The Berkshire meeting is filled with great conversations; one of those touched on why a long-term owner never sold his shares and what makes businesses truly great over the long run.
The Berkshire meeting this year was the most fun and the most productive of all the meetings I’ve attended. Of course, the meeting itself can be viewed online at home, but the real value in going to Omaha is to meet up with clients and friends who I don’t often get to see and make new connections with all kinds of interesting people. The conversations that take place that weekend are a lot of fun. Some people call the event an echo chamber with 40,000 fanboys (and fangirls), but the reality is that there is a huge amount of collective wisdom and experience that descends on that midwestern town once a year that’s available for anyone who wants to participate.
Q1 2023 hedge fund letters, conferences and more
My own personal formula for making Omaha a productive weekend is to use serendipity as much as possible. I schedule meetings and attend events, but I also try to leave the calendar a little bit open for the various impromptu meetings and discussions that materialize spontaneously. I had a lot of great chats last weekend, with one being particularly interesting…
The “Neversell” Nebraska Farmer
A friend of mine had dinner with a Nebraska farmer who bought shares under $50 (today those shares have 4 extra zeros: $500,000). This farmer still owns most of his shares. A 10,000 bagger! That is back to back 100 baggers in the same stock. He put a few bucks in and now has tens of millions. Why didn’t he sell?
If you’ve been to Berkshire, you’ve probably heard a somewhat similar story. There are many rich Omaha folks who lived “regular” (for lack of a better term) lives and became unimaginably rich by owning one stock for the long run. How was it that so many of these “regular” people were able to hold onto a stock for so long — long after the stock made them rich many times over? Why not sell and “book” profits (as so many financial advisers certainly would have recommended)?
Of course, performance seems like the obvious answer. But this is much easier to say in hindsight. Think about all the difficult times the company faced:
The stock dropped 50% three separate times. The media has proclaimed on multiple occasions (usually after these drops): “Buffett has lost it”. And, believe it or not, the fundamentals of Berkshire haven’t always looked rosy:
I was rereading the early 1980’s letters to see what Buffett had to say about the S&L banking crisis and one thing that stuck out to me was how poorly the insurance company was performing at that time.
The 1982 report shows the insurance business lost $21 million that year (a sizable sum in those days) with a 109% combined ratio (100% is breakeven, meaning insurance underwriting had a negative 9% profit margin in 1982). This was a continuation of a worrisome trend: the insurance business lost money in 7 of the previous 9 years. This was to no fault of Buffett’s — the industry was just miserable, ravaged by inflationary pressures and competition. Buffett didn’t sugarcoat how bad the industry was and how bleak the prospects were, describing insurance as a commodity business with no pricing power and increasing competition:
“If costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.”
By the time Buffett wrote these words in 1982, that farmer had owned his shares for around 15 years and had already made a small fortune. Why did he still hold his shares when there were real (seemingly) long term headwinds in the business that the CEO himself was warning about?
The answer we came to in my discussion group was one word: trust.
Buffett used the phrase “your savings” in his annual letter. That subtle phrase tells us a lot about how Buffett thinks. It tells us about his integrity — the immense care he has for the hard-earned money that his shareholders have entrusted to him. The phrase “your savings” has a way of removing any boundary that exists between the corporate entity and the individual (and after all, every share of stock is owned by some individual person somewhere, even if there are corporate entities or institutional gatekeepers in between). It becomes personal.
Buffett treated Berkshire’s money as their savings, not as money to grow a corporate empire, hand out as stock based comp to his employees, or anything else that was selfishly motivated. He guarded their capital as if it was his own (which it was in large part as well). Berkshire has never issued a stock option. All managers who want to own shares pay for the shares in full with their own cash.
I think the long-term owners of Berkshire clearly saw Buffett’s brilliance and that probably was the biggest factor in buying the shares, but it was his character that made them stay for so long. Those two things combined to create a trust factor that collectively permeates throughout the shareholder base.
This treatment of shareholders created a valuable intangible asset that transcended any difficulty that a particular business line might be facing, and I think the Nebraska farmer recognized this. In effect, these long-term shareholders had a very simple thesis:
Buffett is a smart guy. He’s honest. And I believe he’s going to do well long-term.
These people may not have been “sophisticated” investors, but they were very wise investors (and wisdom is better than sophistication). They understood what really mattered to the long-term value of Berkshire. They understood what Nick Sleep calls “The Sources of Enduring Business Success”. They knew what was creating value at Berkshire. It certainly wasn’t what the earnings were going to do this year, it wasn’t even what the longer term prospects for the insurance business were. What really mattered was that Buffett was at the helm and his incredible capital allocation skills combined with the integrity he treats shareholder capital would eventually create a lot of value in whatever businesses Berkshire ventured into. Buffett would find a way to create free cash flow. (As a side note, this is one reason why great capital allocators can be great long-term partners: they won’t throw good money after bad and they’ll exit entire business lines if it’s the right thing to do.)
This is what gets re-instilled when I attend the BRK meeting. The culture truly is so special and unique. It’s not about the huge crowds or the fanboys. It’s something much more valuable. It’s the honest and truly genuine attitude of a management team toward their shareholders.
It’s a refreshing mindset to have someone who thinks about equity capital as someone else’s retirement. This mindset existed in 1956 when Buffett established his first partnership with $105,000 of capital and it persists today. He thinks of his shareholders the way he thought of his original family members who were his first partners.
It is so unique and I’m afraid we may never see anything else quite like this in the future. It’s why the company is so special, and it’s why the event is so fun to attend. We get to see so many people that have trusted one person with their savings.
The event often inspires me. Whatever it is you’re working on, you can’t help coming away from the meeting being motivated to do your best to instill the same ethos and the same fiduciary care into your own business. To serve your customers or clients or partners or vendors with the same respect that Buffett has treated his. It’s the most valuable thing about Berkshire in my opinion, and I’m very thankful to have had the great opportunity to be building a business during the time when such a great blueprint is being laid out.
This Nebraska farmer discussion also got us talking about the main qualities that lead to the best stock market winners — those businesses that create the most wealth for owners over many years. My Journalytic entry with these notes got long so I’ll post some of those thoughts in the next post…
