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1989 Shareholder Letter

First Published on 2 March 1990

· Value Investing

The original 1989 Shareholder letter can be found here (

Focus on Intrinsic Business Value

Even though Berkshire's book value has been compounded at a highly respectable rate above 20% for years, WB continuously emphasizes the need to focus on Intrinsic Business Value, rather than what is carried on the balance sheet. One of the main confusions is that for Berkshire, they have a large component of shares of other companies, which are always calculated at their prevailing market prices, which may or may not be a good proxy for their underlying business value.

With perfect foresight, this number can be calculated by taking all future cash flows of a business - in and out - and discounting them at prevailing interest rates. So valued, all businesses, from manufacturers of buggy whips to operators of cellular phones, become economic equals.

Size matters. Small investors have an advantage

Here, WB emphasizes that as Berkshire gets bigger, it's going to get increasingly harder to generate the same levels of returns as in the past, simply because the base capital has gotten a lot larger, and to generate the same levels of returns, you're going to need super-high absolute amounts.

A high growth rate eventually forges its own anchor.

Honest and Able Management

Again, useful to remember, that no matter how hard we try, we won't be able to gain the same level of insights that an industry veteran has, and that's why while we study the industry, and study the business, analyse the metrics etc, we also need to make sure that we invest only in honest and able management.

"If you don't know jewelry, know your jeweler" makes sense whether you are buying the whole business or a tiny diamond.

Learning from your mistakes

In this letter, WB summarizes his mistakes in the last 25 years of running Berkshire. This was an interesting read, and I encourage all readers to go read the original letter: learning from others' mistakes is a lot cheaper than making the mistakes yourself. Here is a curated copy of some notable quotes

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Here, WB recollects his previous mistakes of trying to get businesses for super-cheap, and realises that it's never a good move to buy a mediocre business, no matter how cheap it is.

After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.

Again, going back to the first principle of value-investing: only invest in companies that you understand and capable of understanding. The reality for most of us is that we try to intellectually challenge ourselves by trying to buy businesses that we don't understand or will find it difficult o understand. WB emphasizes this point again:

It's no sin to miss a great opportunity outside one's area of competence.

Here in 1989, WB emphasizes that he doesn't take outsized risks, no matter how small the risk, and how big the upside could be. This is his first rule of investing: don't lose money.

A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster.

And this quote reminds us to take things slowly (but surely), and that there's no need to chase 50% - 100% annual returns, if 20% is going to get you to the same place (generational wealth). Just be slow-and-steady, and you will eventually reach there, faster than most people.

Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also.

Enjoy the process of reading up on businesses, and of understanding the world around you through businesses, and enjoy your investing journey.

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