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2012 Shareholder Letter

Published on 1 March 2013

· Value Investing

The original 2012 Shareholder letter can be found here (

Doing better than benchmark

This is an interesting letter because it marks 4 or 5 years after the Global Financial Crisis of '08, where the S&P500 went on the longest bull run in history: on hindsight, a perfect time to be investing in indices.

It’s our job to increase intrinsic business value – for which we use book value as a significantly understated proxy – at a faster rate than the market gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund.

The American Tailwind

WB speaks often of the american tailwind that has helped all companies in america do exceedingly well (and also why if you're investing in indices, you will do well to put the S&P500 in your sights).

American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and
many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

Focus on Intrinsic Business Value

For every business in every industry, what forms the intrinsic business value per share may be different. For example, if you're in the media industry, one of the hardest thing for you to value may be your back-catalog of past movies/films (think Disney). Surely these are worth something, people still buy past movies, and every sale is pure gravy.

Equally important is the need to focus on your return on capital or return on equity or return on assets. A company may keep increasing its revenue or net income, but if it requires the deployment of ever-larger amounts of capital, then it's not necessarily an awesome business.

Of course, a business with terrific economics can be a bad investment if the price paid is excessive. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for intangible assets. Overall, however, we are getting a decent return on the capital we have deployed in this sector.

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