Warren Buffett

Honesty is a very expensive gift. Don’t expect it from cheap people “says Warren Buffett. Buffett believed ethics are key components that drive success in business. He established an ethical code of conduct as the guide everyone must abide by with honesty and professionalism being the key aspects. His style of leadership is very genuine, and that can’t be taught. He was born that way, but he believed he could inspire others to follow him and do the same.

So, he recruited honest, skillful, likable, and coachable people to work and run his various businesses in Berkshire Hathaway. His managers own their process and took initiative to continue the legacy he created. Buffett trusted the managers he hired with the Berkshire’s employees to manage their people and get the job done. He didn’t believe in micromanaging his employees. He believed in accountability and valued his people, but didn’t interfere in their work. (Buffett, W. 2001)

Running any business organization on the basis of the character of managers and senior executives can be a very big mistake taken by any leader or business owner. A number of factors affect the character (including the ethical character) of a person. These include:

• Individual factors- like personal knowledge, personal goals, personal values, and others.

• Social factors- which include the cultural norms influence made by the actions or thoughts of the coworkers and others.

• Life Experiences

• Family influences

• Peer influencers

• Stage of moral development

• Situational factors

As we can see, individual factors (including personal goals), situational factors and the moral development stage also affect the ethics and ethical principles that are practiced and followed by the managers. The same person may take highly moral and ethical decisions and actions in one instance while making an unethical choice in another.

The Pragmatic Necessity to Focus on Ethical Codes and Compliance

Ethics in itself is a normative field. For the proper and effective following of ethical principles and values, it is important to back them through policies, programs, training, and other possible means. Mr. Warren Buffett needs to focus more on ethical codes and compliance measures, for his executives and CEOs to follow and abide by the ethical principles fully and without negligence. It is also important to lay proper checks and scrutiny measures towards the abidance of ethical values and principal as well, to prevent any untoward incidence to occur.

Most public organizations already have the established code of conducts, and the compliance measures are also well placed here. Only well-documented and binding codes can be complied with, and it is not wise and prudent to leave the practicing of ethical principles and abidance by them to the desire, wish, or understanding of a manager or CEO. Stringent disciplinary actions lay down an example for others to abide better, and implementation of the code of conduct and compliance measures mitigate risks as well.

Codes and compliance are now a pragmatic necessity. Following ethics is crucial for the sustainability, success, and growth of an organization in the long run. While the moral character and integrity of a manager are important, the imposition of standards rules and regulations ensure that no deviation and behavioral/ethical irresponsibility occurs. (Nelson, K. A. 2016)

Leadership Behaviors

Buffett credits quite a bit of his ability in putting resources into organizations to Benjamin Graham. It is genuine in reality that he took in his expository aptitudes and speculation obtaining theory from Graham. In any case, Ben Graham couldn’t have set him up for the unfathomable and mind-boggling street Warren Buffett has needed to explore as a business head. A few exercises inferred are: 

Run contrary to the natural order of things 

Warren Buffett has made his prosperity by adhering to his qualities and putting his cash in zones that fly legitimately despite extraordinary market weights to pursue the group.

Face failure head-on

On the off chance that any of the three above-recorded excellent stock buys had genuinely gone south, the size of the buys contrasted with the remainder of the capital under Warren Buffett’s order could have caused an extreme emergency of financial specialist certainty.

Humble

In the late 1990s, Benjamin Graham was missing from the tech division where even unsophisticated informal investors were making colossal riches practically medium-term. At the point when faultfinders began to circle the sentiment that Warren Buffett was making his financial specialists pass up the riches being made, he straightforwardly expressed that he didn’t “put resources into organizations he couldn’t comprehend” and he levels out conceded that he didn’t see cutting edge plans of action.

Warren Buffett two quotes for a necessary combination for people who are involved in investing. “Once you have ordinary intelligence, and what you need is the temperament to control the urges that get other people into trouble in investing.”  These mean that developing necessary temperament. Ethical approach – In behavioral science responses is first character of living and nonliving does not response to emotional behavior.

In social psychology people gather for their mutual benefit. Only question remain is trust. The mutual trust begin moment they either dependents on each other. Ordinary intelligence develops doubt and distrust at same.

To covert this doubtless and trustful operation it require super intelligence. His quotation points out whatever action performed by individual perform, it has reason and reason is containing certain self-fish ness. Hence its factor of temperament is to rectify doubt or motivate people for investment. In technical no one can compel someone for makeup for mindset certain duration has to pass to build trust worthiness and such duration should not get hammered accidently it must get treated with proper nourishment.

Power is described to have the ability to cause change or potentially construct effect on others. Power stems from relationships so in order to have power the followers must allow it to happen. As a leader of an organization, you must have the ambition and the resources to exert power in order to influence your subordinates in an effective manner to promote productivity.

There are several ways to exert power and depending on the firm and its environment will determine which use of power would be most effective for the organization. Warren Buffett is a mogul figure in the business market. His name alone would attract any business person to conduct any sort of collaboration due to his success. That being said, Warren exercises the use of legitimate power in order to remain successful. (Solomon, R. C. 1992)

References

• Buffett, W., & Cunningham, L. A. (2001). The essays of Warren Buffett: lessons for corporate America. L. Cunningham.

• Trevino, L. K., & Nelson, K. A. (2016). Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.

• Solomon, R. C. (1992). Corporate roles, personal virtues: An Aristotelean approach to business ethics. Business Ethics Quarterly, 2(3), 317-339.

Are financial markets efficient?

NO! Citing a well-known quote from Warren Buffett: ” I’d be a bum on the street with a tin cup if the markets were always efficient.” What does Buffett (one of the most successful investors in recent times) mean by this? Obviously, that markets are NOT always efficient.

The Efficient Market Hypothesis(EMH), assumes that share prices reflect all available information and that it is impossible for investors to generate excess returns. Eventually, stocks always trade at their “fair” value, making it impossible for investors to either buy undervalued stocks, and/or sell stocks that are overvalued. If this were the case, why participate in the markets at all? Save for the dividends – if issued.

I am mostly a Value Investor, following an investment strategy that involves buying stocks that appear under-priced by some form of fundamental analysis (e.g. Discounted Free Cash Flow, DFCF). Through DFCF, I can get a rough estimate of a stock’s intrinsic/fair value. If the stock’s intrinsic value is greater than the market value, I would consider buying it, because there is certain “Margin of Safety”. If financial markets were indeed efficient, none of this would make sense. Sometimes, stocks enjoy great popularity (a “Keynesian beauty contest”), often completely separate from their fundamentals, but showing strong upward-trending prices. Example: Tesla (TSLA) today (January 2020).

Do managers care about shareholders?

Do they have to? Having been a shareholder during various times of my life and of a variety of public companies, I am inclined to say NO. Despite their obligation to maximize “shareholder value”, most senior managers are first and foremost concerned about their own remuneration (including bonuses!) and…to survive. It is a common assumption that shareholders are the owners of the company; they are not.

In pure legal terms, shareholders have a claim on earnings. Shareholders do not have a final say over most big company decisions. But, boards of directors do. That is the reason why so-called “activist shareholders” obtain enough shares to demand a seat on the board of directors and are thus able to directly influence corporate strategy. In addition, managers do not have a real incentive to care about shareholders.

Shareholders are often widely dispersed around the country, or the world, and generally do not attend the annual meetings, or bother to fill out a proxy. The shares they own about the company in question are often a small part of a larger diversified portfolio. Finally, most shareholders lack the knowledge and skills to have a well-rounded opinion on management performance. Be aware if one or more members of the board of directors have “friendly relations” with the CEO.

Can one trust public authorities (politicians)?

A leading question. According to sociologist/political economist Max Weber (1864-1920), the true political leader has three qualities: passion (a commitment to the matter at hand, or the passionate dedication to a cause); a feeling of responsibility (owning the results of their actions); and a sense of proportion (an acute awareness of the realities). Weber: “Those destined for political leadership must have strength of character (ethics); and a deep sense of purpose and responsibility.” We all know that today (2020), NO politician in whatever country possesses all those qualities, or adheres to those standards.

The political arena is a very tough and hostile environment, where the weak perish quickly. To survive politicians lie consistently; fake sincerity and amiability, and empty promises for the sole purpose of getting re-elected. A politician’s inaccurate statements are either intentional lies meant to mislead the public, or they confirm that those who are supposed to be in charge of oversight have no idea what they are supposed to oversee – especially in the area of finance! Whether whole governments can be trusted is a matter of geography. Both the Swiss and Canadians have considerable trust in their governments; the Greeks much less so. Whatever your location, be vigilant and sceptical about trusting public authorities.

How to decide when facing irrationality?

Irrationality is all around us, all the time. Economic models still assume, a “homo economicus” always acting perfectly rationally, i.e. in his/her own best interest, making unbiased choices based on all available information. On that subject, I have always liked the quote attributed to John Maynard Keynes: “Markets can stay irrational much longer than you can stay solvent.” Economist Robert Shiller even wrote entire book on the topic entitled Irrational Exuberance.

My main point: People are not rational and most economic models are wrong. Actually, individuals operating in the financial markets are usually quite emotional and irrational. Together, these irrational individuals can create market trends and valuations that are far removed from a company’s fundamentals like earnings and cash flows. The price of the stock becomes a highly-predictable reality, as investors continue to boost the perceived trend. What to do? 1). The trend is your friend, i.e stay with the trend as long as you can. Technical Analysis (MACD, RSI) can give you some indication when the trend may reverse. 2). Fundamental Analysis: Look at some key ratio’s to get an idea about the company’s growth, profitability and overall financial health