Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

25 Ways to Run Your Business Like Warren Buffett


The "world's greatest investor" runs Berkshire Hathaway along agreeable, self-sustaining lines.

Berkshire Hathaway's (BRK.A, BRK. B) annual "Woodstock of Capitalism," its shareholder meeting, happens on April 30 this year. Warren Buffett's baby is by far America's most beloved conglomerate. What's behind the fame? Buffett and his partner Charlie Munger are investing prodigies, but so are, say, Carlos Slim and Donald Trump, and you don't see their companies' shareholder meetings doubling as love fests.

Berkshire has some special things going for it. Buffett himself comes off as an honest folk hero with an incredible investing legacy that started during the Great Depression. While value investing existed before Buffett, his success played a pivotal role in mainstreaming it.

The other secret to Berkshire's success, however, is in its corporate DNA. Buffett and Munger have designed the company along agreeable, self-sustaining lines. From the kinds of people they recruit as managers to their corporate culture, Berkshire has built a template for success. Here are 25 ways to run your business like Buffett, based on Berkshire's "Owner-Related Business Principles," as listed in the 2010 annual report.

1. Think of it as a partnership
Warren Buffett and Charlie Munger see their shareholders as owner-partners. "We view the company as a conduit through which our shareholders own assets," Buffett writes in the company's 2010 annual report. They liken it to owning a farm or apartment with members of your family.

This approach guarantees that everyone is more personally invested in the company. If it's more personal, employees feel like there's more at stake. This keeps them loyal and committed, while simultaneously preventing shareholders from dumping shares or speculating. How can you build your company as a partnership rather than an established hierarchy?

2. "Eat your own cooking"
The majority of Berkshire Hathaway's directors have a substantial portion of their own net worth invested with the company. With stakes that high, you know they're paying close attention to the quality of their investments. What benefits the company benefits directors, and vice-versa. How can you arrange your organization to "eat its own cooking"?

3. Make pay proportional to company performance
Instead of bonuses, options, golden handcuffs or parachutes or Fed handouts, Buffett and Munger, who have the vast majority of their fortunes invested with Berkshire Hathaway, are rewarded in sync with their company, not on the crust above it. "When I do something dumb," Buffett writes, "I want you to be able to derive some solace from the fact that my financial suffering is proportional to yours." Why can't all companies be run this way?

4. Measure success by progress
Buffett and Munger focus on the rate by which Berkshire Hathaway's shares increase, based on per-share value. That value matters more than size, political clout, or visibility. This is their main priority, and they have a solid way of measuring it. What are the markers of your progress, and how do you measure them?

5. Have a simple strategy for success
Berkshire has a Plan A and a Plan B for reaching success, which is defined by increasing value per share. Although these strategies may be complex in implementation, they can each be summed up in a single sentence.

Plan A involves generating cash and steady above-average capital returns by owning a diverse set of businesses. Plan B is to own parts of those kinds of businesses in the form of stock bought by Berkshire's insurance subsidiaries.

Those two sentences cover the basic strategy of one of the world's most successful and longest-lived conglomerates. Can you sum up your strategy as simply as this?

6. Know how bad times will benefit you
If your company is as intimate with the stock market as Berkshire, how do you benefit when said market goes into hibernation mode? By picking shares of companies and entire companies up on the cheap, according to Buffett and Munger. Because companies also tend to buy back their own shares at discounted rates, Berkshire, a major shareholder in a variety of companies, benefits that way, too. What's your strategy for benefiting from bad times?

7. Facilitate understanding of the way you think
Buffett and Munger are upfront about the kind of financial information they provide about their business and why they provide it. They think that conventional accounting doesn't provide all the necessary numbers to evaluate their businesses' performances, so they add earnings and additional information because they think that will help readers better judge their performance. If they use additional concepts to assess businesses, they explain them to shareholders and why they think they're important. This form of transparency has gained Buffett many admirers. How do you help your shareholders, clients and employees understand the way you think?

8. Don't use much debt
Now here's an unusual concept. Berkshire funds itself through deferred taxes and the premiums its insurance companies collect. It doesn't support itself off debt or government bailouts. Buffett and Munger claim to feel an obligation towards shareholders, many of whom have a huge portion of their net worth with Berkshire Hathaway; using debt to field that obligation isn't comfortable for them. This is exceptional behavior for a business of any size. It does beg the questions: How can you fund yourself and avoid debt? Can your business be run debt-free?

9. Only take out conservative loans

In the rare instances Berkshire does take out loans, they're generally fixed rate and long term. No fancy loans, no abbreviations, no loan sharks cloaked as Wall Street banks. Buffett and co. know that these loans don't potentially lose you as much money as the other kinds. Having substantial cash, they also pay back those loans as early as possible. Can you run your business by only taking out conservative loans? What's your strategy for paying off loans as quickly as possible?

10. Don't supersize management perks
Buffett and Munger do not increase their office size or private island purchases as Berkshire's balance sheet grows. The annual rent at Berkshire HQ is a little more than $270,000, piddling by conglomerate standards. For what it's worth, Buffett's own annual CEO salary is $100,000, and he has more than 98% of his wealth invested with Berkshire Hathaway. Do supersized management perks help your company, or could you have the same level of talent and results without them?

11. Acid test your success
Berkshire retains its earnings, but doesn't assume that strategy makes sense all the time. So management tests it. They test it once every five-year period. If Berkshire's gains are higher than the S&P, and $1 of its retained earnings were worth more than one dollar, then retaining earnings makes sense. Buffett admits that these conditions haven't always been met. The point is to regularly test your strategy for success.

12. Admit your weaknesses
Buffett and Munger don't like selling their businesses, even the ones that are struggling. Instead, they try to rehabilitate them by addressing the problems that are slowing them down. They don't "discard (their) least promising businesses at every turn." They also admit that this attitude negatively affects their financial performance. Yet they keep doing it, because they would rather carry that weakness than pick up and discard their businesses all the time. Do you have behavior that you keep doing that negatively affects your financial performance? If so, why do you do it, and what do you gain from it?

13. Communicate as though the tables were turned
When Buffett and Munger communicate, they say they owe it to their shareholders to tell them the "business facts that (Buffett and Munger) would want to know if the tables were turned." They try to hold their business reporting up to journalistic standards. They also shirk priority updates to analysts or high-grade shareholders. Instead, they update everyone at the same time. This non-elitist model of communication has helped solidify their folk-hero reputation and earn them their "Woodstock of Capitalism" annual meeting in Omaha. How can you communicate as though the tables were turned?
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos