I have always loved, admired and revered Warren Buffett, and in today's economic world I love, admire and revere him even more. He is the one famous person I would love to meet. I am almost afraid to revere him as much as I do for fear he might turn out tomorrow to be an epic disappointment like everyone else, but at almost eighty years old I don't think that's going to happen. To me, he is like a financial saint ... a business leader who has lived his life and made billions by adhering to a down-to-Earth set of principles including honesty and humility and who has decided at the end of his life to give all his wealth away.
When I went to business school, we use to do case studies on companies and with the exception of a finance professor telling my class that "if we ever got the chance to do insider trading to do it" we were trained to have strong business ethics. I wonder what in the hell business professors say to their students nowadays.
Since I graduated business school we've seen the demise of Enron, which was the first big scandal I can remember. We've also seen Bear Stearns and Lehman Brothers disappear into thin air. Then there's Bernie Madoff and a host of other crooked companies that the government has put on the Billionaire Welfare Program.
It's disgusting. After watching a decade of crooks, I have no faith in anyone or anything. Even companies that you thought were safe blue chip companies are pulling the unimaginable ... Toyota endangers lives by avoiding a recall so they can save $100 million.
Warren Buffett is the one person who restores my totally wrecked faith in humanity. So without further adieu, here is an example of what a business leader should look like.
The Gospel According To Warren Buffett ... an excerpt from Bershire Hathaway's 2010 Shareholder letter.
" To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*
Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone.
In this letter we will also review some of the basics of our business, hoping to provide both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.
How We Measure Ourselves
Our metrics for evaluating our managerial performance are displayed on the facing page. From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it. Selecting the S&P 500 as our bogey was an easy choice because our shareholders, at virtually no cost, can match its performance by holding an index fund. Why should they pay us for merely duplicating that result?
What We Don’t Do
Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled “Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife.)
Here are a few examples of how we apply Charlie’s thinking at Berkshire:
• Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their
products may be. In the past, it required no brilliance for people to foresee the fabulous growth
that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the
companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean
we can judge what its profit margins and returns on capital will be as a host of competitors battle
for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to
come seems reasonably predictable. Even then, we will make plenty of mistakes.
• We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback
position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier
of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured
$15.5 billion into a business world that could otherwise look only to the federal government for
help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure
American businesses that needed – without delay – our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned.
We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.
• We tend to let our many subsidiaries operate on their own, without our supervising and
monitoring them to any degree. That means we are sometimes late in spotting management
problems and that both operating and capital decisions are occasionally made with which Charlie
and I would have disagreed had we been consulted. Most of our managers, however, use the
independence we grant them magnificently, rewarding our confidence by maintaining an owner oriented attitude that is invaluable and too seldom found in huge organizations. We would rather
suffer the visible costs of a few bad decisions than incur the many invisible costs that come from
decisions made too slowly – or not at all – because of a stifling bureaucracy. With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of different operating units. We hope to have many more of each. But we will never allow Berkshire to become some monolith that is overrun with committees, budget presentations and multiple layers of management. Instead, we plan to operate as a collection of separately-managed mediumsized
and large businesses, most of whose decision-making occurs at the operating level. Charlie
and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and
setting their compensation.
• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. If Charlie and I were to go into a small venture with a few partners, we would seek individuals in sync with us, knowing that common goals and a shared destiny make for a happy business “marriage” between owners and managers. Scaling up to giant size doesn’t change that truth.
To build a compatible shareholder population, we try to communicate with our owners directly and informatively. Our goal is to tell you what we would like to know if our positions were reversed. Additionally, we try to post our quarterly and annual financial information on the Internet early on weekends, thereby giving you and other investors plenty of time during a non-trading period to digest just what has happened at our multi-faceted enterprise. (Occasionally, SEC deadlines force a non-Friday disclosure.) These matters simply can’t be adequately summarized in a few paragraphs, nor do they lend themselves to the kind of catchy headline that journalists sometimes seek.
Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830
words in the annual letter was this sentence: “We are certain, for example, that the economy will
be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428. Given a few experiences we’ve had like that, you can understand why I prefer that our communications with you remain as direct and unabridged as possible."
