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1999 Shareholder Letter

Published on 1 March 2000

· Value Investing

The original 1999 Shareholder letter can be found here (

Size Matters, Investment Universe matters

Again, in this letter, WB repeats his point that it's getting harder and harder for Berkshire to beat the S&P500 at the same rate that they have done so in the past, simply because they are a lot bigger, and their "investment universe" or number of investable companies that will make a meaningful impact on their returns is getting a lot smaller. This is a point bear repeating because very often, a lot of people feel that it's difficult for them to beat the market simply because they dont have enough time or experience or expertise, and that if professional fund managers can't beat the market, what makes them able to beat the market? The reality is that professional fund managers have different constraints from the individual. When you're investing with a 1M portfolio versus a 1B portfolio, the amount of absolute returns you need to make is 1000X smaller. For a 1M portfolio, you can invest in 10 different companies with 100k each, and basically most of the public companies will be available to you. For a 1B portfolio, with the same level of concentration, you need to invest at least 100M in each company for 10 companies. That limits the universe that you can participate in, as your participation will move their prices.

They existed then because we could buy both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us today.

Key Principle: Honest and Able Management

One of the 4 key principles that we adhere to at BTS. In almost all years, WB will refer to his managers as true business owners, and this is something that before we invest in any company, we will do well to try to answer for ourselves whether the current company management is honest, competent and thinks like a owner, and is in it because he loves the work, loves the company, or just there for a salary.

They work neither because they need the money nor because they are contractually obligated to -- we have no contracts at Berkshire. Rather, they work long and hard because they love their businesses.

Focus on "Look-through" earnings

Again and again, WB focuses on his concept of "look-through" earnings, which is his interpretation of the best way to judge the business performance of his portfolio. While you should still look at the major numbers such as EPS, ROE etc, ultimately calculation of intrinsic business value is a judgement call, and you need to be able to understand when a company is doing well, will continue to do well, and will likely survive whatever stuff that comes up.

To depict something closer to economic reality at Berkshire than reported earnings, though, we employ the concept of "look-through" earnings. As we calculate these, they consist of: (1) the operating earnings reported in the previous section, plus; (2) our share of the retained operating earnings of major investees that, under GAAP accounting, are not reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of investees had instead been distributed to us. When tabulating "operating earnings" here, we exclude purchase-accounting adjustments as well as capital gains and other major non-recurring items.

Key Principle: Durable Economic Characteristics

WB mentions this often, and this could very well be the first principle that you look at. All good businesses need some kind of barrier-to-entry that allows them to survive competitively far into the future. Also, WB repeats his point that he finds it hard to evaluate the long-term prospects of tech companies, and he wonders if their competitive advantage is truly "durable".

Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can't -- not at least with a high degree of conviction. This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.

Key Principle: You must be able to understand the company/business/industry

Again and again, WB emphasizes that you dont have to get everything right, you just need to get some things right and it will be able to get you spectacularly rich. When other people seem to be able to guess that Amazon or Google or Facebook are going to do well, and they did, good for them. You stick to what you know and able to understand.

If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.... .... we just stick with what we understand.

Key Principle: Sensible and Attractive Price

While the business/company may satisfy all 3 principles, what-price to get in is an important question that will determine your long-term returns. While it's not possible to time the market in any meaningful way, or to try to predict whether the stock market will go up or go down in the next week, it's important to stay away from the wildly optimistic or wildly pessimistic emotions in the market.

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

On Share Repurchase

Similar to the way "a sensible and attractive price" should determine whether you should buy or sell the stock, the same should apply to share repurchases by companies. Companies should only repurchase shares when it makes sense, and the key determinant is whether the market is overvaluing or undervaluing the stock. When a stock is selling at a price that's below the intrinsic value, it makes sense to buy back stocks, but not when the stock is selling at a price that's above intrinsic value. So, it's not always a good thing when companies buy-back shares, and for existing shareholders who wish to continue holding on to the company, it's not always time to rejoice.

Buying dollar bills for $1.10 is not good business for those who stick around.

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