Warren Buffett and Hedge Fund GM Drama Highlights Different Investment Styles

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By Jacob Maslow

General Motors Detroit Headquarters
The Renaissance Center, world headquarters for GM in downtown Detroit.

If you are looking for a black and white example of the fundamentally different investment strategies Warren Buffett and other investors have, you only need to look at the recent share buyback drama at General Motors (NYSE:GM) . Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) owns a nice block of General Motors stock. His votes go a long way with regard to General Motors policies. His word goes a long way. However, there are other shareholders of General Motors. A block of these owners comprising four hedge funds have a totally different view of General Motors.

Warren Buffett’s famous investing strategy is to look at a stock based primarily on fundamental value, and hang on to that stock for a long long time. This is very different from the investing strategy of hedge funds and other short-term investment vehicles. They would like to invest in a stock, unlock its value over a short period of time, get a high return, and then move on to another stock to unlock that stock’s value. You can see that these two investment philosophies don’t exactly see eye to eye. This all came to a head in the public pronouncements of the different interests in General Motors.

The current issue is whether or not General Motors should spend $8 billion of its current cash to buy back $8 billion worth of shares. Four hedge funds, led by Harry Wilson, are championing this move. Opponents of this initiative got a nice shot in the arm when no less than Warren Buffett, the legendary global investor, said no. He is saying that he has full faith in General Motors and he doesn’t think that a share buyback strategy is a good idea. Moreover, he doesn’t back the idea of one of the managers of those four hedge funds advocating for share buyback to get on the Board of Directors.

This is a nice example of value investing versus short-term investing. I am not saying that short-term investing is absolutely bad. In fact, it can work tremendous benefits under the right circumstances. Regardless of which side of the fence you are in, the GM share buyback drama is a good indication of the fundamental differences between fundamental investing and short-term value maximization investing.

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