Category Archives: Warren Buffett

Day 1 : Berkshire Hathaway Annual Letter 1977

This post starts off the Berkshire Hathaway Project, a series where I’ll read all the annual shareholder letters that Berkshire Hathaway Chairman Warren Buffett has written.

The first letter that I found on the web site  is from 1977.  Disco was big. The Steelers were awesome.  And the economy was moribund.   As I read the letter, a few elements jumped out, useful for anyone in business–tech or otherwise.

Have an approach.  Buffett talks about in the letter the decision the Berkshire Hathaway has taken towards buying up less than controlling shares of companies it believes in.

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….

This is an unorthodox view, but one we believe to be sound.

Clearly, Berkshire Hathaway had an approach.  And if you read Buffett’s statements over time, the 4 key elements they look for when investing have remained unchanged over the many, many years he’s been investing.

What is interesting in this snippet is the clear willingness to focus on buying non-controlling shares of companies and common stock, if he were convinced that the propsect was a good one.  He basically justifies this view on two fronts.  First, he can buy in more cheaply–makes sense. And, he clearly signals that when he buys in and doesn’t control, he’s making a direct bet on management.

It’s an approach.  Clearly one that’s worked.  The lesson: an approach, have one.

Market dynamics matter. 

I’ve written before about the importance of big market opportunities in being critically important for a startup.  That a great team in a crumby market will get trumped by the crumbiness of the market.  Interestingly, Buffett makes this exact same case in this letter, from 1977.

In his note, he compares and contrasts the performance of two portfolio businesses within Berkshire Hathaway: its textile business and its insurance business.  Both textiles and insurance had great management teams, according to Buffett.  But the market dymaics were totally different, leading to different results.

It is comforting to be in [the insurance] 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.

Again, sage advice that I agree with–aiming for a  big market opportunity makes a tremendous difference.

Recognizing the role of shareholders.

Buffett’s tone in the letter is one that strikes me as doing a great job dileneating the different stakeholders’ roles in the venture.  He discusses the accomplishments and diligence of the different management teams building the different businesses.  He also uses a lot of ‘you’s and ‘your’s’ to reinforce that the shareholders are indeed the owners of the business. See quote above as example.

Deft touch.



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