Warren Buffett’s two great lessons for Business and Branding.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” (Warren Buffett)
By Gustavo Bernardino / Co-founder and Head of Business Development at Fire Can Burn
Warren Buffett’s fundamental strength as an investor is seeking truth in business. His geniality is based on a simple and yet deep investigation. Instead of having thousands of models to describe reality, he looks directly into it. His success depends much more on firm values and a sharp perception than on a stratospheric IQ, as he himself affirms (1).
Buffett can penetrate a company’s essence and see it through with clear sight: Its performance, problems, people and, most importantly, its brand value. He developed a distinct skill set that allows him to see businesses in their bare reality and predict their outcomes with astonishing precision.
How did he achieve that? Of course, there are many facets to his success, ranging from his education until the American business environment that favored his investment acumen. I will not exhaust all these factors. But, I believe, Buffett had two defining moments that were essential to shape his career and that would later become the cornerstones of his investment philosophy. He learned to identify value by paying attention to two layers of a company: The hard facts about the business and the economic value that cannot be touched, but it is there nonetheless. That is, the intangible value reflected on a brand.
When Buffett started investing in the stock market he was mostly unaware of these two types of values. He was guided by graphic analysis and the desire of short-term gains, trying to predict market trends through complex models that focused merely on stock prices. That is, he was joining all of that crazy hyper-activity we can verify in Wall Street. This was until he met his master Benjamin Graham, a man of an unbelievable vast intellect, who taught him to forget the market frenetic movements and do a simple and powerful thing: To look. To verify a business’ real value.
Ben taught him that the stock prices were, in the short-term, a mere reflection of speculators’ opinions. People were “voting” according to their predictions. The job of a real investor was to verify what a company was really worth by checking the business per se: How much are the assets worth? how good is the performance? Once the analyst is grounded on reality, understanding a business’ true and intrinsic value, he's able to assess if a market price ist too high or too low and profit off of that discrepancy.
Benjamin Graham used to say that “in the short-term the market is a voting machine; in the long-run it acts as a weighing machine.”(2) Opinions fly frantic and the market goes through euphoria and depression - and the prices move along these same lines -, but once the market gets back to its senses, it will recognize where true economic value lies. This was Buffett’s first wake-up call: Do not be fooled by the jugglers and the clowns. Search for real value.
The other great defining moment was when he met his lifetime business partner Charlie Munger, who until this day works with him at Berkshire. Munger’s teaching is essentially the same of Graham's. It still requires one to look closely into reality, but also paying attention to a much more profound and vital aspect than the book value: the brand. In Buffett’s own opinion “Charlie’s most important architectural feat was the design of today’s Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”(3) That means, do not only chase businesses with a good operational performance or with valuable tangible assets, but find the wonderful brands that are being sold at fair prices in the market; buy and keep them, because it’s very likely that they will prosper and grow.
When Buffett started noticing the power of brands his whole strategy evolved and became more refined. In this new phase, he acquired Coca-cola, Walt-Disney, American Express and many others. All of them are brands with a distinct position in the market. One of his most recent investments was Heinz, the famous ketchup. As a reason for investing in the brand he said that “we (at Berkshire Hathaway) hope to own Heinz a hundred years from now. If you own great brands and you take care of them, they’re terrific assets.”(4) Regarding American Express he also commented that the most important thing in it is “the brand and the customers that aspire to be associated with the brand."(5) The way the brand connects to its audience, how it is perceived and its unique position in the minds and hearts of the clients is essential to create long-term value.
Not only was Buffett now looking for great brands, but he understood that he should create one himself: Berkshire Hathaway. His holding company’s brand is today a symbol of economic abundance and wisdom.
The human values Buffett imprinted in Berkshire’s culture also became an immense intangible value. He has a great focus on reputation, sobriety and prudence. He is very strict about keeping his reputation and the company’s intact.(6) As he once wrote: “"Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."(7) The non-economic values are a great ingredient to his success, so much so, that without them “much of Berkshire’s economic value would collapse as well.”(8) There is no great business without a great brand possessing lasting values, economic and non-economic.
That is why every company must be committed to seeking the truth in business and brands: They need to create long-term sustainability. This lasting and powerful value can only be possible through the building of a great brand with human values and sound economic principles. Only by working on these multiple dimensions can we translate human endeavor into real value that will be perceived, chosen by consumers and that will have a lasting impact in the future.