Every year, Warren Bufffet pens down an open letter to the Berkshire Hathaway shareholders. These letters have now become a celebrated tradition, full of wisdom, knowledge and expertise in the business world. They provide investors and shareholders with great insights into the mind of the genius that is Warren Buffet. Here are some of the nuggets of information and strategy we can all learn from the letters by one of the richest persons in the world:
Max Bender/Unsplash. Buffet is a staunch advocate of ‘eat what you kill’ philosophy when it comes to executive compensation.
Eat what you can kill
In a 1991 letter on the occasion of acquisition of the H.H Brown Shoe Company by Berkshire Hathaway, Buffet wrote about why they chose the company for takeover. As a rule, he gave the managers a $7800 bonus every year, along with a percentage of the profits that the company made. This made every manager consider the business as his own, and they could ‘stand in the shoes of the owner’ as they made important company decisions. Buffet is a staunch advocate of ‘eat what you kill’ philosophy when it comes to executive compensation.
Nicholas Cappello/Unsplash. Buffet has always advised against giving stock options as compensation as it could lead to losing millions in settlements.
Do not give stock options as compensation:
At the turn of the century, thousands of companies shut their doors and many investors had to lose their millions on their holdings as a result. And at the same time, many company executives received record levels of compensation on their shares as the companies faced huge losses. Time and again, CEOs take home millions in compensation as part of their stock options, while the shareholders bear the brunt of heavy losses. Citigroup, AOL, Cisco and CMGI are classic examples of this phenomenon.
Sharon McCutcheon/ In his 1996 letter, Buffet writes that only buy a stock if you are willing to own it for ten years, otherwise it's not even worth holding onto it for ten minutes.
Own your stocks
Many retail stock investors, when they put money in a certain stock, become obsessed with the constantly changing price, gauging if they made or lost their money. But Warren has written about being very mindful when you decide to buy the stocks of a company. In his 1996 letter, he writes that only buy a stock if you are willing to own it for ten years, otherwise it's not even worth holding onto it for ten minutes.
When looking for options to invest in stocks, look out for companies that make quality products, instead of the recent trends in the stock market. Look out for what gives the company their edge and their USP, only then the company is going to give you consistent returns on your initial investment in the long term.
