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2010 Shareholder Letter

Published on 26 February 2011

· Value Investing

The original shareholder letter can be found here: (

Goal of Investing

What's your goal for investing? What's your benchmark for performance? If you're only looking at <10% returns per year, then perhaps the easiest and stress-free way to do it will be to buy index funds. At the end of the day, for the amount of effort you are putting in, you must be able to achieve returns above that of an index fund (take your pick!).

In Berkshire’s case, we long ago told you that our job is to increase per-share intrinsic value at a rate greater than the increase (including dividends) of the S&P 500. In some years we succeed; in others we fail. But, if we are unable over time to reach that goal, we have done nothing for our investors, who by themselves could have realized an equal or better result by owning an index fund.

Focus on Intrinsic Value

Again and again, WB implores everyone to focus on the "true north", which is the intrinsic value of the business. While intrinsic value cannot be precisely calculated at any point of time, it is important to try.

Market price and intrinsic value often follow very different paths – sometimes for extended periods – but eventually they meet.

Beta as risk?

Academics like to quantify risk by calculating the beta, which is something WB think is complete nonsense.

But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed.

The numbers that count and those that don't

Consistently across all years, WB has his own way of reporting Berkshire's performance so as to give shareholders an accurate view of the business. In this letter, he explains why indicators like Net Income is pretty much useless for Berkshire. This is an important point to note because as accounting rules change (as they will over the years), it's important to keep track of which changes makes sense and which changes will make it easier to obfuscate the actual performance of the business. However, WB feels that Operating earnings are still quite important in judging the performance of the business. For most other companies, both indicators should be useful.

Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our businesses are doing. Ignore our net income figure, however. Regulations require that we report it to you. But if you find reporters focusing on it, that will speak more to their performance than ours.

Life and Debt

In this letter, WB shared an old letter that was written, that articulates why Berkshire always keep around 10-20B of cash on-hand. It's important to be prudent, and ensure that no matter what happens, you have the ability to withstand the hardship.

the importance of liquidity as a condition for assured survival.

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