Mind your Language Please! Words Count When Delivering Results

“Himself” at the premiere of the HBO movie “Becoming Warren Buffett”

Berkshire Hathaway CEO Warren Buffett, known widely for his investment prowess, is a man of many talents. Among them are writing skills, which presumably led to him being invited to pen the preface to “The Plain English Handbook”, a publication issued in 1998 by the Securities and Exchange Commission.

The handbook was the regulator’s attempt to guide companies on how to best explain their progress. And while it may have been written almost two decades ago, many of its recommendations still ring true today.

In fact, executives who don’t heed its advice could end up managing companies with lower share prices, even if they perform well in the numbers department, according to a new study.

Using the Plain English Handbook as a guide, assistant professors at Cornell University and the University of South Carolina assessed the readability of annual reports for 92 equity funds between 2003 and 2013. Their research, which has just been published in the Journal of Financial Economics, found that a 10 percentage point increase in the number of writing “faults” translated into funds trading at a 2.7% discount.

“Put bluntly, yes, it pays to write well.”

“Put bluntly, yes, it pays to write well,” Cornell’s Byoung-Hyoun Hwang and USC’s Hugh Hoikwang Kim concluded.

The findings are perhaps more relevant to communications executives responsible for producing disclosure documents, such as annual reports. But the premise can apply to all forms of investor communication, whether it be through CEO letters to shareholders, press releases or media interviews.

The results were backed up by two separate studies involving Cornell assistant professor Kristina Rennekamp. In 2016, she found that companies that used poor language to obscure bad news ended up driving readers to get extra information from external sources that may have provided less-than-favorable coverage. Her previous research in 2015 found that companies that used concrete rather than abstract language attracted more investment.

Tips for better writing include keeping sentences short and simple, while avoiding jargon and the passive voice. It also can help to picture your audience, as Buffett can attest. When the Oracle of Omaha is writing his famed annual letter to shareholders, he pretends he’s talking to his sisters.

“Though highly intelligent, they are not experts in accounting or finance,” he explains. “They will understand plain English, but jargon may puzzle them. My goal is simply to give them the information I would wish them to supply me if our positions were reversed.”

Buffet concludes: “To succeed, I don’t need to be Shakespeare; I must, though, have a sincere desire to inform.”

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