Berkshire's CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.
-- Warren Buffett, 2010.
Don't think you can learn anything about your money from baseball and the New York Yankees? Warren Buffett wants you to think again.
The power of diversity
The words quoted above are from Buffett's 2010 letter to Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholders, in which he describes the varying styles of managers tasked with ensuring the success of the company's businesses.
While each of these managers is considered an all-star, each one also operates very differently from the others. So what does that have to do with baseball?
Consider for a moment the 1927 New York Yankees, which the National Baseball Hall of Fame deems "The Greatest Team of All-Time."
As Sports Illustrated noted about that year's team: "The Yankees went 110-44, outscored opponents by 371 runs, and then ambushed Pittsburgh in the World Series. A couple of guys named Ruth and Gehrig hit 107 homers and scored 307 runs."
And it wasn't just Babe Ruth and Lou Gehrig who are Hall of Famers, but also second baseman Tony Lazzeri, center fielder Earle Combs, and pitchers Herb Pennock and Waite Hoyt. And the Hall of Fame didn't stop at players, also inducting manager Miller Huggins.
Yet they all found themselves that year in different stages of their careers, with a varied set of skills, and playing an assortment of positions, and they all put up incredibly strong, but remarkably different, stats:
While they are all baseball greats, each had his own unique skill set that made him a valuable contributor to the team.
In the same way, Buffett wants us to see that while all his managers go about their business in different fashions, they each provide incredible value, which has led to great success.
Buffett similarly appreciates diversity in his businesses. Berkshire Hathaway consists of 83 businesses -- to say nothing of the nearly $120 billion worth of investments it holds -- that range from insurance, to energy, to railroads, to manufacturing, and much, much more.
A glance at its income reveals the "vastly different" nature of these businesses.
The key to remember
Don't be led into thinking that there is just one path to success. Both the 1927 Yankees and the team of managers and businesses that composes Berkshire Hathaway show that there is immense value in variety.
When addressing his beginning assemblage of diverse businesses, affectionately called “The Sainted Seven Plus One,” in the 1989 letter to Berkshire Hathaway shareholders, Buffett said that the group “is a collection of businesses with economic characteristics that range from good to superb,” and that the “managers range from superb to superb.”
When speaking more directly about those who ran the businesses, he went on to add: "Most of these managers have no need to work for a living; they show up at the ballpark because they like to hit home runs…When I call off the names of our managers -- the Blumkin, Friedman and Heldman families, Chuck Huggins, Stan Lipsey, and Ralph Schey -- I feel the same glow that Miller Huggins must have experienced when he announced the lineup of his 1927 New York Yankees."
And while many of these businesses are now mere footnotes in the financial statements of Berkshire Hathaway -- See's Candies, Nebraska Furniture Mart, and others -- they were nonetheless instrumental in helping to guide Buffett on how to appropriately build the foundation of businesses that have turned Berkshire into what it is today.
But it’s also important to see, as Babe Ruth himself said, that the key isn't just variety, but unity among that variety: "The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime."
And clearly the diverse collection of businesses at Berkshire Hathaway is worth more than a dime. As Buffett remarked earlier this year, "Berkshire now owns 8.5 companies that, were they stand-alone businesses, would be in the Fortune 500."
This management and business mixture has enabled Buffett to deliver hall of fame returns: $100 invested in Berkshire nearly 50 years ago would have been worth $693,518 at the end of 2013. For comparison, $100 parked in the S&P 500 would have been worth $9,841.
Talk about a great return on your investment.