Berkshire 1971 Chairman Letter
1 Minute Summary:
- By the end of 1970, Buffett and Susie's ownership in Berkshire Hathaway (BRK) was approx. 36%.
- Buffett had figured out a new type of business (insurance float).
- Insurance business was becoming the future of BRK.
- Inflation was high at the time (average 4-5%, compared to 1-1.5% in 1955-1965)
- U.S. was off the gold standard in 1971 (Nixon Shock).
- (Not in the letter) Blue Chip Stamps saw its business model deteriorated. To replace the earnings in the business, president of Blue Chip Stamps suggested that See's Candies was for sale (Munger loved the business, but the price tag was considered expensive at the time—$25m for $5m assets).
What were the details of the letter:
- BRK was showing better return on capital (14%, excluding capital gains) as a result of redeployment of capital that started five years ago.
- Buffett discussed operations in the three segments (Textile, Insurance, and Banking).
- Home & Auto was a major purchase of the year.
New Terminology / concepts / ideas / useful examples:
- Management objective should be to improve return on total capitalization, as well as the return on equity capital.
- Find managers with talent for operating profitably and enthusiasm for the business.
- It would be even more beneficial for the owner if the managers have substantial ownership and pride in the company.
Practical application:
- Track record: Compare statements and/or objectives made by managers in previous years with actual financial results in current year.
- Insider ownership: Check managers' ownership to see if it is significant. Also check how they've acquired and how long they've had the shares.
- Due diligence on management: What if the company has excellent financial results, significant insider ownership, but questionable characters at senior level (ex. American Apparel).
Quotes from the letter:
- "We retain a fundamental belief in operating from a very strongly financed position so as to be in a position to unquestionably fulfill our responsibilities."
- "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+ questions to the group & group discussion:
- What is the best way to establish and maintain loyalty in relationship with others?
- What is the key to perseverance?
- How do you identify good character?
- Following the crowd—the good and bad?
