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Broadband Buffett

In Perspective

Unio's "In Perspective" short-form series covers the Unio team's views on topics ranging from investing to business to economics.  

 

Broadband Buffett

John Allison

A Brief History

Born 1930. He started with a newspaper route. Also started investing at ten (Cities Service preferred). Had a small chain of pinball machines in barber shops in his teens. Same years: invested in a small farm. Worked for deep-value investor Ben Graham (1954–56). Revered him but found him too mechanistically deep-value. Plied his own version of value investing (buying $1.00 at 50 cents) at BPL (Buffett Partners Ltd.) from 1956–69.

Bought a textile company, Berkshire Hathaway (founded 1888), for the partnership—his self-acknowledged biggest mistake (it was in a bad business). Made first investments in insurance (late 60s). Dissolved BPL. Distributed its assets in 1969 including shares of Berkshire Hathaway which from 1970 became his investment vehicle. Slowly moved away from deep-value-only to higher quality but simple businesses. Example: See’s Candies (1972); Washington Post (1973). Moved further away from tangible deep-value by buying Capital Cities (1979) as he began to see how a company with good intangibles (good intellectual property) could have its intangibles grow in value.

Accepted more complex businesses when Capital Cities bought ABC (1985) and when he bought Salomon Brothers—itself a foray into capital-intensive financial services that his earlier philosophy would have suggested he wouldn’t like. Moved further into the quality realm and away from tangible deep-value when he bought into Coca Cola (1988). Went into insurance with both feet with acquisition of GEICO (1996) and General Re (1998).

Also, from about 1995–2012 there was an explosion of wholly-owned purchases across a wide range of industries. Here is a partial list:

And on the publicly-traded securities side, for someone who is supposed to be America-centric, he owns Tesco (UK), Sanofi (France), Posco (Korea), Munich Re (Germany), and ISCAR (Israel). For someone for whom technology was supposed to be above his pay grade, he owns IBM. For someone who once talked about the only certainty in banking being a bank’s liabilities, he owns stakes in US Bancorp and Wells Fargo.

Apparent Contradictions

This is quite a history. Here is an investor who likes simple businesses and later moved into complex businesses; who is the icon of value investing and yet has paid up more and more for quality and intellectual property value; who liked low-capital-intensive businesses but has embraced more high-capital-intensive businesses; who is Mr. America but becoming more Mr. International; who started out investing in publicly-traded companies and now mostly owns private companies 100%; who began Berkshire as a textile company and shed the original Berkshire (finally in 1985) for a set of companies that are completely different.

Either Warren Buffett is the great investment magician who has been breaking all his own rules left and right. Or he is something else. I think he is something else. I think Buffett is the ultimate broadband investor.

As I described it last month, a narrowband investor is someone who excludes all sorts of investments except those that narrowly fit into a focused beam of investigation. The broadband investor shines a floodlight on a variety of investments and integrates what appear to be disparate targets into a unified whole.

The difference can be summarized as follows: narrowbanders are exclusionists and broadbanders are inclusionists.

Look at how Buffett is an inclusionist when it comes to value. When Buffett trained under Ben Graham he was already expanding his view of “value” to include more than just a mechanistic rendering of the numbers on a company’s balance sheet. By the time he bought See’s Candies he realized that “quality” had value that might not be numerically present in the balance sheet numbers.

In his purchases of Washington Post and Capital Cities he expanded his view of value to include intellectual property. And throughout his migration from deep value to what he does today, he expanded further his concept of “value” to include “longevity”—realizing that $1.00 whose value can grow and last for 100 years is very different (and superior) to a $1.00 whose value deteriorates (as the original Berkshire Hathaway textile business deteriorated).

In short, Buffett’s basic principles of value haven’t changed, but his concept of value has included more and more under its floodlight.   

Perhaps the biggest hallmark of the broadband investor is his ability to change and adapt without doing injustice to his mindset and its principles.

Even though there is much about Buffett that looks like it doesn’t change (the look of his Annual Reports for example), he has a far more flexible, change-sensitive, mind than he is given credit for. So much so that I was going to call this piece “The Eighty-Something Kid” to draw attention to the childlike flexibility of Buffett’s brain—one of the undernoted hallmarks of his amazing success and, in our dislocated world, an imperative for all long-lasting investment success.

– John A. Allison