The rent is too damn high and the weather is too damn cold. Can I interest you in an all-weather portfolio? All kidding aside, if not already in your possession, get Larry Cunningham’s Berkshire Beyond Buffett: The Enduring Value of Values and enjoy the latest of Larry’s deep dives into Berkshire Hathaway (BRK.A, BRK.B). To keep these posts short I’ll share some interesting Berkshire Beyond Buffett notes every few chapters or so.
Some of the stories such as of Berkshire’s origin and Warren Buffett’s association with it in the early years will be familiar to many — this sort of biographical context is not the point of the book. Rather, the constant of disciplined corporate acquisitions led by Buffett and Charlie Munger, and the unique composition of the numerous Berkshire subsidiaries that have made Berkshire one of the world’s largest corporations poised for what seems could be perpetual value creation, is the compare-contrast journey Cunningham has documented for our benefit.
The data tables in chapter 2 (which is entitled, “Diversity”) will disabuse anyone from thinking they can identify the next Berkshire acquisition target based merely on valuation. More importantly, it’s impressive to see the diverse collection of companies that Buffett/Munger have acquired from various lenses: my favorites are price paid, P/E and P/B (again, these reinforcing the point of diversity).
Among the most intriguing acquisitions is See’s Candies (in 1972; discussed in some detail in chapter 1). At $25 million and only 6x net income but 3.5x book value, Buffett is lucky Munger was persuasive and that the See family accepted their very low offer via Blue Chip Stamps. These days See’s earns $80M pre-tax. Further, Berkshire Hathaway’s 2007 annual letter details the seemingly impossible accomplishment of See’s needing only $32M of additional capex that has witnesssed it earn $1.35B cumulatively. Only Fruit of the Loom is listed as a less-than book value acquisition, by the way. Acquisition multiples seem to be mostly at market averages and premiums — a long way from Graham and Dodd criteria.
My last share is from early in chapter 3 (“Culture”). I don’t believe I knew of Buffett running an ad in the Wall Street Journal in 1986 promoting his interest in acquisitions and his criteria. Cunningham says Berkshire targeted companies of $5M in net income back then; $75M is the hurdle today. Otherwise, it feels as much qualitative as it does quantitative in seeking companies with: proven profitability, good unleveraged returns on equity, management in place, basic businesses, and a fair price. Also ever-important is the mindset that is the very culture at Berkshire: shareowners as business partners in an endless venture; permanent home (of investor capital and for operating subsidiaries alike). Berkshire Hathaway has one-fifth the share turnover of other large firms, says Cunningham. And on the matter of corporate governance, I’ll side with Buffett and his longtime, similarly successful friends and associates on the Berkshire board of directors over the hodgepodge, bloat, and sinecures not uncommon elsewhere.