Thursday, March 5, 2009, 5:52 PM

How Warren Buffett delivers bad news

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Few mortals escaped the stock market's swoon in 2008, not even the revered Warren Buffett, whose Berkshire Hathaway conglomerate suffered its worst year ever with an $11.5 billion loss.
Last week, the investing world pored over Buffett's new letter to shareholders to glean insights into what 2009 holds for the economy.

I read it for a different reason: to learn how he delivers bad news to the public. Below are five lessons I pulled from the letter, many of which we've discussed here before. To read the entire letter, click here.

1. Executive accountability. Buffett assumes responsibility for many of Berkshire Hathaway's mistakes in 2008. "I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action...The tennis crowd would call my mistakes 'unforced errors.'"

2. Candor. See above, and Buffett's predictions for 2009. It is not encouraging, but his candor is a sign of his respect for his audience and customers. "Most of the Berkshire businesses whose results are significantly affected by the economy earned below their potential last year, and that will be true in 2009 as well."

3. The facts, plain and simple. Buffett backs up his assertions with facts, adding to the credibility and trustworthiness of his message. Even the bad news - Berkshire Hathaway's disappointing performance in 2008 - is verified for the reader.

4. Belief in the mission. Buffett reminds his audience that in good times and bad he has four simple goals: maintaining Berkshire's "Gibralter-like" position, recruiting and nurturing good managers, acquiring new revenue streams, and expanding his subsidiaries' competitive advantage. Imagine how much easier it is to communicate one's goals when they don't change with the market winds.

5. Perspective. Buffett reminds his audience of Berkshire Hathaway's long-term success. "Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually."

Finally, he frames the economy's troubles in the context of America's long-term economic prosperity. "Real standard of living for Americans improved nearly seven-fold during the 1900s...Though the path has not been smooth, our economic system has worked extraordinarily well over time...America’s best days lie ahead."

We could all do worse than follow Mr. Buffett's lead when delivering bad news. As one analyst said, "[Buffett] admits when he is wrong. You don't get that candor from other CEOs. That's why his credibility is so high."
Let's hear from you. Should he have said more?

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