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.!!