By L.J. Rittenhouse, President, Rittenhouse Rankings
This weekend, I will attend my 14th Berkshire Hathaway shareholder meeting. Over the years, I’ve watched Berkshire grow from an upstart insurance/investment company to an elephant-sized conglomerate. By now I know the questions that will surface in Buffett’s six-hour Q&A-athon. I also can guess the questions that won’t be asked. Why? They expose the underbelly of American capitalism. Armed with my analysis of Berkshire’s economic principles (Buffett’s Bites, McGraw-Hill 2010), here are three leading candidates:
1. WARREN, YOU DEVOTE SIX PAGES IN YOUR 2010 SHAREHOLDER LETTER TO EXPLAIN “PER-SHARE INTRINSIC VALUE” – AND TELL US YOU CAN’T PRECISELY CALCULATE IT. WHY SHOULD WE TRUST AN IMPRECISE NUMBER?
Buffett uses more ink to write about “intrinsic value” – the estimated value of future cash flows in a business – than in any letter of the past decade. He tells us that intrinsic value cannot be precisely calculated. Nice try, Warren. Now that Berkshire is an elephant-sized company, it will get judged like other elephants. Respected companies impress investors with the precision of their numbers. Please, Warren, don’t tell us how to calculate intrinsic value. Give us the answer.
2. YOU SAY THAT BERKSHIRE’S MOST IMPORTANT COMPETITIVE ADVANTAGE IS THE OWNERSHIP MINDSET AND LOYALTY OF ITS MANAGERS. DOES DAVID SOKOLS’S RECENT RESIGNATION WEAKEN THIS ADVANTAGE?
Important questions are raised by the Sokol resignation: Why did Buffett say that David Sokol’s resignation had nothing to do with buying Lubrizol stock when the timing of events seems to connect them? Was his stock purchase an isolated incident? What about asking: Why is managerial trust necessary to grow intrinsic value?
The answer is obvious. Without trust, Berkshire becomes a company where people hide out, do less than their best and wait to disclose problems until they grow big and expensive to fix. A Berkshire manager has resigned, but this does not diminish the necessity for organizational trust among the remaining 60-plus company managers. Berkshire’s “ownership mindset” is a principle that people follow. People may change, but principles don’t.
3. YOU WROTE THAT BERKSHIRE’S “BOUNTIFUL YEARS” WILL NEVER RETURN. IF SO, WHY SHOULD I CONTINUE TO HOLD THE STOCK?
Since Buffett abhors financial guidance, it was startling to find this bold forward-looking statement in the 2010 letter: “the huge sums we manage eliminate any chance for [future] exceptional performance.” If Berkshire is now handicapped by the law of large numbers, why will as many as 50,000 shareholders turn up at the Qwest Center this weekend? Fortune’s Alan Sloan understands why. Read his report on how Buffett misread the market and still made a huge profit on his derivatives investments: http://finance.fortune.cnn.com/2011/03/08/how-buffett-makes-money-even-on-bad-bets
Buffett is an unrepentant value investor. He doggedly allocates capital based on economic value and capital stewardship – not market manipulation and speculation. Hard-core Berkshire owners are grateful. They too believe the market functions best as a weighing, not a voting machine. At this time in Omaha, we will bask in running with and not against the crowd.
L.J. Rittenhouse is president of Rittenhouse Rankings, Inc., which is a New York-based investor-relations company that advises CEOs and CFOs on strengthening execution and valuation through candid evaluations of strategies, investor perceptions and communications. The firm publishes the Rittenhouse Rankings Candor SurveyTM which annually benchmarks CEO candor and stock price performance. Rittenhouse is the author of Buffett’s Bites, a guide to Warren Buffett’s principles and Do Business with People You Can Tru$t, both featured selections at the Berkshire Hathaway Shareholder Meeting.