Warren Buffett has published his always excellent annual shareholder letter. His letters, provide excellent investing insight and good management ideas.
Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earthâ€™s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A â€œhire well, manage littleâ€ code suits both them and me.
Cultures self-propagate. Winston Churchill once said, â€œYou shape your houses and then they shape you.â€ That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior
. (As one wag put it, â€œYou know youâ€™re no longer CEO when you get in the back seat of your car and it doesnâ€™t move.â€) At Berkshireâ€™s â€œWorld Headquartersâ€ our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment â€“ you name it â€“ totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshireâ€™s managers are likely to be careful with it as well.
At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium canâ€™t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. â€œThe other guy is doing it so we must as wellâ€ spells trouble in any business, but none more so than insurance.
I don’t agree with everything he says. And what works at one company, obviously won’t work everywhere. Copying doesn’t work. Learning from others and understanding what makes it work and then determining how to incorporate some of the ideas into your organization can be valuable. I don’t believe in “Our trust is in people rather than process.” I do believe in â€œhire well, manage little.” Exactly what those phrases mean is not necessarily straight forward. I believe you need to focus on creating a Deming based management system and that will require educating and coaching managers about how to manage such a system. But that the management decisions about day to day operations should be left to those who are working on the processes in question (which will often be workers, that are not managers, sometimes will be supervisors and managers and sometimes will be senior executives).
Related: Too often, executive compensation in the U.S. is ridiculously out of line with performance. – Management Advice from Warren Buffet – Great Advice from Warren Buffett to University of Texas – Austin business school students – 2004 Warren Buffet Report
Buffett’s New CEO Shows Analysts, Hedge-Fund Managers to Door
Buffett’s Berkshire Hathaway Inc. completed the buyout yesterday after winning the approval of Burlington Northern investors. The deal, valued at $100 a share, allows Rose to hand out returns of nearly 300 percent, plus dividends, to investors who bought stock the day he was named CEO in 2000. The problem, he said, is that shareholders with that length of commitment are dwindling in number and influence.
“When I started as CEO 10 years ago, the typical investor had a time frame of three to five to seven years,” Rose said in an interview. “Year-by-year, that’s gotten shorter.”
The increased focus on short-term results, fueled by real- time media and quarterly analyst calls, can be a distraction for a railroad executive who needs to buy locomotives that run for 20 years and put down tracks that last for 40, Rose said. Burlington Northern said last month it would commit $2.4 billion this year to capital projects, including track, signal systems and locomotives, about $240 million less than in 2009.
“The money I spend this year really won’t pay off for three, four, five or seven years down the road,” said Rose, 50. “There’s the advent of the hedge fund which has changed the time horizon of what satisfies the institutional investor.”
“The speed of the news today I think has harmed, quite frankly, investors looking at long-term assets,” Rose told reporters in a news conference this week. A long-term perspective is “one thing that our country has kind of lost sight of, not just for the railroad equity investor but for a lot of investors.”
Decades ago Dr. Deming said short term focus was one of the seven deadly diseases of western management. Unfortunately we have made very little progress on the deadly diseases. The failed, health care system with it’s focus on a few special interests fighting to keep the broken system that does great harm to society but benefits the special interests is another a disease that has definitely gotten much worse.
Related: Think Long Term Act Daily – posts related to Warren Buffett – Goodbye Quarterly Targets – A Great Day for Georgia-Pacific
Each year Warren Buffett and Charlie Munger answer questions in front of crowds of tens of thousands of Berkshire Hathaway shareholders in Omaha, Nebraska. The question and answer sessions provide great wisdom on economics, investing and management. Here are some of the highlights I have found from the meeting (see more on the Curious Cat Investing and Economic Blog review of the answers)
Buffett, Munger praise Google’s moat
“Google has a huge new moat
,” Munger said. “In fact I’ve probably never seen such a wide moat.” Google’s main business of charging companies when people click on their ads after running an Internet search is “incredible,” the Berkshire chairman said. “I don’t know how to take it away from them,” he added. “Their moat is filled with sharks,” Munger said.
Google hopes the anti-trust regulators don’t see it the same way. And I believe Google sees their moat as easy to loose (and I think they are right). At the same time Buffett and Munger are right. The moat is huge but if Google looses focus they can drain the moat in no time.
Warren Buffett’s Q&A With Shareholders (Afternoon Session)
2:58 pm: Buffett says his hope for Berkshire Hathaway 20 years from now is that its culture will be maintained, that it will be seen as a place where good managers want to work for the rest of their lives. That and to have the world’s “oldest living managers.” The audience rises for a standing ovation. That concludes the Q&A session.
3:10 pm: After taking a break, Buffett is now conducting the formal business session of the annual meeting. It is totally routine.
3:15: Buffett, Munger and the other directors have been re-elected to the Board and the meeting has been adjourned.
Related: Warren Buffett’s Letter to Shareholders 2009 – Management Advice from Warren Buffet – Warren Buffett Webcast on the Credit Crisis – Sleep Well Fund Investing Results
As usual, Warren Buffett’s letter to shareholders is packed with wisdom. He is best know for his investing genius but his writing provides great thoughts for managers also: Berkshire Hathaway 2007 Letter to Shareholders:
We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.
This deal was done in the way Jay would have liked. We arrived at a price using only Marmonâ€™s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.
Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. Sheâ€™s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings’ with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” â€“ a metaphor for the superiorities they possess that make life difficult for their competitors â€“ have widened during the year.
You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run.
What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire.
Related: Buffett’s Letter to Shareholders (from last year) – Buffettâ€™s Shareholder Letter (2006) – Overview of Warren Buffett – Annual Report by Warren Buffett (2005) – Hiring the Right People