Notes : Berkshire Annual Letter – 1984— October 20, 2013
Secrets of Mrs. B’s Success :
- Energy and Enthusiasm in their Business
- Define with extraordinary realism their area of special competence and act decisively on all matters within it
- Ignore even the most enticing preposition outside the area of their special competence
- Unfailingly deal in high-grade manner with they deal with
Note : It’s not that different from what Mr. Buffet follows himself
Image credits : www.buffettsecrets.com
Bulletin-Board Business :
Inferior products generally produces inferior economics, however if a product is like a “bulletin-board” – inferior yet essential and the customers lack viable alternatives due to many factors, such as regulations, exclusive access to resources, monopolies operating on economies of scale. An average product can still have good economics. Local news papers in 1980’s were one such business. The internet weakened the barrier to entry, which took over the “bulletin-board” business from news papers and rendered them less essential.
The description of news paper business by buffet has few valuable lessons for all businesses.
- Poor products = poor economics
- businesses that are essential to customers have better chances against inflation
- “bulletin-board” business has a moat that’s harder to break, as the community creates the value along with the business
Secrets of outstanding long-term investment performance – “Temperament” and “Intellect”
Walking Dead :
Unlike other businesses, insurance business can be broke but flush, since cash comes in at the inception of insurance policy and claims come much later. The insurance business don’t run out of cash, until they have run out of net worth. – Warren Buffet
Buy Bonds like a Businessman :
When you are evaluating any investment, if you think like a businessman you will pay attention to the returns on your capital, weather it’s coupon payments in bonds, Cap rate in rental properties or ROIC in bonds. Hence you should always look for the safest opportunities to get good returns on your capital. Buffet ends this discussion with a quote from the book “Intelligent Investor” – Investment is most intelligent when it’s most business like.
The problem of over diversification :
If you have a harem of 40 women, you will never get to now any of them well – Billy Rose
Bonds, Stocks and Hyperinflation :
While there is not much to choose from bonds and stocks ( as a class ) when inflation is in the range of 5%-10%, runaway inflation is a different story. In the circumstance a diversified stock portfolio will almost certainly suffer an enormous loss in real value, bunds will suffer significantly more, and hence an all-bond portfolio carries a small but unacceptable “wipe out” risk.
Buffet goes on to say that Berkshire will buy bonds only when bonds are decidedly superior to business and also notes he expects them to be rare. This clearly indicates his preference of stocks / businesses as an investment than bonds.
Dividend Policy :
What a owner should know while considering a dividend policy
- All earnings are not created equal ( restricted vs unrestricted earnings )
- Outstanding businesses by definition generate large amounts of excess cash
- Company’s ROIC can be deceiving as few outstanding business units can makeup for money losing / average business units.
- It’s best to return earnings in the form of dividends to shareholders, where there is no opportunities in the business to return at-least over a dollar for every dollar invested ( more the better )
- Dividend payments (payout ratios ) should reflect long-term expectations of both earnings and return on invested capital.
- If the dividends are unwisely retained, it’s evident that managers too have been unwisely retained
Diversifying earnings from bad businesses to good business is like overcoming misspent youth
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