Berkshire's Woodstock

While the whole David Sokol issue has been disappointing and out of character for Berkshire Hathaway, all of a sudden there are articles about breaking up the company because of the "sum of the parts" opportunity to create value. I'm sure that the financial press received spreadsheets and analyses from all the major investment banks on this hackneyed idea.

The fundamental issue is the durability of the BH business model. In my opinion, it's built on a few key elements. First, there is the enduring Graham and Dodd foundation, which is the basis on which Warren Buffett and Charlie Munger invest and look at companies. After all, Buffett himself studied at the feet of Graham & Dodd at the Columbia Business School in 1949, and his longstanding support of the value-oriented philosophy led to the creation of the Heilbrunn Center for Value Investing and the Graham & Dodd breakfast, which has always attracted top notch business leaders. Along with a disciplined analytical focus, the team of Buffett and Munger have added a fantastic intuition for simple businesses with good models and good leaders.

The next feature is the ability to reallocate cash flows among the businesses in the Berkshire portfolio. Past Chairman's letters have told stories like redeploying over a billion dollars in excess cash flow from See's Candies to other portfolio companies or for new acquisitions. This is an art that cannot be taught in a corporate finance course. Again, it comes from an analytical discipline, an ability to isolate the key issues, and a good sense for people. Looking at M&A experience in public companies, this is indeed a rare and valuable skill. This is "alpha," not "beta," and it is a skill investors should be willing to pay for.

The fact that they have done it over such a long period of time, as shown by their long and consistent growth in book value above the S&P 500 would suggest that investors are not being fooled by randomness.

Finally, there is the skill of the founders in retaining and properly motivating the founders of the portfolio companies to invest 100 percent of their energies in growing their business and in making a contribution to the portfolio by, for example, stepping to lead troubled assets from time to time. Of course, there are many, many additional subtle personal elements to the way the Buffett-Munger team operates, but these are the key elements, in my view.

Add them up, and it's quite a potent model that has proved durable and effective. Breaking up the company means that "The Song is Over," as Roger Daltrey would sing. But, if Buffett and Munger are good at leadership development and succession planning, there's no obvious reason why it should be so. However, their continued waffling about a successor, while dropping occasional hints about Ajit Jain, David Sokol and others, has really not been a good service to shareholders. While "Trust us," is okay for a time, ultimately shareholders deserve some sort of answer. I doubt that it will come in Omaha this weekend, which will do nothing but add to speculation and rumor mongering.