Learnings from Berkshire Hathaway Shareholder Letter 1980

Key takeaways from Buffett's letter to the Shareholders of Berkshire Hathaway in the year 1980.
1. a. "The value of retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage"

1. b. "We would rather have earnings for which we did not get accounting credit put to good use in a 10%-owned company than company by a management we did not personally hire, than have earnings for which we did get credit put into projects of more dubious potential by another management - even if we are that management."

Essentially, Buffett is saying that a company which reinvests retained earnings and generates a good ROI or increase in market value by doing so, can and should retain earnings. He says, "If a tree grows in a forest partially owned by us, but we don’t record the growth in our financial statements, we still own part of the tree." This essentially reiterates the idea that reinvestment for substantial ROI or increases in market value often benefit the investor more than dividends do. In brief, A good return on equity for retained corporate earnings generates value.


2. "If a company can repurchase its shares at a price under 50% of that needed to acquire the same earning power through acquisitions", share repurchases are often a better (and more tax-efficient) way of returning capital to investors, than negotiated acquisitions, in which the company often pays a premium over market value to purchase the company and hence the same increase in earnings.


3. "A silly purchase price for a block of stock in a corporation, can negate the effects of a decade of reinvestment of retained earnings by that corporation." This is applicable to both, point two, regarding reinvestment and acquisitions, and to an investor; this echoes of Howard Marks' statement, "Well bought is half sold".


4. "Only gains in Purchasing power represent real earnings on investment." Only if you can buy more have you really increased the money you have in terms of the value it holds.


5. Make investments in "well-run, favourably-situated businesses, which often pay out only a small proportion of their profits as dividends."


6. "When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." This reiterates the idea that turnarounds very rarely occur. This is because in most cases, incumbents are already working hard and smart, in order to survive. Nota Bene, however, that unlikely and unusual do not mean impossible.

7. An opportunity is often a company which is "temporarily reeling from the effects of a fiscal blow that did not destroy its exceptional underlying economics." Look for businesses undervalued as a result of temporary turbulence, which the management is resolving, and which are not a result of unfavourable industry changes.


8. "Short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."