A letter a day !
Letter #58 2004
Key learnings:
1 Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
- Berkshire Hathaway had investment in mid American which did variety of public utility services. One of its subsidiary had Zinc reserves but unfortunately the company stopped that project.
For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.
Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains.
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Price competition in insurance industry is fierce. Because most of the insured do not care from whom they buy.
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If an insurer is optimistic in its reserving, reported earnings will be overstated, and years may pass before true loss costs are revealed.
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Three questions which are important to ask
- Does the company have the right CEO?
- Is he/she overreaching in terms of compensation?
- Are proposed acquisitions more likely to create or destroy per-share value?
On such questions, the interests of the CEO may well differ from those of the shareholders. Directors, moreover, sometimes lack the knowledge or gumption to overrule the CEO. Therefore, it’s vital that large owners focus on these three questions and speak up when necessary.
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