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The period between Buffett acquiring Buffalo Evening News (1977) and Nebraska Furniture Mart (1983) illustrates how much value can be added to a portfolio by allowing companies that are fully owned to carry on with the team of trusted managers with very little interference, but to use the money they generate to buy other great investments. Also, much money can be made by taking minority stakes in stock market companies (non-controlled) when they are cheap. Underlying both types of investment are the principles of:
- Only invest in what you understand
- Make sure the business is sound
- Make sure the managers are competent and with high integrity
- Buy only when it is cheap
Scourge of the time – inflation
As well as building up the operating businesses Buffett and Munger were particularly interested in obtaining minority stakes in firms that might have some protection against the ravages of high inflation, which reached a worrying 14% in 1979. In an environment like that, even if you bought a share that gave a before tax return of 20%, after deduction of tax you were able to buy less with the money at the end of the year than at the beginning. Companies that could raises prices by at least the inflation rate, and which did not require large capital investment as they grew were to be favoured.
Operating businesses
Berkshire had income flowing in at a tremendous rate over these five years. The operating businesses supplied $39.2m for Buffett and Munger to deploy elsewhere in 1977. It only took until 1981 for the annual amount to reach $62.3m
Net earnings after taxes attributable to Berkshire Hathaway from operating businesses
| $m | 1978 | 1979 | 1980 | 1981 | 1982 | |||||
| Insurance underwriting | 1.6 | 2.2 | 3.6 | 0.8 | -11.3 | |||||
| Insurance investment income (dividends and interest) | 16.4 | 20.1 | 25.6 | 32.4 | 35.3 | |||||
| Realised security gains | 9.2 | 6.8 | 9.9 | 23.1 | 14.9 | |||||
| Associated Retail Stores | 1.2 | 1.3 | 1.2 | 0.8 | 0.4 | |||||
| See’s Candies | 3.0 | 3.4 | 4.2 | 6.3 | 6.9 | |||||
| Blue Chip Stamps – Parent | 1.4 | 1.6 | 3.1 | 2.1 | 2.5 | |||||
| Illinois National Bank | 4.3 | 5.0 | 4.7 | – | – | |||||
| Wesco (Parent and S&L) | 3.7 | 4.2 | 3.0 | 3.1 | 3.7 | |||||
| Other | 0.9 | 1.0 | 2.6 | 0.6 | 1.0 | |||||
| Interest on debt | -2.3 | -2.9 | -4.8 | -6.7 | -7.0 | |||||
| TOTAL EARNINGS | 39.2 | 42.8 | 53.1 | 62.6 | 46.4 |
(Source: Warren Buffett’s Letters to Berkshire Hathaway shareholders 1978-1982)
Profits from insurance underwriting were no great shakes, but the flow in the form of dividends and interest from securities purchased with insurance float was terrific, rising from $16.4m in 1978 to $35.3m in 1982. No wonder Warre……………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
