1992 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1992, Berkshire's book value grew 20.3%, extending our record of consistent outperformance. This consistency is not accidental—it reflects a coherent investment philosophy applied consistently for 28 years.

"The difference between a good business and a bad business is whether it throws off cash year after year. A good business funds its own growth; a bad business consumes cash to survive."

The Principles of Value Investing

Our investment approach rests on three pillars:

First, intrinsic value. Every business has an intrinsic value based on its future cash flows discounted at an appropriate rate. Our job is to estimate this value and buy at a significant discount.

Second, the margin of safety. We never pay full price. We always leave room for error. This margin of safety protects us from the inevitable mistakes that every investor makes.

Third, the circle of competence. We invest only in businesses we understand. This constraint excludes many opportunities, but it protects us from the overconfidence that destroys most investors.

Why Most Analysis Misses the Point

Most financial analysis focuses on the wrong things: quarterly earnings, short-term trends, and relative valuation metrics. These measures are useful for some purposes but mislead investors about business quality.

The right question is always: what will this business look like in 10 years? If you can't answer this question, you don't understand the business well enough to own it.

Looking Forward

Our approach is proven and will not change:

1. We estimate intrinsic value — Every business has a true worth
2. We buy at a discount — Never pay full price
3. We stay within our circle — Understanding is the prerequisite for ownership
4. We hold for decades — Compounding requires patience

Warren E. Buffett February 1993