Warren Buffett's first letter had 5 rules for stock buying. They still work in 2026 as he turns 96

The letter, dated March 14, 1978, covered textile operations, insurance underwriting, banking and stock investments. Nearly five decades later, the five principles Buffett laid out in that letter remain relevant as a practical framework for an investor trying to navigate equity markets.

The first lesson is about how to measure performance. Buffett dismissed the common corporate practice of celebrating "record" earnings, defined as a new high in earnings per share.

"Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share," Buffet wrote.

"After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding," he added.

Buffett proposed return on equity capital as a better measure, arguing that it strips away the illusion of growth that comes simply from deploying more capital.

The second lesson is about admitting mistakes. Buffett's textile operations had a poor year in 1977, as they had in the two preceding years. He admitted to mistakenly predicting better results each time.

As shareholders questioned why Berkshire remained in textiles at all, Buffett gave three reasons, all rooted in human responsibility rather than financial logic: The mills were large employers in their towns, management had been honest and hardworking, and modest profits seemed possible with effort.

However, he was candid about the structural problem. "One of the lessons your management has learned, and, unfortunately, sometimes re-learned, is the importance of being in businesses where tailwinds prevail rather than headwinds".

Buffett contrasted his textile business, where "even very good management probably can average only modest results," with insurance, where "some mistakes can be made and yet a quite satisfactory overall performance can be achieved".

The third lesson is Buffett's four-point checklist for selecting stocks.

"We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price," he wrote. Buffet added that his company made "no attempt to buy equities for anticipated favorable stock price behavior in the short term."

The fourth lesson, and perhaps the most immediately relevant for SIP investors, is Buffett's view on falling stock prices.

"If their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price". This is the exact opposite of how most investors often react.

When the Nifty drops 10%, SIP pause rates typically rise. Buffett's logic suggests they should fall. A monthly SIP investor who continues through a market correction buys more units at lower prices, and those units compound for the longest remaining period in the investment horizon.

Buffett explained the danger of short-term thinking with a historical example from his own company. In 1948, Berkshire Fine Spinning Associates and Hathaway Manufacturing, on a combined basis, had earnings after tax of almost $18 million and employed 10,000 people. In the same year, IBM earned $28 million, Safeway Stores $10 million, and Minnesota Mining $13 million.

Berkshire was an economic powerhouse. Yet in the decade following the 1955 merger of Berkshire Fine Spinning Associates and Hathaway Manufacturing to form Berkshire Hathaway Inc., the aggregate sales of $595 million produced an aggregate loss of $10 million. The net worth shrank from $53 million at the time of the merger to $22 million. "So much for single year snapshots as adequate portrayals of a business", Buffet remarked.

The fifth and final lesson is about capital efficiency. Buffett highlighted See's Candies, a subsidiary of Blue Chip Stamps, in which Berkshire held a 36.5%. Since its purchase in 1972, See's pre-tax operating earnings had grown from $4.2 million to $12.6 million "with little additional capital investment," while operating in an industry experiencing "practically no unit growth". This was one of Buffett's early articulation of what would later become his most famous principle: a great business is one that generates high returns on capital without requiring constant reinvestment.

Buffett's 1977 letter was written when Berkshire Class A shares were valued at around $75-$100 per share. As Buffet has turned 96 years old in 2026, Berkshire Hathaway Class A shares are now trading at around $756,650.00 as of August 31, 2026.