Intrinsic value is discounted future cash
“With perfect foresight, [intrinsic value] can be calculated by taking all future cash flows of a business - in and out - and discounting them at prevailing interest rates.”
Investing
Warren Buffett's 1989 letter to Berkshire shareholders, one of the letters in Berkshire Hathaway Shareholder Letters, 1971–2025.
Past results are not future prospects
“The rear-view mirror is one thing; the windshield is another.”
In a finite world, high growth self-destructs
“We face another obstacle: In a finite world, high growth rates must self-destruct.”
Deferred taxes resemble an interest-free loan
“In economic terms, the liability resembles an interest-free loan from the U.S. Treasury that comes due only at our election (unless, of course, Congress moves to tax gains before they are realized).”
Patient investing carries a tax edge
“Because of the way the tax law works, the Rip Van Winkle style of investing that we favor - if successful - has an important mathematical edge over a more frenzied approach.”
Rare relationships outweigh slightly higher returns
“Now we would rather stay put, even if that means slightly lower returns. Our reason is simple: We have found splendid business relationships to be so rare and so enjoyable that we want to retain all we develop.”
Leaving admirable people resembles marrying money
“[Giving up admirable people] would be akin to marrying for money - a mistake under most circumstances, insanity if one is already rich.”
Good managers make retained earnings worth more
“The reason for this a-bird-in-the-bush-may-be-worth-two-in-the-hand conclusion is that earnings retained by these investees will be deployed by talented, owner-oriented managers who sometimes have better uses for these funds in their own businesses than we would have in ours.”
Know your jeweler, whatever you buy
“'If you don't know jewelry, know your jeweler' makes sense whether you are buying the whole business or a tiny diamond.”
Commodity industries profit only during shortages
“[A commodity-like industry] - whether the product being sold is steel or insurance policies - is certain to cause subnormal profitability in all circumstances but one: a shortage of usable capacity.”
Insurance capacity reflects managers' mental state
“At bottom, therefore, the amount of industry capacity at any particular moment primarily depends on the mental state of insurance managers.”
Good insurance profits come from frightened insurers
“Good profits will be realized only when there is a shortage of capacity. Shortages will occur only when insurers are frightened.”
No appetite for expected-loss insurance
“We have no interest in writing insurance that carries a mathematical expectation of loss; we experience enough disappointments doing transactions we believe to carry an expectation of profit.”
Profitable rates justify much prudent risk
“When rates carry an expectation of profit, we want to assume as much risk as is prudent.”
What suits owners may not suit managers
“I can understand [insurance managements'] thinking: What is best for their owners is not necessarily best for the managers.”
Looking foolish versus acting foolishly
“We are willing to look foolish as long as we don't feel we have acted foolishly.”
Consumer CEOs usually let one discipline dominate
“Normally, the CEO of a consumer products company, drawing on his natural inclinations or experience, will cause either marketing or finance to dominate the business at the expense of the other discipline.”
A bond's stated rate is not guaranteed
“One problem with a normal bond is that even though it pays a given interest rate - say 10% - the holder cannot be assured that a compounded 10% return will be realized.”
Nobody defaults on a promise to pay nothing
“To [ever-junkier credits], zero (or PIK) bonds offer one overwhelming advantage: It is impossible to default on a promise to pay nothing.”
Depreciation is as real as labor costs
“At 95% of American businesses, capital expenditures that over time roughly approximate depreciation are a necessity and are every bit as real an expense as labor or utility costs.”
Zero-coupon bonds create income without expenditure
“With zeros, one party to a contract can experience 'income' without his opposite experiencing the pain of expenditure.”
Zero-coupon bonds delay the reckoning for folly
“The zero-coupon or PIK bond possesses one additional attraction for the promoter and investment banker, which is that the time elapsing between folly and failure can be stretched out.”
Accounting tricks cannot turn base businesses golden
“A base business can not be transformed into a golden business by tricks of accounting or capital structure.”
Financial alchemists get rich from gullible investors
“The man claiming to be a financial alchemist may become rich. But gullible investors rather than business achievements will usually be the source of his wealth.”
Some instruments hold more potential for mischief
“No financial instrument is evil per se; it's just that some variations have far more potential for mischief than others.”
The investment banker as responsible bartender
“At a minimum, therefore, the banker's conduct should rise to that of a responsible bartender who, when necessary, refuses the profit from the next drink to avoid sending a drunk out on the highway.”
The cigar butt approach is foolish
“Unless you are a liquidator, [the cigar butt approach] to buying businesses is foolish.”
Difficult businesses keep producing new problems
“In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen.”
Time favours wonderful businesses over mediocre ones
“Time is the friend of the wonderful business, the enemy of the mediocre.”
Sticking with the easy and obvious pays
“The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.”
Rationality wilts under the institutional imperative
“I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play.”
No good deal with a bad person
“We've never succeeded in making a good deal with a bad person.”
Passing on purchases he understood
“It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding.”
Extra returns do not offset distress risk
“A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns.”
Enjoying the process more than the proceeds
“Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also.”