Berkshire Hathaway | Owner’s Manual part 4

Owner-related business principles cont’d

14. To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be-overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners.

I really believe that Berkshire is for long-term investors, and as Warren Buffett says, his communication and policies do indicate that philosophy. A philosophy of not splitting the stock, or making investments that are beneficial over the long-run all dictate this underlying philosophy. Even today, investors are doubting the decisions made by Warren Buffett, but they fail to realize one thing, he is a man of integrity that will take this company even further. Just wait and see.

15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope to outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings that are described in the next section. Moreover, it now is less meaningful on a year-to-year basis than was formerly the case. That is because our equity holdings, whose value tends to move with the S&P 500, are a far smaller portion of our net worth than they were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index, whereas gains in Berkshire’s equity holdings are counted at 65% because of the federal tax we incur. We, therefore, expect to outperform the S&P in lackluster years for the stock market and underperform when the market has a strong year.

Bruce Berkowitz took Warren Buffett’s advice and sold off shares of Berkshire because he believes he can find bargains in today’s environment where he could earn a better return. I think however, because of Berkshire’s sheer size, it would be difficult to earn a high return as well, however, this environment offered so many opportunities, I believe he can earn a significant return for his long-term investors as well. I feel honored to have bought shares during his tenure. It is my intention to hold forever.

This is the end of the principles within the Owner’s Manual. The next section would be a discussion of his definition of INTRINSIC VALUE. Stay tuned.!!

Related Links:
Berkshire Hathaway | Owner’s Manual Part 3
Berkshire Hathaway | Owner’s Manual Part 2
Berkshire Hathaway | Owner’s Manual Part 1

Warren Buffett's CNBC video on state of the Economy

The rest of the videos can be seen at the CNBC website.

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 1

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 2

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 3

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 4

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 5

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 6

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 7

Morningstar's take on Berkshire's Credit Default Swaps

Do you have confidence in Warren Buffett's ability to make wise decisions, specifically around these sort of instruments? YES.

Disclosure: Long BRK.B

Berkshire Hathaway | Owner's Manual Pt. 3

Owner-related business principles cont'd

9. We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.

This has been the reason why Berkshire has not and will not pay dividends. If they continue to find opportunities to effectively deploy capital, they will not issue the funds to shareholders in the form of dividends. They have continuously proven that retained earnings are being effectively used, therefore shareholders should appreciate the fact that they have one of the best capital allocators in the world investing for them.


10. We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance — not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company — and that is what the issuance of shares amounts to — on a basis inconsistent with the value of the entire enterprise.

The important point to understand here is that Berkshire does not dilute the owners' common stock by issuing shares. The only time that issuing shares make sense is when there is an equitable trade in value. Also, pay attention to when companies you own issue stock and question whether or not the stock is undervalued; this is normally an indication that the managers are not wisely investing your money.


11. You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.

This principle speaks to the competency of the management. They will not invest unnecessarily in a sub-par business and will not exit a business if it can still act as a cash cow and add to the float. They will however, take action if a company problem's can be cured.


12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others. We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.

This is one of the most important principles that investors should pay attention to. Buffett is as clear and honest as possible when he reports results to the owners of Berkshire Hathaway. His annual reports are seen as some of the most valuable investment documents in the value investing world. They are filled with precious information about his investing philosophy and decisions over the years and is considered a must read for all in the business. His reporting techniques should be used as a model for the industry.


13. Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. Therefore we normally will not talk about our investment ideas. This ban extends even to securities we have sold (because we may purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny those reports but say “no comment” on other occasions, the no-comments become confirmation.

Buffett makes it clear that they do not discuss their investment ideas because these ideas are rare and may be subject to competitive appropriation. He fully believes in discussing his investment philosophy which he learned from Benjamin Graham.

For the detailed reading of The Owner's Manual, please refer to Berkshire's Hathaway's website.

Related Links:
Berkshire Hathaway | Owner’s Manual Part 4
Berkshire Hathaway | Owner’s Manual Part 3
Berkshire Hathaway | Owner’s Manual Part 2
Berkshire Hathaway | Owner’s Manual Part 1


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