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1988 Shareholder Letter

First published on 28 February 1989

· Value Investing

The original 1988 Shareholder letter can be found here (

Focus on Intrinsic Business Value

As in the past few letters, WB emphasises alot on the Intrinsic business value of companies, rather than purely the book value. Ideally, the book value should be a reasonable proxy to the business value of companies, but for many companies out there, the book value is not a good proxy to the actual underlying business value of the company.

Return on equity & return on capital

While we typically advise investors to look at return on equity of >15-20% consistently and return of capital to be high single digits or low teens, many investors still ignore these very important indicators. Truly exceptional companies are able to derive ROE of >50% on some years.

Financial statements are the beginning, not the end

Many investment books encourage readers to study financial statements - that is well and good, but due to various accounting rules changes, it's important to realise that it's not always possible to get the full picture just from 3 different financial statements. Good companies' CEOs will have letters that they write to update the shareholders on the actual situation that the company is facing, and what are the steps they are taking to overcome them.

CEOs are free to treat GAAP statements as a beginning
rather than an end to their obligation to inform owners and
creditors - and indeed they should. After all, any manager of a subsidiary company would find himself in hot water if he reported barebones GAAP numbers that omitted key information needed by his boss, the parent corporation’s CEO. Why, then, should the CEO himself withhold information vitally useful to his bosses - the shareholder-owners of the corporation?

Hold it forever

WB always said that the longest possible holding period for any of his stocks, is forever. It's certainly logical that if you hold a good company, then you should hold on to the stock forever, even if it goes through temporary bad patches, or slowdowns. Unlike many professional fund managers who goes in and out of stocks frequently, trying to chase the next best stock, our best bet is to buy companies at good sensible prices, and hold on to them forever.

when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.

Understand your companies well

Again, WB emphasizes the need to only invest within your circle of competence, and to understand your investments well. Concentration of your portfolio is only risky when you dont understand the underlying businesses that you are buying. If you know them well, and are confident of their long-term prospects, then it's absolutely fine to concentrate.

We continue to concentrate our investments in a very few companies that we try to understand well. There are only a handful of businesses about which we have strong long-term convictions. Therefore, when we find such a business, we want to participate in a meaningful way. We agree with Mae West: “Too much of a good thing can be wonderful.”

Do not try to time the market

As always, WB reminds everyone that it's not possible to time the market: the market goes up and down for various, oftentimes irrational reasons, and it's not useful to try to time it. As and when the market is fearful, prices of certain businesses will come down, regardless of the good underlying business economics, and we need to be confident of our choices, and start buying.

As regular readers of this report know, our new commitments are not based on a judgment about short-term prospects for the stock market. Rather, they reflect an opinion about long-term business prospects for specific companies. We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.

Efficient Market Hypothesis/Theory

In this letter, WB goes on a long explanation of what he thinks about the Efficient Market Hypothesis, useful discussion to have, and completely still relevant today. To call it a theory probably gives it too much credit, unlike Einstein's theory of special/general relativity, the EMH/EMT have so many anomalies to it, that it could hardly be considered conclusive. Despite so many counterexamples, it has always been taught at finance schools, much to our (we being value investors) benefit. As a form of motivation and encouragement, WB gives the following statistic.

Over the 63 years, the general market delivered just under a 10% annual return, including dividends. That means $1,000 would have grown to $405,000 if all income had been reinvested. A 20% rate of return, however, would have produced $97 million.

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