The Essays of Warren Buffett: Lessons for Corporate America. Essays by. Warren E. Buffett. Selected, Arranged, and Introduced by. Lawrence A. Cunningham. Editorial Reviews. greentinphalihang.tk Review. Buffett, the Bard of Omaha, is a genuine American folk greentinphalihang.tk: The Essays of Warren Buffett: Lessons for Corporate America, Fourth Edition eBook: Lawrence A. Cunningham, Warren E. Buffett. In the third edition of this international best seller, Lawrence Cunningham brings you the latest wisdom from Warren Buffett's annual letters to Berkshire.
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Parcel Weight. 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.
Ebook The Essays of Warren Buffett: Lessons for Corporate America, Fourth Edition Free Read
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. 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- Ueves 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: 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 aiUng Sunbeam.
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 s. 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 , 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.
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. Many corporations pay their managers stock op- tions whose value increases simply by retention of earnings, rather than by superior deployment of capitaL As Buffett explains, how- ever, simply by retaining and reinvesting earnings, managers can report annual earnings increases without so much as lifting a finger to improve real returns on capitaL Stock options thus often rob shareholders of wealth and allocate the booty to executives.
More- over, once granted, stock options are often irrevocable, uncondi- tional, and benefit managers without regard to individual performance. It is possible to use stock options to instill a managerial culture that encourages owner-like thinking, Buffett agrees. But the align- ment will not be perfect. Shareholders are exposed to the down- side risks of sub-optimal capital deployment in a way that an option holder is not. Buffett therefore cautions shareholders who are reading proxy statements about approving option plans to be aware of the asymmetry in this kind of alignment.
Many share- holders rationally ignore proxy statements, but this subject should really be on the front-burner of shareholders, particularly share- holder institutions that periodically engage in promoting corporate governance improvements.
Buffett emphasizes that performance should be the basis for executive pay decisions. Executive performance should be mea- sured by profitability, after profits are reduced by a charge for the capital employed in the relevant business or earnings retained by it.
If stock options are used, they should be related to individual per- formance, rather than corporate performance, and priced based on business value.
Better yet, as at Berkshire, stock options should simply not be part of an executive's compensation. After all, ex- ceptional managers who earn cash bonuses based on the perform- ance of their own business can simply download stock if they want to; if they do, they "truly walk in the shoes of owners," Buffett says. This is an elaborate set of ideas that boil down to one simple and misleading practical im- plication: One of modern finance theory's main tenets is modern portfo- lio theory.
It says that you can eliminate the peculiar risk of any security by holding a diversified portfolio-that is, it formalizes the folk slogan "don't put all your eggs in one basket. This leftover risk can be measured by a simple mathematical term-called beta- that shows how volatile the security is com- pared to the market. Beta measures this volatility risk well for se- curities that trade on efficient markets, where information about publicly traded securities is swiftly and accurately incorporated into prices.
In the modern finance story, efficient markets rule. Reverence for these ideas was not limited to ivory tower aca- demics, in colleges, universities, business schools, and law schools, but became- standard dogma throughout financial America in the past thirty years, from Wall Street to Main Street.
Many profes- sionals still believe that stock market prices always accurately re- flect fundamental values, that the only risk that matters is the volatility of prices, and that the best way to manage that risk is to invest in a diversified group of stocks. Being part of a distinguished line of investors stretching back to Graham and Dodd which debunks standard dogma by logic and experience, Buffett thinks most markets are not purely efficient and that equating volatility with risk is a gross distortion.
Accord- ingly, Buffett worried that a whole generation of MB As and IDs, under the influence of modern finance theory, was at risk of learn- ing the wrong lessons and missing the important ones. A particularly costly lesson of modern finance theory came from the proliferation of portfolio insurance-a computerized technique for readjusting a portfolio in declining markets.
The promiscuous use of portfolio insurance helped precipitate the stock market crash of October , as well as the market break of Octo- ber It nevertheless had a silver lining: Ensuing market volatility could not be explained by modern finance theory, nor could mountainous other phenomena relating to the behavior of small capitalization stocks, high dividend-yield stocks, and stocks with low price-earnings ratios.
In stirring up the discussion, people started noticing Buffett's record of successful investing and calling for a return to the Gra- ham-Dodd approach to investing and business. As Buffett emphasizes, the stunning per- formances at Graham-Newman and at Berkshire deserve respect: Threatened by Buffett's performance, stubborn devotees of modern finance theory resorted to strange explanations for his suc- cess.
Maybe he is just lucky-the monkey who typed out Ham- let- or maybe he has inside access to information that other investors do not. In dismissing Buffett, modern finance enthusiasts still insist that an investor's best strategy is to diversify based on betas or dart throwing, and constantly reconfigure one's portfolio of investments.
Buffett responds with a quip and some advice: That can best be done for many people through long-term invest- ment in an index fund.
Or it can be done by conducting hard- headed analyses of businesses within an investor's competence to evaluate. In that kind of thinking, the risk that matters is not beta or volatility, but the possibility of loss or injury from an investment. Assessing that kind of investment risk requires thinking about a company's management, products, competitors, and debt levels. The inquiry is whether after-tax returns on an investment are at least equal to the downloading power of the initial investment plus a fair rate of return.
The primary relevant factors are the long-term economic characteristics of a business, the quality and integrity of its management, and future levels of taxation and inflation. Buffett points out the absurdity of beta by observing that "a stock that has dropped very sharply compared to the market.
Equally unhelpful, beta cannot distinguish the risk inherent in "a single- product toy com- pany selling pet rocks or hula hoops from another toy company whose sole product is Monopoly or Barbie. Contrary to modern finance theory, Buffett's investment knit- ting does not prescribe diversification.
It may even call for concen- tration, if not of one's portfolio, then at least of its owner's mind. As to concentration of the portfolio, Buffett reminds us that Keynes, who was not only a brilliant economist but also a brilliant investor, believed that an investor should put fairly large sums into two or three businesses he knows something about and whose management is trustworthy.
On that view, risk rises when invest- ments and investment thinking are spread too thin. A strategy of financial and mental concentration may reduce risk by raising both the intensity of an investor's thinking about a business and the comfort level he must have with its fundamental characteristics before downloading it. The fashion of beta, according to Buffett, suffers from inatten- tion to "a fundamental principle: It is better to be approximately right than precisely wrong.
Reconfiguring a portfolio by downloading and selling stocks to accommodate the desired beta-risk profile defeats long-term in- vestment success. Such "flitting from flower to flower" imposes huge transaction costs in the forms of spreads, fees and commis- sions, not to mention taxes. Buffett jokes that calling someone who trades actively in the market an investor "is like calling someone who repeatedly engages in one-night stands a romantic.
In a number of classic works, including The Intelligent Investor, Graham introduced some of the most profound investment wisdom in history. It rejects a prevalent but mistaken mind-set that equates price with value.
On the con- trary, Graham held that price is what you pay and value is what you get. These two things are rarely identical, but most people rarely notice any difference. One of Graham's most profound contributions is a character who lives on Wall Street, Mr.
He is your hypothetical business partner who is daily willing to download your interest in a busi- ness or sell you his at prevailing market prices. Market is moody, prone to manic swings from joy to despair. Sometimes he offers prices way higher than value; sometimes he offers prices way lower than value. The more manic-depressive he is, the greater the spread between price and value, and therefore the greater the in- vestment opportunities he offers.
Buffett reintroduces Mr. Market, emphasizing how valuable Graham's allegory of the overall market is for disciplined investment knitting-even though Mr. Market would be unrecognizable to modern finance theorists. Another leading prudential legacy from Graham is his margin- of-safety principle.
This principle holds that one should not make an investment in a security unless there is a sufficient basis for be- lieving that the price being paid is substantially lower than the value being delivered. Buffett follows the principle devotedly, not- ing that Graham had said that if forced to distill the secret of sound investment into three words, they would be: Over forty years after first reading that, Buffett still thinks those are the right words.
While modern finance theory enthusiasts cite market efficiency to deny there is a difference between price what you pay and value what you get , Buffett and Graham regard it as all the difference in the world. That difference also shows that the term "value investing" is a redundancy.
All true investing must be based on an assessment of the relationship between price and value. Strategies that do not employ this comparison of price and value do not amount to in- vesting at all, but to speculation-the hope that price will rise, rather than the conviction that the price being paid is lower than the value being obtained.
They are integrally linked since growth must be treated as a component of value. Nor does the phrase "relational investing" resonate with Buf- fett. The term became popular on Wall Street and in the academy in the mids, describing a style of investing that is designed to reduce the costs of the separation of shareholder ownership from managerial control by emphasizing shareholder involvement and monitoring of management. Many people incorrectly identified Buffett and Berkshire as exemplars of this descriptive label.
It is true that Buffett downloads big blocks in a few companies and sticks around a long time. He also only invests in businesses run by peo- ple he trusts.
But that is about as far as the similarity goes. If Buffett were pressed to use an adjective to describe his investment style, it would be something like "focused" or "intelligent" invest- ing. Yet even these words ring redundant; the unadorned term in- vestor best describes Buffett. Other misuses of terms include blurring the difference be- tween speculation and arbitrage as methods of sound cash manage- ment; the latter being very important for companies like Berkshire that generate substantial excess cash.
The Essays of Warren Buffett: Lessons for - Monitor Investimentos
Both speculation and arbi- trage are ways to use excess cash rather than hold it in short-term cash equivalents such as commercial paper. Speculation describes the use of cash to bet on lots of corporate events based on rumors of unannounced coming transactions.
Arbitrage, traditionally un- derstood to mean exploiting different prices for the same thing on two different markets, for Buffett describes the use of cash to take short-term positions in a few opportunities that have been publicly announced. It exploits different prices for the same thing at differ- ent times.
Deciding whether to employ cash this way requires eval- uating four common-sense questions based on information rather than rumor: In all investment thinking, one must guard against what Buf- fett calls the "institutional imperative.
Contrary to what is often taught in business and law schools, this powerful force often inter- feres with rational business decision-making. All these investment principles are animated in Buffett's lively essays on junk and zero-coupon bonds and preferred stock. Chal- lenging both Wall Street and the academy, Buffett again draws on Graham's ideas to reject the "dagger thesis" advanced to defend junk bonds.
The dagger thesis, using the metaphor of the intensi- fied care an automobile driver would take facing a dagger mounted on the steering wheel, overemphasizes the disciplining effect that enormous amounts of debt in a capital structure exerts on management. Buffett points to the large numbers of corporations that failed in the early s recession under crushing debt burdens to dispute academic research showing that higher interest rates on junk bonds more than compensated for their higher default rates.
He attrib- utes this error to a flawed assumption recognizable to any first-year statistics student: They would not. Further illuminating the folly of junk bonds is an essay in this col- lection by Charlie Munger that discusses Michael Milken's ap- proach to finance. Wall Street tends to embrace ideas based on revenue-generat- ing power, rather than on financial sense, a tendency that often perverts good ideas to bad ones.
In a history of zero-coupon bonds, for example, Buffett shows that they can enable a downloadr to lock in a compound rate of return equal to a coupon rate that a normal bond paying periodic interest would not provide.
Using zero-coupons thus for a time enabled a borrower to borrow more without need of additional free cash flow to pay the interest ex- pense. Problems arose, however, when zero-coupon bonds started to be issued by weaker and weaker credits whose free cash flow could not sustain increasing debt obligations.
Buffett laments, "as happens in Wall Street all too often, what the wise do in the begin- ning, fools do in the end. Unlike many CEOs, who desire their company's stock to trade at the highest possible prices in the market, Buffett prefers Berk- shire stock to trade at or around its intrinsic value-neither materi- ally higher nor lower. Such linkage means that business results during one period will benefit the people who owned the company during that period.
Maintaining the linkage requires a shareholder group with a collective long-term, business-oriented investment philosophy, rather than a short-term, market- oriented strategy. Buffett notes Phil Fisher's suggestion that a company is like a restaurant, offering a menu that attracts people with particular tastes. Berkshire's long-term menu emphasizes that the costs of trading activity can impair long-term results.
Avoiding or minimizing such costs is necessary for long-term investment success, and Berkshire's listing on the New York Stock Exchange helped contain those costs. Corporate dividend policy is a major capital allocation issue, always of interest to investors but infrequently explained to them.
Buffett's essays clarify this subject, emphasizing that "capital allo- cation is crucial to business and investment management. Yet the company has never effected a stock spUt, and has not paid a cash dividend in three decades. Apart from reflecting the long-term menu and minimization of transaction costs, Berkshire's dividend policy also reflects Buffett's conviction that a company's earnings payout versus retention deci- sion should be based on a single test: Earnings retention is jus- tified only when "capital retained produces incremental earnings equal to, or above, those generally available to investors.
Earnings are often retained for non-owner reasons, such as expanding the corporate empire or fur- nishing operational comfort for management. Stock splits are another common action in corporate America that Buffett points out disserve owner interests.
Stock splits have three consequences: With no offsetting benefits, splitting Berkshire's stock would be foolish. Not only that, Buffett adds, it would threaten to reverse three decades of hard work that has attracted to Berkshire a shareholder group comprised of more focused and long-term investors than probably any other major public corporation.
Two important consequences have followed from Berkshire's high stock price and its dividend policy. First, the extraordinarily high share price impaired the ability of Berkshire shareholders to effect gifts of their equity interest to family members or friends, though Buffett has offered a few sensible strategies like bargain sales to donees to deal with that.
Second, Wall Street engineers tried to create securities that would purport to mimic Berkshire's performance and that would be sold to people lacking an under- standing of Berkshire, its business, and its investment philosophy.
In response to these consequences, Buffett and Berkshire did an ingenious thing. In mid, Berkshire effected a recapitaliza- tion by creating a new class of stock, called the Class B shares, and sold it to the public. Accordingly, the Class B shares should and do trade somewhere in the vicinity of th of the market price of the Class A shares.
More importantly, the Berkshire recapitalization would halt the marketing of Berkshire clones that contradict all the basic principles Buffett believes ia. These clones-investment trusts that would download and sell Berkshire shares according to demand for units in the trust-would have im- posed costs on shareholders.
If held by people who do not under- stand Berkshire's business or philosophy, they would have caused spikes in Berkshire's stock price, producing substantial deviations between price and value. The Class B shares are designed to be attractive only to inves- tors who share Buffett's philosophy of focused investing.
For ex- ample, in connection with the offering of the Class B shares, Buffett and Munger emphasized that Berkshire stock was, at that time, not undervalued in the market. They said that neither of them would download the Class A shares at the market price nor the Class B shares at the offering price. The message was simple: The effort to attract only long-term investors to the Class B shares appears to have worked: Some expressed surprise at Buffett and Munger's cautionary statement, since most managers tell the market that newly-issued equity in their companies is being offered at a very good price.
You should not be surprised by Buffett and Munger's disclosure, however. A company that sells its stock at a price less than its value is stealing from its existing shareholders. Quite plausibly, Buffett considers that a crime. Contrary to common practice, Buffett argues that in download- ing all of a business, there is rarely any reason to pay a premium. The rare cases involve businesses with franchise characteris- tics-those that can raise prices rather easily and only require in- cremental capital investment to increase sales volume or market share.
Even ordinary managers can operate franchise businesses to generate high returns on capital. These two categories are extremely limited, and certainly do not explain the hundreds of high-premium takeovers that occur an- nually. Buffett attributes high-premium takeovers outside those unusual categories to three motives of downloading-managers: In paying for acquisitions, Berkshire issues stock only when it receives as much in business value as it gives.
Many other downloaders, when not using cash or debt, violate this simple rule. Buffett notes that sellers in stock acquisitions measure the download price by the market price of the downloader's stock, not by its intrinsic value. If a downloader's stock is trading at a price equal to, say, half its intrinsic value, then a downloader who goes along with that measure gives twice as much in business value as it is getting.
Its manager, usually ra- tionalizing his or her actions by arguments about synergies or size, is elevating thrill or excessive optimism above shareholder interests. Moreover, acquisitions paid for in stock are too often almost always described as "downloader downloads seller" or "downloader acquires seller. After all, that is what is happening; and it would enable one to evaluate what the downloader is giving up to make the acquisition. If the worst thing to do with undervalued stock is to use it to pay for an acquisition, the best thing is to download it back.
There would rarely be better uses of capital than that. Yet many more undervalued shares are paid to effect value-destroying stock acquisitions than are redownloadd in value-enhancing stock download-backs. In contrast to sensible redownloads of undervalued stock, which serve owner interests, Buffett condemns management repur- chases from individuals at premium prices to fend off unwanted acquisition overtures.
Buffett forcibly shows that this practice of greenmail is simply another form of corporate robbery. Nearly as reprehensible, a second Charlie Munger essay in this collection explains, were the cascades of leveraged download-outs in the s. Value-enhancing acquisitions are hard enough to find without the added burden of higher average costs for all of them.
Indeed, most acquisitions are value-decreasing, Buffett says. Finding the best value-enhancing transactions requires concentrating on oppor- tunity costs, measured principally against the alternative of downloading small pieces of excellent businesses through stock market downloads.
Such concentration is alien to the manager obsessed with synergies and size, but a vital part of Berkshire's double-bar- reled investment approach. Berkshire has additional advantages in acquisitions: Buffett also puts his money where his mouth is, reminding prospective sellers that Berkshire has acquired many of its businesses from family or other closely-held groups, and inviting them to check with every previous seller about Berk- shire's initial promises measured against its later actions.
In dissect- ing significant aspects of generally accepted accounting principles GAAP , Buffett shows both their importance and limits in under- standing any business or investment. Buffett demystifies key topics that highlight the important differences between accounting earn- ings and economic earnings, between accounting goodwill and eco- nomic goodwill, and between accounting book value and intrinsic value.
These are essential tools for any investor's or manager's val- uation toolbox. The most basic point to understand about accounting is that it is a form. As a form, it can be manipulated. Buffett shows just how severe the manipulation can be with a satire written by Ben Graham in the s.
The advanced bookkeeping methods Gra- ham presents enable his phantom US Steel to report "phenome- nally enhanced" earnings without cash outlays or changes in operating conditions or sales. Except in its lampooning spirit, Gra- ham's illustration of accounting chicanery is not all that different from what is often seen coming out of corporate America.
Buffett emphasizes that useful financial statements must en- able a user to answer three basic questions about a business: Buffett laments that GAAP con- ventions make these determinations difficult, and indeed almost any accounting system will be hard pressed to furnish completely accurate answers given the complexities of business. Acknowledg- ing the monumental difficulty of inventing an accounting system superior to GAAP, Buffett articulates a range of concepts that go a longer way toward making financial information useful to investors and managers.
Consider a concept Buffett calls "look-through earnings. These accounting rules obscure a major factor in Berkshire's economic performance: Recognizing that it is not the size of an equity investment that determines its value, but how the undistributed earnings are deployed, Buffett develops the concept of look-through earnings to gauge Berkshire's economic performance.
Look-through earnings add to Berkshire's own net earnings the undistributed earnings in investee companies, less an incremental amount for taxes. Look- through earnings are not different from GAAP earnings for many businesses.
But they are for Berkshire and probably are for many individual investors. Accordingly, individuals can adopt a similar approach for their own portfolios and try to design a portfolio that delivers the highest possible look-through earnings over the long term.
The difference between accounting goodwill and economic goodwill is well-known, but Buffett's lucidity makes the subject re- freshing.
Accounting goodwill is essentially the amount by which the download price of a business exceeds the fair value of the assets acquired after deducting liabilities. So the accounting goodwill assigned to that busi- ness decreases over time by the aggregate amount of that expense.
Economic goodwill is something else. It is the combination of intangible assets, like brand name recognition, that enable a busi- ness to produce earnings on tangible assets, like plant and equip- ment, in excess of average rates. The amount of economic goodwill is the capitalized value of that excess.
Economic goodwill tends to increase over time, at least nominally in proportion to inflation for mediocre businesses, and more than that for businesses with solid economic or franchise characteristics. Indeed, businesses with more economic goodwill relative to tangible assets are hurt far less by inflation than businesses with less of that.
These differences between accounting goodwill and economic goodwill entail the following insights. First, the best guide to the value of a business's economic goodwill is what it can earn on un- leveraged net tangible assets, excluding charges for amortization of goodwill.
Therefore when a business acquires other businesses, and the acquisitions are reflected in an asset account called good- will, analysis of that business should ignore the amortization charges. Second, since economic goodwill should be measured at its full economic cost, i.
Buffett emphasizes, however, that the same does not hold for depreciation charges-these should not be ignored because they are real economic costs. He makes this point in explaining why Berkshire always shows its shareholders the results of operations with respect to acquired businesses net of any download price ad- justments GAAP requires. It is common on Wall Street to value businesses using a calcu- lation of cash flows equal to a operating earnings plus b depre- ciation expense and other non-cash charges.
Buffett regards that calculation as incomplete. After taking a operating earnings and adding back b non-cash charges, Buffett argues that you must then subtract something else: Buffett defines c as "the average amount of capitalized ex- penditures for plant and equipment, etc. For most businesses, c usually exceeds b , so cash flow analysis usually overstates economic reality.
That is why Berkshire supplementally re- ports owner earnings for its acquired businesses, rather than rely solely on GAAP earnings figures, or cash flow figures.
A final example of Buffett's specialized toolkit is intrinsic value, "the discounted value of the cash that can be taken out of a business during its remaining life.
It depends on estimation of both future cash flows and interest rate movements. But it is what ultimately matters about a business. Book value, in contrast, is easy to calculate, but of limited use. So too with market price, at least for most companies. Differences between intrinsic value and book value and market price may be hard to pin down.
They can go either way, but there will almost certainly be differences. GAAP has enough trouble. Yet two groups of people make it worse: The former is especially hard to deal with, as Buffett suggests in illustrating how debate on accounting for retiree benefits and stock options revealed the paro- chialism of many executives and accountants. For example, criti- cizing the view against treating stock options as expenses when granted, Buffett delivers this laconic argument: If compensation isn't an ex- pense, what is?
And, if expenses shouldn't go into the calculation of earnings, where in the world should they go? Until , businesses that promised to pay for health care services to retired employees were not required by GAAP to rec- ord the associated obligation as a liability on their balance sheets. It thus made it easy to make such financial commitments, and many businesses made far more generous commitments to cover retiree health benefits than they would have had they been re- quired to report the obligation.
One consequence was a wave of bankruptcies, as businesses failed to meet their mounting and ma- turing obligations.
Despite enormous managerial leeway in reporting earnings and potential abuse, financial information can be of great use to investors. Buffett uses it every day, and has allo- cated billions of dollars doing it. So it is possible to make impor- tant investment decisions on the basis of available financial information if one exercises knowledgeable judgment. That judg- ment may include making adjustments to determine look-through earnings, owner earnings, and intrinsic value, and to show the real costs of stock options or other obligations that GAAP does not require to be recorded on the financial statements.
Bringing this collection full circle, the concluding essays note the obvious but often overlooked tax advantages of long-term in- vestment. Linking life's two certainties, the final essay includes one of Buffett's many jokes about his personal longevity: At the symposium featuring this collection, someone asked what effect Buffett's death would have on Berk- shire stock.
Another answered, "a negative effect. Even as a complete novice in this field I managed to gain so much from this book. And to think what a person, studying finances or working with investments, could learn from essays - is just mind-blowing! Nevertheless, Buffet states and re-states his principles clearly and succinctly and often provides amusing anecdotes or related jokes, and if you're at all interested in how businesses sh If, when I bring up that this is a "greatest hits" of excerpts from Berkshire Hathaway annual reports written by Warren Buffet, you are already wishing you clicked away from this to anywhere else on the Internet -- ANYWHERE, PLEASE -- then mentioning that Buffet is actually not too hard to read won't help much.
Nevertheless, Buffet states and re-states his principles clearly and succinctly and often provides amusing anecdotes or related jokes, and if you're at all interested in how businesses should be run and investments should be made this book will be valuable. First, however, you'll have to get through a fantastic counterexample of good business writing: Seriously, you can just skip it.
It's a summary of what Buffet says, rephrased in abstract and bland terms, and adds nothing. It does do a good job of making Buffet's writing look better, though. Thankfully the editor's conclusion is not as bad, chiefly because it has the virtue of being two pages long. Some main points from Buffet's writing: Buffet knows his grasp on technology-related business is tenuous so he doesn't try to get involved in tech.
After that, don't download the stock unless its price is well below the intrinsic value of the company. Jul 18, Daniel Olshansky rated it liked it. It is difficult to judge this as a book, because it really is just a collection of Warren Buffet's letters to the shareholders. There is a very nice introduction that sums up Buffet's views, and is great for people who have not been exposed to, or are not very familiar with value investing. The books lacks flow, with the order that the letters are listed in sometime jumping back and forth by a decade and two without preparing the reader to make the appropriate context switch.
Since these are lett It is difficult to judge this as a book, because it really is just a collection of Warren Buffet's letters to the shareholders.
To some extent, it is analogous to picking up a newspaper from three decades ago. While it is an unbiased look into the past, showing that history does repeat itself, the book does a poor job at preparing the reader from entering the proper mindset. This shouldn't be the first book any value investor picks up, but it should still be read early into one's "investment career" since there are invaluable lessons directly from one of the world's greatest investors.
Nov 24, Brady Bunte rated it it was amazing. This book is a great, well organized compilation of Mr. Buffett's famous "Letters to Shareholders" which appear in the annual reports of Berkshire Hathaway.
It has been recently updated to include the letters to shareholders written since the book was first released in , a new introduction has been written, and a new, tougher, blue cover has been added.
It is a great tool to use when trying to compile Mr. Buffett's comments on a particular subject since it is organized by subjects he has discussed in his letters over the years.
Trying to find all of his comments on a particular subject throughout the annual reports is a time consuming task when you have to look through many years worth of annual reports. Cunningham has made this task much simpler with this book.
Brady Bunte Tres Sietes Tequila My expectation before I started reading this book as with books of this nature was to understand how Buffett pins down a download. He is miles ahead than many because he has the ability to question the standard approach.
The book shares his view on a wide variety of issues that come about when you consider a "business" and it is here that you realise how important the approach of looking at an investment as "part-owner" is.
I thought this was all pretty good. It's a strange compilation. Different sections from different reports in different years are arranged by topic. So, as business conditions change, the details of the advice changed. The fundamentals are always the same: Owning a business is good if the business is good and never invest because you think the price will go up rather than because the business is good.
Buffett is often funny although some of his jokes are a little dated such that they're much less I thought this was all pretty good. Buffett is often funny although some of his jokes are a little dated such that they're much less funny now than they would have been perceived when told or earlier and usually makes business concepts very accessible.
I was searching for the hardcopy book of Buffet's letters to the shareholders, and landed with this book in library. But this is a good summary from all those letters organised like your corporate finance chapters. I should have read this book along with my Corporate Finance course text book during my course. This is just pure rational thought process of buffet, even if he does not follow all those mentioned for the criticisms against him gave a better idea of various concepts of running , own I was searching for the hardcopy book of Buffet's letters to the shareholders, and landed with this book in library.
This is just pure rational thought process of buffet, even if he does not follow all those mentioned for the criticisms against him gave a better idea of various concepts of running , owning a company. Loved this book to the core, got me glued to this for last one week.
Sep 11, Karan rated it really liked it Shelves: I thought this "book" was more direct advice on investing and personal finance.
Through reading this book, I found out that it's about: Warren won't tell you how to be rich. He just lays out his philosophy and thinking about money, businesses and people. I think it's not a very useful information for people looking to make small trades in the market, but a gold mine for those going in the I thought this "book" was more direct advice on investing and personal finance. I think it's not a very useful information for people looking to make small trades in the market, but a gold mine for those going in the finance world think hedge fund managers.
Mar 28, Yoo Jin added it. Slightly difficult to read through but with a little extra determination, I was able to finish this timeless collection of essays that helped me gain essential insights with real-life and straight forward examples. Great insight into Buffet's view on business valuation, capital structuring and importance and role of management in corporations.
It's a book i'll most likely return to again from time to time! Jul 20, Suman rated it really liked it Recommends it for: This is an excellent book on how business should be run. Larry Cunningham does an excellent job rearranging Buffett's expositions in his annual report to show Buffett's approach on investing and life.
In a world where Wall Street looks for short-term gains at all cost, Buffett stands out in making sure that his investing world is as equitable as possible. This book should be read by anyone interested in investing.
Aug 07, Pat Murphy rated it really liked it. These were mostly letters to buffett's share holders. There is humor, and good naturedness. Some common sense investing knowlege. Of course he is a master. I don't know if I would read this knowing what I know now. But I am not discouraging others from it. It has some worth for anyone wanting to read what Buffett has to say in any case.
Sep 19, Kurt Christensen rated it it was amazing. One of those rare books on business and leadership that both entertains and enlightens.
Deftly edited, the book consists of excerpts from the Berkshire Hathaway annual shareholder letters, organized by theme to reveal the larger philosophies of Warren Buffett and Charlie Munger that have led to Berkshire's unparalleled success.
It might be the only business text you'll ever need. Jan 05, Harold Zable rated it liked it. It's got some interesting points, and it taught me some stuff about businesses. But it's terribly repetitive. The main points could probably have been expressed in a ten-page essay instead of a page book.
I sympathize with the business students who have to use it as a textbook. Mar 27, Markes Gonzalez rated it it was amazing. Warren Buffett and Charlie Munger are geniuses. Inspired by Ben Graham. Feb 24, Valerie rated it really liked it. I am the average joe, so this was a bit beyond me.The es- says follow. Accordingly, prior to our download, I was forced into my Galileo mode. Once your order has been dispatched from our Sydney warehouse you will receive an Order Shipped status email.
The Anxieties of Plant Closings 43 D. View 2 comments. Beta measures this volatility risk well for se- curities that trade on efficient markets, where information about publicly traded securities is swiftly and accurately incorporated into prices. It's good news for Berkshire. The book more than lived up to its promise.
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