A letter a day!

[aashka_trivedi]

A letter a day.

Letter 9#1964

Key Learnings:

1. In this letter Buffett explains the “Joys of compounding” through the famous story of Leonardo da Vinci. If you havnt read it yet, I will put it down here

"Francis I of France paid 4,000 ecus in 1540 for Leonardo da Vinci’s Mona Lisa. On the off chance that a few of you have not kept track of the fluctuations of the ecu 4,000 converted out to about $20,000.
If Francis had kept his feet on the ground and he (and his trustees) had been able to find a 6% after-tax investment, the estate now would be worth something over $1,000,000,000,000,000.00. That’s $1 quadrillion or over 3,000 times the present national debt, all from 6%."

2. Variation of merely few percentage points over the time has enormous impact on compounding.

3. In this letter he has again described the three categories of investment i.e workout, general and control in detail (which is already discussed in 1961) . The division of the portfolio amongst the three categories is largely determined
   by the accident or availability.

[aashka_trivedi]

A letter a day.

Letter #10 Half Yearly letter (1964)

Key learnings:

1. While making an investment, keep buying a stock patiently with improving earnings, increasing asset values etc. Even if the market price is not moving, keep acquiring it. This will not do much for a short term performance, especially in the rising market, but it is a comfortable and logical producer of longer term profits.

2. In the general category ( As earlier explained in the letters, general category of stocks means where there is no special situation and it is even not expected to take control or ownership of the companies) always expect market to justify your analyses in a reasonable period of time .

3. It is also many a times difficult for respect investment management company to beat the unmanaged index of blue chip stocks. Quoting Buffett here

“When the water (the market) rises, the duck rises; when it falls, back goes the duck. SPCA or no SPCA, I think the duck can only take the credit (or blame) for his own activities. The rise and fall of the lake is hardly something for him to quack about.”

( Duck here refers to the investment management companies).

He also says that that investment managers spend considerable amount of time studying a particular sector/company, but at the same time they should also establish certain standards of performance , and regularly and objectively, study their own results as carefully as they study their investments.

4. Comparison of your performance with good mutual fund scheme or index ( For a three a year or a longer period) in no way will guarantee good results but it merely guarantees obejective evaluation. As Buffett has written

" We started out with a 36-inch yardstick and we’ll keep it that way. If we don’t measure up, we won’t change yardsticks. In my opinion, the entire field of investment management, involving hundreds of billions of dollars, would be more satisfactorily conducted if everyone had a good yardstick for measurement of ability and sensibly applied it. This is regularly done by most people in the conduct of their own business when evaluating markets, people, machines, methods, etc., and money management is the largest business in the world."

[aashka_trivedi]

A letter a day.

Letter 11#1964

Key learnings

1.The first job of any investment management organization is to analyze its own techniques and results before pronouncing judgment on the managerial abilities and performance of the other corporate entities. For the fund managers of marquee mutual funds unable to beat the index, Buffett states the following reasons

"I think it is much more the product of: (1) group decisions - my perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the
policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional
framework whereby average is “safe” and the personal rewards for independent action are in no way
commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally and importantly, (5) inertia."

Further on importance of evaluating the performance of fund managers he states that

“People who watch their weight, golf scores, and fuel bills seem to shun quantitative evaluation of their investment management skills although it involves the most important client in the world - themselves. While it may be of academic interest to evaluate the management accomplishments of Massachusetts Investors Trust or Lehman Corporation, it is of enormous dollars-and-cents importance to evaluate objectively the accomplishments of the fellow who is actually handling your money - even if it’s you.”

2.Truly conservative actions arise from intelligent hypothesis , correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy.

3. A public opinion is no substitute for your own thought and conviction. If the facts for investment are ascertainable and clear, whther others agree or disagree, keep investing in a conservative manner.

4.One rational way to evaluate your performance is to study them in the declining markets.

5. If a 20% or 30% drop in the market value of your equity holdings is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet - Harry Truman – “If you can’t stand the heat, stay out of the kitchen. It is preferable, of course, to consider the problem before you enter the “kitchen.”

5.Addition of new category in the investment division “ Generals-relatively undervalued” this category consists of securities selling at prices relatively cheap compared to securities of the same general quality.

4. Buffett shares how investors are worried about taxes due to portfolio change. He advices his investors on how to save taxes

“There are only three ways to avoid ultimately paying the tax: (1) die with the asset - and that’s a little too ultimate for me even the zealots would have to view this “cure” with mixed emotions; (2) give the asset away - you certainly don’t pay any taxes this way, but of course you don’t pay for any groceries, rent, etc., either; and (3) lose back the gain if your mouth waters at this tax-saver, I have to admire you -you certainly have the courage of your convictions.”

[aashka_trivedi]

A letter a day.

Letter 12# 1965 (Half yearly letter)

Key Learnings:

1. The first point to note in this letter is if you are a fund manager, always communicate with your investors when you outperform the index and also when you don’t. Quoting Buffett here

"We actually achieved a wide margin during the upswing and then fell at a rate fully equal to the Dow during the market decline.
I don’t mention this because I am proud of such performance – on the contrary, I would prefer it if we had achieved our gain in the hypothesized manner. Rather, I mention it for two reasons: (1) you are always entitled to know when I am wrong as well as right; and, (2) it demonstrates that although we deal with probabilities and
expectations, the actual results can deviate substantially from such expectations, particularly on a short-term basis."

2. When a small minority interest is held in the company, earnings power and assets are important because they will dominate the price and when a controlling interest is held, we own a business rather than a stock hence a conservative business valuation is important.

[Joseph_Johnson]

Just here to say thank you for sharing your insights. It has inspired me to start my own reading as well; it has been something I’ve had on my bucket list for too long.
Good luck to you!

[aashka_trivedi]

Today I am covering two letters. The first one is the year-end letter, written after the half-yearly letter in the year 1965, and the second one is an annual letter of 1965.

The year-end letter and its key learnings:

This letter is important for a reason because it is in this letter that Buffett mentions Berkshire Hathway for the very first time. He started acquiring controlling interest in Berkshire from 1962(at the price of $7.6) onwards which he clearly mentions in this letter. A controlling stake was acquired in the year 1965. Berkshire was a textile company and in little trouble when Buffett started acquiring it. Very less people know that initially, it was Buffett Partnership Ltd that eventually became Berkshire Hathway. ( We will discover it in the letters ahead).

Letter 13#1965

Key learnings:

1. The success of past methods and ideas does not transfer forward to future ones. This is said in that context that the same research done in the past might not apply to partners/clients onboarding with us today.

2. On performance comparison, Buffett has already highlighted the importance of having a yardstick to measure your performance. Again quoting him here

“So if you are evaluating others (or yourself!) in the investment field, think out some standards - apply them - interpret them. If you do not feel our standard (a minimum of a three-year test versus the Dow) is an applicable one, you should not be in the Partnership. If you do feel it is applicable, you should be able to take the minus years with equanimity in the visceral regions as well as the cerebral regions -as long as we are surpassing the results of the Dow.”

3. With the increasing amount of capital, each fund manager is worried about it hampering their performance and so was Buffett. He said:

"Several times in the past I have raised the question of whether increasing amounts of capital would harm our investment performance. Each time I have answered negatively and promised you that if my opinion changed, I would promptly report it.
I do not feel that increased capital has hurt our operation to date. As a matter of fact, I believe that we have done somewhat better during the past few years with the capital we have had in the Partnership than we would have done if we had been working with a substantially smaller amount. This was due to the partly fortuitous development of several investments that were just the right size for us -big enough to be significant and small enough to handle. I now feel that we are much closer to the point where increased size may prove disadvantageous. I don’t want to ascribe too much precision to that statement since there are many variables involved. What may be the optimum size under some market and business circumstances can be substantially more or less than the optimum under other circumstances. There have been a few times in the past when on a very short-term basis I have felt it would have been advantageous to be smaller but substantially more times when the converse was true."

4. In this letter, Buffett has also described the state of Berkshire in a detailed manner. (Too many points so advising you to read from the letter itself if you find it interesting).

5. Always have good quality ideas( even if one) rather than focusing on the number of ideas.

6. The investment business is that of ascertaining facts and then applying experience and reason to such facts to reach expectations.

7. The good performance of the portfolio does not depend upon the number of stocks.

"If the good performance of the fund is even a minor objective, any
portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one billion dollars) is not being operated logically. The addition of the one-hundredth stock simply can’t reduce the potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on the overall portfolio expectation."

Adding one more thing here "All texts counsel “adequate” diversification, but the ones who quantify “adequate” virtually never explain how they arrive at their conclusion.

[aashka_trivedi]

A letter a day!

Letter 14# 1966 (Half yearly letter)

Key learnings:

1. When others are making money in the general run of the market you should too, but when everyone is losing it’s okay to lose money at the same rate. It is not always necessary that you will lose a little less than others ( though we all intend to do that). Never promise such things.

2. Always prefer an iceberg approach to investment disclosure. ( Not disclosing everything at once).

3. Don’t buy/sell stocks upon what other people think the stock market is going to do but rather what you think the company is going to do. As Buffett said

“The course of the stock market will determine, to a great degree, when we will be right, but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on what should happen, not when it should happen.”

4. On-market prediction and guessing

"Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you – or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect.
If we start deciding, based on guesses or emotions, whether we will or won’t participate in a business where we should have some long-run edge, we’re in trouble. We will not sell our interests in businesses (stocks) when they are attractively priced just because some astrologer thinks the quotations may go lower even though such forecasts are obviously going to be right some of the time. Similarly, we will not buy fully priced securities because “experts” think prices are going higher. Who would think of buying or selling a private business
because of someone’s guess on the stock market?"

Buffett also recommends reading a chapter of the book Intelligent investor here

"A marvelous articulation of this idea is contained in chapter two (The Investor and Stock
Market Fluctuations) of Benjamin Graham’s “The Intelligent Investor”. In my opinion, this chapter has more investment importance than anything else that has been written."

[aashka_trivedi]

A letter a day!

Letter 15# 1966

1. lesser efforts can sometimes produce good opportunities. Always focus on quality and not on quantity.

“In the last three years, we have come up with only two or three new ideas a year that has had such an expectancy of superior performance. Fortunately, in some cases, we have made the most of them.”

“It is obvious that a business based upon only a trickle of fine ideas has poorer prospects than one based upon a steady flow of such ideas. To date, the trickle has provided as much financial nourishment as the flow. This is true because there is only so much one can digest (million-dollar ideas are of no great benefit to thousand-dollar bank accounts - this was impressed on me in my early days) and because a limited number of ideas causes one to utilize those available more intensively.”

2)The new ideas should be continually measured against present ideas and there should be no shifts if the effect is to downgrade the expectable performance.

3. The frequent reporting to clients is sometimes foolish and even misleading if you are aiming for long-term performance.

4. Buffett on concentration VS Diversification:

“Personally, within the limits expressed in last year’s letter on diversification, I am willing to trade the pains (forget about the pleasures) of substantial short-term variance in exchange for maximization of long-term performance. However, I am not willing to incur the risk of substantial permanent capital loss in seeking to better long-term performance. To be perfectly clear - under our policy of concentration of holdings, partners should be completely prepared for periods of substantial underperformance (far more likely in sharply rising markets) to offset the occasional overperformance such as we experienced in 1965 and 1966, and as a price, we pay for hoped-for good long term performance.”

5. What is the definition of long-term?
   “Even five minutes is a long time if one’s
   the head is being held underwater."
   ( Decide your own long-term)

[aashka_trivedi]

A letter a day!

Letter 16# 1967 ( Half yearly letter)

Key learning:

1)When you own a substantial part of the business ( Controls category as per Buffett) and the business is facing difficulties, you may experience a drag in the performance in the short term. During this time, the Generals category will drive the performance.

"However, B-H(Berkshire Hathway) is experiencing and faces real difficulties in the textile business, while I don’t presently foresee any loss in underlying values. I similarly see no prospect of a good return on the assets employed in the textile business. Therefore, this segment of our portfolio will be a substantial drag on our relative performance (as it has been during the first half) if the Dow continues to advance. Such relative performance with controlled companies is expected in a strongly advancing market but is accentuated when the business is making no progress. As a friend of mine says. “Experience is what you find when you’re looking for something else.”

[aashka_trivedi]

A letter a day!

Letter 17# 1967

Key learning’s

1. The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors.

“Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no one has come back from recess - I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a “high-probability insight”. This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side - the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.”

2. Three years can a perfect parameter to check if the fund is performing. But now it has reduced to yearly, quarterly , monthly on the demand of investors.

“The pay off for a superior short term performance has become enormous, not only in compensation for results actually achieved, but in the attraction of new money for the next round. Thus a self-generating type of activity has set in which leads to larger and larger amounts of money participating on a shorter and shorter time span.”

3. Speculation has been on an increasing sale. Never attempt investing in a security where you attempt to predict the market actions which over rides business valuations.

4.Frequent revision of the results you promise to the investors , looking at the market scenario, can be a good activity.

“Elementary self-analysis tells me that I will not be capable of less than all-out effort to achieve a publicly proclaimed goal to people who have entrusted their capital to me. All-out effort makes progressively less sense. I would like to have an economic goal which allows for considerable non-economic activity. This may mean activity outside the field of investments or it simply may mean pursuing lines within the investment field that do not promise the greatest economic reward. An example of the latter might be the continued investment in a satisfactory (but far from spectacular) controlled business where I liked the people and the nature of the business even though alternative investments offered an expectable higher rate of return. More money would be made buying businesses at attractive prices, then reselling them. However, it may be more enjoyable (particularly when the personal value of incremental capital is less) to continue to own them and hopefully improve their performance, usually in a minor way, through some decisions involving financial strategy.”

I have always found behavior most distasteful which publicly announces one set of goals and motivations when actually an entirely different set of factors prevails. Therefore, I have always tried to be l00% candid with you about my goals and personal feelings so you aren’t making important decisions pursuant to phony proclamations (I’ve run into a few of these in our investment experience).

[aashka_trivedi]

A letter a day!

There were in total three letters written in the year 1967. The last letter was focused on the revision of the performance criteria and the reasons why it is done.

This letter focuses on the annual fund performance for the year 1967.

Letter 18 # 1967

Key learnings:

1. At times, because of speculation some might outperform the market.

"In 1967 this condition intensified. Many investment organizations performed substantially better than BPL, with gains ranging from over 100%. Because of these spectacular results, money, talent, and energy are converging in maximum effort for the achievement of large and quick stock market profits. It looks to me like greatly intensified speculation with concomitant risks -but many of the advocates insist otherwise.

My mentor, Ben Graham, used to say. “Speculation is neither illegal, immoral nor fattening (financially).”
During the past year, it was possible to become fiscally flabby through a steady diet of speculative bonbons. We continue to eat oatmeal but if indigestion should set in general, it is unrealistic to expect that we won’t have some discomfort."

2. When you hold a controlling stake in the company, you might be questioned for not shifting to better opportunities for better performance. It will seem foolish to do so if it is the nature of business on basis of which you have taken a controlling stake.

“The satisfying nature of our activity in controlled companies is a minor reason for the moderated investment objectives discussed in the October 9th letter. When I am dealing with people I like, in businesses I find stimulating (what business isn’t ?), and achieving worthwhile overall returns on capital employed (say, 10-12%), it seems foolish to rush from situation to situation to earn a few more percentage points. It also does not seem sensible to me to trade known pleasant personal relationships with high-grade people, at a decent rate of return, for possible irritation, aggravation, or worse at potentially higher returns. Hence, we will continue to keep a portion of our capital (but not over 40% because of the possible liquidity requirements arising from the nature of our partnership agreement) invested in controlled operating businesses at an expected rate of return below that inherent in an aggressive stock market operation.”

3. In the last letter, there were some changes in the return expectations. Buffett had earlier stated an outperformance of at least 10% P. A , which was later on revised to 5%, keeping in mind the market scenario. Post that communication many of the partners/investors did withdraw their capital from BPL ( Buffett Partnership Ltd) to which Buffett has replied in this letter

“Some of those who withdrew (and many who didn’t) asked me, “What do you really mean?” after receiving the October 9th letter. This sort of question is a little bruising to any author, but I assured them I meant exactly what I had said. I was also asked whether this was an initial stage in the phasing out of the partnership. The answer to this is, “Definitely, no”. As long as partners want to put up their capital alongside mine and the business is operationally pleasant (and it couldn’t be better), I intend to continue to do business with those who have backed me since tennis shoes.”

At times, many of our clients/partners will not be satisfied with our fund’s performance. At that point in time, clear communication of what we feel regarding the market and the fund’s performance is the best option. We might end up losing some of the investors, but at least the ones who are aligned with our investment philosophy will still continue.

[aashka_trivedi]

A letter a day!

Letter #19 1968 ( Half yearly letter)

Key learnings:

1. If you have a heavily concentrated portfolio, the performance in the short run can be volatile in comparison to a highly diversified portfolio.

2. Buffett is known to invest in distressed businesses, take control of the same and make them work efficiently. Such stakes in controlled businesses will not produce visible returns in the short term.

“As I have mentioned before, we cannot make the same sort of money out of permanent ownership of controlled businesses that can be made from buying and reselling such businesses, or from skilled investment in marketable securities. Nevertheless, they offer a pleasant long-term form of activity (when conducted in conjunction with high-grade, able people) at satisfactory rates of return.”

3. In this letter, Buffett also talks about people making money through stock promotions. A similar thing is also being witnessed today, where many are trying to earn by providing stock tips via various social media platforms. (That is why they say in the stock market “History repeats itself”)

"Spectacular amounts of money are being made by those participating (whether as originators, top employees. professional advisors, investment bankers, stock speculators, etc… ) in the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and the cynical. To create the proper illusions, it frequently requires accounting distortions (one particularly progressive entrepreneur told me he believed in “bold, imaginative accounting”), tricks of capitalization and camouflage of the true nature of the operating businesses involved. The end product is popular, respectable and immensely profitable (I’ll let the philosophers figure in which order those adjectives should be placed).

Quite candidly, our own performance has been substantially improved on an indirect basis because of the fallout from such activities. To create an ever widening circle of chain letters requires increasing amounts of corporate raw material and this has caused many intrinsically cheap (and not so cheap) stocks to come to life. When we have been the owners of such stocks, we have reaped market rewards much more promptly than might otherwise have been the case. The appetite for such companies, however, tends to substantially diminish the number of fundamentally attractive investments which remain."

"We live in an investment world, populated not by those who must be
logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe."

4. Book Recommendation by Buffett " The money game by Adam Smith"

[karanthharsha999]

@aashka_trivedi
LIkes is the least we / I can do to inspire you to contribute more on this topic.
appreciate your work and thank you.

[aashka_trivedi]

Thank you. I am glad you find it value adding

[aashka_trivedi]

A letter a day!

Letter #20 1968

Key learnings:

1. This letter starts with the headline “Everyone makes mistakes”. I think this is very relevant. The irony is we often expect fund managers to continue to deliver the same performance as they did in the historical past, judging them for a few of their contrarian stock picks that fail to perform, despite knowing the volatility and uncertainty of the stock markets. ( Strange but true).

2. Equity research /money management is no doubt a full-time job. However, a minute-by-minute review of the stock you pick is unnecessary. A strong thesis followed by conviction, with periodic reviews ( monthly, quarterly) will work(These are completely personal views, they can differ from person to person). Warren Buffett’s comments on the same

“The complexities of national and international economics make money management a full-time job. A good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day basis. Securities must be studied in a minute-by-minute program.”

Wow!

This sort of stuff makes me feel guilty when I go out for a Pepsi. When practiced by large and increasing numbers of highly motivated people with huge amounts of money on a limited quantity of suitable securities, the result becomes highly unpredictable. In some ways, it is fascinating to watch and in other ways it is appalling."

3. Market price is irrelevant in the valuation of the controlling interests. (Controls means basically having ownership in the company through a large stake).

" I still sometimes get comments from partners like: “Say, Berkshire is up four points - that’s great!” or “What’s happening to us, Berkshire was down three last week?” The market price is irrelevant to us in the valuation of our controlling interests. We valued B-H at 25 at yearend 1967 when the market was about 20 and 31 at yearend 1968 when the market was about 37. We would have done the same thing if the markets had been 15 and 50 respectively. (“Price is what you pay. value is what you get”). We will prosper or suffer in controlled investments in relation to the operating performances of our businesses - we will not attempt to profit by playing various games in the securities markets."

4. This letter also contains a brief history of how Buffett Partnership Limited was formed. ( For anyone who is interested to read)

5. Communication of the "Skin in the game " numbers to your investors/partners will definitely help them gain confidence. This is repeatedly done by Buffett in his letters.

“The office group, along with spouses (one apiece - I still haven’t figured out how I should handle that plural) and children have over $27 million invested in BPL on January 1, 1969. Assorted sizes and shapes of aunts, uncles, parents, in-laws, brothers, sisters, and cousins make the BPL membership list read like “Our Crowd” - which, so far as I am concerned, is exactly what it is.”

[aashka_trivedi]

A letter a day!

Letter # 21 1969

Key learnings:

1. This letter (to my surprise) is a declaration by Buffett to retire. He has listed varied reasons for doing so

"However, it seems to me that: (1) opportunities for investment are open to the analyst who stresses quantitative factors have virtually disappeared, after rather steadily drying up over the past twenty years; (2) our $100 million of assets further eliminates a large portion of this seemingly barren investment world, since commitments of less than about $3 million cannot have a real impact on our overall performance, and this virtually rules out companies with less than about $100 million of common stock at market value; and (3) a
swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) more speculative market."

2. As you continuously outperform the markets or provide better returns than the top mutual funds, there is the highest amount of possibility of receiving a heavy inflow of funds. At this time, if you don’t find relevant investment opportunities, the same will be frustrating.

"As long as I am “on stage”, publishing a regular record and assuming responsibility for the management of what amounts to virtually 100% of the net worth of many partners, I will never be able to put sustained effort into any non-BPL activity. If I am going to participate publicly. I can’t help being competitive. I know I don’t want to be totally occupied with out-pacing an investment rabbit all my life. The only way to slow down is to stop."

There is a saying you are not investing if you find it exciting. it is more often boring and requires a lot of patience. Many do not perceive fund management as a full-time job, to me it appears more than a full-time job. Why? Because you have the responsibility to manage people’s lifelong savings and not create wealth but ensure its protection. It’s tough. Who imagined Buffett would have also gotten frustrated at some point in his life? (Though at 92 today he is still doing the same thing) Everyone goes through this!

[aashka_trivedi]

A letter a day!

Letter #22 1969

1)In this year Buffett officially retires from managing outside money. Few of his investors were still interested in value investing, and therefore Buffett recommended the name of Bill Ruane. I found this interesting article on him for those who are interested to read.

Bill Ruane Sequoia Fund: Buffett’s Ultimate Referral

Buffett on Bill Ruane

"Now, to Bill Ruane - we met in Ben Graham’s class at Columbia University in 1951 and I have had considerable opportunity to observe his qualities of character, temperament, and intellect since that time. If Susie and I were to die while our children are minors, he is one of three trustees who have carte blanche on investment matters - the other two are not available for continuous investment management for all partners, large or small.
There is no way to eliminate the possibility of error when judging humans, particularly in regard to future behavior in an unknown environment. However, decisions have to be made - whether actively or passively - and I consider Bill to be an exceptionally high probability decision on character and a high probability one on investment performance. I also consider it likely that Bill will continue as a money manager for many years to come."

The letter further contains his thoughts about the market in general, bond investing, etc.

[aashka_trivedi]

A letter a day!

Letter #23 1969

Today I am covering two letters. Both were written by Buffett at the end of 1969. Both the letters summarize positions in 2 main holdings Berkshire Hathaway and Diversified retailing company.

Key learnings:

1. BPL ( Buffett partnership limited) owned 8,00,000 out of 10,00,000 outstanding shares in DRC. At that time DRC had outstanding debentures . Buffett had put a special clause for the debenture holders
   “DRC has $6.6 million in debentures outstanding (prospectus with full description of the business as of December 18th, 1967 and the debenture terms will be sent you upon request) which have one unusual feature in that if I, or an entity controlled by me, is not the largest shareholder of DRC, the debenture holders have the right to present their debentures for payment by the company at par.”

2. Market prices for stocks fluctuate at great amplitudes around intrinsic value but, over the long term, intrinsic value is virtually always reflected at some point in market price.

3. Berkshire Hathaway had many business verticals and one of which was a textile unit. At that point of time, textile unit was not working well. On being asked by investors why are they still investing in the textile unit, Buffett reply was as follows:

"Pretty much for the reasons outlined in my letter. I don’t want to liquidate a business employing 1100 people when the Management has worked hard to improve their relative industry position, with reasonable results, and as long as the business does not require substantial additional capital investment. I have no desire to trade severe human dislocations for a few percentage points additional return per annum. Obviously, if we faced material compulsory additional investment or sustained operating losses, the decision might have to
be different, but I don’t anticipate such alternatives."

We can consider Buffett more of an owner of Berkshire rather than just a shareholder. The owner having such a mindset is inspiring.

4. Whenever a fund manager or business man does good business or makes good money for his investors , he is often asked who is the second line of management after you? Buffett was asked the same regarding the three excellently managed unit to which he replied

“In any company where the founder and chief driving force behind the enterprise is still active, it is very difficult to evaluate “second men”. The only real way to see how someone is going to do when running a company is to let him run it. Some of our businesses have certainly been more “one-man shows” than the typical corporation. Subject to the foregoing caveat, I think that we do have some good “second men” coming along.”

[aashka_trivedi]

A letter a day!

Letter #24 1970

This letter is all about investing into different types of bonds. While many things have changed now with respect to the taxability of bonds, anyone who wants a basic understanding of different types of bonds can read this letter. The next set of letters are focused on Berkshire Hathaway’s performance since Buffett had retired from managing public money and he promised to provide information regarding the business operations of Berkshire Hathaway till he remains invested.

So Berkshire Hathaway consisted of various business operations like textile, Banking, insurance. In this letter Buffett has made some good acquisitions. In order to fund the purchases, Buffett sold majority of marketable securities held in Berkshire Hathaway. Some of the acquisitions were of The Illinois National Bank and Trust Co. of Rockford, Illinois where he acquired about 97.7% stake.

(Next few letters will be just focusing on Berkshire Hathaway performance. Since the letters are short, will try to cover 2-3 in a post.)

[aashka_trivedi]

A letter a day!

Letter #25 1971

The previous letters before 1969 were all relating to Buffett’s communication as a public fund manager. The letters to follow from 1970 is more focused on Berkshire Hathaway and how it progressed later on.

Since the letters contains details of all divisions together, I have divided the learnings in various parts:

1. General:

1.The letters starting from this year become more descriptive. Two metrics used by Buffet to measure performance ROE and ROCE. One of the key point to note , he clearly communicates to the investors not to have unrealistic expectations as it may not be sustainable( He did the same in 1965).

"It is a pleasure to report that operating earnings in 1971, excluding capital gains, amounted to more than 14% of beginning shareholders’ equity. This result—considerably above the average of American industry—was achieved in the face of inadequate earnings in our textile operation, making clear the benefits of redeployment of capital inaugurated five years ago. It will continue to be the objective of management to improve return on total capitalization (long term debt plus equity), as well as the return on equity capital. However, it should be realized that merely maintaining the present relatively high rate of return may well prove more difficult than was improvement from the very low levels of return which prevailed throughout most of the 1960’s.

2. Insurance operations

Buffett explains the insurance operations in great detail in this letter. He explains the various insurance divisions that Berkshire is running, its development over the years, new divisions, acquisitions and as usual praises his managers, the newly acquired company
(Home & Automobile Insurance Company) and its founder, Victor Raab. Insurance as a sector has still not gained that much attention. People are still becoming aware regarding its importance even today. Buffett wrote the same in his letter to not expect returns in short term and have a long term view.

"We set no volume goals in our insurance business generally — and certainly not in reinsurance — as virtually any volume can be achieved if profitability standards are ignored.”

3. Banking operations
   In discussing the performance of the Illinois National Bank, Buffett also gives us the metrics on which a bank can be evaluated. So if you are looking to invest in a bank, you now know what parameters to check.
   “In 1971, Illinois National earned well over 2% after tax on average deposits while (1) not using borrowed funds except for very occasional reserve balancing transactions; (2) maintaining a liquidity position far above average; (3) recording loan losses far below average; and (4) utilizing a mix of over 50% time deposits with all consumer savings accounts receiving maximum permitted interest rates throughout the year.
   This reflects a superb management job by Gene Abegg and Bob Kline.”

4. Financial operations:
   Buffett is clearly known for his capital allocation skills which is depicted in this letter. He re-casted Berkshire Hathaway’s loan which helped him to acquire Home & Auto. There is also a display of discipline which he shows in building financial strength.

“Because of the volume gains being experienced by our insurance subsidiaries early in 1971, we re-cast Berkshire Hathaway’s bank loan so as to provide those companies with additional capital funds. This financing turned out to be particularly propitious when the opportunity to purchase Home & Auto occurred later in the year.

Our insurance and banking subsidiaries possess a fiduciary relationship with the public. We retain a fundamental belief in operating from a very strongly finances position so as to be in a position to unquestionably fulfill our responsibilities. Thus, we will continue to map our financial future for maximum financial strength in our subsidiaries as well as at the parent level.”