Charlie Munger's Warren Buffett Tell-All
Most big corporations are managed in a perversely counterproductive way that discourages good long-run leadership. Organize your company in a different way and maybe you’ll do better.
That is what Vice Chairman Charlie Munger explains in a wonderfully brisk account of Berkshire Hathaway’s strengths that is tacked on to the company's annual letter to shareholders released today. Munger has been second in command for 37 years of what is now one of the world's largest and most admired corporations. He has also been close friends for 56 years with its chairman, Warren Buffett. I highly recommend Munger's contribution, which takes up just 4 ½ pages, much of it in the form of lists. Here’s the bit about counterproductive management:
In its early Buffett years, Berkshire had a big task ahead: turning a tiny stash into a large and useful company. And it solved that problem by avoiding bureaucracy and relying much on one thoughtful leader for a long, long time as he kept improving and brought in more people like himself.
Compare this to a typical big-corporation system with much bureaucracy at headquarters and a long succession of CEOs who come in at about age 59, pause little thereafter for quiet thought, and are soon forced out by a fixed retirement age.
This year, Munger and Buffett set themselves the task of trying to explain why Berkshire has been so successful (its stock price has risen 1,826,163 percent since Buffett took over in 1965) and whether that success can continue over the next 50 years.
They both answer yes to that second question, though Buffett does what he can to temper the optimism. Berkshire “will outperform the average American company,” he predicts, but its long-term gains “will not come close to those achieved in the past 50 years. The numbers have become too big.”
Buffett and Munger, however, are largely focused on explaining past successes -- and that’s where they have the most interesting things to say.
Buffett’s contribution covers 24-plus pages that feature lots of fun stories and self-flagellation but basically attribute Berkshire’s sustained success to two factors: Munger’s investment philosophy -- “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices” -- and the fact that “a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimal cost.”
To elaborate on the second:
At Berkshire, we can -- without incurring taxes or much in the way of other costs -- move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That’s important: If horses had controlled investment decisions, there would have been no auto industry.
Financial markets should perform this role, Buffett writes, and to a great extent they do. But they get it wrong often enough and are subject to enough frictions that there’s ample room for a capital-allocation machine such as Berkshire to do better.
In contrast to Buffett’s largely structural explanation, Munger focuses mainly on leadership -- Buffett’s, that is. This list sums up the “Berkshire system” created by Buffett:
(1) He particularly wanted continuous maximization of the rationality, skills, and devotion of the most important people in the system, starting with himself.
(2) He wanted win/win results everywhere -- in gaining loyalty by giving it, for instance.
(3) He wanted decisions that maximized long-term results, seeking these from decision makers who usually stayed long enough in place to bear the consequences of decisions.
(4) He wanted to minimize the bad effects that would almost inevitably come from a large bureaucracy at headquarters.
(5) He wanted to personally contribute, like Professor Ben Graham, to the spread of wisdom attained.
Why then has Berkshire done so well over the past 50 years? Another list! The “four large factors,” Munger writes, were:
(1) The constructive peculiarities of Buffett,
(2) The constructive peculiarities of the Berkshire system,
(3) Good luck, and
(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.
Could other companies replicate this? Munger clearly thinks the answer is yes, though he doesn’t spell out exactly how. Which is sort of the point. To succeed in as unique a way as Berkshire has, you need to develop a few of your own “constructive peculiarities.”
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