056: Investing Intensive 1997-2001

Table of Contents

1. 1997 Letter
2. 1998 Letter
3. 1999 Letter
4. 2000 Letter
5. 2001 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.

1. 1997 Berkshire Hathaway Letter, dated February 27, 1998

1997 Letter in PDF from Berkshire Hathaway website

Major Berkshire investments reported in the letter:

Notable: Solomon merged into Travelers Group.

Standard of success mentioned at the beginning: net worth, and per-share book value….then a few paragraphs down, intrinsic value. “Gains in book value are, of course, not the bottom line at Berkshire. What truly counts are gains in per-share intrinsic business value.”

  • Again he referred to the Owner’s Manual to understand what he means by intrinsic value of Berkshire, and it’s worth reading as a more succinct version of what he’s included in his letters thus far about intrinsic value.

Highlights:

  • This letter was about a high market, buying in a high market, and being ready for a dip or crash.
  • Even Mr. Buffett feels our pain in a hot market, as he waited for the fat pitch back in 1997. (Prepare for baseball analogy:) “…we try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors. If they are in the strike zone at all, the business “pitches” we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today’s balls go by, there can be no assurance that the next ones we see will be more to our liking.” (emphasis mine)
    • Really appreciate that he acknowledged he could invest in good companies at higher prices, and the consequence would be low returns. He’s not saying it’s automatically a bad investment. He’s saying it limits returns. There’s a huge difference.
    • So what did he do? “When we can’t find our favorite commitment — a well-run and sensibly-priced business with fine economics — we usually opt to put new money into very short-term instruments of the highest quality. Sometimes, however, we venture elsewhere. Obviously we believe that the alternative commitments we make are more likely to result in profit than loss. But we also realize that they do not offer the certainty of profit that exists in a wonderful business secured at an attractive price. Finding that kind of opportunity, we know that we are going to make money — the only question being when. With alternative investments, we think that we are going to make money. But we also recognize that we will sometimes realize losses, occasionally of substantial size.” (emphasis mine)
  • Interesting metric. “Though we don’t attempt to predict the movements of the stock market, we do try, in a very rough way, to value it. At the annual meeting last year, with the Dow at 7,071 and long-term Treasury yields at 6.89%, Charlie and I stated that we did not consider the market overvalued if 1) interest rates remained where they were or fell, and 2) American business continued to earn the remarkable returns on equity that it had recently recorded. So far, interest rates have fallen — that’s one requisite satisfied — and returns on equity still remain exceptionally high. If they stay there – and if interest rates hold near recent levels — there is no reason to think of stocks as generally overvalued.”

Checklist points:

  • Management compensation: “In none of Berkshire’s subsidiaries do we relate compensation to our stock price, which our associates cannot affect in any meaningful way. Instead, we tie bonuses to each unit’s business performance, which is the direct product of the unit’s people. When that performance is terrific — as it has been at GEICO — there is nothing Charlie and I enjoy more than writing a big check.” (emphasis mine) I’d love to see a public company tie a CEO’s compensation to the earnings and return on equity of the company over several years.
  • On which end of this scale is a potential investment? “…most public companies retain two-thirds or more of their earnings to fund their corporate growth. In contrast, those Berkshire subsidiaries have paid 100% of their earnings to us, their parent company, to fund our growth.”

Particular points of candor:

  • Section entitled “A Confession”. “I’ve mentioned that we strongly prefer to use cash rather than Berkshire stock in acquisitions. A study of the record will tell you why: If you aggregate all of our stock-only mergers (excluding those we did with two affiliated companies, Diversified Retailing and Blue Chip Stamps), you will find that our shareholders are slightly worse off than they would have been had I not done the transactions. Though it hurts me to say it, when I’ve issued stock, I’ve cost you money. Be clear about one thing: This cost has not occurred because we were misled in any way by sellers or because they thereafter failed to manage with diligence and skill. On the contrary, the sellers were completely candid when we were negotiating our deals and have been energetic and effective ever since. Instead, our problem has been that we own a truly marvelous collection of businesses, which means that trading away a portion of them for something new almost never makes sense. When we issue shares in a merger, we reduce your ownership in all of our businesses…” (emphasis mine) I love how suspicious he is of issuing shares for a purchase. Yet, it’s incredibly common.

I was also struck by:

  • Star Furniture purchase: one attribute Mr. Buffett does not get enough credit for is being an absolutely, hands-down, excellent judge of character. “Here’s a story illustrating what [the owners of Star Furniture] Melvyn and Shirley are like: When they told their associates of the sale, they also announced that Star would make large, special payments to those who had helped them succeed — and then defined that group as everyone in the business. Under the terms of our deal, it was Melvyn and Shirley’s money, not ours, that funded this distribution. Charlie and I love it when we become partners with people who behave like that.”

2. 1998 Berkshire Hathaway Letter, dated March 1, 1999

1998 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. (But notes most of the gain came from issuing shares in acquisitions.)

Highlights:

  • This letter was about the businesses of Berkshire, with a particular focus on its new acquisition, General Re, and the insurance business, as well as accounting.
  • Struck by his attitude toward money and taxes. So many of us, including me, dread the tax bill. I could learn something valuable from his shift in perspective. “Writing checks to the IRS that include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I’m sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us — say, because we are disabled or unemployed.”

Checklist points:

  • At GEICO, he made a point of describing how their compensation formula intends to incentivize associates towards long-term business. How does a given company incentive their employees towards sustainable, long-term growth (or do they)? “This pace has been encouraged by our compensation policies. The direct writing of insurance — that is, without there being an agent or broker between the insurer and its policyholder — involves a substantial front-end investment. First-year business is therefore unprofitable in a major way. At GEICO, we do not wish this cost to deter our associates from the aggressive pursuit of new business — which, as it renews, will deliver significant profits — so we leave it out of our compensation formulas. What’s included then? We base 50% of our associates’ bonuses and profit sharing on the earnings of our “seasoned” book, meaning policies that have been with us for more than a year. The other 50% is tied to growth in policyholders — and here we have stepped on the gas.” (emphasis mine)
  • Then, at General Re, he made a similar adjustment. “…we are replacing General Re’s longstanding stock option plan with a cash plan that ties the incentive compensation of General Re managers to their operating achievements. Formerly what counted for these managers was General Re’s stock price; now their payoff will come from the business performance they deliver.”
  • Earnings on net worth? “Last year Scott Fetzer, operating with no leverage (except for a conservative level of debt in its finance subsidiary), earned a record $96.5 million after-tax on its $112 million net worth.” Wow.
  • Reminder. “Cash never makes us happy. But it’s better to have the money burning a hole in Berkshire’s pocket than resting comfortably in someone else’s.”
  • “Accounting-Part 2” is an excellent read on special charges and restructuring that inflate a company’s earnings, all legally.
    • Yes. I would love a CEO who says she is not trying to raise their stock price…or earnings. “These managers start with the assumption, all too common, that their job at all times is to encourage the highest stock price possible (a premise with which we adamantly disagree)…CEOs understandably do not find it easy to reject auditor-blessed strategies that lead to increased future “earnings.””
    • “The distortion du jour is the “restructuring charge,” an accounting entry that can, of course, be legitimate but that too often is a device for manipulating earnings. In this bit of legerdemain, a large chunk of costs that should properly be attributed to a number of years is dumped into a single quarter, typically one already fated to disappoint investors. In some cases, the purpose of the charge is to clean up earnings misrepresentations of the past, and in others it is to prepare the ground for future misrepresentations. In either case, the size and timing of these charges is dictated by the cynical proposition that Wall Street will not mind if earnings fall short by $5 per share in a given quarter, just as long as this deficiency ensures that quarterly earnings in the future will consistently exceed expectations by five cents per share.” Watch out for one huge drop, explained by some merger or other.
    • “A big piece of news, however, is that the SEC, led by its chairman, Arthur Levitt, seems determined to get corporate America to clean up its act. In a landmark speech last September, Levitt called for an end to “earnings management.” He correctly observed, “Too many corporate managers, auditors and analysts are participants in a game of nods and winks.” And then he laid on a real indictment: “Managing may be giving way to manipulating; integrity may be losing out to illusion.””
  • Issuing earnings guidance courts the short-term traders. Berkshire doesn’t play. “But if it is “earnings guidance” or the like that shareholders or analysts seek, we will simply guide them to our public documents.”

Particular points of candor:

  • Ha! “And now a small hint to Berkshire directors: Last year I spent more than nine times my salary at Borsheim’s and EJA. Just think how Berkshire’s business would boom if you’d only spring for a raise.”
  • “During the year, we slightly increased our holdings in American Express, one of our three largest commitments, and left the other two unchanged. However, we trimmed or substantially cut many of our smaller positions. Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours.” (emphasis mine)

I was also struck by:

  • Mentioned understanding the Owner’s Manual yet again – clearly, he viewed it as his best description of how Berkshire (he) understands and values businesses.
  • “…we have enlarged the staff at world headquarters from 12 to 12.8. (The .8 doesn’t refer to me or Charlie: We have a new person in accounting, working four days a week.) Despite this alarming trend toward corporate bloat, our after-tax overhead last year was about $3.5 million, or well under one basis point (.01 of 1%) of the value of the assets we manage.”
  • He really doesn’t like most option plans, but then also says they can be useful. I think this quote best sums up his view: “Though options, if properly structured, can be an appropriate, and even ideal, way to compensate and motivate top managers, they are more often wildly capricious in their distribution of rewards, inefficient as motivators, and inordinately expensive for shareholders.” I found a 2003 HBR article that delves more deeply into Mr. Buffett’s argument, and here is a 2017 description of newer accounting rules which are meant to expense option plans more accurately. I haven’t seen options expensing (or lack thereof) be a defining problem lately, but I’m very curious to find out if he says anything about it when we get to more recent years. If there is something to watch out for in this area, I’d definitely like to know about it.

3. 1999 Berkshire Hathaway Letter, dated March 1, 2000

1999 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:

  • This letter was about going through a tough year, and while most of the letter was about his businesses and accounting as usual, he also, unusually, addressed the overall market (in the “Investments” section). It’s such a valuable, back-of-the-envelope view that, though long, I have included it here:
    • “Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns. We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments. If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future. If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.” (emphasis mine)
  • For a small investor, this would be look-through earnings versus the stock portfolio. “In 1998, to go back a bit, the stock outperformed the business. Last year the business did much better than the stock, a divergence that has continued to the date of this letter. Over time, of course, the performance of the stock must roughly match the performance of the business.”
  • Not sure he’s said this with such a fine point on it until this letter. “Our main business — though we have others of great importance — is insurance. To understand Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these factors.”
  • Hmmm. Circle of competence. “As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.”
  • “If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality.”

Checklist points:

  • How he evaluates Berkshire’s earnings – possibly instructive for evaluating other companies as well? “…per-share earnings from Berkshire’s operating businesses before taxes and purchase-accounting adjustments…but after all interest and corporate expenses… [excluding] all dividends, interest and capital gains that we realized from the investments presented in the first column.”
  • “If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.”

Particular points of candor:

  • “We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well. Relative results are what concern us: Over time, bad relative numbers will produce unsatisfactory absolute results…Several of our largest investees badly lagged the market in 1999 because they’ve had disappointing operating results. We still like these businesses and are content to have major investments in them. But their stumbles damaged our performance last year, and it’s no sure thing that they will quickly regain their stride.” (emphasis mine)
  • “We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down.”

I was also struck by:

  • Goals. “Businesses such as See’s and Buffalo News are now worth fifteen to twenty times the value at which they are carried on our books. Our goal is to continually widen this spread at all subsidiaries.”

4. 2000 Berkshire Hathaway Letter, dated February 28, 2001

2000 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:

  • This letter was about his acquisitions. The market took a turn, and Mr. Buffett got to buy. He also, unusually, commented on the market exuberance in hindsight.
    • He also bought the best way possible for shareholders: “…we incurred no debt in making these purchases, and our shares outstanding have increased only 1 / 3 of 1%. Better yet, we remain awash in liquid assets and are both eager and ready for even larger acquisitions.”
    • He bought so many companies, he made a bullet point list of them.
    • Another reason he could buy was that borrowing became more expensive, which cut down on his competitors. “In the two preceding years, junk bond purchasers had relaxed their standards, buying the obligations of everweaker issuers at inappropriate prices. The effects of this laxity were felt last year in a ballooning of defaults. In this environment, “financial” buyers of businesses — those who wish to buy using only a sliver of equity — became unable to borrow all they thought they needed. What they could still borrow, moreover, came at a high price. Consequently, LBO operators became less aggressive in their bidding when businesses came up for sale last year. Because we analyze purchases on an all-equity basis, our evaluations did not change, which means we became considerably more competitive.” (emphasis mine)
  • First year the letter included his giant chart of Berkshire’s Corporate Performance vs. the S&P 500! I feel like this is a milestone. I’m so used to that chart, but I didn’t realize it didn’t appear until 2000.

Checklist points:

  • Excellent description of a great owner. I have nothing to add. “We find it meaningful when an owner cares about whom he sells to. We like to do business with someone who loves his company, not just the money that a sale will bring him (though we certainly understand why he likes that as well). When this emotional attachment exists, it signals that important qualities will likely be found within the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a strong sense of direction. The reverse is apt to be true, also. When an owner auctions off his business, exhibiting a total lack of interest in what follows, you will frequently find that it has been dressed up for sale, particularly when the seller is a “financial owner.” And if owners behave with little regard for their business and its people, their conduct will often contaminate attitudes and practices throughout the company.” (emphasis mine)
  • Does this company acknowledge and analyze errors? “Agonizing over errors is a mistake. But acknowledging and analyzing them can be useful, though that practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid post-mortem of a failed decision, particularly one involving an acquisition. A notable exception to this never-look-back approach is that of The Washington Post Company, which unfailingly and objectively reviews its acquisitions three years after they are made.”
  • Watch out for “nonrecurring” charges: “The financial consequences of these boners are regularly dumped into massive restructuring charges or write-offs that are casually waved off as “nonrecurring.” Managements just love these. Indeed, in recent years it has seemed that no earnings statement is complete without them.”
  • Worth reading the entire “Investments” section. There’s a lot more there on the Inefficient Bush Theory.
    • “…the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C….The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush  and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.”
    • “Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.”
    • “Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach. Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in relation to value. (Let’s call this phenomenon the IBT — Inefficient Bush Theory.)”
  • “Charlie and I think it is both deceptive and dangerous for CEOs to predict growth rates for their companies. They are, of course, frequently egged on to do so by both analysts and their own investor relations departments. They should resist, however, because too often these predictions lead to trouble….The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more troublesome is the fact that they corrode CEO behavior. Over the years, Charlie and I have observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced.”

Particular points of candor:

  • “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” (emphasis mine)
  • Wealth creation, or wealth transfer? “Last year, we commented on the exuberance — and, yes, it was irrational — that prevailed, noting that investor expectations had grown to be several multiples of probable returns…[there was] much loose talk about “value creation.” We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get. What actually occurs in these cases is wealth transfer, often on a massive scale.” (emphasis mine)

I was also struck by:

  • Good advice for us all. “Charlie, bless him, never lets me forget Ben Franklin’s advice: “A small leak can sink a great ship.””
  • The annual meeting description. It positively rings with fun.

5. 2001 Berkshire Hathaway Letter, dated February 28, 2002

  • Major World Events Wiki for 2001, and the World Trade Center and Pentagon attacks on the early morning of Tuesday, September 11, 2001. The stock market did not open on Sept 11 and stay closed until Sept 17, the longest closure since the Depression.
  • S&P 500 Trajectory (inflation-adjusted): dropped 2100 to 1600
  • Inflation: 2.8%
  • Interest Rate on a 30-year fixed-rate mortgage: 6.97%
  • US President: Bill Clinton went out, George W. Bush (the younger) came in

2001 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:

  • This letter was about the business aftermath of the September 11, 2001 terrorist attack on the World Trade Center and Pentagon on Berkshire’s business – in insurance, investments/acquisitions, and in the market.
  • Compared to previous years, his writing feels subdued to me, and that is appropriate.
  • He bought quite a few businesses in the stock market aftermath, and suffered huge losses in Berkshire’s insurance and reinsurance businesses – which he says he should have foreseen. It was a time of great uncertainty. No one knew if more terrorist attacks would succeed.
  • “In setting prices and also in evaluating aggregation risk, we had either overlooked or dismissed the possibility of large-scale terrorism losses. That was a relevant underwriting factor, and we ignored it. In pricing property coverages, for example, we had looked to the past and taken into account only costs we might expect to incur from windstorm, fire, explosion and earthquake. But what will be the largest insured property loss in history (after adding related business-interruption claims) originated from none of these forces. In short, all of us in the industry made a fundamental underwriting mistake by focusing on experience, rather than exposure, thereby assuming a huge terrorism risk for which we received no premium.” (emphasis mine)

Checklist points:

  • Mr. Buffett listed three key principles of insurance underwriting, and to me, they read like a description of three key principles of investing. The winners do the following:
    • “1. They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are offering foolish prices or policy conditions.”
    • “2. They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risks.”
    • “3. They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn’t work. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive, sometimes extraordinarily so.”
    • “I have known the details of almost every policy that Ajit has written since he came with us in 1986, and never on even a single occasion have I seen him break any of our three underwriting rules. His extraordinary discipline, of course, does not eliminate losses; it does, however, prevent foolish losses. And that’s the key: Just as is the case in investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather than by making brilliant ones.” (emphasis mine)

Particular points of candor:

  • “At certain times, however, using experience as a guide to pricing is not only useless, but actually dangerous.”
  • Briefly mentioned the Enron scandal, only in the context that such abuse is far more widespread. “Charlie and I are disgusted by the situation, so common in the last few years, in which shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these disasters have walked away with extraordinary wealth. Indeed, many of these people were urging investors to buy shares while concurrently dumping their own, sometimes using methods that hid their actions. To their shame, these business leaders view shareholders as patsies, not partners. Though Enron has become the symbol for shareholder abuse, there is no shortage of egregious conduct elsewhere in corporate America.”
  • On his shoe business, Dexter: “I’ve made three decisions relating to Dexter that have hurt you in a major way: (1) buying it in the first place; (2) paying for it with stock and (3) procrastinating when the need for changes in its operations was obvious. I would like to lay these mistakes on Charlie (or anyone else, for that matter) but they were mine. Dexter, prior to our purchase – and indeed for a few years after – prospered despite low-cost foreign competition that was brutal. I concluded that Dexter could continue to cope with that problem, and I was wrong…During part of 2002, Dexter will be hurt by unprofitable sales commitments it made last year. After that, we believe our shoe business will be reasonably profitable.”
    • It strikes me that over and over, I’ve read about him buying businesses that have been very profitable in the past, and then getting burned when the industry – not the business, but the industry – just is not viable anymore. Textile factory. Encyclopedias. Newspapers. American-made shoes. I understand the logic of each one at the time – it’s frustrating to try to find the sweet spot between a business that has proven itself and an industry that has a lot more growth in it. Maybe the checklist point is: Even if the business is a good one, does this industry have high growth for at least twenty more years?

I was also struck by:

  • He attached an article about his views on the overall stock market. I found it online.
    • I find his statement on the future of the market rather odd. He’s made a point over many years not only not to comment on the market, but to say that he does not comment on the market because he’s bad at predicting it. “Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the prospects for stocks in general over the next decade or so. I expressed my views about equity returns in a speech I gave at an Allen and Company meeting in July (which was a follow-up to a similar presentation I had made two years earlier) and an edited version of my comments appeared in a December 10 th Fortune article. I’m enclosing a copy of that article….Charlie and I believe that American business will do fine over time but think that today’s equity prices presage only moderate returns for investors. The market outperformed business for a very long period, and that phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many investors disappointed, particularly those relatively new to the game.”
  • I’m adding this article to my list of non-letter pieces of reading after the Investing Intensive.
  • It seems this year was when he started making broader-market statements, because there weren’t many earlier.

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