Warren Buffett has spent decades urging investors to separate a company’s underlying economics from the market’s shifting enthusiasm. In Berkshire Hathaway’s (BRK.B) (BRK.A) 1993 shareholder letter, the CEO revisited a theme that runs through much of his writing: in the short term, stock prices can depart sharply from the progress of the businesses they represent. That performance gap, he suggested, can persist long enough to tempt investors into confusing momentum with durability — even though it rarely becomes a permanent condition.
Buffett framed the issue through the experience of two of Berkshire’s major holdings at the time, writing: “Over time, of course, market price and intrinsic value will arrive at about the same destination. But in the short run the two often diverge in a major way, a phenomenon I've discussed in the past. Two years ago, Coca-Cola (KO) and Gillette, both large holdings of ours, enjoyed market price increases that dramatically outpaced their earnings gains. In the 1991 Annual Report, I said that the stocks of these companies could not continuously overperform their businesses.”
This observation was not aimed at predicting an imminent decline. Instead, it underscored a structural reality: over extended periods, the market’s return from owning a business tends to be anchored by what the business earns and reinvests, not by how excited investors become at any particular moment.
The historical context matters: Buffett wrote those lines after a period when widely admired consumer brands had experienced strong price appreciation, drawing attention and capital. His point was not that great companies are immune to overvaluation or that rising prices automatically imply wrongdoing. It was that a stock’s price can temporarily race ahead of its earnings power, and when it does, the future investment experience depends heavily on whether the business eventually “catches up” through sustained profitability and growth, or whether expectations embedded in the price prove too optimistic.
That principle remains relevant in modern markets, particularly during periods when new technologies capture investor imagination. Market commentary today frequently raises “bubble” concerns, especially when narrow segments rally sharply, and valuation discussions begin to rely more on narrative than on measurable cash generation. Smaller thematic surges, whether centered on emerging computing paradigms or on fast-moving developments in artificial intelligence, often share a familiar pattern: a real innovation attracts attention, prices climb rapidly, and the market begins projecting far into the future with increasing confidence.
Buffett’s framework offers a way to analyze those moments without assuming either euphoria or collapse. If prices move “dramatically” faster than earnings or underlying business progress, the question becomes less about whether the technology is real and more about whether the current price requires near-perfect execution. In those conditions, even good news may not be enough to justify returns if expectations are already extreme. Conversely, periods of skepticism can create opportunities when strong businesses trade as though their economics are ordinary or deteriorating.
The quote also points to a practical discipline for investors navigating high-enthusiasm markets: distinguishing between business performance and stock performance. A company can be building genuine competitive advantages while its shares simultaneously become priced for outcomes that leave little margin for error. When that happens, future returns may rely not only on business success, but on the market’s willingness to sustain an elevated multiple… something Buffett argues cannot “continuously” occur without the business ultimately delivering commensurate results.
In a timeless sense, his message speaks to the recurring tension between storytelling and cash flows. Market cycles change, favored sectors rotate, and new themes emerge, but the underlying lesson Buffett emphasizes stays consistent: over the long run, investment outcomes tend to converge toward the economic reality of the businesses investors own.
On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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