The Buffett Letters, Pt. 3: Enter The FEE

By Robert Walker Cohen

In 1979, Warren Buffett explained why he writes his own annual report by way of take-out chicken.

He was still running the same analogy thirty-three years later. And it wasn't his to begin with.

Most writers spend a good image once and throw it away.

Defining the move

Buffett is known for using the mundane and the everyday to explain complex topics to ordinary people. I call this move the Friendly Everyday Example, or "FEE" for short.

He reaches for them constantly. Baseball, in the 1997 letter, to explain why Berkshire declines most of what it's offered. A Nebraska farm and a New York retail property, in 2013, to explain what actually matters in an investment. A chronically leaking boat, in 1985, to explain why changing vessels beats patching leaks. A few have escaped the letters entirely — the cigar butt is now standard vocabulary for people who have never opened a Berkshire report.

The reason isn't decoration. Capital allocation, opportunity cost, intrinsic value, shareholder constituency — none of these have anything you can look at. The reader has no direct experience of them, and no instincts to draw on.

But every reader has been a restaurant customer. Everyone has watched a hitter swing at a bad pitch. Everyone knows the difference between bailing out a boat and getting off it.

That is what a FEE can do. They are most often used as teaching tools, though they also soften difficult truths and carry humor. At their best, they trade a subject the reader has no experience of for a situation they've already lived through — so the reader isn't acquiring a new judgment, but recognizing one they already hold.

The FEE helps the reader to arrive at their own conclusion, rather than simply to receive one from the writer.

1979: the deployment

The passage many quote comes from a section of the 1979 letter about financial reporting — specifically, about why Berkshire's annual report is written by Buffett rather than handed to a staff specialist or a public relations consultant. His argument is that owners are entitled to hear directly from the person running the business.

Then he makes the turn: companies largely obtain the shareholder constituency they seek and deserve, and a company that talks about short-term results will collect shareholders who care about short-term results.

Enter the restaurant FEE:

"Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele—patrons of fast foods, elegant dining, [...] etc.—and eventually obtain an appropriate group of devotees. If the job were expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently. But the restaurant could not change its character constantly and end up with a happy and stable clientele. If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers.

So it is with corporations and the shareholder constituency they seek. You can't be all things to all men, simultaneously seeking different owners whose primary interests run from high current yield to long-term capital growth to stock market pyrotechnics, etc...

We much prefer owners who like our service and menu and who return year after year."

What's brilliant here isn't the simplicity. It's what he does with the borrowed image in four moves.

He credits Fisher by name. He borrows the analogy intact. He applies it to Berkshire specifically. Then he pivots — closing on a statement of preference that doubles as a compliment and a reassurance to the shareholders already holding the stock.

Notice what the restaurant lets him get away with. The message underneath is that some of his readers may be the wrong shareholders, and that if they want something else they should go get it elsewhere. Said straight, that insults the person holding the letter. Said through a restaurant, nobody feels accused — of course the French place isn't for the man who walked in wanting fried chicken.

The FEE itself is also a sound choice of a “bundle of things,” definitionally.

Restaurants are ubiquitous, yes. But so are movies, books, and clothes, and none of those would have worked as well. A restaurant customer, on the other hand, isn't just an object within a category. "Restaurant customer" is a state of being that rests entirely on preference — exactly like "shareholder of Berkshire."

That definitional match is why the analogy runs smoother than other bundles of things would.

1996: the reprint

Seventeen years later, Berkshire issued 517,500 Class B shares, bringing thousands of new shareholders onto the rolls at once — most of them with no idea how the company thought about itself.

Buffett wrote them a booklet. "An Owner's Manual," issued that June, collected the thirteen owner-related business principles he had set down in 1983, with commentary around them.

He did not write anything new about shareholder constituency. He reached back seventeen years, lifted the restaurant passage out of the 1979 letter, changed "You can't be all things to all men" to "You can't be all things to all people," and printed it.

That is the argument of this post, happening on the page. The image had already proved it could carry weight. So it stayed in inventory, and when a new audience turned up, he shipped it again.

2012: the re-cut

Then, in the 2012 letter, Buffett re-cuts his FEE — and tells us, finally, exactly where it came from:

"Above all, dividend policy should always be clear, consistent and rational. A capricious policy will confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can't switch capriciously between the two and retain the fans of either.

Most companies pay consistent dividends, generally trying to increase them annually and cutting them very reluctantly...

At Berkshire, however, we have consistently followed a different approach that we know has been sensible and that we hope has been made understandable by the paragraphs you have just read."

The original was never about shareholder constituency at all.

Fisher used it in his book in 1958, about dividend policy. Buffett had borrowed it, widened it, and run it for thirty-three years — and here he returns it to the subject it started on, with a new menu and a different message.

—

Same borrowed image. Three different jobs. Fifty-four years.

This is the lesson buried inside the technique. A FEE is not an ornament you produce once and discard. It is a durable asset — an image that has already proven it can carry weight, kept in inventory and re-cut to fit whatever argument is in front of you.

Which means the useful question is rarely what fresh analogy an argument needs. More often, it's this:

Of the images you already trust, which can be re-cut to carry today’s message?

What Buffett does not charge in fees, he more than makes up in FEEs — so often as to nearly parody himself.

But the leeway isn't granted by the returns. It's earned in the construction. He credits his sources, keeps the good images in inventory, and re-cuts them for new arguments decades later.

That is a method, not a personality.