Friday, April 1, 2011

Buffett: Severe Change, Exceptional Returns Don't Mix - Berkshire Shareholder Letter Highlights

A follow up to this previous post.

Berkshire Hathaway (BRKa) has generally owned a stable of businesses experiencing little change while requiring small amounts of incremental capital. Businesses that can perform well while making almost all of their after tax profits available for deployment into other attractive assets as Warren Buffett sees fit.

Warren Buffett had this to say about See's Candies in the 2007 Berkshire Hathaway shareholder letter:

"Just as Adam and Eve kick-started an activity that led to six billion humans, See's has given birth to multiple new streams of cash for us. (The biblical command to 'be fruitful and multiply' is one we take seriously at Berkshire.)"

Back in 1987 the seven largest non-financial units were: Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, and World Book.

Not exactly an exciting sounding list of businesses but that's precisely the point. From the 1987 Berkshire Hathaway shareholder letter:

"There's not a lot new to report about these businesses - and that's good, not bad. Severe change and exceptional returns usually don't mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today's business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.

Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago."

Look for high return on capital businesses with as little change going on around them as possible; the businesses that are doing today what they have been doing profitably for a very long time.

Adam

Long BRKb
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