Warren Buffett’s management of Berkshire Hathaway pulled the company from the brink of collapse and formed it into a multi-billion dollar company that owns and operates more than 50 other companies. And, while there isn’t any one thing that has led to the success of Buffett and his corporation, the business practices, principles, and philosophy certainly have helped.
In the 1983 Shareholder Letter, Buffett spelled out exactly what shareholders could expect, and many of those practices continue today.
1. Shareholders are considered owner-partners
Being a Berkshire Hathaway shareholder is more than just owning stock in a valuable company. Buffett encourages shareholders to hang on to their stocks and take pride and ownership in the company. In his shareholder letter, Buffett wrote: “Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners…”
2. Maximize per-share value through diversified investing
Berkshire Hathaway’s long-term economic goal is to increase the business’ intrinsic value on a per-share basis. Because of the size of the company and the variety of companies, this makes more sense than measuring the overall value of the company all lumped together. And, towards that goal, Buffett wrote he would rather own valuable businesses which earn at an above-average rate: “…Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stocks by our insurance subsidiaries…”
3. Cash is cash, whether it is reportable under modern accounting or not
Accounting numbers and such should be taken with a grain of salt, as they aren’t going to always properly reflect the status of a company. To that end, Buffett has always preferred to purchase companies that he believes to be vaulable. “When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.”
4. Consolidated reported earnings should be taken with a grain of salt.
Because Buffett is into diversification and doesn’t worry about unreported earnings, sometimes conventional accounting numbers don’t accurately report the value of a company. “Charlie and I, both as owners and managers, virtually ignore such consolidated numbers,” Buffett wrote.
5. Don’t use debt. When you do, make sure it’s a long-term fixed rate.
Debt is never the way to go when you’re running a business, and Buffett has spoken frequently about how the best way to make money is to stay out of debt. In fact, that is one of his 10 Ways to Get Rich. In his shareholder letter, Buffett explained further: “We will reject interesting opportunities rather than over-leverage our balance sheet.”
6. It’s important to constantly test and evaluate decisions to retain stocks
In general, Buffett prefers to hold on to stocks rather than to sell them, however it’s important to constantly evaluate whether those decisions are still good for the business. “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,” Buffett wrote.
7. Selling businesses that are making money is not preferable; even if they are sub-par
Buffett and Berkshire Hathaway invest for the long-term, and that includes weathering poor market conditions. “…Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns, and are 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… And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures.”
8. Don’t talk about investments and opportunities
This might seem like odd advice from the man who seems always ready with a quote, but while he’ll happily talk about his reading habits and his children, he keeps his really good investment ideas to himself. “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,” Buffett wrote.
It’s also noteworthy that not talking about business also includes the buying and selling of stocks. “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.”