It's Supposed to be Hard, and 18 Other Lessons from Warren Buffett

by Richard Walsh

To foster our culture of continuous learning at MEI, I wanted to delve into Warren Buffett's wealth of knowledge, a fitting sequel to the post on mimicking Charlie Munger's decision-making process. The most fascinating aspects of learning from Warren Buffett are two-fold. For starters, he serves as the primary source, sharing invaluable insights yearly through the Berkshire Hathaway shareholder letters. Secondly, the learning is real-time, devoid of retrospective biases often found in memoirs or books by other business leaders or investors. This transparent and live learning process is a hallmark of the 'Oracle of Omaha.'

1. It's supposed to be hard. The most interesting takeaway from reading Buffett's shareholder letters, a few books on Buffett, and listening to podcasts about them - notably one of our favorite podcasts at MEI, the Founders podcast - is an implicit one. He never comes out and says that it's supposed to be challenging. Still, every year, the person many believe to be the greatest investor of all time discusses mistakes, missed opportunities, and poor investments. Of course, as we will learn in the other lessons from Buffett, he has a system to aid his decision-making, significantly allowing the wins to outweigh the losses.

2. Maintain a margin of safety. Limit debt, keep costs low, and operate from a position of financial strength with multiple sources of earnings and cash flow.

3. Selective diversification. It is essential to know when and where to diversify. Having a diversified base of earnings is vital, but diversifying funds away from your best investment to a second-tier investment is anathema to the Buffett way of thinking. At MEI, we have a diverse portfolio of assets across geographies, climates, service providers, customers, products, and channel partners, but limit diversification across technologies (solar, batteries, and EV charging as of today) and sectors (commercial industrial, community solar, and selective small utility-scale). For instance, we cannot be the best wind energy or residential solar provider, so we have avoided diversifying that way.

4. A big believer in autonomy. At Berkshire, a limited central function manages capital allocation and compensation of top people, leaving most day-to-day operations to the individual businesses. He believes autonomy leads to visible problems instead of the invisible type. An example would be a certain problem at one of the businesses that could have been avoided if management had been involved earlier. If they had known about X, then Y would not have happened. However, the decentralized autonomous approach avoids the scarier, invisible problems that come from decisions made too slowly or, even worse, not at all. We strive for this at MEI by enabling our team to be autonomous and 'run their business' and by launching Accel-Dev, which invests directly in development partners like Formation Energy and Centennial Generation.

5. Create moats around operating businesses. "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital," says Buffett. There are several types of moats discussed by Buffett over the years, including low-cost production and scaling, high switching costs, brands and other intangible assets, and network effects. We enjoy several of those moats at MEI, and the one we are most proud of is the network effect, or what we call the MEI ecosystem of partners and customers.

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6. There is a reason horses wear blinders. More broadly, it is essential to focus on the fundamentals of the business, not the price of the stock or the market, and avoid overreacting to the macro environment. Horses need to be aware if the course is wet or dry and where the turns are, but only a little beyond that. Blinders help them focus on what they can control, such as their speed, and avoid the distraction of focusing too much on the competition. The only time Buffett admits to paying attention to the market is when they can be buyers and take advantage of fearful sellers. The long-term approach allows them to resist the temptation of managing their business according to the whims of the market.

7. Good jockeys do well on good horses. He is clearly a fan of horse racing. The chief takeaway here is that it is better to be in a business with strong tailwinds as they outweigh even the best management teams. He stresses that "eventually, eroding fundamentals of an industry will overwhelm management brilliance." We recognize we are 'doubly blessed' at MEI to be in the clean infrastructure business with significant tailwinds in the areas of policy, consumer demand, improving technology, and declining costs, and we will let the reader be the judge on the quality of the management team!

8. It is better to switch boats than to row harder in a boat with a leak. Or said another way by Buffett, "turnarounds rarely turn."

9. Get the right shareholders. Companies often obtain the shareholders they seek and deserve. If the focus and communication are on short-term results and stock price movements, the company will likely attract shareholders who think the same way. He wants to make money with his shareholders rather than for them. We could not be happier with our current investors at EQT as they provide us with the capital, resources, and, most importantly, the growth mindset that is required to take advantage of the significant tailwinds we are experiencing in the clean infrastructure sector.

10. Predicting the rain is only useful when building an ark. Forecasts and predictions about the market are only useful with a strategy to execute them. It is no secret that the clean infrastructure sector and, more specifically, the commercial and industrial solar (and storage) sectors are growing rapidly, but just knowing that is not enough. At MEI, we have a plan in partnership with EQT, our Board, and a leading consulting firm to 10x the business in the next five years.

11. Beware of the 'Princess and the Toad' temptation. Many management teams are tempted by the chase or the thrill of the deal and believe they have the kiss to turn a toad into a prince. We try to constantly remind ourselves a lesson from Buffett that it is okay to buy a toad at a reasonable price for the toad or a prince for the price of a prince, but always beware of deal activity for deal activity's sake and remember corporate size is not directly related to shareholder wealth. As we explore M&A and strategic partnerships at MEI, we are constantly pushing our team to answer the following questions: Why us? Why did this deal come to us? Why are we uniquely positioned to add value to this?

12. Know when to use the 'Gin Rummy strategy' for quickly discarding cards (or businesses). Buffett is self-aware enough to know that he often hangs on to companies or investments too long, but he would rather do that than enter into investments with a short-term view. He also admits to holding onto an average business for longer than he should if it is generating cash, and he likes the people. We are certainly guilty of this at MEI. We have been known to hold onto a potential deal or project for too long or allocate time to an opportunity even though we know there is a low likelihood of it moving forward.

13. Bet on things that do not change (like fear and greed). There will always be outbreaks of fear and greed, and perhaps the most famous quote from Buffett is, "Be fearful when others are greedy and greedy when others are fearful." It is important to recognize that fear and greed are ever present and to be positioned to take advantage when they occur. It is difficult to predict when they occur, and he does not play the prediction game. Customer needs in our sector that stay the same are the desire to have low-cost energy and infrastructure solutions that require no capital upfront and are clean and resilient.

14. There is never just one cockroach in the kitchen. This one really stuck with me as it is pertinent to the M&A business for both assets and companies. If, in the diligence process, the team discovers something in the lease was misrepresented, then you can likely bet something in the revenue agreement is going to stray from the initial understanding. The same is true for underwriting a pipeline, state market strategy, or customer relationship with a potential development partner.

15. Businesses are not judged like divers. The degree of difficulty does not matter. He and Charlie are known for having the 'too hard bucket' and admit they have not learned how to solve complex problems, just how to avoid them.

16. Distribute merit badges, not lottery tickets. He is an advocate for paying people based on what they can control. He wants leaders that run the business as if they own 100% of it, cannot sell it for 100 years and treat it like it is 100% of their net worth. 

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17. Only swing at pitches in your strike zone. He admired Ted Williams, who was one of the greatest hitters the game of baseball has ever known. Williams broke the strike zone into 72 pitches and would only swing at pitches that fell within his own strike zone. This is in line with the circle of competence discussed in the Charlie Munger post.

18. Time is the best filter. Time is the friend of a wonderful business and an enemy of the average business.

19. Love the work and the people. Why else would someone who has more wealth than he would have ever dreamed of and is well into his 90s still be working every day? He clearly loves the work and the people he works with. We are doing our best to build an organization at Madison with people who are a joy to work with and enjoy the work.

Warren Buffett, often regarded as the epitome of prudent investing, provides invaluable lessons year after year through his annual letter to shareholders that can apply to any business or investment strategy. The core takeaway lies in acknowledging the strategic prowess and decision-making and understanding the essence of perseverance amid challenges. At MEI, we are committed to maintaining a margin of safety, exercising selective diversification, embracing autonomy, and fortifying our business with enduring moats. With unwavering determination, we navigate the clean infrastructure sector's surging tides, fueled by a clear vision and guided by the timeless wisdom from Buffett, among others. Here's to rowing in the right boat and riding the best horse!