Berkshire Hathaway; 50 years of Success and 50 More to Come!

    Berkshire Hathaway recently released their letter to the shareholders, and tacked on a short account of Berkshire Hathaway’s strengths written by Vice Chairman Charlie Munger.

    Munger has been Vice Chairman for 37 years and has watched the company grow into one of the world’s largest and most admired corporations. He has also been close friends with Warren Buffett, Chairman, for 56 years. Munger has developed a wealth of knowledge on managing a corporation. He has some interesting points regarding counterproductive management.

    In its early Buffett years, Berkshire had a big task ahead: turning a tiny stash into a large and useful company. And it solved that problem by avoiding bureaucracy and relying much on one thoughtful leader for a long, long time as he kept improving and brought in more people like himself.

    Compare this to a typical big-corporation system with much bureaucracy at headquarters and a long succession of CEOs who come in at about age 59, pause little thereafter for quiet thought, and are soon forced out by a fixed retirement age.

    Since Buffett took over in 1965, Berkshire Hathaway’s stock price has risen 1,826,163 percent. Munger uses his letter to shareholders addendum to assure stockholders the success will continue over the next 50 years. Buffett is confident in this continued success, although he does his best to temper the optimism, saying BH “will outperform the average American company,” but the long term goals “will not come close to those achieved in the past 50 years. The numbers have become too big.”

    Buffett and Munger then go on to explain past successes, which is some of the most interesting discussion in the letter.

    Buffett attributes his success to 2 rules. One is Munger’s investment philosphy “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices” — and the fact that “a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimal cost.”

    At Berkshire, we can — without incurring taxes or much in the way of other costs — move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That’s important: If horses had controlled investment decisions, there would have been no auto industry.

    While Buffett provides a structured and intuitive explanation, Munger focuses mainly on leadership, specifically Buffett’s leadership. This list sums up Buffett’s “Berkshire System”

    (1) He particularly wanted continuous maximization of the rationality, skills, and devotion of the most important people in the system, starting with himself.

    (2) He wanted win/win results everywhere — in gaining loyalty by giving it, for instance.

    (3) He wanted decisions that maximized long-term results, seeking these from decision makers who usually stayed long enough in place to bear the consequences of decisions.

    (4) He wanted to minimize the bad effects that would almost inevitably come from a large bureaucracy at headquarters.

    (5) He wanted to personally contribute, like Professor Ben Graham, to the spread of wisdom attained.

    And as every CEO wants to know, why has Berkshire Hathaway done so well over the last 50 years? The “four large factors,” Munger explains, were:

    (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.

    This sincere approach could absolutely be replicated in other companies. Although, to succeed in such a unique way as Berkshire Hathaway has, a company will need to develop their own “constructive peculiarities.”

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