OtherWarren Buffett's Portfolio Manager Ted Weschler:
"We Love the Stability in Germany"
Warren Buffett's portfolio manager Ted Weschler wants to acquire more companies in Germany. In this interview, he talks about what makes the Mittelstand special, reading regulatory filings, the appeal of Wall Street, and what drives him.
Astrid Dörner
June 14, 2016 - 12:00 PM
Ted Weschler has a sense of humor. In his office in tranquil Charlottesville, there's a telescope standing in the corner. But it's not there for stargazing. It once belonged to investment fraudster Bernie Madoff. And when his assets were auctioned off in the wake of the exposed Ponzi scheme, Weschler bought it. It's a reminder of how crazy things can get on Wall Street, he says.
OtherMr. Weschler, you're looking for more acquisition targets in Germany for Warren Buffett. How do you currently view the country?
Ted WeschlerWe acquired the Hamburg motorcycle retailer Louis in early 2015. Louis is a very attractive company. And it was an opportunity for us to show that we want to be active in Germany and are active there. The company is smaller in volume compared to other investments. However, we would like to do more such deals — and would also be interested in larger transactions. We love the stability in Germany. When you look at the Mittelstand, with the many companies that have been passed down from generation to generation, we believe: Berkshire Hathaway would be a good new home for many of these companies if the next generation doesn't want to continue the business or can't continue it because, for example, there's no succession.
OtherWhat makes the German Mittelstand so special?
Ted WeschlerI was in the private equity business for a long time. And when I came out of university, I thought everyone only does deals to maximize their own profit. But for true entrepreneurs, the company is like their own child. Many have more money than they need and are very loyal to the employees who built the business. And for them, it's not just important how much money they get after selling the company. They want to know what happens to the company after it changes hands. That was also a key factor with Louis.
OtherWhat did you answer?
Ted WeschlerOne of the first letters Warren received from Louis contained the condition that the company remain based in Hamburg for at least seven years. Our answer was: We'll even go one better: We promise you that the company will remain in Hamburg forever. We only need people who run the company properly. And we found two who have been with the company for a very long time, and they complement each other excellently.
OtherWhy should Berkshire Hathaway in distant Omaha be a good home for German Mittelstand companies?
We're not a strategic buyer who wants to create lots of synergies. We won't fire a third of the people and change the business to improve it. We operate very decentralized, which is extremely rare. Only 25 people work at Berkshire's headquarters in Omaha. And that only works if we have companies that stand completely on their own feet.
QuestionerHow often are you in Germany?
OtherI go over at least once a year to show presence. But of course we're always there when management needs us. We also work in Germany with transaction advisor Zypora Kupferberg, who looks for suitable investments for us and is a contact person for German Mittelstand companies. We want the companies to feel at home with us. Both bosses of Louis attended the shareholders' meeting in Omaha this year. They got to know Warren and saw the "large" headquarters of Berkshire. It's only one floor, we have linoleum in the break room. It's the same furnishings that have been there for 35 years.
Everyone has very simple offices. And Warren has this couch... Well, my couch is much better than his. But it makes people feel comfortable.
QuestionerHow large should the companies be that you want to acquire in Germany?
OtherLarger is better. 50 million euros in pre-tax profit is a size we'd like to see. That's on page 23 of the annual report. Louis wasn't quite there, but there were special circumstances.
QuestionerDo you prefer certain industries?
OtherYou know, we're very unbound when it comes to industries. However, we avoid companies with technologies that only have a short life cycle. We do now hold shares of the IT company Apple in our portfolio and have been invested in IBM for longer. But I see IBM more as a service provider. And Apple is more of a subscription service than anything else. Once you're in the Apple ecosystem, the probability is very high that you'll buy more Apple products. That's not quite like the newspaper business, which we understand something about, but it is a bit similar.
QuestionerAre you worried about the German economy?
OtherThat's always an interesting question. And the short answer is: no. We think 50 years ahead. When we acquire something, we don't worry about what will happen next year. When we acquire a company, we hold it forever. There will be downturns in every economy. But we feel very comfortable with Germany. The country has reliable laws. There are smart, industry-oriented people. Generally speaking, it's a very attractive place to do business. And in recessions we often find our best ideas.
QuestionerAre you also looking at other European states?
Ted WeschlerYes, but we have to limit ourselves to certain countries, and since we've already made an acquisition in Germany, it's better to concentrate our energy there. But I do get calls from other European countries. And we'll see. We're certainly open to it. But I want to be where the probability is highest of closing new deals. If we can show one day that we've closed several transactions in Germany, then I would guess that the rest of Europe would also be more open to us.
QuestionerSome mid-sized companies also have the reputation of not really keeping up with the times. Does that bother you?
Ted WeschlerA little bit maybe, but we can take that into account in the purchase price. And if you show me a company that has been criticized for not being innovative enough, but is in a stable industry and has delivered stable results for the last 30 years, then that's okay. We're not necessarily looking for the company that will change the world tomorrow. We're looking for people who care about stability in day-to-day business and where there's a high probability that this business will still exist and be profitable in ten, twenty, or thirty years.
QuestionerYou joined Berkshire as a portfolio manager five years ago. When you're not looking at German companies, what does your day look like?
Ted WeschlerI read. And that probably makes up 95 percent of my day. I start with five newspapers. And I have the tradition that I always read the local newspaper first, from the city I'm currently in. Here in Charlottesville it's the "Daily Progress," which belongs to Berkshire Hathaway. After that comes "USA Today." That gives me a good overview of everything that's currently popular and important. Then come "New York Times," "Wall Street Journal," and finally the "Financial Times." I've read the newspapers by 7:30 a.m. After that come the emails that came in overnight. And I get a series of industry newsletters: "Furniture Today," "Daily Bankruptcy Reporter," "Women's Wear Daily" — I've been reading those for twenty years. Around 8:30 a.m. my assistant Kirsten comes in. And she makes another news summary for me. There are about 100 to 150 ticker symbols that interest me. And she checks if there's any news about them.
QuestionerWhich stocks do you follow?
Ted WeschlerStocks of those companies I invest in for Warren, of course. But also their competitors or suppliers, as well as a number of other companies that are on my watchlist. For example, I follow some newspaper companies because we're engaged in the newspaper business. I work with our TV studio in Florida that we acquired from the Graham group. All in all, that adds up to about 500 to 700 pages. Unfortunately, we have to kill a lot of trees. And 90 percent of it is garbage, I just skim over it. But I want to be on top of everything that's happening.
QuestionerDo you follow quarterly numbers when you have such a long-term investment horizon?
Ted WeschlerYes, that's always a very busy time. Kirsten listens to the conference calls of all these companies, and she knows what things interest me. So she highlights them for me in the transcript.
QuestionerHow often do you trade stocks?
Ted WeschlerOnly very rarely. My portfolio has a volume of about nine billion dollars and is very concentrated. I currently hold seven names. And my job is to know these names inside and out. I'll never be good at knowing what will happen in the next six to twelve months. My goal is to look around the corner and get a feel for what things will look like in five years. And in a more differentiated way than the rest of the market looks at things. The goal is to be right with my bets over a long time. That's sometimes easier said than done. But if I only have one such idea per year and see what's really mispriced, then that's good.
QuestionerWarren Buffett also advises to trade very selectively.
Ted WeschlerWarren likes to use the punch card analogy: We should all invest as if we had a punch card that only allowed us to make 20 investment decisions in our lifetime. We'd probably all be better investors then. Because with such a high threshold, you only invest where you're very confident. And I try to do exactly that. But that also means a lot of inactivity when it comes to trading.
QuestionerYou're known for not talking much with executives before buying shares of a company.
Ted WeschlerI'm a bit strange that way. I tend not to do that. I've made the biggest investment mistakes when I've become too fond of people. I just liked them too much. And I like to like people, that's my disposition. It's a good way to go through life, but it creates a kind of bias. So in most cases I invest before I've met anyone from the company. After that we're usually contacted by the company's managers. If they wish, there can be a meeting. But it's not a requirement.
QuestionerYou're also known for reading regulatory filings very intensively — like Mr. Buffett.
Ted WeschlerYes, I spend a lot of time on that. And you know that companies choose their words very carefully here and put a lot of work into it. That's simply a better source of information. It creates a mosaic of information that's uniquely tailored to me. Because when everyone looks at the same data points, you can't form a differentiated opinion.
QuestionerThere's a rumor that you also take these regulatory filings on vacation...
Ted WeschlerAsk my kids! Yes, I'm a fun guy. But I've gotten better because I can now load them into my Dropbox and onto my iPad. But yes, no matter where I go, I have them with me. And I like that.
QuestionerCan you say which names are in your portfolio?
Ted WeschlerNo, we don't do that. A few are known. But basically: The investments that are larger than a billion dollars are Warren's, the rest are Todd's and Ted's. Warren once mentioned that General Motors is my investment. And Davita. He likes it when people guess. And it makes sense because it doesn't put so much pressure on us.
QuestionerYour office is in tranquil Charlottesville in the state of Virginia. How often are you at headquarters in Omaha?
Ted WeschlerSunday evening I have dinner with my family, and then I fly to Omaha. I usually have a meeting with Warren Monday morning where we exchange news from the past week. At lunch we then meet with Warren and Todd Combs, Berkshire's other portfolio manager. Often manager Tracy Britt also joins. We have about 90 minutes of lunch and discuss all kinds of topics.
QuestionerIs there competition between you and Todd Combs?
Ted WeschlerNo, not really. We're both very withdrawn and work alone. Only occasionally do we compare our views. Once we both invested in the same company. My compensation is partly dependent on Todd's success and vice versa.
QuestionerDid you ever feel tempted to work on Wall Street?
Ted WeschlerI have to laugh at that. Because when I finished college, I applied to investment banks and was rejected by all of them. I really wanted to get into investment banking, but ended up getting a job at chemical manufacturer W.R. Grace, and in hindsight that was wonderful.
Ted WeschlerThere are advantages to being far away from the herd. Wall Street is very transactional. And that doesn't help returns. When you sit on Wall Street, it's extremely difficult to maintain a laser-sharp focus on any topic over ten years. On Wall Street you're always in the middle of the hustle and bustle and constantly comparing yourself with your colleagues. I try to avoid that.
QuestionerMany bankers in New York are under extreme pressure to succeed. Do you feel that too?
Ted WeschlerNo, I don't feel pressure. I've always been self-motivated. And I put much more pressure on myself than anyone else. I want to beat the market. And by that I mean: Every morning I wake up and think that's exactly what I want to do. And I know I'm competing with the smartest people in the world. There are people who just came out of university who might be better at getting information than I am. But you know, I have the advantage that I've been doing this for a few years and have good data. And I work for the guy who has the best database in the world. Warren has been absorbing data points since he was a little boy. And investing is about who has the most information and best recognizes trends and patterns. Warren is simply the best out there.
QuestionerBut your competitors nowadays are also computers?
Ted WeschlerI know, of course, that artificial intelligence is increasingly advancing. But observing how people interact with each other and what characters are on a board of directors, that's very difficult to cover with algorithms.
QuestionerNevertheless, computers can process so much more information than a single person.
Ted WeschlerArtificial intelligence will keep getting better. But you still need a smart operator. For spreads where you have to pay attention to 1/1000 of a difference, artificial intelligence is wonderful and impressive. But when it comes to thinking five years ahead, I'd rather rely on human judgment. And if you want to go one step further: The other big trend is index investing. More and more dollars are flowing into that. And interestingly, I like that. Because the more shares the market puts into such funds, the more opportunities there are relatively speaking to have a different view than the market.
QuestionerWhat drives you to want to beat the market? You don't give the impression that it's about buying yourself a bigger private jet or a yacht.
Ted WeschlerI love the game of the market. And the fact that you can compare yourself precisely with the market. But I don't mean that I want to beat the market every day, but over time. And what spurs me on is that other people are competing with me every day. That just gives me a kick. If you're intellectually curious and like to learn new things, then there's no better industry than this — except maybe what you do.
QuestionerCan you imagine leading Berkshire Hathaway one day?
Ted WeschlerAbsolutely not. I love the investment side, and more importantly: Warren was very specific. He said, when he's no longer here — and I hope it's a very long time before that happens — then your duties will be distributed across multiple shoulders. Someone will be responsible for the operational business, and the two of us will then be Chief Investment Officers, that makes a lot of sense. You met my only employee, Kirsten. When I had my own fund, I had one analyst and Kirsten. I like running small operations and keeping the number of people working under me as small as possible. My primary passion is investing.
QuestionerMr. Weschler, thank you very much for the interview.