My Review of Porter Stansberry's "Warren's Mistakes"*

 Chinks in Buffett’s Armor

Financial newsletter writer Porter Stansberry has written a detailed critique of legendary investor Warren Buffett’s investments after 1999. In essence Stansberry believes that Buffett changed his investing style in 1999 when Berkshire Hathaway offered its then undervalued stock to buy General Re. From there, instead of finding hidden value in the stock market, Berkshire embarked on a process of buying companies whole with huge investments in electric utilities and the Burlington Northern Railroad. Berkshire became a clunky conglomerate, a business model he once derided. In a notable example he cites Berkshire’s acquisition of the Benjamin Moore paint company for one billion dollars in 2001. Instead Stansberry argues that Berkshire should have bought a 25% interest in Sherwin Williams, a far better paint company.

 

The reason why the years around the turn of the century are so important is that from 1967-2000 Berkshire dramatically outperformed the stock market as a whole. After that Berkshire’s performance roughly tracked the S&P 500. To Stansberry, Buffett is a better investor than an operator.

 

One of the questions Stansberry asks is to what we attribute Buffett’s success as a stock market investor. He found the answer in a 2018 Financial Analysts Journal article by Andrea Frazzini, David Kabiller and Lasse Heje Pedersen, all of AQR, entitled “Buffett’s Alpha.” Using data from 1976-2017 the AQR authors developed a multi-factor analysis that attributed much of Buffett’s outperformance to buying high-quality low beta stocks with a considerable amount of leverage. A good piece of the leverage came from Buffett’s utilizing the float from his insurance companies.

 

Buffett’s genius was to consistently utilize these factors, even the face of temporary downturns that could have broken other managers employing the same strategy. In 1998-1999 Buffett was sorely underperforming and many “value” managers were crushed during that period. (See for example: https://shulmaven.blogspot.com/2026/02/my-review-of-jeremy-granthams-making-of.html ) Such was the strength of Buffett’s reputation and the permanence of his capital that enabled him to ride out the storm.

 

Stansberry is especially critical of Berkshire’s investment in the Burlington Northern Railroad in 2010 and a series of investments in Berkshire Hathaway Energy. (BHE) In the case of Burlington Northern the author notes that is has the worst operating ratio of all the Class I railroads significantly underperforming its competitor, Union Pacific. Indeed, Buffett himself has noted that Burlington’s capital expenditure consistently exceeds its depreciation allowance. Thus, owner’s income is less than reported income.

 

In the case of BHE, Stansberry states that it has yet to pay a dividend to the parent company. BHE’s huge investment in solar and wind energy is done solely for the tax credits that the parent company utilizes. Absent the tax credit the investments in solar and wind would not be economic. Furthermore, in 2022 BHE was valued in excess of $90 billion in 2022 when then CEO Greg Abel sold his stock back to Berkshire. Two years later the company was valued when the Scott family sold its interests back to Berkshire, a huge haircut. In the interim the PacifiCorp subsidiary became on the hook for a maximum of $50 billion for potential liabilities accruing from the Oregon wildfires. Stansberry unfairly harps this maximum liability because should it be awarded the liability would be limited by the bankruptcy of its Pacific Power subsidiary.

 

Stansberry’s solution is for Berkshire to spin off both Burlington Northern and BHE. That would clean up Berkshire’s balance sheet and make it look more like the Berkshire of old.  

 

My primary criticisms of the book are twofold. First, Stansberry after paying lip service to Buffett’s investment acumen, he takes on the role of prosecutor and in many instances, he refers to Buffett as an “old man,” hardly fair. Next, he leaves out perhaps the most important reason as to why Berkshire has failed to outperform the S&P 500.

 

My explanation is that Berkshire’s primary competitive advantage, aside from Buffett’s investment acumen, is the ability to access its insurance float at a low or zero cost. With the Federal Reserve operating at a very low or zero interest rate policy for the past 25 years, Berkshire’s competitive advantage from this source has been severely eroded. Thus, with interest rates normalizing, we should expect Berkshire to once again outperform the market averages. However, this would be a tall order with Buffett no longer at the helm. Greg Abel, Berkshire’s new CEO, has his work cut out for him.

* Shulmaven is a longtime shareholder in Berkshire Hathaway. Subsequent to the original post I discovered that Stansberry was found civilly liable by the SEC for violating the securities law to the tune of $1.5 million in 2007.