Buffett banks on people for success

By DAVID MOON, Moon Capital Management, LLC
December 7, 2008

In the last two months, shares of the $152 billion holding company, Berkshire Hathaway, have declined 33 percent, prompting some investors and observers to ponder if the Oracle of Omaha has lost his touch.

I'm not willing to make that bet.

Nor am I terribly concerned about Warren Buffett's eventual departure from the company. Don't get me wrong; I wish him a continued long and healthy life. My guess, however, is that one day Warren will die. So am I panicked?

No.

The company has already announced that two people will take his place: one for operations and one for investments.

That doesn't mean that I think Warren is irrelevant to the success of Berkshire Hathaway. I simply conclude that the combination of many factors, including the current price of the stock and the corporate culture, make it an attractive investment.

Of course, I could be wrong. It's happened before.

In Knoxville, speculation about successors has centered on really important things ' like Tennessee football. One has to keep his priorities straight.

Unlike the Vols, however, bringing along a more experienced father was not among the list of qualifications Buffett listed in his 'help wanted ad' published in March 2007.

In the company's 2006 annual report, Buffett said he was accepting resumes for younger managers with a successful track record and a certain emotional mindset, able to manage large sums of capital.

People are important. That's one of the reasons corporate executives make exorbitant salaries. But how important are they?

There are a couple of schools of competing thought.

Warren Buffett has long argued that the most important assets of any organization are its people. When you buy a company you are buying a collection of management experience.

Peter Lynch, the poster boy for successful investing in the 1980s, used to explain that he tried to buy companies that any idiot could run, because 'sooner or later one will.'

Which super-investor is correct?

Each of them.

A typical mutual fund might own hundreds or sometimes thousands of individual stocks. By contrast, Buffett's investment style is to own large positions in a relatively small number of companies.

When Buffett buys a company, it's a lot like getting married. He typically (but not always) plans on owning the stock for a very long time, so the quality of the people involved is important.

A Peter Lynch portfolio was less like getting married and more like collecting a harem. The personality of any specific member of the group didn't matter because there were so many of them. Besides, the odds were that none would stay in the group very long anyway, as he constantly swapped one stock for another.

Most individual investors are probably relegated to a combination of these two investment methods. They follow the Peter Lynch mindset with a relatively modest number of stocks.

However, because small investors aren't typically in a position to know much about a company's top executives ' like it or not ' they end up 'marrying' strangers.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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