Warren Buffett: How Marriages, Corporate Acquisitions Are Alike

“Beware Wall Streeters Bearing Fees”

[Editor’s Note: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway (“Berkshire”), or any other entity referenced. Edina Realty is a subsidiary of Berkshire.]

Fans of Warren Buffett’s annual letter to shareholders won’t be disappointed: the just-released 2019 Letter is one of his best, at least in IMHO.

Here are just a few verbatim excerpts from Berkshire Hathway’s founder and chairman (it’s hard to improve on Buffett’s own words):

–On corporate acquisitions:

“I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding — but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I’d have to say it is usually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships.”

Warren goes on to say — and long-time Berkshire investors will appreciatively note — that the vast majority of his acquisitions have produced stellar results.

–On predicting interest rates:

“Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subjects reveal, by that very behavior, far more about themselves than they reveal about the future.”

I feel exactly the same way predicting home prices.

Namely, in the short run, I have no idea (and neither does anyone else); in the long run . . . I’m confident they’ll be significantly higher.

–On supposedly “independent” board directors:

“Director compensation has now soared to a level that inevitably makes pay a subconscious factor affecting the behavior of many non-wealthy members. Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days six or so times a year. Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households. (I missed much of this gravy train: As a director of Portland Gas Light in the early 1960s, I received $100 annually for my service. To earn this princely sum, I commuted to Maine four times a year.)

And job security now? It’s fabulous. Board members may get politely ignored, but they seldom get fired. Instead, generous age limits — usually 70 or higher — act as the standard method for the genteel ejection of directors.

Is it any wonder that a non-wealthy director (“NWD”) now hopes — or even yearns — to be asked to join a second board, thereby vaulting into the $500,000-600,000 class? To achieve this goal, the NWD will need help. The CEO of a company searching for board members will almost certainly check with the NWD’s current CEO as to whether NWD is a “good” director. “Good,” of course, is a code word. If the NWD has seriously challenged his/her present CEO’s compensation or acquisition dreams, his or her candidacy will silently die. When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”

Alas, unlike in previous years, Edina Realty’s immediate parent company, Home Services of America, didn’t rate a mention.

That’s undoubtedly because it takes a couple billion in annual profit, minimum, to stand out in Berkshire’s diversified galaxy of mega-holdings . . .

P.S.: I don’t recall Buffett ever using his annual letter to plug an upcoming book (he does regularly tout two Berkshire subsidiaries: Geico and Borsheim’s).

The lucky beneficiary? “Margin of Trust,” by Larry Cunningham and Stephanie Cuba.