Another in our thrilling series following the wisdom of Warren Buffet as delivered via his annual Letter to Berkshire Hathaway shareholders.

In this, our 19th installment out of 30, we lok at the year 1995.

In 1995, the economy was roaring and as Buffett remarks:

This was a year in which any fool could make a bundle in the stock market. And we did.

Berkshire acquired three companies in 1995: Helzburg's Diamond Shops, R.C. Willey Home Furnishings and the car insurance company GEICO, which Berkshire had longed owned part of as a major shareholder before finally buying up the rest of the company. Following on these purchases, Buffet took the opportunity to again explain the Berkshire philosophy. Berkshire wants:

"...to build a collection of companies - both wholly- and partly-owned - that have excellent economic characteristics and that are run by outstanding managers. Our favorite acquisition is the negotiated transaction that allows us to purchase 100% of such a business at a fair price. But we are almost as happy when the stock market offers us the chance to buy a modest percentage of an outstanding business at a pro-rata price well below what it would take to buy 100%. This double-barrelled approach - purchases of entire businesses through negotiation or purchases of part-interests through the stock market - gives us an important advantage over capital-allocators who stick to a single
course. Woody Allen once explained why eclecticism works: "The real advantage of being bisexual is that it doubles your chances for a date on Saturday night."

On the wisdom of using the projections of a company that is interested in being acquired as the basis for anything:

"...why potential buyers even look at projections prepared by sellers baffles me. Charlie and I never give them a glance, but instead keep in mind the story of the man with an ailing horse. Visiting the vet, he said: "Can you help me? Sometimes my horse walks just fine and sometimes he limps." The vet's reply was pointed: "No problem - when he's walking fine, sell him." In the world of mergers and acquisitions, that horse would be peddled as Secretariat."

A recurring theme in Buffet's letters is the fact that Berkshire likes to buy good businesses and then let them perform autonomously without meddling from the home office. He likes to buy businesses that want this type of arrangement, too:

For our part, we like dealing with owners who care what happens to their companies and people. A buyer is likely to find fewer unpleasant surprises dealing with that type of seller than with one simply auctioning
off his business.

In running down the performance of Berkshire's wholly-owned businesses, Buffet discusses two businesses that are falling victim to larger trends---newspapers and encyclopedias:

The Buffalo News, though still doing very well in comparison to other newspapers, is another story. In this case, industry trends are not good. In the 1991 Annual Report, I explained that newspapers had lost a notch in their economic attractiveness from the days when they appeared to have a bullet-proof franchise. Today, the industry retains its excellent economics, but has lost still another notch. Over time, we expect the competitive strength of newspapers to gradually erode, though the industry should nevertheless remain a fine business for many years to come.

Berkshire's most difficult problem is World Book, which operates in an industry beset by increasingly tough competition from CD-ROM and on-line offerings. True, we are still profitable, a claim that perhaps no other print encyclopedia can make. But our sales and earnings trends have gone in the wrong direction. At the end of 1995, World Book made major changes in the way it distributes its product, stepped up its efforts with electronic products and sharply reduced its overhead costs. It will take time for us to evaluate the effects of these initiatives, but we are
confident they will significantly improve our viability.

Finally, in 1995, Berkshire announced a plan that would increase the availability of its stock and therefore increase the number of shareholders, a plan that was approved and is now the status quo for buying Berkshire Hathaway shares:

At the Annual Meeting you will be asked to approve a recapitalization of Berkshire, creating two classes of stock. If the plan is adopted, our existing common stock will be designated as Class A Common Stock and a new Class B Common Stock will be authorized.

Each share of the "B" will have the rights of 1/30th of an "A" share with these exceptions: First, a B share will have 1/200th of the vote of an A share (rather than 1/30th of the vote). Second, the B will not be eligible to participate in Berkshire's shareholder-designated charitable contributions program.

When the recapitalization is complete, each share of A will become convertible, at the holder's option and at any time, into 30 shares of B. This conversion privilege will not extend in the opposite direction. That is, holders of B shares will not be able to convert them into A shares.

We expect to list the B shares on the New York Stock Exchange, where they will trade alongside the A stock. To create the shareholder base necessary for a listing - and to ensure a liquid market in the B stock - Berkshire expects to make a public offering for cash of at least $100 million of new B shares. The offering will be made only by means of a prospectus.

The market will ultimately determine the price of the B shares. Their price, though, should be in the neighborhood of
1/30th of the price of the A shares.