▶ Full Post Text
**Full Letter:**
https://theoraclesclassroom.com/wp-content/uploads/2019/09/1968-Berkshire-AR.pdf
**Key Passage:**
>Four years ago your management committed itself to the development of more substantial and more consistent earning power than appeared possible if capital continued to be invested exclusively in the textile industry. The funds for this program were temporarily utilized in marketable securities, pending the acquisition of operating businesses meeting our investment and management criteria. 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 over-all 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.
>We anticipate no further purchases of marketable securities, but our search for desirable acquisitions continues. Any acquisition will, of course, be dependent upon obtaining appropriate financing.
**Textile Operations**
>Dollar sales volume in 1969 was approximately 12% below 1968. Net earnings were slightly higher despite substantial operating losses incurred in the termination of our Box Loom Division. Earnings on capital employed improved modestly but still remain unsatisfactory despite strenuous efforts toward improvement.
>We are presently in the midst of a textile recession of greater intensity than we have seen for some years. There is an over-all 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.
>We have concentrated our textile operations in those areas that appear, from historical performance and from our market projections, to be potentially satisfactory businesses. Improvements have been made in our mill operations which, under better industry conditions, should produce substantial cost reductions. However, the present picture is for lower profits in this business during 1970.
So while the textile field is having an awful year, and got double the return on their equity from the total business compared to just the textile business this year.
There is a “textile recession” this year but luckily the insurance business does great. Go read the letter if you want to hear about their performance and entrance into the worker’s comp space.
The textile business had revenue decrease from $46M to $40.5M, and only grew earnings 2.6%. But the whole of Berkshire regardless increased earnings from $2.65M to $4.35M a ~64% increase. The strategy of leaving the textile business on life support has proven wise. This did come with a drop in assets of $9M, primarily due to the liquidation of all $5M+ of their stock holdings as described here. A move buffet also made in his partnerships(more on this in the comments). Also reduction of inventory and accounts receivable. These earnings seem to have been deployed in the purchase of the…
**Acquisition of the week**
>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 approxіmately $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.
>After almost a year of ownership, we are delighted with our investment in Illinois National Bank, and our association with Mr. Abegg.
The media acquisitions last week were minor but this bank generated 35% of Berkshire’s earnings this year. Banking is another float business like discussed with Blue Chip Stamps but much more heavily regulated. Eugene Abegg is another addition to Buffet’s manager collection and I’m sure we will hear praise of him in future letters. (more on him in comment)
in 1969 Buffet pulled his money from the market and terminated his partnerships. His main focus went from the partnerships (those letters had more of his personality at the time. I may cover them in a series after this one). He also had Berkshire sell all its stock holdings and instead buy a bank.
The good news with the partnerships ending is that Berkshire becomes his main focus and the letters get more of his personality and signed by himself instead of Ken Chace (even though he is editing/approving them as well as dictating business strategy). He becomes the public face of the company.
This letter feels like a bit of a goodbye to the old berkshire. Not just in the highlighting the textile “recession” (earnings up 2%, revenue down 10%), while glazing the insurance and new banking sectors… But also this is the first time they have broken down earnings by sector, you can easily see the YoY changes in earnings in each of these 3 pillars. It is now operating as a holding company and communicating with investors as such.
Buffet’s networth passed $25M this year (noted in The Snowball to be $26.5M)