"More Jimmy Lings will appear."
This is Warren Buffett's warning from his 50th letter to Berkshire Hathaway shareholders that investors who hang too closely on the word or vision — but not results — of any one executive may find themselves one day disappointed.
In his letter, Buffett tells the story of Jimmy Ling, the CEO of LTV who in the 60s took LTV from a company with $36 million in sales to number 14 on the Fortune 500 two years later.
Ling’s strategy, which he labeled "project redeployment," was to buy a large company and then partially spin off its various divisions. In LTV’s 1966 annual report, he explained the magic that would follow: "Most importantly, acquisitions must meet the test of the 2 plus 2 equals 5 (or 6) formula." The press, the public and Wall Street loved this sort of talk.
In 1967 Ling bought Wilson & Co., a huge meatpacker that also had interests in golf equipment and pharmaceuticals. Soon after, he split the parent into three businesses, Wilson & Co. (meatpacking), Wilson Sporting Goods and Wilson Pharmaceuticals, each of which was to be partially spun off. These companies quickly became known on Wall Street as Meatball, Golf Ball and Goof Ball.
Soon thereafter, it became clear that, like Icarus, Ling had flown too close to the sun. By the early 1970s, Ling’s empire was melting, and he himself had been spun off from LTV ... that is, fired.
Buffett's lesson here is not that today's investors need to avoid conglomerates.
(In fact, Buffett notes that Berkshire is one of the only major conglomerates left and defends the structure here. Well, and he sort of has to.)
What Buffett is advising is that investors remain cautious of situations where the word of an executive becomes something that seeks to talk past what the numbers might be telling you.
Periodically, financial markets will become divorced from reality — you can count on that. More Jimmy Lings will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will fight for their business. What they are saying will recently have "worked." Their early followers will be feeling very clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is — zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.
Of course, Buffett mentions no companies by name. And it's unclear if he really has specific companies in mind. What he's interested in cautioning investors about here are situations in which a company or a stock starts to look a bit too good to be true.
Because it probably is.
And what Buffett would likely say to folks looking for the next Steve Jobs is that a good CEO is important to make a great company, but don't overthink it: if you buy good businesses at good prices, you will be a successful investor.
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