Book: “The Essays of Warren Buffett” by Lawrence Cunningham | Episode #165 (Part 1 of 2)
Jan 2, 2024
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Lawrence Cunningham, author of 'The Essays of Warren Buffett', discusses the book's origins and the importance of studying Buffett. They explore the benefits of a conglomerate structure for long-term capital growth and the challenges of allocating capital. They also discuss Berkshire Hathaway's communication practices with shareholders and their unique perspective on accounting.
Warren Buffett and Charlie Munger prioritize long-term partnerships with shareholders, focusing on owner interest and maintaining transparency.
Berkshire Hathaway's conglomerate structure provides unique advantages, including flexibility in capital allocation and the ability to acquire diverse investments.
Berkshire's culture is built on a partnership-driven approach, where shareholders are considered co-venturers who align with the company's operations and expectations.
When selling a business, it is crucial to find a buyer like Berkshire Hathaway who values autonomy, preserves the business's culture, and offers fair terms.
Deep dives
Owner-Oriented Approach and Shareholder Partnership
At Berkshire Hathaway, shareholders are treated as owner-partners, while Warren Buffett and Charlie Munger see themselves as managing partners. They view Berkshire as a conduit through which shareholders own the assets, emphasizing a long-term partnership approach. The annual reports and shareholder letters are written with the idea of providing useful information to owner-partners and maintaining transparency. Buffett and Munger prioritize owner interest rather than short-term stock market movements, and they prefer shareholders who share their long-term perspective. Berkshire's low turnover rate and the significant net worth invested by directors further demonstrate their commitment to a long-term owner-focused culture.
Advantages of the Conglomerate Structure
Berkshire Hathaway's conglomerate structure provides unique advantages, including capital allocation flexibility, the ability to move funds between businesses without incurring taxes, and the opportunity to deploy capital rationally and at minimal cost. The diversity of earnings, premier financial strength, and liquidity contribute to Berkshire's ability to maximize long-term capital growth. The conglomerate structure also enables Berkshire to acquire pieces of wonderful businesses (common stocks) with a broad range of investment options. The structure creates opportunities for rational decision-making and allows Berkshire to be a permanent home for owners and managers who wish to retain the company's people, culture, and financial strength.
Culture of Berkshire Hathaway
Berkshire's culture is distinct and reflects its owner orientation. Shareholders are considered co-venturers who have entrusted their funds to Berkshire for the long term. The company's attitude is partnership-driven, with an emphasis on trust and alignment. Warren Buffett and Charlie Munger prefer shareholders who understand Berkshire's operations, approve of its policies, and share its expectations. Berkshire's directors have a significant portion of their net worth invested in the company. Berkshire prioritizes long-term progress in intrinsic business value, measured on a per-share basis. Buffett and Munger focus on the quality and diversity of the businesses owned by Berkshire rather than the company's size. Their goal is to make money when shareholders do, with an economic partnership that aligns their financial fortunes.
Long-Term Perspective and Financial Alignment
Berkshire Hathaway's goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis. Buffett and Munger prioritize per-share progress over company size. They aim for financial alignment, sharing the same upsides and downsides as shareholders. Their approach rejects large salaries, options, or other means of personal gain. Their focus is on making money when shareholders do and ensuring that their financial suffering is proportional to shareholder experiences. While they expect the rate of per-share progress to decrease in the future, their commitment to long-term economic growth remains steadfast.
Selling Your Business: Choosing the Right Buyer
When considering selling your business, it is important to carefully evaluate potential buyers. Strategic acquirers may not maintain the autonomy of your business, while financial maneuver buyers may only be interested in short-term gain. Berkshire Hathaway offers a different approach, buying businesses to keep and allowing existing management to continue running the business. Their independence and commitment to trust and performance make them a unique buyer.
Advantages of Selling to Berkshire Hathaway
Berkshire Hathaway stands out as a buyer due to their commitment to autonomy and their track record of keeping management teams intact. They offer cash for the acquisition, prioritize the preservation of your business's culture, and work to align incentives for long-term success. With Berkshire, you can maintain your position of wealth while gaining the potential to participate in the growth of an exceptional conglomerate.
Warren Buffett's Advice: Consider your Wealth and Future Success
When selling your business, Warren Buffett advises considering the preservation of your wealth and the continued success of your business. A sale should not be solely focused on becoming wealthier. It is crucial to find a buyer who values the business and its management, maintains its culture, and offers fair terms. Berkshire Hathaway offers stability, support, and the opportunity to grow while preserving the legacy you have built.
The Essays of Warren Buffett by Lawrence Cunningham
For over 50 years, Warren Buffett has written an annual letter to Berkshire Hathaway's shareholders. Many people set it as a goal to read all of Warren’s shareholder letters chronologically. Which is certainly a fascinating way to see how Berkshire Hathaway evolved year after year.
This book is different. It breaks from this chronological order to instead group things Warren has said over the years by topic. So, for instance, you can see his ideas on the importance of culture or the power of incentives holistically — as a single body of work.
What I love about this book is the focus on Warren’s ideas. Warren Buffett has built one of the largest conglomerates in history — full of incredible companies from See’s Candies to GEICO — from a standing start in 1965. I would argue that if you only have time to study one entrepreneur and investor, that you should study Warren Buffett.
There’s no better way to do that than with this book. I know it’s one I’ll be re-reading for the rest of my life.
Listen to Part 2.
https://www.outlieracademy.com/episode/166
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The Essays of Warren Buffett: Warren's Ideas from 50+ Years Grouped by Topic
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