1980
Click here to read the letter.🧠 Key Takeaways
Share buybacks are fantastic for existing shareholders because they now own a bigger piece of the company without having to invest more money. And for the company itself, it's a smart move because they're investing in themselves when they believe their shares are undervalued.
“Turnaround” businesses are typically poor investments. This is because the problems inherent in the business itself tend to outweigh the talents of the management team. In other words, if a business is fundamentally flawed in terms of its economics, even the best managers will struggle to make a meaningful difference.
✍️ Memorable Quotes
“One usage of retained earnings we often greet with special enthusiasm when practiced by companies in which we have an investment interest is repurchase of their own shares. The reasoning is simple: if a fine business is selling in the market place for far less than intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interests of all owners at that bargain price?”
When a company generates profits, it can either distribute those profits to shareholders as dividends or retain them for future use. "Retained earnings" refer to the portion of profits that a company keeps rather than distributing to shareholders, and one way companies can use retained earnings is by buying back their own shares from the market.
Now, why would a company want to do this?
Imagine you own a piece of a great business, but for some reason, the market isn’t seeing it, and is undervaluing its shares. Those shares are selling for less than what the company is worth based on its assets, earnings, and potential for growth.
In this scenario, if the company uses its retained earnings to buy back its own shares, that will reduce the number of shares available in the market. This means that each remaining share represents a larger ownership stake in the company.
For existing shareholders, this is fantastic news because they now own a bigger piece of the company without having to invest more money. And for the company itself, it's a smart move because they're investing in themselves when they believe their shares are undervalued.
It's a win-win situation - existing shareholders benefit from increased ownership, and the company benefits by effectively deploying capital to enhance shareholder value.
“We have written in past reports about the disappointments that usually result from purchase and operation of “turnaround” businesses. Literally hundreds of turnaround possibilities in dozens of industries have been described to us over the years and, either as participants or as observers, we have tracked performance against expectations. Our conclusion is that, with few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
In Warren’s experience, “turnarounds rarely turn.”
Over the years, he’s seen many examples of this scenario, and he’s noticed a consistent pattern: even when highly skilled and reputable managers step in to save a failing business, it usually doesn't work out as expected.
This is because the problems inherent in the business itself tend to outweigh the talents of the management team. In other words, if a business is fundamentally flawed in terms of its economics, even the best managers will struggle to make a meaningful difference.
So, despite their best efforts, struggling businesses tends to remain unchanged.