2005
Click here to read the letter.🧠 Key Takeaways
In business, long-term success is almost always the result of small, incremental improvements stacking up over time. It’s really all about getting 1% better every day, across every part of the business.
If you want to own a business that’s stronger ten or twenty years from now than it is today, management has to consistently make decisions that benefit the long-term health of the business—even when those decisions get in the way of short-term results.
Over the full life of a business, shareholders as a group can’t earn returns that diverge from the company’s underlying financial performance. The business itself is the source of all the value.
✍️ Memorable Quotes
“Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.”
In business, long-term success is almost always the result of small, incremental improvements stacking up over time. It’s really all about getting 1% better every day, across every part of the business.
None of these things feels revolutionary in the moment, but they all move the needle in the same direction. Every seemingly minuscule improvement strengthens the business just a little bit, and over time, that’s how competitive advantages are built.
“When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted.”
It’s pretty simple: if you want to own a business that’s stronger ten or twenty years from now than it is today, management has to consistently make decisions that benefit the long-term health of the business—even when those decisions get in the way of short-term results.
On the other hand, when management becomes overly focused on short-term outcomes, it usually comes at the expense of the company’s long-term moat. And once that long-term competitive advantage is damaged, it’s incredibly hard to build back up.
“With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic - no shower of money from outer space - that will enable them to extract wealth from their companies beyond that created by the companies themselves.”
In other words, over the full life of a business, shareholders as a group can’t earn returns that diverge from the company’s underlying financial performance. The business itself is the source of all the value.
For example, if a business compounds its earnings at roughly 8% over time, that’s ultimately the return shareholders should expect to earn as well. Of course, an investor who buys at the right time or sells at the right time can do better (or worse) than the business itself since markets aren’t perfectly efficient.
But over the long run, the physics of it all are still intact. The returns will follow the operational performance of the business.
Memorable quotes and key takeaways from the 2005 Berkshire Hathaway shareholder letter.