Category: Symposium (The Essays of Warren Buffett: Lessons for Corporate America)


Deals without Bankers: Salomon and Benjamin Moore

Warren Buffett has a reputation for not relying heavily on investment bankers in doing transactions.

A. Salomon, Inc.  The first time I personally experienced this aspect of Buffet’s approach occurred in connection with the sale of Salomon, Inc. to Travelers. Salomon was a major investment bank which had a near death experience in 1991. Berkshire was a very substantial shareholder of Salomon and Buffett played a significant role in its rebuilding.

Although Delaware decisions in the wake of Smith v. van Gorkum suggested the advisability of the board of directors of a company being sold getting a fairness opinion from an outside investment banker, Salomon did not get such a fairness opinion to validate the price its shareholders received in the sale of the company. It did put Salomon Brothers investment bankers to work getting the same type of information and analysis which would normally be given to a board of directors in connection with a business combination for which Salomon Brothers had been retained to give a fairness opinion.

Salomon considered the advisability of securing a fairness opinion, but as the proxy states “ . . . a fairness opinion would have provided little, if any, incremental value to the deliberations of the Salomon Board given the insurance and securities industry expertise of the officers and directors of Salomon and its subsidiaries who were evaluating the Merger from a financial point of view.”

B. Benjamin MooreMy next experience with Warren Buffett and his willingness to do transactions without involving an outside investment banker occurred when I was an outside director of Benjamin Moore. Benjamin Moore was essentially a family- controlled corporation which had acquired enough other shareholders to be traded in the over-the-counter market. The company decided that it was time either to go public or be sold. It retained an investment banker to advise it. After studying the company, the investment banker determined that the company should be able to command a price of $X. It then tried to find buyers at that price, but proved unable to do so. Read More


The Skeptical Principal

A bracing tone of skepticism directed toward transactional intermediaries and third-party advisers recurs throughout The Essays of Warren Buffett: Lessons for Corporate America, which intrigues me as a scholar of agency law and intermediation more generally. On reflection, I came to understand the author, Warren Buffett, and Berkshire Hathaway as unusual principals—willing to use the services of agents and advisors but only when circumstances require, able to discern which agents warrant trust, and uncommonly self-reliant in determining what objectives to pursue.

As the Essays note, Berkshire is unusual in several ways. These include the diverse range of businesses that it controls or in which it holds a significant ownership interest, its large proportion of non-controlling equity held long-term by individual shareholders, and its no-dividend pattern. These characteristics—plus the enduring management success of its controlling shareholders—may well be linked to the skeptical voice evident in the Essays.         

Consider first how the Essays recount the process through which Berkshire acquired Scott Fetzer. A “major investment banking house” had undertaken to sell it but failed despite offering Scott Fetzer “widely.” Learning of this failure Mr. Buffett wrote Scott Fetzer’s CEO (whom he had never met), expressing interest, and “within a week we had a deal.” But “[u]nfortunately, Scott Fetzer’s letter of engagement with the investment bank provided it a $2.5 million fee upon sale, even it had nothing to do with finding the buyer.” (Essays at 217).

To be sure, this account may slight the investment bank’s contribution because its unsuccessful marketing effort preceded Mr. Buffett’s awareness of Scott Fetzer as an acquisition target. Nonetheless the incident exemplifies the Essays’ skepticism of the value of external intermediaries and deal-facilitators, at least most of the time. Instead, identifying acquisition targets and determining the terms on which a deal might be possible can be handled internally and more simply. Read More


Mr. Buffett Joins a Board

Don Graham (courtesy of WaPo)

Mr. Graham contributed this post to the symposium featuring L. Cunningham’s third edition of The Essays of Warren Buffett: Lessons for Corporate America (2013).

In September 1974, I joined the board of The Washington Post Company.  Two other directors were elected at roughly the same time:  George J. Gillespie III, a partner at Cravath, Swaine and Moore; and Warren E. Buffett, ceo of Berkshire Hathaway.   Adding Warren to the board was one of the best decisions (in a life full of great ones) for Katharine Graham, the ceo of The Washington Post Company, and my mother.  (George’s contributions are a story for another day).

I’m pretty certain that Kay was, at the time, the only woman ceo in the Fortune 1,000.  Her autobiography, Personal History, won the Pulitzer Prize for biography in 1998 and was a number one bestseller.  Her book emphasized how utterly uncertain she was at all times, how unsure of her own judgment, how modest.  If conceit normally enters the bloodstream when one takes on the title ceo, Kay was an exception.

There were two people she worked with who gave my mother the belief that she could do the job:  Ben Bradlee, the executive editor of the Post, and Warren Buffett (later Meg Greenfield, the Post’s editorial page editor, would be added to the group).

Kay Graham, who had never heard of Mr. Buffett before he bought stock in her company, quickly figured out after meeting Buffett and Charlie Munger, Berkshire vice chairman, that they were the two smartest business people she’d ever met. Many advisers told her not to put Warren on the board; she ignored their advice and in effect made him her lead director.

Warren was an active, smart director from the first meeting.  He had more time then than now; he advised her on basic corporate matters; on management choices; and on acquisitions (the story of his input on acquisitions for The Washington Post Company is told in wonderful detail in Personal History).

The story I want to tell in this blog post has to do with Mr. Buffett’s first two interventions in our company’s business life.  Warren extensively advised Kay Graham (in writing, in both cases) to change major corporate policies.  Neither involved reversing policies she herself had been involved in.  Read More


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


An Insider’s View of The Essays of Warren Buffett

Carol Loomis (courtesy of Fortune)

Warren Buffett’s words in his annual letters to Berkshire Hathaway shareholders are brilliant, and years ago Larry Cunningham took them to a still-higher level by reorganizing what Buffett said into single-subject chapters.  Cunningham’s The Essays of Warren Buffett (whose third edition we are now celebrating) therefore emerged as a book no student of Buffett can do without.  It begins, moreover, with an excellent introduction written by Larry.

After that beginning, the book moves into what Buffett said in his letters—and here I will lay a small claim to being the person participating in this symposium who is most familiar with those words. That’s because I have been the editor of Warren’s annual letter to shareholders for 36 years—since 1977, when he served on a SEC task force studying communications to shareholders and decided to renovate his own letter.

I had then been a friend of Warren’s for about ten years; he knew my work in Fortune; and he sent me a first draft of his letter, saying, “Any suggestions?” Somewhat intimidated—my husband and I were big admirers of Warren and also Berkshire shareholders—I have joked that I suggested changing a “the” to an “a.”  Since that time, I have been his pro bono, but attentive editor. The drill over the years has never changed. He writes, I edit (and sometimes, alas, lose arguments about how a sentence should go).

Fortune and I published our own book about Buffett just a few months ago:  Tap Dancing to Work, Warren Buffett on Practically Everything, 1966-2012.  It is at heart a real-time business biography, containing everything important Fortune published about Buffett in those years (the bulk of it arranged chronologically). Among these articles are speeches he gave and pieces we took from his annual reports (most of which, you will not be surprised to hear, also turn up in Essays).

In the book’s introduction, I praise Buffett for his “consistency of thought” over the years. Cunningham’s book provides constant reminders of how what Buffett thought became what he did—and in this online space, I will present a classic example.  There have been a few exceptions to the general rule, though, and I will supply an example on the inconsistency front as well.
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Introducing Symposium: The Essays of Warren Buffett

We at Concurring Opinions are delighted to welcome a dozen luminaries and thousands of readers to this week’s on-line symposium featuring The Essays of Warren Buffett: Lessons for Corporate.  

I began studying Warren Buffett’s letters to the shareholders of Berkshire Hathaway in 1992 when researching what became my first scholarly article, tracing the intellectual history of efficient market theory.  The letters went against the grain of prevailing academic work, so they served as a sort of contrary exhibit rather than supporting many standard assertions.  

The letters were smart, witty, arresting and expansive, addressing governance, mergers, investing, accounting, taxes and many other topics I would spend my career teaching and writing about. I could not put them down. Yet nor could I, acting alone, give them a place of respect in the academy that I thought they deserved but had not received.

So I decided to host a symposium featuring the letters, gathering a group of 20 scholars to dissect their content. Through Monroe Price, then Dean of Cardozo Law School, where I worked, I contacted Bob Denham, a close Berkshire adviser then and now, who passed along my proposal, which Warren embraced.

Susan and Warren Buffett & Charlie Munger at Cardozo 1996

We held a two-day conference in New York on October 27-28, 1996, with five separate panels of four to six people each. Warren was in the front row participating actively in the discussion throughout, flanked by his wife Susie (pictured at left), son Howard, insurance maven Ajit Jian and business partner Charlie Munger (likewise pictured)—who also had a lot to say during the conference.

The centerpiece of the conference was a collection of Buffett’s letters, which I had rearranged thematically, and would later publish as The Essays. The arrangement both enabled a correspondence between the collection and the panel topics and papers, as well as the emergence of an unmistakable organizing principle: the fundamental idea that price and value are different things.

That meant that stock markets are not so efficient as to invariably produce a price that is a reliable proxy for value. This idea is so deep, and was so contrary to academic literature and classroom teaching, that it received an entire section of the collection and separate panel at the symposium. But it was even larger because pretty much all the other principles in The Essays—about governance, mergers, accounting and so on—followed from that tenet.

Since the conference edition (1997), we published a revised first edition (2001), a second edition (2008) and now a third edition (2013), in each case maintaining the themes that have animated the material from the beginning while adding discussion of contemporary issues that radiate from them.

We have often thought of hosting a reunion symposium on The Essays and this week, thanks to the generosity of a dozen luminaries, we do so.  Following is a run-down of the participants in this week’s symposium, half of whom participated in the original.  They are listed in roughly the order in which their contributions appear (with links to pieces as they have been posted).

[To see all posts in the symposium grouped together, click the following link, which also appears below every post in the symposium: “Symposium: The Essays of Warren Buffett: Lessons for Corporate America.”]

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