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35 Years of Buffett's Greatest Investing Wisdom

Matt Koppenheffer - March 1, 2012
Last weekend, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) released Warren Buffett's annual letter to the company's
shareholders. As always, Buffett delivered with a combination of ever-quotable folksy wisdom and an easy-to-digest view of the year
that Berkshire Hathaway had.
The ritual of the annual letter is far from new. In fact, this most recent letter was the 35th edition that Berkshire has posted online for
investors to peruse. Most of those letters' contents are dated in terms of when Buffett put pen to paper, but to show just how enduring
his wisdom is, I thought I'd take a look back at some of Buffett's best quips over the past three-and-a-half decades.
1977: "Most companies define 'record' earnings as a new high in earnings per share. Since businesses customarily add from year to
year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in
equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising
interest earnings each year because of compounding. ... we believe a more appropriate measure of managerial economic performance
to be return on equity capital."
1978: "We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is
something we think neither we nor anyone else can do."
1979: "Both our operating and investment experience cause us to conclude that "turnarounds" seldom turn, and that the same energies
and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."
1980: "[O]nly gains in purchasing power represent real earnings on investment. If you (a) forgo ten hamburgers to purchase an
investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds
that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in
dollars."
1981: "While market values track business values quite well over long periods, in any given year the relationship can gyrate
capriciously."
1982: "The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know
not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent
decade of favorable business developments."
1983: "We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our
guideline is to tell you the business facts that we would want to know if our positions were reversed. ... We also believe candor benefits
us as managers: the CEO who misleads others in public may eventually mislead himself in private."
1984: "[M]ajor repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that
value. ... Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything
close to $1 of value for each $1 expended."
1985: "[A] good managerial record ... is far more a function of what business boat you get into than it is of how effectively you row ...
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy
devoted to patching leaks."
1986: "We intend to continue our practice of working only with people whom we like and admire. ... On the other hand, working with
people who cause your stomach to churn seems much like marrying for money -- probably a bad idea under any circumstances, but
absolute madness if you are already rich."
1987: "The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will
not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an
investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the supercontagious emotions that swirl about the marketplace."
1988: "To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will indeed occur?
(2) How long will your money be tied up? (3) What chance is there that something still better will transpire -- a competing takeover bid,
for example? and (4) What will happen if the event does not take place because of antitrust action, financing glitches, etc.?"
1989: "Because of the way the tax law works, the Rip Van Winkle style of investing that we favor -- if successful -- has an important
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mathematical edge over a more frenzied approach."

1990: "Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing
shares of a poorly managed bank at a 'cheap' price. Instead, our only interest is in buying into well-managed banks at fair prices." (He
wrote this in reference to Berkshire's purchase of Wells Fargo (NYSE: WFC), a bank he continues to laud today).
1991: " An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have
no close substitute and; (3) is not subject to price regulation."
1992: "[W]e think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to
justify the amount paid? Consciously paying more for a stock than its calculated value -- in the hope that it can soon be sold for a stillhigher price -- should be labeled speculation (which is neither illegal, immoral nor -- in our view -- financially fattening)."
1993: "The worst of these [arguments for selling a stock] is perhaps, 'You can't go broke taking a profit.' Can you imagine a CEO using
this line to urge his board to sell a star subsidiary?"
1994: "We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and
businessmen. ... Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear
is the foe of the faddist, but the friend of the fundamentalist."
1995: "Any company's level of profitability is determined by three items: (1) what its assets earn; (2) what its liabilities cost; and (3) its
utilization of 'leverage' -- that is, the degree to which its assets are funded by liabilities rather than by equity."
1996: "In the end, however, no sensible observer -- not even these companies' most vigorous competitors, assuming they are assessing
the matter honestly -- questions that [Coca-Cola (NYSE: KO)] and Gillette will dominate their fields worldwide for an investment
lifetime." (A decade and a half later, and he's yet to be proven wrong, though Gillette is now dominating as a Procter & Gamble
(NYSE: PG) subsidiary, making Berkshire P&G's fourth-biggest shareholder and Coke's largest.)
1997: "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers
should much prefer sinking prices."
1998: "[W]e give each [of our company managers] a simple mission: Just run your business as if: 1) you own 100% of it; 2) it is the
only asset in the world that you and your family have or will ever have; and 3) you can't sell or merge it for at least a century. As a
corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our
managers to think about what counts, not how it will be counted."
1999: "Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie
and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents,
manufacturing processes or geological prospects. So we simply don't get into judgments in those fields."
2000: "But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old
lessons: First, many in Wall Street -- a community in which quality control is not prized -- will sell investors anything they will buy.
Second, speculation is most dangerous when it looks easiest."
2001: "Some people disagree with our focus on relative figures, arguing that 'you can't eat relative performance.' But if you expect as
Charlie Munger, Berkshire's Vice Chairman, and I do -- that owning the S&P 500 will produce reasonably satisfactory results over time, it
follows that, for long-term investors, gaining small advantages annually over that index must prove rewarding."
2002: "Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to
transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps
for individual participants. And, on a micro level, what they say is often true. ...
"Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk,
have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The
troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties.
Some of these counterparties, as I've mentioned, are linked in ways that could cause them to contemporaneously run into a problem
because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power
projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems."
2003: "True independence -- meaning the willingness to challenge a forceful CEO when something is wrong or foolish -- is an
enormously valuable trait in a director. It is also rare. The place to look for it is among high-grade people whose interests are in line
with those of rank-and-file shareholders -- and are in line in a very big way."
2004: "Over the 35 years [ending in 2004], American business has delivered terrific results. It should therefore have been easy for
investors to earn juicy returns... Instead many investors have had experiences ranging from mediocre to disastrous.
"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 under way)
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
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others are fearful."

2005: "[For CEOs] huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp
committees have become slaves to comparative data. The drill is simple: Three or so directors -- not chosen by chance -- are
bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards. Additionally, the committee is
told about new perks that other managers are receiving. In this manner, outlandish "goodies" are showered upon CEOs simply because
of a corporate version of the argument we all used when children: 'But, Mom, all the other kids have one.' "
2006: "Corporate bigwigs often complain about government spending, criticizing bureaucrats who they say spend taxpayers' money
differently from how they would if it were their own. But sometimes the financial behavior of executives will also vary based on whose
wallet is getting depleted. Here's an illustrative tale from my days at Salomon. In the 1980s the company had a barber, Jimmy by name,
who came in weekly to give free haircuts to the top brass. A manicurist was also on tap. Then, because of a cost-cutting drive, patrons
were told to pay their own way. One top executive (not the CEO) who had previously visited Jimmy weekly went immediately to a onceevery-three-weeks schedule."
2007: "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of
capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns. Therefore a formidable
barrier such as a company's being the lowcost producer (GEICO, [Costco]) or possessing a powerful worldwide brand (Coca-Cola,
Gillette, [American Express]) is essential for sustained success."
2008: (Recall that the financial crisis was raging) "Amid this bad news, however, never forget that our country has faced far worse
travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen
or so panics and recessions; virulent inflation that led to a 21 12% prime rate in 1980; and the Great Depression of the 1930s, when
unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
"Without fail, however, we've overcome them. In the face of those obstacles -- and many others -- the real standard of living for
Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497."
2009: "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."
2010: "Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of
'great uncertainty.' But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how
serene today may be, tomorrow is always uncertain."
2011: "The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly
(through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.
Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in
seeing stock prices advance."

Voila!
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