Posted by Berkshire Hathaway on March 02, 2008 at 12:33:32:
There are 13 principles that drive Berkshire Hathaway.
Munger and Buffett view their relationship with shareholders as a long-term partnership. It¡¯s to be as if you owned an ¡°a farm or apartment house in partnership with members of your family.¡±
With over 90% of their net-worth in Berkshire stock, Buffett and Munger put their money, and yours, where their mouth is. ¡°¡we can guarantee that your financial fortunes will move in lockstep with ours for whatever period of time you elect to be our partner.¡±
Here we see Buffett setting shareholder expectations, he warns not to expect more than a 15% increase in intrinsic per-share value. He notes per-share intrinsic value as the key-metric by which performance is measured.
Berkshire¡¯s acquisition policy is clear. The first choice is to completely acquire outstanding businesses, the second choice is to buy parts of outstanding businesses in the public equity markets.
General accounting practices don¡¯t always accurately represent Berkshire¡¯s consolidated earnings statement. As such Buffett will comment individually on the performance and prospects of each of the major Berkshire businesses.
The concept of ¡°look-through earnings¡± is introduced. This is how Berkshire accounts for the undistributed earnings of its subsidiaries in the annual report.
Berkshire steers clear from potentially hazardous debt levels. Borrowing will take place at favorable rates in long-term contracts. With deferred taxes and the ¡°float¡± from its insurance operations Berkshire has more attractive capital sources than debt.
Acquisitions are not made for reasons other than boosting long-term performance. There is no ¡°wish list¡±, or ego-bolstering acquisitions masquerading as a strategic purchases.
On retained earnings. ¡°We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market values of reach $1 retained.¡± If this test isn¡¯t met, Buffett writes, ¡°we will pay them out and let our shareholders deploy the funds.¡±
¡°We will issue common stock only when we receive as much in business value as we give.¡± Buffett further notes, ¡°Owners unfairly lose if their managers deliberately sell assets for 80¢ that in fact are wroth $1.¡±
As long as a business generates some cash Berkshire won¡¯t sell it, even though it¡¯s performance is sub-par. Nor will they engage in an expensive rescue operation. Buffett concedes that this is a practice that may hurt performance.
Buffett strives for candor in all reporting and comment about Berkshire. Efforts won¡¯t be made to smooth numbers or mislead investors. He writes, ¡°The CEO who misleads others in public may eventually mislead himself in private.¡±
The philosophy and performance of Berkshire will be freely discussed, however there may be timely issues that can¡¯t be divulged lest they damage competitive advantage in the securities markets. An Added Principle. Buffett is concerned about shareholder expectations knowing that the market may toy with them. As such he makes it known that, ¡°we would rather see Berkshire¡¯s stock price at a fair level than a high level.¡±