The first letters of Warren Buffett –

At university, studying finance, I read “Les Essais de

warren buffet (Trades, Portfolio): Lessons for Investors and Managers”, by Lawrence A. Cunningham. At the time, I thought it would be a good idea to read Berkshire Hathaway’s original letters to shareholders at some point.

While I’ve followed Berkshire and learned a lot from reading the annual letters over the years, I only recently discovered the very first shareholder letters published by Buffett from 1965 to 1976, since only those from 1977 are available on the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).

I started my search for these letters after coming across a very interesting interview with a value investor

Whitney Tilson (Jobs, Portfolio) on GuruFocus. In the interview, Tilson says:

“Bill Ackman (Trades, Portfolio) who I went to college with was still in his original hedge fund Gotham Partners, and he was the only guy I knew in the investment business. He said that there was only one thing I had to do: read all

warren buffet (Trades, Portfolio) and that’s the best advice I’ve ever been given.”

Ackman is someone I have a lot of time for because I think his investing style is a good mix of value investing and activism. I think activism is a version of George Soros’ theory of reflexivity, where positive feedback loops exist in markets, so if you have the power to sway something in your favor, that might be a strategy very profitable.

Given Ackman and Tilson’s advice to read Buffett’s letters, and the fact that I believe value will outpace growth in the coming years given the macro environment, now is a better time than ever to cross the early days of Berkshire Hathaway, so I did some digging. Letters from 1977 are available on the Berkshire Hathaway website, but to find earlier letters I had to look elsewhere. I discovered that Buffett’s letters from 1965 to 2014 are available in a compilation made by Max Olson.


Buffett first took control of Berkshire Hathaway in April 1965 after a period of underperformance at the company. It was a value investment for Buffett who would later become his holding company.

For the years 1965 through 1969, Buffett wrote the letters but they were signed by President Kenneth V. Chace (whom Buffett had promoted to run the company). In those early years, the letters were relatively short. For those who want to know more about Buffett’s acquisition of Berkshire, it’s well covered in Roger Lowenstein’s biography of Buffett titled “Buffett: The Making of an American Capitalist.”


This first letter from Buffett to shareholders is only one page long, but we immediately think of the distinction between accounting income and cash flow. Berkshire’s net profit does not include one-time losses on asset disposals due to permanent plant closures, which were charged against a reserve previously established for that purpose.

It’s also pointed out that the company benefited from loss carryforwards that eliminated federal income tax payments for the year, but Berkshire still included a profit tax charge to “prevent any misleading interpretation of profits.” future”. The company has cut overhead, bought back some of its own shares, invested in new machinery to improve efficiency and said it plans to dispose of other machinery as it completes the liquidation of unused factories. profitable.

Clearly, Buffett wasted no time trying to improve profitability and pointed to adjustments to earnings to better reflect underlying performance. In today’s parlance this would be called “adjusted earnings”.


In Buffett’s 1966 letter, his second to Berkshire, he discusses four main areas: operating conditions for 1966, a survey of operations from 1961 to 1966, maintaining the financial position, and finally dividends.

Buffett discusses the characteristics of commodities in the textile market as different divisions face oversupply in the sector. Along with increased imports, this has led to greater competition and lower prices. Buffett predicted that looms would therefore revert to cotton products, which would likely affect sales in another division. Buffett warns against production cuts to avoid stockpiling.

That year, Berkshire signed a three-year contract with the Garment Workers Union covering wages and benefits with no reopening clause, locking in costs.

In the survey of operations from 1961 to 1966, Buffett notes the strong cyclicality of the textile business and that the profitability of 1966 had succeeded in restoring Berkshire’s financial position to that last seen in 1960.

Berkshire executed stock buybacks over the six-year period, accounting for 37% of shares outstanding in 1960, which Buffett said was appropriate given the company’s reduced scale of operations. due to the closure of unprofitable factories.

By streamlining the business, Berkshire had managed to increase its share price despite the tough operating environment in the textile industry.

Buffett noted that working capital per share had risen from $14.41 to $22.76 six years prior.

Buffett discusses the reasons for a strong financial position to offset the risk of the cyclical nature of the textile business and to provide capital to seek acquisitions inside and outside the textile sector. Although he doesn’t mention the word moat, it’s clear that Buffett doesn’t like the industry structure, basically perfect competition, within the textile industry and is looking for ways to diversify Berkshire. That said, he is happy to (potentially) invest in the Home Fabrics division due to the rapid growth it has seen in recent years. However, he notes that the threat of technological change is always present in textiles and that the industry requires high capital expenditure on plant and equipment, which he says requires careful weighing of risk and return before moving forward. make any investment.

Due to all the uncertainties, Buffett decides to hold various financial investments in Berkshire’s working capital as these are more liquid than factory, inventory and receivables. Buffett believes this strategy has better return potential than textiles and provides liquidity in case other acquisition opportunities arise.

Finally, a small dividend is declared in the letter due to the company’s financial recovery, but Buffett warns of the importance of keeping Berkshire’s financial position strong.

So we can see, even at the very beginning of Buffett’s involvement with Berkshire Hathaway, that he has a keen eye on industry momentum and profitability, liquidity and capital allocation.

About Joel Simmons

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