 Good day, fellow investors. What do I do when I'm tired and I want to relax a little bit? I read about investing and what the great investments in the investors in the past did. So last evening I started reading Warren Buffett's letter to shareholders to really grasp the picture of how did he build what is now Berkshire Hathaway and he started doing that in the 1960s. So I have read the letters to shareholders that he sent from 1964 to 1975 and we will go through them in this video to see, okay, what was his focus during those initial 10 years? How did he build what is now Berkshire Hathaway, the biggest compounding machine in the market? Let's start. So 1965 starting assets, 66 one dividend, 67 an addition of insurance business, 69 publishing business, textile recessions, going into banking, earnings, going to 19% of equity, finally reaching his target, 17% in 73, building the insurance empire, a bad year, 74 for insurance, but he had 140 million in bonds. So let's start with 65 starting assets. It's very interesting to see how Berkshire Hathaway, the one we know today was created. What Buffett bought was yes a business, but he bought the assets that he could slowly deploy elsewhere. There was a million in cash, high accounts, receivables and inventory. So if he can sell the inventory, lower the inventory, there is the first cash, net property, plant and equipment, 27 million of assets on what was it? I think 1.2 million in shares. So that is about 20, 20 something in shares. He bought it for $7.5. So it was a cigar, but he knew that he was buying value no matter what. I think that that was 5 million, so 22 million, 1.2, I don't know, somewhere around 20 of book value. He paid, let's say below 10 for that. And from there, he started unlocking the value, reinvesting the value and building an empire. 1966, he usually jokes that he must have gone to the toilet when they decided to pay out a dividend of 10 cents. But okay, a funny, funny note from that year. 1967, very important addition of insurance businesses, acquire two insurance businesses for 8.6 million. So he got the money out. He invested in National Indemnity Company and National Fire and Marine Insurance Company. It was a good year and all the earnings have been retained to build additional capital. So first lesson here is capital, investment, reinvestment and you have to let it compound. You have to reinvest at a high investment rate of return and then let it simply grow always. Okay, he's not focused so much on the stock market. He is, he was focused and he still is focused. This is my capital. How can I compound that at a high rate, highest possible rate of return to get more cash back to deploy it where it is again compounded where it again makes a high rate of return? So Buffett was a capital allocator and he started investing in insurance because in insurance, you get the float, you get more capital to deploy. What's the point of insurance? You pay upfront to be insured if something bad happens. But in between, the insurance company gets the money and in between they have to deploy that money and that's what Buffett does amazingly well. So he started buying insurance businesses to get more money to deploy at a higher rate of return and that's how he started building his wealth, he started building Berkshire Headway. Buffett also mentions diversification. It's better to see two businesses so insurance and in that case he was still in the textile business that didn't do very well but it allowed him as he bought it on the cheap to do very well. 1969 he diversified into publishing businesses, purchase of sun newspapers and Blacker printing company. 1970s there was a textile recession, he was going into banking, more money, he bought the Illinois National Bank, however they changed some regulation and we'll see in the future if he mentions how he sold that. Focusing on earnings on equity in 1971, finally after more than five years of struggle he managed to reach a satisfying return on equity of 14% from the businesses, acquired home and automobile insurance company and continued to work on the ensuring business growing it as the textile part continued to struggle. 1972 earnings going to almost 20% on equity which is what he did over the future which is what he aimed for and the earnings for the year amount to 11 million so Buffett is now making 11 million on the 22 million of equity he started with in 1964. This means he compounded at 16.5% annually. One important mention here, the businesses he acquired insurance the bank he acquired them from the founders and let the founders still work there so he would inject the capital raise the business get the business and take advantage of the growth and take advantage of the dedication of the founders so he was yes investing in businesses but he was also investing in the people. Second thing that people forget about it they were really developing those insurance businesses starting new ventures he invested in Texas that didn't go very well later changed the management there and then starting he was really building a new company from scratch an insurance company from scratch so practically what could say Berkshire Hathaway was an insurance small startup in the 1960s 1970s and taking advantage of the huge economic growth in the US increased population increased cars ownership etc increased insurance so he really saw the big picture there the long-term picture among all those short-term recessions oil crisis deep-pagging the dollar from gold etc etc he was focused on the businesses businesses businesses because the US would become the greatest power during that period and the next 40 years and that is what he invested in this case insurance and diversification and the main message here is short-term volatility trouble will be Vietnam war everything there will be always trouble there will be always issues focus on the businesses focus on high returns on investment capital and you'll do well no matter what because you cannot know what will happen in the future but if you focus on high returns on capital you will do well 1973 good return on equity but he actually lost 12 million when investing in stocks but he believed the intrinsic value of what he bought was very high and despite the unrealized loss he expected satisfactory results from the portfolio over the longer term so always focused on the longer term so then they tried to merge with diversified retailing company didn't go didn't issue stocks for that but they acquired 90 percent of blue chips stamps that wasn't such a great deal but what was included into the business was again margin of safety seas candy and vesco financial next year 74 was bad for insuring but he had now 140 million invested in bonds and we have to see 1974 high returns on those bonds mostly in municipal bonds 120 million with maturities to 12 to 15 years so he was locking in the high interest rates that were there in that moment so due to higher interest rates in the market the carrying value of the bond portfolio was down over the year but then he again doesn't care about the short term he cares about the long term the key here is that the insurance business was growing and there was more money and more money to be deployed for the premiums when he found high yielding bonds with low risk he bought them because margin of safety and a good business the stock portfolio on the other hand lost 17 billion for the year however seas candy is what they saw as a very positive so focus here warren buffett's focus was not on the market on the returns on the businesses and i think he actually enjoyed the low prices he knows okay i could have bought cheaper but that's timing the market you can't do it when your business reaches your required return yesterday we discussed craft Heinz if craft Heinz you're happy with the 5% dividend yield that's your business return then you buy it if you want a 7% then you wait for it to go lower if it goes lower and that's how you have to balance things nobody knows what will happen you have to focus on the return on investment to conclude on buffett it's amazing how he was building cash machines a high return on invested capital machines that he would allow him to compound his cash other people's cash he even took debt in 1973 berkshire had to a borrow 20 million at eight percent from institutional lenders on a 20 year term with principal repayments beginning in march of 1979 so he even took debt to grow that more cash reinvested at a higher rate of return to get to higher returns compounding taking some risk taking some leverage and this is how buffett with other people's money from the float from the debt and with his own money plus the value that he bought from berkshire where he took out part to let it grow so again margin of safety taking practically no risk just building it over the long term being happy of or not even caring about the volatility about the markets the stock market is rarely mentioned in his letters just focusing on investing in businesses which is the core when it comes to investing and which is what we will continue to do on this channel so please subscribe click that notification bell for more letters to come thank you for watching looking forward to see you in the next video and looking forward to your comments anything you can add to these years of warren buffett please add in the comments to add value and i'm sure you will find more interesting things to read there see you in the next video