Berkshire Brilliance: Compounding And Vested Interests

Thomas Russo bought his first shares of Berkshire Hathaway back in 1981 (he’s done “ok”). After originally being skeptical of a little-known character named Warren Buffett and his snappy sidekick Charlie Munger, Russo had two “lightbulb moments.” These two simple observations apply to our businesses as well as anything we’ll ever invest in. 


Buffett said that the government gives you one advantage: no taxes on unrealized gains, which means businesses that can reinvest in themselves can compound without tax drag (consider Amazon, not a Berkshire holding, but the ultimate example of this accounting reality). He also said to remember that anyone making a capital allocation decision on your behalf is your agent, and it is up to you to make sure they aren’t acting in a self-interested manner (consider this part of the reason Buffett closed the partnership and moved to a shareholder model). 


So how can we apply these seemingly larger-than-life ideas at a smaller scale?


First, respect the power of reinvestment and its compounding results. Forget the tax advantage for a moment and focus just on the concept of internal improvement. The best businesses regularly upgrade themselves in an efficient manner. We’ll include self-improvement and getting the right people on the bus within this concept. There is no “set it and forget it,” all things require proper maintenance over time. Any tax advantage is a bonus on top of steady forward progress. Let’s call this the rule of compounding interests.


Second, we have to respect the power of collaboration with mutually-shared interests. We want to align ourselves with people who both care and benefit from our success. Whether it’s for clients or partners, the goal should be to produce a contractual structure that assures mutual benefits with some standard of care. When a contract isn’t available, we can always check the motives. Let’s call this the rule of vested interests.


Whether it’s Russo vetting Berkshire or ourselves setting up our own businesses, the rule of compound and vested interests apply. When a group of people not only care but are incentivized to move the whole business forward, magic happens. The snowball we collectively roll over grows to be pretty big, pretty fast. It really is that simple.


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