Skip navigation
Warren And Me

Warren And Me

An RIA's collected wisdom of Warren Buffett.

Richard J. Connors, of St. Louis, first wrote to Warren Buffett, the legendary investor, in 2006, telling him that he would be teaching a class about Buffett's business management. “Four days later, I received a letter back from him enthusiastically supporting the class and inviting me to the Berkshire Hathaway shareholder meeting,” says Connors. “In January, 2007, at his invitation, I met him at his office in Omaha. Certainly the highlight of my professional life. Since then, we have regularly corresponded by email about the course and my book.”

Connors is a value manager (running Connors Investment Management, an RIA for high-net-worth clients using mostly mutual funds). Connors says his RIA practice grew of out of his work as a lawyer. Connors worked previously at PriceWaterhouse Coopers and First Union Bancorporation. Most of his students, Connors says, are retired professionals, who come to the 8-week class to learn about business management and Buffett's closely followed investing strategies. “After presenting the course a couple of times, I began to realize that not only was he arguably the greatest investor of our time, he was under-appreciated and under-recognized as an extraordinary business executive and manager,” Connors says.

Connors notes that most books about Buffett (over 40 to date, Connors estimates) focus on teaching readers to invest like him. “My book is very different,” Connors says. “A major portion of the book is about business ethics, including chapters on treating shareholders as partners, corporate governance, corporate culture and executive behavior. It is a tribute to Buffett's unconventional management principles and practices (he describes them as simple, few and old) on how to run a very successful company on a highly ethical level. “

Warren Buffett On Business: Principles from the Sage of Omaha (Wiley, $24.95, December 2009) is a handbook of timeless strategies for running a successful business in Buffett's own words. Again Connors' book is not about how Buffett invests or how you can invest like him, but about his business management principles and practices. Compiled by Connors, Warren Buffett on Business contains carefully selected observations from Berkshire Hathaway letters written over the decades of Buffett's long career.

Below are some excerpts:

In selecting a new director, we were guided by our long-standing criteria, which are that board members be owner-oriented, business-savvy, interested and truly independent. I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors' fees to maintain their standard of living. These payments, which come in many forms, often range between $ 150,000 and $ 250,000 annually, compensation that may approach or even exceed all other income of the “independent” director. And — surprise, surprise — director compensation has soared in recent years, pushed up by recommendations from corporate America's favorite consultant, Ratchet, Ratchet, and Bingo. (The name may be phony, but the action it conveys is not.)

Charlie [Munger, Buffett's long-time colleague at Berkshire Hathaway] and I believe our four criteria are essential if directors are to do their job — which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We're looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah' s ark. Over the years I've been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?”

The questions I instead get would sound ridiculous to someone seeking candidates for, say, a football team, or an arbitration panel or a military command. In those cases, the selectors would look for people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment.

[…]

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn't smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long - term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bus — and the maximum number of the birds you now possess that should be offered for it. And, of course, don't literally think birds. Think dollars.

Aesop's investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

[…]

We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown ups who behave in the market like children.

[…]

How We Think About Market Fluctuations

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

[…]

After some other mistakes, I learned to go into business only with people whom I like, trust, and admire. As I noted before, this policy of itself will not ensure success: A second-class textile or department-store company won't prosper simply because its managers are men that you would be pleased to see your daughter marry.

However, an owner — or investor — can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics. Conversely, we do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person.

[…]

I mean it's just the scope of human beings to do crazy things, self-destructive things, things as a mob they do. You saw it on October 19, 1987 …. You saw Long-Term Capital Management. You've seen all kinds of things. There will be other things in the future. They will have similar factors. The human factor will be at the bottom of them. They won't be exactly the same. But it's like Mark Twain said, “You know history doesn't repeat itself, but it rhymes. ” We will see some things that rhyme with 1929 or whatever it may be. Well, I've seen all kinds of people with 160 IQs with intense interest in the subject, lots of experience in the investment world. I've seen them self destruct. And you have to have a certain amount of natural flow of juices just to be excited about the game and down there participating. And the trick of course is to keep control of those juices. And most people, even smart people, have trouble not getting caught up in the game and thinking I'll just dance one more dance like Cinderella at five minutes till twelve or something like that because they think they are smarter than the rest of the public. … Or they don't protect themselves against something that will come totally from right field. Long-Term Capital Management is a good example of that.

Ben Graham told a story 40 years ago that illustrates why investment professionals behave as they do: An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You're qualified for residence,” said St. Peter, “ but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions.

Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I'll go along with the rest of the boys. There might be some truth to that rumor after all.”


Excerpted with permission of the publisher John Wiley and Sons from Warren Buffett on Business: Principles from the Sage of Omaha. Copyright (c) 2010 by Richard J. Connors.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish