A couple days ago I received my annual report from Berkshire Hathaway, Warren Buffett's acquisition monster. As Bill mentioned about a month ago, Buffett has never explicitly endorsed lean manufacturing, but he does know a well-run company when he sees is (and eats it), and some of those are lean-driven.
But what I really like about Warren is his straight-shooting no-nonsense style, peppered with a choice of flowery adjectives. We could really use more of that these days. Let's take a look at some samples from his shareholder letter. First, on the performance of Berkshire Hathaway itself.
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
No kidding. And what's his opinion of the bailout?
In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.
He goes on to describe the impact of Carteresque hyperinflation and a country where organizations, not just individuals, are dependent on the nanny state. Time to run for the hills, or at least invest in gold. He is positive about the future, as most successful people are… or have to be.
In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.
But probably my favorite section is where he compares his investment strategy against the vultures of private equity. We've also lamented these short-term cash-sucking banana slugs many times.
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin.
Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators are contemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses. Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing.
Right on, Warren. Now do me a favor and spend a bit more time understanding why some of your businesses, especially those in manufacturing, do so well. Then share. You're leaving some money on the table.