One Reason for Warren Buffett's Success May Not Outlast Him

(Bloomberg Opinion) -- On Feb. 25, the day before sending out a Berkshire Hathaway Inc. annual shareholder letter that lamented the lack of “action” at the company in 2021, Warren Buffett got an email from Alleghany Corp. Chief Executive Officer Joseph Brandon.

Brandon is a former CEO of Berkshire subsidiary General Re who took charge at insurer Alleghany last April. The company had just released the first annual report and shareholder letter of his tenure, and he wanted Buffett to take a look. Buffett replied that he would, and also that he would be in New York City, where Alleghany is based, on March 7 (to see “The Music Man” on Broadway, among other things), and wondered if Brandon might have time to get together.

He did, and two weeks after Buffett and Brandon met, Berkshire and Alleghany announced that the former would acquire the latter for $11.6 billion, part of a big-spending February and March for Berkshire that has already insured that Buffett will have no need to apologize for lack of action in 2022.

The main point of this story, when Buffett recounted it at Berkshire's annual meeting on Saturday (except for the bit about “The Music Man,” which he mentioned in on an earlier interview with Charlie Rose), seemed to be that serendipity plays a really big role in life and in the fortunes of the world's seventh-most-valuable corporation. “If he hadn't sent me the note it would have never occurred to me to write to him,” Buffett said, and the acquisition wouldn't have happened.

Then again, Buffett also mentioned that he'd been following Alleghany's ups and downs for 60 years, and had four filing drawers filled with its annual reports. As he contemplated meeting with its CEO, it hadn't taken him long to develop a clear idea of what the company was worth and what he would pay for it. As Berkshire board member Ron Olson put it on CNBC a little later: “I'm not sure it was all that accidental myself.”

This interplay of serendipity and preparedness came up a lot during Saturday's annual meeting in Omaha, the first conducted in person since 2019. With a question-and-answer session that lasted for more than five hours, lots of other things came up too. But as a first-time observer (via streaming) I was struck by how often Buffett and Berkshire Vice Chairman Charlie Munger came back to expressing a philosophy of business that I guess can be summed up as:

Don't plan ahead all that much.
Be prepared to act quickly when opportunity presents.

The modern history of Berkshire Hathaway, in this telling, has been one of “putting one foot in front of the other.” Many of those steps — including Buffett's 1965 takeover of Berkshire, a struggling Massachusetts textile firm — were probably mistakes, but that was OK.

Munger: Part of the trick is to correct your own mistakes.
Buffett: We've done better with the mistakes than with the good ideas.
Munger: It's so easy to overvalue a good idea.

The correcting of the mistake that was Berkshire began with the 1967 acquisition of National Indemnity, an Omaha insurance company that gave Buffett the first “float” that he could invest in the market. Getting the opportunity to buy it “was pure luck,” Buffett said Saturday. Its owner would get fed up with regulators once a year or so and decide to sell, only to change his mind. Buffett caught him in one of those moods and pounced. “The one thing is you have to be prepared,” he said. “When opportunity comes, you really do have to just move. Fortunately I operate in an environment where I can do that.” That is, “if the board set up a committee to review every major acquisition,” Berkshire might have missed out on a lot of opportunities. Then came this exchange:

Munger: The relative absence of bureaucracy at Berkshire has made the company a lot of money.
Buffett: We are extraordinarily well positioned to do exactly what we want to do with float.

Amid this year's market turmoil, that has involved taking big stakes in Chevron Corp., Occidental Petroleum Corp. and HP Inc., as well as buying Alleghany outright and, as Buffett revealed at the meeting on Saturday, adding to Berkshire's holdings of Activision Blizzard Inc. in a bet that its announced acquisition by Microsoft Corp. will go through. There could be much more to come: Berkshire still had $103 billion in cash and U.S. Treasury bills on hand as of March 31, down from $144 billion at the end of last year but still well above the $30 billion that Buffett has said is the minimum cash cushion he's comfortable with.

With Buffett now 91 and Munger 98, this could be the last such big buying flurry of their joint tenure. The gigantic corporation that they have by their own description somewhat haphazardly assembled will trundle on. On Saturday both expressed confidence that Berkshire's “culture” would sustain it for decades to come. But a significant part of that culture has been the ability to make deals quickly and without much board interference. When a shareholder asked if Buffett's anointed successor Greg Abel will have that same freedom to act, the honest-sounding answer was … probably not. “My guess is the board will put on some more restrictions and require some more consultation than they do with me,” Buffett said. “They won't need to, but they will feel they have to.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”