In June 1996, Warren Buffett issued a booklet called “An Owner’s Manual” to Berkshire shareholders. If you like to read the entire 5-page manual, you can download an updated version of it at the Berkshire Hathaway website.
Here’s a summary of the things that are covered in the manual.
13 Owner-Related Business Principles
1) Shareholders are treated as owner-partners, with Warren and Charlie Munger taking the role of managing partners.
2) Most of Berkshire’s directors have a major portion of their networth invested in the company.
3) The long term economic goal is to maximize Berkshire’s average annual rate of gain in intrinsic business value on a per-share basis.
4) The preference to reach this goal is to directly own a diversified group of businesses that generate cash and consistently earn above-average returns on capital. The second choice is to own parts of similar businesses, obtained through purchases of marketable common stocks by Berkshire’s insurance subsidiaries. The challenge for Berkshire is to generate ideas as rapidly as they generate cash.
5) Because of the two-pronged approach to business ownership, consolidated reported earnings will reveal very little about their true economic performance.
6) Accounting consequence do not influence operating or capital-allocaton decisions.
7) Debt is used sparingly and when it is used, preference will be to structure it on a long-term fixed rate basis. Interesting opportunities will be rejected if there is a need to over-leverage.
8) A managerial “wish list” will not be filled at shareholder’s expense. Only acquisitions that can raise the per-share intrinsic value of Berkshire will be considered.
9) The noble intention of retenting earnings to increase shareholder value will be checked periodically. If they reach a point where retained earnings cannot be used to create extra value, the earnings will be given out to shareholders.
10) Common stock will only be issued when Berkshire can receive as much in business value as they give.
11) Regardless of price, Warren and Charlie have no interest in selling any good business that Berkshire owns. Even for sub-par business, they will be reluctant to sell as long as the business can be expected to generate some cash and they feel good about their managers and labor relations.
12) Warren and Charlie will be candid in their reporting, highlighting both the good and bad. There will not be any accounting maneuvers or restructurings to smooth earnings.
13) Activities in the securities markets will only be discussed to the extent legally required. This is because good investment ideas are rare and any relevation will only serve to invite competition.
Two Added Principles
14) Warren will like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that period. For this to come about, the relationship between intrinsic value and market price will have to be constant.
15) Berkshire’s per-share book value will be regularly compared to the performance of the S&P 500. They expect to outperform the S&P in lackluster years for the stock market and underperform when the market has a strong year.