Notes on the Berkshire Hathaway Shareholder Letter 1981

1. "Predicting rain doesn't count, building arks does". i.e.: Predicting rain and cold doesn't count, but carrying a coat does :)

2. "We may very well pay a fairly fancy price for a 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." In effect, most business, NOT all, are usually running at close to maximum efficiency. This ties well with the idea that usually, the reputation of an industry is more durable than the reputation of a fantastic manager. This also relates to the idea that potent "managerial kisses of wonder" are rare, because "turnarounds seldom turn."

3. Consider:

A. The management you are electing to join

B. The future economics of the business

C. The price you are (i) having to and (ii) are willing to pay

If A, B, and C are favourable its probably a good investment. If your investment goes wrong, where did you miscalculate?

4. INFLATION

    "For inflation acts as a gigantic corporate tapeworm.  That 
tapeworm preemptively consumes its requisite daily diet of 
investment dollars regardless of the health of the host organism.  
Whatever the level of reported profits (even if nil), more 
dollars for receivables, inventory and fixed assets are 
continuously required by the business in order to merely match 
the unit volume of the previous year.  The less prosperous the 
enterprise, the greater the proportion of available sustenance 
claimed by the tapeworm."

Essentially, inflation increases costs of operation, and if you do not have the pricing power to pass on this rise in costs to the consumer, even if, by some miracle, you are able to maintain the same nominal profitability, people will be willing to pay less for said profit stream. This is because you may be putting "cash into their wallets, but your not putting food in their stomachs." Thus, when risk free rates rise, and people demand greater compensation for the risk they undertake on the equity market, if companies cannot increase profits, the share prices fall.

5. FORECASTING

A. Sam Goldwyn said, "Forecasts, are dangerous, particularly those about the future".

B. Pogo says, "The future isn't what it used to be".

6. A company with a high ROCE should retain and reinvest earnings, whereas a company with a low ROCE should, ideally, return profits to investors as dividends, so that they can reinvest this to generate a higher return.

7. INSURANCE

Berkshire "sacrificed much volume, but have maintained a substantial underwriting superiority in relation to industry-wide results." Essentially, Buffett is saying that it is better to ensure you are correctly compensated for the risks you take in the long run, than to maintain a high underwriting volume and premium revenue, at the risk of becoming insolvent when policyholders claim insurance.