WARREN BUFFETTWARREN ON BUSINESS [ CONTINUED FROM FRONT FLAP ] WARREN BUFFETT ON BUSINESS $24.95 USA | $29.95 CAN An informative and inspiring book on Berkshire Hathaway’s business management practices, all in Warren Buffett’s own words, Warren Buffett on The proven business principles of Business provides direct, hands-on information Warren Buffett—in his own words on how to effectively manage a company that WARREN HE NAME WARREN BUFFETT is will connect with senior executives, managers, synonymous with success and prosperity entrepreneurs, and business students. Tin the business world. There are many books written about how Buffett invests and Warren Buffett is one of the most admired and prolifi c how you can invest just like him—but this is not investors and managers in corporate America. In this one of them. This book is not about how Buffett one-of-a-kind collection of Buffett’s letters to the shareholders invests, but rather, it is about his highly successful of Berkshire Hathaway, the “Sage of Omaha” reveals, in a business management principles and practices. clear, simple style, his basic management principles of sound It is about his way of communicating with and business practices. Through Buffett’s own remarkable words, FROM THE SAGE BUFFETT treating employees and shareholders fairly and this practical management handbook shares valuable insights PRINCIPLES OF OMAHA honestly; responsible corporate governance; on communicating with and treating employees and ethical behavior; patience and perseverance; shareholders fairly; responsible corporate governance; ethical admitting mistakes; having a passion for work; behavior; patience and perseverance; admitting mistakes; ON BUSINESS and having fun and a sense of humor. Warren having a passion for work; and more. Richard Connors weaves Buffett on Business is a practical management Buffett’s priceless pearls of business and management wisdom handbook on the Buffett/Berkshire Hathaway into an engaging narrative presented in an accessible manner model of effectively managing a business, large and organized by business and management topics—with RICHARD J. CONNORS is a Registered Investment PRINCIPLES FROM THETHE or small. strong lessons from Buffett in every chapter. Advisor and owner of Connors Investment Management Company in St. Louis, Missouri. Drawing from carefully selected Berkshire Warren Buffett on Business provides direct, hands-on SAGE OF OMAHA Beginning in 2006, he has presented a class on Hathaway shareholders’ letters written over four information on major topics important to senior executives, Warren Buffett at the Washington University decades (1977–2008), Connors presents Buffett’s managers, entrepreneurs, business students, and anyone in St. Louis Lifelong Learning Institute. He is own words on corporate culture, communica- interested in business. Informative and inspiring, this unique a graduate of the University of Notre Dame tion, risk management, time management, crisis book puts Warren Buffett’s business beliefs in perspective and Featuring Business School and the St. Louis University management, executive compensation, capital provides you with a timeless guide to the management Winning Management School of Law. allocation and management, and much, much strategies that will help you run a successful business. 25 Strategies from over more. Taken as a whole, they show that, when you JACKET DESIGN: C. WALLACE of His Shareholder strip it all away, effective business management the COVER IMAGE © NAJLAH FEANNY/NAJLAH FEANNY/CORBIS CONNORS Letters Warren Buffett way is remarkably obvious and simple. As Buffett himself describes his business principles, they are “simple, old, and few.” SELECTED AND ARRANGED BY [ CONTINUED ON BACK FLAP ] RICHARD J. CONNORS babout.indd 260 10/28/09 4:09:35 PM WARREN BUFFETT ON BUSINESS PRINCIPLES FROM THE SAGE OF OMAHA RICHARD J. CONNORS John Wiley & Sons, Inc. ffirs.indd i 10/29/09 11:18:41 AM Copyright © 2010 by Richard J. Connors. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data: Connors, Richard J., 1940- Warren Buffett on business : principles from the sage of Omaha/Richard J. Connors. p. cm. Includes bibliographical references. ISBN 978-0-470-50230-3 (cloth) 1. Management. 2. Buffett, Warren. 3. Berkshire Hathaway Inc.—Management. I. Title. HD31.C6244 2010 658—dc22 2009024946 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd ii 10/29/09 11:18:44 AM To my father, a great investor, who would have loved to have met Warren Buffett To my grandchildren, Bridget, Frankie, Richie, Patrick, Catherine, and Sean ffirs.indd iii 10/29/09 11:18:44 AM I wish I knew what I know now when I was younger. — Rod Stewart The wisdom of the wise, and the experience of ages, may be preserved by quotation. — Isaac Disraeli ffirs.indd iv 10/29/09 11:18:44 AM Contents Acknowledgments ix Introduction xi Chapter 1 Shareholders as Partners 1 “Although our form is corporate, our attitude is partnership.”1 Chapter 2 Corporate Culture 5 “It takes 20 years to build a reputation and fi ve minutes to ruin it. If you think about that, you’ll do things differently.”2 Chapter 3 Corporate Governance 15 “At Berkshire, board members travel the same road as shareholders.”3 Chapter 4 Berkshire Managers 29 “They love their businesses, they think like owners, and they exude integrity and ability.”4 Chapter 5 Communication 33 “As managers, Charlie and I want to give to our owners the fi nancial information and commentary we would wish to receive if our positions were reversed.”5 v ftoc.indd v 10/28/09 1:58:53 PM vi CONTENTS Chapter 6 Acquisition of Nebraska Furniture Mart 43 “We gave Mrs. B a check for $55 million and she gave us her word. That made for an even exchange.”6 Chapter 7 Acquisition of GEICO 51 “The security I like best”7 Chapter 8 Acquisition of General Reinsurance 57 “Long ago, Mark Twain said: ‘A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.’ If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.”8 Chapter 9 The Assessment and Management of Risk 71 “Don’t think, however, that we have lost our appetite for risk. We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk.”9 Chapter 10 Executive Compensation 77 “At Berkshire . I am a one man compensation committee who determines the salaries for the CEOs of around 40 signifi cant operating businesses. How much time does this aspect of my job take? Virtually none. How many CEOs have voluntarily left us for other jobs in our 42-year history? Precisely none.”10 Chapter 11 Time Management 83 “When my mother got to be eighty the most important thing in how long you live is how long your parents live. I got her an exercise bike, put her on a strict diet, and she’s just piling up the years for me.”11 Chapter 12 How to Manage a Crisis 87 “. I will attempt to do it in the manner of a fellow that has never met a lawyer.”12 Chapter 13 Management Principles and Practices 99 “Simple, old and few.”13 ftoc.indd vi 10/28/09 1:58:53 PM Contents vii Chapter 14 Executive Behavior 131 “Many CEOs attain their positions because they possess an abundance of animal spirits and egos. When such a CEO is encouraged by his advisors to make deals, he responds such as would a teenage boy who is encouraged by his father to have a normal sex life.