Tag Archives: Warren Buffett’s Letter

WARREN BUFFETT’S LETTER – 1976 – 1979

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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.

WB 1979 03

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

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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 1/3rd 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

Metal company 1

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

 

WARREN BUFFETT’S LETTER – 1969 – 1970

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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.

WB 1969 03

WB 1969 04

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.

WB 1969 05

WB 1969 06

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.

WB 1969 07

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.

WB 1969 08

WB Letter 1970

Mr.Buffett stated his criteria for purchasing bonds.

WB 1969 09

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

WARREN BUFFETT’S LETTER – 1966 – 1968

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WB Letter 1966

Mr. Buffett had acquired a controlling stake in Berkshire Hathway in the year 1965. Berkshire was a textile company and Mr. Buffett had started acquiring the stake of Berkshire since 1962 at the price of $7.60 per share. During the year 1965, Berkshire had closed down certain mills and only 2 mills were working as they were profitable and with about 2300 employees. As per the calculations, networking capital alone was worth about $19 per share.

Diversification

Mr. Buffett gave his view on diversification and also gave his opinion on why aren’t all managers generating superior returns.

WB 1966 01

Mr.Buffett says that he diversifies less as compared to what majority of the investment managers does. He can willingly invest upto 40% of the net worth into a single company; where the probability is higher about his facts and reasoning being appropriate in enhancing the value of the investment.

WB 1966 02

Mr. Buffett mentions that we should have a proper diversifying policy rather than behaving illogically as others do by owning one hundred securities into their portfolio. Rather, we should work as per our own view and understanding.

WB 1966 03

During the year 1966, Mr.Buffett had fully acquired Hochschild and Kohn & Co. The quantitative and qualitative aspects of the business were evaluated and weighed against price, both on an absolute basis and relative to other investment opportunities.

WB 1966 04

WB Letter 1967

During the year 1967, Mr.Buffett had faced difficulty in identifying new investment ideas. And the reason he felt was as below –

WB 1967 01

Mr. Buffett does not make an investment into the business which is difficult for him to understand (like technology business). He prefers staying away from the stocks which are in fashion into the market as such approaches don’t fit properly with his stock selection policy.

WB 1967 02

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.

Warren Buffett’s Letters 1957 – 2012