WARREN BUFFETT’S LETTER – 1980 – 1981

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WB Letter 1980

Mr.Buffett gave his opinion about the repurchase of outstanding shares of the company.

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

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

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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

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

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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.

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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.

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

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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.

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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.

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