Investment Firm Loses Faith In Buffett, Sells $123 Million In Berkshire Hathaway Stock

By many accounts, Warren Buffett is the greatest investor of our generation. In over six decades, the "Oracle of Omaha," as he's now known, has grown his seed capital of $10,000 into a net worth of roughly $82 billion. That's not too shabby considering the tens of billions of dollars Buffett has also given away to charity throughout the years.

Buffett's investing style is exceptionally simple, and yet lauded by retail investors and Wall Street bigwigs alike. Rather than overthinking things, eyeing the short term, or relying on fancy trading software to do the heavy lifting, Buffett instead chooses to focus on a handful of sectors and industries of the market and looks for relatively inexpensive companies that offer long-term competitive advantages. It may not sound all that exciting, but it's hard to argue with Buffett's long-run outperformance, or the returns of his conglomerate and investment company, Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B).

A major investment firm just sold its entire stake in Buffett's company

However, not everyone is a fan of the Oracle of late.

Last week, investment firm Wedgewood Partners, a company with over $2 billion in assets under management and headed by Chief Investment Officer David Rolfe, published its quarterly investment letter to its clients. In that letter, Rolfe expressed cautious optimism that recent actions taken by the Federal Reserve would lead to a soft landing for the U.S. economy, rather than a recession. But Rolfe also took the time to blast Warren Buffett's investment strategy over the past decade, as well as announce that his firm had sold its stake in Berkshire Hathaway during the third quarter.

Wedgewood, which owned 578,002 shares of Berkshire Hathaway Class B (BRK-B) stock as of the end of the first quarter -- a business Wedgewood had owned a stake in for more than 20 years -- pared more than 249,000 shares of its stake during the second quarter, and parted ways with the remainder in the third quarter. Although we don't know what sales price Wedgewood received for its stake, Berkshire's Class B shares ended Q2 and Q3 at $213.17 and $208.02, respectively. Using these end-of-quarter figures works out to an estimated receipt of $123 million from selling its longtime stake in Berkshire.

Here's what caused Wedgewood Partners to lose faith in Warren Buffett

Why would a supporter of the Buffett buy-and-hold ethos suddenly close the door on our generation's most successful investor? Rolfe had four specific criticisms offered in his investment firm's letter to clients.

First, Rolfe noted that it was going to be extremely difficult for Berkshire Hathaway's non-investment businesses -- Buffett has acquired about five dozen companies from a variety of sectors and industries -- to grow without needle-moving acquisitions. More notably, Rolfe sees the utilities side of the Berkshire business as being exposed to underperformance without regular acquisitions.

Secondly, Rolfe chastised Buffett for not returning money to shareholders through buybacks. The Oracle of Omaha has repeatedly said that he's opposed to issuing a regularly quarterly dividend to Berkshire's shareholders. However, he has supported the idea of repurchasing shares of Berkshire Hathaway stock if they appear inexpensive. Unfortunately, these buybacks have been minimal in recent quarters, which didn't sit well with Wedgewood Partners considering that Berkshire has a record $122.4 billion in cash on hand.

Third, Wedgewood's CIO was critical of Buffett's mistakes over the past decade. Even though all investors make mistakes, Rolfe found Berkshire's investments in Kraft Heinz (NASDAQ:KHC) and IBM to be unacceptable. Kraft Heinz has, arguably, been the biggest disappointment in Buffett's entire portfolio. Earlier this year, Kraft Heinz took a $15.4 billion writedown tied to a handful of its well-known brands, but is still left with a balance sheet sporting approximately $30 billion in net debt and $36 billion in goodwill. With Berkshire holding a 26.7% stake in Kraft Heinz and Buffett admitting during the company's most recent annual shareholder meeting that Heinz overpaid for Kraft in 2015, the Oracle of Omaha is sort of stuck in this underperforming holding for the time being.

Fourth and finally, Rolfe and his team couldn't overlook the fact that Buffett chose not to beef up his positions in clear winners over the past decade. Rolfe referred to payment processing giants Visa (NYSE:V) and Mastercard (NYSE:MA) as would-be "layups" for Buffett, especially given his knowledge of the financial industry and payment processing space. Combined, Visa and Mastercard comprise a "thumb-sucking" 1.5% of Berkshire's portfolio, but Rolfe believes they should have been weighted closer to 15%. It's hard to argue with this hindsight assessment given that both Visa and Mastercard are up 1,137% and 1,521% over the past decade, respectively. And since neither company lends directly to consumers, they're immune to credit delinquencies.

Buffett is sending mixed signals

There's no doubt that Buffett's investing strategy is a bona fide wealth creator. But it's also become evident, at least to Yours Truly, that the most successful investor of our generation has been sending mixed signals for some time now.

Despite preferring the company's cash position closer to $30 billion, Berkshire Hathaway hasn't made a so-called needle-moving transaction since it acquired Precision Castparts for $37.2 billion in January 2016. By not making any major purchases, Buffett appears to be signaling to investors that he doesn't see any true value in stocks at the moment.

This also seems to be reinforced by the fact that Berkshire Hathaway's stock repurchases have been minimal. After repurchasing $1.7 billion in stock during the first quarter, Berkshire Hathaway only bought about $400 million worth of its own stock during the second quarter. This is one of Rolfe's chief complaints in his letter to clients.

Buffett, a longtime bull, would never come out and admit that stock valuations are too pricy. However, the Oracle of Omaha's lack of action on the buyback and acquisition front tells investors everything they need to know.

This article originally appeared in the Motley Fool.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Mastercard, and Visa. The Motley Fool is short shares of IBM and has the following options: short January 2020 $200 puts on IBM, long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2020 $155 calls on IBM, and long January 2020 $200 calls on IBM. The Motley Fool has a disclosure policy.