This is my highlights and notes from the Warren Buffett's 1983 letter to the shareholders. You can read the complete letter here. This is a rather a shortened version, containing only texts that resonated with me while reading it. Take it away, Mr. Buffett..
To the Shareholders of Berkshire Hathaway Inc.:
To the Shareholders of Berkshire Hathaway Inc.:
The major business principles we follow that pertain to the
o Although our form is corporate, our attitude is
partnership. Charlie Munger and I think of our shareholders as
owner-partners, and of ourselves as managing partners. (Because
of the size of our shareholdings we also are, for better or
worse, controlling partners.) We do not view the company itself
as the ultimate owner of our business assets but, instead, view
the company as a conduit through which our shareholders own the
o Our long-term economic goal is to maximize the average annual rate of gain
in intrinsic business value on a per-share basis. We do not
measure the economic significance or performance of Berkshire by
its size; we measure by per-share progress.
o Our preference would be to reach this goal by directly
owning a diversified group of businesses that generate cash and
consistently earn above-average returns on capital. Our second
choice is to own parts of similar businesses, attained primarily
through purchases of marketable common stocks.
o We rarely use much debt and, when we do, we attempt to
structure it on a long-term fixed rate basis. We will reject
interesting opportunities rather than over-leverage our balance
sheet. This conservatism has penalized our results but it is the
only behavior that leaves us comfortable.
o We feel noble intentions should be checked periodically
o You should be fully aware of one attitude Charlie and I
share that hurts our financial performance: regardless of price,
we have no interest at all in selling any good businesses that
Berkshire owns, and are very reluctant to sell sub-par businesses
as long as we expect them to generate at least some cash and as
long as we feel good about their managers and labor relations.
We hope not to repeat the capital-allocation mistakes that led us
into such sub-par businesses. And we react with great caution to
suggestions that our poor businesses can be restored to
satisfactory profitability by major capital expenditures. (The
projections will be dazzling - the advocates will be sincere -
but, in the end, major additional investment in a terrible
industry usually is about as rewarding as struggling in
quicksand.) Nevertheless, gin rummy managerial behavior (discard
your least promising business at each turn) is not our style.
o We will be candid in our reporting to you, emphasizing the
pluses and minuses important in appraising business value. Our
guideline is to tell you the business facts that we would want to
know if our positions were reversed. We owe you no less.
We also believe candor benefits us as managers: the CEO
who misleads others in public may eventually mislead himself in
o Despite our policy of candor, we will discuss our
activities in marketable securities only to the extent legally
required. Good investment ideas are rare, valuable and subject
to competitive appropriation just as good product or business
acquisition ideas are. Therefore, we normally will not talk
about our investment ideas. This ban extends even to securities
we have sold (because we may purchase them again) and to stocks
we are incorrectly rumored to be buying. If we deny those
reports but say “no comment” on other occasions, the no-comments
That completes the catechism, and we can now move on to the
high point of 1983 - the acquisition of a majority interest in
Nebraska Furniture Mart and our association with Rose Blumkin and
Nebraska Furniture Mart
Last year, in discussing how managers with bright, but
adrenalin-soaked minds scramble after foolish acquisitions, I
quoted Pascal: “It has struck me that all the misfortunes of men
spring from the single cause that they are unable to stay quietly
in one room.”
Even Pascal would have left the room for Mrs. Blumkin.
About 67 years ago Mrs. Blumkin, then 23, talked her way
past a border guard to leave Russia for America. She had no
formal education, not even at the grammar school level, and knew
no English. After some years in this country, she learned the
language when her older daughter taught her, every evening, the
words she had learned in school during the day.
In 1937, after many years of selling used clothing, Mrs.
Blumkin had saved $500 with which to realize her dream of opening
a furniture store. Upon seeing the American Furniture Mart in
Chicago - then the center of the nation’s wholesale furniture
activity - she decided to christen her dream Nebraska Furniture
She met every obstacle you would expect (and a few you
wouldn’t) when a business endowed with only $500 and no
locational or product advantage goes up against rich, long-
entrenched competition. At one early point, when her tiny
resources ran out, “Mrs. B” (a personal trademark now as well
recognized in Greater Omaha as Coca-Cola or Sanka) coped in a way
not taught at business schools: she simply sold the furniture and
appliances from her home in order to pay creditors precisely as
Omaha retailers began to recognize that Mrs. B would offer
customers far better deals than they had been giving, and they
pressured furniture and carpet manufacturers not to sell to her.
But by various strategies she obtained merchandise and cut prices
sharply. Mrs. B was then hauled into court for violation of Fair
Trade laws. She not only won all the cases, but received
invaluable publicity. At the end of one case, after
demonstrating to the court that she could profitably sell carpet
at a huge discount from the prevailing price, she sold the judge
$1400 worth of carpet.
Today Nebraska Furniture Mart generates over $100 million of
sales annually out of one 200,000 square-foot store. No other
home furnishings store in the country comes close to that volume.
That single store also sells more furniture, carpets, and
appliances than do all Omaha competitors combined.
One question I always ask myself in appraising a business is
how I would like, assuming I had ample capital and skilled
personnel, to compete with it. I’d rather wrestle grizzlies than
compete with Mrs. B and her progeny. They buy brilliantly, they
operate at expense ratios competitors don’t even dream about, and
they then pass on to their customers much of the savings. It’s
the ideal business - one built upon exceptional value to the
customer that in turn translates into exceptional economics for
Mrs. B is wise as well as smart and, for far-sighted family
reasons, was willing to sell the business last year. I had
admired both the family and the business for decades, and a deal
was quickly made. But Mrs. B, now 90, is not one to go home and
risk, as she puts it, “losing her marbles”. She remains Chairman
and is on the sales floor seven days a week. Carpet sales are
her specialty. She personally sells quantities that would be a
good departmental total for other carpet retailers.
We purchased 90% of the business - leaving 10% with members
of the family who are involved in management - and have optioned
10% to certain key young family managers.
And what managers they are. Geneticists should do
handsprings over the Blumkin family. Louie Blumkin, Mrs. B’s
son, has been President of Nebraska Furniture Mart for many years
and is widely regarded as the shrewdest buyer of furniture and
appliances in the country. Louie says he had the best teacher,
and Mrs. B says she had the best student. They’re both right.
Louie and his three sons all have the Blumkin business ability,
work ethic, and, most important, character. On top of that, they
are really nice people. We are delighted to be in partnership
During 1983 our book value increased from $737.43 per share
to $975.83 per share, or by 32%. We never take the one-year
figure very seriously. After all, why should the time required
for a planet to circle the sun synchronize precisely with the
time required for business actions to pay off? Instead, we
recommend not less than a five-year test as a rough yardstick of
economic performance. Red lights should start flashing if the
five-year average annual gain falls much below the return on
equity earned over the period by American industry in aggregate.
(Watch out for our explanation if that occurs as Goethe observed,
“When ideas fail, words come in very handy.”)
During the 19-year tenure of present management, book value
has grown from $19.46 per share to $975.83, or 22.6% compounded
annually. Considering our present size, nothing close to this
rate of return can be sustained. Those who believe otherwise
should pursue a career in sales, but avoid one in mathematics.
We report our progress in terms of book value because in our
case (though not, by any means, in all cases) it is a
conservative but reasonably adequate proxy for growth in
intrinsic business value - the measurement that really counts.
Book value’s virtue as a score-keeping measure is that it is easy
to calculate and doesn’t involve the subjective (but important)
judgments employed in calculation of intrinsic business value.
It is important to understand, however, that the two terms - book
value and intrinsic business value - have very different
Book value is an accounting concept, recording the
accumulated financial input from both contributed capital and
retained earnings. Intrinsic business value is an economic
concept, estimating future cash output discounted to present
value. Book value tells you what has been put in; intrinsic
business value estimates what can be taken out.
An analogy will suggest the difference. Assume you spend
identical amounts putting each of two children through college.
The book value (measured by financial input) of each child’s
education would be the same. But the present value of the future
payoff (the intrinsic business value) might vary enormously -
from zero to many times the cost of the education. So, also, do
businesses having equal financial input end up with wide
variations in value.
At Berkshire, at the beginning of fiscal 1965 when the
present management took over, the $19.46 per share book value
considerably overstated intrinsic business value. All of that
book value consisted of textile assets that could not earn, on
average, anything close to an appropriate rate of return. In the
terms of our analogy, the investment in textile assets resembled
investment in a largely-wasted education.
Now, however, our intrinsic business value considerably
exceeds book value.
More important, we own several businesses that possess
economic Goodwill (which is properly includable in
intrinsic business value) far larger than the
accounting Goodwill that is carried on our balance
sheet and reflected in book value.
Goodwill, both economic and accounting, is an arcane subject
and requires more explanation than is appropriate here. The
appendix that follows this letter - “Goodwill and its
Amortization: The Rules and The Realities” - explains why
economic and accounting Goodwill can, and usually do, differ
You can live a full and rewarding life without ever thinking
about Goodwill and its amortization. But students of investment
and management should understand the nuances of the subject. My
own thinking has changed drastically from 35 years ago when I was
taught to favor tangible assets and to shun businesses whose
value depended largely upon economic Goodwill. This bias caused
me to make many important business mistakes of omission, although
relatively few of commission.
Keynes identified my problem: “The difficulty lies not in
the new ideas but in escaping from the old ones.” My escape was
long delayed, in part because most of what I had been taught by
the same teacher had been (and continues to be) so
extraordinarily valuable. Ultimately, business experience,
direct and vicarious, produced my present strong preference for
businesses that possess large amounts of enduring Goodwill and
that utilize a minimum of tangible assets.
Charlie and I believe that Berkshire possesses very significant economic
Goodwill value above that reflected in our book value.
Stock Splits and Stock Activity
We often are asked why Berkshire does not split its stock.
The assumption behind this question usually appears to be that a
split would be a pro-shareholder action. We disagree. Let me
tell you why.
One of our goals is to have Berkshire Hathaway stock sell at
a price rationally related to its intrinsic business value. (But
note “rationally related”, not “identical”: if well-regarded
companies are generally selling in the market at large discounts
from value, Berkshire might well be priced similarly.) The key to
a rational stock price is rational shareholders, both current and
If the holders of a company’s stock and/or the prospective
buyers attracted to it are prone to make irrational or emotion-
based decisions, some pretty silly stock prices are going to
appear periodically. Manic-depressive personalities produce
manic-depressive valuations. Such aberrations may help us in
buying and selling the stocks of other companies. But we think
it is in both your interest and ours to minimize their occurrence
in the market for Berkshire.
To obtain only high quality shareholders is no cinch. Mrs.
Astor could select her 400, but anyone can buy any stock.
Entering members of a shareholder “club” cannot be screened for
intellectual capacity, emotional stability, moral sensitivity or
acceptable dress. Shareholder eugenics, therefore, might appear
to be a hopeless undertaking.
In large part, however, we feel that high quality ownership
can be attracted and maintained if we consistently communicate
our business and ownership philosophy - along with no other
conflicting messages - and then let self selection follow its
course. For example, self selection will draw a far different
crowd to a musical event advertised as an opera than one
advertised as a rock concert even though anyone can buy a ticket
Through our policies and communications - our
“advertisements” - we try to attract investors who will
understand our operations, attitudes and expectations. (And,
fully as important, we try to dissuade those who won’t.) We want
those who think of themselves as business owners and invest in
companies with the intention of staying a long time. And, we
want those who keep their eyes focused on business results, not
Investors possessing those characteristics are in a small
minority, but we have an exceptional collection of them. I
believe well over 90% - probably over 95% - of our shares are
held by those who were shareholders of Berkshire or Blue Chip
five years ago. And I would guess that over 95% of our shares
are held by investors for whom the holding is at least double the
size of their next largest. Among companies with at least
several thousand public shareholders and more than $1 billion of
market value, we are almost certainly the leader in the degree to
which our shareholders think and act like owners. Upgrading a
shareholder group that possesses these characteristics is not
Were we to split the stock or take other actions focusing on
stock price rather than business value, we would attract an
entering class of buyers inferior to the exiting class of
sellers. At $1300, there are very few investors who can’t afford
a Berkshire share. Would a potential one-share purchaser be
better off if we split 100 for 1 so he could buy 100 shares?
Those who think so and who would buy the stock because of the
split or in anticipation of one would definitely downgrade the
quality of our present shareholder group. (Could we really
improve our shareholder group by trading some of our present
clear-thinking members for impressionable new ones who,
preferring paper to value, feel wealthier with nine $10 bills
than with one $100 bill?) People who buy for non-value reasons
are likely to sell for non-value reasons. Their presence in the
picture will accentuate erratic price swings unrelated to
underlying business developments.
We will try to avoid policies that attract buyers with a
short-term focus on our stock price and try to follow policies
that attract informed long-term investors focusing on business
values. just as you purchased your Berkshire shares in a market
populated by rational informed investors, you deserve a chance to
sell - should you ever want to - in the same kind of market. We
will work to keep it in existence.
One of the ironies of the stock market is the emphasis on
activity. Brokers, using terms such as “marketability” and
“liquidity”, sing the praises of companies with high share
turnover (those who cannot fill your pocket will confidently fill
your ear). But investors should understand that what is good for
the croupier is not good for the customer. A hyperactive stock
market is the pickpocket of enterprise.
We are aware of the pie-expanding argument that says that
such activities improve the rationality of the capital allocation
process. We think that this argument is specious and that, on
balance, hyperactive equity markets subvert rational capital
allocation and act as pie shrinkers. Our view is that
casino-type markets and hair-trigger investment management act as
an invisible foot that trips up and slows down a forward-moving
What We Look For
Last year in this section I ran a small ad to encourage
acquisition candidates. In our communications businesses we tell
our advertisers that repetition is a key to results (which it
is), so we will again repeat our acquisition criteria.
(1) large purchases (at least $5 million of after-tax
(2) demonstrated consistent earning power (future
projections are of little interest to us, nor are
(3) businesses earning good returns on equity while
employing little or no debt,
(4) management in place (we can’t supply it),
(5) simple businesses (if there’s lots of technology, we
won’t understand it),
(6) an offering price (we don’t want to waste our time or
that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
We will not engage in unfriendly takeovers. We can promise
complete confidentiality and a very fast answer - customarily
within five minutes - as to whether we’re interested. We prefer
to buy for cash, but will consider issuance of stock when we
receive as much in intrinsic business value as we give. We
invite potential sellers to check us out by contacting people
with whom we have done business in the past. For the right
business - and the right people - we can provide a good home.
* * * * *
Warren E. Buffett
March 14, 1984 Chairman of the Board