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?
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