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The Complete Financial History of Berkshire Hathaway: A Chronological Analysis of Warren Buffett and Charlie Munger's Conglomerate Masterpiece
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Published November 3, 2021
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Displaying 1 - 20 of 20 reviews
June 27, 2021
Great Analysis of Berkshire Hathaway,s history
I hold an MBA , but felt the analysis in this book gave me more actionable insight into being a CEO than my graduate degree ever could. For those seeking to build a business this is a must read!
I hold an MBA , but felt the analysis in this book gave me more actionable insight into being a CEO than my graduate degree ever could. For those seeking to build a business this is a must read!
October 26, 2021
Phenomenal, comprehensive history of Berkshire Hathaway. The insane level of detail and thought really helps you get a feel for how this unique company and its leaders evolved (and continue to do so). Great for a first read and also as a lifelong reference! Well done Adam!
July 5, 2021
Great effort from the author.
July 11, 2021
This masterpiece should be converted into a formal textbook or encyclopedia of Berkshire. Outstanding analysis of Berkshire's evolution and great insights into the performance of its often obfuscated private holdings.
December 16, 2023
Summary:
A huge book with the complete history of the world’s biggest conglomerate
The chronological information of how the conglomerate was formed and the information of all the major events around it is useful and a must-read for business professionals & people in the Finance sector and even for the general people to get a perspective of the economy from the eyes of the business people.
There are just so many learnings from Buffet’s annual letters as the whole book itself is based on the excerpts from the legend’s annual letters/reports.
The book’s content is nicely categorized into chunks as much as possible in a consumable form, yet it feels like reading a huge encyclopedia, that’s how much there is to say about that over 6 decades of history and I’m sure there’s more to say and this book just condenses the whole thing into a summary.
Overall, if you’re into Finance, then this book is a must-read otherwise it still has something to learn from for all other general audiences since Finance is such a core thing for all of us to survive in the economy which is inevitable for anyone to escape from.
Some of my Notes & Excerpts from the book:
“A mere 12.5 cents set off the long chain of events that led Warren Buffett to go all-in on Berkshire Hathaway and ensured its (and his) place in history. Buffett first acquired shares in Berkshire for his investing partnership, Buffett Partnership Limited, using a playbook executed countless times before: find a business selling for less than its liquidating value and wait for a temporary market correction to sell at a profit. Berkshire had a history of share repurchases that Buffett saw as a catalyst to monetize his current holdings. He anticipated future repurchases and even struck what he thought was a deal with Seabury Stanton to tender his partnership’s shares for $11.50 per share. The official offer came at $11.375, or 12½ cents less. Feeling slighted, Buffett set out to seek control of Berkshire.”
Buffet’s control of Berkshire
“The very first sentence under a section entitled Issuance of Equity foretold the future: “Berkshire and Blue Chip are considering a merger in 1983.” That should have made readers sit up and pay close attention. Buffett did not expound on the merger itself. Instead he described share-based mergers and acquisitions in general, and the all-too-often value-destroying practices they produce.
Remember the metaphor about mergers being a business marriage? The wise would not go into marriage without a lot of thought and knowledge. Buffett’s long explanation of mergers was his way of sharing knowledge. Commenting on Berkshire’s policy relating to share-
issuances, he said: “Our share issuances follow a simple basic rule: we will not issue shares unless we receive as much intrinsic business value as we give.” Don’t all other managers act in such a rational manner? No. Quite frequently, Buffett explained, one or a combination of the managers’ thirst for deals, or the valuation of either side of a merger, caused value-destructing action for one of the parties involved. Most often, it was the acquirer that engaged in value-destroying practices (usually by issuing undervalued shares or overpaying for a target), but it’s possible for either side to destroy value.
Buffett used the example of a family farm. A hypothetical merger of a 120-acre farm with a neighboring sixty-acre farm would result in a 180-acre farm. The merger provides an equal partnership between the two farmers. Yet this calculation sees the owner of the larger farm experience a 25% reduction in ownership (from 100% of 120 acres to 50% of 180 acres, or ninety acres pro rata). This happens all the time in business mergers.
Even if the two farms were of equal size, their relative valuations could cause a value-destroying result. For example, if one of the two farms were selling for half of their worth, the result would be the same as the scenario Buffett described above since the undervalued side would be giving up more than they were getting. Buffett thought managers and directors should ask themselves if they would sell 100% of the business at the same valuation as they were considering selling part of it. This train of thought was identical to that used by Buffett when buying less than 100% of a business, public or private. Start with the valuation of the whole, and then split it into pieces to determine the per-share price one is willing to pay.
The crux of the issue was that CEOs had different incentives than owners. By using stock rather than debt or cash, he (for the vast majority of CEOs at the time were male) would end up with more kingdom to manage at the expense of owners. Such mergers or acquisitions were frequently done on the basis that either future business value would materialize, growth for growth’s sake was needed,
or for perceived tax reasons (giving some consideration in stock because the manager had to).
Buffett was priming his shareholders for the proposed Blue Chip merger and letting them know he would act in their best interests. He reminded them that the only other such merger under his management of Berkshire that caused the issuance of shares took place in 1978 with the merger of Diversified Retailing.
With the impending Blue Chip merger Buffett promised to, “not equate activity with progress or corporate size with owner-wealth.” Since Buffett was Berkshire’s largest shareholder, and therefore proportionately affected by all capital allocation decisions, minority partners should have felt ease about having him at the helm.”
An amazing example of value destruction in mergers and acquisitions
“in discussing Berkshire’s equity portfolio, Buffett commented, “we find doing nothing the most difficult task of all.”
That’s true
“Stock Splits and Stock Activity” section gives a good reasoning by buffet to not split the shares
“Berkshire’s common stock portfolio had a $5.3 billion carrying value at year-end 1989 and $3.6 billion of it was unrealized gains (increases in market value over cost that had yet to be sold). Like other forms of income, the government taxed gains on the sale of assets (known as capital gains). However, the tax was only due when the asset was sold. This led to an interesting economic benefit for the holder of the asset akin to an interest-free loan from the US Treasury.
Here’s how it worked: Due to the power of compounding without interruption, an asset held for a long period of time (assuming its value increased) would grow at a higher compounded annual rate of return by paying one tax at the end versus lots of little taxes in between. This is somewhat counterintuitive since one would think that a tax paid every year would be the same as one paid at the end. But it is not. The accrued tax incurred, but not paid, appreciates and a portion of this subsequent gain is shared with the owner. The net result of a tax deferred over many years is a much higher rate of return”
Explains how deferred taxes has a hidden compounding benefit
“At every Berkshire Hathaway Annual Meeting, Buffett plays a clip of himself testifying at a Congressional hearing. “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless,” is Buffett’s now-famous message. It is a message worth
repeating.”
Hmm
“ “I think the idea of carving ownerships in an enterprise into little, tiny $20 pieces is almost insane …. I don’t see why there shouldn’t be a minimum as a condition of joining some enterprise … we’d all feel that way if we were organizing a private enterprise.”
Munger on stock split
“A comment by Charlie Munger at the 2001 Annual Meeting was instructive, as it sheds light on his and Buffett’s correct thinking about buying internet companies around the time of the dot-com bubble. He recalled that both he and Buffett had worked at Buffett’s grandfather’s grocery store in Omaha as youngsters. Munger noted that the business, which included delivering goods to customers, “barely supported one family”. Buffett made explicit what Munger was referring to: Webvan, an internet-based grocery delivery business, ran into the same costs that Buffett & Son did generations earlier delivering groceries.
The internet hype roped many into a speculative frenzy based on the false belief that technology would somehow eliminate costs and shower profits on all. Buffett and Munger looked beneath to the basic economics and saw otherwise. They saw that ordering groceries would go from paper to computer entry, but the costs of buying the product and distributing it to customers would not change. “There was a lot of money transferred … from the gullible to the promoters [of internet stocks] … It’s been a huge trap for the public,” Buffett said”
About delivery business during dotcom bubble
“As much as Buffett disliked the accounting of stock options, he thought derivatives as a class represented a true risk to the real economy. Buffett railed against the widespread use of derivatives and their potential to cause unintended harm, devoting two pages of his Chairman’s letter to it. Derivatives, as the word implies, are contracts that derive value from the performance of an underlying entity such as an asset, index or interest rate. Buffett called them time bombs and saw their potential to aggregate risk, rather than disperse it. Once concentrated into a few counterparties, those would then pose systemic risks to the financial system and the broader economy. Derivatives “carry dangers that, while now latent, are potentially lethal.”
Buffet on Derivatives
“Buffett shared his formula in his 1995 Chairman’s letter: Berkshire had “benefitted greatly—to a degree that is not generally well-understood—because our liabilities have cost us very little.” Buffett said a company’s profitability is determined by three factors: “1. What its assets earn; 2. What its liabilities cost; and 3. Its utilization of ‘leverage’.” Berkshire did a good job earning high returns on assets, but its liabilities also contributed to its outsized success. Not only did float provide leverage to enhance Berkshire’s return on equity, it came at a negative cost and was therefore profitable”
Buffet’s formula
“during the fourth quarter of 2005, Gillette merged into Proctor & Gamble. This created a lot of accounting noise and much less economic change, providing one of Buffett’s famous accounting lessons.
Berkshire did not sell a single share of Gillette. It simply accepted the 0.975 shares of Proctor & Gamble stock for each Gillette share it owned. However, GAAP rules required a $5 billion non-cash, pre-tax gain
be booked through the income account. Many people would rightfully ask why? This was a perfect example of economics vs. accounting. In economic terms, Berkshire’s cost basis in Gillette at the time of the merger was $600 million. Berkshire’s cost basis for tax purposes in Proctor & Gamble was $940 million.
This was because Berkshire purchased $340 million of Proctor & Gamble to an even 100 million shares. In accounting terms, the cost basis increased to $5.96 billion, reflecting the non-cash gain booked through the income statement”
Imp note
“The Lubrizol acquisition cost Berkshire more than billions of dollars. It also cost it a trusted lieutenant who many supposed was a leading candidate to someday succeed Buffett as Berkshire’s CEO. The full story is long and nuanced but amounted to this: David Sokol (who first came to Berkshire with the MidAmerican acquisition and had recently been put in charge of NetJets) purchased stock in Lubrizol just before recommending Berkshire buy it. Sokol’s actions suggested a significant lapse of judgement rather than an attempt to make a short-term profit. But the hit to Berkshire’s reputation cost Sokol his job (he resigned). Buffett had a rule of thumb that employees should be willing to have their actions appear on the front page of the paper. This was not the kind of attention Sokol wanted.
Just the year before, Buffett had included a copy of a biennial letter sent to Berkshire’s managers at the end of the 2010 Annual Report.
The two-page letter emphasized the priority of each Berkshire employee: “The priority is that all of us continue to zealously guard reputation. We can’t be perfect but we can try to be. As I’ve said in these[…]”
Buffet on reputation
“Commodities: This category included anything that did not produce, the most well-known example being gold. The logic was compelling. “If you own one ounce of gold for an eternity, you will still own one ounce at its end.” Gold and other commodities were usually held by those fearful of runaway inflation, or because they thought others would buy it from them at a higher price. A visualization really drove home the point. All the gold in the world could be melted together into a 68-foot square cube worth $9.6 trillion that would never grow. Instead, at the current price of gold, one could buy all the farmland in the United States (400 million acres), sixteen Exxon Mobil-sized companies—and
have $1 trillion left over.”
Buffet on Gold
“Berkshire’s price-to-book value in the market allowed more than one dollar of value to be created for every dollar retained. Paying out retained earnings in dividends meant a loss of value.
Shareholders could choose their own dividend policy by selling shares. Not only would they receive more (because of the premium to book value above), but Berkshire would not impose one dividend policy on all shareholders. Some shareholders were in accumulation mode and didn’t want a dividend, while others might wish to sell shares equal to the entirety of earnings each year (or more).
Dividends are taxed in their entirety, while the capital gains tax only applied to the gain over one’s cost basis. Shareholders wishing to retain capital in Berkshire would have to pay tax on the dividend and
invest it back in at a premium to the underlying book value”
Buffet on Dividends
“Productivity and Prosperity
Productivity is the amount of output per hour of labor input. Buffett devoted a section of the 2015 Chairman’s letter to productivity, connecting it to both Berkshire’s and America’s prosperity. The topic was timely (and probably prompted by) Heinz and Kraft, whose new management at 3G Capital were known for ruthlessly improving productivity, most often by reducing headcounts. Buffett thought the connection between productivity and prosperity was not entirely clear to some, so he provided examples.
Farming
: The most dramatic example was America’s shift away from farming during the 20th
century. In 1900, 40% of the country was employed growing America’s food. As of 2015, just 2% of the population worked on farms. Productivity allowed this to happen, beginning with the invention and perfection of
the tractor and extending to better farming techniques and seed quality.
Railroading
: After World War II there were 1.35 million workers employed in the railroad industry, and they moved 655 billion revenue ton-miles. Fast forward to 2014 and Class I railroads moved 1.85 trillion
ton-miles with just 187,000 workers. The result was a 55% decline in the inflation-adjusted cost of moving a ton-mile of freight. Safety improved dramatically too. Using BNSF as an example, Buffett said injuries fell 50% from 1996.
Utilities
: Berkshire Hathaway Energy’s (BHE) Iowa utility in 1999 employed 3,700 people and produced 19 million megawatt-hours of electricity. Fast forward to 2015 and it generated 29 million megawatt-hours while employing just 3,500 people. Such improvements in productivity allowed BHE to keep rates the same for sixteen years. Like BNSF, safety improved too.
The examples above proved that increased productivity resulted in real gains to civilization and allowed more to be employed in other industries. But they came with short-term costs, most notably the workers who lost their jobs. Buffett was aware of these costs and had experienced some up close. When Berkshire shuttered its mills in the mid-1980s (and at Dexter Shoe years later) it employed older workers with non-transferrable skills. Buffett thought the solution was social safety nets that cushioned the blow to the unfortunate workers while leaving productivity to continue working its magic for the benefit of society at large.
Both Buffett and Munger were clearly on the side of making operations at Kraft Heinz more efficient. They detested sloppy operations and were ever on the lookout for inefficiencies at Berkshire, noting that once costs crept in, they tended to proliferate. A large and highly profitable conglomerate required continual diligence to protect itself from such tendencies.”
Buffet on productivity and advancements in human civilisation
“The answer: Apple had a huge moat and IBM did not.
Apple’s moat was wide and deep. While its first successful business reinvention was the iMac personal computer in the late 1990s, the company hit true paydirt with the very portable iPod (which replaced bulkier CDs and CD players) and then again with the iPad (a tablet that can browse the internet) and iPhone (a smartphone that could be a telephone or used to browse the internet). These innovations made Apple more of a consumer products company than a technology company. They sold products people liked, and created an app technology ecosystem around those products that consumers invested in. Every time a new device or version of a device came out, people rushed to buy it. Having an iPhone was a status symbol, and Apple became a household name.
These consumer habits combined with significant switching costs created and maintained Apple’s moat. Consumers would invest in apps and music that could only be used on Apple devices. Over time the market had consolidated to two large competitors: Apple and Google’s Android system. Consumers had little incentive to adopt the competing system since it offered little added benefit compared to the large cost of repurchasing the apps and music already on their Apple system.”
Answer to why Berkshire invested in Apple
“Buffett divided Berkshire into five groves, four of which were used to calculate value (insurance was the fifth and supplied the float to fund the other groves). Those four groves were:
Grove #1: Non-insurance businesses with ownership between 80% and 100%
Grove #2: Equity securities
Grove #3: Control group businesses
Grove #4: Cash, US Treasuries, Fixed Income (bonds)”
4 groves
“without tax consequences. Two stocks owned within a portfolio might have one common owner, but cannot share resources without tax implications. Once owned through a conglomerate, this barrier is removed”
On Tax benefit
A huge book with the complete history of the world’s biggest conglomerate
The chronological information of how the conglomerate was formed and the information of all the major events around it is useful and a must-read for business professionals & people in the Finance sector and even for the general people to get a perspective of the economy from the eyes of the business people.
There are just so many learnings from Buffet’s annual letters as the whole book itself is based on the excerpts from the legend’s annual letters/reports.
The book’s content is nicely categorized into chunks as much as possible in a consumable form, yet it feels like reading a huge encyclopedia, that’s how much there is to say about that over 6 decades of history and I’m sure there’s more to say and this book just condenses the whole thing into a summary.
Overall, if you’re into Finance, then this book is a must-read otherwise it still has something to learn from for all other general audiences since Finance is such a core thing for all of us to survive in the economy which is inevitable for anyone to escape from.
Some of my Notes & Excerpts from the book:
“A mere 12.5 cents set off the long chain of events that led Warren Buffett to go all-in on Berkshire Hathaway and ensured its (and his) place in history. Buffett first acquired shares in Berkshire for his investing partnership, Buffett Partnership Limited, using a playbook executed countless times before: find a business selling for less than its liquidating value and wait for a temporary market correction to sell at a profit. Berkshire had a history of share repurchases that Buffett saw as a catalyst to monetize his current holdings. He anticipated future repurchases and even struck what he thought was a deal with Seabury Stanton to tender his partnership’s shares for $11.50 per share. The official offer came at $11.375, or 12½ cents less. Feeling slighted, Buffett set out to seek control of Berkshire.”
Buffet’s control of Berkshire
“The very first sentence under a section entitled Issuance of Equity foretold the future: “Berkshire and Blue Chip are considering a merger in 1983.” That should have made readers sit up and pay close attention. Buffett did not expound on the merger itself. Instead he described share-based mergers and acquisitions in general, and the all-too-often value-destroying practices they produce.
Remember the metaphor about mergers being a business marriage? The wise would not go into marriage without a lot of thought and knowledge. Buffett’s long explanation of mergers was his way of sharing knowledge. Commenting on Berkshire’s policy relating to share-
issuances, he said: “Our share issuances follow a simple basic rule: we will not issue shares unless we receive as much intrinsic business value as we give.” Don’t all other managers act in such a rational manner? No. Quite frequently, Buffett explained, one or a combination of the managers’ thirst for deals, or the valuation of either side of a merger, caused value-destructing action for one of the parties involved. Most often, it was the acquirer that engaged in value-destroying practices (usually by issuing undervalued shares or overpaying for a target), but it’s possible for either side to destroy value.
Buffett used the example of a family farm. A hypothetical merger of a 120-acre farm with a neighboring sixty-acre farm would result in a 180-acre farm. The merger provides an equal partnership between the two farmers. Yet this calculation sees the owner of the larger farm experience a 25% reduction in ownership (from 100% of 120 acres to 50% of 180 acres, or ninety acres pro rata). This happens all the time in business mergers.
Even if the two farms were of equal size, their relative valuations could cause a value-destroying result. For example, if one of the two farms were selling for half of their worth, the result would be the same as the scenario Buffett described above since the undervalued side would be giving up more than they were getting. Buffett thought managers and directors should ask themselves if they would sell 100% of the business at the same valuation as they were considering selling part of it. This train of thought was identical to that used by Buffett when buying less than 100% of a business, public or private. Start with the valuation of the whole, and then split it into pieces to determine the per-share price one is willing to pay.
The crux of the issue was that CEOs had different incentives than owners. By using stock rather than debt or cash, he (for the vast majority of CEOs at the time were male) would end up with more kingdom to manage at the expense of owners. Such mergers or acquisitions were frequently done on the basis that either future business value would materialize, growth for growth’s sake was needed,
or for perceived tax reasons (giving some consideration in stock because the manager had to).
Buffett was priming his shareholders for the proposed Blue Chip merger and letting them know he would act in their best interests. He reminded them that the only other such merger under his management of Berkshire that caused the issuance of shares took place in 1978 with the merger of Diversified Retailing.
With the impending Blue Chip merger Buffett promised to, “not equate activity with progress or corporate size with owner-wealth.” Since Buffett was Berkshire’s largest shareholder, and therefore proportionately affected by all capital allocation decisions, minority partners should have felt ease about having him at the helm.”
An amazing example of value destruction in mergers and acquisitions
“in discussing Berkshire’s equity portfolio, Buffett commented, “we find doing nothing the most difficult task of all.”
That’s true
“Stock Splits and Stock Activity” section gives a good reasoning by buffet to not split the shares
“Berkshire’s common stock portfolio had a $5.3 billion carrying value at year-end 1989 and $3.6 billion of it was unrealized gains (increases in market value over cost that had yet to be sold). Like other forms of income, the government taxed gains on the sale of assets (known as capital gains). However, the tax was only due when the asset was sold. This led to an interesting economic benefit for the holder of the asset akin to an interest-free loan from the US Treasury.
Here’s how it worked: Due to the power of compounding without interruption, an asset held for a long period of time (assuming its value increased) would grow at a higher compounded annual rate of return by paying one tax at the end versus lots of little taxes in between. This is somewhat counterintuitive since one would think that a tax paid every year would be the same as one paid at the end. But it is not. The accrued tax incurred, but not paid, appreciates and a portion of this subsequent gain is shared with the owner. The net result of a tax deferred over many years is a much higher rate of return”
Explains how deferred taxes has a hidden compounding benefit
“At every Berkshire Hathaway Annual Meeting, Buffett plays a clip of himself testifying at a Congressional hearing. “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless,” is Buffett’s now-famous message. It is a message worth
repeating.”
Hmm
“ “I think the idea of carving ownerships in an enterprise into little, tiny $20 pieces is almost insane …. I don’t see why there shouldn’t be a minimum as a condition of joining some enterprise … we’d all feel that way if we were organizing a private enterprise.”
Munger on stock split
“A comment by Charlie Munger at the 2001 Annual Meeting was instructive, as it sheds light on his and Buffett’s correct thinking about buying internet companies around the time of the dot-com bubble. He recalled that both he and Buffett had worked at Buffett’s grandfather’s grocery store in Omaha as youngsters. Munger noted that the business, which included delivering goods to customers, “barely supported one family”. Buffett made explicit what Munger was referring to: Webvan, an internet-based grocery delivery business, ran into the same costs that Buffett & Son did generations earlier delivering groceries.
The internet hype roped many into a speculative frenzy based on the false belief that technology would somehow eliminate costs and shower profits on all. Buffett and Munger looked beneath to the basic economics and saw otherwise. They saw that ordering groceries would go from paper to computer entry, but the costs of buying the product and distributing it to customers would not change. “There was a lot of money transferred … from the gullible to the promoters [of internet stocks] … It’s been a huge trap for the public,” Buffett said”
About delivery business during dotcom bubble
“As much as Buffett disliked the accounting of stock options, he thought derivatives as a class represented a true risk to the real economy. Buffett railed against the widespread use of derivatives and their potential to cause unintended harm, devoting two pages of his Chairman’s letter to it. Derivatives, as the word implies, are contracts that derive value from the performance of an underlying entity such as an asset, index or interest rate. Buffett called them time bombs and saw their potential to aggregate risk, rather than disperse it. Once concentrated into a few counterparties, those would then pose systemic risks to the financial system and the broader economy. Derivatives “carry dangers that, while now latent, are potentially lethal.”
Buffet on Derivatives
“Buffett shared his formula in his 1995 Chairman’s letter: Berkshire had “benefitted greatly—to a degree that is not generally well-understood—because our liabilities have cost us very little.” Buffett said a company’s profitability is determined by three factors: “1. What its assets earn; 2. What its liabilities cost; and 3. Its utilization of ‘leverage’.” Berkshire did a good job earning high returns on assets, but its liabilities also contributed to its outsized success. Not only did float provide leverage to enhance Berkshire’s return on equity, it came at a negative cost and was therefore profitable”
Buffet’s formula
“during the fourth quarter of 2005, Gillette merged into Proctor & Gamble. This created a lot of accounting noise and much less economic change, providing one of Buffett’s famous accounting lessons.
Berkshire did not sell a single share of Gillette. It simply accepted the 0.975 shares of Proctor & Gamble stock for each Gillette share it owned. However, GAAP rules required a $5 billion non-cash, pre-tax gain
be booked through the income account. Many people would rightfully ask why? This was a perfect example of economics vs. accounting. In economic terms, Berkshire’s cost basis in Gillette at the time of the merger was $600 million. Berkshire’s cost basis for tax purposes in Proctor & Gamble was $940 million.
This was because Berkshire purchased $340 million of Proctor & Gamble to an even 100 million shares. In accounting terms, the cost basis increased to $5.96 billion, reflecting the non-cash gain booked through the income statement”
Imp note
“The Lubrizol acquisition cost Berkshire more than billions of dollars. It also cost it a trusted lieutenant who many supposed was a leading candidate to someday succeed Buffett as Berkshire’s CEO. The full story is long and nuanced but amounted to this: David Sokol (who first came to Berkshire with the MidAmerican acquisition and had recently been put in charge of NetJets) purchased stock in Lubrizol just before recommending Berkshire buy it. Sokol’s actions suggested a significant lapse of judgement rather than an attempt to make a short-term profit. But the hit to Berkshire’s reputation cost Sokol his job (he resigned). Buffett had a rule of thumb that employees should be willing to have their actions appear on the front page of the paper. This was not the kind of attention Sokol wanted.
Just the year before, Buffett had included a copy of a biennial letter sent to Berkshire’s managers at the end of the 2010 Annual Report.
The two-page letter emphasized the priority of each Berkshire employee: “The priority is that all of us continue to zealously guard reputation. We can’t be perfect but we can try to be. As I’ve said in these[…]”
Buffet on reputation
“Commodities: This category included anything that did not produce, the most well-known example being gold. The logic was compelling. “If you own one ounce of gold for an eternity, you will still own one ounce at its end.” Gold and other commodities were usually held by those fearful of runaway inflation, or because they thought others would buy it from them at a higher price. A visualization really drove home the point. All the gold in the world could be melted together into a 68-foot square cube worth $9.6 trillion that would never grow. Instead, at the current price of gold, one could buy all the farmland in the United States (400 million acres), sixteen Exxon Mobil-sized companies—and
have $1 trillion left over.”
Buffet on Gold
“Berkshire’s price-to-book value in the market allowed more than one dollar of value to be created for every dollar retained. Paying out retained earnings in dividends meant a loss of value.
Shareholders could choose their own dividend policy by selling shares. Not only would they receive more (because of the premium to book value above), but Berkshire would not impose one dividend policy on all shareholders. Some shareholders were in accumulation mode and didn’t want a dividend, while others might wish to sell shares equal to the entirety of earnings each year (or more).
Dividends are taxed in their entirety, while the capital gains tax only applied to the gain over one’s cost basis. Shareholders wishing to retain capital in Berkshire would have to pay tax on the dividend and
invest it back in at a premium to the underlying book value”
Buffet on Dividends
“Productivity and Prosperity
Productivity is the amount of output per hour of labor input. Buffett devoted a section of the 2015 Chairman’s letter to productivity, connecting it to both Berkshire’s and America’s prosperity. The topic was timely (and probably prompted by) Heinz and Kraft, whose new management at 3G Capital were known for ruthlessly improving productivity, most often by reducing headcounts. Buffett thought the connection between productivity and prosperity was not entirely clear to some, so he provided examples.
Farming
: The most dramatic example was America’s shift away from farming during the 20th
century. In 1900, 40% of the country was employed growing America’s food. As of 2015, just 2% of the population worked on farms. Productivity allowed this to happen, beginning with the invention and perfection of
the tractor and extending to better farming techniques and seed quality.
Railroading
: After World War II there were 1.35 million workers employed in the railroad industry, and they moved 655 billion revenue ton-miles. Fast forward to 2014 and Class I railroads moved 1.85 trillion
ton-miles with just 187,000 workers. The result was a 55% decline in the inflation-adjusted cost of moving a ton-mile of freight. Safety improved dramatically too. Using BNSF as an example, Buffett said injuries fell 50% from 1996.
Utilities
: Berkshire Hathaway Energy’s (BHE) Iowa utility in 1999 employed 3,700 people and produced 19 million megawatt-hours of electricity. Fast forward to 2015 and it generated 29 million megawatt-hours while employing just 3,500 people. Such improvements in productivity allowed BHE to keep rates the same for sixteen years. Like BNSF, safety improved too.
The examples above proved that increased productivity resulted in real gains to civilization and allowed more to be employed in other industries. But they came with short-term costs, most notably the workers who lost their jobs. Buffett was aware of these costs and had experienced some up close. When Berkshire shuttered its mills in the mid-1980s (and at Dexter Shoe years later) it employed older workers with non-transferrable skills. Buffett thought the solution was social safety nets that cushioned the blow to the unfortunate workers while leaving productivity to continue working its magic for the benefit of society at large.
Both Buffett and Munger were clearly on the side of making operations at Kraft Heinz more efficient. They detested sloppy operations and were ever on the lookout for inefficiencies at Berkshire, noting that once costs crept in, they tended to proliferate. A large and highly profitable conglomerate required continual diligence to protect itself from such tendencies.”
Buffet on productivity and advancements in human civilisation
“The answer: Apple had a huge moat and IBM did not.
Apple’s moat was wide and deep. While its first successful business reinvention was the iMac personal computer in the late 1990s, the company hit true paydirt with the very portable iPod (which replaced bulkier CDs and CD players) and then again with the iPad (a tablet that can browse the internet) and iPhone (a smartphone that could be a telephone or used to browse the internet). These innovations made Apple more of a consumer products company than a technology company. They sold products people liked, and created an app technology ecosystem around those products that consumers invested in. Every time a new device or version of a device came out, people rushed to buy it. Having an iPhone was a status symbol, and Apple became a household name.
These consumer habits combined with significant switching costs created and maintained Apple’s moat. Consumers would invest in apps and music that could only be used on Apple devices. Over time the market had consolidated to two large competitors: Apple and Google’s Android system. Consumers had little incentive to adopt the competing system since it offered little added benefit compared to the large cost of repurchasing the apps and music already on their Apple system.”
Answer to why Berkshire invested in Apple
“Buffett divided Berkshire into five groves, four of which were used to calculate value (insurance was the fifth and supplied the float to fund the other groves). Those four groves were:
Grove #1: Non-insurance businesses with ownership between 80% and 100%
Grove #2: Equity securities
Grove #3: Control group businesses
Grove #4: Cash, US Treasuries, Fixed Income (bonds)”
4 groves
“without tax consequences. Two stocks owned within a portfolio might have one common owner, but cannot share resources without tax implications. Once owned through a conglomerate, this barrier is removed”
On Tax benefit
July 17, 2023
A comprehensive look at Berkshire Hathaway's financials under Warren Buffett and Charlie Munger.
The author goes beyond 'just the facts' (which are neatly summarized here and on a supplemental website www.theoraclesclassroom.com in Excel form) and provides analysis and context around every year from 1965-2019 by decade (plus relevant pre-Buffett history of the companies that eventually became Berkshire Hathaway).
I read this cross-referencing year by year with Buffett's annual letters to his shareholders (available at https://berkshirehathaway.com/letters...), the book The Snowball: Warren Buffett and the Business of Life (through 2008), and, starting with 2015, client letters analyzing Berkshire in insightful detail by Semper Augustus Investment's Chris Bloomstran (available at https://www.semperaugustus.com/client...).
The pieces taken together reveal insights into Buffett's sourcing and analysis of acquired companies, public and private, in addition to a blueprint on how to run a business with wisdom and integrity.
This volume will reside on the Reference shelf, ready to be plucked down when needed.
The author goes beyond 'just the facts' (which are neatly summarized here and on a supplemental website www.theoraclesclassroom.com in Excel form) and provides analysis and context around every year from 1965-2019 by decade (plus relevant pre-Buffett history of the companies that eventually became Berkshire Hathaway).
I read this cross-referencing year by year with Buffett's annual letters to his shareholders (available at https://berkshirehathaway.com/letters...), the book The Snowball: Warren Buffett and the Business of Life (through 2008), and, starting with 2015, client letters analyzing Berkshire in insightful detail by Semper Augustus Investment's Chris Bloomstran (available at https://www.semperaugustus.com/client...).
The pieces taken together reveal insights into Buffett's sourcing and analysis of acquired companies, public and private, in addition to a blueprint on how to run a business with wisdom and integrity.
This volume will reside on the Reference shelf, ready to be plucked down when needed.
February 25, 2023
test the limits of my penchant for deferred gratification.
The textile business would drag down Berkshire’s operating results and cause headaches for another twenty years. Yet those challenges provided crucial business lessons. One lesson was that even the most talented management team can’t save a business with bad economics. Another was how swiftly capital allocation could shift the fortunes of a company for the better
it purchased See’s Candies in 1972, began purchasing Wesco in 1973, and acquired The Buffalo News in 1977. Berkshire also merged with Diversified Retailing in 1978
The purpose of the combination of the two companies was to effect operating economies and greater diversification of products for each.
could delay, not stop, the inevitable.
1985 Chairman’s letter, the year Berkshire decided to permanently close the textile division. “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
“Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes).
The newest technology won’t necessarily help a business, in terms of profitability, if that technology is available to all industry participants and that industry is commoditized.
declining margins translate to declining returns on capital
The more important metric is return on capital. A low margin business can produce a satisfactory return on capital provided capital requirements are low. Conversely, a business requiring a lot of capital can produce a satisfactory return if it achieves high margins. A business requiring a large capital investment with low margins (like the textile business during this decade), in an industry with surplus capacity and competitive disadvantages, was doomed.
playbook executed countless times before: find a business selling for less than its liquidating value and wait for a temporary market correction to sell at a profit.
Berkshire was forced to lay off skilled labor. If Berkshire ramped up production in the future, it would face higher training costs to onboard new employees.
1967 was the acquisition of National Indemnity Company and its sister company, National Fire and Marine Insurance Company
“There’s no such thing as a bad risk, only bad rates.”
The single most important measure of profitability for an insurance company is captured in what is called the combined ratio. The combined ratio is made up of the loss ratio (amounts paid out to cover losses to insureds), and the expense ratio (expenses incurred to conduct operations and write additional premium volume, such as salaries and rent).
In 1968, these ratios were 65.4% (loss ratio) and 32.1% (expenses), producing a combined ratio of 97.5%. It may seem counterintuitive, but a ratio below 100% is generally good and means an insurer is operating at an underwriting profit. In this case, Berkshire got to keep 2.5% of the insurance premiums it took in from policyholders, in addition to money earned from investing those funds.
1969, Berkshire acquired 100% of Sun Newspapers and its related printing business, Blacker Printing Company
mantra of praise by name, criticize by category
Spending money to bring in more business caused expenses to balloon, and there was no accounting convention for separating monies spent on expansion versus those for maintaining existing levels of business.
The results from Illinois National Bank were achieved while maintaining high levels of liquidity. Its average loans to deposits ratio was just 49%. For perspective, today’s banks routinely loan up to 80% of deposits.
High interest rates meant Berkshire enjoyed an enormous economic advantage holding onto these funds.
Buffett reiterated, “management’s objective is to achieve a return on capital over the long term which averages somewhat higher than that of American industry generally—while utilizing sound accounting and debt policies.” From the vantage point of history, we know this objective was achieved by a wide margin.
In response to inflationary pressures on raw materials, the Textile Group changed its accounting from FIFO to LIFO.
the rising price environment would leave it assigning low values to costs as it sold products, and thus incurring higher taxes.
Offsetting those inflationary costs was an ongoing oil crisis, which created higher gasoline prices and led consumers to take fewer long car trips. This in turn lowered accident frequency.
$1.5 million in Blue Chip Stamps. One notable investment made in 1973 was $10.6 million for 467,150 shares in The Washington Post
Their dealings were above board, of course, though most financial fraud is accompanied by intricate accounting maneuvers meant to cover up misdeeds.
Though general industry conditions and stiff competition hurt results during the year, nothing was more painful than self-inflicted losses.
Berkshire now had many sources of earnings power. Owners of Berkshire in turn owned an insurance operation, a bank, a newspaper, and, through Blue Chip Stamps, an interest in a trading stamps business, another bank, and a candy company.
Capital allocation is a continuous, ongoing process. Not only must opportunities within an existing business be examined, options in entirely different industries must also be considered. If additional opportunities for investment are not available, management should consider returning capital to shareholders via buybacks and/or dividends.
Berkshire acquired Waumbec Mills and Waumbec Dyeing and Finishing Co. in Manchester, New Hampshire. On April 28, 1975 Berkshire purchased the company for $1.7 million, partially funding the purchase with $1.15 million of promissory notes issued by Berkshire at the parent company level.
Berkshire paid less than what the net assets recorded in the books were worth
Buffett considered it unwise to make major investments in new fixed assets in the textile industry due to the “relatively low returns historically earned,” a comment which seems to confirm the low purchase price indeed made the Waumbec acquisition appealing.
Buffett delegated the day-to-day underwriting to others, while retaining the investing—meaning capital allocation—to himself.
The Washington Post Company first purchased in 1973
“While too much attention should not be paid to the figure in any single year, over the longer term the record … is of significance.” He wanted to remind shareholders to think like owners. That is, long term.
But the primary reason was that each company owned a piece of the other. In combining the two companies, the cross-ownership needed to be reconciled and eliminated. 117 Accounting is (most often) logical, but it can be messy.
As married couples know, no matter when vows are taken (it could be January 1 or December 31) the Internal Revenue Service views the couple as having been married throughout the whole year. Accounting principles generally work the same way, with one exception.
Berkshire’s investment was made below book value, which meant Berkshire acquired its interest below the cost to even build a similar business from scratch.
The Blue Chip that existed as of 1971 was the same business it had always been—trading stamps. The business was very much like insurance where cash was received ahead of product delivery. Like an insurer, a trading stamp company could make money not only from its products, but by investing the cash it held in the meantime.
Wesco was the holding company for a bank, Mutual Savings and Loan Association. As of 1973
He took the view that operating earnings prior to any securities gains and losses was the correct numerator for any calculation. For the denominator, he used the prior year’s ending equity with securities valued at cost, not market. The equation looked like this:
“The primary test of managerial performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share,”
Negative cost of float, remember, was a very good thing since it meant Berkshire was getting paid to hold policyholders’ money above and beyond any investment income.
Buffett admired both Abegg’s under-promise and over-deliver business approach
the time to borrow money was when one didn’t need it.
2. Demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations), 3. Businesses earning good returns on equity while employing little or no debt,
50% of family net worth in Berkshire. “We eat our own cooking.”
Their long-term goal is increase in intrinsic value per share
Buffett told shareholders that “we regard the most important measure of retail trends to be units sold per store rather than dollar volume.” More will be said in the discussion of 1984 results, which contain a history of revenues, operating profits, poundage, and number of stores for See’s.
Buffett commented, “we find doing nothing the most difficult task of all.”
An insurer, on the other hand, takes in its revenues first (whether earned or unearned) and must estimate upfront what its future costs will be over the life of the insurance contract. It not only doesn’t know how much it will cost, but it might not even know when the cost will come.
Banking then and now, almost by definition, involved borrowing short and lending long. A bank took its depositors’ money, most of which was usually on demand, and lent it on terms to borrowers to purchase homes, finance businesses, and for other needs. The mismatch between the typically lower short-term interest rates paid to depositors and the typically higher rates received from borrowers (the spread) is how a bank makes money. Such an arrangement carried a small risk that interest rates would increase rapidly and cause the cost of money (the interest rate paid) to exceed the rate at which it was lent out.
Buffett repeatedly told shareholders why he disliked dividends.
A business that faced higher costs due to inflation and did not have the capital on hand to pay was no different than the textile companies in the early part of the twentieth century that paid out dividends when they should have used that cash to replenish depreciated equipment. 182 Those textile companies eventually suffered mightily, and so too would the owner of a capital-intensive business operating in an inflationary environment.
GEICO, General Foods, Exxon, and The Washington Post ) represented 75% of the entire portfolio in 1984.
competitively disadvantaged business
had risen threefold over that time
One of Buffett’s favorite ways to praise managers was naming them in his Chairman’s letter
Deferred taxes were, as Buffett would later write, an “interest-free loan from the government”
Benjamin Disraeli’s observation: “What we learn from history is that we do not learn from history.”
incented to grow only if that growth was profitable.
Another standard metric by which banks are measured is return on average assets, which measures operating performance. An estimate 208 of the 1986 return on assets for Berkshire’s Finance-Type Businesses of 2.6% would have ranked it among the very best banks.
1. How much is the company worth? 2. Is the company likely to meet its future obligations? 3. How well are managers doing with the hand they are dealt?
Berkshire’s shares began trading on the NYSE on November 29, 1988
Berkshire was “willing to look foolish as long as we don’t feel we have acted foolishly,” said Buffett
joined Berkshire in 1989. Borsheims is an Omaha-based jewelry store
“extraordinary combination of brains, integrity, and enthusiasm for work.”
Borsheims and Nebraska Furniture Mart were economic cousins. Each operation had the same fundamentals:
1. One location with a massive amount of inventory across various price ranges;
2. Daily attention to detail by top management (featuring generations of each family);
3. High turnover;
4. Astute buying;
5. And low expenses for its industry.
sign a non-compete agreement
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Mistake number three: An unseen force Buffett termed the institutional imperative. This was a tendency for managers to make irrational decisions and misspend shareholders’ money by blindly following others in the business community. This was quite contrary to what was taught in business schools.
The lesson: While above-average managers would not cure a below-average business, he preferred such individuals to others —even if it meant slightly lower results for Berkshire. “We’ve never succeeded in making a good deal with a bad person.”
positive feedback loop
Berkshire was pursuing business in the super cat (short for super catastrophe) area of reinsurance. This line of business reinsured other insurance companies for large losses from natural disasters, typically above a pre-determined threshold. Profits were expected over time, but they came at the expense of volatility. For this segment alone, the combined ratio could be zero in some years, or as high as 300% when earthquakes, hurricanes, and other natural events struck. Measured over a period of a decade, Buffett thought that Berkshire’s overall results would be better than insurers who preferred to lay off the risk to others in exchange for smoother sailing. He summed it up nicely: “Charlie and I always have preferred a lumpy 15% return to a smooth 12%.” Buffett’s basic framework, and how he thought insurers should be measured, was the cost of float. This was determined based on a ratio of underwriting loss to average float. In this way the cost of float (assuming a combined ratio over 100%) was akin to the cost of debt. Comparing the cost of float to an interest rate benchmark would provide a gauge for the quality of float generated. Most insurers could still produce a breakeven result with a cost of float between 7% and 11%. Under long-tail situations where a long time period elapsed from premium collection to the payout of losses, a higher combined ratio of 115% or more could be profitable.
Munger’s analysis started with a question. “How then does bad lending occur so often?” he asked. The answer, he said, was because humans are social animals with “predictable irrationalities.”
“Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless,”
obligations to its 22,000 employees were negligible. This was no accident. Buffett and Munger avoided acquiring businesses burdened with post-retirement healthcare obligations; they also tended to avoid buying the stocks of companies with such liabilities.
The textile business would drag down Berkshire’s operating results and cause headaches for another twenty years. Yet those challenges provided crucial business lessons. One lesson was that even the most talented management team can’t save a business with bad economics. Another was how swiftly capital allocation could shift the fortunes of a company for the better
it purchased See’s Candies in 1972, began purchasing Wesco in 1973, and acquired The Buffalo News in 1977. Berkshire also merged with Diversified Retailing in 1978
The purpose of the combination of the two companies was to effect operating economies and greater diversification of products for each.
could delay, not stop, the inevitable.
1985 Chairman’s letter, the year Berkshire decided to permanently close the textile division. “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
“Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes).
The newest technology won’t necessarily help a business, in terms of profitability, if that technology is available to all industry participants and that industry is commoditized.
declining margins translate to declining returns on capital
The more important metric is return on capital. A low margin business can produce a satisfactory return on capital provided capital requirements are low. Conversely, a business requiring a lot of capital can produce a satisfactory return if it achieves high margins. A business requiring a large capital investment with low margins (like the textile business during this decade), in an industry with surplus capacity and competitive disadvantages, was doomed.
playbook executed countless times before: find a business selling for less than its liquidating value and wait for a temporary market correction to sell at a profit.
Berkshire was forced to lay off skilled labor. If Berkshire ramped up production in the future, it would face higher training costs to onboard new employees.
1967 was the acquisition of National Indemnity Company and its sister company, National Fire and Marine Insurance Company
“There’s no such thing as a bad risk, only bad rates.”
The single most important measure of profitability for an insurance company is captured in what is called the combined ratio. The combined ratio is made up of the loss ratio (amounts paid out to cover losses to insureds), and the expense ratio (expenses incurred to conduct operations and write additional premium volume, such as salaries and rent).
In 1968, these ratios were 65.4% (loss ratio) and 32.1% (expenses), producing a combined ratio of 97.5%. It may seem counterintuitive, but a ratio below 100% is generally good and means an insurer is operating at an underwriting profit. In this case, Berkshire got to keep 2.5% of the insurance premiums it took in from policyholders, in addition to money earned from investing those funds.
1969, Berkshire acquired 100% of Sun Newspapers and its related printing business, Blacker Printing Company
mantra of praise by name, criticize by category
Spending money to bring in more business caused expenses to balloon, and there was no accounting convention for separating monies spent on expansion versus those for maintaining existing levels of business.
The results from Illinois National Bank were achieved while maintaining high levels of liquidity. Its average loans to deposits ratio was just 49%. For perspective, today’s banks routinely loan up to 80% of deposits.
High interest rates meant Berkshire enjoyed an enormous economic advantage holding onto these funds.
Buffett reiterated, “management’s objective is to achieve a return on capital over the long term which averages somewhat higher than that of American industry generally—while utilizing sound accounting and debt policies.” From the vantage point of history, we know this objective was achieved by a wide margin.
In response to inflationary pressures on raw materials, the Textile Group changed its accounting from FIFO to LIFO.
the rising price environment would leave it assigning low values to costs as it sold products, and thus incurring higher taxes.
Offsetting those inflationary costs was an ongoing oil crisis, which created higher gasoline prices and led consumers to take fewer long car trips. This in turn lowered accident frequency.
$1.5 million in Blue Chip Stamps. One notable investment made in 1973 was $10.6 million for 467,150 shares in The Washington Post
Their dealings were above board, of course, though most financial fraud is accompanied by intricate accounting maneuvers meant to cover up misdeeds.
Though general industry conditions and stiff competition hurt results during the year, nothing was more painful than self-inflicted losses.
Berkshire now had many sources of earnings power. Owners of Berkshire in turn owned an insurance operation, a bank, a newspaper, and, through Blue Chip Stamps, an interest in a trading stamps business, another bank, and a candy company.
Capital allocation is a continuous, ongoing process. Not only must opportunities within an existing business be examined, options in entirely different industries must also be considered. If additional opportunities for investment are not available, management should consider returning capital to shareholders via buybacks and/or dividends.
Berkshire acquired Waumbec Mills and Waumbec Dyeing and Finishing Co. in Manchester, New Hampshire. On April 28, 1975 Berkshire purchased the company for $1.7 million, partially funding the purchase with $1.15 million of promissory notes issued by Berkshire at the parent company level.
Berkshire paid less than what the net assets recorded in the books were worth
Buffett considered it unwise to make major investments in new fixed assets in the textile industry due to the “relatively low returns historically earned,” a comment which seems to confirm the low purchase price indeed made the Waumbec acquisition appealing.
Buffett delegated the day-to-day underwriting to others, while retaining the investing—meaning capital allocation—to himself.
The Washington Post Company first purchased in 1973
“While too much attention should not be paid to the figure in any single year, over the longer term the record … is of significance.” He wanted to remind shareholders to think like owners. That is, long term.
But the primary reason was that each company owned a piece of the other. In combining the two companies, the cross-ownership needed to be reconciled and eliminated. 117 Accounting is (most often) logical, but it can be messy.
As married couples know, no matter when vows are taken (it could be January 1 or December 31) the Internal Revenue Service views the couple as having been married throughout the whole year. Accounting principles generally work the same way, with one exception.
Berkshire’s investment was made below book value, which meant Berkshire acquired its interest below the cost to even build a similar business from scratch.
The Blue Chip that existed as of 1971 was the same business it had always been—trading stamps. The business was very much like insurance where cash was received ahead of product delivery. Like an insurer, a trading stamp company could make money not only from its products, but by investing the cash it held in the meantime.
Wesco was the holding company for a bank, Mutual Savings and Loan Association. As of 1973
He took the view that operating earnings prior to any securities gains and losses was the correct numerator for any calculation. For the denominator, he used the prior year’s ending equity with securities valued at cost, not market. The equation looked like this:
“The primary test of managerial performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share,”
Negative cost of float, remember, was a very good thing since it meant Berkshire was getting paid to hold policyholders’ money above and beyond any investment income.
Buffett admired both Abegg’s under-promise and over-deliver business approach
the time to borrow money was when one didn’t need it.
2. Demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations), 3. Businesses earning good returns on equity while employing little or no debt,
50% of family net worth in Berkshire. “We eat our own cooking.”
Their long-term goal is increase in intrinsic value per share
Buffett told shareholders that “we regard the most important measure of retail trends to be units sold per store rather than dollar volume.” More will be said in the discussion of 1984 results, which contain a history of revenues, operating profits, poundage, and number of stores for See’s.
Buffett commented, “we find doing nothing the most difficult task of all.”
An insurer, on the other hand, takes in its revenues first (whether earned or unearned) and must estimate upfront what its future costs will be over the life of the insurance contract. It not only doesn’t know how much it will cost, but it might not even know when the cost will come.
Banking then and now, almost by definition, involved borrowing short and lending long. A bank took its depositors’ money, most of which was usually on demand, and lent it on terms to borrowers to purchase homes, finance businesses, and for other needs. The mismatch between the typically lower short-term interest rates paid to depositors and the typically higher rates received from borrowers (the spread) is how a bank makes money. Such an arrangement carried a small risk that interest rates would increase rapidly and cause the cost of money (the interest rate paid) to exceed the rate at which it was lent out.
Buffett repeatedly told shareholders why he disliked dividends.
A business that faced higher costs due to inflation and did not have the capital on hand to pay was no different than the textile companies in the early part of the twentieth century that paid out dividends when they should have used that cash to replenish depreciated equipment. 182 Those textile companies eventually suffered mightily, and so too would the owner of a capital-intensive business operating in an inflationary environment.
GEICO, General Foods, Exxon, and The Washington Post ) represented 75% of the entire portfolio in 1984.
competitively disadvantaged business
had risen threefold over that time
One of Buffett’s favorite ways to praise managers was naming them in his Chairman’s letter
Deferred taxes were, as Buffett would later write, an “interest-free loan from the government”
Benjamin Disraeli’s observation: “What we learn from history is that we do not learn from history.”
incented to grow only if that growth was profitable.
Another standard metric by which banks are measured is return on average assets, which measures operating performance. An estimate 208 of the 1986 return on assets for Berkshire’s Finance-Type Businesses of 2.6% would have ranked it among the very best banks.
1. How much is the company worth? 2. Is the company likely to meet its future obligations? 3. How well are managers doing with the hand they are dealt?
Berkshire’s shares began trading on the NYSE on November 29, 1988
Berkshire was “willing to look foolish as long as we don’t feel we have acted foolishly,” said Buffett
joined Berkshire in 1989. Borsheims is an Omaha-based jewelry store
“extraordinary combination of brains, integrity, and enthusiasm for work.”
Borsheims and Nebraska Furniture Mart were economic cousins. Each operation had the same fundamentals:
1. One location with a massive amount of inventory across various price ranges;
2. Daily attention to detail by top management (featuring generations of each family);
3. High turnover;
4. Astute buying;
5. And low expenses for its industry.
sign a non-compete agreement
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Mistake number three: An unseen force Buffett termed the institutional imperative. This was a tendency for managers to make irrational decisions and misspend shareholders’ money by blindly following others in the business community. This was quite contrary to what was taught in business schools.
The lesson: While above-average managers would not cure a below-average business, he preferred such individuals to others —even if it meant slightly lower results for Berkshire. “We’ve never succeeded in making a good deal with a bad person.”
positive feedback loop
Berkshire was pursuing business in the super cat (short for super catastrophe) area of reinsurance. This line of business reinsured other insurance companies for large losses from natural disasters, typically above a pre-determined threshold. Profits were expected over time, but they came at the expense of volatility. For this segment alone, the combined ratio could be zero in some years, or as high as 300% when earthquakes, hurricanes, and other natural events struck. Measured over a period of a decade, Buffett thought that Berkshire’s overall results would be better than insurers who preferred to lay off the risk to others in exchange for smoother sailing. He summed it up nicely: “Charlie and I always have preferred a lumpy 15% return to a smooth 12%.” Buffett’s basic framework, and how he thought insurers should be measured, was the cost of float. This was determined based on a ratio of underwriting loss to average float. In this way the cost of float (assuming a combined ratio over 100%) was akin to the cost of debt. Comparing the cost of float to an interest rate benchmark would provide a gauge for the quality of float generated. Most insurers could still produce a breakeven result with a cost of float between 7% and 11%. Under long-tail situations where a long time period elapsed from premium collection to the payout of losses, a higher combined ratio of 115% or more could be profitable.
Munger’s analysis started with a question. “How then does bad lending occur so often?” he asked. The answer, he said, was because humans are social animals with “predictable irrationalities.”
“Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless,”
obligations to its 22,000 employees were negligible. This was no accident. Buffett and Munger avoided acquiring businesses burdened with post-retirement healthcare obligations; they also tended to avoid buying the stocks of companies with such liabilities.
November 19, 2023
Great analytical history of Berkshire Hathaway especially on the operating companies and acquisitions. Less so on the secondary trading side of the business that tends to be everyone's focus (please no more stories about Coca Cola, a company that has delivered sub-market returns for any investor post 1990).
Easy to understand why GEICO and Sees are among Buffett’s favorites.
GEICO and Ajit were able to underwrite float at about negative 5-10% consistently for decades
Surprising how large Sees and Buffalo News were to BRK in the 1980s
Many clever transactions to take advantage of high implied volatility (writing warrants) and buying volatility when it was cheap – or taking advantage of the low implied interest rates of options in the case of the 2008 SPX put sold. Also did very clever tax related transactions to unlock value such as MidAmericans accelerated depreciation which went to the parent co or exchanging stock for assets and cash in the corp (pg 596).
-"as long as excess productive capacity exists, prices tent to reflect direct operating costs rather than capital employed" pg 121 in reference of BRK textiles
-pg 274 even in BRKs worst underwriting period (1980s) they were generating float at about 6% cost vs 10% long term yield for USTs
-pg 290 BRK opted for 15% return hurdle so on 50% leverage basically 22% ROE.
-pg295 IPOs should be avoided because their pricings tend to be more efficient than the secondary market.
-pg316 super cat business produced a large portion of float vs a small amount of premium volume. It saw itself as having three advantages (pg353): reputation to pay, ability to write business at any time (if price is right), ability to write large policies
-pg343 “an insurance operation is valuable only if its float does not cost it money or at worst cot what it would cost the govt to borrow funds.”
Pg412 Rules for insurance: 1. Only accept risks one is capable of evaluating 2. Limit aggregate exposure via diversification 3. Avoid doing business with bad actors. Pg546 restated as 1. Understanding of all exposures that could incur losses 2. Conservative evaluation of probability and severity of losses 3. Premium that is profitable after accounting for operating costs and expected loss 4. Willingness to walk away if profits are insufficient
Pg430 Buffett wary of companies that do not expense stock options, have overly optimistic pension assumptions, mgmts. That tout EBITDA, unintelligible footnotes
Pg433 BRK wrote $1bio insurance for a Pepsi marketing promotion. Berkshire could earn premiums on large payouts that others might be too embarrassed to payout – able to capitalize on slightly better risk neutrality vs competitors
Pg441 “Buffett judged businesses and their operating managers based on return on capital employed. But BRK paid a premium to acquire companies so he judged himself on the total purchase price (i.e. w goodwill).”
Pg453 Midamerican attempted to extract zinc from its geothermal operations. They failed after hundreds of millions spent because zinc extraction requires many processes so even a small error rate can render it inviable. One wonders if this means existing zinc extraction is good moat business.
Pg457 BRK transitioned from 86% equity vs bond in 1994 to 62% equity in 2004
Pg550 BRK did not hedge fuel costs for BNSF because they thought they should cancel long run and only cost them the frictional transaction costs.
Pg550 Saw housing as long run reflecting replacement value
Pg568 used a survival ratio of roughly 9yr for liability calculations of long tail insurance. Did not write catastrophic contracts longer than a year (pg 690)
Pg679 one key insight was that Apple could produce high margin returns with negative tangible capital as supplier and customers supplied all of the funds.
interesting investments
- pg 178-179 "BRK bought Washington Public Power Supply System bonds at 17% aftertax yield...for 12% of BRK equity or 7% of assets." The default risk was likely overpriced but BRK could buy due to a generally conservative financial position. Basically a barbell strategy.
- pg 247 keeping a AAA credit rating allowed BRK to write huge premiums when valuations were attractive (barbell).
-pg357 BRK unlocked capital from its Salomon stock (which was slightly overvalued) by selling a bond that was convertible into shares of Salomon over five years, allowing BRK to take advantage of low rates and use of the capital tax free (plus upside participation in Salmon).
-pg361 Buffett bought total of 46mio barrels of oil in 1994, zero coupon bonds, 110mio ounces of silver in 1997
Pf427 Buffett conducted arbitrage in highly rated fixed income securities and invested with bond RV fund Value Capital run by Mark Byrne (son of Jack)
Pg429 BRK issued “SQUARZ Notes” in 2002 that allowed BRK to borrow cash at -0.75% in exchange for selling a warrant on BRK. Author calculates the cost of these warrants to be about 9% IRR if BRK gains 15%/yr in value and 4% if 10%.
Pg452 in 2004 BRK had 21bio of FX contracts betting on the decline in the USD vs eight other currencies
Pg527 in 2008 BRK wrote 10-20y puts on SPX for 37bio notional to collect 5bio of premium on SPX,UKX,SX5E,NKY. If these indices declined by 25% this would equate to a 4-5% cost of float. They also wrote $4bio worth of CDS protection
Interesting practices
Pg 218 when BRK bought 19% of CapCities they gave management their proxy for 10yrs
Pg 227 BRK had a no layoffs policy at its insurers. They thought that higher expense ratio would be more than offset by better loss ratio (i.e. no incentive to write bad policies for the sake of growth)
Pg445 Insurance employees were rewarded based on profitability rather than volume
Pg252 “reason tells us that the best time to buy assets or acquire companies and the best time to borrow money rarely coincided exactly and are often exactly opposite…so action on the asset and liabilities side should be separated.”
Pg312 “BRK charged operating companies 14-20% for capital or for short term LIBOR+X
Pg436 BRK charged Clayton 100bps over its borrowing costs for capital. Fairly large advantage to run a financing business at AAA+100
Pg562 Ted and Todd paid $1mio per yr plus 10% of their outperformance of the SP500 on 3y rolling basis
Pg570 Buffett removed CEO of Benjamin Moore after breaking a promise not to compete with independent dealers
Pg663 GEICO employees compensated based on growth in number of polices and profitability of existing business
Easy to understand why GEICO and Sees are among Buffett’s favorites.
GEICO and Ajit were able to underwrite float at about negative 5-10% consistently for decades
Surprising how large Sees and Buffalo News were to BRK in the 1980s
Many clever transactions to take advantage of high implied volatility (writing warrants) and buying volatility when it was cheap – or taking advantage of the low implied interest rates of options in the case of the 2008 SPX put sold. Also did very clever tax related transactions to unlock value such as MidAmericans accelerated depreciation which went to the parent co or exchanging stock for assets and cash in the corp (pg 596).
-"as long as excess productive capacity exists, prices tent to reflect direct operating costs rather than capital employed" pg 121 in reference of BRK textiles
-pg 274 even in BRKs worst underwriting period (1980s) they were generating float at about 6% cost vs 10% long term yield for USTs
-pg 290 BRK opted for 15% return hurdle so on 50% leverage basically 22% ROE.
-pg295 IPOs should be avoided because their pricings tend to be more efficient than the secondary market.
-pg316 super cat business produced a large portion of float vs a small amount of premium volume. It saw itself as having three advantages (pg353): reputation to pay, ability to write business at any time (if price is right), ability to write large policies
-pg343 “an insurance operation is valuable only if its float does not cost it money or at worst cot what it would cost the govt to borrow funds.”
Pg412 Rules for insurance: 1. Only accept risks one is capable of evaluating 2. Limit aggregate exposure via diversification 3. Avoid doing business with bad actors. Pg546 restated as 1. Understanding of all exposures that could incur losses 2. Conservative evaluation of probability and severity of losses 3. Premium that is profitable after accounting for operating costs and expected loss 4. Willingness to walk away if profits are insufficient
Pg430 Buffett wary of companies that do not expense stock options, have overly optimistic pension assumptions, mgmts. That tout EBITDA, unintelligible footnotes
Pg433 BRK wrote $1bio insurance for a Pepsi marketing promotion. Berkshire could earn premiums on large payouts that others might be too embarrassed to payout – able to capitalize on slightly better risk neutrality vs competitors
Pg441 “Buffett judged businesses and their operating managers based on return on capital employed. But BRK paid a premium to acquire companies so he judged himself on the total purchase price (i.e. w goodwill).”
Pg453 Midamerican attempted to extract zinc from its geothermal operations. They failed after hundreds of millions spent because zinc extraction requires many processes so even a small error rate can render it inviable. One wonders if this means existing zinc extraction is good moat business.
Pg457 BRK transitioned from 86% equity vs bond in 1994 to 62% equity in 2004
Pg550 BRK did not hedge fuel costs for BNSF because they thought they should cancel long run and only cost them the frictional transaction costs.
Pg550 Saw housing as long run reflecting replacement value
Pg568 used a survival ratio of roughly 9yr for liability calculations of long tail insurance. Did not write catastrophic contracts longer than a year (pg 690)
Pg679 one key insight was that Apple could produce high margin returns with negative tangible capital as supplier and customers supplied all of the funds.
interesting investments
- pg 178-179 "BRK bought Washington Public Power Supply System bonds at 17% aftertax yield...for 12% of BRK equity or 7% of assets." The default risk was likely overpriced but BRK could buy due to a generally conservative financial position. Basically a barbell strategy.
- pg 247 keeping a AAA credit rating allowed BRK to write huge premiums when valuations were attractive (barbell).
-pg357 BRK unlocked capital from its Salomon stock (which was slightly overvalued) by selling a bond that was convertible into shares of Salomon over five years, allowing BRK to take advantage of low rates and use of the capital tax free (plus upside participation in Salmon).
-pg361 Buffett bought total of 46mio barrels of oil in 1994, zero coupon bonds, 110mio ounces of silver in 1997
Pf427 Buffett conducted arbitrage in highly rated fixed income securities and invested with bond RV fund Value Capital run by Mark Byrne (son of Jack)
Pg429 BRK issued “SQUARZ Notes” in 2002 that allowed BRK to borrow cash at -0.75% in exchange for selling a warrant on BRK. Author calculates the cost of these warrants to be about 9% IRR if BRK gains 15%/yr in value and 4% if 10%.
Pg452 in 2004 BRK had 21bio of FX contracts betting on the decline in the USD vs eight other currencies
Pg527 in 2008 BRK wrote 10-20y puts on SPX for 37bio notional to collect 5bio of premium on SPX,UKX,SX5E,NKY. If these indices declined by 25% this would equate to a 4-5% cost of float. They also wrote $4bio worth of CDS protection
Interesting practices
Pg 218 when BRK bought 19% of CapCities they gave management their proxy for 10yrs
Pg 227 BRK had a no layoffs policy at its insurers. They thought that higher expense ratio would be more than offset by better loss ratio (i.e. no incentive to write bad policies for the sake of growth)
Pg445 Insurance employees were rewarded based on profitability rather than volume
Pg252 “reason tells us that the best time to buy assets or acquire companies and the best time to borrow money rarely coincided exactly and are often exactly opposite…so action on the asset and liabilities side should be separated.”
Pg312 “BRK charged operating companies 14-20% for capital or for short term LIBOR+X
Pg436 BRK charged Clayton 100bps over its borrowing costs for capital. Fairly large advantage to run a financing business at AAA+100
Pg562 Ted and Todd paid $1mio per yr plus 10% of their outperformance of the SP500 on 3y rolling basis
Pg570 Buffett removed CEO of Benjamin Moore after breaking a promise not to compete with independent dealers
Pg663 GEICO employees compensated based on growth in number of polices and profitability of existing business
January 15, 2025
WB DEFINED A BUSINESS FRANCHISE AS; IS NEEDED OR DESIRED, IS THOUGHT BY ITS CUSTOMERS TO HAVE NO CLOSE SUBSTITUTE AND IS NOT SUBJECT TO PRICE REGULATION.
Inflation is bad for insurers as the cost to deliver on promises is higher than when the premium is written (if inflationary expectations increase).
Equity investments are based on favourable economic characteristics, competent and honest management and an attractive purchase price.
Merchandising, realestate and cost containment are key for retailers.
In 1972 Blue Chip bought 93% of Sees Candies for $25m = PE of 8x. Over the 1st 13 years that BH owned Sees Candies it was able to increase per-pound selling prices by 9.5% pa.
BH's policy to have centralisation of capital allocation and decentralisation of operating authority was a formula for success as it was highly scalable.
Paid 12x PE for Nebraska Furniture in 1983.
BH wrote less insurance that its balance sheet allowed but could invest more liberally than competitors as a result and not have issues with regulators.
Buyers of insurance are buying IOU's so the financial strength of the seller of insurance is paramount.
GEICO was 50% of the investment portfolio in 1985.
BH had a no layoff staff policy at its insurance companies, so as staff would only write business when they should.
95% of the time WB couldnt determine what the economics of the business and industry would look like in 10-20 yrs time so didnt invest.
BH overcame the dismal economics of the insurance industry by; discipline, correct incentives and capital strength.
Todd and Ted were paid a base salary with a performance fee benchmarked to the S&P500, with 80% tied to individual performance and 20% tied to the other manager.
Inflation is bad for insurers as the cost to deliver on promises is higher than when the premium is written (if inflationary expectations increase).
Equity investments are based on favourable economic characteristics, competent and honest management and an attractive purchase price.
Merchandising, realestate and cost containment are key for retailers.
In 1972 Blue Chip bought 93% of Sees Candies for $25m = PE of 8x. Over the 1st 13 years that BH owned Sees Candies it was able to increase per-pound selling prices by 9.5% pa.
BH's policy to have centralisation of capital allocation and decentralisation of operating authority was a formula for success as it was highly scalable.
Paid 12x PE for Nebraska Furniture in 1983.
BH wrote less insurance that its balance sheet allowed but could invest more liberally than competitors as a result and not have issues with regulators.
Buyers of insurance are buying IOU's so the financial strength of the seller of insurance is paramount.
GEICO was 50% of the investment portfolio in 1985.
BH had a no layoff staff policy at its insurance companies, so as staff would only write business when they should.
95% of the time WB couldnt determine what the economics of the business and industry would look like in 10-20 yrs time so didnt invest.
BH overcame the dismal economics of the insurance industry by; discipline, correct incentives and capital strength.
Todd and Ted were paid a base salary with a performance fee benchmarked to the S&P500, with 80% tied to individual performance and 20% tied to the other manager.
This entire review has been hidden because of spoilers.
August 20, 2024
There are a few books that I strongly recommend for people really interested in Berkshire Hathaway and Buffet and Mungers strain of value investing and this is one of them. It is not a light read by any stretch, but if you are interested in the nuts and bolts and some of the mechanics of how Berkshire changed over time great book. Highly recommend.
January 25, 2025
A great look behind the scenes of how a great institution is built. It was spectacular to see actual numbers on a lot of the companies that you always heard about (See's Candies, Nebraska Funiture Mart, and other), and get a more accurate idea of which companies and ideas were behind Berkshire's compounding.
August 18, 2021
Must read for Value Investors. The four decades of Warren Buffett’s value investment and capital allocations are well-explained in actions.
Businesses might come and go, the management is the key for success.
Businesses might come and go, the management is the key for success.
June 24, 2021
A must read
A book that contains 50+ years of wisdom tantamount to reading 50 years of Berkshire’s annual reports. A must read for those with grand aspiration. Highly recommended!
A book that contains 50+ years of wisdom tantamount to reading 50 years of Berkshire’s annual reports. A must read for those with grand aspiration. Highly recommended!
October 7, 2021
Interesting very little new if you know already the story of Berkshire
November 6, 2021
Must have book for investing nerds
June 24, 2023
More numbers than I was prepared for in an audiobook. Hard not to come away with an admiration for Buffett & Munger's business accumen and integrity. Loved the brief backgrounds of BH's subsidiaries.
November 25, 2024
It’s all about waiting for the fat pitch and making sure you can stay in the game long enough to see the compound work out.
June 24, 2025
It’s exactly what you’d expect. From the perspective of a 22 year old, there are so many fascinating lessons to be learned. However, it’s really f-ing long and it took me a while to finish.
Want to read
August 28, 2025Recommended by Bill Ackman
https://assets.pershingsquareholdings...
https://assets.pershingsquareholdings...
April 26, 2025
Great documentation and efforts from the author. You need some will and interest to read all the lines and between the lines.
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