Comment lire les « lettres d’investisseurs »
Interpréter la correspondance entre les actionnaires et les dirigeants de sociétés ouvertes comme s’il s’agissait d’un genre littéraire.
5 septembre 2016
John Lanchester, Le New Yorker
[Texte de langue anglaise.]
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Books September 5, 2016 Issue
How Should We Read Investor Letters?
Considering the correspondence between C.E.O.s and shareholders as a literary genre.
By John Lanchester
In 1926, Benjamin Graham, a professional investor in his early thirties, was working in the Washington, D.C., record room of the Interstate Commerce Commission when he came across something he considered “treasure.” It appeared in the prosaic form of a twenty-page document detailing the financial condition of Northern Pipeline, one of eight pipeline companies established when the Supreme Court broke up Standard Oil, the monopoly created by John D. Rockefeller. Northern Pipeline’s shares were trading at sixty-five dollars, and the company generated an annual six dollars of earnings per share. That was generally known. What Graham discovered was that Northern Pipeline was sitting on a fat pile of holdings in other companies. According to his calculations, the company could make a one-off payment of ninety dollars per share to all its stockholders, without having any impact on its ongoing earnings. That’s as sweet a deal as you’ll ever find, so Graham, after an unsuccessful attempt to persuade the company’s senior managers to distribute the cash, loaded up on shares and travelled to the Northern Pipeline annual shareholders’ meeting, in Oil City, Pennsylvania.
The location should have been a warning. Why would a company whose offices were in New York, at 26 Broadway, and most of whose shareholders were also in New York, choose to have its annual meeting in a place that most New Yorkers could get to only after taking an overnight train to Pittsburgh and then a cold, rickety local train ninety miles north? Graham found out when he arrived. Of the six people present, he was the only one who wasn’t an employee. He asked the chairman if he could read a memorandum. The chairman asked him to put his request in the form of a motion. Graham did. “Is there any second to this motion?” the chairman asked. Silence. “I’m very sorry, but no one seems willing to second your motion,” the chairman said. “Do I hear a motion to adjourn?” Meeting over. Ben Graham went back to New York, humiliated and angry, and vowing revenge.
In the next six months, Graham bought more shares in Northern Pipeline, turning himself into the second-biggest holder of the stock, and then wrote a letter to the body that owned more shares than he did, the Rockefeller Foundation. The letter called the state of affairs at Northern Pipeline “absurd and unfortunate,” and made a cogent case for giving back the excess cash to its real owners, the shareholders: “The cash capital not needed by these pipe line companies in the normal conduct of their business, or to provide for reasonable contingencies, should be returned to the stockholders, whose property it is.” The Rockefeller Foundation listened to Graham politely, then told him that it did not interfere in the running of its holdings. Graham, who later taught economics at Columbia when he wasn’t managing his investments, wasn’t put off. He lobbied the other shareholders, collected their proxy votes for the next annual meeting, and won two of the company’s five board seats. Northern Pipeline caved in, and distributed the cash to its shareholders.
In an engaging and informative book, “Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism” (HarperBusiness), Jeff Gramm argues that this letter marked an important turning point in the history of modern capitalism. It was the moment at which shareholders began to assert their rights as the owners of companies, against managers who tended to run the companies in their own interests instead. Economists call this state of affairs the “agency problem,” in which a company’s agents—the managers—have interests that are not aligned with those of the company’s owners. Gramm’s book focusses on eight investor’s letters that sum up some of the great agency-problem battles in the history of American business. It is a valuable set of stories. As Gramm says, “It is incredible how much useful information from the business world is becoming lost to history. I can get detailed box scores from decades-ago college football games, but finding a 1975 annual report from a midsize company is surprisingly difficult.”
The letters in “Dear Chairman” are in one sense structurally identical: they are written by investors in public companies, sometimes addressed to the management of those companies and sometimes to other investors, telling them what to do. Within that over-all similarity, there is a broad story about the evolution of modern capitalism. Ben Graham’s innovation was followed by the “proxyteer” wars, in which activist shareholders gathered together collections of proxy votes to overturn complacent managements. After that came the “corporate raiders,” outsiders who sent “bear hug letters” offering to buy companies, and threatening a hostile takeover if the offer was refused. (A takeover is hostile when the management doesn’t want it; if shareholders approve the takeover, the managers are usually fired.) Gramm gives the example of Carl Icahn’s battle against Phillips Petroleum, in 1985, which is interesting, since Icahn is still, more than three decades later, America’s best-known activist investor, and is still regularly writing to the bosses of his chosen companies. “Dear Chairman” then takes the story all the way up to the present, with the activist hedge-fund investor Daniel Loeb firing off a series of letters to public-company chairmen.
From the literary-critical point of view, there is always going to be a difficulty with the genre of the investor’s letter. What we’re dealing with here, in essence, is rich people wanting more money. That creates issues of tone. The attempted solutions to the problem change over time, just as financial fashions change. In the early days, a moral note is struck. Ben Graham’s prose is sincere and concerned—Wharton School of Business meets Edith Wharton (“Your attention is respectfully directed . . .”). By 1985, Ross Perot is communicating in bullet points, even when he is writing a blisteringly personal letter to the head of General Motors:
For example, during the recent meeting in Detroit, you were
—Obviously bored.
—Barely tolerated what others said.
—Your attitude and comments stifled open communication.
By the time we get to Loeb, in 2005, the tone is that of Internet flame wars. “Ridicule is a radiating weapon,” a hedge-fund manager has said; Loeb acts on that conviction. Here’s a sample letter, to the head of a target company: “It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.” Welcome to the twenty-first century.
These letters are performances, attempts at persuasion: they are trying to get someone to do something. The desire to make money is always sincere, but not everything else is. When Carl Icahn was a big investor in Apple, he wrote an annual letter to Tim Cook, its C.E.O., urging him to spend the company’s cash on buying back its own stock. “There is nothing short term about my intentions here,” he wrote in the first letter, in October, 2013. In October, 2014, he wrote that “Apple is one of the best investments we have ever seen from a risk reward perspective,” and that, while he was urging a share buyback, he was also eager “to preemptively diffuse any cynical criticism that you may encounter with respect to our request.” In a letter of May, 2015, he said that Apple was “very much a long term growth story from our perspective.” The company represented “one of the greatest growth stories in corporate history, as well as one of the greatest opportunities ever for a company to invest in itself by repurchasing its shares.” A year later, after the company had spent eighty-seven billion dollars buying back its stock, Icahn announced that he had sold most of his Apple shares, for an over-all profit of around two billion dollars. Fool me once, shame on you. Fool me twice, and you’re starting to develop a business model.
The liveliest letter writer in modern corporate America would certainly not agree with that. Warren Buffett, a pupil of Ben Graham’s at Columbia and then an employee at his investment company, is the person who took forward Graham’s legacy as an analyst of stocks, as an investor, and as a communicator—someone eager to explain his investment philosophy. Buffett does this in speeches, in interviews, and, especially, in the annual letter that accompanies the report of his company, Berkshire Hathaway. The letters have become a cult item, offered for free at Berkshire Hathaway’s Web site, and arranged by Lawrence A. Cunningham in a book, “The Essays of Warren Buffett: Lessons for Corporate America” (Carolina Academic Press). A collection of his early letters, most from the pre-Berkshire days, when Buffett ran an investment partnership for family and friends, has now been published in Jeremy C. Miller’s “Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor” (HarperBusiness). The themes are consistent across his whole career: ignore the markets, look for steady earnings and good management, and invest only in what you know.
If Buffett hadn’t chosen to be one of the richest men in the history of the world, he would have made an unfailingly readable financial journalist. He has a great eye for telling details: talking about the risks in the insurance business, he comes up with the startling fact that the epicenter of the biggest earthquake in American history, 8.7 on the Richter scale, was located far from any tectonic fault line, in New Madrid, Missouri, in 1812. (At least that’s how Buffett tells it; seismologists agree it was one of the biggest earthquakes, estimated at between 7.0 and 8.8.) He tells us about a year in the insurance business during which a colleague underwrote insurance policies on the life of Mike Tyson, the possibility of more than two hundred and twenty-five Lloyd’s “Names” dying, and two Chinese satellites. “Happily,” he says, “both satellites are orbiting, the Lloyd’s folk avoided abnormal mortality, and if Mike Tyson looked any healthier, no one would get in the ring with him.” His writing is lucid, with a strong folksy streak, often borrowed from the lyrics of country music: “A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’ ” Or, on acquisitions gone wrong: “How can I miss you when you won’t go away?” He can be mordant, too. “If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”
The letters need not have been written. Buffett could easily have decided that the numbers speak for themselves—especially when they’re enunciating as loudly and clearly as his do. Buffett took over Berkshire Hathaway in April, 1965, when the shares cost eighteen dollars. By the time of his fiftieth-anniversary letter to shareholders, in 2015, the shares were trading for two hundred and twenty-three thousand dollars, an annual gain of about twenty-one per cent. No other investor matches that record over that period of time. In the world of hedge funds, secrecy about investment methods is de rigueur: if the sauce weren’t secret, you wouldn’t be having to pay two per cent per year, and twenty per cent of the profit on top, for your serving of it. Buffett, by contrast, doesn’t miss an opportunity to explain his ideas.
It might seem as if these letters were the opposite of those in “Dear Chairman,” because it’s a case of a manager writing to owners, not the other way around. The situation is more complicated than that, though. As Buffett regularly points out, ninety-nine per cent of his family’s net worth is tied up in his company’s stock: when it comes to Berkshire Hathaway, he is more of an owner than anyone else alive. Nonetheless, the other owners need to be kept onside. “Dear Chairman” amply documents how much trouble shareholders can create when they become unhappy with the direction of a company they own. Because Buffett ignores the short-term fluctuations of the stock market and doesn’t mind long stretches when the valuations of companies in his portfolio are depressed, he needs shareholders who see things the same way. His way of heading off this potential trouble is to practice what he calls “shareholder eugenics.” He wants the highest-quality owners he can find, and that’s why he goes to such trouble to educate them. Even the look of the letters—deliberately plain to the point of hokiness, with old-school fonts and layout hardly changed in fifty years—is didactic. The message is: no flash here, only substance. Go to the company’s Web site, arguably the ugliest in the world, and you are greeted by “A Message from Warren E. Buffett” telling you that he doesn’t make stock recommendations but that you will save money by insuring your car with Geico and buying your jewelry from Borsheims. As he says elsewhere, “Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture.”
According to his biographer, Alice Schroeder, Buffett had difficulties interacting with his peers while in high school but transcended them by adopting the advice of Dale Carnegie’s “How to Win Friends and Influence People.” The letters show that influence: they are careful always to “praise by name, criticize by category,” and are compulsively modest and self-deprecating. It’s as if Huck Finn grew up to run the biggest investment conglomerate in the world. The numbers are allowed to do the bragging, and to counterpoint them there’s a lot of aw-shucks, such as when Buffett talks about an investment being “unblemished by success,” or admits to having bought a corporate jet and named it “The Indefensible,” or recounts the “Mistakes of the First 25 Years” and the “Mistake Du Jour.” In 1980, he wrote that the value of Berkshire Hathaway’s holdings had compounded by 20.5 per cent every year for the past sixteen years. That’s a remarkable number, which he then goes on to undercut with the following astonishing observation: “You’ve done better: the value of the mineral content in the human body compounded at 22% annually during the past decade.”
The corporate figures who really need to write explanatory letters are, in some respects, in a similar position. They run, with a long-term perspective, companies that are of necessity going to have periods of being unprofitable, or out of step with markets. Jeff Bezos writes an annual letter to Amazon’s investors, and with each one he attaches the first letter he wrote to those same investors, in 1997. In that letter he said, “It’s all about the long term” and warned that “we may make decisions and weigh tradeoffs differently than some companies.” The message is as plain as the prose, and as repetitive as Gertrude Stein.
In business, however, the real story is always going to be the one told by the numbers. An overenthusiastic letter writer can lose sight of this melancholy truth. Sam Hinkie, the departing general manager of the Philadelphia 76ers, wrote one such letter recently, citing the “ideal of having the longest view in the room” and the need “to zig while our competitors comfortably zag,” while citing Warren Buffett, Atul Gawande, Elon Musk, James Clerk Maxwell, Max Planck, the 10,000-Year Clock, and Amos Tversky, among others. The thing is, though, that if you’ve just gone 10–72, the third-worst season in N.B.A. history, nobody cares what books are on your bedside table. People want to hear your views when you’re making them money, and that’s the ideal moment to tell them that this is all part of a long-term plan. Season’s end after the longest losing streak in the history of American professional sports—that’s a less good moment. It’s fine to have the longest view in the room, as long as the thing at the end of the vista is a gigantic hill of money.
The corporate letter is a useful form of storytelling and of self-definition, but modern leaders of companies have other tools at their disposal. The avowed aim of Elon Musk’s company, Space X, is “to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.” That’s pretty much the opposite of Berkshire Hathaway, and so is the style of Space X’s storytelling; it’s entertaining to contrast the two companies’ Web sites. Instead of a letter telling you to insure your car with Geico, Space X features high-production-value live streams of its launches. (The same production values, let it be said, apply to the company’s crashes and explosions.) Musk adds stardust of his own. When CNN wondered what he had been doing after he was spotted at the Pentagon, Musk—who is often said to have been a model for the cinematic version of Tony Stark, the hero of “Iron Man”—tweeted, “Something about a flying metal suit. . . .” It’s a good joke, but one with a serious purpose: if you buy Space X shares, you can’t claim that you never knew what you were getting into.
There’s an opposite trend in this area, too: instead of engaging, persuading, and convincing outside shareholders, some managers have arranged things so that they can take money from them without ceding them control. From their perspective, the story of investor activism isn’t an optimistic narrative about the increasing influence of owners on how businesses are run; it’s an escalating horror story about shareholders’ ignorance and presumption. The technology industry, in particular, is fond of creating structures where the management is free to ignore the company’s owners: the founders of Google and Facebook have accessed the market for the purpose of a gigantic payday but retain control of their companies.
Gramm is a skeptic about the tech industry’s appetite for these structures. “It will be fascinating to watch how these benevolent dictatorships work out over time,” he says. “Google already betrayed its original agreement with shareholders by concentrating ownership back into its founders after generous employee stock and options grants diluted their voting stakes. How long will shareholders continue to trust the company? How long can you really trust anybody that says they aren’t evil?” Answer: as long as they’re making money. Besides, Google’s founders can point to the statement attached to the prospectus at the time of their I.P.O.: “Google is not a conventional company. We do not intend to become one.”
The investor’s predicament hasn’t changed in the ninety years since Ben Graham went to 26 Broadway to ask the managers of Northern Pipeline to give the shareholders back their money. The reply he got was: “You must give us credit for knowing better than you what is best for the company and its stockholders.” All company managements think that, and always have, even if they’re increasingly careful about how and when they say so. For the rest of us, the difficulty is in telling the guys who can be trusted with your money from the guys who can’t. Warren Buffett can, and his letters make it sound easy. (“There seems to be some perverse human characteristic that likes to make easy things difficult,” he says.) Reading him, you think, How hard can this investing business be? His biographer gives us a clue as to the answer. When Buffett was in high school, he was earning twenty-one hundred dollars a year, more than his teachers, from a daily paper route. With the proceeds, he bought a forty-acre farm in Nebraska. So that’s the answer: if you bought a farm with your earnings while still in high school, you, too, will find investing simple. If not, business letters can still be fun to read, but it might be best to regard them as a form of literary fiction. ♦
John Lanchester, the author of “How to Speak Money,” is a contributing editor at The London Review of Books, and has written for The New Yorker since 1995. More
This article appears in other versions of the September 5, 2016, issue, with the headline “Cover Letter.”
