An investment lesson from Warren Buffett: embrace criticism

It was showtime last Saturday in Nebraska, Omaha, as Warren Buffett hosted the annual general meeting of his firm, Berkshire Hathaway.

Over the years, PR-savvy Buffett has gradually turned the AGM into a major event, with celebrity guests and cameo appearances on US TV shows. Last weekend, 30,000 people turned up to watch what Buffett calls the Woodstock of capitalism'.

But impressive as Buffett's showmanship is, the real reason the event is followed with such interest is that he's one of America's greatest living investors. The book value of his firm has risen by more than 5,800 times since he took control in 1965. As a result, Berkshire Hathaway is now the fifth-largest publicly-listed firm on the planet.

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Regular watchers of these meetings will know that investors' questions tend to focus on two key issues: who will succeed the 82-year old Buffett; and the challenge of maintaining growth rates at such a big company. As usual, there was not much news on either.

More interesting was Buffett's decision to invite a bear to the party. This year, Doug Kass, a hedge fund manager who has a short position on Berkshire Hathaway, was allowed to ask questions.

One of his most barbed was: "How, beyond the accident of birth, is your son qualified to be non-executive chairman?" Buffett responded by saying that given that his son's role would be quite limited, "the probability of a mistake being made is one in a hundred."

Kass also questioned if Hathaway's size it has a market cap of $264bn and employs more than 288,000 people means Buffett is starting to overpay for the few deals out there large enough to make a difference. One recent acquisition to draw criticism was the $13bn billion purchase of Heinz, which was at a 20% premium to the stock's all-time high.

Buffet admitted that "we've paid up for good businesses [more] than we would have 30-40 years ago", but he reckons that even allowing for "some diminution from returns in the past, they can still be satisfactory."

In other words, says Buffett, one thing he's learned over the years is "that paying up for an extraordinary business is not a mistake."

Kass's questions may not have been the toughest in one bizarre moment he asked Buffett for $100m to set up an investment fund but Buffett deserves praise for inviting criticism. After all, how many of his competitors would ask a bear, even a relatively polite one, to grill him in front of shareholders?

As Jason Zweig pointed out in The Wall Street Journal blog MoneyBeat maybe the most important takeaway from this year's Buffett-fest is that investors should challenge their convictions. "A deliberate, lifelong effort to find people to tell him why he might be wrong is one of the keys to Mr. Buffett's success", says Zweig. "It doesn't come naturally to most investors."