the richest man in atherstone

SOURCE: Berkshire Hathaway Shareholder Letter 1977

Business Advice
Buffett begins this letter by giving a general overview of Berkshire Hathaway's annual results highlighting that the insurance companies have had outstanding performance whereas the textile companies came in well below forecast.

Shareholders have raised their concerns about keeping the textile companies when bigger profits could be made in other industries. Buffett explains that Berkshire intends to continue supporting them as they employ a large number of people with non-transferrable skills and both employees and management have worked hard together to keep the business as a viable operation. Buffett believes that it is realistic to expect modest returns from this division.

In contrast, the insurance division of Berkshire has performed exceedingly well despite a number of small mistakes. Buffett highlights the importance of being in businesses that can absorb some of the damage when mistakes are made.

"One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds."

Buffett continues by stating that there is very little product differentiation within the insurance sector, therefore the fantastic results obtained must be credited to the management of those companies.

Investment Advice
Something that I found particularly interesting was that Buffett uses the same criteria to select the shares he invests in as he would use if he were to buy the entire company. He recommends that a business should:

1. Be easy to understand.
2. Have favourable long-term prospects.
3. Be operated by honest and compentent people.
4. Be available at a very attractive price.

Having found a favourable business to invest in, the purchase price should represent good value for money. Stock market fluctuations should be used to the investors advantage and shares should only be bought at a discount. Buffett actually welcomes low share prices in his portfolio because it gives him the chance to purchase more stock at discount.

"If [a company's] business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price."

Buffett understands that an outstanding company bought at a discount due to market fluctuations will eventually realise the value it deserves.

He also notes that by buying stock through the markets, discounts can be attained that would not be possible if the company was bought as a whole. If a business and its management are performing well, it would cost more to purchase the company rather than a large holding of stock, while there would be no advantage in taking control.

"To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us."

Buffett warns readers to be careful of the figures when companies report "record earnings". His grievance is that this phrase is often used when earnings per share (EPS) hits a new high. He explains that it is usual for a company to increase their equity base each year, so higher EPS should be expected.

"Even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding."

Buffett continues by explaining that a better performance indicator is Return on Equity (ROE). Not only is ROE more accurate, it also takes into account the company's debt levels.

Being confident that I'm not going to smoke again, I took some time out to plan how I was going to put my saving (up to £250 per month) to good use.

I feel that some of the money should go towards my wealth accumulation plan. Currently I save 10% of my income, which is used as an emergency fund and investment pot. I am going to increase this to 12% of my income, which equates to around £250. This is the maximum amount I can deposit into my Lloyds TSB Monthly Saver account each month, so that fits in nicely with my existing plans.

An additional £57 per month will be added to the £143 I currently save for one-off annual expenses including home insurance, car insurance/tax/servicing and dental bills. I want to start using this fund to pay for holidays, days out and birthday/xmas gifts as well, so the extra cash input should cover those.

The rest of the money (for this year, at least) will be used to reward myself and my family for the the achievement we've made. I couldn't have done it without my family's support, so we're going to spend the remainder of this years savings (around £500) on a holiday.

By the way, it feels fantastic to be a non-smoker!

I have decided that in order to maximise my earnings from investments I should dedicate some time to learning more about the subject. My first investment in Plusnet Shares probably wasn't the best decision, however it has served the purpose of teaching me about the stock market in general as well as the lingo that goes with it and has left me comfortable reading annual reports. Now, I think it's time to develop my education further.

The best way to learn is from the experts in a particular field and arguably the most successful investor of all time is Warren Buffett of Berkshire Hathaway. Berkshire Hathaway Inc. is a holding company that manages many subsidary companies. The core businesses are in the insurance sector. Buffett has invested the insurance premiums collected by these companies in a number of opportunities including stocks, bonds and buying entire companies. Over the 40 years or so since Buffett originally took control of Berkshire Hathaway, the company has averaged an annual return of 22% plus.

Every year, Buffett sends out a letter to Berkshire Hathaway shareholders to clarify certain aspects of the businesses and talk about his investment approach and portfolio management. These letters are published on the Berkshire Hathaway website. Many financial sources suggest that a lot of financial and business nous can be obtained from reading these letters, so I'm going to spend the next few months doing just that.

I've not had a cigarette now for over a week and I'm still finding it easy and still enjoying it. A big test came on Saturday night when I went out drinking with my pals (all smokers). I thought I might have some difficulty before I left and felt a bit anxious, however once I arrived I felt great and didn't even think about smoking. Even after I'd had a skinfull!

I thought I'd just recap the savings that I stand to make by quitting my 25-35 a day habit:

• £8 every day
• £240 every month
• £2880 every year
• £14'400 every 5 yers

It is a cruel irony that anti-smoking guru Allen Carr has been diagnosed with lung cancer according to this report from the BBC. I hope that he can recover quickly and continue his wonderful work of curing people afflicted with nicotine addiction.

I've not had a cigarette for over 100 hours now and I'm certain I'll never touch them again. And I have Allen Carr to thank for that. He's given me back control over my life as well as more money and energy and self-confidence.

If anyone reading this would like help to stop smoking, I would definitely recommend reading Allen Carr's Easy Way to Stop Smoking. For me, just five days after quitting the book has paid for itself more than 6 times over due to me not wasting money on cigarettes and will continue to make me money for the rest of my life.