Buffet's Shareholder Meeting

Leveraging Businesses Can Backfire: Warren Buffett

There are five segments to Warren Buffett’s Management Principles:

  1. Pick the right business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate authority: learn how to give up control safely.
  3. Find a manager with the right qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate your work force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn the managerial axioms for different problems: there are axioms for handling dishonest employees, and keeping costs low.

5. Managerial Pitfalls, Challenges, and Learning Opportunities: the axioms of management.

Making A Living On Borrowed Money: those who borrow will try to dodge problems. Banks are the king of leverage. When the bank can’t pay these things back, it can get messy. Life is full of economic change. Leverage is very tempting, and always leads to trouble. Leverage can improve any business, which is the problem with leverage ultimately.

Imagine a 6 million business, you need 100million to finance a deal, if you agree to pay 10million in interest, you will get a net profit of 5 million. So you almost double your net earnings, and who gets the bonus? The managers! That’s why managers want so much debt/leverage. However, if you can’t service the debt you will start collapsing the companies net worth. When companies begin contemplating bankruptcy, the old managers are first to be fired. If you don’t take on the 100million in leverage, then if a recession occurs, you need only reduce production to reflect declining demand, and fire some less important people. Warren still looks at the long-term performance of the company. DO NOT go into debt, if you can’t pay it, then don’t bother. Warren gained a lot from the 2009 drop in stock prices. If you pile on the debt you will have an end to your management career.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

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