In the last History Factor, we talked about Tesla, Elon Musk and what happens when a company is so tightly identified with one person that their volatility becomes an existential threat. Now let’s look at the other end of the spectrum: what it looks like when succession is slow-cooked for years, and an enterprise’s figurehead not only steps back but does so on a pedestal of enduring excellence with a talented team in place.
Warren Buffett is stepping down from leading Berkshire Hathaway after an unparalleled career spanning seven decades. There’s no one like Buffett. Like Mozart or Jordan, he’s just built differently. A freak of compounding nature, he bought his first stock at 11 and was self-made wealthy before he graduated from high school. Buffett’s entrepreneurial accomplishments as a kid included buying a farm and running (and selling) a pinball business.
Buffett and Berkshire’s astonishing success has resulted from a balance of being willing to adapt and staying true to longstanding principles. For instance, in his early years, Buffett adhered to a philosophy that his mentor Benjamin Graham preached known as “cigar butt investing.” The strategy is to find companies that are so cheap that even one puff would be profitable or, ideally, that will recover and can then be sold for a big profit.
Eventually, with more capital to deploy, Buffett realized he was outgrowing that strategy. There weren’t enough undervalued stocks to sustain his returns. Heavily influenced by Charlie Munger, who would become the Robin to his Batman, Buffett shifted his outlook from looking for cheap assets to seeking great businesses with durable advantages. “It’s far better to buy a wonderful company at a fair price,” Munger told him, “than a fair company at a wonderful price.”
Just as he ignored great companies in his early years, Buffett avoided the technology sector for decades, missing enormous opportunities with companies like Intel and Microsoft and, later, Amazon and Google. But Berkshire purchased nearly $40 billion of Apple stock between 2016 and 2018, and today that investment has paper gains of about $120 billion. While Buffett’s pivots from cigar butts to blue chips purchasing Apple demonstrate a willingness to change, other principles that have guided Berkshire’s investments haven’t changed in decades. In fact, they explain why Apple passed the test.
Berkshire looks for:
- Simplicity: Buffett famously said, “A ham sandwich could run Coca-Cola.” Executives in the beverage business in Atlanta and around the globe must have loved that.
- Float: In 1951, a 21-year-old Buffett famously showed up uninvited on a Saturday at the Washington, D.C., headquarters of the Government Employees Insurance Company and got a meeting with an executive. He left with a life-changing insight about “float,” the ability to use other people’s money (typically through insurance premiums) to invest long before those funds are needed, as long as underwriting is disciplined and losses are predictable. Buffett has often said that float is one of Berkshire’s superpowers. Thanks to float, the conglomerate has access to vast pools of capital without needing to borrow or raise equity. The bigger the float—and the longer it stays in-house—the more time compounding gets to do its magic.
- Moat: In Buffett’s lexicon, “moat” is a company’s enduring competitive advantage. Whether it’s the result of a world-class brand like Coke, a dominant distribution network like BNSF Railway or a customer experience at scale in a fragmented industry like NetJets, a moat allows a company to grow profits consistently. It’s what separates a good business from a great one, especially over the decades.
Now the question becomes: If Buffett were evaluating Berkshire Hathaway today, would he invest? Moat? Absolutely. Berkshire has an iconic brand, a sterling reputation and decentralized companies with autonomy. Float? It has insane cash generation and a war chest consisting of a $350 billion cash reserve. But simplicity? That’s a harder sell. Berkshire today isn’t something that can be “run by a ham sandwich.” It needs a steady, experienced hand. And that hand now belongs to Greg Abel, who has been the heir apparent for years, quietly building trust among stakeholders and proving that the company’s future doesn’t rest on one voice or vision.
But make no mistake: Abel will be judged. His every misstep will be compared and scrutinized. The reality is that Abel is not replacing Buffett. He’s an operator more like Tim Cook leading a deep and talented team. It’s also important to remember that even though Warren Buffett is the GOAT, he was far from perfect. He famously sold the Government Employees Insurance Company’s stock far too soon, only to buy it back later. (Now you know what GEICO stands for.) In the late ’80s, Buffett stepped in to rescue Salomon Brothers amid scandal. He salvaged the firm, but it was a huge risk to his business and reputation. Based on that experience, he passed when asked to help bail out Lehman Brothers at the onset of the Great Recession. The 1998 acquisition of the reinsurance firm General Re was a disaster, and Buffett was repeatedly bloodied by the allure of the airline industry. He famously said, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money.” Yet he still bought into the industry after that.
Notwithstanding the incredible success of the Apple investment, Buffett and Berkshire’s performance over the last decade has been subpar. Buffett leaves behind an architecture for growth based on a system of principles, decision-making and clarity. Oh yes. And there’s that $350 billion. Berkshire’s next act won’t be a one-man show, but it may be a blockbuster. Greg Abel is no ham sandwich, and he and the talented team Warren Buffett and Charlie Munger have mentored for years have a whole lot of bread with which to cook.
Subscribe to The History Factor.