Introduction: by Lawrence Cunningham
Lawrence Cunningham begins by stating that Warren Buffet’s letters to the shareholders of Berkshire Hathaway Inc., which he has selected and arranged for this volume, provide in clear language an exceptional education on the basic principles of sound business practice. Their central theme is that fundamental analysis should guide business investment, a theme discussed in regard to understanding the proper roles of managers and shareholders, finance, mergers, valuation, and accounting. Cunningham points out that many of Buffet’s principles contradict the central dogmas of the past thirty years held in the major business schools, Wall Street, and corporate America .
Buffett has applied these principles as CEO since 1964 of Berkshire Hathaway, a textile business he purchased and transformed into a holding company that came to own completely or to have substantial stock holdings in a number of profitable companies. (In 1988 nearly 75% of Berkshire’s total net worth was concentrated in three companies: GEICO, The Washington Post, and Capital Cities/ABC.) Buffett’s business principles are what he calls “owner-related”: he considers the shareholders as owners for whom he and Charlie Munger, his managing partner at Berkshire, work to serve their interests, and he gives the managers of the constituent companies held by Berkshire the kind of autonomy they would have were they the actual owners.
In this lengthy introduction, Cunningham discusses each of the major sections into which Buffett’s writing falls. Regarding “Corporate Governance,” having companies managed by first-rate people that Buffett admires and can trust is far more important than devising organizational hierarchies. So-called modern finance and portfolio theory, which assumes market efficiency and stresses diversification and random stock selection, is a poor approach to “Corporate Finance and Investing” because it slights the importance of carefully learning about individual companies. Buffett’s opinions in “Alternatives to Common Stock” and “Common Stock” lament that the widespread short-term, market-oriented approach favored by institutional investors has become dominant in contrast to the long-term, business-oriented approach that he practices. Providing clarity on “Mergers and Acquisitions,” Buffett makes the point that shareholders of the acquiring companies frequently are losers when companies combine. Finally, in the last two sections, devoted to accounting matters, Buffett discusses the proper use of financial information.