Rafi Mohammed

Warren Buffett: You and I Don't See Eye to Eye

Posted on February 24th, 2011 (1 Comments)

Warren Buffett is considered to be one of the most successful investors in history and is often revered in hushed tones as the “Oracle of Omaha.” While I want to believe in and profit from this lore, I am starting to question Mr. Buffett’s financial prowess.

I am a longtime shareholder of Mr. Buffett’s company Berkshire Hathaway (which I’ll elaborate on in a moment) and over the years have disagreed with a few of his pricing strategies. In this blog, I reveal how a simple peak/off-peak pricing strategy could help Mr. Buffett’s interval ownership jet company, NetJets, minimize its need to use profit-draining outside charter services during high usage times such as holidays. I recommend that NetJets charge higher prices during high demand times and grow its business by offering a discount “off-peak” option. In this other blog, I question the wisdom of the pricing strategy at See’s, Mr. Buffett’s candy company. Instead of offering standard volume discounts, See’s actually charges a higher prorated per pound price if you purchase a 2 pound box of chocolate. I’ll order two one pound boxes, please.

In a recent Bloomberg story written by Andrew Frye and Dakin Campbell, Mr. Buffett is quoted as saying, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising prices by 10 percent, then you’ve got a terrible business.”

Quite frankly, as a pricing strategist, I am confused by this quote. If you are charging the highest possible market value price, you do have to have a “prayer session” to profitably raise prices by 10%. Perhaps Mr. Buffett means that he is looking for companies that are doing a poor job of pricing and they can generate new profits by raising prices. Interestingly, the Bloomberg article mentions that Buffett is an investor in Coca-Cola. In my experience, the regular sale price in Boston today of a 2 liter bottle of Coke is 99 cents. That’s about the same sale price when I was a kid growing up in the 1980’s in Cincinnati. Where’s the pricing power?

So what about Mr. Buffett being a great investor – the proof is in his financial returns, right? I can only relay my personal experience: I bought Berkshire Hathaway shares on 8/24/99 and my total return since then (11+ years) is 105%. As a comparison, the Dow Jones Index on 8/24/99 was 11,283 and it closed yesterday at 12,106. So while Mr. Buffett handily beat this key benchmark, I’ve made better investments. I purchased shares of the Janus Overseas Fund on 5/3/99 and my total return to date is 216%, for instance.

So after reading this blog what do you think? Is Mr. Buffett still the business guru that we’ve been led to believe he is?

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Readers' Comments on This Blog Entry

From PS on March 6th, 2011
I think there is a difference in the pricing of the business and the pricing of the products by the business. I appreciate your views on the pricing strategy by the business. When it comes to pricing of the business, I feel Mr Buffet is right.