Warren Buffett's Letters to Shareholders – Selected Excerpts (Part 1/4)

I recently reread all the "Shareholder Letters" written by the greatest investor of all time since 1977. They are available for free at:

http://www.berkshirehathaway.com/letters/letters.html

It's hard to find someone who combines such in-depth economic knowledge, unfailing common sense and such a keen sense of humor, even when it comes to laughing at himself.

I have selected my favorite passages so that you can enjoy these timeless thoughts.

The year always refers to that of the general meeting (for example, 2000 corresponds to the letter to shareholders of 2000 for the 1999 financial year).

 

1983:
Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out.

An analogy will suggest the difference. Assume you spend identical amounts putting each of two children through college. The book value (measured by financial input) of each child's education would be the same. But the present value of the future payoff (the intrinsic business value) might vary enormously - from zero to many times the cost of the education. So, also, do businesses having equal financial input end up with wide variations in value.

 

1987:
Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.

We are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate.

In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.

 

1988:
When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.

 

1989:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

 

1991:
Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting from flower to flower. Indeed, we believe that according to the name "investors" to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.

 

1992:
We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.