Brief notes on the 1979 Berkshire Hathaway Shareholder Letter
Buffett continues to espouse return on equity as the preferred metric for economic performance, provided it is adjusted, where necessary, to capture economic reality.
The scorecard for investment results must take both inflation and taxes into account.
Buffett underscores outstanding management as a key driver of a successful business, particularly in insurance which tends to “magnify, to an unusual degree, human managerial talent – or the lack of it”.
Buffett suggest that it probably makes sense to pay-up for great businesses – those that produce high returns on tangible capital employed – rather than purchase statistical bargains in mediocre or subpar businesses.
Early on, Buffett showed the discipline to walk away from insurance business if it could not be underwritten with an expectation of a profit.
Successful investing in insurance requires the ability to tolerate lumpy returns.
Buffett is disinterested in market trends or fads.
Even sophisticated managers can ignore reality if it is too painful to deal with or if it requires a difficult change in direction. (See the example of how the insurance industry reacted to losses on long-term bonds.)
Lending money at a fixed price for an extended duration (long-term bonds) is inherently risky in an inflationary world. This is why Buffett favors convertible bonds which function as if they have shortened maturities.
It generally doesn’t pay to be clever when the tide is running against you.
You usually have to pay up to purchase a high-quality business.
“It is difficult to say anything new or meaningful each quarter about events of long-term significance.”
Buffett takes pride in running a very lean operation at the top.
Buffett wants a shareholder base that understands Berkshire Hathaway and has rational expectations.
Buffett likes the trade-offs inherent in running a decentralized operation: whatever he misses by not having more controls he gains in cost savings and responsiveness.