3/25/2015

Buffett's stock pickers are beating the market - Fortune

Subscribe

MENU Fortune.com

MARCH 24, 2015

Standard General raises bid for

RadioShack in bankruptcy auction

FINANCE INVESTING

Buffett's stock pickers are

beating the market
by Stephen Gandel

@stephengandel

OCTOBER 14, 2014, 5:00 AM EDT

Ted Weschler (left) and Todd Combs (right)

Photos by Daniel Acker/Bloomberg via Getty Images

Berkshires Ted Weschler and Todd Combs are delivering,

according to Fortunes analysis.
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

1/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

A year ago Ted Weschler, one half of the duo likely to someday take over the massive Berkshire
Hathaway stock portfolio and the even more titanic investing legacy of Warren Buffett, was in a
footrace with the S&P 500. Weschler was leading by a nose with a 20% gain, vs. 18% for the S&P,
in the first nine months of 2013, according to estimates compiled by Fortune.

Then, in November, one of Weschlers largest holdings, satellite television provider DirecTV,
announced it had signed up an additional 139,000 subscribers. Another Weschler choice, dialysiscenter operator DaVita Health, reported better-than-expected earnings. Both stocks shot up. By
the end of the year, Weschlers portfolio had risen another 11%.

Interactive: How Berkshires Combs and Weschler are beating the market

In his annual letter to shareholders in April, Buffett revealed that both Weschler and his partner
Todd Combs once again handily beat the market. They have made Berkshire billions already
that we wouldnt have otherwise made, the Oracle of Omaha told CNBC that month. They both
have a fundamental combination of soundness and brilliance.

What will happen to Berkshire after Buffett, 84, is perhaps the most closely watched succession
story in corporate American history. If investors are nervous, they arent showing it. This summer
the price of Berkshires A shares floated above $200,000. The conglomerate, which owns dozens
of companies, ranging from insurer Geico to railway Burlington Northern Santa Fe to ice cream
chain Dairy Queen, has a market cap of $331 billion. The question is whether Berkshire will be able
to continue its stellar success after Buffett.
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/
2/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

to continue its stellar success after Buffett.

How Combs and Weschler do will comprise a large part of the answer. As of the middle of this year,
the two managed a total of just over $14 billion (their allocation has been increasing) of Berkshires
$115 billion stock portfolio. This month marks four years since Buffett hired Combs. Weschler
joined the company a little less than a year later. A third, yet-to-be-named person will run
Berkshires operating businesses, which have become a much larger proportion of the companys
assets in the past decade. (Buffett says the person has been picked.) None of the plans are final,
and Buffett says he has no intention to retire anytime soon.

Berkshires CEO has offered few details on the performance of his handpicked successors. The
company is required to reveal its holdings once a quarter, but it has no obligation to explain which
manager chose a particular stock or at what price. As a result, just how well the duo have done has
remained a mystery.

They have made Berkshire billions

already that we wouldnt have
otherwise made.Warren Buett
Fortune set out to solve that mystery. We scrutinized public fillings, sounded out investing pros
who know Buffett, Combs, and Weschler, and made some educated guesses. (More on our
methodology later.) We ended up with what are most likely the current portfolios of Combs and
Weschler, as well as a list of all the shares they have bought and sold for Berkshire in the past four
years, and at roughly what price. The returns calculated from those portfolios largely jibe with
what Buffett has said about Combs and Weschler, and got the thumbs-up from the close Berkshire
watchers we showed them to.

Combs and Weschler declined to comment. Buffett says Weschlers performance exceeds
Fortunes estimates of his results, but he declined to comment further.

So how have the Oracles disciples done? Quite impressively, according to our estimates. Both
have outpaced the S&P 500 in their time at Berkshire (their compensation is determined by how
much they beat that index over three years). Combs has done the better of the two, generating a
cumulative return of 116% over the past nearly four yearsmore than double the S&Ps 55% over
the same period. Weschlers portfolio is up 81%, but hes had only three years to prove himself.
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

3/11

3/25/2015

pickers are beating the market - Fortune

the same period. Weschlers portfolioBuffett's
is upstock
81%,
but hes had only three years to prove himself.
Combs picks increased an incredible 51% last year alone. And Weschler is well ahead of the

market this year.

Combs tends to get in and out of

stocks much faster than Buffett.
Weschler prefers to buy and hold a
few stocks for a long time.
Combs and Weschler took unlikely paths to Berkshire. Combs was 39 and ran a fund, Castle Point
Advisors, which managed just $400 million, when he was hired by Buffett. Weschler, the founder
of a successful hedge fund, Peninsula Capital, wasnt on Buffetts radar until he won a lunch with
Buffett, for which he paid $2.6 million in a charity auction. Buffett has been critical of hedge funds,
but the two hit it off. At the next years lunch (Weschler paid another $2.6 million), Buffett
recruited him.

A look at the stocks Combs and Weschler have picked since joining Berkshire shows that their
investing philosophies have a lot in common with Buffetts (no surprise there). Both Combs and
Weschler have bought into cable-TV providers, including DirecTV, Dish, and most recently
Charter Communications, which generate a lot of cash flow and have a so-called business moat
its hard to get into the business of providing cable television. Those are two traits that Buffett has
said he seeks. And just as Buffett loves iconic American brands like Coke and, more recently,
Heinz, Combs has purchased shares of tractor company Deere. Buffett is a longtime holder of
American Express shares; Combs has opted for Visa and MasterCard.

In other ways the protgs strategies diverge from Buffetts. A good example: Liberty Media and
its CEO, John Malone. Both Combs and Weschler have bought shares of various Malone entities,
which tend to have complicated corporate structures. Buffett has tended to be wary of the sort of
complexity that, in his view, makes it hard to grasp the workings of a business.

Combs and Weschler run their portfolios autonomously, though for compliance reasons they do
have to inform Buffett of their selections in advance. Combs tends to get in and out of stocks much
faster than Buffett. For instance, Combs prescribed himself $200 million worth of shares in
drugstore chain CVS in late 2011, only to dispense with the stake at an estimated 28% profit a
year later. Weschler prefers to buy and hold a few stocks for a long time. His $7.5 billion portfolio
at Berkshire is spread among just seven stocks.
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

4/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

at Berkshire is spread among just seven
stocks.

Not Found
The requested URL /interactives/buffet-portfolio/ was not found on this server.

To crunch their performance numbers, Fortune enlisted the help of hedge fund tracker Insider
Monkey for a list, based on public filings, of all the shares that Berkshire has bought and sold over
the past four years. Fortune also examined holdings at the funds Combs and Weschler ran before
they joined Berkshire. Weschlers former hedge fund, for instance, owned shares of DaVita. So
when DaVita popped up in Berkshires portfolio, we inferred that it was a Weschler pick.

Next we talked to some longtime Buffett watchers, some of whom have known Combs and
Weschler since before they joined Berkshire. Once we had our best guesses, we went back and
double-checked our work with the investment pros. There were some close calls. Lee Enterprise,
for instance, owns newspapers, as well as other local publications. Buffett has said that he is
interested in buying up smaller newspapers. But others argued the Lee investment is Weschlers
and we included it in his group.

To calculate returns, we used the average price of the stocks that Combs and Weschler were
buying in the quarter. That approach may artificially depress our calculation of the mens returns
since its entirely possible that skilled traders bought at prices below the average. We did not
include dividends in calculating their returns or those of the S&P 500 because Combs and
Weschler do not appear to be reinvesting their dividends. Berkshire has yet to file its holdings for
the third quarter, so we were able to calculate performance only through the middle of the year.

Combs and Weschler have made some very good investments at Berkshire. Both seem to have a
knack for catching stocks near their lows. Weschler bought shares of Canadian oil company Suncor
in mid-2013 for around $30 a share; the stock now trades for $36. Shares of credit card company5/11
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

3/25/2015

Buffett's stock pickers are beating the market - Fortune

in mid-2013 for around $30 a share; the stock now trades for $36. Shares of credit card company
MasterCard have been a big winner for Combs. The shares, then worth $25, were his first
investment at Berkshire. Today they trade for $74.

Click to enlarge. Graphic by Nicolas Rapp

Of course, Combs and Weschler have endured a few bumps. Recently Combs has struggled. Shares
of Chicago Bridge & Iron, which was an $800 million position in his portfolio coming into the year,
have tumbled 30% because of weak construction activity. Overall, Combs portfolio inched down 6/11
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

3/25/2015

Buffett's stock pickers are beating the market - Fortune

have tumbled 30% because of weak construction activity. Overall, Combs portfolio inched down
an estimated 1% in the first half of the year while the S&P increased by 7%. Combs bought shares
of Intel in late 2011 for just over $21. He sold his remaining stake nine months later for under $20
a share.

And shares of General Motorsone of Weschlers biggest holdingshave fallen 21% this year in
the wake of the scandal surrounding the companys faulty ignition switches. Weschler acquired the
shares at about $22, sold some at $36, and is still holding the rest at $32. Other investors might
rue not selling more when the stock was above $40 before the recall scandal ignited, but Weschler
is a believer: He added $100 million worth of shares in the second quarter.

Its decades too early to discern whether Combs and Weschler will ever be able to live up to
Buffetts legacy, and, in fairness, thats far too high a standard. Its hard to follow a legend. Still,
every now and then a Joe DiMaggio is succeeded by a Mickey Mantle.

This story is from the October 27, 2014 issue of Fortune.

AROUND THE WEB

2 Comments

Reprint

Sponsored Links by

TECH KLEINER PERKINS

Closing arguments in
Kleiner Perkins sexism
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

7/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

trial: Two wildly different

views
by Kia Kokalitcheva

@imkialikethecar

MARCH 24, 2015, 8:57 PM EDT

Ellen Pao
Photograph by Eric Risberg AP

Attorneys for both sides of the case, filed by Ellen Pao

against her former venture capital employer, had their
chance to sway the jury one last time.
Attorneys in the sexism case against venture capital firm Kleiner Perkins painted vastly different
pictures of the prestigious investment partnership in their closing arguments Tuesday.
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

8/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

Paos lawyer portrayed his client as victim of sexist partners, retaliation and a web of lies.

Kleiner Perkins discriminated against Ellen Pao because shes a woman, Alan Exelrod, Paos
attorney, told the jury. Kleiner Perkins, however powerful or successful it may be, cannot be
above the law.

Lynne Hermle, Kleiner Perkins attorney, responded with an impassioned defense of the firm,
saying that it gave Pao more opportunities than others in similar positions at the firm. Moreover,
the attorney accused Pao of inventing all the slights against her as a way to make money.

Ellen Paos version of these events turned up when, and only when she hired Brendan Dolan, her
lawyer, and she wrote her complaint, Hermle said.

The start of closing arguments, following four weeks of testimony, gave both sides a last chance to
make their case in the high-profile trial in San Francisco Superior Court. The closing arguments
are expected to end Wednesday, at which point it will be up to the six man, six woman jury to
reach a verdict.

The case has cast a harsh light on the inner workings of Kleiner Perkins, an early investor in
companies like Google and Genentech. Emails, performance reviews and testimony have shown a
firm filled with bickering, egos and disorganization. The trial has also focused attention on the
wildly skewed demographics in the venture capital industry. Although venture capitalists espouse
innovation, their ranks include few women as if they are a relic of 19th century.

During his three hours of closing arguments, Exelrod, Paos attorney accused Kleiner Perkins of
turning a blind eye to mistreatment of women and denied Pao the promotions she deserved. He
started his presentation with a tinge of reticence, but then eventually found a more confident
rhythm. Exelrod described Paos qualifications and operating experience that he said exceeded
that of male partners who were hired around the same time. He also described her
accomplishments at the firm, year by year, and what he called her sharp investment instincts
including early meetings with Twitter, which Kleiner Perkins initially passed on but invested in a
few years later.

Although Paos claims of discrimination are against Kleiner as a whole, Exelrod singled out senior
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

9/11

Buffett's stock pickers are beating the market - Fortune

Although Paos claims of discrimination
are against Kleiner as a whole, Exelrod singled out senior
partners Matt Murphy and Ted Schlein in particular for helping to push Pao from the firm.

3/25/2015

He wanted her gone because of her gender, Exelrod said in reference to Schleins testimony
earlier in the trial in which he said she was unable to see the grey areas inherent in venture capital.
In a moment of revelation, we heard what Mr. Schlein really thought. Ted Schlein said it was
Ellen Paos genetic makeup that prevented her from being a good venture capitalist.

Exelrod also accused Schlein of fabricating fraudulent performance reviews about Pao to derail
her Paos career at Kleiner. The attorney compared summaries of comments left by partners
about Pao with those of male partners. Both focused on personality traits and whether they
aligned with the firms expectations for successful investors. But when it came to promotions, only
Pao and a fellow female partner seemed to be penalized for negative feedback.

Are there different standards for men and women? Exelrod said. The comments are similar, the
result is different.

Exelrod also called out the testimony of Stephen Hirshfeld, the workplace investigator Kleiner
hired in early 2012 following a harassment complaint from a second female partner, Trae Vassallo,
and whose investigation Pao has called biased. Exelrod warned the jurors against taking
Hirschfelds conclusions too seriously as they were presented with far more evidence during this
trial than he had.

Hes there to defend companies. Hes not there to represent employees, Exelrod said.

Kleiner Perkins attorney rebutted Paos allegations. Speaking in a loud, steady, and confident
voice, Hermle reminded the jury that while Pao testified that she wanted to change Kleiners
culture and help other women at the firm, no other female partner, include the several who
testified during the trial, joined her in this lawsuit. And that was because Kleiner did not in fact
mistreat women, Hermle said.

All of the emphasis about other women, the finger-pointing, was designed to distract you from
one thing only: The clear lack of evidence supporting the claims of Ellen Pao, she said.

Hermle also countered the argument that Ellens weaknesses were held against her while male
partners with similar challenges were promoted. She showed the jury several slides that compared
http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/
10/11

3/25/2015

Buffett's stock pickers are beating the market - Fortune

partners with similar challenges were promoted. She showed the jury several slides that compared
and contrasted Paos attributes and skills with other junior partners, concluding that she was
simply less qualified than them and unwilling to improve.

Unlike these men and women, Ellen Pao would not accept that outcome whether because of her
success from 10 years in academia, she rejected criticism of her not being promoted, Hemle said.

AROUND THE WEB

Comments

Reprint

Sponsored Links by

Subscribe to The Fortune Daily and get updates on Tech and

more!
Subscribe

Enter your email address

See all newsletters

http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

11/11