Warren Buffett's 2009 Shareholder Letter: Measuring Performance by Book Value, Defense Over Offense

In the 2009 shareholder letter, Warren Buffett provides a detailed explanation of how Berkshire Hathaway measures its performance and justifies the use of per-share book value as the central metric. Although the ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value, Buffett notes: "The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for it: per-share book value." He acknowledges this measure has flaws, as book value often underestimates intrinsic value for most companies, but at Berkshire—especially within its insurance operations—the discrepancy is substantial. Nevertheless, he and Charlie Munger still consider it the most useful tool for tracking changes in intrinsic value.

The letter also offers a profound insight into long-term performance versus short-term volatility: "Defense over offense." By comparing data from 1965 to 2009, Buffett finds that Berkshire significantly outperformed the S&P 500 in years when markets declined, while not necessarily achieving large gains during market rallies. He concludes: "In other words, our defense has been better than our offense, and that’s likely to continue." The core of this strategy lies in avoiding permanent capital loss, rather than chasing the highest return each year. Additionally, he notes that as the company grows larger, future advantages will shrink: "But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."

For contemporary investors, this letter provides a clear framework for evaluating their own investment systems: Do they have a rational and unshakable standard for measuring success? Buffett emphasizes: "That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it." If an investor assumes they possess stock-picking skill simply because they beat the market in one year, while ignoring drawdowns during bear markets, they may fall into the trap of hindsight bias. True long-term compounding comes from survival capability in adverse conditions and steady value growth—not speculative gains during bull markets.