I want to make two points in this post. The first is on Buffett’s management style and the second on his patience.
First, Buffett’s management skills are amazingly unique. I don’t think this is well appreciated, although he has demonstrated his approach for over 30 years now. Here are his comments from Berkshire’s 1979 annual letter:
Your company is run on the principle of centralization of financial decisions at the top (the very top, it might be added), and rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level. We could just field a basketball team with our corporate headquarters group (which utilizes only about 1500 square feet of space).
This approach produces an occasional major mistake that might have been eliminated or minimized through closer operating controls. But it also eliminates large layers of costs and dramatically speeds decision-making. Because everyone has a great deal to do, a very great deal gets done. Most important of all, it enables us to attract and retain some extraordinarily talented individuals – people who simply can’t be hired in the normal course of events – who find working for Berkshire to be almost identical to running their own show.
We have placed much trust in them – and their achievements have far exceeded that trust.
You do not typically see Buffett’s hands-off approach when it comes to Berkshire’s operating subsidiaries. However, I want to fast-forward 20 years to Berkshire’s 1999 letter for a little sneak peek at how Buffett treated Bill Child’s who sold his company, RC Willey, to Berkshire in 1995.
I will let Buffett explain:
Charlie and I try to behave with our managers just as we attempt to behave with Berkshire’s shareholders, treating both groups as we would wish to be treated if our positions were reversed. Though “working” means nothing to me financially, I love doing it at Berkshire for some simple reasons: It gives me a sense of achievement, a freedom to act as I see fit and an opportunity to interact daily with people I like and trust. Why should our managers — accomplished artists at what they do — see things differently?
In their relations with Berkshire, our managers often appear to be hewing to President Kennedy’s charge, “Ask not what your country can do for you; ask what you can do for your country.” Here’s a remarkable story from last year: It’s about R. C. Willey, Utah’s dominant home furnishing business, which Berkshire purchased from Bill Child and his family in 1995. Bill and most of his managers are Mormons, and for this reason R. C. Willey’s stores have never operated on Sunday. This is a difficult way to do business: Sunday is the favorite shopping day for many customers. Bill, nonetheless, stuck to his principles — and while doing so built his business from $250,000 of annual sales in 1954, when he took over, to $342 million in 1999.
Bill felt that R. C. Willey could operate successfully in markets outside of Utah and in 1997 suggested that we open a store in Boise. I was highly skeptical about taking a no-Sunday policy into a new territory where we would be up against entrenched rivals open seven days a week. Nevertheless, this was Bill’s business to run. So, despite my reservations, I told him to follow both his business judgment and his religious convictions.
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store — for about $9 million as it turned out — and would sell it to us at his cost if it proved to be successful. On the other hand, if sales fell short of his expectations, we could exit the business without paying Bill a cent. This outcome, of course, would leave him with a huge investment in an empty building. I told him that I appreciated his offer but felt that if Berkshire was going to get the upside it should also take the downside. Bill said nothing doing: If there was to be failure because of his religious beliefs, he wanted to take the blow personally.
The store opened last August and immediately became a huge success. Bill thereupon turned the property over to us — including some extra land that had appreciated significantly — and we wrote him a check for his cost. And get this: Bill refused to take a dime of interest on the capital he had tied up over the two years.
If a manager has behaved similarly at some other public corporation, I haven’t heard about it. You can understand why the opportunity to partner with people like Bill Child causes me to tap dance to work every morning.
If you are interested, you can read more about Bill Child and the RC Willey story (“How to Build a Business Warren Buffett Would Buy”). Another interesting point is that Child took stock instead of cash when accepting a buyout from Berkshire. Needless to say, Child was a smart man.
Fast forward once again to present day, 2016. A few weeks ago, Berkshire Hathaway’s 13F revealed that one of his managers (Combs or Weschler–my guess would be Combs) bought a basket of airline stocks (American Airlines, Delta, United Airlines and Southwest).
I bring this purchase up because of Buffett’s historical comments on airlines:
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
Buffett has not been one to mince words with his disdain for business of airlines over the years. Yet, one of his newly hired investment managers was willing to go against his boss and buy airlines.
It is one thing for Buffett to say that Combs and Weschler have full authority to do what they want, but it is another for them both to believe Buffett and buy something he has so forcefully spoke out against. It is impossible to quantify how much of Berkshire’s success has been a result of Buffett’s ability to attract top-level talent because they knew they could be left alone to manage their business. However, I think it would certainly be a needle-mover.
Moving on to the second point regarding patience, I pulled this Q&A portion from the 2013 Berkshire meeting. A question was asked by Bill Miller regarding airlines:
Question from Bill Miller: The airline industry is plagued with terrible economics. With the pending merger with U.S. Air and American (AMR)… the industry has been consistently profitable with double-digit returns. Do you think the industry’s improved economics are likely to improve?
Warren Buffett: The answer to the second question is no. The question about the industry is interesting because it’s true it has consolidated. In some industries there are only two competitors and they still beat each other’s brains out. Freddie Mac and Sallie Mae. Two enormous companies in battle to beat the other guy out drove prices down to improper levels and did stupid things. Certain industries once down to certain levels do extremely well and others even when there’s two of them still don’t do that well. Coke and Pepsi in the U.S. are the only two colas people can name and 50 percent of drinks sold are colas, but if you go into the market on a weekend they’re pricing the product at low prices and competing vigorously. It’s industry-specific. The airline industry has situation where have very, very, very low incremental cost per seat with enormous fixed costs. The temptation to sell that last seat at a very low price is very high and sometimes it’s very hard to distinguish between that seat and the last seat. It’s labor-intensive and capital intensive and largely commode type business. As Bill Miller points out, it’s been a death trap for business since Orville took off. If it ever gets down to one airline it will be a wonderful business and the question will be if having gotten down to relatively few through bankruptcy will question be whether it is a good business yet. I don’t know the answer but I’m skeptical.
Charlie: The last time we were presented with the opportunity of the railroad we did the same thing Bill Miller would suggest. And what did we do? We missed it. We stumbled in late to the party. We proved to be slow learners. It’s conceivable that Miller is right in what he suggests. It goes into my too hard pile.
Warren: Mine too.
From this conversation, it appears that both Buffett and Munger have thought about the changing landscape of the airline industry and even considered that the airline landscape could be evolving in a similar way to the railroads, however, there is a sense that neither Buffett or Munger are convinced. The result is that both are perfectly happy to watch the pitch sail by with the bat on their shoulder. No need to swing.
In another great example of patience, we can see from Buffett’s 2016 investment activities that he has taken up lethargy as his 2016 new year’s resolution (I am guessing his 2017 resolution is the same). His only two “trades” so far have been to buy Phillips 66 and sell almost his entire stake in Wal-Mart (along with adding a small amount of IBM).
The oft-repeated quote from Pascal seems relevant, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Although Buffett’s practices on both management style and patience are widely available for anyone to see, he enjoys very few copycats.