Individual investors can learn a lot about investing from Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) Warren Buffett (Trades, Portfolio), but one big difference between Buffett and the average investor is that the Buffett has hundreds of billions of dollars of capital under management, whereas most individuals invest considerably less. Berkshire has the ability to acquire the entirety of a business, whereas most investors can only buy partial stakes of a publicly traded company. Therefore, it's fair to wonder whether Buffett's advice is really applicable to smaller investors.
In a 1996 talk with students at the University of North Carolina, Buffett explained the difference between owning part of a business and owning all of it.
The two big advantages
Buffett said that there are essentially two advantages to owning 100% (or having a controlling stake) of a business.
The first is that as a controlling owner, you can replace bad managers. While this might seem like a big deal, Buffett believes that it's not as relevant to Berkshire's activities:
"If I own all of See's [Candy] and I want to change the management, I can do that. But I don't want to get in with managements that we want to change in the first place. If I were going to buy See's and thought I needed to change the management, I might not buy it, because what do I know about making chocolate?"
So if you subscribe to Buffett's philosophy of buying shares of "wonderful companies at fair prices," then not having the ability to change management won't be a significant issue.
The other advantage for big owners like Buffett is that they can decide what to do with the earnings of a subsidiary business. On this, the Berkshire chief said:
"You can take the earnings out of a business. If you own 100% you control the distribution policy and put [the cash] over someplace else. If the XYZ company that we own 5% of wants to go out and buy movie studios or whatever, they get to allocate the capital. All things being equal, or even unequal, I would prefer to allocate the capital."
One of the strengths that Berkshire has as a business is that it can move capital from underperforming sectors to better-performing ones. For instance, if it owns a steel producer, and demand for steel starts to fall, it can choose to take that company's earnings and put it into a better part of its business (for example, insurance). Ordinary investors obviously don't have this kind of power.
When it comes to everything else, however, they can emulate Buffett's approach.
Disclosure: The author owns no stocks mentioned.
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