Management can encourage rational market pricing
“Management cannot determine market prices, although it can, by its disclosures and policies, encourage rational behavior by market participants.”
Investing
Warren Buffett's 1985 letter to Berkshire shareholders, one of the letters in Berkshire Hathaway Shareholder Letters, 1971–2025.
Investor gains equal business gains overall
“Wild swings in market prices far above and below business value do not change the final gains for owners in aggregate; in the end, investor gains must equal business gains.”
Realized gains are like graduation day
“Security profits in a given year bear similarities to a college graduation ceremony in which the knowledge gained over four years is recognized on a day when nothing further is learned.”
Stock selection focuses on attractive purchases
“In selecting common stocks, we devote our attention to attractive purchases, not to the possibility of attractive sales.”
Munger studies mistakes rather than successes
“Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life.”
No closures merely to lift returns slightly
“I won’t close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return.”
Mill owners read the same facts more objectively
“A recent Business Week article stated that 250 textile mills have closed since 1980. Their owners were not privy to any information that was unknown to me; they simply processed it more objectively.”
Industrywide cost cuts become lower prices
“Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide.”
Changing vessels likely beats patching leaks
“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.”
Savings-account growth hardly earns hosannas
“You can get [earnings from additional capital] personally while operating from your rocking chair. just quadruple the capital you commit to a savings account and you will quadruple your earnings. You would hardly expect hosannas for that particular accomplishment.”
Pay plans reward growth from retained earnings
“Many corporate compensation plans reward managers handsomely for earnings increases produced solely, or in large part, by retained earnings - i.e., earnings withheld from owners.”
Managers' own options ignore the cost of capital
“Managers regularly engineer ten-year, fixed-price options for themselves and associates that, first, totally ignore the fact that retained earnings automatically build value and, second, ignore the carrying cost of capital.”
Options reward sluggards and stars alike
“Once granted, the option is blind to individual performance. Because it is irrevocable and unconditional (so long as a manager stays in the company), the sluggard receives rewards from his options precisely as does the star.”
Option holders escape owners' costs and risks
“No owner has ever escaped the burden of capital costs, whereas a holder of a fixed-price option bears no capital costs at all. An owner must weigh upside potential against downside risk; an option holder has no downside.”
Bargain sales of the business rarely serve owners
“Except in highly unusual cases, owners are not well served by the sale of part of their business at a bargain price - whether the sale is to outsiders or to insiders.”
Berkshire bonuses ignore the stock price
“We believe good unit performance should be rewarded whether Berkshire stock rises, falls, or stays even. Similarly, we think average performance should earn no special rewards even if our stock should soar.”
Age and seniority leave incentive pay unaffected
“We believe, further, that such factors as seniority and age should not affect incentive compensation (though they sometimes influence basic compensation). A 20-year-old who can hit.300 is as valuable to us as a 40-year-old performing as well.”
Juries weigh the insurer's ability to pay
“The insurer’s ability to pay has assumed overwhelming importance with juries and judges in the assessment of both liability and damages.”
Insurance is priced like any commodity
“The insurance product now is priced as any other commodity for which a free market exists: when capacity is tight, prices will be set remuneratively; otherwise, they will not be.”
Insurance capacity is an attitude
“Capacity currently is tight in many lines of insurance - though in this industry, unlike most, capacity is an attitudinal concept, not a physical fact.”
Insurance capacity shortages vanish quickly
“In the insurance industry, capital can be secured instantly. Thus, any capacity shortage can be eliminated in short order.”
Reinsurers behave like Mark Twain's cat
“The behavior of reinsurers finally becomes like that of Mark Twain’s cat: having once sat on a hot stove, it never did so again - but it never again sat on a cold stove, either.”
Counting every run scored against you
“In any business, insurance or otherwise, ‘except for’ should be excised from the lexicon. If you are going to play the game, you must count the runs scored against you in all nine innings.”
The real mistake is the actor
“Any manager who consistently says ‘except for’ and then reports on the lessons he has learned from his mistakes may be missing the only important lesson - namely, that the real mistake is not the act, but the actor.”
Managers who learn by experience keep doing so
“Managers who have learned much from personal experience in the past usually are destined to learn much from personal experience in the future.”
Buying good businesses at a large discount
“Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”
Some things just take time
“(No matter how great the talent or effort, some things just take time: you can’t produce a baby in one month by getting nine women pregnant.)”
Diffused ownership breeds corporate instability
“Today, corporate instability is an inevitable consequence of widely-diffused ownership of voting stock. At any time a major holder can surface, usually mouthing reassuring rhetoric but frequently harboring uncivil intentions.”
Stability plus good management yields a harvest
“[Ownership stability], combined with a good manager and a good business, provides excellent soil for a rich financial harvest.”
Issuing stock only for equal value
“We prefer to buy for cash, but will consider issuance of stock when we receive as much in intrinsic business value as we give.”
Framing a question shapes its answers
“(Recognizing that it’s possible to influence the answers to a question by the framing of it, we attempted to make the wording of ours as neutral as possible.)”