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2009 Shareholder Letter

Published on 26 February 2010

· Value Investing

The original letter can be found here: (

Focus on Intrinsic Value

As a value investor, we need a "true north", a way of measuring the value of a business that's based on actual business value and underlying economics of the business rather than a price that fluctuates and is divorced from business fundamentals. This concept is called the Intrinsic Value.

The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for it: per-share book value.

Unfortunately, for most businesses, the book value is not the best proxy for the intrinsic value. However, it's still an important criteria when evaluating a business because even though the Book Value is not a good proxy for the Intrinsic Value of the company (since it typically understates it), changes in the Book Value could be a good proxy for changes in the intrinsic value.

Do and Don't Do:

In value-investing, as much as we can learn to evaluate businesses correctly, adopt a business-owner mindset etc, it's also important to learn what NOT to do. One of the key learnings from Charlie Munger, is "Invert, always invert". You may be 100% confident that the company will see fabulous growth, and that it IS the future, but you are taking a lot of risks when you are not able to reasonably judge what its margins will be like.

Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But
the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.

Be confident

Based on your research, you must be very confident about the intrinsic value of the company, and be assured that if you go in at a sensible price, even if the price should drop in the near-term, as long as the fundamental economics of the business doesn't change, it's an opportunity to buy even more.

Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

This letter as well as last year's letter was instructive, because it gives you a sense of how WB invests in a climate of fear, when the world seemed to be collapsing.

We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.

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