Berkshire Hathaway AGM 2015 – Pender’s Key Take Away Thoughts (Part 1)
We attended the Berkshire Hathaway 2015 Annual Meeting in Omaha. We like to hear first hand from two of our value investing icons. We took away four key thoughts. This is the first.
“Always be open to good accidents” – Warren Buffett
When asked at the Berkshire Hathaway AGM whether he thinks he could repeat his success in insurance if he started all over again, Buffett focused on the role of luck in many successful business outcomes and the importance of being open to ideas as they come along. The core economic engine of Berkshire’s incredible success over the last 50 years has been its insurance businesses. Without a few “good accidents” in Buffett’s career, combined with his willingness to act, Berkshire would look much different today. He specifically pointed to three lucky inflection points in his career that would be unlikely to happen again.
1) A lucky break to learn about insurance: At the age of 20, while attending the Columbia Business School, Buffett learned that his business professor and mentor Ben Graham owned a large stake in GEICO, an insurance company. Curious to learn more about this investment, Buffett went knocking on their office doors the following Saturday morning. Businesses were closed on Saturdays, but he got lucky when a janitor let him in and he was fortunate to meet the only person working there during the weekend, GEICO’s future president, Lorimer Davidson. Most senior executives would not have given a student the time of day, especially when they were attempting to get extra work done on the weekend. However, Buffett explained that he was a student of Graham’s and somehow persuaded Davidson to answer his questions about the insurance industry and GEICO over the next 4 hours. (Decades later, Berkshire would end up acquiring the entire company.) Without this initial accidental meeting with Davidson, Buffett would not have learned why insurance could be a great business and Berkshire might not have become the insurance company it is today.
2) Pouncing on a tiny window of opportunity: Berkshire Hathaway bought its first insurance company National Indemnity in 1967 from its founder Jack Ringwalt. Although it was a great and well-run insurance business, Jack would occasionally “get mad for about 5 minutes” about some claim which made him want to sell the company. Upon hearing this, Buffett asked a friend who was on National’s board to let him know the next time Jack got into one of his selling moods. Inevitably, Jack got mad again and Buffett pounced on the opportunity to buy his initial business in the insurance sector. The $20 million of float that came with the 1967 purchase has now increased – both through internal growth and acquisitions – to $84 billion. Without Jack’s occasional mood swings and Buffett’s willingness to pounce on the opportunity before he could change his mind back, Berkshire might not have been the big insurance company it is today.
3) Unproven talent becomes a future insurance superstar: In the mid-1980s, Ajit Jain approached Buffett looking for work although he had never worked in the insurance business before. Buffett was impressed with Jain and decided to hire this unproven talent. Since then, Ajit has become so valuable to Berkshire that Buffett once wrote to shareholders that if he, his partner Charles Munger and his deputy Ajit Jain were ever on a sinking boat and only one of them could be saved, “swim to Ajit.” If Ajit had not walked into Buffett’s office that day, Berkshire’s insurance operations would be much smaller today.
Buffett did not have a master plan to create the world’s largest insurance company. He said “the whole thing in business is being opened to ideas as they come along” and got lucky that his initial “good accidents” were within the insurance sector. If his mentor Ben Graham had owned a large stake in Ford instead of GEICO, perhaps Berkshire might own an automotive company today. And what if the janitor hadn’t opened the door, or the senior executive hadn’t been inclined to talk? That said, Buffett commented that if he was starting all over again he probably would focus on something else besides insurance. We think many of life’s great outcomes are a result of someone seizing an opportunity which initially looked more like an “accident”. We have also seen the other side of the coin. While some people embrace “good accidents” as stepping stones for greater success, others see more of the downside risks and fail to act.
Part 2 – “Hardly anything is more important than behaving well as you go through life.”
Part 3 – “If people weren’t so often wrong, we wouldn’t be so rich.”
Part 4 – “If we continue with these interest rates, stocks will look very cheap”
Felix Narhi, 6 May 2015
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