The Essays of Warren Buffett

A biblical approach to analyzing the worldÆs most talented value investor.

Just under 2000 years ago there was a man who spoke in Aramaic whose every word was written down, translated to Greek and later incorporated into what became known as the New Testament. Today, there is a man who speaks in plain English called Warren Buffett, for whom the same phenomenon is largely true.

July/August Bookend

In The Essays of Warren Buffett, the ‘author’ has taken a truly biblical approach to analyzing the world’s most talented value investor.

Rather than corrupt Buffett’s words with any of his own, Cunningham has simply collated the great man’s remarks on various subjects.

Actually I am being unfair when I say it is like a Bible. The effect is more like a book I was given at University that contained Samuel Johnson’s pithiest remarks ("When a man is tired of London, a man is tired of life"  – and such like).

What I find exceptionally interesting about Buffett’s company Berkshire Hathaway is that it (successfully) runs contrary to many modern-day mantras. In an era where focus is a ‘virtue’ and big conglomerates are out of favour with investors, Berkshire Hathaway is a ‘conglomerate’ (in many cases it owns 100% of businesses) that has no focus at all.

That he doesn’t think like a quarter-to-quarter fund manager is obvious. Speaking of Gillette and Coke he says: “We measure our success by the long-term progress of the companies rather than by the month-to-month movements of their stock.”

To underline his views on long-term investing versus short-term punting, he notes that Coke went public at $40 a share in 1919 and one year later was at $19.50 – hammered by the short-term volatility of public opinion. But by year-end 1993 that single share (with the dividend reinvested)
was worth more than $2.1 million.

He now tries to limit himself to having “one good idea per year”.

Nor is he a Gordon Gekko-type. His approach is all too human, which makes his success all the more encouraging for those of who hate the callous machismo of a certain type of chief investment officer. When Buffet had to close his textiles business in 1985 it is patently clear he hated having to do so, and had enormous sentimental attachment to the business and a grave concern for the staff.

“I won’t close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return,” he says. “However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable.”

He reserves most of his ire for bad managements and poor board directors. “The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate.”

This rather reminded me of the chapter on Earl Mountbatten in Eminent Churchilians. He was the classic example of someone promoted beyond his abilities. Mountbatten caused ever more chaos the higher he went, until he was eventually given control of the British Army in the Far East and then made Viceroy of India. (In one interview with the BBC he commented that he could not remember the last time he’d made a mistake. Ask Canadians about Dieppe for a strongly alternative view.)

Back to Buffett and CEOs, I liked the quip: “At board meetings, criticism of the CEO’s performance is often viewed as the social equivalent of belching.” This says a lot about why so many bad management decisions (and acquisitions) go through. Buffett’s view is that most boards are simply not independent enough.

Buffett, on the other hand, is hands-on. He likes to control businesses, because then he can allocate the capital within that business. When he is a minority shareholder, he does not have that privilege and rues some of the awful capital allocation decisions taken by CEOs who come up through the marketing department.

As he points out: “CEOs who recognize their lack of capital allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants or merchant bankers. Charlie [Munger] and I have frequently observed the consequences of such ‘help’. On balance, we feel it is more likely to accentuate the capital allocation problem than to solve it.”

Reviewed by Steven Irvine

Rating: 3

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