Lessons from Berkshire Hathaway’s 1969 Letter
In 1968, BRK enters into banking. Also, insurance operations continued to exhibit strong performance and the textile business operations struggled.
Now is the time to review the 1969 letter, which was published on April 3, 1970.
TL; DR
Over the past four years, Berkshire Hathaway has successfully diversified beyond textiles, liquidating marketable securities to fund significant acquisitions. This strategic shift enabled a more than 10% return on average stockholders’ equity last year.
The textile sector faced a severe recession, leading to a 12% decline in sales and necessitated production curtailments. Despite these challenges, minor improvements in net earnings were seen, though profitability from textiles continued to be weak.
Insurance operations excelled, achieving significant underwriting profits in a year when the broader industry suffered losses. Innovations and expansions, such as the introduction of a new reinsurance division and plans for home state insurance operations, are expected to drive continued growth.
The acquisition of a major stake in The Illinois National Bank and Trust Co. was a key development in 1969, marking Berkshire's entry into banking. The bank has been highly efficient, producing record earnings in 1969.
Despite strategic gains, particularly in insurance and banking, the textile sector’s struggles weigh on overall earnings, with ongoing efforts to improve returns across all sectors.
Acquisition Criteria
Four years prior, Berkshire Hathaway's management decided to diversify its investments beyond the textile industry, which had been yielding inadequate returns. Funds were temporarily placed in marketable securities until suitable operating businesses meeting Berkshire's investment criteria could be found. This strategy has been successful, especially compared to other firms that continued investing heavily in the textile sector without adequate returns.
Over the past two years, Berkshire liquidated its marketable securities, realizing over $5 million in after-tax profits. These funds facilitated major acquisitions, particularly at a time when borrowing for acquisitions was challenging. Going forward, Berkshire plans to cease purchasing marketable securities, focusing instead on acquiring new businesses.
This policy has proved reasonably successful—particularly when contrasted with results achieved by firms which have continued to commit large sums to textile expansion in the face of totally inadequate returns. We have been able to conclude two major purchases of operating businesses, and their successful operations enabled Berkshire Hathaway to achieve an overall return of more than 10% on average stockholders’ equity last year in the face of less than a 5% return from the portion of our capital employed in the textile business. We have liquidated our entire holdings of marketable securities over the last two years at a profit of more than $5 million after taxes. These gains provided important funds to facilitate our major purchase of 1969, when borrowed money to finance acquisitions was generally most difficult to obtain.
— WARREN BUFFETT
Textile Operations
The textile operations saw a 12% decrease in dollar sales volume compared to 1968, though net earnings were slightly higher despite substantial losses from the termination of the Box Loom Division. Efforts to improve profitability continued, but the return on capital employed in textiles remained unsatisfactory.
Also, the textile industry faced a severe recession, with a significant lack of demand leading to production curtailments and inventory build-ups.
We are presently in the midst of a textile recession of greater intensity than we have seen for some years. There is an overall lack of demand for textile products in a great many end uses. This lack of demand has required curtailment of production to avoid inventory build-up. Both our Menswear Lining Division and Home Fabrics Division have been forced to schedule two-week shutdowns during the first quarter of 1970, but inventories remain on the high side. The slowdown in demand appears even greater than that normally occurring in the cyclical textile market. Recovery from this cycle will probably be dependent upon Federal Government action on economic factors they can control.
— WARREN BUFFETT
The company concentrated its textile operations in areas with historically satisfactory performance and potential. Improvements were made to mill operations, which could lead to cost reductions under better industry conditions, though profits were expected to decline in 1970.
Insurance Operations
The insurance subsidiaries, managed by Jack Ringwalt, continued to perform excellently, achieving substantial underwriting profits in a year when the broader industry faced losses.
During another year in which the fire and casualty insurance industry experienced substantial underwriting losses, our insurance subsidiaries achieved significant adjusted underwriting profits.
— WARREN BUFFETT
Innovations included entering new markets such as workmen’s compensation in California and launching a reinsurance division. Also, Expectations were set for continued growth in insurance operations, with new initiatives planned for expanding into "home state" insurance operations.
Our new reinsurance division seems to be off to a strong start, although the nature of this business is such that it takes at least several years to render an intelligent verdict as to operating results. We also have interesting plans for a new “home state” insurance operation.
— WARREN BUFFETT
Banking Operations
The significant event of 1969 was Berkshire's acquisition of a major stake in The Illinois National Bank and Trust Co. of Rockford, Illinois. This bank, built from a modest beginning to substantial size by Eugene Abegg, produced record earnings in 1969, making it one of the most efficient commercial banks in the U.S.
The most significant event of 1969 for Berkshire Hathaway was the acquisition of 97.7% of the stock of The Illinois National Bank and Trust Co. of Rockford, Illinois. This bank had been built by Eugene Abegg, without addition of outside capital, from $250,000 of net worth and $400,000 of deposits in 1931 to $17 million of net worth and $100 million of deposits in 1969. Mr. Abegg has continued as Chairman and produced record operating earnings (before security losses) of approximately $2 million in 1969. Such earnings, as a percentage of either deposits or total assets, are close to the top among larger commercial banks in the country which are not primarily trust department operations. It will not be easy to achieve greater earnings in 1970 because (1) our bank is already a highly efficient business, and (2) the unit banking law of Illinois makes more than modest deposit growth difficult for a major downtown bank.
— WARREN BUFFETT
Summary
BRK continued to move away from its traditional textile business towards more diversified investments. Buffett discusses the successful divestiture of marketable securities. These funds played a crucial role in facilitating major acquisitions at a time when borrowing for acquisitions was particularly challenging. This shift in strategy underscores Berkshire's move towards acquiring operating businesses that meet specific investment criteria, rather than continuing to invest in the struggling textile industry, which has historically yielded inadequate returns.
Insurance operations excelled, achieving substantial underwriting profits in a year when the broader industry faced losses. Berkshire's insurance subsidiaries continued to innovate by entering new markets and expanding existing operations, which Buffett anticipates will contribute to future growth.
A significant highlight of 1969 was Berkshire's acquisition of a major stake in The Illinois National Bank and Trust Co. of Rockford, Illinois. This move marked Berkshire's entry into the banking sector, with the bank achieving record earnings and demonstrating high efficiency under the continued leadership of Eugene Abegg.
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