50 Master Moves That Shaped Berkshire Hathaway

While he has always wanted to win and still does, Warren Buffett himself might not have visualised that he would end up creating the Berkshire Hathaway of today. He wrote in the 2014 annual report, “Berkshire now owns nine-and-a-half companies that would be listed on the Fortune 500 were they independent.” Last year, his partner, Charlie Munger, had mused, “How the hell does this thing end up blowing past GE?” At last count, Berkshire had a market cap of $360 billion versus GE’s $280 billion. 

Though Munger explained what he thought were the reasons for Berkshire’s phenomenal success, he did also write, “Berkshire’s better outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.” When this was pointed out at the 50th-year annual meeting, Buffett recalled the trifecta that was unlikely to happen again. The first was Lorimer Davidson spending four hours to explain the insurance industry to him when he was a 20-year-old. The second was Jack Ringwalt selling National Indemnity to him and the final one was Ajit Jain walking into his office in 1985. 

Left to Buffett, his list of master moves would only be these fortuitous three. But if one were to believe Munger, “If people weren’t so often wrong, we wouldn’t be so rich.” The fortuitous trifecta and Munger’s wisecrack aside, what they have achieved through Berkshire is the stuff of legend and the 50 master moves that you will read below is only in hindsight.

 1 Choosing to stay at Omaha
The key to thinking independently is to shut out noise and not get carried away by it. Independent thinking and rationality has been central to Buffett’s success and being away from Wall Street has helped.After graduating from Columbia and being turned down by Ben Graham for a job at his investment firm Graham and Newman, he returned to Omaha to become a stockbroker. Buffett didn’t quite enjoy the brokerage business and pursued Graham, sending him stock ideas continuously till he relented. Buffett moved to New York for the love of the job in 1954, but returned to Omaha once Graham dissolved his partnership firm in 1956.Buffett ran his investment partnership firm in Omaha with extreme success till 1969. His next stint at New York was only when he stepped in at Salomon Brothers when it was embroiled in a crisis

2 Winding up Buffett Partnership
In the investment industry, it’s not common for fund managers to wind down operations and return capital to clients if they have run out of ideas or are circumspect. Buffett did exactly that early in his career.After an extremely successful stint at the Buffett Partnership, delivering return of 29.5% compounded between 1956 and 1969, Buffett decided to close down the partnership and return the money to investors in 1969. Despite his fabulous performance, he took this bold decision, citing “inability to find bargains in the current market”. He liquidated all shares held by the partnership except Berkshire Hathaway, a textile company he had whimsically taken control of.

3 Turning Berkshire into an investment company
Buffett qualifies his Berkshire purchase as the "dumbest" stock he bought but then turned it into his famed investment vehicle. When he first bought into Berkshire, its textile business was ailing but he revived the company under CEO Ken Chace. Besides Chace's efforts to reduce inventory, sweat and sell assets, a temporary cyclical upturn generated substantial cash in the initial years. Buffett read correctly the winds of change affecting the textiles business, so he changed direction and invested its cash flows into more lucrative businesses. This decision forms the foundation for Berkshire's future. "Burlington Industries, the largest company in the textiles business (then and now) chose a different path, deploying all available capital into its existing business between 1965 and 1985. Over the 20-year period, Burlington's stock appreciated at a paltry annual rate of 0.6 percent; Berkshire's compunded return was a remarkable 27 percent", notes William Thorndike in his book The Outsiders.

4 Focusing on capital allocation
Buffett figured out in his late 20s that investing had become his passion and that’s what he excelled at. His enormous reading list and legwork had led to a deep understanding of varied businesses and their economics, unlike most CEOs, who are constrained and blinkered because of the business they operate in. What differentiates Buffett from other successful CEOs is that he turned Berkshire into an investment company where he would take all investment decisions and let the operating managers take care of those businesses. Despite their phenomenal operating experience, the managers of Berkshire companies send their profits back to Omaha and Buffett decides on the allocation based on every business’ investment worthiness. There is no question of sinking money in declining businesses (textiles was shut down) but nothing stops him from allocating extraordinary capital to businesses that may hold outsized return potential. In recent history, capital intensive businesses such as BH Energy and Burlington Northern have received a bulk of the funding for acquisitions and expansion.

5 Investment flexibility
Through his career, he has dabbled in every financial instrument in the universe. Buffett has been asset-class agnostic, though now he is constrained by size. He still wants to own the best and says, “At Berkshire, we prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone. Our flexibility in capital allocation — our willingness to invest large sums passively in non-controlled businesses — gives us significant advantage over companies that limit themselves to acquisitions they can operate. Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.”

6 Investing in long-term relationships
Buffett’s investment prowess apart, one of his greatest strengths is his ability to gauge character and competence in people, and cultivate them. Right from choosing Charlie Munger as his partner, to his close association with the chairperson of Washington Post Company, Katherine Graham, who aided in understanding the media business, where he made some remarkable bets, to the current partnership with 3G Capital. Buffett’s secret to great long-term relationships is to first have a high entry barrier in terms of trust. Buffett works with trust and talk rather than confront and mock. His approach of “praise by name, criticise by category” also ends up winning him more friends than enemies.

7 National Indemnity
Buffett’s likeability also resulted in many a great deal. Jack Ringwalt, the controlling shareholder of National Indemnity Insurance, came to Buffett in 1967 saying he would like to sell. Buffett did not ask for an audit, as he knew Ringwalt was honest but quirky, and would walk away if the deal became complicated.Buffett used a bulk of Berkshire’s cash to acquire National Indemnity and sister company National Fire and Marine for $8.6 million. “Though that purchase had monumental consequences for Berkshire,” Buffett reveals in the 2014 annual letter, “its execution was simplicity itself.” More importantly, it became an important pillar of the Berkshire structure.

8 The power of float
Using the insurance business to fuel his investment vehicle was Buffett’s masterstroke, as it provided an implicit leverage without the firm having to actually borrow any money but bolstering overall return. This “float” is estimated to have added nearly a third to Berkshire’s annual return. Buffett explains the power of float lucidly in his 2014 letter. “Property-casualty insurers receive premiums up front and pay claims later. This collect-now pay-later model leaves P/C companies holding large sums — money we call ‘float’. Meanwhile, insurers get to invest this float for their benefit. Consequently, as our business grows, so does our float.” Besides, Buffett adds, the nature of Berkshire’s insurance contracts is such that “we can never be subject to immediate demands for sums that are large compared to our cash resources. This strength is a key pillar in Berkshire’s economic fortress”.

9 Underwriting discipline
Normally, insurance companies register an underwriting profit if premiums exceed the total of expenses and eventual losses that adds to the investment income the float produces. Buffett says the lure of this profit creates such intense competition that the industry actually ends up with a significant underwriting loss.But Berkshire is an exception, operating at an underwriting profit for 12 consecutive years, with pre-tax gain for the period having totalled $24 billion. The whole strategy of profitable underwriting and focus on float creation, as opposed to simply focusing on premium revenue, has meant that Berkshire companies would avoid underwriting insurance when prices were unattractive, while underwriting large amounts when the prices were attractive.“In 1984, National Indemnity wrote $62.2 million in premium. Two years later, premium volumes grew an extraordinary six-fold to $366.2 million. By 1989, they had fallen back 73 percent to $98.4 million and did not return to the $100 million level for 12 years. Three years later, in 2004, the company wrote over $600 million in premiums. Over this period, National Indemnity averaged an annual underwriting profit of 6.5 percent as a percentage of premiums compared with an average loss of 7 percent for a typical property and casualty insurer,” points out Thorndike in The Outsiders. As for re-insurance, almost all big-ticket underwriting lands up at Berkshire. “When major insurers have needed an unquestionable promise that payments of this type (where contracts entail substantial payments 50 years hence or more) will be made, Berkshire has been the party — the only party — to call,” says Buffett, adding that there have been only eight P/C policies in history that had single premium exceeding $1 billion and all eight were written by Berkshire; the highest ever was a transaction with Lloyd’s in 2007, where the premium was $7 billion.

10 Geico
Buffett bought into Geico when the firm lost more than 95% of its value because of serious underwriting losses, but a new CEO was trying to revive the company, bringing back the underwriting discipline it was once known for. Between 1975 and 1980, Buffett invested about $45 million into Geico, raising his stake to 33%, as he knew the company had a low-cost structure (it directly sold insurance to customers and, hence, its operating cost was 15 cents a dollar compared with 24 cents for competition) and with the new management, it could do better.Over the next 15 years, by 1995, Buffett’s investment had grown to $2.4 billion, a 51% stake, as the company also bought back shares. Berkshire finally bought the remaining 49% in January 1996 for $2.3 billion. In the 2014 annual letter, Buffett wrote, “It was clear to me that Geico would succeed because it deserved to succeed. No one likes to buy auto insurance. Almost everyone, though, likes to drive. The insurance consequently needed a major expenditure for most families. Savings matter to them — and only a low-cost operation can deliver these. Geico’s low costs create a moat — an enduring one — that competitors are unable to cross.” 

11 Conglomerate structure
Charlie Munger loves spin-offs as a strategy and Buffett himself may feel that Berkshire is subject to a holding company discount, but they have favoured the conglomerate structure rather than split the company for a short-term pop. The conglomerate structure is abhorred by the market, usually because of the discretion it allows management to allocate — or misallocate — capital. With Buffett and Munger at the helm, the structure works beautifully, as they have perfected capital allocation. The biggest advantage is tax efficiency. Buffett has often advocated more taxes for the rich but has worked toward minimising tax outgo via deal structuring and deferrals. “Thanks to its long-time horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now totalling $60 billion. These amount to interest-free government loans without conditions,” says Buffett watcher Lawrence Cunningham.

 12 Lean operation
For a company of Berkshire’s size and complexity with a turnover of nearly $200 billion and 340,000 employees, its headquarters is thinly staffed — and that’s an understatement. Berkshire’s office at Farnam Street in Omaha houses 25 people, including Buffett. Adds Cunningham, “Most sizable American corporations use centralised procedures and departments, middle managers meeting regularly, along with consultants, directives, supervision and second-guessing. Berkshire has none of that — no centralised accounting, personnel, legal or technology departments; no hierarchies for reporting or budgeting; no middle managers or consultants. All such functions are handled in the individual units.” That cuts costs and eliminates bureaucracy.

13 Buying forever as centerpiece
As Buffett graduated from Graham’s cigar butts strategy to one that emphasised quality stocks and fair prices, “buying forever” was probably a natural corollary. Implicit in the philosophy of buying for keeps are three considerations: 1) the power of compounding can do magic over long time periods, 2) there is cost associated with moving in and out of stocks, which erodes value over time, and 3) the reinvestment risk associated with winding down an existing holding. Barring IBM, which was purchased in 2011, his top four positions have been in his portfolio for over 20 years.

14 See's Candies
See’s, a California-based candy company, was the landmark investment that marked the departure of Buffett from a pure quantitative process that Graham advocated to a quality-focused approach — the concept of ‘moat’ in Buffett parlance. Buffett bought the company on Munger’s recommendation, at a price far higher than what he had paid for any stock till then. He paid $25 million, or 6X operating income, in 1972. To date, See’s Candies has brought in pre-tax earnings of $1.9 billion, with its growth funded by investments of $40 million. See’s competitive advantage was unleashed after Buffett initiated a more aggressive pricing strategy commensurate with its quality of products. Buffett has said, “If there was no See’s, there would have been no Coke,” highlighting the significance of this investment.

 15 Coca-Cola
Buffett’s big bet on Coke had many tittering as they could not figure out why Buffett had taken such a massive bet on a century-old company. But the cold war was thawing and coupled with a massive distribution moat, Buffett could not see anything but a windfall of sugary profits from across the globe. The presence of one-time neighbour, the very competent Donald Keough, at the helm reinforced the comfort. Berkshire is now sitting on more than a twenty-fold gain on its investment, with the dividend fountain unlikely to run out of concentrate anytime soon. Coke is one of those dream investments for Buffett, high not only on nostalgia but also on return.

16 Washington Post
This was one of those bargains of the century. Not only did he run a paper route as a teen, Buffett had also been buying regional newspapers and realised that sooner or later, the bulk of the advertising ends up with the market leader. The Washington Post was as strong as one could get in its market and given what it was trading at, Buffett loaded up enough to become the second-largest shareholder in the holding company. If anything comes close to Coke, Washington Post Company must be it. The only difference is that he let go of it, but in a tax-effective manner that only Buffett could have envisaged. 

17 Capital Cities
If The Washington Post was Buffett’s initiation to national newspapers, then Capital Cities and getting to know Tom Murphy was his gateway to national broadcasting. His earlier experience of investing in ad agencies and the template of advertising leadership was transplanted to a television network. Buffett financing Capital Cities’ acquisition of ABC resulted in a network that ran across the country, and then the eventual buyout by Disney. Again, like Keough at Coke, the formidable tag team of Tom Murphy and Dan Burke at Cap Cities made a big difference to how the return shaped up.

18 Concentration as opposed to diversification
Buffett and Munger have held the view that diversification does not reduce risk. “Diversification is protection against ignorance. It makes little sense if you know what you are doing,” Buffett has famously said. In the end, investing is about recognising everything that could go wrong and still being convinced about the upside. What this means is that your chances of striking it rich are higher if you bet on a few high-conviction ideas than across many where your conviction isn’t as high. Currently, the top four positions in Berkshire’s investment portfolio account for 60% of the total value. There have even been occasions when a single stock has accounted for more than 15% of the total value.

19 American Express
During his partnership days, Buffett made a big bet on American Express in 1965, when the company was battling the salad-oil crisis. He loaded up on Amex, building it to about 40% of his total portfolio — that amounted to more than 5% ownership in Amex at a cost of $13 million. That affection continues and Berkshire today holds nearly 15% in Amex, and that stake was worth $14 billion in end-December 2014.American Express' credit card business focuses on encouraging higher spending by creating great reward schemes. While Amex has consistently widened its basket of offerings, it has been facing the heat recently because of a host of business challenges, including the end of its partnership with Costco, the largest US wholesaler. Buffett is unfazed, but his portfolio managers have already built positions in MasterCard and Visa, although that exposure is significantly smaller.

20 Wells Fargo
Buffett’s traditional dislike of financial institutions was overcome by the valuation at play. During the collapse in banking stocks in 1990, Buffett reckoned that Wells Fargo’s balance sheet had the depth to withstand the rot lending it had done. It was too good an opportunity to pass up and pretty soon, he was laughing all the way to the bank to buy more of its stock. So much so, that today, Berkshire holds about 10% of the bank in its investment portfolio. Given his earlier affirmation about “loading up on things that he likes best”, expect him to add more to the single-biggest holding in his portfolio.

21 Moody's
While he does make general statements, Buffett never goes to town with his investment thesis on any of his holdings. However, many in town went after him for Berkshire’s holding in Moody’s after the 2008 crisis. Buffett, who was one of the ardent critics of those involved in the sub-prime crisis, always had a fat holding in Moody’s, one of the credit rating agencies, that was asleep at the wheel. Moody’s enviable regulatory moat aside, Buffett has reduced his holding over the years but the remainder is still worth over $2 billion. This is probably one of the few stocks which has made him money but not given him much cause for cheer.

22 Contrarian approach
At the heart of investing are the emotions of greed and fear. The more depressed and fearful the market, the greater the potential for gains. And vice versa. While Buffett has bought into great businesses run by able managements, he timed his entry on several occasions when the stock was hit by a major scandal or crisis, which, in Buffett’s assessment, did not damage the intrinsic value of the business to the extent that the market was reacting. Thorndike notes, “The majority of Berkshire’s public market investments originated in some sort of industry or company crisis that obscured the value of a strong underlying business.”

23 Strike only when cold
Conventional fund managers say “time in the market is more important than timing the market.” While that statement may have some merit, steering clear of a major catastrophe can result in very valuable dry powder. Buffett did so famously on two occasions — the first time in the late ’60s when he dissolved the Buffett Partnership and returned money to investors saying the markets were overvalued; and he did a repeat in 1987 ahead of the October market crash, when he sold all his stocks barring his core positions. Buffett’s comfort with long periods of inactivity and spurts of peak activity is legendary and helps seize opportunities that offer superlative return.

24 Smart acquisitions led by intrinsic value
The key to maximising return is to buy businesses when the price is substantially lower than the intrinsic value. Buffett’s acquisitions are not led by size or synergies but by the addition to intrinsic worth. Deeply cognisant of the intrinsic worth of Berkshire, barring the odd misstep with Dexter Shoes, he has largely abstained from making large acquisitions (BNSF is an exception) using shares. “The intrinsic value of the shares you give in an acquisition should not be more than the intrinsic value of the business you receive. Trading share of a wonderful business which Berkshire most certainly is for ownership of a so-so business irreparably destroys value,” said Buffett in his 2014 letter, adding that “I’ve yet to see an investment banker quantify this all-important math when he is presenting a stock-for-stock deal to the board of the potential acquirer.”

25 Positioning BRK as a great place to sell
Berkshire has, over time, earned itself a reputation of an ideal home for family businesses wanting to sell out. Firstly, it’s easy to sell to Berkshire. No prolonged discussions or negotiations. Buffett has been listing his “acquisition criteria” in the Berkshire annual report for over three decades now, and any business-owner can approach Buffett directly if the acquisition criteria are met. Buffett is quick with deals and assures to give an answer usually in five minutes or less. But more than the ease of transaction itself is what comes after. Says Barnett Helzberg, who sold off his business Helzberg Diamonds to Berkshire Hathaway in 1995, “Promoters know Buffett is not going to change it, he is not going to sell it and he is not going to take it public. That is why he is the best person in the world to sell out to. That is also why Warren gets the opportunity to buy some very good family businesses.” 

26 Hire well, manage little
Buffett may have said, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will,” but that grossly underplays the emphasis he lays on smart managers. His model of extreme de-centralisation would not work unless the operating managers delivered. A notable fact is that nobody at Berkshire is awarded stock options. Having hired well, Buffett limits his interactions with his CEOs to the minimal, only to get involved in capex decisions. He allows 100% operating freedom to his managers, with full expectation that they will be conscientious. This tightrope walk has ensured that Berkshire has never lost a CEO to competition in all these years. It also demonstrates the fiduciary responsibility that is ingrained in the Berkshire culture.

27 Trust-based model
In May 2009, when the world was emerging out of the credit crisis, Buffett’s partner Charlie Munger said something fundamental about Berkshire Hathaway that resonated with the 35,000 people present at the annual meeting: “Our model is a seamless web of trust that’s deserved on both sides. That’s what we’re aiming for. The Hollywood model, where everyone has a contract and no trust is deserved on either side, is not what we want at all.” To which Buffett had added, “We don’t want relationships that are based on contracts.” It is this seamless web of deserved trust that is unique to Berkshire.

28 Steering clear of institutional imperative
Human beings and, by extension, companies find great comfort in herding. Hence, anything popular or even downright financially foolish gets copied if there are enough people doing it. That applies to sub-prime lending or the rush to underwrite insurance at low premium. It is then left to independent-minded contrarian leaders to ensure that their institution doesn’t succumb to mindless fads or indulge in collective behaviour that borders on grey. Buffett was clear from the onset about doing the right thing both in letter and spirit and this was forcefully put forward when he stepped in to fix the breakdown at Salomon Brothers. All his operating companies are expected to toe the line. 

29 No banker for deals
In the earlier days, Buffett, unlike most CEOs, relied on his own research. And he didn’t rely on investment bankers to do deals either. Bankers and brokers are driven by self-interest and for the hefty fees they charge, their advice often ends up being counter-productive. “Don’t ask the barber if you need a haircut,” says Buffett. Apart from the deals that knock on his door, he relies on his network and previous sellers of businesses for deals. That has not deterred Wall Street from calling every now and then as Berkshire subsidiaries do a lot of bolt-on acquisitions through the year.

30 Governance structure
If Berkshire were some middling company, its board could have passed off as a coterie. Most of them have known Buffett for a long period of time but there is a big difference. The directors are personally invested in Berkshire and those shares have been bought with their personal money. Buffett champions the idea that directors will be able custodians of shareholder interest when they have skin in the game. Unlike other American directors who are well-paid, Berkshire directors get paid almost nothing. They probably end up spending more attending the board meetings and are also not provided liability insurance cover.

31 Direct communication with shareholders
In line with the belief of not pandering to Wall Street, he does not give earnings guidance, spends no time on analyst calls or investment conferences but spends a full day answering questions at his legendary annual shareholder meetings in Omaha. His shareholder letters are a detailed account of all the major operating businesses of Berkshire, besides his take on important economic concepts and issues. Buffett and Munger have maintained that all shareholders should have access to new information that Berkshire releases simultaneously and should also have adequate time to analyse it. All financial data is thus released late on Fridays or early on Saturdays. The annual meeting is also always held on the first Saturday in May. Buffett and Munger do not talk one-on-one to large institutional investors or analysts, treating them as they do all other shareholders. 

32 Not splitting shares and creating another class
Managements often engineer stock splits to make the stock appear optically cheap and to create greater liquidity. Slicing a pizza does not make it any bigger, so Buffett has refrained from splitting the shares of Berkshire. Higher ticket size investments are often more thought through by investors and they tend to take a more long-term view. Still, Buffett created a new Class B, with fractional economic and voting rights, back in 1996 when two New York money managers designed a unit trust that would buy the stock and then issue fractional units designed to trade at a low price for a fee. “To knock out these meddling middlemen, Berkshire amended its charter to rename its existing common stock Class A and add a Class B, with fractional economic and voting rights. It vowed to offer as many shares as necessary to fill demand, which it did, thus killing off demand for the unit trust,” says Cunningham. 

33 No dividend policy
Over the past nearly 50 years, Berkshire has not paid a single dollar as dividend. In addition to its cash pile, Berkshire earned $20 billion in 2014 but all of that is retained for reinvestment. In his 1984 letter to shareholders, Buffett wrote, “Unrestricted earnings should be retained only when there is a reasonable prospect — backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future — that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors…”For investors who are in need of cash, he suggests selling shares instead. “The sell-off policy lets each shareholder make his own choice between cash receipts and capital build-up.” The other advantage is that dividends attract a higher rate of tax compared with capital gains. The recent clamour for dividends from certain pockets was voted down overwhelmingly by the majority of shareholders.

34 Integrity at all costs
Buffett’s values of integrity and humility were ingrained at an early age from his father Howard Buffett, a stockbroker who later ran successfully for Congress. Warren has carried that forward and carefully built Berkshire with trust and integrity as core values. Breach of trust and integrity issues fall in the zero-tolerance zone for Buffett and Munger. After the Salomon Brothers episode, this was again apparent when Buffett took the tough decision to let go of David Sokol, after it came to light that he had bought shares of Lubrizol in his personal account ahead of Berkshire’s acquisition of the company. David Sokol was one of his smartest managers, a trusted lieutenant and potential heir apparent. Despite that, or perhaps because of that, Buffett took the hard call.

35 Surfing big trends
Although Buffett underplays how much he looks at macros, his stock selection reveals a strong underpinning of the prevailing economic environment. Whether it be companies having pricing power when inflation was hurting or playing the private equity game at a time of near-zero interest rates or even investing in a business like wind energy because of the tax advantages it offers, Buffett has intelligently played macro trends as is visible in his portfolio. The beauty of his strategy is to pick stocks by quickly identifying structural trends but, at the same time, not lose sight of an opportunistic move that could hold significant gains.

36 Betting on management change
Another strategy is betting on a new management and strategic change. Managements tend to destroy value when they diversify into businesses that promise lower returns than the existing “franchise-type” business that delivers high returns. A capable new management can add value by simply returning to the core business and doing away with mediocre businesses, and that’s a good opportunity to exploit. Thorndike presents evidence in his book The Outsiders.

37 Saying no to dotcom darlings
Even at the peak of the internet boom, when Buffett was underperforming and there was pressure and criticism about his abstaining from technology, he stuck to his circle of competence. Although Buffett says he does not understand technology, the truth is that the pace of technology change makes predicting future cash flows next to impossible. Often, the longevity of the company also becomes questionable. Even though Buffett has largely refrained from technology, he bought into IBM in 2012 and has added to his position amid much cynicism.

38 Widening circle of competence
Sticking to his circle of competence has been Buffett’s pet theory but the best part of Buffett and Munger is that they turned themselves into a life-long learning machine which has resulted in an ever-expanding circle of competence. The continuous learning — besides being intense readers, both devour balance sheets like a tabloid — ensures that they know what to look at and where not to waste time. In the recent annual meeting, Munger said, “We were always dissatisfied with what we already knew, and we wanted to know more. If Warren and I had stayed frozen in time, Berkshire would have been a terrible place.”

39 Cultivating China as an ally
Outside the US, UK and Germany, the country with the most Berkshire fanatics has to be China, where he is looked upon as a god of investing. About 3,000 shareholders were in attendance from China for the 50^th-year annual meeting, and so were various Chinese media agencies. Buffett and Munger, too, are impressed by the way China has emerged as an economic power. And being the kind to have always looked around bends, they both believe that it is imperative for the US to nurture a cordial economic and political relationship with China. While there has been nothing recent, Berkshire’s earlier investment in PetroChina was handsomely rewarding.

40 PetroChina
This was Buffett’s first major investment in the Chinese market and seemed timed to cash in on a bottoming crude market and potential economic recovery in 2002. Buffett, until then, had not ventured outside the US market in such a major way, with a close to $500-million investment. The recovery in the world economy resulted in a higher crude price and Buffett exited the largest Chinese oil producer making seven times his original investment. In an earlier interview, he had mentioned, “We bought it at a $35-billion market cap, but I thought the company was worth at least $100 billion. When we sold the stock, it was valued at probably $250 billion-275 billion.”

41 BYD
Munger may have discussed and suggested a zillion investment ideas after See’s Candies to Buffett, but it is the BYD investment that most recall as the recent one influenced by him. The BYD investment was suggested by Himalaya Capital’s Li Lu — who manages Munger’s money — and then became a part of the Berkshire portfolio. BYD is essentially a bet on the adoption of electric cars in China, and possibly around the world. The company is working on an efficiently rechargeable car battery and if it gets there before anybody else, there is another windfall awaiting Berkshire. That happening, BYD will indeed mean Build Your Dreams.

42 Berkshire Hathaway Energy
Earlier known as MidAmerican, Berkshire Hathaway Energy supplies electricity and natural gas to about 12 million customers and generated $1.9 billion in net earnings in 2014. Buffett has traditionally stayed away from utilities, as they are capital-intensive businesses. The aggressive stance at BH Energy is not only driven by tax incentives but also the assurance of a steady return. In a way, it seems to be insurance against a turn in the current benign market environment. There is also a potential successor in the form of Greg Abel, who also sits on the board of Heinz.

43 Impeccable deal structuring
Buffett is great at identifying investment opportunities, as his buying spree during the 2008 crisis showed, but his prowess extends far beyond in smartly structuring deals. Buffett invested in the late ’80s in convertible preferred securities of Salomon Brothers, Gillette, US Airways, and Champion Industries, wherein the dividends came with tax relief, which meant that not only could he earn higher post-tax yields but also benefit from any potential appreciation in stock price. In the deal struck with Bank of America post the crisis, Berkshire has the option of buying 700 million shares by 2021 at $5 billion. The market value of that stake today is $12 billion. Buffett is still sitting on the position and says he will “exercise the option closer to expiry”, even as he holds on to the cash. He has also frequently used a “cash-rich split-off” to maximise return. This play involves an exchange of cash and assets for stock and Buffett has used this tax-efficient mechanism very effectively in the case of the Duracell acquisition and to exit the Washington Post Company.

 44 Burlington Northern
If there was a direct vote on the future of the US economy, this $44-billion deal was it. It is now in Buffett’s words “Berkshire’s most important noninsurance subsidiary”. Berkshire will spend $6 billion on capital expenditure to improve capacity and its network. This is one quarter of revenues, but this capex as well as that at BH Energy should lead to more deferred taxes and hence quasi float. Given the fear of mishaps, half the capex will be for improvement and maintenance of tracks.

45 Iscar
If PetroChina was the first major listed equity that Berkshire bought outside the US, then metalworks company Iscar was the first major buyout of a private company outside the US for Berkshire. This buyout, again, reinforced Berkshire’s position as a prized home even for private companies outside the US. The $6-billion transaction was done in two parts over 2006 and 2013, and the fact that Berkshire paid $2 billion for the last 20% implied that it was pretty satisfied with the way Iscar had grown since the acquisition. Given this favourable experience, it is likely that Berkshire could do more acquisitions in Israel.

46 IBM
The world takes its own time to come around and grasp the wisdom in Buffett’s decisions. His call to invest in IBM might be another such case. It could well be that Buffett has not bought IBM for its technology. After having dissected it well over his lifetime, he might have bought it as a digital concrete company for its corporate moat, regular cash flows, share buy-backs and its capacity to pay regular dividends. Buy-backs are a regular theme wherever Buffett is involved, and so are dividends. Buffett likes dividends, it is just that he doesn’t like to pay them. Then, given its legacy and standing in the corporate world, IBM is not something that will just go away. It can marshal enough resources to do an acquisition and tilt the playing field in services.

47 Partnering with 3G
In a world of low interest rates, to juice up return, you need leverage. Debt has been anathema to Berkshire since its inception. So, the next best alternative in a 1%-interest-rate world is to do private equity with a partner that you are comfortable with. 3G Capital is that partner for Berkshire Hathaway and Jorge Paulo Lemann seems to be someone who Buffett is comfortable with. Getting into Berkshire’s inner circle is a tough act, and that Buffett is taking the flak for 3G’s tough-love tactics is a reflection of the belief that he has in its capabilities. Look forward to more big elephant co-hunting.

48 Cash hoard
Buffett has been averse to leverage and loves cash because it comes handy when the best opportunities arise. That belief has only been strengthened over time, especially after the 2008 crisis, when there was great opportunity in the market and Buffett himself ended up buying early in the plunge. He considers cash a strategic advantage, and that was very evident in 2008. And even though Buffett may deliberately deemphasise macro fundamentals in his investment approach, his acute sense of timing has helped him make profitable decisions. That’s probably the reason he is being judicious with his cash in the current times. 

49 Succession structure

This has been the subject of endless speculation, and almost everybody associated with Berkshire was unusually tight-lipped this time around at the annual meeting. Buffett had earlier written, “Both the board and I believe we now have the right person to succeed me as CEO — a successor ready to assume the job the day after I die or step down. In certain important respects, this person will do a better job than I am doing.” Even Charlie Munger, who knows how much to speak and where, had everyone chattering after mentioning Greg Abel and Ajit Jain. The only hitch is that outside of Buffett and Munger, despite Berkshire’s culture, very few seem assured that his successor will measure up. Given the tone of finality in the 2014 letter, it is likely that a successor will be announced much sooner than is expected.

50 Giving through Berkshire

Over the years, Warren and Charlie have transferred planeloads of wisdom through their writing and annual meetings at Omaha and Los Angeles. They have not only been generous with their knowledge but also with their wealth. Like with most things, both Buffett and Munger are in sync here. “Those of us who have been very fortunate have a duty to give back. Whether one gives a lot as one goes along as I do, or a little and then a lot (when one dies) as Warren does, is a matter of personal preference,” says Munger. Buffett, on his part, has outsourced his giving to the Bill and Melinda Gates Foundation. He has been systematically giving Berkshire stock away and continues to nudge other billionaires to sign the Giving Pledge. The impact of this collective largesse will be felt after those who left it behind are long gone. 

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