Letter

Berkshire Hathaway's 2011 letter to shareholders

Warren Buffett · 2012

It sets out, in plain arithmetic, when buybacks create value and why Buffett measures risk by loss of purchasing power rather than volatility, two ideas at the centre of capital allocation.

• Risk
• Investing
• Capital allocation
• Valuation

2 ideas from this letter

• FrameworkRisk located

  Risk is the probability of losing purchasing power, not the volatility of the price

  Measure risk as the chance of ending the holding period with less buying power, which makes volatile productive assets safer than stable unproductive ones.

  Any debate about what risk means, portfolio construction over long horizons, and questions about gold or cash as safe assets.

• FrameworkCapital allocation located

  What is smart at one price is dumb at another: the two tests before a buyback

  A buyback creates value only with funds to spare and a price well below intrinsic value; above that price the same action destroys it.

  Any capital allocation question, any company announcing a buyback, and private equity interviews on value creation.