2008: How do you grow a small business into a big one?

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Svinneyvaz Canadival (PH). I’m from Fort Lauderdale, Florida.

I read all your letters and annual reports multiple times, and every time I get a different insight. So thanks for doing it.

My question is about converting the successful small businesses into large enterprise. I have a good and successful small business from the last few years, and I’m unable to grow it to the next level. It seems like there are some components are missing, so I wanted to take your advice on it.

WARREN BUFFETT: Well, Berkshire was a small business at one time. I mean, it just takes time. I mean, it’s the nature of compound interest. You know, you can’t build it in one day or one week.

So Charlie and I — you know, we’ve never tried to do in some master stroke — convert Berkshire into something four times as large. People have done that sometimes in business.

But we’ve sort of felt that if we kept doing what we understood, and did it consistently, and had fun while we were doing it, that it would be something quite large at some point.

But there’s nothing magic — it would be nice to attract a whole bunch of money into some great idea and have it — you know, multiply it manyfold in a few weeks or something of the sort. But that has really not been our approach.

We have just — we have done — in a general way, we’ve done the same thing. Now, we do little variations of it, but we kept doing the same thing for years and we’ll keep doing it.

You know, we will have more businesses a few years from now than we have now. And we’ll have all the ones we have presently. Most of them will do better. Some won’t. And we will have added something.

And that’s an automatic formula for getting ahead, but it’s not an automatic formula for galloping ahead.

But we don’t really feel — we’re not unhappy because we’re not galloping. We’re not happy if we’re not moving at all.

But, you know, we’ve got 76 or so, in most cases, pretty darn wonderful businesses. And, like I say, we’ll have more as we go along. So it’s a very simple formula.

Gypsy Rose Lee said once — she said, “I have everything I had five years ago. It’s all that it’s 2-inches lower,” you know.

Well, what we want to have five years from now is a whole bunch of businesses we had before that are 2-inches higher, plus some more businesses. And that’s the formula.

Charlie?

CHARLIE MUNGER: Yeah. You’ve got to remember that it’s the nature of things that most small businesses will never be big businesses.

It’s also in the nature of things that most small — most big businesses — eventually fall into mediocrity or worse. So it’s a tough game out there.

In addition, the players of the game all have to die, and that is — those are just the rule of the game, and you have to get used to it.

We’ve only created from scratch one small business that became a huge business that I can think of, and that’s the reinsurance department.

And there, Warren and Ajit and others have created a great and valuable business out of air. But can you think of anything other that’s large that we’ve done in all these decades?

WARREN BUFFETT: No. No.

CHARLIE MUNGER: We’ve only done it once, so we’re a one-trick pony.

WARREN BUFFETT: Yeah. We were lucky on that one, too. (Laughter)

Yeah, and incidentally, without Ajit we wouldn’t have done it at all.

CHARLIE MUNGER: Right, right.

WARREN BUFFETT: It isn’t that we did it. Ajit did it. We just sat there cheering.

CHARLIE MUNGER: Somebody asked us once what was the best investment we ever made, and I answered the fee we paid to the executive recruiter to find Ajit Jain. (Applause.)