The Essays of Warren Buffett: Lessons for Corporate America

by Lawrence A. Cunningham

The value to Berkshire Hathaway of retained earnings is not determined by whether we own 100%, 50%, 20% or 1% of the businesses in which they reside. Rather, the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage.

To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these.

In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.

Keynes identified my problem: “The difficulty lies not in the new ideas but in escaping from the old ones.”

For years the traditional wisdom—long on tradition, short on wisdom—held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets (“In Goods We Trust”). It doesn't work that way.

Operations that appear to be winners based upon perspective (1) may pale when viewed from perspective (2). A good business is not always a good purchase—although it's a good place to look for one.

Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to long-dated options.

Our inability to pinpoint a number doesn't bother us: We would rather be approximately right than precisely wrong.

It has been far safer to steal large sums with a pen than small sums with a gun.

Indeed, my successor at Berkshire may well receive much pay via options, albeit logically-structured ones in respect to (1) an appropriate strike price, (2) an escalation in price that reflects the retention of earnings, and (3) a ban on his quickly disposing of any shares purchased through options.

Their behavior brings to mind Voltaire's comment on sexual experimentation: “Once a philosopher, twice a pervert.”

Abraham Lincoln's favorite riddles: “How many legs does a dog have if you call his tail a leg?” The answer: “Four, because calling a tail a leg does not make it a leg.”

To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.

One of the heralded virtues of capitalism is that it efficiently allocates funds.

A caring owner, however—and there are plenty of them—usually does not want to leave his long-time associates sadly singing the old country song: “She got the goldmine, I got the shaft.”

Berkshire's directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our view, that is an essential criterion for repurchases that is often ignored by other managements.)

In our view, it is madness to risk losing what you need in pursuing what you simply desire.

My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency.

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.