The Letter You Wish You Had In 1994

Many things changed since 1994, but certain investing principles still remain relevant today. Warren Buffett is a classic example of that statement and I bet that he would agree his investing strategy hasn’t changed since the 1950’s. We will go over some excerpts from his letter to the shareholders of Berkshire Hathaway in 1994. Warren is famous for his writings and many investing pundits from all over the world enjoy his letters. These three key principles should give you an insight on how one of the greatest investors of the 20th century approaches investing.

Strategy    
 The problem is not that what has worked in the past will 
cease to work in the future.  To the contrary, we believe that 
our formula - the purchase at sensible prices of businesses that 
have good underlying economics and are run by honest and able 
people - is certain to produce reasonable success.  We expect, 
therefore, to keep on doing well.

     Nevertheless, we will stick with the approach that got us 
here and try not to relax our standards.  Ted Williams, in 
The Story of My Life, explains why:  "My argument is, to be 
a good hitter, you've got to get a good ball to hit.  It's the 
first rule in the book.  If I have to bite at stuff that is out 
of my happy zone, I'm not a .344 hitter.  I might only be a .250 
hitter."  Charlie and I agree and will try to wait for 
opportunities that are well within our own "happy zone."
the Future
We will continue to ignore political and economic forecasts, 
which are an expensive distraction for many investors and 
businessmen.  Thirty years ago, no one could have foreseen the 
huge expansion of the Vietnam War, wage and price controls, two 
oil shocks, the resignation of a president, the dissolution of 
the Soviet Union, a one-day drop in the Dow of 508 points, or 
treasury bill yields fluctuating between 2.8% and 17.4%.

     But, surprise - none of these blockbuster events made the 
slightest dent in Ben Graham's investment principles.  Nor did 
they render unsound the negotiated purchases of fine businesses 
at sensible prices.  Imagine the cost to us, then, if we had let 
a fear of unknowns cause us to defer or alter the deployment of 
capital.  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.

     A different set of major shocks is sure to occur in the next 
30 years.  We will neither try to predict these nor to profit 
from them.  If we can identify businesses similar to those we 
have purchased in the past, external surprises will have little 
effect on our long-term results
Intrinsic Value
We regularly report our per-share book value, an easily 
calculable number, though one of limited use.  Just as regularly, 
we tell you that what counts is intrinsic value, a number that is 
impossible to pinpoint but essential to estimate.

     For example, in 1964, we could state with certitude that 
Berkshire's per-share book value was $19.46.  However, that 
figure considerably overstated the stock's intrinsic value since 
all of the company's resources were tied up in a sub-profitable 
textile business.  Our textile assets had neither going-concern 
nor liquidation values equal to their carrying values.  In 1964, 
then, anyone inquiring into the soundness of Berkshire's balance 
sheet might well have deserved the answer once offered up by a 
Hollywood mogul of dubious reputation:  "Don't worry, the 
liabilities are solid."

     Today, Berkshire's situation has reversed:  Many of the 
businesses we control are worth far more than their carrying 
value.  (Those we don't control, such as Coca-Cola or Gillette, 
are carried at current market values.)  We continue to give you 
book value figures, however, because they serve as a rough, 
albeit significantly understated, tracking measure for Berkshire's 
intrinsic value.  Last year, in fact, the two measures moved in 
concert:  Book value gained 13.9%, and that was the approximate 
gain in intrinsic value also.

     We define intrinsic value as the discounted value of the 
cash that can be taken out of a business during its remaining 
life.  Anyone calculating intrinsic value necessarily comes up 
with a highly subjective figure that will change both as 
estimates of future cash flows are revised and as interest rates 
move.  Despite its fuzziness, however, intrinsic value is all-
important and is the only logical way to evaluate the relative 
attractiveness of investments and businesses.
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