Lessons from this meeting:
1. Fixing a Misaligned Culture
- Prioritize profitability over sheer scale: At Gen Re, Buffett & Munger cut unprofitable “accommodation” business, even at the cost of halving premiums, to restore underwriting discipline.
- Don’t hesitate to overhaul: True turnaround sometimes means a “major fix-up operation”—firing or refocusing teams until the right culture sticks.
2. Entrench the Right Culture for Succession
- Autonomy breeds loyalty: By letting managers “paint their own painting,” Berkshire keeps talented operators happy and unlikely to leave, even post-Buffett.
- Guard your unique culture: Size and concentrated shareholding make hostile takeovers virtually impossible; culture becomes its own moat.
3. Invest in Capital-Intensive Businesses That Earn ≥ Cost of Capital
- Accept lower ROIC if sustainable: Utilities or railroads earning ~12% on retained capital can be as attractive as cash-rich businesses, provided returns exceed cost.
- Float is a lever: When float costs less than zero, even modest underwriting returns amplify equity ROI.
4. Expect Float Growth to Slow and Run Off
- Plan for natural runoff: Retroactive reinsurance contracts “melt away” over time—don’t assume perpetual 20%+ growth.
- Keep hunting smarter float: Even if headline float plateaus, you can still find niche deals that add low-cost float incrementally.
5. Steer Clear of Declining Businesses—Unless They’re Dirt Cheap
- Avoid “cigar butt” investing: Declining industries (e.g., encyclopedias, newspapers) rarely reward new entrants—best to pass unless price is so low risk/reward is compelling.
- Pick your exceptions wisely: If you do own a downturn business (e.g., newspapers), you must understand its long-run economics better than most.
6. Ignore New Issues & High-Commission Offerings
- Never chase IPOs: If a seller picks the timing, odds are the new issue won’t outperform a vast universe of un-promoted shares.
- Avoid products with embedded “ratchet” fees: Any opportunity that pays brokers 5–7% up front can’t be the cheapest use of your capital.
7. Incentives: Autonomy + Partnership
- Tailor pay to business: No one-size-fits-all formula—each subsidiary’s comp plan reflects its unique economics (e.g., GEICO, reinsurance, investment teams).
- Align partners, not principals: Todd Combs & Ted Weschler share 20% of each other’s performance to foster collaboration, not turf wars.
8. Beware False Precision in Risk Models
- Don’t worship “sigma”: Heavy reliance on statistical (Gaussian) forecasts blinds you to fat‐tail events—Berkshire prefers mental worst-case thinking.
- Margin of safety > fancy math: Build in conservatism so you never risk what you can’t afford to lose, even if it “penalizes” short-term returns.
9. Retain Earnings When You Can Compound >100% ROI
- Buybacks vs dividends: If every dollar left in Berkshire turns into more than $1, shareholders are better off than receiving a dividend.
- Redeploy cash at an edge: Whether buying Lubrizol or expanding utilities, prioritize internal redeployment over cash payouts.
10. Read Widely, Learn from Others’ Folly
- Study financial history: Obsessively reading past disasters (e.g., 1901 Northern Pacific corner) teaches far more than any risk model.
- Continuous learning trumps IQ: Over decades, Buffett & Munger gained more edge by understanding human nature and error patterns than by raw smarts alone.
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