A letter a day!
Letter #52 1998
Key learnings:
- Acquisition of Executive Jet Aviation
This is the same company from which Warren Buffett purchased his personal jet. Its CEO, Rich Santulli, created the fractional ownership industry in 1986, by visualizing an important new way of using planes. Then he combined guts and talent to turn his idea into a major business. It fraction ownership you can own say 1/8th of plan rather than buying the entire plan and have to pay for maintenance and fuel expenses on the basis of hours flown.
Buffett on the business model of EJA
“In many cases our clients, both corporate and individual, own fractions of several different planes and can therefore match specific planes to specific missions. For example, a client might own /16th of three different jets (each giving it 150 hours of flying time), which in total give it a virtual fleet, obtained for a small fraction of the cost of a single plane.
Significantly, it is not only small businesses that can benefit from fractional ownership. Already, some of America’s largest companies use NetJets as a supplement to their own fleet. This saves them big money in both meeting peak requirements and in flying missions that would require their wholly-owned planes to log a disproportionate amount of dead-head hours.”
- conomics of property-casuality insurance business
This has already been covered in the previous letters, however with the acquisition of the general Re , it has again been explained in depth.
The key determinants are:
(1) the amount of float that thebusiness generates;
(2) its cost; and
(3) most important of all, the long-term outlook for both of these factors.
- Portfolio actions:
“During the year, we slightly increased our holdings in American Express, one of our three largest commitments, and left the other two unchanged. However, we trimmed or substantially cut many of our smaller positions. Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have
been better off last year if I had regularly snuck off to the movies during market hours.”
( A major part of letter consists of accounting related issues which are not so relevant today so havnt discussed the same)
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