Buffett: How to Grow a Small Business into a Big Business

Question: How do you grow a small business into a big business?

Buffett: Berkshire was a small business at one time. It just takes time. It is the nature of compound interest. You can’t build it in one day, or one week. Charlie and I never tried to do a masterstroke to convert Berkshire into something four times bigger. We just consistently kept doing what we understood and, if you have fun doing it, then it’ll be something quite large at some point. Nothing magical. It would be nice to multiply money in a few weeks. In a general way, we have done the same things for years. We will have more businesses in a few years – some will do worse, but most will do better. It is an automatic formula for getting ahead, but not galloping. We are happy not doing anything at all. As Gypsy Rose Lee said, ‘I have everything I had before, just two inches lower.’ [laughter] We want everything in two years to be higher.

Munger: It’s the nature of things that most small businesses will never be big businesses. It is the nature of things that most big businesses fall into mediocrity or worse. Most players have to die. We have only made one new business, and that is the reinsurance business run by Ajit. We only created from scratch one small business into a big one. We’ve only done it once. We are a one-trick pony.

Buffett: Without Ajit, we wouldn’t have done it all.

Munger: The best investment we ever made was the fee we paid to an executive recruiter to find Ajit Jain.

Buffett: We went into the muni bond [insurance] business. Ajit got the company up, licensed and running. In Q1’08, our premium volume was $400 million. Our volume was bigger than anyone else, and I wouldn’t be surprised if it was bigger than all the rest combined. They did 278 transactions. All done in an office with 29 or 30 people. One of the interesting things about it was that almost all the business was from people who already had insurance from others who are rated AAA. So we pay out only if the muni defaulted AND the bond insurer didn’t pay. We wrote for 2.25% when the original guy charged 1%. This tells you something about AAA in bond insurance in 2008. Ajit has done a remarkable job. We wrote a couple policies for Detroit sewers, and people have found these bonds trading at a better price than others only insured by other bond in- surers. I congratulate Ajit for it.

Source: BRK Annual Meeting 2008 Boodell Notes