Berkshire Hathaway 2011 Annual Report Download - page 95

In June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual*” to Berkshire’s
Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of
operation. An updated version is reproduced on this and the following pages.
OWNER-RELATED BUSINESS PRINCIPLES
At the time of the Blue Chip merger in 1983, I set down 13 owner-related business principles that I thought would help
new shareholders understand our managerial approach. As is appropriate for “principles,” all 13 remain alive and well today,
and they are stated here in italics.
1. Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-
partners, and of ourselves as managing partners. (Because of the size of our shareholdings we are also, for better or
worse, controlling partners.) We do not view the company itself as the ultimate owner of our business assets but instead
view the company as a conduit through which our shareholders own the assets.
Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily
and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize
yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or
apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as
faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may
well turn out to be the remainder of their lives.
The evidence suggests that most Berkshire shareholders have indeed embraced this long-term partnership concept. The
annual percentage turnover in Berkshire’s shares is a fraction of that occurring in the stocks of other major American
corporations, even when the shares I own are excluded from the calculation.
In effect, our shareholders behave in respect to their Berkshire stock much as Berkshire itself behaves in respect to
companies in which it has an investment. As owners of, say, Coca-Cola or American Express shares, we think of Berkshire
as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term
progress of the companies rather than by the month-to-month movements of their stocks. In fact, we would not care in the
least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we
have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an
opportunity to increase our ownership at an attractive price.
2. In line with Berkshire’s owner-orientation, most of our directors have a major portion of their net worth invested in the
company. We eat our own cooking.
Charlie’s family has 80% or more of its net worth in Berkshire shares; I have more than 98%. In addition, many of my
relatives – my sisters and cousins, for example – keep a huge portion of their net worth in Berkshire stock.
Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of
truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the
businesses in which it owns either a controlling interest or a minority interest of significance.
Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in lockstep with ours
for whatever period of time you elect to be our partner. We have no interest in large salaries or options or other means of
gaining an “edge” over you. We want to make money only when our partners do and in exactly the same proportion.
Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering
is proportional to yours.
3. Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire’s average annual
rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance
of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish
in the future – a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that
of the average large American corporation.
4. Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and
consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained
primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of
businesses and the need for insurance capital determine any given year’s capital allocation.
* Copyright ©1996 By Warren E. Buffett
All Rights Reserved
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