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.
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.
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 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.
Mr.Buffett quoted the shifting of a pendulum from good period to the worst period –
He mentioned his investment criteria as –
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%.
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.
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 –
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