In my previous few articles I shared the notes I took from Bob Miles’ Berkshire System Summit. Again, it was a fabulous event, and I highly recommend it to everyone who’s attending future annual Berkshire Hathaway (BRK.A)(BRK.B) meetings. This year’s speakers included Don Wurster from National Indemnity, Tony Nicely from GEICO, Bob Batt from NFM and Ron Olson from Munger, Tolles & Olson. I’ve learned tremendously from those distinguished speakers.
There are three key takeaways when I synthesize the notes I took from all of them.
Focus is the most important factor to success
Both Warren Buffett (Trades, Portfolio) and Bill Gates (Trades, Portfolio) have attributed their success to relentlessly focusing on one specific passion or problem. This applies to most of Berkshire’s subsidiaries too.
There are three aspects of focus based on my understanding.
First, focus means sticking to a core competency that has been developed over time and sticking to the geographic areas where a business can have sustainable competitive advantages. National Indemnity focuses on niche insurance markets in the U.S. Geico focuses on automobile insurance in the U.S market. Nebraska Furniture Mart focuses on furniture, appliances and electronics in three geographic areas. All of them are also focused and passionate about providing the best value for their customers.
Second, focus means constantly figuring out a way or ways to do it better than anybody else and adding more economic value to the customers than anybody else. Geico and Nebraska Furniture Mart are exemplary in providing the best value for their customers with the best quality services and products.
And third, focus means continuously cultivating and maintaining a remarkable culture and a spotless reputation to deserve the trust and respect from all participants in the ecosystem. Every Berkshire manager tries their best to avoid doing anything that would embarrass Berkshire in any way. This goes along with Warren Buffett (Trades, Portfolio)’s “newspaper test.” At Berkshire’s subsidiaries, it’s a moral duty to conduct business in an ethical, meritocratic and win-win way.
The importance of being consistent
When asked about the Berkshire system, Tony Nicely said that one thing he learned early on about the system is that it doesn’t change. Warren Buffett (Trades, Portfolio) has been the same person all his adult life. Bob Batts and Don Wurster echoed Nicely’s observation. Many aspects of Berkshire Hathaway have remained the same for decades, for instance:
- The chairman spends most of his time reading.
- Its small headquarters.
- Managers are left alone.
- They always stick to their circle of competency.
What they meant is that the key ingredients, or the overriding principles of the system don’t change. But when things change, the system is also flexible enough to adapt to the changing environment.
To me, the things that don’t change are the building blocks of the system. These building blocks were small advantages in the beginning but as they keep compounding, over time they become huge non-replicable competitive advantages. In other words, Berkshire’s moat widens every day because the compounding power of the key building blocks. This is very powerful.
Berkshire will still be Berkshire after Buffett
After attending the Berkshire System Summit, it suddenly dawned on me that while investors mostly associate Berkshire with Buffett and Munger, Berkshire is much more than that – it’s a collection of wonderful businesses, the best capital allocators and the best operators in the world. Yes, Buffett and Munger are the best capital allocators but without the best operators such as Tony Nicely, Mrs. B, Ajit Jain and Greg Abel, Berkshire would not have achieved what it has achieved today. All publicly traded companies would be lucky to have any of the Berkshire managers as their jockeys. In fact, I would happily own Nebraska Furniture Mart or Geico if they were publicly traded companies because they are wonderful businesses with wonderful management teams.
As the operating businesses becomes a larger part Berkshire’s owner’s earnings, Berkshire’s operating managers will play a larger role in growing Berkshire’s intrinsic value and capital allocation, while still crucial to Berkshire’s intrinsic value today, might decline in terms of significance in the future.
Read more here:Ă‚
Notes From Tony Nicely's Talk, Part IIĂ‚
Notes From Tony Nicely's Talk, Part 1Ă‚
Notes From Don Wurster's Talk at the Berkshire System SummitÂ
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