WB Letter 1993
H.H.Brown shoes (Purchased by Berkshire) has made an acquisition of Dexter Shoe in the year 1993, which is in the business of manufacturing of popular-priced men’s and women’s shoes. Buffett & Charlie admire Dexter as a business. Dexter’s has a 77 retail outlets and company is a leading manufacturer of golf shoes which is producing 15% of U.S. output.
Example – Good player into the worst industry matrix
We can see in above example of three real estate companies where Company – 1 having a good matrix compared to the other two companies. Also equity dilution into the company – 1 is increased by 1% CAGR in last 10 years compared to 12% CAGR and 5% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see that debt and equity both has increased into the second and third company whereas company – 1 has maintained balance sheet strength. During a good period, the company – 1 has the least inventories as a % of sales and other 2 companies has higher inventory as a % of sales. Sales of a company – 1 has increased by 10% CAGR in last 10 years compared to -7% CAGR and -6% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see stock performance then company – 1 has given 53% CAGR in last 17 years compared to -9% CAGR and 15% CAGR in last 11 & 17 years respectively for the company – 2 and company – 3.
We need to focus on the good player into the worst industry matrix for making an investment. Generally, the good player will gain the market share compared with the worst players in the industry and able to survive for the longer period of time. Also our invested capital get protection with the creation of wealth. The similar pattern we can able to find at infra, telecom, power sectors, etc.
Many of us misunderstood that insurance business of Berkshire get float as a free of cost but it is not true. When insurance business incurring underwriting losses then such losses need to take for consideration as a cost of float.
Mr. Buffett and Mr.Munger believe that they are not smart enough to make many right decisions. But they like to hold good business forever and avoid to make many decisions. We should consider “Risk” as a loss, not the academic definition of “Beta” as a volatility of the portfolio.
We should focus on what the company produces, what competitors are doing, how much borrowing company has taken rather than focusing on the price history of the company and the daily price movement of the stocks.
Criteria for focusing during investment evaluation –
Mr. Buffett has explained three scenarios of management and owners of the company which impacts to the performance and corporate governance of the company.
First scenario where no controlling authority and company managed by directors
The second scenario where controlling owner also work as a manager
The third scenario where controlling owner who is not involved in the management