A letter a day!
Letter #40 1986
Theme: Team Management
Key learnings:
- In order to manage Berkshire Hathaway, Charlie and Buffett does 2 things :
1). One is to attract and keep outstanding managers to run various operations.
- Allocation of capital.
“Three factors make that so: we earn more money than average; we retain all that we earn; and, we are fortunate to have operations that, for the most part, require little incremental capital to remain competitive and to grow.”
- Acqusition of the Fechheimer Bros. Co.
This company which is based out of Omaha was acquired by Berkshire. They purchased about 85% stake in the same. One interesting fact to note here
“You may be amused to know that neither Charlie nor I have been to Cincinnati, headquarters for Fechheimer, to see their operation. (And, incidentally, it works both ways: Chuck Huggins, who has been running See’s for 15 years, has never been to Omaha.) If our success were to depend upon insights we developed through plant inspections, Berkshire would be in big trouble. Rather, in considering an acquisition, we attempt to evaluate the economic characteristics of the business – its competitive strengths and weaknesses – and the quality of the people we will be joining. Fechheimer was a standout in both respects.”
- One of the major cost increases in the insurance business was due to social and judicial inflation. Buffett writes on the same
” Today, social and judicial inflation are the major culprits; the cost of entering a courtroom has simply ballooned. Part of the jump in cost arises from skyrocketing verdicts, and part from the tendency of judges and juries to expand the coverage of insurance policies beyond that contemplated by the insurer when the policies were written.”
- Insurance business is very difficult to operate and one must be prepared for uncertainties.
Despite the difficulties we have had in reserving and the commodity economics of the
industry, we expect our insurance business to both grow and make significant amounts of money but progress will be distinctly irregular and there will be major unpleasant surprises from time to time. It’s a treacherous business and a wary attitude is essential. We must heed Woody Allen: “While the lamb may lie down with the lion, the lamb shouldn’t count on getting a whole lot of sleep.”
- In this year the company purchased about $700 million of tax-exempt bonds. Buffett has written on bonds:
You might think that this commitment indicates a considerable enthusiasm for such bonds. Unfortunately, that’s not so: at best, the bonds are mediocre investments. They simply seemed the least objectionable alternative at the time we bought them, and still seem so. (Currently liking neither stocks nor bonds, I find myself the polar opposite of Mae West as she declared: “I like only two kinds of men – foreign and domestic)
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