What were the details of the letter:
· 1999 was the worst absolute and relative performance in per-share-book value growth of BRK to date.
· Several BRK’s largest investees’ lagged the market in 1999, but the business did better than the stock. Despite the poor showing, Buffett expected BRK to modestly exceed the gain from owning the S&P in the future.
· Buffett expressed his views on why S&P will do far less well in the next decade or two than it had done since 1982, unless the following factors materialize.
o Interest rates must fall further.
o After-tax corporate profitability in relation to GDP must rise.
o The public expectation on equity return must remains lofty.
· Exceptional managerial story by Bill Child, manager of R.C. Willey.
o Bill believed that R.C. Willey could successfully expand in markets outside of Utah and maintain it’s No-Business-on-Sunday policy.
o To back up his business judgment, he personally invested in the land and building of the new store in Boise.
o He would only sell it to BRK at his cost if the store proved to be successful.
o And, he refused to take any interest on the capital he had tied up.
· Insufficient pricing impacted General Re’s results.
· GEICO cost competitive advantages will be sustainable. Overall market share was 4.1% in 1999, up from 2.7% in 1996, with room for significant growth.
· Both FlightSafety International and Executive Jet Aviation had been capital intensive, but they provided services highly valued by customers.
· BRK acquired Jordon’s Furniture and to acquire a major portion of MidAmerican Energy, both from respected referrals.
· Change in goodwill accounting; the end of pooling-of-interests method.
· Look for companies with truly durable competitive advantage.
· Repurchase of BRK shares would only have a minor effect on the future rate of gain in its intrinsic value.
Practical application:
· Identify and associate with first class people.
· Look for people who are willing to tie up their money with their business action.
· Compensation plans have to be simple, directly to relevant operating activities.
Quotes from the letter:
· “We have no contracts at Berkshire. Rather, they [managers] work long and hard because they love their businesses. And I use the word “their” advisedly, since these managers are truly in charge – there are no show-and-tell presentations in Omaha, no budgets to be approved by headquarters, no dictums issued about capital expenditures.”
· “In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks; the realism to forget about those he can’t evaluate; the courage to write huge policies when the premium is appropriate; and the discipline to reject even the smallest risk when the premium is inadequate.”
· “An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what’s presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed.”
· “What’s particularly entertaining in these books [sell-side research] is the precision with which earnings are projected for many years ahead. If you ask the author-banker, however, what his own firm will earn next month, he will go into a protective crouch and tell you that business and markets are far too uncertain for him to venture a forecast.”
· “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. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out.”
3+ questions to the group & group discussion:
· Corporate culture, how important is it? Can we identify strong culture based on the numbers?
· How do we become an experienced observer in a particular field without relying on the financial numbers being presented as is?
· Key metrics and people—how to identify which factors are relevant?
