What You Can Learn From Warren Buffett’s Advice To A Top CEO

Warren Buffett is a man that needs little introduction. Many know him as one of the world’s wealthiest men (Buffett occupies the fourth spot on Forbes’s ‘World’s Billionaires List’) who built his remarkable fortune largely through rational and intelligent investing through his company, the American conglomerate Berkshire Hathaway.

On the other hand, Katherine Graham – the ‘Top CEO’ in our title – would probably need a little introduction. Graham was the Chairman and CEO of American newspaper publisher The Washington Post Company. According to William Thorndike’s book The Outsiders, under Graham’s tenure as the company’s leader, shares of Washington Post turned every $1 investment in 1971 (the year Washington Post went public) into $89 by 1993 when she ended her tenure.

With such a record, any one would be hard pressed to not recognise her ability as a great CEO. But, it was also no secret that Graham had, over the years, received tremendous advice and help from Buffett in his capacity as a personal friend to Graham and a member of the Board of Directors for Washington Post.

Buffett’s Advice to Graham

Buffett recently publicly released a brilliant 1975-dated memo that he sent to Graham, which contains advice on how the Washington Post could manage its pension plans. In the memo, Buffett penned down his thoughts on the approach and attitude needed to undertake the art of stock-picking and that’s what we can all learn from.

From The Horse’s Mouth

Buffett wrote that his favoured option toward securities-selection for pension plans was one which “involves treating portfolio management decisions much like business acquisition decisions by corporate managers.”

When corporate managers make acquisitions of other publicly-listed companies, they are not worried about where the share prices of the acquired company will be in the next quarter or the next year. After all, with most acquisitions, the acquired companies will cease to be publicly-listed entities.

So, the prime concern for managers would be the corporate performance of the acquired company in the future, predicated on the assumption that a reasonable price was paid in the acquisition.

Buffett counselled Graham to think about investing in individual stocks for Washington Post’s pension plan in the same way she would think about other newspapers or companies if she were interested in acquiring them.

Buffett then went on to add that for investors who think the way he does, they’ve likely exhibited a different attitude toward stock selection. When they think like corporate managers, and by extension, business owners, “results of the business become the standard against which measurements are made rather than quarterly stock prices.”

What It Means For You

It should be noted that Graham followed Buffett’s advice in framing her thinking about investing in the stock market for her company’s pension plans and  the end result was spectacular – Washington Post ended up with a pension plan that had a billion US dollars more than it needed when Jeff Bezos bought over the paper from the company recently, even as other American businesses are struggling with their pensions.

Buffett’s advice to Graham needed no vindication given that he invests Berkshire Hathaway’s mountains of cash – with phenomenal success – in much the same way that he advised her in the memo.

But the fact that Washington Post’s pension plans became such a success perhaps proves a point that adopting the thinking-of-stocks-as-a-real-business mind-set, in addition to basing measurements on corporate performance instead of stock-price appreciation, is more than applicable to just Buffett alone.

It’s what you can do as well.

Benefits of Focusing on Corporate Performance

Buffett’s line of reasoning ultimately rests on the belief (emphasis added), “which both seems logical and which has been borne out historically in securities markets, that intrinsic business value is the eventual prime determinant of stock prices”.

We can see how that plays out in the local market.

We have four shares here –VICOM Ltd  (SGX: V01), Dairy Farm International Holdings Ltd  (SGX: D01), Raffles Medical Group Ltd  (SGX: R01), and Super Group Ltd  (SGX: S10) – that have more than doubled their profits since 2006 as shown in the chart below, signalling strong corporate performance and increase in intrinsic business value (profits can be taken to be a close proxy for business value).

Earnings growth for Super Group, Raffles Medical, Vicom, and Dairy from 2006 to 2013

Investors who followed Buffett’s advice on measuring corporate performance instead of share price appreciation would likely have been very satisfied. But how did their shares actually perform?

Company 11 Oct 2007 23 Aug 2013 % Change
Super Group S$0.88 S$4.70 434%
Vicom S$1.78 S$4.66 162%
Dairy Farm Holdings US$5.10 S$10.93 114%
Raffles Medical Group S$1.51 S$3.08 104%
Straits Times Index 3,876 3,089 -20%

The Straits Times Index (SGX: ^STI) hit a peak of 3,876 points on 11 Oct 2007, before the Great Financial Crisis went into full swing. I chose to measure the share price performance of those four companies starting from 11 Oct 2007 to show how their share price movements were largely driven by their respective corporate performances, instead of being subjected to the phenomenon of ‘a rising tide that lifts all boats’.

And as the table above shows, the share price returns over the past 5-plus-years for the four companies have been remarkable, more than doubling in price even as the STI’s still 20% down from its pre-crisis peak

Foolish Bottom Line

It should be noted that thinking about stocks the way Buffett does is not as easy as it sounds. It requires steadfast concentration on the fundamentals of a business even in the face of market irrationality and it’s perhaps not natural at all for us to do so, given our predisposition to emotionally-driven actions in financial-related matters.

That said, Buffett’s success with Berkshire Hathaway, as well as the recent history of the aforementioned four local companies (though it’s admittedly a small sample), shows how beneficial it can be for investors to take his gentle admonition to heart.  Continue to learn more about how to invest like Buffett through a free subscription to Take Stock Singapore.  The Motley Fool’s weekly investing newsletter will teach you how to grow your wealth in the years ahead. Sign up here!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group and Berkshire Hathaway’s B-Class shares.

This article was first published on in August 2013.