Mr.Buffett has taught us – 

Never count on making a good sale. Have a purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.

Our business is making excellent purchases – not making extraordinary sales.

Mr. Buffett believes that big money can be made by making investment decisions based on qualitative factors whereas sure money can be made by making investment decisions based on quantitative factors. And hence, on the basis of this; he considers himself as a quantitatively focused investor.

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.

Business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.

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.

Accounting numbers, of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it.

“What we learn from history is that we do not learn from history.”

Any company’s level of profitability is determined by three items: (1) what its assets earn; (2) what its liabilities cost; and (3) its utilization of “leverage” – that is, the degree to which its assets are funded by liabilities rather than by equity. Great companies = Float + Investment + Cash with higher return ratio

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

Buy commodity, sell brand has long been a formula for business success.

Capital-intensive business, look for PBT / interest cost rather EBITDA / interest cost.

When we are fearful with our investment decisions then we focus on the each and every aspects which can result in the erosion of the capital.

Mr.Buffett has taught us many concepts and wisdom which is essential to us while making an investment decision. I am hereby compiling all my learning from the letters of Mr.Warren Buffett. Also an evolution of Mr.Buffett from bargain to quality businesses.

For all in one learning from Mr.Warren Buffett’s Letters, Click here –>  BIBLIOPHILE WARREN BUFFETT’S LETTER 1957-2017


WB Letter 1988


Berkshire Hathway has made an investment in the Borsheim’s which is a jewelry business in Omaha. This business is run by family members of Mrs.Blumkins (Founder of The Nebraska Furniture Mart). This business also getting managed by the people who have similar quality as Mrs.B such as an extraordinary combination of brains, integrity, and enthusiasm for work. All members of the Friedman family has been continued with the managing business as they were managing before Berkshire has acquired an interest.

WB 1988 01

Insurance business of the company remains in the pressure since long time and company expect to the float/premiums ratio to be at least three times in the year 1989 and 1990 with help of the team of Mike Goldberg, Ajit Jain, Dinos Iordanou, and the National Indemnity managerial team.

In the year 1988, Berkshire has made an acquisition of Coca-cola and Federal Home Loan Mortgage Pfd. (“Freddie Mac”).

Coca Cola 1988

Mr.Buffett had made an investment into one arbitrage situation – Rockwood & Co. when he worked at Graham-Newman Corp. Rockwood & Co. is a chocolate manufacturing company based in Brooklyn. During the year 1954, the price of the cocoa soared due to the temporary shortage.

WB 1988 02

Mr.Buffett give few points to keep in mind while making an investment into arbitrage opportunities-

WB 1988 03

Efficient Market Theory which is more in trend and many people believe that market knows everything. Yes, Market know many a thing which we also don’t know, but it is also a fact that many a time, the market also provides us an opportunities to make an investment which reward us in future.

Mr.Buffett also mentioned that if a market is efficient and know everything then he has not generated decent returns by investing into the various arbitrage opportunities. We also have seen wealth creation through investing into the equities and if market knows everything then few people are not able to generate good wealth. But with such arguments, we should not forget that market also knows many a thing and already discounted those into a price of securities.

WB Letter 1989

Borsheim’s – Jewelry business focusing more on the controlling cost and this cost control attracts more sales volume.

WB 1989 01

Berkshire has tripled advertising expenditure for the See’s Candies which reach the highest percentage of sales and which has converted into the good sales.

Coca-cola has started a new journey into the year 1981 with the appointment of the Roberto Goizueta as a CEO and Don Keough. Due to both, a product of the company started gaining momentum and sales has been started improving. They transform business in a manner which can benefit the shareholders.

Berkshire Hathway purchased preferred of the Gillette Co. –

WB 1989 02

As Mr.Buffett mentioned, we also need to look for the cover over depreciation as we look for the cover over the interest expenditures. Depreciation & capital expenditure is also a real expense, we can delay it but we cannot avoid it. If the company continuously keeps on avoiding capital expenditure then business will no longer remain into existence.

WB 1989 03

Low depreciation cover companies

Low dep cover

We can see in above image that companies having a low depreciation cover then those companies need to bring external finance (Debt or dilution of capital) for expansion whereas those companies having a good depreciation cover then those companies do not need to bring external finance to fund expansion (repayment of debt or buyback of shares also can be done).

High depreciation cover companies

High dep cover

Mr.Buffett has mentioned his past mistakes for the review purpose. He believes that before committing a new mistake, we need to review our old mistakes.

WB 1989 04

WB 1989 05

WB 1989 06

WB 1989 07

WB 1989 08

WB 1989 09

WB 1989 10

We can learn and correct our mistakes from the learning from the mistakes of Mr.Buffett. These mistakes show us a transformation of Mr.Buffett from buying a “cigar butt” to a business which has an economic value.

Warren Buffett’s Letters 1957 – 2012

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