WARREN BUFFETT’S LETTER – 1982

Posted on May 27, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1982

Mr.Buffett has mentioned characteristics of cyclical industries-

The product which can be differentiated and sell it by the branding of it then the company can able to earn extra from it. But the product where no chance to differentiate product then profitability is the major factor of market forces.

We cannot predict that when the cycle will going to turn, we cannot predict that when demand will overtake supply and prices of the commodity will start improving or supply increases much compared to demand and prices starts falling.

We should focus when any company is engaged in the corporate acquisition. If any company is issuing shares for the acquiring a company which having lesser intrinsic value then we should keep cautious. Such decision of the management provides us a clue regarding the perspective of the management and weather company is intended to create the wealth of the owners or not.

While management makes an acquisition at the expensive valuation by issuing their shares than some of the rationale given by management which we should check by putting highest cautions.

Mr.Buffett had provided a solution by which management can avoid value destruction for the existing owners of the company.

Many a time, management only focuses on the increasing future Earning Per Share (EPS) by sacrificing the strength of the balance sheet. But they forget that if the balance sheet does not remain strong for a longer period of time then business is going to have a tough time into the future.

The criterion which Mr.Buffett focuses while making an investment decision –

Warren Buffett’s Letters 1957 – 2012

Disclaimer: Businesses discuss in this article is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered research analyst.

WARREN BUFFETT’S LETTER – 1980 – 1981

Posted on April 26, 2018 by Jimit Zaveri under Bibliophile

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1980

Mr.Buffett gave his opinion about the repurchase of outstanding shares of the company.

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He had discussed the effect of inflation to his shareholders in a very well manner.

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Buffett focuses on businesses that can enhance the Return on Equity with the rising inflation and without the need of additional capital requirement.

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When there is a temporary trouble to the business; and if the managers have an ability to cure that temporary problem and the business itself can generate good cash; then

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Buffett mentions that we should focus on strong business so that it does not depend on the good management.

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WB Letter 1981

Mr.Buffett has given his view on maximizing economic benefits rather than accounting appearance. And also stated some of the mistakes which the management is making.

Rather than buying companies which have the management with above-mentioned characteristics, he suggests buying a company which has the following characteristics.

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Few companies are able to enhance their margins though their sales which are not growing at a very high rate and are still sustaining their market share.

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In India, there is an air cooler manufacturing company which grew well without major additional capital.

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In the above table; we can see that Sales and Net profit has grown by 30% and 48% CAGR respectively. And if we see cumulative capital expenditure made by the company; then it is just 10% of the cumulative net profit. The company has grown its sales and profitability without the requirement of major additional capital.

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Mr.Buffett gives a good logical perspective that when the company can earn higher Return on equity; then they should invest their earnings into the business itself. And if the company is unable to earn higher Return on equity; then they should distribute earnings to the owners so that the owners can deploy capital in a better way. But we should be aware of companies that are raising capital for the dividend payout.

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Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1976 – 1979

Posted on April 20, 2018 by Jimit Zaveri under Bibliophile

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1976

Performance of the company has shown significant improvement in the year 1976 and company has been able to achieve 17.30% returns on shareholders’ equity.

Textile operation

Return on sales and Return on capital employed of textile operations was inadequate due to sluggish industry condition. Performance of any company can be measured by looking at the return on sales and return on capital employed and whether the business has a temporary problem or not.

Insurance operation

In the year 1976, insurance underwriting business has shown good performance due to the increase in the premium rates.

WB Letter 1977

People measure higher earnings per share on the basis of the past record-breaking earnings but according to Mr.Buffett, if the company issued 10% additional equity capital and if due to that there is an increase in earnings per share by 5%; then it is not considered a good performance. He mentioned that rather focusing on the higher reported earnings per share, we should focus on the return on equity capital (I.e. RoE).

Textile operation

Textile operations once again were reported as poor earning in the year 1977. Mr.Buffett gave a reason to the shareholders for remaining into the textile business.

WB 1977 01

Insurance operation

Mr.Buffett quoted the shifting of a pendulum from good period to the worst period –

WB 1977 02

He mentioned his investment criteria as –

WB 1977 03

WB Letter 1978

Diversified Retailing Company got merged into the Berkshire Hathway and due to this merger; holding of Berkshire into the Blue Chip Stamps increased to ~58%.

Textile operation

When a product is indifferentiated and business is capital intensive in nature, we earn inadequate return whereas we can earn above-average returns during a tight supply or shortage of product.

WB Letter 1979

Investment into equities shares carried out till 1979 at the lower of aggregate cost or market value. But from the year 1979, the accounting profession has decided to carry out investment at the market value.

Mr.Buffett has mentioned “Return on Capital Employed” as the criteria for measuring managerial performance.

WB 1979 01

A few years ago, Mr.Buffett had decided to purchase a Waumbec Mills in Manchester, the stock was available statistically cheap, well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But this decision resulted into the poor performance and faced too many difficulties to manage the business. Due to this experience, Mr.Buffett communicates an effective point to understand –

WB 1979 02

According to Mr.Buffett, we should focus on the management who utilize retained earnings effectively and will translate a dollar retained by them into a dollar or more of subsequent market value for us.

Mr.Buffett recognized his mistake in buying a bond and he had accepted this in front of his shareholders.

If we recognize our mistake and accept it, only then we can learn from it.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1969 – 1970

Posted on March 8, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1969

Mr.Buffett has made a comment on the fund management business –

WB 1969 01

Mr.Buffett has mentioned that in the year 1967, Associated Cotton Shops, a subsidiary of DRC run by Ben Rosner, and National Indemnity Company, a subsidiary of Berkshire Hathway run by Jack Ringwalt can able to earn about 20% on capital employed. And there are only 37 companies among Fortune 500 which can able to achieve such performance. Achieving a better performance is not possible for each company. Also, Mr.Buffett indicates irrelevant of focusing on market price.

WB 1969 02

Mr.Buffett has made a decision to liquidate partnership due to changing the market environment and increasing the size of the fund manage by the Buffett. Such factors bring down the performance of the partnership and also Mr.Buffett does not able to identify quantitatively cheap investment ideas. He suggested Bill Ruane as a fund manager to the partners who want to give money to manage.

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Diversified Retailing Company owned two businesses – one was Hochschild, Kohn & Company of Baltimore and another one was Associated Retail Stores. The company had sold out entire stake of Hochschild, Kohn & Company of Baltimore to the Supermarkets General Corp. for $5,045,205 of cash plus non-interest bearing SGC notes for $2 million due on date 2-1-70, and $4,540,000 due on date 2-1-71. The present value of these notes approximates $6.0 million so, effectively, DRC received about $11 million on the sale. DRC has tangible net assets of about $11.50 – $12.00 per share, an excellent operating business and substantial funds available for reinvestment in other operating businesses. On an interim basis, such funds will be employed in marketable securities.

Buffett Partnership owns 691441 shares of Berkshire Hathway, the company having an operating businesses includes Textile, Insurance, Illinois National Bank, Trust Company of Rockford Illinois, Sun Newspapers Inc, and Gateway Underwriters.

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Diversified Retailing Company and Berkshire Hathway, both were run by an excellent management and which was one of the reason for Buffett to hold these both companies. Mr.Buffett mentioned that we should not focus on the short-term price action of the securities because we are not holding a piece of paper but we are holding a business. So if businesses will perform well over a period of time then the stock will also perform.

There were a few questions was asked to Buffett by his partners and Buffett has given logical answers to those questions.

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Above answer shows his genuineness, he is not ready to liquidate a business who has a huge employee strength just because of his own benefits. He decided to keep business working till the time business does not require any additional capital.

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WB Letter 1970

Mr.Buffett stated his criteria for purchasing bonds.

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Berkshire Hathway’s textile division experiencing a recession in the textile industry which has the impact of lower profitability. Management has tried to control costs during a recession time so that operation can run more efficiently. Other both major businesses i.e insurance business and banking business of Berkshire performing well.

Warren Buffett’s Letters 1957 – 2012