ON the 50th anniversary of Berkshire Hathaway, the investment fund-cum-industrial conglomerate that employs 341,000 people and is the fourth most valuable company in the US, the question is: is Warren Buffett inimitable? Or could the Sage of Omaha be cloned?
Charlie Munger, his long-time partner, thinks that too few people try to mimic him. “I believe that versions of the Berkshire system should be tried more often elsewhere,” he writes in this year’s golden anniversary letter to shareholders. The ‘system’ is a benign dictatorship, “relying much on one thoughtful leader for a long, long time, as he kept improving”.
We cannot all be 84 years old — not for a while, anyway — but it is strange that so few funds or companies work like Berkshire Hathaway, given its enormous success. Mindful of time passing, Mr Buffett and Mr Munger both reflect at length in their letter on how he operates. It seems to me to boil down to three precepts, two of which can be applied by others, and the third not.
First, be patient. Mr Buffett has always displayed, as Mr Munger puts it, ‘an almost inhuman patience’. Berkshire Hathaway itself was a dud — a US textile mill company that slowly collapsed — and he only acquired two other businesses during its first decade. But he refused to rush for the sake of growth, waiting to be offered ‘wonderful businesses at fair prices’.
He still has a far longer time horizon than almost anyone else. These days, in a world of executives and fund managers being judged on quarterly performance, hedge funds trying to make companies disburse cash, and bankers pushing mergers and acquisitions, three to five years is ‘long-term’. That is the time it takes for a private equity fund to buy, fix and flip a company.
Mr Buffett tries to buy companies, or shares in companies, with strong brands and franchises that cannot easily be undermined, and which have high margins
For Mr Buffett, and for anyone saving for their retirement, it is barely a blink of an eye. The best results come from buying and holding for decades, when compounded interest and reinvested dividends work their magic. As the letter records, the Standard & Poor’s 500 index, including dividends, has alone gained 11,196pc over the five decades of Berkshire’s existence.
In the grand scheme of things, most financial and deal-making activity is essentially a waste of money, serving largely to enrich advisers and executives without benefiting investors. “Frequently, the best decision is to do nothing,” Mr Buffett writes. Buy, tune out the market noise, and hold.
Second, be private. Berkshire is a public company but in many respects it operates more like a private enterprise. It is an odd mixture of a private equity group, a giant investment fund and, as Mr Buffett puts it, ‘a sprawling conglomerate’. It does not fit within the usual corporate conventions.
Its operating principle is, however, clear. Mr Buffett tries to buy companies, or shares in companies, with strong brands and franchises that cannot easily be undermined, and which have high margins. Thus, as well as insurers such as Geico, Berkshire owns railways, leasing companies, house builders, auto dealerships and many other solid, mundane, steady operations.
They generate cash, which is reinvested in the business or handed back to Mr Buffett to invest elsewhere. He holds $20bn in cash and Treasuries, in case of a big insurance claim or other upset, and can borrow more if he wants (a European bond issue is in the offing). Berkshire’s shareholders get no cash — it does not pay a dividend — but its voting shares are worth $219,000 each.
For companies owned by Berkshire, it is akin to being private. They do not need to publish financial results, answer to analysts, explain away short-term fluctuations in performance, or respond to anyone but the benign dictator in Omaha, Nebraska. Mr Buffett sets the pay of the chief executive, and occasionally fires him or her. Otherwise, they are largely left to get on with it.
Ruling his own corporate kingdom gives Mr Buffett a considerable edge in attracting owner-managers to sell businesses to him. They may not get the highest price, as they would from an investment bank-run auction, but they can sell with fine prospects of being both wealthy and in charge.
Third, be peculiar. This is the least useful precept because, although we are all odd in different ways, no one has what Mr Munger calls Mr Buffett’s ‘constructive peculiarities’. He takes an interest in little except investing, finding deals and running Berkshire. Roger Lowenstein, one of his biographers, calls it a ‘’genius of character — of patience, discipline and rationality,’
It is one thing to realise that one needs to find and buy businesses with strong brands that will still be going in 30 years, but doing it with the same aptitude and consistency as Mr Buffett is nigh-on impossible. Mr Munger writes that his partner’s skill has “improved and improved as he got older and older during 50 years, instead of deteriorating like the skill of a basketball player does”.
He also had the peculiar advantage of placing a long-term bet on the US economy during a post-war spurt of enterprise and growth, interspersed by recessions that he could easily ride out. Even if someone in China or Africa today had all his skills, it would require that country, or continent, to match the US performance for decades.
No one can be Mr Buffett, but Mr Munger is right: there is much to learn from him, and there is still time.
Published in Dawn, Economic & Business, March 9th, 2015
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