149 - How To Obtain Stable And Substantial Earnings (1967 Letter)

April 20, 201734 min
Welcome to Episode 3 of the "Becoming Buffett" Series! This week we discuss the 1967 letter to Berkshire Hathaway shareholders. Buffett's annual letters book:   Some brief notes: “Our goal is to obtain a reasonably stable and substantial level of earning power commensurate with the capital employed in the business.” Negative: Sales were down, sharp drop in prices, sales and profits down substantially, depressed conditions in textile markets, curtailed production 15% Positive: one sector doing well due to “attempting to establish product lines away from areas of direct competition” P8, para1: spending money internally for the purpose of future increased cash flows P8, para4: conducted research and made tough decision to close a quality plant that had lack of demand for product What are we a slave to financially? Your job? What do you need to cut and stop throwing money into? P8, para7: broader investment philosophy (insurance companies) You can have time as an investor if you are focused on the long-term This was BH’s first move toward diversification: textiles and insurance This was a slow process, could you research and add one company per year to your BH? As you acquire more capital, where will you allocate it? P9, para2: mgmt continues to be alert to new opportunities for capital allocation They were poor investors from 1956-66 (pre-Buffett), had basically no ROI on invested capital for 10 year period Can you relate to that? Acknowledged the reality and are learning from it. Keeping liquid money in stocks as they wait for the right capital allocation/investment opportunity Will not hesitate to borrow money to take advantage of attractive opportunities 

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