"The Coca Cola Conspiracy"

Prediction: Coca Cola will be shelling out to state attorneys general, just like the tobacco companies did.

Do you think Buffett thinks about this at all? I doubt it.

Gary North on Warren Buffett

From his latest essay, When the Insiders Lose Control:

The symbol of this train wreck is Warren Buffett. His outfit bought newspapers. [I like how Gary North refers to Berkshire as "his outfit".] It owns a chunk of the Washington Post. He recently resigned from the board of the Post. But he assured people that he will never sell shares of the Post. A columnist on the Motley Fool had some comments on this statement. He quotes Buffett from two years ago.

Twenty to 40 years ago, [newspapers] were essential to customers and advertisers. They had pricing power, but [it] essentiality has eroded. Erosion accelerated dramatically, and it won't end based on anything on the horizon. We do not see anything to reverse it. They are essential to advertisers only as long as they're essential to readers. Ten years ago, the head of The Buffalo News said that on an economic basis, Berkshire should sell The Buffalo News. We could have sold the business for hundreds of millions. Not so today.

The writer went on to say that Buffett has always bought companies on this basis: he will not break them up. He buys to hold. I can see the logic of this. But that logic has trapped him. He owns big chunks of sinking ships made of newsprint.

The strategy of the Insiders has always been to control the flow of information. Because of the cost of entering the various fields, those without a lot of capital could not get in. Mergers and acquisitions went on for 50 years until the Insiders controlled the whole shebang.

I have long thought that Buffett's biggest weakness is a lack of sell discipline. I have written about this in the context of our USG short:

There is no information content in a Buffett holding as opposed to a purchase, because he basically won't sell no matter how bad things get. Examples: Moody's (discredited by their mortgage security ratings), Washington Post and Gannett (dying industry), USG Corp (down hugely since most of his purchases, why hold through a housing crash?), General Electric (turned itself into a bank making risky commercial loans)

There are obviously things I like about Buffett, but I am a skeptic. I wonder whether there ever been a case where Buffett recognized a problem in an industry and completely sold his holdings or went short?

He is in the complacent, "rah-rah America" class of investors who think that because the baby boomers lived such pampered lives, misfortune has been permanently banished from history.

I think some of these deficits could stem from Buffett's mental models of America (and Goldman Sachs, and the newspaper industry) not incorporating the changes that have occurred since the 1950s.

Another name that I think Buffett will end up riding over the peak and all the way down into the ground (if he lives long enough) is Coca Cola. His enthusiasm for Coca Cola has always bothered me. What happens to Coca-Cola if more people switch to paleolithic diets? What happens if people get sick of its habit of filing amicus briefs in politically sensitive cases?

On Buffett and Coca-Cola (KO)

Buffett's enthusiasm for Coca-Cola (KO) has always bothered me:

Coke is now getting a royalty on swallows; probably 7.2 billion a day if the average gulp is one ounce. I feel 100% sure (perhaps mistakenly) that I know the odds of this continuing- again 100% as long a cola doesn’t cause cancer.

One-hundred percent is too high. Everything comes to an end eventually. There's lots of evidence of an association between sugar generally, and sugar-sweetened soft drinks specifically, and obesity and type 2 diabetes. Health concerns are even listed as a risk factor in the Coca-Cola annual report!

Obesity and other health concerns may reduce demand for some of our products.
Consumers, public health officials and government officials are becoming increasingly concerned about the public health consequences associated with obesity, particularly among young people. In addition, some researchers, health advocates and dietary guidelines are encouraging consumers to reduce consumption of sugar-sweetened beverages, including those sweetened with HFCS or other nutritive sweeteners. Increasing public concern about these issues; possible new taxes and governmental regulations concerning the marketing, labeling or availability of our beverages; and negative publicity resulting from actual or threatened legal actions against us or other companies in our industry relating to the marketing, labeling or sale of sugar-sweetened beverages may reduce demand for our beverages, which could affect our profitability.

What happens to Coca-Cola if more people switch to paleolithic diets?

Coca-Cola has also been known to file amicus briefs in politically sensitive cases. And, like another one of Berkshire's operations, GEICO, they spent massive amounts on advertising - $2.79 billion in 2009. You have to understand that media's real customers are advertisers, not readers. Advertisers underwrite most of the media produced in this country.

I don't see why you would be enthusiastic about owning KO at today's price. I would also be long Charlie Munger and short Warren Buffett.

I wonder if Buffett is ever tempted to walk away and start over with a $100 million fund, where you can do real value investing on smaller situations? What kind of terms do you think he could get from investors?