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Lessons from Warren Buffett - XXXIV...

Apr 3, 2008

In the previous article, we got to know Warren Buffet's take on the retail business and what kind of people he would prefer at the helm of such a business. Let us now turn to the letter for the year 1996 and see what investment wisdom the master has to offer through this letter. The investing genius of the master has shone through amply in the letters that he has written to his shareholders so far. However, while there was no doubt in anyone's minds that Berkshire Hathaway is indeed a shareholder friendly company, in the letter that we are currently discussing, Warren Buffett has made a few comments that would further dispel any notions that people have with respect to the shareholder friendliness of the company. These comments are a big lesson to those greedy promoters who rob minority shareholders of their hard earned money by giving them some extremely misguided estimates of the intrinsic value of the company. Nowhere this is more evident than in the case of IPOs, most of them so obscenely overpriced that crashes like the recent ones reduce highly priced stocks to mere wads of paper. Minority shareholders are nothing but equal partners, having a proportionate stake in the company and it is grossly unfair that greedy promoters become rich at the expense of innocent partners.

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If the master's comments on the issue, which are laid out below are properly paid heed to, it can make equity investing for the uninformed and innocent minority shareholder an experience with significantly lesser pain.

This is what Warren Buffett has to say on the issue:

"Over time, the aggregate gains made by Berkshire shareholders must of necessity match the business gains of the company. When the stock temporarily overperforms or underperforms the business, a limited number of shareholders - either sellers or buyers - receive outsized benefits at the expense of those they trade with. Generally, the sophisticated have an edge over the innocents in this game.

Though our primary goal is to maximize the amount that our shareholders, in total, reap from their ownership of Berkshire, we wish also to minimize the benefits going to some shareholders at the expense of others. These are goals we would have were we managing a family partnership, and we believe they make equal sense for the manager of a public company. In a partnership, fairness requires that partnership interests be valued equitably when partners enter or exit; in a public company, fairness prevails when market price and intrinsic value are in sync. Obviously, they won't always meet that ideal, but a manager - by his policies and communications - can do much to foster equity.

Of course, the longer a shareholder holds his shares, the more bearing Berkshire's business results will have on his financial experience - and the less it will matter what premium or discount to intrinsic value prevails when he buys and sells his stock. That's one reason we hope to attract owners with long-term horizons. Overall, I think we have succeeded in that pursuit. Berkshire probably ranks number one among large American corporations in the percentage of its shares held by owners with a long-term view."

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