WARREN BUFFETT’S LETTER – 1988-89

Posted on August 25, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1988

Borsheim’s

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.

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

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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.

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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. –

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.

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Low depreciation cover companies

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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

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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.

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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

WARREN BUFFETT’S LETTER – 1987

Posted on July 22, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1987

Mr.Buffett indicates the behavior of most of the investors and which should be avoided.

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Companies which can perform well and earned 20% above return on equity, all those companies have also performed well into stock-market in terms of stock prices. But such companies are few and we need to identify those and sit tight with holding those companies. Companies which have a good earning power then those companies do not require the debt.

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Mr.Buffett indicated that they do not cut down budget as the profit of the company falls. He has always focused on the employees and their welfare. We have seen that the Textile division of the company remains to continue for the longer period only due to largest employees’ works at the company.

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Whenever the shortage of a particular commodity arises then prices of particular commodity start rising and commodity companies start getting benefits of price raised.

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We should enter into the commodity companies when there is an excess supply and price of the particular commodity is traded lower which having a lower profitability, lower return ratio, such lower prices bring bankruptcy to weak companies etc. and should try to exit when shortage of supply and price of the particular commodity is traded on a higher side. But generally, we forget it and enter while the financial matrix of the commodity companies already improved which creates wealth destruction.

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Major mistakes made by an investor in the cyclical company is that they choose to invest when commodity prices are at higher level, return ratio improves well, profitability margin improves, etc. We should try to avoid such mistake.

Additionally, Mr.Buffett explained the philosophy of Ben Graham to see a market. Ben Graham quote market as Mr.Market and price moment as the mood of Mr.Market.

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Mr.Buffett has made a point regarding when he will ready to sell his existing security in which he has made an investment. These points can be used as a checklist for selling decision of our investment.

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People have misunderstood saying of Mr.Buffett and they keep on believing that Mr.Buffett never sell his investment and keep on holding it forever. But in reality, it is fact. He is also ready to sell securities when the above-mentioned criterion matched with his investment and he holds till the above-mentioned criterion does not match.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1985 – 86

Posted on June 24, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1985

Mr.Buffett indicate that Berkshire Hathway has a capability to earn superior return generally earn by corporate America.

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We need to focus on the mistakes which we have made and try to learn from our mistakes.

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Berkshire liquidates its textile business in the year 1985. Cyclical nature of the business and huge competition makes them helpless which resulted in the shutdown of the textile business.

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If management having good managerial skills then company able to produce the good economic return.

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Commodity business only able to produce profit while prices of the product are fixed or capacity is shorted. And managers can enhance capacity with the availability of capital when things look good in future.

Acquisition of Scott & Fetzer

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CEO of the Scott & Fetzer – Ralph Schey is capable enough. When he took charge of the company, at that Time, Company had 31 businesses. Ralph had disposed of many of the businesses which have limited profitability and result of that company left with 17 businesses. Capital allocation decision of the Ralph is good enough which Mr.Buffett admired.

After the purchase by Berkshire, Schey spent two years revising World Book segment by selling off the Japanese division and trimming domestic operations in much the same way as he had tightened Scott Fetzer.

WB Letter 1986

Mr.Buffett mentioned that he and Mr.Charlie only having a major two job to perform – one is to retain and attract a good manager to manage a business and other is to allocate capital of Berkshire Hathway in a way which helps to earn more money than average.

Acquisition of the Fechheimer Bros. Co.

Mr.Buffett mentioned that he only acquire a company when economic characteristics of the business are favorable, and connected with the right people who can handle position with integrity.

Mr.Buffett on Accounting numbers –

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Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1983 – 84

Posted on June 3, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1983

Berkshire Hathway made an acquisition of majority stake into Nebraska Furniture Mart. Mrs.Blumkin leave Russia for America when she was the age of 23. She had no formal education, no knowledge of English.

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Many retailers had pressurized to the furniture and carpet manufacturers to not to sell products to Mrs.B but Mrs.B has managed to run her business and also able to cut prices. She has to face many cases but she won all and received huge publicity.

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Mr.Buffett has explained the concept of intrinsic value in a very well manner.

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Mr.Buffett has explained how to look at the economic Goodwill with the example of the See’s Candy. He has an emphasis more on economic Goodwill rather than accounting Goodwill. Company’s ability to produce a higher return on assets compared to market then that excess return is economic Goodwill.

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Also mentioned that assets heavy businesses require additional capital for the further growth.

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Great business creates a fortune during an inflationary year where the company requires less tangible assets. And also companies having availability of the fund for acquisition of the new business. They do not have to depend on the bringing additional fund by either debt or issuing new share capital.

I have quoted example of 2 two companies into the automobile business and one company is in the paint business.

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Example 1 – 3 which are asset heavy businesses, where we can see that borrowing is compounding, non-availability of free cash flow and wealth of shareholders does not created or get erode, whereas in example 4 – 6 which are asset light or least asset businesses, we can see that borrowing reduced or increased at a lower rate and investments into the books has compound well, availability of free cash flow which resulted into the wealth creation for the shareholders.

But the management who is not disciplined then they will do a silly things such as –

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