Learning from Warren Buffett Shareholders Letters - Year 1981 - Objective of Acquisition.

7th September 2024

Learning from Warren Buffett Shareholders Letters – Year 1981 – Objective of Acquisition.

Dear Investors,

Namaste! Today we will discuss what are the objectives of Berkshire Acquisition. Read this post with the last post together as it will make more sense.

Master Says: -

What kind of prices HE is ready to Pay?

We will continue to seek the acquisition of businesses in their entirety at prices that will make sense, even should the future of the acquired enterprise develop much along the lines of its past. We may very well pay a fairly fancy price for a Category 1 business if we are reasonably confident of what we are getting. But we will not normally pay a lot in any purchase for what we are supposed to bring to the party - for we find that we ordinarily don’t bring a lot.

During 1981 we came quite close to a major purchase involving both a business and a manager we liked very much. However, the price finally demanded, considering alternative uses for the funds involved, would have left our owners worse off than before the purchase. The empire would have been larger, but the citizenry would have been poorer.

Although we had no success in 1981, from time to time in the future we will be able to purchase 100% of businesses meeting our standards. Additionally, we expect an occasional offering of a major “non-voting partnership” as discussed under the Pinkerton’s heading on page 47 of this report. We welcome suggestions regarding such companies where we, as a substantial junior partner, can achieve good economic results while furthering the long-term objectives of present owners and managers.

Currently, we find values most easily obtained through the open-market purchase of fractional positions in companies with excellent business franchises and competent, honest managements.

We never expect to run these companies, but we do expect to profit from them. ( see the clarity of purpose)

We expect that undistributed earnings from such companies will produce full value (subject to tax when realized) for Berkshire and its shareholders. If they don’t, we have made mistakes as to either: (1) the management we have elected to join; (2) the future economics of the business; or (3) the price we
have paid.

We have made plenty of such mistakes - both in the purchase of non-controlling and controlling interests in businesses. Category (2) miscalculations are the most common. Of course, it is necessary to dig deep into our history to find illustrations of such mistakes - sometimes as deep as two or three months back.

For example, last year your Chairman volunteered his expert opinion on the rosy future of the aluminum business. Several minor adjustments to that opinion - now aggregating approximately 180 degrees - have since been required.

For personal as well as more objective reasons, however, we generally have been able to correct such mistakes far more quickly in the case of non-controlled businesses (marketable securities) than in the case of controlled subsidiaries. Lack of control, in effect, often has turned out to be an economic plus. ( he says by selling the shares he has corrected themistakes).

Our comments: -

The acquisition by the other people and by the BERKSHIRE has a lot of difference. Buffett has given us the detailed guidance of what to do - when to buy business in totality and when to buy portion of that corporation from the market ( Equity Shares).

His objective is profit and not the status of having more and more companies. I love his sentence - The empire would have been larger, but the citizenry would have been poorer.


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Hitesh Parikh.