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.
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