Brief notes on the 1978 Berkshire Hathaway Shareholder Letter

  • GAAP financial statements are merely a starting point to understand the economics of a business.
  • Berkshire is best understood by looking at its various segments.
  • Buffett tries to provide segmented information to investors (“partners”) in the same form that he likes to see it.
  • One-time capital gains should not be used in evaluating the performance of any given single year. Nevertheless, they are a meaningful component of Berkshire’s longterm performance.
  • Buffett does not believe it is possible to forecast short-term stock market prices.
  • Return on equity may be overstated if balance sheet assets, such as property and equipment, are carried materially below replacement cost.
  • Textiles is a lousy business characterized by slow capital turnover, low profit margins, poor returns on capital.
  • Attempts to improve profitability may yield little benefit if a business’s competitors are able to make the same improvements, i.e. differentiating products, lowering costs, increasing productivity, changing product mix, etc. [Author’s note: Buffett will later write that this is akin to standing on your tippy toes at a parade.]
  • When it come to controlling costs, management’s past track record is a meaningful indicator of future performance.
  • As long as a business is generating at least modest returns, Buffett will consider non-economic factors when deciding to remain in the business.
  • The hallmarks of Berkshire’s highly successful insurance operations were already on display in 1978: discipline, growth, realism, conservative expectations, and recognition of the tremendous power of low-cost float coupled with investment skill.
  • Buffett reiterates his investment criteria: “(1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively.”
  • Buffett chides pension fund managers for investing heavily when the market was richly valued and investing relatively little at bargain prices.
  • Buffett sought blocks of stock for Berkshire’s insurance portfolios at valuations lower than what they would “command in negotiated sales”.
  • As a net buyer of securities, Buffett prefers share prices to stay undervalued rather than quickly re-pricing to unattractive levels.
  • Buffett’s policy is to concentrate holdings.
  • Forgoing control is completely rational when 1) a meaningful portion of a business can be purchased in the market for less than it would cost to create it, 2) the business has relatively certain prospects, and 3) possesses proven management. See the SAFECO example.
  • Buffett praises investee companies’ reinvestment of retained earnings, provided it is done at attractive returns. This anticipates his concept of look-through earnings.
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