A letter a day!
Letter #43 1989
Key learnings:
- Two factors which has led to appreciation of Berkshire Hathaway’s performance:
- the exceptional gains in intrinsic value that the portfolio companies have achieved;
- Markets have appropriately corrected the prices of these companies.
- Buffett writes on the method of operation adopted by them in the insurance business which have helped them in all the times:
“Our method of operation, incidentally, makes us a stabilizing force in the industry. We add huge capacity when capacity is short and we become less competitive only when capacity is abundant. Of course, we don’t follow this policy in the interest of stabilization - we follow it because we believe it to be the most sensible and profitable course of action. Nevertheless, our behavior steadies the market. In this case, Adam Smith’s invisible hand works as advertised.”
- In this letters, he mentions about Ajit Jain, who is an Indo American and currently vice chairman of Insurance operations of Berkshire Hathaway.
If you want to read more about him, you can read it here:
- Buffett writes in this letter how he bought coca cola shares. I will share an excerpt here
" This Coca-Cola investment provides yet another example of the incredible speed with which your Chairman responds to investment opportunities, no matter how obscure or well-disguised they may be. I believe I had my first Coca-Cola in either 1935 or 1936. Of a certainty, it was in 1936 that I started buying Cokes at the rate of six for 25 cents from Buffett & Son, the family grocery store, to sell around the neighborhood for 5 cents each. In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product."
I continued to note these qualities for the next 52 years as Coke blanketed the world. During this period, however, I carefully avoided buying even a single share, instead allocating major portions of my net worth to street railway companies, windmill manufacturers, anthracite producers, textile businesses, trading-stamp issuers, and the like. (If you think I’m making this up, I can supply the names.) Only in the summer of 1988 did my brain finally establish contact with my eyes."
- This year Berkshire Hathaway has also made some investments in the preference l shares . One of the companies is The Gillete Co.
“The preferred-stock structures we have negotiated will provide a mediocre return for us if industry economics hinder the performance of our investees, but will produce reasonably attractive results for us if they can earn a return comparable to that of American industry in general. We believe that Gillette, under Colman’s management, will far exceed that return and believe that John, Ed, and Andy will reach it unless industry conditions are harsh.”
- In the last part of this letter, Buffett recalls his mistakes in the past 25 years.
1. My first mistake, of course, was in buying control of Berkshire. Though I knew its business - textile manufacturing - to be unpromising, I was enticed to buy because the price looked cheap.
2. Good jockeys will do well on good horses, but not on broken-down nags.
3. Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them
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