Saturday, December 15, 2012

The Collected Wisdom of Warren Buffett

The Collected Wisdom of Warren Buffett
Michael Moritz
Chairman at Sequoia Capital

There is no greater advertisement for the potent combination of formidable intelligence, commonsense, consistency and self-discipline than Warren Buffett. Tap Dancing to Work, Warren Buffett on Practically Everything, 1966 – 2012, a collection of articles about and by Omaha's most famous citizen, drawn from an archive of Fortune magazine that spans almost half a century, is a wonderful reminder of those virtues.

Disciples of Buffett who devour the shareholder letters that he sends to owners of Berkshire Hathaway stock, or who have read The Snowball by Alice Schroeder and The Making of an American Capitalist by Roger Lowenstein, will not be startled by anything in this compilation assembled by longtime Fortune writer (and Buffett confidante) Carol Loomis. Instead they will be reminded of the qualities that have made Buffett the most successful investor (as opposed to inventor or entrepreneur) in American history and a man whose pronouncements immediately appear on the front pages and are tweeted hither and yon.

Buffett has achieved the inconceivable as an investor. He is not just respected for his prowess (which might also be said of other investors whose achievements are far less significant) or admired for his approach (which could be said of far fewer) but his genial disposition and ready wit have helped him achieve the impossible: as an investor he is much loved. In all these articles it is hard to uncover a detractor (beyond perhaps a shareholder who disliked his support of the pro-choice movement) let alone a collection of people who harbor deep grudges or feel mistreated by him. Instead tens of thousands of Berkshire Hathaway shareholders make the annual pilgrimage to Omaha for the company's annual weekend celebration of capitalism, during which Buffett and his partner, Charlie Munger, patiently answer questions for five or six hours with the stamina of thirty year olds rather than the octogenarians they allegedly happen to be.

Buffett, born during the year of the Great Crash, bought his first stock at the age of eleven and has never wanted to do anything else but invest. He has pursued this with the purposeful dedication usually associated with artists who work in the same studio for their entire life, or the writer who has employed (or at least used to employ) one typewriter for decades.

Buffett has been successful in part because of what he chooses not to do. He has not got side-tracked by the baubles of the 1% club: multiple homes (and wives); art collections; sports teams and society balls. Impatient with the world of non-profits and intimidated by the time required to intelligently give money away, he famously delegated his philanthropic activities to his close friends, Bill and Melinda Gates. Buffett has been clear about what he likes: living in Omaha, sleeping in his own bed, driving an American car, traveling infrequently, eating burgers and ice-cream, drinking cokes, playing bridge and – buying stocks.

Berkshire Hathaway, despite a market value now approaching one quarter of a trillion dollars, is managed from a tiny office with a staff smaller than a soccer team's starting roster. Buffett is not the slave to a corporate calendar jammed with the humdrum inanities of business life like performance assessments, facilities planning, analyst meetings, compliance training, budget reviews and travel. This leaves him time to read and think so that for Buffett the only real difference between a weekday and the weekend is that for for two days the markets are closed. Buffett is no fan of spreadsheets or reams of analytical mumbo-jumbo. Facts, a pen, a sheet of paper and an agile mind are his tools. He made a $3.5 billion profit some years ago after investing $500 million in PetroChina having only read its annual report.

Buffett is both an investor and first-rate manager. As an investor he has leavened the slant towards value espoused by his first mentor, Ben Graham, with an appreciation for the qualities of a first-rate business. While he began by buying bad businesses because they were cheap he later gravitated towards buying good businesses when they were cheap. That makes things much easier. He once bought portions of businesses but after the float generated by his insurance operations furnished him with the firepower, he began buying entire businesses. Those are now housed within Berkshire Hathaway and that is where his management skills are on display.

As the CEO of Berkshire Hathaway, Buffett does what great leaders (and managers) do. He sets an ethical example for others to emulate; demonstrates a level of performance that his juniors can only aspire to; carefully picks people and designs their rewards; allocates capital and decides how much risk is prudent. But he doesn't meddle, dwell on details that don't matter or micro-manage. He readily admits that people inside the Berkshire Hathaway operating companies are far more versed in their businesses.

When Berkshire Hathaway's interests are trampled upon or a CEO leads a good business into the muck, Buffett acts – no matter how much he dislikes confrontation. Just ask, among others, Doug Ivester, John Gutfreund, Richard Santulli (deposed heads of Coca Cola, Salomon Brothers and NetJets respectively); Irene Rosenfeld, CEO of Kraft, whose takeover of Cadbury appalled Buffett; or David Sokol, a senior Berkshire Hathaway officer, who blotted his copybook. When Buffett buys stocks, the interests of Berkshire Hathaway's shareholders come first and his investments frequently contain preferential terms that only he can command. There is nothing he values more than the underlying value of Berkshire Hathaway which – on occasion – causes him to buy back stock as he has done recently. This lets his shareholders own more of the business they all cherish.

The reader of this compilation will be treated to Buffett's views on topics dear to his heart. These include the lunacy of pension fund accounting; the tendency of investors to hunt in packs; the self-dealing ways of intermediaries and buyout firms (ludicrously now labeled private equity funds when they should be called public debt firms); the way in which securitization (the bundling of hundreds of different loans) conceals the seeds of destruction; the toxic nature of derivatives; self-serving annual reports; the crippling consequences of the federal deficit; and the legacy of the Wright brothers – billions of dollars lost in airline investments. Even the tartest of Buffett's observations are coated in honeyed analogies. Best of all, Buffett's lessons about complicated subjects are delivered in a way that a precocious 11 year old, contemplating his first stock purchase, can understand.

Edited by: Lawyer Asad

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