The Job of Warren Buffett
Warren Buffett really has only two jobs. One is attracting and keeping outstanding managers to run the various operations. This he has no problems doing as one of the criteria that he uses for buying any business is an outstanding management team.
And he never gets in the way of these managerial stars. They got to where they were because they knew what they were doing. If you were managing a top soccer team and had world class players, would you be teaching them technical skills like how to kick a ball?
Rather, the value a soccer manager bring to the team lies in team selection and formulation of tactics. This is what Buffett’s second job is. The task of capital allocation. This is a challenge as Berkshire generates a lot of capital.
A business earning 23% annually and retaining it all will be far more affected by today’s capital allocations than a business earning 10% and distributing half of that to shareholders.
As far as Buffett is concerned, there are five options to deploy the capital: (1) long-term common stock investments; (2) long-term fixed-income securities; (3) medium-term fixed-income securities; (4) short-term cash equivalents; and (5) short-term arbitrage commitments.
Of these, he likes common stocks the most but in times of greed where stock prices are gloriously uncoupled from the underlying business itself, he would rather not take part in such foolishness. After all, stocks can’t outperform businesses indefinitely.
To have a material difference in the performance of Berkshire, any business acquisition would have to be of a significant amount. And as Berkshire gets larger, any returns are almost certain to drop.
News Hole in Newspapers
In any newspaper, there is an important statistic known as the news hole. This is the portion of the total space in the paper that is devoted to news. A typical newspaper has a news hole of about 40% compared to 50% for “The Buffalo News”.
While 10% might not sound like a lot, it is the reason why “The Buffalo New” has a much greater readership compared to it’s rivals.
A paper with 30 pages of advertisements and a 40% news hole delivers 20 pages of news a day, whereas another paper with a 50% news hole matches 30 pages of ads with 30 pages of news. For the same amount of ads, the latter has 50% more news content!
The Fechheimer Bros. Co
There was a purchase of a company called Fechheimer in the past year. It’s basically a uniform manufacturing and distribution business. The interesting point about this acquisition is that neither Buffett nor Charlie Munger went to Cincinnati, headquarters for Fechheimer, to see their operation.
This is actually Buffett’s usual practice. He does not rely on insights obtained from plant inspections to decide whether or not to purchase a company. Rather, he considers the economics of the business as well as the quality of the people running the show.
I will leave you with a question. If corporate taxes are increased, does it really affect the corporations? Do they pass on the increased taxes to the consumers by increasing prices? Or do they simply absorb the increased taxes?