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Berkshire Hathaway’s annual “Woodstock of Capitalism,” its shareholder meeting, happens on April 30 this year. Warren Buffett’s baby is by far America’s most beloved conglomerate. What’s behind the fame? Buffett and his partner Charlie Munger are investing prodigies, but so are, say, Carlos Slim and Donald Trump, and you don’t see their companies’ shareholder meetings doubling as love fests.
Berkshire has some special things going for it. Buffett himself comes off as an honest folk hero with an incredible investing legacy that started during the Great Depression. While value investing existed before Buffett, his success played a pivotal role in mainstreaming it.
The other secret to Berkshire’s success, however, is in its corporate DNA. Buffett and Munger have designed the company along agreeable, self-sustaining lines. From the kinds of people they recruit as managers to their corporate culture, Berkshire has built a template for success. Here are 25 ways to run your business like Buffett, based on Berkshire’s “Owner-Related Business Principles,” as listed in the 2010 annual report.
Think of it as a partnership
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Warren Buffett and Charlie Munger see their shareholders as “owner-partners.” “We view the company as a conduit through which our shareholders own assets,” Buffett writes in the company’s 2010 annual report. They liken it to owning a farm or apartment with members of your family.
This approach guarantees that everyone is more personally invested in the company. If it’s more personal, employees feel like there’s more at stake. This keeps them loyal and committed, while simultaneously preventing shareholders from dumping shares or speculating. How can you build your company as a partnership rather than an established hierarchy?
“Eat your own cooking”
The majority of Berkshire Hathaway’s directors have a substantial portion of their own net worth invested with the company. With stakes that high, you know they’re paying close attention to the quality of their investments. What benefits the company benefits directors, and vice-versa. How can you arrange your organization to “eat its own cooking”?
Make pay proportional to company performance
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Instead of bonuses, options, golden handcuffs or parachutes or Fed handouts, Buffett and Munger, who have the vast majority of their fortunes invested with Berkshire Hathaway, are rewarded in sync with their company, not on the crust above it. “When I do something dumb,” Buffett writes, “I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours.” Why can’t all companies be run this way?
Measure success by progress
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Buffett and Munger focus on the rate by which Berkshire Hathaway’s shares increase, based on per-share value. That value matters more than size, political clout, or visibility. This is their main priority, and they have a solid way of measuring it. What are the markers of your progress, and how do you measure them?
Have a simple strategy for success
Berkshire has a Plan A and a Plan B for reaching success, which is defined by increasing value per share. Although these strategies may be complex in implementation, they can each be summed up in a single sentence.
Plan A involves generating cash and steady above-average capital returns by owning a diverse set of businesses. Plan B is to own parts of those kinds of businesses in the form of stock bought by Berkshire’s insurance subsidiaries.
Those two sentences cover the basic strategy of one of the world’s most successful and longest-lived conglomerates. Can you sum up your strategy as simply as this?
Know how bad times will benefit you
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If your company is as intimate with the stock market as Berkshire, how do you benefit when said market goes into hibernation mode? By picking shares of companies and entire companies up on the cheap, according to Buffett and Munger. Because companies also tend to buy back their own shares at discounted rates, Berkshire, a major shareholder in a variety of companies, benefits that way, too. What’s your strategy for benefiting from bad times?
Facilitate understanding of the way you think
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Buffett and Munger are upfront about the kind of financial information they provide about their business and why they provide it. They think that conventional accounting doesn’t provide all the necessary numbers to evaluate their businesses’ performances, so they add earnings and additional information because they think that will help readers better judge their performance. If they use additional concepts to assess businesses, they explain them to shareholders and why they think they’re important. This form of transparency has gained Buffett many admirers. How do you helps your shareholders, clients and employees understand the way you think?
Don’t use much debt
Now here’s an unusual concept. Berkshire funds itself through deferred taxes and the premiums its insurance companies collect. It doesn’t support itself off debt or government bailouts. Buffett and Munger claim to feel an obligation towards shareholders, many of whom have a huge portion of their net worth with Berkshire Hathaway; using debt to field that obligation isn’t comfortable for them. This is exceptional behavior for a business of any size. It does beg the questions: How can you fund yourself and avoid debt? Can your business be run debt-free?
Only take out conservative loans
In the rare instances Berkshire does take out loans, they’re generally fixed rate and long term. No fancy loans, no abbreviations, no loan sharks cloaked as Wall Street banks. Buffett and co. know that these loans don’t potentially lose you as much money as the other kinds. Having substantial cash, they also pay back those loans as early as possible. Can you run your business by only taking out conservative loans? What’s your strategy for paying off loans as quickly as possible?
Don’t supersize management perks
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Buffett and Munger do not increase their office size or private island purchases as Berkshire’s balance sheet grows. The annual rent at Berkshire HQ is a little more than $270,000, piddling by conglomerate standards. For what it’s worth, Buffett’s own annual CEO salary is $100,000, and he has more than 98% of his wealth invested with Berkshire Hathaway. Do supersized management perks help your company, or could you have the same level of talent and results without them?
Acid test your success
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Berkshire retains its earnings, but doesn’t assume that strategy makes sense all the time. So management tests it. They test it once every five-year period. If Berkshire’s gains are higher than the S&P, and $1 of its retained earnings were worth more than one dollar, then retaining earnings makes sense. Buffett admits that these conditions haven’t always been met. The point is to regularly test your strategy for success.
Admit your weaknesses
Buffett and Munger don’t like selling their businesses, even the ones that are struggling. Instead, they try to rehabilitate them by addressing the problems that are slowing them down. They don’t “discard (their) least promising businesses at every turn.” They also admit that this attitude negatively affects their financial performance. Yet they keep doing it, because they would rather carry that weakness than pick up and discard their businesses all the time. Do you have behavior that you keep doing that negatively affects your financial performance? If so, why do you do it, and what do you gain from it?
Communicate as though the tables were turned
When Buffett and Munger communicate, they say they owe it to their shareholders to tell them the “business facts that (Buffett and Munger) would want to know if the tables were turned.” They try to hold their business reporting up to journalistic standards. They also shirk priority updates to analysts or high-grade shareholders. Instead, they update everyone at the same time. This non-elitist model of communication has helped solidify their folk-hero reputation and earn them their “Woodstock of Capitalism” annual meeting in Omaha. How can you communicate as though the tables were turned?
“Be fearful when others are greedy, and greedy when others are fearful.”
This is perhaps Buffett’s most famous quote. Its application to the stock market is pretty obvious–when most people sell, prices go down, and it’s an ideal time for you to start collecting bargains. The quote applies to other areas of business, too. If everyone’s running towards the latest business opportunity, think before you follow the herd. It could be a bubble. Likewise, if everyone is writing off a market or service model as dead, is it true, or are there still opportunities in the space? The idea is to hone your critical thinking skills so that you see through mass movement and make better investing decisions, inside financial markets and in other areas.
Don’t overvalue or undervalue your stock
Berkshire tries to keep a fair value on its stock at all times, though some analysts would beg to differ. Their reasoning behind this is that they want to attract their target market of long-term investors with a loyalty to their company, and avoid speculators. Even in privately held companies, they same could be said for any other soft currency, like your reputation, your PR, etc. Are you running at fair market value? If not, how can you increase equity or prepare for your bubble to burst?
Have a succession plan
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The Berkshire barge isn’t sinking after Buffett or Munger’s death. They’ve made sure of that through careful succession planning. They’ve reassured investors time and again that the business will continue to run as it has even after its two head men pass on. This keeps investors confident in the company. What’s your succession plan?
Only do things you can picture being written on the front page of a national newspaper
Dirty finance has proliferated during the past several years. Buffett doesn’t want to be involved in that. In his July 2010 letter to his managers, he said that managers need to measure their action against “what we would be happy to have written about on the front page of a national newspaper written by a friendly but unintelligent reporter.” ‘Nuff said.
Report bad news immediately
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Buffett told his managers to always do this in his 2010 letter, based on the hard lesson he learned with Salomon Bros. in 1987. It’s a good general business concept to follow, whether you’re managing someone or you work for them. A fresh problem is often easier to address than one that’s been concealed for a while, and often complicated in the process. Case in point: Toyota.
Hire people who aren’t in it for the money
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Most of Buffett’s managers are independently wealthy. They work for Berkshire Hathaway because they want to, not because they have to. That means they like their work, and won’t be drawn away by the promise of higher pay. How do you attract people who aren’t in it for the pay?
Trust your employees
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Buffett doesn’t micromanage. He acknowledges the fact that his managers run the gamut of styles. Buffett and Munger give the managers as much autonomy as they want, leaving them in charge of operations. Managers send any excess cash their business generate to Buffett and Munger, who invest it accordingly. How do you accommodate a variety of styles in your team? How do you keep the company successful while allowing for this?
Treat your employees the way you would want to be treated
Buffett says Berkshire does this in order to retain its passionate, independently wealthy managers, but it’s a good general rule of thumb for any business that doesn’t thrive off high turnaround (and really, who does?).
Have “f%#* you” money
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Not that Buffett calls it that, but he makes sure that Berkshire always holds at least $10 billion in cash. This helps the company cover losses from its insurance industry, such as the $3 billion it lost after Hurricane Katrina. It also helps them snap up whole businesses or shares at a moment’s notice. Your business can enjoy similar benefits if you keep a cash stash on hand at all times. It also comes in handy for personal finance, enabling you to say “f%$# you” to your employer, business partner, or even your own business when you’ve had enough. Do you have this kind of money? If not, how can you get it?
Focus on company culture
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Berkshire’s directors are heavily invested in the company and feel the responsibility of owners. So they tend to Berkshire as though it were an English garden, cultivating the right investments at the right time so the financial bloom continues, letting managers do what they need to do in order to contribute cash supplements to the cause. Buffett doesn’t believe in layers of bureaucracy or what he dubs “imperious behavior,” common to too many upper-management types. How does your company culture help you tend to your financial garden?
With every decision, weigh your alternatives
Berkshire’s business model is to buy businesses, but sometimes even the most drool-worthy acquisition options don’t offer financial returns as good as stocks or bonds. In such cases, no matter how much they want the business, Buffett and Munger buy securities instead, and wait for a better business buy opportunity to come along. They also compare potential buy candidates across industries against each other, making the best financial, not emotional or trend-based, decision. How do you weigh your alternatives to come to rational decisions?
Embrace the unexpected
When Berkshire is swimming in capital, Buffett looks for opportunities across industries. He and Munger don’t limit themselves to one industry or type of investment. As long as they can understand its “likely future,” they can see if it’s a worthy investment. That’s why Berkshire is invested in everything from insurance to candy. How can you quickly and rationally embrace unexpected opportunities?