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Buffett's Manager Mandate: Run It Like You Own 100% and Can't Sell for a Century

By sagebytes —

Warren Buffett's Investment Best Practices

Insights from the 1998 Berkshire Hathaway Shareholder Letter

Focus on Intrinsic Value, Not Book Value

  • "It's the per-share gain in intrinsic value that counts rather than the per-share gain in book value."
  • Intrinsic value represents the true economic worth of a business, while book value is merely an accounting measure.
  • A business's intrinsic value can far exceed its book value.

Two Key Components of Value

  • Investments: The per-share ownership of investments (cash, equivalents, and securities)
  • Operating Earnings: Per-share earnings from businesses before taxes, excluding investment returns
  • Continuously work to increase both components, but recognize that growth rates will inevitably decline as capital base expands.

Be Realistic About Growth Expectations

  • "Our future rates of gain will fall far short of those achieved in the past."
  • As capital base grows (Berkshire had $57.4 billion net worth in 1998), outsized returns become mathematically impossible.
  • Even at peak performance, Buffett estimated a 15% average annual growth rate, acknowledging some years would fall far short or show negative returns.

Hunt for "Elephants" (Major Acquisitions)

  • Seek significant businesses that can meaningfully impact results.
  • "Popcorn stands just won't do" - small acquisitions cannot move the needle for a large enterprise.
  • Look for businesses with "outstanding management" who operate as if they owned 100% of the business.

Manager Selection and Autonomy

  • "Very few CEOs of public companies operate under a similar mandate" to Berkshire's managers, who are encouraged to:
    1. Act as if they own 100% of the business
    2. Act as if it's the only asset they and their family will ever own
    3. Act as if they cannot sell or merge for at least a century
  • "Never let any decisions be affected even slightly by accounting considerations."
  • Focus on "what counts, not how it will be counted."

Long-Term Investment Horizon

  • Berkshire has "the longest investment horizon to be found in the public-company universe."
  • A majority of shares are held by investors who "expect to die still holding them."
  • This allows management to focus on long-term value maximization rather than quarterly earnings.

Conservative Accounting Principles

  • Avoid financial engineering and accounting gimmicks that manipulate earnings.
  • "If we are to disappoint you, we would rather it be with our earnings than with our accounting."
  • Be skeptical of companies that engage in "restructuring charges" and merger accounting manipulation.

Cash Management Philosophy

  • "Cash never makes us happy. But it's better to have the money burning a hole in Berkshire's pocket than resting comfortably in someone else's."
  • Maintain discipline to wait for the right opportunity rather than making suboptimal investments.

Personal Commitment

  • "I'll keep at least 99% of my net worth in Berkshire for as long as I am around."
  • Align your interests completely with your investment to maintain focus and conviction.

Understand Insurance Economics

  • In insurance, focus on "float" (money held but not owned) and its cost.
  • An insurance business has value if its cost of float over time is less than market rates for money.
  • Be conservative in estimating underwriting results, as "virtually all surprises in insurance are unpleasant ones."