csen
Profit Margins, Labor Scarcity, Promises, and Berkshire Hathaway

"Berkshire’s promises have no equal, a fact affirmed in recent years by the actions of the world’s largest and most sophisticated insurers, some of which have wanted to shed themselves of huge and exceptionally long-lived liabilities, particularly those involving asbestos claims…No other insurers’s promise would have given Lloyd’s the comfort provided by its agreement with Berkshire. The CEO of the entity then handling Lloyd’s claims said it best: ‘Names [the original insurers at Lloyd’s] wanted to sleep easy at night, and we think we’ve just bought them the world’s best mattress.’" -2013 Berkshire Hathaway Annual Report, Page 10.

I think about employment a lot these days. Until my current endeavor, I’d had four jobs in my career. The first I left after a year for a more attractive offer. The second I got fired from after a year because while doing a competent job, I wasn’t very passionate about what I was doing and it showed. The third I left after four and a half years because the head of the firm and I both agreed that I had grown professionally as much as I could there, and I wasn’t interested in staying there any longer under the existing terms of my role. And in the fourth I wasn’t very happy with the direction the company was going in or my place within the company, and whether coincidence or not after expressing my concerns I was no longer employed a week later. Good learnings experiences all.

After ~9 years of employment I assessed my strengths and weaknesses and thought about what a good next fit for me would be. I had demonstrated that after a year or two of being a generic employee I tended to get bored or irritated with management. I wasn’t very good at carving out a role for myself in a complex organization — I suspect a lot of doctor’s sons are like this. Vision and long-term decision-making were incredibly important to me. I operated best as an independent decision-maker with a lot of flexibility in terms of who I could collaborate with and how and where I worked. Two-way trust mattered a lot. Money was important but a secondary factor. So when Guillermo and I talked about figuring out a way of working under the same virtual roof it appealed to me a lot. The value of that implicit trust/promise was worth more to me than any company or hedge fund could offer.

Which brings me back to Berkshire Hathaway. Those familiar with hedge fund economics might not understand why Todd Combs and Ted Weschler would take less money working for Berkshire than they might be able to get in the hedge fund world. But having spent half my career at a hedge fund, I totally get it. If your investment management style requires a long-term perspective, long-term patience, and long-term capital, and you know what you want to do for the rest of your career, why take a gamble on the potential for more money if you have to operate in an environment that is notoriously short-term, at times unethical, and often not loyal?

Profit margins in the corporate sector are at record highs. The multi-decade period of demographic labor scarcity on the horizon promises to give labor more bargaining power over its employers/capital than it’s had in decades. The easy assumption is that wages/profits will rebalance to give labor an increased share, reducing profit margins while possibly increasing economic growth.

But there’s more to employee compensation and satisfaction than wages. Schedule flexibility matters. Workplace flexibility matters. The implicit or explicit promises of employers matter. Trust is a form of goodwill not found on any balance sheet. This is a cultural thing that will take time to appreciate, and not everyone will get it. But, and there’s no good way to quantify this, companies worthy of that trust may find it easier to maintain present profit margins more than profit margin skeptics appreciate.

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