Lessons From Berkshire Hathaway Annual Letters (1977-1985)
In anticipation of Berkshire’s 50th year under current management, I’m in the process of going through all of the annual letters with a fine toothed comb, and collecting what I find to be the best nuggets of wisdom. The formatting is messed up, and i'm not tech savvy enough to fix it. I hope the value of the info exceeds the price of the ugly formatting.
Here are my favorites from 1977-1985. Enjoy!
-PhillyValueInvestor
1977 Lesson – Focus on long-term business performance, not short term price performance.
“Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.”
Top 4 portfolio positions at the end of 1977 (cost)
GEICO 22%, Kaiser Aluminum 11%, Capital Cities 10%, Washington Post 10%
Top 4 portfolio positions at the end of 1977 (market)
GEICO 24%, Washington Post 18%, Interrepublic 9%, Cap Cities 7%
Top non-insurance operating businesses
See’s Candies, Blue Chip Stamps, Illinois Nat’l Bank
1978 Lesson – No one can predict short term market fluctuations.
“We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do.”
Top 4 portfolio positions at the end of 1978 (cost)
SAFECO, 18%, GEICO 18%, Cap Cities 15%, Kaiser Aluminum 14%
Top 4 portfolio positions at the end of 1978 (market)
Washington Post 24%, GEICO 21%, SAFECO 15%, Interrepublic 11%
Top 4 non-insurance operating businesses:
IL Nat’l Bank $4.2M, See’s $3.1M, Mutual S&L $3M, Blue Chip $1.4M
1979 Lesson – Don’t buy crappy businesses just because they’re dirt cheap.
“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.”
Top 4 portfolio positions at the end of 1979 (cost)
GEICO 15%, SAFECO 13%, Handy & Harman 13%, Kaiser Aluminum 11%
Top 4 portfolio positions at the end of 1979 (market)
GEICO 20%, Washington Post 12%, Interrepublic 11%, SAFECO 11%
Top 4 non-insurance operating businesses:
IL Nat’l Bank $5.0M, See’s $3.5M, Mutual S&L $3.2M, Blue Chip $1.6M
1980 Lesson - Bad businesses vs good management
“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.”
Top 4 portfolio positions at the end of 1980 (cost)
General Foods 27%, GEICO 20%, SAFECO 14%, Alcoa 11%
Top 4 portfolio positions at the end of 1980 (market)
GEICO 20%, General Foods 11%, Handy & Harman 11%, Safeco 9%
Top 4 non-insurance operating businesses:
IL Nat’l Bank $5.0M, See’s $3.5M, Mutual S&L $3.2M, Blue Chip $1.6M
1981 Lesson - The only 3 things that can go wrong
“We expect that undistributed earnings from such companies will produce full value (subject to tax when realized) for Berkshire and its shareholders. If they don’t, we have made mistakes as to either: (1) the management we have elected to join; (2) the future economics of the business; or (3) the price we have paid.”
Top 4 portfolio positions at the end of 1981 (cost)
R.J. Reynolds 22%, General Foods 19%, GEICO 13%, Handy & Harman 6%
Top 4 portfolio positions at the end of 1981 (market)
GEICO 31%, R.J. Reynolds 13%, General Foods 10%, Washington Post 9%
Top 4 non-insurance operating businesses:
See’s $6.3M, Blue Chip $2.1M, Wesco $1.6M, Mutual S&L $1.5M,
1982 Lesson - The importance of purchase price
“Our partial-ownership approach can be continued soundly only as long as portions of attractive businesses can be acquired at attractive prices. We need a moderately-priced stock market to assist us in this endeavor. The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
Top 4 portfolio positions at the end of 1982 (cost)
R.J. Reynolds 34%, General Foods 16%, GEICO 11%, Crum & Forster 11%
Top 4 portfolio positions at the end of 1982 (market)
GEICO 33%, R.J. Reynolds 17%, Washington Post 11%, General Foods 9%
Top 4 non-insurance operating businesses:See’s $6.9M, Blue Chip $2.5M, Wesco $2.2M, Mutual S&L $1.5M,
1983 Lesson – Eating Your Own Cooking
“Although our form is corporate, our attitude is
partnership. Charlie Munger and I think of our shareholders as
owner-partners, and of ourselves as managing partners. (Because
of the size of our shareholdings we also are, for better or
worse, controlling partners.) We do not view the company itself
as the ultimate owner of our business assets but, instead, view
the company as a conduit through which our shareholders own the
assets.
In line with this owner-orientation, our directors are all
major shareholders of Berkshire Hathaway. In the case of at
least four of the five, over 50% of family net worth is
represented by holdings of Berkshire. We eat our own cooking.”
Top 4 portfolio positions at the end of 1983 (cost)
R.J. Reynolds 47%, General Foods 29%, GEICO 8%, Time, Inc 5%
Top 4 portfolio positions at the end of 1983 (market)
GEICO 31%, R.J. Reynolds 26%, General Foods 18%, Wash Post 10%
Top 4 non-insurance operating businesses:
See’s $12.2M, Buffalo News $8.8M, Wesco $3.5M, Mutual S&L $1.9M,
1984 Lesson – On Capital Intensity
“The first point to understand is that all earnings are not created equal. In many businesses particularly those that have high asset/profit ratios - inflation causes some or all of the reported earnings to become ersatz. The ersatz portion - let’s call these earnings “restricted” - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas: its ability to maintain its unit volume of sales, its long-term competitive position, its financial strength. No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.”
Top 4 portfolio positions at the end of 1984 (cost)
Exxon 30%, General Foods 27%, Time, Inc 15%, GEICO 8%
Top 4 portfolio positions at the end of 1984 (market)
GEICO 31%, General Foods 18%, Exxon 14%, Wash Post 12%
Top 4 non-insurance operating businesses:
See’s $13.4M, Buffalo News $13.3M, Nebraska Furniture Mart $5.9M, Wesco $4.8M
1985 Lesson – On Commodity industry competition
“Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on-investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses. But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic.”
Top 4 portfolio positions at the end of 1985 (cost)
Beatrice Companies 39%, ABC 20%, GEICO 17%, Time,Inc 7%
Top 4 portfolio positions at the end of 1985 (market)
GEICO 50%, Wash Post 17%, ABC 9%, Beatrice Companies 9%
Top 4 non-insurance operating businesses:
See’s $14.6M, Buffalo News $14.6M, Nebraska Furniture Mart $5.2M, Wesco $4.2M
Thanks for reading Part 1. Look for a few more installments over the next couple weeks.
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