1989 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1989, Berkshire's book value grew 44.4%—our best year ever. Much of this gain came from the recovery after the October 1987 crash, when the market fell 21% in one day.

"In October 1987, I received many phone calls asking what I was doing. The answer was: nothing. I had not sold a single share. This was not a bold or brave decision; it was simply the correct one."

What the Crash Taught

The October 1987 crash was the largest one-day decline in market history. Many investors panicked. Some sold everything. Others tried to figure out what had changed overnight.

The answer: nothing had changed. The crash was pure market psychology. Business values had not changed; only prices had. The businesses we owned—Coca-Cola, Gillette, GEICO—were exactly as valuable on October 20 as they had been on October 15.

The lesson is simple: prices are not values. When prices fall, intelligent investors should ask whether values have changed. If they haven't, the lower price is an opportunity, not a danger.

Why We Did Nothing

In the crash, I did not sell. I also did not buy. The reason was simple: I could not identify any businesses that had become dramatically undervalued. The crash had lowered all prices equally, but not all businesses had become cheap.

I needed prices to fall more—or business values to rise—to create opportunities. Neither happened in the crash itself. So we waited.

The Value of Inaction

Most investors believe they must act. They believe that successful investing requires constant activity. They are wrong.

The best investment decisions often require doing nothing. Waiting for the right price. Waiting for a business to prove itself. Waiting for the market to present opportunities.

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 remains constant:

1. We ignore short-term prices — They are irrelevant to long-term values
2. We wait for opportunities — The best deals come to those who wait
3. We act decisively when we see value — No price is too high for the right business
4. We hold forever — The best businesses deserve permanent ownership

Warren E. Buffett February 1990