Warren Buffett first published an "owner's manual" for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholders in June 1996, providing valuable information about the company's goals, policies, and expectations. Since his owner's manual is now more than 20 years old, Buffett decided to update it and provide some new commentary in Berkshire's recently released 2017 annual report.
The full text of Buffett's owner's manual can be found on pages 18 through 21 of Berkshire's annual report, but here's a simple English version of the 13 original principles and the two new ones that were just added.
1. Warren Buffett and Vice Chairman Charlie Munger think of Berkshire's shareholders as partners, not just as shareholders. Buffett wants investors to feel that they are part-owners of a business -- or in Berkshire's case, a collection of businesses.
2. Most of Berkshire's directors have lots of skin in the game. Buffett points out that he and Munger both have the majority of their net worth in Berkshire stock, and Berkshire's diversification makes them comfortable doing so.
3. Berkshire's primary goal is to grow the company's intrinsic value, not necessarily its share price or size.
4. Berkshire's preferred growth mechanism is by owning entire businesses. Buying stocks (parts of businesses) is the second choice. Along with this principle, Buffett points out that because of this business model, stock market declines are good news for Berkshire.
5. Buffett and Munger don't see much use in a consolidated earnings number for Berkshire. This is especially true going forward, as accounting changes require the company's earnings to include unrealized gains from the stock portfolio. Instead, shareholders should take the time to look at the results from each of Berkshire's individual businesses, which can be found in the annual report.
6. To a similar point as the last principle, Buffett and his team don't consider accounting consequences when making decisions. In other words, Berkshire wants to maximize its intrinsic value, even if a certain investment doesn't show up under standard accounting practices.
7. Berkshire will avoid using excessive debt, even if a particular opportunity looks interesting. As Buffett says, it's not worth losing sleep for a chance at a slightly better return.
8. Buffett and Berkshire's managers will always keep shareholders in mind when making acquisitions, as opposed to thinking about their own paychecks.
9. Berkshire will continue to evaluate its performance using what Buffett refers to as the "five-year test." On a five-year rolling basis, the company will ask itself:
- Did book value growth exceed the S&P 500's performance?
- Did Berkshire's stock continuously sell at a premium to book value? If this is true, Buffett reasons, it makes sense to retain earnings to increase value.
10. Berkshire will be very careful when it comes to issuing stock. Buffett has learned from experience that issuing stock (for acquisitions, public offerings, stock options, etc.) is often dilutive, especially if management believes -- as Buffett generally does -- that the stock is attractively priced.
11. Buffett has no interest whatsoever in selling any "good business" that is in Berkshire's portfolio, even if it would result in a big gain. Berkshire doesn't even want to sell its so-so businesses, as long as they're expected to generate cash flow. To be clear, this principle is referring to wholly owned businesses, not to common stocks, which Berkshire disposes of somewhat often.
12. Berkshire's managers will always be candid with shareholders. That is, they will not use accounting tricks to make bad news look good, and they will try to give as much information as reasonably possible. This is why Berkshire doesn't give guidance, nor does it provide any information to analysts or big investors that isn't also given to everyone else.
13. Although Berkshire will be candid about its businesses, the same cannot be said about its stock investing strategy. This refers to investment ideas, sales, and even rumored buys. Buffett is notoriously silent about what stocks he likes at any given time, considering good stock-picking one of Berkshire's competitive advantages. As Buffett puts it, "good investment ideas are rare." So, why would Berkshire give them away?
14. Berkshire wants its stock price to move proportionally to its intrinsic value over time. In other words, the goal of all of the company's open communications with investors is to keep the stock from becoming too overvalued or undervalued, believing this is the best way to attract the right kind of long-term investors.
15. Berkshire's ultimate goal is for its book value per share to outpace the performance of the S&P 500 over the long run. "Otherwise," Buffett asks, "why do our investors need us?" However, Buffett cautions that this isn't going to happen every year. Specifically, Buffett expects Berkshire to underperform the market during strong years for the stock market (Berkshire's stock gains are only counted at 79% -- the after-tax profit), but to outperform during so-so or down years. Berkshire's track record confirms that this is indeed the case more often than not.