Few shareholder reports from publicly traded companies are quite anticipated as the annual letter penned by Berkshire Hathaway’s Chief Executive and Chairman Warren Buffett.
His latest edition published last month, and like most of his yearly missives, is worth reading even if you don't own a single Berkshire share. And by now, you know it's my annual tradition to share my observations on the same.
First, a story he narrates about purchasing a private business, got me wondering. In a land where private equity (PE) is a large and thriving industry, why do some businesses choose to exit via Berkshire? How different is PE from Berkshire Hathaway?
It was plain, from my brief research, that contrary to what PE pros might imply, some business owners actually do care about their legacy, their co-workers, and the health of their ventures.
By selling to PE firms that are the highest bidders who will immediately look for the exit often by disposing of all parts one by one or firing most of the staff, many business owners feel somewhat squeamish going down this road -- more so if the business has been in their family for decades or they have relationships with their co-workers for similar lengths of time.
Preference for Berkshire is because they are not looking for an exit strategy the second the deal closes - they are more or less a "permanent" owner. Reason why Berkshire’s non-marketable securities - that is, equity in companies that do not trade publicly, including those Berkshire owns outright - remains far greater than the value of the marketable portfolio.
Secondly, his admission of past mistakes was quite refreshing. A rarity in corporate circles. He admits, “sometimes I’ve made mistakes in assessing the future economics of a business I’ve purchased for Berkshire – each case of capital allocation gone wrong.”
He adds, “I have also been a director of large public companies at which the words, "mistake" or "wrong" were forbidden words at board meetings or analyst calls.” That taboo, implying managerial perfection is the reason some companies go under. Even the Good Lord knows Man is weak.
Lastly, he highlights why hiring right (and for the right position) is such a critical component in the success of any business. Makes sense.
Over the years, haven’t we witnessed some CEOs (with the help of their boards) destroy shareholder value at the Nairobi Securities Exchange (NSE)?.
Buffet writes, “In our CEO selections: I never look at where a candidate has gone to school. Never!” Think GEICO as a business decision, Ajit Jain as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner, personal advisor and steadfast friend.
In his experience, a single hire decision can make a breath-taking difference over time. Mistakes fade away; winners can forever blossom. He adds why strong profits can cover up bad leadership and poor capital allocation.
Note: Berkshire has posted a compounded annual return of 19.8 percent since 1964 to date, exceeding S&P 500’s 10.2 percent gain over the same period.
The writer is the Managing Director, Canaan Capital Limited.
