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Warren Buffett, Chairman and CEO of Berkshire Hathaway, is perhaps the greatest investor of our time, if not ever.  At buffettologist.com, we have been studying, practicing, and learning from the teachings of the Oracle of Omaha for years.  As such, we have created this blog to share our insights on Mr. Buffett, other Buffett disciples, and value investing.

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Thursday, December 31, 2009

Where Are All The Howard Roarks?

On the side of a country road a few months ago stood a young farmer with a sign advertising apples he had grown that were for sale for a mere five dollars a bushel.  To the casual passer-by this young farmer might have gone un-noticed, just another person trying to make his way through the turbulent economic times of the last few years, but—in my mind at least—what this farmer really represents is a businessman at the most basic level.  This young farmer is a person who created (grew) something that people want, and is now directly selling the fruits of his labors—at a great price too—directly to his customers.  Not only is this what the exchange of goods is really about, but, in my opinion, this farmer should also be viewed as a classic entrepreneur.

Ironically, when the great majority of people—or more poignantly the popular media--refer to the essence of business, they are often referring to what is known to many as “Corporate America.”  Large organizations with layers and layers of people, most of which are simply pushing reams and reams of papers back and forth between each other, are put forth as role models for what folks who want to be viewed as “successful” should strive to become.  Never mind that very few of these people have ever even produced the actual good or service their companies purport to create, nor have any of them ever even looked their end customers in the eye while booking a sale.  They are simply caught up in all the frictional costs of running a business, and for many of them, they are able to accumulate a large fortune by just siphoning off some of these costs for themselves. 

And now, many of these folks are finding that their old way of existing in Corporate America just doesn’t work any more.  The large organizations that they work—or used to work—for are in chaos, as they recalibrate their businesses and look for new ways to rein in costs and to gain revenue.  In fact, because many of these large corporations employ so many people that have always just pushed paper back and forth, these companies are finding it increasingly difficult to find ways to create new products and services.  Their culture just doesn’t support it.  Amid all of this, many folks previously employed in “Corporate America” now find themselves facing a crossroads. 

In Ayn Rand’s great novel, The Fountainhead, two of the central characters, Howard Roark and Peter Keating, pursue careers in utter and complete contrast to each other.  Roark, the hero of the novel, an uncompromising entrepreneur, has a vision for his life’s work and relentlessly pursues making it a reality.  Roark loves what he does, and has made his passion his profession.  Keating, on the other hand, is in the same profession as Roark (architecture), but molds himself and his work in a way that he thinks others would like to view him, and strives for accumulating material wealth over the enjoyment of what he does.  In so doing, Keating uses backroom dealings, bribes, and other chicanery to win assignments and accumulate wealth.  Roark, on the other hand, lets his work—and his passion for his work—speak for itself, with each building serving as his calling card.  Even though it was a more difficult and long road for Roark to win some of his initial projects, his adherence to his core principles--in both architecture and business—ultimately allow him to flourish.  Roark’s wealth is doing what he loves.  Keating was just the opposite.  The fact that his view of success was dependent on others, that he didn’t actually enjoy his work, and that he used conniving ways to win projects, left him a hollow, desolate, and unhappy man.

As individuals and companies recalibrate and try to emerge from the economic downturn of the last few years, many folks’ view of what they previously thought was successful must change.  And in my mind, it can change for the better.  Now that so many others are busy retrenching, it finally offers a choice--and an opportunity--for many individuals to strike out on their own, and to create businesses around their passions.  In effect, if many folks are wired correctly, they can finally eschew the Peter Keating’s of the world in Corporate America—those who really don’t do much and create little of value---and pursue a more Roark-like existence---where success is defined by truly loving what one does and creating something of value for customers.  After all, if one does, riches—in one form or another—are sure to follow.

What got me thinking about all this again was the recent town hall meeting Berkshire Hathaway Chairman Warren Buffett and Microsoft founder Bill Gates had at Columbia University in New York, where they encouraged students—and the public at large, really—to not go for the highest paying job, but to rather to do work for which they are passionate about for either themselves or for someone they admire.  Now, you might say that this is easy for them to say all this because after all, they are already both billionaires.  I, however, would disagree, and argue that the reason that they are both billionaires is because they followed their passion and were able to create a business out of it.  Their wealth is simply the outcome of their work and their passion.

In some way both Buffett and Gates were wired to pursue life and business much more like Rand’s hero Howard Roark than Corporate America’s Peter Keating.  Now, perhaps, many others may have the chance to do or create something new in business too.  The only question is whose path will they choose to emulate.

I hope that 2009 has treated each of you well, and my best wishes to you and your families for a happy and safe 2010.

 

Justin

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

5:27 pm est | link 

Wednesday, December 9, 2009

Why Big Firms Fail

There is a lot of discussion these days about firms that get so large that their failure—or bankruptcy, more poignantly--could have the potential to destroy the entire financial system.  To wit, this is likely why there were so many government interventions and nationalizations of large financial firms over the last year.  AIG, Fannie Mae, Freddie Mac, the list goes on, were all deemed to be “too big to fail.”

But by the time the government decided to step in and rescue these companies from a formal bankruptcy process, it was evident that they had already failed.  These companies failed their customers, their shareholders, their employees, as well as the business community at large.  Perhaps the question that should be asked is not whether such and such firm is too big to fail, but rather, why is it that big firms fail?

What one generally hears in the post-mortem analysis of a business failure is that the firm’s business had changed, or that it couldn’t expand, or that it had too much leverage.  And each of these reasons may be an easily describable symptom of a business failure, but in my opinion, the real reasons are of a more human nature.

As companies grow, more and more people are added to the particular organization, often creating layers and layers of managers to “help” run the business. In my opinion, what these layers are really doing is trying to corral the growing number people, rather than focusing on running the business.  The resultant bureaucracy causes, in my opinion, most people in the organization to pursue a perverse set of incentives, often at complete odds with good business decisions and sound practices.

I would argue that most managers—even the senior ones—in large organizations spend at least forty percent of their time on trying to insulate themselves from political attacks from their peers, or even worse engaging in un-productive activities to make themselves appear to be intelligent, or to look like a good manager.  In other words, that is almost half of the workday spent on what I would call “political nonsense” rather than taking care of new or existing customers.  In this case, wouldn’t time simply be better spent being a good manager rather than trying to look like you’re a good manager?

While some of the self-preservation activities described above are in direct opposition to running a good business, they can create even more insidious behavior.  Often when other managers observe this behavior they are compelled to engage in similar behavior for fear of being passed over in the promotion ranks or earning less compensation.  Furthermore, this type of behavior often compels certain managers to refrain from sharing bad news or problems with their superiors for fear of them blaming the messenger, rather than appreciating the honesty, and helping to craft solutions to the problem.  This type of behavior is a disease that once an organization becomes infected with, it is almost impossible to eradicate.

And even worse, when solutions are somehow crafted among all this mess, most managers—especially the senior ones—are often apt to engage in groupthink.  What this means to me, is that they make decisions or look for solutions that are least offensive to the group of individuals making the decision, rather than doing what is best for clients or shareholders.  In other words they make decisions out of fear.

As a result of all this, you begin to have organizations that are completely dysfunctional, and at times—like last year for example—non-functional.  And over time, as many of the behaviors described above become more prevalent, these companies begin to implode from within.  And all of a sudden, folks realize that customers are fleeing, their cash is dwindling, and as a result their debt burden becomes an outward symptom of an already bigger problem.  By the time the outside world—or even some folks in senior management—begin to realize it, it is often too late, as these firms have spiraled out of control.  Perhaps it should be said that these firms aren’t too big to fail, but rather, that they are too big to manage.

There are, of course, exceptions to these types of companies.  Some large organizations, for example, are run on a de-centralized basis, which typically pushes decision making down to the people who actually interact with customers on a daily basis, and furthermore makes these managers feel like they have a more vested stake in the business.  In my opinion, this ownership mentality forces folks to quash any politically motivated behavior, and also compels them to show employees who engage in these non-productive activities the door.  So while the large bureaucracies are spending their time infighting, the de-centralized firms are focusing on stealing their customers.

Another exception is smaller businesses, where the owners spend time getting to better know their customers, and can also be much more flexible for their customers than can larger organizations. In fact, de-centralized firms are, in effect, a collection of smaller businesses owned by a larger parent.  Berkshire Hathaway (BRK-B) is a good example of this.  Furthermore, I suspect that now as more and more folks begin to realize that large companies are more focused on themselves rather than their clients, many clients will turn to smaller businesses—or decentralized ones--where they know and trust the decision maker. 

You might also be interested to know that I recently appeared on Fox Business News, which I have linked here.

I always welcome dialogue with my readers, so please feel free to send me any comments or questions you may have.

Justin

Copyright © 2009 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

12:45 pm est | link 


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Justin Fuller, CFA provides his market and investment commentary on this website.  Justin has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years.  If you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at:  justin@buffettologist.com.

 



The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way.  This content is intended solely for the entertainment of the reader, and the author.