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ILLUSTRATION 8.4 Eating its own cooking: Berkshire Hathaway's parenting The challenge of managing a highly diverse set of businesses for shareholders. From a small struggling textile business in the 1960 s War- competitors battle for supremacy. At Berkshire we will ren Buffet, Berkshire Hathaway's 85-year-old billionaire stick with businesses whose profit picture for decades Chairman and CEO, had built a $356bn(219bn;274bn) to come seems reasonably predictable. Even then, we conglomerate in 2015. Its businesses were highly diverse will make plenty of mistakes.' including insurance companies (GEICO, General Re, NRG), carpets, building products, clothing and footwear manufacExplaining how they managed their subsidiary businesses, turers, retail companies and private jet service, NetJets. Buffet said: It also held significant long-term minority stakes in Coca- 'We subcontract all of the heavy lifting to the managCola and General Electric and continued to make major ers of our subsidiaries. In fact, we delegate almost to cash acquisitions, including BNSF for $34bn in 2009 (the the point of abdication: though Berkshire has about second largest US railway company), Lubrizol (speciality 340,000 employees, only 25 of these are at headquarchemicals, \$9bn, 2011), Heinz (\$23.3bn, 2013), Duracell ters. Charlie and I mainly attend to capital allocation and (batteries, \$4.7bn, 2014). In 2015, Precision Castparts, the care of our key managers. Most are happiest when an aircraft components company suffering from falling they are left alone to run their businesses, and that is revenues, profits and a 30 per cent decline in share price, just how we leave them. That puts them in charge of all was acquired for $37bn. But, as Buffet remarked, the size operating decisions and of dispatching the excess cash of Berkshire Hathaway made finding deals that make a dif- they generate to headquarters. By sending it to us, they ference, difficult - a bit like 'elephant hunting'. don't get diverted by the various enticements that would Annual reports explained how Buffet and Deputy Chair- come their way were they responsible for deploying the man Charlie Munger ran the business: cash their businesses throw off. Furthermore, Charlie 'Charlie Munger and I think of our shareholders and I are exposed to a much wider range of possibilities as owner-partners, and of ourselves as managing for investing these funds than any of our managers could partners. (Because of the size of our shareholdings find.' we are also, for better or worse, controlling part- Berkshire Hathaway's 50th birthday had financial ners.) We do not view the company itself as the commentators reviewing its astonishing success. Buffet's ultimate owner of our business assets but instead investment genius is often cited alongside 'a weirdly intense view the company as a conduit through which our contagious devotion of shareholders and media' (Munger). shareholders own the assets... In line with Berk- Many would like to fully understand the success formula shire's owner-orientation, most of our directors have that has stood Berkshire Hathaway in such good stead for a major portion of their net worth invested in the so long. In the meantime, Berkshire Hathaway still had company. We eat our own cooking.' a huge cash pile in 2016. Should the ageing billionaire investor reload his 'elephant gun' for another acquisition? Berkshire has a clear 'dominant logic': Sources: 'Berkshire Hathaway Owner's Manual', http://brkshr.com/ 'Charlie and I avoid businesses whose futures we can't owners.html; http://www. berkshirehathaway.com/letters/2009ltr.pdf. evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and televi- Questions sion sets (in 1950). But the future then also included 1 In what ways does Berkshire Hathaway competitive dynamics that would decimate almost all fit the archetypal portfolio manager (see of the companies entering those industries. Even the Section 8.6.2)? survivors tended to come away bleeding. Just because 2 Warren Buffet still had $73bn to invest. Charlie and I can clearly see dramatic growth ahead for Suggest industries and businesses he would an industry does not mean we can judge what its profit be unlikely to invest in. margins and returns on capital will be as a host of