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1982 Shareholder Letter

Published on 3 March 1983

· Value Investing

The original 1982 Shareholder letter can be found here (

Focus on real things, not "accounting things"

Straight off the bat, WB draws the attention on perhaps the most important thing to emphasise, is that while the numbers are important, more importantly is what the numbers mean and represent. For example, some companies have been giving increasing dividends for the past decade to shareholders - is this good? is this bad? Whether it's good or bad depends on where the money comes from. And some companies (famously Berkshire Hathaway) have never given dividends in their entire existence. Is this good or bad? Again, it depends on what they're doing with the money: businesses with economic characteristics allowing each dollar of  retained earnings to be translated eventually into at least a  dollar of market value. 

Prices will fluctuate, only buy at sensible prices

Again, WB focuses on the fact that stock prices fluctuate wildly, and it's difficult to predict where they will land. It will pay well for most investors to focus on the above point and focus on the companies as real businesses with real cashflow rather than pay any attention to the stock price: you only pay attention when the price is irrationally high or low.

as long as portions of attractive businesses can be acquired at  attractive prices.  We need a moderately-priced stock market to  assist us in this endeavor.  The market, like the Lord, helps  those who help themselves.  But, unlike the Lord, the market does  not forgive those who know not what they do.  For the investor, a  too-high purchase price for the stock of an excellent company can  undo the effects of a subsequent decade of favorable business  developments.

Durable Competitive Advantage

Down the letter, WB elaborates on the importance of durable economic advantages that your business should have, what we call here at BTS as Moats. Just like how a moat protects a castle, a business moat will allow the business to charge higher prices without reducing demand. Again, some products and services are just easier to differentiate than others: you have to understand whether the product is a commoditized product with little differentiation.

In many industries, differentiation simply can’t be made  meaningful.  A few producers in such industries may consistently  do well if they have a cost advantage that is both wide and  sustainable.  By definition such exceptions are few, and, in many  industries, are non-existent.  For the great majority of  companies selling “commodity”products, a depressing equation of  business economics prevails: persistent over-capacity without  administered prices (or costs) equals poor profitability.

The past, the present and the future

In this letter, WB also talks about how important it is for the business to retain competitive advantage, and while the past can tell you something about the business, you have to continually check that the current situation has not changed, and that the MOATS that were there continued to work (castles with moats no longer as useful when flying machines were invented.).

Future profitability of the industry will be determined by  current competitive characteristics, not past ones.  Many  managers have been slow to recognize this.  It’s not only  generals that prefer to fight the last war.  Most business and  investment analysis also comes from the rear-view mirror.

A dollar for 50 cents?

In a reverse view of the situation, WB highlights the fact that alot of M&A activity in business are "bad deals": literally paying a dollar for 50 cents in value.

Our share issuances follow a simple basic rule: we will not  issue shares unless we receive as much intrinsic business value  as we give.  Such a policy might seem axiomatic.  Why, you might  ask, would anyone issue dollar bills in exchange for fifty-cent  pieces?

And he highlights this with a numerical example:

If (1) your family owns a 120-acre farm and (2) you invite a neighbor with 60 acres of comparable land to merge his farm into an equal partnership - with you to be managing partner, then (3) your managerial domain will have grown to 180 acres but you will have permanently shrunk by 25% your family’s ownership interest in both acreage and crops. Managers who want to expand their domain at the expense of owners might better consider a career in government.

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