Yesterday I had the pleasure to listen to Mr. Jeff Matthews discuss his two amazing trips to Berkshire Hathaway shareholders’ meeting. The shareholders’ meeting, long regarded as “Woodstock for Capitalists,” attract an ever increasing amount of pilgrims through good times or bad. A passionate Buffett fan, I reserved a spot for the event as soon as it was announced and arrived the earliest as early as possible to get a good seat. Getting a free copy of his book wouldn’t hurt my eagerness either.
Expecting a religious gathering about Buffett’s astuteness as an investor, I was soon surprised that the event was more about his mistakes and shortcomings. However, his perspectives led me into thinking about the aspect of life that admirers either don’t look for or discuss. As I digested the book and processed his thoughts, I have come to my own conclusion about the man that I admire. What to follow, what not to follow, and how to become my own man instead of blindly following a god-like figure. This part I will talk about what my investment vehicle will be like.
One of Mr. Matthews’ main concerns with Berkshire Hathaway has to do with the company after he dies. When Mr. Matthews had the opportunity the visit Nebraska Furniture Mart the crown jewel of Berkshire, what he found was not a glamorous store that attracted the high end buyers. In fact, it looked even far from a low end retailers like Wal-Mart. It looked old and failing, sustaining by the flow of customers which gave the store some vitality. Clearly, the store was underinvested. NFM was so entrenched in Nebraska and its surrounding states that national retailer would avoid expanding there. However, beyond the mid-west, it is nowhere to be found. The same was true for See’s Candy.
That goes back to Buffett’s model. He acquires business with good cash flow so he can buy other good businesses. He is so efficient at investing that he doesn’t want his managers to do it. For the past 40 years, it has worked very well for investors. But then what if the train comes? There are 70 businesses in Berkshire, ranging from candy shop to oil company. Whoever the successor is, he is probably interested in his expertise, whether it is insurance or energy. He wouldn’t want to deal with other businesses.
Here was when I cut in and asked, “Mr. Matthews, I have an opinion about Berkshire. I think another who took Economics knows about diminishing marginal return. By the time the person fills Buffett’s spot, he would have so much money to invest that he cannot get the return Buffett once enjoyed. I envisioned that the company could go slimmer by selling unprofitable businesses and huge dividend distribution.”
He responded, “True, now it leads to corporate governance issue. Take a look at who is at the board. Tom Murphy, Bill Gates, Howard Buffett. Those people wouldn’t allow the new guy, at least in the short run, to reverse what Buffett built. And since Buffett never invested in his businesses, preferring to expand his portfolio, when Buffett dies, the profitability through acquisition might not be sustainable.”
This is when I suddenly became clear. Buffett had a model that worked for him, but it doesn’t necessarily work for everyone. In fact, Ms. Schroeder wrote in “Snowball” that Buffett made a conscious choice that he would have his privacy by restarting his fund or run Berkshire, and Buffett, already a renowned investor, chose latter because he wanted to use Berkshire as a vehicle of his teaching.
It is hard to fathom how he would have done statistically had he stuck with the partnership model, but it is clear that if I have investors in the future, there is no way I want to use the public company model. First, there is far too much scrutiny than I can take. The analysts will torch you if the earning is not up to expectation. The SEC is all over you about filing. If I am interested in teaching, I teach. If I am interested in making money, I make money. I shouldn’t use a model so I can teach.
Buffett was also wearing two hats at the same time: the manager and the investor. He had to schmooze the managers and invest at the same time. As a fund manager the first part can be avoided for the most part (Buffett admitted that he hadn’t talked half of the mangers of the companies in his security portfolio). I don’t have to step in unless the company is underperforming. When it is profitable just by investing, just invest. Buffett said, “I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” That I am going to follow.
It is far easier to disband a partnership instead of a public company. Berkshire’s model, besides its security holdings, provides little short term liquidity. In transition period, it is hard for the successor to make selling decision. I also believe that Buffett has written enough that people will remember him whether or not the company still exists. Of course, in my opinion, once I am dead, I am dead. I am not particularly worried about my reputation besides how my family, friends and partners view me.
Lastly, I will never be Buffett and be so confident about my investments that they can be held forever. Liquidity can be underrated. Kind of like a girlfriend that you have been with for a while. You don’t cherish her till she is gone.
P.S. I am still hoping to save enough to experience the shareholders’ meeting. Because of the economic crisis, I have to conclude: Long live Mr. Buffett!!
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The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett
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