Buffett on inflation, EPS and buybacks (1978-81 letters)

This story is part of our ongoing series decoding Warren Buffett's annual letters, not just for what he said, but for how we can use his wisdom today. Between 1978 and 1981, the world changed dramatically for investors. Inflation roared, interest rates soared, and equity investing lost its halo. Buffett, as usual, saw it all with unusual clarity without even blinking. Let's decode the fundamental lessons from his 1978-1981 letters to Berkshire shareholders. The cruel math of commodity businesses In 1978, Buffett turned a candid eye toward Berkshire's textile business—a classic case of what he called a commodity business. Despite appearing "cheap" on paper (machines booked at a fraction of their replacement cost), the returns were perpetually unsatisfying. Why? Because capital turnover was low and margins were thin—a double whammy. Even the best efforts of management couldn't overcome the fact that everyone in the industry was trying to do the same thing: lower costs, improve efficiency, chase trends. As Buffett wrote, textile businesses—and other producers of undifferentiated goods—don't earn good returns unless supply is tight. And when there is excess capacity, prices fall to meet operating costs, not capital invested. It's a rigged game but not in your favour. Return on equity vs the earnings mirage Buffett has always warned against taking earnings per share (EPS) at face value, and his 1979 letter makes

This article was originally published on November 15, 2024, and last updated on April 03, 2025.