Berkshire Hathaway Letters to Shareholders: 1965-2024

by Warren Buffett

“Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.”

We prefer a concept of “economic” earnings that includes all undistributed earnings, regardless of ownership percentage.

managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.

However, this very unevenness and irregularity offers advantages to the value-oriented purchaser of fractional portions of businesses. This investor may select from almost the entire array of major American corporations, including many far superior to virtually any of the businesses that could be bought in their entirety in a negotiated deal.

“It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.”

Geometric progressions eventually forge their own anchors.

Year-to-year variances, however, cannot consistently be in our favor. Even if our partially-owned businesses continue to perform well in an economic sense, there will be years when they perform poorly in the market. At such times our net worth could shrink significantly. We will not be distressed by such a shrinkage; if the businesses continue to look attractive and we have cash available, we simply will add to our holdings at even more favorable prices.

(From 1950 through 1970, the industry combined ratio averaged 99.0. allowing all investment income plus 1% of premiums to flow through to profits.)

“Part of A sold to acquire B”, or “Owners of B to receive part of A in exchange for their properties”.

(Las Vegas has been built upon the wealth transfers that occur when people engage in seemingly-small disadvantageous capital transactions.)

We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet.

We will not sell small portions of your company—and that is what the issuance of shares amounts to—on a basis inconsistent with the value of the entire enterprise.

regardless of price, we have no interest at all in selling any good businesses that Berkshire owns,

It’s the ideal business—one built upon exceptional value to the customer that in turn translates into exceptional economics for its owners.

After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off?

Red lights should start flashing if the five-year average annual gain falls much below the return on equity earned over the period by American industry in aggregate.

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.

price is what you give, value is what you get.)

a ratio below 100 indicates an underwriting profit and one above 100 indicates a loss.

We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree. Let me tell you why.

We want those who think of themselves as business owners and invest in companies with the intention of staying a long time.

People who buy for non-value reasons are likely to sell for non-value reasons.

(those who cannot fill your pocket will confidently fill your ear).

A hyperactive stock market is the pickpocket of enterprise.

Splitting the stock would increase that cost, downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value.

“excess of cost over equity in net assets acquired”. To avoid constant repetition of this mouthful, we will substitute “Goodwill”.

businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.

Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.

Asset-heavy businesses generally earn low rates of return—rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.

unrealized capital gains over a period of years as very important.)

1,166 (467) 3,151 1,917 Precision Steel 4,092 3,241 3,278 2,102

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.

Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer.

We try to avoid compromise of these standards, although we find doing nothing the most difficult task of all.

“masterly inactivity”.

“I come home to eat and sleep, and that’s about it. I can’t wait until it gets daylight so I can get back to the business”.

(1) apply themselves with an enthusiasm and energy that would make Ben Franklin and Horatio Alger look like dropouts; (2) define with extraordinary realism their area of special competence and act decisively on all matters within it; (3) ignore even the most enticing propositions failing outside of that area of special competence; and, (4) unfailingly behave in a high-grade manner with everyone they deal with.

as in all of our investments, we look to business performance, not market performance.

“Well, it may be all right in practice, but it will never work in theory.”) Simply put, we feel that if we can buy small pieces of businesses with satisfactory underlying economics at a fraction of the per-share value of the entire business, something good is likely to happen to us—particularly if we own a group of such securities.

(In what I think is by far the best book on investing ever written—”The Intelligent Investor”, by Ben Graham—the last section of the last chapter begins with, “Investment is most intelligent when it is most businesslike.” This section is called “A Final Word”, and it is appropriately titled.)

(Billy Rose described the problem of over-diversification: “If you have a harem of forty women, you never get to know any of them very well.”)

Only when bond purchases appear decidedly superior to other business opportunities will we engage in them. Those occasions are likely to be few and far between.

If earnings have been unwisely retained, it is likely that managers, too, have been unwisely retained.

Historically, Berkshire has earned well over market rates on retained earnings, thereby creating over one dollar of market value for every dollar retained. Under such circumstances, any distribution would have been contrary to the financial interest of shareholders, large or small.

But as long as prospective returns are above the rate required to produce a dollar of market value per dollar retained, we will continue to retain all earnings.

(We cannot, however, respond to written or phoned questions at other times of the year; one-person-at-a time reporting is a poor use of management time in a company with 3000 shareholders.)

The current situation is 180 degrees removed from that existing about a decade ago, when the only question was which bargain to choose.

You’ll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses.

(Ironically, we would have been better off financially if our union had behaved unreasonably some years ago; we then would have recognized the impossible future that we faced, promptly closed down, and avoided significant future losses.)

“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.”