WWW.DIS.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Thesis, dissertations, books
 
<< HOME
CONTACTS



Pages:     | 1 || 3 | 4 |   ...   | 5 |

«Note: The following table appears in the printed Annual Report on the facing page of the Chairman's Letter and is referred to in that letter. ...»

-- [ Page 2 ] --

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business.

In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. 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.) There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.





One example of good, but far from sensational, business economics is our own FlightSafety. This company delivers benefits to its customers that are the equal of those delivered by any business that I know of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the best is like taking the low bid on a surgical procedure.

Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have 273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far from See’s-like, return on our incremental investment of $509 million.

Consequently, if measured only by economic returns, FlightSafety is an excellent but not extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For example, our large investment in regulated utilities falls squarely in this category. We will earn considerably more money in this business ten years from now, but we will invest many billions to make it.

Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.

And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in

1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain.

In the decade following our sale, the company went bankrupt. Twice.

To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

************ And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors.

To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and that $1.35 billion would have gone to somebody else.

About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting, called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it.

I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners.

Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager and outstanding human being. He knew the television business forward and backward and would not have called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But I didn’t listen.

In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once described: “If his I.Q. was any lower, you would have to water him twice a day.”) Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you

can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions:

“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.” ************ Now, let’s examine the four major operating sectors of Berkshire. Each sector has vastly different balance sheet and income account characteristics. Therefore, lumping them together impedes analysis. So we’ll present them as four separate businesses, which is how Charlie and I view them.

Insurance The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney, who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be president?” To which she replied, “Honey, you weren’t in my wildest dreams.” When we first entered the property/casualty insurance business in 1967, my wildest dreams did not envision our current operation. Here’s how we did in the first five years after purchasing National

Indemnity:

–  –  –

This metamorphosis has been accomplished by some extraordinary managers. Let’s look at what each has achieved.

• GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million to $751 million during the same period.

Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company – proud of how it could both save money for its customers and provide growth opportunities for its associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I.

Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in November we wrote our first commercial auto policy. GEICO and National Indemnity are working together in the commercial field, and early results are very encouraging.

Even in aggregate, these lines will remain a small fraction of our personal auto volume.

Nevertheless, they should deliver a growing stream of underwriting profits and float.

• General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23 billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however, had a shaky start.

For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I completely missed when I made the decision in 1998 to merge with General Re. The General Re of 1998 was not operated as the General Re of 1968 or 1978.

Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the company has been restored. Joe and Tad have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan. They have restored discipline to underwriting, reserving and the selection of clients.

Their job was made more difficult by costly and time-consuming legacy problems, both in the U.S. and abroad. Despite that diversion, Joe and Tad have delivered excellent underwriting results while skillfully repositioning the company for the future.



Pages:     | 1 || 3 | 4 |   ...   | 5 |


Similar works:

«VICTIMISATION AND THE REASON WHY1 Olivia-Faith Dobbie Key points: Section 27(1) EA 2010 provides a definition of “victimisation” which • applies to protected acts done by reference to any/all protected grounds – consolidating the previous provisions scattered through the anti-discrimination legislation. Section 27(2) EA 2010 sets out the definition for “protected act”. It is sections 39(3) and (4) EA 2010 which render such conduct • unlawful as against workers / employees. Of...»

«ISSN (Print): 2279-0063 International Association of Scientific Innovation and Research (IASIR) ISSN (Online): 2279-0071 (An Association Unifying the Sciences, Engineering, and Applied Research) International Journal of Software and Web Sciences (IJSWS) www.iasir.net Identifying a person using 2D Ear images Akshay Sanjay Borse, Ammen Sanjay Singh, Arshad Harun Attar, Dr. Nuzhat Faiz Shaikh Savitribai Phule Pune University, Computer Department, MES College of Engineering, Pune, Maharashtra,...»

«IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA LIBERTY LIFE INSURANCE COMPANY, ) ) Civil Action Plaintiff ) No. 09-cv-03069 ) vs. ) ) VERONICA N. FIGUEROA, ) Administratrix of the ) Estate of Ernesto Figueroa, ) also known as ) Ernesto F. Carrion, ) ) Defendant ) * * * APPEARANCES: RICHARD R. GALLI, ESQUIRE On behalf of Plaintiff RICHARD P. ABRAHAM, ESQUIRE GREGORY B. HELLER, ESQUIRE On behalf of Defendant * * * OPINION JAMES KNOLL GARDNER, United States District...»

«Maria Manuel Serrano Bernardo Licenciada em Engenharia Química Mestre em Energia e Bioenergia Study of the valorisation of the solid byproducts obtained in the co-pyrolysis of different wastes Dissertação para obtenção do grau de doutor em Energia e Bioenergia Orientador: Nuno Lapa, Professor Auxiliar, Faculdade de Ciências e Tecnologia Universidade Nova de Lisboa Co-orientador: Margarida Gonçalves, Professora Auxiliar, Faculdade de Ciências e Tecnologia Universidade Nova de Lisboa...»

«IPTC IPTC NAA News Industry Text Format Version 2.0b November 1997 Comité International des Télécommunications de Presse IPTC NAA News Industry Text Format Version 2.0b Although IPTC and NAA have reviewed the documentation, IPTC and NAA make no warranty or representation, either express or implied, with respect to this documentation, its quality, merchantability, or fitness for a particular purpose. This documentation is supplied ‘as is’, and you, by making use thereof, are assuming the...»

«Disciplining the Spectator: Subjectivity, the Body and Contemporary Spectatorship Theresa Anne Cronin Goldsmiths, University of London PhD Cultural Studies I, Theresa Anne Cronin, declare that the work presented in this thesis is my own.Disciplining the Spectator: Subjectivity, the Body and Contemporary Spectatorship Abstract In this thesis the author argues that although questions of the spectator’s corporeal engagement with film are much neglected by film theory, the body is nevertheless a...»

«BULLETIN The August 2012 The Official Publication of the Budgerigar Society of NZ Inc. ISSN 1176-8827. Contents Page Content Cover Winning Colouring in Competition. 2 Topflight Bird Seed. 3&4 3 Contents & Contact Details. 4 Editorial. 5 Obituaries & NZ Half-Sider information. 6 Letter from Ken Bourke, Whanganui. 7 Article from Daniel Lutolf, Switzerland. 8&9 8. Grand National Champions. 9 Gallery. 10-12 Parasites of Budgerigars, by Hamish Baron. 13 & 14 13 Suggestions & facts. 14 Grit...»

«Asia Pacific Journal of Research Vol: I Issue XVII, September 2014 ISSN: 2320-5504, E-ISSN-2347-4793 TRUCK OPERATIONS IN NAMAKKAL DISTRICT OF TAMILNADU – AN OVERVIEW Dr. S.ADAIKALA CHARLES Assistant Professor and PG Research Advisor, Department of Commerce, Rajah Serfoji Govt. College (Autonomous), Thanjavur 05, Tamilnadu Mr. M. MANOHAR Assistant Professor, Department of Commerce, Sri Santhoshi College of Arts and Science, Paiyambadi, Madurantakam-603 309 ABSTRACT The Road transport Industry...»

«US Product Ingredients (Revised April 2016) This list is compiled based on product information provided by Subway® approved food manufacturers. Every effort is made to keep this information current however it is possible that ingredient changes and substitutions may occur before this list is updated. This list does not include regional or special promotional items as ingredients vary.BREADS 9-GRAIN WHEAT Whole wheat flour, enriched flour (wheat flour, niacin, iron, thiamine mononitrate,...»

«United States Marshals Service Privacy Impact Assessment for the Justice Detainee Information System (JDIS) Issued by: William E. Bordley, Senior Component Official for Privacy United States Marshals Service (USMS) Reviewed by: Luke J. McCormack, Chief Information Officer, Department of Justice Approved by: Joo Y. Chung, Acting Chief Privacy and Civil Liberties Officer Department of Justice Date approved: September 25, 2013 (March 2012 DOJ PIA Form) Department of Justice Privacy Impact...»

«Product Manual Seagate® Enterprise Performance 10K HDD v8 SAS with TurboBoostTM Standard Models Self-Encrypting Drive Models SED FIPS140-2 Models Review Pending ST1800MM0018 ST1800MM0068 ST1800MM0078 ST1200MM0018 ST1200MM0068 512 Emulation ST900MM0018 ST900MM0068 ST600MM0018 ST600MM0068 ST1800MM0128 ST1800MM0148 ST1800MM0158 512 Emulation ST1200MM0158 ST1200MM0178 w/TurboBoost ST900MM0128 ST900MM0148 ST600MM0158 ST600MM0178 ST1800MM0008 ST1800MM0038 ST1800MM0048 4096 Native ST1200MM0008...»

«Women’s Bodies as a Battleground: Sexual Violence Against Women and Girls During the War in the Democratic Republic of Congo South Kivu (1996-2003) Réseau des Femmes pour un Développement Associatif Réseau des Femmes pour la Défense des Droits et la Paix International Alert Réseau des Femmes pour un Développement Associatif (RFDA), Réseau des Femmes pour la Défense des Droits et la Paix (RFDP) and International Alert The Réseau des Femmes pour un Développement Associatif and the...»





 
<<  HOME   |    CONTACTS
2016 www.dis.xlibx.info - Thesis, dissertations, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.