David Rolfe hasn’t lost his admiration for Warren Buffett, but he has lost patience with him.
Rolfe, the chief investment officer at Wedgewood Partners in Ladue, had a sizeable investment in Buffett’s company, Berkshire Hathaway, for most of the past 21 years. He was often quoted in news articles as a Buffett admirer.
Berkshire was usually among Wedgewood’s top three stock picks, and early this year it represented nearly 9% of the firm’s $2.2 billion portfolio. Rolfe and his team trimmed their Berkshire holdings in the second quarter, and sold the rest in the third quarter.
In a recent report to investors, Rolfe says he was worried about a slowdown in Berkshire’s economically sensitive businesses, which include the Burlington Northern railroad and housing manufacturer Clayton Homes.
He also is concerned about Buffett’s hoard of nearly $125 billion in cash. In today’s low-interest-rate environment, that’s one-sixth of Berkshire’s assets earning a negligible return.
Buffett has said he’d like to use the cash to acquire more businesses, but he admits that the prospects for doing so are not good. Quality companies fetch higher prices than Buffett would prefer to pay, and private equity firms are throwing a lot of money at the sorts of deals he likes to do.
Given those constraints, Berkshire probably can’t replicate the performance that made him the most admired investor of his generation.
Buffett’s recent deals don’t inspire confidence. Rolfe says Precision Castparts, bought in 2016, “hasn’t grown at all,” and Kraft Heinz “has been a debacle” since Berkshire invested in the food company’s 2015 merger.
“I’ve been following him for almost 40 years, and he and (Berkshire Vice Chairman Charlie) Munger are two of the most rational individuals I’ve seen,” Rolfe told me. “It’s mind-boggling to me that they continue to play a game where they don’t have an advantage.”
He wishes that Buffett, rather than building a war chest for a big acquisition that may never happen, would use his cash to buy back Berkshire stock. “Over the past 10 or 20 years his best way to allocate capital would have been buying his own stock,” Rolfe said.
When a company buys its own shares, the value of the remaining shares goes up. Buffett said in this year’s shareholder letter that Berkshire would be a “significant repurchaser of its shares,” but so far it has bought relatively small amounts.
During the 10-year bull market that started in 2009, Berkshire has been a mediocre performer. Through Sept. 30, its shares rose 269%, compared with 370% for the Standard & Poor’s 500 index.
Even after singing Buffett’s praises for 21 years, Rolfe says the decision to sell wasn’t a hard one. “We’ve been very patient, we’ve tried to let hard numbers decide and we’ve tried to keep emotion out of it,” he said. “If we’ve learned anything from Buffett’s tenets over the years, it’s that emotion has no role in investing.”
Will Wedgewood ever rebuild a significant position in Berkshire? Maybe, Rolfe said.
“If somehow he was able to put a lot of that cash into one or two or three significant investments at an attractive price, then yes,” he explained. “But I don’t know what he could buy that would move the needle.”
Rolfe would like to continue attending Berkshire’s gala annual meeting in Omaha, which Buffett has described as a Woodstock for capitalists. He knows, though, that his public criticism will be unpopular there.
“I’ll wear some heavy armor,” Rolfe said.