1983 (II): Nebraska Furniture World

In 1983, Buffett was 53 years old.

Historical background

international:

On March 14, 1983, members of the Organization of the Petroleum Exporting Countries agreed for the first time to cut oil prices.

On March 23, 1983, Reagan gave a "Star Wars" speech.

On April 4, 1983, the U.S. Challenger was successful for the first time.

domestic:

On March 1, 1983, the Trademark Law of the People's Republic of China came into effect.

On April 1, 1983, China accelerated the development of Hainan.

On April 5, 1983, the "Armed Police of China" was established.

Digression

Encourage everyone to express their feelings, express their views and evaluations. Contribute to others, improve yourself, and then see the words left by others you like, you can also like it, which is what we call a virtuous circle.

Because the more you like it, the more you encourage the other person to output, contribute more wisdom, and you can also benefit. The other party can also improve.

So these things happen in our lives, they happen around us.

The marginal cost increment is not large, you like it, how big can the marginal cost be, you write a sentence, how much can the cost increase?

But you form a virtuous circle that promotes your own growth and development.

It is also an encouragement and promotion for others, and it is also a virtuous circle.

Life is likely to open a new chapter on the basis of a small marginal cost increase.

Such stories, such real events, are all around us, more and more.

1983 Study Excerpt (II)

1, the success of others is always difficult, all kinds of difficulties include what you think and what you did not expect.

2) When we evaluate the corporate value of a company, I often ask myself a question. Buffett said if I had enough money and talent, would I be willing to compete with this company?

3, the core competitiveness is low cost, high efficiency, and then create value for customers, while transforming this value into economic benefits to the owner.

4, as an entrepreneur and a strict manager of business management, to be honest, he is not strict is impossible. He must have personality traits, otherwise, if he has a bodhisattva heart and no means, he can do anything.

5, we recommend at least 5 years as a cycle, that is, 5 years as a cycle, to examine your business performance, investment performance. The performance of an investment is judged by cyclical rolling yields.

6, every 5 years as a cycle means that from the first year to the fifth year, the second year to the sixth year, the third year to the seventh year, in turn, the cycle continues.

7, the book value can tell you what has been invested, the intrinsic value is expected to be what you can get from it.

8) The real difficulty is not in generating new ideas, but in getting rid of old ones.

9, my teacher I adhered to his learning his things, he let me benefit a lot, but benefit a lot of leads to what we call path dependence. It's because you've been successful in doing this, so you'll do it next time.

10, young people at a young age, if the first step on the wrong path turns out to be successful, it is over. Because of path dependencies, it's hard to change them.

Text (2)

Buffett introduced and reviewed a case with pride, this case is called Nebraska, referred to as NFM, Nebraska furniture world, Mart is the market, shopping malls. It's interesting.

Nebraska Furniture City, this Founder, the founder of the old lady called Mrs. B, Mrs. B is actually a Belarusian, that is, from Russia, Mrs. B's full name is ROSE BLUMKIN.

He said that Mrs. B, 67 years ago, at the age of 23, persuaded the Russian border guards with a mouth to flee to the United States, and then when she came, she did not go to school, did not go to primary school, did not graduate from primary school, did not understand English, and then relied on her daughter to teach her a little word every day, and slowly she learned English.

After that, the shop that sold second-hand clothes for many years, did the business of second-hand clothes for many years, and her dream was to open a furniture store. This is what Buffett told shareholders in his annual letter.

At that time, there was a largest furniture trading center in the United States in Chicago, abbreviated as AFM, Chicago American Furniture Store, so Mrs. B called her furniture store NFM, which is the Nebraska Furniture World, Nebraska is the state where Omaha is located, Nebraska is the name of the state, Omaha is the name of a city, and Omaha is the capital of Nebraska.

After that, Mrs. B encountered all kinds of difficulties that you expected and imagined, including many difficulties that you did not expect.

So you will find Buffett very interesting, and he will tell you in various ways that the success of others is always difficult, and all kinds of difficulties include what you think of and what you did not expect.

Mrs. B started with $500, without any products and low-price advantages to fight against the long-term business with strong funds, and you are not the only one making furniture, without any advantages.

In the early days, her advantage was almost exhausted, Mrs. B even sold all the valuable things in her family in order to maintain her credibility, and now Mrs. B's trademark is almost on par with Coca-Cola in this greater Omaha area, and with Buffett's blessing of this company, it is even more in the sky.

The Omaha retail store at that time this peer competitor found that this old lady often offered customers lower prices, very annoyed, joined forces to produce suppliers, carpet factories to put pressure on the production suppliers, carpet factory, said you don't want to supply Mrs. B again, otherwise, we boycott.

Even so, Mrs. B can still break through all kinds of difficulties to obtain a source of goods, and sharply reduce the price, that is, bargaining, so some manufacturers are too annoyed, they sued this matter to the court, saying no, you violate this competitive transaction, you are dumping at a low price, no, then later a lawsuit was fought, and later this lawsuit Mrs. B also won. Greatly increased her visibility.

After reading a book, it was mentioned that a judge who listened to Mrs. B's statement and ruled that Mrs. B would win, and the judge felt that Mrs. B was doing it very well, at a good price, and then went to Mrs. B's shop to buy the carpet after the court closed. This is the real thing.

Buffett's letter also mentions this. Says the judge bought a $1400 rug. In 1983, $1400 a carpet was not cheap.

Buffett said Nebraska Furniture City is a storefront that has grown to 250,000 square feet today, about 20,000 square meters. 1 year of sales can reach 100 million US dollars, very powerful.

He said no retail furniture store in the United States can match and achieve the same sales with the same area.

He said she sold more furniture, carpet household items than all her other counterparts in Omaha combined.

He said that when we evaluate the corporate value of a company, I often ask myself a question.

Buffett said if I had enough money and talent, would I be willing to compete with this company? That's the question Buffett asked himself. Soul torture.

In the end, I came to the conclusion that I would rather go to the wrist fight with the Big Grizzly Than compete with Mrs. B.

They purchase a set, and their operating expenses are also very low, so low that competitors can't imagine, and then save every penny to give back to customers. This is an ideal business.

It is built on creating value for customers and translating it into economic benefits for the owner, which Buffett writes clearly.

That is to say, the first it has low cost, the core competitiveness is low cost, high efficiency, and then create value for customers, while transforming this value into economic benefits to the owner. That is, the economic benefit to the shareholders.

Mrs. B is far-sighted and has very good family genes, and I have admired this family for forty or fifty years, because Buffett has been driving through it every day and watching it for decades.

Buying it in 1983 is actually Buffett talking to people for years before buying it. At least for a decade or two, and then he continued to praise people.

So the whole deal, because we were so familiar, the whole deal was finalized quickly, Mrs. B didn't go back to rest right away, she was 80 years old at the time, she sold the company to Buffett, turned around and went to work, and continued to do the same work as before, seven days a week in the store.

Buffett is very knowledgeable, he saw Mrs. B, she loves to work, the company is not hers, she likes to work, so Buffett said that we bought a total of 90% of the equity, the other 10% left to the company's original management of the company's family members, Mrs. B's sons and grandchildren are working in this company, and some part of the equity is left to young people with potential.

He concluded by saying that geneticists should study Mrs. B's family and why they all became good managers.

He said that Mrs. B's son is also very powerful, Mrs. B's son is called Louis, and he is also very powerful, and the son of Mrs. B's son is also very powerful, that is, the grandson is also very powerful. In short, Mrs. B's son said he had the best teachers, and Mrs. B said she had the best students. They praised each other.

Buffett is absolutely right about both, saying that they are good partners and we're excited to work with them, and that's a story Buffett wrote about Mrs. B's management of Nebraska Furniture City.

This year we add information, this year Buffett bought it, Mrs. B was born in 1894, she actually lived to be more than 100 years old, Buffett often sees this company on the way to and from work every day, he talks to people when he has nothing to do, he actually talks a lot of times, you sell me this company.

The old lady was also seventy or eighty years old at that time, of course, there was no shortage of money, but because Buffett was also very good, there was nothing to talk to someone, talking until suddenly one day, I didn't know mrs. B's hot head said, well, anyway, more than 50 million US dollars, more than 50 million US dollars in cash In 1983, to be honest, there were not many people and companies that could come up with so much money.

But Buffett is really in the fire, Buffett has never ordered, Buffett has not sent anyone, did not personally order its inventory and assets in the store. Actually turned around and wrote a check and gave the money to Mrs. B.

Mrs. B is also a promise. Put the deal and you're done. After completing the transaction, Buffett sent someone to count the company and found that the assets were higher than the price quoted by Mrs. B.

It is that Buffett as an outsider is better than Mrs. B as the founder of his own company, the specific operation of people, insiders, but also understand this company, Buffett is really a strong mental.

There is also an episode on Mrs. B's side. Buffett should have written the 1983 letter. Although he is very capable of praising Mrs. B's sons and grandchildren, he is glad that Buffett has always liked to praise people, and everyone is more familiar with them.

In fact, there is an episode behind it, that is, Mrs. B as a manager, everyone knows that a good entrepreneur is usually more severe.

Mrs. B is also like this, she is an entrepreneur and a strict manager of business management, to be honest, she is not strict is impossible.

She must have a personality trait, otherwise, if she has a bodhisattva heart and no means, she can do anything.

So she and her children and grandchildren were actually strict to the end of the big contradiction, a big contradiction, angry, the old lady was 90 years old at the time, the old lady was angry in her furniture city, personally established, and then sold to Buffett's furniture city opposite the opened a furniture city, and the business is also good.

Buffett was dumbfounded later, the old lady was 90 and started a business, and did the same job, that is, Buffett was also dumbfounded, this problem, and then Mrs. B is older, Buffett is also good, nothing to find someone to chat. After talking, I said, well, sell me the new store.

Later, for $5 million, this new furniture city was bought again, and at this time, Buffett ate a long and wise, signed a contract, which signed an agreement prohibiting competition in the same industry, that is, Mrs. B, you are now more than 90 years old, after you sold the new store to me, you can no longer work in the furniture store, you have to promise me, Mrs. B actually signed later, and then Mrs. B lived until the age of 105.

The story of this period of history just added is not written in this letter.

Going back to Buffett's 1983 letter to shareholders, the following section is about the performance of the business.

He said that in 1983, the net value of our company on the books increased from $737 to $737 per share to $975. Approximately 32% increase.

But we never take the performance of a single year's numbers too seriously, he said, Buffett said, every natural year, a single year's performance should not be too serious. Instead, we recommend a cycle to test and judge the performance of a company. How much is the cycle appropriate?

He said we recommend at least 5 years as a cycle, that is, 5 years as a cycle, to look at your business performance, investment performance.

The performance of an investment is judged by cyclical rolling yields. As you can see, the cycle rolls are regular, not from the first year to the fifth year, from the sixth year to the tenth year, not like this.

Taking every 5 years as a cycle means that the cycle continues from the first year to the fifth year, from the second year to the sixth year, and from the third year to the seventh year.

He said we measure our investments in cycles every 5 years, and if the returns we achieve every 5 years are worse than the average for U.S. businesses, we should be wary.

He said that the existing management, that is, the management of Buffett's representative, has been in office for 19 years today, and when we took over, the company was only worth $19, and now it has increased to $975, and the annualized rate of return is 22.6%, which is still good, not still good, but very good.

Buffett said another cliché below, you may not be able to achieve such a high growth rate in the future, if not, you better choose to be a salesman instead of a mathematician.

He said that we chose book value as a measure because it was actually a conservative and reasonable alternative to measuring the growth of intrinsic value.

The advantage is that it is easy to calculate and does not involve subjective measurement of intrinsic value, but I still need to emphasize that the two actually have very different meanings.

Book value is an accounting term that records the financial input of capital and accumulated surplus, and intrinsic value is an economic term, which is the discounted present value of estimating future cash inflows. It doesn't matter if you don't understand it, you can understand it for the time being, and you can learn the part that you can learn. Although he spoke very well, it was normal for him to suddenly understand it in a year or two.

Then there's a paragraph where book value tells you what you've invested, and intrinsic value is what you're expected to get out of it.

He went on to give an example. He said similar words can tell you the difference between them. Suppose you spend the same money for two children to go to college, each child gets ten thousand dollars, the book value of the two children, that is, the tuition fee spent is the same, spend ten thousand dollars, but the future return (that is, the intrinsic value) of the two children is not the same, these two children may find a job after graduation, start a business, is not how well the career is done, that is the intrinsic value of the return.

So the book value is to tell you what has been invested, and the intrinsic value is what you can expect to get from it.

He said that berkshire took over at the beginning of the fiscal year 1965, when the current management took over, it was $19 per share, but I would like to tell you that although the book value at that time was $19, it was actually significantly higher than its intrinsic value. Because the assets on the books are actually not worth that much money.

After 19 years, nearly 20 years of development, I can now tell you that our current intrinsic value actually exceeds book value.

In fact, there are two different things, Buffett is increasingly telling people more and more mysteries. But people who want to understand these mysteries also need to be patient and calm to learn.

He said that there are two main reasons why our intrinsic value today greatly exceeds our book value.

The first is GAAP, which is the standard general accounting principle, which requires the shares held by our insurance subsidiaries to be recorded at market price, while other companies do not ask, that is, the cost buy method is calculated, which is the lowest method.

That is, you hold shares of other companies, one is the cost of buying the shares of these companies, and the second is the market price of the stocks you hold, which is low, which is calculated, which is low. You see what that means.

Anyone who studies accounting must know that some of the value in this way cannot be reflected in Berkshire's books.

The second more important thing is that he said that several of the companies we own have huge economic goodwill, and this real economic goodwill is actually far greater than the accounting goodwill on the books. This is important.

He said that goodwill, whether accounting or economic, is actually a mysterious subject. This was explained in an appendix annex at the end of this year's letter. Interested students can learn about it.

Buffett went on to say that he said that Keynes found problems, and Keynes was the economist, that is, the British one, of course, very famous, a very famous landmark figure in economics, and Buffett admired him very much.

Keynes once said that the real difficulty is not in generating new ideas, but in getting rid of old ones. It's hard.

Then Buffett said that I was slower to respond, I was slower to reflect people, I was not very smart, on the one hand, because the teacher who taught me has always benefited me a lot, he is talking about Graham, but from the actual business experience, directly and indirectly, I also found that I have a lot of goodwill for companies that have goodwill and only need a small amount of real assets.

In fact, at this time Buffett,000, his inner train of thought has changed, and it is very obvious from this sentence that he has changed.

That is to say, he said that my teacher I adhered to his learning from him, he benefited me a lot, but the benefits led to what we call path dependence.

It's because you've been successful in doing this, so you'll do it next time.

So why, as I once wrote in my book, young people succeed in the first step on the wrong path when they are young, it's over. Because of path dependencies, it's hard to change them.

It's what Keynes just said, you get rid of the old ideas, it's hard. It's not that it's hard to generate new ideas, and it's certainly not easy to generate new ideas, but it's harder to get rid of old ideas, old ways of behaving, old habits and ideas.

Buffett went on to say that Charlie and I agree that the value that Berkshire now has is actually much higher than its book value.