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Berkshire Hathaway
The Real "Smartest Guys in the Room."

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By gdefelice
July 3, 2006

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The real "smartest guys in the room."

The more I think about this move by Buffett, the more "perfect" it is...and, of course, Gates understands this as well.

The BMG foundation owns no Microsoft stock. Now that Gates is going to be devoting so much time to it, the issue of obvious conflict of interest if it did own large portions of Microsoft doesn't exist.

Still, this foundation -- even before the WEB contributions -- has a very large pool of assets to invest. Now, really, if you had $30 billion, is there a better long-term investment than Berkshire? Wanna bet on it?

I've always been surprised that no other mega-billionaires have ever invested large portions of their outside assets into Berkshire -- probably an ego thing or maybe they're not that smart. But, if you're going to dump those stock options because you need to "diversify", there are few long-term homes as cozy as Berkshire.

Gates gets it, though.

Gates still has another $50 billion or thereabouts in net worth. He has said, I believe, that 95% of this will go to the foundation.

In time, since I doubt highly that any shares of Berkshire will be sold by the BMG for some time, Gates can prevent the foundation from becoming too dominated by Berkshire in the short-term by simply adding to the asset base from his fortune (which is bound to grow). Nevertheless, Berkshire will come to dominate the foundation's asset base....and, really, it shouldn't be any other way. The beauty of the construct here is that (1) WEB can pass Berkshire shares to the BMG while they're undervalued...thus reducing the necessary payout from the BMG foundation and allowing the shares to grow in value and (2) by giving to the BMG, WEB or future managers don't have to adjust Berkshire's capital allocation strategy in any way they don't think is rational and (3) future uncertainty is reduced since mass selling now become very unlikely.

In time (though maybe not soon enough for some), Berkshire will inevitably pay a dividend. This dividend will grow as will the underlying value of the company. The BMG foundation will, in time, become so unGodly large that the morons among us will question whether it makes sense for such a concentration of wealth to be in one foundation -- aren't they already?

Just wait a decade or two.

WEB has made a point in recent days that it makes sense to let someone who is better at you at something do it for you...this is anathema to most people, it seems to me. Yet it really is a hallmark of his approach.

WEB is saying, in a sense, I'll grow it, you spend it. Who's going to be better than us at these two activities? Indeed, who?


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