1988 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1988, Berkshire made a major new investment: $1 billion in Coca-Cola, acquiring 7.8% of the company. We paid a premium to book value, which disturbed some shareholders. They shouldn't have worried.

"The price you pay determines your return, but the business you buy determines whether you have a chance of earning a good one. Quality matters more than price."

Why We Bought Coca-Cola

Coca-Cola is the greatest brand in consumer products history. In 1988, the company had a dominant position in soft drinks worldwide, with pricing power, distribution advantages, and brand recognition that no competitor could match.

We paid a premium price for this business. But the premium was small compared to the quality we received. Coca-Cola's competitive position has only strengthened since 1886. It will be stronger still in 2086.

Quality Beats Price

Most investors focus on price. They look for cheap stocks, low P/E ratios, and small price-to-book values. These metrics are useful but incomplete.

The critical question is: what are you buying for that price? A cheap stock in a deteriorating business is not a bargain; it's a trap. A fair-priced stock in an excellent business is the foundation of wealth.

Charlie taught me this lesson early. "It's better to buy a wonderful business at a fair price than a fair business at a wonderful price." This insight has guided our investing ever since.

The Two Things That Matter

In investing, there are only two things that matter:

First, quality. The business you own must have durable competitive advantages. Its products must be essential, not easily substituted. Its management must be honest and capable. Without quality, compounding is impossible.

Second, patience. The magic of compounding works slowly. The best investments often take years to realize their potential. You must be willing to wait.

Quality without patience produces nothing. Patience without quality produces only average results. Together, they produce extraordinary wealth.

Looking Forward

Our approach will not change:

1. We seek quality first — Business economics determine long-term returns
2. We pay fair prices — We never demand a bargain at the expense of quality
3. We are patient — Compounding takes decades, not quarters
4. We hold forever — The best businesses deserve permanent ownership

Warren E. Buffett February 1989