10/28/2010 03:51 pm ET Updated May 25, 2011

Buffett Acolytes Scrutinize Todd Combs' Returns and Wonder Why

The Berkshire Crowd, the army of wannabe Warren Buffetts, are intensely querying The Oracle's decision to appoint Greenwich hedge-fund manager Todd Combs as his chief investment officer for Berkshire Hathaway's portfolio. One major Berkshire investor is withholding judgment until he meets with Combs soon, but underscores his respect for Charlie Munger's obvious comfort with recommending Combs to Buffett.

Here are the issues:

Combs' returns, at least according to Bloomberg, come nowhere near Berkshire's long-term record. Castle Point Capital is mainly invested in financial-service companies and real estate investment trusts, similar to the private-equity orientation of a related company, Stone Point Capital, also headquartered in Greenwich, Conn., home to many large private hedge-fund operations.

Here they are: 2006, 13.6 percent; 2007, 19 percent; 2008, -5.7 percent, and 2009, 6.2 percent. Overall, Combs made 33 percent for four years, an average return of slightly over 8 percent. Not exactly the 20 percent increase in Berkshire's book value over the years.

Second, Combs ran a hedge fund; so in these returns are the shorts, which have not been an integral strategy used by Berkshire in recent decades. No one knows the returns after the short trades are taken out. There's no method to compare Berkshire, a long only fund, with a hedge fund that goes long and short.

Third; it is odd that Buffett would choose an investment manager so committed to financial-service stocks, when Berkshire is recognized as such a great judge of consumer franchises like Coca Cola, Walmart, Kraft and others.

Fourth; there is suspicion that Combs' hedge fund is an active trading one, and therefore not a long-term holder/owner like Berkshire Hathaway.

"Just by observing the portfolio of Todd Combs it is not clear why Warren Buffett chose Mr. Combs as one of (his) successors. His portfolio has much higher turnover than Buffett used to have," says the website

Fifth; some of Combs' recent purchases include Leucadia National Corp(LUK), a diversified financial services company, with an average price of $23.36.

The Hartford Financial Services Group(HIG), at estimated average price of $26.15.

First Financial Bancorp warrant(FFBCW) average price, $6.66

Chatham Lodging Trust(CLDT) at average price of $18.56

A recent investment study by RS Investments includes a chart that shows the average holding period for a NYSE stock to have declined from eight years in 1955 to less than one year in 2010 and concludes that "annual turnover is greater than 100%." So, perhaps Messrs. Munger and Buffett, are willing to try the new vogue of investing with more rapid turnover.

Notwithstanding the fact that risk-adjusted returns among the lowest turnover funds were higher and "outperformed their peers," according to the RS Investment White Paper "The Case for High Conviction Investing." The study quotes Buffett as saying "portfolio concentration may well decrease risk if it raises, as it should, both the intensity, with which an investor thinks about a business and the comfort level he/she must feel with its economic characteristics."

Conceptually, then, there are a great many questions about this decision and what the ramifications may be for BRKA investment portfolio going into the future. Will long-term value investing be replaced by opportunistic shorter-term trading?