MarcAndreessen

Yahoo has had a longstanding problem with leaks of confidential internal documents and memos. This presents a real challenge to any company since the countermeasures that could be employed to try to stop the leaks can create even bigger problems than the leaks.

This statement is more interesting than it first appears, in two ways:

First, Buffett is notoriously stingy at giving Berkshire executives stock or stock options. So many of his managers have little or no stock in the company, which makes it hard to claim they are shareholder-oriented (as opposed to oriented to whatever other incentive goals Buffett sets for them).

Second, many investors routinely complain that a big problem with large, publicly-owned companies is that their managers typically own very little stock and are therefore out of alignment with shareholders.

Once again, as with the S&P 500 index, Buffett perhaps chooses an overly easy bar to jump over.

This is a valuable explanation on Buffett’s part, and stands in opposition to a fairly large number of stock market commentators such as Mark Cuban who insist that companies that do not pay dividends are not treating their shareholders properly.

Many public companies, the New York Times Company for example, exhibit a very different pattern of stock repurchases. They repurchase a lot of stock when their stock price is high and they are feeling good about their future, and then stop repurchasing stock and even issue new stock when their stock price is low and they are feeling terrible. This is, of course, buying high and selling low.

This is a key dynamic that helps keep the business and investment world fresh: any investor or business manager who is successful at small scale will rapidly find herself running more and more money, or a bigger and bigger business, until all of a sudden the kind of opportunities that she exploited to become successful are now too small for her to bother with. So a new set of investors and managers come along to exploit those opportunities, and the cycle repeats.

This also leads to an interesting outcome in some cases, where investors who have great long-term performance track records expressed in annual percentage returns can actually be net destroyers of capital. Imagine the hedge fund manager who starts by managing $50 million and generating 30% gains for several years. Then large institutions notice his performance and give him $10 billion to manage, then he has a 30% down year, like in the 2008 financial crisis, and wipes out $3 billion of investor capital — more than all the dollar profit he has ever generated.

There are two interesting aspects of the investing profession that can be compared, in different ways, to sports.

One is that, like sports, the greatest investors are correct only some of the time. The best batters in the history of baseball get base hits maybe 30% of the time, and the best investors make correct investment decisions maybe 60% of the time. This is in contrast to many other professions where a high failure rate would result in catastrophe instead of success.

Further, like baseball, investing is at heart a slugging percentage endeavor — what really matters is the magnitude of the correct calls vs the number of correct calls, versus the magnitude of the incorrect calls. A successful investor can be wrong much of the time as long as her successful calls generate large returns.

Second, unlike sports, where professional athletes typically can’t play past their 30’s or early 40’s, great investors who keep working hard can keep getting better and better well into their 80’s — like Buffett.

Berkshire effectively sold certain other financial firms insurance that pays off for the other firms if global stock market levels fall over a long period of time. If global stock market levels rise as Buffett anticipates, this will be a highly profitable transaction for Berkshire.

Berkshire sold other firms insurance that the global stock market would fall. The position for Berkshire is long the market, and for the other firms is short the market.

A very interesting question in the insurance business is how dramatically global warming and climate change will affect the frequency of weather-based disasters like hurricanes and droughts. Some climate scientists believe we will see a lot more Hurricane Sandy-level weather events in the future than we have in the past. This could spell real trouble for insurance companies relying on historical weather data.

Reinsurance is the business is insuring risks borne by other insurance companies. In effect, it is wholesale insurance.

It can be a highly attractive business since you don’t have to deal with individual customers.

On the other hand, managed poorly, you can be exposed to huge losses.

Many financial services businesses have this problem — managers can be incented, through fees and bonuses, to take on business that someone with a true owner mentality would turn down.

The more distributed the control of a large financial services enterprise, the more likely this problem is to occur. Hence there is a real advantage to having a CEO like Buffett with total control and a large ownership stake.