1983 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1983, Berkshire's book value reached $975 per share—a 51-fold increase from the $19 per share when Charlie and I took over in 1965. This compound rate of 21.4% per year has exceeded our own expectations.

"The best businesses are those that generate cash but require no additional capital. They are rare, but when you find them, they are worth holding forever."

Book Value and Intrinsic Value

In 1983, I discussed the relationship between book value and intrinsic value. Book value is the accounting measure of net assets; intrinsic value is the discounted value of future cash flows. They are different things.

For most businesses, book value is a poor indicator of intrinsic value. A business with significant intangible assets—brand value, intellectual property, customer relationships—will have intrinsic value far exceeding book value. Conversely, a capital-intensive business may have book value exceeding intrinsic value.

For Berkshire, book value is the best available indicator of intrinsic value. Most of our assets are marketable securities and operating businesses that can be valued at or near their reported values. We carry our businesses at cost, which is conservative.

Management Honesty

In 1983, I reflected on the importance of management honesty. It is the most underrated quality in evaluating businesses.

Honest managers tell you the truth about their businesses—including the bad news. Dishonest managers tell you what you want to hear, delaying the day of reckoning and making the ultimate correction worse.

At Berkshire, we seek managers who tell us the truth, even when it's uncomfortable. This quality is rare but invaluable.

The Best Businesses

The best businesses have two characteristics: they generate significant cash, and they require minimal additional capital to maintain their competitive position.

These businesses can compound shareholder capital at extraordinary rates. Every dollar of earnings can be reinvested at high rates of return, accelerating the compounding process.

Looking Forward

Our approach remains constant:

1. We estimate intrinsic value — Book value is an indicator, not the answer
2. We seek honest management — Truth-telling is the foundation of trust
3. We own businesses that don't need capital — Free cash flow compounds fastest
4. We hold forever — The best businesses deserve permanent ownership

Warren E. Buffett February 1984