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2016: Is Valeant "highly immoral?"
BECKY QUICK: This question comes from Rom and Raji Terracod from Sugarland, Texas.
He writes, “My wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr. Buffett, you have endorsed the Sequoia Fund on more than a few occasions.
“Recently, the Sequoia Fund has been in the news because of its large position in Valeant Pharmaceuticals. Mr. Munger has termed Valeant’s business model ‘highly immoral.’
“Mr. Buffett, do you agree with Mr. Munger’s assessment? Have your views about Sequoia Fund changed? Also, as you know, Sequoia is an admirer and large holder of Berkshire stock. ”
WARREN BUFFETT: Yeah, in a sense, I’m the father of Sequoia Fund, in that when I was closing up my partnership at the end of 1969, I was giving back a lot of money to partners, and these people had trusted me, and they wanted to know what they should do with their money.
And we helped out those who wanted to put it in municipal bonds for a few months, Bill Scott and I stayed around and helped those people come up with those. But most of them were equity oriented-type investors.
And we said there were two people that we admired enormously in the investment business, not simply because they were terrific investors, but they were terrific people. And they would be the kind of people that you’d make trustee of your will.
So those two, one of whom is in the room — Sandy Gottesman, our director — and one was Sandy and one was Bill Ruane. They were friends themselves.
So, Sandy took on a number of our clients — a number of our partners — and they became clients, and very happy clients, of his, and I’ll bet some of them are still clients, or their children or their grandchildren are, to this day.
Others went with Bill — a lot of them went with both of them, actually — in fact, I would be surprised if the majority who had a lot of money gave some to Sandy and gave some to Bill.
But Bill — we had a lot of people whose total funds were really not of a size that made them economic individual clients. And so, Bill, who would not have otherwise set up a fund, Bill said, “I’ll set up a fund.”
And they actually had an office in Omaha. John Harding, who used to work for me, became the employer here.
And a number of our ex-partners — my ex-partners — joined Sequoia Fund as a way to find an outstanding investment manager, like I say, both for ability and for integrity, and could deploy small sums with him.
And Bill ran Sequoia until, I think, roughly 2005, when he died, and did a fantastic job.
And even now, if you take the record from inception to now, with the troubles they’ve had recently, I don’t know of a mutual fund in the United States that has a better record. There probably is one, maybe, or two, But it’s — it’s far better than the S&P, and you won’t find many records that go for 30 or 40 years that are better than the S&P.
So Bill did a great job for people. And Bill died in 2005, and the record continued to be good until a year or so ago.
And at that time, they — the management company — the manager, I should say — took an unusually large position in Valeant and, despite the objection of some people on the board, not only maintained that position but actually increased it, after a fair amount of doubt had been expressed by the board about the advisability of doing that.
The record, like I say, to date, still, from when it started, is significantly better than average.
My understanding is that the manager who made the decision on Valeant is no longer running the operation, and that other people have (inaudible) for doing so, and I have every reason to believe that they’re — I know that they’re very smart, decent people, who are good, probably way better than average analysts, in terms of Wall Street.
So, I think it was a very unfortunate period when the manager got overly entranced with a business model, which, if you — I watched the Senate hearings a couple of days ago when Senator Collins and Senator McCaskill interrogated three people from Valeant, and it was not a pretty picture.
In my view, the business model of Valeant was enormously flawed. It had been touted to us. We had several people who urged us, strongly, to buy Valeant, and wanted us to meet Pearson, and all that sort of thing.
But it illustrated a principle that Pete Kiewit, I think, said many, many years ago. He said if you’re looking for a manager, find somebody that’s intelligent, energetic, and has integrity. And he said that if they don’t have the last, be sure they don’t have the first two. If you’ve got somebody that lacks integrity, you want them to be dumb and lazy.
You know — and if you get an intelligent, energetic guy, or woman, who is pursuing a course of action which, if put on the front page, you know, would make you very unhappy, you can get in a lot of trouble.
It may take a while. But Charlie and I have seen, and we’re not remotely perfect at this, I don’t mean that, but we’ve seen patterns. You get — pattern recognition gets very important in evaluating humans and businesses. And, the pattern recognition isn’t 100 percent, and none of the patterns exactly repeat themselves, but there’re certain things in business and securities markets that we’ve seen over and over, and that frequently come to a bad end, but frequently look extremely good in the short run.
One, which I talked about last year — I’m not referring to Valeant in this regard — is the chain letter scheme, the disguised chain letter. You’re going to see chain letters the rest of your life.
Nobody calls them chain letters because that has a connotation that will scare you off. But they’re disguised chain letters. And many of the schemes in Wall Street that are designed to fool people have that particular aspect to it.
And there were patterns at Valeant that I think — certainly if you go and watch those Senate hearings, I think, you’ll decide that there were patterns there that really should have been picked up on, and it’s been very painful to the people of Sequoia.
And I personally think that the people running Sequoia now are able people, and I’ll get into in a second the difficulty in managing money, but first, I’ll give Charlie a chance to comment on this.
CHARLIE MUNGER: Well, I totally agree with you that Sequoia, as reconstituted, is a reputable investment fund and that the manager, as reconstituted, is a reputable investment adviser.
I’ve got quite a few friends and clients that use Ruane, Cunniff, and I’ve advised them to stay with the place as reconstituted. I believe you’ve done the same thing, haven’t you?
WARREN BUFFETT: Right.
CHARLIE MUNGER: So we trust — we think the whole thing is fixed.
Valeant, of course, was a sewer, and those who created it deserve all the opprobrium that they got. (Applause)