Berkshire Hathaway Annual Letter – 1982

“Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager.”

“Accounting numbers are the beginning, not the end, of business valuation.”

“It is our job to select businesses with economic characteristics allowing each dollar of retained earnings to be translated eventually into at least a dollar of market value.”

“What really makes us dance is the purchase of 100% of good businesses at reasonable prices……but it is an extraordinarily difficult job – far more difficult than the purchase at attractive prices of fractional interests.”

“The thrill of the catch blinded the pursuers to the consequences of the catch. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.””

“Year-to-year variances, however, cannot consistently be in our favor…… such tgimes our net worth could shrink significantly. We will not be distressed by such a shrinkage; if the businesses continue to look attractive and we have cash available, we simmply will add to our holdings at even more favorable prices.”

“Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. Hence the constant struggle of every vendor to establish and emphasize special qualities of product or service. This works with candy bars (customers buy by brand name, not by asking for a “two-ounce candy bar”) but doesn’t work with sugar (how often do you hear, “I’ll have a cup of coffee with cream adn C&H sugar please”).

“For the great majority of companies selling “commodity” products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability……the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success.”

“What really counts is whether a merger is dilutive or anti-dilutive in terms of intrinsic business value.”

“For current and prospective owners understandably will not pay as much for assets lodged in the hands of a management that has a record of wealth-destruction through unintelligent share issuances as they will pay for assets entrusted to a amnagement with precisely equal operating talents, but a known distaste for anti-owner actions. Other things being equal, the highest stock market prices relative to intrinsic business value are given to companies whose managers have demonstrated their unwillingness to issue shares at any time on terms unfavorable to the owners of the business.”

We prefer

1. Large purchases (at least $5 million of after-tax earnings)

2. Demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations)

3. Businesses earning good returns on equity while employing little or no debt

4. Management in place (we can’t supply it)

5. Simple businesses (if there’s lots of technology, we won’t understand it)

6. An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

“Both Ben and Phil ran their businesses for Berkshire with every bit of the care and drive that they would have exhibited had they personally owned 100% of these businesses. No rules were necessary to enforce or even encourage this attitude; it was embedded in the character of these men long before we came on the scene. Their good character became our good fortune.”