Charlie Munger: An 'Idiot' Can Run Berkshire

Munger and Buffett's comments on the company's future from the 1995 annual meeting

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Sep 30, 2019
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Warren Buffett (Trades, Portfolio) is widely believed to be the best investor alive today. He has turned Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) from a struggling textile company into one of the largest businesses in the world over the past six decades thanks to his investment skill and business acumen.

Buffett's reputation has been a substantial contributing factor in the company's growth over the years. Business owners who are looking to sell have sought out the Oracle of Omaha. His buy-and-hold forever business mentality, as well as the degree of autonomy he gives his managers, appeals to sellers.

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Buffett and Berkshire are one and the same, but the investor isn't getting any younger. The big question hanging over the business is what will happen when its current CEO eventually leaves?

Berkshire after Buffett

Buffett has publically said there is a succession plan in place at Berkshire. The sprawling conglomerate has a lot of highly talented managers ready to take over when the time is right.
Buffett and his right-hand man, Charlie Munger (Trades, Portfolio), also believe they have constructed the business in a way that will help it stand the test of time no matter who takes over.

While they've discussed this topic many times since, comments from the duo at the 1995 annual meeting gives us an invaluable insight into their thoughts on the matter.

A shareholder asked Buffett if he had developed a process to allow other individuals to "carry forward your collected visions and to manage the company's resources as effectively and as profitably as is being done now."

Buffett explained that putting a plan in place to manage Berkshire after his death is not "as tough as you might think because we have a collection of fabulous businesses." Not only does the conglomerate wholly own a collection of fantastic businesses, but it also owns stakes in an assortment of wonderful companies. These are run independently of the leading (wholly-owned) group. As Buffett said, "And I don't think razor blade sales or Coca-Cola sales are going to fall off dramatically the day Charlie or I die. It — we've got some great businesses. And then same is true of the wholly-owned businesses."

The day-to-day management of Berkshire's businesses will continue as usual, but the group's capital allocation might take a hit.

Capital allocation policy

On this point, Buffett said he's not worried if it takes the managers who take over some time to find their feet because "the businesses will run very well."

He went on to add, "We have a big advantage in that, as contrasted to virtually almost every other company, we, now and in the future, are willing — eager — to buy parts of wonderful businesses or all of them."

Following these comments, Munger said:

"I think few business operations have ever been constructed to require so little continuing intelligence in corporate headquarters. An idiot who was willing just to sit here would have a very good record long after the present incumbents were dead."

So there we have it. In 1995, Munger believed that Buffett had done such a good job of constructing Berkshire to be a decentralized organization over the previous few decades that any idiot could run the business. Only time will tell if this is indeed going to be the case.

When you look at Berkshire today, however, it does look as if the business is built to stand the test of time: it throws off cash, has a solid balance sheet and owns stakes in some of the most successful businesses in the world today.

All the next managers have to do is invest the cash generated from operations back into high-quality stocks and let the rest of the business run itself to achieve steady positive returns. That may not seem too hard, but the big challenge will be avoiding any significantly stupid capital allocation decisions, something most large businesses struggle with.

Disclosure: The author owns shares of Berkshire Hathaway.

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