Lessons from Berkshire Hathaway’s 1968 Letter
In 1968, BRK enters into the publishing business. Also, insurance operations continued to exhibit strong performance.
Now is the time to review the 1968 letter, which was published on March 12, 1969.
Buffett notes that while earnings from both textile and insurance operations improved in 1968, the total operating earnings in relation to stockholders’ investment were still not satisfactory. Efforts were being made to elevate these to a more acceptable level.
TL; DR
Sales increased by approximately 14%, led by strong performances in the Home Fabrics and Menswear Linings divisions. Plans were announced to introduce new 150-inch Saurer looms in 1969 to expand style lines.
Due to cyclical challenges and operational difficulties, the decision was made to phase out the Box Loom Division's greige goods operations by the end of 1969, anticipating some initial losses but expecting overall improvement in textile operations.
National Indemnity and National Fire & Marine Insurance continued to perform well, focusing on profitable underwriting and expanding capital funds, which increased the capacity to retain more premium volume.
BRK realized a profit of $1.5 million from part of the marketable securities portfolio, with an unrealized appreciation of $6.4 million.
The company also ventured into the publishing business with the acquisition of Sun Newspapers Inc. and Blacker Printing Company.
While improvements were noted in both textile and insurance operations, overall earnings in relation to stockholder investments were still not at a satisfactory level, with efforts underway to enhance performance.
Textile Operations
The sales volume saw an approximate 14% increase, with significant gains in the Home Fabrics and Menswear Linings divisions, which have historically been the most consistently profitable segments. The improvement was credited to effective management by Richard Bowen (Home Fabrics) and Ralph Rigby (Menswear Linings).
The Home Fabrics Division planned to introduce new 150-inch Saurer looms in 1969, providing opportunities to expand its style line. Berkshire held options on additional looms to enable further expansion should profitable projections materialize.
Sales volume increased about 14% with good gains in both Home Fabrics and Menswear Linings. Over the years, these have been our most consistently profitable areas and their improvement in 1968 reflects strong efforts by Richard Bowen in Home Fabrics and Ralph Rigby in Menswear Linings. The Home Fabrics Division in 1969 will utilize new 150 inch Saurer looms, offering opportunities for expanding our style line. We hold options on additional looms, enabling expansion if profitable projections materialize.
— WARREN BUFFETT
Box Loom Division faced ongoing severe operational difficulties. A pattern of cyclical price spikes followed by heavy imports and price cuts led to a decision to phase out the operation of greige goods in this division by the end of 1969. This strategic exit was expected to lead to initial losses on the sale of fixed assets but ultimately to an improved overall textile operating situation.
Our Box Loom Division continued to present severe operating problems, as it has over many years. Our history in this area shows occasional periods of strong prices, regularly followed by heavy imports of goods, severe Price cutting and curtailed operations. As a result of a careful survey of the future market for Box Loom greige goods and the investment required to service this market, it was decided to phase out our operation of such greige godos during 1969. After the transitional operating period has been completed and some loss has been sustained on the sale of fixed assets, we expect an improved over-all textile operating situation.
— WARREN BUFFETT
Insurance Operations
The National Indemnity Company and National Fire & Marine Insurance Company continued their strong performance under the leadership of Jack Ringwalt. Despite only a slight increase in premium volume, the companies achieved a good underwriting profit during a period when the broader property insurance industry faced losses. Investment income from these subsidiaries increased significantly, reflecting both a larger asset base and higher yields on fixed income securities.
Investment income increased substantially in 1968, reflecting both a greater base of assets and higher yields on fixed income securities. Some capital gains again developed from our investments in common stocks .
— WARREN BUFFETT
Insurance operations were exploring new expansion areas, with a sustained emphasis on profitable underwriting rather than merely increasing volume. All earnings were retained within the insurance subsidiaries to significantly enhance their capital funds, thereby increasing Berkshire's capacity to retain more of its originated premium volume.
The insurance companies continue to seek new areas for expansion, both at the direct level and possible in the reinsurance field. The emphasis continues, however, to be on underwriting at a profit rather than volumen simply for the sake of size. Due to our policy of retaining all earnings in the insurance subsidiaries, we have substantially augmented their capital funds, increasing our ability to retain greater segments of our originated premium volume.
— WARREN BUFFETT
Marketable Securities and Acquisitions
Berkshire sold part of its marketable securities portfolio, realizing a profit of approximately $1.5 million after taxes. At year-end, the company had an unrealized market appreciation of $6.4 million in the remaining portfolio. These holdings in marketable common stocks were considered temporary, pending their use in acquisitions or the expansion of operating businesses.
New acquisition in the publishing business
Just after the end of 1968, BRK made a foray into the publishing business by acquiring all stock of Sun Newspapers, Inc. and Blacker Printing Company, Inc.
This acquisition represented a relatively small use of available funds but was seen as having potential for future growth. Sun Newspapers publishes five weekly newspapers in Omaha, Nebraska, with a combined paid circulation of about 50,000. The related printing operations are managed by Blacker Printing Company.
Immediately after year end, we purchased all of the stock of Sun Newspapers, Inc. and Blacker Printing Company, Inc., which represents an initial entry into the publishing business. This purchase involved only a small portion of our funds available for acquisition. [...] This purchase, while small, has potential for future expansion. The operations will continue under the able management of Stanford Lipsey.
— WARREN BUFFETT
Summary
In his 1968 letter, Warren Buffett provides an insightful update on Berkshire Hathaway's operations, highlighting a year of strategic transitions and solid performances, particularly in the textile and insurance sectors. The company reported a 14% increase in sales volume, driven mainly by the Home Fabrics and Menswear Linings divisions, both of which had shown consistent profitability over the years. In response to ongoing operational challenges, the decision was made to phase out the Box Loom Division's greige goods operations by the end of 1969, a move anticipated to result in initial losses but expected to ultimately benefit the overall textile operation.
In the insurance realm, the National Indemnity Company and National Fire & Marine Insurance Company continued to exhibit strong performance. The focus remained on profitable underwriting rather than volume expansion, with significant increases in capital funds enhancing Berkshire's capacity to retain more of its originated premium volume. This strategy proved effective, especially during a period when the broader property insurance industry faced challenges.
Additionally, Buffett discussed the company's financial maneuvers, noting the realization of a $1.5 million profit from the sale of part of its marketable securities portfolio, alongside an unrealized market appreciation of $6.4 million. The year also marked Berkshire's entry into the publishing business with the acquisition of Sun Newspapers Inc. and Blacker Printing Company, a move seen as having potential for future growth.
Despite these positive developments, Buffett noted that the total operating earnings in relation to stockholders' investments were still not satisfactory, with ongoing efforts to elevate these to more acceptable levels.
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