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2019 Shareholder Letter

Published on 26 February 2020

· Value Investing

The original 2019 Shareholder letter can be found here (

The Importance of Operating and Retained Earnings

In this letter, WB emphasised the importance of operating and retained earnings; and opined that these numbers are more "real-world" than anything else, especially with the change in GAAP rules that allows companies to record unrealised capital gains (read: paper gains).

WB also emphasised that good companies perform better for investors when they re-invest their earnings (retained earnings) instead of giving it out as dividends, and that this should be no surprise to any keen observer:

It’s difficult to understand why retained earnings were unappreciated by investors before Smith’s book was published. After all, it was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits. T

Reiterating the key principles of investing

Just a few paragraphs down into this shareholder's letter, WB emphasised again the key principles of investing:

... we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.

Again, consistently through the 4 decades of investing, WB has continued doubling down on these principles, and it's worth considering that these principles will likely last the test of time.

Think like a business owner

Again and again, WB has strongly put forth the notion that an investor should think like a business owner, and pretend that you're buying the whole business, rather than one part of the business, or WORSE, be like one of the "professional fund managers" that view their portfolio as just a collection of stock ticker symbols.

Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers – dalliances to be terminated because of downgrades by “the Street,” an earnings “miss,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.

Return on Invested Capital (ROIC)

Once again, WB emphasized the importance of ROIC, and the importance of lack of debt

What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.

A warning

Our website BTS exists to help the little guy do better than the pros. Too many people believe the myths that the professionals and the institutions propagate: you can't do better than the professional, you should focus on your day job, the professionals have way more tools at their disposal. WB repeats another gem:

A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.

Swim in your pool of competence

WB reminds us again, in his folkly manner, that it's much better for each and every one of us to work in the area in which we are most competent (or most capable of learning and improving).

We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.

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