Tuesday, January 12, 2010

Warren Buffet's role in Kraft

A lot is written about why Mr. Buffet pays part of Burlington North Fe transaction in equity. Check this link if interested (http://www.rationalwalk.com/?p=4035). But the more interesting question is why Mr. Buffet is opposing Kraft's offer of issuing more equity to buy Cadbury's.

Buffet in the past two decades has chosen to be passive investor. His key was to associate with good managements rather than to direct or influence management actions. This has worked well for him in general. His rationale was that managements usually do not listen even if such advice is provided from within the board room. Usually CEO ego takes precedence over advice from elders!

However, investment in Moody's may have changed his opinion. Mr. Buffet was criticized for not taking more active role in Moody's operations during the boom years even though Berkshire owned 20% of the company. In effect, Berkshire was a silent partner in company's role in the credit crisis. In the annual meeting, Mr. Buffet was questioned about this and he gave the same standard answer that managements will not listen.

I think that Mr. Buffet has had second thoughts on this issue. While being a passive investor is still his first choice and correct choice most of the time, he has a responsibility to exercise his responsibility as an owner in circumstances when value is destroyed or when the direction of company is wrong. Ben Graham in intelligent investor asks all investors to take an active role in the companies in which you invest. I think Mr. Buffet may be taking more such active role in future and that is good for all investors who invest along side him or with him.

Please leave your thoughts....

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