Warren Buffett has one of the steadiest hands in business. He moves deliberately and thoughtfully and doesn't panic. His annual letters to Berkshire Hathaway shareholders are legendary.

The latest one, summing up the company's 2018, has been out for a bit. Tucked away on the fifth page, in the second paragraph, he quotes Abraham Lincoln. It's amusing and much more:

Abraham Lincoln once posed the question: "If you call a dog's tail a leg, how many legs does it have?" and then answered his own query: "Four, because calling a tail a leg doesn't make it one." Abe would have felt lonely on Wall Street.

Seems simple. A joke at the expense of big finance, an area in which Buffett and Berkshire Hathaway spend a lot of time. However, it's anything but.

Context helps place the quote. Buffett was discussing how companies--Berkshire Hathaway, specifically--are valued.

Some assets get constant value redefinition, based on market activity. For Berkshire Hathaway, that means daily value fluctuations of $2 billion or more. Back in December, with stock volatility, that turned into $4 billion "'profit' or 'loss'" on some days.

Then there's the question of stock-based compensation: "For example, managements sometimes assert that their company's stock-based compensation shouldn't be counted as an expense. (What else could it be - a gift from shareholders?)" Or restructuring expenses that are called one-time fees, no matter how frequently managers depend on reorganization to get results that often never come because the executives are the problem.

Page after page, Buffett explains how he and long-time partner Charlie Munger evaluate Berkshire or the companies it holds. How their evaluation criteria have changed over time. Where the money goes. How Buffett and Munger make decisions to benefit the people who stick around and continue to own stock, not to placate or lure back those who sell off and go elsewhere.

Throughout the pages of explanation and analysis, the result is what might be called an experiment in radical transparency, were the enterprise more modern and stylish. Instead of trying to woo investors--the goal of too many annual reports--the letter educates and explains.

Few such documents would have a line like this: "Now let's take a look at what you own." It's an explicit recognition of the shareholders' position and the job as stewards management has.

You don't get this type of clear analysis by accident, nor by sparing yourself. It comes when those responsible strip away their own preconceptions and stare at what they've done and the accompanying results. Then they come out and say so in public.

Another passage that I like particularly well:

When we say "earned," moreover, we are describing what remains after all income taxes, interest payments, managerial compensation (whether cash or stock-based), restructuring expenses, depreciation, amortization and home-office overhead.
That brand of earnings is a far cry from that frequently touted by Wall Street bankers and corporate CEOs. Too often, their presentations feature "adjusted EBITDA," a measure that redefines "earnings" to exclude a variety of all-too-real costs.

That reminds me of speaking with a high-tech industry CEO many years ago and insisting on looking at GAAP earnings rather than pro forma version, in which certain expenses were taken out, he pushed. "But it's how the industry looks at things," the CEO argued. "Maybe," I said, "but if you're doing it every year, which you do, then it's a regular recurring expense and it's got to be part of the picture.

It's not just Wall Street that frequently calls a dog's tail a fifth leg.

This is a brutal truth about success. You might be able to con yourself and others to the extent that you seem to gain it, but at the highest levels, you don't spend your time miscounting the legs on a dog. You put strategies and decisions under a harsh light to look at them, flaws and all.

It's not necessarily pleasant, especially during the long periods where you're trying to learn how to run a business, an organization, or a life. There are a lot of mistakes--in things, ideas, and one's self--to contemplate. People interested foremost in their image don't want to spend the time being honest. It's hard work.

It's also good work. The more you  bring honesty and probity to what you do, the better life becomes. You needn't hide from anyone's gaze or mirrors. This becomes the ultimate form of relaxation as you no longer twist yourself into distorted shapes.

The truth, which can be brutal, is also freeing and, ultimately, more important than success.

Published on: Jun 26, 2019
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