053: Investing Intensive 1982-86

Table of Contents

(Quick Check-In)
1. 1982 Letter
2. 1983 Letter
3. 1984 Letter
4. 1985 Letter
5. 1986 Letter

This issue does not and is not meant to fully summarize or recap the Berkshire Hathaway shareholder letters. Rather, it includes the tidbits I found interesting and wanted to highlight during my reading. Always do your own reading and come to your own conclusions about Mr. Buffett’s opinions.

How to find the quotations: It is difficult to cite specific sections of a given letter because there are no consistent page numbers and the sections are not numbered. The easiest way to find the quote is to open a PDF of the letter and use the search feature.

(Quick Check-In)

Wow. Week 2. Only. How are you doing with your own Investing Intensive? I find this consistent level of reading to be A LOT.

The amount of time each letter takes to to read depends largely on how carefully I choose to read it. I’m really enjoying reading them quite closely, but then I find I’m spending hours on one single letter and that’s a little bit much.

I remind myself this isn’t the last time I will read this letter, I can come back to it whenever I want, and give silent thanks to Mr. Buffett in my head for the lessons and move on.

So let’s move on! Here are this week’s letters. Enjoy!

1. 1982 Berkshire Hathaway Letter, dated March 3, 1983

1982 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Standard of success mentioned at the beginning: operating earnings. However, he then delved into why it’s not the best yardstick for Berkshire anymore (see Highlights, below). He also mentioned book value, later on.

Highlights:

  • This letter was about how to financially evaluate companies – Berkshire, and and any companies being purchased.
  • After years of stating that operating earnings are the best yardstick for Berkshire, he then completely reversed himself – and admitted the cognitive dissonance of it! I love him. “It was only a few years ago that we told you that the operating earnings/equity capital percentage, with proper allowance for a few other variables, was the most important yardstick of single-year managerial performance. While we still believe this to be the case with the vast majority of companies, we believe its utility in our own case has greatly diminished. You should be suspicious of such an assertion. Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager.” (emphasis mine)
  • OK, so what does he prefer now? Berkshire owns percentages of quite a few companies, and he wants to look at the effectiveness with which earnings are used, regardless of ownership percentage. “Economic” earnings rather than “accounting” earnings.
  • Berkshire and Blue Chip were in the process of merging, so he described at length why exchanging stock was, in his opinion, the best way to merge. Unusual opinon because he then described why typically buying a company for stock is a bad deal for the buyer and especially for shareholders, but this was an exception because the intrinsic business value exchange was equal. I don’t love purchases with shares, and it’s clear Mr. Buffett doesn’t either and is trying to defend this one.

Checklist points:

  • “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
  • Acquisitions:
    • Stock selling at intrinsic value = fine
    • Stock selling below intrinsic value = undervalued currency. “In that case, the buyer is faced with the unhappy prospect of using a substantially undervalued currency to make its purchase.”
    • Stock selling above intrinsic value = overvalued currency. “In that situation, the use of stock as currency actually may enhance the wealth of the acquiring company’s owners.”
    • Company that issues new shares of stock to make an acquisition = dilutes current owners…usually with the rationalization that it will be made up for in the future due to this amazing new acquisition.
  • He listed a few favorite rationalizations of stock-issuing managements, and it quite struck me that these are the same rationalizations we, investors, tell ourselves! Sound familiar? I won’t copy-paste the entire section here, but it’s worth going and reading.
    • “The company we’re buying is going to be worth a lot more in the future.” (Presumably so is the interest in the old business that is being traded away; future prospects are implicit in the business valuation process. If 2X is issued for X, the imbalance still exists when both parts double in business value.)”
    • “We have to grow.” (….Were Berkshire to issue shares tomorrow for an acquisition, Berkshire would own everything that it now owns plus the new business, but your interest in such hard-to-match businesses as See’s Candy Shops, National Indemnity, etc. would automatically be reduced…)”
    • “Our stock is undervalued and we’ve minimized its use in this deal – but we need to give the selling shareholders 51% in stock and 49% in cash so that certain of those shareholders can get the tax-free exchange they want.” (…the wishes of sellers can’t be the determinant of the best interests of the buyer – what would happen if, heaven forbid, the seller insisted that as a condition of merger the CEO of the acquirer be replaced?)”
  • I thought this was a really important point for a checklist, which I’ve never heard quite put this way: “A second language problem relates to the equation of exchange. If Company A announces that it will issue shares to merge with Company B, the process is customarily described as “Company A to Acquire Company B”, or “B Sells to A”. Clearer thinking about the matter would result if a more awkward but more accurate description were used: “Part of A sold to acquire B”, or “Owners of B to receive part of A in exchange for their properties”. In a trade, what you are giving is just as important as what you are getting.” Clear, intellectually honest thinking. Which is what a checklist is supposed to foster.
  • Would I be willing to buy this entire business for its entire price? “Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell part of it. And if it isn’t smart to sell all on such a basis, they should ask themselves why it is smart to sell a portion.”
  • Does this management have history of dumb share issuances or share buybacks? “For current and prospective owners understandably will not pay as much for assets lodged in the hands of a management that has a record of wealth-destruction through unintelligent share issuances as they will pay for assets entrusted to a management with precisely equal operating talents, but a known distaste for anti-owner actions.”

Particular points of candor:

  • No one outside would have ever known about this. But of course he told us anyway! “(Your Chairman left the room once too often last year and almost starred in the Acquisition Follies of 1982. In retrospect, our major accomplishment of the year was that a very large purchase to which we had firmly committed was unable to be completed for reasons totally beyond our control. Had it come off, this transaction would have consumed extraordinary amounts of time and energy, all for a most uncertain payoff. If we were to introduce graphics to this report, illustrating favorable business developments of the past year, two blank pages depicting this blown deal would be the appropriate centerfold.)”

I was also struck by:

  • The whole letter was about defending this stock merger with Blue Chip. Clearly touched a nerve with him, considering all the stock purchases he decried. I really took his point away that looking at management’s history of stock purchases, stock issuances, and stock buybacks tells us a lot about how much that management is on the side of existing, long-term shareholders.

2. 1983 Letter, dated dated March 14, 1984

1983 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Notable: only change is the absence of Crum & Forster.

Standard of success mentioned at the beginning: None. Far down in the letter, he mentioned its book value, as proxy for “intrinsic business value.”

Highlights:

  • This letter is his mission statement. Well worth reading if you read no others.
  • Because lots of new shareholders showed up, he began, instead of usually mentioning his standard of success, with “major business principles.” There are too many to copy-paste here, but I recommend going and reading them. Key points that stuck out to me are highly useful for evaluating other companies, so I put them below in the Checklist points section.
  • Intrinsic business value is very different from book value: “Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out.”
    • Perfect analogy: “Assume you spend identical amounts putting each of two children through college. The book value (measured by financial input) of each child’s education would be the same. But the present value of the future payoff (the intrinsic business value) might vary enormously from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value.”
  • Extensive description and discussion of the accounting concept of Goodwill, including a stand-alone essay at the end on the subject.
  • In the letter, he made the point that his view on the importance of Goodwill changed drastically from what he had been taught by his investing teacher (he doesn’t say who it was in the letter, but it’s reasonable to assume it was Ben Graham).
    • “Keynes identified my problem: “The difficulty lies not in the new ideas but in escaping from the old ones.” My escape was long delayed, in part because most of what I had been taught by the same teacher had been (and continues to be) so extraordinarily valuable. Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets.”
    • Goodwill now, so many years and an entirely new technology economy later, is even more different and more important than it was in 1983. Hidden value is an entirely other subject, but it’s one based on Buffett’s views on Goodwill described here.

Checklist points:

  • Directors being owner-shareholders is highly important. “…our directors are all major shareholders of Berkshire Hathaway. In the case of at least four of the five, over 50% of family net worth is represented by holdings of Berkshire. We eat our own cooking.” A lot of smart people think the exact opposite: that directors are, in theory anyway, independent from the company, so as to give independent (unbiased) advice. Why you would want a disinterested director is beyond me, as I as a shareholder certainly want someone deeply biased toward the success of the company, but I do think it’s important to point out the differing views.
  • The goal: “…directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital.”
  • After the years before this had horrifically high interest rates: “We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis.”
  • Do retained earnings earn for shareholders? “We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained.”
  • What are the larger industry prospects? “we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling – the advocates will be sincere but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.)”
  • Ding ding ding. “We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less…We also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private.”
  • “One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it.” This is such a golden question. Simple. Vital.
  • Check the share count of a company over the years. Has it grown and have shareholders been diluted? “Berkshire now has 1,146,909 shares outstanding compared to 1,137,778 shares at the beginning of fiscal 1965, the year present management assumed responsibility. For every 1% of the company you owned at that time, you now would own .99%. Thus, all of today’s assets – the News, See’s, Nebraska Furniture Mart, the Insurance Group, $1.3 billion in marketable stocks, etc. – have been added to the original textile assets with virtually no net dilution to the original owners.”

Particular points of candor:

  • One-year results mean little. “Instead, we recommend not less than a five-year test as a rough yardstick of economic performance. Red lights should start flashing if the five-year average annual gain falls much below the return on equity earned over the period by American industry in aggregate. (Watch out for our explanation if that occurs as Goethe observed, “When ideas fail, words come in very handy.”)”
  • Truth. “People who buy for non-value reasons are likely to sell for non-value reasons.”
  • Savage. “A hyperactive stock market is the pickpocket of enterprise.” Because it creates price swings that are not related to what the business is actually doing, which is distracting, focused on the wrong values, and lines the pockets of stockbrokers.

I was also struck by:

  • How intensely he praised the Blumkin family.
  • Detailed discussion of See’s and Buffalo Evening News, two small businesses for Berkshire, so I enjoy how much he’s involved with the nitty-gritty of their industry. It’s a good example.
  • How much he cares about Berkshire’s shares being bought and sold – i.e., turnover – because of its effect on the company as a whole. I’d imagined he paid little attention to share turnover, but clearly, at least then, he paid a lot of attention to it.

3. 1984 Letter, dated February 25, 1985

1984 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Standard of success mentioned at the beginning: net worth, book value, and per-share intrinsic business value.

Highlights:

  • This letter is really about Berkshire’s business operations and not much outside that. GEICO, See’s, the newspaper business, the furniture business.
  • Regarding inflation and the budget deficit: “…we view the longterm outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation….we believe that present fiscal policy – featuring a huge deficit – is both extremely dangerous and difficult to reverse. Without a reversal, high rates of inflation may be delayed (perhaps for a long time), but will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral. While there is not much to choose between bonds and stocks (as a class) when annual inflation is in the 5%-10% range, runaway inflation is a different story. In that circumstance, a diversified stock portfolio would almost surely suffer an enormous loss in real value. But bonds already outstanding would suffer far more.”
    • I wonder – and fear – if now is the end of the “long time”.
    • “During an inflationary period, companies with a core business characterized by extraordinary economics can use small amounts of incremental capital in that business at very high rates of return (as was discussed in last year’s section on Goodwill).”

Checklist points:

  • “Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer.”
  • Evaluate management like the Blumkins. “All members of the family: (1) apply themselves with an enthusiasm and energy that would make Ben Franklin and Horatio Alger look like dropouts; (2) define with extraordinary realism their area of special competence and act decisively on all matters within it; (3) ignore even the most enticing propositions failing outside of that area of special competence; and, (4) unfailingly behave in a high-grade manner with everyone they deal with. (Mrs. B boils it down to “sell cheap and tell the truth”.)”
  • His view on how hard it is to unseat the dominance of a newspaper within its community rang very true to me in a modern-day analogous business: the internet. Take Amazon. Amazon won with lower prices and easier buying and shipping…until it beat everyone else. Same playbook for many, many, many websites and apps. Facebook kept attracting eyeballs, without featuring ads on its platform, in its fight against MySpace and all the others until its network effects moat was strong enough. This one is long, but worth it:
    • “Owners, naturally, would like to believe that their wonderful profitability is achieved only because they unfailingly turn out a wonderful product. That comfortable theory wilts before an uncomfortable fact. While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better – as long as either class of paper is dominant within its community. Of course, product quality may have been crucial to the paper in achieving dominance….Once dominant, the newspaper itself, not the marketplace, determines just how good or how bad the paper will be. Good or bad, it will prosper. That is not true of most businesses: inferior quality generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply because of its “bulletin board” value. Other things being equal, a poor product will not achieve quite the level of readership achieved by a first-class product. A poor product, however, will still remain essential to most citizens, and what commands their attention will command the attention of advertisers. Since high standards are not imposed by the marketplace, management must impose its own.” (emphasis mine)
  • GEICO’s stock price dropped, and Mr. Buffett noted, “We are not at all unhappy with such a result: we would far rather have the business value of GEICO increase by X during the year, while market value decreases, than have the intrinsic value increase by only 1/2 X with market value soaring. In GEICO’s case, as in all of our investments, we look to business performance, not market performance.” Question for each and every company – intrinsic business value is subjective and criteria varies for each company. What is it for THIS company?
  • Does the CEO explain dividend policy? “Dividend policy is often reported to shareholders, but seldom explained. A company will say something like, “Our goal is to pay out 40% to 50% of earnings and to increase dividends at a rate at least equal to the rise in the CPI”. And that’s it no analysis will be supplied as to why that particular policy is best for the owners of the business.”

Particular points of candor:

  • No one but Mr. Buffett could ever do this, and get it right. “Our evaluation of the integrity of Mrs. B and her family was demonstrated when we purchased 90% of the business: NFM had never had an audit and we did not request one; we did not take an inventory nor verify the receivables; we did not check property titles. We gave Mrs. B a check for $55 million and she gave us her word. That made for an even exchange.”
  • Regarding insurance underwriting results: “…my errors in reporting to you have been substantial and recently have always presented a better underwriting picture than was truly the case. This is a source of particular chagrin to me because: (1) I like for you to be able to count on what I say; (2) our insurance managers and I undoubtedly acted with less urgency than we would have had we understood the full extent of our losses; and (3) we paid income taxes calculated on overstated earnings and thereby gave the government money that we didn’t need to.”

I was also struck by:

  • Greenmail? Shareholders demanding their shares be purchased by the company as an alternative to hostile takeover. It’s so 80s. “(Our endorsement of repurchases is limited to those dictated by price/value relationships and does not extend to the “greenmail” repurchase – a practice we find odious and repugnant. In these transactions, two parties achieve their personal ends by exploitation of an innocent and unconsulted third party. The players are: (1) the “shareholder” extortionist who, even before the ink on his stock certificate dries, delivers his “your-money-or-your-life” message to managers; (2) the corporate insiders who quickly seek peace at any price – as long as the price is paid by someone else; and (3) the shareholders whose money is used by (2) to make (1) go away. As the dust settles, the mugging, transient shareholder gives his speech on “free enterprise”, the muggee management gives its speech on “the best interests of the company”, and the innocent shareholder standing by mutely funds the payoff.)”

4. 1985 Letter, dated March 4, 1986

1985 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Standard of success mentioned at the beginning: net worth, and per-share book value.

Highlights:

  • He did things this year! He started the letter off, very unusually, with their major acquisitions and sales. Clearly excited that he had made some. It’s very wait…wait…wait…and then pounce.
  • “Today we cannot find significantly-undervalued equities to purchase for our insurance company portfolios.” Yikes. Like now. “The current situation is 180 degrees removed from that existing about a decade ago, when the only question was which bargain to choose.” Like 2009. So be realistic: “In our 1974 annual report I could say: “We consider several of our major holdings to have great potential for significantly increased values in future years.” I can’t say that now. It’s true that our insurance companies currently hold major positions in companies with exceptional underlying economics and outstanding managements, just as they did in 1974. But current market prices generously appraise these attributes, whereas they were ignored in 1974. Today’s valuations mean that our insurance companies have no chance for future portfolio gains on the scale of those achieved in the past.”
  • He shut down Berkshire’s textile operation because it was too expensive to run. Clearly painful. “I ignored Comte’s advice – “the intellect should be the servant of the heart, but not its slave” – and believed what I preferred to believe.” He used it, in the letter, as an object lesson of what book value means in real life. In a failing industry, not much.
    • Just as an example of the pain – I feel for him, and especially for all the employees, who worked together to keep it going for so many years. “Thus, we faced a miserable choice: huge capital investment would have helped to keep our textile business alive, but would have left us with terrible returns on ever-growing amounts of capital. After the investment, moreover, the foreign competition would still have retained a major, continuing advantage in labor costs. A refusal to invest, however, would make us increasingly non-competitive, even measured against domestic textile manufacturers. I always thought myself in the position described by Woody Allen in one of his movies: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.””
    • On book value: “Some investors weight book value heavily in their stock-buying decisions (as I, in my early years, did myself).” There’s that shift from Graham to Munger!
    • These numbers are insane. Book value is often talked about as what the company would receive if it paid off all its liabilities and then sold all its assets in a fire sale. Literally, in accounting, it’s the assets minus the liabilities. It’s a number that’s relied upon. I mean, look above – Mr. Buffett cited Berkshire’s book value at the beginning of his letter. But check this out, in real life, in a dying industry. “The equipment sold (including some disposed of in the few months prior to the auction) took up about 750,000 square feet of factory space in New Bedford and was eminently usable. It originally cost us about $13 million, including $2 million spent in 1980-84, and had a current book value of $866,000 (after accelerated depreciation). Though no sane management would have made the investment, the equipment could have been replaced new for perhaps $30-$50 million. Gross proceeds from our sale of this equipment came to $163,122. Allowing for necessary pre- and post-sale costs, our net was less than zero. Relatively modern looms that we bought for $5,000 apiece in 1981 found no takers at $50. We finally sold them for scrap at $26 each, a sum less than removal costs.” (emphasis mine)

Checklist points:

  • “If the financial experience of new owners of Berkshire is merely to match the future financial experience of the company, any premium of market value over intrinsic business value that they pay must be maintained.” Interesting way to look at paying a premium for a great company. Haven’t heard this before. Pay it – IF you think that premium can be maintained into the future. Otherwise, you’ve lost money already.
  • What business boat am I getting into? “…a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
  • To measure increases in earnings over the years: “You must first make sure that earnings were not severely depressed in the base year. If they were instead substantial in relation to capital employed, an even more important point must be examined: how much additional capital was required to produce the additional earnings? In both respects, our group of three scores well. First, earnings 15 years ago were excellent compared to capital then employed in the businesses. Second, although annual earnings are now $64 million greater, the businesses require only about $40 million more in invested capital to operate than was the case then.”
  • “if return on capital was lackluster and capital employed increased in pace with earnings, applause should be withheld.”

Particular points of candor:

  • “At this point we usually turn to a discussion of some of our major business units. Before doing so, however, we should first look at a failure at one of our smaller businesses. Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life. He does so in the spirit of the man who said: “All I want to know is where I’m going to die so I’ll never go there.” You’ll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses.”

I was also struck by:

  • His foray into criticizing options admitted that there are companies using options to properly incentivize employees to think and act like owners. I suspect the way options are used now is quite different from in the 80s.
  • This is the first time he mentioned the annual meeting! And so it began…

5. 1986 Letter, dated February 27, 1987

1986 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Standard of success mentioned at the beginning: Net worth, and per-share book value.

  • Net worth and book value terms refer to the same thing, and it kind of bugs me that he uses different terms for them in the same paragraph. These letters are meant to be for any shareholder with any level of financial knowledge, but that’s just confusing.

Highlights:

  • This letter was about not having any great investing ideas. “…we had no new ideas in the marketable equities field, an area in which once, only a few years ago, we could readily employ large sums in outstanding businesses at very reasonable prices. So our main capital allocation moves in 1986 were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either. If Charlie and I were to draw blanks for a few years in our capital-allocation endeavors, Berkshire’s rate of growth would slow significantly.”
  • Instead, he praised his business managers by name and profusely.
  • Best attributes of a great business manager: “they work because they love what they do and relish the thrill of outstanding performance. They unfailingly think like owners (the highest compliment we can pay a manager) and find all aspects of their business absorbing.
    • Ha! “(Our prototype for occupational fervor is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican. When he returned, his parish held a special meeting to get his first-hand account of the Pope. “Tell us,” said the eager faithful, “just what sort of fellow is he?” Our hero wasted no words: “He’s a forty-four, medium.”)”
    • A great policy, may we all have the opportunity to implement it in our own lives. “We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time. On the other hand, working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich.”
  • One action he was taking at this time was small arbitrage bets on mergers and acquisitions. “We continue to periodically employ money in the arbitrage field. However, unlike most arbitrageurs, who purchase dozens of securities each year, we purchase only a few. We restrict ourselves to large deals that have been announced publicly and do not bet on the come. Therefore, our potential profits are apt to be small; but, with luck, our disappointments will also be few.” From what I can find by internet searching, “do not bet on the come” means don’t bet on promises or roadmaps for the future.

Checklist points:

  • He described his latest acquisition, The Fechheimer Bros. Co., and I think it’s a lovely example of how Buffett writes his “Story” of a company. He described its history, both personal and financial. It’s economic record. Its managers. Its purchase details. Four paragraphs. That’s all he needed, and it’s much more effective than four pages. Same with his investment in NHP, Inc. He described its “geneology,” which is very cute.
  • “in considering an acquisition, we attempt to evaluate the economic characteristics of the business – its competitive strengths and weaknesses – and the quality of the people we will be joining.”
  • He’s put this “ad” for a new acquisition in every letter the last few years, so here it is:
    • “Here’s what we’re looking for: (1) large purchases (at least $10 million of after-tax earnings), (2) demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations), (3) businesses earning good returns on equity while employing little or no debt. (4) management in place (we can’t supply it), (5) simple businesses (if there’s lots of technology, we won’t understand it), (6) an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).”
  • What Buffett does NOT want: “new ventures, turnarounds, auction-like sales, and the ever-popular (among brokers) “I’m-sure-something-will-work-out-if-you-people-get-to-know-each-other.” None of these attracts us in the least.”

Particular points of candor:

  • Permanent holdings. “We should note that we expect to keep permanently our three primary holdings, Capital Cities/ABC, Inc., GEICO Corporation, and The Washington Post. Even if these securities were to appear significantly overpriced, we would not anticipate selling them, just as we would not sell See’s or Buffalo Evening News if someone were to offer us a price far above what we believe those businesses are worth.”
  • In tiny letters: “We bought a corporate jet last year.” LOL. “What you have heard about such planes is true: they are very expensive and a luxury in situations like ours where little travel to out-of-the-way places is required. And planes not only cost a lot to operate, they cost a lot just to look at. Pre-tax, cost of capital plus depreciation on a new $15 million plane probably runs $3 million annually. On our own plane, bought for $850,000 used, such costs run close to $200,000 annually. We bought a corporate jet last year. Cognizant of such figures, your Chairman, unfortunately, has in the past made a number of rather intemperate remarks about corporate jets. Accordingly, prior to our purchase, I was forced into my Galileo mode. I promptly experienced the necessary “counter-revelation” and travel is now considerably easier – and considerably costlier – than in the past. Whether Berkshire will get its money’s worth from the plane is an open question, but I will work at achieving some business triumph that I can (no matter how dubiously) attribute to it. I’m afraid Ben Franklin had my number. Said he: “So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.””

I was also struck by:

  • Special to read this now. “It’s easy to overlook what I consider to be the critical lesson of the Mrs. B saga: at 93, Omaha based Board Chairmen have yet to reach their peak. Please file this fact away to consult before you mark your ballot at the 2024 annual meeting of Berkshire.”

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