Berkshire Hathaway Is A Great Investment Despite The Departure Of David Sokol

| April 5, 2011 | 0 Comments

“At least give me a clean death.  A soldier’s death.”

You may recognize that line from one of my all time favorite movies… Gladiator.  The film won the Academy Award for best picture in 2000.  So I’m assuming you’ve seen it…

It’s a great scene.  I still get chills when I watch it.

In it our hero Maximus, a well respected Roman General, is about to be executed at the behest of the new Roman Emperor.

An executioner is about to behead Maximus before he requests “a soldier’s death”.  The Emperor’s guard grants his request for a clean death.  The executioner moves into position to stab instead of behead him.

It was a sign of respect.  It allowed honorable foes to die with their head and dignity intact.

I think there was a modern day equivalent of a “soldier’s death” in the world of finance at Berkshire Hathaway (BRK-A) last week.

You see, one of Warren Buffett’s top executives, David Sokol, was allowed to resign amid accusations of insider trading.  Apparently, Sokol bought millions of dollars worth of Lubrizol (LZ) stock before he pitched the buyout to Mr. Buffett.

And he held onto the Lubrizol shares after Mr. Buffett decided to purchase the company.  LZ jumped 30% when Berkshire announced the buyout.  And Sokol pocketed a cool $3 million.

This situation screams insider trading!

It certainly looks like he was front-running the stock.  But apparently, since Sokol bought the shares before Berkshire was considering the proposal, he didn’t violate the letter of the law.

Then Sokol abruptly announced he was leaving Berkshire to “invest his family’s resources”.  (At least he has an extra $3 million to get him started on the right foot!)

So far Mr. Buffett has been supportive of his “general” in public.  He’s allowed Mr. Sokol’s departure from Berkshire to appear as if it was Sokol’s choice to leave.

But I don’t buy it…

I think Buffett fired Sokol.  Then, out of respect for his service, Sokol was given a “clean death”.  Buffett allowed him to leave Berkshire with his dignity.

Remember, Warren Buffet values his integrity above all else.

In one of the many books written about him, he’s quoted as saying, “Lose money for my firm, and I will be understanding.  Lose a shred of reputation for the firm, and I will be ruthless.”

Clearly this situation has hurt Buffett’s and Berkshire’s reputation.

So, where’s the ruthlessness?

The only explanation is Buffett truly doesn’t believe Sokol broke any laws.  However, he had to part ways with Sokol due to the appearance of impropriety.  Hence, the “clean death”.

One thing’s for sure, it has opened Warren and his company up to criticism.  And Moody’s (MCO) didn’t waste any time before weighing in on the subject.

They said “a senior officer with the appearance of a conflict of interest, may give rise to burdensome regulatory/legal investigations, and raise questions regarding Berkshire’s risk controls”.  Yet the credit rating agency left the company’s rating unchanged.

I’m sure everyone at Moody’s is getting a big kick out of this one.

Don’t forget, Berkshire was Moody’s largest shareholder before the financial crisis.  But since then, Buffett’s been selling shares of MCO like clockwork.

He cut his position in MCO down from around 20% in the mid 2000’s to about 12% today.  And he continues to sell millions of shares every quarter.

So let me get this straight… I’m supposed to believe a negative jab about Berkshire from a company whose stock Buffett’s been selling for the last two years?

Give me a break… Moody’s has no credibility here (if they do anywhere these days).

The bottom line is Berkshire is what it has been for the last decade.  In other words, it’s a rock solid investment that will outperform the S&P 500 over the long run.

Don’t let any of the negative spin change your opinion about the stock. Any selloff or dip should be treated as a buying opportunity.

Buffett let one of his greatest generals walk away with his dignity.  I have no doubt that if any laws were broken, we would have seen a bit of the Buffett ruthlessness.  BRK-A or the lower priced BRK-B are still great investments.  Take a look at adding them to your portfolio.

Tags: , , ,

Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

Leave a Reply

Your email address will not be published. Required fields are marked *