By Geoff Colvin
December 14, 2016

As the Dow inches closer to 20,000, let’s take a break from all-Trump-all-the-time news and consider one of the top beneficiaries of the market rally, Warren Buffett. The price of a share in his company, Berkshire Hathaway, yesterday hit $250,000 for the first time. Over the past 51 years the stock has appreciated at a 21% annual rate, a performance that is beyond mind-blowing. For every $1,000 an investor put into Berkshire back in 1964, he or she would have almost $45 million now. As to how he has done it, most people say simply that he’s the world’s greatest investor. He may well be, but that’s only part of the answer. The overlooked angle on Buffett is that he has also been an extraordinarily successful manager, and that’s the angle of greatest interest to business leaders.

What can we learn from Buffett the manager? Berkshire owns several businesses outright – Burlington Northern Santa Fe, See’s Candies, Geico, Precision Castparts, and many others – so he’s in charge of how they’re run. His management principles aren’t complicated, yet they are rarely followed. Among the most important:

-Don’t even try to manage a fundamentally bad businesses. So simple, yet how many leaders torture themselves in a doomed effort to make a miserable business perform? One of Buffett’s most famous lines is “With few exceptions, when a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

-Judge managers as human beings first. Buffett buys few of the companies that are offered to him, and one of his first screens is the nature of the people who run it, since he has no interest in trying to replace them. He wants them to be “likable, talented, honest, and goal-driven.” Such people often turn out to be excellent managers. Plus, he believes life is too short to work with people you don’t like.

-Pay for performance like you mean it. Unlike most employers, Buffett offers managers unlimited incentive bonuses. He sets the pay of the CEOs of his companies, and from year to year their pay can vary by a factor of 20 or 30. Such swings are far too extreme for most companies, but with properly constructed incentives Buffett sees no reason to discourage managers from swinging for the fences.

-Price aggressively. Buffett is remarkably hands-off in overseeing his businesses, but he often likes to take charge of pricing. That’s because most CEOs are too timid, scared of tanking their business by pricing too high. Buffett, managing a portfolio of businesses, is willing to take greater risks. And he repeatedly finds that a company can get away with higher prices than its managers think.

Many years ago, Buffett told Fortune’s greatest writer, Carol J. Loomis, that when it came to managing, “what we do is not beyond anybody else’s competence. I feel the same way about managing that I do about investing: It’s just not necessary to do extraordinary things to get extraordinary results.” He’s effective on a historic scale because, as with investing, hardly anyone else is willing to do those ordinary things.

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