The Hindu Business Line : BuffetSpeak

Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.

Unlike many business buyers, Berkshire has no `exit strategy.' We buy to keep. We do, though, have an entrance strategy, looking for businesses in this country or abroad that meet our six criteria and are available at a price that will produce a reasonable return. If you have a business that fits, give me a call. Like a hopeful teenage girl, I'll be waiting by the phone.

Currently, the white-hot market in residential real estate of recent years is cooling down, and that should lead to additional acquisition possibilities for us.

None of the deals involve the issuance of Berkshire shares. That's a crucial, but often ignored, point: When a management proudly acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their interest in everything they own.

Surprises in insurance are far from symmetrical. You are lucky if you get one that is pleasant for every ten that go the other way. Too often, however, insurers react to looming loss problems with optimism.

What we do know is that our ignorance (about Nature's onslaught) means we must follow the course prescribed by Pascal in his famous wager about the existence of God. He concluded that since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion.

I failed in my attempt to exit (the derivatives business) painlessly, and in the meantime more trades were put on the books. Fault me for dithering. (Charlie Munger, Vice-Chairman of Berkshire, calls it thumb-sucking.) When a problem exists, whether in personal or in business operations, the time to act is now.

A `normal' dividend policy, of course — one-third of earnings paid out, for example — produces less extreme results but still can provide lush rewards for managers who achieve nothing.

If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.

We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted.

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can `earn' more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets.

Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.

Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years.

The other question that must be addressed is whether the Board will be prepared to make a change if that need should arise not from my death but rather from my decay, particularly if this decay is accompanied by my delusionally thinking that I am reaching new peaks of managerial brilliance.

Humans age at greatly varying rates - but sooner or later their talents and vigour decline. When their abilities ebb, so usually do their powers of self-assessment. Someone else often needs to blow the whistle.

Every share of Berkshire that I own is destined to go to philanthropies, and I want society to reap the maximum good from these gifts and bequests. It would be a tragedy if the philanthropic potential of my holdings were diminished because my associates shirked their responsibility to (tenderly, I hope) show me the door.

Don't worry about this (succession). We have an outstanding group of directors, and they will always do what's right for shareholders. And while we are on the subject, I feel terrific.

Excerpts from the letter to shareholders (2005) of Berkshire Hathaway written by its Chairman, Mr Warren Buffett. Full text of letter on http://www.berkshirehathaway.com/letters/2005.html