Mar 01 2010
Buffett sticks it to the CEOs
By Greg Hoffman of the Intteligent Investor
Every year since 1996 – when I first read Roger Lowenstein’s book Buffett: The Making of an American Capitalist – I’ve looked forward to the release of Warren Buffett’s annual chairman’s letter to the shareholders of Berkshire Hathaway. The latest – released at the weekend – did not disappoint, getting stuck into CEOs in a way that few politicians would dare.
But first, a few of Buffett’s key themes. Each letter begins with a table summarising the change in Berkshire Hathaway’s book value (a crude and understated measure of the company’s true value) compared to the S&P 500 index. If you look at only one page of his letter, make it this one. There is no more persuasive case for the power of compounding.
Berkshire has underperformed the market index just seven times in the 45 years since Buffett assumed managerial control. Last year was one of them. The S&P 500 outpaced Berkshire’s book value 26.5% to 19.8%, although that followed Buffett’s thumping of the index in 2008.
Between 1965 and 2009, the S&P index has risen by 5,430% (9.3% per annum). Berkshire’s book value has risen by 434,057% (20.3% per annum). Over 45 years Buffett has grown Berkshire at more than twice the rate of the index. The result is an absolute return 80 times greater than that of the index; that’s the power of compounding.
Buffett also talks regularly of a business’s ”intrinsic value”; ”The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value,” Buffett wrote. He then went on to say ”Alas, that value cannot be calculated with anything close to precision”, an important point to remember if anyone ever tries to sell you a computer program which professes to calculate this figure.
Crucial distinction
Buffett also highlighted a crucial distinction that often trips up novice investors; a spectacular growth industry does not automatically equate to strong shareholder returns.
In fact, the opposite can often be the case. ”Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950),” Buffett explained, speaking for himself and his business partner. He then delivered the killer point.
”But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.”
Buffett also explained that, ”We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend.” For those looking to emulate Buffett’s approach, if not performance, this is a key point.
”Those who invest only when commentators are upbeat,” he continued, ”end up paying a heavy price for meaningless reassurance.” ”In the end,” he wound up, ”what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade of two.”
Scorn for failed CEOs
Special scorn was reserved for the CEOs of companies requiring government assistance. Buffett believes these people – and the boards responsible for overseeing their performance and remuneration – deserve to suffer.
”The CEOs and directors of the failed companies…have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style.”
He was just warming up. ”It is the behaviour of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance.”
And finally, ”CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”
It’s hard to disagree with these sentiments. But it also appears, as occurred with his observations on the dangers of derivatives, which he years ago termed ”weapons of mass financial destruction”, that, while much needs doing, little will be done.
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors.
I don’t think bufett is any better than anyone else he just got lucky
My Father has outperformed Buffet over the last 30 years! Why don’t you worship him SJ?
Do tell Iamatrashman, what is your fathers name? Liberace I bet.
You are probably to young to remember him but I reckon your father would have a very similar lifestyle. It is the only way we can explain his moronic offspring.
Dipstick’s father is in fact Gomer Pyle, which still explains allot.