This is the third article in a series reviewing each of Warren Buffett's annual shareholder letters. Although he's never written a book, he pens these letters each year covering many subjects of interest to his shareholders, and uses it as a vehicle to discuss the subject of investing. At times his wisdom is right out in the open, and at other times it requires a little thought. If an investor can understand his methods and apply the concepts holistically in his/her portfolio, there's a good chance of success. In each article, I extract the investing nuggets of wisdom, by subject matter, for commentary. We now turn to the 1979 shareholder letter.
On Judging Performance
"…the ratio of operating earnings (before securities gains or losses) to shareholders' equity with all securities valued at cost is the most appropriate way to measure any single year's operating performance."
"…we had a reasonably good operating performance in 1979 – but not quite as good as that of 1978 – with operating earnings amounting 18.6% of beginning net worth. Earnings per share, of course, increased somewhat (about 20%) but we regard this as an improper figure upon which to focus. We had substantially more capital to work with in 1979 than in 1978, and our performance in utilizing that capital fell short of the earlier year, even though per-share earnings rose."
"'Earnings per share' will rise constantly on a dormant savings account or on a U.S. Savings Bond bearing a fixed rate of return simply because 'earnings' (the stated interest rate) are continuously plowed back and added to the capital base. Thus, even a 'stopped clock' can look like a growth stock if the dividend payout ratio is low."
"In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if managements and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure."
While discussing long-term economic performance--"…we believe it is appropriate to recognize fully any realized capital gains or losses as well as extraordinary items, and also to utilize financial statements presenting equity securities at market value. Such capital gains or losses, either realized or unrealized, are fully as important to shareholders over a period of years as earnings realized in a more routine manner through operations; it is just that their impact is often extremely capricious in the short run, a characteristic that makes them inappropriate as an indicator of single year managerial performance."
On the book value gain of Berkshire since 1964, "The gain in book value comes to 20.5% compounded annually. This figure, of course, is far higher than any average of our yearly operating earnings calculations, and reflects the importance of capital appreciation of insurance equity investments in determining the overall results for our shareholders."
"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share."
Speaking of Ben Rosner of Associated Retail Stores, "Year after year, he produces very large earnings relative to capital employed – realized in cash and not in increased receivables and inventories as in many other retail businesses – in a segment of the market with little growth and unexciting demographics."
Warren opened his letter discussing the change in the accounting profession that required Berkshire to now carry their equity securities at market value. The result would be a substantial increase in the 1978 and 1979 net worth due to the change in the valuation in assets. However, he warns of the illusory nature of this practice and instead refocuses the shareholder on the most appropriate way to measure year-to-year performance: the ratio of operating earnings to beginning equity capital. The short-term illusion will also flow to the EPS on the bottom line, and his comparative example is the EPS performance between 1978 and 1979 versus the operating performance of those years. He had more equity capital to work with in 1979 but his operating performance fell short compared to 1978 even though 1979 EPS rose. In the short-run, the voting machine nature of the stock market makes the inclusion of capital gains in the equity an inappropriate indicator of performance. However, since the stock market is a weighing machine in the long run, it's appropriate to use capital gains to determine investor performance as well as operational performance. The moral of the story? Think like an owner and judge the operational performance of the company over a period of years instead of focusing on EPS--the latter is affected by accounting conventions that don't necessarily bear any resemblance to operational reality.
On Inflation
On discussing inflation, "…a business earning 20% on capital can produce a negative real return for its owners under inflationary conditions not much more severe than presently prevail."
"If we should continue to achieve a 20% compounded gain…your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax any time you wish to convert your twenty percentage points of nominal annual gain into cash."
"The combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (ie., ordinary income tax on dividends and capital gains tax on retained earnings) – can be thought of as an 'investor's misery index.' When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all."
The 1970s was the era of double-digit inflation. On an absolute basis, a 20% return sounds tremendous. But on a relative basis with 14% inflation, not so much. An investor needs to be concerned about frictional costs, not only in the form of commission fees, management fees, and taxes, but also from those imposed from inflation—which is the worst of all "taxes."
On Business Economics
"Our textile business also continues to produce some cash, but at a low rate compared to capital employed. This is not a reflection on the managers, but rather on the industry in which they operate."
"In some businesses – a network TV station, for example – it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar, a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the 'easy' business may be the better route to go."
Speaking of the Waumbec Mills purchase, "By any statistical test, the purchase price was an extraordinary bargain; we bought well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But the purchase was a mistake."
"Both our operating and investment experience cause us to conclude that 'turnarounds' seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."
During the 1960s, Warren came to be the majority shareholder of Berkshire Hathaway, a then struggling textile mill which he then also had to manage. In his previous letters, he lamented on the poor economics of this particular kind of business. Here he continues to remind us of this. Even with good managers in place, it's very difficult to right the ship of a business with poor economics. However, there are some businesses that have such superior economics, and that require little in ongoing capital expenditures that you've got to really work at it to produce poor results…these are the "easy" businesses. During his early days, he looked for "cigar but" investments, like Waumbec Mills. However, in this letter he seems to be changing his tune. Managing a business with poor economics, or a turn-around situation, is a lot of work…so if you're going to expend the energy to manage a business, why not manage an "easy" one? And if you're going to invest, why not look for the "easy" ones? This is where business management and investing meet, and he seems to be letting his investors know of a coming change…"the easy business may be the better route to go" characterized by paying up for very well-run businesses, aka growth at a reasonable price.
On Selecting Investments
"We have severe doubts as to whether a very long-term fixed-interest bond, denominated in dollars, remains an appropriate business contract in a world where the value of dollars seems almost certain to shrink by the day."
"It was a mistake to buy fifteen-year bonds, and yet we did; we made an even more serious mistake in not selling them (at losses, if necessary) when our present views began to crystallize."
"We may even miss large profits from a major rebound in bond prices. However, our unwillingness to fix a price now for a pound of See's candy or a yard of Berkshire cloth to be delivered in 2010 or 2020 makes us equally unwilling to buy bonds which set a price on money now for use in those years. Overall, we opt for Polonius (slightly restated): 'Neither a short-term borrower nor a long-term lender be."
"We continue to feel very good about our insurance equity investments. Over a period of years, we expect to develop very large and growing amounts of underlying earning power attributable to our fractional ownership of these companies. In most cases they are splendid businesses, splendidly managed, purchased at highly attractive prices."
Warren felt the need to discuss bond investments in this letter, warning of the dangers of interest rate risk on very long-term bond contracts (30 & 40 years). At the time, the insurance underwriters would rather write a 6-month policy because they felt comfortable they could look ahead that far in time actuarially; however, they weren't comfortable doing so looking one year forward. But ironically, they felt comfortable enough to take the 6-month premiums and invest them in 30- or 40-year bond contracts. Admitting to his mistaken purchase on the 15-year bonds, Buffett's response was to purchase convertible bonds—they had a shorter life than implied by the maturity terms and he could terminate by converting the bond into stock at will.
On Mr Market and Valuations
On Berkshire's equity investments, "In 1979 they continued to perform well, largely because the underlying companies in which we have invested, in practically all cases, turned in outstanding performance."
"Retained earnings applicable to our insurance equity investments, not reported in our financial statements, continue to mount annually and, in aggregate, now come to a very substantial number. We have faith that the managements of these companies will utilize those retained earnings effectively and will translate a dollar retained by them into a dollar or more of subsequent market value for us."
"We currently believe that equity markets in 1980 are likely to evolve in a manner that will result in an underperformance by our portfolio for the first time in recent years. We very much like the companies in which we have major investments, and plan no changes to try to attune ourselves to the markets of a specific year."
In these paragraphs, Warren's focus is on the performance of the underlying company, not the daily, short-term price movement. Since he thinks like an owner, he wants to align himself with good managers, and over time, good managers beget good business results, and good business results beget capital gains in the stock market. Additionally, even though the retained earnings of the companies involved aren't reported on Berkshire's financial statements, he reviews them, and he applies the "$1 Premise" on a rolling basis as mentioned in the last two articles of this series. The take away for the individual investor? Periodically review the performance of the managers you've entrusted your capital to. Are they creating value with the retained earnings?
With respect to valuations, the overall market price, when measured by total market capitalization to gross domestic product (TMC/GDP), was still dirt cheap, with a high prospect for returns over the coming decade. It appears Warren was telling us here that Berkshire's stock portfolio was fairly-valued and would lag compared to the overall market. But also notice, he wasn't planning on any portfolio changes based on market conditions in any given year…timing isn't his thing.
On Financial Reporting
In reference to Berkshire's listing on the NASDAQ in 1979, "Prior to such listing, the Wall Street Journal and the Dow-Jones news ticker would not report our earnings, even though such earnings were one hundred or more times the level of some companies whose reports they regularly picked up."
"Now, however, the Dow-Jones news ticker reports our quarterly earnings promptly after we release them and, in addition, both the ticker and the Wall Street journal report our annual earnings."
"…we include no narrative with our quarterly reports. Our owners and managers both have very long time-horizons in regard to this business, and it is difficult to say anything new or meaningful each quarter about events of long-term significance."
"…owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You would demand that in a private company; you should expect no less in a public company. A once-a-year report of stewardship should not be turned over to a staff specialist or public relations consultant who is unlikely to be in a position to talk frankly on a manager-to-owner basis."
In 1979, Berkshire hit the "big time" when they were listed on the NASDAQ. Sadly, they were relegated to the over-the-counter page of the Wall Street Journal under "Additional OTC Quotes." It's amusing how times change. Back then, the stock market glamour contest ignored this company even though they were performing very well. Now, the financial media can't get enough of him. This listing served a purpose, though, and provided a vehicle to disseminate information to shareholders, current and prospective.
Notice he additionally outlines two gauntlets...no narrative on quarterly reports, just annual reports, and frank commentary from the CEO. When a company and its managers are focused on long-term objectives, their short-term decisions in pursuit of those objectives may have temporary financial implications while they wait for the investment they made to play out…which could take many months to many years. So in all seriousness, what really can happen of business significance in the time it takes the Earth to complete 90 degrees of its arc around the Sun? Providing a narrative on a quarterly report is like the President giving a quarterly State of the Union address. Even though the SEC requires quarterly filing, it doesn't mean it requires quarterly commentary from the CEO. Short-term focus, and related short-term quarterly commentary is not valued added and has the potential to lead to a CEO that will try and "make the numbers" instead of abiding by his duty of creating lasting value to his shareholders (which isn't measured by the daily stock price movement in the short-term). Additionally, this CEO should speak honestly and frankly to his shareholders about the business currently and the company's prospects going forward. Remember, we're partial owners of companies through the stock market…it's not just a piece of paper. So if you think like an owner and see an annual report that looks like a public relations document with glossy photos, catch phrases, and subterfuge…be afraid and stay away.
On Stock Ownership
"In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors. And if they are cynical in their treatment of investors, eventually that cynicism is highly likely to be returned by the investment community."
"The reasoning of managements that seek large trading activity in their shares puzzles us. In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones – because you can't add lots of new owners (with new expectations) without losing lots of former owners."
"So we hope to continue to have a very low turnover among our owners, reflecting a constituency that understands our operation, approves of our policies, and shares our expectations. And we hope to deliver on those expectations."
Businesses choose their shareholders just as much as shareholders choose their businesses, and this is achieved predominantly through corporate policies, operations, and communications. Just as an organizational leader/manager can't be all things to all people and please everybody all the time, a corporation is in the same boat. How can a corporation legitimately attract short-term traders, long-term dividend income seekers, or growth stock investors all at the same time? The answer…they can't, or at least not for very long. And if they try, and shareholders catch on, they can expect their stock price to be ruthlessly punished as shareholder vote with their feet. Of course, if a CEO is focused on the wrong things, like short-term stock price movements and meeting quarterly EPS targets, would you really want him/her managing your hard-earned capital anyway?
This concludes the review of the 1979 Berkshire Hathaway Shareholder Letter.
Follow back next week as we continue with the 1980 letter.
To see the first article of this series, click here.
On Judging Performance
"…the ratio of operating earnings (before securities gains or losses) to shareholders' equity with all securities valued at cost is the most appropriate way to measure any single year's operating performance."
"…we had a reasonably good operating performance in 1979 – but not quite as good as that of 1978 – with operating earnings amounting 18.6% of beginning net worth. Earnings per share, of course, increased somewhat (about 20%) but we regard this as an improper figure upon which to focus. We had substantially more capital to work with in 1979 than in 1978, and our performance in utilizing that capital fell short of the earlier year, even though per-share earnings rose."
"'Earnings per share' will rise constantly on a dormant savings account or on a U.S. Savings Bond bearing a fixed rate of return simply because 'earnings' (the stated interest rate) are continuously plowed back and added to the capital base. Thus, even a 'stopped clock' can look like a growth stock if the dividend payout ratio is low."
"In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if managements and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure."
While discussing long-term economic performance--"…we believe it is appropriate to recognize fully any realized capital gains or losses as well as extraordinary items, and also to utilize financial statements presenting equity securities at market value. Such capital gains or losses, either realized or unrealized, are fully as important to shareholders over a period of years as earnings realized in a more routine manner through operations; it is just that their impact is often extremely capricious in the short run, a characteristic that makes them inappropriate as an indicator of single year managerial performance."
On the book value gain of Berkshire since 1964, "The gain in book value comes to 20.5% compounded annually. This figure, of course, is far higher than any average of our yearly operating earnings calculations, and reflects the importance of capital appreciation of insurance equity investments in determining the overall results for our shareholders."
"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share."
Speaking of Ben Rosner of Associated Retail Stores, "Year after year, he produces very large earnings relative to capital employed – realized in cash and not in increased receivables and inventories as in many other retail businesses – in a segment of the market with little growth and unexciting demographics."
Warren opened his letter discussing the change in the accounting profession that required Berkshire to now carry their equity securities at market value. The result would be a substantial increase in the 1978 and 1979 net worth due to the change in the valuation in assets. However, he warns of the illusory nature of this practice and instead refocuses the shareholder on the most appropriate way to measure year-to-year performance: the ratio of operating earnings to beginning equity capital. The short-term illusion will also flow to the EPS on the bottom line, and his comparative example is the EPS performance between 1978 and 1979 versus the operating performance of those years. He had more equity capital to work with in 1979 but his operating performance fell short compared to 1978 even though 1979 EPS rose. In the short-run, the voting machine nature of the stock market makes the inclusion of capital gains in the equity an inappropriate indicator of performance. However, since the stock market is a weighing machine in the long run, it's appropriate to use capital gains to determine investor performance as well as operational performance. The moral of the story? Think like an owner and judge the operational performance of the company over a period of years instead of focusing on EPS--the latter is affected by accounting conventions that don't necessarily bear any resemblance to operational reality.
On Inflation
On discussing inflation, "…a business earning 20% on capital can produce a negative real return for its owners under inflationary conditions not much more severe than presently prevail."
"If we should continue to achieve a 20% compounded gain…your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go for income tax any time you wish to convert your twenty percentage points of nominal annual gain into cash."
"The combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (ie., ordinary income tax on dividends and capital gains tax on retained earnings) – can be thought of as an 'investor's misery index.' When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all."
The 1970s was the era of double-digit inflation. On an absolute basis, a 20% return sounds tremendous. But on a relative basis with 14% inflation, not so much. An investor needs to be concerned about frictional costs, not only in the form of commission fees, management fees, and taxes, but also from those imposed from inflation—which is the worst of all "taxes."
On Business Economics
"Our textile business also continues to produce some cash, but at a low rate compared to capital employed. This is not a reflection on the managers, but rather on the industry in which they operate."
"In some businesses – a network TV station, for example – it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar, a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the 'easy' business may be the better route to go."
Speaking of the Waumbec Mills purchase, "By any statistical test, the purchase price was an extraordinary bargain; we bought well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But the purchase was a mistake."
"Both our operating and investment experience cause us to conclude that 'turnarounds' seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."
During the 1960s, Warren came to be the majority shareholder of Berkshire Hathaway, a then struggling textile mill which he then also had to manage. In his previous letters, he lamented on the poor economics of this particular kind of business. Here he continues to remind us of this. Even with good managers in place, it's very difficult to right the ship of a business with poor economics. However, there are some businesses that have such superior economics, and that require little in ongoing capital expenditures that you've got to really work at it to produce poor results…these are the "easy" businesses. During his early days, he looked for "cigar but" investments, like Waumbec Mills. However, in this letter he seems to be changing his tune. Managing a business with poor economics, or a turn-around situation, is a lot of work…so if you're going to expend the energy to manage a business, why not manage an "easy" one? And if you're going to invest, why not look for the "easy" ones? This is where business management and investing meet, and he seems to be letting his investors know of a coming change…"the easy business may be the better route to go" characterized by paying up for very well-run businesses, aka growth at a reasonable price.
On Selecting Investments
"We have severe doubts as to whether a very long-term fixed-interest bond, denominated in dollars, remains an appropriate business contract in a world where the value of dollars seems almost certain to shrink by the day."
"It was a mistake to buy fifteen-year bonds, and yet we did; we made an even more serious mistake in not selling them (at losses, if necessary) when our present views began to crystallize."
"We may even miss large profits from a major rebound in bond prices. However, our unwillingness to fix a price now for a pound of See's candy or a yard of Berkshire cloth to be delivered in 2010 or 2020 makes us equally unwilling to buy bonds which set a price on money now for use in those years. Overall, we opt for Polonius (slightly restated): 'Neither a short-term borrower nor a long-term lender be."
"We continue to feel very good about our insurance equity investments. Over a period of years, we expect to develop very large and growing amounts of underlying earning power attributable to our fractional ownership of these companies. In most cases they are splendid businesses, splendidly managed, purchased at highly attractive prices."
Warren felt the need to discuss bond investments in this letter, warning of the dangers of interest rate risk on very long-term bond contracts (30 & 40 years). At the time, the insurance underwriters would rather write a 6-month policy because they felt comfortable they could look ahead that far in time actuarially; however, they weren't comfortable doing so looking one year forward. But ironically, they felt comfortable enough to take the 6-month premiums and invest them in 30- or 40-year bond contracts. Admitting to his mistaken purchase on the 15-year bonds, Buffett's response was to purchase convertible bonds—they had a shorter life than implied by the maturity terms and he could terminate by converting the bond into stock at will.
On Mr Market and Valuations
On Berkshire's equity investments, "In 1979 they continued to perform well, largely because the underlying companies in which we have invested, in practically all cases, turned in outstanding performance."
"Retained earnings applicable to our insurance equity investments, not reported in our financial statements, continue to mount annually and, in aggregate, now come to a very substantial number. We have faith that the managements of these companies will utilize those retained earnings effectively and will translate a dollar retained by them into a dollar or more of subsequent market value for us."
"We currently believe that equity markets in 1980 are likely to evolve in a manner that will result in an underperformance by our portfolio for the first time in recent years. We very much like the companies in which we have major investments, and plan no changes to try to attune ourselves to the markets of a specific year."
In these paragraphs, Warren's focus is on the performance of the underlying company, not the daily, short-term price movement. Since he thinks like an owner, he wants to align himself with good managers, and over time, good managers beget good business results, and good business results beget capital gains in the stock market. Additionally, even though the retained earnings of the companies involved aren't reported on Berkshire's financial statements, he reviews them, and he applies the "$1 Premise" on a rolling basis as mentioned in the last two articles of this series. The take away for the individual investor? Periodically review the performance of the managers you've entrusted your capital to. Are they creating value with the retained earnings?
With respect to valuations, the overall market price, when measured by total market capitalization to gross domestic product (TMC/GDP), was still dirt cheap, with a high prospect for returns over the coming decade. It appears Warren was telling us here that Berkshire's stock portfolio was fairly-valued and would lag compared to the overall market. But also notice, he wasn't planning on any portfolio changes based on market conditions in any given year…timing isn't his thing.
On Financial Reporting
In reference to Berkshire's listing on the NASDAQ in 1979, "Prior to such listing, the Wall Street Journal and the Dow-Jones news ticker would not report our earnings, even though such earnings were one hundred or more times the level of some companies whose reports they regularly picked up."
"Now, however, the Dow-Jones news ticker reports our quarterly earnings promptly after we release them and, in addition, both the ticker and the Wall Street journal report our annual earnings."
"…we include no narrative with our quarterly reports. Our owners and managers both have very long time-horizons in regard to this business, and it is difficult to say anything new or meaningful each quarter about events of long-term significance."
"…owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You would demand that in a private company; you should expect no less in a public company. A once-a-year report of stewardship should not be turned over to a staff specialist or public relations consultant who is unlikely to be in a position to talk frankly on a manager-to-owner basis."
In 1979, Berkshire hit the "big time" when they were listed on the NASDAQ. Sadly, they were relegated to the over-the-counter page of the Wall Street Journal under "Additional OTC Quotes." It's amusing how times change. Back then, the stock market glamour contest ignored this company even though they were performing very well. Now, the financial media can't get enough of him. This listing served a purpose, though, and provided a vehicle to disseminate information to shareholders, current and prospective.
Notice he additionally outlines two gauntlets...no narrative on quarterly reports, just annual reports, and frank commentary from the CEO. When a company and its managers are focused on long-term objectives, their short-term decisions in pursuit of those objectives may have temporary financial implications while they wait for the investment they made to play out…which could take many months to many years. So in all seriousness, what really can happen of business significance in the time it takes the Earth to complete 90 degrees of its arc around the Sun? Providing a narrative on a quarterly report is like the President giving a quarterly State of the Union address. Even though the SEC requires quarterly filing, it doesn't mean it requires quarterly commentary from the CEO. Short-term focus, and related short-term quarterly commentary is not valued added and has the potential to lead to a CEO that will try and "make the numbers" instead of abiding by his duty of creating lasting value to his shareholders (which isn't measured by the daily stock price movement in the short-term). Additionally, this CEO should speak honestly and frankly to his shareholders about the business currently and the company's prospects going forward. Remember, we're partial owners of companies through the stock market…it's not just a piece of paper. So if you think like an owner and see an annual report that looks like a public relations document with glossy photos, catch phrases, and subterfuge…be afraid and stay away.
On Stock Ownership
"In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors. And if they are cynical in their treatment of investors, eventually that cynicism is highly likely to be returned by the investment community."
"The reasoning of managements that seek large trading activity in their shares puzzles us. In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones – because you can't add lots of new owners (with new expectations) without losing lots of former owners."
"So we hope to continue to have a very low turnover among our owners, reflecting a constituency that understands our operation, approves of our policies, and shares our expectations. And we hope to deliver on those expectations."
Businesses choose their shareholders just as much as shareholders choose their businesses, and this is achieved predominantly through corporate policies, operations, and communications. Just as an organizational leader/manager can't be all things to all people and please everybody all the time, a corporation is in the same boat. How can a corporation legitimately attract short-term traders, long-term dividend income seekers, or growth stock investors all at the same time? The answer…they can't, or at least not for very long. And if they try, and shareholders catch on, they can expect their stock price to be ruthlessly punished as shareholder vote with their feet. Of course, if a CEO is focused on the wrong things, like short-term stock price movements and meeting quarterly EPS targets, would you really want him/her managing your hard-earned capital anyway?
This concludes the review of the 1979 Berkshire Hathaway Shareholder Letter.
Follow back next week as we continue with the 1980 letter.
To see the first article of this series, click here.
