Buffett - February 20, 1997 COMPUTER NETWORKING:...

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555 CALIFORNIA STREET SAN FRANCISCO 94104 (415) 781-9700 February 20, 1997 COMPUTER NETWORKING: {PRIVATE} An Open Letter to Warren Buffett Re: Cisco Systems Paul Johnson, CFA (212) 407-0415 Paul Silverstein (212) 407-0440 Mr. Warren Buffett Chairman of the Board and Chief Executive Officer Berkshire Hathaway Inc. 1440 Kiewit Plaza Omaha, Nebraska 68131 Dear Warren: If You Think Coke Is A Good Investment . . .
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1 Paul Johnson, CFA 590 Madison Avenue New York, NY 10022 February 20, 1997 Dear Mr. Buffett: We have been ardent students and admirers of your investment career. Among other tenets of your investment discipline, we share the following: Long-term investment horizons; A focus on operating business fundamentals and not stock market sentiment; Fundamental analysis that focuses on neither value nor growth— rubrics, which as you have so presciently noted, in and of themselves are devoid of any utility as investment guideposts—but rather, on profitable growth, i.e., the deployment of large amounts of incremental capital at very high rates of return; A predilection for companies that have defensible franchises, with deep moats and high walls, sound business strategies, a high degree of customer control and some level of monopolistic pricing power; A rigorous valuation discipline. We recognize that, having had some success on your own in identifying great businesses and acquiring interests therein when your benefactor, Mr. Market—at times a somewhat capricious fellow—has felt out of sorts, you have never had much use for securities analysts. Nevertheless, in the interest of market efficiency, we feel obliged to call your attention to an industry and a specific company within that industry that you may have overlooked or never occasioned upon in your investment journeys. This investment opportunity lies in a pond that, we believe, you have traditionally avoided in the mistaken belief that you lacked the requisite rod and tackle and that the fishing was too speculative. We assure you, however, we believe that the fish in this pond are not only well worth your time, but also well within your grasp. We should note that we were also inspired to write to you by one of our colleagues at a competing firm across “the Street,” who wrote to you last year to outline an investment case for Kellogg Company. 1 If you found Kellogg to be impressive (even if you didn’t), and given that capital is a scarce resource (albeit perhaps not as scarce for you as for the rest of us), you should continue reading: we believe that you will find the fish to be much fatter and the fishing to be much easier in our pond. The industry within which this investment opportunity lies did not exist ten years
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Buffett - February 20, 1997 COMPUTER NETWORKING:...

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