Lessons from Buffett: Running a Business

Buffett, the well-written biography of Warren Buffett by Roger Lowenstein, offers an interesting biographical sketch with several insights into principled business and investing.  In this first reflection I am going to compare Warren Buffett’s management philosophy with that of Charles Koch’s.

While their businesses face a host of different incentives — Berkshire Hathaway a publicly owned company and Koch Industries privately held — their principled approach to business echoes many similarities.

Value Creation

Both Buffett and Koch approach business with an openness to change and with a focus on creating value, wherever they can find it.

“Buffett did not think of Berkshire necessarily as a textile company, but as a corporation whose capital ought to be deployed in the greenest possible pastures.”  As Berkshire’s textile business struggled, Buffett began directing it’s profits into new sectors and opportunities.

Similarly, Koch, initially in the oil refining business, diversified his re-investments in the company into other more value-rich propositions — from commodities trading to fiber.  Koch Industries’ vision does not focus on a particular industry, but on value creation:

“Apply Market-Based Management to identify and capture those opportunities for which our capabilities will create the greatest value and develop and implement strategies that will maximize this value long-term.”

Measure Meaningful Things

To reach these lofty goals both Koch and Buffett rigorously look to align the incentives of their companies and employees with creating value for shareholders and society.

“I believe in establishing yardsticks prior to the act; retrospectively, almost anything can be made to look good in relation to something or other.”  Buffett’s basic theory of return on investment is to focus on “the return on equity capital — that is, the percentage profit on each dollar invested.”  He strongly emphasized not wasting time on quarterly projections and other time-wasters.

Koch also frowns on needless paperwork and aims to measure profitability whenever it is practical, placing emphasis on value created by the economics means rather than by the political means.

Compliance

After a series of government investigations and media attacks in the 1980s 1990s, Koch restructured his company and added an entire division to focus on the public sector and compliance. This fueled a new stage of growth.

Buffett also sees the value in operating within the legal environment.  While he does his best to invest in companies with high standards and good management, from time to time he finds himself holding a bad apple. When unordinary situations have arisen, such as they did with the fraud at Salomon Brothers, Buffett felt it his duty as a long-term investor to help restore the company’s long-term position as a financial leader.

As Lowenstein frames it: by the end of the ordeal, Buffett had been so compliant that if the regulators had punished him too severely, they would be encouraging less cooperation in the future from other corporations under similar investigations.

Focus on Good People and Long-term Relationships

Though perhaps the value that trumps all else is one of character. ”[M]ost people, regardless of what they say, are looking for appreciation as much as they are for money,” writes Lowenstein.

Buffett and Koch both seem to understand this and act accordingly as they search for new investment opportunities and new personnel.  Their investment decisions focus on long-term value.

Koch avoids operating as a public company as he believes their quarterly requirements to be adverse short-term incentives. Buffett refuses to offer dividends or divide his stock in order to attract long-term investors.  Koch upholds a rigorous hiring process and would place a higher value on someone with good character and adequate skills over someone with adequate character and high skills.  Buffett chooses to invest in companies whose management he trusts and believes will be running their company for a long time.

Food for Ninjas Competitive Cooking Blog

Food is meant to be shared and, relentlessly, it is compared.  What started out as a shared Google Doc between some friends and family has now become a competitive cooking blog worth flippin’ out about. Epicurious George reporting from Food for Ninjas.

Improving the Design of Tax Forms: Identifying the Problem

If information design has a golden challenge, it is to redesign the U.S. tax forms.  These behemoths ooze the opportunity for improvement.  Not only do they clothe a complex tax in a dismal plaid, but every year they encourage thousands of diligent, hardworking citizens (unable to understand their own tax returns) to tempt hordes of labor away from other value-creating activities.

The 1040 (and its offspring the 1040A, 1040EZ) are not the only culprits, but they will be my inspiration today.  Is there a good reason these forms are confusing?  Yes.  Several.  However, the challenge of the information designer is not to overhaul the tax system, it is to take the problem at hand, and make it beautiful (at least from the user-experience perspective).  Let’s walk through four common elements of good design and see if we can identify why the average taxpayer is so confused.

If you’d like to follow along: our challenge awaits here.

Proximity
Good design groups related items together.  It’s how our brain works.  If you see a man and a women walking together, gazing into each others eyes, you might assume they’re married.  The same principle is true for items on a form.  Though our culprit, the 1040, just may be leading us on…

At first glance, the 1040 appears to have been grouped into sections of similar data:  Label, Filing Status, Exemptions, Adjusted Gross Income, Tax and Credits.  Though as we begin to look into the detail of these sections a number of unexplainable relationships emerge from the design.  How are Other Taxes different from Tax and Credits?  Why do some deductions fall under Adjusted Gross Income and others fall under Tax and Credits?  Do you want $3 to go to the Presidential Election Campaign? Wait a second, what is this doing in the Label section (and where are the check boxes for us to allocate the rest of our money to projects we support)?

Alignment
Elements that line up with one another help create a visual order.  The alignment of letters along their baselines and blocks of text (to the left, right, or center) help organize the elements on the page for the viewer.  Alignment is most easily applied to shapes with nice, straight edges.  It’s a bit more challenging to work with text, but quite possible to succeed.

The 1040 does pretty well aligning elements in some respects.  The rectangular spaces available to fill in our personal information, income , and other data line up for the most part.  The rows are indented where a subtotal needs to be calculated.  The line numbers and the start of each line also do just fine.  But when we look to the right side of the text at the other end of each line (on the page and in the left margin), the text on the page becomes quite jarring.  Hardly any of the lines match up, and when viewed as a whole, the text on the page looks extremely jagged, frequently disrupting the flow of the viewer’s eye.

On top of this, nearly each line refers to a complimentary schedule, form, or page to help you calculate it.  This information is not differentiated in any way, it just blends in with the madness.  For example, to determine a health savings account deduction, you are to fill out form 8889.  For farm income and losses, you need to attach Schedule F.  Each form is hidden at the end of its respective line, wherever that may be.  Some relationships, like with Standard and Itemized Deductions, are even more confusing.  Itemized Deductions refer you to Schedule A in the line, and then give a set of instructions in the left margin regarding the standard deduction.  Without the help of alignment, or some other element of design such as contrast, there is no easy way to scan the 1040 in search of this information.  It could be anywhere.

Repetition
Repeated elements (such as graphics, fonts, and size) help make a design consistent.  See inconsistencies in all other sections.

Contrast
Contrast draws a viewer in and creates visual hierarchy. The point of highest contrast attracts the eye’s attention.

So where is your eye drawn to on the 1040?  Probably the header or the arrows instructing that you must enter your social security numbers and Sign here.  Just about everything else blurs together into a gray fog.  There are a good number of words (and other elements) in bold, but if your eye even happens to focus in on them, they generally come off as a combination of erratic highlighting and incoherent fragments of sentences.  This is not helped by the text being an abundant, dense block of sans-serif type at a small font size.  The only thing they could have done to make it less readable would be to make it all CAPS.  Perhaps we can expect this next year.