Buy the Book: The Buffett Essays Symposium is an annotated transcript of a 1996 symposium held in concert with the release of The Essays of Warren Buffett to discuss Buffett’s thoughts on corporate governance, M&A, investing, accounting, and more found in his shareholder letters.
The Notes
- “At the symposium, a commentator observed that Buffett’s repeated assertions that Berkshire was a partnership among him and all shareholders could well be legally binding and Buffett would owe fellow owners fiduciary duties of loyalty far more stringent than those corporate directors owe shareholders. Buffett said that would be fine with him.”
- Berkshire’s shares traded at $30,000 in 1996 (at the time of the symposium) but 90% of the shares had a basis of less than $100 at that time!
- Berkshire created Class B shares in 1996 to ward off a unit trust created to offer fractional interest in Class A shares for a fee. The Class B shares initially traded at $1,000/share and offered added liquidity for owners who converted A shares to B shares.
- Corporate Governance
- “We act as you would hope a board of directors would act representing dispersed shareholders. We just have a couple of problems. We have a capital allocation problem where the managers of the businesses would probably allocate capital differently than we would at Berkshire, because we don’t care about the relative size of the subsidiaries. We care about the relative profitability of the shareholders of that subsidiary in effect in aggregate.
We also have the problem of dealing with whether we have the right managers and most of the time we do. The biggest problem is not the terrible manager. The biggest problem is the mediocre manager—and that’s true everywhere. That is a very difficult thing to deal with, and I’m not sure how you deal with it.” — Warren Buffett - “I would say that the biggest factor causing boards to act as they would act in our situation where we own 100% is embarrassment. If you embarrass big shots, they will behave better. And in that respect, probably the press has done more to cause boards to behave as they should than anything we can dream up.” — Warren Buffett
- “Good corporate governance is most important for companies in times of transition or crisis.” — Marjorie Knowles
- “The TIAA-CREF model which is the epitome of the large public institution—which owns 1600 companies and really can’t pay attention to all of them. It’s impossible, but that is the way the world is going. When you track through the twenty-five largest companies, you find virtually the same twenty-five institutions owning virtually the same twenty-five companies. Now, as an antitrust lawyer that gives me great concern, but I seem to be the only one in the room with that concern!” — Ira Millstein
- Munger on the consequences if shareholders had a procedure to force the sale of a company — “When you examine the consequences of the proposal, you get a huge concentration. Then if you carry it one step further—which any proper analysis would—you would examine the consequences of the consequences. And all the managers of American corporations—seeing the shareholders having this power to act in their own interest to force sell out after sell out—to prevent being displaced and so on, would go into great voluntary concentrations.” — Charlie Munger
- “As a stockholder, I’m really only interested in the board accomplishing two ends. One is to get a first class manager and the second is to intervene in some way when even that first class manager will have interests that are contrary to the interests of the owners. I think there are great difficulties in achieving both of those ends.” — Warren Buffett
- Buffett’s Two Problems Related to CEOs:
- Finding a First-Class Manager — boards must meet regularly to evaluate the CEO, absent the CEO.
- Conflicts of Interest Between CEO and Shareholder — two conflicts discussed were CEO compensation and a CEO who believes they need to act or “make a big splash” via acquisition that conflict with shareholders.
- “A board may be a legal creation, but it’s a social animal. It is very difficult for a group of people without a very strong leader to all of a sudden, spontaneously decide that they’re going to hold some meetings elsewhere and discuss whether this person who may be a perfectly decent individual, really should be batting clean-up. So, I think there should be a lot of emphasis on process in terms of evaluation of a CEO.” — Warren Buffett
- “If you get that first class chief executive—which is a top priority—he doesn’t have to be the best in the world, just a first class one… You may be able to turn a five into a five-and-a-half or something by having him consult with lots of other CEOs and get a lot of advice from the board. But my experience is that you don’t turn a five into an eight. I think you’re better off getting rid of the five and having him find something else to do in life and going out and acquiring an eight.” — Warren Buffett
- “I have seen board after board approve deals that afterwards the board members say, ‘you know, I really didn’t think it was a very good idea but what could we do about it?’ And there should be a better mechanism. But I’m not sure what it is.” — Warren Buffett
- “I would say that more dumb acquisitions are made in the name of strategic plans than any other. I would be very wary if a board went through some elaborate process where a strategic plan was reviewed in great detail and then they endorse it and then the management went on to make acquisitions and then they came and said, ‘but we made it in accord with a strategic plan.'” — Warren Buffett
- Most boards adopt a general acquisition strategy and then implement them. Buffett, via Berkshire, has no plan. The absence of a “strategic plan” allows Berkshire flexibility to seize opportunities as they arise.
- “In the end, the big, dumb acquisitions are going to cost shareholders far, far more money than all of the other stuff.” — Warren Buffett
- “We say we are trying to buy into businesses with excellent economics, run by honest and able people at a decent price. We buy very few securities, so we look at it as ‘focused’ investing. But the relationship aspect is not a key part of the investment strategy at all. We will tend to have big blocks because we’ve got a lot of money. We buy very few stocks, so that would be an aspect of it, and we stick around a long time. So we do get to know the people in the business… What we are looking for are exactly what we’ve been seeking for decades. When we had way smaller funds, it was the same thing. When we bought stocks twenty years ago, we bought relatively few stocks… We tended to have about the same relationships, or lack of them—in some cases we never met the managements and in other cases we have known them well.” — Warren Buffett
- On VCs: “They’re more interested in an exit-strategy. And if you’re more interested in an exit-strategy, you’re going to have more legal problems. We’re looking for a non-exit-strategy. We want to go into things where we’ll never want to exit. I mean it’s very simple. But if you are in a situation where you are both active and looking for an exit-strategy, you’re going to have more problems. You’re going to have more conflicts.” — Warren Buffett
- “We act as you would hope a board of directors would act representing dispersed shareholders. We just have a couple of problems. We have a capital allocation problem where the managers of the businesses would probably allocate capital differently than we would at Berkshire, because we don’t care about the relative size of the subsidiaries. We care about the relative profitability of the shareholders of that subsidiary in effect in aggregate.
- Investing
- “Regarding common stock repurchases, if you’re getting more intrinsic value than your cash is worth, why, of course that gets to be very attractive as a use of corporate funds. Alternatively, if you have a better use for the funds in terms of the value you get than repurchase, you should use the alternative purpose. Everything should be done in terms of opportunity cost. Opportunity cost is so simple. If you’re going to make a new investment, your opportunity cost of the new investment is whatever the next best choice you have available is. Now, you go through life like that instead of with this gibberish, all I can say is it works better.” — Charlie Munger
- Berkshire had 3 or 4 80+% owned subsidiaries (in 1996) but they allowed the 20% or less owners to decide the dividend policy of the subsidiary because Buffett knew the potential dividend was more important to them than to Berkshire.
- On a Berkshire Dividend:
- “We say our break point is when we get so we can’t deliver more than a dollar of market value per dollar retained, we will start distributing the money to the shareholders instead of retaining it. That’s our break point.” — Charlie Munger
- “We might distribute more than 100% of the earnings.” — Warren Buffett
- On Modern Finance Theory: “Suppose I am running a big pension fund that has net cash flows coming in every year. Very, very long-term obligations. And I decide that what I will do is program a bunch of computers to keep the fund continuously invested in very high beta stocks, very volatile stocks. And my computers do that and they do that year after year for twenty years. When it’s all done, do I have a performance that is two, three, four, five percentage points above the average performance of the stock market. Yes or no?… If you talk about Berkshire, I think the result would be far less than what we get using our methods. And I am deeply suspicious of the idea that a strategy so simple would work to produce a large advantage.” — Charlie Munger
- “If you absorb the important basic knowledge—which at least for the best students is very easy to assimilate—and you absorb all the big basic points across a broad range of disciplines, one day you’ll walk down the street and you’ll find that you’re one of the very most competent members of your generation, and that many people who were quicker mentally and worked harder are in your dust. So, yes, by all means teach the big important points. And the fact that they’re nearly obvious, if they’re important enough, you probably should even repeat them.” — Charlie Munger
- “Volatility is a good measure of risk if you don’t look at security price volatility, but at business volatility. For example, if you look at the businesses that Berkshire has invested in—like Gillette or Coke, businesses with a franchise that’s impenetrable. These are businesses with underlying economics have very low volatility. And if you look at the consistent earnings I think that volatility is a good measure of risk. The problem is, looking at security price volatility is not a good measure of risk. And I think that the model should be adjusted to look at the underlying economics of the business as opposed to where pieces of paper trade and exchange on a daily basis.” — Bill Ackman
- “We don’t go to auctions… I’m afraid of my own idiocy.” — Charlie Munger
- M&A
- “Once you get into great big social institutions that, given certain laws, will cascade in waves of acquisitions and huge agglomerations, that bothers me enough. So, I think that it’s appropriate to have laws in the civilization that prevent it.” — Charlie Munger
- On Stock-for-Stock Acquisitions: “Let me postulate this. Company A, a very large company, is selling at $100 a share. Company B is some rather smaller company selling at $80 a share. Company A decides that there are benefits of joining up with Company B so they offer a share-for-share exchange. Company B shareholders are happy they’re going to get $100 a share for this deal and they vote it and the investment bankers bless it, et cetera. And say that extra value presumably comes from the synergy that would be achieved from putting these two entities together. The market is efficient, we’ll say, about evaluating each one on their own, but putting them together creates enough synergy so that an efficient market also will say that the resulting company is worth $102, just to pick a figure. Now let’s turn it inside out and assume that Company A’s directors are sitting in a director’s meeting one day and in come Company B’s investment bankers and they say, we’ll offer one share of Company B (the $80 stock) for every share of Company A (the $100 stock). If that transaction went through it would have exactly the same number of shares outstanding, the same business economies of the two and everything else. But I think you will find no one who would say that Company A’s shareholders with stock at $100 a share should accept this $80 a share, although presumably it would be worth $102 just the same way, because the same number of shares would be outstanding, the same economies would be realized, and so on. What should the director’s behavior be in both of those illustrations? … It illustrates either that the market is not efficient or directors will behave differently based on whether they are the acquiring company or the target company.” — Warren Buffett
- Buffett’s point to the quote above is that shareholders view M&A deals differently based on the price offered even though the accretive value is the same in both instances.
- “Negotiated value is where a transaction will take place today under all the normal economic assumptions and circumstances—a willing buyer and a willing seller, et cetera. Intrinsic value can differ materially from negotiated value. Negotiated value represents hopes and fears and intrinsic value—admittedly, no one is going to know it precisely. But the intrinsic value is if the company itself were a bond and you could see all the coupons printed out between now and judgment day, if you discounted those back at government bond rates since you would know the certainty, the same certainty that you would have on a government bond what that number would be. Those numbers differ.” — Warren Buffett
- “Generally, I’m not in favor of a social system which throws just huge rewards to people who invent nothing, don’t improve the factories or don’t invent better systems and so forth. Of course, you can argue that I’m condemning myself. All I can say is it’s almost intentional.” — Charlie Munger
- “If you think through the consequences of a rule of law carefully enough, you’re likely to come to some conclusions about what the appropriate rule is.” — Charlie Munger
- Accounting
- The main discussion revolves around financial reporting and the accounting game that has so much potential for manipulation. Further, how few shareholders or analysts notice adjustments (to things like earnings) when it happens — investors need to read the footnotes.
- “There is no question the leeway I have to report earnings as CEO of Berkshire is enormous. I don’t know how to quantify it precisely, and some of it would catch up with you later on, in terms of insurance reserves, for example. In an insurance company, the long-tail business in particular, you can paint any picture you want, for a period that probably encompasses enough time to either buy out the public or to effect a major public offering.” — Warren Buffett
- “They’ve done very interesting experiments with monkeys in zoos. They create a system where the monkey can do things to get a token and the token can immediately be exchanged for a banana. The monkey soon learns to work just as hard for a token as he formerly did for a banana. You can hardly think that corporate managements are going to be much better.” — Charlie Munger
- “In certain kinds of markets—including in the late 1960s for sure and maybe some more recently—there is a feeling among people who are either very smart or cynical that they would rather buy into manipulated earnings than real earnings because there is more certainty of manipulated earnings coming through on target for some time and they will get out before it all collapses. I saw that first hand in the sixties. There are people who think it is rational to play along with a game that isn’t going to be discovered until they are out of it.” — Warren Buffett
- “I have seen significant cases where the auditors come to management and say, here is the way to do this at this point so that you can report better numbers later on. And nobody will pay attention to the numbers for this period because of this or that going on.
It is the degree to which the high grade people have either been co-opted, or acquiesced or whatever word you want to pick. And that’s very tough to cleanse the system of because you don’t have good guys and bad guys anymore.” — Warren Buffett - Goodwill
- “In most cases I would say the premium we pay above the net assets recorded on the books of the predecessor company overwhelmingly is for what we call economic goodwill. We don’t even look at the plants. We did not look at the plants of Scott Fetzer before we bought it. We did not look at the plants of H.H. Brown before we bought it. I have not looked at the plants since—I have never seen the plants at H.H. Brown. We don’t think in terms of appraising physical assets. We think in terms of economic goodwill. We believe that economic goodwill should all be placed on the balance sheet as a purchase. We even think that if we give stock that has greater intrinsic value, that it ought to be placed on at a higher price than market price.” — Warren Buffett
- ” We only buy it if we think [goodwill] is going to appreciate.” — Warren Buffett
- “In the 1890s there was a bill introduced in the Indiana legislature to change the value of pi to 3.2 and the legislator explained it by saying that 3.14159 was too difficult for the schoolchildren of Indiana to work with and he thought this would simplify things.” — Warren Buffett
- “We accept—I shouldn’t say we accept precisely the numbers—but the numbers as given to us from GAAP accounting are of sufficient utility to us so that we can make a judgment about buying a business without ever seeing whether a plant exists.” — Warren Buffett
- Taxation
- A tax that incentivized longer holding periods was briefly discussed and whether it would hurt liquidity.
- NYSE Share Turnover
- 1960 = 14%
- 1996 = 70-75%
- 2008 = 138%
- “Anything we buy—when we buy Coca-Cola or Gillette, whatever it may be—our mindset is that we would be happy to own that security if they closed down the Exchange as they did in 1914. If we aren’t happy owning a piece of that business with the Exchange closed, we’re not happy owning it with the Exchange open.” — Warren Buffett
- “If you’re going to run a democracy, you’ve got to have some general regard for the law which at least is not horribly resentful. The guy who has $5 million in dividend income, pays no income tax. Yet a taxi driver working 90 hours a week is paying 30 or 40% of the income in taxes. It’s so unendurable that any program that contemplates it, whatever its theoretical merits, is a non-starter… The system has to pay some attention to egalitarian instincts.” — Charlie Munger
- “I would argue on the other hand that we want to live in a civilization—so long as we’ve got private capitalism—with substantial accumulations of corporate earnings. That is the great engine of the future growth of the economic pie, and it’s much simpler and surer to be there if the people that earn it just keep it. And so I think you want a civilization where the incentives in place leave at least half of what corporate America earns on its stock routinely accumulated.” — Charlie Munger
