Golden Ideas from 1978 Berkshire Hathaway Inc. Letter to shareholders (part 2/3)

• Creating a good business versus buying one

When Buffett analised BRK’s insurance business he gave an indication on this suggesting that „It is not easy to buy a good insurance business, but our experience has been that it is easier to buy one that to create one.“

• Finding the potential stockmarket winners

Again this year Buffett pointed out how the investments for BRK’s insurance subsidiaries are chosen: „We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) business we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively.“

• Acquisitions by purchasing common stock at bargain prices

Here Buffett suggested that Berkshire’s acquisition strategy „…of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists. It seems quite clear to us that either corporations are making very significant mistakes in purchasing entire businesses at prices prevailing in negotiated transactions and takeover bids, or that we eventually are going to make considerable sums of money buying small portions of such businesses at the greatly discounged valuations prevailing in the stock market.“

• Market valuations of stock purchased at bargain prices and long term investing

Describing Berkshire Hathaway’s investment strategy Buffett notes: „We are not concerned with whether the market quickly revaluates upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be more eventual benefit to us than any selling opportunities provided by short-term run up in stock prices to levels at which we are unwilling to continue buying. Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.“

Source: http://berkshirehathaway.com/letters/1978.html

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