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1986 Shareholder Letter

Buffett's 1986 letter introduces 'The Sainted Seven' businesses earning 57% ROE, explains why hiring 'bigger than we are' creates giants, and discusses capital allocation.

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1986 Shareholder Letter

Date: February 27, 1987 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1986 net worth increased $492.5 million or 26.1%, with per-share book value growing from $19.46 to $2,073.06 — a 23.3% compound annual return over 22 years. This letter introduced "The Sainted Seven" and explained Berkshire's two jobs.

Key Points

The Sainted Seven

Seven businesses delivered extraordinary returns on capital:

  • Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, World Book

Combined, they earned 57% return on equity capital in 1986.

Berkshire's Two Jobs

Job 1: Attract and keep outstanding managers

"Usually the managers came with the companies we bought, having demonstrated their talents throughout careers... Our main contribution has been to not get in their way."

Job 2: Allocate capital

"We earn more money than average; we retain all that we earn; we are fortunate to have operations that, for the most part, require little incremental capital."

Hire Giants, Not Dwarfs

"If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants." — David Ogilvy

On Working with Good People

"We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time."

Famous Quotes

"Working with people who cause your stomach to churn seems much like marrying for money - probably a bad idea under any circumstances, but absolute madness if you are already rich."

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