Issue #1 — The 19% Question

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Key takeaways from this edition

Hey Compounders,

Berkshire Hathaway's operating earnings per share grew 37% in 1977.

Picture what a modern CEO would do with a number like that. A press release with the word "record" three times in the first paragraph. A CNBC hit. A slide deck full of arrows going up and to the right.

Buffett did none of it. On page one of his 1977 letter to shareholders — the first letter Berkshire has ever posted publicly, and the one we're spending this whole issue inside — he did the opposite. He warned his shareholders not to get excited:

And then he wrote the sentence that quietly upgrades your ability to read any earnings release for the rest of your investing life:

Read that twice.

Here's what Buffett means in the plainest possible English.

Imagine you park $10,000 in a savings account paying 5%. Year one, you earn $500. You leave it in. Now you have $10,500.

Year two, the same 5% rate produces $525. Then $551. Then $579.

Your "earnings" go up every single year. You could send out a press release each year announcing record interest income. But you haven't done anything. The bank hasn't done anything. Nothing changed. The account is dormant.

Buffett's point: a lot of what companies call earnings growth is exactly that. The company kept some of last year's profit, added it to the equity base, and now the same rate of return produces a bigger number. No skill involved. Just a bigger pile of money sitting there.

So how do you actually judge management? Buffett introduces the fix in the very next paragraph:

Not earnings. Not earnings per share. Return on the equity capital they started the year with.

Watch how Buffett applies his own test to his own company. Berkshire's 1977 numbers:

In Buffett's own words, the 37% headline was "considerably less impressive than it might appear at first glance."

Almost all of the jump was the savings-account effect. A bigger base earning roughly the same rate of return. The actual report card — the number that measured what Berkshire's management genuinely accomplished with the resources they had — was that 19%. Slightly better than 1976. Above the long-run average of American industry. Genuinely good. But nothing like the fireworks the 37% number implied.

This is what "thinking like an owner" looks like. An owner doesn't ask "how many dollars did I earn?" An owner asks "for every dollar I already had, how many cents did I make?"

Nothing has really changed in the 49 years since Buffett wrote that page.

Open any mega-cap earnings release today. You'll see the same script every quarter:

What you'll rarely see in the headline: the return on the equity shareholders already had invested at the start of the year.

Companies like Alphabet, Microsoft, and Meta retain huge portions of their earnings every year. That cash gets added to equity. The next year's earnings then have to grow just to keep return on equity flat — let alone rising. When these companies report EPS growth of 15 or 20%, the honest owner asks three follow-up questions before deciding whether to be impressed:

If equity grew almost as fast as earnings, that's a savings account in a blazer. If earnings grew much faster than equity, you've found something rare and worth paying attention to — a business that's actually compounding, not just accumulating.

Buffett wrote this warning to his own shareholders in 1977 because he didn't want them confusing size with skill. In 2026, most investors are still making exactly that mistake, every quarter.

Next time you read an earnings release, do one thing before you get to the celebration.

Find the shareholders' equity from the start of the reporting period. Divide operating earnings by that number. That's the real report card.

You now have a filter almost nobody else in your feed is using. That, more than any single stock pick, is why Buffett's letters are worth reading — not to copy his portfolio, but to inherit his questions.

Issue #2 — Why Buffett Kept a Business That Was Losing Money
The tailwinds versus headwinds rule from the 1977 letter, and why the best managers in the wrong industry still lose to average managers in the right one. Plus one Canadian sector this rule might be trying to tell you something about.

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