Managers discard yardsticks, not themselves
“Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager.”
Business
Drawing the bullseye around the arrow
“To managers faced with [deteriorating results], a more flexible measurement system often suggests itself: just shoot the arrow of business performance into a blank canvas and then carefully draw the bullseye around the implanted arrow.”
Accounting earnings can misrepresent economic reality
“Clearly ‘accounting’ earnings can seriously misrepresent economic reality. We prefer a concept of ‘economic’ earnings that includes all undistributed earnings, regardless of ownership percentage.”
Retained earnings are worth what they earn
“In our view, the value to all owners of the retained earnings of a business enterprise is determined by the effectiveness with which those earnings are used - and not by the size of one’s ownership percentage.”
Accounting numbers begin valuation, not end it
“It’s simply to say that managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”
Each retained dollar becoming a market dollar
“Within [the auction market], it is our job to select businesses with economic characteristics allowing each dollar of retained earnings to be translated eventually into at least a dollar of market value.”
Misfortune from an inability to sit still
“Pascal’s observation seems apt: ‘It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.’”
Overpaying can undo a decade of progress
“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
Falling prices as a chance to buy more
“We will not be distressed by [a shrinking net worth]; if the businesses continue to look attractive and we have cash available, we simply will add to our holdings at even more favorable prices.”
Weak managements turn to weak accounting
“In insurance, as elsewhere, the reaction of weak managements to weak operations is often weak accounting. (‘It’s difficult for an empty sack to stand upright.’)”
Honest managers flinch from bad news in lean years
“The great majority of managements, however, try to play it straight. But even managements of integrity may subconsciously be less willing in poor profit years to fully recognize adverse loss trends.”
A wide, lasting cost advantage beats commodity economics
“A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable.”
Over-capacity plus commodity product equals poor profits
“For the great majority of companies selling ‘commodity’products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability.”
Nothing fails like success
“When [over-capacity corrections] finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success.”
Analysis from the rear-view mirror
“Most business and investment analysis also comes from the rear-view mirror.”
Insurance supply is mental, not physical
“‘Supply’, in [insurance], is mental rather than physical: plants or companies need not be shut; only the willingness of underwriters to sign their names need be curtailed.”
Keeping things simple is the most elusive goal
“Jack Byrne and Bill Snyder are achieving the most elusive of human goals - keeping things simple and remembering what you set out to do.”
Issuing shares only for equal value
“Our share issuances follow a simple basic rule: we will not issue shares unless we receive as much intrinsic business value as we give.”
Trading dollar bills for fifty-cent pieces
“Why, you might ask, would anyone issue dollar bills in exchange for fifty-cent pieces? Unfortunately, many corporate managers have been willing to do just that.”
Gold bought with gold valued as lead
“Under [an undervalued currency], a marvelous business purchased at a fair sales price becomes a terrible buy. For gold valued as gold cannot be purchased intelligently through the utilization of gold - or even silver - valued as lead.”
Don't ask the barber about haircuts
“Friendly investment bankers will reassure [the acquirer’s manager] as to the soundness of his actions. (Don’t ask the barber whether you need a haircut.)”
Issuing shares shrinks every existing business
“For present shareholders, the reality is that all existing businesses shrink when shares are issued.”
Deals never fail in projections
“(While deals often fail in practice, they never fail in projections - if the CEO is visibly panting over a prospective acquisition, subordinates and consultants will supply the requisite projections to rationalize any price.)”
Dilution that counts is in intrinsic value
“What really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value (a judgment involving consideration of many variables).”
Calling a stock merger a partial sale
“Clearer thinking about the matter would result if a more awkward but more accurate description were used: ‘Part of A sold to acquire B’, or ‘Owners of B to receive part of A in exchange for their properties’.”
Would you sell the whole on these terms?
“Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it.”
Small stupidities add up to a major one
“A cumulation of small managerial stupidities will produce a major stupidity - not a major triumph.”
One yardstick for both sides of a merger
“[Mergers that destroyed value] could not happen if management and directors would assess the fairness of any transaction by using the same yardstick in the measurement of both businesses.”
Markets reward managers who protect owners
“Other things being equal, the highest stock market prices relative to intrinsic business value are given to companies whose managers have demonstrated their unwillingness to issue shares at any time on terms unfavorable to the owners of the business.”
Issuing shares only for equal value
“At Berkshire, or any company whose policies we determine (including Blue Chip and Wesco), we will issue shares only if our owners receive in business value as much as we give.”
Small teams manage the business, not each other
“A compact organization lets all of us spend our time managing the business rather than managing each other.”
A phone call beats a committee meeting
“Distance impedes us not at all: we’ve always found a telephone call to be more productive than a half-day committee meeting.”