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1978 Shareholder Letter

Published on 26 March 1979

· Value Investing

The original 1978 Shareholder letter (4,355 words) can be found here (

Hard Market Truths To Keep You Value-Investing

In last year's (1977) letter, Warren Buffet shared 4 criteria that they used to evaluate companies that they plan to invest in. While understanding the criteria is important, it's also important to understand some truths about the stock market at a high level. in this year's (1978) letter, Warren Buffet doesn't disappoint, and shares the following:

Hard Truth #1: We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do.

Here, the greatest investor of all time says (just 4 decades ago), that it's impossible for anyone to forecast the price of any stock in the short-term. Any attempts to do so, to try to "arbitrage" based on predictions of future price movements are likely to be futile or short-lived.

Hard Truth #2: We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action.

2/3 down the letter, Warren Buffet shares another important truth about the stock market. While plenty of businesses exist that we can conceivably understand (1),. has favourable long-term prospects (2), and operated by honest and competent management (3), Warren Buffet says that it's rare that the stock price will be priced attractively (4). It's easy to find (1), (2) and (3), but you will have to wait for (4) to happen aka you will have to wait for the company to be priced attractively.

Hard Truth #3: This program of acquisition of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists.

A little lower down the letter, Warren Buffet shares a fundamental truth of the market --- we are only able to buy companies at cheap prices (criteria #4), only when there's little appetite and enthusiasm for it (aka people are not buying it). This speaks volumes of the kind of contrarian thinking that small value investors like ourselves will need to be accustomed to.

Value Investing Lessons

Of course, in this letter, Warren Buffet shares more on his value-investing philosophy. To recap, there's 4 "checkboxes" that he looks at when investing:

(1) one that we can understand,

(2) with favorable long-term prospects,

(3) operated by honest and competent people, and

(4) available at a very attractive price.

(if you're not familiar with these, refer to the 1977 letter blogpost:

In this 1978 letter, he writes on (4):

We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities.

This is related to Criteria #4: Buying at an attractive price. What he's saying is that as value investors, we should rejoice when prices drop further even after we've bought the stock, as this means you can get the same (valuable) company at an even lower price! Keep buying the same solid and awesome company at even lower prices as the price drops, and you effectively bring down your average buying price, making your eventual returns even higher.

Actionable: Ensure that your research and estimation of the intrinsic value of the company is accurate, and buy at a good and attractive bargain price. The discount (or Margin of Safety) will make up for any estimation mistakes you make.

In the last paragraph of the letter, Warren Buffet touches a little on (3); on management of the company. He writes:

...bring an almost passionately proprietary attitude to the business ... ... It is a real pleasure to work with managers who enjoy coming to work each morning and, once there, instinctively and unerringly think like owners.

In this short paragraph, Warren Buffet gives a keen idea of what we should look out for when screening for criteria 3. Competent, able and honest management who thinks like owners will look and feel and smell like how Warren Buffet describes them. Of course, at the end of the day, your judgement and assessment of what kind of people management are like may differ from others analysts --- but at the end of the day, YOU are the one investing, and needs to keep up with updates on the company developments --- always useful to like the management, like the way they talk, present etc, so that you will keep yourself updated.

Actionable: Listen to the interviews, podcasts, earnings calls of management, facebook-stalk them and see what kind of people they are like. Good, able and competent management do not lead double lives.

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