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1981 Shareholder Letter

Published on 26 February 1982

· Value Investing

The original 1981 Shareholder letter can be found here (

An education in M&A

In this letter, Warren Buffet spends some time in M&A talk - Mergers & Acquisitions. More often than not, the (huge) acquisition of a "Target" Company T by an "Acquiring" company A hits the front pages with dizzying and breathtaking talk of how the acquisition will help company A. Warren Buffet, however, is less optimistic, and speaks at length on how such acquisitions only serve the management's ego, and does not actually add any real economic benefits most of the time.

Our acquisition decisions will be aimed at maximizing real economic benefits, not at maximizing either managerial domain or reported numbers for accounting purposes.

Warren Buffet spends some time talking about Toads and Princes, but gives us a gem on investing pragmatism after quite a long discussion:

We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat. We have done well with a couple of princes - but they were princes when purchased. At least our kisses didn’t turn them into toads. And, finally, we have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices.

A particular quote stands out at the end, which points to the ego / hubris of most companies trying to acquire other companies at premium prices:

The empire would have been larger, but the citizenry would have been poorer.

In summary, you can try buying companies that have performed badly (and the prices reflect that), hoping that they turn-around, but most of the time they don't. Or you can buy good companies that have performed well (princes), and most likely than not, they will probably continue to perform well. OR (and this is the key to value-investing), you should focus on buying good companies at attractive prices (princes at toad-like prices).

Some Reminders

(A) Public markets are auctions, but value-investing will work: Again, in the first paragraph, Warren Buffet very quickly reminds us that in the short term, the public markets work like an auction, but in the long run, the prices will match the intrinsic value of the company.

While market values track business values quite well over long periods, in any given year the relationship can gyrate capriciously.

Small portions of exceptionally good businesses are usually available in the securities markets at reasonable prices.

(B) Owning and controlling a business, is not always better than having a partial stake in the business.

we generally have been able to correct such mistakes far more quickly in the case of non-controlled businesses (marketable securities) than in the case of controlled subsidiaries. Lack of control, in effect, often has turned out to be an economic plus.

(C) Being a successful investor, typically involves the ability to predict the future to some extent. In this letter, Warren Buffet reminds us that we need to continuously review our "investment thesis", and seek to continuously understand whether what we have thought to be true remains true.

For example, last year your Chairman volunteered his expert opinion on the rosy future of the aluminum business. Several minor adjustments to that opinion - now aggregating approximately 180 degrees - have since been required.

While investors and managers must place their feet in the future, their memories and nervous systems often remain plugged into the past.

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