According to Mohnish Pabrai, Warren and Charlie have a very simple system. They are not trying to hoard cash. If a sensible opportunity shows up, they will simply put the cash to work. They are not particularly concerned with what happens in the economy or the country in the short term or even in the long term. Rather, they execute solely based on the understanding of the business. If you analyze Warren’s purchase of BNSF Railway, it reveals his understanding of the infrastructure of the railroad industry. The company was sold to him at such a high value in terms of its true intrinsic value that it did not matter what happened in the economy in the short term. Now, BNSF is worth three to four times more than what Warren paid for. Warren and Charlie spend the most of their time in figuring out the business. Pabri believes that they understand a lot of the macro, but that the micro trumps the macro in their perspective. They are seeking to purchase businesses well below the intrinsic value with strong staying power.
They are also not concerned with the details of the S&P 500 or the 10-year treasury. They are looking to purchase exceptional assets with great managers. If you look at Warren’s purchase of Coca-Cola in 1988 up to now, the economic cycles are irrelevant. It is the performance of the business that matters. It is hard enough to figure out the future of the business. Do not try to figure out the future of the country or the world, focus on the business.
Berkshire Hathaway just bought holdings in airline companies. The interesting thing is that based on the enterprise multiple, the companies have actually looked attractive right before Berkshire bought them. The airline investment is a good example of how Warren only selects the manager and does not interfere with the business itself. Many years ago, GEICO did not accept American Express as a payment method. Berkshire had a large holding in AmEx, so the AmEx CEO contacted Warren to ask the CEO of GEICO to answer his call. Warren declined because he did not want to interfere between GEICO and AmEx. Warren told the CEO of AmEx to continue trying but that he would have no say in this interaction. I think the airline situation is similar to the railroad situation in that the industry has bad economics. There is a duopoly in purchasing aircrafts, the workforce is unionized, and the products are commodities. You have no control over fuel prices, which means that you are unable to control a third of your operating costs. However, many of these things are no longer issues. The United States cannot be controlled because thousands of entrepreneurs make the decisions. The airlines used to be a brutally competitive industry with a lot of players, but now we are left with a few, leaving it to be an oligopoly of a sort. Pabrai said the airline industry is in great shape right now because CEOs are now more focused on profits than the market share.
Pabrai has also recently purchased a share in Southwest Airlines and not any other airline company it is an extremely unusual company. For a long time, Southwest blew the performance of Berkshire Hathaway even though the airlines is a volatile industry. Southwest has an unusual culture. They do not allow any type of art on the walls of their headquarters. Instead, they only allow pictures of the employees’ friends and family. When Southwest hires, they are far more concerned with the psychological makeup of the person than his or her capabilities. They believe they can teach capabilities but cannot change psychology. I feel happier riding coach on Southwest than flying business on American or United. I do not know why that is, but the thing is, Southwest is a happy place. They have hired a certain type of people that have the freedom to make the aircraft a happy place. Other companies have tried to copy Southwest, but they could not make it work because it is almost impossible to clone their culture.
Panrai’s suggested reads:
- Poor Charlie’s Almanack
- Sam Walton’s book, Made in America