Eddie Cantor said, “It takes 20 years to make an overnight success” but Pablo Picasso drove home the point better. Late in life, when he had become “the” Picasso, a woman walked up to his café table and said, “Could you draw something and I will pay you whatever you think it is worth.” Picasso took out a pen, sketched something on a napkin, handed it to her and said, “That will be $10,000.” The woman said, “What do you mean $10,000? That only took you 30 seconds.” To which Picasso replied, “No, that took me a lifetime.” The tale may be apocryphal but no one seems to have internalised it more than Warren Edward Buffett and Charles Thomas Munger, better known as Warren and Charlie to their legion of admirers. The investments that Warren and Charlie made and reaped rich returns from are rooted in a lifetime of hard work. It is to honour and pay homage to them that about 40,000 admirers turn up every year for the annual shareholders’ meeting of the Omaha-based conglomerate, Berkshire Hathaway.
We land in Omaha on the evening of May 1. One of the first things that greet you as you deplane at Eppley Airfield is a signboard of Warren endorsing the University of Nebraska saying, “Invest in yourself.” All through the airport, equidistantly placed monitors flash “Berkshire Hathaway welcomes its shareholders.” It’s drizzling and cold outside but next morning turns out to be even chillier — Omaha is experiencing snow in May, for the first time since 1967 and only for the fifth time in the past 129 years. There’s three inches of the pristine stuff and our first thought is, “If this continues through the weekend, how are we going to line up in the wee hours for the annual meeting?”
We have been advised to start queuing up at 4 am on May 4 to get a reasonable seat from where you can actually see the great men rather than look at them on super-sized screens.
Thankfully, on Saturday morning there is no snowfall, but we have something else to deal with — getting a taxi cab. The Berkshire shareholders’ annual meeting held on the first Saturday of May has the effect of an early Christmas on Omaha’s economy. For about 10 days, the multiplier effect is more than evident. If you haven’t booked well in advance, you won’t get a hotel room for love or money. The standard waiting time for a taxi is 45 minutes and, as we later learn cabbies make anywhere from $600 to $700 a day, several times more than their usual $100-120 a day. After an agonising wait, we reach the venue CenturyLink Center around 4.30 am to witness that incipient rain and a biting wind have failed to dampen the enthusiasm of many a braveheart. They have been in queue for several hours already and, despite the chill and no alcohol, spirits are high. What then explains this fanaticism?
Woodstock for capitalists
The night before the meeting, we are at the DoubleTree Hilton attending the Yellow BRKers party — it’s a get-together for Berkshire shareholders organised by Alex Bossert. A native of St.Cloud, Minnesota, the 22-year-old Bossert is a diehard Warren fan, attending the meeting since he was just 14. The budding analyst shares a bit of trivia on the Yellow BRKers’ origins: In the mid 1990s, some Berkshire shareholders used to share their thoughts on AOL’s message board. They agreed to meet up during the 1996 annual meeting at a local restaurant and on getting there, were shocked to find Warren’s daughter Susan was one of the members. She was the one who came up with the name for the group after her favourite movie, The Wizard of Oz.
“Our mascot, the big yellow hat, was made by the original members so they could find each other in the line at the annual meeting,” reminiscences Bossert. Why does he keep coming back, given that he already knows so much about Warren and follows everything he says? Bossert says, “The most valuable experience of coming to Omaha is connecting with old friends at all the social events and at the annual meeting itself. Connecting and sharing ideas with like-minded people at the meeting is priceless.” At the party we meet another young multifaceted entrepreneur and investor, Max Olson, who recently put together in book form a compilation of Warren’s letters to Berkshire shareholders. “Whatever business I finally decide to continue with in life, what I learn from Warren and Charlie is going to help me,” he says.
“Woodstock for capitalists”, as Warren likes to call the annual meeting, had very humble beginnings. During the earlier meetings, not many shareholders turned up at the National Indemnity Cafeteria. But Warren’s legend grew in direct proportion to the returns generated by Berkshire. Ever since they have been together Warren and Charlie have marched to their own tune and stuck to what they have been comfortable with. So, there are no quarterly conference calls or preferential treatment for big-ticket fund managers. Everybody gets a once a year address in the first week of May and, boy, do they turn up for the event.
Back at the CenturyLink Center, the wait at the gate is over, at least for us. The press gates open an hour earlier, at 6 am. We walk in, entering a vast exhibition hall that houses display booths of some 45-odd Berkshire-owned companies, from See’s Candies to Burlington Northern Santa Fe (BNSF). Cameramen and photographers scurry to secure strategic positions — Warren is expected to make the rounds of the exhibition area during the coming hour. The excitement level at two counters is skyhigh — Justin Boots, where he will launch the new line of golf shoes and Clayton Homes, where a 35-foot newspaper-tossing contest will be held. The latter is an annual event in which Warren also participates — it’s a personal thing, really, since his initial “fortune” came from delivering newspapers as a young boy and teenager.
Certainly, Warren started very young. Numbers and math fascinated him and he was always on the lookout to earn that extra dollar. As a child, he sold gum, popcorn, peanuts, Coca-Cola, retrieved golf balls, rented out pinball machines at barber shops… you name it and the young Warren probably tried it.
But in hindsight, his experience in selling Coca-Cola at 6 years seems to have made the biggest impact on his investing style. Warren is said to have bought six-packs of Coke for 25 cents and hawked the cola to sightseers at Lake Okoboji, Iowa, for 5 cents a bottle. That amounted to a 20% return, which is what Warren has stuck to consistently achieving all these years. Of course, his familiarity with Coke was to result in a much bigger investment in Coca-Cola in the years to come.
But, true to form, the investment in Coca-Cola did not happen overnight. Warren advocates that if you are not buying a stock with the intent to hold it for 10 years, then it is not worth buying for 10 minutes. Conversely, if Berkshire has bought marginally into a company, then the chances are equally high that, given an opportune time, Warren would want to buy more of it. That is why Warren’s investments are long drawn-out affairs. The one at GEICO started in 1951 and eventually the company became fully-owned. Even IBM, where Berkshire now holds a 6% stake, was done after having studied IBM for about 50 years.
Warren is no stranger to making big plunges either — during his early days he had 40% of his capital in American Express, then there was the $700 million investment in Salomon Brothers in September 1987, which was to haunt him a few years later although, in typical fashion, Warren had the last laugh. Between September 1991 and May 1992, he served as the chairman of Salomon, after which his fame increased almost exponentially.
But the time spent fixing Salomon — he spent nine months and four days in New York, as he famously counted — also reaffirmed to him how much he hated getting involved in stuff. Warren was already a billionaire when he made the Salomon investment, but when he stepped in to rescue the financial powerhouse from going into bankruptcy, he came into full media glare. Since then, investors and non-investors increasingly started to hear and read about Warren and Berkshire Hathaway. Books began to be written on the “Oracle of Omaha” and the annual meeting became a must-attend.
Its showtime, folks
The format of the annual meeting has been the same for the past few years. There is a movie and then the questions follow. As the movie plays we find that the common thread is lampooning Warren and Charlie. Around us, the press box explodes with laughter — as an animated version of Warren and Charlie does the Gangnam style. One funny act showed Warren desperate to get the role of the villain in Terminator 5. His agent is on the phone pitching the part to Arnold Schwarzenegger, who is not amused. “A villain needs to be scary. How do you think Warren will scare me? Will he spill his Cherry Coke on me or throw his stupid lizard?” Arnie mocks. “I need someone who people will fear. Wait…I think I just got my man.” The camera cuts to Charlie glaring at someone, saying, “There are 18 ways I could kill you right now.”
The most aggressive increase in the last quarter was
DaVita at about 9.5%
The movie ends with Charlie getting the role of the villain in the upcoming Terminator 5. Finally, a song celebrating the operating managers of Berkshire’s 80-odd companies called “We love the managers of BRKA” set to the tune of the Village People’s iconic “YMCA” plays and all the managers names and photos scrolls on the screen. The crowd is up on its feet for two reasons, they are aware that the operating managers play a major role in the success of Berkshire and the end of the movie means that superstars Warren and Charlie will finally be centre stage. As the movie credit rolls, you can sense the collective expectation of the thousands present.
As they take their seats, Warren and Charlie get an ovation befitting their rockstar status. Sitting closest to them in a cordoned-off area are the CEOs and directors of Berkshire companies. On one side of the dais are three members of the press and three analysts picked by Warren. The journalists have pre-screened questions from the media, outside investors as well as non-attending shareholders. The marathon question-and-answer session will also include queries from the shareholder audience picked by lottery and questions from the three chosen analysts.
On the giant screens, Warren and Charlie’s images look tiny, especially when you consider the larger-than-life personalities these men are. Extraordinary clarity, phenomenal retention, photographic memory, a walking search engine are adjectives that crop up again and again if you go around asking what differentiates them from others in the investing business. Given the innumerable permutations in his head of what works and what doesn’t, Warren is always miles ahead of the crowd.
Jeff Matthews, founder of hedge fund, Ram Partners, says people have no idea how good Warren’s track record really is. “The only reason the return on the S&P 500 looks respectable is because of the effect of dividends. Berkshire’s return is pure appreciation.” A $16 investment made in Berkshire on May 10, 1965, is now worth $169,000. For the S&P 500, the return is less than $2,000.
Big game hunting
Expectedly, Carol Loomis, financial journalist and a close friend of Warren, leads the meeting with a question on Berkshire’s underperformance in the past five years. Warren is known for not being evasive about any questions hurled at him at the annual meeting. Since shareholders’ questions aren’t known beforehand, old-timers say Warren’s had quite a few curveballs thrown at him; he could have ducked them but has always chosen to meet them head-on. This year’s no different. Warren himself termed 2012 as a subpar year in his last letter to shareholders. “When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar,” Warren quipped. “We have never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. But the S&P has now had gains in each of the last four years, outpacing us over the period. If the market continues its advance in 2013, our streak of five-year wins will end.”
Indeed, size is becoming a pain point for Berkshire, something Warren and Charlie are clearly aware of. While batting as well like they always did, they are also toning down expectations. Charlie says, “We have said over and over again that we will not do as well in the future because our past returns were unbelievable.” But investors are happy to hold on to Berkshire stock despite the caution. Warren and Charlie have always underpromised and overdelivered. Still, it would be foolish to expect Berkshire to compound at its earlier pace — the track record of 20% compounding in book value over a 48-year period has been sheer magic, but is also a very tough act to keep up.
Later in the meeting, Doug Kass of Seabreeze Capital, a notable bear obviously brought in to liven up the proceedings, brings up a similar point. “Is Berkshire in danger of turning into a glorified index fund, given that it is paying up for established brands?” Warren’s answer provides a peek into how the partners’ investing philosophy has evolved over time. “We have paid up for good businesses more than we would have, 30 or 40 years ago, partly at Charlie’s urging. We now realise that paying up for an extraordinary business is not a mistake.” That realisation happened when Berkshire bought See’s Candies in 1972. Ram Partners’ Matthews recalls Warren having said in an earlier annual meeting, “Thank you See’s Candies for the Coke.”
Given its current size, Berkshire needs to do meaningfully big acquisitions in order to deploy its capital and, given Warren and Charlie’s temperament, it is highly likely that they would want to do one $20 billion deal rather than four $5 billion deals. And, as the deal size gets bigger, Warren has not only been open to a little leverage, he has also demonstrated openness to outside partners. This is possibly a realisation that he needs to reach out to other, equally-matched partners as his successor may not have his aura and door-opening abilities. That is why he is creating partnerships that ensure that Berkshire has a permanent place at the deal table.
Berkshire’s stock has delivered a compounded return of
21.6% compared with the S&P 500’s 6.4%
As Warren reiterates, Berkshire’s biggest competitive advantage now is not him but the capital he can deploy at a moment’s notice. “Berkshire is the 1-800-number when there’s panic in the markets and people need capital. When that happens when I’m not around, it becomes Berkshire’s reputation, not mine.” In a crisis, as Charlie pointed out, few people have capital and even fewer are willing to commit. Staying sane while others go crazy, then, is a competitive advantage.
That said, the Oracle himself admits that the opportunities in the business market are very different from those in the stock market. When you are negotiating for buying a business, the counterparty is as well prepared, if not more than you. Not only is the investible universe shrinking, the kind of businesses that Warren likes to invest in and hold for a lifetime are increasingly few and far between. This, then, seems to be another learning phase for Warren and Charlie and they seem to be coping well. Charlie concurs, “We are in a different mode now. If we kept to our original mode, we wouldn’t have done very well. The game of life is a game of everlasting learning. At least, it is if you want to win.” And Warren backs him emphatically, “We want to win.”
Stand by me
Warren’s winning model wouldn’t have been so without the right people. Many years ago, when Janet Lowe was writing a book on Benjamin Graham, she called on Warren for help. He invited her over to Omaha and, the day she was to meet him for dinner, Warren called and asked her schedule for the day. When Lowe said she intended to work from her hotel room, Warren offered her the use of his conference room instead. At the office, Warren asked Lowe how she was gathering material for the book and then pointed to a filing cabinet, saying Graham’s wife had sent across all his works and writing when he died. “Warren would not have given it to me if he didn’t feel I was sincere enough and would be able to do a good job,” says Lowe, who has since authored books on Graham, Warren and Charlie. “He makes a very quick assessment of character.”
Indeed, while Warren may say that you should invest in businesses even an idiot can run, he takes care to ensure his businesses are run by bright minds with absolute operating flexibility. He also allows the same autonomy to the two investment managers hired by Berkshire, Ted Weschler and Todd Combs. And that is despite being aware of how good his own performance is. During the course of the meeting, Warren says, “I don’t even know about Ted or Todd’s purchases until about a month later. I don’t tell them to diversify or not... When I was managing money, I wanted free reign. That’s exactly the position that I have with Todd and Ted now.”
Warren has always effusively praised his team (the ode to the managers in the opening film is a case in point). Saluting the role that Ajit Jain (who runs Berkshire’s super-catastrophe insurance business) plays, he says, “If he had come in 1965 instead of 1985 we would have owned the world.” In fact, he also had tongue-in-cheek praise for irrepressible Charlie. “I don’t want you to emulate everything that Charlie does, but emulate his reading habits.”
Clearly, Warren’s loyalties don’t fade that easily, be it people or businesses. Or buildings, even. He continues to live in the same, five-bedroom house he bought 55 years ago. His office has been functioning from the same building, Kiewit Plaza, for the past 50 years. He is also committed to the newspapers business, given the money that The Washington Post has made for Berkshire in the past. The prospects aren’t as bright but Warren has forked out about $350 million, buying newspapers, something that’s questioned now at the meeting. Warren’s defence: “We are buying the papers at very, very low prices with [regard to] current earnings and the after-tax return, even with declining earnings, would be at least 10%.” When he was done answering, in his customary style he turns and asks, ‘Anything to add, Charlie?’ who wryly remarks, “I think what you’re saying is it’s an exception and you like doing it.” Warren gurgles with child-like laughter before saying, “I wish I hadn’t asked.”
Made for each other
There is a favourite saying among hedge funds: “If you don’t do macro, macro will do you.” Given that their longevity has been greater than the hedge fund industry, Warren and Charlie over the years have turned the saying on its head. During the meeting, Warren recalls, “Over the years we have been together and bought stock, we never did a macro discussion. You will do very well owning good businesses if you don’t pay too much.” To which Charlie adds, “I do think that knowing the edge of your competency is important. If you think you know a lot more than you do, you can get in trouble.” The seamless conversation continues with Warren saying, “That’s true outside of investing as well” and Charlie retorting, “It works particularly well in matrimony.”
Warren and Charlie have been “wedded” now for 54 years and what a partnership it has turned to be. After reading Ben Graham, Warren started seeing stocks as a piece of a business rather than a ticker symbol. But it was only after he met Charlie in 1959 that Warren realised that paying up for an extraordinary business is not a mistake. Intrinsically, Warren is reluctant to overpay (remember his Rule No.1 philosophy) and Charlie has had to prod Warren quite a few times to pay up. A pointed reference to this is made when a question comes up on whether the buyout of Heinz was priced fairly. The proof of the pudding, of course, was the acquisition of See’s Candies in 1972. Warren credits Charlie for coaxing him to outgrow the classic Graham approach. “It happens a lot of times that Charlie has said, ‘For god’s sake Warren, write the cheque’,” says Warren. Right on cue, Charlie shoots back, “It happens all the time.”
During the meeting, Charlie is comfortable playing second fiddle and constantly munches on See’s Candies and sips Diet Coke as Warren goes about answering the questions posed. Ask the old-timers and they say the magical moments during the annual meeting have always revolved around the chemistry between Warren and Charlie. The audience clearly expects Charlie to be irascible and speak his mind and seems to be on the edge of applause every time he opens his mouth. Like when a shareholder asks, “What would happen if the dollar were no longer the world’s reserve currency?” Warren expresses quiet confidence and says the dollar will be the world’s reserve currency for some decades to come. Then, as is the norm, he passes the question to Charlie, who promptly replies, “If that eventually happened to the US, I do not think it would be that significant… In the long run, as Keynes said, we’re all dead.” And then comes a classic Warren repartee: “This is the cheery part of the meeting.” From there-on the Warren and Charlie show just keeps getting better and the applause louder, even if Charlie just mutters his all-time favourite, “I have nothing to add.”
Late into the meeting, a question is posed regarding the trustworthiness of ECB policies and investment opportunities in the Eurozone. Charlie says, “Letting in Greece into the European Union was a lot like using rat poison as whipping cream. It committed extreme fraud in getting into the union; they lied about their debt.” Warren interjects mock-seriously, “I tried to tell him not to name particular countries,” but Charlie carries on. Realising it is a futile effort, Warren tags along and asks, “So, who haven’t we insulted yet?” The shy, gawky teenager who went on to take Dale Carnegie classes to improve his public speaking has clearly come a long, long way.
Warren is now Brand Warren. He understands the power of imagery, which is why he publicly drinks Cherry Coke. He understands the power of his brand, which is why it has been extended to running shoes and even USB drives and key chains. There are lifesize cut-outs of Warren as a chef, endorsing mattresses sold by Nebraska Furniture Mart (a Berkshire company) and running wear by Brooks. And, as with any big-brand celebrity, there are shareholders happily posing with the cutouts.
That’s something Warren recognises well, and he never loses an opportunity to promote Berkshire or the wares that his investing or operating companies sell. “Because of Warren’s stamp of approval, the Nebraska Furniture Mart during the shareholders’ weekend could do business worth $40 million, while the average furniture store in the US would be happy with $4-5 million a year,” says Robert Miles, author. If endorsing the brands is not enough, Warren also commits his time to promotional events if it helps his companies.
At 7 am, the morning after a hectic shareholder meeting, the 82-year-old Warren shows no signs of fatigue as he lands up to flag off a fun run organised by Brooks, a sportswear company that Berkshire owns. Egged on by the hostess he stretches, jogs and breaks into a jig evoking cheers and whistles from the assembled crowd.
Once the run is flagged off, Warren leaves in a golf cart to get ready for his sales job at Borsheims, lined up for 1 pm. In his shareholder letter, he had mentioned that compared to last year’s sales of $1.5 million he wants to do $2 million this year. At Borsheims, before he goes on clerking to privileged customers, its playtime. Warren is all over the place — playing table tennis alongside Bill Gates and then a hand of bridge with Gates and Sharon Osberg, his long-time bridge partner.
Then it is time to get down to business. As the shareholders stand outside a cordoned area, waiting with cameras in hand for Warren to emerge from the front entrance and take his place at the Borsheims counter, he makes a surprise entry from the side of the assembled crowd, storms into the sales area and vanishes into a private room. Everyone is dumbstruck and sigh in disappointment for having missed photographing him at such close quarters.
It’s a crude reminder of how markets work. Great opportunities are few and far between and when they arrive they may be fleeting but you got to be prepared to seize the opportunity. Often times, even if you are playing the waiting game, you may not react at the right time. The credit crisis of 2008 was one such instance. Warren grabbed the opportunity and cut some very favourable deals cementing his status as private lender of last resort in the financial markets.
The big challenge for Berkshire now is succession. Warren and Charlie have been largely right and they believe that Berkshire will endure because of the quality of people it has attracted as employees, managers, directors and shareholders. During the annual meeting, Seabreeze Capital’s Kass did question the choice of Howard (Warren’s elder son) as non-executive chairman, given that he is more involved in philanthropy and has never been an active manager. Here, too, Warren calmly makes his case, stating that Howard is insurance in case they make a mistake with the CEO because it’s harder to replace a CEO if he’s also chairman. He further adds, “I think the probability of a mistake being made in picking a CEO is less than one in 100, but it’s not zero in 100. He is there as a protector of the culture. He has no illusions at all about running the business.”
Warren is clear that he does not want the future chief executive of Berkshire to use his position as a power centre. “The meek shall inherit the Earth, but who knows if after they inherit the Earth they’ll stay meek,” he wonders out loud. Charlie’s response to whether Berkshire’s culture can be sustained is classic Charlie. He says, “My thoughts are very simple. I want to say to the many Mungers here, ‘Don’t be stupid and sell these shares’.” On hearing which, Warren chimes in, “That goes for the Buffetts too.”
Given the groundwork that Warren has been doing, it would be fair to assume that he has got the succession issue nailed. Matthews says, “The deals that Warren has struck in his lifetime will carry Berkshire through many decades. He is not replaceable in the sense that you will not get somebody exactly like him, but he is replaceable because what he does is very well defined. He’s been setting it up for the last few years.”
Over the years, Berkshire has defied the curse of investment Goliaths whose returns falter under their own weight. Of late, Warren and Charlie have their hands full looking for bigger and fast-moving elephants in which to deploy their cash. By their own account they have planned for immortality. While physical immortality seems like a long shot, the duo certainly has achieved immortal status in the realm of investing. As Warren recalls during the meeting, “We have had so much fun running BRK, it’s almost sinful.” To which Charlie intones, “And you atoned for our sins by giving all the money back.” As always, the older and wiser Charlie has no qualms in letting the younger Warren have the last word. The cutting edge clarity that powered Warren to multi-billionaire status gushes forth when he says, “Yeah, but in the end, you give it all back whether you want to or not.”
You can read more about 50 Master Moves That Shaped Berkshire Hathaway by clicking on the link