The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.

For the inflation rate, coupled with individual tax rates, will be the ultimate determinant as to whether our internal operating performance produces successful investment results—i.e., a reasonable gain in purchasing power from funds committed—for you as shareholders. […] a business earning 20% on capital can produce a negative real return for its owners under inflationary conditions not much more severe than presently prevail.[1]

However, our unwillingness to fix a price now for a pound of See’s candy or a yard of Berkshire cloth to be delivered in 2010 or 2020 makes us equally unwilling to buy bonds which set a price on money now for use in those years. Overall, we opt for Polonius (slightly restated):”Neither a short-term borrower nor a long-term lender be.”


[1] Buffett wrote this when inflation in the U.S. and other economies was between 9% and 13%.




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