 Good day, fellow investors! We continue with our short summaries of Warren Buffett's letters to shareholders. Today we're going to discuss 1978 and there are five extremely important business things to learn that will improve everybody's investing mindset and that's the focus and that's why we do it. So let's start! The content, low returns on capital employed, high competition leads to a cost basis five, not great returns. Business is always cyclical, so something to keep in mind, to always keep in mind should be a core mindset when it comes to investing. Test and fail method in business and investing, what Buffett does and people don't understand that. Focus on business earnings, not the stock market and be happy if the stock prices fall. So low returns on capital employed, high competition leads to a cost basis five. As Buffett explains, the textile industry is producing undifferentiated goods, capital intensive businesses and they will earn inadequate returns except under conditions of tight supply or shortage. Prices tend to reflect direct operating costs rather than capital employed. So this is something to be very very careful when it comes to investing. You might see a lot of value traps that have a lot of capital employed, you'll see okay that's value that cannot go wrong but the factories you have to look also the operating cost at the competition at the differentiation in the products. So also when you invest think also is it a value or value trap? The second learning point is so important. Business is always cyclical. If you remember in the previous videos the 1974-1975 investment letters the insurance insurance business was terrible. Now in 1977-78 it is the best contributor to earnings for Berkshire and that's something key to understand. Businesses are always cyclical, will always be cyclical but you have to be patient and wait three to five years for things to turn around. If you can find businesses that are good also in a better environment that will explode in a good environment then you have found really great investments. Now the test and fail method in investing and businesses. As soon as a stock that Buffett holds falls you will see headlines discussing how Buffett lost his magic. However trying and failing has been Buffett's method since ever so we continue to look for ways to expand our insurance operations but your reaction to this intent should not be unstrained joy. Some of our expansion efforts largely initiated by your chairman have been lackuster, others have been expensive failures. So the key here is to understand you invest the maximum you can lose is 100% of you invest and the maximum you can gain is unlimited. A good example is Coca-Cola. Now everybody is attacking Buffett for Kraft Heinz but compared to Coca-Cola he invested what he invested in 1989-88 now he's getting a 60% dividend yield on the initial investment. So think of the cash flows Coca-Cola is generating for Buffett through that dividend yield per year 60% so he invested later in Kraft. It didn't go that well so he probably will break even on that investment but if it would have been okay like Coca-Cola 10 years from now Berkshire would be making 50% of their initial investment or 20 years on that deal. So bad scenario I break even I don't lose much I get okay dividends positive scenario my returns over the long term are simply unlimited always keep that in mind when it comes to investing and don't be sad you will miss that you will always find stocks that will not do good businesses that will not do good but those that will do good will compensate for all the losses if you are a long-term holder and investor. Further focus on earnings and not the stock market Buffett reiterates his criteria in every level practically but he gives some very interesting examples here how he didn't buy a lot of businesses in 1971 because of the high valuations when all the pension fund managers were investing heavily in stocks no matter the valuation in 1974 Buffett started buying stocks really big and he is now 120 million invested compared to the 10 million in 1971 so extreme investments when there are opportunities and the opposite of what the market does what the market did and what the market will do. So further he concludes it was a marvelous period for the value-oriented equity buyer even if the stock market didn't go up he made great returns 129 million became 216 million so always be greedy when others are fearful and be happy when stock prices fall we are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices in fact we prefer just the opposite since in most years we expect to have funds available to be a net buyer of securities and consistent attractive purchasing is likely to prove of more eventual benefit to us than any selling opportunities provided by a short-term run-up in stock prices two levels at which we are unwilling to continue buying so the key here is most of us if you are not retired and already taking money out most of us will add every month as you get your paycheck as you get your bonus at the end of the year you invest your pension fund invest so we should be happy with lower prices because that allows us to buy more every time if prices are high you buy less and your long-term returns are smaller so to summarize the key points to take away are be careful with value traps not delivering returns even if there seems there is value businesses will always be volatile and never linear keep that in mind and be patient for a few years in the cycle don't be afraid to make mistakes just make sure to be able to play the game tomorrow too focus on earnings be happy if stock prices don't go up for longer thank you for watching subscribe for more long-term investing mindsets which is something that we need to constantly remind ourselves at if you want to see what I do my research please check the links in the description below of this video thank you for watching looking forward to comments and I'll see you in the next video