In his recent annual letter to Berkshire Hathaway shareholders, Chairman and CEO Warren Buffett declared victory over a goal spelled out in his 1983 letter. At the time, he wanted “to get only quality shareholders.” which Buffett identifies as individuals – not institutions – who choose to entrust their wealth to Berkshire for the long term.
Four decades later, Berkshire BRK.A,
has over one million such shareholders. Buffett says he “cherishes” this cohort, pronouncing a “special kinship” with them. Explaining why Berkshire has no interest in cultivating other shareholders, he writes this year that we “I have already the investors we want and don’t think, overall, would be improved by replacements. “
The victory was not easy, however, as Berkshire has several other “buckets” of shareholders, as Buffett calls them. These include the individuals and institutions that hold the stock, but not necessarily for the long term. While preferring the long-term incumbent, Buffett says he is “happy to work” for this other cohort and has “no argument” with their opportunistic attitude.
At the other extreme of high quality shareholders are index funds. For Berkshire, Buffett is agnostic about this cohort, neither opposed nor welcoming. It goes without saying – they don’t buy Berkshire by choice, but have to because Berkshire stock is in the index they are tracking and, therefore, there is no reason for Berkshire to woo them. . As Buffett says, they are on âautopilotâ.
Buffett’s Shareholder “Buckets” map the academic literature to shareholder demographics that we adopt to the Quality shareholders initiative. We use the model to profile the shareholder base of thousands of SOEs based on time horizon and concentration – quality shareholders are both focused and long term, while indexers and transients are one but not the other (indexers are long term but not concentrated, short term transients but often concentrated).
An elite corps of around 40 companies are part of the Berkshire League in attracting quality shareholders to institutional stock picking investors. But Berkshire has the largest proportion of individual owners, accounting for around 40% of the Berkshire shares that Buffett does not own.
Having a high density of quality shareholders has contributed to Berkshire’s success over the decades, as has the performance of dozens of other large companies. They support management’s long-term vision and contribute to the reputations, cultures and distinctive moats that characterize great companies. Such a long-term culture pervades the entire company, from acquisitions to operations.
Since the shareholders of a company influence a company, executives need to care about the shape of their shareholder base. A situation dominated by short-term investors will encourage managers to focus on quarterly targets rather than multi-year performance. A person controlled by indexers will tend to adopt formula-based governance practices even if they do not correspond to a particular company.
Buffett explained in 1983 how he would achieve his goal: “If we consistently communicate our business and ownership philosophy – without further conflicting messages – and then let self-selection take its course.” Buffett has courted quality shareholders by providing them with an informal education, primarily through an acclaimed annual letter and a legendary annual meeting.
By these means, Buffett taught the fundamentals of business and investing, such as moats and circles of skill. He also spoke about the peculiarities offered by Berkshire that appealed to this group, in particular the concepts of partnership and permanence.
Young managers today would do well to emulate Buffett by wooing the same “bucket”, using similar techniques. But they face a different shareholder market. During its early decades, Buffett did not have to compete with index funds, which were in their infancy, or platforms facilitating day-trading or flash trading.
On the other hand, people today want to control their financial destiny. While recent market conditions may have misled some into believing that the short term means effortless profits, many will welcome sober wisdom about the safety of long-term thinking. And while index funds continue to attract millennials by talking about doing good while doing good, individual companies can make such commitments more sincerely.
Buffett has kept an eye on the award and has become one of the most famous business leaders of all time, with a distinct and valuable shareholder base. Those who aspire to this status in the coming decades would do well to cultivate quality individual shareholders today.
Lawrence A. Cunningham is a professor at George Washington University, a long-time shareholder of Berkshire Hathaway, and editor, since 1997, of Warren Buffett’s Essays: Lessons for American Businesses. For updates, including an invitation to her exclusive webinar at the 2021 Berkshire Hathaway Annual Meeting, register here.
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