четвъртък, 15 април 2010 г.
Buffett's 13 Business Principles
By
Chris Menon
Published in Investing Strategy on 14 April 2010
3
comments
Following these simple steps, Buffett has built a fortune.
Warren Buffett didn't become the world's richest investor by accident.
Aside from an unflappable temperament, a highly methodical mind, common sense and plenty of business acumen and integrity he also has the ability to learn from his mistakes and adhere to simple owner-related business principles.
In his latest Berkshire Hathaway annual report, Warren Buffett has outlined the 13 business principles that have guided his investing. They're an updated version of the 'owner's manual' he provided shareholders in 1996, although as Buffett explains, they were first set down in 1983. The fact they've remained unchanged in all this time is a testament to their long-term validity.
Here is a summarised version of the principles. I'd advise that Fools read the original source text to get a fuller understanding of Buffett's thoughts. They can be found on page 89-92 of the 2009 Berkshire Hathaway annual report.
These principles are a useful standard by which to judge the management of any business in which you are considering buying shares, as well as helping inform your approach to investing.
The 13 principles
1) Partnership
The company isn't viewed as the owner of the business assets but rather is the conduit through which the shareholders own the assets. Similarly, as a shareholder, you should view yourself as a part owner of a business that you expect to stay with indefinitely.
2) Management eats its own cooking
Berkshire Hathaway's directors have most of their net worth invested in Berkshire.
3) Maximise intrinsic value
Berkshire's progress is measured by the average annual rate of gain in intrinsic business value on a per-share basis. The long-term aim is to maximise this.
4) Buy quality
Own, either in part or outright, a diverse group of businesses that generate cash and consistently earn above-average returns on capital.
5) Clear reporting of earnings
In the annual report Charlie Munger and Warren Buffett provide the numbers and other information that really matter; the earnings of each major business they control.
6) Intrinsic value before accounting convention
Accounting consequences do not influence their operating or capital-allocation decisions.
7) Beware debt
Berkshire uses debt sparingly and, when it does borrow, attempts to structure loans on a long-term fixed-rate basis. It rejects interesting opportunities rather than over-leverage its balance sheet.
8) No management self-aggrandisement
Management does not pursue acquisitions to increase the size of their paycheck at shareholder expense. The fundamental requirement is for any acquisition to increase the per-share intrinsic value of Berkshire's stock.
9) Retained earnings should benefit the company
This is tested over five years by:
a) during the period did book-value gain exceed the performance of the S&P; and
b) did the stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1.
If these tests are met, retaining earnings has made sense.
10) Value for stock
Berkshire issues common stock only when it receives as much in business value as it gives.
11) Avoid gin rummy behaviour
That is discarding his least promising business at every turn. In addition, be distrustful of suggestions that the poor businesses can be restored to satisfactory profitability by major capital expenditures.
12) Candid reporting
Berkshire is candid in its reporting to shareholders, emphasizing the pluses and minuses important in appraising business value.
13) Don't give business ideas away
Despite his policy of candour, Buffett discusses Berkshire's activities in marketable securities only to the extent legally required. This is because good investment ideas are rare, valuable and can be adopted by competitors.
Clearly, Buffett has set a benchmark that few other business managers meet.
By
Chris Menon
Published in Investing Strategy on 14 April 2010
3
comments
Following these simple steps, Buffett has built a fortune.
Warren Buffett didn't become the world's richest investor by accident.
Aside from an unflappable temperament, a highly methodical mind, common sense and plenty of business acumen and integrity he also has the ability to learn from his mistakes and adhere to simple owner-related business principles.
In his latest Berkshire Hathaway annual report, Warren Buffett has outlined the 13 business principles that have guided his investing. They're an updated version of the 'owner's manual' he provided shareholders in 1996, although as Buffett explains, they were first set down in 1983. The fact they've remained unchanged in all this time is a testament to their long-term validity.
Here is a summarised version of the principles. I'd advise that Fools read the original source text to get a fuller understanding of Buffett's thoughts. They can be found on page 89-92 of the 2009 Berkshire Hathaway annual report.
These principles are a useful standard by which to judge the management of any business in which you are considering buying shares, as well as helping inform your approach to investing.
The 13 principles
1) Partnership
The company isn't viewed as the owner of the business assets but rather is the conduit through which the shareholders own the assets. Similarly, as a shareholder, you should view yourself as a part owner of a business that you expect to stay with indefinitely.
2) Management eats its own cooking
Berkshire Hathaway's directors have most of their net worth invested in Berkshire.
3) Maximise intrinsic value
Berkshire's progress is measured by the average annual rate of gain in intrinsic business value on a per-share basis. The long-term aim is to maximise this.
4) Buy quality
Own, either in part or outright, a diverse group of businesses that generate cash and consistently earn above-average returns on capital.
5) Clear reporting of earnings
In the annual report Charlie Munger and Warren Buffett provide the numbers and other information that really matter; the earnings of each major business they control.
6) Intrinsic value before accounting convention
Accounting consequences do not influence their operating or capital-allocation decisions.
7) Beware debt
Berkshire uses debt sparingly and, when it does borrow, attempts to structure loans on a long-term fixed-rate basis. It rejects interesting opportunities rather than over-leverage its balance sheet.
8) No management self-aggrandisement
Management does not pursue acquisitions to increase the size of their paycheck at shareholder expense. The fundamental requirement is for any acquisition to increase the per-share intrinsic value of Berkshire's stock.
9) Retained earnings should benefit the company
This is tested over five years by:
a) during the period did book-value gain exceed the performance of the S&P; and
b) did the stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1.
If these tests are met, retaining earnings has made sense.
10) Value for stock
Berkshire issues common stock only when it receives as much in business value as it gives.
11) Avoid gin rummy behaviour
That is discarding his least promising business at every turn. In addition, be distrustful of suggestions that the poor businesses can be restored to satisfactory profitability by major capital expenditures.
12) Candid reporting
Berkshire is candid in its reporting to shareholders, emphasizing the pluses and minuses important in appraising business value.
13) Don't give business ideas away
Despite his policy of candour, Buffett discusses Berkshire's activities in marketable securities only to the extent legally required. This is because good investment ideas are rare, valuable and can be adopted by competitors.
Clearly, Buffett has set a benchmark that few other business managers meet.
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