Key Insights from the 1992 Berkshire Hathaway Shareholder Letter
Acquisition Philosophy
Look for excellent economic characteristics and management you like, trust, and admire
Be active, interested, and open-minded in searching for businesses, but never be in a hurry
Buy good businesses at fair prices rather than fair businesses at good prices
Avoid "kissing toads" - paying dearly for troubled businesses in hopes of transformation
Only issue shares when receiving as much value as given
Stock Selection Criteria
Understandable business - Choose companies you can comprehend
Favorable long-term prospects - Focus on sustainable advantages
Honest and competent management - Quality leadership is essential
Attractive price - Seek reasonable valuation with margin of safety
Value vs. Growth Perspective
"Growth is always a component in the calculation of value" - They are not opposing approaches
Growth only benefits investors when each dollar used to finance growth creates over a dollar of long-term market value
In low-return businesses, growth actually hurts the investor
Intrinsic Value Fundamentals
The value of any stock is determined by the cash inflows and outflows—discounted at an appropriate rate—expected during the remaining life of the asset
Buy the investment shown by discounted cash flow calculations to be cheapest, regardless of other factors
The best businesses can employ large amounts of incremental capital at very high rates of return
Most high-return businesses need relatively little capital
Risk Management Principles
Define what you don't know - Investment success depends more on realistically understanding limitations than extensive knowledge
Margin of safety - Only purchase when calculated value is significantly higher than price
Stick to simple, stable businesses - Complex or constantly changing businesses make future cash flows unpredictable
An investor needs to do very few things right as long as big mistakes are avoided
Tolerate short-term volatility for better long-term prospects
Market Wisdom
Stock forecasters make fortune tellers look good
Short-term market forecasts are "poison" and should be kept away from both children and adults who behave like children
The secondary market is periodically ruled by mass folly, creating bargain opportunities
New-issue markets are controlled by sellers who can time offerings and rarely offer bargains
Performance Evaluation
Focus on "look-through" earnings that include Berkshire's share of retained earnings from major investees
The goal: 15% annual growth in intrinsic business value over time
When allocating capital today, think about maximizing long-term results years ahead
In baseball terms, focus on "slugging percentage, not batting average"
"Value investing is redundant. What is investing if it is not the act of seeking value at least sufficient to justify the amount paid?" — Warren Buffett
