To the Shareholders of Berkshire Hathaway

# 1990 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. Operating earnings for 1990 were $309 million, or $1,943 per share. Our book value grew by 19.9% versus a market gain of about 30%. While we underperformed the market this year, our focus remains on long-term value creation, and we believe our approach will serve shareholders well over the decades ahead. ## The Three-Legged Stool At Berkshire, we think of our investment approach as supported by three essential pillars: 1. **Excellent businesses** with durable competitive advantages 2. **Excellent management** with integrity, intelligence, and energy 3. **Excellent capital allocation** that compounds earnings at high rates When all three legs are present, the stool is stable and productive. When any one leg is weak, the entire enterprise is at risk. ## The Critical Role of Management Quality Many investors focus almost exclusively on the quantitative aspects of a business—the P/E ratio, the book value, the earnings growth rate. While these factors matter, they are only part of the story. The quality of management is equally important. > "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the business's reputation that remains intact." The inverse is equally true: a business with excellent economics can be destroyed by poor management. We have seen this happen at companies across America. The talent to run a business well is rare, and when we find managers who combine integrity, intelligence, and energy with a genuine owner's mentality, we want to partner with them for decades. ## The Acquisition Checklist When we evaluate potential acquisitions, we look for businesses with: - **Durable competitive advantages** (economic moats) that will protect earnings power for decades - **Management of high quality and integrity** who will treat shareholders as partners - **Simple, understandable businesses** that we can evaluate with confidence - **Earnings that are largely in cash** rather than dependent on accounting assumptions - **Growth opportunities that do not require significant additional capital** We are not interested in businesses that require constant capital infusion to maintain their competitive position. We want businesses that generate cash, not businesses that consume it. ## On the Culture of Integrity [[Charlie Munger]] has always emphasized that the culture of an organization matters enormously. At Berkshire, we try to build a culture of integrity, rationality, and shareholder-orientation. We want managers who think of themselves as owners, not as hired executives. This culture cannot be created overnight, and it can be destroyed by a single bad hire at the top. We are vigilant about protecting the culture that has served us so well. ## Why We Hold Forever Our ideal holding period is **forever**. We do not think in terms of quarters or even years. We think in terms of decades. This long time horizon gives us enormous advantages. Most corporate managers are evaluated on quarterly and annual earnings, which creates pressure to make decisions that optimize for the short term. We have the luxury of thinking about what will maximize value over twenty or thirty years. > "The stock market is a device for transferring money from the impatient to the patient." This patience is not passive. It requires constant attention to the quality of our businesses and the people who manage them. ## Conclusion We remain committed to building Berkshire as a permanent home for excellent businesses managed by excellent people. The pace of our acquisitions will depend on market conditions and available opportunities, but our standards will not be compromised. Warren E. Buffett March 1991