Berkshire Hathaway Letters to Shareholders: 1965-2024

by Warren Buffett

Investors should understand that in all types of financial institutions, rapid growth sometimes masks major underlying problems (and occasionally fraud).

Float is wonderful — if it doesn’t come at a high price. Its cost is determined by underwriting results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have received.

What we do know is that our ignorance means we must follow the course prescribed by Pascal in his famous wager about the existence of God. As you may recall, he concluded that since he didn’t know the answer, his personal gain/loss ratio dictated an affirmative conclusion.

For investors as a whole, returns decrease as motion increases.

(As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.”)

This is an unusual group in several ways. First, most of them have no financial need to work. Many sold us their businesses for large sums and run them because they love doing so, not because they need the money.

truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.

Long-term competitive advantage in a stable industry is what we seek in a business.

There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so:

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million.

Consequently, the company was earning 60% pre-tax on invested capital.

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth.

It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.

To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually. An investor who owned the Dow throughout the century would also have received generous dividends for much of the period, but only about 2% or so in the final years. It was a wonderful century. Think now about this century.

For investors to merely match that 5.3% market-value gain, the Dow — recently below 13,000 — would need to close at about 2,000,000 on December 31, 2099.

should mention that people who expect to earn 10% annually from equities during this century — envisioning that 2% of that will come from dividends and 8% from price appreciation — are implicitly forecasting a level of about 24,000,000 on the Dow by 2100.

When investing, pessimism is your friend, euphoria the enemy.

“Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.

Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive.

Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

The Black-Scholes formula has approached the status of holy writ in finance, and we use it when valuing our equity put options for financial statement purposes.

Certainly the dollar will then be worth a small fraction of its present value (at only 2% inflation it will be worth roughly 14¢).

Even evaluations covering as long as a decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement period. Steve Ballmer, of Microsoft, and Jeff Immelt, of GE, can tell you about that problem, suffering as they do from the nosebleed prices at which their stocks traded when they were handed the managerial baton.

“All I want to know is where I’m going to die, so I’ll never go there.” That bit of wisdom was inspired by Jacobi,

the great Prussian mathematician, who counseled “Invert, always invert” as an aid to solving difficult problems.

At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable.

the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.

Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.

In the end, what counts in investing is what you pay for a business

Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted,

enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to more than 100%. Others produce good returns in the area of 12-20%.

I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.

Time is the friend of the wonderful business.

Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our businesses are doing.

Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to long-dated options.

What students should be learning is how to value a business. That’s what investing is all about.

“More money has been lost reaching for yield than at the point of a gun.”

we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month.

Anyone who says money can’t buy happiness simply hasn’t learned where to shop.

These errors came about because I misjudged either the competitive strength of the business being purchased or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.

“Buy commodities, sell brands” has long been a formula for business success.

It has produced enormous and sustained profits

“If something’s not worth doing at all, it’s not worth doing well,”

“It’s not what you look at that matters, it’s what you see.”

Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.

More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.