Portfolio manager’s Letter June 2006
Early on, at Berkshire Hathaway Hathaway’s Annual Meeting in Omaha last month, someone asked about training successors. Charlie seemed a bit irritated by yet another in the endless series of succession questions and said that shareholders had better things to worry about. “Warren Buffett has kept faith for 75 years. Does anyone think that he will blow the job of passing that faith on?” In other words, what is perfectly obvious to Charlie is not perfectly obvious to everyone. Even to other shareholders, and when something is perfectly obvious to him, he is not exceptionally patient with people that have to ask a question, the answers to which should be perfectly obvious.
I got the impression Charlie felt that the Iscar acquisition was perfectly obvious he and Warren Buffett have successfully created at Berkshire Hathaway a culture that will still be going strong long after he and Warren Buffett had left the building. He said further that “We don’t train executives here. We find them.” It might have been more accurate for him to say, “We don’t train executives here. We let them find us.”
To Charlie, it is “Perfectly obvious but very little understood” that to companies being acquired, Berkshire Hathaway’s biggest moat is its culture. In the future, the company’s earnings and market value will have very little to do with stock picking; and everything to do with the standards that have been set by Charlie and Warren Buffett, and is “perfectly obvious but very little understood”. Warren Buffett says that he uses the Chairman’s letter and the Annual Meeting to define its culture.
“We’re not saying that we do things better, but rather that this is us. We want people with a lifetime commitment to their business. To underscore the values that we have, everything we do is consistent with Berkshire Hathaway’s culture, and perfectly obvious. Everything they see, hear, and read from the company should be consistent … Homes have cultures. Companies have cultures. Countries have Cultures at Berkshire Hathaway’s people buy into it and see that it works. This kind of thing doesn’t require mentoring. Managers see consistency in how Charlie and I act.” It is” perfectly obvious, but very little understood”.
The thing that has always fascinated me about Warren Buffett is not the money but the character. He is proof that you do not have to be poor to be virtuous. Not everyone will buy his culture, but at a glance at a list of Berkshire Hathaway’s acquisitions shows that the number of investment managers that “get it” is growing because it is perfectly obvious to those attracted to their culture. Berkshire Hathaway’s culture is about honesty, dedication, and steady, durable growth. The word is getting around that this is not the worst of all worlds.
This is not everyone’s idea of paradise; no stock options, no $800 million pay packages. But the investment managers that do not have to be sold on Berkshire Hathaway’s management style have pre-selected themselves in by calling Omaha. They call because they recognize the culture, and they know that it works because it is perfectly obvious. In most cases, it is their culture already. They do not need to be trained because they already understand. No one is a better symbol of the culture than Mrs. B, the immigrant who came here poor, became rich but was still working 70 hour weeks in her 102nd year.
Charlie is convinced that he and Warren Buffett have created a business that will thrive without them because there will always be people like Eitan Wertheimer who will sell to Berkshire Hathaway or no one. They will sell to Berkshire Hathaway because they are attracted to the culture. Berkshire Hathaway is about rewarding the right kind of behavior. It is about building moats, about promising only what you can deliver, about knowing limits of your competency, and respecting the people you work with. It is about tap dancing to work every day, and this is perfectly obvious to the owners of businesses that Berkshire likes.
For the investment manager there is the knowledge that he will get the financial support he needs without the strings attached by Wall Street, no pressure from quarterly earnings that turn out lumpy, no 10Q that exposes his company’s financial information to his competitors.
Iscar is different because they are not coming to Berkshire Hathaway to preserve what they have. They are coming to Berkshire Hathaway because they think the culture will help them grow, to expand their moats and protect them from the cannibals on Wall Street.
It is all perfectly obvious.
Also at the meeting Charlie said that if you look at list of what they have acquired in the last ten years you will be surprised. So I decided to make a list. This is not a perfect list. It is just the best that I could piece together from my annual reports. You will see a lot estimates about prices. These estimates are based on what I remember and what I could guess from the Berkshire Hathaway Cash Flow Statements.
|Year||Date||Company Purchased||Purchase Paid In –|
|Cash (Millions)||Stock (Millions)|
|5-Jul-06||Iscar Metalworking Companies||$4,000|
|31-Aug-05||Forest River Inc||$1000*|
|15-Mar-02||Mid American Energy||$402|
|30-Apr-02||Fruit of the loom||$730|
|27-Feb-01||Johns Manville Corporation||$1,800|
|2000||18-Feb-00||Cort Business Services||$386|
|3-Jul-00||Ben Bridge Jewelry||$224|
|8-Aug-00||US Investment Corp||$90|
|1998||21-Dec-98||General Re, Cologne Re||$22,000|
|7-Aug-98||Executive Jet, Inc||$350||$350|
|1992||1-Dec-92||Central States Indemnity||$40*|
|Lowell Shoe Company||$80*|
The Total for cash deals through 2005 is about $17 Billion and the total of $24 billion in stock deals is, of course, mostly GenRe. The Total for noninsurance deals is about $17 billion and Operating profit for this segment has grown from $200 million to $4 billion so the return on invested capital would be over 20%.
Even though the table goes back 20 years, most of the action has been in the last ten years, and if you ignore the insurance deals that brought in GenRe and GEICO, most of the action has been since 2000. The momentum is definitely building, with the deals getting bigger and more frequent, and perfectly obvious. There are already five deals that are probably worth more $10 billion in the works for 2006, so it is already the biggest year ever for cash deals. A deal for an additional $15 Billion if it happens, would make 2006 a huge year.