Warren Buffett has grown from a boy who at 7 years old roamed the streets of Omaha selling bottles of Coca-Cola for a nickel to a man who now sits atop the Berkshire Hathaway empire he created, with over $525 billion in assets.
Are you curious to know what habits enabled him to get there? Well, there are three we all can, and should, adopt.
Never stop learning
In the 50th annual letter to Berkshire Hathaway shareholders, Charlie Munger, the longtime second-in-command at Berkshire, spoke about one of Buffett’s most enduring and important traits that led to his success:
Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good at tennis.
Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. … And Buffett much out-Woodened Wooden, because in his case the exercise of skill was concentrated in one person, not seven, and his skill improved and improved as he got older and older during 50 years.
In other words, Buffett figured out what he was good at and stuck with it through thick and thin, always honing his skill.
In the book Outliers, Malcolm Gladwell suggests that for anyone to truly become an expert at something, there is some element of inherent skill involved, but there is also a key component of practice. And the key is dedicating at least 10,000 hours of time to become a true expert. Gladwell asserts: “[P]ractice isn’t the thing you do once you’re good. It’s the thing you do that makes you good.”
He cites examples such as Bill Gates, who sneaked out of his parents’ house at night while he was in high school to learn computer coding, or the Beatles, who played eight hours a day in various bars across Hamburg, Germany, before they really mastered their craft.
And the same is true of Buffett, as he himself once remarked:
I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions, than most people in business. I do it because I like this kind of life.
In the same way, in his hit song “I Know I Can,” rapper Nas said:
Boys and girls, listen up / You can be anything in the world, in God we trust / An architect, doctor, maybe an actress / But nothing comes easy, it takes much practice
So no matter where life takes you or what you do, always remember — whether you learn from Buffett, the Beatles, Bill Gates, or Nas — while we’ll never be perfect, persistent practice will always help take us one step closer.
Patience is key
The world around us is moving at a speed that is truly hard to grasp. As The Wall Street Journal reported, “[I]t took 75 years for telephones to achieve 50 million users, while Angry Birds reached that goal in a mere 35 days.”
Another of Buffett’s distinct and admirable characteristics is his patience.
In 2003, he noted:
We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us.
But consider for a moment his remarks in the 2010 letter to shareholders, in which he said that for Berkshire to succeed:
We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.
It’s widely thought that means Buffett intends to purchase a single business worth tens of billions of dollars. While his trigger finger was itchy in 2010, and Berkshire’s cash pile now stands at over $60 billion, Buffett has distinctly been willing to sit on the sidelines until the right opportunity presented itself.
There is obvious value in moving quickly into something if it’s a no-brainer decision and time is of the essence, but otherwise, we would all do well to take a step back and exhibit a little more patience.
And that could be patience in buying batteries at the grocery store, or, like Buffett, the company that makes those batteries.
Give credit where it’s due
One of the final things to note about Buffett is his eagerness to commend the team of managers who surround him.
Consider his 2009 remark about Ajit Jain, who heads Berkshire Hathaway Reinsurance and is widely speculated to be a candidate to replace Buffett atop Berkshire:
If Charlie, I, and Ajit are ever in a sinking boat — and you can only save one of us — swim to Ajit.
Or his remarks about Todd Combs and Ted Weschler — who each manage a sizable stock portfolio at Berkshire Hathaway — in the 2013 letter:
In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd Combs and Ted Weschler handily did so. Each now runs a portfolio exceeding $7 billion. They’ve earned it. I must again confess that their investments outperformed mine. (Charlie says I should add “by a lot.”) If such humiliating comparisons continue, I’ll have no choice but to cease talking about them. Todd and Ted have also created significant value for you in several matters unrelated to their portfolio activities. Their contributions are just beginning: Both men have Berkshire blood in their veins.
Or consider his praise for Tony Nicely in 2005:
Credit Geico — and its brilliant CEO, Tony Nicely — for our stellar insurance results in a disaster-ridden year. … Last year, Geico gained market share, earned commendable profits, and strengthened its brand. If you have a new son or grandson in 2006, name him Tony.
And the list could go on and on.
Here’s a man worth more than $70 billion, who understands that the works of others were just as important to his success as his own. So no matter where we are, we should always take the time to thank the people who helped us get there.
While we’ll always only be ourselves, adopting these three habits will help us no matter where our path takes us.
Assuming you’re a Berkshire Hathaway shareholder.
One lucky Berkshire Hathaway shareholder will get to spend a weekend in Warren Buffett’s childhood home, Airbnb announced Tuesday.
The contest comes after the legendary investor and Berkshire CEO said room rental service Airbnb was a good option for company shareholders looking to travel to Omaha for an annual shareholder meeting.
The Buffett contest is only open to Berkshire Hathaway shareholders. Anyone interested has to do the following:
Provide your name and address and a few creative answers to the following questions:
(a) What are you most excited to experience in Omaha? (200 words max)
(b) What are you most looking forward to at the Berkshire Hathaway Shareholders Meeting? (200 words max)
(c) What’s your favorite Airbnb experience? (200 words max)
(d) What’s next on your travel bucket list? (200 words max)
While a stay in Omaha, Neb. may not seem like much of a travel weekend to some, for fans of the Oracle of Omaha it’s akin staying a night in the Lincoln Bedroom. No word on whether people staying in the house will be required to stick to the Buffett diet, largely made up of Utz Potato Sticks, ice cream and Coca-Cola products.
These numbers illustrate the magnitude of Buffett's achievement -- as well as the "Berkshire system."
As a boy, Berkshire Hathaway CEO Warren Buffett was obsessed with numerical data. You get some sense of this when you go through his annual letters to Berkshire Hathaway shareholders, which are peppered with statistics. The most recent letter, which celebrates 50 years of Buffett at the helm, is rich with numbers that illustrate how uncommon this conglomerate is — and how it was built to be different.
The miracle of compounding (but not at head office!)
|Value of $10,000 Invested at the Start of 1964|
|Berkshire Hathaway||S&P 500 Index (with dividends included)*|
|Compound annual gain||21.6%||9.9%|
Let’s look at some numbers that tell the Berkshire story, along with some quotes from Buffett.
$18.3 billion: Berkshire Hathaway’s increase in net worth during 2014. That gain in book value is greater than the book value of more than four-fifths of the companies in the S&P 500.
9 1/2: Number of Berkshire-owned businesses that would be listed on the Fortune 500 if they were independent — the “1/2″ refers to H.J. Heinz, which Berkshire owns with 3G Capital. (“That leaves 490 1/2 fish in the sea. Our lines are out.”)
340,499: Number of Berkshire Hathaway employees (including those at Heinz).
25: Number of people who work at Berkshire Hathaway’s headquarters (includes the chief executive officer and chairman).
Berkshire’s “Powerhouse Five” businesses
$12.4 billion: Pre-tax 2014 earnings of Berkshire’s “Powerhouse Five” — its five largest non-insurance businesses (Berkshire Hathaway Energy, BNSF, Iscar, Lubrizol, and Marmon).
$1.6 billion: Increase in Berkshire’s “Powerhouse Five” pre-tax earnings.
One: Number of “Powerhouse Five” businesses owned by Berkshire a decade ago (Berkshire Hathaway Energy, then known as MidAmerican Energy, which earned $393 million at the time).
$6 billion: The amount railroad operator BNSF expects to spend on capital investments in 2015 — 26% of estimated revenues!
15%: Percentage of all inter-city freight — whether it’s transported by truck, rail, water, air, or pipeline — carried by BNSF (“the most important artery in our economy’s circulatory system”).
Insurance: “Berkshire’s core operation”
“Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2014 — that makes 12 years in a row — and increased its float. During that 12-year stretch, our float — money that doesn’t belong to us but that we can invest for Berkshire’s benefit — has grown from $41 billion to $84 billion. Meanwhile, our underwriting profit totaled $24 billion during the twelve-year period, including $2.7 billion earned in 2014. And all of this began with our 1967 purchase of National Indemnity for $8.6 million.”
1 1/2: Length of contract, in pages, sealing Berkshire’s acquisition of National Indemnity and National Fire & Marine in 1967 for $8.7 million. (See for yourself: The purchase agreement is reproduced on pages 128-129 of the annual report — the link opens a PDF file.) Not surprisingly, no lawyers or investment bankers were involved in drafting or negotiating the contract.
$111 billion: National Indemnity’s net worth today, according to generally accepted accounting principles.
$22.7 billion: Amount paid out in claims by Berkshire’s insurance operations in 2014.
$7.1 billion: Single premium on a reinsurance policy written for Lloyd’s in 2007. (Berkshire Hathaway has written every property/casualty policy with a premium in excess of $1 billion — there have been eight of them.)
Odds and ends
$40.5 million: Sales at the Omaha Furniture Mart in the week surrounding the 2014 annual meeting — that’s roughly 4.5 times average weekly sales.
$30 million: The price Berkshire Hathaway paid for See’s Candy in 1972 — 7.5 times trailing pre-tax earnings.
$1.9 billion: See’s Candy’s cumulative pre-tax earnings since its acquisition.
$40 million: Aggregate incremental investment in See’s Candy required to produce those $1.9 billion in earnings.
45%: Approximate U.S. market share of Berkshire subsidiary Clayton Homes in manufactured homes.
13%: Clayton Homes’ market share in 2003, the year Berkshire acquired it.
$15.6 billion: The amount of capital Berkshire Hathaway extended to businesses in a three-week period during the height of the financial crisis, including $3 billion to General Electric GENERAL ELECTRIC COMPANY GE 0.2% , $5 billion to Goldman Sachs GOLDMAN SACHS GROUP INC. GS 0.44% and $6.5 billion to Wrigley.
$42 billion: Total unrealized gains at the end of 2014 on Berkshire’s “Big Four” equity investments — American Express, Coca-Cola, IBM and Wells Fargo.
$1.6 billion: Dividends received by Berkshire on its “Big Four” stocks in 2014.
$12.5 billion: Year-end value of Berkshire’s “phantom” stake in Bank of America. (Berkshire has the option to purchase 700 million shares of Bank of America before September 2021 at a cost of $5 billion, an option it expects to exercise just before its expiration. Money has a time value, after all — no sense in making the outlay today.) Berkshire will almost certainly become Bank of America’s largest shareholder, in addition to being Wells Fargo’s largest shareholder.
And the mistakes (there have been some doozies!)
$444 million: Berkshire’s after-tax loss on its investment in UK retailer/grocer Tesco.
$5.7 billion: Current value of Berkshire Hathaway shares that Buffett paid for the acquisition of Dexter Shoe (the 1993 purchase price was $433 million).
Zero: Current value of Dexter Shoe.
$50 billion: The minimum amount by which Berkshire Hathaway’s net worth would exceed its current value “if it had seized several opportunities it was not quite smart enough to recognize as virtually sure things,” according to Vice Chairman Charlie Munger’s estimate. Those mistakes include “not purchasing Wal-Mart stock when that was sure to work out enormously well.”
$100 billion or so: The amount “diverted … from BPL partners to a collection of strangers” by Buffett’s decision to acquire National Indemnity through Berkshire Hathaway rather than via Buffett Partnership Limited directly. BPL owned a 61% stake in Berkshire Hathaway — the “collection of strangers” Buffett refers to are Berkshire Hathaway’s then-minority shareholders.
While the days of Berkshire's amazing 20% average annual returns are likely a thing of the past, Buffett expects Berkshire to outperform the market.
Berkshire Hathaway is one of the most fascinating stories in the history of investing. In the 50 years Warren Buffett and his management team have been running things, a struggling textile company has transformed into one of the largest corporations in the world, with dozens of household-name subsidiary companies and an equally impressive stock portfolio. In the process, early investors have gotten very rich, with the per-share book value rising from $19 to $146,186 during the past half-century.
In Buffett’s most recent letter to shareholders, he discussed his thoughts on Berkshire’s next 50 years. Here’s what Berkshire investors can expect — straight from the pen of the Oracle of Omaha:
Berkshire will not be a good short-term trade, ever
Buffett said that the chance of permanent capital loss with Berkshire is the lowest among any single-company investment. But he added a caveat: If the company’s valuation is high, say approaching two times book value (it’s at about 1.5 times book value now, so not too far off), it could be years before investors realize a profit.
In other words, Berkshire has never been, and will never be, a good “traders’ stock.” The company has one of the most shareholder-friendly business models in the world, but it is geared exclusively toward long-term investors. As a result, Buffett recommends that investors should look elsewhere for investment options if they plan to hold their shares for less than five years.
Berkshire can survive the “thousand-year flood”
Not only will Berkshire be prepared to withstand any economic storm, but the company is positioned to capitalize when things go bad. The company maintains a huge earnings stream, a great deal of liquid assets, and virtually no short-term cash requirements.
This combination keeps Berkshire immune to virtually any adverse market conditions. This is illustrated by the company’s performance during the financial crisis of 2008-09, when Berkshire not only survived, but took advantage of “discounts” in companies like Goldman Sachs.
Berkshire will maintain rather large stockpiles of cash (at least $20 billion at all times, according to Buffett) in order to weather any storm and capitalize on developing opportunities. As Buffett said, “if you can’t predict what tomorrow will bring, you must be prepared for whatever it does.”
Earnings power will continue to grow
Perhaps Buffett’s boldest prediction is that Berkshire can build its per-share earning power every year. This might sound like a lofty expectation, considering he’s talking about a five-decade period. However, it could be achievable.
Now, this prediction doesn’t mean earnings will increase every year. It does, however, mean that each and every year, Berkshire will create the potential to earn more than it did the year before. Actual earnings gains (and declines) will depend on the U.S. economy, but the company will keep moving forward no matter what the economy is doing.
Past performance will not be duplicated
Many casual observers were put off by the following line from the letter: “Berkshire’s long-term gains … cannot be dramatic and will not come close to those of the past 50 years.”
However, this really shouldn’t be much of a surprise. There is only a finite amount of money and investment opportunities in the world, and as companies grow, it gets tougher and tougher to maintain a high growth rate. For example, Apple has increased in value by more than 100-fold since 2004. Would it be reasonable to expect the same over the next decade? Of course not! That would make Apple a roughly $70 trillion company.
The same principle applies to Berkshire. Repeating its performance of the past 50 years would produce a book value per share of roughly $1.2 billion, along with a market capitalization of more than $900 trillion, which would be completely impossible in the absence of extreme inflation.
But the right people are in place to deliver for shareholders
While his time at the helm might be nearing its end, Buffett reassured investors that over the next 50 years, no company will be as shareholder-oriented as Berkshire. Buffett is completely confident the company will have the right CEO, management team, and investment specialists in place, as well as safeguards to protect shareholders in the event that the wrong person is put in charge.
As Buffett stated in a past letter to shareholders: when the market soars, Berkshire may underperform; when the market is down, Berkshire will outperform; and over any full economic cycle, Berkshire will outperform the markets. While the days of Berkshire’s amazing 20% average annual returns are likely a thing of the past, the company’s winning philosophy and business model remain the same, and will deliver for shareholders for decades to come.
The leading investor likes "buying things cheap"
America’s leading investor, Warren Buffett, gave a wide-ranging interview to CNBC in which he gave a fitting explanation of why his company, Berkshire Hathaway, sold all its stock in Exxon Mobil Corp. in the fourth quarter of 2014.
Buffett’s bottom line? “We thought we might have other uses for the money,” he said, and was quick to add, “Exxon Mobil is a wonderful company.”
The Nebraska-based entrepreneur, often referred to as the “Oracle of Omaha,” didn’t say what “other uses” he might have for the $3.7 billion that he’d invested in Exxon Mobil. But he did say why he sold the stock.
“Its current earning power, obviously, is diminished significantly from where it was a year ago, as is true with all oil companies,” Buffett said, referring to the drop in profits, and sometimes losses, suffered by energy companies because of the 8-month-old plunge in oil prices. “But Exxon Mobil has been one of the great investments of all time.”
Read more: Buffet Dumps Exxon Amid Price Slump
Berkshire had held 41.1 million shares in Exxon, worth an average of $90.86 per share in 2013, according to the oil company’s latest annual report. In fact Berkshire was one of Exxon’s largest shareholders until the stock selloff. Exxon shares sold for nearly $3 more during that period, so it’s possible that Buffett even made a profit on the sale.
This and other sales of assets, as well as various acquisitions, were not made public until a regulatory filing on Feb. 17, which is required of investors who manage more than $100 million.
So can Buffett’s reasoning be taken at face value? Was he simply looking for another place to put his money? Evidently so, according to Fadel Gheit, an analyst for Oppenheimer & Co. in New York. Despite its prowess investing in a variety of industries, Berkshire has “not really had the hot hand in energy,” he said, and the plunge in oil prices means the rules have changed dramatically.
Perhaps the best way to understand Buffet’s benign attitude to Exxon Mobil is to liken it to his feelings about IBM. Like Exxon Mobil, IBM has suffered lower sales, yet Berkshire increased its stake in the computer company during the fourth quarter of 2014 and now holds 77 million shares.
Read more: Why Oil Prices Must Go Up
Still, Buffett said, he thinks IBM will continue on a steady course, with no spikes or plunges in its earnings, and its stock price remains stable, making it easier to sell if the need arises.
“The best thing that could happen,” Buffett said, “would be if the stock did nothing for five years. … People have the conception – misconception – [that] when we [investors] buy a stock, we like it to go up. That’s the last thing we want it to do.”
Buffett, sitting in his Omaha office, added, “Look around the room. You can see I like buying things cheap.”
And that may be Buffett’s point about Exxon Mobil: The drop in oil prices can’t last forever, and a bottom will emerge eventually. And from there, logic would dictate that the only direction for Exxon Mobil’s stock would be up.
More from Oilprice.com:
There's plenty of reason to be mad at Wall Street, but dismissing women as angry is too common. And it hurts them at work.
“I think she would do better if she were less angry and demonized less.”
That’s Warren Buffett, CEO of Berkshire Hathaway, on Senator Elizabeth Warren and her campaign to regulate Wall Street.
During his interview Monday on CNBC’s “Squawk Box,” Buffett went on to comment on today’s political climate, noting that doing something is better than doing nothing, and that being too hard on people who disagree with you might not be the best way to get something done. “I believe in ‘hate the sin and love the sinner,'” he said.
Now, let’s set aside that his comments implicitly dismiss Senator Warren’s substantive criticisms of Wall Street. And that anger is arguably an appropriate response to much of the shenanigans leading up to the 2008 financial crisis.
Let’s even acknowledge that Buffett makes a fair point: Compromise is good.
But the reason Buffett’s statement induced cringes across the internet has less to do with his plea for political compromise and everything to do with the language he used to describe Senator Warren’s political approach. For women in the workplace and in the public sphere, passion and persistence are too often dismissed as anger and pushiness. And this tendency has a real impact on their careers.
A recent analysis of performance reviews in the tech industry found that 58.9% of the reviews received by men contained critical feedback, while a much higher 87.9% of the reviews received by women did. Women are also more likely to receive personality feedback along with comments on their professional performance. And that feedback was often found to include words like bossy and abrasive when commenting on leadership skills, and emotional or irrational when discussing any objections they make.
Gender bias in language is not new or mind-blowing information. But it does represent a deeply entrenched idea of how women should express opinions or dissatisfaction, lead a team, or even teach a class. Ben Schmidt, an assistant professor of history at Northeastern University, created an interactive tool that analyzes 14 million teacher reviews on the professor ranking site RateMyProfessors.com. Users can type in a one or two-word phrase and see how the term is split between gender and academic discipline. Go ahead and type “bossy,” “annoying” or “pushy” into the box, and watch what happens to the female-designated orange dots. (Hint: They aren’t randomly distributed.)
Sure, Buffett’s remarks were off the cuff, but these are slips that women in the workplace hear too often. And we can’t help but wonder: If Senator Warren were a man, would her approach be characterized as assertive rather than angry, and persistent rather than pushy?
It’s worth noting that Buffett is supporting the presidential ambitions of Hillary Clinton, who’s been on the receiving end of many of these same loaded adjectives. His recent $25,000 donation to “Ready for Hillary” is the first time he’s aligned himself with an independent political group. Which is not to suggest that the Oracle of Omaha is a flagrant chauvinist, or opposed to women gaining positions of power.
Still, inadvertent sexism is, at the end of the day, still sexism. Just ask Twitter:
Why did Berkshire under Buffett do so well?
Last week, Berkshire Hathaway released its 2014 shareholder letter. Warren Buffett’s letter, always closely followed, was particularly anticipated this year. Indeed, as this year will mark a half-century of Berkshire Hathaway under “current management,” Buffett had promised two “looking back/looking forward” analyses, one from his pen and one from that of his partner, Berkshire Vice Chairman Charlie Munger.
Here are some of the key quotes from this year’s letter. (I’ve identified those that come from Munger.)
Buffett’s successor: one of two men?
With Buffett now 84, Berkshire’s succession plan is a matter of intense speculation. His latest comments on the matter (my emphasis):
Our directors believe that our future CEOs should come from internal candidates whom the Berkshire board has grown to know well. Our directors also believe that an incoming CEO should be relatively young, so that he or she can have a long run in the job. Berkshire will operate best if its CEOs average well over 10 years at the helm. (It’s hard to teach a new dog old tricks.) And they are not likely to retire at 65 either (or have you noticed?). … Both the board and I believe we now have the right person to succeed me as CEO — a successor ready to assume the job the day after I die or step down. In certain important respects, this person will do a better job than I am doing.
Who might the successor be? Munger offers a clue that appears to narrow it down to two individuals (my emphasis):
But under this Buffett-soon-leaves assumption, his successors would not be “of only moderate ability.” For instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.” “World-leading” would be the description I would choose. In some important ways, each is a better business executive than Buffett.
The timing of the elusive Berkshire dividend
Another recurring debate in the financial media is the value and timing of a potential Berkshire dividend — although, as we shall see, it’s not much of a debate among shareholders. Buffett provides his first time-bound guidelines:
Eventually — probably between 10 and 20 years from now — Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases, or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision.
That doesn’t appear to be a problem for current shareholders:
Nevertheless [in response to last year’s proxy motion requesting a dividend], 98% of the shares voting said, in effect, “Don’t send us a dividend but instead reinvest all of the earnings.” To have our fellow owners — large and small — be so in sync with our managerial philosophy is both remarkable and rewarding. I am a lucky fellow to have you as partners.
Munger’s contribution to Berkshire
Although he has remained in Buffett’s shadow over the past 50 years, it’s almost impossible to overstate Munger’s contribution to Berkshire Hathaway. Buffett pays tribute to it:
From my perspective, though, Charlie’s most important architectural feat was the design of today’s Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices. … Charlie never tired of repeating his maxims about business and investing to me, and his logic was irrefutable. Consequently, Berkshire has been built to Charlie’s blueprint. My role has been that of general contractor, with the CEOs of Berkshire’s subsidiaries doing the real work as sub-contractors.
The 4 keys to Berkshire’s success
Munger returns Buffett’s compliment:
Why did Berkshire under Buffett do so well?
Only four large factors occur to me: (1) the constructive peculiarities of Buffett, (2) the constructive peculiarities of the Berkshire system, (3) good luck, and (4) the weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.
I believe all four factors were present and helpful. But the heavy freight was carried by the constructive peculiarities, the weird devotion, and their interactions. In particular, Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good at tennis.
Buffett was, in effect, using the winning method of the famous basketball coach John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.
And Buffett much out-Woodened Wooden, because in his case the exercise of skill was concentrated in one person, not seven, and his skill improved and improved as he got older and older during 50 years, instead of deteriorating like the skill of a basketball player does.
The Berkshire system: 15 rules for building a world-leading conglomerate
What is this “Berkshire system” Munger refers to, which has been at the core of Berkshire’s unparalleled success? He codifies it in 15 points:
The management system and policies of Berkshire under Buffett (herein together called “the Berkshire system”) were fixed early and are described below:
(1) Berkshire would be a diffuse conglomerate, averse only to activities about which it could not make useful predictions.
(2) Its top company would do almost all business through separately incorporated subsidiaries whose CEOs would operate with very extreme autonomy.
(3) There would be almost nothing at conglomerate headquarters except a tiny office suite containing a chairman, a CFO, and a few assistants who mostly helped the CFO with auditing, internal control, etc.
(4) Berkshire subsidiaries would always prominently include casualty insurers. Those insurers as a group would be expected to produce, in due course, dependable underwriting gains while also producing substantial “float” (from unpaid insurance liabilities) for investment.
(5) There would be no significant systemwide personnel system, stock option system, other incentive system, retirement system, or the like, because the subsidiaries would have their own systems, often different.
(6) Berkshire’s chairman would reserve only a few activities for himself. […]
(7) New subsidiaries would usually be bought with cash, not newly issued stock.
(8) Berkshire would not pay dividends so long as more than one dollar of market value for shareholders was being created by each dollar of retained earnings.
(9) In buying a new subsidiary, Berkshire would seek to pay a fair price for a good business that the chairman could pretty well understand. Berkshire would also want a good CEO in place, one expected to remain for a long time and to manage well without need for help from headquarters.
(10) In choosing CEOs of subsidiaries, Berkshire would try to secure trustworthiness, skill, energy, and love for the business and circumstances the CEO was in.
(11) As an important matter of preferred conduct, Berkshire would almost never sell a subsidiary.
(12) Berkshire would almost never transfer a subsidiary’s CEO to another unrelated subsidiary.
(13) Berkshire would never force the CEO of a subsidiary to retire on account of mere age.
(14) Berkshire would have little debt outstanding as it tried to maintain (i) virtually perfect creditworthiness under all conditions and (ii) easy availability of cash and credit for deployment in times presenting unusual opportunities.
(15) Berkshire would always be user-friendly to a prospective seller of a large business. An offer of such a business would get prompt attention. No one but the chairman and one or two others at Berkshire would ever know about the offer if it did not lead to a transaction. And they would never tell outsiders about it.
Both the elements of the Berkshire system and their collected size are quite unusual. No other large corporation I know of has half of such elements in place.
The continued success of Berkshire after Buffett
Will the “Berkshire system” ensure continued success, despite its size, and after Buffett? Buffett says yes:
Despite our conservatism, I think we will be able every year to build the underlying per-share earning power of Berkshire. That does not mean operating earnings will increase each year — far from it. The U.S. economy will ebb and flow — though mostly flow — and when it weakens, so will our current earnings. But we will continue to achieve organic gains, make bolt-on acquisitions, and enter new fields. I believe, therefore, that Berkshire will annually add to its underlying earning power.
The next to last task on my list was: Predict whether abnormally good results would continue at Berkshire if Buffett were soon to depart. The answer is yes. Berkshire has in place in its subsidiaries much business momentum grounded in much durable competitive advantage. Moreover, its railroad and utility subsidiaries now provide much desirable opportunity to invest large sums in new fixed assets. And many subsidiaries are now engaged in making wise “bolt-on” acquisitions.
Provided that most of the Berkshire system remains in place, the combined momentum and opportunity now present is so great that Berkshire would almost surely remain a better-than-normal company for a very long time even if (1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again purchased a large business.
These quotes provide some of the important lessons from this year’s letter, but the document is extraordinarily rich in business and investing lessons and will be analyzed and debated for years to come — including here on Fool.com. Be sure to check back in the next few days for more coverage of the 2014 Berkshire Hathaway shareholder letter.
Even if hedge funds were winning—which they aren't—you still should be in indexes.
Warren Buffett bet a prominent U.S. hedge fund manager in 2008 that an S&P 500 index fund would beat a portfolio of hedge funds over the next ten years. How’s it going?
“We’re doing quite poorly, as it turns out,” president of Protege Partners Ted Seides, who made the bet with Buffett, told Marketplace Morning Report today. In fact, an S&P 500 fund run by Vanguard rose more than 63%, while the other side of the wager, a portfolio of funds that only invest in hedge funds, has only returned 20% after fees.
The fees are the important component. When the two sides made their respective cases for why they would win, Buffett noted that active investors incur much higher expenses than index funds in their quest to outperform the market. These costs only increase with hedge funds, or a fund of hedge funds, thus stacking the deck even more in his favor.
“Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested,” Buffett argued at the time. “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”
Before fees, Seides’s picks would be up 44%—still almost twenty percentage points behind Buffett, but way ahead of where they are.
Seides, to his credit, has been transparent. “Standing seven years into a 10-year wager with Warren Buffett, we sure look wrong,” he wrote in a recent blog post for CFA Institute. He went on to cite the Federal Reserve, both for its decision to keep interest rates at basically zero and undertake an unconventional bond-buying program to jumpstart the economy in the wake of the Great Recession, as one reason why his portfolio has been so roundly beaten by the S&P 500. Of course, investors inability to consistently foresee and time major market events is one reason why index funds are so powerful. (He also points out that a broad stock market index fund is a poor measuring stick for hedge fund performance.)
There’s still three years left in the bet, but barring a prolonged stock market crash, Girls Incorporated of Omaha—Buffett’s charity of choice—seems well placed to win. (The size of that donation stands right now at more than $1.5 million, for reasons having to do with zero-coupon bonds.) Those who are inclined to support passive investing, like MONEY, can be satisfied that once again indexes trumped active traders.
Now here’s the thing: Seven years ago, Seides’ chances of winning this bet actually weren’t so terrible. Cheap index funds have a strong statistical edge over active managers, but that doesn’t mean every stock picker loses. Last December, S&P Dow Jones Indices published “The Persistence Scorecard,” which measures whether outperforming fund managers in one year can continue to outperform the market going forward. “Out of 681 funds that were in the top quartile as of September 2012, only 9.8% managed to stay in the top quartile at the end of September 2014,” according to the report. While that’s not a terribly good record, about 10% of portfolio managers (and their shareholders) think that they are clever investors.
The trouble is, they probably won’t be in the top 10% of investors over the next ten years. There will always be market beaters, even if just by random (and unfortunately unpredictable) chance. That fact goes a long way towards keeping money managers in business.
So when you hear a hot-shot alpha investor type say that he’s beaten the market over the last couple of years, just remember: Stuff happens.
The world’s most successful investor stays youthful by eating "like a 6-year-old." Turns out, the Berkshire Hathaway CEO’s bizarre diet is highly strategic.
How does the world’s top investor, at 84 years old, wake up every day and face the world with boundless energy?
“I’m one quarter Coca-Cola,” Warren Buffett says.
When he told me this in a phone call yesterday (we were talking about the death of his friend, former Coca-Cola president Don Keough), I assumed he was talking about his stock portfolio.
No, Buffett explained, “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.”
Perhaps only a man who owns $16 billion in Coca-Cola KO 0.71% stock—9% of Coke, through his company, Berkshire Hathaway BRK.A -0.23% —would maintain such an odd daily diet. One 12-ounce can of Coke contains 140 calories. Typically, Buffett says, “I have three Cokes during the day and two at night.”
When he’s at his desk at Berkshire Hathaway headquarters in Omaha, he drinks regular Coke; at home, he treats himself to Cherry Coke.
“I’ll have one at breakfast,” he explains, noting that he loves to drink Coke with potato sticks. What brand of potato sticks? “I have a can right here,” he says. “U-T-Z” Utz is a Hanover, Pennsylvania-based snack maker. Buffett says that he’s talked to Utz management about potentially buying the company.
Investors in Berkshire Hathaway may feel relieved that the CEO isn’t addicted to Utz Potato Stix at every breakfast. “This morning, I had a bowl of chocolate chip ice cream,” Buffett says.
Asked to explain the high-sugar, high-salt diet that has somehow enabled him to remain seemingly healthy, Buffett replies: “I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old.” The octogenarian adds, “It’s the safest course I can take.”