Buffett criticizes corporate risk management

OMAHA, Nebraska (AP): Billionaire Warren Buffett said Saturday that CEOs and the boards that hired them should pay a steep price if their companies get into trouble with risky investments.

As part of his annual letter to Berkshire Hathaway Inc. shareholders, Buffett encouraged other corporations to develop meaningful penalties for top executives who misjudge risk so they will be more careful.

Buffett lamented that shareholders, not chief executives and directors, have borne most of the burden of company failures during the economic crisis of the past two years.

"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control," Buffett wrote. "If he's incapable of handling that job, he should look for other employment.

And if he fails at it - with the government thereupon required to step in with funds or guarantees - the financial consequences for him and his board should be severe."

Buffett told his shareholders he initiates and takes full responsibility for every derivative contract Berkshire writes. Those contracts helped deliver a largely unrealized $787 million gain in investments in 2009 after a $7.5 billion loss recorded in 2008.

Sources: http://biz.thestar.com.my/news/story.asp?file=/2010/2/28/business/20100228084734&sec=business

Buffettology

Among the most important laws that Buffett learned:

1) It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

2) When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

3) Management does better by avoiding dragons, not slaying them.

4) As if governed by Newton’s first law of motion, an institution will resist any change in its current direction.

5) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds.

6) Any business craving of the leader, however foolish, will be quickly supported by detailed rate of return and strategic studies prepared by troops.

7) The behavior of peer companies, whether they are expanding, acquiring, setting compensation, or whatever, will be mindless imitated.

8) It is not a sin to miss a business opportunity outside one’s area of expertise.

9) If your actions are sensible, you are certain to get good results.

10) Do not join with managers who lack admirable qualities, no matter how attractive the prospects of their business.

11) Fearful when others are greedy, greedy when others are fearful.

12) First investment rule: do not lose money, second rule: don’t forget the first rule.

Lottery of Life

In a BBC interview, I impressed by one of the highlight of Buffett words:

Warren Buffett:
As my friend Bill Gates says, if I've been born in some different place or some different time. I'd have been some animal's lunch. I'd have been running real fast, and the animal would have been chasing me and I'd say "I allocate capital" and the animal would say "well, those are the kind that taste the best".

 I've been in the right place at the right time, and I'm lucky, I think a fair amount of that luck should be shared with others.