Friday, October 22, 2010

Buffett on Manic-depressive Lemmings: Berkshire Shareholder Letter Highlights

From Warren Buffett's 1982 Berkshire Hathaway (BRKa) shareholder letter:

...while retained earnings over the years, and in the aggregate, have translated into at least equal market value for shareholders, the translation has been both extraordinarily uneven among companies and irregular and unpredictable in timing.

However, this very unevenness and irregularity offers advantages to the value-oriented purchaser of fractional portions of businesses. This investor may select from almost the entire array of major American corporations, including many far superior to virtually any of the businesses that could be bought in their entirety in a negotiated deal. And fractional-interest purchases can be made in an auction market where prices are set by participants with behavior patterns that sometimes resemble those of an army of manic-depressive lemmings.

The market makes it incredibly convenient to own shares in some of the best businesses in the world.

Market prices change dramatically based upon short-to-intermediate term events while intrinsic value changes little if at all. In fact, consider that a typical recession will make the best companies even better (ie. make them intrinsically more valuable by: streamlining operations, buying weaker competitors who can't handle the short-term economic stress, taking market share, making investments etc.) yet stock prices will almost always temporarily go down.

Adam

Long BRKb

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