1977 Berkshire Hathaway Shareholders Letter

For a long time now, I’ve been meaning to read all of the Berkshire Hathaway Shareholders Letters penned by Warren Buffett. I’ve been putting it off and off and off. It doesn’t help that I always seem to have something constantly on my desk to read. So I’ve decided I would leverage the commitment and consistency bias and trick and force myself into reading all of the shareholders letters by making it into a bit of a challenge.

What I’ve done to trick and force myself into finally doing this project is to record it and put it on Youtube. Since I wasn’t reading the damn things even though they have been sitting on my desk for years, I figured making a more interesting project out of them would give me the kick in the ass I needed. Strangely, audio recordings of the shareholders letters don’t exist. Perfect. This is now my mission until all the letters have been read and recorded.

Now, the obvious pitfall here is that you will be forced to listen to my gravely voice. However, hopefully the audio is acceptable and listenable enough to get value out of it. I hope to get one of these processed each week. Be on the lookout. If you have any feedback on the quality of the audio, the mediocre vocal talent, or anything in particular of how these are put together, I would be grateful.


Some of the more interesting observations I personally found from the 1977 letter:

 

That advice on looking long term with investments, possessing an inner scorecard, and thinking of stock purchases on equal footing as buying the whole business have been remarkably consistent over the decades.

 

This was something that I did not know: when Berkshire Hathaway was formed by the merger between Berkshire Fine Spinning Associates and Hathaway Manufacturing, they had one of the most formidable businesses in the world in the year 1955. If you weren’t thinking deeply about businesses and how different industries would be operating and profiting in the world to come after 1955, you might have got trapped in the value trap that ended up being that very powerful and lucrative looking business of Berkshire Hathaway in the year 1955.

 

That’s the hint that when valuing a stock, you need to value the business as a whole and figure out what a reasonable price to pay to hypothetically acquire the entire business would be. For example, if you were looking at Coca Cola stock, you would be best served to figure out what a fair price to pay for the entire company would be, lock, stock, and barrel, and then work backwards from there to divide that total figure by the shares outstanding to arrive at a stock price you would be willing to pay for a fractional slice of the business.

 

If you are confident in your research and analysis, you should match your convictions with a sizeable move into the asset. The last sentence is basically another way of saying that the stock markets are a voting mechanism in the short term and a weighing mechanism in the long term. Stock prices will eventually, inevitably reflect the performance of the underlying business.

1977 Berkshire Hathaway Shareholders Letter e

It would be foolish just to look at the dividends that are paid out to you. This is the concept of owner earnings: the idea that theoretically, the total earnings of a business are beneficial for the owner as retained earnings go towards reinvestment into the business that should lead to greater and growing earnings and dividends in the future.

 

Very prophetic. Interesting to think that Warren Buffett’s influence/involvement with Capital Cities and Tom Murphy extends back so far, and has had inroads with Bob Igers rise in Capital Cities/ABC to his rise as the current Disney CEO after Disney bought Capital Cities/ABC for $19 billion in 1995. Very interesting how everything connects.

 

See’s Candy is the paragon example of a wonderful business that requires virtually no reinvestment of capital to produce ever larger gains in earnings. It’s fascinating to see that it was showing these traits in the 1970s. It was bought for around $25 million in 1972 – after Buffett and Munger really dug their heels in on putting in a stink bid for the business, something they would both later go on to say was foolish, as paying the asking price or higher was worth the money printing qualities of the business – and to date has generated over $1.9 billion in pretax profits with only around $40 million in additional capital outlays over 44 years. Even adjusting everything for inflation, it is still staggering to think of the amount of money the business that is See’s has brought in for Berkshire Hathaway relative to the initial purchase price and capital expenditures.

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6 thoughts on “1977 Berkshire Hathaway Shareholders Letter

    1. I was honestly surprised that these are not already on Youtube – I mean, things like his lectures at universities and stuff are on Youtube. I was thinking I would listen to them at first since I hadn’t started reading the letters, but once I found that they weren’t in existence on Youtube, I figured the next best thing would be to record them myself. Double bonus: I am forced to read them AND listen to them (albeit in embarrassing self reflection on my mediocre vocal talents!).

  1. Great idea, but I think you’re missing out on some added fun. Perhaps this is the time to explore your impersonations skills? I, for one, would like to hear one of these read in the voice of Snidely Whiplash.

    1. I am honoured by the idea of doing interesting vocal impersonations, but I don’t think my mediocre vocal talents would prevail. Never say never, though… perhaps additional vocal comedy can be infused into the project.

  2. It’s interesting to see Warren’s past thoughts. And to see that a few million was a pretty decent amount. Nowadays, companies are all reporting billions, hundreds of them.

    1. The quote “Don’t despise the day of small beginnings” comes to mind. It’s fascinating just how consistent his core thoughts on valuation, gauging management, and investor psychology are to this day. He learned the lessons early and has been repeating them for decades and decades.

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