Berkshire Hathaway Shareholder Letter 1977

So it begins: the Berkshire Hathaway Letters to Shareholders – 2017 Summer Reading ChallengeIf you missed the presentation of the challenge and want to know more you can read about it here.

The first* letter to shareholders from Warren Buffett goes back to the fiscal year of 1977. It’s only 6 pages long and the focus is almost exclusively on the different outcomes for Berkshire’s business operations. Nonetheless, there are still five extracts of worldly wisdom’s that caught my attention and that I would like to share with you.

Please comment if you have read the letter and what you thought of it. Also, if you have found a worldly wisdom in the letter that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

 

* On the Berkshire Hathaway homepage, where the letters can be found, the 1977 letter is the first/earliest one. However, if you look at the later letters, the 2016 letter for example, you will notice on the first page that the “Berkshire’s Performance vs. the S&P 500” table dates back to 1965. So where are the 1965-1976 letters and why are they not published on the Berkshire homepage? The table starts at the year of 1965 because this was the year when Buffett, or more specifically the Buffett Partnership, acquired control over Berkshire (the partnership started buying shares in Berkshire during 1962). However, it was not until 1970 when Buffett became the CEO and chairman of Berkshire. That does not mean he didn’t write or shared his thought but those writings can only be found in the Buffett Partnership letter’s. I will not include the Buffett Partnership letter’s in this challenge but I will probably do similar blog posts about them sometime in the future since I have them in my possession. Why the 1970-1976 letters are not available on the Berkshire homepage I don’t know to be honest. I just recently managed to get them into my possession but since they are not publicly available I will not include these in the reading challenge. In the future I will probably do similar blog posts about them as well.

Worldly wisdom’s from the Berkshire Hathaway Shareholder Letter – 1977

1.

“Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.

Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.”

2.

“In aggregate, the insurance business has worked out very well. […] It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned – and, unfortunately, sometimes re learned – is the importance of being in businesses where tailwinds prevail rather than headwinds.”

3.

“Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.”

4.

“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

5.

“Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.”

7 thoughts on “Berkshire Hathaway Shareholder Letter 1977

  1. You can tell from that letter Buffett had sympathy for the textile workers’ situation and did not want to close down the mills. But that sympathy cost him dearly. In an 2010 interview he claimed trying to make Berkshire’s textile business work was the worst deal he ever made. Berkshire could have been worth $200 billion more, twice as much, had he closed down the textile mills and focused on insurance.

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    1. A very good observation Joe! This is maybe even more evident in the 1978 letter:

      “We hope we don’t get into too many more businesses with such tough economic characteristics. But, as we have stated before: (1) our textile businesses are very important employers in their communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment. As long as these conditions prevail – and we expect that they will – we intend to continue to support our textile business despite more attractive alternative uses for capital.”

      I can’t remember in which letter, but Warren admits in a later letter that he was wrong about point (4).

      Do you have the link to that interview?

      Thanks for your comment Joe, keep them coming!

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