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Category: Symposium (The Essays of Warren Buffett: Lessons for Corporate America)

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Symposium Redux: Essays and Lessons

The Essays of Warren Buffett: Lessons for Corporate America is as rich as the man, judging by the variety and depth of commentary contributed to this week’s on-line symposium about the new third edition of the 300-page book.

A dozen luminaries from various walks of life and backgrounds, and with very different viewpoints, addressed issues such as target audience; thematic approach; selected content; what is Berkshire?; and even who is Warren Buffett?

Seventeen years after hosting an in-person conference on the subject, I remain awestruck at the varied impressions that can be generated by the same set of material. Herewith, a recap of this week’s contributions, at least as I saw them, leading off with a hearty thanks to all who contributed to the symposium.  Read More

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Warren Buffett the Legend

Warren Buffett’s financial genius is self-evident. But as Mr. Buffett and Berkshire Hathaway have grown and prospered, Mr. Buffett has done something greater. He has created a legend.

The legend of Warren Buffett is more than genius investor.  It is a legend which encompasses the qualities of sagacity, wisdom, and commonsense. Instead of 300 foot yachts and hundred million dollar homes Mr. Buffett lives a comfortable upper middle class lifestyle which shames the average Russian oligarch.  Where others focus on themselves, Mr. Buffett gives away the bulk of his life earnings to charity.  And Mr. Buffett is always ready to be there for the common man and nation, from fighting for higher tax rates on the wealthy on equity grounds to writing encouraging letters to General Motors in its dark days.

The characteristics which make Mr. Buffett a great person create synergies with his investment acumen.  As I wrote this week in the N.Y. Times, Mr. Buffett’s aura enables him to be a dealmaker without parallel.  Boards and investors appear to give Mr. Buffett better deals simply because he is Warren Buffett, and these parties want to be associated with Mr. Buffett’s magic. In other words, merely being Warren Buffett creates value for Berkshire Hathaway on a scale Donald Trump can only dream of.

Maintaining this well-deserved reputation is paramount for Mr. Buffett, which is why he took the alleged insider trading controversy with Lubrizol and David Sokol so hard.  To have worked so many years and see it possibly risk taint is not an option.

It is here that we come to The Essays of  Warren Buffett.  Simply put, the legend of Mr. Buffett is enhanced and promulgated through his letters.  They not only provide sage financial advice — talking about derivatives as “weapons of mass destruction” well before the financial crisis – but they promote the legend of Mr. Buffett. He dispenses economic advice, financial advice and talks about the fate of not just of Berkshire Hathaway but America.  These are letters for the entire population, not just lessons for corporate America. Professor Cunningham has done quite a service by curating these letters and updating this volume.

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Emulate, Evolve & A View of Eternity

An important lesson I learned in life is what I call “emulate and evolve.”  If you want to succeed in a particular field, the first thing to do is to seek out the person that has come before you, who has succeeded more than anyone else, and emulate them.  Once you have made those principles or activities a habit, then evolve those so they remain relevant to a changing world.

If your goal is to be a great operator of a business or an exceptional investor, there is no other person you should look to emulate than Warren Buffett.  Larry Cunningham’s Essays of Warren Buffett does a masterful job at providing a logical architecture to introduce, or reintroduce, the important lessons that Warren Buffett has shared over the last half century.  

Warren Buffett followed a path of emulate and evolve.  At the age of nineteen, Buffett read a copy of Benjamin Graham’s Intelligent Investorfrom the Omaha Public Library, and, almost in an instant, he was indoctrinated into thinking as a value investor.  With a goal of committing Graham’s principles to habit, Buffett applied to Columbia Business School to study with Graham.

In The Essays of Warren Buffett: Lessons of Corporate America, the reader is taken on a journey of how Buffett emulated Graham’s value principles, such as Mr. Market and Margin of Safety, and applied those key insights to the rationality of his decision-making process.  The reader is also able to witness the progression of Buffett’s thinking as it evolved over the decades from looking at Graham’s “net-nets” toward looking at businesses where intrinsic value would compound through time. 

I found the organization and compilation of the “Essays” so helpful in communicating the evolution of value investing from Graham to Buffett that I have added this book to the reading list for the Security Analysis class I teach at Columbia Business School.   Read More

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Is Berkshire Hathaway Really a Psychology Experiment?

Warren Buffett and Charlie Munger are known for many things, yet one important aspect of their success is often overlooked: they are conducting Corporate America’s longest running applied psychology experiment.

Buffett and Munger have often discussed the importance of understanding oneself and others in making decisions, but their methods have, strangely, not been copied widely, despite their long-term and outsized success.  This is largely because it is simple to hear and understand the principles they teach, but it goes against human nature – human psychology – to apply them.

So most of us construct logical reasons why applying their ideas are not practical, or because their situation is different, or for any number of other reasons.  Ultimately, most of these arguments are justifications for not doing things that run counter to our own psychological tendencies.  Investors, as a group, largely validate the saying that “man is a rational animal, he can rationalize anything.”

In areas ranging from corporate governance to conducting research and making investment decisions, they do things differently, and better, than 99% of corporate America.

Here are a few examples and some of the psychology behind them: Read More

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Berkshire’s Dividend Policy: Part II

Part I of this post left off with the 2011 Berkshire Annual Report, included in Larry Cunningham’s third edition of The Essays of Warren Buffett: Lessons for Corporate America.   There the story of Berkshire payout policy took an historic turn. Berkshire finally announced itself ready to repurchase, provided (1) that the per share market price stood at no more than 110% of book value per share, and (2) that cash-equivalent holdings ready for reinvestment or acquisitions equaled at least $20 billion.  

Events then took still another turn.  It seems that the 110% rule was relaxed to 120%, with Berkshire purchasing a big block of stock at 116% during 2012.  (See BRK News Release here.) A look at the cash flow statement gives the totals: $1.296 billion repurchased in 2012 versus $67 million in the previous year and 0 the year before that.

Yet there is apparent dissatisfaction: this year’s Annual Report notes that “a number of Berkshire shareholders – including some of my good friends – would like Berkshire to pay a cash dividend.”  Why?  Cash and cash equivalents on the 2012 Berkshire balance sheet total $49.992 billion, far north of the $20 billion minimum cited a year earlier.

Meanwhile, the annual Berkshire vs. S&P 500 comparison favors the S&P 500 for the third time in four years.  Maybe the 120% plus full disclosure test is thought to leave open too small a payout window.  If Berkshire stock refuses to cooperate with the payout policy by holding its value, there’s only one alternative: the old-fashioned mode of dividend.

Thus does Buffett mount the battlements to make the case for the historic no dividends policy.  I hope Larry won’t mind if I anticipate his fourth edition and quote it in full (from this year’s Annual Report): Read More

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Berkshire’s Dividend Policy: Part I

Prof. Bratton

Way back in 1996, when Larry Cunningham asked me to contribute a paper to his original Warren Buffett symposium at Cardozo Law School, I picked dividends as my topic.  I had two reasons, (1) I had always wanted to write a paper on dividends and was looking for an excuse, and (2) Berkshire Hathaway’s absolutist policy against dividends presented the best possible excuse for a paper.  The no dividends policy provided a great start point, for, while posing theoretical problems, it went hand in glove with Berkshire’s unparalleled growth record and relentless long-termism, not to mention Buffett’s status as a capitalist folk hero.  I later put out a second paper on dividends, written on the occasion of the Bush tax cuts.

So it’s no surprise that I went straight for to dividend chapter when I opened Larry’s third edition of The Essays of Warren Buffett: Lessons for Corporate America.  I had a feeling that times were going to have changed, and they have done so.   Where payout policy was once a bedrock point at Berkshire Hathaway, there is now an incipient sense of stress.  Things are changing, so much so that the third edition cannot keep up.  To put together an account of treatments of payout policy in the essays in Berkshire’s Annual Reports, reference also must be made to this spring’s review of 2012.  Take that together with the excerpts in Larry’s third edition and a cloudy picture emerges.

Let us trace Buffett’s views on payouts as it evolves from edition to edition of The Essays of Warren Buffett: Lessons for Corporate America. Read More

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Warren Buffett: Practical Philosopher of Capitalism

Lawrence Cunningham’s Essays of Warren Buffett is a useful and well-ordered collection of Buffett’s thinking on a number of topics.  As such, it serves as a profoundly useful textbook of clear thinking for corporate America.

The book also highlights an aspect of Warren Buffett to which less attention is paid now than will be in the future. That is of Warren Buffett as history’s greatest Philosopher of Practical Capitalism.   

In the last decade many people have lost trust in our capitalist system.   Yes, we like the material abundance that it generates, but who can subscribe to and defend the rampant, unchecked, and amoral version of capitalism that we have seen recently?

We are all too familiar with the cast of ugly characters:  The bankers who lost millions while still collecting their outsized bonuses, Bernie Madoff who masqueraded behind his façade of public spirited financier and philanthropist while he was actually ripping off widows and orphans.

How can we subscribe to a version of capitalism that seems to regularly allow the greedy to endlessly and senselessly enrich themselves while bringing the rest of us to the brink of financial ruin?  Although many of us were brought up on Adam Smith’s invisible hand and the free market of Milton Friedman that delivers goods, services, welfare and justice to all, the way this has played out practically over the last decade is indefensible. 

In a bygone era this unpleasant side of free market capitalism was at least part of what drove Karl Marx to write Das Kapital, and what led to whole societies practicing Socialism, creating so much of the human misery of the last century.

For those of us who still believe in capitalism, free markets and maximum individual liberty as expounded by John Stuart Mill, what is the answer to these excesses? Can we not find a new Milton Friedman, Hayek or Adam Smith for this century? Someone who intelligently and charismatically clarifies why big government and more regulation are not the answer. Read More

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Berkshire’s Enigmatic Secret Sauce

A former student of mine is working on a project that seeks to identify the factors that lead to sustained superior business performance.  Her task brings to mind Warren Buffett, both for his philosophy and his experiences.

Berkshire Hathaway is surely the dominant example of a company that has delivered consistent superior returns throughout its history.  Buffett states, in his letters compiled into The Essays of Warren Buffett, that his returns, first at Buffett Partnership and then Berkshire Hathaway, have averaged 20% per year, as compared to the 10% return delivered by the general market.  Buffett himself notes that this differential is likely to be considered “statistically significant.”

Understanding how to think about Buffett’s remarkable success is challenging, however.  Buffett offers a broad-based set of investment principles that are easily embraced by the average investor – do not try to time the market, invest for the long term, minimize your transaction costs, and invest in businesses that you can understand.  Over time, empirical studies confirm that these strategies are likely to generate better returns than alternatives.

Yet, they fail to explain Buffett’s remarkable investment success.  Buffett himself explains that investors cannot expect to generate, on the average, a better return that the market, and that his strategy is more suited to avoiding egregious mistakes than identifying big winners.  Buffett’s track record belies this conservatism, and his letters suggest that it is possible to outperform the market over time, by identifying outstanding businesses and investing for the long term.

Buffett’s investment performance is difficult to explain, in part, because Berkshire Hathaway defies easy categorization.  The company is a curious hybrid between an investment fund and an operating company.   Berkshire Hathaway owns a substantial number of minority positions in publicly-traded companies, positions that have a current market value of around $90 billion.  These positions include large pieces of companies such as Coca-Cola, Wells Fargo and American Express.  Read More

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Could There Be More Berkshire Hathaways?

Berkshire Hathaway is a hybrid between an investment firm and an operating company, akin to a publicly traded partnership that actively owns operating companies.  Berkshire’s management, guided by Warren Buffett and Charlie Munger, chooses a diverse portfolio of firms to invest in, then monitors those firms as an active, attentive owner would.  Berkshire shareholders are treated as co-owners of the firm and managers of subsidiaries are expected to act as though they were the sole owners of their divisions.  Everyone is expected to have a long-term time horizon.  Everyone is expected to pay attention. 

Despite being operated very differently from most modern, publicly traded corporations, Berkshire Hathaway is remarkably successful.  Some might attribute the firm’s great success to the particular business acumen of Buffett and Munger.  Others might attribute it to the fact that the firm is run by its controlling shareholders.  In letters to shareholders, edited by Larry Cunningham into essays in The Essays of Warren Buffett: Lessons for Corporate America, Buffett himself attributes the firm’s success to a number of his business philosophies that define every part of Berkshire’s operations from executive compensation to corporate charitable giving to bookkeeping and communication with shareholders.

In light of the tremendous success of Berkshire Hathaway as a whole, and its various subsidiaries individually, I have often wondered why there are not more firms like it.  Of course, there is only one Warren Buffett, a point Berkshire shareholders apparently make every year at the annual meeting.  But why are more firms not adopting Buffett’s business philosophies and strategies?  Berkshire might provide a model for investment firms trying to build a diverse portfolio of firms to offer their investors.  It may also teach institutional shareholders how to monitor the managers of the firms in which they have invested.  Officers and directors could learn how they should operate a firm for long-term success and how managers should be compensated to encourage optimum performance without giving them perverse incentives. Read More