Berkshire Hathaway Annual Letter – 1979

“We continue to feel that the ratio of operating earnings (before securities gains or losses) to shareholders’ equity with all securities valued at cost is the most appropriate way to measure any single year’s operating performance. “

“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.”

“the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) – can be thought of as an “investor’s misery index”.

“high inflation rates will not help us earn higher rates of return on equity.”

“our book value at the end of 1964 would have bought one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. …………..government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.”

“Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

“We would rather have some slack in the organization from time to time than keep everyone terribly busy writing business on which we are going to lose money.”

“much reinsurance business involves an exceptionally “long tail”, a characteristic that allows catastrophic current loss experience to fester undetected for many years)”

“Inflation is man-made; perhaps it can be man-mastered.”

“at the end of each year about 98% of the shares outstanding are held by people who also were shareholders at the beginning of the year. Therefore, in our annual report we build upon what we have told you in previous years instead of restating a lot of material.”

“In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors.”

“If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers.”

“Your company is run on the principle of centralization of financial decisions at the top (the very top, it might be added), and rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level.”

“This approach produces an occasional major mistake that might have been eliminated or minimized through closer operating controls. But it also eliminates large layers of costs and dramatically speeds decision-making……… enables us to attract and retain some extraordinarily talented individuals – people who simply can’t be hired in the normal course of events – who find working for Berkshire to be almost identical to running their own show.”