- Adam Mead is the author of the upcoming book, “The Complete Financial History of Berkshire Hathaway.”
- Warren Buffett’s concentrated investments, skillful delegation, and efforts to educate shareholders struck Mead during his research.
- Here are Mead’s seven key takeaways about Buffett and Berkshire.
- Visit Fintech Zoom’s homepage for more stories.
Adam Mead devoured more than 10,000 pages of annual reports, regulatory filings, meeting transcripts, and other research material to assemble “The Complete Financial History of Berkshire Hathaway.”
In his upcoming 770-page tome, the value investor chronicles how Warren Buffett transformed Berkshire Hathaway from a failing textile mill into one of the world’s largest and most successful companies over the course of half a century.
“Writing the book allowed me to relive the evolution of the conglomerate as it was put together, focusing on the many wonderful small details, but also to take a step back and examine the broader arc and connect the time periods,” Mead told Insider.
The Mead Capital Management founder and CEO shared seven key takeaways from his exhaustive research into Buffett and Berkshire:
1. Concentrated bets
Buffett and Charlie Munger — the famed investor’s right-hand man and Berkshire’s vice-chairman — have concentrated their investments for decades, Mead found.
Berkshire’s largest holding made up at least 23% of its stock portfolio in every decade between 1965 and 2014. The company has continued that trend with its Apple stake, which accounts for nearly 50% of its stock portfolio’s current value.
Buffett and Munger have taken a similar approach to acquisitions. They put 28% of Berkshire’s equity capital into National Indemnity in 1967, and 44% into Illinois National Bank and Trust in 1969, Mead said.
The pair spent at least 15% of Berkshire’s capital on its largest purchases in subsequent decades too, including 18% on the BNSF railroad in 2010.
2. Insignificant businesses
As Berkshire has grown over the years, some of its biggest businesses have “literally faded to a footnote,” Mead said.
For example, Berkshire’s purchase of World Book publisher Scott Fetzer in 1986 nearly doubled its revenues. Yet the business barely warrants a mention in the conglomerate’s operating reports these days. The same is true for Shaw, a multi-billion dollar carpet company it bought in 2000.
3. Safety in debt
Buffett has repeatedly borrowed money without a compelling reason, Mead found to his surprise. That may reflect the billionaire investor’s treatment of Berkshire’s assets as distinct from its liabilities.
It might reflect Buffett’s financial prudence as well. The investor has pledged that Berkshire will never be caught short of cash and forced to rely on the kindness of strangers.
Buffett may also have found it hard to resist cheap money. Berkshire is sitting on more than $130 billion in cash and short-term investments, yet it has borrowed billions more at rock-bottom interest rates in recent years.
4. The power of float
One of Berkshire’s key advantages is its ability to utilize the “float,” or the difference between the premiums paid and claims made to its insurers such as Geico, Mead said.
Buffett and his team deploy the money where it’s needed inside Berkshire, or use it to purchase public securities, generating higher returns. The strategy is tax-efficient and spares them from issuing shares to raise money and diluting shareholders.
5. Entrepreneurial spirit
Buffett has shown occasional glimpses of the enterprising young man he once was. As a child, he made thousands of dollars by selling cans of Coke, delivering newspapers, and installing pinball machines, among other ventures.
At Berkshire, he oversaw the creation of Home State insurance companies, brainstormed ways to expand the reach of See’s Candies, and pushed for a credit-card program at Geico that promptly flopped, Mead said.
6. Trusting deputies
Buffett and Munger have translated their passive investing approach into a hands-off management style at Berkshire.
The pair famously prefer to invest in quality businesses with solid management, allowing them to sit back and collect their checks. Similarly, Berkshire “delegates just shy of abdication” when it comes to its subsidiaries, Mead said.
Buffett and Munger “cared more about the ownership than control, and that allowed the companies to flourish,” he added.
Mead highlighted Berkshire’s investment in miner Barrick Gold last summer, despite Buffett’s repeated criticism of the yellow metal and preference for productive assets such as businesses. The purchase was likely made by one of Buffett’s portfolio managers, Todd Combs or Ted Weschler.
“How many other CEOs would let a subordinate take an action they’ve publicly put down? Probably few to none,” Mead said. “It demonstrates the autonomy that pervades Berkshire and is a reason for its success over time.”
7. Teaching lessons
Buffett and Munger have taken pains to educate their shareholders for decades. They have devoted themselves to distilling complex ideas and helping investors understand why they’ve made certain decisions.
“They simply mastered the art of business and conveyed to us how they did it,” Mead said. “That’s worth more than the hundreds of billions of dollars of wealth created for shareholders over the years because it will benefit future generations.”