Buffett's heir apparent (no it's not me!)
THE new heir apparent to Warren Buffett's roughly $US100 billion portfolio got the job the old fashioned way: He applied for it.
Wall Street was still agog about Warren Buffett's selection of Todd Combs, a little known fund manager who at 39 is the leading contender to take over Berkshire Hathaways investment portfolio when the investing legend dies, or retires.
Mr Combs was one of hundreds of people who responded to an unconventional "help wanted" request Mr Buffett made in early 2007. But his initial inquiry didn't distinguish itself.
Undaunted, the low key father of three, who lives in Darien, Connecticut, recently sent another letter to Berkshire vice-chairman Charles Munger asking for a meeting. Mr Munger said in an interview that he gets "hundreds" of such requests each year, but "something in his request piqued my interest".
The two soon met for a lunch that extended well into the afternoon at the California Club in downtown Los Angeles. Mr Munger later phoned Mr Buffett and told him, "This is a guy I am sure you are going to like," Mr Munger recalls.
Mr Buffett says he and Mr Munger were sold on Mr Combs not only because of his ability and intelligence but also because they were convinced he would fit in to Berkshire's no-fuss culture.
Mr Combs, a native of Sarasota, Florida, who is still partial to his alma mater Florida State Seminoles football team, struck a lasting impression, Mr Buffett says. He and Mr Munger arrived at the decision based on the same kind of "gut check" they make with acquisitions of companies.
"He is a 100 per cent fit for our culture," Mr Buffett says. "I can define the culture while I am here, but we want a culture that is so embedded that it doesn't get tested when the founder of it isn't around. Todd is perfect in that respect."
Other Berkshire shareholders had a less enthusiastic response to the news. Following yesterday's announcement in the US that Mr Combs would join Berkshire as an investment manager, Berkshire's Class A shares fell $US1575, or 1.3 per cent, to $US123,455 on the New York Stock Exchange composite trading, while the broader market edged higher in the latest session.
Mr Combs's rise to one of the most visible and high-pressure posts in business doesn't follow a typical path of privilege and pedigree.
"He is smart, and he can adapt," says Sheryl Lucante, who was the maid of honour when Combs wed April, who remains his wife. "When he got into this business, he didn't know anybody."
After graduating from Florida State in 1993, he worked as an analyst for a state financial regulator, a job that gave him insights into the inner workings of banks and fraud investigations.
He then joined auto insurer Progressive Corp, working in the department that analyses risks and sets rates for car insurance policies. It was there he met Chuck Davis, a company director, who would later help him get his hedge fund started.
People who have worked with Mr Combs say he has a deep understanding of finance, business and regulation. He does his own research and spends a significant amount of time reading newspapers and arcane financial documents, such as insurers' statutory filings and prospectuses for securities backed by pools of assets.
In 2000, Mr Combs enrolled in Columbia Business School, where in his second year he was one of 40 students picked for its Value Investing Program, which had just gotten off the ground. There, Mr Combs learned techniques to identify and analyse stocks that were out of favour with professional money managers and renowned finance professors, including Bruce Greenwald.
Richard Hanley, manager of Hambletonian Partners, a hedge fund in New York, taught a course called Applied Value Investing at Columbia Business School as an adjunct professor in 2002. "When you teach, you see some people that just go through the motions," Mr Hanley says, "and some people who genuinely want to make money. That's where Todd's head was."
Mr Combs, recalls Mr Hanley, "stood out in his level of intensity among a very intense group of MBAs all trying to get to the front of the line".
Was Mr Combs far and away the best student Mr Hanley ever taught, much as Mr Buffett was the greatest student that Benjamin Graham ever had? "I don't remember saying to myself, This guy is the next Warren Buffett," says Mr Hanley, "but he probably had the greatest desire to win".
After completing business school in 2002, Mr Combs quickly found work. Scott Sipprelle, a former Morgan Stanley managing director and hedge fund manager who is now running for Congress, gave Mr Combs his start in the hedge fund world when he hired him to analyse financial stocks held by his firm, Copper Arch Capital. He says Mr Combs, a heavy coffee drinker, worked long hours and created voluminous spreadsheets packed with data, which he used to assess the probability of negative events happening to financial-services firms.
Copper Arch, which had roughly $US1 billion ($1.02bn) in assets at its peak, modelled itself after Mr Buffett's style of investing, targeting a long-term investment horizon, holding a fairly concentrated portfolio of stocks, and trying to understand its core holdings intimately. "We called Warren Buffett the spiritual mentor of the firm. We talked about him constantly, read and debated his annual letters, and analysed his portfolio religiously," says Mr Sipprelle, who has never met the billionaire investor in person.
Mr Combs left Copper Arch in 2005 when a new opportunity came along. Stone Point Capital, based in Greenwich, Connecticut, had for the last few years been looking to start a fund that would invest in the stocks of publicly traded companies using similar principles as its core operations, which generally only bought stakes in private companies.
Mr Davis, Stone Point's chief executive, says he interviewed dozens of candidates before focusing on Mr Combs, who he had kept track of following his days at Progressive. After "nine months of intensive back and forth, we decided to back him", says Mr Davis, whose firm provided $US35 million of seed money and operational resources to help Mr Combs start his fund, Castle Point Capital Management.
Mr Combs seemed more excited about shares in his portfolio than most managers, says Jared Perry, who helps run investment firm Stonehorse Capital, which signed up as an investor in Mr Combs's fund.
When Mr Combs meets clients outside the office, there is little chitchat. He lights up when the subject of the market is broached and launches into a discussion of his biggest investment positions. "It's tough to find someone that passionate and thoughtful," said Mr Perry.
In 2006 and 2007, as the bubble in credit markets grew, Mr Combs's skills in spotting problem-areas started to become apparent. He found construction loans in Florida's slowing real estate market and traced their origination to banks in the US mid-west, and identified financial firms that had large exposures to illiquid assets and were heavily reliant on short-term funding that could dry up suddenly.
Mr Combs profited by "shorting" the stocks of some financial companies as markets crumbled. By early 2006, Mr Combs had become downbeat about the prospects for Fannie Mae and Freddie Mac, the mortgage lenders that two years later would run into deep trouble and be rescued by the government.
His short positions on financial shares helped him through the financial crisis and market-meltdown, though he didn't emerge unscathed. Mr Combs suffered losses of a little more than 5 per cent in 2008, though that return trounced that of the overall market. As markets collapsed in September 2008, and his fund lost 9 per cent during that month, clients say Mr Combs was disappointed but quite calm, unwilling to sell shares he believed in.
Last year, his hedge fund rebounded, rising just over 6 per cent, a figure below the overall market's gain. So far this year, Mr Combs's fund has lost about 4 per cent, according to an investor. That is worse than the 6 per cent gain of the Standard & Poor's 500 stock index.
Others who became fans of Mr Combs say that, unlike many hedge fund mangers, he spent little time sharing investment ideas with others in the business, preferring to develop his own ideas. But some were less impressed after examining Mr Combs's operation, part of the reason his firm hasn't grown larger than $US400m.
Among his current investors are insurance company Axis Capital and Walton Investment Partnership, which invests for sons of Wal-Mart founder Sam Walton, and a "prominent New York museum", according to documents provided to an investor.
Clients say Mr Combs has done a better job watching out for downside risk than he has finding huge gainers. Focusing on banks, brokerage firms and insurance companies, Mr Combs's returns since launching his firm in November 2005 are a cumulative 34 per cent, according to an investor.
Around the office, Mr Combs is low key, wearing khaki pants and a button-down shirt and rarely seen with tie and jacket, say those who know him. He spends many Sundays in the office, sometimes calling his clients to discuss investment positions. A photograph of his family is prominent on his desk, along with tall piles of research materials and annual reports.
That hard work was present when Mr Combs was a Columbia student. His former teacher Mr Hanley told the class he would award a $US10 gold piece - then worth about $US175, he recalls - for the stock pick with the best performance over the next sixth months.
About half the class chose to work in pairs, but Mr Combs decided to work alone, recalls his former professor. And Mr Combs also differed from many of the other students in going short. While Mr Hanley can't recall the name of the stock Mr Combs bet against, he remembers that it was "a leveraged, energy-related stock" that went down at least 50 per cent over the coming sixth months, handily beating all the other stocks selected by the class.
"I'd completely lost track of Todd until the announcement," says Mr Hanley. "I still owe him the $US10 gold piece, but now I know how to get a hold of him." The coin, he says, is now worth about $US750.
Bad luck yambaman, but don't take it personally.
These are big shoes to fill.
Bigger than Ronald McDonald's :)