Finance · 09

The Essays of Warren Buffett

Warren Buffett

Judge a business as a lasting owner would, by the cash it can return and the people who run it.

Five questions this book answers, each in a short piece. Read them, or listen as every word lights up.

The fence is the business.The blue line is the owner's claim.

The five questions

In the order the book argues them.

The same savings, more land

A share gives you partial ownership of a business. If its earning power remains intact, a falling price lets each dollar buy more of it.

If you're investing for decades, when does a falling price make an asset safer, and when is 'cheap' a trap?When a falling price helps youA lower price buys more earning power only if the business can keep it. Buffett's bargains and mistakes show how to tell the difference.7 min listen

Owner earnings

Not all of the harvest is yours

Owners can take out what remains after paying real costs and keeping the business competitive and financially sound. Buffett calls that estimate owner earnings.

Before you trust rising profits, how much cash can owners take out without weakening the business or hiding a bill for later?The profit owners can actually useTwo accounts of the same business show why reported earnings need adjusting before owners can spend them.7 min listen

Room to work

The manager has the field

At GEICO, Berkshire freed Tony Nicely from analyst presentations and quarterly earnings expectations so he could run the insurer. Excess cash went to headquarters, which compared opportunities across Berkshire.

When you must trust someone else with your money, how can you give them freedom without rewarding recklessness or losing control?Giving managers room to workOperating freedom works better when pay reflects the money used, reports invite scrutiny, and someone can intervene when trust fails.8 min listen

Growth

A bigger farm, a smaller claim

A family owns 120 acres. A neighbor with 60 acres joins as an equal partner. The farm grows to 180 acres, and the family's half amounts to 90.

The farm grew by half. The family lost a quarter of its claim.

If you need wealth you can spend or pass on, when does growing a business make its owners poorer?When growth makes owners poorerA larger company can leave each owner with less. Follow the value surrendered, the claim retained, and the cash eventually available.7 min listen

Reserves

Kept for a bad year

Some of Berkshire's insurance payments support injured people for fifty years or more. Berkshire held Treasury bills at low yields so that money would be there when it was due.

When is earning less the wiser choice if you must survive a crisis and honor obligations to customers, workers, and society?The return worth giving upEarning less can protect people who depend on a business, provided that protecting them does not become a promise the business cannot keep.7 min listen

The essays

The owner's view, in his own words

Lawrence A. Cunningham selected these essays from Buffett's letters and arranged them by subject.

Cover of The Essays of Warren Buffett by Warren Buffett, published by Carolina Academic Press

Start with question oneBuy the book

Published by Carolina Academic Press. Cover shown to identify the book. Warren Buffett drawn as an editorial caricature.