Meyer Shields knows what it’s like to not get invited to a party.
As Berkshire Hathaway investors, executives, and analysts whooped it up at cocktail receptions and Gorat’s Steak House in Omaha this past weekend, the veteran analyst watched the annual meeting alone from more than 1,100 miles away at his home in Silver Spring, Maryland.
Shields — an insurance industry specialist with Keefe, Bruyette & Woods — was once again not asked to pitch questions to CEO Warren Buffett or vice chairman Charlie Munger at the Berkshire lovefest. By Shields’ count, he is the longest-tenured sell-side brokerage analyst not to have been so invited.
“Our invitation to participate in Berkshire’s annual meeting seems once again to have been lost in the mail,” the arch, Canadian-born managing director quipped in a research note last week.
So on Saturday, it was analyst Jay Gelb of Barclays who asked questions along with a gaggle of friendly journalists and investors.
One possible reason for Berkshire to shun Shields: the man has never, ever recommended the stock since he began covering it in October, 2009.
Shields says a frequent annual meeting attendee told him that his name has been floated to participate in the past, but rejected — reasons unknown. He was initially taken aback by the notion that Buffett would freeze him out. “It surprised me at first,” he says in an interview. “His reputation was that he was someone who welcomed tough questions.”
In an email, Buffett’s assistant Debbie Bosanek said that Berkshire has been using the same analysts and journalists for some years. “At one point we had three insurance analysts rotate but one is no longer an analyst so we rotate between the remaining two insurance analysts,” she wrote. “We haven’t added anyone new.”
Shields publishes original, hard-hitting research that raises the kind of topics that make CEOs hot under the collar. For example, Shields argues that major pricing problems at Kraft Heinz, in which Berkshire owns a 26.7 stake, call into question Buffett’s ballyhooed alliance with Brazilian investment firm 3G Capital. “There was a lot of enthusiasm for the 3G partnership,” Shields says.
He slams Berkshire’s increasingly skimpy financial disclosures for its individual business and insurance lines compared to that of rivals. “Progressive gives us information every month and doesn’t seem to suffer for it,” he notes.
Most controversial: Shields’ call last week for Buffett to consider abandoning stock picking in favor of passive indexing, a veritable heresy to those who worship at the feet of the master asset allocator.
Shields did plenty of homework to arrive at the suggestion. He sifted through nearly 20 years of Berkshire’s monthly stock portfolio holdings to calculate an accurate estimate of the firm’s equity returns over different time spans. At last count, the portfolio was worth $209 billion. Berkshire’s holdings substantially outperformed the S&P 500 for the 10 years ending in 2009, beating the benchmark by a cumulative 119 percent, Shields calculated. However, from yearend 2009 through March 31, 2019, portfolio holdings modestly underperformed by about 12.9 percent.
Accordingly, Shields suggests that Buffett — who has long championed index funds for most investors — consider taking his own advice. The analyst is quick to add that he has “no expectation that it will ever happen.”
Shields, 47, is a veteran insurance hand. Beginning as a teenager, he was steeped in the intricate machinations of the industry. Shields graduated from the University of Toronto, in his hometown, with a bachelor’s in actuarial science. His first job was with the Maryland Insurance Administration, from which he moved on to a series of actuarial positions at Zurich Insurance Group, and then to Wall Street as an analyst at Legg Mason. Shields kicked off his Berkshire coverage in 2009, after Stifel Financial bought Legg Mason’s capital markets business. Then Stifel bought Keefe, Bruyette & Woods, and Shields shifted to the financial services boutique soon after.
“The world is changing,” says Shields. Technology is transforming investment dogma — witness last week’s bombshell from Buffett that Berkshire owned a stake in Amazon.com, although he emphasized that one of his younger lieutenants were responsible. “We’re at a stage where technology companies, and Amazon is one of them, are doing very real things in the real world. You can’t ignore them,” says Shields.
A passive investing strategy is one way of grappling with transformation, providing automatic exposure to a sector one might not fully understand. But indexing would likely generate complications.
“It would not be practical,” says Princeton University professor Burton Malkiel, author of A Random Walk Down Wall Street, the seminal tome about the difficulties of outperforming the stock market. “A lot of the holdings of Berkshire Hathaway have considerable embedded capital gains.”
Example: The tax basis for Berkshire’s 17.9 percent stake in American Express was $1.3 billion. The market value as of the end of 2018: $14.5 billion. Such embedded gains are akin to a long-term loan from the government. Taxes must theoretically — eventually — be paid. In the meantime, though, they pay out growing dividends on the “borrowed” money invested. Famously, Buffett has said that his favorite holding period is forever.
Dumping big positions to go passive entails other potential collateral damage. “When you are moving large amounts of stock, you have market impact costs,” says Malkiel.
Carol Loomis, the storied former Fortune magazine writer, put forward to Buffett a related suggestion on Saturday at the annual meeting. Why wouldn’t he invest the cash Berkshire holds in stock indexes, she asked, until he finds a ripe acquisition? Buffett’s response: “It may well make sense in the future.”
Plenty of investors take issue with Shields’ indexing proposal. The last ten or so years following the financial crisis may be a poor time frame through which to judge the performance of Berkshire’s concentrated portfolio. There has not been a proper bear market in that span, says William Smead, chief investment officer of Smead Capital Management. “That will come back over the next ten years,” he says.
Buffett’s stock picking is value-oriented, a countercyclical style that has been out of fashion for much of the past decade, as finance professor Lu Zhang of Ohio State University points out. “Ten years is just too short to suggest Buffett should change his strategy,” Zhang says. “Over the long term, Berkshire has beaten any index, any index, hands down.”
For his part, Shields reiterates that he doesn’t expect Buffett to heed his suggestion, and that he finds plenty of positive takeaways from the annual meeting, even from afar. “He has all his marbles,” he says of Buffett. “And Charlie does too.”
And, no, Shields isn’t holding his breath for an invite next year.