Adam Mead (Mead Capital Management): What to learn from The Complete Financial History of Berkshire Hathaway?
- Adam Mead digested well over 10,000 pages of material for the book, which ends in 2019.
- About 140 hours of Berkshire annual meetings went into the research for the book (2019).
- Fechheimer and Scott Fetzer, bought in the 1980s, were earning 25% to 30% returns on capital.
- The energy business, bought in 1999, has never paid a dividend to Omaha, Adam says.
- His first annual meeting was in 2012, when he knew nobody there.
What is The Complete Financial History of Berkshire Hathaway about?
TL;DR: Five years of work, over 10,000 pages of material and about 140 hours of annual meetings, in a book that ends in 2019.
Tilman Versch [00:00:00] Warm welcome to the Good Investing Talks podcast. I’m your host Tilman Versch and the Berkshire meeting is coming again a good tradition, I want to use the chance to share interesting events and interesting content about the Berkshire meeting on this channel in the weeks ahead. So here you can find invites to events that are happening on the ground or interesting content. I hope you enjoy it and please RSVP to the many events. Thank you.
A chronological financial history of Berkshire up to 2019
Tilman Versch [00:00:27] Dear audience of Good Investing Talks. The Berkshire meeting is coming and I’m very happy to present some book writers on Berkshire Hathaway today. I’m having Adam Mead. Adam, share a bit about your book. What is the title and why have you written a book about Berkshire?
But I guess the second it came out, it became an incomplete financial history. So it ends in 2019, which is an even five years based on when Warren Buffett took over. But it took me 5 years to do. I digested well over 10,000 pages of material, including all of the transcripts of the annual meetings and listened to them. So I think it was about 140 hours of annual meetings that I went through as well.
I wrote it sort of for two audiences. One was the existing shareholder who’s been going to the meetings or has owned Berkshire Hathaway for a number of years. For that audience, maybe it’s more of a reference guide and again it’s chronological.
So you could flip to you want to look at how Berkshire handled the 70s and the 80s with some inflation or you want to go back in some of the earlier days or look at the 90s. I mean you can you can kind of flip around. And then that second audience is more of the newer shareholders. That might only be. I mean, could be brand new to Berkshire Hathaway. OK. Yeah, you should look at it, Warren Buffett. He’s a billionaire and created this incredible enterprise.
How did it happen? And you’re sitting there thinking, Oh my gosh, I have over 50 years worth of you know homework to do, basically, how did this thing come into existence? And so in a relatively short considering the material that’s out there, relatively short book, be able to go through the complete history of Berkshire Hathaway and see the evolution from a New England textile manufacturer to one of the most respected and strongest companies in the entire world.
So from that perspective, It’s quite short. I certainly stood on the shoulders of giants of the others that came before me, and who wrote some incredible books. But I think my book is sort of the first to really take that financial approach year by year and that’s where I think it differentiates itself from others, but there’s there’s, there’s so many good books out there on Berkshire.
What are the key lessons from Berkshire’s history?
TL;DR: Patience, simplicity and concentration. Businesses bought in the 1980s earned 25% to 30% returns on capital, and the top four or five holdings make up about 75% of the portfolio.
Patience, simplicity and a series of concentrated bets
Tilman Versch [00:03:30] If I would ask you for three learning points you got from the writing of the book. Reading it afterwards again. What were these three points if there are any key points.
So I think the patience, the simplicity. No, it wasn’t easy building Berkshire Hathaway by any stretch. But when you look at the history of capital allocation and doing what makes sense at the time and not trying to get caught up in fads.
And really, I mean, so many of these businesses that they purchased. Throughout their years were either ignored by others or discarded. I mean the 1980s they picked up Fechheimer, which is a uniform business they picked up Scott Fetzer, which is sort of a little mini conglomerate that had Kirby vacuums and world book encyclopaedias among about a dozen or so other businesses.
And those businesses were earning you know, 25, 30% returns on capital and they were passed over you know, failed leveraged buyouts or what have you and Berkshire said, you know, we’ll be home for you, basically so just that approach to it and then I think related to capital allocation, Berkshire allowed these businesses and allows their businesses to be the best that they can be. And what I mean by that is you take a See’s candy, for example, wonderful returns on capital. Terrible reinvestment opportunities.
So See’s earns really high returns on capital, sends that capital back to Omaha, and does different things with it instead of trying to be smart and do something in the candy business. Then you flip that coin and look at a business like the energy business, which Berkshire bought in 1999. I think it actually technically closed in 2000. That business has never paid a dividend to Omaha. On the reverse side, they’ve actually invested billions of dollars into the energy business. Now it’s its ability to distribute money goes up every year. Its earnings have continued to grow, but that business can take a lot of capital.
And so just that fluidity of capital which you know the average investor can’t do right because you don’t own these whole businesses, but just I guess that notion of making sure the management team, if you’re not in control, at least make sure the board or the management team of the companies that you own are looking beyond the borders of that company for capital allocation, might mean dividends and buybacks.
So those were just a couple that that come to mind at this point, you know the patience and then of course the concentration you know I found Berkshire, you could, you could argue, is really just a series of concentrated bets so as equity grew as their assets grew as the securities portfolio grew. In the decade that I studied Berkshire had its largest acquisition was no less than 15% of equity capital at the time.
So it’s this series of increasing bets you’re seeing even today, with the concentration on Apple as the largest holding. And then the top four or five representing you know 75% of the portfolio that has been the case throughout much of Berkshire’s history. So it’s the same playbook being executed at Berkshire today, it’s just the opportunities look different and it’s tougher. The universe is smaller because of the sheer size of Berkshire today.
How did writing the book change Adam Mead as an investor?
TL;DR: About 2.5 years of full-time work. Short notes from Warren Buffett in 2016 and 2019 showed him how Buffett motivates managers.
The long arc of patience and Buffett’s way of motivating managers
Tilman Versch [00:08:07] How has writing the book made you a better investor? What have you changed or how have you grown through it?
I sort of had forgotten this wonderful arc of Berkshires’ history and again the patience you know, looking at national indemnity, for example, there was a 13-year period where they experienced declines in premiums and you say wow, that’s pretty impressive. But I mean imagine living that year by year that patience and the incentives.
And here’s here’s one other thing I learned sort of tangentially the power of Warren Buffett’s motivating his ability to motivate the managers. So when I when I first sent Warren the first two chapters were way back in 2016, I think, 2016 or ’17. He wrote back and said, you know, I’m glad you’re doing this.
Gave me a little suggestion, he said, you know, go back to the World War II era and take a look at that. And then I wrote to him again in 2019, after I came back from the moment I said, you know Warren I just want to let you know that I’m still writing this book I haven’t stopped, you know, I’m just doing it. Would you like to do you like to read what I have so far? He said no, you know, really looking forward to it when it comes out.
You know when you publish it and like those two short pieces of communication from Warren Buffett that just we’re just like the fire, you know? It’s just it was like, OK, I’m writing this book for Warren Buffett. Like, that’s, you know, just that was sort of that mental attitude that I had.
And so thinking about it, it’s like, this is how these managers must feel. You don’t have to hear from him every single month or year but when you do, it’s something special. And so it’s something I thought about even sort of on a post, Buffett. You know what? What will that look like? Post Buffett? Will Greg Abel have that same ability to inspire managers like that just by saying, you know, geez, I can’t wait to see what you do, basically.
But it was just an incredible insight into how those the softer side of Warren Buffett, you know, he’ll name managers in his annual reports it doesn’t take much, you know Warren Buffett as an informed observer, he knows your business. But just that little touch can go a long way. It’s been it’s one of the reasons why they’re able to operate in such a decentralized manner for so long and become so big.
What did Adam Mead get out of the book and where can you meet him?
TL;DR: He found 200 titles on Berkshire but not the book he wanted, so he wrote it with over 300 tables. He has gone to the annual meeting since 2012.
He wrote the book he never found
Tilman Versch [00:12:07] It‘s a bit of a wild investment in today’s time to spend 2 1/2 years of work on writing a book as an investor. What is the outcome you did get in feedback or yeah, doors that opened for you to do this book investment?
If you were a rational, purely rational, you know if you’re a professional writer and you said you want to write about a company, you would not choose Berkshire Hathaway. I wrote the book because I felt I had just absorbed everything that was out there in Berkshire Hathaway and I said, I just, I feel like a book is missing. I really, I would read Warren’s letters to shareholders and he would talk about, you know, the manufacturing service and retailing businesses generated, you know of 17% return on tangible equity and that’s kind of where he would leave and he would go on well.
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I wanted to go into the 10K and deeper into the report and find those numbers and how he calculated them. What can I learn from it? And I pined for a book that would do that. And so that’s why the title has financial history and I’ve had some interesting Amazon reviews of people saying, Oh my gosh, there’s like, there’s literally over 300 tables in the book. And oh, my gosh, look at all these numbers and facts.
And it’s like, that’s the whole point of the book. And that’s why I say it. If someone uses it as a reference. I am not offended, you know if you don’t read the thing from cover to cover. I just think there are so many lessons in Berkshire Hathaway that are timeless, I mean it’s no different than security analysis where you read that book and Ben Graham is talking about an old railroad company or a coal company or something.
And you can learn so much from Berkshire’s early history, even just a textile business which is defunct. But things like working capital and capital intensity and turnover and competition. I mean, all those things are not going away. And you can pick up these lessons and learn from Warren Buffett. I mean, he’s just an incredible teacher.
So I wanted to convey, you know, it‘s certainly like I said earlier, I have certainly been on the shoulders of giants, those who came before me, it’s necessarily a perhaps biased view but it’s through my eyes, so I’m certainly going to miss something or what have you and but I wrote the book I never found is kind of the short answer to spending all of that time and I think you know everyone who can do it should take that journey that I took off reading all the annual reports, all the 10K’s and all the details chronologically and going into all of the acquisitions you just come across, you just come away with such an appreciation for what they built and I say they in a very broad sense, not just Warren Buffett, not just Charlie Munger, but all of these incredible managers at Berkshire Hathaway, many of whom are still there today working on their masterpieces just within the confines of the Berkshire Museum, as one likes to say.
A companion website and book signings at the annual meeting
Tilman Versch [00:15:44] So aside from reading the book, you also have some web resources. People can find them via the link below, but there’s also a chance to find you in person in Omaha, so you’re in the exhibition hall. Can you tell me a bit more about this for this meeting, but also I think for future meetings. People might find you there.
Warren’s invited me to come back and sell, sell the book, and sign copies. I’ll be there probably the latter, the latter half of Friday afternoon, and then I’m going to try to be there during most of the shopping period, I’ll watch the meeting, but I’ll make sure to be there when people have time to shop and come shop for my book and get an autograph, talk to me, I love talking to people from all over the world and meeting some wonderful people and made a lot of friends through the meeting.
Tilman Versch [00:17:11] Great. So there’s also a chance to take a selfie with you or just say hey.
Tilman Versch [00:17:51] Great. Then see you in Omaha and thank you very much for the insights into your work.
Tilman Versch [00:17:58] And thank you and bye-bye.
Book cover © Harriman House.
