Ted Weschler's Final Partnership Letter (2011) & What It Means for Berkshire Hathaway Today
This letter, written as Weschler stood on the precipice of his dream move to Berkshire Hathaway, tells us a lot about the investor — and the man
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Late last month, I asked about Ted Weschler’s partnership letters from his (pre-Berkshire Hathaway) days at Peninsula Capital Advisors in Charlottesville, Virginia.
A Twitter friend kindly sent over Weschler’s final Peninsula letter — dated December 13, 2011 — as he wound up the partnership ahead of his move to Berkshire.
Just a few months earlier, Warren Buffett had announced that Weschler would join Berkshire in early 2012 to help oversee its investment portfolio. This came after he twice won charity auctions for lunch with Buffett — and the two men immediately hit it off with similar outlooks on investing and the business of life.
After winning the first auction in 2010, Weschler was struck (and impressed) that Buffett called him personally to arrange the details of their meet-up.
I get this phone call … and pick up my phone — and it’s Warren on the other end. It’s like, “Oh, geez, this is something! This is my hero!”
[Warren] said, “When would you like to do it?” and I said, “Well, your schedule will dictate, Mr. Buffett.”
He really was unbelievable because then he said, “I can do tomorrow night, I can do Wednesday, I can do Thursday…” He rattled off four days in a row!
In 2011, Weschler won again — and came ready with three pages of written questions after feeling starstruck the year before. This time, Buffett offered him a job. And the rest is history.
At Berkshire, though, Buffett keeps Weschler (and fellow portfolio manager Todd Combs) mostly under wraps. We rarely get to hear from either one — and good luck trying to figure out what specific stocks they are buying and selling.
Which makes the chance to read Weschler’s writing all the more exciting.
This final Peninsula letter, written as Weschler stood on the precipice of his dream move to Berkshire, tells us a lot about the investor — and the man.
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TWO PEAS IN A POD: This may not come as a particular shock, but Ted Weschler shares many similarities with Warren Buffett — and the investing philosophy that he immortalized at Berkshire Hathaway.
A few excerpts from Weschler’s letter make these commonalities crystal clear…
Buy and hold — “One of the key roles I’ve played at Peninsula on your behalf over the past twelve years is resisting the temptation to sell — doing nothing can run counter to a serious work ethic, but in the world of investing it can be a very effective strategy in that it: (1) minimizes transaction costs, (2) minimizes taxes, and (3) respects the fact that as a practical matter, market timing is a fool’s errand.”
Embrace a long time horizon — “I have never been good at picking stocks over less than a one-year horizon — in fact, I have always guided towards measuring success or failure over a three-year period. Along these lines, the eight individual stocks you are receiving can change in value substantially (up or down) over any given time period, but the likelihood of their value appreciating increases based on your investment horizon, i.e. the longer your expected holding period, the higher the likelihood of increased value.”
“Peninsula worked because we had a commonality of investment horizon — you as investors soldiered through some pretty ugly markets with nary a whisper (and virtually no requests for liquidation).”
Bet big on strong convictions — “Managing a concentrated portfolio of securities is a logical way to manage money (why put a dollar in your 11th pick when you could put more in pick number 1, 2, or 3?), but very few people have the benefit of patient capital to make it happen — thank you for that.”
Change “Peninsula” to “Berkshire” and any of these sentiments would fit right into one of Buffett’s famous annual letters. No surprise that the Oracle recognized a kindred spirit in Weschler — and offered him a ticket to the big leagues at Berkshire.
STEWARDSHIP ABOVE ALL ELSE: How Ted Weschler handled the closure of Peninsula Capital Advisors also mirrored Warren Buffett’s approach with his own partnership in 1969. Much like Buffett distributed shares of Berkshire Hathaway and Diversified Retailing to his erstwhile partners, Weschler did the same with eight Peninsula holdings that he felt would continue to provide particularly strong value.
And, while Weschler made no promises — “my intentions may change depending on future facts and circumstances” — he revealed that he planned to hold onto these shares for the foreseeable future.
As implied by the above, I intend to do nothing, as I am comfortable with the long-term prospects of each of Peninsula’s positions — no guarantee of success and certainly a guarantee of lumpy returns, but a strategy that, in my view, is likely to deliver the best outcome over a five-plus-year horizon.
In a further attempt to help his soon-to-be-former partners transition out of Peninsula, Weschler also devoted a great deal of space in the letter to sharing his unvarnished thoughts on these eight holdings.
Plus, he compiled a 500-page package of company presentations and select analyst reports on them available at any partner’s request. Weschler seemingly did everything possible to ensure that no one got left high and dry in Peninsula’s final days.
WESCHLER ON DAVITA: One familiar name from the Peninsula portfolio just so happened to pop up at Berkshire Hathaway at the same time Ted Weschler joined the team. (And has remained there ever since.) No prize for guessing who did the buying.
When Berkshire opened its position in DaVita in Q4 2011, Weschler had closely followed the dialysis industry for nearly thirty years. And been a DVA 0.00%↑ shareholder, through Peninsula, since 2000. Safe to say he'd been a fan for a while.
(In fact, DaVita accounted for 15% of Peninsula's portfolio at the time of Weschler's letter.)
Berkshire continued to add more shares between 2012-2014 and now owns 39.9% of the healthcare company at a current value of $2.98 billion.
So what did Weschler write about DaVita back in 2011?
DaVita benefits from several positive attributes:
An outstanding management team headed by the same CEO for the past 12 years.
A very efficient delivery model.
It provides a life-sustaining therapy: DaVita’s patient customers cannot live without the therapy the company provides, creating a very stable, recession-resistant business model.
4 to 5% average annual increases in patient count, driven by increasing life expectancy for those already on dialysis and supplemented by incremental patients requiring dialysis services: As the incidence of obesity increases in the United States, so does the incidence of hypertension, a leading driver of diabetes, which in turn is a major driver of end-stage renal disease, the disease state requiring dialysis.
A pricing umbrella created by smaller, less-efficient providers: Many of the smaller dialysis providers operate at or near breakeven, so any major reductions in reimbursement by the Federal government or private insurers could have the effect of forcing smaller providers out of the market — a very undesirable and therefore unlikely outcome from a policy standpoint.
Thoughtful and active capital management: The company has reduced its shares outstanding from 128 million to 95 million over the past 12 years through timely repurchases of its equity.
Significant growth opportunities through both international expansion (started in 2011), as well as providing a higher percentage of the healthcare needs of its patient base.
Weschler also told his partners that he expected DaVita to deliver higher earnings, less debt, a higher valuation multiple, and more repurchases in the years to come.
Then, in a 2014 interview on CNBC’s Squawk Box, Weschler all but confirmed that he spearheaded Berkshire’s investment in DaVita.
The broad filters that I apply for healthcare investing in general is:
(1) Does the healthcare company deliver better quality than someone could get somewhere else? And DaVita falls into that.
(2) Does it deliver net savings to the healthcare system? In other words, is the total bill for U.S. healthcare cheaper because of the efficiency the company provides? DaVita checks that box.
And, lastly, do you get a higher return on capital, predictable growth, and shareholder-friendly management? Absolutely.
I’m not sure what the stock will do over the next year or the next two years, but [I’m] very comfortable that five years from now it will be a more valuable franchise.
Unfortunately, it hasn’t quite worked out that way.
At least, not yet.
In the nine years since Weschler’s comments, DVA 0.00%↑ has earned just 2.1% compounded annual returns. Not exactly a grand slam.
Nevertheless, it’s still fascinating to read Weschler’s then-current investment thesis on DaVita straight from the horse’s mouth.
Plus, seeing as how he hasn’t sold out of DaVita yet (other than a small trim in 2020), it quite possibly provides some insight into how he continues to view the company today.
And, if nothing else, we get a rare peek behind the curtain at a moderately-sized member of Berkshire’s portfolio — and a better understanding of Ted Weschler as an investor.
(If anyone out there has any more of Weschler’s letters, please send ‘em my way!)