Monday, March 7, 2011

BUFFETT’S LESSONS FOR BUSINESS

It’s that time of the year again when the world’s richest investor Warren Buffett publishes his letter to the shareholders of Berkshire Hathaway, a conglomerate he runs and in which he has a controlling stake.

Berkshire Hathaway is a $210b company – this is almost thrice the size of the East African Community economy, which employs 250,000 people in the more than 70 firms it owns. A Berkshire share goes for $130,000.

While impressive, these numbers belie Buffett’s reputation as the world’s premier investor.

Buffett who turned 80 last year, took over Berkshire when it was a floundering textile company in 1965 and through buying stakes in public companies and acquiring companies provided superhuman returns for his shareholders.

The book value of the company’s shares have shown a compounded annual growth rate of 20.2%, meaning if you had met the nerdish 34 year-old Buffett when he took over Berkshire 46 years ago and placed sh1m with him, that investment would have grown to about sh500m today.

At the end of last year DSTV’s BBC Knowledge channel had a revealing documentary on “The Sage of Omaha” as he is affectionately referred to, in which they broke down his investment philosophy into a handful of principles.

Far way as he may be in the American heartland, Buffett’s annual letter to his partners has useful lessons for businessmen and investors in Uganda.

Below are some of the lessons I was able to glean from this year’s letter.

On the economy,

“Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and a Civil War – remains a live and effective”



On Managing managers/companies,

“At Berkshire, managers can focus on running their business: 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….. There are managers to who 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 “hire well, manage little” code suits both them and me”

“Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.”


On Corporate culture,

“Cultures self propagate …. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. … As long as Charlie (Munger, vice-chairman) and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

“Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent. This culture grows stronger every year, and it will remain intact long after Charlie and I have left the scene.”

On Investment,

“You can be highly successful as an investor without having the slightest ability to value an option. What students should be learning is how to value a business. That’s what investing is all about.”


On corporate governance, (in letter to his managers)


“The priority is that all of us continue to guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos fro more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

“Sometimes your associates will say “everybody else is doing it.”… It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as rationale, in effect they are saying that they can’t come up with a good reason. If any one gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.”

The 26-page letter is devoid of illustrations and graphics but still makes for compelling reading.

2 comments:

  1. Thanks for sharing Buffet's thoughts. What beats me about Warren is his frugality. By American standards his house is not out of the ordinary to mention but a few. I am not sure whether the guy owns a laptop! Perhaps his age limits his tech abilities?

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  2. Danny,

    in his letter he says he bought his house for $31,000 46 years ago.

    you need to read his biography "The Snowball" his attitude to money is dictated by his appreciation for the future value of money.

    In one anecdote he picked up a coin in a lift and said aloud "This is the beginning of the next billion dollars". Meanwhile there is no real indication that he is a miser, he does not deprive himself or his family of the essentials.

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