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1990 Shareholder Letter

Published on 1 March 1991

· Value Investing

The original 1990 Shareholder letter can be found here (

Focus on Intrinsic business Value

In this letter, WB continues to emphasize that as Berkshire grows bigger, it's going to become more and more difficult to maintain the same rate of growth, simply because the base is a lot larger now. He also reiterated that at Berkshire, they try to make Book Value as close a proxy as possible as the Intrinsic value, but because intrinsic value is, no matter how detailed your analysis is, still an estimate, there's going to be differences between anyone's calculations. Your rate of return may differ however, depending on the price that you bought-in and the price that you sold. In a demonstration of his prudence, Warren Buffett emphasizes that he only strives for 15%.

We continue to aim for a 15% average annual gain in intrinsic value

Focus on what's real, and just what's accounting

WB continues to emphasize that the financial statements are just the beginning of your understanding of the business, and that it's important to scrutinize those numbers well, and use your own logic to determine if there's any trickery in the numbers. What we're trying to focus on, is good return on equity, which inevitably requires good revenue and good earnings. There are many ways to manipulate the earnings numbers, and one must be always careful.

Clearly, investors must always keep their guard up and use accounting numbers as a beginning, not an end, in their attempts to calculate true "economic earnings" accruing to them.

One way to calculate true economic earnings

WB shares one way of calculating the true economic earnings by giving a numerical example of Coca-cola.

I believe the best way to think about our earnings is in terms of "look-through" results, calculated as follows: Take $250 million, which is roughly our share of the 1990 operating earnings retained by our investees; subtract $30 million, for the incremental taxes we would have owed had that $250 million been paid to us in dividends; and add the remainder, $220 million, to our reported operating earnings of $371 million. Thus our 1990 "look-through earnings" were about $590 million.

Wait for the right pitch - dont swing at the wrong balls

In this year, Berkshire didn't do much, because the markets were just too high. WB gives a quote of his investment style which bears reminding,

Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings.

Be wary of high assets: equity ratios

WB shares an important criteria when evaluating companies: that they dont have too much liabilities or debt (typically shown by high assets to equity ratios).

When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity.

Think like a business owner

Near the end of the letter, WB mentions something perhaps quite controversial (but which he continues to maintain today), that if the management wants to make donations to any cause, the management should use their own money, and not make donations using the company's money.

However, neither our operating managers nor officers of the parent company use Berkshire funds to make contributions to broad national programs or charitable activities of special personal interest to them, except to the extent they do so as shareholders. If your employees, including your CEO, wish to give to their alma maters or other institutions to which they feel a personal attachment, we believe they should use their own money, not yours.

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