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.
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.
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.
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.
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?