12/15/2019 Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham – The Rabbit Hole

Essays of Warren Buffett: Lessons for Corporate

America by Lawrence Cunningham
Summary
1. An organized compilation of Warren Buffett’s annual letters, broken down by concept. “By arranging these
writings as thematic essays, this collection presents a synthesis of the overall business and investment
philosophy intended for dissemination to a wide general audience.”

Key Takeaways
1. Focus on the business with outstanding economic characteristics (favorable and durable moats) and
management
2. People are everything – partner with CEOs who will act well even if they could cheat, who act as if they’re the
sole owner, as if it’s the only asset they hold, as if they can’t sell or merge for 100 years
3. Performance should be the basis for executive pay decisions, as measured by profitability, after profits are
reduced by a charge for the capital employed in the relevant business or earnings retained by. If stock options
are used, it should be related to individual rather than corporate performance, and priced based on business
value
4. True risk is not volatility but permanent loss of capital
5. Rather be approximately right than precisely wrong
6. Put eggs in one basket and watch that basket
7. Price is what you pay, value is what you get
8. The 3 legs of the investing stool – Mr. Market, margin of safety, circle of competence
9. Value investing is a redundancy – aim for focused or intelligent investing
10. Deploying cash requires evaluating 4 commonsense questions based on information rather than rumor
1. the probability of the event occurring
2. The time the funds will be tied up
3. The opportunity cost
4. The downside if the event does not occur
11. Guard against the institutional imperative – CEOs herd-like behavior, producing resistance to change, inertia,
and blindness
12. If you aren’t happy owning business when exchange is closed, you aren’t happy owning it when open
13. Create the business and environment that attracts the people, management, shareholders that you want
14. Useful financial statements must enable a user to answer 3 basic questions about a business
1. Approximately how much a company is worth
2. Its likely ability to meet its future obligations
3. How good a job its managers are doing in operating the business
15. Owner earnings –> cash flow = operating earnings + depreciation expense and other non-cash charges –
required reinvestment in the business (average amount of capitalized expenditures for PPE that the business
requires to fully maintain its long-term competitive position and its unit volume)
16. Intrinsic value = the discounted value of the cash that can be taken out of a business during its remaining life
17. Don’t risk what you have and need for what you don’t have and don’t need
18. Beware weak accounting (EBITDA), unintelligible foot notes, those who trumpet projections
19. Directors must be independent, business savvy, shareholder oriented, have a genuine interest in the business
20. Really only 2 jobs – capital allocation, attract and keep outside management
21. Choose a cold sink (weaker competition) than best management

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22. Conventionality often overpowers rationality

23. Risk – we continually search for large business with understandable, enduring and mouth-watering economics
that are run by able and shareholder-oriented managements
1. The certainty with which the long-term economic characteristics of the business can be evaluated
2. The certainty with which management can be evaluated, both as to its ability to realize the full potential of
the business and to wisely employ its cash flows
3. The certainty with which management can be counted on to channel the reward from the business to the
shareholders rather than to itself
4. The purchase price of the business
5. The levels of taxation and inflation that will be experienced and that will determine the degree by which
an investor’s purchasing-power return is reduced from his gross return
24. When dumb money acknowledges its limitations, it ceases to be dumb
25. Need to do very few things right if you avoid big mistakes
26. Changing styles often is a recipe for disaster
27. Worry most about management losing focus
28. If you won’t own a business for 10 years, don’t own it for 10 minutes – materially higher earnings in 5-10 years
is what you’re looking for
29. Time is the friend of the wonderful business, the enemy of the mediocre
30. Have not learned how to solve difficult business problems, but have learned to avoid them
31. Never in a hurry – enjoy the process more than the proceeds
32. “Expert error” – falling in love and acting on theory, not reality
33. You don’t have to make it back the way you lost it
34. In commodity-type businesses, it’s almost impossible to be a lot smarter than your dumbest competitor
35. 4th Law of Motion – for investors as a whole, returns decrease as motion increases. a hyperactive market is the
pickpocket of enterprise
36. Attract proper inventors through clear, consistent communications of business philosophy
37. It pays to be active, interested, and open-minded, never in a hurry
38. Avoid small commitments – if something is not worth doing at all, it’s not worth doing well
39. Deals often fail in practice but never in projections
40. In a trade, what you give is as important as what you get
41. The goal of each investor should be to create a portfolio (in effect, a “company”) that will deliver him other the
highest possible look-through earnings a decade or so from now. An approach of this kind will force the investor
to think about long-term business prospects rather than short-term market prospects, a perspective likely to
improve results. It’s true, of course, that, in the long run, the scoreboard for investment decisions is market
price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the
scoreboard one must watch the playing field, not the scoreboard
42. The primary test of managerial economic performance is the achievement of a high ROE employed and not the
achievement of consistent gains in earnings per share
43. The difficulty lies not in the new ideas but in escaping the old ones.
44. Ultimately, business experience, direct and vicarious, produced my present strong preference of businesses that
possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets.
45. Nothing sedates rationality like large doses of effortless money
46. Speculation most dangerous when it looks easiest
47. Fear is the foe of the faddist but the friend of the fundamentalist
48. Take into account exposure, not experience
49. Noah Rule – predicting rain doesn’t count, building arks does
50. Tolerance for huge losses is a major competitive advantage

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51. Berkshire’s next CEO – temperament is important, independent thinking, emotional stability, and a keen
understanding of both human and institutional behavior is vital to long-term investing success.

What I got out of it

1. An amazing collection of investing, finance, accounting, and management ideas

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