Learning from Warren Buffett, the Manager

Many investors have a favorite Warren Buffett quote. Here is mine:

“I am a better businessman because I am an investor, and I am a better investor, because I am a businessman.”

There is a very large number of books on Warren Buffett the investor. But there are not any books on Warren Buffett the manager. 

The focus on investment makes perfect sense, his investment track record stands alone, with success spanning from the 1950s to the present day. However, Buffett’s management approach deserves careful study as well. Here are some of Buffett's and his longtime partner Charlie Munger's lessons on the core tenets for managers and operators:

1) Create Value

"Price is what you pay, value is what you get" -Buffett

Warren Buffett built Berkshire from three failing business - a New England textile mill, a small insurance business, and a stamps business. From this rather dowdy mix, Buffett made Berkshire Hathaway into the sixth largest business in the United States employing 370,000 people. Moreover, he did not build Berkshire from “one great idea” like Microsoft or Walmart, he did this in part by realizing that is not static thing, it is a moving target, and you need to be prepared to adapt.

2) Pay up for quality

“See’s Candies was acquired at a premium over book (value) and it worked. Hochschild, Kohn, the department store chain (in Baltimore), was bought at a discount from book and liquidating value. It didn’t work. Those two things together helped shift our thinking to the idea of paying higher prices for better businesses.” - Munger

Too much focus on near term prices can obscure truly great long term opportunities. This is an investing lesson, and also a lesson to managers and operators. One of the key conclusions from the founder of Trader Joe's is that paying your people more attracts and retains better people, and that he could not have built Trader Joe's without that policy.

3) From Investor to Owner Mindset

“It’s one thing to own stock in a Coca-Cola or something, but when you’re actually in the business of making determinations about opening stores and pricing decisions, you learn from it. We have made a lot more money out of See’s than shows from the earnings of See’s, just by the fact that it’s educated me.” - Buffett

Over the years, Berkshire moved from an outside passive investor in stocks of companies and towards being an active owner of wholly owned businesses. If you are going to buy the entire company and the people are your partners, why would you want to buy anything less than a fabulous business?

4) Avoid growth for growth’s sake

“We’ve tried 50 different ways to put money into See’s. If we knew a way to put additional money into See’s and produce returns a quarter of what we’re getting out of the existing business, we would do it in a second. We love it. We play around with different ideas, but we don’t know how to do it.” -Buffett

As wonderful a business as See’s is, there are limits. It is almost totally a U.S. West Coast business, which limits it to specific areas. The vast majority of it sales are seasonal meaning it loses money for two quarters each year. Rather than try to smooth out these issues through diversification, Berkshire has simply lived within these limitations, optimized the business within its existing lumpy consumer demand structure, and used the proceeds to invest outside of the candy business.

5) Communicate clearly

Warren Buffett grew up on the nerdy and introverted side. As he grew into young adulthood, he realized that his fear of communication with others and public speaking would limit his opportunities going forward. He was very shy, but worked up enough courage to pay $100 to enroll in a Dale Carnegie public speaking class. However, when the time came for the class his shyness overwhelmed him and he chickened out. 

Still he realized, “If you can’t communicate and talk to other people … you’re giving up your potential.” Some he tried again and this time to inoculate himself against failing to show, he made sure to pay for the class in advance in cash. Buffett like the other attendees were “terrified of getting up and saying our names.”

Buffett’s self-awareness and focus to working on his communication skills has paid off. His initial weakness became a strength through effort, Buffett addresses 40,000 shareholders and millions more across the globe each spring in Omaha. One of the things that shareholders and employees value at Berkshire is the direct communication style that Buffett has honed over the decades. 

“Schools, to some extent, underemphasize that. If you can’t communicate and talk to other people and get across your ideas, you’re giving up your potential. You have to learn to communicate in life—it’s enormously important,” - Buffett

When Buffett talks to business schools he says that improving communication skills can add 50% to a student’s lifetime earnings. There is not a magic formula here, but it is obvious that the better you listen to others and get your own story and questions out to the wider teams you work with, the more your ideas will resonate.

One of the challenges that large companies can have is “dinosaur brain” where a very large body with a long tail has one tiny brain. Clear communication is vital to keeping the message that leadership wants to convey consistent across a larger group.

Buffett’s advice on writing works very well for larger groups - keep it simple and avoid jargon: “One unoriginal but useful tip: Write with a specific person in mind. When writing Berkshire Hathaway’s annual report, I pretend that I’m talking to my sisters. I have no trouble picturing them: Though highly intelligent, they are not experts in accounting or finance. They will understand plain English, but jargon may puzzle them.

My goal is simply to give them the information I would wish them to supply me if our positions were reversed. To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform. No siblings to write to? Borrow mine: Just begin with “Dear Doris and Bertie.” -Buffett

6) Keep an Inner Scorecard - Ethics

“How would they feel about any given action if they knew it was to be written up the next day in their local paper to be read by their family, by their friends, by their neighbors. Written by a smart but kind of unfriendly reporter and if it passes that test it’s okay. And I tell them if anything is close to the lines it’s out and they can always call me if they wanted to check something. But if they call me there’s something wrong with it probably anyway and that’s about it.” - Buffett

The beauty of this newspaper guide is that while not everyone is a lawyer and able to parse out legalities, everyone knows their own inner virtue as to what would or would not pass the test as defensible actions when viewed by others. Business only works well over the long haul when conducted in an ethical manner. If you want your team, your customers, and partners to trust you, then you need to behave in a way that deserves their trust.

7) Decentralize to Scale

“The important thing we do with managers, generally, is to find the . 400 hitters and then not tell them how to swing” -Buffett

Buffett has a history of identifying exceptional operators. None greater than Nebraska Furniture Mart's Rose Blumkin. Rose Blumkin was born in Russia in 1893, and she escaped Russia as a young girl fleeing oppression against Jews. She came the United States eventually landing in Omaha with no money, assets, or connections, unable to speak, read or write, a word of English. In fact, she never went to school a day in her life and never learned to read or write English, but she scrimped together enough money selling used clothes and fabrics to invest $500 that she started Nebraska Furniture Mart which became the largest furniture store in the world (while operating in Omaha, the 50th largest market in the US).

Berkshire acquired 80% of Nebraska Furniture Mart in 1983 with the remaining 20% being held by the family. By 1983, sales were around $88 Million per year, in the following years under the Blumkin family management, the stores grew sales by over 30 times. Because of Rose Blumkin’s multi decade reputation for integrity, Buffett did not even ask for an inventory check at the time of purchase. He simply asked Rose Blumkin if she owed anyone any money, when she said, “No”, Buffett signed over the $55 Million check to purchase the Furniture Mart. The contract was one page long, and Buffett included no outside consultants or investment bankers in the deal, Buffett said about doing business with Rose Blumkin, “I would rather have her word than that of the Big Eight auditors; it’s like dealing with the Bank of England.” 

Rose Blumkin never learned to read or write English, never attended a day of school, but she learned that if she practiced two things summed up in her motto, “sell cheap and tell the truth” then good things would follow. Her longstanding reputation for integrity meant that there was less friction when it came to doing transactions and operating her business. This simple rule can be obscured by all of the jargon in business management, but if your dealings are not fair and honest, then no one of any merit will want to work with you.

Rose Blumkin faced challenge after challenge as she built her business “The merchants were very rotten to me. When I walked in Merchandise Mart to buy furniture, to buy anything, they used to kick me out and say, ‘Don’t bother us. We’re not going to sell you nothing. Brandeis and Rogers won’t let us sell you anything.’ I used to almost start to cry. My face would get red and I’d say, ‘Someday you’ll come to my store to try to sell to me, and I’ll kick you out the same way that you did to me.’ And my wish come true. Who would ever suspect? Never. I outlived them all.” Today, Nebraska Furniture Mart is the second largest tourist attraction in Omaha after the Zoo. It turns out that customers really do like low prices.

People like Rose Blumkin do not come along very often, but managers can look for people with her qualities like singleminded customer focus, integrity, and drive.

8) Worry about downside first

“We think in terms of not exposing ourselves to any mistakes that could really hurt our ability to play tomorrow. And so we are always thinking about, you know, worst-case situations … we have to think about whether we’re doing anything really big that could have really terrible consequences.” -Buffett

Echo chambers can result in less visibility into risk. Team's should challenge poor ideas, whoever they come from, their peers, their boss or elsewhere. No one has a monopoly on good ideas, and everyone has bad ideas at times, it is a service to the team to root them out and to improve the teams’ knowledge generally. 

A step to achieving this is cognitive diversity. Ajay Banga former CEO of Mastercard said “if you surround yourself with people who grew up like you, the same school you went to, the same background as you, the same middle class suburb you grew up in, you will fail. Because you will have blindspots. In the day age, technology is moving things so fast, blindspots are what will bring you down. But if you surround yourself with people who are different from you, you will profit and grow. How do you do that in a good way, in a fair way, in a sensible way, not just in a nice way, that’s the magic of leadership.”

When things do go wrong, Buffett says that managers should always have a hotline to understand quickly when something negative happens, and be prepared to act qucikly when it does and be prepared to, “Get it right, get it fast, get it out, and get it over”

9) Learning Machines

“The main contribution of [buying See’s Candies] was ignorance removal. If we weren’t good at removing ignorance, we’d be nothing today. We were pretty damn stupid when we bought See’s – just a little less stupid enough to buy it. The best things about Berkshire is that we have removed a lot of ignorance. The nice thing is we still have a lot more ignorance left. Another trick is scrambling out of your mistakes, which is enormously useful. We have a sure to fail department store. A trading stamp business sure to fold and a textile mill. Out of that comes Berkshire. Think about how we would have done if we had a better start.” - Munger 

A major theme at Berkshire is a frank acknowledgement of mistakes. How else can you be prepared to learn from mistakes if you do not acknowledge them? Berkshire is not afraid to try new things, and when it does, the management monitors success and failures, holding themselves accountable, not to perfection, but to learn and grow. Berkshire’s track record is hardly error free, they have made plenty of mistakes, but two things stand out in their track record. First, due to focusing on downside risk first ahead of the considering the upside, the mistakes are not anywhere near being fatal, they may cost money to recover form, but they are not existential threats, Berkshire is designed to play the game a long time and the wins more than make up for the losses. Second, due to humility, they rarely make the same mistake twice. 

The concept of learning machines could hardly be more critical to long term success. Leaving Omaha for a moment for Formula 1, former Mercedes technical director of James Allison on the importance of learning machines, "People focus on the outcomes. They focus on particular things. Does a car have a long wheelbase? Is it high rake? Is it low rake? A low drag concept? A high drag concept? These are all just froth and meaningless to whether or not a car is good. The thing that people should be focusing on, but don't, is - how good is a team at learning? How good is a team understanding the physics that govern making a fast racing car. Because the car is merely the product of the organization that produces it. It is the collective knowledge and understanding of that organization that determine whether the car is fast, not any particular detail."

Warren Buffett, the investor, will always get the most headlines, but I hope that you enjoyed learning from Warren Buffett the manager.