WB Letter 1969
Mr.Buffett has made a comment on the fund management business –
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.
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.
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.
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.
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 Letter 1970
Mr.Buffett stated his criteria for purchasing bonds.
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.