In 2018, CNBC launched the Warren Buffett (Trades, Portfolio) Archive, “the digital home to the world’s largest video collection of Warren Buffett (Trades, Portfolio)." The website includes complete video footage from every Berkshire Hathaway (BRK.A, BRK.B) shareholder meeting since 1994, in addition to video clips from Buffett’s appearances on CNBC dating back to 2005.
As discussed previously, my goal in this series is to share key takeaways from the meetings. I will select a handful of quotes from each section that I think are most insightful for investors. With that, let’s take a look at the 1998 afternoon session.
Decentralization – 'just short of total abdication'
Early in the session, Buffett and Munger were asked about their operating management style. Specifically, the shareholder wanted to know if managers submitted annual business plans and how frequently Buffett and Munger met with the managers. Here’s what they said:
Buffett: “We may meet with some [of our managers] annually, we meet with others semiannually, but we have no formal system whatsoever, and we will never have a formal system. We don’t demand any meetings of any of our managers. We have no operating plan submitted to headquarters. Some of the companies use operating plans themselves, some of them don’t. They are all run by people who have terrific records, and they have different batting styles. And we’re not about to tinker with somebody that’s batting .375 just because somebody else holds the bat a little differently or uses a different weight bat. We believe in letting them do, currently and in the future, what has been successful for them in the past. And different people have very different styles. I’ve got my own style. But we have managers that like to talk things over, we have other managers that like to go their own way. We have managers that have a by-the-book approach which works well, we have other managers who wouldn’t dream of that. Most managers probably have monthly statements of financials. We have other managers that don’t. It really isn’t a problem. What we want to have is good managers. There’s more than one way to get to business heaven, and we have a number that have found different ways to get there… Talent is the scarce commodity, and when you find talent and they’ve got their own way of doing things, we’re delighted to have them do it. We want them to do it their way. We don’t want to change them.”
Munger: “The truth of the matter is that we have decentralized power in the operating businesses to a point just short of total abdication. And we don’t think our system is right for everybody. It has suited us and the kind of people that have joined us…”
Buffett: “We centralize money. Everything else we decentralize, pretty much. For example, Al Ueltschi is here. He started FlightSafety in 1951. And I don’t know what he’ll spend on simulators this year, but it could easily be a hundred million dollars or thereabouts. If I spent hours with him, I couldn’t add 0.01% to his knowledge of how to allocate that money. It would be ridiculous. It’d be a waste of his time and it would be an act of arrogance on my part… Our managers know their businesses and they know how to run them. And if they didn’t, we’d do something about the manager, we wouldn’t try and build a bunch of systems.”
The beauty of Berkshire’s approach to acquiring wholly-owned businesses is that, by design, they attract a certain type of high-quality individual. For example, if somebody is primarily concerned with money, and they’re willing to sell their business solely based upon whoever is willing to write the largest check, it’s of no interest to Berkshire (and as a corollary, they may be willing to do things in the short-term that are likely to increase the size of that check, even if they are detrimental to the long-term value of the enterprise).
In addition, as Steve Jobs pointed out at the D8 conference in 2010, the truly talented people will not stand for a system where they’re being micromanaged for no good reason:
“If you want to hire great people and have them stay working for you, you have to let them make decisions and you have to be run by ideas, not hierarchy. The best ideas have to win. Otherwise, good people don’t stay.”
At Berkshire, managers are fairly compensated and are given a long leash to do what they believe is in the best long-term health of their business (with incentives to ensure that their pay is aligned with those outcomes). It’s a management strategy that gives best-in-class people the mix of autonomy, recognition and compensation that they desire – which is why the people who are brought on through acquisitions so often stay at Berkshire for decades once they join in.
Investment mistakes
Later in the meeting, Buffett and Munger were asked about some of the most memorable investment mistakes that they had committed in their careers. Here were their answers:
Buffett: “Well, we’ll start off with the fact that when I was 11, I bought some Cities Service preferred at $38 and it went to $200 - but I sold at $40, grabbing my $2 a share of profit. Everything we’ve ever sold has gone up subsequently, but some of them have gone up more painfully, subsequently, than others. Certainly, the Disney (DIS) sale in the 1960’s was a huge mistake. I should have been buying, forget about holding. That’s happened many times. We think that anything we sell should go up subsequently because we own good businesses. We may sell them because we need money for something else, but we still think they’re good businesses, and we think good businesses are going to be worth more over time. Everything I sold in the past, that I can think of, has gone on to sell for a lot more money. And I would expect that would continue to be the case. That’s not a source of distress. But I must say that selling the Disney was a mistake, and actually the ad agencies had done very well since we sold them, too. Now, maybe some of that money went into Coca-Cola (KO) or something else, so I don’t worry about that. I would worry, frankly, if I sold a bunch of things right at the top, because that would indicate that, in effect, I was practicing the bigger fool approach to investing, and I don’t think that can be practiced successfully over time. I think the most successful investors, if they sell at all, will be selling things that end up going a lot higher, because it means that they’ve been buying into good businesses as they’ve gone along.”
Munger: “I’m glad the questioner brought this touch of humility because it is really useful to be reminded of your errors. And I think we’re pretty good at that. We kind of mentally rub our own noses in our mistakes. And that is a very good mental habit…”
Buffett: “It is instructive to do postmortems on everything as long as you don’t get carried away with it. But every acquisition decision, that kind of thing, there should be postmortems. Now, most companies don’t like to do postmortems on their capital expenditures. I’ve been a director at a lot of companies over the years and they’ve usually not spent a lot of time on postmortems. They spend a lot of time on telling you how wonderful the acquisitions are going to be, or the capital expenditures, but they don’t like to look so hard, necessarily, at the results.”
There are a number of good lessons here. The one that jumps out to me is the idea that an investor in high-quality businesses should expect the stocks they sold to trade higher over time (after they sell).
As Buffett points out, if you sell something at $100 per share and it’s trading at $50 per share five years later, you may have made a good (or lucky) trade – but it was a bad investment. That’s an instructive thought, and it’s a reminder that post-mortems should not only consider the outcomes – particularly when that outcome is being judged solely based upon where a security trades on the day of the decision.
Berkshire’s durability
Halfway through the session, Buffett and Munger were asked by a shareholder if they were prepared for adversity, such as a repeat of the Great Depression or a prolonged bear market. Here’s what Buffett said:
Buffett: “We are probably about as well prepared as any company can be for adversity because Berkshire has been built to last. Net, we would benefit over a 20-year period by having some periods of terrible markets. That doesn’t mean we’re wishing for them and it doesn’t mean they’re going to happen. We make our money by allocating capital well, and the lower the general stock market, the better we can allocate capital. So, we’re well-prepared but we’re not necessarily expecting.”
Munger: “We are not going to ever sell everything and go to cash and wait for a crash so we can go back in. On the other hand, we are structured so that I think, net, a lot of turmoil in the next 20 years will help us, not hurt us. I don’t mean it’ll be pleasant to go through the downcycle, but it’s part of the game.”
The point that Buffett and Munger make here is what I alluded to in my recent article about Berkshire’s capital allocation decisions – or lack thereof – during the market sell-off in early 2020. In a period where the range of economic outcomes is “extraordinarily wide,” their primary concern will be to ensure the sustainability of the enterprise (and when I talk about uncertainty, I am not referring to changes in stock prices).
Buffett has been clear about his priorities: “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” It’s up to potential shareholders to decide whether or not they are comfortable with such an approach.
Disclosure: Long BRK.B and DIS
Read more here:
- Some Thoughts on Berkshire's Recent Lack of Activity
- Berkshire Hathaway Meeting: 1997 Morning Session
- Nike: Digital Shines, but a Tough End to 2020
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