1984 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1984, Berkshire's book value grew 22.4% while the S&P 500 returned only 6.1%. This outperformance—consistent over 20 years—poses a challenge to academic theories about market efficiency.

"The efficient market hypothesis says that no investor can consistently outperform the market because all available information is already reflected in prices. If this hypothesis were true, Berkshire's record would be impossible."

The Efficient Market Hypothesis

In 1984, at the Columbia University business school, I debated the efficient market hypothesis with academic proponents. My argument was simple: Berkshire's record proves that the hypothesis is wrong.

If markets were truly efficient, no investor could consistently outperform for 20 years. Yet we had done exactly that. The hypothesis must be flawed.

The flaw is this: while information may be widely available, not all investors process it equally well. Some investors—through better analysis, better judgment, or better temperament—consistently see more than the market prices in.

Why Most Investors Underperform

Most professional investors underperform the market for one reason: they trade too much. Every trade incurs costs and requires conviction that the new position is better than the old one.

The investor who holds a diversified portfolio of excellent businesses for decades will outperform the investor who constantly rotates among positions. Compounding requires time; trading interrupts the process.

The Value of Patience

In 1984, the most valuable thing we did was nothing. Our core holdings—See's Candy, Blue Chip Stamps, Insurance Operations—continued to compound. No action was required; no action was taken.

This patience is difficult to maintain. It requires resisting the social pressure to be doing something. But it is the foundation of successful investing.

Looking Forward

Our approach is proven and will not change:

1. We think independently — The crowd is usually wrong at extremes
2. We hold excellent businesses — Quality compounds
3. We are patient — Compounding requires time
4. We ignore short-term noise — Market prices are irrelevant to long-term values

Warren E. Buffett February 1985