From the ‘black and white’ perspective, a disgruntled BRK shareholder might be forgiven for
thinking that he is entitled to be receiving a distribution of some sort from Berkshire. Buffett put his commitment to that effect in writing, and left that assurance out there for decades in Berkshire’s Owners’ Manual . Then when Berkshire and its share price fell short of the standard he so clearly and explicitly set, Buffett simply rewrote the rules. Recalling Kevin Bacon's character, ‘these are the facts of the case, and they are undisputed.’ Berkshire and Buffett have broken the very clear and pretty precisely written commitment to owners, at least the owners of the era.
That Buffett may now think that his commitment wasn’t appropriately phrased in its original form and (we note, only after the conditions that would trigger such a distribution finally came to pass) did he change that long-standing promise. He rewrote the Owners’ Manual after the fact – not in anticipation of the triggering event – with the result nonetheless of not having to make good on his commitment. That’s pretty straightforward.
We can argue that the company and the Owners’ Manual may be better now for the change – but it may not be better for ghu who for all we know may have relied on this written promise. And let’s remember that Alice S has repeatedly said that Buffett is both very careful and very literal in his written communications. This original commitment was not a mistake. And this wasn’t a hurdle he (or many others) would consider particularly high. After all, market had ‘always’ assigned a multiple of great than 1x to book until then, so it was a pretty safe bet that it would continue to – on an incremental basis – if we looked at long enough (eg, 5 year) time increments.
Activist shareholders may have the high ground here. But it doesn’t matter one whit so we may as well move the discussion on. It is what it is now – and as far as we can tell, there’s no distribution for the foreseeable future. Buffett laid out a commitment he really didn’t envision needing to honor. So, we’ll have to get past that point and move on.
Let’s go to the second approach:
The argument that shareholders should not be in Berkshire if they ‘ever needed the money’ is perhaps simplistic and maybe even condescending, considering the make-up and propensities of long-standing partners. Similarly, the idea that astute Berkshire ‘partners’ should be trading in and out of Berkshire to take advantage of temporary market moods is not in the long-standing spirit of this partnership.
Buffett does not do this himself, and neither would he expect his partners to undertake this type of ‘short-term income’ generation from their holdings. Active money managers maybe (including those nefarious ‘traders’) but not the everyday ‘partners’. Remember the early culture: from the very beginning partners were either ‘in’ or ‘out’ with only annual decision points.
For those with a low basis for a good chunk of their BRK holdings, this active trading advice isn’t particularly efficient or helpful. And it runs against the lessons we’ve so thoroughly internalized from our Berkshire experience. Those holding through the ‘70’s and 80’s and even into the 90’s, saw (or painfully learned) that trading in and out of Berkshire was a fool’s game. The trend was always decidedly up, but never smoothly, laying flat for excruciatingly long times before suddenly doubling yet again. Through these decades, active trading meant it was too easy to get permanently left behind. Maybe that’s not the case these past dozen years. Maybe both the market for Berkshire shares and the in-it-for-the-long-haul partnership culture has changed.
For at least some who have ‘kept the faith’ over four-plus decades, there has been a long-running expectation that when it came to the end of the Buffett run there’d be a plan that made sense all around. Buffet himself – pre-Gates Foundation – was anticipating that he’d be funding charities of some sort well past his lifetime. Similarly, at least some of us had set up vehicles to fund our favorite philanthropic activities for years to come.
As Buffett has so often noted, for many long-term holders Berkshire has grown over the years to represent a pretty significant chunk of our net worth. As with him, many have positions that are overwhelmingly high proportions of their wealth - not because, as someone noted, they decided to take a BRK flyer on 505 of their portfolio - but because over an investing lifetime, albeit as passive 'partners,' BRK has handily outstripped alternative investments.
Many also share his values in terms of perpetuating a positive impact from our collective good fortune. These endeavors take continuing, regular distributions of cash. Tax law assures that we’ll be paying out at a minimum 5% annually for as long as this thing lasts. In these repositories of donated shares, this does not mean cash from alternative sources, by the way, but from Berkshire, in one form or another. For many at this stage, unless there’s another element to this long-running venture, this means finally – and reluctantly – having to sell.
Munger addressed this in the pre-Gates-Foundation days– saying that considering we’re up to our necks in cash, the company could accommodate this (distribution) need. He was talking about Buffett’s charity at the time, but the approach could be applied universally. Those stock-blessed but perhaps not cash-heavy partners – who like Buffett despised the idea of selling their long-held portions- could all do good things together, each in his or her own way, when the time came. Over the same time, Berkshire matured into a high-cash-generating and leveling-of-returns-on-equity business where this doesn’t sound so crazy.
Perhaps the B-shares brought some subtle some dilution of the ‘partnership’ culture. ‘Buy and hold forever, and ride this thing’ mentality may have faded– for better or worse. We even saw the introduction of options relative to Berkshire’s equity, of all things!
Maybe it was never going to progress as we may have thought, or as Munger inferred. Who knows, maybe this ‘funding into perpetuity’ frame of mind changed with Susie’s death. If I were arguing ghu’s case from the perspective of Berkshire’s long-time partners, though, that’s probably the case I’d present.
thinking that he is entitled to be receiving a distribution of some sort from Berkshire. Buffett put his commitment to that effect in writing, and left that assurance out there for decades in Berkshire’s Owners’ Manual . Then when Berkshire and its share price fell short of the standard he so clearly and explicitly set, Buffett simply rewrote the rules. Recalling Kevin Bacon's character, ‘these are the facts of the case, and they are undisputed.’ Berkshire and Buffett have broken the very clear and pretty precisely written commitment to owners, at least the owners of the era.
That Buffett may now think that his commitment wasn’t appropriately phrased in its original form and (we note, only after the conditions that would trigger such a distribution finally came to pass) did he change that long-standing promise. He rewrote the Owners’ Manual after the fact – not in anticipation of the triggering event – with the result nonetheless of not having to make good on his commitment. That’s pretty straightforward.
We can argue that the company and the Owners’ Manual may be better now for the change – but it may not be better for ghu who for all we know may have relied on this written promise. And let’s remember that Alice S has repeatedly said that Buffett is both very careful and very literal in his written communications. This original commitment was not a mistake. And this wasn’t a hurdle he (or many others) would consider particularly high. After all, market had ‘always’ assigned a multiple of great than 1x to book until then, so it was a pretty safe bet that it would continue to – on an incremental basis – if we looked at long enough (eg, 5 year) time increments.
Activist shareholders may have the high ground here. But it doesn’t matter one whit so we may as well move the discussion on. It is what it is now – and as far as we can tell, there’s no distribution for the foreseeable future. Buffett laid out a commitment he really didn’t envision needing to honor. So, we’ll have to get past that point and move on.
Let’s go to the second approach:
The argument that shareholders should not be in Berkshire if they ‘ever needed the money’ is perhaps simplistic and maybe even condescending, considering the make-up and propensities of long-standing partners. Similarly, the idea that astute Berkshire ‘partners’ should be trading in and out of Berkshire to take advantage of temporary market moods is not in the long-standing spirit of this partnership.
Buffett does not do this himself, and neither would he expect his partners to undertake this type of ‘short-term income’ generation from their holdings. Active money managers maybe (including those nefarious ‘traders’) but not the everyday ‘partners’. Remember the early culture: from the very beginning partners were either ‘in’ or ‘out’ with only annual decision points.
For those with a low basis for a good chunk of their BRK holdings, this active trading advice isn’t particularly efficient or helpful. And it runs against the lessons we’ve so thoroughly internalized from our Berkshire experience. Those holding through the ‘70’s and 80’s and even into the 90’s, saw (or painfully learned) that trading in and out of Berkshire was a fool’s game. The trend was always decidedly up, but never smoothly, laying flat for excruciatingly long times before suddenly doubling yet again. Through these decades, active trading meant it was too easy to get permanently left behind. Maybe that’s not the case these past dozen years. Maybe both the market for Berkshire shares and the in-it-for-the-long-haul partnership culture has changed.
For at least some who have ‘kept the faith’ over four-plus decades, there has been a long-running expectation that when it came to the end of the Buffett run there’d be a plan that made sense all around. Buffet himself – pre-Gates Foundation – was anticipating that he’d be funding charities of some sort well past his lifetime. Similarly, at least some of us had set up vehicles to fund our favorite philanthropic activities for years to come.
As Buffett has so often noted, for many long-term holders Berkshire has grown over the years to represent a pretty significant chunk of our net worth. As with him, many have positions that are overwhelmingly high proportions of their wealth - not because, as someone noted, they decided to take a BRK flyer on 505 of their portfolio - but because over an investing lifetime, albeit as passive 'partners,' BRK has handily outstripped alternative investments.
Many also share his values in terms of perpetuating a positive impact from our collective good fortune. These endeavors take continuing, regular distributions of cash. Tax law assures that we’ll be paying out at a minimum 5% annually for as long as this thing lasts. In these repositories of donated shares, this does not mean cash from alternative sources, by the way, but from Berkshire, in one form or another. For many at this stage, unless there’s another element to this long-running venture, this means finally – and reluctantly – having to sell.
Munger addressed this in the pre-Gates-Foundation days– saying that considering we’re up to our necks in cash, the company could accommodate this (distribution) need. He was talking about Buffett’s charity at the time, but the approach could be applied universally. Those stock-blessed but perhaps not cash-heavy partners – who like Buffett despised the idea of selling their long-held portions- could all do good things together, each in his or her own way, when the time came. Over the same time, Berkshire matured into a high-cash-generating and leveling-of-returns-on-equity business where this doesn’t sound so crazy.
Perhaps the B-shares brought some subtle some dilution of the ‘partnership’ culture. ‘Buy and hold forever, and ride this thing’ mentality may have faded– for better or worse. We even saw the introduction of options relative to Berkshire’s equity, of all things!
Maybe it was never going to progress as we may have thought, or as Munger inferred. Who knows, maybe this ‘funding into perpetuity’ frame of mind changed with Susie’s death. If I were arguing ghu’s case from the perspective of Berkshire’s long-time partners, though, that’s probably the case I’d present.
