153 - Great Management Matters (1970 Letter)

Welcome to Episode 6 of the "Becoming Buffett" Series!

This week we discuss the 1970 letter to Berkshire Hathaway shareholders.

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

Some brief notes:

1970

First letter signed by Buffett

• Very diverse earnings across various operations
• • Bank had record earnings
  • Insurance had some setbacks but still excellent returns
  • Textile became more and more difficult and broke-even
  • Highlights the value of diversifying
• Overall BH return of ~10%
• • This is far better than would have been the case if BH had remained exclusively devoted to the textile business
  • Again, reinforces why strategic diversification can be so valuable
• Continue to face strong headwinds in textile operations
• • Actively working to make the most of the situation, including costly decisions to BH and employees
  • Are we willing to make an honest assessment of our "business (household)" and make appropriate changes? Ex: cut expenses, take a step of faith and try to start a new income stream, etc.
• New insurance division will take years before a real evaluation can be made (long-term mindset)
• • How long are we willing to wait for an investing thesis to play out?
  • What if an investment loses money for 3 years, then returns 20%+ for 10 years straight, would that be worth the wait?
• Surety business
• • Operated at a significant underwriting loss
  • Contractor's bond field was a disappointment
  • Even Buffett and BH make investments that don't' appear to work out, nobody is perfect at this!
• Launched a new business/subsidiary out of National Indemnity (insurance operation) and plan to open a new one in 1971
• • BH began launching new companies/subsidiaries
  • This is a new method, methods so far:
  • • Full acquisitions
    • Common stocks (no longer)
    • Starting new businesses
    • What options are on the table for you and I?
• Buffett is quick to celebrate his operational managers and give them credit
• • Strong management is central to his acquisition philosophy
  • Are you surrounding yourself with people smarter than you?
  • Are you trusting your capital to people smarter than you?
  • Are you humble enough to admit and act on this?
  • Bonus: Would you hire yourself to manage your business?

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