Warren Buffett's 2004 Letter to Shareholders: Intrinsic Value and the Investor Behavior Trap

In his 2004 letter to shareholders, Warren Buffett clearly distinguishes between book value and intrinsic value. He notes: "It’s per-share intrinsic value that counts, however, not book value." (However, what matters is per-share intrinsic value, not book value.) Despite its flaws, Buffett believes the annual book value calculation remains useful at Berkshire Hathaway as a "slightly understated gauge" of long-term intrinsic value growth. He further explains that due to changes in stock holdings relative to net worth, the correlation between annual performance and the S&P 500 has diminished, but in the long run, unless they can achieve per-share intrinsic value growth exceeding that of the S&P 500, his and Charlie Munger’s contributions to shareholders will be negligible.

Beyond valuation principles, Buffett delves into three main reasons for poor investor performance. First is high cost, often stemming from excessive trading or paying excessive investment management fees; second is portfolio decisions based on rumors and trends rather than thoughtful, quantifiable assessments of businesses; third is poor market timing—entering after prolonged gains and exiting during stagnation or decline. He warns: "Investors should remember that excitement and expenses are their enemies." (Investors should remember that excitement and expenses are their enemies.)

For today’s readers, understanding these principles helps reflect on personal investment behavior. For example, suppose an investor frequently trades in an attempt to capture market volatility and pays high management fees—this perfectly aligns with Buffett’s description of "high costs" and "start-and-stop approach." Buffett’s advice is that if one insists on timing, one should follow the principle of "be fearful when others are greedy and greedy only when others are fearful." This emphasis on cost control and emotional discipline remains a key guide for ordinary investors to avoid catastrophic outcomes.