|
THE ESSAYS OF WARREN BUFFETT
169
their ownership and subsequent utilization is all-important. We
care not whether the auditors hear a tree fall in the forest; we do
care who owns the tree and what's next done with it.
When Coca-Cola uses retained earnings to repurchase its
shares, the company increases our percentage ownership in what I
regard to be the most valuable franchise in the world. (Coke also,
of course, uses retained earnings in many other value-enhancing
ways.) Instead of repurchasing stock, Coca-Cola could pay those
funds to us in dividends, which we could then use to purchase more
Coke shares. That would be a less efficient scenario: Because of
taxes we would pay on dividend income, we would not be able to
increase our proportionate ownership to the degree that Coke can,
acting for us.
If
this less efficient procedure were followed, how-
ever, Berkshire would report far greater "earnings."
I believe the best way to think about our earnings is in terms
of "look-through" results, calculated as follows: Take $250 million,
which is roughly our share of the 1990 operating earnings retained
by our investees; subtract $30 million, for the incremental taxes we
would have owed had that $250 million been paid to us in divi-
dends; and add the remainder, $220 million, to our reported oper-
ating earnings of $371 million.
Thus our 1990 "look-through
earnings" were about $590 million.
In our view, the value to all owners of the retained earnings of
a business enterprise is determined by the effectiveness with which
those earnings are used-and not by the size of one's ownership
percentage.
If
you have owned .01 of 1% of Berkshire during the
past decade, you have benefited economically in full measure from
your share of our retained earnings, no matter what your account-
ing system. Proportionately, you have done just as well as if you
had owned the magic 20%. But if you have owned 100% of a great
many capital-intensive businesses during the decade, retained earn-
ings that were credited fully and with painstaking precision to you
under standard accounting methods have resulted in minor or zero
economic value. This is not a criticism of accounting procedures.
We would not like to have the job of designing a better system. It's
simply to say that managers and investors alike must understand
that accounting numbers are the beginning, not the end, of busi-
ness valuation.
In most corporations, less-than-20% ownership positions are
unimportant (perhaps, in part, because they prevent maximization
of cherished reported earnings) and the distinction between ac-
170
CARDOZO LAW REVIEW
[Vol. 19:1
counting and economic results we have just discussed matters little.
But in our own case, such positions are of very large and growing
importance. Their magnitude, we believe, is what makes our re-
ported operating earnings figure of limited significance.
Within [the] gigantic auction arena [composed of the entire
array of major American corporations], it is our job to select busi-
nesses with economic characteristics allowing each dollar of re-
tained earnings to be translated eventually into at least a dollar of
market value. Despite a lot of mistakes, we have so far achieved
this goal. In doing so, we have been greatly assisted by Arthur
Okun's patron saint for economists-St. Offset. In some cases,
that is, retained earnings attributable to our ownership position
have had insignificant or even negative impact on market value,
while in other major positions a dollar retained by an investee cor-
poration has been translated into two or more dollars of market
value. To date, our corporate over-achievers have more than offset
the laggards.
If
we can continue this record, it will validate our
efforts to maximize "economic" earnings, regardless of the impact
upon "accounting" earnings.
We also believe that investors can benefit by focusing on their
own look-through earnings. To calculate these, they should deter-
mine the underlying earnings attributable to the shares they hold in
their portfolio and total these. The goal of each investor should be
to create a portfolio (in effect, a "company") that will deliver him
or her the highest possible look-through earnings a decade or so
from now.
An approach of this kind will force the investor to think about
long-term business prospects rather than short-term stock market
prospects, a perspective likely to improve results. It's true, of
course, that, in the long run, the scoreboard for investment deci-
sions is market price. But prices will be determined by future earn-
ings. In investing, just as in baseball, to put runs on the scoreboard
one must watch the playing field, not the scoreboard.
The primary test of managerial economic performance is the
achievement of a high earnings rate on equity capital employed
(without undue leverage, accounting gimmickry, etc.) and not the
achievement of consistent gains in earnings per share. In our view,
many businesses would be better understood by their shareholder
owners, as well as the general public, if managements and financial
1997]
Do'stlaringiz bilan baham: |
