Lessons in Investment – 7 Key Takeaways from the Berkshire Hathaway AGM

Investment

WHEN IT COMES TO INVESTMENT, BERKSHIRE HATHAWAY HAVE THEIR OWN WAY OF DOING THINGS

They have a very simple but proven model to decide whether an investment opportunity is for them or not. Sticking rigidly to their model over the long term has clearly worked too. We embarked upon an insightful excursion to the Berkshire Hathaway AGM to find out more about how they determine what to invest in, what characteristics and traits they buy into when originating deals. Here’s what we found:

  1. The Core Questions

Their 4 core questions at the start of the investment process are as follows:

  1. Do we understand the business?
  2. Does the business have a long term future and competitive advantage?
  3. How good and reliable are the team?
  4. What is the right price?

Berkshire run a short due diligence process that begins with spending time with the management team of the business in question. They believe the real risks/benefits lie with the people running the business and no due diligence checklist will establish a feeling about people that will be better than your gut when you spend time with them. “None of the bad managers would be any better if there was more due diligence” Warren Buffett stated at the AGM.

Your judgement on the business and the human quality behind it are in the view of Berkshire, the two most important aspects of due diligence.

2. The Benefits of Compounding

Warren Buffett has been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. His secret is time.

Key to this is that Berkshire has not ordinarily paid dividends to its shareholders. Instead, the various companies in the Berkshire group reinvest earnings to grow their businesses over time. This has resulted in long term annual growth in the value of the businesses which starts to compound at significantly greater rates as the years pass. To illustrate this, a Berkshire Hathaway share today is worth $215,880 v’s $5,735 in 1990.

3. Invest in The Right People and Culture

The major takeaway from the weekend was the value Berkshire place on having the right people running the businesses they have invested in with the following characteristics:

  • People who are business savvy
  • Willing to walk in the shoes of their shareholders
  • Strong personal interest in Berkshire
  • Not in it for the money (albeit they are paid well)
  • Outstanding performers

If we buy businesses that an idiot can manage, pretty soon we will”.

Integrity

One of the core values Berkshire Hathaway have is the integrity of the people running each of the businesses. They have developed a keen sense of pride in the Berkshire Hathaway ethos and way of conducting business. “Win fairly and use wisely” Warren Buffett

A video of Warren Buffett was played where he was quoted as saying “lose money for the firm and I will be understanding, lose a shred of reputation I will be ruthless

Buffett has developed an ability to judge a managers integrity. He cites habitual observing of people leading to an ability to see what he calls “Pattern Recognition” in human behaviour.

Company culture

In many cases, the companies that Berkshire has invested in approached Berkshire. According to Buffett, this wasn’t for the money, but they wanted to join the culture of Berkshire. The culture in Berkshire is well established, fosters long term value generation where people are empowered and love their jobs. The culture is such that if a business or person doesn’t fit within it, the culture will squeeze them out to protect itself.

One such example was a company called Mitek which told me that each member of the management team are responsible for succession planning for their own jobs and developing that person in the mould that the business requires. This leads to the company culture being preserved in their view.

4. Learning and Development

Berkshire Hathaway place great value on continued learning & development. A view we share here in Broadlake and that brought Kevin and I to Omaha. Where better to learn than from the best?

Several times during the weekend, Buffett and Munger mentioned they and their business managers routinely seek learning opportunities. The management teams from the Berkshire companies gather during the year to share experiences and help each other to grow their businesses. They state it is important to take a step back from your business, look at what’s going on around you, learn from it and implement those learnings in your business. The power of the Berkshire network facilitates peer to peer learning and stood out as a clear differentiator. At Broadlake we host insight days for our own partner companies for the same purpose of shared learning.

Buffett mentioned that himself and Munger read every day leading Munger to state “ In my whole life I have known no wise people who didn’t read all the time, none”.

5. Know Your Business

Berkshire and their companies place a very strong emphasis on their brand. Such is the strength and pride in the Berkshire Hathaway brand, the companies exhibiting all had “A Berkshire Hathaway Company” under their logos.Every company had a clear understanding what their brand stood for

A deep knowledge of your business

At the AGM, Buffett and Munger displayed a deep knowledge of each of the Berkshire companies. It was also clear when we talked to all the companies exhibiting that they each knew their businesses inside and out. They know their industries, markets, competitors, customers and have a clear view on future trends that may affect their business. Detailed reporting packs with KPI’s are employed in each company leading to management knowing all they need to know about their business.

Berkshire Hathaway, the most successful investment company in the world are located in Omaha, Nebraska. Omaha is a small city by US standards and not located near the big financial centres. Most of the businesses they have invested in are from all over the US.

They have shown that you do not need to be located in New York, London or anywhere specifically to be successful. This inspires us at Broadlake being from Dublin.

6. Competing in the age of disruption

When asked how they are managing the shift from push to pull marketing, Buffett stated that while some Berkshire companies were slow to adopt to the internet they have since jumped in with both feet. The learning they took was that a business needs to have their eyes open to industry/technological changes and not be afraid to adopt them

 

Managing competition

Businesses need not necessarily fear competition as it is a good thing. It will keep your business sharp. You need to have a constant mind-set of increasing their competitive advantage and remember that your competitors will fear you too.

Don’t panic if something in your business isn’t as strong as it used to be or if a competitor had a good quarter, but keep looking forward to manage risks and increasing your competitive advantage” Warren Buffett at the AGM

 

7. Negotiation

Buffett and Munger approach each negotiation with the following mind-set:

  • Negotiations need to move quickly, as deals fall apart when people argue over insignificant details
  • Don’t try to win each point, deals need to be good for everyone
  • If you disagree with someone, you should be able to state their case better than they can
  • There is no reason why it can’t be win win for everyone

 

Conclusion

It’s amazing what a 20 person team in Omaha are capable of, managing a diverse portfolio of dozens of businesses located all over the world. It gave me great encouragement of what investors like us can achieve here in Ireland.

We will return next year to get further insights, ideas and inspiration.