This is where my task of picking the five most unique and insightful extracts from the Berkshire Hathaway shareholder letters starts to get really hard. The 1983 letter is twenty pages long and packed with investing wisdom. The forthcoming letters are not shorter why I realize that I will continue to struggle in my selection process of extracts as I’m certain that the level of investing wisdom will remain intact.
The increase in number of pages per letter, the 1977 letter for example was only six pages long, can in my opinion be explained by a change in both content and style of the letters. What I mean is that letters are no longer a strict presentation of financial information. Rather, the financial information is now incorporated into stories about the businesses that Berkshire own and the managers that run these businesses. A perfect example is the presentation of Nebraska Furniture Mart and Mrs Rose Blumkin in the 1983 letter. Also, the style of the letters has drifted towards the meaning and implications of the financial outcomes to the degree of having an investors/reader education purpose. An example of this is the discussion about goodwill in the 1983 letter and the appendix about goodwill and its amortization included in the 1983 letter.
Before presenting the extracts that I have chosen from the 1983 letter I would like to share with you a short clip of Rose Blumkin (Mrs. B), the founder of Nebraska Furniture Mart. Berkshire acquired a 90 % ownership in Nebraska Furniture Mark in 1983 and Mrs. B, then 90 years old (!), remained as chairman as well as working seven days a week in the store. She’s truly an intelligent fanatic.
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 Berkshire Hathaway Shareholder Letter – 1983
“One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I’d rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don’t even dream about, and they then pass on to their customers much of the savings. It’s the ideal business – one built upon exceptional value to the customer that in turn translates into exceptional economics for its owners.”
“We never take the one-year figure very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off? Instead, we recommend not less than a five-year test as a rough yardstick of economic performance.”
“We report our progress in terms of book value because in our case (though not, by any means, in all cases) it is a conservative but reasonably adequate proxy for growth in intrinsic business value – the measurement that really counts. Book value’s virtue as a score-keeping measure is that it is easy to calculate and doesn’t involve the subjective (but important) judgments employed in calculation of intrinsic business value. It is important to understand, however, that the two terms – book value and intrinsic business value – have very different meanings.
Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out.
An analogy will suggest the difference. Assume you spend identical amounts putting each of two children through college. The book value (measured by financial input) of each child’s education would be the same. But the present value of the future payoff (the intrinsic business value) might vary enormously – from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value”
“Thus our first lesson: businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.”
“A good business is not always a good purchase – although it’s a good place to look for one.”