Business Relationships and Long-Duration Investing

Trips to Berkshire Hathaway’s annual meeting in Omaha are a great way to meet other investors and to think about my own investment process. The 2023 meeting played the role well. Below are a few thoughts from this year’s trip.

Short-termism. In the Q&A session, Buffett talked about the world being overwhelmingly run by short-termism, i.e. businesses and people are increasingly driven to make quick profits before moving on to something else. Short-termism is sticky and it does affect long-term business outcomes. A recent PwC study showed that the median tenure of a public company CEO is just five years—a timeframe consistent with the short-term orientation of managerial incentives, including bonuses and stock-based compensation.

To drive their short-term stock prices higher, managers are often compelled to feed the investing public numbers that meet or beat quarterly estimates produced by Wall Street analysts. Finance firms employing the analysts benefit from market activity triggered by short-term earnings estimates. And on and on we go. The result is frequent misallocation of shareholder capital, including scant internal investments, and unnecessary acquisitions.

Relationships are key for the long game. Berkshire’s long-term stock chart shows that much of its rapid appreciation happened beginning in 1990s—a full 30 years after Buffett took control of the company. No one can accuse him of short-termism here.

It is true that excellent capital allocation decisions played a key role in Berkshire’s rise. But if we dig deeper, Buffett’s ability to make consequential deals was also due to his stellar reputation for honesty and integrity and his ability to build high-quality, lasting relationships.

According to Sandy Gottesman, the late founder of First Manhattan and a long-time friend of Buffett’s, Warren tends to bring people together and is a very inviting person. During the decades Sandy knew Buffett, Warren was a great friend to many. He was also very inclusive and shared his connections with others. Speaking of inviting, years ago, I was fortunate to take part in a student trip to visit Warren, during which he treated all 150 students to a steak dinner, took individual pictures with every visitor and answered questions for two hours. Back then, Warren received student groups twice a year. 

Gottesman also frequently described Berkshire’s reputation as one of honesty and decency—a sentiment shared by many connected to the company: employees, business managers, investors, charitable organizations, and friends. One would have a hard time finding promotional references to this excellent culture on the company’s bare bones website: www.berkshirehathaway.com. As they say, do the right thing when no one is looking.