The 1988 letter is Warren Buffett’s most quotable demolition of academic finance — and the year Berkshire bought Coca-Cola. Buffett opens by warning that past rates of gain say little about the future, since judging Berkshire on its record is like judging a forty-two-year-old center fielder on his lifetime batting average. He celebrates the Sainted Seven, which earned 67% on equity with no leverage, and welcomes Borsheim’s into the family — bought from Ike Friedman with no audit, no inventory count, and a one-page contract, because the Friedmans and the Blumkins share Mrs. B’s creed: sell cheap and tell the truth. The heart of the letter is a masterclass on arbitrage, from the 24-year-old Buffett buying Rockwood shares and selling cocoa beans with subway tokens as his only expense, to the Arcata redwood saga where he valued a government timber claim at “somewhere between zero and a whole lot” and was eventually proven spectacularly right. That record becomes his case against efficient market theory: 63 years of 20%-plus arbitrage returns, against a market that returned just under 10% — the difference between $1,000 growing to $405,000 and growing to $97 million. Along the way he explains why it is far easier for an inadequate CEO to keep his job than an inadequate typist, why bosses paint the bullseye around wherever the arrow lands, why he wants Berkshire’s newly NYSE-listed shares to trade quietly at intrinsic value rather than as high as possible, and why accounting fraud pays: it has been far safer to steal large sums with a pen than small sums with a gun. He also pays tribute to his teacher David Dodd, and coins the line that defines his approach to Coca-Cola and Freddie Mac — our favorite holding period is forever. Essential listening on value investing, market efficiency, arbitrage, accounting and Berkshire Hathaway history.
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