In October, Jeff Matthews, the author of “Pilgrimage to Warren Buffett’s Omaha” came to our local Houston National Investor Relations Institute chapter meeting to talk about his book and to make observations about Warren Buffett and Berkshire Hathaway. It was an interesting talk and the Houston chapter gave everyone who attended copies of the book.
Normally I don’t read a lot of business books, as by the end of the work day I’m on information overload and prefer to pick up something kinder and gentler, such as a murder mystery. But in this case I already had the book and it looked as if it might be interesting, so I started to read it. I was pleasantly surprised. It’s an easy read and has more nuggets than the usual business book written by consultants or business school professors. (As someone who fills both roles, I am qualified to make that statement.) If you get a chance it’s worth the read.
The book itself is written around two visits Jeff Matthews made to the Berkshire Hathaway annual meetings in 2007 and 2008 and the bulk of the book is devoted to what was revealed through questions and answers at those sessions. But Matthews, a professional investor, is not content with merely acting as a reporter and uses the visits as springboards to examine a little bit about Buffett himself and a bit more about the businesses that make up Berkshire Hathaway.
There are a number of trenchant observations in the book, including the fact that most of Berkshire’s operating companies seem to prefer high profitability with okay growth to high growth with okay profitability, so that they can send all of their excess cash back to Omaha for further investment by Buffett. However, this is a blog about investor relations, so I want to focus on what I consider to be the most important IR takeaways from the book.
First, the bad news: Berkshire Hathaway does not have an investor relations department, nor do they have a fancy IR web site. Instead what they have is Warren Buffett and his annual letters to shareholders and appearances at the annual meeting. But this is more than enough. What Buffett tries to do is to get investors to understand the philosophy and culture of Berkshire Hathaway. He figures that if they understand what he is trying to do, he will get “high quality” investors that will stick with Berkshire Hathaway over the long term. Jeff Matthews illustrates this early in the book with a quote from the 1983 Chairman’s letter:
“We feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy – along with no other conflicting messages – and then let self selection follow its course.”
In investor relations we all want to have “high quality” investors, but most of us spend our time discussing the latest 5 basis points of change in last quarter’s gross profit margins. As a result we tend to self-select towards those types of investors that are interested in the latest minute quarterly change as opposed to where the company is going to be five years down the road. So the first takeaway is that we get the shareholders we cater to. Focus on the long term and how you propose to increase value over time and you will be rewarded (assuming you execute well against your plans) with shareholders that are more patient and willing to overlook short-term bumps in the road. Focus on the current quarter and the short term and you will get investors that think that’s what’s important.
The second item for investor relations practitioners from the book is the immense amount of importance Buffett places on culture and reputation. I’ve written about this before in the context of investor relations (see “A “Cultured” Approach to Investor Relations” February 24, 2009) but it’s always nice to see that the world’s greatest investor agrees with you. In short, corporate culture and reputation matter, and it is important that investors understand these intangibles if they are going to understand how to value your company. And finally, and most importantly, it’s crucial that the actions of management conform to the culture that supports the reputation of your firm. To take another quote from Buffett in the book:
“We can afford to lose money – even a lot of money. We cannot afford to lose reputation – even a shred of reputation. Let’s be sure that everything we do in business can be reported on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”
A short way to sum up these two key IR points is that you get the investors you deserve as a result of what you do and say. This is very typical of the way Buffett boils things down into powerful insights into the obvious that we often overlook.