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.

wb_1980_01

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

wb_1980_02

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

wb_1980_03

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

wb_1980_04

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

wb_1980_05

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.

wb_1981_02

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.

fin_cab___hul

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

symphony_capex

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.

symphony_chart

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.

wb_1981_03

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 – 1971 – 1975

Posted on March 21, 2018 by Jimit Zaveri under Bibliophile

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

WB Letter 1971

Mr.Buffett’s objective is the growth of the business by improvising returns on total capital and returns on equity of the business.

Textile Operation

Berkshire’s textile business was facing recession and that dropped the performance of the business. To sustain profitability of the business; management is even trying to reduce costs as well as control inventories.

Insurance Operation

Berkshire started with reinsurance operation and home-state insurance operation, by acquiring home & automobile insurance company.

WB Letter 1972

Berkshire did not issue additional share capital to run the business. Instead, he repurchased his own company’s shares from the public during the recession.

WB 1972 01

WB Letter 1973

Mr.Buffett believes that premium rate will drop in future due to increasing competition in the Insurance business.

The merger of Diversified Retailing Company into Berkshire got approved pertaining to the terms and conditions of issuing shares of Berkshire. Berkshire and Diversified Retailing Company both had shares of Blue Chip Stamps and after the merger of Diversified Retailing Company into Berkshire, the holding of shares of Blue Chip into Berkshire increased.

WB 1973 01

WB Letter 1974

Textile operation

Berkshire, in order to avoid the buffer inventory, started its operations at 1/3^rd of its installed capacity.

Insurance operation

Unusual profitability into insurance business increased the competition level into the industry. On account of this competition; the profit level of various companies decreased and the underwriting losses increased on a larger scale. But above all of this, the insurance business kept on growing and earned higher returns on capital employed.

The merger of Diversified Retailing Company into Berkshire was terminated by Board of Directors but Mr.Buffett planned to reopen possibilities of the merger in the future.

WB Letter 1975

Textile operation

During 1975, the textile industry again faced recession and that resulted in the operation losses and reduction of employment by ~53%. Most of the textile producers decreased their production and this resulted into business rebound in the fourth quarter of 1975.

WB 1975 01

We can able to see that we should buy cyclical companies during the worst time in the industry as Mr.Buffett has done.

Iron ore price

Metal company

From the above, we can analyze that investors who had purchased shares of metal companies which dealt in iron ore during December 2015 where the prices were the lowest in the period of 10 years; have received decent returns.

Insurance operation of the company showed underwriting losses which in turn reduced the fund available to make an investment into the stocks and as a result of this; the investment portfolio reported an unrealized loss.

WB 1975 02

Mr.Buffett says that short-term market price fluctuation is not important; only business performance counts and hence he explains the criteria for the selection of stocks for holding the businesses for a longer period of time.

Warren Buffett’s Letters 1957 – 2012