1979 Shareholder Letter

Date: March 3, 1980 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1979 produced operating earnings of 18.6% of beginning net worth — a good year but below 1978's performance. Over 15 years under Buffett's management, per-share book value grew from $19.46 to $335.85, a 20.5% compound annual return. This letter introduced the concept of the "investor's misery index" and warned about inflation's impact on real returns.

Key Points

Against EPS as a Metric

"'Earnings per share' will rise constantly on a dormant savings account or on a U.S. Savings Bond bearing a fixed rate of return simply because 'earnings' (the stated interest rate) are continuously plowed back and added to the capital base. Thus, even a 'stopped clock' can look like a growth stock if the dividend payout ratio is low."

The Investor's Misery Index

Buffett introduced this concept:

"The inflation rate, coupled with individual tax rates, will be the ultimate determinant as to whether our internal operating performance produces successful investment results... This combination — the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business — can be thought of as an 'investor's misery index'."

Why 20% Returns May Produce Zero Real Gains

"If we should continue to achieve a 20% compounded gain... your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate."

The Gold Analogy

"A business whose per-share net worth compounded at 20% annually would have guaranteed its owners a highly successful real investment return. Now such an outcome seems less certain."

Buffett referenced that 1964 book value bought about half an ounce of gold, and 15 years later of "blood, sweat and tears," book value still only bought about the same half ounce.

Low Leverage Approach

"We have achieved this result while utilizing a low amount of leverage... and also without significant issuance or repurchase of shares."

Famous Quotes

"Government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil."

"We intend to continue to do as well as we can in managing the internal affairs of the business. But you should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway."

Related

• letter-1978 — Previous year
• letter-1980 — Discussing retained earnings and the iceberg theory
• warren-buffett
• compounding
• intrinsic-value