149 - How To Obtain Stable And Substantial Earnings (1967 Letter)

Welcome to Episode 3 of the "Becoming Buffett" Series!

This week we discuss the 1967 letter to Berkshire Hathaway shareholders.

Buffett's annual letters book: http://amzn.to/2ogVi4U

Some brief notes:

"Our goal is to obtain a reasonably stable and substantial level of earning power commensurate with the capital employed in the business."

• Negative: Sales were down, sharp drop in prices, sales and profits down substantially, depressed conditions in textile markets, curtailed production 15%
• Positive: one sector doing well due to "attempting to establish product lines away from areas of direct competition"
• P8, para1: spending money internally for the purpose of future increased cash flows
• P8, para4: conducted research and made tough decision to close a quality plant that had lack of demand for product
• • What are we a slave to financially? Your job?
  • What do you need to cut and stop throwing money into?
• P8, para7: broader investment philosophy (insurance companies)
• • You can have time as an investor if you are focused on the long-term
  • This was BH's first move toward diversification: textiles and insurance
  • This was a slow process, could you research and add one company per year to your BH?
  • As you acquire more capital, where will you allocate it?
• P9, para2: mgmt continues to be alert to new opportunities for capital allocation
• • They were poor investors from 1956-66 (pre-Buffett), had basically no ROI on invested capital for 10 year period
  • Can you relate to that?
  • Acknowledged the reality and are learning from it.
  • Keeping liquid money in stocks as they wait for the right capital allocation/investment opportunity
  • Will not hesitate to borrow money to take advantage of attractive opportunities

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