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Posted: May 23, 2014

Three Buffett rules I learned in Omaha

They apply to investing -- and daily life

Helen Raleigh

In early May, I attended my very first Berkshire Hathaway shareholder meeting in Omaha. This three-day event was full of activities: cocktail reception at Borsheims, picnic at the Nebraska Furniture Mart, and “Invest in Yourself” 5K run. The most memorable activity was the close to six hours non-censored, non-scripted, Q&A session with Warren Buffett and his partner Charlie Munger, who answered nearly 60 questions from journalists, analysts and shareholders.

The duo offered many great insights in investing as well as everyday life. Here are three of them:

1. Cash is as important as oxygen. Currently, Berkshire has a large cash balance of more than $20 billion. When Buffett was asked why Berkshire always carries a large cash reserve, he explained that he believes in self-reliance. Berkshire never issued bonds and never borrowed money either from banks or from the government and he likes to keep it that way.

He cautioned that sooner or later, Berkshire would be in a position to need cash and it can rely on this $20 billion as a nice cushion. He wouldn’t want his company to rely on the kindness of others at a time of need. Munger further explained that cash is just like oxygen: You don't realize you need it 99 percent of time until it’s too late.

This rule about keeping an adequate cash reserve is not just applicable to a big corporation like Berkshire, but also applicable to every individual. When I work out a financial plan with any of my clients, the first item is always about saving 6-12 month worth of emergency fund in cash for rainy days.

2.  Understand group dynamics and pick your battles wisely. Recently, Coca-Cola shareholders approved a multi-billion compensation program over the objections of some shareholders. As the largest shareholder, Buffett abstained; he said publicly afterward that he was uncomfortable with this compensation package but didn’t want to go to war with Coke’s management.

When pressed again about his abstain vote at the Berkshire Hathaway’s shareholder meeting, Buffet explained that any corporate board is part business and part social organization. Therefore, one has to pick which battle is worth the fight. “You keep belching at the dinner table, you’ll be eating in the kitchen," Buffett said. Munger added, “Don't shout disapproval in public all the time – pick your spots. Otherwise we can't hear each other.”

We all face all kinds of conflicts in life as well as work. Shouting match will never solve any problems.  It is important to ask ourselves two questions: One, is this a battle worth fighting for? Two, what’s the best way to resolve it in a non-confrontational manner so you can still preserve your influence at the table?

3. Beware unintended consequence of good intentions.  Executive compensation was a hot topic this year. Buffett was pressed by an analyst on when and if Berkshire would publish salaries of its top executives of its various subsidiaries for the sake of transparency.  Buffett pointed to companies who did such disclosures and said that no executives or even regular employees would think he/she should be paid less once they knew how much the other guys were getting paid. 

Since of this kind of disclosure has only caused salary inflation while accomplishing not much else, the unintended consequence is bad for shareholders. There are many other examples in our lives where a good intention sometimes brings harm to the people it intended to help. To evaluate whether an idea is good or bad, we ought to look beyond its name, its objective and its intention, but spend more time investigating its unintended consequence.

 

Helen Raleigh, CFA is the owner and Chief Investment Officer for Red Meadow Capital, LLC, a Colorado Registered Investment Advisory Firm. She has more than10 years experience in the financial services industry ranging from pension funds to risk management. She served on the board of the Colorado Chartered Financial Analyst Society from 2009-2011 and is fluent in both English and Chinese.  In addition to helping clients to build a secure financial future, she writes an insightful monthly newsletter and frequently speaks publicly on investment and financial management related topics. She can be reached at: helen.raleigh@redmeadowadvisors.com

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Readers Respond

Why can't the author, a financial analyst, correctly spell the name of the foremost investor of our time. His name is Buffett. And how did this gaffe get through the editing process. A business magazine loses serious cred over things like this. By Robb Ruyle on 2014 05 28
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