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?