Author: Simon Lorne


The Many Audiences of Buffett’s Letters

Sy Lorne

In part I of this post, I talked at a basic level about the factors that seem to me to have enabled the financial success of Warren Buffett and Berkshire Hathaway, and the value of his annual letters to stockholders, and their amalgamation in Larry Cunningham’s The Essays of Warren Buffett, now in its third edition.  In examining Buffettonian business principles through those letters, however,  it is good to remember that among his many talents has always been an uncanny ability to recognize how his comments will be perceived by different audiences, combined with an acute sensitivity to those audiences (in this regard, he has sometimes been regarded as differing somewhat from his partner, Charlie Munger).

The audience for the letters of Warren Buffett (as he is well aware) is not limited to the stockholders of Berkshire Hathaway.  The audience also includes other investors and market participants, the managers and other employees of Berkshire and its many subsidiaries, the owners of businesses who might one day want to sell to Berkshire, the regulators and other government officials who can affect the business, its competitors, the news media and others.  Inevitably, then, some part of the content of the letters is intended for those non-stockholder audiences.

To take a simple example, the letters have at times referred to a given operation’s return on book value, in the process of praising the operation’s management for above-market returns.  (Always naming the managers involved: “Praise by name, criticize by category.”  A maxim breached only, to my recollection, by a reference to Ivan Boesky.)  It is fairly apparent that Warren Buffett would not seriously suggest that an appropriate measure of an entity’s worth is book value.  There are simply too many ways and too many circumstances in which book value will understate, and often substantially understate, actual worth.  (Where is the value of the moat to be found on a balance sheet, except in the case of goodwill for a recently-acquired enterprise?   Warren himself notes this—see page 224 in the Essays, for example—whenever he talks about the more rational, if less precise, intrinsic value of an enterprise.)   And by virtue of the necessity of recognizing impairment charges book value should be far more likely to understate than to overstate intrinsic value.  In consequence, an organization’s return, as measured by return on book value, will often overstate the performance of its managers, but in the  pattern of Berkshire Hathaway, to overstate the contribution of managers does little or no harm to stockholders, and may provide a little more job satisfaction, a little more incentive, etc., to the managers involved.

I do not mean to suggest that Warren Buffett would mislead his partner-stockholders—far from it.  That he would avoid like the plague.  In the first place, it’s simply not in his nature.  In the second place (as if a second place were needed) he would immediately realize that misrepresentations would likely be discovered and the reputation he has worked so assiduously to maintain and enhance would be undermined.  But he would, and does, introduce relatively harmless error from time to time when doing so is in one way or another to the longer term benefit of Berkshire Hathaway.  I rather think he expects his stockholders to be able to recognize such excursions and treat them accordingly.  It’s worth recognizing, though, that if in the course of reading the letters, or the Essays, there comes a point when one finds oneself scratching one’s head and saying “that can’t be right,” there is at least a possibility that it isn’t quite right, and was written for a different audience.  Of course, it’s also possible that it is right, and that one just didn’t understand.  It is quite unlikely to be the case that Warren didn’t understand.

It’s an interesting question whether the change in Berkshire’s stockholder body over the last several years has changed the nature of the annual letters (I would guess not—they have always been written to be understood by everyman).  If there have been such changes, that is the kind of nuance that is necessarily lost in the deconstruct-and-reconstruct process of putting together the EssaysRead More


A Devotee on Three Elements of Buffett’s Success

Sy Lorne

When I was a very young lawyer, Chuck Rickershauser (the law firm’s name was then Munger, Tolles, Hills & Rickershauser, now Munger, Tolles & Olson—and yes, the Munger is Charlie) explained Warren Buffett to me.  “They say,” he said, “that when Mozart looked at the score for a symphony, he could actually hear the music, and hear each of the different instruments working together.  That’s the way Warren is with a financial statement.  He can look at it and visualize the widgets coming off the assembly line, the sales force generating leads, inventories building up and being depleted and all the other activities involved in running the business—including the financial consequences of it all.”

It seems to me that Warren Buffett’s remarkable accomplishments, and this is true of many people who have achieved truly extraordinary success, are the result of a coalescing of at least three factors.  The first is being born into circumstances that are conducive to that success.  This is what Buffett has often referred to as winning the Ovarian lottery.  If Mozart had been born in a remote village in China, instead of Salzburg, we might never have heard of him.

Alternatively, if Warren Buffett had been born in Salzburg instead of Omaha, his success might have been in a field other than investing.   (Having heard his efforts on a Ukulele, with all due respect, I’m not convinced he would have been a musical success, even in Salzburg, but I’m quite confident he would have been successful.)  Quite a large number of people “win” the Ovarian lottery, but it is a necessary element of success—and even more, unfortunately, don’t win it.  (Before we rush to the assumption that winning that lottery for financial success requires being born in the United States, it’s good to remember that the current leader in the “world’s richest” race was born and has always lived in Mexico.)

The second factor is natural aptitude, and the third is the application of dedicated, focused effort over a long period of time.  (Of course, these two factors also have elements of the genetic lottery at work, but that’s not what the “Ovarian lottery” references are about.)  To achieve financial success at a Buffettonian level probably requires a 10 on a scale of 1 to 10 for each of these factors, but considerable success might well be achieved with scores of 6 on one and 7 on the other.  One with 5% of the wealth of Warren Buffett is still very, very rich.

I would speculate that of the two last factors—aptitude and dedication—the latter is the more important.   Very few people seem to have the willingness, or perhaps capacity, to focus in on the goal, with laser-like intensity, over a sustained period of time, to the exclusion of much of anything else.  In her Buffett biography The Snowball, Alice Schroeder notes that aspect of his success, and compares it with a similar dedication on the part of Bill Gates.  It can also be easily discerned in Walter Isaacson’s biography, Steve Jobs.

It’s not so much that they forced themselves hermit-like to work on the one thing, whether it be investing or software or design, as it is that they enjoy immersing themselves in it completely.  It’s in their DNA.  Given a favorable environment and the necessary quantum of natural ability (the more the better) it seems likely that it is dedication and single-minded pursuit, over a lengthy period of time, that makes the difference.

The coalescence of those factors in the person who is Warren Buffett, in any event, has led to the phenomenal investment success story that is Berkshire Hathaway, and it is a worthy object of study.  Larry Cunningham’s assembly and reordering of the contents of the annual letters to Berkshire’s stockholders to create The Essays of Warren Buffett provides us with a very useful picture of the world of business as Buffett sees it.  Read More