BERKSHIRE HATHAWAY LETTERS – 1978 LEARNINGS

Each year, Warren Buffett writes an open letter to Berkshire Hathaway shareholders which many value investors can’t wait to jump on reading. In this post, we have summarised the key learnings from the letter written in 1978, to save you the time from reading the whole letter (although still strongly recommended).

1978 Letter Learnings

Buffett: We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.

MoneyWiseSmart (MWS): Do you prefer to see your portfolio in red/ green (in the short term)?

Buffett: Of course, with a minor interest we do not have the right to direct or even influence management policies of SAFECO. But why should we wish to do this? The record would indicate that they do a better job of managing their operations than we could do ourselves. While there may be less excitement and prestige in sitting back and letting others do the work, we think that is all one loses by accepting a passive participation in excellent management. Because, quite clearly, if one controlled a company run as well as SAFECO, the proper policy also would be to sit back and let management do its job.

MWS: Do you question management often, based on facts (and not speculations)? And do you give them a second doubt and time to execute, particularly if they have been executing well for a long period prior, and nothing all businesses are bound to have ups and downs?

Buffett: The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital. We hope we don’t get into too many more businesses with such tough economic characteristics.

MWS: Are your businesses differentiated & capital light?

Buffett: Our experience has been that the manager of an already high-cost operation frequently is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors. No one has demonstrated this latter ability better than Gene Abegg.

MWS: Do your businesses run a tight or loose ship? We know one great business that has excellent cost control, well below the industry average – Bank OZK (https://youtu.be/_dWvt_8dVaA)

Summary

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Source: Berkshire Hathaway letter.