1994 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1994, Berkshire celebrated 30 years of operations under Charlie's and my management. When we began in 1965, Berkshire's book value was $19 per share. In 1994, it reached $10,083 per share—a compound rate of 23%.

"The stock market is a device for transferring money from the impatient to the patient. Those who trade frequently inevitably underperform those who sit still."

The Cost of Trading

Most investors believe that trading frequently will improve their returns. The evidence says otherwise. Every trade incurs costs: commissions, bid-ask spreads, and taxes. These costs compound against the active trader and in favor of the patient holder.

Worse, frequent trading encourages investors to focus on short-term price movements rather than long-term business values. This focus leads to decisions based on emotion rather than analysis.

The Power of Compounding

In 1964, the Dow Jones Industrial Average was at 900. In 1994, it was at 4,700—a gain of 422% or about 7% annually. Not bad, but Berkshire's book value grew by 52,000% over the same period.

The difference is compounding. Every dollar we retained in 1964 has been reinvested at high rates of return. Over 30 years, this compounding transformed $19 into $10,083.

The lesson is clear: find excellent businesses, hold them forever, and let compounding work its magic. There is no other path to extraordinary investment returns.

Our Investment Philosophy

In 1994, we continued to hold our core positions. American Express, Coca-Cola, Gillette, and our other major holdings continued to compound earnings. We added to positions when prices were attractive and made no major changes otherwise.

Charlie and I have no insight into where the stock market will go next year, or next decade. What we do know is that excellent businesses, held for decades, will create extraordinary wealth.

Looking Forward

Our approach for the next 30 years will be exactly what it was for the last 30:

1. Own excellent businesses — Quality compounds; mediocrity doesn't
2. Hold forever — The optimal holding period for great businesses is forever
3. Ignore the market — Stock prices are not business values
4. Stay the course — Consistency is the foundation of compounding

Warren E. Buffett February 1995