Bain Capital vs. Berkshire Hathaway and Romney vs. Buffett

by JT McGee

They stand at virtually two opposite ends of the political machine. Romney’s an unabashed capitalist, and on a good day, a Republican. Buffett is an unabashed capitalist, and without question, a Democrat.

Both Romney and Buffett are remarkable investors, even if they differ in political ideology. I thought it would be fun to compare the two men and their history as portfolio managers and investors.

Investment Specialty

Mitt Romney: At Bain Capital, Romney participated in leveraged buyouts. Using funds from all different sources – wealthy private investors, pensions, and even public school teachers and their unions – Bain Capital purchased companies to control, improve, and hopefully resale. Bain was also involved in venture capital to small private companies. Many businesses were improved by cost cutting and offshoring.

Romney had a mixed record. Major successes included the office supplies store Staples. Major failures included a leveraged buyout of KB Toys, which gave Bain and its investors a massive return while passing off the losses to banks that financed the transaction.

Warren Buffett: In his early years, Buffett ran what would today be known as a hedge fund. He purchased the worst of businesses he could find, often purchasing shares in companies for less than their cash on hand before pushing for management to distribute cash to shareholders. These, as Buffett described, we’re “cigar butts.” You could find them along the street, get a free puff, and then move on.

Buffett’s famous Berkshire Hathaway acquisition was intended to be “vulture capitalism;” he wanted to buy it to shut it down, reaping the cash on hand and cash flow until it died. It was only after a local paper called him out that he promised to keep it open. A fool’s move that cost him dearly in terms of opportunity costs, he closed it in 1968. He still made a profit on Berkshire Hathaway, but only because he didn’t reinvest in the company’s continuing operations. He later admitted he bought the company out of anger to fire then major owner and CEO Seabury Stanton.

It was only after he took over Berkshire Hathaway (and began working with Charlie Munger) did he avoid net-net businesses for high-quality, well run companies.

Leverage and Other People’s Money

Mitt Romney: Leverage was a key driver of returns for Romney’s leveraged buyouts at Bain Capital. Bain Capital was financed by private funds, with Romney earning management fees based on performance.

Warren Buffett: A huge fan of leverage. In his early years, he convinced his dad to cosign for a loan to purchase more shares of outstanding investments he found as a young broker at his dad’s firm. He later issued bonds on behalf of Berkshire Hathaway to invest in new securities. His early partnerships compensated him for performance. His original investment was only $100, as others put up the original $105,000. Later financed much of his purchases out of the float from insurance operations – other people’s money.

Background

Mitt Romney: Son of an automotive CEO and later governor. Graduated from Harvard and Harvard Business School.

Warren Buffett: Son of a stockbroker and congressman. He graduated from Columbia.

On Family Life

Mitt Romney: Has a wife, never divorced.

Warren Buffett: Has a wife, who he had only a short relationship with. Buffett has three kids from Susie, his first wife, but had an affair with Katharine Graham of the Washington Post. He was later introduced by his wife to Astrid Menks, who lived with him for many years until they were married a few years after Susie passed away. Buffett famously wrote to his oldest son’s adopted daughter to say “I have not emotionally or legally adopted you as a grandchild, nor have the rest of my family adopted you as a niece or a cousin.” To say his own family life is complicated is an understatement.

Bailouts

Mitt Romney: His biggest controversy comes from his flip-flopping on the bailout of the automotive industry in 2008-2009.

Warren Buffett: Berkshire benefitted tremendously from bailouts given its exhaustive derivative positions. Invested in Goldman Sachs near the bottom, saying that he thought Congress would “do the right thing” and bail out the investment bank. Defended Lloyd Blankfein’s $13 million salary as CEO of Goldman Sachs.

Charity

Mitt Romney: Donates a substantial amount of his income to the Mormon church.

Warren Buffett: Will donate more than 99% of his wealth to the Gates Foundation.

Are You Surprised?

Buffett doesn’t have a super clean history. Romney doesn’t either – Bain had plenty of failures with other people’s money.

As investors, both have impressive track records. When I examine the details of their histories, I often wonder why Romney is a political punching bag for the left and Buffett is regarded as some kind of savior. Some of this stuff isn’t easy for me to write. I have always been one of Buffett’s biggest fans, and I regard him as one of the most intelligent and influential investors of all time. He is the standard for the value investing style.

Even still, in his personal life and business dealings, he is not much different than Romney.

It just makes me wonder – have we really gotten to a point where someone’s favorable view of higher taxation can override every other detail of their history?

{ 7 comments… read them below or add one }

Wayne @ Young Family Finance September 23, 2012 at 22:58

Interesting; I hadn’t thought much about pitting Romney and Buffett, to tell you the truth. I didn’t know anything about Buffett’s personal life before. I vacillate between wanting to know how bad people are in their personal lives and not wanting to know; all people do things that are wrong and stupid. However, doing things that are wrong and stupid in your personal life could potentially leak into your professional life. So, I suppose you are right to care!

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PK September 24, 2012 at 10:50

This is a serious suggestion: Next do the Kochs vs. George Soros!

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American Debt Project September 26, 2012 at 22:59

That one would be amazing!! I’d love to see that. You’re right that both came from similar backgrounds and have similarities throughout their paths. But Romney’s just so damn unlikeable. Republicans need to give that Marco Rubio some more air time! #handsome. But in all seriousness, one has been a politician for 10 years, the other occasionally shares political views that resonate with the people. Buffett to me is sharing his genuine views and he has the ability to do what he says he’s going to do (like donate all his money), Romney is intent on winning a campaign but I can’t tell if he has reasons for wanting to win besides…really wanting to win.

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Darwin's Money September 25, 2012 at 15:43

It’s telling that Warren was never calling for higher taxes in his 40s, 50s, 60s or 70s. Only when he’s got a few livable years to go realistically and has already committed most of his funds to his desired charity does he call for the rich paying higher taxes.

This punishment of Romney is silly. Even at a 14% effective tax rate, aside from the fact that it’s millions of dollars per year, since everyone in this country gets so many deductions and credits, that seemingly low rate IS still higher than the vast majority of Americans.

Pure political pandering.

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Readtoawake September 26, 2012 at 02:42

Great post and very interesting the comparison between Buffett and Romney.

I have never seen a post comparing these 2 great men. Sometimes it’s useful to know about other successful people to get inspired and motivated. This post shows that everyone can become like Warren Buffett. He is like other person on this planet.

This is a great article. Thanks for sharing.

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Cliff October 25, 2012 at 16:22

The biggest difference I see between the two is that Romney thinks his paying a lower tax rate than someone making $50k is just fine while Buffet thinks it is ridiculous.

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JT McGee October 25, 2012 at 16:49

So because Romney thinks his taxes should be lower makes it okay to criticize his past whereas Buffett gets a free pass? Trying to understand…

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