It has been a while since my last post. The blog has shifted over to blogger beta and one cool feature that has been added is the use of labels.
By clicking on the labels at the end of each post, you will be able to see posts sorted by specific labels (categories). This is an improvement on the previous limited nagivation style of blogger.
Part 1 of Warren Buffett’s 1990 letter follows. You will notice that it is very short. This is because I have decided to move to shorter (and more frequent) postings. Figured this is what most readers want.
Look Through Earnings
Looking at the reported earnings of a company can be misleading. Accounting numbers should be used as a beginning, not an end, to calculate the true “economic earnings” of the company.
For example, Berkshire has huge investments in companies whose earnings far exceed their dividends that is reported in Berkshire’s accounts. An extreme case is Capital Cities/ABC, Inc, where Berkshire’s 17% share of the company’s earnings amounted to more than $83 million in 1989, yet only about $530,000 was counted in Berkshire’s GAAP earnings.
$82 million-plus stayed with Cap Cities as retained earnings, which will ultimately work for Berkshire’s benefits but in the meantime go unrecorded on their books.
A good way to look at the real earnings of a company is to include the share of the operating earnings retained by the company’s investees, deduct the estimated tax and then add it to the reported earnings.