Our final Buffett-related principle is something we touched on earlier when we talked about what to look for when evaluating management—and that’s finding people who are ethical and fair. Buffett has always conducted himself this way, nearly to a fault, as we’ll see, and it’s tragic but true that in this day and age that’s pretty unusual. However, as Buffett demonstrates, success can, in fact, come to those who play nice. (And that’s the way it should be!)
One significant way that Buffett embodies this idea of fairness is his belief that all shareholders, no matter how big their stake or how tiny, deserve to be updated at the same time and in the same manner. This may sound like an obvious tenet, and one not particular to Buffett, but in fact, things on Wall Street weren’t always this way. Many companies over the years have given precedence to the large, institutional shareholders of their stock, or to the analysts on the Street following their company, essentially slamming the door in the face of the small individual investor, a now-illegal practice known as “selective disclosure.”
In fact, Arthur Levitt, then chairman of the Securities and Exchange Commission, commended The Motley Fool for our advocacy that this shady practice should be stopped.1 With the passage of Regulation Fair Disclosure, in August 2000, it finally was. The playing field was, as they say, level at last. Buffett called selective disclosure “corrupt” and said, “The fact that this reform came about because of coercion rather than conscience should be a matter of shame for CEOs and their investor relations departments.”2
This was never the case with Buffett and Berkshire, however. Buffett believes strongly in not giving advantages to one group of shareholders over another. Everyone should be treated equally and fairly. Writing in the Berkshire “Owner’s Manual,” Buffett says, “In all of our communications, we try to make sure that no single shareholder gets an edge: We do not follow the usual practice of giving earnings ‘guidance’ to analysts or large shareholders. Our goal is to have all of our owners updated at the same time.”3
In addition to making sure everyone gets the same information simultaneously, Buffett also works hard to give his shareholders just as much info on how Berkshire’s performing as he would want were he in their shoes. And he does it with clear language and an openness to revealing as much as he feasibly can (without giving anything away to competitors).
Writing again in the Owner’s Manual, Buffett says, “We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. . . . We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.”4
Buffett holds the notion that his shareholders are more like family than acquaintances, so communicating effectively with them is a priority for him. When he refers to them as his “partners” in Berkshire Hathaway, he means it. He’s not just giving that idea lip service. It goes hand in hand with his strong belief that when you buy shares in a company, you are buying a piece of a business, and you are truly an owner of that business. Remember that and don’t allow yourself to be treated as anything less. Demand that all the executive teams running your companies—and they are your companies—speak honestly and clearly with you and your fellow shareholders. All investors, big and small, deserve that.
Buffett’s found that being fair can raise some eyebrows, with he and Munger once having to defend themselves to the Securities and Exchange Commission for overpaying for a company that they wanted to buy. Yes, you read that right—Buffett and Munger were once investigated for willingly paying too much for a company they were trying to purchase in full. Not surprisingly, the firm that Buffett and Munger were trying to buy wasn’t the one raising a fuss about how much they wanted to pay. It was another company, which was supposed to merge with their target for a much cheaper price, that called foul on them.
Wesco, which is now a fully owned subsidiary of Berkshire and run by Charlie Munger, is the company in question. Way back in the 1970s, before they’d fully joined forces, Buffett and Munger were investing together using different companies to buy shares of others. Through one of these combo efforts, Blue Chip Stamps, they’d bought some shares of Wesco, which was a California savings and loan firm.
Not long after they started buying shares, Wesco announced it was merging with another California bank, but Buffett and Munger didn’t like or approve of the price. They both believed the company was letting itself go for too little. While they met with and got to know some of the executives at the company, they started buying Wesco shares at above what the stock market was pricing them at. Because the original deal had apparently fallen apart, investors were driving Wesco shares down, and Buffett and Munger did not want to take advantage of this fact, especially since in a sense, they’d caused it. Eventually, they bought the rest of the company, also for above what shares were trading at at the time.
Government investigators were confused as to why two smart and able money managers like Buffett and Munger would willingly do this. Munger’s entreaty that it was the “right thing” to do didn’t persuade them. It was just unfathomable that investors would decide to pay more than they had to, to acquire a company they wanted. In the end, luckily, Buffett and Munger escaped virtually unscathed from the legal morass. They were able to buy Wesco outright, as they’d wanted all along, at a price that to them represented what was fair.
Earlier in his career, Buffett had also chosen to stand up for what he saw was right and fair. In 1964, a small subsidiary of American Express was involved in a scandal that cost some banks that had loaned it money millions of dollars, but did not ultimately affect the overall strength of the company’s brand, main business line, or future prospects. The market sold the stock off, and Buffett, ever the brave soul to step in where others would not, starting buying shares of it for the partnership. Trying to move beyond the scandal, American Express was ponying up money to settle the banks’ claims, but some shareholders sued, arguing that instead of paying up, the company should defend itself.
Buffett came out strongly on the side of American Express doing the right thing, which was, as he saw it, making good by paying the banks off. He believed the company would be “worth very substantially more” if it did right by the banks versus fighting them.5 American Express listened, and it turned out that Buffett was right. The stock recovered more than 40 percent from its lows, and remains a significant Berkshire Hathaway holding today.
One final incident represents Buffett’s feelings about the importance of ethics in business. In the early 1990s, a rogue bond trader at Salomon Brothers, the now long-gone Wall Street investment house, created a scandal for the company by engaging in dubious practices when it came to the Treasury bond market. Essentially, he was creating fake accounts to corner the market and buy more than Salomon’s fair share of bonds from the government for resale.
Berkshire owned a chunk of Salomon at the time, although Buffett knew nothing about the misdeeds at the company. The top guys in charge resigned, and Buffett was asked to step in and serve as interim chairman. This was a role he did not relish, but he made the tough choice and agreed to do it. He shook Salomon to its core with his open attitudes and willingness to be honest with the media and others.
Buffett agreed, naturally, to cooperate with the government’s inquiry into Salomon’s doings. And it was his 1991 congressional testimony on the Salomon Brothers scandal that allowed him to express his feelings on the importance of ethics most clearly: “After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.”6
Warren Buffett takes doing the right thing very seriously, and over the long term, the evidence from him bears out that in addition to simply being the most karma-friendly way to go, it also leads to wealth. Doing right by other people, being fair, and having the attitude that everyone can win is a great framework with which to approach investing. It allows you to look for opportunities that can both make you feel good and make you rich.
So, remember:
• You can be good and be rich; one doesn’t preclude the other.
• It’s possible to find companies where employees, shareholders, and customers all win, and those can make for winning investments.
• Look for companies that communicate in an open, honest way. You, as an owner, deserve to be treated this way.
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