Berkshire Hathaway Annual Letter – 1981

“Small portions of exceptionally good businesses are usually available in the securities markets at reasonable prices. But such businesses are available for purchase in their entirety only rarely, and then almost always at high prices.”

“Most organizations, business or otherwise, measure themselves, are measured by others, and compensate their managers far more by the yardstick of size than by any other yardstick.”

“Such favored businesses must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investmen tof capital.”

“the magnitude of our non-recorded “ownership” earnings has grown to the point where their total is greater than our reported operating earnings. We expect this situation will continue.”

“our unreported ownership earnings will find their way, irregularly but inevitably, into our net worth.”

“The economic case justifying equity investment is that, in aggregate, additional earnings above passive investment returns – interest on fixed-income securities – will be derived through the employment of managerial and entrepreneurial skills in conjunction with that equity capital.”

“When change is slow, constant rethinking is actually undesirable; it achieves little and slows response time. But when change is great, yesterday’s assumptions can be retained only at great cost.”

“But facts do not cease to exist, either because they are unpleasant or because they are ignored.”

“Logically, a company with historic and prospective high returns on equity should retain much or all of its earnings so that shareholders can earn premium returns on enhanced capital. Conversely, low returns on corporate equity would suggest a very high dividend payout so that owners could direct capital toward more attractive areas.”

“Beware of “dividends” that can be paid out only if someone promises to replace the capital distributed.”

“”Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.””

“It was clear that insurers with large holdings of bonds valued, for accounting purposes, at nonsensically high prices would have little choice but to keep the money revolving by selling large numbers of policies at nonsensically low prices. Such insurers necessarily fear a major decrease in volume more than they fear a major underwriting loss.”

“This pressure continues unabated and adds aa new motivation to the others that drive many insurance managers to push for business; worship of size over profitability, and the fear that market share surrendered never can be regained.”

“(Such lassitude did not pervade all departments of that firm; it billed Berkshire for mailing services within six days of that belated and ineffectual action.)”