25 Must-Read Quotes From Buffett's Letter to Shareholders

Warren Buffett released his annual letter (PDF file, Adobe Acrobat required) to Berkshire Hathaway (NYSE: BRK-B  ) on Saturday. If you have the time, it's worth reading the whole thing. If not, here are 25 important quotes.

On value: "The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply."

On market moves: "Here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham's The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life."

On foreclosures: "A largely unnoted fact: Large numbers of people who have 'lost' their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender."

On share buybacks: "The first law of capital allocation -- whether the money is slated for acquisitions or share repurchases -- is that what is smart at one price is dumb at another."

On predicting turnarounds: "Last year, I told you that 'a housing recovery will probably begin within a year or so.' I was dead wrong."

On housing: "I believe [low housing construction] is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy."

On everything besides housing: "Though housing-related businesses remain in the emergency room, most other businesses have left the hospital with their health fully restored."

On recovery after the bubble: "[The] supply/demand equation is now reversed: Every day we are creating more households than housing units. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America's best days lie ahead."

More on buybacks: "Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated. We have witnessed many bouts of repurchasing that failed our second test."

On conditions for share buybacks: "First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: 'Talking our book' about a stock we own -- were that to be effective -- would actually be harmful to Berkshire, not helpful as commentators customarily assume."

On risk management: "[I]f the insurance industry should experience a $250 billion loss from some megacatastrophe -- a loss about triple anything it has ever faced -- Berkshire as a whole would likely record a moderate profit for the year because of its many streams of earning."

On acquisitions: "We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go."

On Burlington Northern: "We must, without fail, maintain and improve our 23,000 miles of track along with 13,000 bridges, 80 tunnels, 6,900 locomotives and 78,600 freight cars. This job requires us to have ample financial resources under all economic scenarios and to have the human talent that can instantly and effectively deal with the vicissitudes of nature, such as the widespread flooding BNSF labored under last summer."

On Berkshire's subsidiaries: "Some of the businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to more than 100%. Others produce good returns in the area of 12[%]-20%. A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business being purchased or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor. Charlie's has been better; he voted no more than 'present' on several of my errant purchases."

On committing to bad investments: "Any management consultant or Wall Street advisor would look at our laggards and say 'dump them.' That won't happen. For 29 years, we have regularly laid out Berkshire's economic principles ... [describing] our general reluctance to sell poor performers (which, in most cases, lag because of industry factors rather than managerial shortcomings). Our approach is far from Darwinian, and many of you may disapprove of it. I can understand your position. However, we have made -- and continue to make -- a commitment to the sellers of businesses we buy that we will retain those businesses through thick and thin. So far, the dollar cost of that commitment has not been substantial and may well be offset by the goodwill it builds among prospective sellers looking for the right permanent home for their treasured business and loyal associates. These owners know that what they get with us can't be delivered by others and that our commitments will be good for many decades to come."

On banking: "The banking industry is back on its feet, and Wells Fargo [ (NYSE: WFC  ) ] is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America [ (NYSE: BAC  ) ], some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire."

On derivatives: "Though our existing contracts have very minor collateral requirements, the rules have changed for new positions. Consequently, we will not be initiating any major derivatives positions. We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement -- arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack -- is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength.

On bond yields: "Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: 'Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.'"

On fixed-income: "Most of these currency-based investments are thought of as 'safe.' In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control. Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as 'income.'"

On liquidity: "Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be."

On gold: "Gold ... has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth -- for a while."

On stocks: "Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola [ (NYSE: KO  ) ] or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce."

On why Berkshire chooses businesses over gold or fixed-income: "Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest."

On opportunity: "[T]wo categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard 'cash is king' in late 2008, just when cash should have been deployed rather than held. Similarly, we heard 'cash is trash' in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort."

On smart investing: "Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date."

Fool contributor Morgan Housel owns shares of Berkshire and Bank of America preferred. His latest ebook, 50 Years in the Making: The Great Recession and Its Aftermath, can be purchased for your Kindle or iPad. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Coca-Cola, Wells Fargo, and Bank of America. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 27, 2012, at 2:13 PM, bzhayes wrote:

    I always agree with Buffet's investing advice, however when I look back at my past investments they rarely followed that advice very well. Putting Buffet's advice into practice seems to me to be the real challenge.

  • Report this Comment On February 27, 2012, at 5:20 PM, DoctorLewis4 wrote:

    Great letter, as usual. Buffett's paragraph about IBM is eye opening. It's hard to wrap your mind around the concept, but once you do you see the light!

  • Report this Comment On February 27, 2012, at 5:41 PM, rhealth wrote:

    Me on gold- As gold has no intrinsic value, it's value is assigned by those in the marketplace. It has no corrupt board members, no obsolete technology, no managerial missteps. It is the perfect investment as it is the gauge of fear and greed.

    If you know about fear and greed, as WB is always mentioned for, and their cycles, then you can guess pretty fairly what gold will do.

    I don't know why people insist on licking up everything this guy does. He is a billionaire and invests like one. What does he know about guys with a few thousand/ten thousand dollars to invest? If he knew at one time I doubt he does anymore.

  • Report this Comment On February 27, 2012, at 6:08 PM, matter15 wrote:

    Hey DoctorLewis4, what paragraph about IBM are you referring to?

  • Report this Comment On February 27, 2012, at 8:39 PM, richardrollo wrote:

    Always interesting to read Buffett on investment. The basic ideas remain the same but it's always interesting to hear the latest version. As for gold, right now, I'd like to be on the selling end of that exchange. In the 70's, if you had bought gold you made about 30 per cent on your money in the stagflation economy. If instead, you had invested in Berkshire....well, I think Buffett's point is well made.

    His comments on foreclosed homeowners, I'm sorry to say, are another descent into political buffoonery that sadly we have come to expect from him. I can't see how a homeowner no matter how stupid benefits from having a house foreclosed on them. I can think of several people who are living on the streets as a result of having their home foreclosed. Neighborhoods are dying. The shadow inventory of non performing but not yet foreclosed houses is growing. The real victims are the ones who are paying their mortgages while losing equity in their houses. To paraphrase a line from the scene in the W.C. Fields movie "You Can't Cheat an Honest Man" where Field's character keeps telling snake stories: Warren, you're just talking too much [about politics, again.]

  • Report this Comment On February 27, 2012, at 9:06 PM, TMFMorgan wrote:

    << I can't see how a homeowner no matter how stupid benefits from having a house foreclosed on them.>>

    They put zero down, cash out a $50,000 home equity line of credit, and default. In the end they're $50k ahead.

  • Report this Comment On February 27, 2012, at 10:45 PM, kyleleeh wrote:

    <<If you know about fear and greed, as WB is always mentioned for, and their cycles, then you can guess pretty fairly what gold will do.>>

    I heard the same thing said about real estate 5 years ago, and stocks 12 years ago...most of them got burned. I'm willing to bet the gold bugs didn't see it coming in the late 70s early 80s either...hubris is not a good thing in investing.

  • Report this Comment On February 28, 2012, at 3:25 AM, ipodnation wrote:

    Sorry, I don't understand WEB's paragraphs on IBM. He's happy to get $100 million if IBM's stock price stays at $200 over the next 5 years vs $300 - coz that will allow IBM to repurchase more shares and hence increase BRK's % holding of IBM (from 6.5% to 7%) and therefore its share of the $20 billion earnings.

    However, if IBM stock price became $300 (instead of $200) after 5 years, he could profit $100 x 63.9 million shares (that BRK owns) = $6.4 billion if he sold the stocks - which is no small change! He can then use $6.4 billion to buy some other profitable businesses at bargain prices!!

    I don't get his logic. Can some Foolish guru please enlighten me? Thanks!!

  • Report this Comment On February 28, 2012, at 3:37 AM, ipodnation wrote:

    Amendment : 2nd sentence should read ... "He's happy to get $100 million MORE if IBM's stock price stays at $200 ..."

  • Report this Comment On February 28, 2012, at 10:28 AM, WestBend1 wrote:

    @ ipodnation:

    I'm not sure if I'm being Foolish, but I think Warren Buffet takes great pride in being a very long term investor. If IBM's share price rises rapidly, it is of little benefit to him because now the company cannot buy back its stock at the lower (and better) price, and Warren cannot buy more stock at the lower price.

    Morgan noted that Warren will not sell his poor performing stocks, either, for the reason that he has committed to the company being bought that Berkshire is a good partner and will stick with them through thick and thin. He would be showing a lack of commitment if he sold IBM quickly if the price reached $300.

  • Report this Comment On March 03, 2012, at 1:51 AM, Libertarian71 wrote:

    "[Warren Buffett's] reality is that he is the greatest PR person of recent times. And he has imagined to achieve a snow job that has conned virtually everyone in the press to my knowledge ... and [it] is remarkable that he continues to do it."

    Michael Steinhardt, April 5, 2011

  • Report this Comment On March 04, 2012, at 1:23 PM, ariel6363 wrote:

    Lets think about this way: try to compare it to an old fashion marriage , Let say like your parents (= WB.) who stayed together for ever . You too decided to follow this way of life ( let's say it took you to decide also 20 years to get married) Do You stay with your wife through good or bad ? ( your life NOW , just became a 24 hours a day hell just after the wedding let say because of her) Do you still stay married ? = ( stick and not sell IBM now at $ 10. let say from $200.) that is warren philosophy after all . He promised to be loyal and because he investigate that company for at least 20 years.

    On the other hand, shouldn't he be loyal to his investors first ( his first fiduciary duty is profit ) and sell before they lose everything the whole 100% of the investment ?) the same IBM at

    $ 300.because this is what his investors expect , first profits and not loyalty.

  • Report this Comment On March 05, 2012, at 5:43 PM, DJDynamicNC wrote:

    "because this is what his investors expect , first profits and not loyalty."

    Buffett has been saying the same things for half a century. If his investors don't expect loyalty and unique investing strategy by now, then they haven't been paying attention. Caveat emptor.

    I suspect that many of his investors specifically invest because of that loyalty, not in spite of it. It's not as though he's not churning out profits, regardless.

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