Thoughts on Business and Technology

Notes : Berkshire Annual Letter – 1988

Performance Highlights :

  • Net Worth $569
  • Book value $2974.52 ( 23% compounded annually )
  • Purchased an 80% interest in Borsheim’s in 1989

Data that should be reported in annual reports by CEO’s : 

  1. Approximately how much is this company worth?
  2. What is the likelihood that it can meet its future obligations? and
  3. How good a job are its managers doing, given the hand they have been dealt?

If this can’t be provided by GAAP, the CEO should provide non-GAAP or extra-GAAP data to his shareholders.

Tricks used in financial reporting : 

Big Bath Quarter or Year – The strategy of manipulating a company’s income statement to make poor results look even worse. The big bath is often implemented in a bad year to enhance artificially next year’s earnings. The big rise in earnings might result in a larger bonus for executives. New CEOs sometimes use the big bath so they can blame the company’s poor performance on the previous CEO and take credit for the next year’s improvements.

As long as investors blindly believe GAAP numbers managements will manipulate the number to fit GAAP.

Scheduled Tax changes in 1990 –

 The new rule will affect us in various ways. Most important, we will be required to change the way we calculate our liability for deferred taxes on the unrealized appreciation of stocks held by our insurance companies.

Right now, our liability is layered. For the unrealized appreciation that dates back to 1986 and earlier years, $1.2
billion, we have booked a 28% tax liability. For the unrealized  appreciation built up since, $600 million, the tax liability has  been booked at 34%. The difference reflects the increase in tax rates that went into effect in 1987.

It now appears, however, that the new accounting rule will require us to establish the entire liability at 34% in 1990,  taking the charge against our earnings. Assuming no change in  tax rates by 1990, this step will reduce our earnings in that

Borsheim’s : 

Common fundamentals that NFM and Boreshem share

  1. Same family – Borsheim was started by Mrs. B’s brother-in-law Mr. Friedman and sister Rebecca
  2. Single store operations featuring huge inventories that provide customers with an enormous selection across all price ranges
  3. Daily attention to detail by top management
  4. Rapid turnover,
  5. Shrewd buying,
  6. Incredibly low expenses.
  7. Both families focus on what right for the customers ( a strong trait among all successful entrepreneurs )

Note : Sounds like a “Patel” operating a motel … Dandho! business


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