Behind Berkshire: Warren’s Run

By Nick Slepko - May 10, 2012 | Tickers: BRK-B, BRK-A, IBM | 0 Comments

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The average investor has to ask if the robber baron methods employed by Warren Buffett are either approaches they can use in their own investing or even if the Next Buffett is capable enough to continue on with the tradition.  While Warren’s Run has been a good one, as he is led off to Carrousel recent events have forced him to recognize his failure to create a long-term institution with Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B).  His interest in IBM (NYSE: IBM)(NASDAQ: IBM) might be a play for Renewal or even Sanctuary.

Observers have noted how odd it is that famed technophobe Warren Buffett recently directed Berkshire Hathaway to make its first foray into the technology sector by becoming the largest shareholder of IBM.  First, as one of America’s oldest continuously-operating companies IBM seems to fit with Buffett’s preference for longevity (if not outright immortality).

Second, Buffett’s well-known aversion to technology is somewhat surprising considering that contemporary technology companies, which are built around the IPO cult like none other and highly acquisitive, are operated much like financial service firms and share other telling similarities like the cultural and managerial ones pointed out by Monadnock Research’s Mark O’Connor:

But we need to understand that Buffett and Munger do very little due diligence on deals. And they are money managers, not operating executives. Also, it’s important to understand the distinction between operating and financial experts that is often not adequately respected. This is illustrated in the career trajectories of operating executives in training, compared to those of financial executives where it is steep at the beginning and levels out at a high level for top people. The responsibility and earnings of budding operating executives, in comparison, is steep only after decades of learning how their businesses work from the trenches. A simple analysis of the ages of key managers in finance and operations of any large publicly traded company shows this clearly.

Third, technology is really only a fraction of modern IBM’s activities, business consulting, logistics, supply chain management, infrastructure planning and other related activities.  So, it is not as huge a leap for Berkshire as first thought.

Fourth, Buffett sayings and IBM’s late founder Tom Watson sayings are remarkably similar in tone, temperament, and faux bumpkin affectations:

I am not a very intelligent person, but I am smart in spots, and I stick to those spots. –Tom Watson

You don’t need a lot of brains in this business…Just follow the facts and your reasoning. That’s tough for a lot of people. But that part, I was just lucky with. I was born that way. –Warren Buffett

Buffett’s advice was imparted to rapper mogul Jay-Z and publisher Steve Forbes at a get together celebrating each other’s perspectives on bling, which led Forbes to ask, “Warren, what advice would you have for Jay-Z in the music business? You've seen business models change a bit in the newspaper business with the Washington Post and Buffalo News.” Buffett then expounded on how to handle a conglomerate:

[Change] happens. Street railways were big here in Omaha 100 years ago. But I will say this about investing: Everything you do earn is cumulative. That doesn't mean that industries stay good forever, or businesses stay good forever, but in learning to think about business models, what I learned at 20 is useful to me now. What I learned at 25 is useful to me now. It's like physics. There are underlying principles, but now they're doing all kinds of things with physics they weren't doing 50 years ago.

But if you've got the principles, if you know what makes a good business, if you know what makes a good manager, if you know what makes a good product, and you learn that in one business, there is some transference to other businesses. As you go along, you learn what things you're not going to understand. Knowing what to leave out is just as important as knowing what to focus on. Somebody said how to beat Bobby Fischer; you play him any game except chess. And so I don't play Bobby Fischer at chess.

So while Buffett fiddles in politics to play the Fischers of the world, his aversion to operations has also caused him to avoid focusing on integrating and solidify his corporate structure – an essential achievement for anyone with a truly long-term approach.  His dereliction grows more evident by the day.  Even with certain Berkshire leaders like Ajit Jain in insurance, he has failed to groom and prepare an individual (let alone a team) to take on the awesome responsibilities and repair the cracks in Berkshire, a company that seems to be following the historic patterns of the average public company and will soon be broken up and scattered.  With IBM and others, Buffett and Munger like to crow about how fast Berkshire can move.  Its dissolution may be just as swift.  Although this shouldn’t be a surprise considering Buffett’s ultimate assessment of his major beneficiary, the Gates Foundation:

I want them to dispense [my money] because who the hell knows 50 years from now, you know, when the place becomes some large institution, what will happen.

When Buffett dies so will Berkshire, and while the Buffett Babies will struggle to continue the legacy they will lack its most important element: the public’s love affair with Warren B.  Without that essential component, it will be difficult for Berkshire to define the terms under which it operates in the economy.

Instead of looking inside Berkshire for the next incarnation of Buffett, those looking for a new messiah might overcome their home bias and cast their gaze beyond the continent now that the conditions Buffett described as the catalyst for his success in 1930s America are taking place in other parts of the world.

Next Buffett Babies
Previously in Behind the BRK-A: Buffett, Please

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