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There is a certain kind of investing advice that sounds smart—until you try to follow it. "Buy great businesses." "Don't overpay." "Think long term." All true. But what does any of that actually mean when you are staring at a frothy market surrounded by hype, and your broker is begging for attention?
That is why I keep returning to Buffett's letters from the late 1990s. These were the years when the world was losing its mind over dot-com stocks and the Nasdaq was making millionaires out of college kids. But Buffett? He stuck to the basics. He didn't just repeat the old lines—he explained what they meant, why they mattered, and when they broke down.
From the brutal truth about retail business to why most M&A deals are just ego wrapped in spreadsheets to how insurance becomes a money-printing machine if you do it right—his letters from 1995 to 1999 are a masterclass in staying sane when the market goes manic.
This is our attempt to decode them, one idea at a time. To read our take on his earlier letters, follow this story series.
Retail traps
Back when I was in college, there was this bookstore chain that everyone in town loved. They had beanbags, free coffee, and a cool vibe that made you feel more cultured just by stepping inside. The place was packed. Then, one day, it was not. The chain went bust in a few years.
I thought of that store when I read Buffett's 1995 letter. "Retailing is a tough business," he wrote. Not just tough—brutal. Even the best-run retailers, the ones posting glowing ROEs and steady same-store growth, can crash spectacularly. That is because, in retail, there is no resting on your laurels. Your rivals copy your ideas before you have even celebrated them, and your customers vanish at the first whiff of something newer or cheaper.
In Buffett's world, a retailer doesn't get to cruise. Cruising, in fact, is code for dying.
When to stay still and why that matters
The 1996 letter offers one of Buffett's clearest investment philosophies: inactivity is not laziness—it's intelligence. "We favour businesses and industries unlikely to experience major change," he says. In a world obsessed with chasing disruption, Buffett leans into the opposite: predictability.
And here is the part I love: he compares trimming your best-performing stock just because it dominates your portfolio to trading away Michael Jordan because he scores too many points. Why would you weaken your side on purpose?
Still, even great businesses are not invincible. Coke once tried growing shrimp. Gillette went looking for oil. Great companies sometimes get bored—and when they do, the damage to shareholders can last for years. For Buffett, the enemy of compounding is not a competition; it's a distraction.
Index funds and the know-nothing investor
Buffett doesn't just write for people like him. He writes for people like us. And in 1996, he gave one of his most generous pieces of advice: most people should just buy index funds. Forget beating the market—beat the fund managers who try and fail. That alone will make you rich.
But if you do want to go the active route, keep it simple. You don't need to know beta or option pricing models. You don't need to forecast interest rates or read the RBI's tea leaves. You just need two skills: the ability to value a business and the patience to wait for the right price.
And most importantly, as advised by Buffett: "if you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
Suggested read: What's in a story? Sometimes, Rs 4,500 crore
The duck that thinks it's flying
In 1997, Buffett fired a warning shot for all bull market heroes: don't confuse brains with a bull market. He compares it to a duck quacking proudly after a downpour, thinking it's his/her paddling skill that lifted him/her. A smart duck, he says, would look around and notice that all the other ducks are floating higher too.
It's a gentle reminder that rising markets make everyone look good. But only a few know why they are winning—and fewer still know what to do when the tide turns.
Mergers, illusions, and accounting magic
Buffett's disdain for most M&A deals shows up again in the 1997 and 1998 letters. If you are paying a premium to acquire a business, you better either have an overvalued currency (your stock) or a genuinely synergistic plan. Most don't. But they do have clever accountants.
In 1998, he talked about "restructuring charges"—a phrase that sounds boring until you realise it's code for this: dump years of bad decisions into one awful quarter and then glide smoothly with inflated numbers going forward. Wall Street cheers. Shareholders are deceived.
In the hands of some, accounting is not the language of business. It's an exercise in smoke and mirrors.
The quiet magic of the insurance business
Buffett loves the insurance business—not for the premiums but for the float. That is the money insurers collect today for claims they will pay years from now. In the meantime, they get to invest it.
But float only creates value if two things hold:
- You can generate lots of it.
- The cost of generating it (underwriting loss/float) is lower than the cost of borrowing money.
That second part is where most insurers stumble. Underwriting losses eat into returns. Worse, the numbers can be fudged because loss costs are estimated, not known. And overly rosy assumptions can make a lemon look like a cash cow...until reality catches up.
Buffett insists on a profitable float. If the underwriting is disciplined and the float comes cheap (or free, in case of underwriting profit), the insurer becomes more than a risk manager—it becomes a capital allocator. And that is when the real compounding begins.
Buybacks done right (and wrong)
By 1999, buybacks were everywhere—and Buffett was not thrilled. A buyback only makes sense if a company has excess funds and its stock is trading below intrinsic value. Not for signalling confidence. Not to impress Wall Street. And certainly not to offset dilution from stock options.
Buffett puts it bluntly: "Buying dollar bills for $1.10 is not good business for those who stick around."
Too many CEOs, he says, do buybacks not to create value but to look good. And those who stay? They foot the bill.
Conclusion: Slow ducks, index funds, and the case for staying sane
The Buffett letters from 1995 to 1999 are a clinic in resisting noise. They ask us to slow down when the world is speeding up, to think before we chase, and to question before we conform.
Don't be the duck that thinks it's flying. Be the one that knows how deep the pond is.
Also read: Buffett, beta and the case for a few big bets (1993 letter)
This article was originally published on April 11, 2025.
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