WARREN BUFFETT’S LETTER – 1971 – 1975

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1971

Mr.Buffett’s objective is the growth of the business by improvising returns on total capital and returns on equity of the business.

Textile Operation

Berkshire’s textile business was facing recession and that dropped the performance of the business. To sustain profitability of the business; management is even trying to reduce costs as well as control inventories.

Insurance Operation

Berkshire started with reinsurance operation and home-state insurance operation, by acquiring home & automobile insurance company.

WB Letter 1972

Berkshire did not issue additional share capital to run the business. Instead, he repurchased his own company’s shares from the public during the recession.

WB 1972 01

WB Letter 1973

Mr.Buffett believes that premium rate will drop in future due to increasing competition in the Insurance business.

The merger of Diversified Retailing Company into Berkshire got approved pertaining to the terms and conditions of issuing shares of Berkshire. Berkshire and Diversified Retailing Company both had shares of Blue Chip Stamps and after the merger of Diversified Retailing Company into Berkshire, the holding of shares of Blue Chip into Berkshire increased.

WB 1973 01

WB Letter 1974

Textile operation

Berkshire, in order to avoid the buffer inventory, started its operations at 1/3rd of its installed capacity.

Insurance operation

Unusual profitability into insurance business increased the competition level into the industry. On account of this competition; the profit level of various companies decreased and the underwriting losses increased on a larger scale. But above all of this, the insurance business kept on growing and earned higher returns on capital employed.

The merger of Diversified Retailing Company into Berkshire was terminated by Board of Directors but Mr.Buffett planned to reopen possibilities of the merger in the future.

WB Letter 1975

Textile operation

During 1975, the textile industry again faced recession and that resulted in the operation losses and reduction of employment by ~53%. Most of the textile producers decreased their production and this resulted into business rebound in the fourth quarter of 1975.

WB 1975 01

We can able to see that we should buy cyclical companies during the worst time in the industry as Mr.Buffett has done.

Iron ore price

Metal company

Metal company 1

From the above, we can analyze that investors who had purchased shares of metal companies which dealt in iron ore during December 2015 where the prices were the lowest in the period of 10 years; have received decent returns.

Insurance operation of the company showed underwriting losses which in turn reduced the fund available to make an investment into the stocks and as a result of this; the investment portfolio reported an unrealized loss.

WB 1975 02

Mr.Buffett says that short-term market price fluctuation is not important; only business performance counts and hence he explains the criteria for the selection of stocks for holding the businesses for a longer period of time.

Warren Buffett’s Letters 1957 – 2012

 

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