Warren Buffett's Investment Best Practices

Insights from the 1982 Berkshire Hathaway Letter

Core Principles

Focus on Business Quality Over Size

• "If something's not worth doing at all, it's not worth doing well"
• Avoid small commitments; seek opportunities to deploy large sums effectively
• Maximize real economic benefits, not accounting numbers or managerial domain

Acquisition Philosophy

• Be comfortable with both total ownership and partial ownership through marketable securities
• Prefer buying 10% of a wonderful business at fair price rather than 100% at double the price
• Be wary of high-premium takeovers driven by managerial ego or size obsession
• Recognize that "kisses" rarely transform corporate "toads" into princes

Business Characteristics to Seek

1. Ability to increase prices easily without losing market share or volume, even during flat demand
2. Ability to accommodate large volume increases with minimal additional capital investment
3. Strong management teams that recognize and nurture business value
4. Excellent business franchises with competent, honest management

Valuation Mindset

• Good businesses must deliver returns that exceed passive investment alternatives
• Businesses must earn more than their "keep" (the return on long-term passive money)
• Be prepared to pay a "fairly fancy price" for Category 1 businesses when confident
• Don't overpay for what you're "supposed to bring to the party"

Ownership Approach

• Non-controlled ownership positions often deliver excellent economic results
• Look for businesses where undistributed earnings will translate into shareholder value
• Be willing to sacrifice volume to maintain quality of business and underwriting standards
• Maintain financial flexibility as a potential operational asset

Common Mistakes to Avoid

• Misunderstanding future business economics
• Selecting poor management partners
• Overpaying relative to intrinsic value
• Expanding empire size at the expense of shareholder value
• Falling victim to "animal spirits" and the lure of increased activity

Long-Term Perspective

• Value real economic benefits over accounting appearance
• Recognize that market values track business values over long periods, but can "gyrate capriciously" short-term
• Understand that irregularity in results is inevitable, especially in non-controlled businesses
• Be willing to correct mistakes quickly, particularly with marketable securities

"We continue to seek the acquisition of businesses in their entirety at prices that will make sense, even should the future of the acquired enterprise develop much along the lines of its past."