A letter a day!
Letter #29 1975
Key learnings:
- Textile Operations:
Textile as an industry was facing problems as stated by Buffett in the earlier letters. When the entire industry is depressed, it is the right time to acquire distressed companies which are already struggling. Buffett is known for this and he did the same this year.
On April 28, 1975, we acquired Waumbec Mills Incorporated and Waumbec Dyeing and
Finishing Co., Inc. is located in Manchester, New Hampshire. These companies have long sold woven goods into the drapery and apparel trade. Such drapery materials complement and extend the line already marketed through the Home Fabrics Division of Berkshire Hathaway. In the period prior to our acquisition, the company had run at a very substantial loss, with only about 55% of looms in operation and the finishing plant operating at about 50% of capacity. Losses continued on a reduced basis for a few months after acquisition.”
- Insurance investments
Buffett has highlighted the criteria he uses to select a company for making investments of money received via the insurance business.
“Our equity investments are heavily concentrated in a few companies that are selected based on favorable economic characteristics, competent and honest management, and a purchase price attractive when measured against the yardstick of value to a private owner. With this approach, stock market fluctuations are of little importance to us—except as they may provide buying opportunities—but business performance is of major importance.”
3.Insurance Operations
At the time of bad cycles in the insurance business, only the companies with a strong liquidity position will survive. Other companies will have to sell their investments in order to sustain the cycle.
“We have continued to maintain a strong liquid position in our insurance companies. We consider such market fluctuation of minor importance as our liquidity and general financial strength make it highly improbable that bonds will have to be sold at times other than those of our choice.”
- Diversification
Buffett emphasizes the importance of diversification in investing and how Berkshire Hathaway’s portfolio is diversified across different industries and companies. He writes,
“In 1965, two New England textile mills were the company’s only sources of earning power and, before Ken Chace assumed responsibility for the operation, textile earnings had been erratic and, cumulatively, something less than zero subsequent to the merger of Berkshire Fine Spinning and Hathaway Manufacturing. Since 1964, net worth has been built to $92.9 million, or $94.92 per share. We have acquired total, or virtually total ownership of six businesses through negotiated purchases for cash (or cash and notes) from private owners, started four others, purchased a 31.5% interest in a large affiliate enterprise and reduced the number of outstanding shares of Berkshire Hathaway to 979,569. Overall, equity per share has compounded at an annual rate of slightly over 15%.”
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