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MPE – 16: Financial Management: Report on

Berkshire Hathaway Letters [1!! " 1#1$

%ontents

1. Summary of Letters – [1977 – 1981]

………………………………………………….2 - 5

&' Berkshire Hathaway ear wise !"im#ses……………………….

…………………$–7

(' %efere&'es………………………………………………………………

…………………………….7

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  RE ARED BY:

Anupam Roy.

Ashish Naidu.

Sumit Mishra.

Uddipan al.

Vijayakumar

attaman!hi.

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BERS"#RE "A$"A%AY MA&'R ('N()US#'NS *R'M )E$$ERS +,-/,-0,1

*arre& Bu+et ,e"o&)s to the !raham o// s'hoo" of 0a"ue &esti&). 3a4or'o&'"usio&s from

the "etters to shareho"/ers from 1977-1981 are as fo""ows

1. Sto'k 3arkets are the ,est #"a'e to ,uy ,usi&esses at /is'ou&te/ #ri'es

6,ar)ai&s i& ,usi&ess2. Sto'k Se"e'tio& riteria

a Busi&esses we 'a& u&/ersta&/., *ith faora,"e "o&)-term #ros#e'ts.' :#erate/ ,y ho&est 'om#ete&t #eo#"e; e<traor/i&ary #ro#erties

ma&a)eme&t =ua"ity/ (ri'e/ ery attra'tie"y.e Busi&esses with hi)her i&tri&si' a"ue tha& the 'ommo& sto'k #ri'e.

>. t is /i?'u"t to #re/i't sto'k market moeme&ts i& the short ru&.@. &stitutio&a" i&estors are &ot a"ways ri)ht.5. &estors shou"/ hae 'o&'e&trate/ #ortfo"ios.$. %etur& o& a#ita" em#"oye/ A%: is a )oo/ measure of the ,usi&ess

stre&)th.7. Coi/ i&esti&) i& 'om#a&ies with a re"atie"y u&/i+ere&tiate/ )oo/sD#ro/u't

#i#e"i&e.8. &est i& ,usi&esses where tai"-wi&/s #reai" rather tha& hea/ wi&/s.9. Low retur&s are a resu"t of s"ow 'a#ita" tur&oer "ow #roEt mar)i&s.

m#roe/ #roEt mar)i&s i&o"e #ro/u't /i+ere&tiatio&; "owere/

ma&ufa'turi&) 'osts more e?'ie&t use of e=ui#me&t #eo#"e.1F.Bu+et #refers a'=uisitio& of sma"" fra'tio&s of ,usi&esses as 'ommo& sto'ks

G ,ar)ai& #ri'es for whi'h "itt"e e&thusiasm e<ists i& 'o&trast to )e&era"

'or#orate tre&/ of a'=uisitio& a'tiity i& whi'h mu'h e&thusiasm e<ists.11.3a&a)eria" e'o&omi' #erforma&'e is /etermi&e/ ,y hi)her ear&i&)s rate o&

e=uity 'a#ita" rather tha& )ai&s i& (S.12.Bu+et a)rees to or)a&iatio&s whi'h ho"/ their e&tire #roEts #um# it ,a'k

i&to the ,usi&ess #roi/e/ they 'a& #roi/e a hi)her rate of retur& o& the

#roEts rei&este/.1>.Berkshire a'=uisitio&s are ,ase/ o& ma<imii&) rea" e'o&omi' ,e&eEts. He

=uotes 6*e wou"/ rather ,uy 1FI of *o&/erfu" Busi&ess J at K #er share

tha& 1FFI of J at 2K #er share1@.Bu+et further /ii/es ,usi&esses i&to 2 'ate)ories

a Busi&esses we"" a/a#te/ to i&atio&ary e&iro&me&t, <traor/i&ary Busi&esses /is)uise/ as or/i&ary or ,e"ow or/i&ary o&es.

B*siness a+apte+ to in,ationary en-ironment:

 Jhese ,usi&esses hae 'hara'teristi's

1 C,i"ity to i&'rease #ri'es easi"y without fear of "oss of market share

o"ume.2 C,i"ity to a''ommo/ate "ar)e /o""ar o"ume i&'reases i& ,usi&ess with "ow

a//itio&a" i&estme&t 'a#ita".

E.traor+inary B*siness +isg*ise+ as or+inary ones:

Bu+et states that he is &ot )oo/ e&ou)h to i/e&tify these ma&a)eria"

su#erstars.

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Bu+ett fo'uses o& the mi'ro As#e'iE' 'om#a&ies ,ut heMs a"ways mi&/fu" of thema'ro. C&/ he 'ertai&"y u&/ersta&/s that his su''ess 'ou"/&Mt hae ha##e&e/

without ri/i&) the ,i))est ma'ro wae of the "ast 1FF years – the amai&) )rowth of 

the NS e'o&omy.

“Who has ever benefted during the past 238 years by betting against America? I 

 you compare our country’s present condition to that existing in !!"# you have to

rub your eyes in $onder% In my &ietime a&one# rea& per'capita () output has

sixo&ded% *y parents cou&d not have dreamed in +3, o the $or&d their son $ou&d

see%- 

He =uotes that it is ery /i?'u"t to ,eat the market &o matter how ,ri)ht you arewith a& e<am#"e where a 'omme&tator i&ter#rete/ that the ,ook a"ue of Berkshire

Hathaway i& 19$@ 'ou"/ hae ,ou)ht O ou&'e of )o"/ 15 yrs "ater with mu'h

,"oo/ sweat tears the ,ook a"ue #ro/u'e/ wi"" ,uy the same O ou&'e of )o"/.

Bu+et further states i& 1982 that Cmeri'a& ,usi&esses are 'urre&t"y 6,a/

,usi&esses e'o&omi'a""y #ro/u'i&) "ess for their i&/ii/ua" i&estors after-ta< tha&

the ta<-e<em#t #assie rate of retur& o& mo&ey. But Cmeri'a& e=uity 'a#ita"; i&

a))re)ate; #ro/u'es &o a"ue-a//e/ for i&/ii/ua" i&estors.f the 'auses of "o&)-

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term i&atio& 'a& ,e tem#ere/; #assie retur&s are "ike"y to fa"" a&/ the i&tri&si'

#ositio& of Cmeri'a& e=uity 'a#ita" shou"/ si)&iE'a&t"y im#roe. 3a&y ,usi&esses

that &ow must ,e '"assiEe/ as e'o&omi'a""y 6,a/ wou"/ ,e restore/ to the 6)oo/

'ate)ory u&/er su'h 'ir'umsta&'es.

BERS"#RE "A$"%AY S$A$#S$#(S

Bu+et shares that o& !CC( ,asis; /uri&) the #rese&t ma&a)eme&tMs term of see&tee& years; ,ook a"ue has i&'rease/ from P19.@$ #er share to P52$.F2 #ershare; or 21.1I 'om#ou&/e/ a&&ua""y. Jhis rate of retur& &um,er is hi)h"y "ike"y to/rift /ow&war/ i& future years.

o&e&tio&a" a''ou&ti&) o&"y a""ows "ess tha& ha"f of our ear&i&)s 6i'e,er) toa##ear a,oe the surfa'e; i& #"ai& iew. *ithi& the 'or#orate wor"/ su'h a resu"t is=uite rareQ i& our 'ase it is "ike"y to ,e re'urri&)

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Berkshire Hathaway ear wise 2limpses

1!! – !#

- Cfter mer)i&) Berkshire Ri&e S#i&&i&) Csso'iates with Hathaway

3a&ufa'turi&) om#a&y i& 1955; these were the ,e)i&&i&) of the years whe&

*arre& Bu+et starte/ i&tera'ti&) with shareho"/ers ,y #u,"ishi&) the

shareho"/er "etters.- 3ost of the 'om#a&ies ow&e/ ,y Berkshire /eE&e 6re'or/ ear&i&)s as a &ew

hi)h i& ear&i&)s #er share.- :#erati&) ear&i&)s o& ,e)i&&i&) e=uity 'a#ita" amou&te/ to 19I; s"i)ht"y

,etter tha& "ast year.- Rew shareho"/ers =uestio& the wis/om of remai&i&) i& te<ti"e ,usi&ess.- 1F years 'om#"etio& of Berkshire i& the &sura&'e i&/ustry.- $FF I )rowth i& "ast 1F years i& the a))re)ate i&sura&'e #remium [P22

mi""io& to P151 mi""io&].- y#ress &sura&'e om#a&y was #ur'hase/ i& 'ash.

- Home state Cuto 'o&ti&ues to make e<'e""e&t #ro)ress i& 1977 ,ut was/isa##oi&ti&) i& 1978.

- &sura&'e i&estme&ts )rew from P1>@.$ mi""io& to P252.8 mi""io&.- 3akes rea"ie/ 'a#ita" )ai&s of P$.9 mi""io& a&/ u&rea"ie/ 'a#ita" )ai&s of 

P7@ mi""io& – (BJ.- ""i&ois atio&a" Ba&k [(ur'hase/ i& 19$9] 'o&ti&ue/ to a'hiee a rate of 

ear&i&)s o& assets a,out three times that of most "ar)e ,a&ks.- Berkshire i&'reases e=uity i&terest i& B"ue hi# Stam#s; a&/ ow&s

a##ro<imate"y >$ 1D2I at the e&/ of 1977.

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- 3er)er with iersiEe/ retai"i&) 'om#a&y.

1!

- C''ou&ti&) #rofessio& /e'i/es that e=uity se'urities ow&e/ ,y i&sura&'e'om#a&ies must ,e 'arrie/ o& the ,a"a&'e sheet at market a"ue. Howeer;si&'e this 'ou"/ si)&iE'a&t"y /istort the o#erati&) #erforma&'e #er'e&ta)e,e'ause of wi/e year-to-year market a"ue 'ha&)es i& the &et worth E)ure;Berkshire /e'i/es to 'o&ti&ue to re#ort o#erati&) #erforma&'e measure/

a)ai&st ,e)i&&i&) &et worth; with se'urities a"ue/ at 'ost.- Ha/ a reaso&a,"y )oo/ o#erati&) #erforma&'e ,ut &ot as )oo/ as the

#reious year.- Book 0a"ue of share rises to P >>5.85 #er share. C )ai& of 2F.5 I

'om#ou&/e/ a&&ua""y. Howeer; &atio& remai&s a 'ause of 'o&'er& i& or/er

to 'o&ti&ue to a'hiee this )ai& o& a 'o&ti&uous ,asis.- C'=uires tota" ow&ershi# of thirtee& ,usi&esses [from the ,ase of te<ti"e

,usi&ess] throu)h &e)otiate/ #ur'hases from #riate ow&ers for 'ash; a&/

hae starte/ si< others.- Je<ti"e a&/ %etai"i&) shows a /imi&ishi&) si)&iE'a&'e oer the years as

'om#are/ to the i&sura&'e ,usi&ess.- &sura&'e u&/erwriti&) ratio /e'rease/ from 98.2I to 97.1I.

- Home state was /isa##oi&ti&) i& this year /ue to /ata #ro'essi&);a/mi&istratie a&/ #erso&&e" #ro,"ems.

- y#ress &sura&'e 'om#a&y #ur'hase tur&s out to ,e a& a,so"ute )em.- Berkshire e&ters i&to the s#e'ia"ie/ area of surety rei&sura&'e.- Berkshire fee"s that ery "o&) term ,o&/s are of "ess yie"/ a&/ a mistake

ma/e ,y them.- Last year for ""i&ois atio&a" Ba&k a&/ Jrust om#a&y as a su,si/iary of 

Berkshire Hathaway as the Ba&k Ho"/i&) om#a&y C't of 19$9 re=uires that

they /iest the ,a&k ,y e'em,er >1; 198F.- CSCT tra/i&) was i&itiate/ i& the sto'k of Berkshire Hathaway. Jhis mea&s

that the sto'k &ow is =uote/ o& the :er-the-ou&ter #a)e of the *a"" Street

 4our&a" u&/er 6C//itio&a" :J Tuotes.1#3

- :#erati&) ear&i&)s im#roe/ to P @1.9 mi""io& i& 198F from P>$.F mi""io& i&

1979.- Cs #er the !CC( re=uireme&t; a"" B"ue hi# i&'ome a&/ e<#e&se items are

i&'"u/e/ i& fu"" i& BerkshireMs o&so"i/ate/ Stateme&t of ar&i&)s; with the

@FI ow&ershi# i&terest of others i& B"ue hi#Ms &et ear&i&)s.- & "ast si<tee& years; ,ook a"ue #er share with i&sura&'e-he"/ e=uities

a"ue/ at market i&'rease/ from P19.@$ to P@FF.8F; or 2F.5I 'om#ou&/e/

a&&ua""y.

- Jhe "ar)est &o&-'o&tro""e/ ho"/i&)[7.2 mi""io& shares] of !: or#.; e=ua"to a,out a >>I e=uity i&terestwou"/ =ua"ify as a& 6i&estee ho"/i&) a&/

wou"/ re=uire Berkshire to ree't a #ro#ortio&ate share of !:Ms ear&i&)s

i& their ow&.- Jhe i&sura&'e i&/ustryMs u&/erwriti&) #i'ture 'o&ti&ues to rise from 1FF.$ i&

1979 to a& estimate/ 1F>.5 i& 198F.- Home a&/ Cuto i&sura&'e 'o&ti&ues to make )oo/ #ro)ress.- Home state was /isa##oi&ti&) a)ai& 'o&se'utie"y i& this year.

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- Berkshire 'uts the s'o#e of their te<ti"e ,usi&ess. :#eratio&s at *aum,e'

3i""s were termi&ate/; re"u'ta&t"y ,ut &e'essari"y.

1#1

- :#erati&) ear&i&)s of P>9.7 mi""io& i& 1981 amou&te/ to 15.2I of ,e)i&&i&)

e=uity 'a#ita" 'om#are/ to 17.8I i& 198F.- Berkshire 'o&ti&ues to seek the a'=uisitio& of ,usi&esses i& their e&tirety.

 Jhey are #re#are/ to #ay a fair"y fa&'y #ri'e for a ,usi&ess if they fee" that

they are reaso&a,"y 'o&E/e&t of what they are )etti&).- Jhe ,ook a"ue of share i&'reases to P52$.F2 #er share; or 21.1I

'om#ou&/e/ a&&ua""y.- Berkshire fee"s that the future of &sura&'e 'om#a&ies is ,"eak /ue to the

a,a&/o&me&t of their u&/erwriti&) /is'i#"i&e a&/ writi&) ,usi&esses at a&y

#ri'e i& or/er to aoi/ &e)atie 'ash ow.

Re4erences: "

1' http:55www'erkshirehathaway'com5letters5letters'html

&' https:55en'wikipe+ia'org5wiki5Berkshire7Hathaway

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