Lessons from Essays of Warren Buffett

Corporate Governance:

·         Importance of candor and forthrightness in communication to shareholders

·         Select able, honest and hardworking people instead of focusing efforts on organizational structures

·         Special attention to CEO compensation

·         Identify CEOs who perform despite weak structural restraints

·         Director power in various board situations differs. For example, in case of controlling shareholder manager director power is low. When management has no controlling shareholder then management problems are most acute and Buffett advises that the board should be small in size with mostly independent outside directors

·         Long term ownership orientation is very important

·         Stock options are not always good. Many options are such that their value increases simply by retention of earnings without improving real returns on capital. Shareholders are exposed to the downside risks of sub optimal capital deployment in a way that an option holder is not i.e. asymmetry in alignment

Company Stock Price :

·         Stock price should ideally trade marginally around the intrinsic value and neither higher nor lower.

·         Sensible repurchase of undervalued stock serves owner’s interests.

Earnings Retention :

·         Earnings retention is justified only when capital retained produces incremental earnings equal to, or above, those generally available to investors.

Consequences of Stock Splits :

·         Increase in transaction costs by promotion of high share turnover

·         Attracting shareholders with short term, market oriented views who focus unduly on prices

·         Together these above two reasons cause volatility in stock prices which is harmful

Acquisitions :

·         Value enhancing acquisitions are hard to find. Most acquisitions are value-decreasing

Accounting :

·         Remember accounting is a form and like any other form it can be manipulated