This simple chart showing the growth of Berkshire Hathaway’s share price
makes it easy to see why BRK has been able to attract the masses:
Keep it simple
Undoubtedly the track record of Berkshire Hathaway is extraordinary. But
what may be even more incredible are the simple concepts and principles on
which this wealth creation was built. Warren Buffett’s partner Charlie
Munger puts it best: “Our approach has worked for us. Look at the fun we,
our managers, and our shareholders are having. More people should copy us.
It’s not difficult, but it looks difficult because it’s unconventional – it
isn’t the way things are normally done… It’s simple and common sense.”
And even though the concepts that are reiterated in every Berkshire letter,
meeting, and interview are simple, few have successfully replicated the
formula. This is because “simple” does not translate into “easy.” Our
brains are hardwired to act in certain illogical ways, and it takes hard
work, introspectiveness, and forethought to overcome these tendencies. One
firm that has unabashedly copied the Berkshire Hathaway model to its
Markel Corp. (NYSE: MKL), led by co-CEOs Tom Gayner and Richard Whitt. Here’s the stock’s
Given Markel’s phenomenal track record and resemblance to BRK, its annual
meeting has also become a must-attend event for value investor proponents
who find themselves in Omaha each May.
Here are three key insights we gleaned from both the BRK and MKL meetings:
1. The value of brand and reputation
Berkshire Hathaway may be best known for investing sizable amounts into
North America’s most prominent brands. If there is one investor who truly
understands the value of this intangible asset, an asset that will never
properly show up on a balance sheet, it’s Berkshire. And a brand is nothing
but a reputation.
Berkshire has leveraged this asset to its fullest potential not only in its
investments, such as
Coca-Cola Co. (NYSE: KO) and GEICO, but also in the Berkshire brand itself.
As a testament to the importance Warren and Charlie place on their own
reputation, they noted during the 2018 meeting that they intend for
Berkshire’s reputation to remain long after they are gone, and that the
only thing they could tell you in 50 years’ time is that Berkshire will
still be “based on certain principles.”
These are principles that the firm’s reputation was built on. And acting in
a reputable manner year after year has garnered Berkshire a steadfast
reputation that has attracted two key groups of people: a long-term
oriented shareholder base and willing sellers that knock on their door.
Although unquantifiable, these two groups have had an immensely important
role in Berkshire’s wealth creation. It is not only in the interests of
others to act in an ethical and respectful manner, but in the interests of
oneself. We at Pender also strive never to underestimate the power of a
brand or reputation in either our investments or our own dealings.
2. The power of continuous learning
One cannot go to the BRK annual meeting today and not be struck by Charlie
Munger, 94 years young, walking out from behind the blue curtain to hold an
eight-hour meeting before tens of thousands of people. And if walking
unaided isn’t an impressive enough feat, Charlie holds court, gathering
laugh after laugh with well-timed and pointed comments throughout the day.
After factoring in luck and good genes, it’s hard not to attribute this
remarkable display to Charlie’s unrelenting mind. He is the exemplar of
continuous knowledge gathering, or in his own words continuous “ignorance
Berkshire has set a foundation of principles that it hopes will stand the
test of time, but in implementing those principles Warren and Charlie
remain flexible. Their surprising agility is rooted in a curiosity about
the world, an acknowledgment of their own ignorance, and a receptiveness to
change. Berkshire’s recent technology and airline investments, two
industries that were previously denounced by the pair, are examples of
Munger: “You have to have the habit of re-examining your old ideas all the
time…You just can’t get through life successfully without it. The world
One of our key values at Pender is to nurture an entrepreneurial
environment. The word “entrepreneur” is a powerful one, as it represents
passion, innovation, and ambition. Entrepreneurs do not rest on their
laurels, but instead embrace change and seek opportunity in the world of
tomorrow. And for us, Charlie is a poignant example of how continuous
curiosity enables this spirit.
3. The importance of understanding the human factor
Often forgotten in investing is a true understanding, or a desire to
understand, the strength of human relationships. All businesses have key
relationships with consumers, employees, and shareholders. We signify these
as key relationships because a major strain in only one of these
relationships can bring down even the most formidable companies. By the
same token, mediocre companies can be made great by properly strengthening
Warren, Charlie, and Tom very much appreciate the importance of these
When Tom was asked at the Markel meeting to outline the perfect
hypothetical business, he didn’t rifle off profitability metrics or balance
sheet strength. He simply said a world class business is one which truly
serves its customers, employees, and shareholders. That is a powerfully
simple statement from the CEO of a US$15 billion conglomerate. But all too
often, the importance of this foundational concept is lost in the
short-termism of Wall Street.
Another example of the human factor is the power of incentives. Charlie
Munger tried to hammer home the importance of incentives in his 1995
Harvard University speech titled
The Psychology of Human Misjudgement, where he stated: “I think I’ve been in the top 5% of my age cohort all my
life in understanding the power of incentives, and all my life I’ve
underestimated it. Never a year passes that I don’t get some surprise that
pushes my limit a little farther.”
It’s even fair to say that some of Berkshire’s secret sauce is in their
deep understanding of incentives. This was evidenced by Charlie’s response
when Warren was asked to detail Berkshire’s managerial incentive
structures: “He [Warren] really doesn’t want to answer…he’s got every
formula in the book, and he keeps them all private. That’s our system.”
As evidenced by Markel and Berkshire, stakeholder relationships and
incentive structures are immensely important. And although it will always
be imprecise, we at Pender heavily weigh these qualitative factors in all
of our investing decisions.
Words of wisdom
Our Omaha weekend was well worth the trip and recommended for all those who
are as passionate about investing as we are. And although we write about
these insights in relation to investing, there may be truth to these
concepts in everyday life. It’s hard to imagine someone going astray in
life while properly valuing human relationships, continuously learning, and
upholding a good reputation. And come to think of it, the permeation of
Warren and Charlie’s wisdom into everyday life may have as much to do with
the gathering of the masses as with Berkshire’s long-term track record.
Kenndal Mcardle is Investment Analyst at PenderFund Capital Management.
This article first appeared in the
Pender blog. Used with permission.
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