Intelligent Investor Club

Berkshire Annual Letter 1999 (Part 4)

There are a couple of conditions which must exist for a share repurchase scheme to be meaningful to shareholders.

The company must available funds (cash plus sensible borrowing capacity) that more than meets the near term needs of the business. These needs consists of:

• expenditures a company must make to maintain its competitive position and
• optional outlays aimed at business growth.

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Berkshire Annual Letter 1999 (Part 3)

Reported earnings do not accurately measure the economic progress of Berkshire as they include only the dividends received from investees.

These dividends are only a small fraction of the earnings attributable to Berkshire.

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Berkshire Annual Letter 1999 (Part 2)

When an acquisition takes place, there are two generally accepted accounting principles (GAAP) methods of recording the transaction.

In the “purchase” method, a goodwill account has to be established and subsequently written off against earnings. Payment can be made in either cash or stock.

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Berkshire Annual Letter 1999 (Part 1)

The majority of Berkshire’s managers are wealthy, and work because they love their businesses. Even though the businesses are owned by Berkshire, these managers are given authority to run them as if they were their own.

Here’s a story of how one of their managers truly wanted their business to do well.

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Berkshire Annual Letter 1998 (Part 4)

Michael Kinsley has said about Washington: “The scandal isn’t in what’s done that’s illegal but rather in what’s legal.”

Many CEOs have no hesistation about manipulating earnings to meet the desires of Wall Street.

Their first assumption is that their job is to encourage the highest stock price possible, something which Warren Buffett disagrees. To get a high price, operational excellence is required failing which they will resort to accounting gimmicks.

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Berkshire Annual Letter 1998 (Part 3)

Many companies ignore the cost of stock options when earnings are calculated, even though such employee’s compensation should be an expense.

Imagine that GEICO spends $190 million for advertising and pays for it all using Berkshire options. Isn’t that an expense, and should be charged accordingly to the earnings?

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Berkshire Annual Letter 1998 (Part 2)

General Re

On December 21 1998, Berkshire completed the $22 billion acquisition of General Re Corp. This ownership will allow General Re to operate in whatever manner that will maximise its value without worrying about market perception.

For instance, a publicly held reinsurer by the very nature of its role, has very volatile earnings. This volatility can hurt it’s credit ratings and p/e ratios. As a result, an reinsurer might sometimes do things to smoothen the earnings that is actually costly to its core business.

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Berkshire Annual Letter 1998 (Part 1)

Being owned by Berkshire can make the best of managers even more effective. All the ritualistic and non-productive activities like board meetings, press interviews, presentations by investment bankers or talks with financial analysts that go with the job of CEO are eliminated.

Managers are given a simple mission. Run the business as if:

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Berkshire Annual Letter 1997 (Part 7)

Whenever Warren Buffett buys into an industry whose leading participants aren’t known to him, he will always ask his new partners, “Are there any more at home like you?”

Here’s something interesting. When he asked that of the Blumkin family upon buying Nebraska Furniture Mart in 1983, he was given three names - R.C. Willey, Star Furniture and one other.

Many years later, Warren Buffett puchased R.C. Willey and put the same question to the CEO, Bill Child. He was given two names which matched the remaining two given by Blumkin.

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Berkshire Annual Letter 1997 (Part 6)

Many of Berkshire’s businesses have an extraordinary performance that may not be immediately obvious to the untrained observer. Certainly, if you compare the earnings history of Buffalo News or Scott Fetzer to their publicly-owned counterparts, they might be similar.

The reality behind the scenes is that most public companies retain at least two-thirds or more of their earnings to fund their growth. On the other hand, Berkshire subsidiaries have always returned 100% of their earnings to their parent company.

Continue Reading » …Continue reading » Operating Earnings of Berkshire’s Subsidiaries

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