EXPLAIN IN THE MEMBRANE: Warren Buffett & The Woodstock Of Capitalism


BFFs: Warren Buffett and Charlie Munger

(Originally written 04/20/2015)

Woot! Woot! The Woodstock of Capitalism (aka Berkshire Hathaway’s Annual General Meeting aka Berkshire’s AGM) is right around the corner. There’s nothing quite like watching an 84-year old Warren Buffett (Berkshire Chairman & CEO & 3rd Richest Man in the World) and 91-year old Charlie Munger (Berkshire Vice-Chairman) holding court and dispensing business knowledge. And unlike a Kanye or Taylor Swift concert, you don’t have to pay those outrageous Ticketmaster “convenience fees” to attend; you just have to be a shareholder. You also have to physically be in the city of Omaha which, depending on your urban density preferences, may or may not be a prohibitive hurdle.

Unfortunately for me, my investment advisor Sergei convinced me to put all my money in a Russian ETF (RSX) so I don’t have a golden ticket to Buffett’s extravaganza this year. But I do have the internet and I am here to answer all your Berkshire-related queries.

WHAT EXACTLY DOES BERKSHIRE HATHAWAY DO (OTHER THAN THROW SICK PARTIES)?

Berkshire Hathaway is a holding conglomerate with controlling (or near-controlling) investments in 59 companies across industries as diverse as insurance (GEICO), clothing (Fruit of the Loom), footwear (Brooks), home building (Clayton Homes), chemicals (Lubrizol), rail transportation (Burlington North Sante Fe), electricity (Berkshire Hathaway Energy formerly MidAmerican Energy Holdings Company), metalwork (Iscar), paint (Benjamin Moore), candy (See’s Candies), fast food (Dairy Queen), luxury jets (NetJets), condiments (Heinz) and so much more. Berkshire also has large minority holdings in some of America’s most prized corporate entities – Coca-Cola, Wells Fargo, American Express and IBM among others. In sum, Berkshire Hathaway’s revenue for 2013 totaled $182.2 billion (!!) with earnings coming in at $19.5 billion.


Some notable Berkshire Hathaway subsidiaries

Anyone interested in a thorough breakdown of what Berkshire Hathaway does needs to go read all 37 Annual Letters that Warren Buffet has penned going back to 1977. A former finance professor of mine once told me, “if you want to be a good investor, pretty much the only foundation you need is Buffett’s annual letters and Benjamin Graham’s “Intelligent Investor”. Great advice! And much cheaper than an MBA.

In his letters, Buffett does not actually separate out each subsidiary but he does delineate and report on Berkshire’s four main operating segments: 1) Insurance; 2) Regulated-Capital Intensive Businesses; 3) Manufacturing, Services and Retail Operations; and 4) Finance & Financial Products. Any attempt to distill Berkshire’s success into one tidbit is a fool’s game but the conglomerate does have one very powerful secret sauce related to its insurance business worth highlighting:

“Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float.”

Berkshire’s “float” reached $77 billion by end-2013. Essentially, this cash is free to fund Berkshire’s investments and acquisitions, as the likelihood of an insurance claim(s) against the total amount of the float is infinitesimally small. In years that Berkshire’s insurance units underwrite a profit, something truly magical happens:

“If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it.”

Again, I am not suggesting that “float” is the only reason Berkshire succeeds. It is one very important piece of the puzzle and, as previously noted, please read the annual letters to learn more.

WHY IS THE BERKSHIRE AGM CALLED THE WOODSTOCK OF CAPITALISM?


Guess which one is Woodstock

To answer this question, we need to first revisit what Woodstock actually was. The original 3-day outdoor music festival took place in 1969, 43 miles outside of New York City. The concert was attended by 400,000 people and was a seminal moment in Rock ‘N Roll history as well as a touchstone moment for the 1960’s anti-Vietnam War/Greenpeace/Hippie/counterculture revolution.

In comparison, Berkshire’s AGM typically draws 30,000-40,000 loyal shareholders to an event that includes 194,000 square feet of shopping booths for Berkshire’s subsidiaries, Bill Gates sightings, a newspaper tossing event, a 5km mini-marathon, mud-wrestling, ping-pong matches, food galore and the main Q&A event with Mr. Buffett and Mr. Munger.


We can only wish there was a picture of Bill Gates and Warren Buffett mud-wrestling

As the Venn diagram below shows, the only real similarity between the two events is that both are packed with people and said people are die-hard advocates, respectively, of hippie-dom (Woodstock) and capitalism (Berkshire Hathaway).


I love Venn diagrams

Despite the differences between these events, Berkshire really has a strangle hold on the “Woodstock of” title. When you Google “Woodstock of…”, “…Capitalism” ranks ahead of “1969”!! As in “1969” being the actual Woodstock! Even the “Woodstock of Physics” (this sounds like the nerdiest yet potentially greatest party ever) beats out “1969”!!


The words “aa” and “Woodstock” should never be this close together

What are the merits of such search ranking victories, though? As Lisa Simpson famously once quipped, “Anything that is the ‘something of a something’, isn’t really the ‘anything of anything’”(extra points for taking a dig at my alma mater McGill, I concur). Using this Simpsons truism, why would any event even want to be called “the Woodstock of” anything? I get that Warren Buffett is widely considered the greatest investor ever (net worth of $67 billion with a ‘b’). I get that Berkshire Hathaway’s market cap is $364 billion. I get that, in sum, Berkshire’s 59 subsidiaries employs more than 300,000 people. I get it all!

But come on! There has to be a better way to celebrate the pinnacle of capitalism. What about calling Berkshire’s AGM the “Burning Man of Capitalism”. Although with its hardcore libertarian and Silicon Valley bent, Burning Man already kind of is the “Burning Man of Capitalism”. At the very least, we could modernize the AGM’s nickname for the Facebook Generation.

WHAT IS AN APPROPRIATE GEN-Y MONIKER FOR BERKSHIRE’S AGM?

The best answer I could come up with is the mock poster below:


Hopefully Berkshire Hathaway will make U2 or Coldplay a subsidiary one day

Now, I’m not saying Coachella has the same cultural significance as Woodstock. Nor am I saying that it represents anything closer to the ideal of a Berkshire AGM. I’m sure a Venn diagram comparing Coachella and a Berkshire AGM would be just as dubious as the previous one. What I am saying, though, is that Coachella is clearly the premier American live concert event in the United States today. That makes it relevant. More importantly, the Coachella poster is a perfect template to list all of the Berkshire subsidiary and minority investments in an eye-catching format.

The “Woodstock” name does show impressive resilience against “Coachella” on Google Trends but as Victor Hugo once said, “You can’t stop an idea that’s time has come.” The intermittent popularity spikes suggest to me that Coachella’s time has come.


On average, Woodstock is ahead but I prefer variance!!

As an aside, one main actor from Woodstock (“LSD”) still trumps “Warren Buffett” handily in search volume. I’m trying to decide if I want to live in a world where more people search for “LSD” than “Warren Buffett”.


Yup, we’re screwed.

IS WARREN BUFFETT THE GREATEST INVESTOR EVER?

Yes. If you had invested $11 in Berkshire Hathaway in 1964, that investment would have topped out at $190,000 fifty years later. To say that Warren Buffett “crushed it” is akin to saying that Michael Jordan is an OK basketball player. As you can see from the graph below, Berkshire shares (BLUE) crushes annihilates the S&P 500 (RED) over the past few decades.


Slightly better than “crushing it”

And in case you were wondering if you should have invested with Buffett in 1964, the answer is…


Some things in life aren’t that complicated

Buffett is also one of the world’s great philanthropists. He has given away billions of dollars and, as one of the most prominent figures in The Giving Pledge, he has committed to giving more than 80% of his remaining wealth to the Bill & Melinda Gates foundation. Buffett laid out his giving philosophy back in 1988 (via Wikipedia):

“I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die.”

HOW IS WARREN BUFFETT SO SUCCESSFUL?

Lawrence A. Cunningham’s brand new book – Berkshire Beyond Buffett: The Enduring Value of Values – sets out to answer just this question. Cunningham believes Buffett has created a winning corporate culture and summarizes Berkshire’s particular values in a convenient acronym “B.E.R.K.S.H.I.R.E.” (see table below). According to Cunningham, the persistence of these values have led to Berkshire’s outstanding success. While there are many that question whether Berkshire can thrive without Buffett’s genius investment acumen and foundational moral compass, Cunningham lays out the following qualities that he believes will endure:


Adapted from Berkshire Beyond Buffett

It goes without saying that I have not done the book justice. Please do read it.

IS WARREN BUFFETT REALLY FRIENDS WITH LEBRON JAMES?

Yes.

He.

Is.

IS HE FRIENDS WITH JAY-Z TOO?

Is the Pope catholic?


Empirical evidence that everything is funnier when you’re rich

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