Good Investing Talks - The Complete Financial History of Berkshire Hathaway (Adam Mead)

Episode Date: March 13, 2024

The Complete Financial History of Berkshire Hathaway (Adam Mead)

Warm welcome to the Good Investing Talks podcast. I'm your host, Timon Fiersch, and the Berkshire meeting is coming again. In a good tradition, I want to use the chance to share interesting events and interesting content about the Berkshire meeting on this channel in the weeks ahead. So here you can find invites to events that are happening on the ground or interesting content. I hope you enjoy it and please RSP to the many events. Thank you. dear audience of good investing talks the berkshire meeting is coming and i'm very happy to present

some book writers on berkshire hathaway today i'm having adam meet on adam share a bit about your book what is the title and why have you written a book about berkshire sure so uh let's get on the camera there it's uh it's called the complete financial history of berkshire hathaway a chronological analysis of Warren Buffett and Charlie Munger's conglomerate masterpiece. Now, I do need to give a disclaimer to your audience that the title is the complete financial history of Berkshire Hathaway, but I guess the second it came out, it became the incomplete financial history. So it does, it ends in 2019, which is an even five years based on where Warren Buffett

took over. But it took me five years to do. I digested well over 10,000 pages of material, including all of the transcripts of the annual meetings and and listened to them. So I think it was about 140 hours of annual meetings that I went through as well. I wrote it sort of for two audiences. One was the existing shareholder that's been going to the meetings or has owned Berkshire Hathaway for a number of years. And for that audience, maybe it's more of a reference guide and again, it's chronological. So you could flip to, you want to look at how Berkshire handled the 70s and the 80s with some inflation or you want to go back in some of the earlier days or look at the 90s.

I mean, you can kind of flip around. And then that second audience is more of the newer shareholder that might only be, I mean, could be brand new to Berkshire Hathaway. Okay, yeah, you should look at Warren Buffett. He's a billionaire, created this incredible enterprise. How did it happen? And you're sitting there thinking, oh my gosh, I have over 50 years worth of, you know, homework to do basically. How did this thing come into existence? And so in a relatively short, considering the material that's out there, relatively short book, be able to go. through that complete history of Berkshire Hathaway and see the evolution from a New England textile manufacturer to one of the most respected and strongest companies in the entire world. So from that perspective, it's quite short. I certainly stood on the shoulders of giants of the others that came before me who wrote some incredible books. But I think this is, I think my book is sort of the first to really take that financial approach year by year.

And that's where I think it differentiates itself from others. But there's so many good books out there on Berkshire. If I would ask you for three learning points you got from reading the book, writing the book, reading it afterwards again, what were these free points if there were any key points? a lot of yeah there's there's there's there's there's so much to unpack um and i'll try to i'll try to be try to be short but you know kind of the the big lessons i think it's that consistency and charlie has talked about and i think warren has to you know if you take take the top ten uh acquisitions or financial moves you know decisions just call it decisions

over Berkshire's entire span of control under Warren Buffett, you know, they'd have a shadow of their record. And so you see this incredible patience. So I think the patience, the simplicity, you know, it wasn't easy building Berkshire Hathaway by any stretch. But when you look at the history of capital allocation and doing what makes sense at the time, And not trying to get cut up in fads. And really, I mean, so many of these businesses that they purchased throughout their years were either ignored by others or discarded. I mean, the 1980s, they picked up Feckheimer, which is a uniform business. They picked up Scott Fetzer, which is sort of a little mini conglomerate that had Kirby vacuums and World Book encyclopedias among about a dozen or so other businesses. And those businesses were earning. you know, 25, 30% returns on capital. And they were passed over, you know, failed leverage buyouts or what have you. And Berkshire said, you know, we'll, we'll be home for you, basically. And so just, just that approach to it. And then I think related to capital allocation, Berkshire allowed these

businesses and allows their businesses to be the best that they can be. And what I mean by that is, take a Seas Candy, for example, wonderful returns on capital, terrible reinvestment opportunities. So C's earn really high returns on capital, send that capital back to Omaha, do different things with it instead of trying to be smart and do something in the candy business. Then you flip that coin and look at a business like the energy business, which Berkshire bought in 1999, I think it actually technically closed in 2000. That business has never paid a day. dividend to Omaha, on the reverse side, they've actually invested billions of dollars into the energy business. Now, its ability to distribute money goes up every year. Its earnings have continued

to grow, but that business can take a lot of capital. And so just that fluidity of capital, which the average investor can't do, right, because you don't own these whole businesses, but just, I guess, that notion of making sure the management team, if you're not in control, at least making sure the board or the management team of the companies that you own are looking beyond the borders of that company for capital allocation, which might mean dividends and buybacks. So those were just a couple that come to mind at this point, you know, the patience and then, of course, the concentration. You know, I found Berkshire, you could argue,

is really just a series of concentrated bets. So as equity grew, as their assets grew, as the securities portfolio grew, in no decade that I studied did Berkshire have, its largest acquisition was no less than 15% of equity capital at the time. So it's a series of increasing bets. you're seeing even today with the concentration in Apple is the largest holding and then the top four or five representing 75% of the portfolio. That has been the case throughout much of Berkshire's

history. So it's the same playbook being executed at Berkshire today. It's just the opportunities look different and it's tougher. The universe is smaller because of the sheer size of Berkshire today. How is writing the book made you a better investor? What have you changed or how have you grown through it? Yeah, that's a great question. You know, I spent five years doing this. It was not five years full time. I'd say probably two and a half years full time equivalent work.

Still a lot of work. And again, going through Berkshire's history year by year and decade by decade, it had been a long time since I had gone back to the beginning. And so when I was all done, you know, the editing process was, you know, literally three steps forward, two steps back. And so we kind of inched our way forward. At the very end, reading the whole thing, proofreading it and doing that sort of final read through, I was like, wow, this is really interesting. Like some of the things I just talked about that being so focused in the year to year in this decade by decade, I sort of had forgotten this. this wonderful arc of Berkshire's history. And again, the patience, you know, looking at

national indemnity, for example, there was a 13-year period where they experienced declines in premiums. And you say, wow, that's pretty impressive. But I mean, imagine living that year by year that patience and the incentives. And here's one other thing I learned. sort of tangentially, was the power of Warren Buffett's motivating, his ability to motivate managers. So when I first sent Warren the first two chapters way back in 2016, I think, 2016 or 17, he wrote back and said, you know, I'm glad you're doing this, gave me a little suggestion. He said, you know, go back to the World War II era and take a look at that. and then I wrote him again in 2019

after I came back from the in Omenia. I said, you know, Warren, I just want to let you know that I'm still writing this book. I haven't stopped. You know, I'm just doing it. Would you like to read what I have so far? He said, no, you know, really looking forward to when it comes out, you know, when you published it.

And like those two short pieces of communication from Warren Buffett just were just like the fire, you know. It was like, okay, I'm writing this. book for Warren Buffett. That's, you know, just that was sort of that mental attitude that I had. And so in thinking about it, it's like, this is how these managers must feel. You don't have to hear from him every single month or year. But when you do, it's something special. And so it's something I thought about even sort of on a post-Buffet. You know, what will that look like post-Buffet? Will Greg Abel have that same ability to inspire managers like that just by saying, you know, geez, I can't wait

to see what you do, basically. But it was just an incredible insight into how, it was the softer side of Warren Buffett. You know, he'll name managers in his annual reports. And it doesn't take much, you know, Warren Buffett as an informed observer. He knows your business. But just that little, that little touch can go a long way. It's been, it's one of the reasons why they're able to operate in such a decentralized manner for so long and become so big. Hey, Timlin here. It's great that you've made it that far into the video and I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to

people who are ambitious about investing. It's helpful to investment talent as well as experienced fund managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. It's a bit of an wild investment in today's time to spend two and a half years of work on writing a book as an investor. What is the outcome you did get in feedback or, yeah, those that opened for you to do this book investment? So my friend Chris Blumstrand, who wrote the forward to the book, he searched the Library of Congress in the United States and found 200 titles on Berkshire Hathaway, Warren Buffett, Charlie Munger. If you were a rational, purely rational, you know, if you're a professional

writer. And he said, I want to write about a company. You would not choose Berkshire Hathaway. I just, I wrote the book because I felt, I had just absorbed everything that was out there in Berkshire Hathaway. And I said, I just, I feel like a book is missing. I really, I would read Warren's letters to shareholders. And he would talk about, you know, the manufacturing service and retailing businesses generated, you know, a 17% return on untangible equity. And that's kind of where he would leave and he would go on. Well, I wanted to go into the 10K and deeper into the report and find those numbers. How did he calculate it? What can I learn from it? And I pined for a book that would do that. And so that's why the title has financial history. And I've had some interesting

Amazon reviews of people saying, oh my gosh, there's like, there's literally over 300 tables in the book. And oh, my gosh, look at all these numbers and facts. And it's like, well, that's the whole point of the book. And that's why I say if someone uses it as a reference guide, I'm not offended, you know, if you don't read the thing from cover to cover. I just think there's so many lessons in Berkshire Hathaway that are timeless. I mean, it's no different than security analysis where you read that book and Ben Graham is talking about an old railroad company or a coal company or something. And you can learn so much from Berkshire's early history, even just a textile business, which is defunct, but things like working capital and capital intensity and turnover

and competition. I mean, all those things are not going away. And you can pick up these lessons and learn from Warren Buffett. I mean, he's just an incredible teacher. And so I wanted to convey, you know, it's certainly, like I said earlier, I'd certainly been on the shoulders of giants, those who came before me. It's necessarily a perhaps biased view, but it's through my eyes. So I'm certainly going to miss something or what have you. But I wrote the book I never found is kind of the short answer to spending all of that time. And I think, you know, everyone who can do it should take that journey that I took of reading all the annual reports, all the 10Ks and all the detail chronologically and going into all of the acquisitions. You just come across, you just come

away with such an appreciation for what they built. And I say they in a very broad sense, not just Warren Buffett, not just Charlie Munger, but all of these incredible managers at Berkshire hat the way, many of whom are still there today, working on their masterpieces just within the confines of the Berkshire Museum, as Warren likes to say. So aside from reading the book, you also have some web resources. People can find them via the link below, but there's also a chance to find you in person in Omaha. So you're in the exhibition hall.

Can you tell a bit more about this for this meeting, but also I think for future meetings? People might find you there. Sure, yeah. So I'm on Twitter at BRK underscore student. We were talking earlier before we started recording about my companion website, BRKbook.com. It's called the Oracle's Classroom, where I have a lot of the material, the 200 tab spreadsheet that went into the book. I'm happy to help anybody that is looking for resources.

It's fun still discovering things. But yeah, I will be at the annual meeting this year, again, at the bookworm. Warren's invited me to come back and sell the book and sign copies. I'll be there probably the latter half of Friday afternoon and then I'm going to try to be, try to be there during most of the shopping period. I'll watch the meeting, but I'll make sure to be there when people have time to shop. I come shop for my book and get an autograph, talk to me. I love talking to people from all over the world and meet some wonderful people and made a lot of friends through uh through the meeting so great so there's also a chance to take a selfie with you or just say hello

yeah you can take take a selfie i'll sign your book i'll sign your arm or you know what any crazy thing you want to do you can you can buy me a dilly bar if you want you know uh buy me some seas a Coca-Cola I don't know but yeah just come come say hello don't be shy it's um it's a lot of fun like I say it's just a lot of fun and uh if anybody's out there on the fence about coming my first year 2012 I knew nobody and it just come you're going to be among instant friends and you'll have a great time great then see you in Omaha and thank you very much for the insights into your book hey you're very welcome Thank you and bye-bye.