In his 1999 Berkshire Hathaway Annual Letter, Warren Buffett explains that he and Charlie Munger aren’t distressed by their lack of tech insights, as there are many areas where they lack expertise. They avoid making judgments in fields like patents and manufacturing, focusing instead on operating within their circle of competence.
Predicting the long-term economics of fast-changing industries is beyond their capability, and they don’t envy or emulate those who claim such skills. Currently, they find the prices of their owned businesses unattractive, preferring to invest in comfortable businesses at reasonable prices, rather than questionable businesses at comfortable prices. Their goal is to find good businesses at good prices.
Here’s an excerpt from the letter:
Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes, or geological prospects. So we simply don’t get into judgments in those fields.
If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.
If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out.
Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That’s why we haven’t added to our present holdings.
Nevertheless, we haven’t yet scaled back our portfolio in a major way: if the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.
You can find a copy of the letter here:
1999 Berkshire Hathaway Annual Letter
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