Berkshire Hathaway is big, mature, and its chairman is old (92 years). This leads many investors to look for companies that are similar to Berkshire but might offer a much longer runway. This article was initially written in 2019.
Invest like Warren Buffett: This article lists 15 high-quality business models which we label Mini/Baby Berkshires (Berkshire clones). They all have similarities to Berkshire Hathaway, except that they are much smaller and thus have a longer runway. They all have quality shareholders – an underrated factor in making market-beating returns.
In a recent article, Lawrence Cunningham lists 15 US companies that he believes have similarities to Berkshire. The businesses might not be similar, but Cunningham looks at similarities in how the companies are managed, how capital is allocated, and how the shareholders think. Lawrence A. Cunningham is an author and investor that has studied Berkshire Hathaway extensively. He has written multiple books, which we strongly recommend.
What is a quality shareholder?
If Warren Buffett had attracted the wrong shareholders early on, it’s unlikely he would have managed his superior performance. Why is that?
Quality shareholders have patience which helps managers operate strategically with a long-term outlook, and thus the capital allocations become more efficient with the help of compounding. Warren Buffett has spent his life educating his shareholders via his annual shareholder letters, and this has made it much easier for him to implement the investment strategy that has been so successful. Thus, the right shareholders are an essential factor in determining future returns.
In his book Quality Shareholders – How The Best Managers Attract And Keep Them, Cunningham argues that a high density of dedicated long-term shareholders results in numerous comparative advantages for companies and their managers, including ample time to execute the strategies. Mark Leonard in Constellation Software once said that you get the shareholders you deserve.
Cunningham argues a quality shareholder has these attributes:
- Quality shareholders have lots of patience
- Quality shareholders are not activists
- Quality shareholders reject prevailing fashion
- Quality shareholders measure performance over many years – not annual or quarterly
Index funds allow investors to enjoy market returns at no cost, and activist shareholders promote management accountability. But they both have their drawbacks:
Activists are short-term and mainly interested in a quick buck before they sell their position after a few years. Indexers don’t care as long as they get their market returns. Quality shareholders counteract many of these drawbacks by thinking long-term.
Quality shareholders and evidence
Lawrence Cunningham backs his thinking with empirical evidence:
The list above is free from survivorship bias, thus indicating Cunningham’s theories might offer great value.
How to attract quality shareholders
First, as mentioned above, an annual shareholder letter is a great tool to attract quality shareholders. What is a good shareholder letter? We will write more about this later, but we recommend reading LJ Rittenhouse’s Investing Between The Lines.
Second, quality shareholders are not focusing on quarterly earnings and certainly not guidance or earnings. Their focus is on long-term returns on capital employed and operational metrics. This is also reflected in the long tenure of CEOs with quality shareholders. Buffett has been in charge for 60 years, Alleghany has had only five CEOs in 80 years, and Prem Watsa has been in charge in Fairfax since 1985.
Third, how management allocates capital is paramount – how it is put to its best use. They are agnostic and not fixed on specific types of allocation.
15 quality companies (Mini/Baby Berkshires)
Below is 15 companies that Cunningham suggests offer both quality businesses and quality shareholders:
Adobe is one of the world’s biggest and most diversified software companies. Many of the products are offered as SaaS (Software as a service) and the recurring revenue is high.
Alleghany (Y) (Noq acquired by Berkshire Hathaway):
We have covered Alleghany in a previous article:
Amphenol has seven business units aerospace, automotive, sensors, fiber, and broadband.
The company belongs to the exclusive group that has raised the dividend at least 25 times in a row: the Dividend Aristocrats.
Carlisle Cos (CSL):
Carlisle is an investment focus where one of the main goals is to have a decentralized/hands-off philosophy toward the underlying businesses. It’s mainly an industrial conglomerate.
Danaher is an investment company mainly focusing on healthcare.
Dover is an industrial conglomerate with a wide range of businesses and industries. The business segments are engineered products, fueling solutions, imaging & identification, pumps & process solutions, refrigeration, and food equipment.
Dover is a Dividend Aristocrat.
Emerson Electric (EMR):
Just like Roper Technologies has evolved into the software business (see below), Emerson is gradually doing the same. Still, around 25% of its business is related to the volatile energy markets. The current segments are automation solutions and commercial & residential solutions.
Since 1954 Emerson has had only three different CEOs. Emerson is a Dividend Aristocrat.
Graham Corporation (GHM):
Graham Holdings is the former Washington Post and Newsweek owner. It has become an owner of a wide range of businesses:
- Some online magazines
- Several TV stations
- Manufacturing companies
- Health care
- Car dealerships
- Energy production
Fairfax Financial Holdings (FRFHF):
Fairfax was founded by Prem Watsa in 1985 and is a Canadian version of Berkshire Hathaway. The main businesses are insurance and investments. The performance was excellent up until 2010, but many investments have not turned out well over the last decade.
Illinois Tool Works (ITW):
Much like Berkshire, the philosophy of ITW is a decentralized and hands-off management style. It’s a very diversified industrial conglomerate with seven business segments: automotive, construction, food equipment, polymers & fluids, specialty products, test & measurement, and welding.
We have covered Alleghany in a previous article:
Post Holdings (POST):
Post is a food company that owns its brands but also has branded and private labels.
Roper Technologies (ROP):
Roper was historically an industrial company, but it has gradually shifted its business to becoming a software company. The current business model is not that different from Constellation Software’s, except that Roper historically has done fewer but bigger acquisitions. Roper owns many niche software businesses ranging from insurance to toll booths.
Roper has paid an increasing dividend for 28 years. The payout ratio is low, and the trend will likely continue for many years.
Stryker Corp (SYK):
Stryker is a healthcare company with three segments: Orthopaedics, MedSurg, and Neurotechnology & Spine.
About 90% of the sales are derived from one single product that is not patented: The WD-40. Most males on this planet have knowingly or unknowingly used this product for lubrication and rust removal. The other business segment is household/cleaning products.
Despite not being patented, the WD-40 has performed consistently and reliably over many decades.
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.
– What are Mini/Baby Berkshires, and how do they differ from Berkshire Hathaway?
Mini/Baby Berkshires are companies similar to Berkshire Hathaway but smaller, offering a longer runway. They share qualities in management, capital allocation, and shareholder thinking. Learn more about these companies in the article.
– What is a quality shareholder, and why are they crucial for a company’s success?
Quality shareholders are patient, non-activist investors who focus on long-term returns. Cunningham argues that companies with quality shareholders outperform, as these investors contribute to strategic operation and efficient capital allocation.
– Why is a long tenure of CEOs associated with quality shareholders?
Quality shareholders prioritize long-term returns on capital employed and operational metrics, reflected in the extended leadership tenure. Examples include Warren Buffett’s 60 years at Berkshire Hathaway and Prem Watsa’s leadership at Fairfax since 1985.