Omaha, Nebraska: a place of pilgrimage, where 35,000 shareholders of Berkshire Hathaway have come to pay homage. This is a global event but quintessentially American. On Friday, the conglomerate’s products are on sale; See’s Candies and Fruit of the Loom T-shirts are the most popular. Precision Castparts, the maker of specialist components for aircraft engines, puts on a bewildering display.
A model railway represents the Burlington Northern Santa Fe network. Sadly, there are no discounts on NetJets, the pay-per-flight private aircraft operator. In the evening, we drink cocktails and eat junk food in a tacky marquee alongside a display of expensive jewellery (25 per cent off for Berkshire shareholders).
Then the ritual’s high point: journalists, analysts and shareholders fire questions at Warren Buffett and Charlie Munger, vice-chairman, for five hours. The stamina of Mr Buffett, 85, and Mr Munger, 92, would be astonishing if they were younger men. They engage in easy, witty repartee; if Mr Buffett is prolix, Mr Munger is sardonically concise.
The business model is as simple as it is effective: a closed-end fund, whose shares can be redeemed only by selling to another investor, with a strategy of long-term commitment and close engagement with the companies invested in.
What is surprising is that Berkshire’s success produced so little imitation. Where other conglomerates use financial engineering and impose “transferable” management skills, Mr Buffett eschews creative accounting and has no illusions that he will manage Precision Castparts better than the incumbents. His method is to find well-run companies and give them more freedom than they would enjoy on public markets.
Yet the closed-end fund is out of fashion; financial advisers and regulators prefer the open-ended model, with all the accompanying constraints on long-term investment. In the EU, closed-end vehicles are to be classified as complex products, supposedly dangerous for small shareholders such as those who flock to the arena to applaud Mr Buffett.
The control mechanisms in the group are tight but informal. Exchanges with analysts at the shareholder meeting demonstrate that the tiny staff at the headquarters in Omaha is familiar with what is happening in the operating businesses.
Mr Buffett, however, is at pains to emphasise the absence of formal reporting lines and control systems, central budgets and targets, and complex incentive schemes. In a revealing moment, he was asked about the absence of conventional due diligence in his acquisition process; Berkshire had made bad acquisitions, he acknowledged, but never one that could have been avoided by the kind of information that due diligence might have revealed.
The overriding ethos of the shareholder weekend is that of a cult, an ethos engendered by informality but also crucial to the effectiveness of that informality.
Berkshire’s success is based on the trust between the group, its operating companies and its investors. It is a world apart from the notion of the company as nexus of contracts among people who find it mutually advantageous, for the moment, to do business together; a world apart from the place to which financial innovation has led us.
Mr Buffett’s particular genius is not that he is a great stock picker. His genius lies in the relentless clarity of his appreciation of the nature of business: focus on competitive advantage, find good management, give that management freedom with accountability only for results. And in his creation of a business model that follows those insights.
This article was first published in the Financial Times on May 4th, 2016.
