A letter a day!
Letter #53 1999
Key learnings:
- Berkshire had been consistently spending money on marketing for its GEICO insurance business, despite of that the greatest contributor to get new business had been word of mouth recommendations from the existing policy holders.
Apart from advertising, the company also spent money on hiring sales counselors which made the policy holders happy with their services.
- Berkshire had acquired Executive Jet Aviation. In this letter , Buffett talks about its competitive advantages:
“EJA enjoys another important advantage in that its two largest competitors are both subsidiaries of aircraft manufacturers and sell only the aircraft their parents make. Though these are fine planes, these competitors are severely limited in the cabin styles and mission capabilities they can offer. EJA, in contrast, offers a wide array of planes from five suppliers. Consequently, we can give the customer whatever he needs to buy — rather than his getting what the competitor’s parent needs to sell.”
From the perspective of a retail investor, I consider EJA as playing premiumization, i.e something which is not meant for all. In Indian markets, we can relate it to Ethos Limited, Sula Vineyards Limited or even Delta Corp limited for that matter.
- Acquisition in the furniture business
Those who have been following the letter since start, they would have identified a pattern in purchase decisions made by Buffett ie. multiple acquisitions of business in similar industry. Be it furniture or insurance, Buffett tried to get the best of all the companies available in that industry.
“Each of our furniture operations is number one in its territory. We now sell more furniture than anyone else in Massachusetts, New Hampshire, Texas, Nebraska, Utah and Idaho. Last year Star’s Melvyn Wolff and his sister, Shirley Toomim, scored two major successes: a move into San Antonio and a significant enlargement of Star’s store in Austin. There’s no operation in the furniture retailing business remotely like the one assembled by Berkshire. It’s fun for me and profitable for you. W. C. Fields once said, “It was a woman who drove me to drink, but unfortunately I never had the chance to thank her.” I don’t want to make that mistake. My thanks go to Louie, Ron, and Irv Blumkin for getting me started in the furniture business and for unerringly guiding me as we have assembled the group we now have.”
- Acquisition of Mid-American Energy:
MidAmerican Energy, was an electricity utility company . These kind of companies are complicated because they are governed by variety of regulations. There, Berkshire avoided taking a stake that would give them controlling rights.
“Though there are many regulatory constraints in the utility industry, it’s possible that we will make additional commitments in the field. If we do, the amounts involved could be large.”
- Shoe business
The major constraint faced by the shoe business was approximately 93% of the 1.3 billion pairs of shoes purchased in the country came from abroad, where extremely low-cost labor is the rule. Due to this, the shoe business couldn’t perform well.
“Counting both Dexter and H. H. Brown, we are currently the leading domestic manufacturer of shoes, and we are likely to continue to be. We have loyal, highly-skilled workers in our U.S. plants, and we want to retain every job here that we can. Nevertheless, in order to remain viable, we are sourcing more of our output internationally. In doing that, we have incurred significant severance and relocation costs that are included in the earnings we show in the table.”
- Buffett on tech companies:
"We made a few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.
Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes, or geological prospects. So we simply don’t get into judgments in those fields.
- Stock repurchase
There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value.
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