Berkshire Hathaway

Tim Sagawa

Berkshire Hathaway

1. What are the key Elements that made Berkshire Hathaway a Success? The fundamental reasons for Berkshire Hathaway’s (BH) success are, at least according to this case study, legion. One should come to the conclusion that BH today is in the catbird seat largely because of the “Oracle of Omaha” (i.e., Warren Buffet, founder and current CEO of the BH conglomerate) and his approach to investments and operations. One could probably go all the way back a superior business curriculum at Columbia University and other early influences on Buffet. However, for brevity’s sake, this writer will focus on what seems to be the most fundamental apropos of what is deemed “the Buffet way.”  To start, Buffet utilized—and continues to use—his “floats” or “available reserves” (i.e. available cash generated from insurance premiums) from his prior insurance company acquisitions to make large bets on companies that seemingly have very good long-term prospects, often have quality management, and are within the purview of BH’s management. Buffet and his cabal of financial gurus look for these types of companies that they consider undervalued, and their approach has been validated by BH’s success. Moreover, BH seems to have a quality network of information that allows then to strike while the iron is hot. Taken together, these key factors comprise a successful methodology that synthesizes large, perspicacious value investments and acquisitions with shrewd timing, which is in turn facilitated by BH’s huge, enviable float-based war chest.

Another key element for BH’s success that seems implicit in this case study is that BH’s management—and Buffet especially—are not only good at identifying, retaining, and hiring managerial talent, they provide the right type of incentives for superior managerial performance. To wit, Buffet insists that top managers own a stake in BH and have their pay linked with performance; moreover, he eschews less incentivizing executive compensatory practices like stock options. Furthermore, Buffet seems to be the antithesis of the soul-crushing micromanager--he sets reasonable goals for executives to attain and allows them a wide degree of autonomy in realizing these objectives. Moreover, the “Oracle of Omaha remains available to his top henchmen (and presumably henchwomen) for advice. Buffet’s managerial style seems to be in no small part driving the ongoing success story that is Berkshire Hathaway.

1. What is Berkshire Hathaway’s Investment Philosophy? Are they a Growth or Value Investor? BH’s investment philosophy--and more specifically Buffet’s—runs contrary to efficient market hypotheses (EMH). That is to say, Buffet propounds that sometimes markets (hence stock valuations) are inefficient, which in turn allows the shrewd investor to realize abnormal gains by purchasing (and oftentimes holding) those types of “inefficient” stocks that are undervalued. Indeed, this case study notes that Buffet’s paramount concern vis-à-vis investments is to find stocks that are undervalued. Furthermore, contrary to assumptions in weak-form EMH, Buffet successfully uses financial statements of firms (i.e., historical data) under consideration for investment as a means of realizing superior returns.

The aforementioned examples help define the Buffet Tao of investing by what it is not. However, if one were pressed to define his philosophy in a pithy fashion, one could summarize it as “keep it simple, stupid.” The Buffet way is driven by his aforementioned zeal to find underpriced stocks, and five basic precepts guide BH to realize this objective: first, Buffet does not follow the herd, i.e., he ignores “market and macroeconomic trends in evaluating a business”; second, BH and Buffet do not invest outside their area of expertise; third, BH prefers managers that run firms under consideration for investment to have skin in the game, i.e., ownership; fourth, Buffet uses the aforementioned financial statements for a company’s evaluation and eschews more modern equity assessments; and finally, Buffet holds that since most stocks are out of his bailiwick, BH should “know a limited universe of companies extremely well” and go large when investing in these types of firms.