value and opportunity

“Built to last” is a managment literature classic, first published in 1994. It has been reviewed and critized many times already,so I just want to provide a very short summary:

The author analyzes 18 companies which were succesfull for a very long time and compares them to less succesful companies in order to find out what set them apart. The most important point seems to be that the company is a “visionary company”, meaning that the company has a clear mission which is not only earning as much money as possible but somthing in the way of “We want to make people happy” (Disney). Combined with “core values” and “really big goals”, this, according to the author is the secret sauce for a long term succesfull organization.

Looking at those 18 companies clearly shows that since the book was written, not all the companies were great successes for their shareholders. Citigroup, Ford, Motorola were clearly not performance stars, on the other hand, a couple of o the companies (AMEX, Wal-Mart, IBM) are long-term successes and core holding of our value investing Hero Warren Buffett.

Is the book relevant for investing and if yes how ?

I think the answer is clearly “YES” and those are the 3 major points in my opinion:

1. Many current CEOs have read this book (and many future CEOs will read it) and try to act accordingly

For instance the “3G story” of the Brazilians who now run Ambev, Heinz and Burger King seem to have clearly taken this book as blueprint for their strategy. “Dream Big”, core values such as meritocracy, honesty etc. were clearly inspired by this. Edit: And yes, Jim Collins has actually written the foreword to “dream Big” and he seems to have worked with “mastermind” Leman for a long time.

Interestingly, in the book it is clearly said that just writing down those statements is clearly not enough, you have to live them every day which is not easy to achieve. So just when you see something like this written on an annual report, you know that they have read the book but you cannot be sure if a company actually follows those vision and values.

2. A strong vision and core values compared with a good alignment of management and investors might result in great shareholder returns

Many critics use the failed companies of the book as a proof, that success is more depending on luck than on any vision and core values. I would argue that they are missing one point: In many of the failed cases, there happened a serious disconnect between shareholders and management. The most obvious case is Citigroup, which at least since the 2000s was run to the benefits of the employees rather than for all stakeholders. The same could be said of Ford, where the Ford family did not really exercise the owner’s influence as it would have been necessary.

I think it is not random, that especially the companies which were held for instance by Berkshire (Amex, Procter) or where the founder / founding family has a strong tie to the business (Wal-Mart) did well. Both, the influence of a significant investor or a founder with a large ownership can ensure that a visionary company can be also a big success for shareholders. It is clearly not a 100% “hit ratio” but I think the chances for long-term success are clearly above 50%.

For me, Google for instance is a fantastic “visionary company”, but in Google’s case I am not fully convinced that their goals are fully aligned with me as potential minority shareholder.

3. Non-visionary companies can be very good investments as well but it might be harder to sustain success in the long run

The prime example for a non-visionary company in my opinion is Berkshire Hathaway. Buffett’s target has always been to compound shareholder’s wealth. That the company did this for so long and so successful in my opinion is clearly the result of Warren’s and Charlie’s genius and their long and healthy lives. Interestingly, now close to the end of their careers, they seem to be on the “Vision” and “core value” track. At least that is how I interpret the rebranding of many subsidiaries as “Berkshire Energy” and Buffett’s speeches about Berkshire core values which at least to my knowledge were not so prominent years ago.

I think it has become clear to Buffett, that a conglomerate formed by two geniuses might be hard to sustain when those two are not around anymore.Additionally it will be interesting to see how the interests of a future Berkshire CEO who will not own half of the company, will be aligned with the shareholders.

Summary:

Despite having some lengths, I think the book is a good and relevant read for investors who want to look a little bit outside typical investment literature. Some people might say that the book is too old to be relevant, but I personally think that the content of the book is pretty timeless.