and Charlie were to write down their intrinsic value estimate of Berkshire, they would probably be within 5% but wouldn’t be within 1% of each other.
On Conglomerates and General Investments
“It’s not a bad business plan to own a bunch of great businesses.”
The question was related to conglomerates but Buffett and Munger used it as a way to espouse some of their general wisdom on investing in general.
They started by saying that most conglomerates fail because of financial engineering (issuing stock at 20x to buy at 10x—Buffett likened this process to a chain letter). This practice doesn’t create long term value. The key is to buy great businesses and focus on earning power, not engage in financial engineering.
Keys to successful conglomerates:
- Common sense business principles
- Good capital allocation
- Focus on earning power, not stock promotion (issuing stock to make investments)
Buffett said that “our goal is to buy really good businesses that can grow over time and that have great managers”.
Charlie added that there are two main differences between Berkshire and the failed conglomerates:
- We can buy stocks
- We don’t feel the need to always be doing something
This last point is underrated. Berkshire doesn’t have to deal with limited partners who have expiring lock up periods (thus demanding shorter term results). They can sit on piles of cash as long as they want and wait for the proverbial “fat pitch”. This is incredibly valuable when things become distressed.
On Identifying Winning Businesses in “Disruptive” Times:
- “We stick to businesses where we can identify the winners”. Buffett discussed his classic and simple idea that he likes to look for businesses where he can imagine the earnings being much higher 10 years from now.
- He and Munger try to stick to businesses that have slow changing characteristics (likely will be providing the same basic product or service in 10 years that they are currently providing). He mentions that all businesses go through changes, but he tries to invest in ones where change is happening slowly and over time.
There were many other interesting topics broached during the 6 hour Q&A session. One book I added to my ever growing Amazon wish list is Dream Big by Cristiane Correa, which is about Jorge Paulo Lemann and 3G Capital, the firm Berkshire partnered with to buy Heinz. Buffett spoke very highly (and very often) on Saturday about 3G and how he believes they are incredibly talented managers.
As I continuing perusing my notes, there are many other thoughts, but they’ll have to be reserved for future posts.
Have a great week!