🎙️ Interview Lawrence Cunningham
Warren Buffett insights
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I’m Pieter and welcome to a 🔒free edition 🔒 of Compounding Quality.
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Do you know Lawrence Cunningham?
He is a Warren Buffett expert and serves on the board of great companies such as Markel, Constellation Software, and Kelly Partners Group.
In this interview, you’ll learn the following:
Unique Warren Buffett stories
What makes great companies like Berkshire and Markel so unique
And much more
🎙️ Interview Lawrence Cunningham
Compounding Quality: What was the key reason you decided to write The Essays of Warren Buffett?
Lawrence Cunningham: Warren Buffett is an investment expert and I focused mainly on corporate governance. The combination of both can be very powerful. It was Warren’s idea to publish The Essays of Warren Buffett as a book and to update it regularly.
The book compiles all shareholder letters of Warren by theme. You can see it as an autobiography of Buffett’s writings.
I think that every investor can learn a lot from Warren. I wanted to give back to the community via this book.
Compounding Quality: Could you summarize the book in a few key learnings?
Lawrence Cunningham: The Essays of Warren Buffett is often described as the bible of quality investing.
Investors should focus on the underlying fundamentals of the business and not on the stock price. In the long term, stock prices always follow the evolution of the intrinsic value.
Another key takeaway is the importance of management. You should focus on companies that are run by very honest and capable people.
“Look for 3 things in a person. Intelligence, Energy, & Integrity. If they don't have the last one, don't even bother with the first two.” - Warren Buffett
What is described in The Essays of Warren Buffett differs from what most professors teach at university. They focus on the Modern Portfolio Theory (MPT), beta, ...
… This doesn’t make a lot of sense to me. I prefer to focus on the underlying business instead.
"Beta and modern portfolio theory and the like - none of it makes any sense to me." - Charlie Munger
Compounding Quality: The Essays of Warren Buffett was first published in 1997. How did Warren Buffett and Berkshire Hathaway evolve since then?
Lawrence Cunningham: Under the influence of Charlie Munger, Warren Buffett evolved from a classic value investor to a quality investor.
Warren Buffett always said that he likes both equities and private companies. When the price looks attractive, Warren will buy the company regardless of whether it’s a listed company or not.
The major change he made since 1997 is that Warren Buffett moved Berkshire Hathaway from an organization that invested mainly in public equities to a conglomerate where most value can be found in wholly owned subsidiaries.
The main reason for this is that Warren has built an exceptional track record over the years. He is well-known for being trustworthy and to keep his word.
Private companies know Berkshire is a good home for their business if they want to sell their ‘baby’.
As a result, more families started to call Buffett and he got more opportunities to buy great (private) companies at a fair price.
Compounding Quality: What’s something new you learned about Warren Buffett over the past 10 years?
Lawrence Cunningham: Warren Buffett is not full of surprises. What you see is what you get.
One interesting thing to highlight is that besides Berkshire Hathaway, he also has some investments in his private portfolio.
He owns a bit of Microsoft, invested in farms, bought distressed real property, residential apartment buildings, and so on. Over the years, Buffett owned companies like Wells Fargo, Walmart, and Johnson & Johnson.
Almost all of Buffett’s money is invested in Berkshire Hathaway and his private investments only count for a small fraction of his total wealth. But it’s still interesting to look at his private portfolio.
Compounding Quality: Given its size, do you think Berkshire can outperform the S&P 500 over the next two decades?
Lawrence Cunningham: Size hurts performance. Berkshire Hathaway will have a harder time delivering above-market returns just because of their size and the fact that their opportunity set available shrinks.
There are only a very small number of companies available for sale today that would move the needle for Berkshire.
I don’t think Berkshire Hathaway will perform as well over the next 50 years as it did over the past 50 years. However, the Berkshire structure is unique.
As a result, I think Berkshire will continue to do well in the years to come. I definitely won’t sell my shares.
"Everyone who says that size doesn't hurt performance is selling." - Warren Buffett
Compounding Quality: What is the best decision Warren Buffett made during his career?
Lawrence Cunningham: Warren Buffett says the best decisions he has ever made are all personnel decisions. This underlines once again the importance of management.
Partnering up with Charlie Munger helped Warren Buffett and Berkshire Hathaway tremendously.
Charlie made Warren see the power of owning wonderful companies. As a result, Buffett switched from buying fair companies at wonderful prices to wonderful companies at a fair price.
The big lesson for readers here is that you should associate yourself with the right people in life. This is the case for marriage, friends, as well as in business.
Compounding Quality: How can you recognize an exceptionally talented investor?
Lawrence Cunningham: The proof of the pudding is in the eating.
Look at the track record of an investor. It tells you a lot. You want to see a strong track record for at least 10 years and preferably even 20 years.
Great investors are very disciplined and don’t make emotional investment decisions. They also aren’t focused on market prices and they focus on the fundamentals of the business instead.
Compounding Quality: You are active as a Director in many excellent companies (Markel, Constellation Software, and Kelly Partners Group). What do these companies have in common?
Lawrence Cunningham: These companies are active in 3 different industries:
Markel: provides specialty insurance and investments
Constellation Software: focuses on acquiring niche software companies (VMS software)
Kelly Partners Group: offers accounting services for private businesses and individuals
And yet, these 3 companies have many things in common.
The foundation for these great businesses, just like Berkshire Hathaway, is built on an excellent culture.
They use a decentralized business model and give their employees the autonomy to make business decisions at a lower level. Furthermore, they are excellent capital allocators too.
Great companies always try to create a win-win-win situation:
Win for employees: happy employees are more productive
Win for customers: happy customer will result in a thriving business
Win for shareholders: happy employees + happy customers = good business
It’s important to understand that business is not a zero-sum game.
Compounding Quality: You serve on the Board of Directors of Kelly Partners Group. What attracted you to the company?
Lawrence Cunningham: Great companies need Quality Shareholders. I wrote a book about this and Brett Kelly seemed to like it. Brett Kelly (founder and CEO of KPG) periodically updates investors in Kelly Partners Group and this series is called Quality Shareholders too.
I believe that Brett Kelly is an excellent capital allocator. It is an interesting business to look at if you ask me.
Compounding Quality: Berkshire Hathaway, Markel, Constellation Software, and Kelly Partners Group are very attractive companies. Any other examples you can give? Maybe Watsco?
Lawrence Cunningham: I agree with you that Watsco has an excellent business model and culture.
Danaher is another example of a company that possesses these characteristics. The brothers Steve and Stewart Rales did an excellent job with the company.
In my book Margin of Trust, I give some more company examples.
Compounding Quality: Thank you very much for your time, Lawrence. Any final advice for our readers?
Lawrence Cunningham: I would like to end with 3 pieces of advice:
Always let your winners run
Let the magic of compounding work for you as long as possible
Invest early and invest often
Whenever you’re ready
That’s it for today.
Compounding Quality is all about securing your financial future.
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Happy Compounding!
Pieter (Compounding Quality)
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Finchat: Financial data
I have just finished reading "Quality Investing" by L. Cunningham, strongly recommended to those that understand that owning stocks = part-owning businesses!
Good reminder of what matters most, thanks for sharing!