Among Warren Buffett’s letters to Berkshire Hathaway stakeholders, one that gave shareholders a good summary of Berkshire Hathaway’s major business principles pertaining to the manager-owner relationship is that of March 14, 1984 for Year 1983.
Here is a gist of the summary:
* Although Berkshire Hathaway’s form is corporate, its attitude is partnership, treating shareholders as owner-partners, with Warren Buffett and Charlie Munger as managing partners.
* In line with the owner-orientation, its directors are all major shareholders of Berkshire Hathaway. “In the case of at least four of the five, over 50% of family net worth is represented by holdings of Berkshire. We eat our own cooking.”
* Berkshire Hathaway’s long-term economic goal (subject to some qualifications) is to maximize the average annual rate of gain in intrinsic business value on a per-share basis.
* Berkshire Hathaway’s preference is to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. Its second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stocks by its insurance subsidiaries.
* “Because of this two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I (Warren Buffett), both as owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major business we control, numbers we consider of great importance. These figures, along with other information we will supply about the individual businesses, should generally aid you in making judgments about them.”
* Accounting consequences do not influence Berkshire Hathaway’s operating or capital-allocation decisions. When acquisition costs are similar, it much prefers to purchase $2 of earnings that is not reportable by it under standard accounting principles than to purchase $1 of earnings that is reportable. “In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.”
* Berkshire Hathaway rarely uses much debt and, when it does, it attempts to structure it on a long-term fixed rate basis. “We will reject interesting opportunities rather than over-leverage our balance sheet.”
* A managerial “wish list” will not be filled at shareholder expense. “We will not diversify by purchasing entire businesses at control prices that ignore long-term economic consequences to our shareholders.”
* “We feel noble intentions should be checked periodically against results. 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.”
* “We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance – not only mergers or public stock offerings, but stock for-debt swaps, stock options, and convertible securities as well.”
*”You should be fully aware of one attitude Charlie and I share that hurts our financial performance: 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.”
* “We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed.”
* “Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. 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. 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.”
“That completes the catechism,” said the letter.”