Warren

Buffett’s
investing
wisdom
The most insightful excerpts from
his annual letters of the last 11 years
Warren Buffett’s Investing Wisdom 1
 2010 ANNUAL LETTER
Perils of leverage and the virtue of cash
Buffett says tough economic
conditions can unravel debt-laden
companies and cash is the ultimate
king, no matter if it appears to be
unproductive in the short term
U
nquestionably, some people have become very
rich through the use of borrowed money.
However, that’s also been a way to get very poor.
When leverage works, it magnifies your gains. Your
spouse thinks you’re clever, and your neighbors get
envious. But leverage is addictive. Once having
profited from its wonders, very few people retreat to
more conservative practices. And as we all learned in
third grade – and some relearned in 2008 – any series
of positive numbers, however impressive the numbers
may be, evaporates when multiplied by a single zero.
History tells us that leverage all too often produces
zeroes, even when it is employed by very smart people.
Leverage, of course, can be lethal to businesses as
well. Companies with large debts often assume that
these obligations can be refinanced as they mature.
That assumption is usually valid. Occasionally,
though, either because of company-specific problems
or a worldwide shortage of credit, maturities must
actually be met by payment. For that, only cash will
do the job. except for
Borrowers then learn that credit is like oxygen.
When either is abundant, its presence goes
unnoticed.When either is missing, that’s all that is
noticed. Even a short absence of credit can bring a
company to its knees.
In September 2008, in fact, its overnight
disappearance in many sectors of the economy came
dangerously close to bringing our entire country to
its knees. of liquidity, though, lets us sleep
Charlie and I have no interest in any activity that
could pose the slightest threat to Berkshire’s
wellbeing. (With our having a combined age of 167,
starting over is not on our bucket list.) We are forever
conscious of the fact that you, our partners, have
entrusted us with what in many cases is a major
By being so cautious in respect to leverage, we penalize our returns by a minor
amount. Having loads of liquidity, though, lets us sleep well.
2 Warren Buffett’s Investing Wisdom
portion of your savings. In addition, important
philanthropy is dependent on our prudence. Finally,
many disabled victims of accidents caused by our
insureds are counting on us to deliver sums payable
decades from now. It would be irresponsible for us to
risk what all these constituencies need just to pursue
a few points of extra return…
…we will hold at least $10 billion of cash, excluding
that held at our regulated utility and railroad
businesses. Because of that commitment, we
customarily keep at least $20 billion on hand so that
we can both withstand unprecedented insurance
losses… and quickly seize acquisition or investment
opportunities, even during times of financial turmoil.
We keep our cash largely in U.S. Treasury bills and
avoid other short-term securities yielding a few more
basis points, a policy we adhered to long before the
frailties of commercial paper and money market
funds became apparent in September 2008. We agree
with investment writer Ray DeVoe’s observation,
“More money has been lost reaching for yield than at
the point of a gun.” At Berkshire, we don’t rely on
bank lines, and we don’t
enter into contracts
that could
require
postings
of
collateral
amounts
that are tiny in
relation to our
liquid assets...
By being so cautious
in respect to leverage, we
penalize our returns by a
minor amount. Having loads
well. Moreover, during the episodes of financial chaos
that occasionally erupt in our economy, we will be
equipped both financially and emotionally to play
offense while others scramble for survival. That’s
what allowed us to invest $15.6 billion in 25 days of
panic following the Lehman bankruptcy in 2008.
 2011 ANNUAL LETTER
Stocks vs fixed income and gold
In spite of their volatility, stocks are
actually less ‘risky’ than bonds and
gold, suggests Buffett
I
nvesting is often described as the process of laying
out money now in the expectation of receiving
more money in the future. At Berkshire we take a
more demanding approach, defining investing as the
transfer to others of purchasing power now with the
reasoned expectation of receiving more purchasing
power – after taxes have been paid on nominal gains –
in the future. More succinctly, investing is forgoing
consumption now in order to have the ability to
consume more at a later date.
From our definition there flows an important
corollary: The riskiness of an investment is not
measured by beta (a Wall Street
term encompassing volatility and
often used in measuring risk) but
rather by the probability – the
reasoned probability – of that
investment causing its owner a loss of
purchasing-power over his
contemplated holding period.
Assets can fluctuate greatly
in price and not be risky as
long as they are reasonably
certain to deliver increased
purchasing power over their Assets can fluctuate greatly in
holding period. And as we will
see, a non-fluctuating asset can price and not be risky as long
be laden with risk. as they are reasonably certain
Investment possibilities are
both many and varied. There to deliver increased purchasing
are three major categories, power over their holding period
however, and it’s important to
understand the characteristics of each. So let’s survey
the field.
l Investments that are denominated in a given
currency include money-market funds, bonds,
mortgages, bank deposits, and other instruments.
Most of these currency-based investments are thought
of as “safe.” In truth they are among the most
dangerous of assets. Their beta may be zero, but their
risk is huge…
Even in the U.S., where the wish for a stable
currency is strong, the dollar has fallen a staggering
86% in value since 1965, when I took over management
of Berkshire. It takes no less than $7 today to buy
what $1 did at that time…
l The second major category of investments involves
assets that will never produce anything, but that are
purchased in the buyer’s hope that someone else –
who also knows that the assets will be forever
unproductive – will pay more for them in the future.
Tulips, of all things, briefly became a favorite of such
buyers in the 17th century…
The major asset in this category is gold... Gold,
however, has two significant shortcomings, being
neither of much use nor procreative. True, gold has
some industrial and decorative utility, but the demand
for these purposes is both limited and incapable of
soaking up new production. Meanwhile, if you
own one ounce of gold for an
eternity, you will still own one
ounce at its end.
l My own preference – and you
knew this was coming – is our
third category: investment in
productive assets, whether
businesses, farms, or real estate.
Ideally, these assets should have the
ability in inflationary times to deliver
output that will retain its purchasing-
power value while requiring a
minimum of new capital investment.
Farms, real estate, and many
businesses such as Coca-Cola,
IBM and our own See’s Candy
meet that double-barreled test…
Our country’s businesses will
continue to efficiently deliver
goods and services wanted by
our citizens. Metaphorically,
these commercial “cows” will
live for centuries and give ever greater quantities of
“milk” to boot. Their value will be determined not by
the medium of exchange but rather by their capacity
to deliver milk. Proceeds from the sale of the milk will
compound for the owners of the cows, just as they did
during the 20th century when the Dow increased from
66 to 11,497 (and paid loads of dividends as well)… I
believe that over any extended period of time this
category of investing will prove to be the runaway
winner among the three we’ve examined. More
important, it will be by far the safest.
Warren Buffett’s Investing Wisdom 3
 2012 ANNUAL LETTER
The opportunity in newspapers
Why Buffett likes newspapers as a
business in spite of their falling
profitability
N
ews, to put it simply, is what
people don’t know that they
want to know. And people will
seek their news – what’s important
to them – from whatever sources
provide the best combination of
immediacy, ease of access, reliability,
comprehensiveness and low cost. The relative
importance of these factors varies with the nature of
the news and the person wanting it.
Before television and the Internet, newspapers were
the primary source for an incredible variety of news,
a fact that made them indispensable to a very high
percentage of the population…
Now the world has changed. Stock market quotes
and the details of national sports events are old news
Why you shouldn’t crave dividends
…and instead sell your stocks to generate income if needed
A
profitable company can allocate its earnings in
various ways (which are not mutually
exclusive). A company’s management should
first examine reinvestment possibilities offered by its
current business…
[The] next step... is to search for acquisitions
unrelated to our current businesses...
The third use of funds – repurchases – is sensible
for a company when its shares sell at a meaningful
discount to conservatively calculated intrinsic value.
Indeed, disciplined repurchases are the surest way
to use funds intelligently: It’s hard to go
wrong when you’re buying dollar bills for
80¢ or less…
But never forget: In repurchase decisions,
price is all-important. Value is destroyed when
purchases are made above intrinsic value…
And that brings us to dividends…
Aside from the favorable math [here
Buffett illustrates mathematically why
selling off shares to generate income is
better than drawing dividends from a
4 Warren Buffett’s Investing Wisdom
long before the presses begin to roll… In one area of
interest after another, newspapers have therefore lost
their “primacy.” And, as their audiences have
fallen, so has advertising…
Newspapers continue to reign
supreme, however, in the delivery
of local news. If you want to know
what’s going on in your town –
whether the news is about the
mayor or taxes or high school
football – there is no substitute for
a local newspaper that is doing its
job. A reader’s eyes may glaze over after
they take in a couple of paragraphs about
Canadian tariffs or political developments in
Pakistan; a story about the reader himself or his
neighbors will be read to the end. Wherever there is
a pervasive sense of community, a paper that serves
the special informational needs of that community
will remain indispensable to a significant portion of
its residents…
company], there are two further – and important –
arguments for a sell-off policy. First, dividends impose
a specific cash-out policy upon all shareholders…
The sell-off alternative, on the other hand, lets each
shareholder make his own choice between cash
receipts and capital build-up… Of course, a
shareholder in our dividend-paying scenario could
turn around and use his dividends to purchase more
shares. But he would take a beating in doing so: He
would both incur taxes and also pay a 25% premium
to get his dividend reinvested. ([Assuming] Keep
remembering, open-market purchases of the stock
take place at 125% of book value.)
The second disadvantage of the dividend approach
is of equal importance: The tax consequences for all
taxpaying shareholders are inferior – usually
far inferior – to those under the sell-off
program. Under the dividend program, all
of the cash received by shareholders each
year is taxed whereas the sell-off program
results in tax on only the gain portion of
the cash receipts.
 2013 ANNUAL LETTER
Investing gems
Buffett provides a distillation of his
investment wisdom and highlights
the common follies to avoid in
stock investing
[Here Buffett refers to an investment in a farm in 1986
and another in a retail property adjacent to NYU in
1993]
l You don’t need to be an expert in order to achieve
satisfactory investment returns. But if you aren’t, you
must recognize your limitations and follow
a course certain to work reasonably well.
Keep things simple and don’t swing for
the fences. When promised quick
profits, respond with a quick “no.”
l Focus on the future productivity
of the asset you are
considering. If you don’t feel
comfortable making a rough
estimate of the asset’s future
earnings, just forget it and move
on. No one has the ability to
evaluate every investment
possibility. But omniscience
isn’t necessary; you only need
to understand the actions you
undertake.
l If you instead focus on the
prospective price change of a
contemplated purchase, you are
speculating. There is nothing improper about
that. I know, however, that I am unable to speculate
successfully, and I am skeptical of those who claim
sustained success at doing so. Half of all coin-flippers
will win their first toss; none of those winners has an
expectation of profit if he continues to play the game.
And the fact that a given asset has appreciated in the
Games are won by players who focus
on the playing field – not by those
whose eyes are glued to the
scoreboard. If you can enjoy Saturdays
and Sundays without looking at stock
prices, give it a try on weekdays.
recent past is never a reason to buy it.
l With my two small investments [the farm and the
property], I thought only of what the properties would
produce and cared not at all about their daily
valuations. Games are won by players who focus on
the playing field – not by those whose eyes are glued to
the scoreboard. If you can enjoy Saturdays and
Sundays without looking at stock prices, give it a try
on weekdays.
l Forming macro opinions or listening to the macro
or market predictions of others is a waste of time.
Indeed, it is dangerous because it may blur your
vision of the facts that are truly important.
(When I hear TV commentators glibly opine
on what the market will do next, I am
reminded of Mickey Mantle’s
scathing comment: “You don’t
know how easy this game is
until you get into that
broadcasting booth.”)
l My two purchases were
made in 1986 and 1993. What
the economy, interest rates,
or the stock market might do
in the years immediately
following – 1987 and 1994 – was
of no importance to me in
making those investments. I
can’t remember what the
headlines or pundits were
saying at the time. Whatever the
chatter, corn would keep growing
in Nebraska and students would flock to NYU.
There is one major difference between my two
small investments and an investment in stocks. Stocks
provide you minute-to-minute valuations for your
holdings whereas I have yet to see a quotation for
either my farm or the New York real estate.
It should be an enormous advantage for investors
in stocks to have those wildly fluctuating valuations
placed on their holdings – and for some investors, it is.
After all, if a moody fellow with a farm bordering my
property yelled out a price every day to me at which
he would either buy my farm or sell me his – and
those prices varied widely over short periods of time
depending on his mental state – how in the world
could I be other than benefited by his erratic
behavior? If his daily shout-out was ridiculously low,
and I had some spare cash, I would buy his farm. If
Warren Buffett’s Investing Wisdom 5
the number he yelled was absurdly high, I could either
sell to him or just go on farming.
Owners of stocks, however, too often let the
capricious and often irrational behavior of their
fellow owners cause them to behave irrationally as
well. Because there is so much chatter about markets,
the economy, interest rates, price behavior of stocks,
etc., some investors believe it is important to listen to
pundits – and, worse yet, important to consider acting
upon their comments.
Those people who can sit quietly for decades when
they own a farm or apartment house too often become
frenetic when they are exposed to a stream of stock
quotations and accompanying commentators
delivering an implied message of “Don’t just sit there,
do something.” For these investors, liquidity is
transformed from the unqualified benefit it should be
to a curse.
A “flash crash” or some other extreme market
fluctuation can’t hurt an investor any more than an
erratic and mouthy neighbor can hurt my farm
investment. Indeed, tumbling markets can be helpful
to the true investor if he has cash available when
prices get far out of line with values. A climate of
fear is your friend when investing; a euphoric world
is your enemy.
During the extraordinary financial panic that
occurred late in 2008, I never gave a thought to selling
my farm or New York real estate, even though a severe
recession was clearly brewing. And, if I had owned
100% of a solid business with good long-term prospects,
it would have been foolish for me to even consider
dumping it. So why would I have sold my stocks that
were small participations in wonderful businesses?
True, any one of them might eventually disappoint, but
as a group they were certain to do well…
Invest in stocks as you would in a farm
When Charlie and I buy stocks – which we think of as
small portions of businesses – our analysis is very
similar to that which we use in buying entire
businesses. We first have to decide whether we can
sensibly estimate an earnings range for five years out,
or more. If the answer is yes, we will buy the stock (or
business) if it sells at a reasonable price in relation to
the bottom boundary of our estimate. If, however, we
lack the ability to estimate future earnings – which is
usually the case – we simply move on to other
prospects. In the 54 years we have worked together, we
have never foregone an attractive purchase because of
the macro or political environment, or the views of
other people. In fact, these subjects never come up
when we make decisions.
It’s vital, however, that we recognize the perimeter
6 Warren Buffett’s Investing Wisdom
of our “circle of competence” and stay well inside of
it. Even then, we will make some mistakes, both with
stocks and businesses. But they will not be the
disasters that occur, for example, when a long-rising
market induces purchases that are based on
anticipated price behavior and a desire to be where
the action is.
Most investors, of course, have not made the study
of business prospects a priority in their lives. If wise,
they will conclude that they do not know enough
about specific businesses to predict their future
earning power.
I have good news for these non-professionals: The
typical investor doesn’t need this skill… The goal of
the non-professional should not be to pick winners –
neither he nor his “helpers” can do that – but should
rather be to own a cross-section of businesses that in
aggregate are bound to do well. A low-cost S&P 500
index fund will achieve this goal.
The goal of the non-professional
should not be to pick winners – neither
he nor his “helpers” can do that – but
should rather be to own a cross-
section of businesses that in
aggregate are bound to do well
That’s the “what” of investing for the non-
professional. The “when” is also important. The
main danger is that the timid or beginning investor
will enter the market at a time of extreme
exuberance and then become disillusioned when
paper losses occur. (Remember the late Barton Biggs’
observation: “A bull market is like sex. It feels best
just before it ends.”) The antidote to that kind of
mistiming is for an investor to accumulate shares
over a long period and never to sell when the news is
bad and stocks are well off their highs. Following
those rules, the “know-nothing” investor who both
diversifies and keeps his costs minimal is virtually
certain to get satisfactory results. Indeed, the
unsophisticated investor who is realistic about his
shortcomings is likely to obtain better long-term
results than the knowledgeable professional who is
blind to even a single weakness...
Nevertheless, both individuals and institutions will
constantly be urged to be active by those who profit
from giving advice or effecting transactions. The
resulting frictional costs can be huge and, for
investors in aggregate, devoid of benefit. So ignore the
chatter, keep your costs minimal, and invest in stocks
as you would in a farm.
 2014 ANNUAL LETTER
Buy wonderful businesses at fair prices
Buffett credits Charlie Munger for motivating him to move beyond cigar-butt
strategy of buying stocks and instead focus on wonderful enterprises
M
y cigar-butt strategy [buying discarded stocks
with declining business fundamentals and then
selling them when they rise a little] worked
very well while I was managing small sums. Indeed, the
many dozens of free puffs I obtained in the 1950s made
that decade by far the best of my life for both
relative and absolute investment
performance…
But a major weakness in this approach
gradually became apparent: Cigar-butt
%
investing was scalable only to a point.
With large sums, it would never work
well.
In addition, though marginal
businesses purchased at cheap prices
may be attractive as short-term
investments, they are the wrong
foundation on which to build a large and
enduring enterprise. Selecting a marriage
partner clearly requires more demanding criteria
than does dating…
It took Charlie Munger to break my cigar-butt
habits and set the course for building a business that
could combine huge size with satisfactory profits…
…The blueprint he gave me was simple: Forget
what you know about buying fair businesses at
wonderful prices; instead, buy wonderful businesses
at fair prices.
The year 1972 was a turning point for Berkshire…
We had the opportunity then to buy See’s Candy for
Blue Chip Stamps, a company in which Charlie, I and
Berkshire had major stakes, and which was later
merged into Berkshire.
See’s was a legendary West Coast manufacturer and
retailer of boxed chocolates, then annually earning
about $4 million pre-tax while utilizing only $8 million
of net tangible assets. Moreover, the company had a
huge asset that did not appear on its balance sheet: a
broad and durable competitive advantage that gave it
significant pricing power. That strength was virtually
Trading shares of a wonderful
business for ownership of a so-so
business irreparably destroys value
certain to give See’s major gains in earnings over
time. Better yet, these would materialize with only
minor amounts of incremental investment. In other
words, See’s could be expected to gush cash for
decades to come.
The family controlling See’s wanted $30
million for the business, and Charlie rightly
said it was worth that much. But I didn’t
want to pay more than $25 million and wasn’t
all that enthusiastic even at that figure. (A
price that was three times net tangible
assets made me gulp.) My misguided
caution could have scuttled a terrific
purchase. But, luckily, the sellers
decided to take our $25 million bid.
To date, See’s has earned $1.9 billion
pre-tax, with its growth having required
added investment of only $40 million.
See’s has thus been able to distribute huge
sums that have helped Berkshire buy other
businesses that, in turn, have themselves produced
large distributable profits. (Envision rabbits
breeding.) Additionally, through watching See’s in
action, I gained a business education about the value
of powerful brands that opened my eyes to many
other profitable investments.
Even with Charlie’s blueprint, I have made plenty
of mistakes… The most gruesome was Dexter Shoe.
When we purchased the company in 1993, it had a
terrific record and in no way looked to me like a cigar
butt. Its competitive strengths, however, were soon to
evaporate because of foreign competition. And I
simply didn’t see that coming.
Consequently, Berkshire paid $433 million for
Dexter and, rather promptly, its value went to zero.
GAAP accounting, however, doesn’t come close to
recording the magnitude of my error. The fact is that I
gave Berkshire stock to the sellers of Dexter rather
than cash, and the shares I used for the purchase are
now worth about $5.7 billion. As a financial disaster,
this one deserves a spot in the Guinness Book of
World Records.
...Mistakes of that kind are deadly. Trading shares
of a wonderful business... for ownership of a so-so
business irreparably destroys value.
Warren Buffett’s Investing Wisdom 7
 2015 ANNUAL LETTER
Why it pays to be optimistic
Despite all challenges, human
society has progressed, as Buffett
illustrates in the case of the
American people. Growth-related
concerns are often overblown.
I
t’s an election year, and candidates can’t stop
speaking about our country’s problems (which, of
course, only they can solve). As a result of this
negative drumbeat, many Americans now believe
that their children will not live as well as they
themselves do. That view is dead wrong: The
babies being born in America today are the
luckiest crop in history.
American GDP per capita is now about
$56,000. As I mentioned last year that – in real
terms – is a staggering six times the amount
in 1930, the year I was born, a leap far beyond
the wildest dreams of my parents or their
contemporaries. U.S. citizens are not
intrinsically more intelligent today, nor do they
work harder than did Americans in 1930.
Rather, they work far more efficiently and
thereby produce far more. This all-powerful
trend is certain to continue: America’s economic
magic remains alive and well.
Some commentators bemoan our current 2%
per year growth in real GDP – and, yes, we would
all like to see a higher rate. But let’s do some
simple math using the much-lamented 2% figure.
That rate, we will see, delivers astounding gains.
America’s population is growing about .8% per year
(.5% from births minus deaths and .3% from net
migration). Thus 2% of overall growth produces about
1.2% of per capita growth. That may not sound
impressive. But in a single generation of, say, 25 years,
that rate of growth leads to a gain of 34.4% in real
GDP per capita. (Compounding’s effects produce the
excess over the percentage that would result by simply
multiplying 25 x 1.2%.) In turn, that 34.4% gain will
produce a staggering $19,000 increase in real GDP per
capita for the next generation. Were that to be
distributed equally, the gain would be $76,000 annually
for a family of four. Today’s politicians need not shed
tears for tomorrow’s children.
Indeed, most of today’s children are doing well. All
8 Warren Buffett’s Investing Wisdom
families in my upper middle-class neighborhood
regularly enjoy a living standard better than that
achieved by John D. Rockefeller Sr. at the time of my
birth. His unparalleled fortune couldn’t buy what we
now take for granted, whether the field is – to name
just a few – transportation, entertainment,
communication or medical services. Rockefeller
certainly had power and fame; he could not, however,
live as well as my neighbors now do.
Though the pie to be shared by the next generation
will be far larger than today’s, how it will be divided
will remain fiercely contentious…
The good news, however, is that even members of
the “losing” sides will almost certainly enjoy – as they
should – far more goods
and services in the
Nothing rivals the
market system in
producing what
people want – nor,
even more so, in
delivering what
people don’t yet
know they want
future than they have in the
past. The quality of their
increased bounty will also
dramatically improve. Nothing
rivals the market system in producing what people
want – nor, even more so, in delivering what people
don’t yet know they want. My parents, when young,
could not envision a television set, nor did I, in my
50s, think I needed a personal computer. Both
products, once people saw what they could do,
quickly revolutionized their lives. I now spend ten
hours a week playing bridge online. And, as I write
this letter, “search” is invaluable to me. (I’m not
ready for Tinder, however.)
For 240 years it’s been a terrible mistake to bet
against America... America’s golden goose of
commerce and innovation will continue to lay more
and larger eggs... And, yes, America’s kids will live far
better than their parents did.
 2016 ANNUAL LETTER

The folly of investment advice

You don’t need some exotic investment idea or product to do well.
Simplicity is your best bet.

O
ver the years, I’ve often been asked for clearly the best choice. My calculation, admittedly very
investment advice, and in the process of rough, is that the search by the elite for superior
answering I’ve learned a good deal about human investment advice has caused it, in aggregate, to
behavior. My regular recommendation has been a low- waste more than $100 billion over the past decade.
cost S&P 500 index fund. To their credit, my friends Figure it out: Even a 1% fee on a few trillion dollars
who possess only modest means have usually followed adds up. Of course, not every investor who put
my suggestion. money in hedge funds ten years ago lagged S&P
I believe, however, that none of the mega-rich returns. But I believe my calculation of the
individuals, institutions or pension funds aggregate shortfall is conservative.
has followed that same advice Much of the financial
when I’ve given it to them. damage befell pension funds
Instead, these investors politely for public employees. Many of
thank me for my thoughts and these funds are woefully
depart to listen to the siren song underfunded, in part because
of a high-fee manager or, in the they have suffered a double
case of many institutions, to whammy: poor investment performance
seek out another breed of accompanied by huge fees. The
hyper-helper called a resulting shortfalls in their
consultant. assets will for decades have to be
That professional, however, made up by local taxpayers.
faces a problem. Can you imagine an Human behavior won’t change.
investment consultant telling clients, year When a person with Wealthy individuals, pension funds,
after year, to keep adding to an index fund endowments and the like will continue to
replicating the S&P 500? That would be money meets a feel they deserve something “extra” in
career suicide. Large fees flow to these person with investment advice. Those advisors who
hyper-helpers, however, if they cleverly play to this expectation will get
recommend small managerial shifts every experience, the one very rich. This year the magic potion may
year or so. That advice is often delivered with experience be hedge funds, next year something else.
in esoteric gibberish that explains why The likely result from this parade of
fashionable investment “styles” or ends up with the promises is predicted in an adage: “When
current economic trends make the shift money and the one a person with money meets a person with
appropriate. experience, the one with experience ends
The wealthy are accustomed to feeling with money leaves up with the money and the one with
that it is their lot in life to get the best with experience money leaves with experience.”
food, schooling, entertainment, housing, Long ago, a brother-in-law of mine,
plastic surgery, sports ticket, you name it. Their Homer Rogers, was a commission agent working in
money, they feel, should buy them something superior the Omaha stockyards. I asked him how he induced a
compared to what the masses receive. farmer or rancher to hire him to handle the sale of
...For that reason, the financial “elites” – wealthy their hogs or cattle to the buyers from the big four
individuals, pension funds, college endowments and packers... After all, hogs were hogs and the buyers
the like – have great trouble meekly signing up for a were experts who knew to the penny how much any
financial product or service that is available as well to animal was worth...Homer gave me a pitying look and
people investing only a few thousand dollars. This said: “Warren, it’s not how you sell ‘em, it’s how you
reluctance of the rich normally prevails even though tell ‘em.” What worked in the stockyards continues to
the product at issue is – on an expectancy basis – work in Wall Street.

Warren Buffett’s Investing Wisdom 9

 2017 ANNUAL LETTER
The acquisition logic
Acquisitions are touted as mega achievements.
In reality, the efficacy of most is suspect.
I
n our search for new stand-alone businesses, the key
qualities we seek are durable competitive strengths;
able and high-grade management; good returns on
the net tangible assets required to operate the business;
opportunities for internal growth at attractive returns;
and, finally, a sensible purchase price.
That last requirement proved a barrier to virtually
all deals we reviewed in 2017, as prices for decent, but
far from spectacular, businesses hit an all-time high.
Indeed, price seemed almost irrelevant to an army of
optimistic purchasers.
Why the purchasing frenzy? In part, it’s because the
CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to
consider possible acquisitions, it’s a bit like telling your
ripening teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never
lack for forecasts that justify the purchase.
Subordinates will be cheering, envisioning enlarged
domains and the compensation levels that typically
increase with corporate size. Investment bankers,
smelling huge fees, will be applauding as well. (Don’t
ask the barber whether you need a haircut.) If the
historical performance of the target falls short of
validating its acquisition, large “synergies” will be
The magic of retained earnings
The gains from undistributed
earnings accumulate for patient
investors over the long term
C
harlie and I view the marketable common stocks
that Berkshire owns as interests in businesses,
not as ticker symbols to be bought or sold based
on their “chart” patterns, the “target” prices of
analysts or the opinions of media pundits. Instead, we
simply believe that if the businesses of the investees
are successful (as we believe most will be) our
investments will be successful as well…
From our stock portfolio – call our holdings
“minority interests” in a diversified group of publicly-
10 Warren Buffett’s Investing Wisdom
forecast. Spreadsheets never disappoint.
The ample availability of extraordinarily cheap debt
in 2017 further fueled purchase activity. After all, even a
high-priced deal will usually boost per-share earnings
if it is debt-financed. At Berkshire, in contrast, we
evaluate acquisitions on an all-equity basis, knowing
that our taste for overall debt is very low and that to
assign a large portion of our debt to any individual
business would generally be fallacious... We also never
factor in, nor do we often find, synergies.
Our aversion to leverage has dampened our returns
over the years. But Charlie and I sleep well. Both of us
believe it is insane to risk what you have and need in
order to obtain what you don’t need. We held this view
50 years ago when we each ran an investment
partnership, funded by a few friends and relatives who
trusted us. We also hold it today after a million or so
“partners” have joined us at Berkshire.
Despite our recent drought of acquisitions, Charlie
and I believe that from time to time Berkshire will
have opportunities to make very large purchases. In
the meantime, we will stick with our simple guideline:
The less the prudence with which others conduct their
affairs, the greater the prudence with which we must
conduct our own.
owned businesses – Berkshire received $3.7 billion of
dividends in 2017…
That dividend figure, however, far understates the
“true” earnings emanating from our stock holdings…
we expect undistributed earnings of our investees to
deliver us at least equivalent earnings by way of
subsequent capital gains…
The connection of value-building to retained
earnings… will be impossible to detect in the short
term. Stocks surge and swoon, seemingly untethered
to any year-to-year buildup in their underlying value.
Over time, however, Ben Graham’s oft-quoted maxim
proves true: “In the short run, the market is a voting
machine; in the long run, however, it becomes a
weighing machine.”
 2018 ANNUAL LETTER
When numbers
are adjusted, be
extra careful
Adjusted numbers can hide important
details. Dig deeper into them.
D corporate bad
espite our recent additions to marketable
equities, the most valuable grove in
Berkshire’s forest remains the many dozens
of non-insurance businesses that Berkshire
controls... Those subsidiaries earned $16.8 billion
last year. When we say “earned,” moreover, we are
describing what remains after all income taxes,
interest payments, managerial compensation
(whether cash or stock-based), restructuring
expenses, depreciation, amortization and home-
office overhead.
That brand of earnings is a far cry from that
frequently touted by Wall Street bankers and
corporate CEOs. Too often, their presentations
feature “adjusted EBITDA,” a measure that redefines
“earnings” to exclude a variety of all-too-real costs.
For example, managements sometimes assert that
their company’s stock-based compensation shouldn’t
be counted as an expense. (What else could it be – a
gift from shareholders?) And restructuring
expenses? Well, maybe last year’s exact
rearrangement won’t recur. But restructurings of
one sort or another are common in business...
Abraham Lincoln once posed the question: “If
you call a dog’s tail a leg, how many legs does it
have?” and then answered his own query: “Four,
because calling a tail a leg doesn’t make it one.”
Abe would have felt lonely on Wall Street.
Buffett doesn’t
worry about Street
expectations
Trying to meet
them can lead to
behaviour and
fudged numbers
F
or 54 years our managerial decisions at Berkshire
have been made from the viewpoint of the
shareholders who are staying, not those who are
leaving. Consequently, Charlie and I have never focused
on current-quarter results.
Berkshire, in fact, may be the only company in the
Fortune 500 that does not prepare monthly earnings
reports or balance sheets. I, of course, regularly view
the monthly financial reports of most subsidiaries. But
Charlie and I learn of Berkshire’s overall earnings and
financial position only on a quarterly basis.
Furthermore, Berkshire has no company-wide
budget (though many of our subsidiaries find one
useful). Our lack of such an instrument means that the
parent company has never had a quarterly “number”
to hit. Shunning the use of this bogey sends an
important message to our many managers, reinforcing
the culture we prize.
Over the years, Charlie and I have seen all sorts of
bad corporate behavior, both accounting and
operational, induced by the desire of management to
meet Wall Street expectations. What starts as an
“innocent” fudge in order to not disappoint “the Street”
– say, trade-loading at quarter-end, turning a blind eye
to rising insurance losses, or drawing down a “cookie-
jar” reserve – can become the first step toward full-
fledged fraud. Playing with the numbers “just this once”
may well be the CEO’s intent; it’s seldom the end result.
And if it’s okay for the boss to cheat a little, it’s easy for
subordinates to rationalize similar behavior.
At Berkshire, our audience is neither analysts nor
commentators: Charlie and I are working for our
shareholder-partners. The numbers that flow up to us
will be the ones we send on to you.
Warren Buffett’s Investing Wisdom 11
 2019 ANNUAL LETTER
The sinecure of directorship
Buffett mocks the way directors are appointed and how they work
O
ver the years, board “independence” has become
a new area of emphasis. One key point relating
to this topic, though, is almost invariably
overlooked: Director compensation has now soared to
a level that inevitably makes pay a subconscious
factor affecting the behavior of many non-wealthy
members. Think, for a moment, of the director
earning $250,000-300,000 for board meetings consuming
a pleasant couple of days six or so times a year.
Frequently, the possession of one such directorship
bestows on its holder three to four
times the annual median income
of U.S. households. (I missed
When seeking
much of this gravy train: As a directors,
director of Portland Gas Light in
the early 1960s, I received $100
CEOs don’t
annually for my service. To earn look for pit
this princely sum, I commuted to
Maine four times a year.)
bulls. It’s the
And job security now? It’s cocker spaniel
fabulous. Board members may get
politely ignored, but they seldom
that gets
get fired. Instead, generous age taken home.
limits – usually 70 or higher – act
as the standard method for the
genteel ejection of directors.
Is it any wonder that a non-
wealthy director (“NWD”) now
hopes – or even yearns – to be
asked to join a second board,
thereby vaulting into the $500,000-
600,000 class? To achieve this goal,
the NWD will need help. The CEO
of a company searching for board
members will almost certainly
check with the NWD’s current
CEO as to whether NWD is a
“good” director. “Good,” of course, is
a code word. If the NWD has
seriously challenged his/her present
CEO’s compensation or acquisition
dreams, his or her candidacy will silently
die. When seeking directors, CEOs don’t
look for pit bulls. It’s the cocker
spaniel that gets taken home.
Despite the illogic of it all, the
director for whom fees are important
12 Warren Buffett’s Investing Wisdom
– indeed, craved – is almost universally classified as
“independent” while many directors possessing
fortunes very substantially linked to the welfare of the
corporation are deemed lacking in independence. Not
long ago, I looked at the proxy material of a large
American company and found that eight directors had
never purchased a share of the company’s stock using
their own money. (They, of course, had received grants
of stock as a supplement to their generous cash
compensation.) This particular company had long been
a laggard, but the directors were doing wonderfully.
Paid-with-my-own-money ownership, of course,
does not create wisdom or ensure business smarts.
Nevertheless, I feel better when directors of our
portfolio companies have had the experience of
purchasing shares with their savings, rather than
simply having been the recipients of grants.
Here, a pause is due: I’d like you to know that almost
all of the directors I have met over the years have been
decent, likable and intelligent. They dressed well, made
good neighbors and were fine citizens. I’ve enjoyed
their company. Among the group are some men and
women that I would not have met except for our mutual
board service and who have become close friends.
Nevertheless, many of these good souls are people
whom I would never have chosen to handle money
or business matters. It simply was not their game.
They, in turn, would never have asked me for
help in removing a tooth, decorating their home
or improving their golf swing… We are all duds
at one thing or another. For most of us, the list
is long…
At Berkshire, we will continue to
look for business-savvy directors
who are owner-oriented and
arrive with a strong specific
interest in our company.
Thought and principles, not
robot-like “process,” will
guide their actions. In
representing your interests,
they will, of course, seek managers
whose goals include delighting their
customers, cherishing their
associates and acting as good
citizens of both their
communities and our country.
 2020 ANNUAL LETTER

The trickery of conglomerates

The valuation illusion created by conglomerates to get a controlling stake
in a mediocre business and how Berkshire Hathaway is different

B
erkshire is often labeled a conglomerate, a fees that deal-making generates, and the press loves the
negative term applied to holding companies stories that colorful promoters provide. At a point, also,
that own a hodge-podge of unrelated the soaring price of a promoted stock can itself become
businesses. And, yes, that describes the “proof ” that an illusion is reality.
Berkshire – but only in part. To Owning a non- Eventually, of course, the party ends,
understand how and why we differ and many business “emperors” are
from the prototype conglomerate, controlling portion found to have no clothes. Financial
let’s review a little history. of a wonderful history is replete with the names of
Over time, conglomerates have famous conglomerateurs who were
generally limited themselves to business is more initially lionized as business geniuses by
buying businesses in their entirety. profitable, more journalists, analysts and investment
That strategy, however, came with bankers, but whose creations ended up
two major problems. One was enjoyable and far as business junkyards.
unsolvable: Most of the truly great less work than Conglomerates earned their terrible
businesses had no interest in having reputation.
anyone take them over. Consequently, struggling with Charlie and I want our conglomerate
deal-hungry conglomerateurs had to 100% of a marginal to own all or part of a diverse group of
focus on so-so companies that lacked businesses with good economic
important and durable competitive enterprise characteristics and good managers.
strengths. That was not a great pond Whether Berkshire controls these
in which to fish. businesses, however, is unimportant to us.
Beyond that, as conglomerateurs dipped It took me a while to wise up. But Charlie – and also
into this universe of mediocre businesses, my 20-year struggle with the textile operation I
they often found themselves required to inherited at Berkshire – finally convinced me that
pay staggering “control” premiums to owning a non-controlling portion of a wonderful
snare their quarry. Aspiring business is more profitable, more enjoyable
conglomerateurs knew the answer to this and far less work than struggling
“overpayment” problem: They simply with 100% of a marginal enterprise.
needed to manufacture a vastly overvalued For those reasons, our
stock of their own that could be used as a conglomerate will remain a
“currency” for pricey acquisitions. (“I’ll pay collection of controlled and non-
you $10,000 for your dog by giving you two controlled businesses. Charlie and I will
of my $5,000 cats.”) simply deploy your capital into whatever we
Often, the tools for fostering the believe makes the most sense, based on a
overvaluation of a conglomerate’s stock company’s durable competitive strengths,
involved promotional techniques and the capabilities and character of its
“imaginative” accounting maneuvers that management, and price.
were, at best, deceptive and that If that strategy requires little or no effort on
sometimes crossed the line into fraud. our part, so much the better. In contrast to the
When these tricks were “successful,” scoring system utilized in diving competitions,
the conglomerate pushed its own stock you are awarded no points in business
to, say, 3x its business value in order to endeavors for “degree of difficulty.”
offer the target 2x its value. Furthermore, as Ronald Reagan cautioned: “It’s
Investing illusions can continue for a said that hard work never killed anyone, but I say
surprisingly long time. Wall Street loves the why take the chance?”

Warren Buffett’s Investing Wisdom 13

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