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This month, the famous investment firm Berkshire Hathaway acquired about 28% of Occidental Petroleum’s shares. Occidental is considered a leader in the effort to move fossil fuel companies to net-zero emissions. The move reflects Omaha, Nebraska-based Berkshire Hathaway’s investment style established under the leadership of Warren Buffett and his longtime partner Charlie Munger, who died this year at age 99. are doing.
From Buffett’s leadership to It seemed like an interesting moment to consider whether such lessons could be learned. Move away from fossil fuels.
Berkshire Hathaway is one of the most successful investment companies in history. Important to efforts to draw general lessons from their operations is that holding companies have developed a track record despite significant changes in the economics surrounding them. News and World Report writers John Devine and Wayne Duggan recently noted that the company’s stock has risen at a compound annual growth rate of 19.8%, compared to the S&P 500’s 9.9% annual return from 1965 to 2022. I wrote that I did.
I asked Lawrence A. Cunningham to send me a copy of the latest edition of this book. warren buffett essay. Mr. Cunningham edited and summarized the essays, originally published as a letter to Berkshire Hathaway shareholders, and worked with Mr. Buffett to compile them into a book. After reading this book, I spoke with Cunningham about what lessons can be learned.
Don’t try to invest like Buffett
As a side note, these are leadership lessons for entrepreneurs rather than personal investing lessons, although some can be applied to both areas. People often seek personal investment advice from the founders of successful investment companies. They overlook the fact that being a professional investor is a completely different profession than a part-time job to build personal financial security. In fact, when giving personal financial advice, Buffett advises amateur investors (almost all of them) to avoid expensive professional advisors and buy index funds instead.
And because Berkshire Hathaway invests heavily in companies, Buffett’s investment style leans more towards management.Leadership lessons I learned essay It was primarily about how Buffett operates with a long-term approach and how American companies should participate in our nation’s social compact.
practice long-term thinking
In some ways, the recent acquisition of nearly a third of Occidental’s stock is typical of Berkshire Hathaway’s approach. This is a bet on bold-thinking executives in energy, an area of the economy that is almost certain to grow over the long term.
It’s easy to say you’re a long-term investor or long-term thinker, but it’s much harder to be a long-term investor. Berkshire Hathaway’s most important investments (and sometimes acquisitions) were in its insurance business. This gave us enough capital to make other investments. “The culture started as a long-term horizontal organization because the majority of the investment went into the insurance business,” Cunningham told me. “(Buffett) is one of the rare people in humanity who looks beyond the short term.”
There are many interesting examples of how Buffett practices long-term thinking. Buffett wrote that holding companies never have “numbers” or profit targets to hit every quarter. The company pays CEOs of companies in which it owns stock based on performance over periods longer than a quarter. He also has a track record of buying troubled companies like Fruit of the Loom, helping them turn around, and holding them until they pay dividends.
This is a particularly interesting style at this time, as some question whether the U.S. capitalist system can successfully adapt to complex, long-term challenges like climate change. If you are focused on short-term profits or asset price appreciation, you may not be able to afford to spend money on technologies that will bear fruit years or decades later (such as carbon capture).
In the latest edition of his essay, Buffett avoids the political controversy over climate change that has plagued the likes of Larry Fink. Business leaders who advocate investing in climate change technologies that provide long-term benefits have been (oddly) accused of being anything other than capitalists, such as “woke” people, or socialists. Mr. Buffett is openly opposed to the kind of “stakeholder” capitalism embraced by the Business Roundtable. But this seems to be, to some extent, semantics (as politics often is).
Recognize the value of the system and trust it
Not in the political world, but in the real world. It’s clear that worrying about long-term profits effectively means worrying about more than just this quarter’s earnings. For example, consider what Buffett writes about BSNF, the railroad giant owned by Berkshire Hathaway.
“More than 11 percent of all U.S. intercity ton-miles are transported by BNSF,” he writes in a section titled “Social Compact.” “When you add all of this together, it’s a huge responsibility. We have to anticipate society’s needs, not just react to them.”
Buffett has also written about the importance of the social safety net, noting that it is inevitable that the government will redistribute some of America’s wealth. The key is to continue to grow overall U.S. productivity through a system of entrepreneurship and smart long-term investments.
“The price of achieving ever-increasing productivity for the majority of Americans should not be to the detriment of those less fortunate,” he wrote.
The business “boat” and how to row it
Our business press is now full of advice on how to develop your skills and perform at your best at work. (We also live in generally narcissistic times). But Buffett, like every other wise businessman I know, emphasizes that your environment is most important. “Ultimately, fundamentals erode and management talent becomes overwhelmed.” A great management team in a shrinking business may not be as successful as a great team in a growing industry. there is.
This truism also applies to Berkshire Hathaway itself. Buffett and Munger started investing in the late 2020s.th A century when the American economy was dominant. His appreciation for the system is admirable and well-deserved.
Remember how fast the world is changing
If you’re tempted to think you know what’s going to happen in the short term, stop. Buffett is comfortable making long-term predictions about the continued growth of the U.S. economy, but he doesn’t predict the short-term outlook for specific companies.
“We continue to ignore political and economic projections that are costly distractions for many investors and businesspeople. Thirty years ago, we faced the massive escalation of the Vietnam War, wage and price controls, , two oil shocks…or Treasury bill yields that would fluctuate between 2.8% and 17.4%,” Buffett wrote.
perspective
Mr. Cunningham is a corporate governance expert who came up with the idea to edit and publish Mr. Buffett’s annual letter in 1995. He also identified 30 companies that follow the Berkshire Hathaway model and published a book called “The Berkshire Hathaway Model.” margin of trust About them. When I pointed out that Buffett was practicing stakeholder capitalism to some extent by embracing the long term over the short term, he responded: … “(Buffett) makes very practical observations about achieving financial prosperity.”
Mr. Cunningham says Mr. Buffett’s rarest talent is his long-term ability. Part of that ability is temperament, part of it is his ability to surround himself with people who take a long-term view, and part of it is training. Buffett’s mentor was Benjamin Graham, who lived through the Great Depression.
Difficult times tend to teach people not to cling to the present.
That may be why Buffett’s approach is attracting more attention now. The generation emerging from the pandemic is now faced with climate change, which Buffett himself acknowledges is a major danger to the world. These challenging times are raising new questions about what defines success: short-term gains or long-term value?
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