"My theory, Warren, is if it can't stand a little mismanagement, it's no business." -- Charlie Munger
Let's say some pretty obvious things about Warren Buffett, starting with this: He's pretty good at investing. Good enough that Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholders of long standing (I have been one for several decades) have profited wildly from his talents. Some have seen their entire financial condition altered, for the better.
So, it's fascinating that, at age 87 and with a track record of success that almost defies reason, Warren Buffett seems so dearly to underestimate Warren Buffett. When he says "the reputation belongs to Berkshire now. We are the first call and will continue to be the first call," I have to wonder if he is kidding himself about his importance to the business. Even though Berkshire Hathaway is a $500 billion company, it is very much overshadowed by Buffett.
Warren Buffett's 70-year track record is amazing simply because he has enjoyed enduring market-beating returns while most kinds of investing success are mean-reverting. In A Random Walk Down Wall Street, Princeton professor Burton Malkiel showed how most mutual fund managers who outperform the market one year do not do so over subsequent years. The reason for this is pretty simple -- you make a bunch of good calls in stocks, they go up, then you sell and have to repeat that process. The repetition is not so easy. Times change, valuations change, people notice you've done well and copy you.
As an object example, 42,000 like-minded contrarians just sat for more than 6 hours to listen to Warren Buffett talk about investing. In uncomfortable chairs. In Omaha.
I once wrote that Buffett was so good at making money that if you asked him to break a twenty, he'd give you two $10s and somehow have $13 million left over. I also once wrote that if investing were a card game, Warren Buffett's hand would have 37 aces in it. I like these quotes because they're funny but also because they employ proper punctuation.
He's historically great because he applied a discipline and logic to investing employed by few others. But Buffett has also received plenty of additional self-reinforcing benefits. For example, simply a report that Warren Buffett has bought a stock makes that stock go up. The time frame doesn't matter as much to him since he holds stocks for such a long time, but the impact is there.
There's also the transitive property of Buffett, in which he invests in regulated industries where regulators may be more lenient on behavior because Warren Buffett is doing it and Warren Buffett does good things. A mobile home lender or a wild, finite risk retrocessional transaction might receive less scrutiny as a result.
But the third area of self-reinforcement -- which he seems to discount -- is by far the most important. When companies want money, they tend to offer Warren Buffett deals on very favorable terms. This is what Buffett means by Berkshire Hathaway being the "first call." And I think he has lovingly rendered Berkshire in his own image, but there is a reason that the media focuses on Buffett whenever Berkshire does something -- his name matters more. During the financial crisis, Goldman Sachs offered Berkshire warrants to go along with a $5 billion purchase of Goldman's preferred stock with a 10% dividend, plus warrants for 43.5 million shares. Did media reports focus on Berkshire Hathaway or Buffett?
(What do you think? To channel Bloomberg's Matt Levine, "Buffett" sounds much better than "Insurance-Railroad-Candy Company Converts Crisis-Era Warrants for 2.8% of Goldman Sachs.")
That's because the Buffett reputation gives his deal partners something besides money -- it gives them access to the Buffett halo. That was incredibly valuable to Goldman, and to Bank of America, in the aftermath of the collapse of Lehman Brothers.
Buffett also buys whole companies, where these same publicly facing signals do not matter. There are lots of benefits for sellers to join the Berkshire Hathaway family: the ease of the transaction, the decentralized model, the retention of independence. But let's also put another one on the table -- it has to be pretty cool to sell your company to Warren Buffett, to have him say the occasional nice thing about you, to have the ability to pick up the phone and give him a call whenever you'd like.
This matters because actuarial tables suggest that Buffett will not be running the show at Berkshire Hathaway forever. And when he turns it over to someone else, the company will still be massive. And what then? If we agree that investing is largely mean-reverting, and if we agree that managing huge amounts of money creates huge challenges (how many hidden multi-billion deals are there?) then we have to accept the possibility that the personage of Warren Buffett matters, and it will matter much more when he's gone than he seems to admit.
Yes, Berkshire Hathaway's culture is amazing, but its culture also places an enormous amount of judgment in the hands of a single decisionmaker. Think about it this way -- if you were to set up a company today, would you want to have the CEO decide to invest billions of dollars on a whim, with no due diligence, lawyers, etc.? You'd better hope you have the right man or woman in charge if you do. Warren Buffett is the right man. But what if the next person lacks his same charisma? Does the Berkshire culture survive?
Buffett is also a champion of good corporate governance, which has benefited other investors who have never held a share of Berkshire. He has used his bully pulpit for good, including when he simply, during the worst of the financial crisis, wrote "Buy stocks. I am." I think as a tribute we should just go ahead and rename "all-you-can-eat buffets" to "all-you-can-eat-Buffetts." He'd appreciate the thrift. And the wordplay.
But it's also possible that he's underplaying the influence he has on the actual company he manages. His vice chairman, Charlie Munger, is 94 and won't be taking over for Buffett. I have been hoping against hope for a few years that he would invite his eventual successor up on stage to publicly start the transition with Buffett while he is still alive and in charge. I suspect that there is no person who will need the Buffett halo more.