Bill Gross tweets multiple times a day, Warren Buffett publishes his letter to shareholders once a year. But even Buffett goes with the times and speaks much more frequently with the media these days (he immediately returned Andrew Sorkin’s call from the NY Times this week). Still, the investment world cherishes his bon mots (remember last year’s “when the tide goes out”?) and the 2010 version of the letter again showed why Buffett is admired around the world and how he uses his reputation to inform and educate the investment community – Buffett Business Management 101:

Advice: Buffett doesn’t like it. In the past he said that “diversification is only needed when you don’t know what you are doing”, but this year he went much further when discussing investment bankers. Are they useful? “Our recommendation in respect to the use of advisors remains: “Don’t
ask the barber whether you need a haircut.””

Social Media Use, Buffett-style: While not on Twitter or Facebook, Warren Buffett for years has advocated direct communication with clients instead of going through gatekeepers. “We try to post our quarterly and annual financial information on the Internet early on weekends, thereby giving you and other investors plenty of time during a non-trading period to digest just what has happened at our multi-faceted enterprise… Given a few experiences we’ve had (referring to “terrible journalism”, you can understand why I prefer that our communications with you remain as direct and unabridged as possible.

Having fun:: “Now 66, Tony (Nicely, CEO of GEICO) still tap-dances to the office every day, just as I do at 79. We both feel lucky to work at a business we love.” Tony also has a $800 million annual advertising budget (twice that of the runner-up advertiser, as Buffett points out), so that might help with the dancing.

People skills: Buffett loves to tell anecdotes about his managers and how much he values them. His comment in regard to Ajit Jain (he met him in 1985, Ajin runs National Indemnity): “If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.” He also mentions that Ajit was discovered by Mike Goldberg, “now elevated to St. Mike”). It shows his way of managing people and results in low turnover. Buffett points out the group of his companies that increased profits despite sales decreasing, along with the “CEOs who made it happen”.

Self-deprecation: Buffett knows he is the Sage of Omaha and the most admired investor in the world, but routinely points out his mistakes in his letters to shareholders. This year is no exception: And now a painful confession: “Last year your chairman closed the book on a very expensive business
fiasco entirely of his own making… I subtly indicated that I was older and wiser. I was just older.”

Financial markets: Of course, Buffett has, again, some strong views on the markets, especially during times of crisis: “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance”.

Before getting into his favorite topic of derivatives, Buffett reviewed the corporate and muni bond markets and that they “were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”

Derivatives and risk control: Berkshire has held derivative contracts since 1998. Buffett thinks derivatives are dangerous “for both participants and society” when they lead to leverage and/or counterparty risk that is extreme. “At Berkshire nothing like that has occurred – nor will it. It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important.”

And taking the not so subtle criticism of certain large institutions further: “At Berkshire, I both initiate and monitor every derivatives contract on our books … If Berkshire ever gets in trouble, it will be my fault.
It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.”

In Buffet’s view a board is “derelict” if it does not insist on the CEO bearing full responsibility for risk control: ”
If he’s (Buffett thinks most of them are men) incapable of handling that job, he should look for other
employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe… CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well. ”

“An Inconvenient Truth (Boardroom Overheating)”: Berskhire had to issue some 100,000 shares for its BNSF acquisition. “Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy”. After explaining the close call for the purchase, Buffett continues with a 101 on investment banking and a little IB bashing a la “I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?)…behave like teenage boys who had just discovered girls.