tical: You just asked, “…how does Mr. Buffett fare relative to his peers?”
You should be able to read something on this gentleman and his accomplishments and spectacular achievements since he (Mr. Buffett) joined Graham-Newman Corp; and then you will realize how he fares… and it seems, for some, ignorance could be a virtue(?) to get cheap publicity.

Posted by Jane10 | Report as abusive
 

To the substance – succession plan and hypocrisy. The results of the former remain to be seen and, although we are all guilty of the second at one time or another, some of Buffetts are doosies. Beyond the one case cited by Rajagopol, one of Buffett’s favorite dicta is “Never invest in something you don’t understand”.

Well, consider General Re – a previous major investment of B.H.’s and the following from AP in Jan of last year. “Ronald Ferguson, the former chief executive of General Re, was sentenced in December to two years in prison and fined $200,000 for his role in the fraud. Three other former Gen Re officials await sentencing. They are former senior vice president Christopher P. Garand, former chief financial officer Elizabeth Monrad and former senior vice president Robert Graham. General Re is part of Berkshire Hathaway Inc., which is led by billionaire investor Warren Buffett of Omaha.” The details of who Gen Re was helping and how are not suitable print on a G-rated news site

And presumably, this is the same W. Buffett that was held up by Obama (and other devotees in the Cult of the Tycoons) as a uber guru and as a principle adviser in wending our way through the current financial debacle.

Now, either Buffett understood what he was investing in over all those years or his dicta are no more than a mid-western version of Dixie which he whistles all the way to the bank.

And, like Rajagopol, I too am a just a college graduate – but, in econ and having watched such things unfold for over 40 years.

Posted by Jack2010 | Report as abusive
 

It should be noted that Mr. Buffet already owned a significant portion of Burlington. In the transaction where he acquired the remainder of it, he actually paid himself a portion of the proceeds. The advertised price was not his out of pocket. Always interesting.

Posted by jrg | Report as abusive
 

It is amazing: Some kid that hasn’t even finished grad school starts taking pot shots at one of the most successful businessmen of current times, and it becomes a media event worthy of publication on one of the world’s leading intl. news websites. Why? It only goes to show the anger Warren Buffett has generated by being so right about so many things that have gone wrong in the world of corporate finance & banking. We have a cadre of over-paid idiots and their lieutenants that are still in charge after they brought the world economy to the brink of ruin. Then some school kid taps into their sense of bitterness (for so clearly being proven wrong) and he becomes a instant (but forgettable) media hit. All of this media noise is a good measure of just high right Warren Buffett is about the folly of normal practices in our current financial system.
Good for you Mr. Buffett!

Regarding Mr. Buffett’s interest in buying one of those old foggey train companies: My guess is that he knows that fuel costs are just going to keep going higher and higher, so he may have asked himself, “How much future growth can be expected within the most cost efficient and fuel efficient system for transporting massive amounts of goods across a large continent?” When the IT industry finally empowers us to download railcar loads of fresh produce through the internet, then the railroads will have to worry about competition from alternative technologies. Until then, we as a nation have no option but to continue developing our nation’s railways….

Posted by HAP | Report as abusive
 

‘J.P. Morgan sees better profits for railroads’

It requires vision and wisdom, for somebody who should have seen things in its right perspective, than bent on just parochial publicity…

Posted by Jane10 | Report as abusive
 

Mr. Rajaopal’s comments read like those of a jealous newbie speculator, who thinks he can do better.

It lacks any understanding of how the Berkshire Hathaway business is structured, the investment philosophy or anything that relates to the generation of cold hard cash.

No, you’re not going to see 24% compounded returns into the future and Buffet has said as much. If this Rajagopal character did even a basic free cash flow analysis on the company and realised that Buffet is ultimately about generating cash, and returns on that cash he would realise that Berkshire Hathaway is not that expensive at the moment, it’s not super discounted either. That’s assuming the business will grow at around 7% into the future.

As for railways did Rajagopal even bother to read the basics from Security Analysis by Benjamin Graham? If the right proportion of cash is reinvested into a railway and it’s not overburdened with debt, during its lifetime, it can be very profitable. Buffett has bought an extremely well run railway here and what’s more with petrol running out (don’t kid yourselves it’s not) he will see some very satisfactory returns.

This Rajagopal is obviously from the Wall Street school of short termers and speculators, whose stock in trade is the “latest thing”, management rhetoric and other meaningless BS. It doesn’t surprise me that it’s circulating around the seedy haunts of the hedge funds.

I don’t own Berkshire stock but I admire the business and its CEO, that admiration is based on concrete facts and won’t be swayed by jealous no marks like this.

Posted by Jay-98765 | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/