Not too long ago American magazine Forbes published its 2007 list of the richest people on the planet. Well as the story goes today, the Mexican telco entrepreneur Carlos Slim Helu apparently just wrestled the number 2 spot from my favorite oracle, Warren Buffet.

How rich?
As published in this article, 67 years old Slim is now a one happy billionaire sitting on a net worth of $US53.1 billion, around US$700 million more than Buffett.

How was it achieved?
Well it seems that Mexican economy is going through some rather extraordinary times growing around 50% in last year and Slim’s telecommunication giant Telmex is riding the wave to its fullest, enjoying an unchallenged monopoly position on the Mexican market. These two factors combined than increased Slim’s wealth by $US23 billion in last 14 months! That equals to about $US1.64 billion a month or approximately $US322 per week. An incredible growth, which most probably won’t be replicated any time soon.

Its all in the mind
Tons of paper have been written about the principles, motivations and changes of the way one thinks in order to become successful and wealthy. From my experience most of the time the advice will boil down to “follow your dream”, “do what you love”, “never give up”, “keep learning” and “don’t get discouraged by anybody” (well there may be few more but you get the idea). If applied, all these will require you to “wear a thick skin” (others may call it arrogance) and single mindedly obsess over your quest to success.

And so it appears that there may be some true to it as, undoubtedly successful, Carlos Slim Helu apparently brushes off criticisms of his business by

When you live for others’ opinions, you are dead. I don’t want to live thinking about how I’ll be remembered.

and comments on charitable efforts of Bill Gates’ foundation saying

Poverty isn’t solved with donations. Building businesses did more for society than going around like Santa Claus.

Wow! Who is to say, for what we know he may be absolutely right so I am the last one to judge him. But use this as a reminder that extraordinary success in any field is not achieved by an average, conventionally thinking personality.

As is his tradition every year, at the end of February Warren Buffett released another of his highly anticipated Letters to Shareholders summarizing states of affairs in his investment vehicle Berkshire Hathaway. Needless to say that the information it contains are both entertaining and educational providing an insight into the genius’ investing mind.

Berkshire’s performance
Compared to 2005, the book value of the company rose by 18.4%, beating its benchmark, S&P 500 by 2.6%. This result makes for yearly after tax compounding rate of 21.4% since 1965 meaning that $100 dollars invested those days would today represent value of approximately $350,000.

Acquisitions
2006 saw Buffett’s first major venture overseas by acquiring 80% of Israeli toolmaker ISCAR for approximately $4 billion dollars. Apart from that company, at home he also finilized purchases of PacifiCorp, Business Wire and Applied Underwriters for the grand total of $6 billion.

Investments
One of the parts which I believe the regular investors find most amusing is the publicized list of Berkshire’s commons stock holdings.

We don’t itemize the two securities referred to, which have a market value of $1.9 billion, because we continue to buy them. I could, of course, tell you their names. But then I would have to kill you.

Of course great speculations arised as to the identity of the other two major holdings. According to latest news, one of the appears to be second largest US railroad Burlington Northern Santa Fe Corp.

The Annual Meeting
As pointed out in the Letter, this year’s “Woodstock for Capitalists” will be held on Saturday May 5 with all its regular attractions and activities. So if you are intending to attend this event in Omaha and still have not made you travel arrangement, better hurry!

Do you invest according to Buffett and his strategies? Are you planning visit to this year’s Annual Meeting? Let us know either in the comments or directly to our email dan@soundofgold.com.

One of the most important measures in deciding which companies do or don’t make it into one’s portfolio is the test of managerial integrity. An investor will always look more favourably on businesses where large portion of the stock is held directly by its management.

The principle is simple enough – if the managers do believe in their company and their own ability to run it successfully, they should not be afraid assigning a large portion of their own net worth to the company stock. Warren Buffett calls this “aligning the managers’ interests with the interests of the company owners” (i.e. shareholders).

However the interests of the owner are ill served if the company chooses to use stock options as a tool in management compensation structure. The main reasons are following:

1. Options reward for profits on retained earning
   No extra managerial skills are necessary to keep the retained earnings in the bank and make profits from interest. However the option will reward such managerial technique by increasing in value since also these “lazy profits” will appear on the annual report and increase the bottom line.
   The difference in interests could not be more obvious. While the option holder wishes for no dividend payout to earn the biggest amounts of interest possible, shareholders are best served by the profits being paid out in full.
2. Shifting the management’s focus
   Instead of fully commit and monitor the performance of the business, managers will will most likely work with one eye on the the stock performance. Many times decisions cheered on by the share market may lead to future disasters within the company or the other way around.
3. Fixed option has no downside
   While the owner of the company (i.e. shareholder) needs to bear all the capital costs, the fixed option holder bears no cost. The fixed option in its reality does only have upside and has no downside being sometimes compared to a “free lottery ticket”.

So can the option be ever used in the compensation scheme appropriately? Probably yes however some stringent rules would need to apply:

• Options should be priced realistically
  Too often the management puts in an extra effort to find out how low it can go with the price of options they are about to grant themselves. Obviously no owner is served well if a part of his business is sold for a bargain price either to an insider or to an outsider.

• Options only to managers with overall responsibility
  As options are tied to the overall performance of the business it does not make much sense to use them while rewarding a manager only responsible for one part of the business. Even if some departments and their managers perform poorly, the options reward them equally with all the other executives.
• Pricing structure needs to reflect retained capital
  As per above, the credit for profits made on retained earnings should not be automatically awarded to the option holders. Instead, as the interest earnings on retained funds grow, the options should allow for repricing to reflect that fact.

As can be seen, using the stock options in executives compensation schemes is less than ideal and more often than not it goes directly against the interest of the very owners of a company – the shareholders.

From an investor’s point of view, it is much more satisfactory to see a company using cash bonuses which are tied up to the performance of a particular manager in his area of responsibility, not the share price. Only if such manager than uses his bonus to purchase the company stock at market levels, are his interests truly aligned to those of the company owners.

For more information regarding this topic read Berkshire Hathaway Letter to Shareholders 1985.