Warren Buffett, Charlie Munger Have Thoughts Re: High Frequency Trading, Activist Investing

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The highlight of Buffettstock is always Warren’s five-hour, off-the-cuff Q&A session with Berkshire investors at Omaha’s CenturyLink Arena, and this year was no different. The Berkshire chief and sidekick Charlie Munger ranged over a variety of topics for 38,000 adoring fans, including: Did they fuck up, re: Coke? Should a 59-year-old volunteer sheriff and college dropout take over as Berkshire chair when the 83-year-old Buffett expires? Can they invest all of the money they’re making?* And, last but not least, stuff they don’t like, notably high-frequency trading and activist investors.

Munger said, "It's the functional equivalent of letting rats into a granary" and "does the rest of the civilization no good at all…."

Buffett added, "It's not a liquidity provider. It may create more volume but that's not the same as being a liquidity provider."

In addition, "To the extent that it is front running, I think society has generally been against front running for good reasons... Here they've gained an advantage by figuring out how the system worked and getting there first and that adds nothing" to economic activity."

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Buffett and Munger, renowned for their success with long-term value investing atBerkshire Hathaway Inc., both predicted at the firm’s annual meeting that activist funds will draw more money. Munger questioned whether the strategy actually improves targeted companies.

The tactic is causing a bigger stir “than anything has in years,” Munger said. “I don’t think it’s good for America....”

Buffett, the 83-year-old chairman and chief executive officer, asked Munger, the 90-year-old vice chairman, what he thought activist investing would be like in three years.

“Big,” Munger said. “What’s stopping it?”

“They are certainly attracting more and more money,” Buffett said. Wall Street sees activism as a form of success and is plowing funds into it, he said. “I don’t think it will go away, and I think it scares the hell out of a lot of managers.”

To which the reconciled Carl Icahn and Bill Ackman responded, “Well, sure, but not us, right?”

“I 100 percent agree with them,” said Ackman, 47, who runs hedge fund Pershing Square Capital Management LP, of Buffett and Munger. Seeking short-term gains without creating better businesses is “bad for markets, and it’s bad for shareholders.”

Pershing Square typically holds stakes “four, five, six years or more,” Ackman said....

“I understand and somewhat agree with their criticisms that some activists are going for a short-term pop,” Icahn, 78 and chairman of Icahn Enterprises LP, said of Buffett and Munger’s remarks. “That doesn’t mean you throw the baby out with the bath water. One of the most important things we need in this country is to keep companies accountable.”

* No, yes and maybe not.

Ackman, Icahn Defend Activism as Munger Sees Harm to U.S. [Bloomberg]
Buffett, Gates and Munger criticize high-frequency trading [CNBC]
Buffett Displays His Nuanced Side at Berkshire Annual Meeting [WSJ]
Heir Apparent at Berkshire Hathaway: Warren Buffett’s Eldest Son [WSJ]

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