Thunderbird’s 2019 CEO Profile — The Transformation of Warren Buffett10/16/19
Warren Buffett is that rarest of double majors. He is a portfolio maestro whose prognostications make tons of money for a whole lot of people. The results are so good that spending the energy to build a company doesn’t add up. If so, it is like discovering the actress Hedy Lamar was a scientific genius. Buffett is the exceptional investor who is a self-taught manager, and a brilliant one at that. As he revealed in his 2015 annual letter: “Experience in business can make you a better investor, and vice versa.” He makes it sound a little simpler than it really is.
The story of Berkshire Hathaway is a tale of finding under-appreciated assets and investing for the long-term. The formula would produce $2.4 million today from an investment in Berkshire Hathaway in 1985 of $10,000. The same amount put into the S&P 500 is worth $227,000. It had an effect on Buffett’s bank account, as well. Because he is Berkshire’s largest shareholder, Forbes noted that Buffett is now the third richest person in the world. There is an interesting backstory, as his daughter Suzy told People Magazine: “It’s surprising to people that the money doesn’t matter to him. He made it by accident because he was really good at doing what he loved.” Buffett adds: “I buy everything I want in life,” Buffett said. “Would 10 homes make me happier? Possessions possess you at a point. I don’t like a $100 meal as well as a hamburger from McDonald’s. I don’t equate the amount I spend with the enjoyment I’m going to get.”
Before he became fabulously wealthy, the Columbia Business School grad was investing for his parents and friends between 1964 and 1969. His greatest fear at the time was losing their money. He plunged into the stock of an old-line textile company called Berkshire Hathaway only to find out the CEO duped him with a tender offer that wasn’t what they agreed on. Underestimating Buffett has always been dangerous. Rather than take a loss, the young fund manager acquired a controlling interest and fired the CEO. By 1969, he added an insurance franchise onto Berkshire, and his fund turned into a public holding company with thousands of shareholders. Buffett found himself running a business, not a fund portfolio.
The transformation that took place during those years had less to do with money and more to do with Buffett’s most precious asset, time. In the 1969 annual letter to investors, he revealed he wanted to call it quits. Beating the S&P every year was a good living, but it was taking over his life. Two years earlier, he warned them he was going to reduce his focus. Now, looking back, he saw he was no good at multitasking: “I have flunked this test completely.” But the desire to control his days wasn’t over: “I will never be able to put sustained effort if I don’t stop chasing an investment rabbit all my life. The only way to slow down is to stop.”
Stopping wasn’t an option because he loved the work too much. What he really needed was to change the scale, not the work. From now on, the focus would be on big game, and it required a new business model. It turned out to be just the prescription for his talent and boundless energy. In the process, the small “fund” would grow to a half-trillion-dollars.
Hurricanes and Floats
Most people don’t see until too late that an average career is 9000 days — 200 days a year for 45 years. Buffett’s career longevity may be unique, he’s going on 65 years, but his problem is no different than the ordinary Jill or Joe. He has to create value in a finite number of days. Buffett saw the only way he could achieve his goals was to minimize the things he needed to do and maximize those he wanted to do. This realization led him to rethink the Berkshire business model, and he began by acquiring an insurance company called National Indemnity in 1967 for $8.6 million (Berkshire still owns it).
The secret to the insurance business is a simple one, the return from investing the premiums in between hurricanes. The hurdler in the business is the premiums must be invested securely, and most insurers put them into treasury bills. Buffett liked stocks better. His big epiphany was in recognizing the Great Depression had created an adverse, low-risk mentality. Buffett saw that as long as he could afford hurricanes, the float was free capital. So he changed Berkshire’s approach to risk-taking. It had to be profitable, and there should be no ordinary losses. He went on to purchase General Re and Geico for the same reason. It’s an oversimplification to conclude Buffett’s success depended on calculating the cost of storms against the appreciation of companies, but that is how the model works. There would be another benefit: Owning an insurance company meant the days of traipsing off to Wall Street were over.
Bigger is Better
As his capital grew it had a multiplier effect on deal flow, and Buffett recognized that doing one massive deal was quicker than ten smaller ones. Buffett made partners out of Mr. Quality and Mr. Quantity and became the largest shareholder of companies like American Express, Coca Cola, and The Washington Post. Professionally managed companies did not need him to mind the store. Instead, Buffett could take time to study the numbers and the people, and along the way, he learned the business better than the experts.
Over the years, Buffett the stock maven turned into a C suite maestro. His transformation into a management guru was modeled on his investing thesis. Instead of quality stocks, he invested in great talent; he bought companies the same way he would buy an undervalued stock that had headroom. Capable managers meant he avoided timewasters like endless staff meetings that are typical in a 330,000 employee company. Those tasks are in the hands of his company CEOs who thrive under the Buffett formula of hands-off, head down. Today, Buffett meets with Berkshire’s CEOs at most once or twice a year and runs headquarters with a staff of 25.
Buffett’s Trust Factor
Two other factors explain the Berkshire miracle. First, his trust level. As a significant investor, he needs the confidence of families that want to cash out or big companies that would like a friendly investor on board. The good news is they look for trust first, money second. It means the deals he sees are often previewed to a market of one. The Thunderbird survey shows the value of building credibility. 38% of Buffett’s admirers believe trust is the most important quality in a leader.
Buffett’s Midas touch on Wall Street and “Uncle Warren” persona on Main Street are the offspring of his transparency when it comes to communicating. For instance, after he took a loss on airlines, he told shareholders he carries a business card that reads: “My name is Warren, and I am an aeroholic. Please stop me if you see me buying an airline stock.”
Buffett’s passion for business conceals his real motivation. He believes business is a course of study. He isn’t joking when he says that all he does in the office is sit around and read. The reality is biographies as well as annual reports and 10Ks are part of the job: “I sit in my office and read all day. I insist on a lot of time spent, almost every day, to sit and think. That is very uncommon in American business.” He’s right. By turning himself into a perpetual learning machine, Buffett learns the rhythm of business better than hands-on managers. It is why he doesn’t go out on the speaking circuit: “I read 500 pages every day. That’s how knowledge works. It builds up, like compound interest. Anyone can do it, but I guarantee not many do.” Few people have a better feel for the business cycle, and the reason is Buffett allows himself time for study and reflection.
Fitzgerald told Hemingway: “The rich are different from you and me.” Buffett is different from the rich, but the reason is not the $82 billion. The transformation that started in the 1960s showed Buffett had a gift — but there was to be a price. If Buffett were Superman, being uprooted from the things he loves is his kryptonite. It’s what brings him back to Omaha at pivotal points in his life. The first time was after a challenging year at Wharton and later when he resists the lure of Wall Street after Columbia Business School. He is famous for avoiding unnecessary travel and hobnobbing. With his reading habit, a two-day trip costs him a biography of Napoleon.
Buffett’s no-frills life mystifies those who are fascinated by wealth. But look closely, and love of the ordinary is what grounds him and grants a privilege permitted to a very few — the perspective to see how others live and behave. That reveals to him how the world works. From there it is a short hop to a business strategy that defied gravity and made Berkshire Hathaway one of the world’s most admired businesses. It is why fifty-six years after taking over in 1964, he never tires of drinking Cherry Coke or cracking jokes at the annual meeting like a genius stand-up entertainer. Buffett also stayed faithful to his gospel of 1969: the conscious awareness of the passage of time. At 89, his enthusiasm for finding deals and building businesses is undiminished, and that is how he makes every day count.
Sanjeev Khagram is a world-renowned scholar in global business studies. He holds a doctoral degree in economics and a doctorate in political economy from Stanford University. Khagram is a Hindu and a refugee from Idi Amin’s Uganda. He is Managing Director and Dean of the Thunderbird School of Global Management at Arizona State University. Follow him on Twitter and LinkedIn.
Jeff Cunningham is the former publisher of Forbes Magazine, former CEO of Elon Musk’s first startup, Zip2.com, managing director of Schroder Ventures IFP fund, founder of NACD Directorship Magazine, and a professor of practice in global leadership at the Thunderbird School of Global Management at Arizona State University. Follow him on Twitter andLinkedIn.
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