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2001 Shareholder Letter

Published on 28 February 2002

· Value Investing

The original 2001 Shareholder letter can be found here (

Relative VS Absolute Performance

As investors, our main purpose is to make good returns on our invested capital, and our main "tool" is capital allocation, amongst different assets: whether you want to invest in commercial property, manage a residential property, buy equities, invest in bonds, or collect art pieces. Capital allocation is the name of the game, but what's the end-game? How do you count your points? In this letter, WB says that he uses the S&P500 as a benchmark, and tracks Berkshire's performance against the S&P500. Of course, having some kind of benchmark doesn't mean you will beat it, but it's worthwhile "keeping score" of how you're doing.

Some people disagree with our focus on relative figures, arguing that "you can't eat relative performance." But if you expect - as Charlie Munger, Berkshire's Vice Chairman, and I do - that owning the S&P 500 will produce reasonably satisfactory results over time, it follows that, for long-term investors, gaining small advantages annually over that index must prove rewarding. Just as you can eat well throughout the year if you own a profitable, but highly seasonal, business such as See's (which loses considerable money during the summer months) so, too, can you regularly feast on investment returns that beat the averages, however variable the absolute numbers may be.

Small Portfolios Is An Advantage

Again, WB warns that it's getting difficult to maintain the same level of returns as in past years, simply because Berkshire is too big. The converse is true: for small investors like ourselves, we can move a lot more nimbly than everyone else, especially the institutional funds, and our ability to judge business value, and to take action regardless of how the market feels at the moment, are huge advantages.

We need "elephants" to make significant gains now - and they are hard to find.

Focus on what's real

WB has used these letters over the years to try to develop "Owners' mindset" as well as the the ability to focus on what's real and to cut through the B.S. Here, WB summarizes it somewhat:

Bad terminology is the enemy of good thinking. When companies or investment professionals use terms such as EBITDA and pro forma, they want you to unthinkingly accept concepts that are dangerously flawed.

This is especially important because the basics of business and the foundations of financial statements are not hard to understand from a practical perspective: a business makes money by selling products and services at a higher price than it takes to make and produce the products and services. That's it.

You can't time the market. But you can tell when the market is too expensive.

In this year's letter, WB mentioned that he feels that equity prices are too high (quite similar to the situation now). While we cannot tell when the stock market will go down, or when it will go up, in general, you can tell when prices are overall too high, or exceeding actual business performance.

Charlie and I believe that American business will do fine over time but think that todayís equity prices presage only moderate returns for investors. The market outperformed business for a very long period, and that phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many investors disappointed, particularly those relatively new to the game.

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