2013: What's Berkshire's long-term competitive advantage and business model?

CAROL LOOMIS: This question comes from Mark Trautman of Crested Butte, Colorado.

And you’ve touched on this, Warren and Charlie, on little fringes today, but this is a direct question.

“Warren, both you and Charlie have described over the years how you have built Berkshire Hathaway to be sustainable for the long term.

“I am having difficulty explaining to my 13-year-old daughter, and frankly, to many adults, also, in easy to understand terms, Berkshire’s business model and long-term sustainable, competitive advantage.

“Can you give all of us, and particularly my daughter, Katie, who is here today, the Peter Lynch two-minute monologue explaining the business of Berkshire Hathaway and its merits as a long-time investment for future decades?”

WARREN BUFFETT: OK, Charlie, you talk to Katie. (Laughter)

I’m going to have some fudge. (Laughter)

CHARLIE MUNGER: All right. I’ll try that.

We’ve always tried to stay sane, and other people, a lot of them, like to go crazy. That’s a competitive advantage. (Laughter and applause)

Number two: as we’ve gotten bigger, we’ve used this sort of golden rule that we want to treat the subsidiaries the way we would want to be treated if we were in the subsidiaries.

And that, again, is a very rare attitude in corporate America, and it causes people to come to us who don’t want to come to anybody else. That is a long-term competitive advantage.

We’ve tried to be a good partner to people who come to us and need a partner with more money. That is a competitive advantage.

And so, we are leaving behind a field that’s very competitive and getting into a place where we’re more unusual.

This was a very good idea. I wish we had done it on purpose. (Laughter)

WARREN BUFFETT: A few years ago, a person who’s in this audience, I believe, came to me and he was in his 60s, and he said that for about a year, he’d been thinking about selling his business.

And the reason he had been thinking about it was not because he wanted to retire. We’re not — we very seldom buy businesses from people who want to retire. He didn’t want to retire at all. He loved what he was doing.

But he’d had an experience in buying a business a few years earlier from a family where he had known the fellow that built it, the fellow had died, and then just everything bad started happening in the family and the business and the employees, everything else.

So he really wanted to put to bed the question of what happened with his business.

It wasn’t that he really cared a lot about monetizing it or having the money. He just wanted — he wanted to put his mind at ease, that what he had spent lovingly building up over 30 or 40 years was not going to get destroyed — or that his family would get destroyed — if he — if he made a — if he died.

So he said he thought about it a year. And he thought about it and he thought, “Well, if I sell it to one of my competitors” — and they would be a logical buyer, they usually are. That’s why we have antitrust laws.

If he sold it to a competitor, they would come in and basically they would put their people in charge.

They would have all these ideas about synergy, and synergy would mean that the people that had helped him build the business over 30 years would all get sacked and that the acquiring company would come in like Attila the Hun and be the conquering people, and he just didn’t want to do that to the people that helped him over the years.

And then he thought he could — he might — sell it to some private equity firm. And he figured that if he sold it to them, they’d load it up with debt, which he didn’t like, and then they’d resell it later on. And so he would, again, have lost control and they might do the same thing that he didn’t want to have happen in the first place, in terms of selling it to a competitor, or whatever it might be.

So when he came to me, he said — he described this — and he said, “It really isn’t because you’re so attractive.”

But he said, “You’re the only guy left standing. You know, I mean, you’re not a competitor, you’re not a private equity firm, and I know I will get a permanent home with Berkshire and that the people that have stayed with me over the years will continue to get opportunities and they will continue to work for me. I’ll keep to get doing what I love doing, and I won’t have to worry about what will happen if something happens to me tonight.”

Well, that company has turned out to be a wonderful acquisition for Berkshire, and our competitive advantage is we had no competitors. And I think — well, we will see more of that. We’ve seen a lot of that over the years. We’ll see more of it.

Charlie, anything?

And I don’t think you mentioned the fact that developing a shareholder base, too, that’s different than —we do look at shareholders as partners, and, you know, it’s not something a public relations firm wrote for us, or anything of the sort. We want you to get the same result we get, and we try to demonstrate that in every way we can.