1987 Shareholder Letter

Date: February 29, 1988 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1987 net worth increased $464 million or 19.5%, with per-share book value reaching $2,477.47 — a 23.1% compound annual return over 23 years. This letter explained why book value and intrinsic value often have little relationship.

Key Points

Book Value vs Intrinsic Value

"In many cases, a corporation's book value and business value are almost totally unrelated."

Examples:

• LTV and Baldwin-United: Book values of $652M and $397M respectively, then went bankrupt
• Belridge Oil: Sold for $3.6 billion vs book value of only $177M

The Sainted Seven Performance

Seven businesses earned 57% return on equity capital:

• Combined pre-tax earnings: $180 million
• Equity capital required: only $175 million
• Only 6 of 1000 Fortune 500 companies achieved 30%+ ROE over the previous decade

The Double-Dip Opportunity

"Our premium of business value to book value has widened for two simple reasons: We own some remarkable businesses and they are run by even more remarkable managers."

Famous Quotes

"Jack Benny expressed upon receiving an acting award: 'I don't deserve this, but then, I have arthritis and I don't deserve that either.'"

Related

• letter-1986 — Previous year
• letter-1988 — Following year
• warren-buffett
• intrinsic-value