Berkshire Hathaway BRK.A BRK.B owns a whole range of subsidiary businesses that Warren Buffett (Trades, Portfolio) has helped the conglomerate acquire over the past few decades.
Some of these companies have performed fantastically well. See's Candies is a great example. Since its acquisition, the candy business has yielded over $2 billion in profits for Buffett's conglomerate. That would make the investment a 1000-bagger (and this is a conservative estimate).
However, other operations have not been so successful. For example, Dexter Shoe was a disaster, and Precision Castparts has turned out to be a loss-making acquisition following this year's write-downs. Also, McLane Company, the distribution businesses Berkshire acquired from Walmart WMT in 2003, has provided a pretty terrible return on investment since it was acquired.
Some might question why Buffett has not been more active in buying and selling businesses that do not live up to expectations. He tried to explain why at the 2005 Berkshire annual meeting:
"We say that if a business is going to permanently lose money, we'll get rid of it. If it has major labor problems over a period of time, we might get rid of it. But we are not going to engage in what we call gin-rummy type management where we pick up one card and discard another."
The Oracle of Omaha went on to explain that he followed this approach because once he has good people on board, he wanted them to stay with the Berkshire group:
"Every business decision or investment decision isn't going to work out perfectly. And some businesses are going to run into unexpected surprises. But the people that have gone in with us have stuck with us in times like that. And our attitude is we'll stick with them."
The CEO of Berkshire went on to add that he believed there was a moral distinction between owning a stock and a company. While Buffett has said on many occasions that investors should think of stocks as businesses, and not lottery tickets to be traded on a screen, in 2005, he made a crucial distinction.
Buffett appeared to say that while he would be comfortable owning the stock of a business in a particular sector, he would not be comfortable owning the business. Specifically, he said:
"We would not have trouble owning stock in a cigarette company. We wouldn't want to manufacture cigarettes, you know. We might own a retail company that sells cigarettes. I mean, there's all kinds of gradations. But we do not — there are things we don't want to own and be responsible for their businesses, where we have no problem owning their stocks or bonds."
This matches up with Buffett's desire to stick with good managers even if businesses are doing poorly. The Oracle places a tremendous amount of weight on reputation and has always tried to prioritize having a good reputation over making money.
It would be difficult to argue that this approach has not worked. By making it clear that when he buys a business it's forever and rewarding good managers, business owners have been happy to sell to Berkshire. This has helped the group pick up the best subsidiaries at reasonable prices with their managers.
If Berkshire had adopted more of an aggressive approach, Buffett might have had a more challenging time retaining good management. This would have been bad for the firm's returns in the long run. It may also make it harder for Berkshire to find deals.
Owners would not come to the group with deals, for one. Buffett would have to bid for new businesses, and that would put the group against private equity and force prices higher.
Put simply, while Buffett's approach might not make sense to some, it has produced results over the past six decades.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- A Look at Berkshire Hathaway Energy's Performance in 2020
- Warren Buffett Has Sold $29 Billion Worth of Stock so Far in 2020
- Berkshire Hathaway Buys Back Record Amounts of Stock in 3rd Quarter
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
