Berkshire Hathaway 2009 Annual Meeting Audience Question # 19

Berkshire’s sustainable competitive advantages

Warren Buffett:


Carol Loomis:

This question is from Michael Welter of Portland, Oregon.

“You’ve often said that two things you look for in an investment are a sustainable competitive advantage and a simple, easy to grasp business model. Berkshire’s sustainable competitive advantage is arguably you, Warren and Charlie. And that obviously is not sustainable over the long term.”

Warren Buffett:

I reject that. Defeatism.

Carol Loomis:

I knew you would.

“While at this point, Berkshire does not have a simple, easy to grasp business model. So if the two of you were outside investors, is it possible that, no matter what combination of intrinsic value and price Berkshire offered, you would not invest in it today?”

Warren Buffett:

No, our sustainable competitive advantage is we have a culture and a business model, which people are going to find very, very difficult to copy, even semi-copy.

We have an unusual group of shareholders. We have a business that’s owned by people where the turnover on our stock, even allowing for all the double-counting and everything like that, may be something like 20 percent a year, when virtually every stock in the S&P 500 turns over a hundred percent a year.

So we have a different shareholder base. We have people that understand their business differently.

And we have a business that can offer, to people who own private businesses, the chance to keep running their businesses as they have in the past and get rid of the problems of lawyers and bankers and all kinds of things like that.

And I don’t see any other company in the United States that has the ability to do that now, or probably the ability to adopt that model in any big way.

So I would say we have sort of an ultimate… and it’s not peculiar to me and Charlie. We may have helped create it. But it is a deeply embedded culture which any CEOs that follow are going to be well-versed in when they come into the job, and dedicated to, and able to continue in the future.

And you can’t… I don’t want to name names about other companies… but you can’t do that elsewhere.

So I think anybody wanting to copy Berkshire is going to have a very hard time. And I think the advantages we have are going to be very, very long lasting. And they’re not peculiar to the fact that Charlie and are I sitting up here anymore. They may have been, originally. But no longer.

Our culture, our managers join that culture. Our shareholders join that culture. It gets reinforced all the time. They see that it works.

You know, it’s something that I don’t know how I would copy it, if I were running, you know, some other company.

And it’s meaningful. Because there will be businesses, just as there was with ISCAR awhile back, just as the management at GEICO felt back in the mid-’90s in terms of what they wanted to do, there will be people that want to join up with us. And they really won’t have a good second choice. They’ll be plenty that don’t, too. But that’s OK.

We just need to have the right ones… some of the right ones… join us. And it can go on a long, long time.


Charlie Munger:

Yes. I might state that a little differently. A lot of corporations in America are run stupidly from headquarters, as they try and force the divisions to come up with profits for every quarter that are better than the profits from the same quarter in the previous year.

And a lot of terrible decisions and terrible practices creep into those businesses. In the Berkshire model, that doesn’t happen.

So while Warren and Charlie will soon be gone… not too soon in my case, but I’m a little worried about Warren… the stupidity of management practice in the rest of the corporate world will likely remain ample enough to give this company some comparative advantage way into the future.

Warren Buffett:

OK. We’ll go to… it’s very important isn’t it, to watch what you eat, as you… in terms of preserving longevity. So we watch it for hours up here at a time.

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