AMA 99 – Learn About Warren Buffett with Lawrence Cunningham

Lawrence Cunningham has written dozens of books including the Berkshire Beyond Buffett: The Enduring Value of Values, which Amazon called “a hot new title”. He has also written books such as the AIG story as well as The Essays of Warren Buffett: Lessons for Corporate America. Lawrence loves to teach, read, write, and spend time with his family. He comes on to the show today to talk with Jason about his latest book, Berkshire Beyond Buffett, and share some insights into why Warren Buffett is an incredibly successful man.

 

Key Takeaways:
3:11 – Lawrence says if you sell a product that’s useful to your customer, you’ll develop a returning customer. It’s just a better business model than selling products no one wants.
7:30 – It turns out Warren Buffett got his values from Tom Murphy.
11:40 – When Lawrence interviewed CEOs for his book, there was a common theme among them – they trusted their staff and didn’t try to control everything.
14:45 – What are some of the myths about Buffett? Lawrence explains in this segment.
17:00 – Will Warren Buffett ever retire?
20:00 – Buffett’s greatest achievement is that he has built a company that will outlast him when he leaves the company.
22:45 – Jason asked if Buffett’s investments in wind and solar are a good idea and Lawrence think it is.
24:30 – Lawrence is excited for his upcoming Berkshire Beyond Buffett book tour.

 

 

Tweetables:
Treat your customers helpfully and carefully. Don’t try and make a deal today to sell them something that may not benefit them long term.

There are successful trust-based business models that are worth the look.

The government is giving tax credits to energy companies to invest in solar and wind.

 

Mentioned In This Episode:
http://berkshirebeyondbuffett.com/

 

 

Transcript

Jason Hartman:

Welcome to the podcast for the American Monetary Association. This is your host Jason Hartman and this is a service of my private foundation, the Jason Hartman Foundation. Today, we have a great interview for you so I think you’ll enjoy it and comment on our website or our blog post, we have a lot of resources there for you, you can find that at AmericanMonetaryAssociation.org or the website for the foundation which is JasonHartmanFoundation.org. Thanks so much for listening and please visit our website and enjoy our extensive blog and other resources there.

It’s my pleasure to welcome Lawrence A. Cunningham to the show. He is a professor who has done extensive research on Warren Buffet. He is with the Henry St George Tucker the 3rd research professor of law at George Washington university and author of a new book entitled Berkshire Beyond Buffett: The Enduring Value of Values. Lawrence, welcome, how are you?

Lawrence Cunningham:
I’m very well, thanks, thanks for having me.

Jason:
Good. I love the title of your book by the way. The Enduring Value of Values. I guess, the subtitle, that’s my favorite part. *Laughter*.

Lawrence:
Oh, thanks so much. It really captures the essence of the book.

Jason:
You know, it does. When we were talking a little bit before the show. I can’t wait to hear you make some parallels to investing in general or maybe even in life in general. I find people are always chasing the pot of gold at the end of the rainbow – they want it today, they don’t wanna wait. The concept of value of investing, I mean, it applies to everything. It applies to real estate certainty and other investments as well. Tell us the value of values.

Lawrence:
Yeah, the idea, I guess it’s best to encapsulate it in the golden rule, the idea of doing onto others as you want them onto you. It’s about doing well by doing good. So, treat your customers helpfully and carefully. Don’t just try and make a deal today to sell them something that will make you a profit that may not benefit from over the long term. If you sell them something that’s good for them, that will help them, something that they really want , they are likely to come back to you.

So, if you build a business that way, your long term gain will be substantially greater than if you were just chiseling for every nickle and dime you can get for whenever you can get it. So, that’s the broad idea of value of values.

At Berkshire Hathaway, what I do in the book is I look across all 50 of the most important operating subsidiaries. I found again and again is that motif characterizes all of these companies, whether it’s treating customers in a certain way, treating employees in a certain way; giving them trust, reposing autonomy in them. People make decisions where they are the best informed whether it’s on the shop floor, diary queen counter, in the sole manufacturing room, the carpet maker.

So, empowering people and giving them autonomy and so on enables them to do their best and that again pays off in the long run. Throughout all the companies that I’ve found these different intangible trades that are virtues that then pay off in economic gains. It’s a great way of doing business really. Certainly a theme of the value investing world, but it’s a lot more than just a margin of safety. It’s a lot more than buying something for a price below value. It’s really about the intangibles that pay off in the long term.

Jason:
I agree. It’s just a good old fashion idea. It’s simple, it works, and it’s great. You’ve prolonged 50 of the companies. How many are there total?

Lawrence:
It depends on how you count. There are, I think, just about 50. I mean, I captured all of the operating companies that are directly-owned subsidiaries of Berkshire. I left out 8 small insurance companies. I just treat them in the notes. So, essentially I treated all of the companies. Now, those 50, in turn, have any number of subsidiaries, 10, 50, 100, so you could add up all the different Berkshire entities there are 500 of them, but I think by looking at these 50 you basically cover the map. It was a coverage that enables in a treatment in a single book that reads well and gives people just as much as they probably want. No more, no less.

Jason:
Yeah, 50 is certainly a big number, so that’s enough. I want to ask you about some of the greatest myths about Mr. Buffett, but I’m also kind of curious about this, you know, where he got these values from this sort of long term value investing concept. Is it because he’s a midwest person? Is it, you know, he lives a pretty modest life except for the jet. *Laughter*. In defensible. He likes diet cherry coke and cheese burgers and lived in the same house for 30 years or something. It’s kind of crazy in a way.

Lawrence:
Yeah. I’m sure his personal heritage and circumstance and have a lot to do with the values he has alluded and embraced, but I don’t think it’s unique to his culture or geography. In fact, to the extend of some of these values are about management style and that certainly includes autonomy and long term outlook and a certain way of treating customers and that sort of thing. He told me, I was finishing up the research for the book, I asked him, “Who should I ask to write the foreword to the book?” and right away he said, “Tom Murphy.”

Tom Murphy is the fellow who built up Capital City, the big communications company, a lot of TV and radio stations around the country and he acquired ABC in 1984 for $3 billion dollars in a deal that Warren purchased 18% of. Tom ran that company through the late 90s when he sold it to Walt Disney. Warren said that Tom should write the foreword because, *Laughter*, this is what Warren said, “I have tried to emulate Tom Murphy. I’ve tried to put myself as a manager after Tom Murphy.”

So, I went and talked to Tom and he wrote the foreword and what I found was that these values that I had seen across all the Berkshire subsidiaries are the same kinds of values that Tom enstooled at ABC and even enstooled..they existed at Disney, especially managerial autonomy, decentralization, a sense of long term, a commitment to reputation, investment, and integrity.

It turns out Warren got these values, he personifies them at Berkshire, he got them from Tom Murphy. Tom is certainly an extraordinary manger, a legendary business man, but neither of these guys are the only people who have embraced these values or practiced them. That’s one of the things that’s great at Berkshire and about what I try to do in the book. It shows how these insights, how these basic attitudes or philosophies can be applied in a lot of different settings by pretty nearly everyone and it’s a great advantage.

Jason:
Yeah, they sure can. So, I’ve always wondered how involved is he in running these companies. I mean, there’s so many of them. Does he exert any control at all or is he really just an investor?

Lawrence:
No, his role is principally to shape the culture of the organization across all of these companies by example, by exhortation, and then, of course, to allocate the profits that each of the units generated. So, he does not involve himself in any of the operation details in any of the companies except if one of the CEOs asks him for input or advice.

They decide how much to charge, what inventory to use, the managers decide, and he stays out of that kind of operational decision, but he encourages all the mangers and all the people across the organization to embrace the kind of values that I’m talking about. The sense of the time horizon. He tells the CEO to think about their businesses in 50 year time horizons.

He tells them to think about operating your company as if it were the only asset that you and your family owned and you could never sell it. You have to have it forever. Once they take that attitude, they’re on their own to make the operational decisions, product decisions, the versification decisions, and everything else.

He doesn’t get involved in any of those kinds of..

Jason:
But, that’s just flies in the face our culture. It’s just so contrary to our culture nowadays and, you know, I talk to you about investors in general and my background in real estate investing and how I always tell people that, you know, that..I’ve just noticed over so many years that people who do the quick flips, they go for the quick profit, they have spending money, but the people who buy and hold seem to have the real wealth.

Lawrence:
It’s very contrary. So, we talked about the number of subsidiaries, my numbers are about 50, it might be 58 if you include those insurance subsidiaries. That’s the number of acquisitions that Berkshire has made since 1975 and they have never sold one of them. *Laughter*.

Jason:
*Laughter*. Wow, isn’t that amazing?

Lawrence:
YEAH!

Jason:
Buy it old strategy.

Lawrence:
It’s the opposite. There’s nothing wrong with KKR or Blackstone, but they’ve got a very different business model. Those are private equity firms that make acquisitions and then interfere pretty extensively in management to change a company and then sell it within 5 to 10 years.

Berkshire is the opposite. It buys something that doesn’t need fixing and hold forever. Now, that doesn’t mean all of these companies are perfect, exculpatory, or always profitable, some of them get into trouble and they face difficulties, but the deal that Berkshire has made them is that we will stand by you.

Come sick or thin, we’re not just going to invest in a subpar business because there’s been an economical upheaval in the industry or because they’re facing other kinds of adversity. We’re going to work and help get it repaired, get it fixed, bring it back to prosperity. It’s a very different attitude from the private equity market and I think it’s also a very different attitude from the tendency from so may mangers to exert hands on over somebody and control.

This is a model of decentralization and trust and autonomy and the thought is, if you give people that kind of latitude and express that kind of confidence in them, they will honor that, respect that, and preform better. I interviewed, one of the things I did for the book, I interviewed a lot of the CEOs from a lot of the subsidiaries to get their take and one reoccurring theme was how they..There was one great quote from a guy named Jim Weber, who is the CEO Brooks running shoe company. He’s been a senior manager for companies under a few different bosses over the years and he said, “In my career, I have never had so much freedom and yet felt so responsible.” So, it’s an unusual approach. It’s a very distinctive culture and it works! That’s one of the things I’m trying to get across in the book. Our tendency to over manage and pose controls may not always be the best way to organize a business or to run a company.

Jason:
Yeah, I certainly agree with you. However, and this is a sort of a big however, you gotta have the right people in place to be able to do that. A lot of it comes down to picking the right people or building the right people, building them into that, because certainly the Wall Street Journal of people who abuse the responsibilities everyday. *Laughter*.

Lawrence:
Yeah, it’s not error-free and Berkshire has not escaped that kind of problem. There have been CEOs that did not work out for this reason or that reason and ended up leaving. I talk about a few of those in the book, so it’s not a perfect system at all, but I go through in one section of the book in comparing this model and its benefits and its cost versus the more control orientated model and its benefits and costs.

Neither of the worlds are perfect, but one of the points I am trying to make in the book is that our preference, our sort of bias in favor of the control and command model may be stronger than it ought to be. There are successful-trust based cultures that are worth the look and worth considering.

Jason:
Well, you know, it’s interesting. When you look at that as a governmental model, I mean, that’s certainly true I would say, the command and control models exemplified in the former Soviet Union, North Korea, etc, etc. I mean, those obviously don’t work very well. *Laughter*.

Lawrence:
Right.

Jason:
And, in the freer countries people excel. Things happen. Just look at Singapore, the US, the former US, I’d say. *Laughter*. A little bit of my political sarcasm in there, but yeah, no question about it. Well, hey, I wanna move on from this topic. I mean, we certainly both agree on it. What are some of the greatest myths about Buffett?

Lawrence:
The biggest one is that I see in a media that he’s introduced all the time as the legendary investor, great investor, the one-of-a-kind investor, and I don’t take anything away from that. It’s true that over a long period of time managed to steadily out preform stock market indexes with the stock in his portfolio. So, there’s no question that he’s a great investor, but I think what’s lost in that kind of statement is his enormous success at the managerial level that he has assembled. This vast, verse congruent that is nevertheless held together by the same values…you know, pretty clear record of success. I think goes under appreciated.

The point of this book is to try and spotlight on that organizational talent, that managerial talent, so that we don’t remember him only as an investor, but also a builder of this organization. I think that’s important because investing is, in a sense, it dies with the man. I mean, if he owns a lot of Coca Cola, America Express, Gillette, Procter & Gamble. Well, there’s no organization there, so someone else will come to own those stocks of those large companies. Where as with Berkshire Hathaway, owning all of these organizations, these subsidiaries, the institution, and what it stands for can survive the man.

One small thing I’m doing with the book is trying to emphasize that part of his record. Not that he hasn’t been a terrific investor, no question about that, but to enlarge the account of his record..what I think is probably be the more important part and the more valuable for the rest of us to sort of learn from.

Jason:
That’s a good question, I mean, Warren is 83 years old now I believe and, you know, we look at Apple and Steve Jobs, it’s obviously a good comparison, probably, how is it going to be…after..I mean, is he ever going to retire or is he eventually going to kick the bucket?

Lawrence:
He’ll retire if he determines along with the board that he’s incapable of providing the leadership and decision making that he does, but my guess that, so far, his doctor gives him an excellent health check up mentally and physically and so far and hasn’t slow down a bit. I mean, there’s a very good chance that we’ll be having this conversation in 10 years or 15 or 20, but I don’t…

Jason:
Wow, that means 93, 98, 103 years old, really? Wow.

Lawrence:
It starts to get a little crazy, right? Nevertheless, everyone needs to plan for and anticipate it. I think the big difference between Buffett and Steve Jobs is that, you know, Steve is a creator, organizational builder. He created a couple of different organizations, really, but he was deeply involved in every operational detail – creativity, product, marketing, connections, right. He has fingers in everything, so he made himself nearly indispensable to Apple. I’m not saying….I think Tim Cook is doing a fine job.

There’s a school of thought that portrays that company as really taking a big tumble or moving sideways without Steve and if that’s true, it may be because he was integral to it. Where as with Buffett’s great insight, I think, was to make a company bigger than him and one factor is that he is not involve in any operation decision, so certainly the BNSF of Railway, Berkshire Hathaway energy, Fruit Of The Loom, the underwear company, the Shaw carpet company, they will all continue to operate just as they do now without him.

The next question is who will be available to provide the cultural cheerleading to keep the company wed to these values that I described and who will lead the capital allocation decision making and then address those thing. I got a whole chapter in the book explaining who would be responsible for what, but the big contrast with Steve Jobs and others, Henry Singleton at Teledyne back in the 70s and 80s was also a very hands-on manger, so those companies were so intertwined with the personality of those men that their passing really did cause a huge disruption.

This may be in the category of myth. I mean, so many people believe that Warren is so identified with and interchangeable with Berkshire that if you take him out the company goes and my point is that that’s really not the case. His achievement is having built something that will outlast him. It’ll obviously a little different because it depends who you have in that job and their style, but the ingredients are all there to succeed, to be prosperous, long after he’s gone.

Jason:
So, tell me about, you know, he’s investing billions of dollars in wind and solar. I sort of feel like he’s sort of pandering to the current administration, the Obama administration, you know, are those investments going to work? Still, the cost per kilowatt is so much higher.

Lawrence:
Yeah, it’s a great question. I had a couple of thought. One is that most opportunities are being taken at the Berkshire Hathaway Energy company level. That’s the Iowa based utility acquired in 2000. It used to be called Midamerican Energy until just this year. Greg Abel is the CEO of that company. He’s worked there for a very long time, I think 20 years, he’s a leader in the industry. You know, he spots a lot of different opportunities across the energy sector. He’s been in coal, in electricity grids, and across the United States, especially in the western United States and also in England. So, it’s a diversified energy platform.

The solar and wind asset, it’s true, Berkshire through Berkshire Hathaway Energy has already invested $15 billion in solar capacity in California wind fields and Wyoming and Buffett just this summer at an energy institute conference announced that they’re prepared invest another $15. It’s all through Greg Abel’s shop and Greg and his people are the ones that are saying, look, this is how we think we should allocate capital that we’ve generated here..an energy company that might be available from the other subsidiaries and Warren signs off on that.

So, the bet, the business proposition is one primarily designed by Greg Abel and his team and Warren signs off on it. My only guess is that those costs, they are high, they have to be managed, they have to be reduced, and one of the traits that I identify across most of these 50 Berkshire subsidiaries that I described in the book is a thriftiness, I call it a budget consciousness. These guys are really good at managing costs and minimizing costs and usually passing it through customers.

Another really good example of that is Gecko, the car insurance company, who’s advertising pitches about, you know, give us 15 minutes, we’ll save you a couple hundred dollars or something. They’re all about saving costs and the energy company too. So, it’s solar and wind, one of the big business challenges with those properties is to get those costs down. That’s right up Berkshire Hathaway’s ally. So, I think it’s a good bet.

It’s also true about your point of the Obama administration. I don’t know if it’s all politics, but the government is giving tax credits to energy companies to invest in solar and wind, so tax credits Berkshire Hathaway energy enjoys or can be used to offset profits at the other companies. There is clear government subsidy that the government is taking advantage of.

You know, from a policy standpoint it’s not a bad idea to try to move the country away from fossil fuels and towards these kinds of renewables. It’s a classic Berkshire operating play that is to take advantage of these kinds of incentives in the market place and through government subsidies to try and reduce costs and try to pass those savings on to the consumer. To me, it’s a perfect illustration of the kind of thing a lot of the Berkshire companies.

Jason:
Absolutely. Well, give out your new website, Larry, you’ve got a new website coming out for the book launch and tell people where they can find out more.

Lawrence:
Yes, it’s going to be BerkshireBeyondBuffett.com. So, that’s the title of the book. BerkshireBeyondBuffett.com is the website. My website designer is working on it this summer. It’ll be out probably around labor day. The book will be out October 21st and my publicist are all hard at work at designing a tour for the book too. We’re going to kick it off in New York on October 28th and on Washington DC on November 4th and then a dozen cities across the country.

One of the great things is that while many of the sites, I’ll give a traditional sort of solo author talk at many of the events. I’m going to be joined by local business people with a Berkshire connection; the heads, the CEOs of Berkshire subsidiaries or a member of the Berkshire board of directors and I’m really looking forward to that. That tour should be a lot of good fun.

Jason:
Good stuff, well Larry Cunningham, thank you so much for joining us.

Lawrence:
It’s a pleasure. Thank you so much, Jason.

 

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