Lessons from the Oracle of Omaha

Capital Budgeting Planning & Strategy Shareholder Engagement

Can you guess who said the following?

“[M]y long-time partner, and I have the job of managing the savings of a great number of individuals. We are grateful for their enduring trust, a relationship that often spans much of their adult lifetime. It is those dedicated savers that are forefront in my mind as I write this letter.”

No, that quote isn’t from some dear family member or close friend but from the opening paragraph of Mr. Warren Buffett’s 2022 Shareholder Letter for Berkshire Hathaway.  Mr. Buffett’s understated demeanor and self-deprecating midwestern mannerisms have a way of making you forget he is, in fact, the fifth richest man in the world. Buffett and his business partner Charlie Munger recently held court in Omaha for Berkshire Hathaway’s annual shareholder meeting, fielding questions for over five hours. Not a bad showing for Buffett and Munger, 92 and 99, respectively.

In what amounts to a near cliché for financial writing, we share a handful of lessons based on this year’s musings from the Oracle of Omaha in his 2022 Shareholder Letter.

$38,000,000 vs. $250,000

In the understatement of the century, Mr. Buffett offered the following assessment of his capital allocation performance:

“At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so.”

Let’s review Berkshire’s performance: if you invested $1,000 in the S&P 500 in 1965, at the end of 2022, you would have (including dividends) $250,000, nearly a 10% return every year. Not bad. If you had invested that same amount into Berkshire Hathaway, you would now have almost $38 million, just under a 20% return annually. What does Mr. Buffett chalk that” so-so performance” to?

“Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.”

When your family business is thinking about its next big growth endeavor or capital allocation decision, it may be helpful to remember Mr. Buffett: long-term outperformance comes from good decisions played out for a long time.

It’s important to make good capital allocation decisions with a solid framework, considering both your family business’s hurdle rate and your long-term strategy.

The power of good, solid decisions over months will move the needle. Done over decades, these decisions will impact your family for generations.

A Family Gathering in Omaha

Here is how Buffett describes what his over $700 billion market cap conglomerate does:

“Charlie and I allocate your savings at Berkshire between two related forms of ownership. First, we invest in businesses that we control, usually buying 100% of each. Berkshire directs capital allocation at these subsidiaries and selects the CEOs who make day-by-day operating decisions….”

“In our second category of ownership, we buy publicly-traded stocks through which we passively own pieces of businesses. Holding these investments, we have no say in management.”

“Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.”

Simple? Yes. Insightful? Definitely. As Mr. Buffett points out, “Almost endless details of Berkshire’s 2022 operations are laid out” in the financial disclosures. This year’s letter was shorter than past years at 11 pages, and Berkshire still abstains from quarterly conference calls. However, there is no dearth of information that would be important to a Berkshire shareholder and may give you and your family business ideas on how to present financial and business results to your family shareholders.

We have discussed how to effectively communicate with your family shareholders, but ultimately the frequency and detail will depend on your shareholder base. Remember that while shareholder communication is an investment of time and energy, it has an attractive return for both your company and your shareholder base.

There Is No Finish

You may be a fifth-generation family business that has been around for over 100 years, or you may be in the early innings. Regardless, family business owners need to be thinking not in terms of quarters but in decades.  This is how Buffett described Berkshire’s genesis.

“In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems. And then came a stroke of good luck: National Indemnity became available in 1967, and we shifted our resources toward insurance and other non-textile operations.”

As we’ve noted in previous posts, family businesses need to be both long-term-minded and nimble enough to adapt to market demand.

You should be asking yourself if you are meeting market demand or hoping the market will accept what you want to produce.  How is market demand different today than it was five years ago?  What will customer preferences look like five years from now? Ultimately you are aiming to make decisions that will impact your family business longevity many years from now.

Analyze the tough decisions with a mindset to ensure your family business continuity through the next generation, even if it may be painful today. From Buffett:

At Berkshire, there will be no finish line.”

Final Thoughts and “Munger-isms”

Over nearly 60 years, one may describe Berkshire’s performance as better than “satisfactory.” Check out Berkshire’s 2022 Shareholder Letter, and I hope you enjoy it as I did. Below are a couple of my favorite quotes from the “artfully blunt” Munger in this year’s letter.

“Don’t bail away in a sinking boat if you can swim to one that is seaworthy.”

“A great company keeps working after you are not; a mediocre company won’t do that.”

“All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.”