Original link: https://ljf.com/2023/08/23/1304/
1999 Speech at the Shareholders’ Meeting of Siko Finance
Different from the “one size fits all” approach of many large companies, each of Berkshire’s subsidiaries has its own incentive mechanism. Berkshire adopts a highly decentralized organizational structure. After we acquired the company, we basically kept the original incentive mechanism unchanged. The only exception is that if the original incentive mechanism includes stock options, then we will definitely change it. The issue of stock options is not a day or two. In my impression, stock options have existed in American companies for more than 50 years. Some of the subsidiaries acquired by Berkshire originally used stock options. We canceled the stock options and replaced them with other incentive plans with the same bonus. We believe that after our changes, the new incentive plan is more honest, and the incentive cost can be truly reflected in the income statement. If there were stock option incentives, we will modify the incentive system and record the bonuses issued to the management as costs in the financial statements.
A significant portion of compensation costs are not accounted for due to the heavy use of stock options. Even with current accounting adjustments for profits, there is still water in diluted profits. Cisco is a software company, very profitable, but because of the use of stock options, there is water in its profits.
A stock option system is very similar to a Ponzi scheme.
The MLM organization has a pyramid structure, and the middle and high-end members eagerly hope that more newcomers will join. The more members at the bottom, the more benefits they reap. The middle and high-end members of an MLM organization are definitely its most staunch defenders. Through stock options, Silicon Valley’s elite got rich. While making their own fortunes, these elites have also created huge wealth for the group behind the company. They are vested interests and staunch defenders of the existing MLM system.
A software company that issues stock options may undercount its operating costs by 12% to 14%
It’s an open secret at Berkshire that we like the kind of companies that end each year with big cash piles of profits.
Cash cows are Berkshire’s favorites. Some companies’ profits are always on the books, and they have no ability to generate cash at all. We don’t touch such companies.
One of the important reasons why Berkshire can develop to today’s scale is that we have long understood that we should stay away from companies that cannot generate cash profits. When valuing a company, regardless of the nature of the profit, regardless of whether it is cash profit or a machine lying in the open space, just take the profit figure and calculate it directly. The valuation obtained will definitely be inaccurate.
In my opinion, the achievements of modern manufacturing, to a large extent, come from the accumulation of practical experience, that is, process reengineering in manufacturing. Process reengineering in manufacturing has greatly contributed to the improvement of production efficiency. People only see technological progress and think that technological progress has played a very important role in improving production efficiency. In fact, process reengineering should make a greater contribution to improving production efficiency.
What we should pay attention to is the kind of technological progress that has epoch-making significance. For example, before the invention of air conditioning, the entire southern part of the United States had a harsh environment, sparsely populated, and far less civilization than the north.
Before the invention of trains, people transported goods through canals, and trackers dragged barges on both sides of the canal, or transported goods by horse-drawn carts, the road surface was potholed, and the horse-drawn carts bumped along the way. With the train, all this has changed, and the train can be called an epoch-making invention. And the refrigerator , the invention of the refrigerator also changed the world.
First of all, it is necessary to discover technological changes, and then to see whether the industry has strong barriers. With strong barriers, there will be no fierce competition. The aviation industry and the railway industry are products of technological change, but these two industries have no barriers to competition. The TV industry is also a product of technological change. Its difference lies in the fact that it has barriers to competition. Finding a technological change like the TV industry, that is really a good wind to send me to Qingyun by force.
We should keep calm. Ben Graham once warned us: “The opportunity that everyone is not optimistic about, the investor’s loss will not be particularly serious. The more optimistic the opportunity is, the greater the investor’s loss.” You may not understand the reason . What Graham means is that if everyone is not optimistic about an opportunity, they will not rush into it crazily. Everyone can tell at a glance that it is obviously not a good opportunity, and it will not cause too many losses. If it is an opportunity that everyone is optimistic about, it will be different. Everyone knows that this opportunity is real, reasonable, and exciting, and simply cannot be missed, and people are bound to flock to it, resulting in a serious stampede. Opportunities that everyone is optimistic about are the most likely to be trampled and cause the most tragic losses.
As a person, I can either completely delegate power and completely let go, or I can do everything myself.
Obviously, the insurance business is Berkshire’s most important business. We have two advantages: first, our scale is larger than other insurance companies; second, our investment capability is stronger than other insurance companies.
When analyzing stocks, it is not difficult to see that a company is a good company and has obvious advantages. The difficult thing is to judge whether the price is right.
Our management method is to fully delegate power. We respect the actual situation of each subsidiary and allow them to operate independently, instead of sitting at the headquarters and issuing orders to each subsidiary. Over the years, this organizational form has given Berkshire a huge competitive advantage.
A company must figure out who the most threatening competitor is.
In most cases, the price-to-earnings ratio is a better indicator of a company’s profitability than the price-to-book ratio. In the long run, the most important thing for a company is profitability.
I already know that it is a good opportunity, what else is there to discuss? It’s over when it’s done, and when it’s time to do it, you don’t need to waste your tongue. To invest is to find this unambiguous good opportunity.
We chose to close the Partnership because of our innate sense of responsibility and because we were brought up with traditional Omaha values. If we fail others, we feel very guilty.
In my opinion, for a society to function normally, capitalists should abide by the code of ethics and treat shareholders fairly. Only by treating shareholders fairly can a company achieve long-term development.
I believe that almost all of you here are honest and upright people. You have to live to learn and master the thinking mode of multi-model and use, so as to make life more meaningful.
Berkshire shares account for 90% of the Munger family’s wealth. I hope that after my death, the Mungers will hold on to Berkshire stock. I am 100% assured of Berkshire.
Only on the basis of an in-depth understanding of the business can we predict the company’s prospects more accurately. To invest, you still have to really understand the business.
Besides the movie business, I don’t like mining either. I also came into contact with mining companies when I was young. I have witnessed the hardships of mining companies, so I crossed mining companies off my list. I don’t regret not watching film companies or mining companies. I made a choice according to my preferences.
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