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1993 Shareholder Letter

Published on 1 March 1994

· Value Investing

The original 1993 Shareholder letter can be found here (

Focus on Intrinsic Value

Almost every year, WB draws the discussion to focus on intrinsic value of a business, and it's no different in this year's letter. What's important for value investors to wrap their head (and emotions) around, is that the intrinsic value and the stock price of a business will generally progress together, but they won't progress in the same ratio. Sometimes the business may do extraordinarily well, but the stock price barely moves, and vice versa. However, all investors must have faith that as long as the business continues to do well, in the long term, the stock price will eventually realise that.

Over time, of course, market price and intrinsic value will arrive at about the same destination. But in the short run the two often diverge in a major way

As WB likes to do, he goes into some explanation with some details on what he means by this, and also quotes Ben Graham.

"In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."

Patience is required

As value-investors, it's important to research and understand the businesses that you want to buy into, well. But the last principle: buying at sensible prices, will require the cooperation of the markets. We all just have to patient for the market to throw us a ball that want to swing at.

If we are to hit the bull's-eye, we will need markets that allow the purchase of businesses and securities on sensible terms. Right now, markets are difficult, but they can - and will - change in unexpected ways and at unexpected times. In the meantime, we'll try to resist the temptation to do something marginal simply because we are long on cash. There's no use running if you're on the wrong road.

What is "risk"?

In this letter, WB emphasizes his point that having a concentrated portfolio with only a few companies is only risky if you lack understanding of the underlying businesses in your portfolio. He defines risk as the common-sensical/common-man logic rather than the mathematical standard deviation kind or "beta"

We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."

... that equating beta with investment risk also makes no

Buy what you can understand

Again and again, we emphasize the need for investors to buy what they know, because only then can you eliminate more risk than the average investor. But the bar's not that high. Alot of investors and analysts look at beta as a proxy for risk, but volatility is driven in the markets by human emotions, but risk in the business sense is ultimately a function of the economy environment and the competitive advantages that the business may or may not have.

The theoretician bred on beta has no mechanism for differentiating the risk inherent in, say, a single-product toy company selling pet rocks or hula hoops from that of another toy company whose sole product is Monopoly or Barbie. But it's quite possible for ordinary investors to make such distinctions if they have a reasonable understanding of consumer behavior and the factors that create long-term competitive strength or weakness. Obviously, every investor will make mistakes. But by confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent informed and diligent person can judge investment risks with a useful degree of accuracy.

A Similar Checklist

In this letter, WB restates his key criteria for evaluating a business, the same way we advocate here at BTS.

1) The certainty with which the long-term economic characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.

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