In his recent annual letter to Berkshire Hathaway shareholders, Chairman and CEO Warren Buffett declared victory on a goal stated in his 1983 letter. Back then, he wanted to “obtain only high-quality shareholders,” whom Buffett identifies as individuals — not institutions — who choose to entrust their wealth to Berkshire for the long term.
Four decades later, Berkshire
has more than 1 million such shareholders. Buffett says he “cherishes” this cohort, pronouncing a “special kinship” with them. Explaining why Berkshire has no interest in cultivating any other shareholders, he writes this year that we “already have the investors we want and don’t think they, on balance, would be upgraded by replacements.”
Victory was not easy, however, as Berkshire has several other shareholder “buckets,” as Buffett dubs them. These include individuals and institutions who hold the stock but not necessarily long-term. While preferring the long-term holder, Buffett says he is “happy to work” for this other cohort and has “no quarrel” with their opportunistic attitude.
At the other extreme from high-quality shareholders are index funds. For Berkshire, Buffett is agnostic about this cohort, neither opposed nor welcoming. This stands to reason — they don’t buy Berkshire by choice but must do so because Berkshire stock is in the index they follow, and, therefore, there’s no reason for Berkshire to court them. As Buffett says, they are on “automatic pilot.”
Buffett’s shareholder “buckets” map the academic literature on shareholder demographics that we adopt at the Quality Shareholders Initiative. We use the model to profile the shareholder base of thousands of public companies based on time horizon and concentration — quality shareholders are both long-term and concentrated, whereas indexers and transients are one but not the other (indexers are long-term but unconcentrated, transients short-term but often concentrated).
An elite corps of about 40 companies are in Berkshire’s league in terms of attracting quality shareholders among stock-picking institutional investors. But Berkshire has the greatest proportion of individual owners, representing an estimated 40% of the Berkshire shares that Buffett doesn’t own.
Having a high density of quality shareholders has contributed to Berkshire’s success over the decades, as it has to the performance of dozens of other major companies. They support management’s long-term view and contribute to the distinctive reputations, cultures, and moats that characterize great companies. Such a long-term culture trickles throughout the company in everything from acquisitions to operations.
Since a company’s shareholders influence a company, managers should care about the shape of their shareholder base. One dominated by short-term investors will induce managers to focus on quarterly targets rather than multi-year performance. One controlled by indexers will tend toward formulaic governance practices even if they do not fit a particular company.
Buffett explained in 1983 how he would achieve his goal: “If we consistently communicate our business and ownership philosophy — along with no other conflicting messages — and then let self-selection follow its course.” Buffett courted quality shareholders by providing an informal education, mainly through an acclaimed annual letter and legendary annual meeting.
By these means, Buffett taught the fundamentals of business and investing, such as moats and circles of competence. He also conveyed the special features Berkshire offered that appealed to this group, especially the concepts of partnership and permanence.
Younger managers today would do well to emulate Buffett by courting the same “bucket,” using similar techniques. But they do face a different shareholder market. In his early decades, Buffett did not have to compete with index funds, which were in their infancy, or platforms facilitating day-trading or flash trading.
On the other hand, today’s individuals want control of their financial destiny. While recent market conditions may have misled some into believing that short-term means effortless profits, many will welcome sober wisdom on the security of longer-term thinking. And while index funds continue to lure millennials with talk of doing well by doing good, individual companies can make such commitments more sincerely.
Buffett kept his eye on the prize and has become one of the most celebrated business leaders of all time, with a distinctive and valuable shareholder base. Those aspiring to that status over the coming decades would do well to cultivate individual quality shareholders today.
Lawrence A. Cunningham is a professor at George Washington University, longtime shareholder of Berkshire Hathaway, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. To get updates, including an invitation to his exclusive webinar during Berkshire Hathaway’s 2021 Annual Meeting, sign up here.