In Search of Warren Wisdom, Part 3
Editor's Note: This is the last part in Jeff Bronchick's discussion of the Berkshire Hathaway
(BRK.A) annual meeting.
The Insurance Racket
Warren Buffett made it clear that he considers insurance a good business for Berkshire, but a generally lousy business for most middle-of-the-road insurance companies. He also made an interesting comment about acquisitions: He would rather have or acquire $20 billion of new "float" with a cost of 1% or 2% (meaning a combined ratio of 101 or 102) than he would $100 million of float generated by a combined ratio of 93. What's the "float?"
Float is, of course, the oldest temptation in the insurance industry: CEO's are infamous for saying "just another point of cost will get me x billion of float" until they are drowning in underwriting losses. While Berkshire will always have its own insurance problems from time to time, I don't think anyone is really sweating out that the problems stem from the greed to buy another dollar of business.
The D&B Opportunity
Berkshire Vice-Chairman Charlie Munger was unusually vocal about a holding of mine, Dun and Bradstreet (DNB), in which I believe Berkshire is up to nearly a 15% position. That's one of the largest percentages that I have ever seen Berkshire take in the past decade, and the reason is Moody's. Buffett and Munger talked about "buying business castles with the widest moats" -- the moat metaphor indicating an impregnable business position -- and it does seem that Moody's would be a lovely fit within the Berkshire financial empire. The credit reporting business was duly noted as a tougher piece to value, but in my humble valuation opinion, Moody's is worth $25 or so per Dun & Bradstreet share, leaving the core credit business valued at next to nothing. Go Berkshire.In thinking back about the meeting, it was almost surreal to see how Buffett talked about his businesses, in contrast with the quarterly nonsense drill conducted by most management teams. So if the world is a competitive place -- and great ideas are repeated by others -- there seems to be a giant disconnect here: Many of the management practices of Berkshire are not adopted by the rest of corporate America, and in fact are going the other way.
Berkshire's Early DaysBuffett also related an interesting story as to how Berkshire was really founded and I don't think it is in any of the Buffett books. Berkshire was a cheap and dodgy textile company that used to tender for its stock regularly as part of a buyback. Buffett used to buy stock and then tender, making some nice arbitrage-like profits. The then-chairman of Berkshire asked at what price Buffett would sell his stock at tender, and Buffett came back to him with the answer: 11 3/8. Some time later, Berkshire announced a tender at 11 1/4. Buffett took it personally. He didn't tender his stock, and instead bought more and eventually seized control of the company. Not a great investment decision -- but a fun story. Although he seems like a wonderful grandfather figure, he can clearly be tough. He also ripped the plastic wrapper off his post-lunch Dilly Bar fiercely with his teeth, sending a shiver through the crowd. Buffett and Munger's snack tally for the meeting, incidentally, was two cherry Cokes, 2 Dilly Bars, and what had to be an entire box of peanut brittle.
My RecommendationSo was it fun and worth going to? A 100% "Yes." I look at it as the equivalent of going to see Babe Ruth play at Yankee stadium. You were stupid if you lived in New York, cared about baseball and didn't bother to go and see arguably the greatest practitioner of the sport.
So What's It Worth?I still stick to my
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