Grace Under Fire After Buffett Hire

09/13/2011 10:11 am EST

Focus: STOCKS

Igor Greenwald

Chief Investment Strategist, MLP Profits

It doesn’t pay to pay too much attention to someone else’s stakes or track record, writes MoneyShow.com senior editor Igor Greenwald.

What does it take to get a job in America these days? For Ted Weschler, the answer was $5.2 million in charity donations to meet his future boss and convince him they’re kindred spirits.

Of course, the hedge-fund manager also boasts an investing record vastly superior to that of Warren Buffett’s Berkshire Hathaway (BRK.A) over the last decade. And—this never hurts—he hardly needed the work or the money Buffett will soon send his way.

Yesterday, Weschler was introduced as the second little-known money manager hired by Buffett, 81, in the last year to run some of Berkshire’s investments, and to divvy up all of them once the Oracle of Omaha steps away.

Weschler anonymously paid more than $2.6 million in 2010, and a similar amount this year, in charity auctions for a private meal with the investing legend. It’s not clear whether this was a career advancement strategy, but if so it turned out to have been money well spent.

Early investors in Weschler’s Peninsula Capital Advisors seem to have spent their money even better. They reportedly saw a return of 1,236% between early 2000 and this year’s first quarter.

Weschler’s investing style seems to be similar to Buffett—long-term stakes in a handful of value-oriented names. Peninsula’s most recent SEC filing lists just nine stakes, and five of those accounted for 90% of the nearly $2 billion under Weschler’s management.

Much of Peninsula’s outperformance over the last decade seems to have come from just one investment, the one Weschler made in W.R. Grace (GRA). He knew the bankrupt chemicals producer very well, having worked there for six years after graduating from college.

By the time Grace sought protection from creditors in 2001, it faced 110,000 personal-injury claims for exposure to the asbestos it had previously manufactured.

What would compel a fledgling hedge-fund manager to bet $25 million of his investors’ money on a bankrupt company that was one of the nation’s most notorious polluters? It was, as Weschler explained a year later, the knowledge that Grace had relatively little debt, potentially benefiting shareholders if it settled the asbestos claims on terms similar to those then being struck by other companies.

Grace went on to settle the asbestos claims for $2 billion, much of it deferred, and looks set to emerge from bankruptcy in the next few months. Weschler’s stake, assembled at an average price of $2.54 a share, exceeded $550 million by the time Grace stock topped out above $52 in late July.

It certainly wasn’t Weschler’s only hit. His longtime investment in dialysis specialist DaVita (DVA) has also turned out great. Perhaps Weschler’s faith in cable mogul John Malone via big positions in DirecTV (DTV) and Liberty Global (LINTA) will be similarly rewarded.

But that nifty 1,236% 11-year return would not have been possible without W.R. Grace, which might not have happened had Weschler gotten a different job after college.

Buffett surely understands that past performance is no guarantee of future results, after reluctantly jettisoning another protégé this spring for the wunderkind’s shocking front-running of Berkshire’s takeover of Lubrizol (LZ).

Weschler’s not going to return 1,236% for Berkshire by 2022. He’s going to return what the market gives him, and what the market gives it can also take away.

See Bill Miller of Legg Mason, who once could do no wrong, but is infallible no longer. See “bond king” Bill Gross of PIMCO, who’s trailing the vast majority of competitors this year after spurning Treasuries for Italian bonds. Buffett, of course, has made his share of mistakes.

It doesn’t mean Weschler’s a bad hire. But it does suggest that a performance record, no matter how good, must be taken with a boulder of salt.

I know someone who deliberately picked a money manager with a very mediocre record for her nest egg. It meant she didn’t get the benefit of Weschler’s expertise, but also disqualified Bernie Madoff.

As for the fortunate investors in the hedge fund Weschler will be liquidating in the coming months, their future also changed yesterday when Weschler’s record of success translated into the Berkshire job. W.R. Grace shares were down as much as 9% intraday—and 38% from that late-July peak—in anticipation that Weschler will be selling his 14.6% stake.

The stock did bounce late as cooler heads prevailed—there’s no knowing whether Weschler has already unloaded a lot of stock ahead of Buffett’s announcement, or simply hedged all of his exposure via put options that the SEC filings don’t track.

In this sense, the portfolio disclosures mandated by the government are a lot like someone’s investment track record. Just because the information is easily obtainable doesn’t mean it’s worth much. In fact, it’s usually a sign that it’s worth little.

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