University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting

by Daniel Pecaut

Each business has its own key measures of building business value. What Buffett wants to pay for is widening the moat. Munger noted that GE and many other large companies have centralized personnel departments for such things. Imposing policy from headquarters can build resentment. Berkshire is the opposite – totally decentralized management.

Buffett recommended that the key to handling it is to create a structure that minimizes the weaknesses in human nature. Munger added that much bad behavior is subconscious, and the cure is to have folks bear the consequences of their decisions. Seen from this perspective, Wall Street is an irresponsible and immoral system.

Buffett summed up the slides, decrying the news headlines that report the “all important number,” which could easily be the “all deceptive number.” Instead, investors should focus on gains in operating earnings, gains in book value and gains in intrinsic value.

Buffett allowed that if you have tons of receivables and inventory, that’s a lousy business in inflation.

As he has in years past, Buffett asserted that The Intelligent Investor chapters 8 (Mr. Market) and 20 (Margin of Safety) give you all you need to know. Build into your system that stocks get mispriced.

Buffett claimed that in 53 years, he and Charlie had never had a discussion about buying a business that included a talk about macro affairs. “If it’s a good business at a good price, we buy it. There is always going to be bad news out there.”

Buffett suggested that investors stay away from businesses they don’t understand well. You want to be able to have a decent idea of what the business will look like in 5-10 years – then wait for a crazy price.

Buffett profoundly noted, “To ignore what you know to listen to someone else who doesn’t know, doesn’t make sense.”

By highlighting these two events, Buffett was teaching the shareholders several essential lessons: For one, focus on intrinsic value growth, not reported earnings. Again, it’s not what the numbers are but what they mean that matters. Each business will have a couple of unique factors that are essential in evaluating its progress. Often, those unique factors are not immediately reflected in the reported earnings. In our short-attention-span world, analysts and the media so often focus on reported earnings and look no deeper.

Buffett sends a letter every other year to all the managers with the “Salomon pledge”: “Lose money for the firm and I will be understanding. Lose one shred of reputation for the firm and I will be ruthless.”