Dec 12, 2011

Excerpts of Letter of Warren Buffett to Shareholders, year 1977

Excerpts/Key Learnings from Warren Buffett’s Letter to Shareholders for year 1977:
The excerpts are taken from the letter and not changed with words or sentences. References are given as and wherever necessary.

After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.

     …Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.

     …The textile business again had a very poor year in 1977.  We have mistakenly predicted better results in each of the last two years.  This may say something about our forecasting abilities, the nature of the textile industry, or both.

 …..Ken Chace’s efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the  acquisition and expansion of our profitable insurance operation.It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved.  In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.

Insurance business-.…As markets loosen and rates become inadequate, we  again will face the challenge of philosophically accepting reduced volume.  Unusual managerial discipline will be required, as it runs counter to normal institutional behavior to let the
other fellow take away business - even at foolish prices.

     Insurance companies offer standardized policies which can be  copied by anyone.  Their only products are promises.  It is not difficult to be licensed, and rates are an open book.  There are no important advantages from trademarks, patents, location,
corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition.  It is commonplace, in corporate annual reports, to stress the difference that people make.  Sometimes this is true and sometimes it isn’t.  But there is no question that the nature of
the insurance business magnifies the effect which individual managers have on company performance.  We are very fortunate to have the group of managers that are associated with us.

… We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.  In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire
even more of a good thing at a better price.

…Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership.  When prices are appropriate, we are willing to take very large positions in
selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.



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