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1983 Shareholder Letter

Published on 14 March 1984

· Value Investing

The original 1983 Shareholder letter can be found here (

Thinking like an Owner

Many times, WB has emphasised the importance of thinking like an owner, and when you buy into the company, you should imagine that you are buying the entire business, instead of just buying a stock ticker symbol. In the first page, WB emphasized that all their director's networth are in Berkshire, ensuring alignment of interests. This is an important point to note as we consider each company: are the management there just to take a salary? or do they truly believe that the company will do well? This is a particularly useful letter as it also includes an appendix on Goodwill, a masterclass in how to think about it. Very important for any student of investing to learn.

We eat our own cooking.

Do not use too much debt

Another important lesson here is that Berkshire doesn't take on too much debt, and they would rather let go of interesting opportunities rather than pile on too much debt in their balance sheets. While this is certainly conservative (and may reduce their returns) , at least they can sleep well at night! This is a useful lesson for all of us and a point for us to remember when we invest in companies - companies that have too much debt will run into trouble.

Know when to commit more capital and when not to

Here, WB shares some instructive advice. Sometimes, companies try to do a "turn-around", or a "pivot" and have some grand vision of what the future looks like, with very optimistic business projections and very convincing arguments, but a lot of times, throwing good money at the problem is unlikely to turnaround a business.

major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand

Loose lips lose returns

WB also says that he will be candid in his shareholders' letters in appraising business value, at least of their wholly owned businesses. However, he shared that for the companies' shares that they bought, they won't be sharing too much, as it's competitive. Too many people are fighting for too little shares, and this brings into contrast some of the practices out there: Analysts will issue strong buy signals/guidance on certain companies - does it make sense?

Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or businss acquisition ideas are.

Investing takes time to bear fruits

Many beginner investors are always in a rush to get returns. They will look at the momentum growth stocks and see how much they have risen, and look to their own portfolio and wonder if they have gone wrong somewhere. The reality is that it takes time for your compound returns to work its magic, and you need to keep working at it.

we recommend not less than a five-year test as a rough yardstick of economic performance. Red lights should start flashing if the five-year average annual gain falls much below the return on equity earned over the period by American industry in aggregate.

Book value is important - take a look

Over the years, WB has always changed the way he reports Berkshire's "value", taking into consideration the various accounting rules changes, and the different economic climate. One of the measure he looks at is Book Value of the company. Book Value of a company, in most cases, should serve as a reasonable estimate for the intrinsic value of the company (although it doesn't really take into account the potential growth) because it's less subjective and often right there in the balance sheets. WB explains it best:

Book value is an accounting concept, recording the accumulated financial input from both contributed capital and retained earnings. Intrinsic business value is an economic concept, estimating future cash output discounted to present value. Book value tells you what has been put in; intrinsic business value estimates what can be taken out.

Goodwill. Is good.

In this particular shareholder letter, WB included an appendix to explain his "current (in 1984)" thoughts on goodwill and its amortization. By this time, he has deviated from his teacher Ben Graham's original thinking of only looking at tangible assets. But there's a lesson in this for every student of investing, is that one has to continually maintain his own opinion, read widely but have his own judgement, and be prepared to change when the facts change.

The difficulty lies not in the new ideas but in escaping from the old ones. - Keynes

Appendix: Goodwill and its amortization: the Rules and The Realities

This is the stuff that textbooks on accounting and finance should be including. Too many gems here (including an actual numerical example on See's Candy), so we will just mention one.

A good business is not always a good purchase - although it's a good place to look for one.

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