Feb 27th What I learned today #82
Buffett letter 1972,1973,1974,1975 and other things I learned
“Being very early and being wrong look exactly the same 99% of the time.” — Seth Klarman
In Warren Buffett’s early years, he will sometime still write about his market prediction, but young Buffett said: “All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given at all times to the detection of substantially undervalued securities.” Even tho he was only comparing the earnings with the market price, not the macro headwind.
Luck is important in the short run.
Buffett’s largest position in his early year contains 10-20% of his assets.
In 1970, when Buffett bought the stock of Illinois National Bank and Trust Co. of Rockford Illinois he mentioned it will not be easy to achieve greater earnings in 1970 because the bank is already a highly efficient business. I wonder what he thinks of investing industry, is it a highly efficient business and no one can achieve greater earnings?
In the early years, Buffett use operating earnings to judge his own result. In 1972 he achieved 19.8% and he thought it was a great result. And in 1974 they achieved 10%, but Buffett thought that was unsatisfactory. In 1975 BK produced a 7.6% operating earnings for equity, but he was disappointed. While the insurance company was not doing well in 1974 and 1975, he still considers the insurance business to be inherently attractive. The reason he gave was due to the high RETURN ON CAPITAL EMPLOYED. Based on his 1975 letter I assume it is something similar to ROIC, but I need to further confirm what metric he was using. And the same year he bought back 14% of the shares. Buffett’s opinion on share buyback is exactly the same as 50 years ago. From 1970-1975, Buffett was running his businesses and gave us a true view from the business side. He pointed out
While 1975 was a major disappointment, efforts will continue to develop growing and diversified sources of earnings. Our objective is a conservatively financed and highly liquid business—possessing extra margins of balance sheet strength with the fiduciary obligations inherent in the banking and insurance industries.
Two years seems long for people who are experiencing it, logical and rational are needed during the downtrend days.