The 1987 letter is where Warren Buffett introduces the world to Mr. Market. Written months after the October crash, it lays out Ben Graham’s allegory of the manic-depressive partner who shows up every day naming a price — and the warning that he is there to serve you, not to guide you. Buffett adds the poker line that has followed it ever since: if you’ve been in the game thirty minutes and don’t know who the patsy is, you’re the patsy. He then turns his fire on “portfolio insurance,” the strategy that had $60 to $90 billion of equities poised on a hair trigger in mid-October, asking whether a rational farm owner would instruct his agent to sell off pieces of the farm each time a neighbour’s land went cheap. Elsewhere in the letter he celebrates the Sainted Seven — the Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing, See’s and World Book — which together earned a 57% return on equity, and explains why the best businesses are usually the ones doing much the same thing they did ten years ago. There is 94-year-old Mrs. B, for whom he scraps the mandatory retirement-at-100 policy; an anonymous letter from a competitor begging him to raise prices; Chuck Huggins turning a candy-discontinuation revolt into a customer-service masterclass; a demand that auditors admit they cannot verify an insurer’s loss reserves; the $700 million Salomon preferred; and a warning that America’s trade deficit has the government depending, like Blanche DuBois, on the kindness of strangers. Essential listening on value investing, market psychology, capital allocation and Berkshire Hathaway history.
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