Summary of 1991 Berkshire Hathaway Chairman Letter

What were the details of the letter

· “Look-through” earnings consist of:

· The operating earnings reported on GAAP basis.

· Retained operating earnings of major investees.

· An allowance for the tax of investees’ retained operating earnings.

· Change in Media economics:

· Competition for eye balls.

· “Bob-around” pattern.

· Future earning prospects impact valuation significantly.

· Does not sell permanent holdings.

· Franchise has a product or service that is:

· Needed or desired;

· No close substitute as determined by its customers;

· Not subject to price regulation.

· Existence of such enterprise can be shown from its pricing power and high rates of return on capital.

· Weak franchise vs. Strong business.

· Ownership of See’s has taught Buffett much about evaluation of franchises.

· Brought H.H. Brown:

· Tough business, but outstanding management.

· Distinguish compensation system.

Practical application

· Create a portfolio that will deliver the highest possible look-through earnings a decade from now. This approach is to force an investor to focus on long-term business prospects.

· Focus on economic franchises.

Quotes from the letter

· “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

· “If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long-term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price.”

3+ questions to the group & group discussion

· What kind of checks and balances do we need to have in place to ensure that we follow established principles?

· Investments in USAir (US Airways), Salomon Brothers, and Fannie Mae—What are the mistakes that we could avoid?

· Franchise vs. Business—how do we distinguish between the two?

Summary of 1987 Berkshire Hathaway Chairman Letter

1-Minute Summary

· The 1987 letter focused on how to identify business with strong franchise: what factors to consider, how manager should be evaluated, and which numbers are important to the owners.

· In addition, the kind of temperament needed for successful investment operation.

Practical application

· Seeking for the “fortress-like” business franchise

· Really figure out the core competitive advantages of a business

o What value or quality proposition does a particular business brings to its customers.

§ NFM: saving

§ BNews: news hole

§ See’s: superb candy and customer service

o Example: BH insurance unit’s competitive advantages are its strong financial standing and sound underwriting policy

Quotes from the letter

On management

· “The managers of the units should be judged by the returns they achieve on the underlying assets; what we pay for a business does not affect the amount of capital its manager has to work with.”

· “Our managers protect their franchises, they control costs, they search for new products and markets that build on their existing strengths and they don’t get diverted.”

· “Management changes, like marital changes, are painful, time-consuming and chancy.”

On business

· “But a business that constantly encounters major change also encounters many chances for major error.”

· “Making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produced exceptional economics.”

· “We neither understand the adding of unneeded people or activities because profits are booming, nor the cutting of essential people or activities because profitability is shrinking. That kind of yo-yo approach is neither business-like nor humane.”

On investment

· “When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not even as security analysts.”

· “Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow’s ears, we fail.”

· “An investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.”

· “Eventually, our economic fate will be determined by the economic fate of the business we own, whether our ownership is partial or total.”

· “The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”

· [On items like efficient markets, dynamic hedging and betas] “Their [people’s] interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising ‘Take two aspirins’?”

3+ questions to the group & group discussion

· What weakness/action do you current have that hinder you to stay insulated from market emotions?

· How can you improve on judgment of characters?

· What are the differences between intelligent and unintelligent capital allocation?