Learning from Warren Buffett Shareholders Letters - Year 1977.

11th May 2024

Learning from Warren Buffett Shareholders Letters – Year 1977.

Dear Fellow Investors,

Namo Narayan! When I look at my investment journey starting from 1992 – the one person who has

helped me, guided me, mentored me and always stood beside me with his wisdom is Mr.Buffett.Whenever I have a doubt in the field of investing – he is always there to guide me with his shareholders letters / speeches / interviews and tons of one liners. 

I always had a desire to share this learning with the group of serious and like minded investors. Somehow, that group thing did not happen. So, I have decided to go SOLO in my journey of sharing. These letters are PURE INVESTMENT wisdom and those who can digest the same – will not only have money but the financial freedom and the best of the quality life. So, whatever you want – Money / Freedom or Quality of Life or all of the three – these letters will help you for sure.

We will take one letter at a time. I will try to give some of the current situation examples – wherever possible – to give you the reference of the Indian Situations. I will also give HOMEWORK in the form of SELF STUDY. Those who want to master the BUFFETT must do the homework for their own developments.

If you have questions regarding any of the things – if you do not understand – you can send me questions on – Hiteshmparikh@gmail.com. With subject line - Questions from Year 1977. ( every time the year will change). Questions will not be answered on WhatsApp or those who do not follow the above steps. Let us start with the year 1977 today. I will refer to Buffett as MASTER. 

Master says: - 

Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.

He gives an example of his company – “In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earnings per share were up 37% from the 

year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance.”

Master’s Example of entry into insurance industry – 2 

It was early in 1967 that we made our entry into this industry through the purchase of National Indemnity Company and National Fire and Marine Insurance Company (sister companies) for approximately $8.6 million. In that year their premium volume amounted to $22 million. In 1977 our aggregate insurance premium volume was $151 million. No additional shares of Berkshire Hathaway stock have been issued to achieve any of this growth.

Our explanation: - 

Say a company is giving bonuses in the ratio of 1:1. Now, as an investor you are happy. But, the equity base will doubled next year. Do you think the company will be able to add NET PROFIT at more than 100% next year? In that case, EPS will go down. 

In this week only two companies announced bonuses – BPCL ( 1:1) and HPCL ( 1:2). So, unless BPCL profits grows by 100% and HPCL by 50% - their EPS will be low compared to the current year. 

Self-Study: - Find out such examples of increase in equity due to Bonuses / FPO / Rights and compare with the increase in Net Profits. Study the effects of this on the share prices between 1 - 3 years post these issues. 

Master says: -

Important point to study the insurance company: - 

Insurance companies offer standardized policies which can be copied by anyone.Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little 

consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.

Master says how to select the company? 

We want the business to be (1) one that we can understand, (2) with favourable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favourable stock price behaviour in the short term. 

In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

Read the above rules of picking up the companies – as many times as you can. 

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Learn a Lesson. Live with Passion & Invest with Reason.

Hitesh Parikh.