Berkshire Debrief: Resting on Laurels

 | May 06, 2013 | 9:30 AM EDT
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I spent the weekend in Omaha with some of my "cabal", enjoying our usual pleasures of the annual meeting weekend, such as our traditional Saturday night steak dinner. This was my 22nd Berkshire Hathaway (BRK.A BRK.B) meeting, and it certainly has changed a bit over the years.

 I did an interview  with our own Lindsey Bell discussing the magic of compounding -- in this case, the compounding of both Berkshire and the meeting. When I first attended the meeting with some business school colleagues in 1991, Berkshire had just increased its net worth by $362 million, up 7.3%, and it had the "permanent four" stock holdings: Capital Cities/ABC, Coca Cola (KO), GEICO, and Washington Post (WPO). Two thousand devotees filled the Orpheum Theater in downtown Omaha for three hours of Q&A.

Twenty-two years later, Berkshire last year increased its net worth by $24 billion, up 14%, and the "big four" stock holdings are now Coca Cola (KO), American Express (AXP), International Business Machines (IBM), and Wells Fargo (WFC). The meeting was attended by over 40,000 devotees, and the six hours of Q&A included TheStreet.Com's own Doug Kass, excelling in his role as the fair but tough-minded skeptic.

You will read dozens of debriefs on the meeting, so I will not rehash the meeting but will focus on one issue that troubled me, among all the love overflowing the arena. Chairman Warren Buffett and Vice-Chairman Charlie Munger have a track record that confirms the wisdom of their approach to business, but for many of the questions they seemed to be resting on their laurels. They justified a position by essentially saying "we are the richest men in the world, our record speaks for itself, so we must be doing something right."

 I get nervous when management dismisses a competitive threat or other issue by citing the fact that a certain approach had worked in the past. The past is nice, but how many businesses were blind-sided by radical fundamental changes that management dismissed? Newspapers, anyone? World Book?

I was disappointed by their response to how GEICO would react to the innovations at Progressive Corp. (PGR), in particular the "SnapShot" technology that tracks driver behavior and offers substantial discounts to proven good drivers. Buffett didn't address this innovative idea. He simply said that GEICO is gaining market share, has an underwriting profit, so "must be doing something right". His sales pitch for GEICO to the audience was that "we can save you money" -- yet the whole point with Progressive is that they can save me even more money! My personal takeaway was that I need to call Progressive and check this out!

Another example was their answer to a question by Doug Kass about whether Berkshire is better off broken up, along the lines of how Dr. Henry Singleton broke up the conglomerate Teledyne back in the 1960s. Warren's answer boiled down to "we think the results will be better together than if broken up" with no more support or elaboration.

I personally disagree. I believe the beast is becoming unmanageably large. While the first generation of senior managers is all happy, there is no upside for the next generation that will be coming in this decade. There is no "culture" or "focus" at Berkshire: It is just one guy's portfolio, and when he is gone the raison d'etre will be as well. Yet Warren could offer no thoughtful reflection on this idea.

This may be a nit in the grand scheme of things, but I never like it when I see it in the management of any size company. Caveat emptor!

My "cabal" joined Lindsey after the meeting to offer our view on the proceedings. You can watch the interview and get more insight our views on a broad swath of subjects related to the meeting.

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