Weekend thoughts: quoting Buffett and reverse snowballs
I spend the majority of most days reading earnings calls, conference transcripts, and annual reports. I don’t think I’m alone in that use of time; I’d guess that’s how most investors spend most of their time (if someone has a better use of their time, I’m always looking to improve my process!).
In those earnings calls / annual reports, I’ll frequently see executives quote Buffett (or, if they’re looking for a deep cut, Munger!), and whenever I see / hear an executive quote Buffett, the hair on the back of my neck stands up. It’s an instant red flag to me.
Don’t get me wrong; I’d love for any company I’m invested in to follow Buffett’s principles or produce returns half as good as Berkshire’s. I mean, who wouldn’t want this outperformance:
But, in general, I’ve found that most CEOs who quote Buffett are really good at parroting his words to their shareholders, but they completely fail to execute the principles behind the words (or, if you want to be really cynical, they only parrot Warren Buffett with the hopes of suckering in gullible shareholders).
Let me give you my current favorite example of this “quoting Buffett but failing to execute the principles” phenomona. Fortress Biotech (FBIO) dropped Buffett’s name multiple times at a conference recently; in fact, they’re such a big fan of Buffett that they stole the Snowball image for one of their corporate slides:
And that’s not just any slide; FBIO’s CEO has called that “the most important slide” in the slide deck because it’s “what we're trying to build.”
So FBIO is great in the theory piece of following Buffett!
But, in practice, I’d suggest FBIO’s execution has been just a little bit off. The whole point of the snowball is to maximize shareholder value per share. You generally do this by increasing intrinsic value while shrinking the share count; a cynic could argue FBIO has been running a “reverse snowball” by maximizing their share count while decreasing the share price.
I’ll pause here to note I haven’t done wild amounts of work on FBIO. It’s entirely possible they got really unlucky in the past (i.e. an unexpected failure on a key drug), or their snowball is just set to really get rolling (it’s a microcap! It’s not unheard of for these to be wildly undervalued before some massive good news comes out; SGTX just got acquired for a ~650% premium!). I honestly only chose FBIO because I did a transcript search for Buffett and just couldn’t resist the combination of talking about Buffett’s snowball while having an active At-the-Market program.
So Godspeed to FBIO and their snowball, but I highlight them because the general bullets there are so emblematic of what I see / worry about any time I see a company talking about Buffett.
Anyway, I mention all of this because I was reading an annual letter yesterday where the company was just quoting Buffett and value creation left and right, and my first thought was “this is a recipe for underperformance.” I was so snarky about it that I tweeted out a poll asking if CEOs who quote Buffett would under or outperform (by the way, that sounds like a fantastic research paper! If you’re an academic looking for something to write up, feel free to steal the “alpha generation after quoting Buffett on an earnings call” back test from me!). My initial gut was that CEOs who quoted Buffett would underperform because they were just looking to dupe shareholders….. but, after a little reflection and despite my cynical side and the FBIO example, I’d probably come out that CEOs quoting Buffett is probably a good thing and I’d guess they slightly outperform. My theory is that, even if they don’t believe what they’re saying, at least they’re taking the time to learn what shareholders want to hear and they might even imprint a little of it internally.
But I am an optimist at heart, so maybe I’m being too generous here. I do know that I’ll likely be staying far, far away from any company that has a snowball in their investor decks!
I think a lot of the signal comes from what exactly they’re quoting of Buffett. In this case, something as general as “build a snowball” (and even disregarding Lowenstein’s superior book!) is a red flag. Whereas if a manager explained why they count stock-based comp as real expense by quoting one of Buffett’s letters, I’d be impressed.
Graham definitely advocated for management to issue stock if the share price was overvaluing the business. While Buffett definitely has his own Graham-influenced approach, I'm not sure it could be ruled out that Berkshire would institute an ATM if the shares started trading at, say, 3x Warren's estimate of intrinsic value.