About the author:
Richard J. Connors is an investment advisor and owner of the investment management firm Connors. He introduced a course on Warren Buffett at the University of Washington.
Main content:
The work is a collection of letters written by Warren Buffett - businessman, sage of Omaha - to shareholders of Berkshire Hathaway. In it, he reveals his management fundamentals for sound business practices.
Chapter 1 – Viewing shareholders as partners
We view Berkshire shareholders as co-investors. The majority of shareholders accept long-term partnerships, they value Berkshire stock like Berkshire respects the companies it invests in.
The financial fortunes of the shareholders will be in sync with the financial fortunes of Charlie and me.
In a partnership, equality requires that the partners' interests be equally valued when they enter or leave the game.
Chapter 2 – Corporate culture
Often, business acquisition is simply a matter of "selling". When the contract has not been exhausted, the buyer has considered the "exit strategies". If you decide to sell your business, Berkshire Hathaway offers a number of advantages that most other buyers do not have. We buy to keep. All of the businesses we own are self-run. If you decide to do business with Berkshire, we will pay in cash. Your business will not be used by Berkshire as collateral for a loan. We do exactly what we promise because we do it for the best business results.
Berkshire has no "exit strategy". We take our obligations to the people who create the business very seriously. If owners treat their businesses and employees with respect, their behavior often infects attitudes and practices within the company. When this emotional bond exists, it makes important qualities more likely to emerge in the business.
We love working with people who love our company. We ask our CEOs to manage for maximum long-term value, rather than focusing on next quarter earnings. It's the strongest cultural background you can have.
I would be extremely proud to have Berkshire co-owned with key members of your family.
I believe there will be as much fun running a business in the next 20 years as you have in the last 20.
If you have the right business give me a call.
Chapter 3 – Corporate Governance
True independence is an extremely valuable quality in a manager. In addition to being independent, directors must have job knowledge, a shareholder-oriented attitude, and a genuine interest in the company.
Both the competence and loyalty of managers have long needed to be monitored. Too many of these people have behaved badly in recent years. Off-limits phenomenon has become common but very few hands are hit.
We will select directors with genuine and profound equity interests who are members of a family that owns at least $40 million of stock without an option or a gift. They enjoy no fees or liability insurance other than a very small percentage of their annual income. We want directors' behaviors to be influenced by the consequences of their decisions on their family's net worth, not their salary. If something serious happens during the session of the directors, they usually suffer more than you. You win, they win big; You lose, they lose badly. We expect these interests to influence their actions to some extent. However, as their talents and vitality decline, their self-esteem declines, too. Then bystanders must "blank" the warning.
To prepare the company's financial statements, which cannot be controlled by the supervisory board, only an external audit organization can determine whether the earnings claimed by management are questionable. . In some cases, the auditing organizations are well aware of the frauds, but they are silent because they see the CEOs and CFOs as their customers and the ones who pay them.
The way to help break that close relationship is that the supervisory boards have to question and force the auditing organizations to tell the truth. Make them understand that they could be fined large sums of money or stand in the dock if they do not speak out what they know or suspect.
Chapter 4 – Managers at Berkshire
We intend to maintain our practice of working with only those we love and admire. Working with someone who makes you uncomfortable is like marrying for money.
To be a winner you have to work with a winner.
Often the managers who go with the company we acquire, have proven their talent over the course of a career that has gone through a lot of ups and downs. They were the stars of management long before they knew us. Our main contribution is not to interfere in their work.
Our primary purpose as owners is to treat our managers the same way we treat Berkshire shareholders. Managers want to be treated fairly, they don't want to be taken advantage of, they want to paint their own picture, they love it and they get what they want from Berkshire.
Chapter 5 – Communication
I have 3 recommendations for investors. First, beware of companies with weak accounting practices. Second, cryptic notes at the bottom of a report often indicate an unreliable management team. Third, be skeptical of companies that flaunt earnings forecasts and growth expectations.
At Berkshire, full reporting means giving you the information we would like you to give us if our roles were interchangeable.
We communicate with you in several different ways: through our annual report, we strive to provide all shareholders with as much valuable information as possible. We strive to convey a brief but important amount of information in our quarterly reports over the internet. Another important occasion is communication at the annual conference.
In all our communications, we strive to be truthful with regard to the current operations as well as the long-term economic characteristics of the business, so that no shareholder misunderstands. .
At the annual meeting, Charlie and I are happy to answer shareholder questions at any time. We like to communicate information directly from management to owners and believe that the annual conference is the ideal place for this exchange.
Chapter 6 – Acquiring Nebraska Furniture Mart “Extraordinary Mrs. B ”
Mrs. B (Rose Blumkin) was born in 1893 in Russia, she crossed the sea to America when she was 23 years old. As a child, she was not fully educated, she did not finish primary school, she did not speak English. In America, she started selling used clothes. In 1937, amassing $500, she founded the Nebraska Funiture Mart (NFM) in Omaha, a furniture, home appliance and carpet store. She is at the store seven days a week from opening to closing. NFM has grown into the largest furniture store in the country.
She liked me to buy this business, and we bought 90% of the business, she was 89 years old at the time. She remains the president and continues to be in the sales department seven days a week. By the age of 93, she had not yet reached her peak. She celebrated her 100th birth in 1993.
This is an ideal business, built on extraordinary value for customers, which then translates into extraordinary economic benefits for the owners.
New York University awarded her an honorary doctorate in commercial science and she was listed in the Guinness Book of World Records.
Mrs. B's business story is unique and I'm her fan.
Mrs. B's business secret is not difficult to understand, in short: (1) show enthusiasm and excitement, (2) define a phenomenally realistic view and act firmly on it, (3) ignore offers that are outside the scope of skills, (4) never act "superior" to anyone who has a business relationship with you. Mrs. B summarizes the above ideas into a sentence: "Sell cheap and tell the truth".
Chapter 7 – Buying Geico “My Favorite Stock”
I entered the business school of Columbia University just because I wanted to study with Ben Graham, an idol of mine. Ben is the chairman of a government insurance company. After hearing about the insurance brochure, I tried to find Geico in Washington, an auto insurance company. Knowing that I was a student of Braham, Davy, the assistant president, enthusiastically guided me about the operation of the insurance industry. I got excited about Geico, so when I finished college, I went back to Omaha to sell stocks, I focused only on Geico stocks. The sale failed, I wrote an article about Geico “My Favorite Stock” published in Finance magazine. I bought Geico stock several times a year by delivering The Washington Post. I bought 350 shares worth $10,282 and at the end of the year the value increased to $13,125.
In 1952, I sold all of my shares in Geico for $15,259 and switched to buying Western insurance because it was cheap. Over time, the amount of Geico shares I sold increased in value to $1.3 million, which taught me a lesson in unwiseness.
In particular, Geico has two talented managers, Tony and Lou, who skillfully run the company's operations, attracting insurance buyers. But the company's ultimate secret was its lowest operating costs that competitors could not compete with, especially during the period when Jack Byrne took over as CEO. Because of our belief in Jack and the power of Geico, Berkshire spent $45.7 million to own 33.3% of Geico in 1980, in 1995 we paid $2.3 billion to buy the rest. again. Berkshire is like "a tiger with more wings". We have created the right working environment so that companies can turn their almost endless source of potential into unparalleled achievements.
Chapter 8 – Acquiring General Reinsurance
When I agreed to merge Berkshire with Gen Re in 1988, I think the company has always adhered to three rules: (a) spend with steadfast discipline, (b) reserve conservatively, and (c) avoid accumulating scandals that could lead to an “impossible” event that threatens the solvency of insurance activities.
Investors should understand that, in all forms of financial institutions, rapid growth sometimes hides serious problems (and sometimes deception). Long-term and variable contracts, which are difficult to gauge against time, provide an opportunity to “imaginary,” as traders estimate their value. The CEOs are incompetent to manage the massive complex derivative accounting system, the derivative fees are very dangerous, they suddenly increase the leverage ratio. Derivatives contracts often go unsettled for years or even decades as counterparties alternate claims against each other.
Massive earnings reports lead to multi-million dollar bonuses, CEOs benefit from their options, fake, exaggerated reports take years to come out. Some of the large-scale scams “facilitated by derivative transactions. Derivatives are, in our opinion, a financial weapon of mass destruction, potentially lethal.
The hypothetical numbers are so dangerous, no real solution can help us out of the maze of debt that has existed for decades. If derivatives activities need to be supported, it will affect the capital as well as the credit level of Berkshire. We had $262 million in losses in 2002, 2003. Our shareholders are paying a much higher price than what is needed to get out of this business. I'm sure I could save approximately $100 million if I shut down Gen Re faster. My takeaway is: I have no idea what's going on in their portfolio.
Chapter 9 – Risk assessment and management
A winner is someone who consistently adheres to three principles: (1) they only take risks they can appreciate, (2) they restrict the deal accepted to ensure that they are not suffer any loss from related events that threaten solvency, (3) they avoid dealings that involve moral hazard.
In our super disaster operation, our clients are insurers who face great volatility in their income streams and want to minimize it. The product we sell is an attitude determined to change that instability in the accounting system.
In the insurance business, it's important to remember that most "surprises" aren't very pleasant, with that in mind, we value the financial perils of a super-catastrophe business one at a time. reasonable manner, such that 90% of the total premium is sufficient to cover losses and expenses.
We've always made sure that super-catastrophic corporate losses, no matter how large, won't have a major impact on Berkshire's core values. The biggest loss to date was the World Trade Center disaster, which cost the insurance industry $35 billion and rocked the insurance and reinsurance industries. But, an event worth $100 billion or even larger is still within our reach. Many insurance companies consider a $100 billion insurance loss as unthinkable, and don't even have a backup plan for this. But at Berkshire, we are always prepared. The returns from our investments and other businesses would easily exceed that cost.When we couldn't find something interesting to invest in, our default target was US treasury vehicles, both bills of exchange and sales contracts.
We will continue to have both the capacity and the interest to become the largest super disaster insurer in the world.
Chapter 10 – Salary and bonus for executives
At Berkshire, we want reward policies that are both easy to understand and in sync with what we want our colleagues to achieve. When using reward policies, they are always tied to performance results under the authority of a particular CEO.
Berkshire employs a variety of bonus arrangements, depending on a number of factors, trying to keep it simple and fair no matter what.
If a CEO bets 300 points, he will be rewarded when he scores 300 points, even if circumstances beyond his control bring Berkshire's operations to a halt, and when he reaches 150 points, he He would not be rewarded if, thanks to the success of others, Berkshire's operations grew rapidly.
We do not set a cap on bonuses and the ability to receive them, nor do we have a hierarchical structure and are not influenced by age and career factors.
Chapter 11 – Time Management
Your life is dominated by so many things that you really don't have a choice. I don't want that. My commute to work and home are not fixed, I don't like to be forced into a framework. I read 5 newspapers a day, including magazines. I read all the annual reports. I could say I spend 75% to 80% of my time reading. I pay 5 million USD per year for playing bridge online 12 hours a week.
I don't have time to mow the lawn, trim the fence, or wash the car. My time is very precious. I know how to organize my time and don't want it to get in the way. However, I often make an appointment: "come anytime". My workday is like a series of irregular hours. I do not use electronic calculators, stock trackers and personal computers. I engage with the world around me through a phone. But the phone doesn't ring very much.
Chapter 12 – How to deal with a crisis
The unusual adjustment of Warren Buffett in Salomon.
In 1987, Berkshire with $ 700 million bought shares of Salomon Brothers and became the largest shareholder of this company.
In December 1990 and February 1991, Salomon's chief executive officer, Paul W. Mozer, conducted unauthorized, clandestine transactions of Salomon customer accounts. On August 18, 1991, the US Department of Finance banned Salomon from participating in the auction of government securities; sure Salomon faced the risk of bankruptcy. The collapse of Salomon could shake the very roots of the global financial system. It was day after day that I was elected as the unpaid interim president of Salomon.
The first was human resources: director Mozer was fired, presidents Gutfreund and Strauss resigned.
Denham and Maughan were added to the board of directors. I conduct an internal inspection
Salomon and submitted to the Energy and Commerce Committee a 52-page report on September 4, 1991.
I believe I have a particularly serious problem, but it's not so common that it's confined to a small number of people. I promulgated some rules and procedures in Salomon. But the environment that encourages good behavior is certainly much more important than the rules.
I set up a legal pre-tax reserve of $200 million for payments, court fees, and other related litigation, promptly pay any reasonable penalties and claims but will sue those that are not. handled or inflated.
I am redefining the bonuses and bonuses of $110 million, having previously spent unreasonably on this issue, affecting shareholder earnings. We want to see managers get rich through their own ownership, not through enjoying someone else's ownership.
Our performance-based pay philosophy is sure to drive some managers away, but more importantly, it's this philosophy that can convince top managers to stay.
The normal operations of the 3rd quarter produced excellent profits. In Fortune's year-end survey, Salomon jumped to third out of 311 companies, in terms of reputation improvement. It was my wise decision to appoint Maughan as general manager. Without the close cooperation of Maughan with Denhan, Don Howard, John MacFarlane, the company certainly could not exist. I will never forget them.
Chapter 13 – Management principles and practices
We have established long-term economic goals including: maintaining a “giraffe” financial position, expanding a “strategic moat” around existing businesses, and earning and growing income streams. new, diversified and expanded, cultivating the core force.
To achieve these goals, we are always looking for and acquiring companies whose businesses we understand well, favorable long-term economic conditions, competent, trustworthy management and a Reasonable price tag. A business has a solid "strategic moat" such as being a low-cost producer or owning a globally recognized brand name.
An economic franchise must arise from a product or service that is: (1) needed or desired, (2) has no corresponding substitute, (3) is not subject to price adjustment.
We try to buy good businesses at reasonable prices instead of buying good businesses at good prices.
In terms of capital allocation, at Berkshire, in owned companies that we don't control, it's done pretty well, very smartly, in the direction of increasing the value of each share, avoiding moves that lower the price. that value. If the allocation of capital is not smart, it will lead to what we often call "restructuring".
Regarding dividend policy, we understand that inflation will cause part or all of income to be limited in value; This means that one dollar of earnings retained for reinvestment into the business has turned into 25 cents of market value. Some businesses disregard that nature, instead of paying the owner, they reinvest with the purpose of expanding the scope of operations or creating a financial state of abundance, if lack of insight will lead to disaster. There is only the best reason to hold back when seeing a reasonable perspective, great core performance; and the remainder is paid to shareholders as dividends or used to buy back shares.
At Berkshire, we do not provide capital, we believe that any subsidiary that borrows money should pay an appropriate percentage of the borrowed capital, should not be subsidized by the parent company.
We want investors to see them as business owners and stay for the long term. They should focus on business results, not market prices. We want the stock to trade in a narrow range. When trading activity takes place, it shows that many owners leave the company. If we split the stock, we will attract a segment of “low-end” buyers; they only focus on stock price instead of business value.
The managers at Berkshire run their businesses as the sole and exclusive property of their families, we believe Charlie's claims. To managers: “Tell me the bad news, the good news will take care of it on its own”.
When recruiting employees, we rarely look at resumes, focusing only on intelligence, passion and honesty. Personality is also an important factor: independent thought, emotional stability, and erudition are essential conditions for long-term collaboration.
Chapter 14 – Management behavior
In the management world, the biggest irony of corporate management is that it's easier for an incompetent CEO to hold onto his seat than an incompetent subordinate. When salespeople do not achieve the set sales, they may be fired, and the CEO's performance standards are rarely set, if at all, it is very confusing and complicated.
Management behavior is even worse when it comes to restructuring or merger accounting. They deliberately focus on calculating numbers to deceive investors; they pumped up the stock price even though the business didn't bring the expected results. To explain this behavior, they say their shareholders will be hurt if the deal (i.e. equity) investment doesn't have the highest value, they argue, which is just what people do.
At Berkshire, we're completely clean about these practices: if we let you down, we'd rather let it affect our own earnings than let it affect our accounting.
Chapter 15 – Mistakes I Made
My first mistake was buying control of Berkshire for cheap, knowing its business was not very promising. There is no initial advantage, low profit, but reselling will lose because of the maintenance fee. In fact, I learned this lesson several times, I bought the department store and three years later I sold it back at the old price. Through that, the lesson I have learned is that a good jockey will do well with a good horse, but not with a sick horse.
My surprising finding is this: the importance of an invisible force in the business world is the “organization imperative”. This unbridled, at times conservative and foolish command guided business. So I reorganized Berkshire to minimize its impact. And later on, I knew I should join an organization with individuals I loved, trusted, and admired.
I missed the opportunity to profit from companies that depend on secret inventions (Xerox), high technology (Apple), smart shopping (Wal-mart).
We decided to buy 30 million shares of Famie Mac, but after buying only 7 million shares, the price started to increase.
An even worse mistake was pre-accepting the Dexter deal for $433 million in Berkshire stock, but its competitive advantage vanished rapidly after only a few years. Because using Berkshire stock makes this mistake more serious, costing Berkshire shareholders $3.5 billion.
Maybe my dumbest mistake will happen in the future. But I always look back at the mistakes I made year after year.
Chapter 16 – Personal Investment
To invest, you don't need to be an expert on every company, you just need to be able to evaluate companies that fall within your range of competence. Over time, you'll realize only a handful of businesses can meet your standards. Therefore, when you see a "standard" business, you should immediately buy a large number of shares. Without straying from your mainstream, arrange a portfolio of businesses whose gross income increases over time, so that the market price of this portfolio increases as well.
The true investor welcomes volatility, because an overly volatile market means that irrationally low prices are sometimes associated with strong businesses.
In fact, people are happy that the stock price is going up. But in reality, only short-term sellers should be happy to see the stock price go up. Futures buyers should be happy to see the price drop.
There are “outbreaks” of two super-contagious diseases of fear and greed, which are always present in the investment community. The timing of these epidemics is unpredictable, both in terms of duration and extent. We never tried to predict their arrival or departure. Our goal is much more modest: We show fear only when others are greedy and appear greedy when others are fearful.
Chapter 17 – Buffett, the Teacher
What I heard when I was 20 years old from people I wanted to hear changed my behavior. Now, when I talk to 20 people, they will ask me questions from their own thoughts. They really made it clear what they were thinking and facing. I love talking to them.
We must admit that the most ethical leaders are parents. If parents have appropriate behavior, it is very likely that children will have similar behaviors. It will be very difficult for you to change habits in your 50s or 60s. In fact, students can fake their habits. So pick someone to admire and ask why you admire them. At your age, you can have any habit you want. When you admire someone, it's entirely possible to act like them.
You must find passion in life. Why do they have to wait until you're 80 to start doing the things you love. Although I want to show patience in what I do, why live and wait so long? Do some things and collaborate with people you don't like, and when you die, your obituary says you're a billionaire, it doesn't make a difference. Go work for an organization you admire or for an individual you admire.
Investing in body, soul and mind makes sense. An MBA can be very rewarding, but as long as it's what you bring to the classroom, it's an attitude of receptivity and a willingness to explore. Economics is interesting; that's how the world really works. In business school, you have to master two things: how to value a business and how to think about stock market fluctuations. You need to have a stable psychological state, have the attitude to separate yourself from the influences of the market.
You must understand that honesty is a great quality. Without the love and respect of others, you are always a failure. It's the only thing you have to earn, because you can never buy it. The other two factors are intelligence and enthusiasm.
Pete Kiewit of Omaha says: “If you hire an employee who doesn't have the first quality, the latter two qualities will 'kill' you, because without honesty they'll just appear stupid and lazy.” .
Chapter 18 – Humor and stories
The elderly man crashes his supermarket trolley into the young man's trolley as they both go shopping.
- Sorry! - said the old man - I lost my wife, was busy thinking about finding her.
“I also lost my wife,” said the young man, and suggested that they both search together, which might be more effective.
The elder agreed and said:
- So what is your wife like?
– She has gorgeous blonde hair, is tall, is wearing white shorts. What about his wife?
The old man quickly: "Forget about her, we'll go find your wife."
Abraham Lincoln used to ask: "How many legs does a dog have if you consider its tail a leg?"
Answer: “Four legs. Because you can't turn a tail into a leg."
Managers should bear in mind the assertion of this answer, even if an audit organization is determined to certify that a dog's tail is also a leg.
