A letter a day!

A letter a day!

Letter #42 1988
Key learnings:

1. The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate.

2. In 1988, major purchases were made of Federal Home Loan Mortgage Pfd. (“Freddie Mac”) and Coca-Cola.

3. When should you involve in arbitrage trading?

(1) How likely is it that the promised event will indeed occur?
(2) How long will your money be tied up?
(3) What chance is there that something still better will transpire – a competing takeover bid, for example?
(4)What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?

“All this said, a warning is appropriate. Arbitrage has looked easy recently. But this is not a form of investing that guarantees profits of 20% a year or, for that matter, profits of any kind. As noted, the market is reasonably efficient much of the time: For every arbitrage opportunity we seized in that 63-year period, many more were foregone because they seemed properly priced.”

In this letter, he has also explained efficient market theory and its pros and cons. On arbitrage, he has written a concluding paragraph.

“An investor cannot obtain superior profits from stocks by simply committing to a specific
investment category or style. He can earn them only by carefully evaluating facts and continuously exercising discipline. Investing in arbitrage situations, per se, is no better a strategy than selecting a portfolio by throwing darts.”

4. Listing of Berkshire Hathaway’s shares on NYSE.

Charlie and Buffett have listed down the goals of listed

1. First, we do not want to maximize the price at which Berkshire shares trade.

“Charlie and I are bothered as much by significant overvaluation as significant undervaluation. Both extremes will inevitably produce results for many shareholders that will differ sharply from Berkshire’s business results. If our stock price instead consistently mirrors business value, each of our shareholders will receive an investment result that roughly parallels the business results of Berkshire during his holding period.”

2. Second, they wish for very little trading activity.

“If we ran a private business with a few passive partners, we would be disappointed if those partners, and their replacements, frequently wanted to leave the partnership. Running a public company, we feel the same way. Our goal is to attract long-term owners who, at the time of purchase, have no timetable or price target for sale but plan instead to stay with us indefinitely.”

5. Buffett mentions David L Dodd in this letter who is one of his teachers. He has also co-authored the book named “Security Analysis” with Ben Graham.( His story is worth reading)