To the Shareholders of Berkshire Hathaway

# 1996 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc.: In 1996, Berkshire's net worth increased by $6.2 billion, or 36.1%. Over the past 32 years, per-share book value has grown from $19.46 to $19,011, a rate of 23.8% compounded annually. ## The Circle of Competence [[Charlie Munger]] and I operate within what we call our **circle of competence**. This means we only invest in businesses we can understand and evaluate. Knowing the boundaries of your competence is as important as having competence. We pass on opportunities outside our circle, no matter how attractive they appear. We would rather miss a good opportunity than make a bad investment. > "Invest within your circle of competence. It's not how big the circle is that counts, it's how well you define the perimeter." ## The Power of Compounding The most powerful force in investing is **compounding**. A dollar invested at 20% for 25 years becomes $95. The same dollar at 10% becomes only $10.8. This mathematical reality explains why we focus on finding businesses that can generate high returns on capital over long periods. A business that compounds at 20% for decades creates extraordinary wealth. ## Economic Moat We continue to seek businesses with wide **economic moats**—sustainable competitive advantages that protect them from competitors. A moat might come from: - Brand strength - Network effects - Cost advantages - Regulatory advantages - Switching costs [[Coca-Cola]]'s brand is a perfect example of a wide moat. Consumers reach for Coke regardless of price, giving the company pricing power that few competitors can match. ## GEICO Acquisition In 1996, we completed the acquisition of the remaining shares of [[GEICO]] that we did not already own. GEICO's low-cost structure gives it a durable competitive advantage in auto insurance. ## Conclusion Stay within your circle of competence, invest in businesses with wide moats, and let compounding work its magic over time. Warren E. Buffett Chairman of the Board