Warren Buffett Knocks Elon Musk Down a Peg

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- By John Engle

Warren Buffett (Trades, Portfolio) and Elon Musk are two of the most famous living businessmen. Both are exceptionally influential, both within their professional spheres and to the broader world. Both are billionaires. Both head empires of multiple companies. Both have big ideas about life, markets and society.


Yet all those similarities are little more than cosmetic. Indeed, one might even go so far as to call them polar opposites.

  • Buffett is the consummate patient value investor. Musk is the consummate Silicon Valley mogul and futurist.

  • Buffett has spent most of his professional life at the helm of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) and looks intent to die in place. Musk flits from project to project, with some supporters fearing recently that he might ditch electric vehicle maker Tesla (TSLA) in favor of SpaceX, his satellite launch firm with dreams of interplanetary exploration.

  • Buffett has demonstrated a near-monomaniacal focus on growing earnings and enhancing shareholder value. Musk shows little care for shareholders (or his own board's corporate governance), favoring his own whims and interests over the guidance of experienced executives.

  • Buffett likes businesses with strong balance sheets, health cash flows and strategic "moats" to protect profitable core businesses. Musk is comfortable with massive risk, heavy losses and constant infusions of fresh capital to keep the lights on (and thinks moats are "lame").

  • Buffett has never lost his soft-spoken Midwestern manners, nor has he deviated from a lifestyle based in frugality. Musk is bombastic, thin-skinned and loves living large.



The differences between these two men has been thrown into even starker relief over the past month.

Shots fired

The two men have not often entered each other's orbits. But there have been occasional interactions, often secondhand, that have resulted in sparks and media attention. We wrote about one such case in a research note published in May, that started with Tesla's first quarter 2018 earnings call.

On the call, Musk was asked if he considered Tesla's Supercharger network a valuable strategic moat in the Buffett sense. Musk responded by saying that he thought moats were "lame" and that no static defense could withstand a competitor working at a higher pace of innovation.

Firing back gently

It might have ended there, except Berkshire's annual meeting took place just days after Tesla first quarter call, and Musk's comments were still top of mind for many. During the Q&A, Buffett was asked about Musk's sentiment. He responded quite generously, complementing Musk as someone who "may turn things upside down in some areas." But he also opined that moats were strong and that Musk might discover that fact were he to, say, enter the candy business in competition with Berkshire's own See's brand.

Elon tries to pick a fight

While Buffett's comments might have been construed as innocuous at worst, and laudatory at best, Musk reacted in rather bizarre fashion. He tweeted further about his disdain for the idea of strategic moats, and then topped it off with a claim that he would indeed enter the candy business to challenge See's.

Buffett had no interest in playing Musk's games or engaging him in a protracted and pointless debate. When it became clear he could not goad the Oracle of Omaha into a fight, Musk eventually skulked off to other things.

Round 2 commences

That ought to have been it for Buffett vs. Musk. But, alas (or thank goodness?), Buffett was denied his wish to avoid engaging with the mercurial tech entrepreneur. In an Aug. 30 interview on Fox Business, Buffett was asked about whether Apple (AAPL) might invest in Tesla. The idea (more wishful thinking) had been floated in a number of articles during and after the collapse of Musk's ill-judged gambit to take Tesla private.

With the subject on Apple and Tesla, Buffett was forced once again to engage with Musk. While obviously highly critical, Buffett maintained his usual magnanimity, even while throwing cold water on the dreamers.

Apple not biting

Asked about the idea, Buffett virtually laughed off the idea. But, even when laughing off Tesla bulls' absurd pipedreams, Buffett could not help but be polite, deferring to Apple's CEO while expressing his opinion:


"I'd support whatever Tim Cook does, but I think it'd be a very poor idea to get in the auto business."



The auto business is expensive, competitive, cyclical and relatively low margin (especially in the mass-market category that Musk claims to be tackling with the Model 3 sedan).

Apple investing in, or buying out, Tesla would be a terrible idea. Apple is a money-printing machine. Why would any value investor be interested in taking a piece of Tesla, an electronic vehicle company with a reputation for incinerating investor cash, and that is currently operationally and financially stressed?

The car business is brutal

While remaining circumspect, Buffett also made it perfectly clear why he thinks Tesla is not worth investing in. According to Buffett, playing in the auto industry "is not an easy business," and, while Tesla has been a pioneer in the EV space, enjoying both a first-mover advantage and almost no serious competition to date, things are rapidly changing:


"It does not give you a permanent advantage."



Every year is a battle for automakers. Tesla is no different. Well, it is different from legacy automakers, but not in a good way: Its obvious deficiencies in financial resources, plant and experienced talent will weigh ever heavier as competition moves in for the kill.

Funding unsecured

Buffett was also pressed during the interview to address Musk's take-private tweet and the subsequent whirlwind of speculation and scandal. Again, Buffett was too polite to let loose on Musk with both barrels. But he did have some choice words for the erratic CEO, including a clear admonishment with regard to the now-infamous "funding secured tweet that got the whole drama started:


"If you misspeak, you correct it immediately."



Musk's tweet sent Tesla shares "trading like crazy" as panicked shorts covered and ebullient longs bought what they considered a slam-dunk arbitrage opportunity with the buyout price set at $420. Clearly, Buffett was not impressed by Musk's reaction to the crisis he created:


"You say I misspoke when I said 'funding secured,' I meant to say I really think I can get funding, something of the sort."



Wisdom against hubris

Warren Buffett (Trades, Portfolio) has survived so long in the world of finance thanks to more than native intelligence. Through experience, curiosity and brilliant supporting team, he has cultivated a fount of genuine wisdom within himself and externally on which he can draw. He understands finance in an intimate way. He understands business qua business. But acknowledges the expertise of others in matters concerning the operations of Berkshire's various subsidiaries and operating assets. He has confidence, but not hubris.

Elon Musk may be an intelligent man. He may even be a visionary. He is, quite certainly, often ruled by his emotions. He appears to have begun to believe his own legend, a dangerous trap into which many great men and women have fallen. Like many tragic figures, it may well be Musk's own hubris that brings him down.

Buffett was not willing to twist the knife when given the opportunity on Aug. 30. He demonstrated restraint, grace and magnanimity when he could have really taken Musk to task. Instead, he merely knocked him down a peg or two.

Musk could learn a lot from Buffett, if he ever cared to listen.

Disclosure: Short TSLA via long-dated put options.

This article first appeared on GuruFocus.


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