In his 2011 Berkshire Hathaway Annual Letter, Warren Buffett explains why Berkshire keeps some of its underperforming businesses. The company believes in honoring its commitment to the sellers and doesn’t sell unless the business has a cash drain or labor problems. This approach may not be optimal in the short term but builds goodwill with sellers for future acquisitions. Here’s an excerpt from the letter:
Berkshire’s newer shareholders may be puzzled over our decision to hold on to my mistakes. After all, their earnings can never be consequential to Berkshire’s valuation, and problem companies require more managerial time than winners.
Any management consultant or Wall Street advisor would look at our laggards and say “dump them.”
That won’t happen. For 29 years, we have regularly laid out Berkshire’s economic principles in these reports (pages 93-98) and Number 11 describes our general reluctance to sell poor performers (which, in most cases, lag because of industry factors rather than managerial shortcomings).
Our approach is far from Darwinian, and many of you may disapprove of it. I can understand your position.
However, we have made — and continue to make — a commitment to the sellers of businesses we buy that we will retain those businesses through thick and thin.
So far, the dollar cost of that commitment has not been substantial and may well be offset by the goodwill it builds among prospective sellers looking for the right permanent home for their treasured business and loyal associates.
These owners know that what they get with us can’t be delivered by others and that our commitments will be good for many decades to come.
Please understand, however, that Charlie and I are neither masochists nor Pollyannas. If either of the failings we set forth in Rule 11 is present — if the business will likely be a cash drain over the longer term, or if labor strife is endemic — we will take prompt and decisive action.
Such a situation has happened only a couple of times in our 47-year history, and none of the businesses we now own is in straits requiring us to consider disposing of it.
You can read the entire letter here:
Berkshire Hathaway 2011 Annual Letter
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One Comment on “Warren Buffett: Holding Onto Losers? Berkshire Hathaway’s Retention Strategy”
Fascinating. Given the extreme labor strife ongoing at NetJets, and the open hatred of management by pilots and flight attendants, I am surprised that Mr. Buffett et al have not dumped them.