To the Shareholders of Berkshire Hathaway

# 1987 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc.: In 1987, Berkshire's net worth increased by $464 million, or 19.5%. Over the past 23 years (since present management took over), our per-share book value has grown from $19.46 to $2,477.47, or at a rate of 23.1% compounded annually. ## Mr. Market [[Benjamin Graham]] introduced the concept of **Mr. Market** in his book "The Intelligent Investor." This metaphor remains one of the most powerful mental models for investors. Imagine you own a small business with a partner named Mr. Market. Every day, Mr. Market offers to buy your share of the business or sell you his share—at a price that changes daily based on his mood. > "Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence." When Mr. Market is euphoric, he offers ridiculously high prices. When he is depressed, he offers absurdly low prices. The rational business owner ignores Mr. Market's daily quotes and focuses on the underlying value of the business. ## The 1987 Market Crash October 19, 1987—Black Monday—saw the Dow Jones Industrial Average fall 508 points, or 22.6%. Many investors panicked. We did not. For the true value investor, market declines are not disasters—they are opportunities. When Mr. Market offers to sell you excellent businesses at bargain prices, you should be grateful, not fearful. ## Permanent Capital Loss We define risk differently than most investors. **Risk is not volatility.** Risk is the possibility of permanent capital loss—the loss of purchasing power over time. A stock that declines 50% and then recovers is not risky if you don't sell during the decline. A stock that appears stable but loses purchasing power to inflation over decades is risky. ## Intrinsic Value and Margin of Safety We continue to focus on [[intrinsic value]] and maintain a **margin of safety** in all our investments. We have no idea what the stock market will do next month or next year. We do know that buying wonderful businesses at fair prices will produce satisfactory long-term results. ## Conclusion Be fearful when others are greedy, and greedy when others are fearful. The market will fluctuate—that is certain. Your ability to ignore the fluctuations and focus on business value will determine your success as an investor. Warren E. Buffett Chairman of the Board