Thoughts and Learnings from Capitalism’s Biggest Event
Once a year Berkshire Hathaway, the world’s fifth largest company, holds its annual shareholders meeting in Omaha, Nebraska. Normally, annual meetings are attended by no more than a couple hundred people even at large companies. The crowd that comes to Omaha, however, is usually in the tens of thousands. It’s often referred to as the ‘Woodstock of Capitalism’ because it’s basically an event that draws people from all over the world that overwhelming share an interest in money and how to make more of it.
As a shareholder and a Buffett/Munger fan, I decided to go to this year’s meeting along with 40,000 shareholders, fans, and capitalism devotees. I mostly went out of curiosity but also to see if there was even more I could learn from Berkshire’s Chairman and Vice Chairman. It’s hard to find two people that have a more rational way of thinking than Warren Buffett and Charlie Munger.
The main attraction of the event is the Q&A portion where shareholders, along with top financial journalist, get to ask Buffett and Munger any question they want. It’s such a popular portion that this year’s meeting had two three hour sessions with a lunch break in between.
There were lots of interesting questions and topics touched on but I wanted to share what I thought were the best takeaways from two of the greatest minds (business or otherwise) currently alive:
Culture is Everything
Berkshire Hathaway is known to buy companies and then largely leave them completely alone. This often makes companies more willing to sell to them as opposed to someone else, you get to keep doing things exactly how you were before but now have access to Berkshire Hathaway resources. For the sixth largest company in the US, they have a very small corporate office, only 25 people.
All this makes working under Buffett very attractive. There were multiple times when culture came up as a topic at the meeting. Some wanted to know a magic formula that was the key to their success and some just wanted to hear what kind of attention Berkshire places on culture. Buffett noted how important culture was, once actually saying “culture is everything”, but he also said that they didn't have many tips to give the crowd. This was because he emphasised how culture comes from the top. As the CEO, everything starts with you. Your employees look to you for what’s acceptable and how they should carry themselves. It also matters more about what you do and not what you say.
He went on to admit that there will always be some bad apples, especially in a company the size of Berkshire. But if you create a company culture where doing something questionable is looked down upon, your employees will report suspicious activity and cut it off at the head instead of turning a blind eye and making matters worse.
Culture is the code of conduct at the core of a company
It was interesting to hear how valuable culture is to Buffett and Munger. Culture is sometimes written off as a trivial matter or something that just refers to having a ping pong table and beer in the office. But it’s much more important than that. Culture is the code of conduct at the core of a company, which is something that is very hard to change.
It’s also notable how much a CEO needs to lead by example. Everyone in the company is watching what the CEO does so he or she has a responsibility to act the way they want the rest of the company to act. Culture is a direct reflection of the CEO. So if you're the CEO of a company and you don't like the company’s culture, change your own behavior and lead by example.
Companies Need to be Adaptable
The subject of adaptability came up a few times in answers to shareholder questions. The first time Buffett talked about a company’s need to adapt was when discussing online car sales and its effects on car dealerships. The shareholder asked a question about the recent acquisition of the Van Tuyl Group and how they might be addressing the rise of purchasing a car online. While Buffett largely felt that a large purchase, such as a car, would generally require a negotiation and therefore not be a great target for online sales, he did recognize the need for a company to adapt to the desires of the customer. He stressed that while he didn't think the market will move in that direction, he did recognize that if it did his company will make sure they adapt.
Towards the end of the Q&A, Buffett mentioned what he really liked about American Express, its adaptability. He told how time and time again, American Express has been able to adapt to the changing market and stay a terrific business. Buffett talked about American Express’s history and how they actually started out as an express mail business and soon after added a money order business because they saw the need to send money around the country as well as packages. He compared that to what they have been doing more recently, adapting to the quickly changing world of technology by continuing to be at the cutting edge with mobile payments and online financial services.
Berkshire Hathaway itself is also a lesson on adaptability. When Buffett gained control of the company in 1962, it was a struggling textile manufacturing company. Over the years, Buffett realized the textile industry was a poor one to be in so he started buying other types of businesses like insurance and local stores. Today’s Berkshire Hathaway looks very different than the one he started with in 1962.
Instead of jamming our products down people’s throats, we should better understand and adapt to their needs.
I think this is especially important to note for lots of new companies today, where they often want the world to adapt to their idea instead of the other way around. That’s why you hear about companies trying to educate their users on how to use their product in the ‘correct’ way. Instead of jamming our products down people’s throats, we should better understand and adapt to their needs.
The Power of Incentives
Everyone knows from Economics 101 that human beings respond to incentives, yet it’s shocking how little we think about them when it comes to our everyday lives. When discussing how big scandals take place at companies, Charlie Munger showed how powerful incentives can be.
He explained that the root of the problems can usually be explained by incentives that encourage people to misreport things. This is especially true in a employee-boss relationship. Often the employee, not wanting to disappoint his or her boss, reports numbers better than they are in actuality. The boss also wants to report the better numbers because they often have incentives to impress shareholders so they go along with the false report. This creates a downward spiral which leads to much bigger issues in the long term. Munger emphasized the importance in controlling incentives so you get the right outcome.
Understand human behavior when you are running a business
This is a more difficult subject than it seems on the surface because of the web that incentives can create. For example, an incentive for one person that is put in place to have a positive outcome might actually produce a negative incentive for someone else. It can be tricky to put the proper incentives in place at a company but it is also important. That’s why Munger encouraged the audience to understand human behavior when you are running a business.
A Strong Brand is Powerful
Throughout the Q&A session the power of brands came up over and over. It was apparent how important brands are to Buffett and Munger when evaluating businesses. One advantage of a strong brand is the ability to increase prices. Strong brands have customer loyalty and therefore aren't subject to becoming a commodity business.
It’s often hard to understand how one candy store can distinguish itself from all the others but the way to do it is with a strong brand. That’s why See’s Candy has been so successful for Berkshire Hathaway. A strong brand can raise prices during periods of inflation and not lose as much business as it competitors because customers are loyal to the brand and are willing to pay more for it rather than buy a cheaper unfamiliar product.
“If you want to be unsuccessful in life, be unreliable” — Charlie Munger
A strong brand is not only important for a business, it’s also important for an individual. One young shareholder asked a question about what qualities Warren Buffett and Charlie Munger would recommend to someone trying to be like them. In their response, both men stressed the importance of having a great reputation. In classic Munger form, he said “if you want to be unsuccessful in life, be unreliable”. The importance of brand is undervalued very often in both business and life.
China was also a popular topic of discussion at the meeting. There were many shareholders who were either from China or who had a lot of interest in what was happening in China. I thought the most interesting point made about China was by Mr. Munger. He compared China and the United States from about 1750 to 1980. During those 230 years, both countries had vastly different results. One became the world’s number one power and largest economy and the other was pretty much nonexistent at the global scale. This despite both countries having equally talented people and China with a much larger population.
Then almost out of nowhere, China exploded on to the world stage and is now amongst the world’s greatest powers and economies and only continuing to rise. This had never happened before in human history, so how could this be?
He explained that in those 230 years America had pretty much figured out a system that was able to maximize it’s citizen’s potential where China had not. But as soon as China put that system in place, it shot off like a rocket. You can say what you want about capitalism but China’s history over the last 250 years is a really strong case that it is a lot better at unlocking human potential than any other systems previously tried.
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