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1979 Shareholder Letter

Published on 3 March 1980

· Value Investing

The original 1979 Shareholder letter (6,263 words) can be found here (

The Single Most Important Indicator

Immediately in the third paragraph, Warren Buffet repeats his emphasis on the single most important indicator of company performance: ROE (Return on Equity). He writes:

We continue to feel that the ratio of operating earnings (before securities gains or losses) to shareholders’ equity with all securities valued at cost is the most appropriate way to measure any single year’s operating performance.

The underlined portion is important as if the shareholders' equity is valued at market value, there could be wide variations from moment to moment, resulting in a completely useless measure of company performance. He goes on to share more on this further down the letter. In quite a few circles online and offline as well as analyst's reports, you will see an emphasis on Earnings Per Share (EPS), Warren Buffet tends to dismiss EPS as a useful measure of company performance simply because even a bond or savings account will have positive EPS. He elaborates on this in several lines:

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share

Useful Reminder #1: Invest to get more purchasing power

Too often we focus too much on growing the numerical value and try to compound our portfolio's value; and forgot the real aim of investing: so that our money can beat inflation; to buy more things etc.

... the ultimate determinant as to whether our internal operating
performance produces successful investment results - i.e., a
reasonable gain in purchasing power from funds committed - for
you as shareholders

Warren Buffet goes on to elaborate that high inflation rates, capital gains taxes (Singapore doesn't have any) will lead to zero after-tax purchasing power gain (note that this was in a time when inflation rate was high in america). This is an important lesson in investing --- that we do not lose our true aim in investing.

Useful Reminder #2: Don't bet on turnarounds

Halfway through the letter, Warren Buffet reflects on one of his purchases. Even though the price was good (good margin of safety), ultimately the investment did not turn out as well as they thought. This is the real benefit of learning from reading biographies, letters, mistakes etc : we as investors can benefit from the rules-of-thumbs that others have derived through their own mistakes. Why pay for your own mistakes when you can learn from others'?

Both our operating and investment experience cause us to
conclude that “turnarounds” seldom turn, and that the same
energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price

A Useful Objective To Have In Your Own Investing

When it comes to your financial life, it will be not be good ROI if you're worrying over your investment decisions every night, leading to loss of sleep, poorer quality of life etc --- you might as well put your money in an index fund and earn that 8% returns. Near the bottom of the letter, Warren Buffet shares a little on the kind of ideal "mantra" that we should all strive for:

We continue to feel very good about our ... investments. Over a period of years, we expect to develop very large and growing amounts of underlying earning power attributable to our fractional ownership of these companies. In most cases they are splendid businesses, splendidly managed, purchased at highly attractive prices.

It's important to do the research on the 4 criteria (as outlined in the 1977 letter:, read widely, and make sure you are comfortable holding on the companies that you've invested in, for the long long long haul.

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