Berkshire Hathaway is one of the largest conglomerates in he world. It also has the distinction of being the only conglomerate that was built from scratch. In fact, when Buffett took over Berkshire Hathaway, it was a failing textile company. Now, more than 50 years later, Berkshire Hathaway has grown into a $300 billion company.
People have been trying for years to pinpoint down exactly what Buffett did to be so successful, and while there are many theories, including this one, it’s hard to say. However, Charlie Munger, the Vice Chairman of Berkshire Hathaway and longtime friend of Warren Buffett, identified four things that made Berkshire such a successful company:
“Why did Berkshire under Buffett do so well? Only four large factors occur to me,” Charlie Munger wrote. “(1) The constructive peculiarities of Buffett, (2) The constructive peculiarities of the Berkshire system, (3) Good luck, and (4) The unusually intense, contagious devotion of some shareholders and other admirers, including some in the press.”
We’ll break down his statement one piece at a time below:
“The constructive peculiarities of Buffett,”
Warren Buffett is a very peculiar individual, as anyone who has seen HBO’s Becoming Warren Buffet documentary will attest. He is excellent with numbers and has a unique temperament to make him an excellent investor—indeed, the best in the world. He is good at analyzing the market, able to disassociate himself from the everyday market rush, and keep a cool head in the face of problems. His adherence to Ben Graham’s value investing has been quite the boon to Berkshire.
“The constructive peculiarities of the Berkshire system,”
While Berkshire Hathaway is far from the only conglomerate of its kind, it is definitely the most unique. Buffett’s managerial style is very hands-off, and he doesn’t try and put red tape everywhere to control each company. In fact, the headquarters of the $300 billion company is an office of less than 30 people in Omaha, Nebraska. The company is unique in the way it handles all of its more than 60 wholly-owned companies. It puts control in the hands of the CEOs, who are often the former owners. In short, selling to Berkshire doesn’t mean a demise of a business, but rather security for the future.
“Good luck, and”
Buffett has said multiple times that purchasing Berkshire was probably one the biggest mistakes he made. The company was failing and shutting down mills all over the place when Buffett took control. Buffett quickly diversified the company, leaping headfirst into insurance and other companies. At the time, it was actually a much bigger risk than it seems now. However, despite some bad decisions and temporary downturns, Berkshire’s luck panned out, and the company profited.
“The unusually intense, contagious devotion of some shareholders and other admirers, including some in the press.”
The combination of all of the above has resulted in Berkshire attracting the cream of the crop. By letting choosing good companies and letting their CEOs retain control as the companies thrive, Berkshire attracts even more good companies, which in turn require less intervention on the part of Berkshire Hathaway. Munger refers to this as a “virtuous circle.”
Additionally, Berkshire has gotten quite a bit of favorable reactions and support from the media and from its shareholders, which don’t even mind allowing Buffett to retain dividends and use them to continue to grow the company. It’s an unusual model, but all together, it has resulted in one of the world’s top companies.