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What Do You Do?
March 12, 2010
Written By: Pete Petersen

Berkshire Hathaway’s meeting was a couple weeks ago and with that comes Warren Buffet’s letter to the shareholders. Buffet’s letter is widely anticipated and reviewed by Wall Street, the media and investors who scour it for insights and direction. This year one of the topics of his letter that stood out for me was “What We Don’t Do”. There are a few lessons I’ve drawn out of his comments that apply for nearly any business.

What We Don’t Do
“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.”
 
Takeaways … Know your business, know your industry, make every effort to understand where your business margins are headed in the future.
 
“We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.
 
We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.”
 
Takeaways … Don’t plan on anyone helping you out except you, keep your balance sheet in order, cash is a good thing to have.
 
“We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that both operating and capital decisions are occasionally made with which Charlie and I would have disagreed had we been consulted. Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy.”
 
Takeaways …Trust your people and delegate; over managing will slow your business down and you can’t afford that in today’s economy.
 
“We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. If Charlie and I were to go into a small venture with a few partners, we would seek individuals in sync with us, knowing that common goals and a shared destiny make for a happy business “marriage” between owners and managers. Scaling up to giant size doesn’t change that truth.”
 
Takeaway …Pick your business partners wisely; make sure you like them, have common goals and a shared vision.

 


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