The Warren Buffett Philosophy of Investment by Elena Chirkova

Author:Elena Chirkova
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2015-04-18T04:00:00+00:00

Public versus Private Company: The Importance of Being Private

As we have discussed, Buffett does not share the view that a public company will do the right thing when required: it will not scale down its business during difficult periods and its CEO will not promise shareholders to shrink the business in the long term, if necessary. This is an organizational weakness of a public company as opposed to a private company. In Buffett’s view, public status creates the wrong incentives for the company’s management. The securities market is very sensitive to short-term fluctuations, so the managers are motivated to “smooth out” the reported results; the market also likes growing companies, and this creates an incentive to acquire other companies, even if they are overvalued. Buffett does not play by the rules that the financial markets enforce. When Berkshire buys companies, it brings more to the party than just money. This is, in Munger’s words, “patient” capital that allows management to pursue long-term strategies [Lowe, 2000, p. 177]. Buffett and Munger explain that by owning companies in their entirety, they minimize the impact of a whimsical stock market on Berkshire’s share price [Lowe, 2000, p. 178].

Another kind of cost that is associated with public status is the cost of the time that the company’s management has to invest in keeping the financial community updated about the company’s performance. There are the costs associated with the reporting of results and the maintenance of listings. Ralph Schey, the CEO of Scott Fetzer, which was acquired by Buffett in the 1980s, recalled that when the company was public, he spent at least 50 of the roughly 200 working days a year outside the company. He had to talk to public relations people, investment people, and others. “We don’t do that anymore, so we have more time to concentrate on growing the business” [cited in Miles, 2002, p. 275]. Buffett does not meet financial analysts and does not give many interviews. “Buffett is probably one of the few CEOs in America who spends much of the day reading” [Serwer and Boorstin, 2002].

A similar attitude toward the shortcomings of public status on the part of other CEOs makes it easier for Buffett to make acquisitions. For instance, in 1994, he decided to buy the shares of GEICO that still remained in free circulation—Berkshire already owned the majority of GEICO shares by that time. Buffett telephoned Tony Nicely, GEICO’s CEO, and told him about the plan. Buffett also advised Nicely that he would pursue the idea only if Nicely agreed that it would be better for the company to become private. It turned out that Nicely had been contemplating the same idea and had also come to the conclusion that nonpublic status would suit the company better for many reasons [Miles, 2002, p. 32]. After Buffett had bought the rest of the GEICO shares, certain things changed. For example, Nicely found that he no longer had to do meetings with analysts or look for ways to smooth out earnings [Miles, 2002, p.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.