08 May

EPIQ Blog: Thoughts from Omaha

Along with 40,000 of our friends, we attended the 2015 Annual Shareholders Meeting of Berkshire Hathaway (BRK) this past weekend. We do not attend every year but this gathering represented the 50th anniversary of current management's reign.

Tombs are written about Warren Buffett and Charlie Munger and more will come as they continue to lead the company. What was once a mediocre textile business operating in a declining industry and with little future, has grown into the fourth most valued public company in the world by market capitalization (behind Apple, Microsoft and Exxon Mobil). In very humble fashion, we share our observations on why the company has succeeded far more than just about any other in the world.

 

BRK is a conglomerate with operating segments in multiple-unrelated industries. We don't see much of a connection between GEICO, Dairy Queen, Acme Boots, BNSF Railway and Business Wire, to name just a few of the operating companies that are wholly owned by BRK. The conglomerate was a popular business structure back in the 1960s and 70s that fell flat when 'corporate raiders' figured out that the sum of the parts, for most, were worth far more separately than together. So, why has BRK, not only survived, but thrived, when many others have come and gone?

Culture:

While the culture has taken decades to develop, it starts at the top and creates a structural fortress by which BRK operates. It is about values and doing the right thing for the long term. The reputation of the company is unmatched by any other. This is driven home by Buffett's testimony before congress when he assumed the chairmanship of Salomon Brothers in the early 1990s. Buffett stated 'Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.' It does not need to be fancy or sophisticated, just honest and straight forward and in the 50 years of his leadership at BRK, this perspective has not changed.

Balance Sheet:

BRK has size and near bullet-proof financial standing. It is able to enter certain types of business no other company can and provide a sustainable, economic advantage through any business cycle. This also gives a huge advantage to the company when deploying capital in turbulent times. For example, during the last downturn, the only place Goldman Sachs could turn for a capital infusion was to BRK, and as such, Buffett extracted terms that significantly benefited BRK and its shareholders.

Acquisitions:

For large, family-owned businesses looking to sell, BRK has developed the reputation of being a stable, 'hands off' home. This is important to a certain type of seller. Many of the acquisitions the company makes are on better terms (cheaper) than what others might pay. BRK can offer something no buyer can: a permanent home which, in many times, may be more important than a higher price.

The Right Mind Set:

With clear vision and discipline, Buffett and Munger stick to what they understand. Their philosophy is truly that of a long-term partnership with the businesses in which they invest and with the shareholders who own the stock. The Proxy Statement, which details executives' compensation and board governance, explains why this company has virtually no peers. In 10 pages this year, we learn that the two leaders make $100,000 a year, a salary that has not changed in decades and BRK has never issued stock grants or options. Board members are compensated $900 for each meeting and the company does not provide directors & officers liability insurance to its directors.

In contrast, typical large companies may take 70 or more pages to describe complex, multimillion-dollar compensation programs, director pay in the hundreds of thousands, and how they routinely issue up to 1 or 2 percent of the stock every year 'to align the interest of the directors and management with the stockholders'. To demonstrate how dilutive the issuance of stock is, consider if BRK's directors had adopted a policy of issuing 1% of the company each year to incent its managers. In over 50 years, there would be 65% more stock outstanding resulting in earnings per share being nearly 40% lower!

Conclusion:

Every investor, capitalist or curious onlooker should attend a BRK Annual Shareholders Meeting at some point. We know for certain that the Warren and Charlie Show cannot last forever.

For us, the biggest takeaways are:

  • Be true to your values and nurture your culture
  • Be patient (EPIQ Blog: Patient)
  • Know what you don't know
  • Never pass up a $1.00 Dilly Bar

Thank you. Please contact us if you would like to continue the conversation.

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SAVE THE DATE: EPIQ Clambake - September 10th - Late afternoon - Contact EPIQ for details  

We are excited to announce that Mary Meehan, Founder and Chief Intelligence Officer at PanoramixGlobal, will be sharing her thoughts on consumer trends and possible pictures of the future.   Mary is a frequent contributor to Forbes magazine.  Click here to review her recent articles: Forbes.com/MaryMeehan.

 

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