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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 » Operating Earnings of Berkshire’s Subsidiaries

Berkshire Annual Letter 1997 (Part 5)

Continuing on from Warren Buffett’s discussion on insurance float, we now move on to the most volatile form of insurance, the super-cat (or super-catastrophy) insurance.

Insurance companies and reinsurance companies purchase insurance themselves to limit their losses in the event of a major disaster. A company that is willing to underwrite such policies must have a very strong financial strength.

Berkshire, being in such a position, underwrites super-cats heavily and has a huge involvement in this form of insurance.

…Continue reading » Super-Cat Insurance

Berkshire Annual Letter 1997 (Part 4)

Unless you understand about “float” and how to measure its cost, you will never be able to make a good estimate about Berkshire’s intrinsic value.

Float is money that is held but not owned.

In the insurance industry, there is float because premiums are received before losses are paid. This time interval can sometimes extend to decades. During this time, the money can be invested by the insurer.

…Continue reading » A Discussion on Insurance Float

Berkshire Annual Letter 1997 (Part 2)

When Warren Buffett cannot find a well-run and sensibly-priced business with good economics, he will put his money into very short term instruments. While these investments are likely to result in profits, they could also sometimes lead to losses of substantial size.

On the other hand, an investment into a wonderful business bought at an attraction price WILL always make money. It is only a matter of when.

At year end 1997, Berkshire had three non-traditional positions.

…Continue reading » Unconventional Investments

The gain in networth for Berkshire in 1997 was $8.0 billion, a good 34.1%. According to Warren, this return was no big deal. When the market goes on a bull run, any investor can get large returns.

It is important to recognise this and not become over-confident of one’s investment abilities during a bull run.

In fact, the S & P index rose almost as fast as Berkshire. Berkshire tends to underperform the S & P during a market boom. The reason is that Berkshire always has to pay tax, something that neither an index nor a mutual fund needs to pay.

…Continue reading » Berkshire Annual Letter 1997 (Part 1)

Berkshire Annual Letter 1996 (Part 9)

In May 1996, 517,500 shares of Class B Common were sold for the first time. The creation and sales of these shares was a necessity.

Appearing in the market were many unit-trusts that were marketed as Berkshire look-alikes. Using Berkshire’s past reputation, they were trying to lure small and naive investors into investing with them (and earning high commissions and fees in the process).
…Continue reading » Berkshire Hathaway Class B Shares

Berkshire Annual Letter (Part 8)

Richard Branson, the owner of Virgin Atlantic Airways, was once asked how to become a millionaire. He had a quick answer to it: “Start as a billionaire and then buy an airline.”

Warren Buffett decided in 1989 to put that statement to the test by investing $358 million in a 9.25% preferred stock of USair. It turned out that Warren’s analysis of USair’s business was both superficial and wrong.

…Continue reading » How to Become a Millionaire

Berkshire Annual Letter 1996 (Part 7)

Warren Buffett feels that the best way for the majority of people to invest is through an index fund. These people are sure to beat the net results delivered by the majority of professional fund managers.

For the people who elect to do their own investments, there are a few important things to remember. Smart investing is not complex. Neither is it easy. …Continue reading » Intelligent Investing

Berkshire Annual Letter 1996 (Part 6)

The portfolio of Berkshire shows little change compared to the previous year.

Warren Buffett considers inactivity as intelligent behaviour.

He will never trade highly-profitable subsidiaries just because of a small change in some economic indicator. Neither will he do so because some Wall Street expert changes his views on the market.

In fact, this principle applies to his minority positions as well. In both cases, you want to acquire at a reasonable price, a business with excellent economics and able, honest management. …Continue reading » Selecting Stocks Investments

Berkshire Annual Letter 1996 (Part 5)

At Berkshire, reported earnings are a poor measure of the economic performance because the numbers represent only the dividends received from investees (which is a small fraction of the earnings attributable to their ownership).

Instead, the concept of “look-through” earnings is used. This consists of:

1) The reported operating earnings, plus;
2) Berkshire’s share of the retained earnings of major investees that are not reflected in their profits under GAAP, less;
3) An allowance for tax that would be paid by Berkshire if these retained earnings have been distributed.

Can we apply this concept to our own portfolio? …Continue reading » Look Through Earnings

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