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Warren Buffett & Bill Gates on Measuring Performance, Wealth, Billionaires, Financial Crisis
Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component. It can involve studying processes/strategies within organizations, or studying engineering processes/parameters/phenomena, to see whether output are in line with what was intended or should have been achieved.
Performance measurement has been defined by Neely as “the process of quantifying the efficiency and effectiveness of past actions”, while Moullin defines it as “the process of evaluating how well organisations are managed and the value they deliver for customers and other stakeholders”. Discussion on the relative merits of these definitions appeared in several articles in the newsletter of the Performance Management Association.
Wikipedia – Performance Measurement
The wealth effect is an economic term, referring to an increase (decrease) in spending that accompanies an increase (decrease) in perceived wealth.
The effect would cause changes in the amounts and distribution of consumer consumption caused by changes in consumer wealth. People should spend more when one of two things is true: when people actually are richer, objectively, or when people perceive themselves to be richer—for example, the assessed value of their home increases, or a stock they own goes up in price.
Demand for some goods (especially Inferior goods) typically decreases with increasing wealth. For example, consider consumption of cheap fast food versus steak. As someone becomes wealthier, their demand for cheap fast food is likely to decrease, and their demand for more expensive steak may increase.
Consumption may be tied to relative wealth. Particularly when supply is highly inelastic – or in the case of monopoly – one’s ability to purchase a good may be highly related to one’s relative wealth in the economy. Consider for example the cost of real estate in a city with high average wealth (for example New York or London), in comparison to a city with a low average wealth. Supply is fairly inelastic, so if a helicopter drop (or gold rush) were to suddenly create large amounts of wealth in the low wealth city, those who did not receive this new wealth would rapidly find themselves crowded out of such markets, and materially worse off in terms of their ability to consume/purchase real estate (despite having participated in a weak Pareto improvement). In such situations, one cannot dismiss the relative effect of wealth on demand and supply, and cannot assume that these are static. (see also General equilibrium).
However, according to David Backus, an NYU economist, the wealth effect is not observable in economic data, at least in regards to increases or decreases in home or stock equity. For example, while the stock market boom in the late 1990s (q.v. dot-com bubble) increased the wealth of Americans, it did not produce a significant change in consumption, and after the crash, consumption did not decrease.
Economist Dean Baker disagrees and says that “housing wealth effect” is well-known and is a standard part of economic theory and modeling, and that economists expect households to consume based on their wealth. He cites approvingly research done by Carroll and Zhou that estimates that households increase their annual consumption by 6 cents for every additional dollar of home equity.
The wealth effect and the Paradox of Thrift are contradictory. The paradox assumes, incorrectly, that people will spend when they feel wealthy, based on the wealth effect, but not when they are actually more wealthy.
Wikipedia – The Wealth Effect
Buffett Grandson: Our Plans to Change the World
Sept. 17, 2013 (Bloomberg) — Howard W. Buffett, executive director of the Howard G. Buffett Foundation, talks about his public management class at Columbia University and new book “40 Chances: Finding Hope in a Hungry World.” Buffett is the son of Berkshire Hathaway Inc. Director Howard Buffett and grandson of Chairman Warren Buffett. He speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)
Three Generations of Buffett: We’re the Lucky Ones
Oct. 23, 2013 (Bloomberg) — Together on set for a Bloomberg First, CEO of Berkshire Hathaway Warren Buffett, his son Howard Buffett and grandson Howard W. Buffett join Bloomberg’s Betty Liu to discuss philanthropy, their plans for Berkshire Hathaway, and their new book “40 Chances.” They speak on Bloomberg Television’s “In The Loop.”
How to Stay Out of Debt: Warren Buffett – Financial Future of American Youth (1999)
Buffett became a billionaire on paper when Berkshire Hathaway began selling class A shares on May 29, 1990, when the market closed at $7,175 a share. In 1998, in an unusual move, he acquired General Re (Gen Re) for stock. In 2002, Buffett became involved with Maurice R. Greenberg at AIG, with General Re providing reinsurance. On March 15, 2005, AIG’s board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism from Eliot Spitzer, former attorney general of the state of New York. On February 9, 2006, AIG and the New York State Attorney General’s office agreed to a settlement in which AIG would pay a fine of $1.6 billion. In 2010, the federal government settled with Berkshire Hathaway for $92 million in return for the firm avoiding prosecution in an AIG fraud scheme, and undergoing ‘corporate governance concessions’.
In 2002, Buffett entered in $11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts was over $2 billion. In 2006, Buffett announced in June that he gradually would give away 85% of his Berkshire holdings to five foundations in annual gifts of stock, starting in July 2006. The largest contribution would go to the Bill and Melinda Gates Foundation. In 2007, in a letter to shareholders, Buffett announced that he was looking for a younger successor, or perhaps successors, to run his investment business. Buffett had previously selected Lou Simpson, who runs investments at Geico, to fill that role. However, Simpson is only six years younger than Buffett.
Buffett ran into criticism during the subprime crisis of 2007–2008, part of the late 2000s recession, that he had allocated capital too early resulting in suboptimal deals. “Buy American. I am.” he wrote for an opinion piece published in the New York Times in 2008. Buffett has called the 2007–present downturn in the financial sector “poetic justice”. Buffett’s Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his recent deals appear to be running into large mark-to-market losses.
Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs. Some of Buffett’s Index put options (European exercise at expiry only) that he wrote (sold) are currently running around $6.73 billion mark-to-market losses. The scale of the potential loss prompted the SEC to demand that Berkshire produce, “a more robust disclosure” of factors used to value the contracts. Buffett also helped Dow Chemical pay for its $18.8 billion takeover of Rohm & Haas. He thus became the single largest shareholder in the enlarged group with his Berkshire Hathaway, which provided $3 billion, underlining his instrumental role during the current crisis in debt and equity markets.
In 2008, Buffett became the richest man in the world, with a total net worth estimated at $62 billion by Forbes and at $58 billion by Yahoo, dethroning Bill Gates, who had been number one on the Forbes list for 13 consecutive years. In 2009, Gates regained the position of number one on the Forbes list, with Buffett second. Their values have dropped to $40 billion and $37 billion, respectively, Buffett having lost $25 billion in 12 months during 2008/2009, according to Forbes.
In October 2008, the media reported that Warren Buffett had agreed to buy General Electric (GE) preferred stock. The operation included extra special incentives: he received an option to buy 3 billion GE at $22.25 in the next five years, and also received a 10% dividend (callable within three years). In February 2009, Buffett sold some of the Procter & Gamble Co, and Johnson & Johnson shares from his portfolio.
In addition to suggestions of mistiming, questions have been raised as to the wisdom in keeping some of Berkshire’s major holdings, including The Coca-Cola Company (NYSE:KO) which in 1998 peaked at $86. Buffett discussed the difficulties of knowing when to sell in the company’s 2004 annual report: That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it’s the windshield through which investors must peer, and that glass is invariably fogged.
You’d Love a Private Jet, But Should You Own One?
Thomas Flohr, chairman of Vistajet, discusses why renting a private jet is a better option than buying one.
CEO pay got out of control because you had an unbalanced set of incentives. The CEOs are highly interested in increasing their salary, and it is given by a compensation committee that meets once per year for 15 minutes. As CEO compensation rises across the board, they use that as a bargaining tool and so the salary continues to get ratcheted up. No company wants to be in the bottom quartile as far as CEO pay goes either. Buffett’s CEOs are satisfied because they know that right or wrong, he is looking at things as an objective owner.
His CEOs have poured their lives into their businesses and they love it. They don’t want to deal with Wall Street or lawyers, so Buffett relieves them of that burden. Buffett is creating his own painting, but he wants the founders and managers to have the ability to create their own painting within their own company as well.
Gates: Buffett is ‘unique leader’
Bill Gates says Warren Buffett is his best friend. The two share a fascination with business – and playing bridge. They also happen to be two of the richest people in the world.
Buffett does not share Gates’ fascination with computers, but learnt to use one just to be able to play bridge online. According to Gates, Buffett is now quite adept at web-browsing.
Three years ago, Buffett announced he was giving the bulk of his fortune – currently estimated at $40 billion – to charity, with most of it going to the Bill and Melinda Gates Foundation
Berkshire has about 70 CEOs that he has to manage. How does he keep them motivated and in sync with his interests? The best thing to do is to work with people who are already 95% of the way there. He makes the sole compensation decision. In his career, he has never had anyone leave him to go work for a competitor. He doesn’t believe in making earnings projections. If you do that, then people will tend to cheat. There are businesses that are capital intensive, and there are businesses in which capital doesn’t matter. There are different compensation packages based on the different economics involved with the different businesses. One thing that Buffett never does is to move the target around year by year.
To learn more about the Business & , Secrets of Warren Buffett
HOW DID WARREN BUFFETT DO IT?
How did Warren Buffett become the world’s richest man? The greatest investor of our times? America’s most successful business executive? Jeff Matthews, a 30-year Wall Street veteran and incisive Buffett watcher, travels to the Berkshire Hathaway annual meeting each year to unlock the “secrets” behind Buffett’s success as an investor and CEO. Matthews’s findings: Buffett’s “secrets” are in plain sight, and 41 of them are in this book, including new secrets uncovered at the April 30, 2011 annual meeting, the most controversial in Berkshire’s history thanks to the “Sokol Affair.” Secrets include:
SECRET # 9: READ EVERYTHING YOU CAN
This is the first advice Warren Buffett gives to aspiring investors, and he isn’t kidding. “By the age of 10,” he says, “I’d read every book in the Omaha Public Library with the word ‘finance’ in the title, some twice.” Buffett’s reading habits did not stop there: he still reads thousands of financial statements and annual reports each year, and acquaintances who’ve shared rides on NetJets with Buffett report that he’ll chitchat briefly and then start reading from a stack of material. But Buffett doesn’t steer investors toward any particular investment style. Instead, he advises reading everything possible to find the style that suits you. Says the world’s best investor: “If it turns you on, it probably will work for you.”
SECRET #13: BE OPEN-MINDED. YOU NEVER KNOW WHERE YOU WILL FIND OPPORTUNITY.
Buffett originally spurned an opportunity to buy a small California-based boxed chocolate maker in the early 1970s. “I don’t think we want to be in the candy business,” he told the caller. At the time, Berkshire was mainly an insurance company. After looking hard at the numbers, however, and with the encouragement of his California-based business partner, Charlie Munger, Buffett changed his mind and they bought See’s Candies for a mere $25 million. It was one of the greatest acquisitions any company would ever make, and it happened because Warren Buffett was open-minded.
SECRET #15: LOOK FOR LOLLAPALOOZA IDEAS.
Buffett and Munger believe another key to investment success is to assiduously search for a few “lollapalooza” ideas … and when you do find them, make a major commitment. “You really want one that you don’t have to sell,” says Charlie Munger. “Then you can sit on your a__ for 30 years.”
SECRET #30: WORRY ABOUT EVERYTHING—NOBODY ELSE WILL DO IT FOR YOU.
“I don’t want to have the chances of having something go wrong to be slim, I wanna have it be none,” says Warren Buffett. “There’s no way I can assign that to a risk committee.” It is no coincidence that Berkshire Hathaway was one of the few financial companies in the world that required no bailout during the crisis. Says Buffett, “I worry about everything at Berkshire.”
From composer, musician, and philanthropist Peter Buffett comes a warm, wise, and inspirational book that asks, Which will you choose: the path of least resistance or the path of potentially greatest satisfaction?
You may think that with a last name like his, Buffett has enjoyed a life of endless privilege. But the son of billionaire investor Warren Buffett says that the only real inheritance handed down from his parents was a philosophy: Forge your own path in life. It is a creed that has allowed him to follow his own passions, establish his own identity, and reap his own successes.
In Life Is What You Make It, Buffett expounds on the strong set of values given to him by his trusting and broadminded mother, his industrious and talented father, and the many life teachers he has met along the way.
Today’s society, Buffett posits, has begun to replace a work ethic, relishing what you do, with a wealth ethic, honoring the payoff instead of the process. We confuse privilege with material accumulation, character with external validation. Yet, by focusing more on substance and less on reward, we can open doors of opportunity and strive toward a greater sense of fulfillment. In clear and concise terms, Buffett reveals a great truth: Life is random, neither fair nor unfair.
From there it becomes easy to recognize the equal dignity and value of every human life—our circumstances may vary but our essences do not. We see that our journey in life rarely follows a straight line but is often met with false starts, crises, and blunders. How we push through and persevere in these challenging moments is where we begin to create the life of our dreams—from discovering our vocations to living out our bliss to giving back to others.
Personal and revealing, instructive and intuitive, Life Is What You Make It is about transcending your circumstances, taking up the reins of your destiny, and living your life to the fullest.
Some Key Ideas:
- Economic prosperity may come and go; that’s just how it is. But values are the steady currency that earn us the all-important rewards of self-respect and peace of mind.
- Our values guide our choices; our choices define who we are. Life is what we make it.
- No matter who your parents are, you’ve still got your own life to figure out.
- There is a famous quotation from the Book of Luke that was taken very seriously in our family: From those to whom much has been given, much is expected.
- …at the start of our lives, no one deserves anything. No one deserves to be rich or poor, privileged or oppressed, healthy or challenged. No one deserves good parents or bad. These are things that happen randomly to the life that has just begun. They are neither fair nor unfair; they simply are.
- Self respect can come only from earning your own reward.
- …psychologist Dr. Madeline Levine, author of The Price of Privilege. Based on a 2007 study, Dr. Levine concluded that 30 to 40 percent of adolescents from affluent homes experience troubling psychological symptoms. Among teenage girls in this demographic, 22 percent suffer from clinical depression; that’s three times the national average. Ten to 15 percent of those who suffer from depression eventually commit suicide.
To learn more about this great book, click here.