POST OF THE DAY
Berkshire Hathaway
In Reply To:
20 Stock Portfolio

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By Goofyhoofy
October 7, 2002

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always wondered, too. If you're buying into a conglomerate that is extremely well-managed, isn't that similar to buying a diversified set of companies?

No, In spite of HB's well reasoned post, he ignores one thing, which makes it completely different.

Even with competent management, spit happens. Researchers at some University in Illinois suddenly find that asbestos causes cancer. A giant earthquake in the Pacific Ocean causes a tidal wave to decimate the entire West Coast. All of the wallboard used in constructing homes for the past 20 years is found to be defective and must be replaced at the manufacturer's expense.

If you have one well-diversified company, which has a major business component in any one of those areas (asbestos, insurance, wallboard), the liabilities can be leveled against the entire corporation.

On the other hand if you, as an individual, have 10 separate companies, one of which is in insurance, one of which makes wallboard, one of which used to make asbestos, and seven of which do other things, the most you can lose is 10% when any one of them gets hit with enough liability to bankrupt that particular company.

While it's not a perfect parallel, Dow Corning had several profitable business lines: shunts, cardiac catheters, artificial skins, but is obviously best known for "silicone breast implants" which became a terrific business for them, right up until the moment it wasn't and the company was bankrupted. In similar fashion, investors shunned Nabisco while it was tied to RJR because of the RJR liability (which has not yet proven to be enough to sink the company in any event.) The assets of the baking company were being held hostage to the liabilities of an entirely separate division.

It is an unfortunate reality in American tort law that you can be found liable for more damages than you actually participated in causing, so one side of a conglomerate could indeed suffer a massive liability, which could render the entire corporation worthless.


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