Two recent items helped me draw lessons for how I want to manage my investment firm, Greybull Stewardship. The first is Warren Buffet’s memo that he sent last month to the managers of the 80 businesses of Berkshire, and the other is in the book, Berkshire Beyond Buffett, by Lawrence Cunningham. The lessons are not new, but they are so central to the success of Berkshire that they are worth thinking about again. These are also ideas and strategies that we have implemented at Greybull Stewardship.
The first observation is a reminder about how reputation is more important than money and profits, particularly given the decentralized manner in which Berkshire Hathaway operates. Warren Buffett spent over half of his memo to his managers (five paragraphs) reminding his managers to stay well “in the center of the court.” He continues, “If it’s questionable whether some action is close to the line, just assume it is outside and forget it.” He also included again his quote that, “We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation.”
Culture of Mutually Deserved Trust
The second observation is about the autonomy that Buffett gives his managers. Autonomy is one of the two primary themes of the Cunningham book. Buffett writes in his memo to his managers to “talk to me about what is going on as little or as much as you wish. The only items you need to clear with me are any changes in post-retirement benefits, acquisitions, and any unusually large capital expenditures. But I like to read, so send along anything that you think I may find interesting.” At Greybull Stewardship, the CEOs and management teams of our portfolio companies do an excellent job and you can see it in their excellent track record. I enjoy discussing things with them, while I believe in letting them manage their businesses. Many private equity investors over estimate their own ability to manage companies, and I work hard not to fall into that trap. As has been explored by Charlie Munger and others, there is something about a trusting culture that brings out the best in people.
Munger said this at the Berkshire annual meeting in 2011, “The greatest institutions . . . select very trustworthy people, and they trust them a lot. There’s so much self-respect you get from [being] trusted and [being] worthy of the trust that the best compliance cultures are the ones which have this attitude of trust. [Some corporate cultures] with the biggest compliance departments, like Wall Street, have the most scandals. So it’s not so simple that you can make your behavior better automatically just by making the compliance department bigger. This general culture of trust is what works.”
Fickle foster parents
And, the third lesson comes from the Berkshire Beyond Buffett book about the idea of permanence that Berkshire can offer to people who may want to sell their business to Buffett. Some private equity investors may consider this not to be important — which suggests they do not appreciate the significance of this permanence. Some other private equity investors understand the significance — yet they do not have a fund structure or an investor base that will allow them to pursue this strategy. As Cunningham writes, “private equity firms are short term by design, as they create funds with ten-year lives (five to sow then five to reap). Iinvestors start looking for their payback in year six.” Cunningham continues by writing that the permanence of Berkshire really helps its subsidiaries because “Management can concentrate without interference and invest in the brand, assuming a fifty-year time horizon rather than focusing on meeting the short-term needs of fickle foster parents.”
While not new, these are important and essential components of Berkshire Hathaway and what I am doing at Greybull Stewardship. Cunningham’s book is a good overview of most of the subsidiaries of Berkshire. That part may be tedious if you are already familiar with Berkshire. Cunningham’s conclusion is that Berkshire’s culture and strategy are so strong that it will remain strong well after Buffett retires. I tend to agree with that. As I have written before, Buffett deserves more credit as a business strategist and how he arranges the culture of Berkshire than for investing acumen. His strengths are putting himself and Berkshire in a place to be the perfect home for great businesses. Then saying yes to invest in great businesses is the easy part.