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2004 Shareholder Letter

Published on 28 February 2005

· Value Investing

The original 2004 Shareholder letter can be found here (

Focus on Intrinsic Value, and look at book value

Again, WB encourages us to focus on intrinsic value, because with all the different accounting shenanigans that can take place, all investors will need a "true north" to be able to navigate their way through all the intentional or unintentional "white lies" that's going on. Without your own internal compass, you will always be battered about by the wild fluctuations in the market.

It's per-share intrinsic value that counts, however, not book value

But your calculation of intrinsic value, almost by definition, is not accurate, and even knowledgeable and experienced value-investing practitioners may diverge in their calculations, so it's good to have some kind of benchmark or proxy. In berkshire's case, the book value gives a good indication of the increase in intrinsic value.

Despite their shortcomings, yearly calculations of book value are useful at Berkshire as a slightly understated gauge for measuring the long-term rate of increase in our intrinsic value.

Remember, it's our job as educated and informed value-investors to estimate carefully the intrinsic value of a particular company, and ensure that it has a durable economic characteristics that will allow it to thrive going forward. As long as you follow the four principles, adopt the correct mindsets when investing, you will be fine.

Some people may look at this table and view it as a list of stocks to be bought and sold based upon chart patterns, brokers’ opinions, or estimates of near-term earnings. Charlie and I ignore such distractions and instead view our holdings as fractional ownerships in businesses.

Index funds work well generally

For the past century, America as the world's largest economy has been doing tremendously well. What WB refers to as the American Tailwind. As long as you have believed in America, and have invested in America, you would have done very well for yourself.

Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job.

However, not all investors have done well, despite the market having done very well (sounds very similar to the 2009-2019 stretch so far). Whether you're stock-picking, or you're investing in the index, it pays to have some notion of value and price. WB offers 3 reasons why most people don't do well, and it will pay well for you if you understand the lessons.

There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

Markets are irrational

Anyone who believes that the stock market is rational all the time, is probably smoking something. The reality is that the stock market is occasionally inefficient, and that most participants in the stock market are not looking at the underlying intrinsic business value of the companies that they invest in.

Since our original purchases, valuation gains have somewhat exceeded earnings growth because price/earnings ratios have increased. On a year-to-year basis, however, the business and market performances have often diverged, sometimes to an extraordinary degree. During The Great Bubble, market-value gains far outstripped the performance of the businesses. In the aftermath of the Bubble, the reverse was true.

And in this irrationality, that's when small individual investors like ourselves can benefit, and beat the professionals.

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