Another installment in our ongoing series on Warren Buffett, in which we investigate Buffett's yearly letters to Berkshire Hathaway shareholders for nuggets of wisdom.

This installment: Buffett's views on the year 1989...

1989 did nothing to tarnish Buffett's reputation, as it was another awesome year:

Our gain in net worth during 1989 was $1.515 billion, or 44.4%. Over the last 25 years (that is, since present management took over) our per-share book value has grown from $19.46 to $4,296.01, or at a rate of 23.8% compounded annually.

Buffett's buy-and-hold strategy has paid handsome dividends, but he says that 1989 may have been the end of the "double dipping" Berkshire had been getting with its portfolio holdings:

We will keep most of our major holdings, regardless of how they are priced relative to intrinsic business value. This 'til-death-do-us-part attitude, combined with the full prices these holdings command, means that they cannot be expected to push up Berkshire's value in the future as sharply as in the past. In other words, our performance to date has benefited from a double-dip: (1) the exceptional gains in intrinsic value that our portfolio companies have achieved; (2) the additional bonus we realized as the market appropriately "corrected" the prices of these companies, raising their valuations in relation to those of the average business. We will continue to benefit from good gains in business value that we feel confident our portfolio companies will make. But our "catch-up" rewards have been realized, which means we'll have to settle for a single-dip in the future.

Buffett explains how short-term trading can hurt you versus long-term investing when it comes to the tax man:

Imagine that Berkshire had only $1, which we put in a security that doubled by yearend and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we
would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash
out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

Discussing the insurance busines, Buffett makes it clear over the years that Berkshire Hathaway doesn't particularly strive to be the lowest-cost providrer, but it makes up for this because of its size---when competition's high and rates are low, Berkshire doesn't write as much business (although it writes more profitable business than its competitors), but when its competitors get stung and have to pull back from their aggressive pricing, Berkshire steps in and takes the lucrative business.

An example from 1989 shows this. After Hurricane Hugo hit, many insurers and reinsurers were on bad shape. Berkshire stepped in and began writing a lot of policies for insurance that in the past it would have stayed away from, because the price was now right:

But because the 1989 disasters left many insurers either actually or possibly bare, and also left most CAT writers licking their wounds, there was an immediate shortage after the earthquake of much-needed catastrophe coverage. Prices instantly became attractive, particularly for the reinsurance that CAT writers themselves buy. Just as instantly, Berkshire Hathaway offered to write up to $250 million of catastrophe coverage, advertising that proposition in trade publications. Though we did not write all the business we sought, we did in a busy ten days book a substantial amount.

Having been at the helm of Berkshire Hathaway for 25 years in 1989, Buffett, ever humble, offered up a section of the letter called "Mistakes of the First Twenty-five Years (A Condensed Version)". This provides all sorts of good advice for those looking to emulate Buffett. It's tempting to just quote the whole thing, but I'll shrink it down a bit.

On bargain investing:

...the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre.

You might think this principle is obvious, but I had to learn it the hard way - in fact, I had to learn it several times over. Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn, buying through a company called Diversified Retailing that later merged with Berkshire. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras - unrecorded real estate values and a significant LIFO inventory cushion. How could I miss? So-o-o - three years later I was lucky to sell the business for about what I had paid. After ending our corporate marriage to Hochschild Kohn, I had memories like those of the husband in the country song, "My Wife Ran Away With My Best Friend and I Still Miss Him a Lot."

And:

That leads right into a related lesson: Good jockeys will do well on good horses, but not on broken-down nags. Both Berkshire's textile business and Hochschild, Kohn had able and honest people running them. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand.

On avoiding companies with problems in hopes of big gains when a company turns around:

Overall, however, we've done better by avoiding dragons than by slaying them.

Buffett jokes about the irrationality inherent in most companies:

For example: (1) As if governed by Newton's First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.

Buffett caps off this section with:

We hope in another 25 years to report on the mistakes of the first 50. If we are around in 2015 to do that, you can count on this section occupying many more pages than it does here.