Wednesday, July 14, 2010

Buffett on Buying Stocks vs Making Acquisitions: Berkshire Shareholder Letter Highlights

Though they serve as a great basis for a business education, not everyone has the time to read all the Berkshire Hathaway (BRKa) letters. Even if you read them there's a lot to absorb and learn to put to use. I like to go back and re-read individual sections as a refresh. I ran (re-ran?) across this excerpt of Warren Buffett's thoughts on buying individual stocks vs buying a controlling interest in a business.

From the 1977 Berkshire Hathaway shareholder letter:

Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.

The emotional nature of the market, from fear to exuberance, creates opportunities. You don't see the same kinds of disconnects in valuation in privately negotiated transactions. Be prepared and in a position to act when Mr. Market's more fearful moments are playing out.

Adam

Long BRKb

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