Berkshire Hathaway Shareholder Letter 1980

We are now on day four of the Berkshire Hathaway Letters to Shareholders – 2017 Summer Reading Challenge and as a result we are moving into the 80’s. The 1980 letter is more or less focused on topics already discussed in previous letters. Nonetheless, you never get tired of picking Buffett’s brain regarding topics such as share buybacksretained earnings, turnarounds vs exceptional businesses and ostrich-like behavior. 

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 – 1980

1.

“One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price. The competitive nature of corporate acquisition activity almost guarantees the payment of a full – frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely-run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise.”

2.

“Of course, this translation of retained earnings into market price appreciation is highly uneven (it goes in reverse some years), unpredictable as to timing, and unlikely to materialize on a precise dollar-for-dollar basis. And a silly purchase price for a block of stock in a corporation can negate the effects of a decade of earnings retention by that corporation. But when purchase prices are sensible, some long-term market recognition of the accumulation of retained earnings almost certainly will occur. Periodically you even will receive some frosting on the cake, with market appreciation far exceeding post purchase retained earnings.”

3.

“We have written in past reports about the disappointments that usually result from purchase and operation of “turnaround” businesses. Literally hundreds of turnaround possibilities in dozens of industries have been described to us over the years and, either as participants or as observers, we have tracked performance against expectations. Our conclusion is that, with few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

4.

“GEICO’s problems at that time put it in a position analogous to that of American Express in 1964 following the salad oil scandal. Both were one-of-a-kind companies, temporarily reeling from the effects of a fiscal blow that did not destroy their exceptional underlying economics. The GEICO and American Express situations, extraordinary business franchises with a localized excisable cancer (needing, to be sure, a skilled surgeon), should be distinguished from the true “turnaround” situation in which the managers expect – and need – to pull off a corporate Pygmalion.”

5.

“This ostrich-like behavior – selling the better assets and keeping the biggest losers – while less painful in the short term, is unlikely to be a winner in the long term.”

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2 thoughts on “Berkshire Hathaway Shareholder Letter 1980

  1. I also liked the paragraph on buying from a more informed seller:

    “You learn a great deal about a person when you purchase a business from him and he then stays on to run it as an employee rather than as an owner. Before the purchase the seller knows the business intimately, whereas you start from scratch. The seller has dozens of opportunities to mislead the buyer – through omissions, ambiguities, and misdirection. After the check has changed hands, subtle (and not so subtle) changes of attitude can occur and implicit understandings can evaporate. As in the courtship-marriage sequence, disappointments are not infrequent.”

    In the specific example provided by Mr. Buffett, the seller was reliable and honest, but I think this is an important lesson to keep in mind for example when investing in IPOs.

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  2. Again, a great find! I also highlighted this one although I didn’t include it in the post. I agree with you regarding that the fact that this should be a reminder when investing in IPOs.

    Also, I think the argument is interesting from the point of view when you compare; buying a private business vs buying a publicly traded business. You are in both situations buying ownership of a business but only in one instance is the person on the other side likely to have an information edge, an opportunity to mislead you and a rational reason for selling. In other words, you would like to be a buyer in the public market and a seller in the private market. Do you agree?

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