New Buffett Stock Indicator, Perhaps?

Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Berkshire Hathaway’s (NYSE: BRK-A) head Warren Buffett made a noteworthy recommendation in his iconic Letter to Shareholders.  He suggests that investors take a look at JP Morgan Chase’s (NYSE: JPM) own Letter to Shareholders – all 16,973 words of it.  The author is  JP Morgan's head Jamie Dimon. 

When Buffett talks, investors listen.  Also with ears perked are those of us in the business - and art - of financial reporting.  So, we assume that there’s something in Dimon’s communications which will give us insight about the value of the stock. And, to take that one step further, we also are likely to assume that we should consider purchasing the stock. We do that despite Berkshire Hathaway’s relatively bad 2011. Its profit was down 30% because of matters related to its insurance business and derivatives.  Masterfully, of course, Buffett details the not so hot year.

What we find in Dimon’s account of 2011 is exactly what Buffett’s financial reporting is known for.  Perhaps Buffett enjoys looking in a mirror. His rhetoric has become famous for:

  • Addressing what’s on everyone’s mind (there’s no elephant in the room).
  • Adopting tone of confidence, along with humility since, hey, we’re human, therefore inherently myopic.
  • Boiling down complex financial concepts to their essence so they can be described in simple terms in a conversational tone. In "Made To Stick," the Heath Brothers mandate simplification.

Excerpt from Buffett letter:

"Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities.  This business produces ‘float’ – money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit.”

The simplicity comes across as transparency.  Yet in tone and word choice it maintains a respect for the importance of the subject under discussion – money.  There’s no buddy-to-buddy talk as in much of social media. 

Dimon’s approach is a dead wringer for that.  An excerpt:

“Your company’s earnings, particularly because of the business we are in, will always be somewhat volatile.  The main reason for the difference between what we should be earning and what we are earning is the extraordinarily high losses we still are bearing on mortgages and mortgage-related issues.”

Can we extrapolate from the fact that Buffett drew our attention to JP Morgan Chase a kind of Buffett Stock Indicator?  In essence, that would be a possible correlation between the percentage of plainspeaking and the value of the stock. If we consider the recent communications of other companies we might be on the money. 

Take the troubled AOL (NYSE: AOL) for example. Activist shareholder Starboard Value, which owns 5.2% of the stock, demanded a change in strategic direction and the appointment of five new members to the board.

AOL’s response didn’t address Starboard’s concerns and certainly didn’t do it in a straightforward way. Here is an excerpt from the release:

“Over the last two years AOL has significantly reduced costs, sold non-core assets, made significant investments in our future, and also recently repurchased over 10% of outstanding shares.  AOL has a clear strategy and operational plan to provide our consumers and customers with exceptional value, which we believe will lead to the creation of shareholder value.”

This seeming dictum to judge a stock by its communications approach extends beyond financial reporting.  Take thriving companies Panera (NASDAQ: PNRA) and McDonald’s (NYSE: MCD).  So much of their external communication is to the point, real, and even fun.  For example, Panera’s menu posted online gets a foodie's attention.  The Low-Fat Vegetarian Black Bean is described:

“Plumb black beans simmered in a spicy vegetarian broth with onion, red bell pepper, cilantro, garlic and cumin.”

When I was down and out and applied to McDonald’s for an executive communications position, it so sweetly turned me down.  The spoonful of sugar that made the medicine go down was the enclosed packet of vouchers for free goodies at its many outlets. Since then, it's my first stop for comfort food.



Motley Fool newsletter services recommend McDonald's and Panera Bread. The Motley Fool owns shares of JPMorgan Chase & Co. and Panera Bread. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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