Warren Buffett's Investment Principles

From the 1978 Berkshire Hathaway Shareholder Letter

Investment Selection Criteria

Buffett commits capital to equity investments only when he finds:

1. Businesses he can understand
2. Favorable long-term prospects
3. Honest and competent management
4. Attractive pricing

Value vs. Price Philosophy

• Buffett seeks to buy "small portions of outstanding businesses at bargain prices" through the stock market
• He contrasts this with the corporate acquisition market where companies pay premium prices for entire businesses
• He emphasizes finding excellent businesses at prices "dramatically cheaper than the valuations inferior businesses command"

Concentration Strategy

• "Our policy is to concentrate holdings"
• Avoiding buying "a little of this or that" when lukewarm about a business or its price
• When convinced about attractiveness, buying in "worthwhile amounts"

Long-Term Perspective on Market Pricing

• Not concerned with whether the market quickly revalues securities upward
• Often prefers when it doesn't, providing opportunities to buy more at attractive prices
• Values being a net buyer of securities in most years over short-term price increases

Retained Earnings Philosophy

• Values companies that retain earnings when they can employ capital at high rates of return
• Views retained earnings in well-managed companies as potentially worth more than 100 cents on the dollar to shareholders
• Recognizes that undistributed earnings in quality businesses may have equal long-term significance as reported earnings

Patience and Contrarian Thinking

• Waits for the right opportunities - in 1971, held minimal equities because few were attractively priced
• By 1978, had invested heavily as market conditions became favorable while indexes declined
• Notes that pension managers put only 9% of funds into equities in 1978 (vs. 122% in 1971 at higher prices)

Quality Over Price

• Berkshire owned over 950,000 shares of SAFECO, "the best run large property and casualty insurance company"
• Purchased at less than book value while "mediocre companies" were selling for premiums in corporate transactions
• Values excellent management that can deploy capital profitably over trying to control or influence operations

The Berkshire Approach

Buffett's investment philosophy focuses on finding exceptional businesses at reasonable prices with the patience to wait for opportunities, rather than compromising on business quality or management integrity for the sake of activity.