Just re-read the 1994 Berkshire Hathaway Annual Letter—Buffett’s full of sharp, clear-eyed takes on investing and leadership. I pulled out a few of the best takeaways.
“A fat wallet is the enemy of superior investment results,” he wrote, acknowledging that Berkshire Hathaway’s growing size made it harder to find needle-moving opportunities.
Still, Buffett and Charlie Munger weren’t about to change their playbook. “We believe that our formula—the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people—is certain to produce reasonable success.”
Buffett emphasized sticking to the “happy zone,” borrowing from Ted Williams’ hitting philosophy, and made it clear that macro predictions wouldn’t guide their actions. “Fear is the foe of the faddist, but the friend of the fundamentalist,” he said, reminding shareholders that Berkshire often bought its best positions when fear was running highest.
The letter also showed Buffett’s sharp eye for capital allocation and management incentives. On stock options and executive pay, he said many plans “flunk this basic test” of alignment, calling out arrangements that are “heads I win, tails you lose.”
Instead, he praised simple, performance-linked pay, like the one worked out with Ralph Schey of Scott Fetzer in “about five minutes,” with no lawyers or consultants.
On intrinsic value, Buffett made it crystal clear: “Book value is meaningless as an indicator.” He laid out how Scott Fetzer, which Berkshire acquired for nearly double its book value, had seen its earnings double even as its carrying value on Berkshire’s books fell by half. “What a manager must do is handle the basics well and not get diverted.”
And with trademark wit, he owned up to his mistakes. His USAir investment, he wrote, was “an unforced error,” slashing its valuation to 25 cents on the dollar. But he also reminded shareholders of the long-term view: “You don’t have to make it back the way that you lost it.”
You can read the entire letter here:
1994 Berkshire Hathaway Annual Letter
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