If you can't understand it, don't buy it: outside the circle of competence it's discipline, inside it's laziness

In 1999 tech stocks soared, and Berkshire, which stubbornly refused to touch them, underperformed the market; quite a few people laughed at Buffett as outdated. In his shareholder letter he admitted that these companies were beyond his understanding, and admitted that he therefore missed the rally, but he held to one rule: don't touch companies whose earnings ten years from now you can't even roughly figure out.

Next time you face a sector that is surging but that you can't understand, first seriously work out the cash flows ten years out. If you truly can't compute them, skipping it is protection—there's no need to blame yourself for missing out. If you could compute them but can't be bothered, that isn't prudence.

If the company is in an industry you should be able to understand, "I can't understand it" is just an excuse—don't use it to exempt yourself from the homework. This letter is a first-person account, with no complete comparison of holdings and returns, so don't use it to prove that this discipline is more profitable over the long run.

Berkshire 1999 Shareholder Letter (2000) | Next review 2027-09-20