In 1983 Warren Buffett set down 15 owner-related principles that he thought shareholders would find helpful in understanding his managerial approach. Now, nearly 30 years later much has changed. For example, Berkshire Hathaway (BRK-A) issued B shares, later split them 50 to 1, and in 2011 announced a stock buyback policy.
Also let's face it, Berkshire is under close scrutiny as David Sokol was essentially fired this year, a once regarded shoo-in for succession, and now new and largely unheard of money managers have been recruited, not to mention BRK stock price has recently underperformed the S&P 500.
This is the first in a series of analytical articles which will examine the Berkshire Hathaway of today against the backdrop of the 15 principles outlined many moons ago to see if any valuable insights might be gained from such an exercise. Let's look at the Owner's Manual's first principle.
Principle 1: Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as ownerpartners, 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.
Today Charlie Munger and Warren Buffett still go together like bread and butter. After all in 2010 Berkshire announced plans to buy the remaining 20% of Munger's Wesco Financial Corporation. And, as always, Munger still serves as the vice-chairman of Berkshire. Therefore, the controlling partners are still the same.
To this day 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 Buffet owns are excluded from the calculation.
This is a profound and often overlooked statistic, particularly for those critical of Berkshire Hathaway. They somehow overlook the fact that in the history of investing only Warren, Charlie and Berkshire can tout that their investments (reflected in the stock price of BRK) averaged an annual growth in book value of 20.3% to its shareholders for the last 44 years, while employing large amounts of capital, and minimal debt.
Berkshire Hathaway stock produced a total return of 76% from 2000–2010 versus a negative 11.3% return for the S&P 500.
Furthermore, in terms of those critical of the stock's shorter term performance, even way back in 1983 when Buffett was first writing his Owner's Manual he explained that "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." With this in mind is it any wonder that this year Buffett and the Board announced a BRK stock buyback policy.
In conclusion, when the Berkshire of today is held up against Principle 1 in the Owner's Manual, the company and its shareholders seem to be doing just fine.
Disclosure: I am long BRK.B.