Warren Buffett Only Wants You to Have What’s Fair
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If there’s one thing I’ve learned from Warren Buffett it’s that he thinks of his shareholders as long term partners, as true investors. He doesn’t manage the business to meet analyst expectations nor does he care much about making a quick buck. Sure, he’s greedy when others are fearful but he’s only able to do that because he takes a longer term view.
Over the past couple of months I’ve undertaken a study of his “Owner’s Manual” for Berkshire Hathaway (NYSE: BRK-B) shareholders to get a deeper understanding of how he runs the business as an owner and for owners. I’ve finally come to the first of his two added principles and this one’s not something I think any one of us wants to hear. Warren only wants his owners to have what’s fair and nothing more.
Principle #14:
“To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be-overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners.”
We are a get rich quick society. Holding periods for stocks are now recorded in Nano-seconds instead of decades. Bubbles have burst, crashes have happened in a flash and we’ve seen scheme after scoundrel attempt to part us from our hard earned money. Who can blame the average investor from taking a profit when its right before their eyes as the past has shown that it could be gone tomorrow? We want to buy our stocks when they are low and sell them when they are high, under and overvalued are relative terms; we just want to ensure that we can retire.
For Warren Buffett it is about buying a business at a fair price and being there for the duration. His desired holding period is forever. This is why he has no problem owning an 8.88% stake in Coca-Cola (NYSE: KO) for decades. It’s a holding that’s now worth over $15 billion. It’s also why he’s built up massive stakes in both American Express (NYSE: AXP) and Wells Fargo (NYSE: WFC) over the years. Respectively, they represent 13.3% and 7.8% stakes in each company worth $8.7 and $14.4 billion. In all three cases he’s buying iconic brands that have stood the test of time. These are brands whose business models are formed around enduring competitive advantages.
Take Coke, whose secret recipe had been locked away for decades. Their strong brand image has lasted decades and when combined with a great product, they’ve been able to market it to consumers and maintain pricing power and thereby grow the economic value of the company over time. The same goes for American Express; they operate a “closed loop network” meaning they are in complete control. This advantage has proved durable over the years as they decide who they will grant an AMEX card to and how much they’re willing to give them as credit. This has enabled them to earn more of the revenue on every transaction their customers transact.
You see, Buffett’s focus isn’t on what Coke will earn next quarter or if American Express can beat on revenue. His focus is on owning these durable brands through the cycles and earning a return on the businesses themselves and not on the gyrations of their stock prices. This flies in the face of conventional Wall Street behavior, a behavior that’s sadly carried down to the average main street investor.
What’s absolutely tragic is that it’s the average retail investor that’s getting burned and it’s just one of the many practices where they rich have gotten richer and the middle class has continued to be mired in the middle. Take the Facebook (NASDAQ: FB) IPO. For the first time in a great long while I had my non-investing friends asking me about stocks, specifically Facebook’s. They wanted to know if they should be buying it the moment it went public and how quickly they could sell. They had no idea that going public was about two things for the company: raising capital to grow the business and giving insiders an exit. They were clueless that those factors meant that the bankers were pushing for the highest possible sell price for their client and if retail investors were creating a bigger market for the stock, that just meant they could sell more of it to raise more capital and if they happened to earn more fees all the better.
Sure Facebook had a brand and they are even making money but they went public not to gain new owners to prosper alongside insiders through the decades. They went public to cash out and to infuse cash to build a war chest to grow the business. Facebook might have an enduring competitive advantage through their massive network of eyeballs but the price traders needed to pay to gain access was one that had many geared toward the mindset of making a quick buck through buying high and selling higher.
This Wall Street mentality is eschewed by Buffett and is eschewed by his favorite bank Wells Fargo. They’re focused instead on building lasting relationships with their customers. They want to be their financial services provider and their goal is to provide each of their customers with at least eight products. Sure, that’s good for their bottom line, but if it’s bad for their customers in the long term, it will also have a long term drag on their bottom line as well.
Warren only wants you to have what’s fair because he doesn’t want you to get burned. He doesn’t want you to buy Berkshire when it’s overvalued and then be disappointed when your holding is cut in half like those of the Facebook IPO. You’ll sell out in disappointment and then continue to make miserable returns or give up on the market altogether. Neither does he want you to buy it because it’s undervalued, make a quick buck and leave. He wants his investors in it for the long term by getting in for a fair price.
You need to learn that while life might not be fair, buying a business at a fair price and owning it for decades is something to be lauded. I’ll admit it; buying a business when it’s undervalued is even better and we know that Buffett would agree, however, you really have to be greedy when others are fearful to get a great business at a great price. If you want to learn alongside those who have decided it is time to invest better click this link to learn how.
latimerburned has options positions in Berkshire Hathaway and American Express. The Motley Fool owns shares of Berkshire Hathaway, Facebook, The Coca-Cola Company, and Wells Fargo & Company and has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, long OCT 2012 $65.00 calls on American Express Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend American Express Company, Berkshire Hathaway, Facebook, The Coca-Cola Company, and Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.
