Buffett: American public has been going ‘wild’ with enthusiasm for index funds

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Rowan Oak
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Buffett: American public has been going ‘wild’ with enthusiasm for index funds

Post by Rowan Oak »

You buy 500 businesses all put together, and I mean that’s the ultimate conglomerate.
-Warren Buffett

Josh Brown's blog (The Reformed Broker) listing all parts of the video interview without commercials:
Everything Warren Buffett said on CNBC this morning

Direct link to CNBC for the video interview the quote is from:
https://www.cnbc.com/video/2020/02/24/w ... k-box.html

edit:
to change post title from: "America going wild for conglomerates in the last few years, but they call them Index Funds"
to: Buffett: American public has been going ‘wild’ with enthusiasm for index funds
Last edited by Rowan Oak on Mon Feb 24, 2020 4:27 pm, edited 2 times in total.
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nisiprius
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by nisiprius »

I don't know why people like to say something is something else, that it clearly isn't. And I expected something better from Warren Buffett.

A conglomerate is a corporation that, usually through mergers and acquisitions, is in a number of seemingly unrelated businesses. Conglomerates became notorious during the 1960s or so when forming conglomerates became a fad and an intentional business strategy. The once-familiar giants included LTV (Ling-Temco-Vought), Litton Industries, ITT, and Teledyne. The fad was fueled by some accounting rules peculiarity which could be exploited to report an illusory gain in profitability, as a result of the acquisition process. The gains were falsely explained as being the result of "synergy," as if Durkee's Spices and Smith-Corona-Marchant (that pair stuck in my mind because I thought it was so bizarre) were clearly going to be able to earn more money together than the sum of what they could earn separately. I think the accounting bug was fixed eventually.

The word "conglomerate" implies the existence of management linkages between the companies. No obvious linkage was created between the Las Vegas Sands and Western Digital just because the S&P decided to add the Las Vegas Sands to the S&P 500 index. My guess is that the management of Western Digital doesn't spend very much time each day helping to manage casinos, and that the Las Vegas Sands management doesn't have much to say about the manufacturing of disk drives.

I don't think anybody claims that the value of an S&P 500 ETF will be consistently higher than the weighted average of the values of the stocks in it. There is no "synergy" in which the stocks combine like sulfur, charcoal and saltpeter to form something new and wonderful. There is no "whole-is-greater-than-the-[weighted]-sum-of-its-parts" story about broad market indexing.
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by bryanm »

I think a key point here is that Buffett was defending Berkshire from criticism that it incurs the negative effects of a conglomerate. His analogy to index funds was basically an argument that Berkshire should be viewed more like a passive investor in its companies than an over-controlling conglomerate head.

I don't think that excuses the imperfect wording here--and I agree with nisiprius's comments--but that appears to be the point he was trying to make.
Last edited by bryanm on Mon Feb 24, 2020 5:11 pm, edited 1 time in total.
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by nisiprius »

bryanm wrote: Mon Feb 24, 2020 12:56 pm I think a key point here is that Buffett was defending Berkshire from criticism that it incurs the negative effects of a conglomerate. His analogy to index funds was basically an argument that Berkshire should be viewed more like a passive investor in it's companies than an over-controlling conglomerate head.

I don't think that excuses the imperfect wording here--and I agree with nisiprius's comments--but that appears to be the point he was trying to make.
Yes to everything you said.

He's saying Berkshire Hathaway isn't a 1960s-fad-type-conglomerate, it's just a curated group of good businesses chosen for business reasons, not for accounting shenanigans... and it doesn't make sense for people to love index funds but hate Berkshire Hathaway because it's a "conglomerate." In particular, he isn't attacking index funds by tarring them with the "conglomerate" brush, which is what I had thought from the thread title.
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by Rowan Oak »

nisiprius wrote: Mon Feb 24, 2020 1:20 pm
bryanm wrote: Mon Feb 24, 2020 12:56 pm I think a key point here is that Buffett was defending Berkshire from criticism that it incurs the negative effects of a conglomerate. His analogy to index funds was basically an argument that Berkshire should be viewed more like a passive investor in it's companies than an over-controlling conglomerate head.

I don't think that excuses the imperfect wording here--and I agree with nisiprius's comments--but that appears to be the point he was trying to make.
Yes to everything you said.

He's saying Berkshire Hathaway isn't a 1960s-fad-type-conglomerate, it's just a curated group of good businesses chosen for business reasons, not for accounting shenanigans... and it doesn't make sense for people to love index funds but hate Berkshire Hathaway because it's a "conglomerate." In particular, he isn't attacking index funds by tarring them with the "conglomerate" brush, which is what I had thought from the thread title.
Ok I see what you mean now. When I watched the interview I heard what he said about the negatives with the word "conglomerate" and then explained how Berkshire is different. Then when he said "You buy 500 businesses all put together, and I mean that’s the ultimate conglomerate." I took that as basically the way Berkshire is run but with 500 businesses instead of however many Berkshire now has. Anyway, a positive about broad market Index Fund investing. That's all I was trying to show with the post.
Last edited by Rowan Oak on Mon Feb 24, 2020 5:24 pm, edited 1 time in total.
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by dkturner »

nisiprius wrote: Mon Feb 24, 2020 1:20 pm He's saying Berkshire Hathaway isn't a 1960s-fad-type-conglomerate, it's just a curated group of good businesses chosen for business reasons, not for accounting shenanigans... and it doesn't make sense for people to love index funds but hate Berkshire Hathaway because it's a "conglomerate." In particular, he isn't attacking index funds by tarring them with the "conglomerate" brush, which is what I had thought from the thread title.
Or, worse yet, that Berkshire Hathaway is an actively managed conglomerate. 😉
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Re: Buffett: American public has been going ‘wild’ with enthusiasm for index funds

Post by lazyday »

Rowan Oak wrote: Mon Feb 24, 2020 11:42 amJosh Brown's blog (The Reformed Broker) listing all parts of the video interview without commercials:
Everything Warren Buffett said on CNBC this morning
Very nice, thanks for linking that. Easy to listen to the more interesting bits.
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Re: Buffett: American public has been going ‘wild’ with enthusiasm for index funds

Post by venkman »

Maybe it's just that everyone has been front-running the S&P 500, in anticipation of the day when Warren Buffett passes, and 90% of his gajillion-dollar estate gets put into an index fund for his wife... :D
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Re: Buffett: American public has been going ‘wild’ with enthusiasm for index funds

Post by spectec »

Maybe he should have called BH an "amalgam".
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Re: "America going wild for conglomerates in the last few years, but they call them Index Funds" - Warren Buffett 2/24/2

Post by Stinky »

nisiprius wrote: Mon Feb 24, 2020 12:10 pm I don't know why people like to say something is something else, that it clearly isn't. And I expected something better from Warren Buffett.

A conglomerate is a corporation that, usually through mergers and acquisitions, is in a number of seemingly unrelated businesses. Conglomerates became notorious during the 1960s or so when forming conglomerates became a fad and an intentional business strategy. The once-familiar giants included LTV (Ling-Temco-Vought), Litton Industries, ITT, and Teledyne. The fad was fueled by some accounting rules peculiarity which could be exploited to report an illusory gain in profitability, as a result of the acquisition process. The gains were falsely explained as being the result of "synergy," as if Durkee's Spices and Smith-Corona-Marchant (that pair stuck in my mind because I thought it was so bizarre) were clearly going to be able to earn more money together than the sum of what they could earn separately. I think the accounting bug was fixed eventually.

The word "conglomerate" implies the existence of management linkages between the companies. No obvious linkage was created between the Las Vegas Sands and Western Digital just because the S&P decided to add the Las Vegas Sands to the S&P 500 index. My guess is that the management of Western Digital doesn't spend very much time each day helping to manage casinos, and that the Las Vegas Sands management doesn't have much to say about the manufacturing of disk drives.

I don't think anybody claims that the value of an S&P 500 ETF will be consistently higher than the weighted average of the values of the stocks in it. There is no "synergy" in which the stocks combine like sulfur, charcoal and saltpeter to form something new and wonderful. There is no "whole-is-greater-than-the-[weighted]-sum-of-its-parts" story about broad market indexing.
As always, nisiprius nails it!

I remember the days of conglomerates. They were a short-lived fad in corporate organization.

My former life insurance employer was a beneficiary of the de-conglomeratization of the 1980s, when we bought a life insurance company from a steel company (and made a good profit in the process).

Index funds will be around much longer than the 1960s conglomerates.
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