In his 1987 Berkshire Hathaway Annual Letter, Warren Buffett discussed the value of stability in businesses, arguing that severe change and exceptional returns rarely coexist. Many investors chase exotic, rapidly evolving companies, imagining future profitability while ignoring current realities.
In contrast, Buffett highlights that the best returns often come from businesses consistently doing what they’ve done well for years. While businesses should seize opportunities to improve, those facing constant major changes risk errors and instability.
He stresses the importance of building a strong, durable business franchise, as sustained high returns are typically achieved on stable, reliable economic terrain rather than one marked by constant upheaval.
Here’s an excerpt from the letter:
Severe change and exceptional returns usually don’t mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change.
That prospect lets investors fantasize about future profitability rather than face today’s business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.
Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.
That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized.
But a business that constantly encounters major change also encounters many chances for major error.
Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.
You can read the entire letter here:
1987 Berkshire Hathaway Annual Letter
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