For Buffett, the Past Isn’t Always Prologue

MAY 6, 2013, 9:23 PM

For Buffett, the Past Isn’t Always Prologue


OMAHA — A little under an hour into the question-and-answer session at Berkshire Hathaway’s annual meeting here on Saturday, a name searing with history but now largely forgotten was mentioned: Henry E. Singleton. Mr. Singleton was, arguably, the Warren E. Buffett of the 1960s and ’70s, though hardly famous. His company, Teledyne, became a remarkably successful and huge conglomerate, with an assortment of related — and unrelated — businesses. Like Mr. Buffett, Mr. Singleton was a modest man with a rare sense of rationality. He didn’t pay his shareholders dividends; he was convinced he could allocate the money more profitably. And he was right more often than not. But after spending decades creating one of the world’s largest conglomerates, Mr. Singleton, who stepped down as chief executive in 1986 but remained as chairman, decided to break it into three companies in the early 1990s before he died at age 82 in 1999. He decided that Teledyne had become too big and unwieldy for a single manager to effectively oversee and expand. It’s a narrative that has been speculated about for years when it comes to Mr. Buffett’s Berkshire Hathaway, the fifth largest company in the world, judged by market value. Mr. Singleton’s name was invoked by Douglas A. Kass, an investor who is betting against Berkshire’s stock and was invited to the meeting to pepper Mr. Buffett with questions along with a panel of analysts and journalists, including this one. After explaining the story of Mr. Singleton, whom Mr. Buffett long admired, Mr. Kass then asked: “What is the advisability of restructuring Berkshire into separately traded companies organized along business lines?”

Mr. Buffett, who has described Berkshire as his “painting,” paused briefly. With a slight smirk that turned briefly into a scowl, he rejected the notion that the path Mr. Singleton chose was the right one for Berkshire. “Breaking them up into several companies I’m convinced would create a poorer result,” Mr. Buffett insisted, while praising Mr. Singleton as an investor. Charles Munger, Berkshire’s vice chairman, had this to say about Mr. Singleton: “I don’t think you should get into your head, just because he is a genius, he did it better than us.” (Mr. Munger knew Mr. Singleton personally.) But Mr. Munger quickly also acknowledged a truism of business: “You look at companies that got really big in the world, the record is not very good. We think we’ll do a little better than the giants in the past. Maybe we have a better system.”The question, of course, is how much is “a little better”?

Mr. Buffett put it bluntly: “There’s no question that we cannot do as well as in the past, and size does matter.” In last year’s annual report, Mr. Buffett described his expectations for Berkshire by saying that the company’s “intrinsic value will over time likely surpass the S.& P. returns by a small margin,” and even suggested that “when the market is particularly strong, expect us to fall short.”

Mr. Kass was much less delicate. “Is Berkshire resembling an index fund more appropriate for widows and orphans?” he pondered.

Part of Mr. Buffett’s bet is that Berkshire’s value and advantage now lie in its size and scale. He believes that in flat or down markets, Berkshire will be able to outperform others because it can take advantage of opportunities — with its huge cash pile — that others cannot.

“Berkshire is the 800 number when there is really some panic in the markets, and people really need significant capital,” he said.

Perhaps more important, Mr. Buffett suggested that it did not matter whether he was chief executive for those opportunities to exist. Panicked sellers are calling for money, not to be his friend.

“If you come to a day when the Dow has fallen 1,000 points a day for a few days and the tide has gone out and you find some naked swimmers, those naked swimmers will call Berkshire,” he said.

“I have no question that my successor will have unusual capital at turbulent times,” he added.

That may be true, but one of the reasons Goldman Sachs and General Electric took Berkshire’s money at steep rates during the financial crisis wasn’t just that Mr. Buffett was the only game in town. It was his imprimatur — the investing equivalent of the Good Housekeeping Seal of Approval — that made costly deals attractive for G.E. and Goldman.

That may be hard to replicate.

Mr. Buffett’s successor will have to be not just a great investor and operator, which is difficult enough, but a legendary one that people will rally around.

There is no question that Berkshire has created a special culture, something that Mr. Buffett talks about regularly and is on display at each annual meeting, known as the “Woodstock of Capitalism.”

Mr. Buffett insists that the managers of Berkshire’s many businesses will remain in place after he is gone. I don’t doubt that. I suspect many managers will work even harder for several years after Mr. Buffett leaves, in part as a tribute to him. There is, of course, huge professional satisfaction in working for one of the greatest investors of all time and the halo that comes with that.

But as time passes, and Berkshire looks more like the conglomerate that it is without the special ingredient that is Mr. Buffett, it is likely to become more challenging for his successor.

Of course, speculation about whom his successor will be was rife, as usual. “It’s the No. 1 subject that the board considers at every meeting. We are solidly in agreement as to who that person is supposed to be,” Mr. Buffett said.

Berkshire Kremlinologists noted the change in seating assignments for three of Berkshire’s top managers. Ajit Jain, who runs Berkshire’s enormous reinsurance business; Matthew K. Rose, the chief executive of Burlington Northern Santa Fe; and Gregory E. Abel, chief of MidAmerican Energy Holdings, all sat in the section reserved for the directors in the front of the arena. In years past, they sat on the side in a section reserved for the managers of Berkshire. Those trying to divine meaning from it suggested they were the names in the envelope.

Mr. Buffett said the seating choice was for practical purposes: it was easier to have them on the floor in case they needed to answer a specific question about their business from the audience, and, indeed, two of them were called upon.

When asked about how he expected Berkshire to be managed in a post-Buffett world, he said, “My guess is that it gets rearranged a bit, but that won’t really make any difference.” Mr. Munger piped in: “Maybe one more person at headquarters if they go crazy.”

Mr. Kass asked about Berkshire’s plan to install Mr. Buffett’s son Howard as nonexecutive chairman after Mr. Buffett steps down. “How, beyond the accident of birth, is your son qualified to be nonexecutive chairman?” he asked.

Mr. Buffett quickly parried: “He has no illusions at all of running the business. He won’t get paid for running the business.” Instead, Mr. Buffett said his son would be responsible for making sure the company has the right chief executive. “I know of nobody who will feel that responsibility more as to doing that job responsibly as my son Howard.”

If there were any doubters in the audience, Mr. Munger insisted there shouldn’t be.

“I want to say to the many Mungers in the audience: Don’t be so stupid as to sell these shares,” Mr. Munger said.

Mr. Buffett added, “That goes for the Buffetts, too.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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