The 1990 letter opens with Warren Buffett’s granddaughter Emily waving a magic wand over Beemer the Clown’s box of wonders and declaring, “Gee, I’m really good at this” — which, Buffett says, sums up his own contribution to Berkshire’s operating results. Net worth rose just 7.3% in a year when his four permanent holdings went nowhere, and the letter’s centrepiece is the purchase that made it famous: a 10% stake in Wells Fargo, bought for $290 million amid a panic in bank stocks at less than five times after-tax earnings. Buffett explains why he normally avoids banks — at twenty times leverage, small mistakes destroy large amounts of equity, and bankers had played follow-the-leader with lemming-like zeal — and why Carl Reichardt and Paul Hazen were the exception. He welcomes the stock’s 50% collapse because it let him buy more, and draws the lesson that has outlived the trade: investors who will be buyers all their lives should welcome falling prices exactly as they welcome falling food prices, since it is optimism, not pessimism, that is the enemy of the rational buyer. The letter also introduces “look-through earnings,” reveals that Berkshire’s non-insurance businesses earned 51% on equity with no leverage, delivers the full cost-of-float framework for judging an insurer, and launches the super-cat reinsurance business with a warning that results will be close to either zero or 300%. There is a blistering post-mortem on the junk-bond decade — the dagger on the steering wheel, Graham’s three words “margin of safety,” the Tampa television station whose interest exceeded its revenues, and mountains of bonds sold by those who didn’t care to those who didn’t think. Buffett concedes his USAir investment was an unforced error, mourns Gillette’s Colman Mockler, names his wife Susan to the board, and admits that in the insurance business there is no statute of limitations on stupidity. The episode closes with two appendices: Ben Graham’s 1936 satire in which U.S. Steel modernizes by writing its plant down to minus a billion dollars, paying its entire workforce in option warrants and carrying inventory at one dollar; and Buffett’s own letter to a family-business owner on what it really means to sell the work of a lifetime. Essential listening on value investing, banking, insurance float, accounting chicanery and Berkshire Hathaway history.
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