The 1979 shareholder letter gave me a very hard time for which five extracts to select as the most unique and insightful ones. In comparison to the two earlier letters, 1977 and 1978, the 1979 letter is much “meatier” in every aspect. An explanation for my observation could be that Berkshire during 1979 was initiated for NASDAQ trading on the OTC-market and thereby acquired a different following than before, i.e. equity analysts and financial magazines.
Unique for the 1979 letter is a long and very interesting section regarding financial reporting that in my opinion should be a mandatory read for every publicly traded company CEO. This was my favorite part of the 1979 letter. In conclusion, the letter is more detailed than previous ones but more importantly, there seems to be an increased effort and focus to explain both new and earlier made comments. As you will see below, this is done by Mr Buffett using stories, jokes and analogies.
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.
Worldly wisdom’s from the Berkshire Hathaway Shareholder Letter – 1979
“That combination – the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) – can be thought of as an “investor’s misery index”. When this index exceeds the rate of return earned on equity by the business, the investor’s purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.”
“In some businesses – a network TV station, for example – it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar, a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the “easy” business may be the better route to go.
We can speak from experience, having tried the other route. Your Chairman made the decision a few years ago to purchase Waumbec Mills in Manchester, New Hampshire, thereby expanding our textile commitment. By any statistical test, the purchase price was an extraordinary bargain; we bought well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But the purchase was a mistake. While we labored mightily, new problems arose as fast as old problems were tamed.
Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”
“You do not adequately protect yourself by being half awake while others are sleeping.”
“In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors. And if they are cynical in their treatment of investors, eventually that cynicism is highly likely to be returned by the investment community.
Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele – patrons of fast foods, elegant dining, Oriental food, etc. – and eventually obtain an appropriate group of devotees. If the job were expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently. But the restaurant could not change its character constantly and end up with a happy and stable clientele. If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers. […]
The reasoning of managements that seek large trading activity in their shares puzzles us. In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones – because you can’t add lots of new owners (with new expectations) without losing lots of former owners.
We much prefer owners who like our service and menu and who return year after year.”
“Your company is run on the principle of centralization of financial decisions at the top (the very top, it might be added), and rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level. We could just field a basketball team with our corporate headquarters group (which utilizes only about 1500 square feet of space).
This approach produces an occasional major mistake that might have been eliminated or minimized through closer operating controls. But it also eliminates large layers of costs and dramatically speeds decision-making. Because everyone has a great deal to do, a very great deal gets done. Most important of all, it enables us to attract and retain some extraordinarily talented individuals – people who simply can’t be hired in the normal course of events – who find working for Berkshire to be almost identical to running their own show.”