The Integrity of Capitalism in the 21st Century

“Only when the tide goes out do you discover who's been swimming naked.”
Warren Buffett
CEO, Berkshire Hathaway

One year ago, in late February 2018, i wrote a letter to two of my idols in investing – Mr Warren Buffett and Mr Charlie Munger.

Below i share some excerpts.

Please find my questions for Mr Charlie Munger and Mr Warren Buffett below, it pertains to the universal idea of sustainable value investing, long-term value creation for stakeholders, as well as questions the very bedrock of capitalism which Mr Warren Buffett, Mr Charlie Munger, Berkshire Hathaway and The United States represent:

In years past, both of you repeatedly highlight and remind investors to beware of financial shenanigans, and that “only when the tide goes out do you discover who’s been swimming naked.” Do you now encourage investors and Berkshire Hathaway shareholders to invest in companies with high goodwill and high debt due to a highly leveraged merger & acquisition deal (M&A), which results in negative Net Tangible Assets (NTA)?

Why would Berkshire Hathaway’s shareholders, Kraft Heinz’s shareholders and the both of you be comfortable with Kraft Heinz’s 104b goodwill and intangible asset which stands at 87% of their total assets, and negative 45b NTA coupled with 32b net debt position, which requires at least 5 years of operating profit to neutralise? Does that mean additional capital raising is imminent when interest rates rise?

What might be some possible long-term ramifications on the economy now that such financial smartness is increasingly encouraged by more institutions?

I sincerely hope to hear from you on the issues i highlighted as i believe some institutions are increasingly reckless with capital allocation which might impact the economy, and us humans, on a long-term basis.

Meanwhile, a friend shared this article with me today.

Kraft Heinz Co. plummeted the most on record Friday, one day after writing down the value of some of its best-known brands by $15.4 billion, an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.

The packaged-food giant’s charge to reduce the goodwill value of the Kraft and Oscar Mayer trademarks and other assets came with disappointing fourth-quarter earnings and an accounting subpoena from securities regulators.

https://www.bloomberg.com/news/articles/2019-02-21/kraft-heinz-slumps-on-sec-subpoena-15-4-billion-in-writedowns

Clearly we do not have yearly billion dollars allocation issues, yet. So we might not understand the situation as intimately, which is why i asked questions instead of sharing my probably limited views. And yet, the current goodwill writedown seems to agree with the points raised.

Now, to put things into proper context, this is a large company with a global footprint and highly visible and transparent business, we are not saying there are any ill-intentions or funny businesses. We are just saying that the goodwill and debt is on the high side, and thus there seems to be only a few ways that balance sheet “pressure” can be let off.

Do we have to wait until the impact had been certainly drawn out, in this case, a plummet of the company’s valuations, before we take action to protect our hard-earned money? In this example, investors have at least one year to very slowly rotate out of this investment before it plummets.

Q) Do you really know the financial health of the businesses you invest in? More critically, do you know who you are investing with? Because the management is directly in charge of making financial decisions for you.