Book Name
The Essays Of Warren Buffett Lessons For Corporate America
Author by Warren E. Buffett (Author), Lawrence A. Cunningham
Book Publishers Carolina Academic Press
Publish Date 2013
Language. English
Category ?
Book Code 239
Pages 219
Rs 1000
Book Quality Black Paper
Whatsapp +92312-9775152
E-mail onlinebookshop.pk@gmail.com
About
In the third edition of this international best seller, Lawrence Cunningham brings you the latest wisdom from Warren Buffett's annual letters to Berkshire Hathaway shareholders. New material addresses:- the financial crisis and its continuing implications for investors, managers and society;- the housing bubble at the bottom of that crisis;- the debt and derivatives excesses that fueled the crisis and how to deal with them;- controlling risk and protecting reputation in corporate governance;- Berkshire's acquisition and operation of Burlington Northern Santa Fe;- the role of oversight in heavily regulated industries;- weaknesses of popular option valuation models; and- investment possibilities today.Preserves all content that makes this book a classic, including such topics as:- circle of competence- intrinsic value- look-through earnings- margin of safety- Mr. Market- owner earnings
The year 2015 marks the fiftieth anniversary of Berkshire Hathaway under Warren Buffett's leadership, a milestone worth commemorating. The tenure sets a record for chief executive not only in duration but in value creation and philosophizing. The fourth edition of The Essays of Warren Buffett: Lessons for Corporate America celebrates its twentieth anniversary. As the book Buffett autographs most, its popularity and longevity attest to the widespread appetite for this unique compilation of Buffett's thoughts that is at once comprehensive, non-repetitive, and digestible. New and experienced readers alike will gain an invaluable informal education by perusing this classic arrangement of Warren's best writings.
INTRODUCTION
Lawrence A. Cunningham
Experienced readers of Warren Buffett's letters to the share-
holders of Berkshire Hathaway Inc. have gained an enormously
valuable informal education. The letters distill in plain words all
the basic principles of sound business practices. On selecting man-
agers and investments, valuing businesses, and using financial in-
formation profitably, the writings are broad in scope, and long on
wisdom.
Yet until now the letters existed in a format that was neither
easily accessible nor organized in any thematic way. Consequently,
the ideas have not been given the more widespread attention they
deserve. The motivation for this compendium and for the sympo-
sium featuring it is to correct an inefficiency in the marketplace of
ideas by disseminating the essays to a wider audience.
The central theme uniting Buffett's lucid essays is that the
principles of fundamental valuation analysis, first formulated by his
teachers Ben Graham and David Dodd, should guide investment
practice. Linked to that theme are management principles that de-
fine the proper role of corporate managers as the stewards of in-
vested capital, and the proper role of shareholders as the suppliers
and owners of capital. Radiating from these main themes are prac-
tical and sensible lessons on mergers and acquisitions, accounting,
and taxation.
Many of Buffett's lessons directly contradict what has been
taught in business and law schools during the past thirty years, and
what has been practiced on Wall Street and throughout corporate
America during that time. Much of that teaching and practice
eclipsed what Graham and Dodd had to say; Buffett is their prodi-
gal pupil, stalwartly defending their views. The defenses run from
an impassioned refutation of modern finance theory, to convincing
demonstrations of the deleterious effects of using stock options to
compensate managers, to persuasive arguments about the exagger-
ated benefits of synergistic acquisitions and cash flow analysis.
Buffett has applied the traditional principles as chief executive
officer of Berkshire Hathaway, a company with roots in a group of
textile operations begun in the early 1800s. Buffett took the helm
of Berkshire in 1964, when its book value per share was $19.46 and
its intrinsic value per share far lower. Today, its book value per
share is around $20,000 and its intrinsic value far higher
growth rate in book value per share during that period is 23.8%
compounded annually.
Berkshire is now a holding company engaged in a variety of
businesses, not including textiles. Berkshire's most important busi-
ness is insurance, carried on principally through its 100% owned
subsidiary, GEICO Corporation, the seventh largest auto insurer
in the United States. Berkshire publishes The Buffalo News and
owns other businesses that manufacture or distribute products
ranging from encyclopedias, home furnishings, and cleaning sys-
tems, to chocolate candies, ice cream, footwear, uniforms, and air
compressors. Berkshire also owns substantial equity interests in
major corporations, including American Express, Coca-Cola, Walt
Disney, Freddie Mac, Gillette, McDonald's, The Washington Post,
and Wells Fargo.
Buffett and Berkshire Vice Chairman Charlie Munger have
built this $50 billion enterprise by investing in businesses with ex-
cellent economic characteristics and run by outstanding managers.
While they prefer negotiated acquisitions of 100% of such a busi-
ness at a fair price, they take a "double-barreled approach" of buy-
ing on the open market less than 100% of such businesses when
they can do so at a pro-rata price well below what it would take to
buy 100%.
The double-barreled approach has paid off handsomely. The
value of marketable securities in Berkshire's portfolio, on a per
share basis, increased from $4 in 1965 to over $22,000 in 1995, a
33.4% annual increase. Per share operating earnings increased in
the same period from just over $4 to over $258, a 14.79% annual
increase. These extraordinary results continue, in recent years in-
creasing at similar rates. According to Buffett, these results follow
not from any master plan but from focused investing-allocating
capital by concentrating on businesses with outstanding economic
characteristics and run by first-rate managers.
Buffett views Berkshire as a partnership among him, Munger
and other shareholders, and virtually all his $15-plus billion net
worth is in Berkshire stock. His economic goal is long-term-to
maximize Berkshire's per share intrinsic value by owning all or
part of a diversified group of businesses that generate cash and
above-average returns. In achieving this goal, Buffett foregoes ex-
pansion for the sake of expansion and foregoes divestment of busi-
nesses so long as they generate some cash and have good
management.
Berkshire retains and reinvests earnings when doing so deliv-
ers at least proportional increases in per share market value over
time. It uses debt sparingly and sells equity only when it receives
as much in value as it gives. Buffett penetrates accounting conven-
tions, especially those that obscure real economic earnings.
These owner-related business principles, as Buffett calls them,
are the organizing themes of the accompanying essays. As organ-
ized, the essays constitute an elegant and instructive manual on
management, investment, finance, and accounting. Buffett's basic
principles form the framework for a rich range of positions on the
wide variety of issues that exist in all aspects of business. They go
far beyond mere abstract platitudes. It is true that investors should
focus on fundamentals, be patient, and exercise good judgment
based on common sense. In Buffett's essays, these advisory tidbits
are anchored in the more concrete principles by which Buffett lives
and thrives.
Many people speculate on what Berkshire and Buffett are do-
ing or plan to do. Their speculation is sometimes right and some-
times wrong, but always foolish. People would be far better off not
attempting to ferret out what specific investments are being made
at Berkshire, but thinking about how to make sound investment
selections based on Berkshire's teaching. That means they should
think about Buffett's writings and learn from them, rather than try
to emulate Berkshire's portfolio.
Buffett modestly confesses that most of the ideas expressed in
his essays were taught to him by Ben Graham. He considers him-
self the conduit through which Graham's ideas have proven their
value. In allowing me to prepare this material, Buffett said that I
could be the popularizer of Graham's ideas and Buffett's applica-
tion of them. Buffett recognizes the risk of popularizing his busi-
ness and investment philosophy. But he notes that he benefited
enormously from Graham's intellectual generosity and believes it
is appropriate that he pass the wisdom on, even if that means creat-
ing investment competitors. To that end, my most important role
has been to organize the essays around the themes reflected in this
collection. This introduction to the major themes encapsulates the
basics and locates them in the context of current thinking. The es-
says follow.
They have shareholder interests at heart. But even first-rate man-
agers will sometimes have interests that conflict with those of
shareholders. How to ease those conflicts and to nurture manage-
rial stewardship have been constant objectives of Buffett's forty-
year career and a prominent theme of his essays. The essays ad-
dress some of the most important governance problems.
The first is not dwelt on in the essays but rather permeates
them: it is the importance of forthrightness and candor in commu-
nications by managers to shareholders. Buffett tells it like it is, or
at least as he sees it. That quality attracts an interested shareholder
constituency to Berkshire, which flocks to its annual meetings in
increasing numbers every year. Unlike what happens at most an-
nual shareholder meetings, a sustained and productive dialogue on
business issues results.
Besides the owner-orientation reflected in Buffett's disclosure
practice and the owner-related business principles summarized
above, the next management lesson is to dispense with formulas of
managerial structure. Contrary to textbook rules on organizational
behavior, mapping an abstract chain of command on to a particular
business situation, according to Buffett, does little good. What
matters is selecting people who are able, honest, and hard-working.
Having first-rate people on the team is more important than de-
signing hierarchies and clarifying who reports to whom about what
and at what times.
Special attention must be paid to selecting a CEO because of
three major differences Buffett identifies between CEOs and other
employees. First, standards for measuring a CEO's performance
are inadequate or easy to manipulate, so a CEO's performance is
harder to measure than that of most workers. Second, no one is
senior to the CEO, so no senior person's performance can be mea-
sured either. Third, a board of directors cannot serve that senior
role since relations between CEOs and boards are conventionally
congenial.
Major reforms are often directed toward aligning management
and shareholder interests or enhancing board oversight of CEO
performance. Stock options for management were touted as one
method; greater emphasis on board processes was another. Sepa-
rating the identities and functions of the Chairman of the Board
and the CEO or appointment of standing audit, nominating and
compensation committees were also heralded as promising re-
forms. None of these innovations has solved governance problems,
however, and some have exacerbated them.1997] THE ESSAYS OF WARREN BUFFETT 9
The best solution, Buffett instructs, is to take great care in
identifying CEOs who will perform capably regardless of weak
structural restraints. Outstanding CEOs do not need a lot of
coaching from owners, although they can benefit from having a
similarly outstanding board. Directors therefore must be chosen
for their business savvy, their interest, and their owner-orientation.
According to Buffett, one of the greatest problems among boards
in corporate America is that members are selected for other rea-
sons, such as adding diversity or prominence to a board.
Most reforms are painted with a broad brush, without noting
the major differences among types of board situations that Buffett
identifies. For example, director power is weakest in the case
where there is a controlling shareholder who is also the manager.
When disagreements arise between the directors and management,
there is little a director can do other than to object and, in serious
circumstances, resign. Director power is strongest at the other ex-
treme, where there is a controlling shareholder who does not par-
ticipate in management. The directors can take matters directly to
the controlling shareholder when disagreement arises.
The most common situation, however, is a corporation without
a controlling shareholder. This is where management problems are
most acute, Buffett says. It would be helpful if directors could sup-
ply necessary discipline, but board congeniality usually prevents
that. To maximize board effectiveness in this situation, Buffett be-
lieves the board should be small in size and composed mostly of
outside directors. The strongest weapon a director can wield in
these situations remains his or her threat to resign.
All these situations do share a common characteristic: the ter-
rible manager is a lot easier to confront or remove than the medio-
cre manager. A chief problem in all governance structures, Buffett
emphasizes, is that in corporate America evaluation of chief execu-
tive officers is never conducted in regular meetings in the absence
of that chief executive. Holding regular meetings without the chief
executive to review his or her performance would be a marked im-
provement in corporate governance.
Evaluating CEO performance is even harder than it may
seem. Both short-term results and potential long-term results must
be assessed. If only short-term results mattered, many managerial
decisions would be much easier, particularly those relating to busi-
nesses whose economic characteristics have eroded. For an ex-
treme but not atypical example, consider Al Dunlap's aggressive
plan to turn around ailing Sunbeam. Dunlap fired half of Sun-10 CARDOZO LAW REVIEW [VoL
beam's workers and closed or consolidated more than half its facili-
ties, including some engaged in the textile business in New
England. Boasting that he was attacking the entire company, Dun-
lap declared that his plan was as carefully plotted as the invasion of
Normandy. Driven solely by the primacy of the short-term bottom
line, that decision was easy.
The decision is much harder, however, if you recognize that
superior long-term results can flow from earning the trust of social
communities, as Buffett's consideration of the anxieties of plant
closings suggests. The economic characteristics of Berkshire's old
textile business had begun to erode by the late 1970s. Buffett had
hoped to devise a reversal of its misfortunes, noting how important
Berkshire's textile business was to its employees and local commu-
nities in New England, and how able and understanding manage-
ment and labor had been in addressing the economic difficulties.
Buffett kept the ailing plant alive through 1985, but a financial re-
versal could not be achieved and Buffett eventually closed it.
Whether Buffett would approve of Dunlap-style short-termism is
not clear, but his own style of balancing short-term results with
long-term prospects based on community trust is certainly differ-
ent. It is not easy, but it is intelligent.
Sometimes management interests conflict with shareholder in-
terests in subtle or easily disguised ways. Take corporate philan-
thropy, for example. At most major corporations, management
allocates a portion of corporate profit to charitable concerns. The
charities are chosen by management, for reasons often unrelated
either to corporate interests or shareholder interests. Most state
laws permit management to make these decisions, so long as aggre-
gate annual donations are reasonable in amount, usually not
greater than 10% of annual net profits.
Berkshire does things differently. Shareholders designate
charities to which the corporation donates. Nearly all shareholders
participate in allocating millions of dollars per year to charitable
organizations of their choice. This is an imaginative practical re-
sponse to a tension that is at the core of the management-share-
holder relationship. It is surprising that other American
corporations do not follow this model of corporate charitable giv-
ing. Part of the reason may be the lack of long-term ownership
orientation that characterizes the shareholder profiles of many
American corporations. If so, this demonstrates a cost of the short-
term mentality of America's investment community.
No comments:
Post a Comment