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January 14 - January 29, 2023
What matters is selecting people who are able, honest, and diligent. Having first-rate people on the team is more important than designing hierarchies and clarifying who reports to whom about what and at what times.
Buffett believes the board should be small in size and composed mostly of outside directors.
They are given a simple set of commands: to run their business as if (1) they are its sole owner, (2) it is the only asset they hold, and (3) they can never sell or merge it for fifty years.
Executive performance should be measured by profitability, after profits are reduced by a charge for the capital employed in the relevant business or earnings retained by
Buffett thinks most markets are not purely efficient and that equating volatility with risk is a gross distortion.
Buffett points out the absurdity of beta by observing that “a stock that has dropped very sharply compared to the market . . . becomes ‘riskier’ at the lower price than it was at the higher price”—that is how beta measures risk.
Buffett jokes that calling someone who trades actively in the market an investor “is like calling someone who repeatedly engages in one-night stands a romantic.
That difference also shows that the term “value investing” is a redundancy. All true investing must be based on an assessment of the relationship between price and value.
This commonsense rule instructs investors to consider investments only concerning businesses they are capable of understanding with a modicum of effort.
Earnings retention is justified only when “capital retained produces incremental earnings equal to, or above, those generally available to investors.”
Buffett regards that calculation as incomplete. After taking (a) operating earnings and adding back (b) non-cash charges, Buffett argues that you must then subtract something else: (c) required reinvestment in the business.
That is why Berkshire supplementally reports owner earnings for its acquired businesses, rather than rely solely on GAAP earnings figures, or cash flow figures.
At the symposium featuring this collection, someone asked what effect Buffett's death would have on Berkshire stock. Another answered, “a negative effect.” Without missing a beat, Buffett quipped: “It won't be as negative for the holders as it will be for me.”
Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners.
In line with Berkshire's owner-orientation, most of our directors have a significant portion of their net worth invested in the company. We eat our own cooking.
Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire's average annual rate of gain in intrinsic business value on a per-share basis.
Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital.
Because of our two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance.
Accounting consequences do not influence our operating or capital-allocation decisions.
We use debt sparingly. We will reject interesting opportunities rather than over-leverage our balance sheet.
(As one of the Indianapolis “500” winners said: “To finish first, you must first finish.”)
A managerial “wish list” will not be filled at shareholder expense. We will not diversify by purchasing entire businesses at control prices that ignore long-term economic consequences to our shareholders.
We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met.
We will issue common stock only when we receive as much in business value as we give.
You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns.
We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed.
To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period.
Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.
The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate.
The requisites for board membership should be business savvy, interest in the job, and owner-orientation. Too often, directors are selected simply because they are prominent or add diversity to the board. That practice is a mistake.
Measured by the biblical standard, the Berkshire board is a model: (a) every director is a member of a family owning at least $4 million of stock; (b) none of these shares were acquired from Berkshire via options or grants; (c) no directors receive committee, consulting or board fees from the company that are more than a tiny portion of their annual income; and (d) although we have a standard corporate indemnity arrangement, we carry no liability insurance for directors. At Berkshire, board members travel the same road as shareholders.
Charlie and I really have only two jobs. One is to attract and keep outstanding managers to run our various operations.
“If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants.”
When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.”
But when short-term and long-term conflict, widening the moat must take precedence.
The situation is suggestive of Samuel Johnson's horse: “A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”
“If you want to get a reputation as a good businessman, be sure to get into a good business.”)
“I owe my fortune to two great American institutions: monopoly and nepotism.”
(Charlie, however, insists that I tell you that $1.4 million of our $4.9 million overhead is attributable to our corporate jet, The Indefensible.)
Ronald Reagan's creed: “It's probably true that hard work never killed anyone, but I figure why take the chance.”
“There are two classes of clients you don't want to offend—actual and potential.”
If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.
I'm afraid Ben Franklin had my number. Said he: “So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.”
“Help me, Oh Lord, to become chaste—but not yet.”
In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people.
Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market you don't belong in the game.
“Develop your eccentricities while you are young. That way, when you get old, people won't think you're going ga-ga.”)
“You shape your houses and then they shape you.”
So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls—but investors gain.”
“Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” (If, however, he studied at the Ivan Boesky School of Arbitrage, it may be a state institution that supplies his meals.)
