Last Saturday, Warren Buffett disclosed that he will retire at year-end as CEO of Berkshire Hathaway, the world’s largest conglomerate.
Buffett, 94, has tended to his flock of millions of everyday investors for six decades as CEO of Berkshire.
Buffett is perhaps best-known for his stupendous net worth of $168 billion (U.S.), a recent estimate.
That’s a shame, because the most important thing about Buffett is his gift to investors, managers and owners of freely dispensed business wisdom, usually delivered in folksy humour.
“You should invest in a business that a fool can run, because someday a fool will,” Buffett said.
With no disrespect intended to the managers of Apple, Coca-Cola, Kraft Heinz, American Express, Benjamin Moore, BNSF Railway and Dairy Queen — among the more than 300 companies Berkshire owns or in which it is a major investor — those are such durable enterprises that they can survive the occasional not-so-good CEO.
Buffett avoided enterprises that chased fads or suddenly got religion about sound management practices.
“Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about,” Buffett wrote in one of his must-read annual letters to Berkshire shareholders.
“The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing.”
Buffett’s formula has been to pay top dollar for superb companies, keep their owner/managers in place, and leave them alone. He has befriended many of his CEOs.
“In an age of fraying loyalties, he turned investments into relationships, almost into a social contract,” Buffett biographer Roger Lowenstein wrote in “Buffett: The Making of an American Capitalist” (1995).
Buffett has been wary of financial engineering, as pervasive today as it was in the 1970s when he laid the foundation of his fortune by acquiring undervalued companies during a prolonged bear market.
“The reaction of weak management to weak operations is often weak accounting,” Buffett said. “The Yanomamo Indians employ only three numbers: one, two, and more than two. Maybe their day will come.”
Buffett is renowned as a “buy-and-hold” investor.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” Buffett said.
By staying invested in a stock, Buffett hasn’t missed out on sudden upturns in its value, which are impossible to time. So, his preferred period for owning a stock is “forever.”
Which requires homework in making investments with minimal downside risk and limitless growth potential, and that need little subsequent attention.
Buffett has counselled against overdiversification, in personal investing and corporate expansion. Many is the enterprise that has come to ruin with acquisitions outside its realm of expertise, or with too many acquisitions to keep track of.
“If you have a harem of 40 women, you never get to know any of them very well,” Buffett said.
That, of course, argues against Buffett’s own conglomerate. Berkshire owns a sprawling network of U.S. natural gas pipelines and BNSF, America’s biggest railway, and it makes jewelry, bricks, house paint and Dilly Bars.
Conglomerates have been out of favour for decades. That’s among the reasons the Wall Street Journal’s front-page headline on Sunday was “Why there will never be another Warren Buffett.”
Wall Street expects Buffett’s hand-picked successor, Greg Abel, a Berkshire vice-chairman, to focus on getting even better returns from Berkshire’s existing investments rather than scouting for new ones as Buffett has ceaselessly done.
Abel, 62, an Edmonton native and University of Alberta grad, has been running Berkshire’s non-insurance businesses for several years.
Buffett has sat out several investing manias. Two years prior to the dot-com bust in 2000, Buffett said, “If I taught a class, on my final exam I would take an internet company and ask (my students), ‘How much is this company worth?’ Anyone who would answer, I would flunk.”
Buffett has called crypto “rat poison squared” and labelled derivatives “weapons of mass wealth destruction.” He has taken modest flings with both, however.
A profitable regard of Buffett is to do as he advises, not what he actually does.
Buffett has repeatedly broken his own rules. For instance, in the late 2010s he bought banks and airlines, which he had warned investors against buying. He then dumped them in the early months of the pandemic when their value cratered, locking in his losses and breaking his buy-and-hold rule. Which was a multibillion-dollar mistake because the stocks recovered.
On the weekend, Buffett restated his intention to donate his entire fortune to charity.
And that is consistent with an observation Buffett made in a 1994 interview.
“All these people who think that food stamps are debilitating and lead to a cycle of poverty, they’re the same ones who want to leave a ton of money to their kids.”
