This year I had the privilege of attending the Berkshire Hathaway Annual General Meeting in Omaha, Nebraska. Berkshire Hathaway is a conglomerate run by Warren Buffett and its class A shares are currently worth $220k, each. So…Buffett knows a little about investing.
Just wandering the halls I met several billionaires, got to chat with Sara Blakey, Founder of Spanx. As well as her husband Jesse Itzler, who has written an amazing book.
As someone who spends the majority of their time in tech and around small to mid-cap companies it was refreshing to see a different side of the business jungle. The following are six lessons I picked up along the way:
Lesson #1 — Love What You Do
Warren and his business partner Charlie Munger genuinely relish what they do. Buffett was asked “Would you do something differently to make yourself happier?”
He replied “Well I’m 85, I get to do something fun, with people I love. I can’t think of another way.”
This seems closely related to their desire to always be learning. Charlie Munger is Buffett’s lesser known business partner. He’s a Harvard trained lawyer who managed a sort-of mini Berkshire called Wesco Financial before joining Buffett. Munger is credited with getting Buffett to make huge investments in name brand companies that had “competitive moats” (an advantage that places them far ahead in a market and hard to compete against. Think Coke vs rival Pepsi).
Munger is also a famous for being taciturn, and kind of a lovable curmudgeon. He looks asleep and then Buffett would spin around after answering a prosaic question about collateralized debt obligations and say “What do you think, Charlie?” Munger would then launch into a four line explanation that concisely summed up the problem and the solution. It was astonishing.
Lesson #2 — Know Your #’s and Do Your Homework
Buffett was asked a question about Berkshire subsidiary Nebraska Furniture Mart. In answering he started talking about the month-to-month swings in sales for one of their stores in Texas.
Keep in mind Nebraska Furniture Mart, while worth hundreds of millions, is a small fry in Berkshire’s $552 Billion portfolio. Buffett knows the month-to-month sales of individual stores. I know CEO’s of $10M companies who don’t know the month-to-month sales of their ONE product line.
Think about the effect that has on the managers of these companies. They can’t hide anything, good or bad. They have to run a disciplined operation just to get these numbers. It has a wonderful side-effect of ensuring the company remains focused on the right things to grow the business.
Lesson #3 — Be a Bit Boring
A lot of unicorns are portrayed as “changing the world” or “revolutionizing” the way something is done. While the problems they purport to solve sound sexy, they’re often doing something that isn’t critical to day-to-day living for a person or business.
Many of Berkshire’s holdings are pretty boring. There’s companies that make industrial drill bits, parts for airplanes, water softeners and manufactured homes. What makes them interesting is they solve a real problem. You can’t make a lot of products without drill bits, people need homes over their heads. These companies create amazing value over time because they solve a genuine need for a person or business. They’re not trying to show “growth” to raise their next round. They’re trying to make someone’s every day life better. It’s a lesson a lot of unicorns need to take to heart.
Lesson #4 — Past Product/Market Fit, A CEO’s Time is About Capital Allocation
Touched on throughout the day, were references to Tom Murphy of Capital Cities and his brilliance at capital allocation. In a 20 year period Murphy’s return on shareholder equity (the amount of profitability for every dollar shareholders put into the company) was 22%, Salesforce has averaged 9.41%. Think about that. Tom produced a company that was 2x more efficient at producing profit than one of the most successful tech companies ever.
A lot of management books and articles focus on how a CEO’s job is to set the vision, build a great culture and recruit. However, once a company has figured out product/market fit a CEO’s number one job is capital allocation.
But what is that?
Best summed up as “what will investing in x vs. y bring us?” It’s asking questions like “If I form this partnership with this supplier can we get better payment terms and keep cash longer, so we can invest in more advertising?” It’s thinking how to best deploy the cash currently at your disposal so you can create the best opportunities for your company to grow in the long-term.
Lesson #5 — It’s all About Incentives
At insurance giant GEICO the entire company is compensated on the same two factors: growth of policies and “seasoned profit” (the profit derived from writing policies after customer acquisition costs have been paid for). Everyone from a Marketing Manager to the CEO is compensated based on the growth of those two numbers. “That way no one thinks the CEO is getting some sort of sweetheart deal, so they’re all in it together,” said Buffett while describing the system.
Having clear incentives, where people know how they’re being judged, and rewarding behaviour that helps the business grow in the long-term, was constantly mentioned as a major key to success for the Berkshire companies.
Lesson #6 — Great Things Take Time
I was also able to attend a dinner with private equity heavyweights Will Ackman,Mario Gambelli and Tom Russo. Gambelli looks at industries and companies for a long time before he decides to invest. He started looking at tv cable provider Cablevision in 1973 and didn’t actually buy stock until 10 years later when he felt he could get a deal. “I knew the weaknesses and strengths of the team. The opportunities around the asset. When it was underpriced, that’s when I struck.”
I encounter entrepreneurs every day that feel they’re a failure if their company isn’t growing 100% month-over-month. They’re not the next Slack or Uber. There is another way. Buffett and Munger built Berkshire over 60 years. They also made a lot of mistakes, that they’ll readily admit to, and that’s an incredible gift. It doesn’t all need to be built in a day.
As Buffett and Munger are getting on in their years I highly, highly recommend you find a way to make the meeting. It’s just incredible to watch two people at the top of their game honestly and openly answer anything and everything about business.
Let me know if you have any questions or thoughts in the comments below.