Golden Ideas from 1979 Berkshire Hathaway Inc. Letter to shareholders (part 3/5)

Rates of return among different industries
When talking about Berkshire Hathaway’s textile operations, Buffett advises „In some businesses – a network TV, for example – it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar, a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the „easy“ business may be the better route to go.“

Catches in purchasing a mediocre business below its working capital
Once again Buffett here use an example from Berkshire’s acquisition of another textile business - Waumbec Mills in Manchester, New Hampshire: “By any statistical test, the purchase was an extraordinary bargain; we bought well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But the purchase was a mistake. While we labored mightily, new problems arose as fast as old problems were tamed.� And continues about changing the dynamics in an established company: “Both our operating and investment experience cause us to conclude that “turnarounds� seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.�

Source: http://berkshirehathaway.com/letters/1979.html

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