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24 January 2018

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For whom the bell tolls

Mark Geoghegan 30 August 2016

"No man is an island, entire of itself; every man is a piece of the continent, a part of the main."

That's how John Donne, the metaphysical poet and cleric, put it back in 1624.

These days we presume a certain Mr Jain and most modern businessfolk beg to differ.

And they would have a fair point. While an oft-quoted 17th century poem may be a fine starting point for theological debate on the nature of society and our moral obligations to our fellow man, it probably doesn't cut it as a motif for success in business in the 21st century.

We've moved on and now allow that phenomena and rewards that encourage what may appear from the outside to be selfish behaviour can, when aggregated, turn into something that is in everyone's collective best interests.

In business in 2016 everyone is an island whose individual desires need to be understood and harnessed collectively if an enterprise is to succeed as a whole. Individual long- and short-term incentives need to be in place to make sure the whole makes the most of the sum of its many parts.

Up to this point everyone agrees. But while current business thought recognises the importance of keeping individuals well motivated and incentivised, when it comes to individual business units most senior managers become more Donne-like. They want their separate businesses to wish to work together - playing nicely and helping with cross-selling synergies and the like.

Where Jain departs from orthodoxy is to recognise that splitting businesses up into individual operating units, or silos, can actually work wonders.

Berkshire Hathaway is a collection of great businesses in hugely varied sectors. These days it is the exception, but back in the 1960s and 1970s many major groups were diversified in this way. A typical giant player would be a blend of raw materials, manufacturing, transport, energy, utilities, leisure, financial institutions and consumer businesses.

Each would almost be a mini-index in its own right and the diversification would be great for smoothing earnings. Then fashions changed.

The focus moved to being concentrated in single sectors and known for being good at what you did. Your group's purpose should be easily explained, measured and analysed against its peers. A long process of vertical M&A and refocusing formed global specialists in each sector.

This included our own, which very markedly divested its way into major insurance and reinsurance specialists.

The old conglomerates were perceived as being too difficult to manage expertly from the centre. They were also tough to analyse.

Yet Berkshire never followed this fashion and has always solved the expertise problem by buying high quality businesses in sectors with high barriers to entry and then leaving existing management well alone.

Check with analysts and they still almost universally hate this - because to analyse the group you have to formulate a view on hundreds of sub-sectors and no one can do this job alone.

But screw the analysts! Look at the value creation.

Munger, Buffett and Jain have shown that as long as you do it well you can do whatever you like.

392 years ago Donne signed off his poem like this:

"...therefore never send to know for whom the bell tolls; it tolls for thee."

His were bells of mourning, but as long as top- and bottom-line profit can keep growing while margins remain healthy, managers and investors alike will be collectively ringing the bells in unified celebration.

Good luck with the GenRe project, Ajit.

This article was published as part of issue August 2016/5

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