巴菲特致股东的信1957--2018
Buffett Partnership Letters 1957 to 1970
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1957 Letter
WARREN E. BUFFETT
5202 Underwood Ave. Omaha, Nebraska
SECOND ANNUAL LETTER TO LIMITED PARTNERS
The General Stock Market Picture in 1957
In last year's letter to partners, I said the following:
My view of the general market level is that it is priced above intrinsic value. This view relates to blue-chip 
securities. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices, both 
undervalued and otherwise. In any event I think the probability is very slight that current market levels will be 
thought of as cheap five years from now. Even a full-scale bear market, however, should not hurt the market 
value of our work-outs substantially.
If the general market were to return to an undervalued status our capital might be employed exclusively in 
general issues and perhaps some borrowed money would be used in this operation at that time. Conversely, if 
the market should go considerably higher our policy will be to reduce our general issues as profits present 
themselves and increase the work-out portfolio.
All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given 
at all times to the detection of substantially undervalued securities.
The past year witnessed a moderate decline in stock prices. I stress the word "moderate" since casual reading of 
the press or conversing with those who have had only recent experience with stocks would tend to create an 
impression of a much greater decline. Actually, it appears to me that the decline in stock prices has been 
considerably less than the decline in corporate earning power under present business conditions. This means that 
the public is still very bullish on blue chip stocks and the general economic picture. I make no attempt to 
forecast either business or the stock market; the above is simply intended to dispel any notions that stocks have 
suffered any drastic decline or that the general market, is at a low level. I still consider the general market to be 
priced on the high side based on long term investment value.
Our Activities in 1957
The market decline has created greater opportunity among undervalued situations so that, generally, our 
portfolio is heavier in undervalued situations relative to work-outs than it was last year. Perhaps an explanation 
of the term "work-out" is in order. A work-out is an investment which is dependent on a specific corporate 
action for its profit rather than a general advance in the price of the stock as in the case of undervalued 
situations. Work-outs come about through: sales, mergers, liquidations, tenders, etc. In each case, the risk is that 
something will upset the applecart and cause the abandonment of the planned action, not that the economic 
picture will deteriorate and stocks decline generally. At the end of 1956, we had a ratio of about 70-30 between 
general issues and work-outs. Now it is about 85-15.
During the past year we have taken positions in two situations which have reached a size where we may expect 
to take some part in corporate decisions. One of these positions accounts for between 10% and 20% of the 
portfolio of the various partnerships and the other accounts for about 5%. Both of these will probably take in the 
neighborhood of three to five years of work but they presently appear to have potential for a high average annual 
rate of return with a minimum of risk. While not in the classification of work-outs, they have very little 
Buffett Partnership Letters 1957 to 1970
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dependence on the general action of the stock market. Should the general market have a substantial rise, of 
course, I would expect this section of our portfolio to lag behind the action of the market. 
Results for 1957
In 1957 the three partnerships which we formed in 1956 did substantially better than the general market. At the 
beginning of the year, the Dow-Jones Industrials stood at 499 and at the end of the year it was at 435 for a loss 
of 64 points. If one had owned the Averages, he would have received 22 points in dividends reducing the overall 
loss to 42 points or 8.470% for the year. This loss is roughly equivalent to what would have been achieved by 
investing in most investment funds and, to my knowledge, no investment fund invested in stocks showed a gain 
for the year. 
All three of the 1956 partnerships showed a gain during the year amounting to about 6.2%, 7.8% and 25% on 
yearend 1956 net worth. Naturally a question is created as to the vastly superior performance of the last 
partnership, particularly in the mind of the partners of the first two. This performance emphasizes the
importance of luck in the short run, particularly in regard to when funds are received. The third partnership was 
started the latest in 1956 when the market was at a lower level and when several securities were particularly 
attractive. Because of the availability of funds, large positions were taken in these issues. Whereas the two 
partnerships formed earlier were already substantially invested so that they could only take relatively small 
positions in these issues. 
Basically, all partnerships are invested in the same securities and in approximately the same percentages. 
However, particularly during the initial stages, money becomes available at varying times and varying levels of 
the market so there is more variation in results than is likely to be the case in later years. Over the years, I will 
be quite satisfied with a performance that is 10% per year better than the Averages, so in respect to these three 
partnerships, 1957 was a successful and probably better than average, year. 
Two partnerships were started during the middle of 1957 and their results for the balance of the year were 
roughly the same as the performance of the Averages which were down about 12% for the period since 
inception of the 1957 partnerships. Their portfolios are now starting to approximate those of the 1956 
partnerships and performance of the entire group should be much more comparable in the future.
Interpretation of results
To some extent our better than average performance in 1957 was due to the fact that it was a generally poor year 
for most stocks. Our performance, relatively, is likely to be better in a bear market than in a bull market so that 
deductions made from the above results should be tempered by the fact that it was the type of year when we 
should have done relatively well. In a year when the general market had a substantial advance I would be well 
satisfied to match the advance of the Averages.
I can definitely say that our portfolio represents better value at the end of 1957 than it did at the end of 1956. 
This is due to both generally lower prices and the fact that we have had more time to acquire the more 
substantially undervalued securities which can only be acquired with patience. Earlier I mentioned our largest 
position which comprised 10% to 20% of the assets of the various partnerships. In time I plan to have this 
represent 20% of the assets of all partnerships but this cannot be hurried. Obviously during any acquisition 
period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any 
given time, a fair proportion of our portfolio may be in the sterile stage. This policy, while requiring patience, 
should maximize long term profits. 
Buffett Partnership Letters 1957 to 1970
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I have tried to cover points which I felt might be of interest and disclose as much of our philosophy as may be 
imparted without talking of individual issues. If there are any questions concerning any phase of the operation, I 
would welcome hearing from you.
Buffett Partnership Letters 1957 to 1970
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1958 Letter
Warren E Buffett
5202 Underwood Ave. Omaha, Nebraska
THE GENERAL STOCK MARKET IN 1958
A friend who runs a medium-sized investment trust recently wrote: "The mercurial temperament, characteristic 
of the American people, produced a major transformation in 1958 and ‘exuberant’ would be the proper word for 
the stock market, at least".
I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and 
professional levels. During the past year almost any reason has been seized upon to justify “Investing” in the 
market. There are undoubtedly more mercurially-tempered people in the stock market now than for a good many 
years and the duration of their stay will be limited to how long they think profits can be made quickly and 
effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and 
thereby stimulate rising prices, I believe it is valid to say that the longer their visit, the greater the reaction from 
it. 
I make no attempt to forecast the general market - my efforts are devoted to finding undervalued securities. 
However, I do believe that widespread public belief in the inevitability of profits from investment in stocks will 
lead to eventual trouble. Should this occur, prices, but not intrinsic values in my opinion, of even undervalued 
securities can be expected to be substantially affected.
RESULTS IN 1958
In my letter of last year, I wrote: 
“Our performance, relatively, is likely to be better in a bear market than in a bull market so that 
deductions made from the above results should be tempered by the fact that it was the type of year when 
we should have done relatively will. In a year when the general market had a substantial advance, I 
would be well satisfied to match the advance of the averages.”
The latter sentence describes the type of year we had in 1958 and my forecast worked out. The Dow-Jones 
Industrial average advanced from 435 to 583 which, after adding back dividends of about 20 points, gave an 
overall gain of 38.5% from the Dow-Jones unit. The five partnerships that operated throughout the entire year 
obtained results averaging slightly better than this 38.5%. Based on market values at the end of both years, their 
gains ranged from 36.7% to 46.2%. Considering the fact that a substantial portion of assets has been and still is 
invested in securities, which benefit very little from a fast-rising market, I believe these results are reasonably 
good. I will continue to forecast that our results will be above average in a declining or level market, but it will 
be all we can do to keep pace with a rising market.
TYPICAL SITUATION
So that you may better understand our method of operation, I think it would be well to review a specific activity 
of 1958. Last year I referred to our largest holding which comprised 10% to 20% of the assets of the various 
partnerships. I pointed out that it was to our interest to have this stock decline or remain relatively steady, so that 
we could acquire an even larger position and that for this reason such a security would probably hold back our 
comparative performance in a bull market.
This stock was the Commonwealth Trust Co. of Union City, New Jersey. At the time we started to purchase the 
stock, it had an intrinsic value $125 per share computed on a conservative basis. However, for good reasons, it 
Buffett Partnership Letters 1957 to 1970
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paid no cash dividend at all despite earnings of about $10 per share which was largely responsible for a 
depressed price of about $50 per share. So here we had a very well managed bank with substantia1 earnings 
power selling at a large discount from intrinsic value. Management was friendly to us as new stockholders and 
risk of any ultimate loss seemed minimal.
Commonwealth was 25.5% owned by a larger bank (Commonwealth had assets of about $50 Million – about 
half the size of the First National in Omaha), which had desired a merger for many years. Such a merger was 
prevented for persona1 reasons, but there was evidence that this situation would not continue indefinitely. Thus 
we had a combination of: 
1. Very strong defensive characteristics; 
2. Good solid value building up at a satisfactory pace and;
3. Evidence to the effect that eventually this value would be unlocked although it might be one year or ten 
years. If the latter were true, the value would presumably have been built up to a considerably larger 
figure, say, $250 per share.
Over a period of a year or so, we were successful in obtaining about 12% of the bank at a price averaging about 
$51 per share. Obviously it was definitely to our advantage to have the stock remain dormant in price. Our block 
of stock increased in value as its size grew, particularly after we became the second largest stockholder with 
sufficient voting power to warrant consultation on any merger proposa1.
Commonwealth only had about 300 stockholders and probably averaged two trades or so per month, so you can 
understand why I say that the activity of the stock market generally had very little effect on the price movement 
of some of our holdings.
Unfortunately we did run into some competition on buying, which railed the price to about $65 where we were 
neither buyer nor seller. Very small buying orders can create price changes of this magnitude in an inactive 
stock, which explains the importance of not having any "Leakage" regarding our portfolio holdings.
Late in the year we were successful in finding a special situation where we could become the largest holder at an 
attractive price, so we sold our block of Commonwealth obtaining $80 per share although the quoted market was 
about 20% lower at the time.
It is obvious that we could still be sitting with $50 stock patiently buying in dribs and drabs, and I would be 
quite happy with such a program although our performance relative to the market last year would have looked 
poor. The year when a situation such at Commonwealth results in a realized profit is, to a great extent, 
fortuitous. Thus, our performance for any single year has serious limitations as a basis for estimating long term 
results. However, I believe that a program of investing in such undervalued well protected securities offers the 
surest means of long term profits in securities.
I might mention that the buyer of the stock at $80 can expect to do quite well over the years. However, the 
relative undervaluation at $80 with an intrinsic value $135 is quite different from a price $50 with an intrinsic 
value of $125, and it seemed to me that our capital could better be employed in the situation which replaced it. 
This new situation is somewhat larger than Commonwealth and represents about 25% of the assets of the 
various partnerships. While the degree of undervaluation is no greater than in many other securities we own (or 
even than some) we are the largest stockholder and this has substantial advantages many times in determining 
the length of time required to correct the undervaluation. In this particular holding we are virtually assured of a 
performance better than that of the Dow-Jones for the period we hold it. 
THE CURRENT SITUATION
The higher the level of the market, the fewer the undervalued securities and I am finding some difficulty in 
Buffett Partnership Letters 1957 to 1970
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securing an adequate number of attractive investments. I would prefer to increase the percentage of our assets in 
work-outs, but these are very difficult to find on the right terms.
To the extent possible, therefore, I am attempting to create my own work-outs by acquiring large positions in 
several undervalued securities. Such a policy should lead to the fulfillment of my earlier forecast – an above 
average performance in a bear market. It is on this basis that I hope to be judged. If you have any questions, feel 
free to ask them.
WARREN E. BUFFETT 2-11-59
Buffett Partnership Letters 1957 to 1970
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1959 Letter
WARREN E. BUFFETT 
5202 Underwood Ave. Omaha, Nebraska
The General Stock Market in 1959:
The Dow-Jones Industrial Average, undoubtedly the most widely used index of stock market behavior, 
presented a somewhat faulty picture in 1959. This index recorded an advance from 583 to 679, or 16.4% for the 
year. When the dividends which would have been received through ownership of the average are added, an 
overall gain of 19.9% indicated for 1959.
Despite this indication of a robust market, more stocks declined than advanced on the New York Stock 
Exchange during the year by a margin of 710 to 628. Both the Dow-Jones Railroad Average and Utility Average 
registered declines. 
Most investment trusts had a difficult time in comparison with the Industrial Average. Tri-Continental Corp. the 
nation's largest closed-end investment company (total asset $400 million) had an overall gain of about 5.7% for 
the year. Fred Brown, its President, had this to say about the 1959 marked in a recent speech to the Analysts 
Society:
"But, even though we like the portfolio, the market performance of Tri-Continental's holdings in 1959 
was disappointing to us. Markets in which investor sentiment and enthusiasm play so large a part as 
those of 1959, are difficult for investment managers trained in values and tuned to investing for the 
long-term. Perhaps we haven't had our space boots adjusted properly. However, we believe that there is 
a limit to risks that an investing institution such as Tri-Continental should take with its stockholders' 
money, and we believe that the portfolio is in shape for the year ahead."
Massachusetts Investors Trust, the country's largest mutual fund with assets of $1.5 billion showed an overall 
gain of about 9% for the year. 
Most of you know I have been very apprehensive about general stock market levels for several years. To date, 
this caution has been unnecessary. By previous standards, the present level of "blue chip" security prices 
contains a substantial speculative component with a corresponding risk of loss. Perhaps other standards of 
valuation are evolving which will permanently replace the old standard. I don't think so. I may very well be 
wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the 
consequences of error, perhaps with permanent capital loss, resulting from the adoption of a "New Era" 
philosophy where trees really do grow to the sky. 
Results in 1959: 
There has been emphasis in previous letters on a suggested standard of performance involving relatively good 
results (compared to the general market indices and leading investment trusts) in periods of declining or level 
prices but relatively unimpressive results in rapidly rising markets. 
We were fortunate to achieve reasonably good results in 1959. The six partnerships that operated throughout the 
year achieved overall net gains ranging from 22.3% to 30.0%, and averaging about 25.9%. Portfolios of these 
partnerships are now about 80%comparable, but there is some difference due to securities and cash becoming 
available at varying times, payments made to partners, etc. Over the past few years, there hasn't been any 
partnership which has consistently been at the top or bottom of performance from year to year, and the variance 
is narrowing as the portfolios tend to become comparable.
Buffett Partnership Letters 1957 to 1970
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The overall net gain is determined on the basis of market values at the beginning and end of the year adjusted 
for payments made to partners or contributions received from them. It is not based on actual realized profits 
during the year, but is intended to measure the change in liquidating value for the year. It is before interest 
allowed to partners (where that is specified in the partnership agreement) and before any division of profit to the 
general partner, but after operating expenses.
The principal operating expense is the Nebraska Intangibles Tax which amounts to .4% of market value on 
practically all securities. Last year represented the first time that this tax had been effectively enforced and, of 
course penalized our results to the extent of .4%.
The present portfolio:
Last year, I mentioned a new commitment which involved about 25% of assets of the various partnerships. 
Presently this investment is about 35% of assets. This is an unusually large percentage, but has been made for 
strong reasons. In effect, this company is partially an investment trust owing some thirty or forty other securities 
of high quality. Our investment was made and is carried at a substantial discount from asset value based on 
market value of their securities and a conservative appraisal of the operating business.
We are the company’s largest stockholder by a considerable margin, and the two other large holders agree with 
our ideas. The probability is extremely high that the performance of this investment will be superior to that of 
the general market until its disposition, and I am hopeful that this will take place this year.
The remaining 65% of the portfolio is in securities which I consider undervalued and work-out operations. To 
the extent possible, I continue to attempt to invest in situations at least partially insulated from the behavior of 
the general market.
This policy should lead to superior results in bear markets and average performance in bull markets. The first 
prediction may be subject to test this year since, at this writing, the Dow-Jones Industrials have retraced over 
half of their 1959 advance.
Should you have any questions or if I have not been clear in any respect, I would be very happy to hear from 
you.
Warren E. Buffett
2-20-60
Buffett Partnership Letters 1957 to 1970
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1960 Letter
WARREN E. BUFFETT 
5202 Underwood Ave. Omaha, Nebraska
The General Stock Market in 1960:
A year ago, I commented on the somewhat faulty picture presented in 1959 by the Dow-Jones Industrial 
Average which had advanced from 583 to 679, or 16.4%. Although practically all investment companies showed 
gains for that year, less than 10% of them were able to match or better the record of the Industrial Average. The 
Dow-Jones Utility Average had a small decline and the Railroad Average recorded a substantial one.
In 1960, the picture was reversed. The Industrial Average declined from 679 to 616, or 9.3%. Adding back the 
dividends which would have been received through ownership of the Average still left it with an overall loss of 
6.3%. On the other hand, the Utility Average showed a good gain and, while all the results are not now 
available, my guess is that about 90% of all investment companies outperformed the Industrial Average. The 
majority of investment companies appear to have ended the year with overall results in the range of plus or 
minus 5%. On the New York Stock Exchange, 653 common stocks registered losses for the year while 404 
showed gains.
Results in 1960:
My continual objective in managing partnership funds is to achieve a long-term performance record superior to 
that of the Industrial Average. I believe this Average, over a period of years, will more or less parallel the results 
of leading investment companies. Unless we do achieve this superior performance there is no reason for 
existence of the partnerships.
However, I have pointed out that any superior record which we might accomplish should not be expected to be 
evidenced by a relatively constant advantage in performance compared to the Average. Rather it is likely that if 
such an advantage is achieved, it will be through better-than-average performance in stable or declining markets 
and average, or perhaps even poorer- than-average performance in rising markets.
I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when 
both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is 
nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important 
thing is to be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic 
to assume we are not going to have our share of both par three's and par five's.
The above dose of philosophy is being dispensed since we have a number of new partners this year and I want to 
make sure they understand my objectives, my measure of attainment of these objectives, and some of my known 
limitations.
With this background it is not unexpected that 1960 was a better-than-average year for us. As contrasted with an 
overall loss of 6.3% for the Industrial Average, we had a 22.8% gain for the seven partnerships operating 
throughout the year. Our results for the four complete years of partnership operation after expenses but before 
interest to limited partners or allocation to the general partner are:
Year Partnerships Operating Entire Year Partnership Gain Dow-Jones Gain
1957 3 10.4% -8.4%
1958 5 40.9% 38.5%
1959 6 25.9% 19.9%
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1960 7 22.8% -6.3%
It should be emphasized again that these are the net results to the partnership; the net results to the limited 
partners would depend on the partnership agreement that they had selected.
The overall gain or loss is computed on a market to market basis. After allowing for any money added or 
withdrawn, such a method gives results based upon what would have been realized upon liquidation of the 
partnership at the beginning, of the year and what would have been realized upon liquidation at year end and is 
different, of course, from our tax results, which value securities at cost and realize gains or losses only when 
securities are actually sold.
On a compounded basis, the cumulative results have been:
Year Partnership Gain Dow-Jones Gain
1957 10.4% -8.4%
1958 55.6% 26.9%
1959 95.9% 52.2%
1960 140.6% 42.6%
Although four years is entirely too short a period from which to make deductions, what evidence there is points 
toward confirming the proposition that our results should be relatively better in moderately declining or static 
markets. To the extent that this is true, it indicates that our portfolio may be more conservatively, although 
decidedly less conventionally, invested than if we owned "blue-chip" securities. During a strongly rising market 
for the latter, we might have real difficulty in matching their performance.
Multiplicity of Partnerships:
A preceding table shows that the family is growing. There has been no partnership which has had a consistently 
superior or inferior record compared to our group average, but there has been some variance each year despite 
my efforts to "keep all partnerships invested in the same securities and in about the same proportions. This 
variation, of course, could be eliminated by combining the present partnerships into one large partnership. Such 
a move would also eliminate much detail and a moderate amount of expense.
Frankly, I am hopeful of doing something along this line in the next few years. The problem is that various 
partners have expressed preferences for varying partnership arrangements. Nothing will be done without 
unanimous consent of partners.
Advance Payments:
Several partners have inquired about adding money during the year to their partnership. Although an exception 
has been made, it is too difficult to amend partnership agreements during mid-year where we have more than 
one family represented among the limited partners. Therefore, in mixed partnerships an additional interest can 
only be acquired at the end of the year.
We do accept advance payments during the year toward a partnership interest and pay interest at 6% on this 
payment from the time received until the end of the year. At that time, subject to amendment of the agreement 
by the partners, the payment plus interest is added to the partnership capital and thereafter participates in profits 
and losses.
Sanborn Map: 
Buffett Partnership Letters 1957 to 1970
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Last year mention was made of an investment which accounted for a very high and unusual proportion (35%) of 
our net assets along with the comment that I had some hope this investment would be concluded in 1960. This 
hope materialized. The history of an investment of this magnitude may be of interest to you.
Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities 
of the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide 
minute details on each structure. The map would be revised by the paste-over method showing new 
construction, changed occupancy, new fire protection facilities, changed structural materials, etc. These 
revisions would be done approximately annually and a new map would be published every twenty or thirty years 
when further pasteovers became impractical. The cost of keeping the map revised to an Omaha customer would 
run around $100 per year.
This detailed information showing diameter of water mains underlying streets, location of fire hydrants, 
composition of roof, etc., was primarily of use to fire insurance companies. Their underwriting departments, 
located in a central office, could evaluate business by agents nationally. The theory was that a picture was worth 
a thousand words and such evaluation would decide whether the risk was properly rated, the degree of 
conflagration exposure in an area, advisable reinsurance procedure, etc. The bulk of Sanborn's business was 
done with about thirty insurance companies although maps were also sold to customers outside the insurance 
industry such as public utilities, mortgage companies, and taxing authorities.
For seventy-five years the business operated in a more or less monopolistic manner, with profits realized in 
every year accompanied by almost complete immunity to recession and lack of need for any sales effort. In the 
earlier years of the business, the insurance industry became fearful that Sanborn's profits would become too 
great and placed a number of prominent insurance men on Sanborn's board of directors to act in a watch-dog 
capacity.
In the early 1950’s a competitive method of under-writing known as "carding" made inroads on Sanborn’s 
business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 
1930's to under $100,000 in 1958 and 1959. Considering the upward bias in the economy during this period, this 
amounted to an almost complete elimination of what had been sizable, stable earning power.
However, during the early 1930's Sanborn had begun to accumulate an investment portfolio. There were no 
capital requirements to the business so that any retained earnings could be devoted to this project. Over a period 
of time, about $2.5 million was invested, roughly half in bonds and half in stocks. Thus, in the last decade 
particularly, the investment portfolio blossomed while the operating map business wilted.
Let me give you some idea of the extreme divergence of these two factors. In 1938 when the Dow-Jones 
Industrial Average was in the 100-120 range, Sanborn sold at $110 per share. In 1958 with the Average in the 
550 area, Sanborn sold at $45 per share. Yet during that same period the value of the Sanborn investment 
portfolio increased from about $20 per share to $65 per share. This means, in effect, that the buyer of Sanborn 
stock in 1938 was placing a positive valuation of $90 per share on the map business ($110 less the $20 value of 
the investments unrelated to the map business) in a year of depressed business and stock market conditions. In 
the tremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the 
buyer of the stock unwilling to pay more than 70 cents on the dollar for the investment portfolio with the map 
business thrown in for nothing.
How could this come about? Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial 
value to the insurance industry. To reproduce the detailed information they had gathered over the years would 
have cost tens of millions of dollars. Despite “carding” over $500 million of fire premiums were underwritten by 
“mapping” companies. However, the means of selling and packaging Sanborn’s product, information had 
remained unchanged throughout the year and finally this inertia was reflected in the earnings. 
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The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the 
need for rejuvenation of the map business. Sanborn had a sales volume of about $2 million per year and owned 
about $7 million worth of marketable securities. The income from the investment portfolio was substantial, the 
business had no possible financial worries, the insurance companies were satisfied with the price paid for maps, 
and the stockholders still received dividends. However, these dividends were cut five times in eight years 
although I could never find any record of suggestions pertaining to cutting salaries or director's and committee 
fees.
Prior to my entry on the Board, of the fourteen directors, nine were prominent men from the insurance industry 
who combined held 46 shares of stock out of 105,000 shares outstanding. Despite their top positions with very 
large companies which would suggest the financial wherewithal to make at least a modest commitment, the 
largest holding in this group was ten shares. In several cases, the insurance companies these men ran owned 
small blocks of stock but these were token investments in relation to the portfolios in which they were held. For 
the past decade the insurance companies had been only sellers in any transactions involving Sanborn stock. 
The tenth director was the company attorney, who held ten shares. The eleventh was a banker with ten shares 
who recognized the problems of the company, actively pointed them out, and later added to his holdings. The 
next two directors were the top officers of Sanborn who owned about 300 shares combined. The officers were 
capable, aware of the problems of the business, but kept in a subservient role by the Board of Directors. The 
final member of our cast was a son of a deceased president of Sanborn. The widow owned about 15,000 shares 
of stock.
In late 1958, the son, unhappy with the trend of the business, demanded the top position in the company, was 
turned down, and submitted his resignation, which was accepted. Shortly thereafter we made a bid to his mother 
for her block of stock, which was accepted. At the time there were two other large holdings, one of about 10,000 
shares (dispersed among customers of a brokerage firm) and one of about 8,000. These people were quite 
unhappy with the situation and desired a separation of the investment portfolio from the map business, as did 
we.
Subsequently our holdings (including associates) were increased through open market purchases to about 24,000 
shares and the total represented by the three groups increased to 46,000 shares. We hoped to separate the two 
businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the 
map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn's 
wealth of raw material in conjunction with electronic means of converting this data to the most usable form for 
the customer.
There was considerable opposition on the Board to change of any type, particularly when initiated by an 
outsider, although management was in complete accord with our plan and a similar plan had been recommended 
by Booz, Allen & Hamilton (Management Experts). To avoid a proxy fight (which very probably would not 
have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large 
portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was 
evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the 
plan. About 72% of the Sanborn stock, involving 50% of the 1,600 stockholders, was exchanged for portfolio 
securities at fair value. The map business was left with over $l,25 million in government and municipal bonds as 
a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining 
stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an 
increased dividend rate.
Necessarily, the above little melodrama is a very abbreviated description of this investment operation. However, 
it does point up the necessity for secrecy regarding our portfolio operations as well as the futility of measuring 
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our results over a short span of time such as a year. Such control situations may occur very infrequently. Our 
bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected 
along with investment in special situations where the profit is dependent on corporate rather than market action. 
To the extent that partnership funds continue to grow, it is possible that more opportunities will be available in 
“control situations.”
The auditors should be mailing your financial statement and tax information within about a week. If you have 
any questions at all regarding either their report or this letter, be sure to let me know. 
Warren E. Buffett 1-30-61 
Buffett Partnership Letters 1957 to 1970
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1960 Letter
BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
July, 1961
TO MY PARTNERS:
In the past, partners have commented that a once-a-year letter was “a long time between drinks,” and 
that a semi-annual letter would be a good idea. It really shouldn’t be too difficult to find something to say twice 
a year; at least it isn’t this year. Hence, this letter which will be continued in future years.
During the first half of 1961, the overall gain of the Dow-Jones Industrial Average was about 13%, 
including dividends. Although this is the type of period when we should have the most difficulty in exceeding 
this standard, all partnerships that operated throughout the six months did moderately better then the Average. 
Partnerships formed during 1961 either equaled or exceeded results of the Average from the time of formation, 
depending primarily on how long they were in operation.
Let me, however, emphasize two points. First, one year is far too short a period to form any kind of an 
opinion as to investment performance, and measurements based upon six months become even more unreliable. 
One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may 
begin to think in terms of short-term performance which can be most misleading. My own thinking is much 
more geared to five year performance, preferably with tests of relative results in both strong and weak markets.
The second point I want everyone to understand is that if we continue in a market which advances at the 
pace of the first half of 1961, not only do I doubt that we will continue to exceed the results of the DJIA, but it is 
very likely that our performance will fall behind the Average.
Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend 
to grow more conservative as the general market level rises. At all times, I attempt to have a portion of our 
portfolio in securities as least partially insulated from the behavior of the market, and this portion should 
increase as the market rises. However appetizing results for even the amateur cook (and perhaps particularly the 
amateur), we find that more of our portfolio is not on the stove.
We have also begun open market acquisition of a potentially major commitment which I, of course, 
hope does nothing marketwise for at least a year. Such a commitment may be a deterrent to short range 
performance, but it gives strong promise of superior results over a several year period combined with substantial 
defensive characteristics.
Progress has been made toward combining all partners at yearend. I have talked with all partners joining 
during this past year or so about this goal, and have also gone over the plans with representative partners of all 
earlier partnerships
Some of the provisions will be:
(A) A merger of all partnerships, based on market value at yearend, with provisions for proper 
allocation among partners of future tax liability due to unrealized gains at yearend. The merger itself will be tax￾free, and will result in no acceleration of realization of profits;
Buffett Partnership Letters 1957 to 1970
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(B) A division of profits between the limited partners and general partner, with the first 6% per year to 
partners based upon beginning capital at market, and any excess divided one-fourth to the general partner and 
three-fourths to all partners proportional to their capital. Any deficiencies in earnings below the 6% would be 
carried forward against future earnings, but would not be carried back. Presently, there are three profit 
arrangements which have been optional to incoming partners:
Interest Provision Excess to Gen. Partner Excess to Ltd. Partners
(1) 6% 1/3 2/3
(2) 4% 1/4 3/4
(3) None 1/6 5/6
In the event of profits, the new division will obviously have to be better for limited partners than the first two 
arrangements. Regarding the third, the new arrangement will be superior up to 18% per year; but above this rate 
the limited partners would do better under the present agreement. About 80% of total partnership assets have 
selected the first two arrangements, and I am hopeful, should we average better than 18% yearly, partners 
presently under the third arrangement will not feel short-changed under the new agreement;
(C) In the event of losses, there will be no carry back against amounts previously credited to me as 
general partner. Although there will be a carry-forward against future excess earnings. However, my wife and I 
will have the largest single investment in the new partnership, probably about one-sixth of total partnership 
assets, and thereby a greater dollar stake in losses than any other partner of family group, I am inserting a 
provision in the partnership agreement which will prohibit the purchase by me or my family of any marketable 
securities. In other words, the new partnership will represent my entire investment operation in marketable 
securities, so that my results will have to be directly proportional to yours, subject to the advantage I obtain if 
we do better than 6%;
(D) A provision for monthly payments at the rate of 6% yearly, based on beginning of the year capital 
valued at market. Partners not wishing to withdraw money currently can have this credited back to them 
automatically as an advance payment, drawing 6%, to purchase an additional equity interest in the partnership at 
yearend. This will solve one stumbling block that has heretofore existed in the path of consolidation, since many 
partners desire regular withdrawals and others wish to plow everything back;
(E) The right to borrow during the year, up to 20% of the value of your partnership interest, at 6%, such 
loans to be liquidated at yearend or earlier. This will add a degree of liquidity to an investment which can now 
only be disposed of at yearend. It is not intended that anything but relatively permanent funds be invested in the 
partnership, and we have no desire to turn it into a bank. Rather, I expect this to be a relatively unused provision, 
which is available when something unexpected turns up and a wait until yearend to liquidate part of all of a 
partner’s interest would cause hardship;
(F) An arrangement whereby any relatively small tax adjustment, made in later years on the 
partnership’s return will be assessed directly to me. This way, we will not be faced with the problem of asking 
eighty people, or more, to amend their earlier return over some small matter. As it stands now, a small change, 
such as a decision that a dividend received by the partnership has 63% a return of capital instead of 68%, could 
cause a multitude of paper work. To prevent this, any change amounting to less than $1,000 of tax will be 
charged directly to me.
We have submitted the proposed agreement to Washington for a ruling that the merger would be tax￾free, and that the partnership would be treated as a partnership under the tax laws. While all of this is a lot of 
work, it will make things enormously easier in the future. You might save this letter as a reference to read in 
conjunction with the agreement which you will receive later in the year.
Buffett Partnership Letters 1957 to 1970
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The minimum investment for new partners is currently $25,000, but, of course, this does not apply to 
present partners. Our method of operation will enable the partners to add or withdraw amounts of any size (in 
round $100) at yearend. Estimated total assets of the partnership will be in the neighborhood of $4 million, 
which enables us to consider investments such as the one mentioned earlier in this letter, which we would have 
had to pass several years ago.
This has turned out to be more of a production than my annual letter. If you have any questions, 
particularly regarding anything that isn’t clear in my discussion of the new partnership agreement, be sure to let 
me know. If there are a large number of questions, I will write a supplemental letter to all partners giving the 
questions that arise and the answers to them.
Warren E. Buffett
Vlb
July 22, 1961
Buffett Partnership Letters 1957 to 1970
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1961 Letter
BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 24, 1962 
Our Performance in 1961
I have consistently told partners that it is my expectation and hope (it's always hard to tell which is which) that 
we will do relatively well compared to the general market in down or static markets, but that we may not look so 
good in advancing markets. In strongly advancing markets I expect to have real difficulty keeping up with the 
general market. 
Although 1961 was certainly a good year for the general market, and in addition, a very good year for us on both 
an absolute and relative basis, the expectations in the previous paragraph remain unchanged. 
During 1961, the general market as measured by the Dow-Jones Industrial Average (hereinafter called the
“Dow”) showed an over-all gain of 22.2% including dividends received through ownership of the Dow. The 
gain for all partnerships operating throughout the entire year, after all expenses of operation, but before 
payments to limited partners or accrual to the general partner, averaged 45.9%. The details of this gain by 
partnership are shown in the appendix along with results for the partnerships started during the year.
We have now completed five full years of partnership operation, and the results of these five years are shown 
below on a year-by-year basis and also on a cumulative or compounded basis. These results are stated on the 
basis described in the preceding paragraph; after expenses, but before division of gains among partners or 
payments to partners.
Year Partnerships Operating Entire 
Year
Partnership Gain Dow-Jones Industrials 
Gain*
1957 3 10.4% -8.4%
1958 5 40.9% 38.5%
1959 6 25.9% 19.9%
1960 7 22.8% -6.3%
1961 7 45.9% 22.2%
* Including dividends received through ownership of the Dow.
On a compounded basis, the cumulative results have been:
Year Partnership Gain Dow-Jones Industrials Gain
1957 10.4% -8.4%
1957-58 55.6% 26.9%
1057-59 95.9% 52.2%
1957-60 140.6% 42.6%
1957-61 251.0% 74.3%
These results do not measure the gain to the limited partner, which of course, is the figure in which you are most 
interested. Because of the varying partnership arrangements that have existed in the past, I have used the over￾all net gain (based on market values at the beginning and end of the year) to the partnership as being the fairest 
measure of over-all performance.
Buffett Partnership Letters 1957 to 1970
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On a pro-forma basis adjusted to the division of gains entailed in our present Buffett Partnership, Ltd. 
agreement, the results would have been:
Year Limited Partners’ Gain Dow Gain
1957 9.3% -8.4%
1958 32.2% 38.5%
1959 20.9% 19.9%
1960 18.6% -6.3%
1961 35.9% 22.2%
COMPOUNDED
1957 9.3% -8.4%
1957-58 44.5% 26.9%
1957-59 74.7% 52.2%
1957-60 107.2% 42.6%
1957-61 181.6% 74.3%
A Word About Par
The outstanding item of importance in my selection of partners, as well as in my subsequent relations with them, 
has been the determination that we use the same yardstick. If my performance is poor, I expect partners to 
withdraw, and indeed, I should look for a new source of investment for my own funds. If performance is good, I 
am assured of doing splendidly, a state of affairs to which I am sure I can adjust.
The rub, then, is in being sure that we all have the same ideas of what is good and what is poor. I believe in 
establishing yardsticks prior to the act; retrospectively, almost anything can be made to look good in relation to 
something or other.
I have continuously used the Dow-Jones Industrial Average as our measure of par. It is my feeling that three 
years is a very minimal test of performance, and the best test consists of a period at least that long where the 
terminal level of the Dow is reasonably close to the initial level. 
While the Dow is not perfect (nor is anything else) as a measure of performance, it has the advantage of being 
widely known, has a long period of continuity, and reflects with reasonable accuracy the experience of investors 
generally with the market. I have no objection to any other method of measurement of general market 
performance being used, such as other stock market averages, leading diversified mutual stock funds, bank 
common trust funds, etc.
You may feel I have established an unduly short yardstick in that it perhaps appears quite simple to do better 
than an unmanaged index of 30 leading common stocks. Actually, this index has generally proven to be a 
reasonably tough competitor. Arthur Wiesenberger’s classic book on investment companies lists performance 
for the 15 years 1946-60, for all leading mutual funds. There is presently over $20 billion invested in mutual 
funds, so the experience of these funds represents, collectively, the experience of many million investors. My 
own belief, though the figures are not obtainable, is that portfolios of most leading investment counsel 
organizations and bank trust departments have achieved results similar to these mutual funds. 
Wiesenberger lists 70 funds in his “Charts & Statistics” with continuous records since 1946. I have excluded 32 
of these funds for various reasons since they were balanced funds (therefore not participating fully in the general 
market rise), specialized industry funds, etc. Of the 32 excluded because I felt a comparison would not be fair, 
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31 did poorer than the Dow, so they were certainly not excluded to slant the conclusions below.
Of the remaining 38 mutual funds whose method of operation I felt was such as to make a comparison with the 
Dow reasonable, 32 did poorer than the Dow, and 6 did better. The 6 doing better at the end of 1960 had assets 
of about $1 billion, and the 32 doing poorer had assets of about $6-1/2 billion. None of the six that were superior 
beat the Dow by more than a few percentage points a year.
Below I present the year-by-year results for our period of operation (excluding 1961 for which I don't have exact 
data, although rough figures indicate no variance from the 1957-60 figures) for the two largest common stock 
open-end investment companies (mutual funds) and the two largest closed-end investment companies: 
Year Mass. Inv. 
Trust
Investors 
Stock
Lehman Tri-Cont. Dow Limited 
Partners
1957 -12.0% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 44.1% 47.6% 40.8% 33.2% 38.5% 32.2%
1959 8.2% 10.3% 8.1% 8.4% 19.9% 20.9%
1960 -0.9% -0.1% 2.6% 2.8% -6.3% 18.6%
(From Moody’s Banks & Finance Manual, 1961)
COMPOUNDED
Year Mass. Inv. 
Trust
Investors 
Stock
Lehman Tri-Cont. Dow Limited 
Partners
1957 -12.0% -12.4% -11.4% -2.4% -8.4% 9.3%
1957-58 26.8% 29.3% 24.7% 30.0% 26.9% 44.5%
1957-59 37.2% 42.6% 34.8% 40.9% 52.2% 74.7%
1957-60 36.0% 42.5% 38.3% 44.8% 42.6% 107.2%
Massachusetts Investors Trust has net assets of about $1.8 billion; Investors Stock Fund about $1 billion; Tri -
Continental Corporation about $ .5 billion; and Lehman Corporation about $350 million; or a total of over $3.5 
billion.
I do not present the above tabulations and information with the idea of indicting investment companies. My own 
record of investing such huge sums of money, with restrictions on the degree of activity I might take in 
companies where we had investments, would be no better, if as good. I present this data to indicate the Dow as 
an investment competitor is no pushover, and the great bulk of investment funds in the country are going to have 
difficulty in bettering, or perhaps even matching, its performance. 
Our portfolio is very different from that of the Dow. Our method of operation is substantially different from that 
of mutual funds.
However, most partners, as all alternative to their investment in the partnership, would probably have their funds 
invested in a media producing results comparable to the Dow, therefore, I feel it is a fair test of performance.
Our Method of Operation
Our avenues of investment break down into three categories. These categories have different behavior 
characteristics, and the way our money is divided among them will have an important effect on our results, 
relative to the Dow in any given year. The actual percentage division among categories is to some degree 
planned, but to a great extent, accidental, based upon availability factors.
Buffett Partnership Letters 1957 to 1970
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The first section consists of generally undervalued securities (hereinafter called "generals") where we have 
nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself. Over 
the years, this has been our largest category of investment, and more money has been made here than in either of 
the other categories. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six 
generals, with smaller positions in another ten or fifteen.
Sometimes these work out very fast; many times they take years. It is difficult at the time of purchase to know 
any specific reason why they should appreciate in price. However, because of this lack of glamour or anything 
pending which might create immediate favorable market action, they are available at very cheap prices. A lot of 
value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety 
in each transaction. This individual margin of safety, coupled with a diversity of commitments creates a most 
attractive package of safety and appreciation potential. Over the years our timing of purchases has been 
considerably better than our timing of sales. We do not go into these generals with the idea of getting the last 
nickel, but are usually quite content selling out at some intermediate level between our purchase price and what 
we regard as fair value to a private owner.
The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap 
does not mean it is not going to go down. During abrupt downward movements in the market, this segment may 
very well go down percentage-wise just as much as the Dow. Over a period of years, I believe the generals will 
outperform the Dow, and during sharply advancing years like 1961, this is the section of our portfolio that turns 
in the best results. It is, of course, also the most vulnerable in a declining market.
Our second category consists of “work-outs.” These are securities whose financial results depend on corporate 
action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are 
securities with a timetable where we can predict, within reasonable error limits, when we will get how much and 
what might upset the applecart. Corporate events such as mergers, liquidations, reorganizations, spin-offs, etc., 
lead to work-outs. An important source in recent years has been sell-outs by oil producers to major integrated oil 
companies.
This category will produce reasonably stable earnings from year to year, to a large extent irrespective of the 
course of the Dow. Obviously, if we operate throughout a year with a large portion of our portfolio in work-outs, 
we will look extremely good if it turns out to be a declining year for the Dow or quite bad if it is a strongly 
advancing year. Over the years, work-outs have provided our second largest category. At any given time, we 
may be in ten to fifteen of these; some just beginning and others in the late stage of their development. I believe 
in using borrowed money to offset a portion of our work-out portfolio since there is a high degree of safety in 
this category in terms of both eventual results and intermediate market behavior. Results, excluding the benefits 
derived from the use of borrowed money, usually fall in the 10% to 20% range. My self-imposed limit regarding 
borrowing is 25% of partnership net worth. Oftentimes we owe no money and when we do borrow, it is only as 
an offset against work-outs.
The final category is "control" situations where we either control the company or take a very large position and 
attempt to influence policies of the company. Such operations should definitely be measured on the basis of 
several years. In a given year, they may produce nothing as it is usually to our advantage to have the stock be 
stagnant market-wise for a long period while we are acquiring it. These situations, too, have relatively little in 
common with the behavior of the Dow. Sometimes, of course, we buy into a general with the thought in mind 
that it might develop into a control situation. If the price remains low enough for a long period, this might very 
well happen. If it moves up before we have a substantial percentage of the company's stock, we sell at higher 
levels and complete a successful general operation. We are presently acquiring stock in what may turn out to be 
control situations several years hence.
Buffett Partnership Letters 1957 to 1970
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Dempster Mill Manufacturing Company 
We are presently involved in the control of Dempster Mill Manufacturing Company of Beatrice, Nebraska. Our 
first stock was purchased as a generally undervalued security five years ago. A block later became available, and 
I went on the Board about four years ago. In August 1961, we obtained majority control, which is indicative of 
the fact that many of our operations are not exactly of the "overnight" variety.
Presently we own 70% of the stock of Dempster with another 10% held by a few associates. With only 150 or so 
other stockholders, a market on the stock is virtually non-existent, and in any case, would have no meaning for a 
controlling block. Our own actions in such a market could drastically affect the quoted price.
Therefore, it is necessary for me to estimate the value at yearend of our controlling interest. This is of particular 
importance since, in effect, new partners are buying in based upon this price, and old partners are selling a 
portion of their interest based upon the same price. The estimated value should not be what we hope it would be 
worth, or what it might be worth to an eager buyer, etc., but what I would estimate our interest would bring if 
sold under current conditions in a reasonably short period of time. Our efforts will be devoted toward increasing 
this value, and we feel there are decent prospects of doing this.
Dempster is a manufacturer of farm implements and water systems with sales in 1961 of about $9 million. 
Operations have produced only nominal profits in relation to invested capital during recent years. This reflected 
a poor management situation, along with a fairly tough industry situation. Presently, consolidated net worth 
(book value) is about $4.5 million, or $75 per share, consolidated working capital about $50 per share, and at 
yearend we valued our interest at $35 per share. While I claim no oracular vision in a matter such as this, I feel 
this is a fair valuation to both new and old partners. Certainly, if even moderate earning power can be restored, a 
higher valuation will be justified, and even if it cannot, Dempster should work out at a higher figure. Our 
controlling interest was acquired at an average price of about $28, and this holding currently represents 21% of 
partnership net assets based on the $35 value.
Of course, this section of our portfolio is not going to be worth more money merely because General Motors, 
U.S. Steel, etc., sell higher. In a raging bull market, operations in control situations will seem like a very 
difficult way to make money, compared to just buying the general market. However, I am more conscious of the 
dangers presented at current market levels than the opportunities. Control situations, along with work-outs, 
provide a means of insulating a portion of our portfolio from these dangers.
The Question of Conservatism
The above description of our various areas of operation may provide some clues as to how conservatively our 
portfolio is invested. Many people some years back thought they were behaving in the most conservative 
manner by purchasing medium or long-term municipal or government bonds. This policy has produced 
substantial market depreciation in many cases, and most certainly has failed to maintain or increase real buying 
power.
Conscious, perhaps overly conscious, of inflation, many people now feel that they are behaving in a 
conservative manner by buying blue chip securities almost regardless of price-earnings ratios, dividend yields, 
etc. Without the benefit of hindsight as ill the bond example, I feel this course of action is fraught with danger. 
There is nothing at all conservative, in my opinion, about speculating as to just how high a multiplier a greedy 
and capricious public will put on earnings.
You will not be right simply because a large number of people momentarily agree with you. You will not be 
right simply because important people agree with you. In many quarters the simultaneous occurrence of the two 
above factors is enough to make a course of action meet the test of conservatism. 
Buffett Partnership Letters 1957 to 1970
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You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, 
and your reasoning is correct. True conservatism is only possible through knowledge and reason.
I might add that in no way does the fact that our portfolio is not conventional prove that we are more 
conservative or less conservative than standard methods of investing. This can only be determined by examining 
the methods or examining the results.
I feel the most objective test as to just how conservative our manner of investing is arises through evaluation of 
performance in down markets. Preferably these should involve a substantial decline in the Dow. Our 
performance in the rather mild declines of 1957 and 1960 would confirm my hypothesis that we invest in an 
extremely conservative manner. I would welcome any partner’s suggesting objective tests as to conservatism to 
see how we stack up. We have never suffered a realized loss of more than 0.5% of 1% of total net assets, and 
our ratio of total dollars of realized gains to total realized losses is something like 100 to 1. Of course; this 
reflects the fact that on balance we have been operating in an up market. However, there have been many 
opportunities for loss transactions even in markets such as these (you may have found out about a few of these 
yourselves) so I think the above facts have some significance.
The Question of Size 
Aside from the question as to what happens upon my death (which with a metaphysical twist, is a subject of 
keen interest to me), I am probably asked most often: "What affect is the rapid growth of partnership funds 
going to have upon performance?”
Larger funds tug in two directions. From the standpoint of "passive" investments, where we do not attempt by 
the size of our investment to influence corporate policies, larger sums hurt results. For the mutual fund or trust 
department investing in securities with very broad markets, the effect of large sums should be to penalize results 
only very slightly. Buying 10,000 shares of General Motors is only slightly more costly (on the basis of 
mathematical expectancy) than buying 1,000 or 100 shares.
In some of the securities in which we deal (but not all by any means) buying 10,000 shares is much more 
difficult than buying 100 and is sometimes impossible. Therefore, for a portion of our portfolio, larger sums are 
definitely disadvantageous. For a larger portion of the portfolio, I would say increased sums are only slightly 
disadvantageous. This category includes most of our work-outs and some generals.
However, in the case of control situations increased funds are a definite advantage. A "Sanborn Map" cannot be 
accomplished without the wherewithal. My definite belief is that the opportunities increase in this field as the 
funds increase. This is due to the sharp fall-off in competition as the ante mounts plus the important positive 
correlation that exists between increased size of company and lack of concentrated ownership of that company's 
stock. 
Which is more important -- the decreasing prospects of profitability in passive investments or the increasing 
prospects in control investments? I can't give a definite answer to this since to a great extent it depends on the 
type of market in which we are operating. My present opinion is that there is no reason to think these should not 
be offsetting factors; if my opinion should change, you will be told. I can say, most assuredly, that our results in 
1960 and 1961 would not have been better if we had been operating with the much smaller sums of 1956 and 
1957. 
And a Prediction 
Buffett Partnership Letters 1957 to 1970
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Regular readers (I may be flattering myself) will feel I have left the tracks when I start talking about predictions. 
This is one thing from which I have always shied away and I still do in the normal sense. 
I am certainly not going to predict what general business or the stock market are going to do in the next year or 
two since I don't have the faintest idea.
I think you can be quite sure that over the next ten years there are going to be a few years when the general 
market is plus 20% or 25%, a few when it is minus on the same order, and a majority when it is in between. I 
haven't any notion as to the sequence in which these will occur, nor do I think it is of any great importance for 
the long-term investor. 
Over any long period of years, I think it likely that the Dow will probably produce something like 5% to 7% per 
year compounded from a combination of dividends and market value gain. Despite the experience of recent 
years, anyone expecting substantially better than that from the general market probably faces disappointment.
Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about 
whether the absolute results in a given year are a plus or a minus. I would consider a year in which we were 
down 15% and the Dow declined 25% to be much superior to a year when both the partnership and the Dow 
advanced 20%. I have stressed this point in talking with partners and have watched them nod their heads with 
varying degrees of enthusiasm. It is most important to me that you fully understand my reasoning in this regard 
and agree with me not only in your cerebral regions, but also down in the pit of your stomach.
For the reasons outlined in my method of operation, our best years relative to the Dow are likely to be in 
declining or static markets. Therefore, the advantage we seek will probably come in sharply varying amounts. 
There are bound to be years when we are surpassed by the Dow, but if over a long period we can average ten 
percentage points per year better than it, I will feel the results have been satisfactory. 
Specifically, if the market should be down 35% or 40% in a year (and I feel this has a high probability of 
occurring one year in the next ten--no one knows which one), we should be down only 15% or 20%. If it is more 
or less unchanged during the year, we would hope to be up about ten percentage points. If it is up 20% or more, 
we would struggle to be up as much. The consequence of performance such as this over a period of years would 
mean that if the Dow produces a 5% to 7% per year overall gain compounded, I would hope our results might be 
15% to 17% per year. 
The above expectations may sound somewhat rash, and there is no question but that they may appear very much 
so when viewed from the vantage point of 1965 or 1970. It may turn out that I am completely wrong. However, 
I feel the partners are certainly entitled to know what I am thinking in this regard even though the nature of the 
business is such as to introduce a high probability of error in such expectations. In anyone year, the variations 
may be quite substantial. This happened in 1961, but fortunately the variation was on the pleasant side. They 
won't all be!
Miscellaneous
We are now installed in an office at 810 Kiewit Plaza with a first-class secretary, Beth Henley, and an associate 
with considerable experience in my type of securities, Bill Scott. My father is sharing office space with us (he 
also shares the expenses) and doing a brokerage business in securities. None of our brokerage is done through 
him so we have no "vicuna coat" situation.
Overall, I expect our overhead, excluding interest on borrowings and Nebraska Intangibles Tax, to run less than 
0.5 of 1% of net assets. We should get our money's worth from this expenditure, and you are most cordially 
invited to drop in and see how the money is being spent.
Buffett Partnership Letters 1957 to 1970
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With over 90 partners and probably 40 or so securities, you can understand that it is quite a welcome relief to me 
to shake loose from some of the details.
We presently have partners residing in locations from California to Vermont, and net assets at the beginning of 
1962 amounted to $ 7,178,500.00. Susie and I have an interest in the partnership amounting to $1,025,000.00, 
and other relatives of mine have a combined interest totaling $782,600.00. The minimum for new partners last 
year was $25,000, but I am giving some thought to increasing it this year.
Peat, Marwick, Mitchell & Company did an excellent job of expediting the audit, providing tax figures much 
earlier than in the past. They assure me this performance can be continued.
Let me hear from you regarding questions you may have on any aspects of this letter, your audit, status of your 
partnership interest, etc. that may puzzle you. 
Cordially Warren E. Buffett.
Buffett Partnership Letters 1957 to 1970
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APPENDIX
Partnerships Operating Throughout 1961
Partnership 1/1/61 Capital at 
Market
Overall Gain in 1961* Percentage Gain
Buffett Associates 486,874.27 225,387.80 46.3%
Buffett Fund 351,839.29 159,696.93 45.4%
Dacee 235,480.31 116,504.47 49.5%
Emdee 140,005.24 67,387.28 48.1%
Glenoff 78,482.70 39,693.80 50.5%
Mo-Buff 325,844.71 149,163.71 45.8%
Underwood 582,256.82 251,951.26 43.3%
2,200,783.34 1,009,785.25 45.9%
Partnerships Started in 1961
Partnership Paid-in Overall Gain in 1961 Percentage Gain
Ann Investments 100,100 (1-30-61) 35,367.93 35.3%
Buffett-TD 250,100 ($200,100 on 3-8-
61, $50,000 on 5-31-61)
70,294.08 28.1%
Buffett-Holland 125,100 (5-17-61) 16,703.76 13.3%
* Gain in net assets at market values plus payments to limited partners during year.
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
July 6, 1962
A Reminder:
In my letter of January 24, 1962 reporting on 1961, I inserted a section entitled. "And a Prediction." While I 
have no desire to inflict cruel and unusual punishment upon my readers, nevertheless, a reprinting of that 
section, in its entirety, may be worthwhile: 
And a Prediction 
Regular readers (I may be flattering myself) will feel I have left the tracks when I start talking about 
predictions. This is one thing from which I have always shied away and I still do in the normal sense. 
I am certainly not going to predict what general business or the stock market are going to do in the next 
year or two since I don't have the faintest idea.
I think you can be quite sure that over the next ten years there are going to be a few years when the 
general market is plus 20% or 25%, a few when it is minus on the same order, and a majority when it is 
in between. I haven't any notion as to the sequence in which these will occur, nor do I think it is of any 
great importance for the long-term investor.
Over any long period of years, I think it likely that the Dow will probably produce something like 5% to 
7% per year compounded from a combination of dividends and market value gain. Despite the 
experience of recent years, anyone expecting substantially better than that from the general market 
probably faces disappointment.
Our job is to pile up yearly advantages over the performance of the Dow without worrying too much 
about whether the absolute results in a given year are a plus or a minus. I would consider a year in 
which we were down 15% and the Dow declined 25% to be much superior to a year when both the 
partnership and the Dow advanced 20%. I have stressed this point in talking with partners and have 
watched them nod their heads with varying degrees of enthusiasm.
It is most important to me that you fully understand my reasoning in this regard and agree with me not 
only in your cerebral regions, but also down in the pit of your stomach.
For the reasons outlined in my method of operation, our best years relative to the Dow are likely to be in 
declining or static markets. Therefore, the advantage we seek will probably come in sharply varying 
amounts. There are bound to be years when we are surpassed by the Dow, but if over a long period we 
can average ten percentage points per year better than it, I will feel the results have been satisfactory.
Specifically, if the market should be down 35% or 40% in a year (and I feel this has a high probability 
of occurring one year in the next ten--no one knows which one), we should be down only 15% or 20%. 
If it is more or less unchanged during the year, we would hope to be up about ten percentage points. If it 
is up 20% or more, we would struggle to be up as much. The consequence of performance such as this 
over a period of years would mean that if the Dow produces a 5% to 7% per year over-all gain 
compounded, I would hope our results might be 15% to 17% per year.
Buffett Partnership Letters 1957 to 1970
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The above expectations may sound somewhat rash, and there is no question but that they may appear 
very much so when viewed from the vantage point of 1965 or 1970. It may turn out that I am 
completely wrong. However, I feel the partners are certainly entitled to know what I am thinking in this 
regard even though the nature of the business is such as to introduce a high probability of error in such 
expectations. In anyone year, the variations may be quite substantial. This happened in 1961, but 
fortunately the variation was on the pleasant side. They won't all be!
The First Half of 1962:
Between yearend 1961 and June 30, 1962 the Dow declined from 731.14 to 561.28. If one had owned the Dow 
during this period, dividends of approximately $11.00 would have been received so that overall a loss of 21.7% 
would have been the result of investing in the Dow. For the statistical minded, Appendix A gives the results of 
the Dow by years since formation of the predecessor partnerships.
As stated above, a declining Dow gives us our chance to shine and pile up the percentage advantages which, 
coupled with only an average performance during advancing markets, will give us quite satisfactory long-term 
results. Our target is an approximately 1/2% decline for each 1% decline in the Dow and if achieved, means we 
have a considerably more conservative vehicle for investment in stocks than practically any alternative.
As outlined in Appendix B, showing combined predecessor partnership results, during the first half of 1962 we 
had one of the best periods in our history, achieving a minus 7.5% result before payments to partners, compared 
to the minus 21.7% overall result on the Dow. This 14.2 percentage points advantage can be expected to widen 
during the second half if the decline in the general market continues, but will probably narrow should the market 
turn upward. Please keep in mind my continuing admonition that six-months' or even one-year's results are not 
to be taken too seriously. Short periods of measurement exaggerate chance fluctuations in performance. While 
circumstances contributed to an unusually good first half, there are bound to be periods when we do relatively 
poorly. The figures for our performance involve no change in the valuation of our controlling interest in 
Dempster Mill Manufacturing Company, although developments in recent months point toward a probable 
higher realization.
Investment Companies during the First Half: 
Past letters have stressed our belief that the Dow is no pushover as a yardstick for investment performance. To 
the extent that funds are invested in common stocks, whether the manner of investment be through investment 
companies, investment counselors, bank trust departments, or do-it-yourself, our belief is that the overwhelming 
majority will achieve results roughly comparable to the Dow. Our opinion is that the deviations from the Dow 
are much more likely to be toward a poorer performance than a superior one.
To illustrate this point, we have continually measured the Dow and limited partners' results against the two 
largest open-end investment companies (mutual funds) following a program of common stock investment and 
the two largest closed-end investment companies. The tabulation in Appendix C shows the five -years' results, 
and you will note the figures are extraordinarily close to those of the Dow. These companies have total assets of 
about $3.5 billion.
In the interest of getting this letter out promptly, we are mailing it before results are available for the closed-end 
companies. However, the two mutual funds both did poorer than the Dow, with Massachusetts Investors Trust 
having a minus 23% overall performance, and Investors Stock Fund realizing a minus 25.4%. This is not 
unusual as witness the lead article in the WALL STREET JOURNAL of June 13, 1962 headed "Funds vs. 
Market.” Of the 17 large common stock funds studied, everyone had a record poorer than the Dow from the 
peak on the Dow of 734, to the date of the article, although in some cases the margin of inferiority was minor.
Buffett Partnership Letters 1957 to 1970
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Particularly hard hit in the first half were the so-called “growth” funds which, almost without exception, were 
down considerably more than the Dow. The three large "growth" (the quotation marks are more applicable now) 
funds with the best record in the preceding few years, Fidelity Capital Fund, Putnam Growth Fund, and 
Wellington Equity Fund averaged an overall minus 32.3% for the first half. It is only fair to point out that 
because of their excellent records in 1959-61, their overall performance to date is still better than average, as it 
may well be in the future. Ironically, however, this earlier superior performance had caused such a rush of new 
investors to come to them that the poor performance this year was experienced by very many more holders than 
enjoyed the excellent performance of earlier years. This experience tends to confirm my hypothesis that 
investment performance must be judged over a period of time with such a period including both advancing and 
declining markets. There will continue to be both; a point perhaps better understood now than six months ago.
In outlining the results of investment companies, I do so not because we operate in a manner comparable to 
them or because our investments are similar to theirs. It is done because such funds represent a public batting 
average of professional, highly-paid investment management handling a very significant $20 billion of 
securities. Such management, I believe, is typical of management handling even larger sums. As an alternative 
to an interest in the partnership, I believe it reasonable to assume that many partners would have investments 
managed similarly.
Asset Values:
The above calculations of results are before allocation to the General Partner and monthly payments to partners. 
Of course, whenever the overall results for the year are not plus 6% on a market value basis (with deficiencies 
carried forward) there is no allocation to the General Partner. Therefore, non-withdrawing partners have had a 
decrease in their market value equity during the first six months of 7.5% and partners who have withdrawn at 
the rate of 6% per annum have had a decrease in their market value equity during the first half of 10.5%. Should 
our results for the year be less than plus 6% (and unless there should be a material advance in the Dow, this is 
very probable) partners receiving monthly payments will have a decrease in their market value equity at 
December 31, 1962. This means that monthly payments at 6% on this new market equity next year will be on a 
proportionately reduced basis. For example, if our results were an overall minus 7% for the year, a partner 
receiving monthly payments who had a market value interest of $100,000 on January 1, 1962 would have an 
equity at December 31, 1962 of $87,000. This reduction would arise from the minus 7% result, or $7, 000 plus 
monthly payments of $500 for an additional $6,000. Thus, with $87,000 of market equity on January 1, 1963, 
monthly payments next year would be $435.00. 
None of the above, of course, has any applicability to advance payments received during 1962 which do not 
participate in profits or losses, but earn a straight 6%.
APPENDIX A
DOW-JONES INDUSTRIAL AVERAGE
Year Closing Dow Change for 
Year
Dow Dividend Overall 
Result from 
Dow
Percentage 
Result
1956 499.47 -- -- -- --
1957 435.69 -63.78 21.61 -42.17 -8.4%
1958 583.65 147.96 20.00 167.96 38.5%
1959 679.36 95.71 20.74 116.45 20.0%
1960 615.89 63.47 21.36 42.11 -6.2%
1961 731.14 115.25 22.61 137.86 22.4%
6/30/62 561.28 169.86 11.00 Est. -158.86 -21.7%
Buffett Partnership Letters 1957 to 1970
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APPENDIX B
PARTNERSHIP PERFORMANCE
Year Partnership Result (1) Limited Partners’ Results (2)
1957 10.4% 9.3%
1958 40.9% 32.2%
1959 25.9% 20.9%
1960 22.8% 18.6%
1961 45.9% 35.9%
6/30/62 -7.5% -7.5%
(1) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout entire 
year after all expenses but before distributions to partners or allocations to the general partners. 
(2) For 1957-61 computed on basis of preceding column of partnership results allowing for allocation to general 
partner based upon present partnership agreement.
APPENDIX C
YEARLY RESULTS
Year Mass. Inv. Trust 
(1)
Investors Stock 
(1)
Lehman (2) Tri-Cont. (2)
1957 -11.4% -12.4% -11.4% -2.4%
1958 42.7% 47.5% 40.8% 33.2%
1959 9.0% 10.3% 8.1% 8.4%
1960 -1.0% -0.6% 2.5% 2.8%
1961 25.6% 24.9% 23.6% 22.5%
6/30/92 23.0% -25.4% N.A. N.A.
(1) Computed from changes in asset value plus any distributions to holders of record during year. 
(2) From Moody's Bank & Finance Manual - 1962.
CUMULATIVE RESULTS
Years Mass. 
Inv. 
Trust
Investors 
Stock
Lehman Tri-Cont. Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1957-58 26.4% 29.2% 24.7% 30.0% 26.9% 44.5%
1957-59 37.8% 42.5% 34.8% 40.9% 52.3% 74.7%
1957-60 36.4% 41.6% 38.2% 44.8% 42.9% 107.2
1957-61 71.4% 76.9% 70.8% 77.4% 74.9% 181.6
1957-6/30/62 31.9% 32.0% N.A. N.A. 37.0% 160.5%
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
November 1, 1962 
TO MY PARTNERS FOR 1963: 
Here we go on the annual paper flurry. Two copies of an amended partnership agreement for 1963 are enclosed. 
The one with the General Provisions attached is to be kept by you and the other single-page agreement should 
be returned. There are no substantive changes of any sort from last year's agreement. This amendment is merely 
to allow for a few new partners and in several places to reword in clearer (we hope) language provisions of the 
present agreement. Practically all of the rewording is in General Provision 5 (paragraph 7 in last year's 
agreement). Rather than have a separate amending document, we have incorporated the changes into one 
complete document embodying the entire agreement. 
We are also enclosing two commitment letters (one for you--one to be returned) on which you are to indicate 
your wishes regarding additions or withdrawals at January 1st. We would like to have the agreement and the 
commitment letter back by December 1st. However, the commitment letter can be amended right up until the 
end of the year (not after) so if you should have a change of plans and you have already mailed us your 
commitment letter, all you have to do is get in touch with me, and I will make whatever changes you desire. 
Any withdrawals will be paid immediately after January 1st. Any additions must reach us by January 10th, and 
should they be paid in during November, they will take on the status of advance payments and draw interest at 
the rate of 6% until yearend.
Please be sure the signature on your partnership agreement is notarized. Partners in Omaha may obtain the 
notarization at our office if they wish. Also, be sure to let us know by an appropriate circle on the commitment 
letter whether you wish to receive monthly payments in 1963. In order to be sure everyone understands this, let 
me again state that these monthly payments are in no sense guaranteed earnings or anything of the sort. They 
represent a convenient form of regular withdrawal, which to the extent we earn better than 6% are payments 
from earnings, and to the extent we don't, are payments from capital. 
Complete tax information for your 1962 return will be in your hands by January 20th. If you should need an 
estimate of your tax position before that time, let me know and I will give you a rough idea. We will also send 
out a short letter on taxes in late December.
Having read this far, you are entitled to a report on how we have done to date in 1962. For the period ending 
October 31st, the Dow-Jones Industrials showed an overall loss, including dividends received, of approximately 
16.8%. We intend to use the same method or valuing our controlling interest in Dempster Mill Manufacturing at 
this yearend that we did at the end of last year. This involved applying various discounts to the balance sheet 
items to reflect my opinion as to what could be realized on a very prompt sale. Last year this involved a 40% 
discount on inventories, a 15% discount on receivables, estimated auction value of fixed assets, etc., which led 
to an approximate value or $35.00 per share.
The successful conversion of substantial portions of the assets of Dempster to cash, at virtually 100 cents on the 
dollar, has been the high point of 1962. For example, inventory of $4.2 million at last yearend will probably be 
about $1.9 million this yearend, reducing the discount on this item by about $920,000 (40% of $2.3 million 
reduction). I will give this story my full journalistic treatment in my annual letter. Suffice to say at this point that 
applying the same discounts described above will probably result in a yearend value of at least $50.00 per share. 
The extent of the asset conversion job can perhaps best be illustrated in a sentence by pointing out that whereas 
Buffett Partnership Letters 1957 to 1970
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we had $166,000 of cash and $2,315,000 of liabilities at November 30, 1961 (Dempster fiscal yearend), we 
expect this year to have about $1 million in cash and investments (of the type the Partnership buys) against total 
liabilities of $250,000. Prospects for further improvement in this situation in 1963 appear good, and we expect a 
substantially expanded investment portfolio in Dempster next year. 
Valuing Dempster at $50 per share, our overall gain (before any payments to partners) to October 31st for the 
Partnership has been 5.5%. This 22.3 percentage-points advantage over the Dow, if maintained until the end of 
the year, will be among the largest we have ever had. About 60% of this advantage was accomplished by the 
portfolio other than Dempster, and 40% was the result of increased value at Dempster.
I want all partners and prospective partners to realize the results described above are distinctly abnormal and 
will recur infrequently, if at all. This performance is mainly the result of having a large portion of our money in 
controlled assets and workout situations rather than general market situations at a time when the Dow declined 
substantially. If the Dow had advanced materially in 1962, we could have looked very bad on a relative basis, 
and our success to date in 1962 certainly does not reflect any ability on my part to guess the market (I never try), 
but merely reflects the fact that the high prices of generals partially forced me into other categories or 
investment. If the Dow had continued to soar, we would have been low man on the totem pole. We fully expect 
to have years when our method of operation will not even match the results of the Dow, although obviously I 
don't expect this on any long-term basis or I would throw in the towel and buy the Dow.
I’ll cut this sermon short with the conclusion that I certainly do not want anyone to think that the pattern of the 
last few years is likely to be repeated; I expect future performance to reflect much smaller advantages on 
average over the Dow.
Each letter ends with the request that you let me know about anything that isn't clear. Please be sure that you do 
this. We are all geared up with secretarial help, a new typewriter, etc., and we want to be sure that this letter and 
agreement are understood by all.
Cordially, 
Warren E. Buffett 
WEB:bf 
P/S: There are no prizes for being the last ones to get in the agreement and commitment letter, so please get to it 
as soon as possible. Remember the commitment letter can be amended by a postcard or a phone call--we are just 
trying to get the bulk of the work out of the way well before December 31st so we can concentrate on getting the 
audit, tax information, etc., out pronto at yearend.
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 18, 1963 
The Ground Rules 
Some partners have confessed (that's the proper word) that they sometimes find it difficult to wade through my 
entire annual letter. Since I seem to be getting more long-winded each year, I have decided to emphasize certain 
axioms on the first pages. Everyone should be entirely clear on these points. To most of you this material will 
seem unduly repetitious, but I would rather have nine partners out of ten mildly bored than have one out of ten 
with any basic misconceptions.
1. In no sense is any rate of return guaranteed to partners. Partners who withdraw one-half of 1% monthly 
are doing just that--withdrawing. If we earn more than 6% per annum over a period of years, the 
withdrawals will be covered by earnings and the principal will increase. If we don't earn 6%, the 
monthly payments are partially or wholly a return of capital. 
2. Any year in which we fail to achieve at least a plus 6% performance will be followed by a year when 
partners receiving monthly payments will find those payments lowered. 
3. Whenever we talk of yearly gains or losses, we are talking about market values; that is, how we stand 
with assets valued at market at yearend against how we stood on the same basis at the beginning of the 
year. This may bear very little relationship to the realized results for tax purposes in a given year. 
4. Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the 
year. It is instead to be measured against the general experience in securities as measured by the Dow￾Jones Industrial Average, leading investment companies, etc. If our record is better than that of these 
yardsticks, we consider it a good year whether we are plus or minus. If we do poorer, we deserve the 
tomatoes.
5. While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance. 
It is a certainty that we will have years when the partnership performance is poorer, perhaps 
substantially so, than the Dow. If any three-year or longer period produces poor results, we all should 
start looking around for other places to have our money. An exception to the latter statement would be 
three years covering a speculative explosion in a bull market. 
6. I am not in the business of predicting general stock market or business fluctuations. If you think I can do 
this, or think it is essential to an investment program, you should not be in the partnership.
7. I cannot promise results to partners. What I can and do promise is that: 
a. Our investments will be chosen on the basis of value, not popularity; 
b. That we will attempt to bring risk of permanent capital loss (not short-term quotational loss) to an 
absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of 
commitments; and 
c. My wife, children and I will have virtually our entire net worth invested in the partnership. 
Buffett Partnership Letters 1957 to 1970
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Our Performance in 1962 
I have consistently told partners that we expect to shine on a relative basis during minus years for the Dow, 
whereas plus years of any magnitude may find us blushing. This held true in 1962.
Because of a strong rally in the last few months, the general market as measured by the Dow really did not have 
such a frightening decline as many might think. From 731 at the beginning of the year, it dipped to 535 in June, 
but closed at 652. At the end of 1960, the Dow stood at 616, so you can see that while there has been a good 
deal of action the past few years, the investing public as a whole is not too far from where it was in 1959 or 
1960. If one had owned the Dow last year (and I imagine there are a few people playing the high flyers of 1961 
who wish they had), they would have had a shrinkage in market value of 79.04 or 10.8%. However, dividends of 
approximately 23.30 would have been received to bring the overall results from the Dow for the year to minus 
7.6%. Our own overall record was plus 13.9%. Below we show the year-by-year performance of the Dow, the 
partnership before allocation to the general partner, and the limited partners' results for all full years of Buffett 
Partnership, Ltd.'s and predecessor partnerships' activities: 
Year Overall Results from 
Dow
Partnership Results 
(1)
Limited Partners 
Results (2)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
(1) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout entire 
year after all expenses but before distributions to partners or allocations to the general partner.
(2) For 1957-61 computed on basis of preceding column of partnership results allowing for allocation to general 
partner based upon present partnership agreement.
The following table shows the cumulative or compounded results in the same three categories, as well as the 
average annual compounded rate:
Year Overall Results 
from Dow
Partnership Results Limited Partners 
Results
1957 -8.4% 10.4% 9.3%
1957-58 26.9% 55.6% 44.5%
1957-59 52.3% 95.9% 74.7%
1957-60 42.9% 140.6% 107.2%
1957-61 74.9% 251.0% 181.6%
1957-62 61.6% 299.8% 215.1%
Annual Compounded Rate 8.3% 26.0% 21.1%
My (unscientific) opinion is that a margin of ten percentage points per annum over the Dow is the very 
maximum that can be achieved with invested funds over any long period of years, so it may be well to mentally 
modify some of the above figures.
Partners have sometimes expressed concern as to the effect of size upon performance. This subject was reflected 
upon in last year’s annual letter. The conclusion reached was that there were some situations where larger sums 
Buffett Partnership Letters 1957 to 1970
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helped and some where they hindered, but on balance, I did not feel they would penalize performance. I 
promised to inform partners if my conclusions on this should change. At the beginning of 1957, combined 
limited partnership assets totaled $303,726 and grew to $7,178,500 at the beginning or 1962. To date, anyway, 
our margin over the Dow has indicated no tendency to narrow as funds increase.
Investment Companies 
Along with the results of the Dow, we have regularly included the tabulations on the two largest open-end 
investment companies (mutual funds) following a common stock policy, and the two largest diversified closed￾end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri￾Continental Corp. and Lehman Corp. manage over $3 billion and are probably typical of most of the $20 billion 
investment company industry. My opinion is that their results parallel those of most bank trust departments and 
investment counseling organizations which handle, in aggregate, vastly greater sums.
The purpose of this tabulation, which is shown below, is to illustrate that the Dow is no pushover as an index of 
investment achievement. The advisory talent managing just the four companies shown commands annual fees of 
approximately $7 million and this represents a very small fraction of the industry. Nevertheless, the public 
batting average of this highly-paid talent indicates results slightly less favorable than the Dow. In no sense is 
this statement intended as criticism. Within their institutional framework and handling the many billions of 
dollars involved, I consider such average results virtually the only possible ones. Their merits lie in other than 
superior results.
Both our portfolio and method of operation differ substantially from the companies mentioned above. However, 
most partners, as an alternative to their interest in the partnership would probably have their funds invested in 
media producing results comparable with investment companies, and I, therefore feel they offer a meaningful 
test of performance. 
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont. 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -13.0% -10.0% -7.6% 11.9%
(1) Computed from changes in asset value plus any distributions to holders of record during year. 
(2) From 1962 Moody's Bank & Finance Manual for 1957-61. Estimated for 1962. 
COMPOUNDED
Year Mass. Inv. 
Trust
Investor 
Stock
Lehman Tri-Cont. Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1957-58 26.4% 29.2% 24.7% 30.0% 26.9% 44.5%
1957-59 37.8% 42.5% 34.8% 40.9% 52.3% 74.7%
1957-60 36.4% 41.6% 38.2% 44.8% 42.9% 107.2%
1957-61 71.3% 76.9% 70.8% 77.4% 74.9% 181.6%
1957-62 54.5% 53.2% 48.6% 59.7% 61.6% 215.1%
Buffett Partnership Letters 1957 to 1970
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Annual 
Compounded 
Rate
7.5% 7.4% 6.8% 8.1% 8.3% 21.1%
The Joys of Compounding
I have it from unreliable sources that the cost of the voyage Isabella originally underwrote for Columbus was 
approximately $30,000. This has been considered at least a moderately successful utilization of venture capital. 
Without attempting to evaluate the psychic income derived from finding a new hemisphere, it must be pointed 
out that even had squatter's rights prevailed, the whole deal was not exactly another IBM. Figured very roughly, 
the $30,000 invested at 4% compounded annually would have amounted to something like $2,000,000,000,000 
(that's $2 trillion for those of you who are not government statisticians) by 1962. Historical apologists for the 
Indians of Manhattan may find refuge in similar calculations. Such fanciful geometric progressions illustrate the 
value of either living a long time, or compounding your money at a decent rate. I have nothing particularly 
helpful to say on the former point.
The following table indicates the compounded value of $100,000 at 5%, 10% and 15% for 10, 20 and 30 years. 
It is always startling to see how relatively small differences in rates add up to very significant sums over a 
period of years. That is why, even though we are shooting for more, we feel that a few percentage points 
advantage over the Dow is a very worthwhile achievement. It can mean a lot of dollars over a decade or two.
5% 10% 15%
10 Years $162,889 $259,374 $404,553
20 Years $265,328 $672,748 $1,636,640
30 Years $432,191 $1,744,930 $6,621,140
Our Method of Operation 
Our avenues of investment break down into three categories. These categories have different behavior 
characteristics, and the way our money is divided among them will have an important effect on our results, 
relative to the Dow, in any given year. The actual percentage division among categories is to some degree 
planned, but to a great extent, accidental, based upon availability factors. 
The first section consists of generally undervalued securities (hereinafter called “generals”) where we have 
nothing to say about corporate policies and no timetable as to when the undervaluation may correct itself .Over 
the years, this has been our largest category of investment, and more money has been made here than in either of 
the other categories. We usually have fairly large positions (5% to 10% of our total assets) in each of five or six 
generals, with smaller positions in another ten or fifteen. 
Sometimes these work out very fast; many times they take years. It is difficult at the time of purchase to know 
any compelling reason why they should appreciate in price. However, because of this lack of glamour or 
anything pending which might create immediate favorable market action, they are available at very cheap prices. 
A lot of value can be obtained for the price paid. This substantial excess of value creates a comfortable margin 
of safety in each transaction. Combining this individual margin of safety with a diversity of commitments 
creates a most attractive package of safety and appreciation potential. We do not go into these generals with the 
idea of getting the last nickel, but are usually quite content selling out at some intermediate level between our 
purchase price and what we regard as fair value to a private owner.
Many times generals represent a form of "coattail riding" where we feel the dominating stockholder group has 
Buffett Partnership Letters 1957 to 1970
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plans for the conversion of unprofitable or under-utilized assets to a better use. We have done that ourselves in 
Sanborn and Dempster, but everything else equal we would rather let others do the work. Obviously, not only do 
the values have to be ample in a case like this, but we also have to be careful whose coat we are holding. 
The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap 
does not mean it is not going to go down. During abrupt downward movements in the market, this segment may 
very well go down percentage-wise just as much as the Dow. Over a period of years, I believe the generals will 
outperform the Dow, and during sharply advancing years like 1961. This is the section of our portfolio that turns 
in the best results. It is, of course, also the most vulnerable in a declining market, and in 1962, not only did we 
not make any money out of our general category, but I am even doubtful if it did better than the Dow.
Our second category consists of "work-outs. These are securities whose financial results depend on corporate 
action rather than supply and demand factors created by buyers and sellers of securities. In other words, they are 
securities with a timetable where we can predict, within reasonable error limits, when we will get how much and 
what might upset the applecart. Corporate events such as mergers, liquidations, reorganizations, spin-offs, etc., I 
lead to work-outs. An important source in recent years has been sell-outs by oil producers to major integrated oil 
companies.
This category will produce reasonably stable earnings from year to year, to a large extent irrespective of the 
course of the Dow. Obviously, if we operate throughout a year with a large portion of our portfolio in work-outs, 
we will look extremely good if it turns out to be a declining year for the Dow, or quite bad if it is a strongly 
advancing year.
We were fortunate in that we had a good portion of our portfolio in work outs in 1962. As I have said before, 
this was not due to any notion on my part as to what the market would do, but rather because I could get more of 
what I wanted in this category than in the generals. This same concentration in work-outs hurt our performance 
during the market advance in the second half of the year.
Over the years, work-outs have provided our second largest category. At any given time, we may be in five to 
ten of these; some just beginning and others in the late stage of their development. I believe in using borrowed 
money to offset a portion of our work-out portfolio, since there is a high degree of safety in this category in 
terms of both eventual results and intermediate market behavior. For instance, you will note when you receive 
our audit report, that we paid $75,000 of interest to banks and brokers during the year. Since our borrowing was 
at approximately 5%, this means we had an average of $1,500,000 borrowed from such sources. Since 1962 was 
a down year in the market, you might think that such borrowing would hurt results. However, all of our loans 
were to offset work-outs, and this category turned in a good profit for the year. Results, excluding the benefits 
derived from the use of borrowed money, usually fall in the 10% to 20% per annum range. My self-imposed 
standard limit regarding borrowing is 25% of partnership net worth, although something extraordinary could 
result in modifying this for a limited period of time.
You will note on our yearend balance sheet (part of the audit you will receive) securities sold short totaling 
some $340,000. Most of this occurred in conjunction with a work-out entered into late in the year. In this case, 
we had very little competition for a period of time and were able to create a 10% or better profit (gross, not 
annualized) for a few months tie-up of money. The short sales eliminated the general market risk.
The final category is I “control” situations, where we either control the company or take a very large position 
and attempt to influence policies of the company. Such operations should definitely be measured on the basis of 
several years. In a given year, they may produce nothing as it is usually to our advantage to have the stock be 
stagnant market-wise for a long period while we are acquiring it. These situations, too, have relatively little in 
common with the behavior of the Dow. Sometimes, of course, we buy into a general with the thought in mind 
that it might develop into a control situation. If the price remains low enough for a long period, this might very 
Buffett Partnership Letters 1957 to 1970
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well happen. Usually, it moves up before we have a substantial percentage of the company's stock, and we sell 
at higher levels and complete a successful general operation.
Dempster Mill Manufacturing Company 
The high point of 1962 from a performance standpoint was our present control situation --73% owned Dempster 
Mill. Dempster has been primarily in farm implements (mostly items retailing for $1,000 or under), water 
systems, water well supplies and jobbed plumbing lines. 
The operations for the past decade have been characterized by static sales, low inventory turnover and virtually 
no profits in relation to invested capital.
We obtained control in August, 1961 at an average price of about $28 per share, having bought some stock as 
low as $16 in earlier years, but the vast majority in an offer of $30.25 in August. When control of a company is 
obtained, obviously what then becomes all-important is the value of assets, not the market quotation for a piece 
of paper (stock certificate).
Last year, our Dempster holding was valued by applying what I felt were appropriate discounts to the various 
assets. These valuations were based on their status as non-earning assets and were not assessed on the basis of 
potential, but on the basis of what I thought a prompt sale would produce at that date. Our job was to compound 
these values at a decent rate. The consolidated balance sheet last year and the calculation of fair value are shown 
below.
(000’s omitted)
Assets Book 
Figure
Valued @ Adjusted 
Valuation
Liabilities
Cash $166 100% $166 Notes Payable $1,230
Accts. Rec. (net) $1,040 85% $884 Other Liabilities $1,088
Inventory $4,203 60% $2,522
Ppd. Exp. Etc. $82 25% $21
Current Assets $5,491 $3,593 Total Liabilities $2,318
Cash Value Life ins., 
etc.
$45 100
Est. net auction 
value
$45 Net Work per Books: $4,601
Net Plant Equipment $1383 $800 Net Work as 
Adjusted to Quickly 
Realizable Values
$2,120
Total Assets $6,919 $4,438 Shares outstanding 
60,146 Adj. Value 
per Share
$35.25
Dempster's fiscal year ends November 30th, and because the audit was unavailable in complete form, I 
approximated some of the figures and rounded to $35 per share last year.
Initially, we worked with the old management toward more effective utilization of capital, better operating 
margins, reduction of overhead, etc. These efforts were completely fruitless. After spinning our wheels for about 
six months, it became obvious that while lip service was being given to our objective, either through inability or 
unwillingness, nothing was being accomplished. A change was necessary.
Buffett Partnership Letters 1957 to 1970
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A good friend, whose inclination is not toward enthusiastic descriptions, highly recommended Harry Bottle for 
our type of problem. On April 17, 1962 I met Harry in Los Angeles, presented a deal which provided for 
rewards to him based upon our objectives being met, and on April 23rd he was sitting in the president's chair in 
Beatrice.
Harry is unquestionably the man of the year. Every goal we have set for Harry has been met, and all the 
surprises have been on the pleasant side. He has accomplished one thing after another that has been labeled as 
impossible, and has always taken the tough things first. Our breakeven point has been cut virtually in half, slow￾moving or dead merchandise has been sold or written off, marketing procedures have been revamped, and 
unprofitable facilities have been sold.
The results of this program are partially shown in the balance sheet below, which, since it still represents non￾earning assets, is valued on the same basis as last year.
(000’s omitted)
Assets Book 
Figure
Valued @ Adjusted 
Valuation
Liabilities
Cash $60 100% $60 Notes payable $0
Marketable 
securities
$758 Mrkt. 12/31/62 $834 Other liabilities $346
Accts. Rec. (net) $796 85% $676 Total liabilities $346
Inventory $1,634 60% $981
Cash value life ins. $41 100% $41 Net Worth:
Recoverable Income 
Tax
$170 100% $170 Per Books $4,077
Ppd. Exp. Etc. $14 25% $4 As Adjusted to quickly 
realizable values
$3,125
Add: proceeds from 
potential exercise of 
option to Harry Bottle
$60
Current Assets $3,473 $2,766
Shares outstanding 
60,146
Misc. Invest. $5 100% $5 Add: shs. Potentially 
outstanding under 
option 2000
Total shs. 62,146
Net Plant Equipment $945 Est. net auction 
value
$700
Adjusted value per 
share
$51.26
Total Assets $4,423 $3,471
Three facts stand out: (1) Although net worth has been reduced somewhat by the housecleaning and writedowns 
($550,000 was written out of inventory; fixed assets overall brought more than book value), we have converted 
assets to cash at a rate far superior to that implied in our year-earlier valuation. (2) To some extent, we have 
converted the assets from the manufacturing business (which has been a poor business) to a business which we 
think is a good business --securities. (3) By buying assets at a bargain price, we don't need to pull any rabbits out 
of a hat to get extremely good percentage gains. This is the cornerstone of our investment philosophy: “Never 
count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good 
results. The better sales will be the frosting on the cake.”
Buffett Partnership Letters 1957 to 1970
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On January 2, 1963, Dempster received an unsecured term loan of $1,250,000. These funds, together with the 
funds all ready "freed-up" will enable us to have a security portfolio of about $35 per share at Dempster, or 
considerably more than we paid for the whole company. Thus our present valuation will involve a net of about 
$16 per share in the manufacturing operation and $35 in a security operation comparable to that of Buffett 
Partnership, Ltd.
We, of course, are devoted to compounding the $16 in manufacturing at an attractive rate and believe we have 
some good ideas as to how to accomplish this. While this will be easy if the business as presently conducted 
earns money, we have some promising ideas even if it shouldn't.
It should be pointed out that Dempster last year was 100% an asset conversion problem and therefore, 
completely unaffected by the stock market and tremendously affected by our success with the assets. In 1963, 
the manufacturing assets will still be important, but from a valuation standpoint it will behave considerably 
more like a general since we will have a large portion of its money invested in generals pretty much identical 
with those in Buffett Partnership, Ltd. For tax reasons, we will probably not put workouts in Dempster. 
Therefore, if the Dow should drop substantially, it would have a significant effect on the Dempster valuation. 
Likewise, Dempster would benefit this year from an advancing Dow which would not have been the case most 
of last year.
There is one final point of real significance for Buffett Partnership, Ltd. We now have a relationship with an 
operating man which could be of great benefit in future control situations. Harry had never thought of running 
an implement company six days before he took over. He is mobile, hardworking and carries out policies once 
they are set. He likes to get paid well for doing well, and I like dealing with someone who is not trying to figure 
how to get the fixtures in the executive washroom gold-plated.
Harry and I like each other, and his relationship with Buffett Partnership, Ltd. should be profitable for all of us. 
The Question of Conservatism 
Because I believe it may be even more meaningful after the events of 1962 I would like to repeat this section 
from last year’s letter:
"The above description of our various areas of operation may provide some clues as to how conservatively our 
portfolio is invested. Many people some years back thought they were behaving in the most conservative 
manner by purchasing medium or long-term municipal or government bonds. This policy has produced 
substantial market depreciation in many cases, and most certainly has failed to maintain or increase real buying 
power.
"Conscious, perhaps overly conscious, of inflation, many people now feel that they are behaving in a 
conservative manner by buying blue chip securities almost regardless of price-earnings ratios, dividend yields, 
etc. Without the benefit of hindsight as in the bond example, I feel this course of action is fraught with danger. 
There is nothing at all conservative, in my opinion, about speculating as to just how high a multiplier a greedy 
and capricious public will put on earnings.
You will not be right simply because a large number of people momentarily agree with you. You will not be 
right simply because important people agree with you. In many quarters the simultaneous occurrence of the two 
above factors is enough to make a course of action meet the test of conservatism. 
“You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, 
and your reasoning is correct. True conservatism is only possible through knowledge and reason.
Buffett Partnership Letters 1957 to 1970
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I might add that in no way does the fact that our portfolio is not conventional prove that we are more 
conservative or less conservative than standard methods of investing. This can only be determined by examining 
the methods or examining the results.
I feel the most objective test as to just how conservative our manner of investing is arises through evaluation of 
performance in down markets. Preferably these should involve a substantial decline in the Dow. Our 
performance in the rather mild declines of 1957 and 1960 would confirm my hypothesis that we invest in an 
extremely conservative manner. I would welcome any partner's suggesting objective tests as to conservatism to 
see how we stack up. We have never suffered a realized loss of more than ½ of 1% of total net assets and our 
ratio of total dollars of realized gains to total realized losses is something like 100 to 1. Of course, this reflects 
the fact that on balance we have been operating in an up market. However there have been many opportunities 
for loss transactions even in markets such as these (you may have found out about a few of these yourselves) so 
I think the above facts have some significance.
In 1962, we did realize a loss on one commitment or 1.0% and our ratio or realized gains to losses was only 
slightly over 3 to 1. However, compared to more conventional (often termed conservative which is not 
synonymous) methods of common stock investing, it would appear that our method involved considerably less 
risk. Our advantage over the Dow was all achieved when the market was going down; we lost a bit of this edge 
on the way up.
The Usual Prediction 
I am certainly not going to predict what general business or the stock market are going to do in the next year or 
two, since I don't have the faintest idea.
I think you can be quite sure that over the next ten years, there are going to be a few years when the general 
market is plus 20% or 25% a few when it is minus on the same order, and a majority when it is in between. I 
haven’t any notion as to the sequence in which these will occur, nor do I think it is of any great importance for 
the long-term investor. If you will take the first table on page 3 and shuffle the years around, the compounded 
result will stay the same. If the next four years are going to involve, say, a +40%, -30%, +10% and –6%, the 
order in which they fall is completely unimportant for our purposes as long as we all are around at the end of the 
four years. Over a long period of years, I think it likely that the Dow will probably produce something like 5% 
per year compounded from a combination of dividends and market value gain. Despite the experience of the last 
decade, anyone expecting substantially better than that from the general market probably faces disappointment.
Our job is to pile up yearly advantages over the performance of the Dow without worrying too much about 
whether the absolute results in a given year are a plus or a minus. I would consider a year in which we were 
down 15% and the Dow declined 25% to be much superior to a year when both the partnership and the Dow 
advanced 20%.
For the reasons outlined in our method of operation, our best years relative to the Dow are likely to be in 
declining or static markets. Therefore, the advantage we seek will probably come in sharply varying amounts. 
There are bound to be years when we are surpassed by the Dow, but if over a long period we can average ten 
percentage points per year better than it, I will feel the results have been satisfactory.
Specifically, if the market should be down 35% or 40% in a year (and I feel this has a high probability of 
occurring one year in the next ten --no one knows which one), we should be down only 15% or 20%. If it is 
more or less unchanged during the year, we would hope to be up about ten percentage points. If it is up 20% or 
more, we would struggle to be up as much. It is certainly doubtful we could match a 20% or 25% advance from 
the December 31, 1962 level. The consequence of performance such as this over a period of years would mean 
that if the Dow produces a 5% per year overall gain compounded, I would hope our results might be 15% per 
Buffett Partnership Letters 1957 to 1970
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year.
The above expectations may sound somewhat rash, and there is no question but that they may appear very much 
so when viewed from the vantage point of 1965 or 1970. Variations in any given year from the behavior 
described above would be wide, even if the long-term expectation was correct. Certainly, you have to recognize 
the possibility of substantial personal bias in such hopes.
Miscellaneous 
This year marked the transition from the office off the bedroom to one a bit (quite a bit) more conventional. 
Surprising as it may seem, the return to a time clock life has not been unpleasant. As a matter of fact, I enjoy not 
keeping track of everything on the backs of envelopes.
We are starting off this year with net assets of $9,405,400.00. At the start of 1962, Susie and I had three “non￾marketable security” investments of other than nominal size, and two of these have been sold. The third will be 
continued indefinitely. From the proceeds of the two sales, we have added to our partnership interest so that we 
now have an interest of $1,377,400.00. Also, my three children, mother, father, two sisters, two brothers-in-law, 
father-in-law, three aunts, four cousins, five nieces and nephews have interests directly or indirectly totaling 
$893,600.00.
Bill Scott who has fit into our operation splendidly has an interest (with his wife) of $167,400.00; A very large 
portion of his net worth. So we are all eating our own cooking.
You will note from the auditor's certificate that they made a surprise check during the year and this will be a 
continuing part of their procedure. Peat, Marwick, Mitchell & Co. again did an excellent job on the audit, 
meeting our rather demanding time schedules.
Susie was in charge of equipping the office which means we did not follow my “orange crate" approach to 
interior decorating. We have an ample supply of Pepsi on hand and look forward to partners dropping in.
Beth Feehan continues to demonstrate why she is the high priestess of the CPS (certified professional secretary, 
that is) group.
Partners did a wonderful job of cooperating in the return of agreements and commitment letters, and I am most 
appreciative of this. It makes life a lot easier. Enclosed you will find Schedule “A” to your partnership 
agreement. You will be receiving your audit and tax figures very soon, and if you have questions on any of this 
be sure to let me hear from you.
Cordially,
Warren E. Buffett 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
July 10, 1963
First Half Performance
During the first half of 1963, the Dow Jones Industrial Average (hereinafter called the "Dow") advanced from 
652.10 to 706.88. If one had owned the Dow during this period, dividends of $10.66 would have been received, 
bringing the overall return from the Dow during the first half to plus 10.0%. 
Our incantation has been: (1) that short-term results (less than three years) have little meaning, particularly in 
reference to an investment operation such as ours that devotes a portion of resources to control situations, and;
(2) That our results relative to the Dow and other common-stock-form media, will be better in declining markets 
and may well have a difficult time just matching such media in bubbling markets.
Nevertheless, our first-half performance, excluding any change in Dempster valuation (and its valuation did 
change --I'm saving this for dessert later in the letter) was plus 14%. This 14% is computed on total net assets 
(not non-Dempster assets) and is after expenses, but before monthly payments (to those who take them) to 
partners and allocation to the General Partner. Such allocations are academic on an interim basis, but if we were 
also plus 14% at yearend, the first 6% would be allocated to partners according to their capital, plus three￾quarters of the balance of 8% (14% -6%), or an additional 6%, giving the limited partners a plus 12% 
performance.
Despite the relatively pleasant results of the first half the admonitions stated two paragraphs earlier hold in full 
force. At plus 14% versus plus 10% for the Dow, this six months has been a less satisfactory period than the first 
half of 1962 when we were minus 7.5% versus minus 21.7% for the Dow. You should completely understand 
our thinking in this regard which has been emphasized in previous letters.
During the first half we had an average net investment in "generals" (long positions in generals minus short 
positions in generals) of approximately $5,275,000. Our overall gain from this net investment in generals (for a 
description of our investment categories see the last annual letter) was about $1,100,000 for a percentage gain 
from this category of roughly 21%. This again illustrates the extent to which the allocation of our resources 
among various categories affects short-term results. In 1962 the generals were down for the year and only an 
outstanding performance by both of the other two categories, "work-outs" and "controls," gave us our unusually 
favorable results for that year.
Now this year, our work-outs have done poorer than the Dow and have been a drag on performance, as they are 
expected to be in rising markets. While it would be very nice to be 100% in generals in advancing markets and 
100% in work-outs in declining markets, I make no attempt to guess the course of the stock market in such a 
manner. We consider all three of our categories to be good businesses on a long-term basis, although their short￾term price behavior characteristics differ substantially in various types of markets. We consider attempting to 
gauge stock market fluctuations to be a very poor business on a long-term basis and are not going to be in it, 
either directly or indirectly through the process of trying to guess which of our categories is likely to do best in 
the near future.
Investment Companies
Shown below are the usual statistics on a cumulative basis for the Dow and Buffett Partnership. Ltd. (including 
predecessor partnerships) as well as for the two largest open-end (mutual funds) and two largest closed-end 
Buffett Partnership Letters 1957 to 1970
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investment companies following a diversified common-stock investment policy: 
Year Dow Mass.Inv. Trust
(1)
Investors Stock 
(1)
Tri-Cont. (2)
1957 -8.4% -11.4% -12.4% -2.4%
1957 – 58 26.9% 26.4% 29.2% 30.0%
1957 – 59 52.3% 37.8% 42.5% 40.9%
1957 – 60 42.9% 36.4% 41.6% 44.8%
1957 – 61 74.9% 71.3% 76.9% 77.4%
1957 – 62 61.6% 54.5% 53.2% 59.7%
1957 – 6/30/63 77.8% 72.4% 69.3% 75.7%
Annual 
Compounded Rate
9.3% 8.7% 8.4% 9.1%
Year Lehman (2) Partnership (3) Limited Partners 
(4)
1957 -11.4% 10.4% 9.3%
1957 – 58 24.7% 55.6% 44.5%
1957 – 59 34.8% 95.9% 74.7%
1957 – 60 38.2% 140.6% 107.2%
1957 – 61 70.8% 251.0% 181.6%
1957 – 62 46.2% 299.8% 215.1%
1957 – 6/30/63 60.8% 355.8% 252.9%
Annual 
Compounded Rate
7.6% 26.3% 21.4%
Footnotes : 
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1963 Moody's Bank & Finance Manual for 1957-62. Estimated for first half 1963.
(3) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
entire year after all expenses but before distributions to partners or allocations to the general partner.
(4) For 1957-61 computed on basis of preceding column of partnership results allowing for allocation to 
general partner based upon present partnership agreement.
The results continue to show that the most highly paid and respected investment advice has difficulty matching 
the performance of an unmanaged index of blue-chip stocks. This in no sense condemns these institutions or the 
investment advisers and trust departments whose methods, reasoning, and results largely parallel such 
investment companies. These media perform a substantial service to millions of investors in achieving adequate 
diversification, providing convenience and peace of mind, avoiding issues of inferior quality, etc. However, 
their services do not include (and in the great majority of cases, are not represented to include) the compounding 
of money at a rate greater than that achieved by the general market.
Our partnership's fundamental reason for existence is to compound funds at a better-than-average rate with less 
exposure to long-term loss of capital than the above investment media. We certainly cannot represent that we 
will achieve this goal. We can and do say that if we don't achieve this goal over any reasonable period excluding 
Buffett Partnership Letters 1957 to 1970
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an extensive speculative boom, we will cease operation.
Dempster Mill Manufacturing Company 
In our most recent annual letter, I described Harry Bottle as the “man of the year”. If this was an understatement.
Last year Harry did an extraordinary job of converting unproductive assets into cash which we then, of course, 
began to invest in undervalued securities. Harry has continued this year to turn under-utilized assets into cash, 
but in addition, he has made the remaining needed assets productive. Thus we have had the following 
transformation in balance sheets during the last nineteen months: 
November 30, 1961 (000’s omitted)
Assets Book Figure Valued @ Adjusted 
Valuation
Liabilities
Cash $166 100% $166 Notes Payable $1,230
Accts. Rec. 
(net)
$1,040 85% $884 Other 
Liabilities
$1,088
Inventory $4,203 60% $2,522
Ppd. Exp. Etc. $82 25% $21 Total 
Liabilities
$2,318
Current Assets $5,491 $3,593 Net Worth:
Per Books $4,601
Cash Value 
Life ins., etc.
$45 100% $45 As adjusted to 
quickly 
realizable 
values
$2,120
Net Plant & 
equipment
$1,383 Est. Net 
Auction Value
$800
Total Assets $6,919 $4,438 Share 
outstanding 
60,146. Adj. 
Value per 
Share
$35.25
Buffett Partnership Letters 1957 to 1970
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November 30, 1962 (000’s omitted)
Assets Book Figure Valued @ Adjusted 
Valuation
Liabilities
Cash $60 100% $60 Notes payable $0
Marketable 
Securities
$758 Mkt. 12/31/62 $834 Other 
liabilities
$346
Accts. Rec. 
(net)
$796 85% $676 Total liabilities $346
Inventory $1,634 60% $981
Cash value life 
ins.
$41 100% $41 Net Worth:
Recoverable 
income tax
$170 100% $170 Per books $4,077
Ppd. Exp. Etc $14 25% $4 As adjusted to 
quickly 
realizable 
values
$3,125
Add: proceeds 
from potential 
exercise of 
option to 
Harry Bottle
$60
Current Assets $3,473 $2,766 $3,185
Shares 
Outstanding 
60,146
Misc. Invest. $5 100% $5 Add: shs. 
Potentially 
outstanding 
under option: 
2,000
Total shs. 
62,146
Net plant & 
equipment
$945 Est. net 
auction value
$700 Adj. Value per 
Share
$51.26
Total Assets $4,423 $3,471
Buffett Partnership Letters 1957 to 1970
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November 30, 1963 (000’s omitted)
Assets Book Figure Valued @ Adjusted 
Valuation
Liabilities
Cash $144 100% $144 Notes payable 
(paid 7/3/63)
$125
Marketable 
Securities
$1,772 Mkt. 6/30/63 $2,029 Other 
liabilities
$394
Accts. Rec. 
(net)
$1,262 85% $1,073 Total 
Liabilities
$519
Inventory $977 60% $586
Ppd. Exp. Etc $12 25% $3 Net Worth:
Per books $4,582
Current Assets $4,167 $3,835 As adjusted to 
quickly 
realizable 
values
$4,028
Misc. Invest $62 100% $62 Shares 
outstanding 
62,146
Net plant & 
equip.
$872 Est. net 
auction value
$650 Adj. Value per 
share
$64.81
Total assets $5,101 $4,547
I have included above the conversion factors we have previously used in valuing Dempster for B.P.L. purposes 
to reflect estimated immediate sale values of non-earning assets.
As can be seen, Harry has converted the assets at a much more favorable basis than was implied by my 
valuations. This largely reflects Harry's expertise and, perhaps, to a minor degree my own conservatism in 
valuation.
As can also be seen, Dempster earned a very satisfactory operating profit in the first half (as well as a substantial 
unrealized gain in securities) and there is little question that the operating business, as now conducted, has at 
least moderate earning power on the vastly reduced assets needed to conduct it. Because of a very important￾seasonal factor and also the presence of a tax carry forward, however, the earning power is not nearly what 
might be inferred simply by a comparison of the 11/30/62 and 6/30/63 balance sheets. Partly because of this 
seasonality, but more importantly, because of possible developments in Dempster before 1963 yearend, we have 
left our Dempster holdings at the same $51.26 valuation used at yearend 1962 in our figures for B.P.L’s first 
half. However, I would be very surprised if it does not work out higher than this figure at yearend.
One sidelight for the fundamentalists in our group: B.P.L. owns 71.7% of Dempster acquired at a cost of 
$1,262,577.27. On June 30, 1963 Dempster had a small safe deposit box at the Omaha National Bank containing 
securities worth $2,028,415.25. Our 71.7% share of $2,028,415.25 amounts to $1,454,373.70. Thus, everything 
above ground (and part of it underground) is profit. My security analyst friends may find this a rather primitive 
method of accounting, but I must confess that I find a bit more substance in this fingers and toes method than in 
any prayerful reliance that someone will pay me 35 times next year's earnings.
Buffett Partnership Letters 1957 to 1970
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Advance Payments and Advance Withdrawals 
We accept advance payments from partners and prospective partners at 6% interest from date of receipt until the 
end of the year. While there is no obligation to convert the payment to a partnership interest at the end of the 
year, this should be the intent at the time of payment.
Similarly, we allow partners to withdraw up to 20% of their partnership account prior to yearend and charge 
them 6% from date of withdrawal until yearend when it is charged against their capital account. Again, it is not 
intended that partners use US like a bank, but that they use the withdrawal right for unanticipated need for 
funds.
The willingness to both borrow and lend at 6% may seem "un-Buffett-like.” We look at the withdrawal right as 
a means of giving some liquidity for unexpected needs and, as a practical matter, are reasonably sure it will be 
far more than covered by advance payments.
Why then the willingness to pay 6% for advance payment money when we can borrow from commercial banks 
at substantially lower rates? For example, in the first half we obtained a substantial six-month bank loan at 4%. 
The answer is that we expect on a long-term basis to earn better than 6% (the general partner's allocation is zero 
unless we do although it is largely a matter of chance whether we achieve the 6% figure in any short period. 
Moreover, I can adopt a different attitude in the investment of money that can be expected to soon be a part of 
our equity capital than I can on short-term borrowed money. The advance payments have the added advantage to 
us of spreading the investment of new money over the year, rather than having it hit us all at once in January. On 
the other hand, 6% is more than can be obtained in short-term dollar secure investments by our partners, so I 
consider it mutually profitable. On June 30, 1963 we had advance withdrawals of $21,832.00 and advance 
payments of $562,437.11.
Taxes 
There is some possibility that we may have fairly substantial realized gains this year. Of course, this may not 
materialize at all and actually does not have anything to do with our investment performance this year. I am an 
outspoken advocate of paying large amounts of income taxes -- at low rates. A tremendous number of fuzzy, 
confused investment decisions are rationalized through so-called "tax considerations.”
My net worth is the market value of holdings less the tax payable upon sale. The liability is just as real as the 
asset unless the value of the asset declines (ouch), the asset is given away (no comment), or I die with it. The 
latter course of action would appear to at least border on a Pyrrhic victory.
Investment decisions should be made on the basis of the most probable compounding of after-tax net worth with 
minimum risk. Any isolation of low-basis securities merely freezes a portion of net worth at a compounding 
factor identical with the assets isolated. While this may work out either well or badly in individual cases, it is a 
nullification of investment management. The group experience holding various low basis securities will 
undoubtedly approximate group experience on securities as a whole, namely compounding at the compounding 
rate of the Dow. We do not consider this the optimum in after-tax compounding rates.
I have said before that if earnings from the partnership can potentially amount to a sizable portion of your total 
taxable income, the safe thing to do is to estimate this year the same tax you incurred last year. If you do this, 
you cannot run into penalties. In any event, tax liabilities for those who entered the partnership on 1/1/63 will be 
minimal because of the terms of our partnership agreement first allocating capital gains to those having an 
interest in unrealized appreciation.
Buffett Partnership Letters 1957 to 1970
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As in past years, we will have a letter out about November 1st (to partners and those who have indicated an 
interest to me by that time in becoming partners) with the amendment to the partnership agreement, commitment 
letter for 1964, estimate of the 1963 tax situation, etc.
My closing plea for questions regarding anything not clear always draws a blank. Maybe no one reads this far. 
Anyway, the offer is still open. 
Cordially,
Warren E. Buffett 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
November 6, 1963
To My Partners for 1964:
Enclosed is the usual assortment of Thanksgiving reading material:
(1) Two copies of an amended partnership agreement for 1964. The one with the General Provisions 
attached is to be kept by you (exactly the same as last year) and the other single page agreement is to be 
signed, notarized and returned to us. Partners in Omaha may come in and obtain the notarization at our 
office.
(2) A copy of that priceless treatise, "The Ground Rules,” I would like every partner to read this at least 
once a year, and it is going to be a regular item in my November package. Don't sign the partnership 
agreement unless you fully understand the concepts set forth and are in accord with them -- mentally 
and viscerally.
(3) Two copies of the commitment letter for 1964, one to be kept by you and one returned to us. You may 
amend this commitment letter right up to midnight, December 31st, so get it back to us early, and if it 
needs to be changed, just let us know by letter or phone.
Any withdrawals will be paid immediately after January 1st. You may withdraw any amount you desire from 
$100 up to your entire equity. Similarly, additions can be for any amount and should reach us by January 10th. 
In the event you are disposing of anything, this will give you a chance to have the transaction in 1964 if that 
appears to be advantageous for tax reasons. If additions reach us in November, they take on the status of 
advance payments and draw interest at the rate of 6% until yearend. This is not true of additions reaching us in 
December.
Complete tax information for your 1963 return will be in your hands by January 25th. If you should need an 
estimate of your tax position before that time, let me know and I will give you a rough idea. We will also send 
out a short letter on taxes in late December.
At the end of October, the overall result from the Dow for 1963 was plus 18.8%. We have had a good year in all 
three categories, generals, work-outs and controls. A satisfactory sale on a going concern basis of Dempster Mill 
Manufacturing operating assets was made about a month ago. I will give the full treatment to the Dempster story 
in the annual letter, perhaps climaxed by some lyrical burst such as “Ode to Harry Bottle.” While we always had 
a built-in profit in Dempster because of our bargain purchase price, Harry accounted for several extra servings 
of dessert by his extraordinary job. Harry, incidentally, has made an advance payment toward becoming a 
limited partner in 1964-- we consider this the beginning, not the end.
However, 1963 has not been all Dempster. While a great deal can happen the last two months and therefore 
interim results should not be taken too seriously, at the end of October the overall gain for the partnership was 
about 32%. Based on the allocation embodied in our agreement, this works out to plus 25 1/2% for the limited 
partners before monthly payments to those who take them. Of our approximate $3 million gain, something over 
$2 million came from marketable securities and a little less than $1 million from Dempster operating assets. The 
combined gain from our single best general and best work-out situation approximated the gain on the Dempster 
operating assets.
Buffett Partnership Letters 1957 to 1970
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You should be aware that if our final results relative to the Dow for 1963 are as favorable as on October 31st, I 
will regard it as an abnormal year. I do not consider a 13.2 percentage point margin to be in the cards on a long 
term basis. A considerably more moderate annual edge over the Dow will be quite satisfactory.
Cordially
Warren E. Buffett 
P/S. Last year we announced there would be no prizes for the last ones to get the material back to us. This 
continues to be our policy. Save us some last minute scurrying by getting your agreement and commitment letter 
back pronto. Give Bill or me a call if we can be of any help. Thanks!
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 18, 1964
Our Performance in 1963 
1963 was a good year. It was not a good year because we had an overall gain of $3,637,167 or 38.7% on our 
beginning net assets, pleasant as that experience may be to the pragmatists in our group. Rather it was a good 
year because our performance was substantially better than that of our fundamental yardstick --the Dow-Jones 
Industrial Average (hereinafter called the “Dow”). If we had been down 20% and the Dow had been down 30%, 
this letter would still have begun “1963 was a good year.” Regardless of whether we are plus or minus in a 
particular year, if we can maintain a satisfactory edge on the Dow over an extended period of time, our long 
term results will be satisfactory -- financially as well as philosophically.
To bring the record up to date, the following summarizes the year-by-year performance of the Dow, the 
performance of the Partnership before allocation to the general partner, and the limited partners' results for all 
full years of BPL's and predecessor partnerships' activities:
Year Overall Results From 
Dow (1)
Partnership Results 
(2)
Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.7% 38.7% 30.5%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received 
through ownership of the Dow during that year.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating 
throughout the entire year after all expenses but before distributions to partners or allocations to the 
general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement.
One wag among the limited partners has suggested I add a fourth column showing the results of the general 
partner --let's just say he, too, has an edge on the Dow.
The following table shows the cumulative or compounded results based on the preceding table: 
Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
1957 – 59 52.3% 95.9% 74.7%
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1957 – 60 42.9% 140.6% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 95.1% 454.5% 311.2%
Annual Compounded 
Rate
10.0% 27.7% 22.3%
It appears that we have completed seven fat years. With apologies to Joseph we shall attempt to ignore the 
biblical script. (I've never gone overboard for Noah's ideas on diversification either.)
In a more serious vein, I would like to emphasize that, in my judgment; our 17.7 margin over the Dow shown 
above is unattainable over any long period of time. A ten percentage point advantage would be a very 
satisfactory accomplishment and even a much more modest edge would produce impressive gains as will be 
touched upon later. This view (and it has to be guesswork -- informed or otherwise) carries with it the corollary 
that we must expect prolonged periods of much narrower margins over the Dow as well as at least occasional 
years when our record will be inferior (perhaps substantially so) to the Dow.
Much of the above sermon is reflected in "The Ground Rules" sent to everyone in November, but it can stand 
repetition.
Investment Companies 
We regularly compare our results with the two largest open-end investment companies (mutual funds) that 
follow a policy of being, typically, 95 -100% invested in common stocks, and the two largest diversified closed￾end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri￾Continental Corp. and Lehman Corp. manage about $4 billion and are probably typical of most of the $25 
billion investment company industry. My opinion is that their results roughly parallel those of the vast majority 
or other investment advisory organizations which handle, in aggregate, vastly greater sums.
The purpose or this tabulation, which is shown below, is to illustrate that the Dow is no pushover as an index or 
investment achievement. The advisory talent managing just the four companies shown commands' annual fees 
of over $7 million, and this represents a very small fraction of the industry. The public batting average of this 
highly-paid talent indicates they achieved results slightly less favorable than the Dow.
Both our portfolio and method of operation differ substantially from the investment companies in the table. 
However, most partners, as an alternative to their interest in the Partnership would probably have their funds 
invested in media producing results comparable with investment companies, and I, therefore, feel they offer a 
meaningful standard of performance.
YEARLY RESULTS
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont. 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.8% 19.5% 20.7% 30.5%
Buffett Partnership Letters 1957 to 1970
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(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1963 Moody's Bank & Finance Manual for 1957-62; Estimated for 1963.
COMPOUNDED
Year Mass. Inv. 
Trust
Investors 
Stock
Lehman Tri-Cont. Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1957 – 58 26.4% 29.2% 24.7% 30.0% 26.9% 44.5%
1957 – 59 37.8% 42.5% 34.8% 40.9% 52.3% 74.7%
1957 – 60 36.4% 41.6% 38.2% 44.8% 42.9% 107.2%
1957 – 61 71.3% 76.9% 70.8% 77.4% 74.9% 181.6%
1957 – 62 54.5% 53.2% 46.2% 59.7% 61.6% 215.1%
1957 – 63 85.4% 78.5% 81.0% 90.8% 95.1% 311.2%
Annual 
Compounded 
Rate
9.2% 8.6% 8.8% 9.7% 10.0% 22.3%
The Dow, of course, is an unmanaged index, and it may seem strange to the reader to contemplate the high 
priests of Wall Street striving vainly to surpass or even equal it. However, this is demonstrably the case. 
Moreover, such a failure cannot be rationalized by the assumption that the investment companies et al are 
handling themselves in a more conservative manner than the Dow. As the table above indicates, and as more 
extensive studies bear out, the behavior of common stock portfolio managed by this group, on average, have 
declined in concert with the Dow. By such a test of behavior in declining markets, our own methods of 
operation have proven to be considerably more conservative than the common stock component of the 
investment company or investment advisor group. While this has been true in the past, there obviously can be no 
guarantees about the future. 
The above may seem like rather strong medicine, but it is offered as a factual presentation and in no way as 
criticism. Within their institutional framework and handling the many billions of dollars involved, the results 
achieved are the only ones attainable. To behave unconventionally within this framework is extremely difficult. 
Therefore, the collective record of such investment media is necessarily tied to the record of corporate America. 
Their merits, except in the unusual case, do not lie in superior results or greater resistance to decline in value. 
Rather, I feel they earn their keep by the ease of handling, the freedom from decision making and the automatic 
diversification they provide, plus, perhaps most important, the insulation afforded from temptation to practice 
patently inferior techniques which seem to entice so many world-be investors.
The Joys of Compounding
Now to the pulse-quickening portion of our essay. Last year, in order to drive home the point on compounding, I 
took a pot shot at Queen Isabella and her financial advisors. You will remember they were euchred into such an 
obviously low-compound situation as the discovery of a new hemisphere.
Since the whole subject of compounding has such a crass ring to it, I will attempt to introduce a little class into 
this discussion by turning to the art world. Francis I of France paid 4,000 ecus in 1540 for Leonardo da Vinci’s 
Mona Lisa. On the off chance that a few of you have not kept track of the fluctuations of the ecu 4,000 
converted out to about $20,000.
If Francis had kept his feet on the ground and he (and his trustees) had been able to find a 6% after-tax 
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investment, the estate now would be worth something over $1,000,000,000,000,000.00. That's $1 quadrillion or 
over 3,000 times the present national debt, all from 6%. I trust this will end all discussion in our household 
about any purchase or paintings qualifying as an investment.
However, as I pointed out last year, there are other morals to be drawn here. One is the wisdom of living a long 
time. The other impressive factor is the swing produced by relatively small changes in the rate of compound.
Below are shown the gains from $100,000 compounded at various rates:
4% 8% 12% 16%
10 Years $48,024 $115,892 $210,584 $341,143
20 Years $119,111 $366,094 $864,627 $1,846,060
30 Years $224,337 $906,260 $2,895,970 $8,484,940
It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a 
compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens. If, 
over a meaningful period of time, Buffett Partnership can achieve an edge of even a modest number of 
percentage points over the major investment media, its function will be fulfilled.
Some of you may be downcast because I have not included in the above table the rate of 22.3% mentioned on 
page 3. This rate, of course, is before income taxes which are paid directly by you --not the Partnership. Even 
excluding this factor, such a calculation would only prove the absurdity of the idea of compounding at very high 
rates -- even with initially modest sums. My opinion is that the Dow is quite unlikely to compound for any 
important length of time at the rate it has during the past seven years and, as mentioned earlier, I believe our 
margin over the Dow cannot be maintained at its level to date. The product of these assumptions would be a 
materially lower average rate of compound for BPL in the future than the rate achieved to date. Injecting a 
minus 30% year (which is going to happen from time to time) into our tabulation of actual results to date, with, 
say, a corresponding minus 40% for the Dow brings both the figures on the Dow and BPL more in line with 
longer range possibilities. As the compounding table above suggests, such a lowered rate can still provide highly 
satisfactory long term investment results.
Our Method of Operation
At this point I always develop literary schizophrenia. On the one hand, I know that we have in the audience a 
number of partners to whom details of our business are interesting. We also have a number to whom this whole 
thing is Greek and who undoubtedly wish I would quit writing and get back to work.
To placate both camps, I am just going to sketch briefly our three categories at this point and those who are 
interested in getting their doctorate can refer to the appendix for extended treatment of examples.
Our three investment categories are not differentiated by their expected profitability over an extended period of 
time. We are hopeful that they will each, over a ten or fifteen year period, produce something like the ten 
percentage point margin over the Dow that is our goal. However, in a given year they will have violently 
different behavior characteristics, depending primarily on the type of year it turns out to be for the stock market 
generally. Briefly this is how they shape up: 
“Generals” - A category of generally undervalued stocks, determined primarily by quantitative 
standards, but with considerable attention also paid to the qualitative factor. There is often little or 
nothing to indicate immediate market improvement. The issues lack glamour or market sponsorship. 
Their main qualification is a bargain price; that is, an overall valuation on the enterprise substantially 
below what careful analysis indicates its value to a private owner to be. Again let me emphasize that 
Buffett Partnership Letters 1957 to 1970
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while the quantitative comes first and is essential, the qualitative is important. We like good 
management - we like a decent industry - we like a certain amount of “ferment” in a previously dormant 
management or stockholder group. But we demand value. The general group behaves very much in 
sympathy with the Dow and will turn in a big minus result during a year of substantial decline by the 
Dow. Contrarywise, it should be the star performer in a strongly advancing market. Over the years we 
expect it, of course, to achieve a satisfactory margin over the Dow.
“Workouts” - These are the securities with a timetable. They arise from corporate activity - sell-outs, 
mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or "inside 
information" pertaining to such developments, but to publicly announced activities of this sort. We wait 
until we can read it in the paper. The risk pertains not primarily to general market behavior (although 
that is sometimes tied in to a degree), but instead to something upsetting the applecart so that the 
expected development does not materialize. Such killjoys could include anti-trust or other negative 
government action, stockholder disapproval, withholding of tax rulings, etc. The gross profits in many 
workouts appear quite small. A friend refers to this as getting the last nickel after the other fellow has 
made the first ninety-five cents. However, the predictability coupled with a short holding period 
produces quite decent annual rates of return. This category produces more steady absolute profits from 
year to year than generals do. In years of market decline, it piles up a big edge for us; during bull 
markets, it is a drag on performance. On a long term basis, I expect it to achieve the same sort of margin 
over the Dow attained by generals.
“Controls” - These are rarities, but when they occur they are likely to be of significant size. Unless we 
start off with the purchase of a sizable block or stock, controls develop from the general category. They 
result from situations where a cheap security does nothing price-wise for such an extended period of 
time that we are able to buy a significant percentage of the company's stock. At that point we are 
probably in a position to assume some degree of, or perhaps complete, control of the company's 
activities; whether we become active or remain relatively passive at this point depends upon our 
assessment of the company’s future and the management's capabilities. The general we have been 
buying the most aggressively in recent months possesses excellent management following policies that 
appear to make very good sense to us. If our continued buying puts us in a controlling position at some 
point in the future, we will probably remain very passive regarding the operation or this business.
We do not want to get active merely for the sake of being active. Everything else being equal I would 
much rather let others do the work. However, when an active role is necessary to optimize the 
employment of capital you can be sure we will not be standing in the wings.
Active or passive, in a control situation there should be a built-in profit. The sine qua non of this 
operation is an attractive purchase price. Once control is achieved, the value of our investment is 
determined by the value of the enterprise, not the oftentimes irrationalities of the marketplace.
Our willingness and financial ability to assume a controlling position gives us two-way stretch on many 
purchases in our group of generals. If the market changes its opinion for the better, the security will 
advance in price. If it doesn't, we will continue to acquire stock until we can look to the business itself 
rather than the market for vindication of our judgment.
Investment results in the control category have to be measured on the basis of at least several years. 
Proper buying takes time. If needed, strengthening management, re-directing the utilization of capital, 
perhaps effecting a satisfactory sale or merger, etc., are also all factors that make this a business to be 
measured in years rather than months. For this reason, in controls, we are looking for wide margins of 
profit-if it looks at all close, we pass.
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Controls in the buying stage move largely in sympathy with the Dow. In the later stages their behavior 
is geared more to that of workouts.
As I have mentioned in the past, the division of our portfolio among the three categories is largely determined 
by the accident or availability. Therefore, in a minus year for the Dow, whether we are primarily in generals or 
workouts is largely a matter of luck, but it will have a great deal to do with our performance relative to the Dow. 
This is one or many reasons why a single year's performance is of minor importance and, good or bad, should 
never be taken too seriously.
If there is any trend as our assets grow, I would expect it to be toward controls which heretofore have been our 
smallest category. I may be wrong in this expectation - a great deal depends, of course, on the future behavior of 
the market on which your guess is as good as mine (I have none). At this writing, we have a majority of our 
capital in generals, workouts rank second, and controls are third.
Miscellaneous 
We are starting off the year with net assets of $17,454,900. Our rapid increase in assets always raises the 
question of whether this will result in a dilution of future performance. To date, there is more of a positive than 
inverse correlation between size of the Partnership and its margin over the Dow. This should not be taken 
seriously however. Larger sums may be an advantage at some times and a disadvantage at others. My opinion is 
that our present portfolio could not be improved if our assets were $1 million or $5 million. Our idea inventory 
has always seemed to be 10% ahead of our bank account. If that should change, you can count on hearing from 
me.
Susie and I have an investment of $2,392,900 in the Partnership. For the first time I had to withdraw funds in 
addition to my monthly payments, but it was a choice of this or disappointing the Internal Revenue Service. 
Susie and I have a few non-marketable (less than 300 holders) securities of nominal size left over from earlier 
years which in aggregate are worth perhaps 1% of our partnership interest. In addition we have one non￾marketable holding of more material size of a local company purchased in 1960 which we expect to hold 
indefinitely. Aside from this all our eggs are in the BPL basket and they will continue to be. I can't promise 
results but I can promise a common destiny. In addition, that endless stream of relatives of mine consisting of 
my three children, mother, father, two sisters, two brothers-in-law, father-in-law, four aunts four cousins and 
five nieces and nephews, have interests in BPL directly or indirectly totaling $1,247,190.
Bill Scott is also in with both feet, having an interest along with his wife or $237,400, the large majority or their 
net worth. Bill has done an excellent job and on several or our more interesting situations going into 1964, he 
has done the majority or the contact work. I have also shoved off on him as much as possible of the 
administrative work so if you need anything done or have any questions, don't hesitate to ask for Bill if I'm not 
around.
Beth and Donna have kept an increasing work load flowing in an excellent manner. During December and 
January, I am sure they wish they had found employment elsewhere, but they always manage to keep a 
mountain of work ship-shape.
Peat, Marwick, Mitchell has done their usual excellent job of meeting a tough timetable. We have instructed 
them to conduct two surprise checks a year (rather than one as in past years) on our securities, cash, etc., in the 
future. These are relatively inexpensive, and I think make a good deal of sense in any financial organization.
Within the next week you will receive: 
(1) A tax letter giving you all BPL information needed for your 1963 federal income tax return. This letter 
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is the only item that counts for tax purposes.
(2) An audit from Peat, Marwick, Mitchell & Co. for 1963, setting forth the operations and financial 
position of BPL as well as your own capital account.
(3) A letter signed by me setting forth the status of your BPL interest on 1/1/64. This is identical with the 
figure developed in the audit.
(4) Schedule “A” to the partnership agreement listing all partners.
Let me know if anything needs clarifying. As we grow, there is more chance of missing letters, a name skipped 
over, a figure transposition, etc., so speak up if it appears we might have erred. Our next letter will be about July 
15th summarizing the first half.
Cordially,
Warren E. Buffett 
Buffett Partnership Letters 1957 to 1970
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APPENDIX
TEXAS NATIONAL PETROLEUM 
This situation was a run-of-the-mill workout arising from the number one source of workouts in recent years --
the sellouts of oil and gas producing companies.
TNP was a relatively small producer with which I had been vaguely familiar for years.
Early in 1962 I heard rumors regarding a sellout to Union Oil of California. I never act on such information, but 
in this case it was correct and substantially more money would have been made if we had gone in at the rumor 
stage rather than the announced stage. However, that's somebody else's business, not mine.
In early April, 1962, the general terms of the deal were announced. TNP had three classes of securities 
outstanding:
(1) 6 1/2% debentures callable at 104 1/4 which would bear interest until the sale transpired and at that time 
would be called. There were $6.5 million outstanding of which we purchased $264,000 principal 
amount before the sale closed.
(2) About 3.7 million shares of common stock of which the officers and directors owned about 40%. The 
proxy statement estimated the proceeds from the liquidation would produce $7.42 per share. We 
purchased 64,035 shares during the six months or so between announcement and closing.
(3) 650,000 warrants to purchase common stock at $3.50 per share. Using the proxy statement estimate of 
$7.42 for the workout on the common resulted in $3.92 as a workout on the warrants. We were able to 
buy 83,200 warrants or about 13% of the entire issue in six months.
The risk of stockholder disapproval was nil. The deal was negotiated by the controlling stockholders, and the 
price was a good one. Any transaction such as this is subject to title searches, legal opinions, etc., but this risk 
could also be appraised at virtually nil. There were no anti-trust problems. This absence of legal or anti-trust 
problems is not always the case, by any means.
The only fly in the ointment was the obtaining of the necessary tax ruling. Union Oil was using a standard ABC 
production payment method of financing. The University of Southern California was the production payment 
holder and there was some delay because of their eleemosynary status.
This posed a new problem for the Internal Revenue Service, but we understood USC was willing to waive this 
status which still left them with a satisfactory profit after they borrowed all the money from a bank. While 
getting this ironed out created delay, it did not threaten the deal.
When we talked with the company on April 23rd and 24th, their estimate was that the closing would take place 
in August or September. The proxy material was mailed May 9th and stated the sale "will be consummated 
during the summer of 1962 and that within a few months thereafter the greater part of the proceeds will be 
distributed to stockholders in liquidation.” As mentioned earlier, the estimate was $7.42 per share.
Bill Scott attended the stockholders meeting in Houston on May 29th where it was stated they still expected to 
close on September 1st. 
The following are excerpts from some of the telephone conversations we had with company officials in ensuing 
months:
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On June 18th the secretary stated "Union has been told a favorable IRS ruling has been formulated but 
must be passed on by additional IRS people. Still hoping for ruling in July.”
On July 24th the president said that he expected the IRS ruling “early next week.”
On August 13th the treasurer informed us that the TNP, Union Oil, and USC people were all in 
Washington attempting to thrash out a ruling.
On September 18th the treasurer informed us "No news, although the IRS says the ruling could be ready 
by next week.”
The estimate on payout was still $7.42.
The ruling was received in late September, and the sale closed October 31st. Our bonds were called November 
13th. We converted our warrants to common stock shortly thereafter and received payments on the common of 
$3.50 December 14, 1962, $3.90 February 4, 1963, and 15 cent on April 24, 1963. We will probably get another 
4 cent in a year or two. On 147,235 shares (after exercise of warrants) even 4 cent per share is meaningful.
This illustrates the usual pattern: (1) the deals take longer than originally projected; and (2) the payouts tend to 
average a little better than estimates. With TNP it took a couple of extra months, and we received a couple of
extra percent.
The financial results of TNP were as follows: 
(1) On the bonds we invested $260,773 and had an average holding period of slightly under five months. 
We received 6 ½% interest on our money and realized a capital gain of $14,446. This works out to an 
overall rate of return of approximately 20% per annum.
(2) On the stock and warrants we have realized capital gain of $89,304, and we have stubs presently valued 
at $2,946. From an investment or $146,000 in April, our holdings ran to $731,000 in October. Based on 
the time the money was employed, the rate or return was about 22% per annum. 
In both cases, the return is computed on an all equity investment. I definitely feel some borrowed money is 
warranted against a portfolio of workouts, but feel it is a very dangerous practice against generals.
We are not presenting TNP as any earth-shaking triumph. We have had workouts which were much better and 
some which were poorer. It is typical of our bread-and-butter type of operation. We attempt to obtain all facts 
possible, continue to keep abreast of developments and evaluate all of this in terms of our experience. We 
certainly don't go into all the deals that come along -- there is considerable variation in their attractiveness. 
When a workout falls through, the resulting market value shrink is substantial. Therefore, you cannot afford 
many errors, although we fully realize we are going to have them occasionally.
DEMPSTER MILL MFG. 
This situation started as a general in 1956. At that time the stock was selling at $18 with about $72 in book value 
of which $50 per share was in current assets (Cash, receivables and inventory) less all liabilities. Dempster had 
earned good money in the past but was only breaking even currently.
The qualitative situation was on the negative side (a fairly tough industry and unimpressive management), but 
the figures were extremely attractive. Experience shows you can buy 100 situations like this and have perhaps 
70 or 80 work out to reasonable profits in one to three years. Just why any particular one should do so is hard to 
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say at the time of purchase, but the group expectancy is favorable, whether the impetus is from an improved 
industry situation, a takeover offer, a change in investor psychology, etc.
We continued to buy the stock in small quantities for five years. During most or this period I was a director and 
was becoming consistently less impressed with the earnings prospects under existing management. However, I 
also became more familiar with the assets and operations and my evaluation of the quantitative factors remained 
very favorable.
By mid-1961 we owned about 30% or Dempster (we had made several tender offers with poor results), but in 
August and September 1961 made, several large purchases at $30.25 per share, which coupled with a 
subsequent tender offer at the same price, brought our holding to over 70%. Our purchases over the previous 
five years had been in the $16-$25 range.
On assuming control, we elevated the executive vice president to president to see what he would do unfettered 
by the previous policies. The results were unsatisfactory and on April 23, 1962 we hired Harry Bottle as 
president.
Harry was the perfect man for the job. I have recited his triumphs before and the accompanying comparative 
balance sheets speak louder than any words in demonstrating the re-employment of capital.
11/30/61 7/31/63 (unaudited)
Cash $166,000 $89,000
US Gov’t Securities – at cost $289,000
Other marketable securities – at 
market (which exceeds cost)
$2,049,000
Total Cash and Securities $166,000 $2,436,000
Accounts receivable (net) $1,040,000 $864,000
Inventory $4,203,000 $890,000
Prepaid expenses, etc. $82,000 $12,000
Current Assets $5,491,000 $4,202,000
Other Assets $45,000 $62,000
Net Plant and Equipment $1,383,000 $862,000
Total Assets $6,919,000 $5,126,000
Notes Payable $1,230,000
Other Liability $1,088,000 $274,000
Total Liabilities $2,318,000 $274,000
Net worth
60,146 shs. 11/30/61
62,146 shs. 7/31/63 $4,601,000 $4,852,000
Total liabilities and net worth $6,919,000 $5,126,000
Harry:
(1) took the inventory from over $4 million (much of it slow moving) to under $1 million reducing carrying 
costs and obsolescence risks tremendously;
(2) correspondingly freed up capital for marketable security purchases from which we gained over 
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$400,000
(3) cut administration and selling expense from $150,000 to $75,000 per month;
(4) cut factory overhead burden from $6 to $4.50 per direct labor hour;
(5) closed the five branches operating unprofitably (leaving us with three good ones) and replaced them 
with more productive distributors;
(6) cleaned up a headache at an auxiliary factory operation at Columbus, Nebraska;
(7) eliminated jobbed lines tying up considerable money (which could be used profitably in securities) 
while producing no profits;
(8) adjusted prices of repair parts, thereby producing an estimated $200,000 additional profit with virtually 
no loss of volume; and most important;
(9) through these and many other steps, restored the earning capacity to a level commensurate with the 
capital employed.
In 1963, the heavy corporate taxes we were facing (Harry surprised me by the speed with which he had earned 
up our tax loss carry-forward) coupled with excess liquid funds within the corporation compelled us to either in 
some way de-incorporate or to sell the business.
We set out to do either one or the other before the end of 1963. De-incorporating had many problems but would 
have, in effect, doubled earnings for our partners and also eliminated the problem of corporate capital gain tax 
on Dempster securities.
At virtually the last minute, after several earlier deals had fallen through at reasonably advanced stages, a sale of 
assets was made. Although there were a good many wrinkles to the sale, the net effect was to bring 
approximately book value. This, coupled with the gain we have in our portfolio of marketable securities, gives 
us a realization of about $80 per share. Dempster (now named First Beatrice Corp. - we sold the name to the 
new Co.) is down to almost entirely cash and marketable securities now. On BPL's yearend audit, our First 
Beatrice holdings were valued at asset value (with securities at market) less a $200,000 reserve for various 
contingencies.
I might mention that we think the buyers will do very well with Dempster. They impress us as people of ability 
and they have sound plans to expand the business and its profitability. We would have been quite happy to 
operate Dempster on an unincorporated basis, but we are also quite happy to sell it for a reasonable price. Our 
business is making excellent purchases -- not making extraordinary sales.
Harry works the same way I do -- he likes big carrots. He is presently a limited partner of BPL, and the next 
belt-tightening operation we have, he's our man.
The Dempster saga points up several morals:
(1) Our business is one requiring patience. It has little in common with a portfolio of high-flying glamour 
stocks and during periods of popularity for the latter, we may appear quite stodgy.
It is to our advantage to have securities do nothing price wise for months, or perhaps years, why we are 
buying them. This points up the need to measure our results over an adequate period of time. We 
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suggest three years as a minimum.
(2) We cannot talk about our current investment operations. Such an open-mouth policy could never 
improve our results and in some situations could seriously hurt us. For this reason, should anyone, 
including partners, ask us whether we are interested in any security, we must plead the “5th 
Amendment.”
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
July 8, 1964
First Half Performance
The whole family is leaving for California on June 23rd so I am fudging a bit on this report and writing it June 
18th. However, for those of you who set your watches by the receipt of our letters. I will maintain our usual 
chronological symmetry in reporting, leaving a few blanks which Bill will fill in after the final June 30th figures 
are available.
During the first half of 1964 the Dow-Jones Industrial Average (hereinafter called the “DOW”) advanced from 
762.95 to 831.50. If one had owned the Dow during this period, dividends of approximately 14.40 would have 
been received, bringing the overall return from the Dow during the first half to plus 10.0%. As I write this on 
June 18th, it appears that our results will differ only insignificantly from those of the Dow. I would feel much 
better reporting to you that the Dow had broken even, and we had been plus 5%, or better still, that the Dow had 
been minus 10%, and we had broken even. I have always pointed out, however, that gaining an edge on the Dow 
is more difficult for us in advancing markets than in static or declining ones.
To bring the record up to date, the following summarizes the performance of the Dow, the performance of the 
Partnership before allocation to the general partner and the limited partners' results: 
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1
st half 1964 10.9% 12.0% 10.5%
Cumulative results 116.1% 521.0% 354.4%
Annual compounded 
rate
10.8% 27.6% 22.2%
(See next page for footnotes to table.)
Footnotes to preceding table:
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses but before distributions to partners or allocations to the general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
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allocation to the general partner based up on the present partnership agreement, but before monthly 
withdrawals by limited partners.
Buying activities during the first half were quite satisfactory. This is of particular satisfaction to me since I 
consider the buying end to be about 90% of this business. Our General category now includes three companies 
where B.P.L. is the largest single stockholder. These stocks have been bought and are continuing to be bought at 
prices considerably below their value to a private owner. We have been buying one of these situations for 
approximately eighteen months and both of the others for about a year. It would not surprise me if we continue 
to do nothing but patiently buy these securities week after week for at least another year, and perhaps even two 
years or more.
What we really like to see in situations like the three mentioned above is a condition where the company is 
making substantial progress in terms of improving earnings, increasing asset values, etc., but where the market 
price of the stock is doing very little while we continue to acquire it. This doesn't do much for our short-term 
performance, particularly relative to a rising market, but it is a comfortable and logical producer of longer-term 
profits. Such activity should usually result in either appreciation of market prices from external factors or the 
acquisition by us of a controlling position in a business at a bargain price. Either alternative suits me.
It is important to realize, however, that most of our holdings in the General category continue to be securities 
which we believe to be considerably undervalued, but where there is not the slightest possibility that we could 
have a controlling position. We expect the market to justify our analyses of such situations in a reasonable 
period of time, but we do not have the two strings to our bow mentioned in the above paragraph working for us 
in these securities.
Investment Companies
We regularly compare our results with the two largest open-end investment companies (mutual funds) that 
follow a policy of being typically 95%-100% invested in common stocks, and the two largest diversified closed￾end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri￾Continental Corp., and Lehman Corp., manage over $4 billion and are probably typical of most of the $28 
billion investment company industry. Their results are shown below. My opinion is that this performance 
roughly parallels that of the overwhelming majority of other investment advisory organizations which handle, in 
aggregate, vastly greater sums.
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont. 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1
st half 1964 11.0% 9.5% 9.6% 8.6% 10.9% 10.5%
Cumulative 
Results
105.8% 95.5% 98.2% 105.1% 116.1% 354.4%
Annual 
Compounded 
Rate
10.1% 9.4% 9.6% 10.1% 10.8% 22.2%
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(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1964 Moody's Bank & Finance Manual for 1957-63. Estimated for first half 1964. 
These figures continue to show that the most highly paid and respected investment management has difficulty 
matching the performance of an unmanaged index of blue chip stocks. The results of these companies in some 
ways resemble the activity of a duck sitting on a pond. When the water (the market) rises, the duck rises; when it 
falls, back goes the duck. SPCA or no SPCA, I think the duck can only take the credit (or blame) for his own 
activities. The rise and fall of the lake is hardly something for him to quack about. The water level has been of 
great importance to B.P.L’s performance as the table on page one indicates. However, we have also occasionally 
flapped our wings.
I would like to emphasize that I am not saying that the Dow is the only way of measuring investment 
performance in common stocks. However, I do say that all investment managements (including self￾management) should be subjected to objective tests, and that the standards should be selected a priori rather than 
conveniently chosen retrospectively.
The management of money is big business. Investment managers place great stress on evaluating company 
managements in the auto industry, steel industry, chemical industry, etc. These evaluations take enormous 
amounts of work, are usually delivered with great solemnity, and are devoted to finding out which companies 
are well managed and which companies have management weaknesses. After devoting strenuous efforts to 
objectively measuring the managements of portfolio companies, it seems strange indeed that similar 
examination is not applied to the portfolio managers themselves. We feel it is essential that investors and 
investment managements establish standards of performance and, regularly and objectively, study their own 
results just as carefully as they study their investments.
We will regularly follow this policy wherever it may lead. It is perhaps too obvious to say that our policy of 
measuring performance in no way guarantees good results--it merely guarantees objective evaluation. I want to 
stress the points mentioned in the "Ground Rules" regarding application of the standard--namely that it should 
be applied on at least a three-year basis because of the nature of our operation and also that during a speculative 
boom we may lag the field. However, one thing I can promise you. We started out with a 36-inch yardstick and 
we'll keep it that way. If we don't measure up, we won't change yardsticks. In my opinion, the entire field of 
investment management, involving hundreds of billions of dollars, would be more satisfactorily conducted if 
everyone had a good yardstick for measurement of ability and sensibly applied it. This is regularly done by most 
people in the conduct of their own business when evaluating markets, people, machines, methods, etc., and 
money management is the largest business in the world.
Taxes
We entered 1964 with net unrealized gains of $2,991,090 which is all attributable to partners belonging during 
1963. Through June 30th we have realized capital gains of $2,826,248.76 (of which 96% are long term) so it 
appears very likely that at least all the unrealized appreciation attributable to your interest and reported to you in 
our letter of January 25, 1964, (item 3) will be realized this year. I again want to emphasize that this has nothing 
to do with how we are doing. It is possible that I could have made the above statement, and the market value of 
your B.P.L. interest could have shrunk substantially since January 1
st
, so the fact that we have large realized 
gains is no cause for exultation. Similarly when our realized gains are very small there is not necessarily any 
reason to be discouraged. We do not play any games to either accelerate or defer taxes. We make investment 
decisions based on our evaluation of the most profitable combination of probabilities. If this means paying taxes 
I'm glad the rates on long-term capital gains are as low as they are.
As previously stated in our most recent tax letter of April 1, 1964 the safe course to follow on interim estimates 
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is to pay the same estimated tax for 1964 as your actual tax was for 1963. There can be no penalties if you 
follow this procedure.
The tax liability for partners who entered January 1st will, of course, be quite moderate, as it always is in the first 
year for any partner. This occurs because realized capital gains are first attributed to old partners having an 
interest in unrealized appreciation. This, again, of course, has nothing to do with economic performance. All 
limited partners, new and old, (except for Bill Scott, Ruth Scott and Susan Buffett per paragraph five of the 
Partnership Agreement) end up with exactly the same results. As usual, net ordinary income for all partners is 
nominal to date.
As in past years, we will have a letter out about November 1st (to partners and those who have indicated an 
interest, to us by that time in becoming partners) with the amendment to the Partnership Agreement, 
Commitment Letter for 1965, estimate or the 1964 tax situation, etc. In the meantime, keep Bill busy this 
summer clearing up anything in this letter that comes out fuzzy.
Cordially, 
Warren E. Buffett 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 18, 1965
Our Performance in 1964 
Although we had an overall gain of $4,846,312.37 in 1964, it was not one of our better years as judged by our 
fundamental yardstick, the Dow-Jones Industrial Average (hereinafter called the "Dow"). The overall result for 
BPL was plus 27.8% compared to an overall plus 18.7% for the Dow. The overall result for limited partners was 
plus 22.3%. Both the advantage of 9.1 percentage points on a partnership basis and 3.6 points by the limited 
partners were the poorest since 1959, which was a year of roughly comparable gains for the Dow.
Nevertheless, I am not depressed. It was a strong year for the general market, and it is always tougher for us to 
outshine the Dow in such a year. We are certain to have years when the Dow gives us a drubbing and, in some 
respects, I feel rather fortunate that 1964 wasn't the year. Because of the problems that galloping markets pose 
for us, a Dow repeat in 1965 of 1964 results would make it most difficult for us to match its performance, let 
alone surpass it by a decent margin.
To bring the record up to date, the following summarizes the year-by-year performance of the Dow, the 
performance of the Partnership before allocation to the general partner, and the limited partner's results:
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses, but before distributions to partners or allocations to the general 
partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
On a cumulative or compounded basis, the results are:
Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
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1957 – 59 52.3% 95.9% 74.7%
1957 – 60 42.9% 140.9% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 94.9% 454.5% 311.2%
1957 – 64 131.3% 608.7% 402.9%
Annual Compounded 
Rate
11.1% 27.7% 22.3%
Investment Companies 
We regularly compare our results with the two largest open-end investment companies (mutual funds) that 
follow a policy of being typically 95-100% invested in common stock, and the two largest diversified closed￾end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri￾Continental Corporation, and Lehman Corporation, manage about $4.5 billion, are owned by about 550,000 
shareholders, and are probably typical of most of the $30 billion investment company industry. My opinion is 
that their results roughly parallel those of the overwhelming majority of other investment advisory organizations 
which handle, in aggregate, vastly greater sums.
The purpose of this tabulation, which is shown below, is to illustrate that the Dow is no pushover as an index of 
investment achievement. The advisory talent managing just the four companies shown commands annual fees of 
over $8 million and this represents a very small fraction of the professional investment management industry. 
The public batting average of this highly-paid and widely respected talent indicates performance a shade below 
that of the Dow, an unmanaged index.
YEARLY RESULTS
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
(1) Computed from changes in asset value plus any distributions to holders of record during year. 
(2) From 1964 Moody's Bank & Finance Manual for 1957-63. Estimated for 1964.
COMPOUNDED
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1957 – 58 26.4% 29.2% 24.7% 30.0% 26.9% 44.5%
1957 – 59 37.8% 42.5% 34.8% 40.9% 52.3% 74.7%
1957 – 60 36.4% 41.6% 38.2% 44.8% 42.9% 107.2%
Buffett Partnership Letters 1957 to 1970
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1957 – 61 71.3% 76.9% 70.8% 77.4% 74.9% 181.6%
1957 – 62 54.5% 53.2% 46.2% 59.7% 61.6% 215.1%
1957 – 63 85.4% 78.5% 80.8% 88.9% 94.9% 311.2%
1957 – 64 114.9% 104.0% 105.4% 112.7% 131.3% 402.9%
Annual 
Compounded 
Rate
10.0% 9.3% 9.4% 9.9% 11.1% 22.3%
The repetition of these tables has caused partners to ask: "Why in the world does this happen to very intelligent 
managements working with (1) bright, energetic staff people, (2) virtually unlimited resources, (3) the most 
extensive business contacts, and (4) literally centuries of aggregate investment experience?" (The latter 
qualification brings to mind the fellow who applied for a job and stated he had twenty years of experience -
which was corrected by the former employer to read “one year's experience -twenty times.”) 
This question is of enormous importance, and you would expect it to be the subject of considerable study by 
investment managers and substantial investors. After all, each percentage point on $30 billion is $300 million 
per year. Curiously enough, there is practically nothing in the literature of Wall Street attracting this problem, 
and discussion of it is virtually absent at security analyst society meetings, conventions, seminars, etc. My 
opinion is that the first job of any investment management organization is to analyze its own techniques and 
results before pronouncing judgment on the managerial abilities and performance of the major corporate entities 
of the United States.
In the great majority of cases the lack of performance exceeding or even matching an unmanaged index in no 
way reflects lack of either intellectual capacity or integrity. I think it is much more the product of: (1) group 
decisions - my perhaps jaundiced view is that it is close to impossible for outstanding investment management 
to come from a group of any size with all parties really participating in decisions; (2) a desire to conform to the 
policies and (to an extent) the portfolios of other large well-regarded organizations; (3) an institutional 
framework whereby average is "safe" and the personal rewards for independent action are in no way 
commensurate with the general risk attached to such action; (4) an adherence to certain diversification practices 
which are irrational; and finally and importantly, (5) inertia. 
Perhaps the above comments are unjust. Perhaps even our statistical comparisons are unjust. Both our portfolio 
and method of operation differ substantially from the investment companies in the table. However, I believe 
both our partners and their stockholders feel their managements are seeking the same goal - the maximum long￾term average return on capital obtainable with the minimum risk of permanent loss consistent with a program of 
continuous investment in equities. Since we should have common goals, and most partners, as an alternative to 
their interest in BPL, would probably have their funds invested in media producing results comparable with 
these investment companies, I feel their performance record is meaningful in judging our own results.
There is no question that an important service is provided to investors by investment companies, investment 
advisors, trust departments, etc. This service revolves around the attainment of adequate diversification, the 
preservation of a long-term outlook, the ease of handling investment decisions and mechanics, and most 
importantly, the avoidance of the patently inferior investment techniques which seem to entice some individuals. 
All but a few of the organizations do not specifically promise to deliver superior investment performance 
although it is perhaps not unreasonable for the public to draw such an inference from their advertised emphasis 
on professional management.
One thing I pledge to you as partners - just as I consider the previously stated performance comparison to be 
meaningful now, so will I in future years, no, matter what tale unfolds. Correspondingly, I ask that you, if you 
do not feel such a standard to be relevant, register such disagreement now and suggest other standards which can 
be applied prospectively rather than retrospectively.
Buffett Partnership Letters 1957 to 1970
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One additional thought - I have not included a column in my table for the most widely-used investment advisor 
in the world - Bell management. People who watch their weight, golf scores, and fuel bills seem to shun 
quantitative evaluation of their investment management skills although it involves the most important client in 
the world - themselves. While it may be of academic interest to evaluate the management accomplishments of 
Massachusetts Investors Trust or Lehman Corporation, it is of enormous dollars-and-cents importance to 
evaluate objectively the accomplishments of the fellow who is actually handling your money - even if it’s you.
The Question of Conservatism
In looking at the table of investment company performance, the question might be asked: “Yes, but aren't those 
companies run more conservatively than the Partnership?" If you asked that question of the investment company 
managements, they, in absolute honesty, would say they were more conservative. If you asked the first hundred 
security analysts you met, I am sure that a very large majority of them also would answer for the investment 
companies. I would disagree. I have over 90% of my net worth in BPL, and most of my family have percentages 
in that area, but of course, that only demonstrates the sincerity of my view - not the validity of it.
It is unquestionably true that the investment companies have their money more conventionally invested than we 
do. To many people conventionality is indistinguishable from conservatism. In my view, this represents 
erroneous thinking. Neither a conventional nor an unconventional approach, per se, is conservative.
Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities 
may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some 
corner of the world they are probably still holding regular meetings of the Flat Earth Society.
We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do 
we derive comfort if they don't. A public opinion poll is no substitute for thought. When we really sit back with 
a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and 
clear, and the course of action obvious. In that case - whether other conventional or unconventional - whether 
others agree or disagree - we feel - we are progressing in a conservative manner.
The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My 
suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in 
declining markets. We have only three years of declining markets in our table and unfortunately (for purposes of 
this test only) they were all moderate declines. In all three of these years we achieved appreciably better 
investment results than any of the more conventional portfolios.
Specifically, if those three years had occurred in sequence, the cumulative results would have been: 
Tri-Continental Corp. -9.7%
Dow -20.6%
Mass. Investors Trust -20.9%
Lehman Corp. -22.3%
Investors Stock Fund -24.6%
Limited Partners +45.0%
We don’t think this comparison is all important, but we do think it has some relevance. We certainly think it 
makes more sense than saying “We own (regardless of price) A.T. &T., General Electric, IBM and General 
Motors and are therefore conservative.” In any event, evaluation of the conservatism of any investment program 
or management (including self-management) should be based upon rational objective standards, and I suggest 
performance in declining markets to be at least one meaningful test.
Buffett Partnership Letters 1957 to 1970
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The Joys of Compounding 
Readers of our early annual letters registered discontent at a mere recital of contemporary investment 
experience, but instead hungered for the intellectual stimulation that only could be provided by a depth study of 
investment strategy spanning the centuries. Hence, this section.
Our last two excursions into the mythology of financial expertise have revealed that purportedly shrewd 
investments by Isabella (backing the voyage of Columbus) and Francis I (original purchase of Mona Lisa) 
bordered on fiscal lunacy. Apologists for these parties have presented an array of sentimental trivia. Through it 
all, our compounding tables have not been dented by attack.
Nevertheless, one criticism has stung a bit. The charge has been made that this column has acquired a negative 
tone with only the financial incompetents of history receiving comment. We have been challenged to record on 
these pages a story of financial perspicacity which will be a bench mark of brilliance down through the ages.
One story stands out. This, of course, is the saga of trading acumen etched into history by the Manhattan Indians 
when they unloaded their island to that notorious spendthrift, Peter Minuit in 1626. My understanding is that 
they received $24 net. For this, Minuit received 22.3 square miles which works out to about 621,688,320 square 
feet. While on the basis of comparable sales, it is difficult to arrive at a precise appraisal, a $20 per square foot 
estimate seems reasonable giving a current land value for the island of $12,433,766,400 ($12 1/2 billion). To the 
novice, perhaps this sounds like a decent deal. However, the Indians have only had to achieve a 6 1/2% return 
(The tribal mutual fund representative would have promised them this.) to obtain the last laugh on Minuit. At 6 
1/2%, $24 becomes $42,105,772,800 ($42 billion) in 338 years, and if they just managed to squeeze out an extra 
half point to get to 7%, the present value becomes $205 billion.
So much for that. 
Some of you may view your investment policies on a shorter term basis. For your convenience, we include our 
usual table indicating the gains from compounding $100,000 at various rates:
4% 8% 12% 16%
10 Years $48,024 $115,892 $210,584 $341,143
20 Years $119,111 $366,094 $864,627 $1,846,060
30 Years $224,337 $906,260 $2,895,970 $8,484,940
This table indicates the financial advantages of:
(1) A long life (in the erudite vocabulary of the financial sophisticate this is referred to as the Methusalah 
Technique)
(2) A high compound rate
(3) A combination of both (especially recommended by this author)
To be observed are the enormous benefits produced by relatively small gains in the annual earnings rate. This 
explains our attitude which while hopeful of achieving a striking margin of superiority over average investment 
results, nevertheless, regards every percentage point of investment return above average as having real meaning.
Our Goal 
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You will note that there are no columns in the preceding table for the 27.7% average of the Partnership during 
its eight-year lifespan or the 22.3% average of the limited partners. Such figures are nonsensical for the long 
term for several reasons: (Don't worry about me "holding back" to substantiate this prophecy.)
(1) Any significant sums compounded at such rates take on national debt proportions at alarming speed.
(2) During our eight-year history a general revaluation of securities has produced average annual rates of 
overall gain from the whole common stock field which I believe unattainable in future decades. Over a 
span of 20 or 30 years, I would expect something more like 6% - 7% overall annual gain from the Dow 
instead of the 11.1% during our brief history. This factor alone would tend to knock 4 points or so off of 
our annual compounding rate. It would only take a minus 20.5% year in 1965 for the Dow to bring it 
down to a 7% average figure for the nine years. Such years (or worse) should definitely be expected 
from time to time by those holding equity investments. If a 20% or 30% drop in the market value of 
your equity holdings (such as BPL) is going to produce emotional or financial distress, you should 
simply avoid common stock type investments. In the words of the poet - Harry Truman – “If you can’t 
stand the heat, stay out of the kitchen. It is preferable, of course, to consider the problem before you 
enter the “kitchen.”
(3) We do not consider it possible on an extended basis to maintain the 16.6 percentage point advantage 
over the Dow of the Partnership or the 11.2 percentage point edge enjoyed by the limited partners. We 
have had eight consecutive years in which our pool of money has out-performed the Dow, although the 
profit allocation arrangement left the limited partners short of Dow results in one of those years. We are 
certain to have years (note the plural) when the Partnership results fall short of the Dow despite 
considerable gnashing of teeth by the general partner (I hope not too much by the limited partners). 
When that happens our average margin of superiority will drop sharply. I might say that I also think we 
will continue to have some years of very decent margins in our favor. However, to date we have 
benefited by the fact that we have not had a really mediocre (or worse) year included in our average, and 
this obviously cannot be expected to be a permanent experience.
So what can we expect to achieve? Of course, anything I might say is largely guesswork, and my own 
investment philosophy has developed around the theory that prophecy reveals far more of the frailties of the 
prophet than it reveals of the future.
Nevertheless, you, as partners, are entitled to know my expectations, tenuous as they may be. I am hopeful that 
our longer term experience will unfold along the following basis:
(1) An overall gain from the Dow (including dividends, of course) averaging in the area of 7% per annum, 
exhibiting customarily wide amplitudes in achieving this average -- say, on the order or minus 40% to 
plus 50% at the extremes with the majority of years in the minus 10% to plus 20% range;
(2) An average advantage of ten percentage points per annum for BPL before allocation to the general 
partner - again with large amplitudes in the margin from perhaps 10 percentage points worse than the 
Dow in a bad year to 25 percentage points better when everything clicks; and
(3) The product of these two assumptions gives an average of 17% to BPL or about 14% to limited partners. 
This figure would vary enormously from year to year; the final amplitudes, of course, depending, on the 
interplay of the extremes hypothesized in (1) and (2).
I would like to emphasize that the above is conjecture, perhaps heavily influenced by self-interest, ego, etc. 
Anyone with a sense of financial history knows this sort of guesswork is subject to enormous error. It might 
better be left out of this letter, but it is a question frequently and legitimately asked by partners. Long-range 
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expectable return is the primary consideration of all of us belonging to BPL, and it is reasonable that I should be 
put on record, foolish as that may later make me appear. My rather puritanical view is that any investment 
manager, whether operating as broker, investment counselor, trust department, Investment Company, etc., 
should be willing to state unequivocally what he is going to attempt to accomplish and how he proposes to 
measure the extent to which he gets the job done.
Our Method of Operation 
In past annual letters I have always utilized three categories to describe investment operations we conduct. I now 
feel that a four-category division is more appropriate. Partially, the addition of a new section - "Generals 
Relatively Undervalued" - reflects my further consideration of essential differences that have always existed to a 
small extent with our "Generals" group. Partially, it reflects the growing importance of what once was a very 
small sub-category but is now a much more significant part of our total portfolio. This increasing importance has 
been accompanied by excellent results to date justifying significant time and effort devoted to finding additional 
opportunities in this area. Finally, it partially reflects the development and implementation of a new and 
somewhat unique investment technique designed to improve the expectancy and consistency of operations in 
this category. Therefore, our four present categories are: 
1. “Generals -Private Owner Basis” - a category of generally undervalued stocks, determined by quantitative 
standards, but with considerable attention also paid to the qualitative factor. There is often little or nothing to 
indicate immediate market improvement. The issues lack glamour or market sponsorship. Their main 
qualification is a bargain price; that is, an overall valuation of the enterprise substantially below what careful 
analysis indicates its value to a private owner to be. Again, let me emphasize that while the quantitative comes 
first and is essential, the qualitative is important. We like good management - we like a decent industry - we like 
a certain amount of “ferment” in a previously dormant management or stockholder group. But, we demand 
value.
Many times in this category we have the desirable "two strings to our bow" situation where we should either 
achieve appreciation of market prices from external factors or from the acquisition of a controlling position in a 
business at a bargain price. While the former happens in the overwhelming majority of cases, the latter 
represents an insurance policy most investment operations don't have. We have continued to enlarge the 
positions in the three companies described in our 1964 midyear report where we are the largest stockholder. All 
three companies are increasing their fundamental value at a very satisfactory rate, and we are completely passive 
in two situations and active only on a very minor scale in the third. It is unlikely that we will ever take a really 
active part in policy-making in any of these three companies, but we stand ready if needed.
2. "Generals -Relatively Undervalued" - this category consists of securities selling at prices relatively cheap 
compared to securities of the same general quality. We demand substantial discrepancies from current valuation 
standards, but (usually because of large size) do not feel value to a private owner to be a meaningful concept. It 
is important in this category, of course, that apples be compared to apples - and not to oranges, and we work 
hard at achieving that end. In the great majority of cases we simply do not know enough about the industry or 
company to come to sensible judgments -in that situation we pass.
As mentioned earlier, this new category has been growing and has produced very satisfactory results. We have 
recently begun to implement a technique, which gives promise of very substantially reducing the risk from an 
overall change in valuation standards; e.g. I we buy something at 12 times earnings when comparable or poorer 
quality companies sell at 20 times earnings, but then a major revaluation takes place so the latter only sell at 10 
times.
This risk has always bothered us enormously because of the helpless position in which we could be left 
compared to the "Generals -Private Owner" or "Workouts" types. With this risk diminished, we think this 
category has a promising future.
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3. "Workouts" - these are the securities with a timetable. They arise from corporate activity - sell-outs, mergers, 
reorganizations, spin-offs, etc. In this category we are not talking about rumors or "inside information" 
pertaining to such developments, but to publicly announced activities of this sort. We wait until we can read it in 
the paper. The risk pertains not primarily to general market behavior (although that is sometimes tied in to a 
degree), but instead to something upsetting the applecart so that the expected development does not materialize. 
Such killjoys could include anti-trust or other negative government action, stockholder disapproval, withholding 
of tax rulings, etc. The gross profits in many workouts appear quite small. It's a little like looking for parking 
meters with some time left on them. However, the predictability coupled with a short holding period produces 
quite decent average annual rates of return after allowance for the occasional substantial loss. This category 
produces more steady absolute profits from year to year than generals do. In years of market decline it should 
usually pile up a big edge for us; during bull markets it will probably be a drag on performance. On a long-term 
basis, I expect the workouts to achieve the same sort of margin over the Dow attained by generals.
4. "Controls" - these are rarities, but when they occur they are likely to be of significant size. Unless we start off 
with the purchase of a sizable block of stock, controls develop from the general - private owner category. They 
result from situations where a cheap security does nothing pricewise for such an extended period of time that we 
are able to buy a significant percentage of the company's stock. At that point we are probably in a position to 
assume a degree of or perhaps complete control of the company's activities. Whether we become active or 
remain relatively passive at this point depends upon our assessment of the company's future and the 
managements capabilities. 
We do not want to get active merely for the sake of being active. Everything else being equal, I would much 
rather let others do the work. However, when an active role is necessary to optimize the employment of capital, 
you can be sure we will not be standing in the wings. 
Active or passive, in a control situation there should be a built-in profit. The sine qua non of this operation is an 
attractive purchase price. Once control is achieved, the value of our investment is determined by the value of the 
enterprise, not the oftentimes irrationalities of the market place. 
Any of the three situations where we are now the largest stockholders mentioned under Generals - Private 
Owner could, by virtue of the two-way stretch they possess, turn into controls. That would suit us fine, but it 
also suits us if they advance in the market to a price more in line with intrinsic value enabling us to sell them, 
thereby completing a successful generals - private owner operation.
Investment results in the control category have to be measured on the basis of at least several years. Proper 
buying takes time. If needed, strengthening management, redirecting the utilization of capital, perhaps effecting 
a satisfactory sale or merger, etc., are also all factors that make this a business to be measured in years rather 
than months. For this reason, in controls, we are looking for wide margins of profit -if it appears at all close, we 
quitclaim.
Controls in the buying stage move largely in sympathy with the Dow. In the later stages their behavior is geared 
more to that of workouts. 
You might be interested to know that the buyers of our former control situation, Dempster Mill Manufacturing, 
seem to be doing very well with it. This fulfills our expectation and is a source of satisfaction. An investment 
operation that depends on the ultimate buyer making a bum deal (in Wall Street they call this the "Bigger Fool 
Theory") is tenuous indeed. How much more satisfactory it is to buy at really bargain prices so that only an 
average disposition brings pleasant results.
As I have mentioned in the past, the division of our portfolio among categories is largely determined by the 
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accident of availability. Therefore, in any given year the mix between generals, workouts, or controls is largely a 
matter of chance, and this fickle factor will have a great deal to do with our performance relative to the Dow. 
This is one of many reasons why single year's performance is of minor importance and good or bad, should 
never be taken too seriously.
To give an example of just how important the accident of division between these categories is, let me cite the 
example of the past three years. Using an entirely different method of calculation than that used to measure the 
performance of BPL in entirety, whereby the average monthly investment at market value by category is 
utilized, borrowed money and office operating expenses excluded, etc., (this gives the most accurate basis for 
intergroup comparisons but does not reflect overall BPL results) the generals (both present categories 
combined), workouts, and the Dow, shape up as follows: 
Year Generals Workouts Dow
1962 -1.0% 14.6% -8.6%
1963 20.5% 30.6% 18.4%
1964 27.8% 10.3% 16.7%
Obviously the workouts (along with controls) saved the day in 1962, and if we had been light in this category 
that year, our final result would have been much poorer, although still quite respectable considering market 
conditions during the year. We could just as well have had a much smaller percentage of our portfolio in 
workouts that year; availability decided it, not any notion on my part as to what the market was going to do. 
Therefore, it is important to realize that in 1962 we were just plain lucky regarding mix of categories.
In 1963 we had one sensational workout which greatly influenced results, and generals gave a good account of 
themselves, resulting in a banner year. If workouts had been normal, (say, more like 1962) we would have 
looked much poorer compared to the Dow. Here it wasn't our mix that did much for us, but rather excellent 
situations.
Finally, in 1964 workouts were a big drag on performance. This would be normal in any event during a big plus 
year for the Dow such as 1964, but they were even a greater drag than expected because of mediocre experience. 
In retrospect it would have been pleasant to have been entirely in generals, but we don’t play the game in 
retrospect.
I hope the preceding table drives home the point that results in a given year are subject to many variables - some 
regarding which we have little control or insight. We consider all categories to be good businesses and we are 
very happy we have several to rely on rather than just one. It makes for more discrimination within each 
category and reduces the chance we will be put completely out of operation by the elimination of opportunities 
in a single category.
Taxes
We have had a chorus of groans this year regarding partners' tax liabilities. Of course, we also might have had a 
few if the tax sheet had gone out blank.
More investment sins are probably committed by otherwise quite intelligent people because of "tax 
considerations" than from any other cause. One of my friends - a noted West Coast philosopher maintains that a 
majority of life's errors are caused by forgetting what one is really trying to do. This is certainly the case when 
an emotionally supercharged element like taxes enters the picture (I have another friend -a noted East Coast 
philosopher who says it isn't the lack of representation he minds -it's the taxation).
Let's get back to the West Coast. What is one really trying to do in the investment world? Not pay the least 
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taxes, although that may be a factor to be considered in achieving the end. Means and end should not be 
confused, however, and the end is to come away with the largest after-tax rate of compound. Quite obviously if 
two courses of action promise equal rates of pre-tax compound and one involves incurring taxes and the other 
doesn't the latter course is superior. However, we find this is rarely the case.
It is extremely improbable that 20 stocks selected from, say, 3000 choices are going to prove to be the optimum 
portfolio both now and a year from now at the entirely different prices (both for the selections and the 
alternatives) prevailing at that later date. If our objective is to produce the maximum after-tax compound rate, 
we simply have to own the most attractive securities obtainable at current prices, And, with 3,000 rather rapidly 
shifting variables, this must mean change (hopefully “tax-generating” change).
It is obvious that the performance of a stock last year or last month is no reason, per se, to either own it or to not 
own it now. It is obvious that an inability to "get even" in a security that has declined is of no importance. It is 
obvious that the inner warm glow that results from having held a winner last year is of no importance in making 
a decision as to whether it belongs in an optimum portfolio this year.
If gains are involved, changing portfolios involves paying taxes. Except in very unusual cases (I will readily 
admit there are some cases), the amount of the tax is of minor importance if the difference in expectable 
performance is significant. I have never been able to understand why the tax comes as such a body blow to 
many people since the rate on long-term capital gain is lower than on most lines of endeavor (tax policy 
indicates digging ditches is regarded as socially less desirable than shuffling stock certificates). 
I have a large percentage of pragmatists in the audience so I had better get off that idealistic kick. There are only 
three ways to avoid ultimately paying the tax: (1) die with the asset - and that's a little too ultimate for me even 
the zealots would have to view this "cure" with mixed emotions; (2) give the asset away - you certainly don't 
pay any taxes this way, but of course you don't pay for any groceries, rent, etc., either; and (3) lose back the gain 
if your mouth waters at this tax-saver, I have to admire you -you certainly have the courage of your convictions.
So it is going to continue to be the policy of BPL to try to maximize investment gains, not minimize taxes. We 
will do our level best to create the maximum revenue for the Treasury -at the lowest rates the rules will allow.
An interesting sidelight on this whole business of taxes, vis-à-vis investment management, has appeared in the 
last few years. This has arisen through the creation of so-called "swap funds" which are investment companies 
created by the exchange of the investment company's shares for general market securities held by potential 
investors. The dominant sales argument has been the deferment (deferment, when pronounced by an enthusiastic 
salesman, sometimes comes very close phonetically to elimination) of capital gains taxes while trading a single 
security for a diversified portfolio. The tax will only finally be paid when the swap fund's shares are redeemed. 
For the lucky ones, it will be avoided entirely when any of those delightful alternatives mentioned two 
paragraphs earlier eventuates.
The reasoning implicit in the swapee's action is rather interesting. He obviously doesn't really want to hold what 
he is holding or he wouldn't jump at the chance to swap it (and pay a fairly healthy commission - usually up to 
$100,000) for a grab-bag of similar hot potatoes held by other tax-numbed investors. In all fairness, I should 
point out that after all offerees have submitted their securities for exchange and had a chance to review the 
proposed portfolio they have a chance to back out but I understand a relatively small proportion do so.
There have been twelve such funds (that I know of) established since origination of the idea in 1960, and several 
more are currently in the works. The idea is not without appeal since sales totaled well over $600 million. All of 
the funds retain an investment manager to whom they usually pay 1/2 of 1% of asset value. This investment 
manager faces an interesting problem; he is paid to manage the fund intelligently (in each of the five largest 
funds this fee currently ranges from $250,000 to $700,000 per year), but because of the low tax basis inherited 
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from the contributors of securities, virtually his every move creates capital gains tax liabilities. And, of course, 
he knows that if he incurs such liabilities, he is doing so for people who are probably quite sensitive to taxes or 
they wouldn't own shares in the swap fund in the first place.
I am putting all of this a bit strongly, and I am sure there are some cases where a swap fund may be the best 
answer to an individual's combined tax and investment problems. Nevertheless, I feel they offer a very 
interesting test-tube to measure the ability of some of the most respected investment advisors when they are 
trying to manage money without paying (significant) taxes.
The three largest swap funds were all organized in 1961, and combined have assets now of about $300 million. 
One of these, Diversification Fund, reports on a fiscal year basis which makes extraction of relevant data quite 
difficult for calendar year comparisons. The other two, Federal Street Fund and Westminster Fund (respectively 
first and third largest in the group) are managed by investment advisors who oversee at least $2 billion of 
institutional money.
Here's how they shape up for all full years of existence: 
Year Federal Street Westminster Dow
1962 -19.0% -22.5% -7.6%
1963 17.0% 18.7% 20.6%
1964 13.8% 12.3% 18.7%
Annual Compounded 
Rate
2.6% 1.1% 9.8%
This is strictly the management record. No allowance has been made for the commission in entering and any 
taxes paid by the fund on behalf of the shareholders have been added back to performance.
Anyone for taxes?
Miscellaneous 
In the December 21st issue of AUTOMOTIVE NEWS it was reported that Ford Motor Co. plans to spend $700 
million in 1965 to add 6,742,000 square feet to its facilities throughout the world. Buffett Partnership, Ltd., 
never far behind, plans to add 227 1/4 square feet to its facilities in the spring of 1965.
Our growth in net assets from $105,100 (there's no prize for guessing who put in the $100) on May 5, 1956 
when the first predecessor limited partnership.(Buffett Associates, Ltd. ) was organized, to $26,074,000 on 
1/1/65 creates the need for an occasional reorganization in internal routine. Therefore, roughly 
contemporaneously with the bold move from 682 to 909 ¼ square feet, a highly capable is going to join our 
organization with responsibility for the administrative (and certain other) functions. This move will particularly 
serve to free up more of Bill Scott's time for security analysis which is his forte. I’ll have more to report on this 
in the midyear letter.
Bill (who continues to do a terrific job) and his wife have an investment in the Partnership of $298,749, a very 
large majority of their net worth. Our new associate (his name is being withheld until his present employer has 
replaced him), along with his wife and children, has made an important investment in the Partnership. Susie and 
I presently have an interest of $3,406,700 in BPL which represents virtually our entire net worth, with the 
exception of our continued holding of Mid-Continent Tab Card Co., a local company into which I bought in 
1960 when it had less than 10 stockholders. Additionally, my relatives, consisting of three children, mother , two 
sisters, two brothers-in-law, father-in-Law, four aunts, four cousins and six nieces and nephews, have interests 
in BPL, directly or indirectly, totaling $1,942,592. So we all continue to eat home cooking. 
Buffett Partnership Letters 1957 to 1970
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We continue to represent the ultimate in seasonal businesses --open one day a year. This creates real problems in 
keeping the paper flowing smoothly, but Beth and Donna continue to do an outstanding job of coping with this 
and other problems.
Peat, Marwick, Mitchell has distinguished itself in its usual vital role of finding out what belongs to whom. We 
continue to throw impossible deadlines at them --and they continue to perform magnificently. You will note in 
their certificate this year that they have implemented the new procedure whereby they now pounce on us 
unannounced twice a year in addition to the regular yearend effort.
Finally -and most sincerely -let me thank you partners who cooperate magnificently in getting things to us 
promptly and properly and thereby maximize the time we can spend working where we should be -by the cash 
register. I am extremely fortunate in being able to spend the great majority of my time thinking about where our 
money should be invested, rather than getting bogged down in the minutiae that seems to overwhelm so many 
business entities. We have an organizational structure which makes this efficiency a possibility, and more 
importantly, we have a group of partners that make it a reality. For this, I am most appreciative and we are all 
wealthier.
Our past policy has been to admit close relatives of present partners without a minimum capital limitation. This 
year a flood of children, grandchildren, etc., appeared which called this policy into question; therefore, I have 
decided to institute a $25,000 minimum on interests of immediate relatives of present partners.
Within the coming two weeks you will receive:
(1) A tax letter giving you all BPL information needed for your 1964 federal income tax return. This letter 
is the only item that counts for tax purposes. 
(2) An audit from Peat, Marwick, Mitchell & Co. for 1964, setting forth the operations and financial 
position of BPL as well as your own capital account.
(3) A letter signed by me setting forth the status of your BPL interest on 111165. This is identical with the 
figure developed in the audit.
(4) Schedule “A” to the partnership agreement listing all partners.
Let Bill or me know if anything needs clarifying. Even with our splendid staff our growth means there is more 
chance of missing letters, overlooked instructions, a name skipped over, a figure transposition, etc., so speak up 
if you have any question at all that we might have erred. My next letter will be about July 15th" summarizing 
the first half of this year.
Cordially, 
Warren E. Buffett 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
July 9, 1965
Warren E. Buffett, General Partner
William Scott
John M. Harding
First Half Performance:
During the first half of 1965, the Dow Jones Industrial Average (hereinafter call the “Dow”) declined from 
874.13 to 868.03. This minor change was accomplished in a decidedly non-Euclidian manner. The Dow instead 
took the scenic route, reaching a high of 939.62 on May 14th. Adding back dividends on the Dow of 13.49 gives 
an overall gain through ownership of the Dow for the first half of 7.39 or 0.8%.
We had one of our better periods with an overall gain, before allocation to the general partner, of 10.4% or a 9.6 
percentage point advantage over the Dow. To bring the record up to date, the following summarizes the year-by￾year performance of the Dow, the performance of the Partnership before allocation to the general partner, and 
the limited partners’ results:
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1
st half 1965 0.8% 10.4% 9.3%
Cumulative results 133.2% 682.4% 449.7%
Annual compounded 
rate
10.5% 27.4% 22.2%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received 
through ownership of the Dow during that year. The table includes all complete years of partnership 
activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating 
throughout the entire year after all expenses but before distributions to partners or allocations to the 
general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
Our constant admonitions have been: (1) that short-term results (less than three years) have little meaning, 
particularly in reference to an investment operation such as ours that may devote a portion of resources to 
control situations; and, (2) that our results, relative to the Dow and other common-stock-form media usually will 
be better in declining markets and may well have a difficult time just matching such media in very strong 
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markets.
With the latter point in mind, it might be imagined that we struggled during the first four months of the half to 
stay even with the Dow and then opened up our margin as it declined in May and June. Just the opposite 
occurred. We actually achieved a wide margin during the upswing and then fell at a rate fully equal to the Dow 
during the market decline.
I don’t mention this because I am proud of such performance – on the contrary, I would prefer it if we had 
achieved our gain in the hypothesized manner. Rather, I mention it for two reasons: (1) you are always entitled 
to know when I am wrong as well as right; and, (2) it demonstrates that although we deal with probabilities and 
expectations, the actual results can deviate substantially from such expectations, particularly on a short-term 
basis. As mentioned in the most recent annual letter, our long-term goal is to achieve a ten percentage point per 
annum advantage over the Dow. Our advantage of 9.6 points achieved during the first six months must be 
regarded as substantially above average. The fortitude demonstrated by our partners in tolerating such favorable 
variations is commendable. We shall most certainly encounter periods when the variations are in the other 
direction.
During the first half, a series of purchases resulted in the acquisition of a controlling interest in one of the 
situations described in the “General Private Owner” section of the last annual letter. When such a controlling 
interest is acquired, the assets and earning power of the business become the immediate predominant factors in 
value. When a small minority interest in a company is held, earning power and assets are, of course, very 
important, but they represent an indirect influence on value which, in the short run, may or may not dominate 
the factors bearing on supply and demand which result in price.
When a controlling interest is held, we own a business rather then a stock, and a business valuation is 
appropriate. We have carried our controlling position at a conservative valuation at midyear and will reevaluate 
it in terms of assets and earning power at yearend. The annual letter, issued in January, 1966, will carry a full 
story on this current control situation. At this time it is enough to say that we are delighted with both the 
acquisition cost and the business operation, and even happier about the people we have managing the business.
Investment Companies:
We regularly compare our results with the two largest open-end investment companies (mutual funds) that 
follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed￾end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, Tri￾Continental Corp., and Lehman Corp., manage over $4 billion and are probably typical of most of the $30 
billion investment company industry. Their results are shown in the following table. My opinion is that this 
performance roughly parallels that of the overwhelming majority of other investment advisory organizations 
which handle, in aggregate, vastly greater sums.
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont (2) Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7 47.5 40.8 33.2 38.5 32.2
1959 9.0 10.3 8.1 8.4 20.0 20.9
1960 -1.0 -0.6 2.5 2.8 -6.2 18.6
1961 25.6 24.9 23.6 22.5 22.4 35.9
1962 -9.8 -13.4 -14.4 -10.0 -7.6 11.9
1963 20.0 16.5 23.7 18.7 20.6 30.5
1964 15.9 14.3 14.0 13.6 18.7 22.3
1
st half 1965 0.0 -0.6 2.7 0.0 0.8 9.3
Buffett Partnership Letters 1957 to 1970
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Cumulative 
Results
114.9 102.8 111.7 115.4 133.2 449.7
Annual 
Compounded 
Rate
9.4 8.7 9.2 9.5 10.5 22.2
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1965 Moody’s Bank & Finance Manual for 1957-64. Estimated for first half 1965.
Last year I mentioned that the performance of these companies in some ways resembles the activity of a duck 
sitting on a pond. When the water (the market) rises, the duck rises; when if falls, back goes the duck. The water 
level was virtually unchanged during the first half of 1965. The ducks, as you can see from the table, are still 
sitting on the pond.
As I mentioned earlier in the letter, the ebb of the tide in May and June also substantially affected us. 
Nevertheless, the fact we had flapped our wings a few times in the preceding four months enabled us to gain a 
little altitude on the rest of the flock. Utilizing a somewhat more restrained lexicon, James H. Lorie, director of 
the University of Chicago’s Center for Research in Security Prices was quoted in the May 25, 1965, WALL 
STREET JOURNAL as saying: “There is no evidence that mutual funds select stocks better than by the random 
method.”
Of course, the beauty of the American economic scene has been that random results have been pretty darned 
good results. The water level has been rising. In our opinion, the probabilities are that over a long period of time, 
it will continue to rise, though, certainly not without important interruptions. It will be our policy, however, to 
endeavor to swim strongly, with or against the tide. If our performance declines to a level you can achieve by 
floating on your back, we will turn in our suits.
Advance Payments and Advance Withdrawals:
We accept advance payments from partners and prospective partners at 6% interest from date of receipt until the 
end of the year. While there is no obligation to convert such advance payments to a partnership interest at the 
end of the year, this should be the intent at the time it is paid to us.
Similarly, we allow partners to withdraw up to 20% of their partnership account prior to yearend and charge 
them 6% from date of withdrawal until yearend when it is charged against their capital account. Again, it is not 
intended that partners use us like a bank, but that they use the withdrawal right for a truly unexpected need for 
funds. Predictable needs for funds such as quarterly federal tax payments should be handled by a beginning-of￾the-year reduction in capital rather than through advance withdrawals from B.P.L. during the year. The 
withdrawal privilege is to provide for the unanticipated.
The willingness to borrow (through advance payments) and lend (through advance withdrawals) at the same 6% 
rate may sound downright “un-Buffettlike”. (You can be sure it doesn’t start my adrenaline flowing.) Certainly 
such a no-spread arbitrage is devoid of the commercial overtones an observer might impute to the 
preponderance of our transactions. Nevertheless, we think it makes sense and is in the best interest of all 
partners.
The partner who has a large investment in indirect ownership of a group of liquid assets should have some 
liquidity present in his partnership interest other than at yearend. As a practical matter, we are reasonably certain 
Buffett Partnership Letters 1957 to 1970
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that advance withdrawals will be far more than covered by advance payments. For example, on June 30, 1965, 
we had $98,851 of advance withdrawals and $652,931 of advance payments.
Why then the willingness to pay 6% for the net of advance payments over advance withdrawals when we can 
borrow from commercial banks at substantially lower rates? The answer is that we expect on a long-term basis 
to earn better than 6% (the general partner’s allocation is zero unless we do) although it is largely a matter of 
chance whether we achieve the 6% figure in any short period. Moreover, I can adopt a different attitude 
regarding the investment of money that can be expected to soon be a part of our equity capital than I can on 
short-term borrowed money. The advance payments have the added advantage to us of spreading the investment 
of new money over the year, rather than having it hit us all at once in January. On the other hand, 6% is more 
than can be obtained in short-term dollar secure investments by our partners, so I consider it mutually profitable.
Miscellaneous:
The bold expansion program to 909 ¼ square feet described in the annual letter was carried off without a hitch 
(the Pepsi’s never even got warm).
John Harding joined us in April and is continuing the record whereby all the actions in the personnel field have 
been winning ones.
As in past years, we will have a letter out about November 1st (to partners and those who have indicated an 
interest to me by that time in becoming partners) with the commitment letter for 1966, estimate of the 1965 tax 
situation, etc.
Cordially,
Warren E. Buffett
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
November 1, 1965
To My Partners for 1966:
Enclosed are:
(1) Two copies or the commitment letter for 1966, one to be kept by you and one returned to us. You may 
amend the commitment letter right up to midnight, December 31st. So get it back to us early, and if it 
needs to be changed, just let us know by letter or phone. Commitment letters become final on December 
31st. Every year I get a number or calls in the first week in January expressing a desire to add to the 
January 1st capital. THIS CAN'T BE DONE.
(2) A copy of our ever-popular "The Ground Rules." It is essential that we see eye-to-eye on the matters 
covered therein. If you have different views - fine, yours may be better - but you shouldn't be in the 
partnership. Please particularly note Ground Rule 7. This has been added this year reflecting a moderate 
shift in my attitude over a period of time. It represents a decidedly unconventional (but logical in my
opinion when applied to our operation) approach and is therefore specifically called to your attention.
Any withdrawals will be paid January 5th. You may withdraw any amount you desire from $100 up to your 
entire equity. Similarly, additions can be for any amount and should reach us by January 10th. In the event you 
are disposing of anything, this will give you a chance to have the transaction in 1966 if that appears to be 
advantageous for tax reasons. If additions reach us in November, they take on the status of advance payments 
and draw 6% interest until yearend. This is not true of additions reaching us in December.
The partnership owns a controlling interest in Berkshire Hathaway Inc., a publicly-traded security. As 
mentioned in my midyear letter, asset values and earning power are the dominant factors affecting the 
valuation of a controlling interest in a business. Market price, which governs valuation of minority interest 
positions, is of little or no importance in valuing a controlling interest. We will value our position in Berkshire 
Hathaway at yearend at a price halfway between net current asset value and book value. Because of the nature 
of our receivables and inventory this, in effect, amounts to valuation of our current assets at 100 cents on the 
dollar and our fixed assets at 50 cents on the dollar. Such a value in my opinion is fair to both adding and 
withdrawing partners. It may be either of lower than market value at the time.
As I write this, we are orbiting in quite satisfactory fashion. Our margin over the Dow is well above average, 
and even those Neanderthal partners who utilize such crude yardsticks as net profit would find performance 
satisfactory. This is all, of course, subject to substantial change by yearend.
If anything needs clarification, call or write John Harding who is in charge of "de-confusing" partners. The tax 
situation is about as reported in the August letter, but if you would like John to make the calculation for you, 
he will be glad to do it.
Cordially,
Warren E. Buffett
Buffett Partnership Letters 1957 to 1970
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P/S: We are continuing our "no prize" policy for the last ones to get their commitment letters back to us. It will 
make things easier for us if you get it back pronto. If you want to make changes later (before January lst), just 
give us a call, and we'll amend it for you.
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP, LTD.
810 KIEWIT PLAZA
OMAHA 31, NEBRASKA
January 20, 1966 
Our Performance in 1965
Our War on Poverty was successful in 1965.
Specially, we were $12,304,060 less poor at the end of the year.
Last year under a section in the annual letter entitled “Our Goal” (please particularly note it was not headed 
"Our Promise"), I stated we were trying to achieve “… An average advantage (relative to the Dow) of ten 
percentage points per annum for BPL before allocation to the general partner again with large amplitudes in the 
margin from perhaps 10 percentage points worse than the Dow in a bad year to 25 percentage points better when 
everything clicks.”
My fallibility as a forecaster was quickly demonstrated when the first year fell outside my parameters. We 
achieved our widest margin over the Dow in the history of BPL with an overall gain of 47.2% compared to an 
overall gain (including dividends which would have been received through ownership of the Dow) of 14.2% for
the Dow. Naturally, no writer likes to be publicly humiliated by such a mistake. It is unlikely to be repeated.
The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before 
allocation (one quarter of the excess over 6%) to the general partner, and the results for limited partners: 
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses, but before distributions to partners or allocations to the general 
partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
On a cumulative or compounded basis, the results are: 
Buffett Partnership Letters 1957 to 1970
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Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
1957 – 59 52.3% 95.9% 74.7%
1957 – 60 42.9% 140.6% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 95.1% 454.5% 311.2%
1957 – 64 131.3% 608.7% 402.9%
1957 – 65 164.1% 943.2% 588.5%
Annual Compounded 
Rate
11.4% 29.8% 23.9%
After last year the question naturally arises, "What do we do for an encore?” A disadvantage of this business is 
that it does not possess momentum to any significant degree. If General Motors accounts for 54% of domestic 
new car registrations in 1965, it is a pretty safe bet that they are going to come fairly close to that figure in 1966 
due to owner loyalties, dealer capabilities, productive capacity, consumer image, etc. Not so for BPL. We start 
from scratch each year with everything valued at market when the gun goes off. Partners in 1966, new or old, 
benefit to only a very limited extent from the efforts of 1964 and 1965. The success of past methods and ideas 
does not transfer forward to future ones.
I continue to hope, on a longer-range basis, for the sort of achievement outlined in the "Our Goal" section of last 
year's letter (copies still available). However, those who believe 1965 results can be achieved with any 
frequency are probably attending weekly meetings of the Halley’s Comet Observers Club. We are going to have 
loss years and are going to have years inferior to the Dow - no doubt about it. But I continue to believe we can 
achieve average performance superior to the Dow in the future. If my expectation regarding this should change, 
you will hear immediately.
Investment Companies
We regularly compare our results with the two largest open-end investment companies (mutual funds) that 
follow a policy of being typically 95% - 100% invested in common stocks, and the two largest diversified 
closed-end investment companies. These four companies, Massachusetts Investors Trust, Investors Stock Fund, 
Tri-Continental Corp., and Lehman Corp. manage over $5 billion, are owned by about 600,000 shareholders, 
and are probably typical of most of the $35 billion investment company industry. My opinion is that their results 
roughly parallel those of the overwhelming majority of other investment advisory organizations which handle, 
in aggregate, vastly greater sums.
The purpose of this tabulation is to illustrate that the Dow is no pushover as an index of investment 
achievement. The advisory talent managing just the four companies shown commands annual fees of about $10 
million and this represents a very small fraction of the professional investment management industry. The public 
batting average of this highly paid and widely respected talent indicates performance a shade below that of the 
Dow, an unmanaged index.
YEARLY RESULTS
Year Mass. Inv. Investors Lehman (2) Tri-Cont Dow Limited 
Buffett Partnership Letters 1957 to 1970
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Trust (1) Stock (1) (2) Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1965 Moody's Bank & Finance Manual for 1957-64. Estimated for 1965.
COMPOUNDED
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1957 – 58 26.4% 29.2% 24.7% 30.0% 26.9% 44.5%
1957 – 59 37.8% 42.5% 34.8% 40.9% 52.3% 74.7%
1957 – 60 36.4% 41.6% 38.2% 44.8% 42.9% 107.2%
1957 – 61 71.3% 76.9% 70.8% 77.4% 74.9% 181.6%
1957 – 62 54.5% 53.2% 46.2% 59.7% 61.6% 215.1%
1957 – 63 85.4% 78.5% 80.8% 88.9% 94.9% 311.2%
1957 – 64 114.9% 104.0% 105.4% 112.7% 131.3% 402.9%
1957 – 65 136.8% 124.0% 145.3% 138.4% 164.1% 588.5%
Annual 
Compounded 
Rate
10.1% 9.4% 10.5% 10.1% 11.4% 23.9%
A number of the largest investment advisory operations (managing, in some cases, well into the billions of 
dollars) also manage investment companies partly as a convenience for smaller clients and partly as a public 
showcase. The results of these funds roughly parallel those of the four funds on which we report.
I strongly believe in measurement. The investment managers mentioned above utilize measurement constantly 
in their activities. They constantly study changes in market shares, profit margins, return on capital, etc. Their 
entire decision-making process is geared to measurement - of managements, industries, comparative yields, etc. 
I am sure they keep score on their new business efforts as well as the profitability of their advisory operation. 
What then can be more fundamental than the measurement, in turn, of investment ideas and decisions? I 
certainly do not believe the standards I utilize (and wish my partners to utilize) in measuring my performance 
are the applicable ones for all money managers. But I certainly do believe anyone engaged in the management 
of money should have a standard of measurement, and that both he and the party whose money is managed 
should have a clear understanding why it is the appropriate standard, what time period should be utilized, etc.
Frank Block put it very well in the November-December 1965 issue of the Financial Analysts Journal. Speaking 
of measurement of investment performance he said," ...However, the fact is that literature suffers a yawning 
hiatus in this subject. If investment management organizations sought always the best performance, there would 
be nothing unique in careful measurement of investment results. It does not matter that the customer has failed 
to ask for a formal presentation of the results. Pride alone should be sufficient to demand that each or us 
determine objectively the quality of his recommendations. This can hardly be done without precise knowledge 
Buffett Partnership Letters 1957 to 1970
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of the outcome. Once this knowledge is in hand, it should be possible to extend the analysis to some point at 
which patterns of weakness and strength begin to assert themselves. We criticize a corporate management for 
failure to use the best of tools to keep it aware of the progress of a complicated industrial organization. We can 
hardly be excused for failure to provide ourselves with equal tools to show the efficiency of our own efforts to 
handle other people’s money. ...Thus, it is our dreary duty to report that systems of performance measurement 
are not automatically included in the data processing programs of most investment management organizations. 
The sad fact is that some seem to prefer not to know how well or poorly they are doing. 
Frankly, I have several selfish reasons for insisting that we apply a yardstick and that we both utilize the same 
yardstick. Naturally, I get a kick out of beating par - in the lyrical words of Casey Stengel, "Show me a good 
loser, and I’ll show you a loser.” More importantly, I insure that I will not get blamed for the wrong reason 
(having losing years) but only for the right reason (doing poorer than the Dow). Knowing partners will grade me 
on the right basis helps me do a better job. Finally, setting up the relevant yardsticks ahead of time insures that 
we will all get out of this business if the results become mediocre (or worse). It means that past successes cannot 
cloud judgment of current results. It should reduce the chance of ingenious rationalizations of inept 
performance. (Bad lighting has been bothering me at the bridge table lately.) While this masochistic approach to 
measurement may not sound like much of an advantage, I can assure you from my observations of business 
entities that such evaluation would have accomplished a great deal in many investment and industrial 
organizations.
So if you are evaluating others (or yourself!) in the investment field, think out some standards - apply them -
interpret them. If you do not feel our standard (a minimum of a three-year test versus the Dow) is an applicable 
one, you should not be in the Partnership. If you do feel it is applicable, you should be able to take the minus 
years with equanimity in the visceral regions as well as the cerebral regions -as long as we are surpassing the 
results of the Dow.
The Sorrows of Compounding
Usually, at this point in my letter, I have paused to modestly attempt to set straight the historical errors of the 
last four or five hundred years. While it might seem difficult to accomplish this in only a few paragraphs a year, 
I feel I have done my share to reshape world opinion on Columbus, Isabella, Francis I, Peter Minuit and the 
Manhattan Indians. A by-product of this endeavor has been to demonstrate the overwhelming power of 
compound interest. To insure reader attention I have entitled these essays "The Joys of Compounding. " The 
sharp-eyed may notice a slight change this year.
A decent rate (better we have an indecent rate) of compound -plus the addition of substantial new money has 
brought our beginning capital this year to $43,645,000. Several times in the past I have raised the question 
whether increasing amounts of capital would harm our investment performance. Each time I have answered 
negatively and promised you that if my opinion changed, I would promptly report it.
I do not feel that increased capital has hurt our operation to date. As a matter of fact, I believe that we have done 
somewhat better during the past few years with the capital we have had in the Partnership than we would have 
done if we had been working with a substantially smaller amount. This was due to the partly fortuitous 
development of several investments that were just the right size for us -big enough to be significant and small 
enough to handle.
I now feel that we are much closer to the point where increased size may prove disadvantageous. I don't want to 
ascribe too much precision to that statement since there are many variables involved. What may be the optimum 
size under some market and business circumstances can be substantially more or less than optimum under other 
circumstances. There have been a few times in the past when on a very short-term basis I have felt it would have 
been advantageous to be smaller but substantially more times when the converse was true.
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Nevertheless, as circumstances presently appear, I feel substantially greater size is more likely to harm future 
results than to help them. This might not be true for my own personal results, but it is likely to be true for your 
results.
Therefore, unless it appears that circumstances have changed (under some conditions added capital would 
improve results) or unless new partners can bring some asset to the Partnership other than simply capital, I 
intend to admit no additional partners to BPL.
The only way to make this effective is to apply it across-the-board and I have notified Susie that if we have any 
more children, it is up to her to find some other partnership for them.
Because I anticipate that withdrawals (for taxes, among other reasons) may well approach additions by present 
partners and also because I visualize the curve of expectable performance sloping only very mildly as capital 
increases, I presently see no reason why we should restrict capital additions by existing partners.
The medically oriented probably will interpret this entire section as conclusive evidence that an effective 
antithyroid pill has been developed.
Trends in Our Business
Last year I discussed our various categories of investments. Knowing the penalties for cruel and unusual 
punishments, I will skip a rehash of the characteristics of each category, but merely refer you to last year's letter. 
However, a few words should be said to bring you up to date on the various segments of the business, and 
perhaps to give you a better insight into their strengths and weaknesses.
The "Workout" business has become very spasmodic. We were able to employ an average of only about $6 
million during the year in the Workout section, and this involved only a very limited number of situations. 
Although we earned about $1,410,000 or about 23 ½% on average capital employed (this is calculated on an all 
equity basis - borrowed money is appropriate in most Workout situations, and we utilize it, which improves our 
rate of return above this percentage), over half of this was earned from one situation. I think it unlikely that a 
really interesting rate of return can be earned consistently on large sums of money in this business under present 
conditions. Nevertheless, we will continue to try to remain alert for the occasional important opportunity and 
probably continue to utilize a few of the smaller opportunities where we like the probabilities.
The "Generals-Private Owner Basis" category was very good to us in 1965. Opportunities in this area have 
become more scarce with a rising Dow, but when they come along, they are often quite significant. I mentioned 
at the start of last year that we were the largest stockholder of three companies in this category. Our largest 
yearend 1964 investment in this category was disposed of in 1965 pursuant to a tender offer resulting in a 
realized gain for BPL of $3,188,000. At yearend 1964 we had unrealized appreciation in this investment of 
$451,000. Therefore, the economic gain attributable to 1965 for this transaction was only $2,737,000 even 
though the entire tax effect fell in that year. I mention these figures to illustrate how our realized gain for tax 
purposes in any year bears no necessary relationship to our economic gain.
The fundamental concept underlying the Generals-Private Owner category is demonstrated by the above case. A 
private owner was quite willing (and in our opinion quite wise) to pay a price for control of the business which 
isolated stock buyers were not willing to pay for very small fractions of the business. This has been a quite 
common condition in the securities markets over many years, and although purchases in this category work out 
satisfactorily in terms of just general stock market behavior, there is the occasional dramatic profit due to 
corporate action such as the one above.
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The "Control" section of our business received a transfer member from our “Private Owner” category. Shares in 
Berkshire Hathaway had been acquired since November 1962 on much the same line of reasoning as prevailed 
in the security mentioned above. In the case of Berkshire, however, we ended up purchasing enough stock to 
assume a controlling position ourselves rather than the more usual case of either selling our stock in the market 
or to another single buyer.
Our purchases of Berkshire started at a price of $7.60 per share in 1962. This price partially reflected large 
losses incurred by the prior management in closing some of the mills made obsolete by changing conditions 
within the textile business (which the old management had been quite slow to recognize). In the postwar period 
the company had slid downhill a considerable distance, having hit a peak in 1948 when about $29 1/2 million 
was earned before tax and about 11,000 workers were employed. This reflected output from 11 mills.
At the time we acquired control in spring of 1965, Berkshire was down to two mills and about 2,300 employees. 
It was a very pleasant surprise to find that the remaining units had excellent management personnel, and we 
have not had to bring a single man from the outside into the operation. In relation to our beginning acquisition 
cost of $7.60 per share (the average cost, however, was $14.86 per share, reflecting very heavy purchases in 
early 1965), the company on December 31, 1965, had net working capital alone (before placing any value on the 
plants and equipment) of about $19 per share.
Berkshire is a delight to own. There is no question that the state of the textile industry is the dominant factor in 
determining the earning power of the business, but we are most fortunate to have Ken Chace running the 
business in a first-class manner, and we also have several of the best sales people in the business heading up this 
end of their respective divisions.
While a Berkshire is hardly going to be as profitable as a Xerox, Fairchild Camera or National Video in a 
hypertensed market, it is a very comfort able sort of thing to own. As my West Coast philosopher says, “It is 
well to have a diet consisting of oatmeal as well as cream puffs.”
Because of our controlling interest, our investment in Berkshire is valued for our audit as a business, not as a 
marketable security. If Berkshire advances $5 per share in the market, it does BPL no good - our holdings are 
not going to be sold. Similarly, if it goes down $5 per share, it is not meaningful to us. The value of our holding 
is determined directly by the value of the business. I received no divine inspiration in that valuation of our 
holdings. (Maybe the owners of the three wonder stocks mentioned above do receive such a message in respect 
to their holdings -I feel I would need something at least that reliable to sleep well at present prices.) I attempt to 
apply a conservative valuation based upon my knowledge of assets, earning power, industry conditions, 
competitive position, etc. We would not be a seller of our holdings at such a figure, but neither would we be a 
seller of the other items in our portfolio at yearend valuations –otherwise, we would already have sold them.
Our final category is "Generals-Relatively Undervalued.” This category has been growing in relative importance 
as opportunities in the other categories become less frequent.
Frankly, operating in this field is somewhat more ethereal than operating in the other three categories, and I'm 
just not an ethereal sort. Therefore, I feel accomplishments here are less solid and perhaps less meaningful for 
future projections than in the other categories. Nevertheless, our results in 1965 were quite good in the 
“Relatively Undervalued” group, partly due to implementation of the technique referred to in last year's letter 
which serves to reduce risk and potentially augment gains. It should reduce risk in any year, and it definitely 
augmented the gains in 1965. It is necessary to point out that results in this category were greatly affected for the 
better by only two investments.
Candor also demands I point out that during 1965 we had our worst single investment experience in the history 
of BPL on one idea in this group.
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Overall, we had more than our share of good breaks in 1965. We did not have a great quantity of ideas, but the 
quality, with the one important exception mentioned above, was very good and circumstances developed which 
accelerated the timetable in several. I do not have a great flood of good ideas as I go into 1966, although again I 
believe I have at least several potentially good ideas of substantial size. Much depends on whether market 
conditions are favorable for obtaining a larger position.
All in all, however, you should recognize that more came out of the pipeline in 1965 than went in.
Diversification 
Last year in commenting on the inability of the overwhelming majority of investment managers to achieve 
performance superior to that of pure chance, I ascribed it primarily to the product of: "(1) group decisions - my 
perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a 
group of any size with all parties really participating in decisions; (2) a desire to conform to the policies and (to 
an extent) the portfolios of other large well-regarded organizations; (3) an institutional framework whereby 
average is "safe" and the personal rewards for independent action are in no way commensurate with the general 
risk attached to such action; (4) an adherence to certain diversification practices which are irrational; and finally 
and importantly, (5) inertia.”
This year in the material which went out in November, I specifically called your attention to a new Ground Rule 
reading, "7. We diversify substantially less than most investment operations. We might invest up to 40% of our 
net worth in a single security under conditions coupling an extremely high probability that our facts and 
reasoning are correct with a very low probability that anything could drastically change the underlying value of 
the investment."
We are obviously following a policy regarding diversification which differs markedly from that of practically all 
public investment operations. Frankly, there is nothing I would like better than to have 50 different investment 
opportunities, all of which have a mathematical expectation (this term reflects the range of all possible relative 
performances, including negative ones, adjusted for the probability of each - no yawning, please) of achieving 
performance surpassing the Dow by, say, fifteen percentage points per annum. If the fifty individual 
expectations were not intercorelated (what happens to one is associated with what happens to the other) I could 
put 2% of our capital into each one and sit back with a very high degree of certainty that our overall results 
would be very close to such a fifteen percentage point advantage.
It doesn't work that way.
We have to work extremely hard to find just a very few attractive investment situations. Such a situation by 
definition is one where my expectation (defined as above) of performance is at least ten percentage points per 
annum superior to the Dow. Among the few we do find, the expectations vary substantially. The question 
always is, “How much do I put in number one (ranked by expectation of relative performance) and how much 
do I put in number eight?" This depends to a great degree on the wideness of the spread between the 
mathematical expectation of number one versus number eight.” It also depends upon the probability that number 
one could turn in a really poor relative performance. Two securities could have equal mathematical 
expectations, but one might have .05 chance of performing fifteen percentage points or more worse than the 
Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the 
first case reduces the desirability of heavy concentration in it. 
The above may make the whole operation sound very precise. It isn't. Nevertheless, our business is that of 
ascertaining facts and then applying experience and reason to such facts to reach expectations. Imprecise and 
emotionally influenced as our attempts may be, that is what the business is all about. The results of many years 
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of decision-making in securities will demonstrate how well you are doing on making such calculations - whether 
you consciously realize you are making the calculations or not. I believe the investor operates at a distinct 
advantage when he is aware of what path his thought process is following.
There is one thing of which I can assure you. If good performance of the fund is even a minor objective, any 
portfolio encompassing one hundred stocks (whether the manager is handling one thousand dollars or one 
billion dollars) is not being operated logically. The addition of the one hundredth stock simply can't reduce the 
potential variance in portfolio performance sufficiently to compensate for the negative effect its inclusion has on 
the overall portfolio expectation.
Anyone owning such numbers of securities after presumably studying their investment merit (and I don't care 
how prestigious their labels) is following what I call the Noah School of Investing - two of everything. Such 
investors should be piloting arks. While Noah may have been acting in accord with certain time-tested 
biological principles, the investors have left the track regarding mathematical principles. (I only made it through 
plane geometry, but with one exception, I have carefully screened out the mathematicians from our Partnership.)
Of course, the fact that someone else is behaving illogically in owning one hundred securities doesn't prove our 
case. While they may be wrong in overdiversifying, we have to affirmatively reason through a proper 
diversification policy in terms of our objectives.
The optimum portfolio depends on the various expectations of choices available and the degree of variance in 
performance which is tolerable. The greater the number of selections, the less will be the average year-to-year 
variation in actual versus expected results. Also, the lower will be the expected results, assuming different 
choices have different expectations of performance.
I am willing to give up quite a bit in terms of leveling of year-to-year results (remember when I talk of “results,” 
I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. 
Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment 
opportunities recognizing very well that this may cause an occasional very sour year - one somewhat more sour, 
probably, than if I had diversified more. While this means our results will bounce around more, I think it also 
means that our long-term margin of superiority should be greater.
You have already seen some examples of this. Our margin versus the Dow has ranged from 2.4 percentage 
points in 1958 to 33.0 points in 1965. If you check this against the deviations of the funds listed on page three, 
you will find our variations have a much wider amplitude. I could have operated in such a manner as to reduce 
our amplitude, but I would also have reduced our overall performance somewhat although it still would have 
substantially exceeded that of the investment companies. Looking back, and continuing to think this problem 
through, I feel that if anything, I should have concentrated slightly more than I have in the past. Hence, the new 
Ground Rule and this long-winded explanation.
Again let me state that this is somewhat unconventional reasoning (this doesn't make it right or wrong - it does 
mean you have to do your own thinking on it), and you may well have a different opinion - if you do, the 
Partnership is not the place for you. We are obviously only going to go to 40% in very rare situations - this 
rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity. 
We probably have had only five or six situations in the nine-year history of the Partnership where we have 
exceeded 25%. Any such situations are going to have to promise very significantly superior performance 
relative to the Dow compared to other opportunities available at the time. They are also going to have to possess 
such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal 
(anything can happen on a short-term quotational basis which partially explains the greater risk of widened year￾to-year variation in results). In selecting the limit to which I will go in anyone investment, I attempt to reduce to 
a tiny figure the probability that the single investment (or group, if there is intercorrelation) can produce a result 
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for our total portfolio that would be more than ten percentage points poorer than the Dow.
We presently have two situations in the over 25% category - one a controlled company, and the other a large 
company where we will never take an active part. It is worth pointing out that our performance in 
1965 was overwhelmingly the product of five investment situations. The 1965 gains (in some cases there were 
also gains applicable to the same holding in prior years) from these situations ranged from about $800,000 to 
about $3 1/2 million. If you should take the overall performance of our five smallest general investments in 
1965, the results are lackluster (I chose a very charitable adjective).
Interestingly enough, the literature of investment management is virtually devoid of material relative to 
deductive calculation of optimal diversification.
All texts counsel "adequate" diversification, but the ones who quantify "adequate" virtually never explain how 
they arrive at their conclusion. Hence, for our summation on overdiversification, we turn to that eminent 
academician Billy Rose, who says, "You've got a harem of seventy girls; you don't get to know any of them very 
well.”
Miscellaneous 
Last year we boldly announced an expansion move, encompassing an additional 227 1/4 square feet. Older 
partners shook their heads. I feel that our gain from operations in 1965 of $12,304,060 indicates 
that we did not overextend ourselves. Fortunately, we didn't sign a percentage lease. Operationally, things have 
never been running more smoothly, and I think our present setup unquestionably lets me devote a higher 
percentage of my time to thinking about the investment process than virtually anyone else in the money 
management business. This, of course, is the result of really outstanding personnel and cooperative partners.
John Harding has taken complete charge of all administrative operations with splendid results. Bill Scott 
continues to develop detailed information on investments which substantially enhances our net profit figure. 
Beth Feehan, Donna Walter and Elizabeth Hanon (who joined us in November) have all handled large work 
loads (secretary's note -Amen!) accurately and efficiently.
The above people, their spouses (one apiece) and children have a combined investment in the Partnership of 
over $600,000. Susie and I have an investment of $6,849,936, which should keep me from slipping away to the 
movies in the afternoon. This represents virtually our entire net worth, with the exception of our continued 
holding of Mid-Continent Tab Card, a local company into which I bought in 1960 when it had less than 10 
stockholders.
Additionally, my relatives, consisting of three children, mother, two sisters, two brothers-in-law, father-in-law, 
three aunts, two uncles, five cousins, and six nieces and nephews have interests in BPL, directly or indirectly, 
totaling $2,708,233. So don't get any ideas about voting a change in the Partnership name.
Peat, Marwick, Mitchell & Co. has done the customary excellent job of expediting the audit and tax information. 
This requires great effort and ability, and they supply both. This year a computer was brought to bear on our 
problems, and naturally, I was a little worried someone else would come out as the general partner. However, it 
all worked quite smoothly.
Within the coming two weeks you will receive:
1. A tax letter giving you all BPL information needed for your 1965 federal income tax return. This letter 
is the only item that counts for tax purposes.
2. An audit from Peat, Marwick, Mitchell & Co. for 1965, setting forth the operations and financial 
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position of BPL, as well as your own capital account.
3. A letter signed by me setting forth the status of your BPL interest on 1/1/66. This is identical with the 
figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. It is difficult to anticipate 
all of the questions you may have and if there is anything that is confusing, I want to hear about it. For instance, 
we received an excellent suggestion last year from a partner regarding the presentation of the reconciliation of 
personal capital accounts.
My next letter will be about July 15th, summarizing the first ha1f of this year.
Cordially,
Warren E. Buffett
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
July 12, 1966
First Half Performance
During the first half of 1966, the Dow-Jones Industrial Average (hereinafter called the "Dow") declined from 
969.26 to 870.10. If one had owned the Dow during this period, dividends of approximately 14.70 would have 
been received, reducing the overall loss of the Dow to about 8.7%.
It is my objective and my hope (but not my prediction!) that we achieve over a long period of time, an average 
yearly advantage of ten percentage points relative to the Dow. During the first half we did considerably better 
than expected with an overall gain of approximately 8.2%. Such results should be regarded as decidedly 
abnormal. I have previously complimented partners on the good-natured tolerance they display in shrugging off 
such unexpected positive variances. The nature of our business is such that over the years, we will not 
disappoint the many of you who must also desire a test of your capacity for tolerance of negative variances.
The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before 
allocation to the general partner, and the results for limited partners:
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
First half of 1966 -8.7% 8.2% 7.7%
Cumulative Results 141.1% 1028.7% 641.5%
Annual Compounded 
Rate
9.7% 29.0% 23.5%
1. Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
2. For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses but before distributions to partners or allocations to the general partner.
3. For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
Even Samson gets clipped occasionally. If you had invested $100.000 on January 1 equally among -
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a. the world's largest auto company (General Motors);
b. the world's largest oil company (Standard of New Jersey);
c. the world's largest retailing company (Sears Roebuck);
d. the world's largest chemical company (Dupont);
e. the world's largest steel company (U.S. Steel);
f. the world's largest stockholder-owned insurance company (Aetna);
g. the world’s largest public utility (American Telephone & Telegraph);
h. the world's largest bank (Bank of America);
your total portfolio (including dividends received) would have been worth $83,370 on June 30 for a loss of 
16.6%. The total market value on January 1 of these eight giants was well over $100 billion. Everyone of them 
was selling lower on June 30.
Investment Companies 
On the next page we bring up to date our regular comparison with the results of the two largest open-end 
investment companies (mutual funds) that follow a policy of being, typically, 95-100% invested in common 
stocks, and the two largest diversified closed-end investment companies.
YEARLY RESULTS
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
First half 
1966
-7.9% -7.9% -1.0% -5.2% -8.7% 7.7%
Cumulative 
Results
118.1% 106.3% 142.8% 126.9% 141.1% 641.5%
Annual 
Compounded 
Rate
8.6% 7.9% 9.8% 9.0% 9.7% 23.5%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1966 Moody's Bank & Finance Manual for 1957-1965. Estimated for first half of 1966.
Proponents of institutional investing frequently cite its conservative nature. If “conservative” is interpreted to 
mean "productive of results varying only slightly from average experience" I believe the characterization is 
proper. Such results are almost bound to flow from wide diversification among high grade securities. Since, over 
a long period, "average experience" is likely to be good experience, there is nothing wrong with the typical 
investor utilizing this form of investment medium.
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However, I believe that conservatism is more properly interpreted to mean "subject to substantially less 
temporary or permanent shrinkage in value than total experience". This simply has not been achieved, as the 
record of the four largest funds (presently managing over $5 billion) illustrates. Specifically, the Dow declined 
in 1957, 1960, 1962 and the first half of 1966. Cumulating the shrinkage in the Dow during the three full year 
periods produces a decline of 20.6%. Following a similar technique for the four largest funds produces declines 
of 9.7%, 20.9%, 22.3% and 24.6%. Including the interim performance for the first half of 1966 results in a 
decline in the Dow of 27.5% and for the funds declines of 14.4%, 23.1%, 27.1% and 30.6%. Such funds (and I 
believe their results are quite typical of institutional experience in common stocks) seem to meet the first 
definition of conservatism but not the second one.
Most investors would climb a rung intellectually if they clearly delineated between the above two interpretations 
of conservatism. The first might be better labeled "conventionalism" - what it really says is that “when others 
are making money in the general run of securities, so will we and to about the same degree; when they are losing 
money, we'll do it at about the same rate." This is not to be equated with "when others are making it, we'll make 
as much and when they are losing it, we will lose less.” Very few investment programs accomplish the latter -
we certainly don't promise it but we do intend to keep trying. (I have always felt our objectives should be 
somewhat loftier than those Herman Hickman articulated during the desperate years when Yale was losing eight 
games a season. Said Herman, "I see my job as one of keeping the alumni sullen but not mutinous.”)
Hochschild, Kohn & Co.
During the first half we, and two 10% partners, purchased all of the stock of Hochschild, Kohn & Co., a 
privately owned Baltimore department store. This is the first time in the history of the Partnership that an entire 
business has been purchased by negotiation, although we have, from time to time, negotiated purchase of 
specific important blocks of marketable securities. However, no new principles are involved. The quantitative 
and qualitative aspects of the business are evaluated and weighed against price, both on an absolute basis and 
relative to other investment opportunities. HK (learn to call it that - I didn't find out how to pronounce it until 
the deal was concluded) stacks up fine in all respects.
We have topnotch people (both from a personal and business standpoint) handling the operation. Despite the 
edge that my extensive 75 cents an hour experience at the Penney's store in Omaha some years back gives us (I 
became an authority on the Minimum Wage Act), they will continue to run the business as in the past. Even if 
the price had been cheaper but the management had been run-of-the-mill, we would not have bought the 
business.
It is impossible to avoid some public notice when a business with several thousand employees is acquired. 
However, it is important that you do not infer the degree of financial importance to BPL from its news value to 
the public. We have something over $50 million invested, primarily in marketable securities, of which only 
about 10% is represented by our net investment in HK. We have an investment of over three times this much in 
a marketable security where our ownership will never come to public attention. This is not to say an HK is not 
important - a 10% holding definitely is. However, it is not as significant relative to our total operation as it 
would be easy to think. I still prefer the iceberg approach toward investment disclosure.
It is my intention to value HK at yearend at cost plus our share of retained earnings since purchase. This policy 
will be followed in future years unless there is a demonstrable change in our position relative to other 
department stores or in other objective standards of value. Naturally we wouldn't have purchased HK unless we 
felt the price was quite attractive. Therefore, a valuation policy based upon cost may somewhat undervalue our 
holdings. Nevertheless, it seems the most objective figure to apply. All of our investments usually appear 
undervalued to me - otherwise we wouldn't own them.
Market Forecasting 
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Ground Rule No.6 (from our November packet) says: “I am not in the business of predicting general stock 
market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you 
should not be in the partnership.”
Of course, this rule can be attacked as fuzzy, complex, ambiguous, vague, etc. Nevertheless, I think the point is 
well understood by the great majority of our partners. We don't buy and sell stocks based upon what other 
people think the stock market is going to do (I never have an opinion) but rather upon what we think the 
company is going to do. The course of the stock market will determine, to a great degree, when we will be right, 
but the accuracy of our analysis of the company will largely determine whether we will be right. In other words, 
we tend to concentrate on what should happen, not when it should happen.
In our department store business I can say with considerable assurance that December will be better than July. 
(Notice how sophisticated I have already become about retailing.) What really counts is whether December is 
better than last December by a margin greater than our competitors' and what we are doing to set the stage for 
future Decembers. However, in our partnership business I not only can't say whether December will be better 
than July, but I can't even say that December won't produce a very large loss. It sometimes does. Our 
investments are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, 
they are not aware that your celestial orientation (and that of the IRS) requires that I report to you upon the 
conclusion of each orbit (the earth's - not ours). Therefore, we have to use a standard other than the calendar to 
measure our progress. This yardstick is obviously the general experience in securities as measured by the Dow. 
We have a strong feeling that this competitor will do quite decently over a period of years (Christmas will come 
even if it's in July) and if we keep beating our competitor we will have to do something better than "quite 
decently". It's something like a retailer measuring his sales gains and profit margins against Sears' - beat them 
every year and somehow you'll see daylight.
I resurrect this "market-guessing" section only because after the Dow declined from 995 at the peak in February 
to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot 
lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 
in May, why didn't they let me in on it then; and, (2) if they didn't know what was going to happen during the 
ensuing three months back in February, how do they know in May? There is also a voice or two after any 
hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two 
points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you –
or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one 
hundred points to focus my attention on how unclear everything is, even though the view back in February 
doesn't look so clear in retrospect.
If we start deciding, based on guesses or emotions, whether we will or won't participate in a business where we 
should have some long run edge, we're in trouble. We will not sell our interests in businesses (stocks) when they 
are attractively priced just because some astrologer thinks the quotations may go lower even though such 
forecasts are obviously going to be right some of the time. Similarly, we will not buy fully priced securities 
because "experts" think prices are going higher. Who would think of buying or selling a private business 
because of someone's guess on the stock market? The availability of a question for your business interest (stock) 
should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage 
of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn formulate 
your judgments. A marvelous articulation of this idea is contained in chapter two (The Investor and Stock 
Market Fluctuations) of Benjamin Graham's "The Intelligent Investor". In my opinion, this chapter has more 
investment importance than anything else that has been written.
We will have a letter out about November 1 with the Commitment Letter for 1967 and an estimate of the 1966 
tax situation.
Buffett Partnership Letters 1957 to 1970
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Cordially,
Warren Buffett
WEB eh 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
January 25, 1967
The First Decade
The Partnership had its tenth anniversary during 1966. The celebration was appropriate -an all-time record (both 
past and future) was established for our performance margin relative to the Dow. Our advantage was 36 points 
which resulted from a plus 20.4% for the Partnership and a minus 15.6% for the Dow.
This pleasant but non-repeatable experience was partially due to a lackluster performance by the Dow. Virtually 
all investment managers outperformed it during the year. The Dow is weighted by the dollar price of the thirty 
stocks involved. Several of the highest priced components, which thereby carry disproportionate weight 
(Dupont, General Motors), were particularly poor performers in 1966. This, coupled with the general aversion to 
conventional blue chips, caused the Dow to suffer relative to general investment experience, particularly during 
the last quarter.
The following summarizes the year-by-year performance of the Dow, the performance of the Partnership before 
allocation (one quarter of the excess over 6%) to the general partner, and the results for limited partners:
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
1966 -15.6% 20.4% 16.8%
Cumulative Results 141.1% 1028.7% 641.5%
Annual Compounded 
Rate
9.7% 29.0% 23.5%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses, but before distributions to partners or allocations to the general 
partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement. but before monthly 
withdrawals by limited partners.
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On a cumulative or compounded basis, the results are: 
Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
1957 – 59 52.3% 95.9% 74.7%
1957 – 60 42.9% 140.6% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 95.1% 454.5% 311.2%
1957 – 64 131.3% 608.7% 402.9%
1957 – 65 164.1% 943.2% 588.5%
1957 – 66 122.9% 1156.0% 704.2%
Annual Compounded 
Rate
11.4% 29.8% 23.9%
Investment Companies 
On the following page is the usual tabulation showing the results of the two largest open-end investment 
companies (mutual funds) that follow a policy of being, typically, 95-100% invested in common stocks, and the 
two largest diversified closed-end investment companies. 
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8%
Cumulative
Results
118.1% 106.3% 142.8% 126.9% 141.1% 641.5%
Annual 
Compounded 
Rate
8.6% 7.9% 9.8% 9.0% 9.7% 23.5%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1966 Moody's Bank & Finance Manual for 1957-1965. Estimated for 1966.
These investment company performance figures have been regularly reported here to show that the now is no 
patsy as an investment standard. It should again be emphasized that the companies were not selected on the 
basis of comparability to Buffett Partnership, Ltd. There are important differences including: (1) investment 
companies operate under both internally and externally imposed restrictions on their investment actions that are 
not applicable to us; (2) investment companies diversify far more than we do and, in all probability, thereby 
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have less chance for a really bad performance relative to the now in a single year; and (3) their managers have 
considerably less incentive for abnormal performance and greater incentive for conventionality.
However, the records above do reveal what well-regarded, highly paid, full-time professional investment 
managers have been able to accomplish while working with common stocks. These managers have been 
favorites of American investors (more than 600,000) making free choices among many alternatives in the 
investment management field. It is probable that their results are typical of the overwhelming majority of 
professional investment managers.
It is not true, however, that these are the best records achieved in the investment field. A few mutual funds and 
some private investment operations have compiled records vastly superior to the Dow and, in some cases, 
substantially superior to Buffett Partnership, Ltd. Their investment techniques are usually very dissimilar to ours 
and not within my capabilities. However, they are generally managed by very bright, motivated people and it is 
only fair that I mention the existence of such superior results in this general discussion of the record of 
professional investment management.
Trends in Our Business
A keen mind working diligently at interpreting the figures on page one could come to a lot of wrong 
conclusions.
The results of the first ten years have absolutely no chance of being duplicated or even remotely approximated 
during the next decade. They may well be achieved by some hungry twenty-five year old working with 
$105,100 initial partnership capital and operating during a ten year business and market environment which is 
frequently conducive to successful implementation of his investment philosophy.
They will not be achieved by a better fed thirty-six year old working with our $54,065,345 current partnership 
capital who presently finds perhaps one-fifth to one-tenth as many really good ideas as previously to implement 
his investment philosophy.
Buffett Associates. Ltd. (predecessor to Buffett Partnership. Ltd.) was founded on the west banks of the 
Missouri. May 5. 1956 by a hardy little band consisting of four family members, three close friends and 
$105,100. (I tried to find some brilliant flash of insight regarding our future or present conditions from my first 
page and a half annual letter of January, 1957 to insert as a quote here. However, someone evidently doctored 
my file copy so as to remove the perceptive remarks I must have made.)
At that time, and for some years subsequently, there were substantial numbers of securities selling at well below 
the "value to a private owner" criterion we utilized for selection of general market investments. We also 
experienced a flow of “workout” opportunities where the percentages were very much to our liking. The 
problem was always which, not what. Accordingly, we were able to own fifteen to twenty-five issues and be 
enthusiastic about the probabilities inherent in all holdings.
In the last few years this situation has changed dramatically. We now find very few securities that are 
understandable to me, available in decent size, and which offer the expectation of investment performance 
meeting our yardstick of ten percentage points per annum superior to the Dow. In the last three years we have 
come up with only two or three new ideas a year that have had such an expectancy of superior performance. 
Fortunately, in some cases, we have made the most of them. However, in earlier years, a lesser effort produced 
literally dozens of comparable opportunities. It is difficult to be objective about the causes for such diminution 
of one's own productivity. Three factors that seem apparent are: (1) a somewhat changed market environment; 
(2) our increased size; and (3) substantially more competition.
Buffett Partnership Letters 1957 to 1970
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It is obvious that a business based upon only a trickle of fine ideas has poorer prospects than one based upon a 
steady flow of such ideas. To date the trickle has provided as much financial nourishment as the flow. This is 
true because there is only so much one can digest (million dollar ideas are of no great benefit to thousand dollar 
bank accounts - this was impressed on me in my early days) and because a limited number of ideas causes one 
to utilize those available more intensively. The latter factor has definitely been operative with us in recent years. 
However, a trickle has considerably more chance of drying up completely than a flow.
These conditions will not cause me to attempt investment decisions outside my sphere of understanding (I don't 
go for the "If you can't lick 'em, join 'em” philosophy - my own leaning is toward "If you can't join ‘em, lick 
'em”). We will not go into businesses where technology which is away over my head is crucial to the investment 
decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the 
chrzaszcz. (That's a Polish May bug, students - if you have trouble pronouncing it, rhyme it with thrzaszcz.)
Furthermore, we will not follow the frequently prevalent approach of investing in securities where an attempt to 
anticipate market action overrides business valuations. Such so-called "fashion" investing has frequently 
produced very substantial and quick profits in recent years (and currently as I write this in January). It represents 
an investment technique whose soundness I can neither affirm nor deny. It does not completely satisfy my 
intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own 
money based upon such an approach hence, I will most certainly not do so with your money.
Finally, we will not seek out activity in investment operations, even if offering splendid profit expectations, 
where major human problems appear to have a substantial chance of developing.
What I do promise you, as partners, is that I will work hard to maintain the trickle of ideas and try to get the 
most out of it that is possible – but if it should dry up completely, you will be informed honestly and promptly 
so that we may all take alternative action.
Analysis of 1966 Results 
All four main categories of our investment operation worked out well in 1966. Specifically, we had a total 
overall gain of $8,906,701 derived as follows:
Category Average Investment Overall Gain
Controls $17,259,342 $1,566,302
Generals – Private Owner $1,359,340 $1,004,362
Generals – Relatively 
Undervalued
$21,847,045 $5,124254
Workouts $7,666314 $1,714,181
Miscellaneous, including US 
Treasury Bills
$1,332,609 $(18,422)
Total Income $9,390,677
Less: General Expense $483,976
Overall Gain $8,906,701
A few caveats are necessary before we get on with the main discussion:
1. An explanation of the various categories listed above was made in the January 18, 1965 letter. If your 
memory needs refreshing and your favorite newsstand does not have the pocketbook edition. we'll be 
glad to give you a copy.
Buffett Partnership Letters 1957 to 1970
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2. The classifications are not iron-clad. Nothing is changed retroactively but the initial decision as to 
category is sometimes arbitrary.
3. Percentage returns calculated on the average investment base by category would be understated relative 
to partnership percentage returns which are calculated on a beginning investment base. In the above 
figures, a security purchased by us at 100 on January 1 which appreciated at an even rate to 150 on 
December 31 would have an average investment of 125 producing a 40% result contrasted to a 50% 
result by the customary approach. In other words, the above figures use a monthly average of market 
values in calculating the average investment.
4. All results are based on a 100% ownership, non-leverage, basis. Interest and other general expenses are 
deducted from total performance and not segregated by category. Expenses directly related to specific 
investment operations, such as dividends paid on short stock, are deducted by category. When securities 
are borrowed directly and sold short, the net investment (longs minus shorts) is shown for the applicable 
average investment category.
5. The above table has only limited use. The results applicable to each category are dominated by one or 
two investments. They do not represent a collection of great quantities of stable data (mortality rates of 
all American males or something of the sort) from which conclusions can be drawn and projections 
made. Instead, they represent infrequent, non-homogeneous phenomena leading to very tentative 
suggestions regarding various courses of action and are so used by us.
6. Finally, these calculations are not made with the same loving care we apply to counting the money and 
are subject to possible clerical or mathematical error since they are not entirely self-checking. 
Controls
There were three main sources of gain during 1966 in respect to controlled companies. These arose through: (1) 
retained business earnings applicable to our holdings in 1966; (2) open market purchases of additional stock 
below our controlling interest valuation and; (3) unrealized appreciation in marketable securities held by the 
controlled companies. The total of all positive items came to $2,600,838 in 1966.
However, due to factors mentioned in my November 1, 1966 letter, specific industry conditions, and other 
relevant valuation items, this gain was reduced by $1,034,780 in arriving at our fair valuation applicable to 
controlling interests as of December 31, 1966. Thus the overall gain in the control category was reduced to 
$1,566,058 for the year.
We were undoubtedly fortunate that we had a relatively high percentage of net assets invested in businesses and 
not stocks during 1966. The same money in general market holdings would probably have produced a loss, 
perhaps substantial, during the year. This was not planned and if the stock market had advanced substantially 
during the year, this category would have been an important drag on overall performance. The same situation 
will prevail during 1967.
Generals -Private Owner
Our performance here falls in the "twenty-one dollars a day, once a month" category. In the middle of 1965 we 
started purchasing a very attractive widely held security which was selling far below its value to a private 
owner. Our hope was that over a two or three year period we could get $10 million or more invested at the 
favorable prices prevailing. The various businesses that the company operated were understandable and we 
could check out competitive strengths and weaknesses thoroughly with competitors, distributors, customers, 
Buffett Partnership Letters 1957 to 1970
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suppliers, ex-employees, etc. Market conditions peculiar to the stock gave us hope that, with patience, we could 
buy substantial quantities of the stock without disturbing the price.
At yearend 1965 we had invested $1,956,980 and the market value of our holding was $2,358,412 so that 
$401,432 was contributed to performance luring 1965. We would have preferred, of course, to have seen the 
market below cost since our interest was in additional buying, not in selling. This would have dampened Buffett 
Partnerships Ltd.’s 1965 performance and perhaps reduced the euphoria experienced by limited partners 
(psychically, the net result to all partners would have been a standoff since the general partner would have been 
floating) but would have enhanced long term performance. The fact that the stock had risen somewhat above our 
cost had already slowed down our buying program and thereby reduced ultimate profit.
An even more dramatic example of the conflict between short term performance and the maximization of long 
term results occurred in 1966. Another party, previously completely unknown to me, issued a tender offer which 
foreclosed opportunities for future advantageous buying. I made the decision that the wisest course (it may not 
have been) for us to follow was to dispose of our holdings and we thus realized a total profit of $1,269,181 in 
February, of which $867,749 was applicable to 1966.
While any gains looked particularly good in the market environment that intimately developed in 1966, you can 
be sure I don't delight in going round making molehills out of mountains. The molehill, of course, was reflected 
in 1966 results. However, we would have been much better off from a long range standpoint if 1966 results had 
been five percentage points worse and we were continuing to buy substantial quantities of the stock at the 
depressed prices that might have been expected to prevail in this year's market environment.
Good ideas were a dime a dozen, such a premature ending would not be unpleasant. There is something to be 
said, of course, for a business operation where some of the failures produce moderate profits. However, you can 
see how hard it is to develop replacement ideas by examining our average investment in the Private Owner 
category - we came up with nothing during the remainder of the year despite lower stock prices, which should 
have been conducive to finding such opportunities.
Generals - Relatively Undervalued
Our relative performance in this category was the best we have ever had - due to one holding which was our 
largest investment at yearend 1965 and also yearend 1966. This investment has substantially out-performed the 
general market for us during each year (1964, 1965, 1966) that we have held it. While any single year's 
performance can be quite erratic, we think the probabilities are highly favorable for superior future performance 
over a three or four year period. The attractiveness and relative certainty of this particular security are what 
caused me to introduce Ground Rule 7 in November, 1965 to allow individual holdings of up to 40% of our net 
assets. We spend considerable effort continuously evaluating every facet of the company and constantly testing 
our hypothesis that this security is superior to alternative investment choices. Such constant evaluation and 
comparison at shifting prices is absolutely essential to our investment operation.
It would be much more pleasant (and indicate a more favorable future) to report that our results in the Generals -
Relatively Undervalued category represented fifteen securities in ten industries, practically all of which 
outperformed the market. We simply don't have that many good ideas. As mentioned above, new ideas are 
continually measured against present ideas and we will not make shifts if the effect is to downgrade expectable 
performance. This policy has resulted in limited activity in recent years when we have felt so strongly about the 
relative merits of our largest holding. Such a condition has meant that realized gains have been a much smaller 
portion of total performance than in earlier years when the flow of good ideas was more substantial.
The sort of concentration we have in this category is bound to produce wide swings in short term performance –
some, most certainly, unpleasant. There have already been some of these applicable to shorter time spans than I 
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use in reporting to partners. This is one reason I think frequent reporting to be foolish and potentially misleading 
in a long term oriented business such as ours.
Personally, within the limits expressed in last year's letter on diversification, I am willing to trade the pains 
(forget about the pleasures) of substantial short term variance in exchange for maximization of long term 
performance. However, I am not willing to incur risk of substantial permanent capital loss in seeking to better 
long term performance. To be perfectly clear - under our policy of concentration of holdings, partners should be 
completely prepared for periods of substantial underperformance (far more likely in sharply rising markets) to 
offset the occasional over performance such as we have experienced in 1965 and 1966, and as a price we pay for 
hoped-for good long term performance.
All this talk about the long pull has caused one partner to observe that “even five minutes is a long time if one's 
head is being held under water." This is the reason, of course, that we use borrowed money very sparingly in our 
operation. Average bank borrowings during 1966 were well under 10% of average net worth.
One final word about the Generals - Relatively Undervalued category. In this section we also had an experience 
which helped results in 1966 but hurt our long term prospects. We had just one really important new idea in this 
category in 1966. Our purchasing started in late spring but had only come to about $1.6 million (it could be 
bought steadily but at only a moderate pace) when outside conditions drove the stock price up to a point where it 
was not relatively attractive. Though our overall gain was $728,141 on an average holding period of six and a 
half months in 1966, it would have been much more desirable had the stock done nothing for a long period of 
time while we accumulated a really substantial position.
Workouts
In last year's letter I forecast reduced importance for workouts. While they were not of the importance of some 
past years. I was pleasantly surprised by our experience in 1966 during which we kept an average of $7,666,314 
employed in this category. Furthermore, we tend to ascribe borrowings to the workout section so that our net 
equity capital employed was really something under this figure and our return was somewhat better than the 
22.4% indicated on page six. Here, too, we ran into substantial variation. At June 30, our overall profit on this 
category was $16,112 on an average investment of $7,870,151 so that we really had a case of an extraordinarily 
good second half offsetting a poor first half.
In past years, sometimes as much as 30-40% of our net worth has been invested in workouts, but it is highly 
unlikely that this condition will prevail in the future. Nevertheless, they may continue to produce some decent 
returns on the moderate amount of capital employed.
Miscellaneous
Operationally, we continue to function well above rated capacity with Bill, John, Elizabeth and Donna all 
contributing excellent performances. At Buffett Partnership. Ltd. we have never had to divert investment effort 
to offset organizational shortcomings and this has been an important ingredient in the performance over the 
years.
Peat, Marwick, Mitchell & Co., aided for the second year by their computer, turned in the usual speedy, efficient 
and comprehensive job.
We all continue to maintain more than an academic interest in the Partnership. The employees and I, our spouses 
and children, have a total of over $10 million invested at January 1, 1967. In the case of my family, our Buffett 
Partnership, Ltd. investment represents well over 90% of our net worth.
Buffett Partnership Letters 1957 to 1970
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Within the coming two weeks you will receive:
1. A tax letter giving you all BPL information needed for your 1966 federal income tax return. This letter 
is the only item that counts for tax purposes.
2. An audit from Peat, Marwick, Mitchell & Co. for 1966, setting forth the operations and financial 
position of BPL, as well as your own capital account.
3. A letter signed by me setting forth the status of your BPL interest on January 1, 1967. This is identical 
with the figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. My next letter will be 
about July 15 summarizing the first half of this year.
Cordially,
Warren E. Buffett
WEB eh 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
July 12, 1967 
First Half Performance
Again, this is being ,written in late June prior to the family's trip to California. To maintain the usual 
chronological symmetry (I try to sublimate my aesthetic urges when it comes to creating symmetry in the profit 
and loss statement), I will leave a few blanks and trust that the conclusions look appropriate when the figures are 
entered.
We began 1967 on a traumatic note with January turning out to be one of the worst months we have experienced 
with a plus 3.3% for BPL versus a plus 8.5% for the Dow. Despite this sour start, we finished the half about plus 
21% for an edge of 9.6 percentage points over the Dow. Again, as throughout 1966, the Dow was a relatively 
easy competitor (it won't be every year, prevailing thinking to the contrary notwithstanding) and a large majority 
of investment managers outdid this yardstick. The following table summarizes performance to date on the usual 
basis:
Year Overall Results From 
Dow (1)
Partnership Results (2) Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
1966 -15.6% 20.4% 16.8%
First half 1967 11.4% 21.0% 17.3%
Cumulative Results 148.3% 1419.8% 843.3%
Annual Compounded 
Rate
9.1% 29.6% 23.8%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses but before distributions to partners or allocations to the general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
BPL's performance during the first hall reflects no change in valuation of our controlled companies and was thus 
achieved solely by the 63.3% of our net assets invested in marketable securities at the beginning of the year. 
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Any revaluation of Diversified Retailing Company (DRC) and Berkshire Hathaway Inc. (B-H) will be made in 
December prior to the time the commitment letters become final and will be based upon all relevant criteria 
(including current operating. market and credit conditions) at that time.
Both DRC and B-H made important acquisitions during the first half. The overall progress of DRC (80% 
owned) and both of its subsidiaries (Hochschild Kohn and Associated Cotton Shops) is highly satisfactory. 
However, B-H is experiencing and faces real difficulties in the textile business, while I don't presently foresee 
any loss in underlying values. I similarly see no prospect of a good return on the assets employed in the textile 
business. Therefore, this segment of our portfolio will be a substantial drag on our relative performance (as it 
has been during the first half) if the Dow continues to advance. Such relative performance with controlled 
companies is expected in a strongly advancing market, but is accentuated when the business is making no 
progress. As a friend of mine says. “Experience is what you find when you're looking for something else.”
Investment Companies
The usual comparison follows showing the results of the two largest open-end and two largest closed-end 
investment companies which pursue a policy of 95-100% investment in common stocks.
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8%
First half 
1967
11.3% 12.3% 19.3% 14.4% 11.4% 17.3%
Cumulative 
Results
143.3% 126.4% 185.4% 156.8% 148.3% 843.3%
Annual 
Compounded 
Rate
8.9% 8.1% 10.5% 9.4% 9.1% 23.8%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1967 Moody's Bank & Finance Manual for 1957-1966. Estimated for first half of 1967.
The tide continues to be far more important than the swimmers.
Taxes
We entered 1967 with unrealized gains of $16,361,974. Through June 30 we have realized net capital gains of 
$7,084,104 so it appears likely that we will realize in 1967 a fairly substantial portion of the unrealized gain 
attributable to your interest at the beginning of the year. This amount was reported to you as Item 3 of our 
February 2, 1967 letter. A copy of that letter, along with a tax letter, will be mailed to you in November giving a 
rough idea of the tax situation at that time.
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As I regularly suggest, the safe course to follow on interim estimates is to pay the same estimated tax for 1967 
as your actual tax was for 1966. There can be no penalties if you follow this procedure. 
Whatever our final figure, it looks now as if it will be very largely long term capital gain with only minor 
amounts, if any, of short term gain and ordinary income. (I consider the whole Income-Principal Myth fair game 
for one of my soft-spoken gently worded critiques. As I told Susie in the early days of our marriage, “Don't 
worry about the income; just the outcome.”)
Miscellaneous
During the first half, Stan Perimeter resigned from the Dissolution Committee because of his present full-time 
involvement in investment management. Fred Stanback, Jr., a long time partner and experienced investor, was 
elected by the remaining members to fill the vacancy.
As in past years, we will have a report out about November 11 along with the Commitment Letter, and the rough 
estimate of the 1967 tax situation, etc.
However, there will be a special letter (to focus your attention upon it) in October. The subject matter will not 
relate to change in the Partnership Agreement, but will involve some evolutionary changes in several "Ground 
Rules" which I want you to have ample time to contemplate before making your plans for 1968. Whereas the 
Partnership Agreement represents the legal understanding among us, the "Ground Rules" represent the personal 
understanding and in some ways is the more important document. I consider it essential that any changes be 
clearly set forth and explained prior to their effect on partnership activity or performance – hence, the October 
letter.
Cordially, 
Warren E. Buffett 
WEBeh
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
October 9, 1967 
To My Partners:
Over the past eleven years, I have consistently set forth as the BPL investment goal an average advantage in our 
performance of ten percentage points per annum in comparison with the Dow Jones Industrial Average. Under 
the environment that existed during that period. I have considered such an objective difficult but obtainable.
The following conditions now make a change in yardsticks appropriate:
1. The market environment has changed progressively over the past decade, resulting in a sharp diminution 
in the number of obvious quantitatively based investment bargains available;
2. Mushrooming interest in investment performance (which has its ironical aspects since I was among a 
lonely few preaching the importance of this some years ago) has created a hyper-reactive pattern of 
market behavior against which my analytical techniques have limited value; 
3. The enlargement of our capital base to about $65 million when applied against a diminishing trickle of 
good investment ideas has continued to present the problems mentioned in the January, 1967 letter; and
4. My own personal interests dictate a less compulsive approach to superior investment results than when I 
was younger and leaner.
Let's look at each of these factors in more detail.
The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative 
and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say. 
"Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price 
will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and 
the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money 
can be made with either approach. And, of course, any analyst combines the two to some extent - his 
classification in either school would depend on the relative weight he assigns to the various factors and not to 
his consideration of one group of factors to the exclusion of the other group.
Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no 
one has come back from recess - I may be the only one left in the class), the really sensational ideas I have had 
over the years have been heavily weighted toward the qualitative side where I have had a "high-probability 
insight". This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights 
usually are, and, of course, no insight is required on the quantitative side - the figures should hit you over the 
head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative 
decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative 
decisions.
Such statistical bargains have tended to disappear over the years. This may be due to the constant combing and 
recombing of investments that has occurred during the past twenty years, without an economic convulsion such 
as that of the ‘30s to create a negative bias toward equities and spawn hundreds of new bargain securities. It may 
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be due to the new growing social acceptance, and therefore usage (or maybe it's vice versa - I'll let the 
behaviorists figure it out) of takeover bids which have a natural tendency to focus on bargain issues. It may be 
due to the exploding ranks of security analysts bringing forth an intensified scrutiny of issues far beyond what 
existed some years ago. Whatever the cause, the result has been the virtual disappearance of the bargain issue as 
determined quantitatively - and thereby of our bread and butter. There still may be a few from time to time. 
There will also be the occasional security where I am really competent to make an important qualitative 
judgment. This will offer our best chance for large profits. Such instances will. however, be rare. Much of our 
good performance during the past three years has been due to a single idea of this sort.
The next point of difficulty is the intensified interest in investment performance. For years I have preached the 
importance of measurement. Consistently I have told partners that unless our performance was better than 
average, the money should go elsewhere. In recent years this idea has gained momentum throughout the 
investment (or more importantly, the investing) community. In the last year or two it has started to look a bit like 
a tidal wave. I think we are witnessing the distortion of a sound idea.
I have always cautioned partners that I considered three years a minimum in determining whether we were 
"performing". Naturally, as the investment public has taken the bit in its teeth, the time span of expectations has 
been consistently reduced to the point where investment performance by 
large aggregates of money is being measured yearly, quarterly, monthly, and perhaps sometimes even more 
frequently (leading to what is known as "instant research"). The payoff for superior short term performance has 
become enormous, not only in compensation for results actually achieved, but in the attraction of new money for 
the next round. Thus a self-generating type of activity has set in which leads to larger and larger amounts of 
money participating on a shorter and shorter time span. A disturbing corollary is that the vehicle for 
participation (the particular companies or stocks) becomes progressively less important - at times virtually 
incidental - as the activity accelerates.
In my opinion what is resulting is speculation on an increasing scale. This is hardly a new phenomenon; 
however, a dimension has been added by the growing ranks of professional (in many cases formerly quite 
docile) investors who feel they must “get aboard”. The game is dignified, of course, by appropriate ceremonies, 
personages and lexicon. To date it has been highly profitable. It may also be that this is going to be the standard 
nature of the market in the future. Nevertheless, it is an activity at which I am sure I would not do particularly 
well. As I said on page five of my last annual letter,
"Furthermore, we will not follow the frequently prevalent approach of investing in securities where an 
attempt to anticipate market action overrides business valuations. Such so-called 'fashion' investing has 
frequently produced very substantial and quick profits in recent years (and currently as I write this in 
January). It represents an investment technique whose soundness I can neither affirm nor deny. It does 
not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my 
temperament. I will not invest my own money based upon such an approach – hence, I will most 
certainly not do so with your money.”
Any form of hyper-activity with large amounts of money in securities markets can create problems for all 
participants. I make no attempt to guess the action of the stock market and haven't the foggiest notion as to 
whether the Dow will be at 600, 900 or 1200 a year from now. Even if there are serious consequences resulting 
from present and future speculative activity, experience suggests estimates of timing are meaningless. However, 
I do believe certain conditions that now exist are likely to make activity in markets more difficult for us for the 
intermediate future.
The above may simply be "old-fogeyism" (after all, I am 37). When the game is no longer being played your 
way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of 
such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as 
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they were - not as they are. Essentially I am out of step with present conditions. On one point, however, I am 
clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even 
though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully 
understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of 
capital.
The third point of difficulty involves our much greater base of capital. For years my investment ideas were 
anywhere from 110% to 1000% of our capital. It was difficult for me to conceive that a different condition could 
ever exist. I promised to tell partners when it did and in my January, 1967 letter had to make good on that 
promise. Largely because of the two conditions previously mentioned, our greater capital is now something of a 
drag on performance. I believe it is the least significant factor of the four mentioned, and that if we were 
operating with one-tenth of our present capital our performance would be little better. However, increased funds 
are presently a moderately negative factor.
The final, and most important, consideration concerns personal motivation. When I started the partnership I set 
the motor that regulated the treadmill at "ten points better than the DOW". I was younger, poorer and probably 
more competitive. Even without the three previously discussed external factors making for poorer performance. 
I would still feel that changed personal conditions make it advisable to reduce the speed of the treadmill. I have 
observed many cases of habit patterns in all activities of life, particularly business, continuing (and becoming 
accentuated as years pass) long after they ceased making sense. Bertrand Russell has related the story of two 
Lithuanian girls who lived at his manor subsequent to World War I. Regularly each evening after the house was 
dark, they would sneak out and steal vegetables from the neighbors for hoarding in their rooms; this despite the 
fact that food was bountiful at the Russell table. Lord Russell explained to the girls that while such behavior 
may have made a great deal of sense in Lithuania during the war, it was somewhat out of place in the English 
countryside. He received assenting nods and continued stealing.
He finally contented himself with the observation that their behavior, strange as it might seem to the neighbors, 
was really not so different from that of the elder Rockefeller.
Elementary self-analysis tells me that I will not be capable of less than all-out effort to achieve a publicly 
proclaimed goal to people who have entrusted their capital to me. All-out effort makes progressively less sense. 
I would like to have an economic goal which allows for considerable non-economic activity. This may mean 
activity outside the field of investments or it simply may mean pursuing lines within the investment field that do 
not promise the greatest economic reward. An example of the latter might be the continued investment in a 
satisfactory (but far from spectacular) controlled business where I liked the people and the nature of the business 
even though alternative investments offered an expectable higher rate of return. More money would be made 
buying businesses at attractive prices, then reselling them. However, it may be more enjoyable (particularly 
when the personal value of incremental capital is less) to continue to own them and hopefully improve their 
performance, usually in a minor way, through some decisions involving financial strategy.
Thus, I am likely to limit myself to things which are reasonably easy, safe, profitable and pleasant. This will not 
make our operation more conservative than in the past since I believe, undoubtedly with some bias, that we have 
always operated with considerable conservatism. The long-term downside risk will not be less; the upside 
potential will merely be less.
Specifically, our longer term goal will be to achieve the lesser of 9% per annum or a five percentage point 
advantage over the Dow. Thus, if the Dow averages -2% over the next five years, I would hope to average +3% 
but if the Dow averages +12%, I will hope to achieve an average of only +9%. These may be limited objectives, 
but I consider it no more likely that we will achieve even these more modest results under present conditions 
than I formerly did that we would achieve our previous goal of a ten percentage point average annual edge over 
the Dow. Furthermore, I hope limited objectives will make for more limited effort (I'm quite sure the converse is 
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true).
I will incorporate this new goal into the Ground Rules to be mailed you about November 1, along with the 1968 
Commitment Letter. I wanted to get this letter off to you prior to that mailing so you would have ample time to 
consider your personal situation, and if necessary get in touch with me to clear up some of the enclosed, before 
making a decision on 1968. As always, I intend to continue to leave virtually all of my capital (excluding Data 
Documents stock), along with that of my family, in BPL. What I consider satisfactory and achievable may well 
be different from what you consider so. Partners with attractive alternative investment opportunities may 
logically decide that their funds can be better employed elsewhere, and you can be sure I will be wholly in 
sympathy with such a decision.
I have always found behavior most distasteful which publicly announces one set of goals and motivations when 
actually an entirely different set of factors prevails. Therefore, I have always tried to be l00% candid with you 
about my goals and personal feelings so you aren't making important decisions pursuant to phony proclamations 
(I've run into a few of these in our investment experience). Obviously all the conditions enumerated in this letter 
haven't appeared overnight. I have been thinking about some of the points involved for a long period of time. 
You can understand, I am sure, that I wanted to pick a time when past goals had been achieved to set forth a 
reduction in future goals. I would not want to reduce the speed of the treadmill unless I had fulfilled my 
objectives to this point.
Please let me know if I can be of any help in deciphering any portion of this letter.
Cordially,
Warren E. Buffett 
WEB eh
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
January 24, 1968 
Our Performance in 1967 
By most standards, we had a good year in 1967. Our overall performance was plus 35.9% compared to plus 
19.0% for the Dow, thus surpassing our previous objective of performance ten points superior to the Dow. Our 
overall gain was $19,384,250 which, even under accelerating inflation, will buy a lot of Pepsi. And, due to the 
sale of some longstanding large positions in marketable securities, we had realized taxable income of 
$27,376,667 which has nothing to do with 1967 performance but should give all of you a feeling of vigorous 
participation in The Great Society on April 15th.
The minor thrills described above are tempered by any close observation of what really took place in the stock 
market during 1967. Probably a greater percentage of participants in the securities markets did substantially 
better than the Dow last year than in virtually any year in history. In 1967, for many, it rained gold and it paid to 
be out playing the bass tuba. I don't have a final tabulation at this time but my guess is that at least 95% of 
investment companies following a common stock program achieved better results than the Dow - in many cases 
by very substantial amounts. It was a year when profits achieved were in inverse proportion to age - and I am in 
the geriatric ward, philosophically.
The following summarizes the year-by-year performance of the Dow, the Partnership before allocation (one 
quarter of the excess over 6%) to the general partner, and the results for limited partners:
Year Overall Results 
From Dow (1)
Partnership Results 
(2)
Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
1966 -15.6% 20.4% 16.8%
1967 19.0% 35.9% 28.4%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses, but before distributions to partners or allocations to the general 
partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
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withdrawals by limited partners.
On a cumulative or compounded basis, the results are:
Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
1957 – 59 52.3% 95.9% 74.7%
1957 – 60 42.9% 140.6% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 95.1% 454.5% 311.2%
1957 – 64 131.3% 608.7% 402.9%
1957 – 65 164.1% 943.2% 588.5%
1957 – 66 122.9% 1156.0% 704.2%
1957 – 67 165.3% 1606.9% 932.6%
Annual Compounded 
Rate
9.3% 29.4% 23.6%
Investment Companies
On the following page is the usual tabulation showing the results of what were the two largest mutual funds 
(they have stood at the top in size since BPL was formed - this year, however, Dreyfus Fund overtook them) that 
follow a policy of being, typically, 95-100% invested in common stocks, and the two largest diversified closed￾end investment companies.
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8%
1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4%
Cumulative 
Results
162.3% 147.6% 206.2% 181.5% 165.3% 932.6%
Annual 
Compounded 
Rate
9.2% 8.6% 10.7% 9.9% 9.3% 23.6%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1967 Moody's Bank & Finance Manual for 1957-1966. Estimated for 1967. 
Last year I said:
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“A few mutual funds and some private investment operations have compiled records vastly superior to 
the Dow and, in some cases, substantially superior to Buffett Partnership, Ltd. Their investment 
techniques are usually very dissimilar to ours and not within my capabilities.”
In 1967 this condition intensified. Many investment organizations performed substantially better than BPL, with 
gains ranging to over 100%. Because of these spectacular results, money, talent and energy are converging in a 
maximum effort for the achievement of large and quick stock market profits. It looks to me like greatly 
intensified speculation with concomitant risks -but many of the advocates insist otherwise.
My mentor, Ben Graham, used to say. “Speculation is neither illegal, immoral nor fattening (financially).” 
During the past year, it was possible to become fiscally flabby through a steady diet of speculative bonbons. We 
continue to eat oatmeal but if indigestion should set in generally, it is unrealistic to expect that we won’t have 
some discomfort.
Analysis of 1967 Results
The overall figures given earlier conceal vast differences in profitability by portfolio category during 1967.
We had our worst performance in history in the “Workout” section. In the 1965 letter, this category was defined 
as,
“...securities with a timetable. They arise from corporate activity -- sell-outs, mergers, reorganizations, 
spin-offs, etc. In this category, we are not talking about rumors or inside information pertaining to such 
developments, but to publicly announced activities of this sort. We wait until we can read it in the paper. 
The risk does not pertain primarily to general market behavior (although that is sometimes tied in. to a 
degree). but instead to something upsetting the applecart so that the expected corporate development 
does not materialize.”
The streets were filled with upset applecarts - our applecarts - during 1967. Thus, on an average investment of 
$17,246,879, our overall gain was $153,273. For those of you whose slide rule does not go to such insulting 
depths, this represents a return of .89 of 1%. While I don't have complete figures. I doubt that we have been 
below 10% in any past year. As in other categories, we tend to concentrate our investments in the workout 
category in just a few situations per year. This technique gives more variation in yearly results than would be the 
case if we used an across-the-board approach. I believe our approach will result in as great (or greater) 
profitability on a long-term basis, but you can't prove it by 1967.
Our investment in controlled companies was a similar drag on relative performance in 1967, but this is to be 
expected in strong markets. On an average investment of $20,192,776 we had an overall gain of $2,894,571. I 
am pleased with this sort of performance, even though this category will continue to underperform if the market 
continues strong during 1968. Through our two controlled companies (Diversified Retailing and Berkshire 
Hathaway), we acquired two new enterprises in 1967. Associated Cotton Shops and National Indemnity (along 
with National Fire & Marine, an affiliated company). These acquisitions couldn't be more gratifying. Everything 
was as advertised or better. The principal selling executives, Ben Rosner and Jack Ringwalt, have continued to 
do a superb job (the only kind they know), and in every respect have far more than lived up to their end of the 
bargain.
The satisfying nature of our activity in controlled companies is a minor reason for the moderated investment 
objectives discussed in the October 9th letter. When I am dealing with people I like, in businesses I find 
stimulating (what business isn't ?), and achieving worthwhile overall returns on capital employed (say, 10 -
12%), it seems foolish to rush from situation to situation to earn a few more percentage points. It also does not 
seem sensible to me to trade known pleasant personal relationships with high grade people, at a decent rate of 
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return, for possible irritation, aggravation or worse at potentially higher returns. Hence, we will continue to keep 
a portion of our capital (but not over 40% because of the possible liquidity requirements arising from the nature 
of our partnership agreement) invested in controlled operating businesses at an expected rate of return below 
that inherent in an aggressive stock market operation.
With a combined total of $37,439,655 in workouts and controls producing an overall gain of only $3,047,844, 
the more alert members of the class will have already concluded we had a whale of a year in the "Generals -
Relatively Undervalued" category. On a net average investment of $19,487,996, we had an overall gain of 
$14,096,593, or 72%. Last year I referred to one investment which substantially outperformed the general 
market in 1964, 1965 and 1966 and because of its size (the largest proportion we have ever had in anything - we 
hit our 40% limit) had a very material impact on our overall results and, even more so, this category. This 
excellent performance continued throughout 1967 and a large portion of total gain was again accounted for by 
this single security. Our holdings of this security have been very substantially reduced and we have nothing in 
this group remotely approaching the size or potential which formerly existed in this investment.
The "Generals - Private Owner" section produced good results last year ($1,297,215 on $5,141,710 average 
investment), and we have some mildly interesting possibilities in this area at present.
Miscellaneous
We begin the new year with net assets of $68,108,088. We had partners with capital of about $1,600,000 
withdraw at yearend, primarily because of the reduced objectives announced in the October 9th letter. This 
makes good sense for them, since most of them have the ability and motivation to surpass our objectives and I 
am relieved from pushing for results that I probably can't attain under present conditions.
Some of those who withdrew (and many who didn't) asked me, "What do you really mean?" after receiving the 
October 9th letter. This sort of a question is a little bruising to any author, but I assured them I meant exactly 
what I had said. I was also asked whether this was an initial stage in the phasing out of the partnership. The 
answer to this is, “Definitely, no”. As long as partners want to put up their capital alongside of mine and the 
business is operationally pleasant (and it couldn't be better), I intend to continue to do business with those who 
have backed me since tennis shoes.
Gladys Kaiser has joined us and is doing the same sort of top-notch job that we have long received from Donna, 
Bill and John. The office group, spouses and children have over $15 million invested in BPL on January 1, 
1968, so we have not had a need for NoDoz during business hours.
Within a few days, you will receive:
1. A tax letter giving you all BPL information needed for your 1967 federal income tax return. This letter 
is the only item that counts for tax purposes.
2. An audit from Peat, Marwick, Mitchell & Co. (they have again done an excellent job) for 1967, setting 
forth the operations and financial position of BPL, as well as your own capital account.
3. A letter signed by me setting forth the status of your BPL interest on January 1, 1968. This is identical 
with the figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. My next letter will be 
about July15th, summarizing the first half of this year.
Cordially,
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Warren E. Buffett
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
July 11th, 1968
First Half Performance
During the first half of 1968, the Dow-Jones Industrial Average declined fractionally from 905 to 898. 
Ownership of the Dow would also have produced dividends of about $15 during the half, resulting in an overall 
gain of 0.9% for that Average. The Dow, once again, was an anemic competitor for most investment managers, 
although it was not surpassed by anything like the margins of 1967.
Our own performance was unusually good during the first half, with an overall gain of 16% excluding any 
change in valuation for controlled companies (which represented slightly over one-third of net assets at the 
beginning of the year). However, any release of adrenalin is unwarranted. Our marketable security investments 
are heavily concentrated in a few situations, making relative performance potentially more volatile than in 
widely diversified investment vehicles. Our long term performance goals are as stated in the revised "Ground 
Rules" and I will be quite happy if we achieve those limited objectives over a period of years. The following 
table summarizes performance to date on the usual basis:
Year Overall Results 
From Dow (1)
Partnership Results 
(2)
Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
1966 -15.6% 20.4% 16.8%
1967 19.0% 35.9% 28.4%
First Half 1968 0.9% 16.0% 13.5%
Cumulative Results 167.7% 1880.0% 1072.0%
Annual Compounded 
Rate
8.9% 29.6% 23.8%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses but before distributions to partners or allocations to the general partner.
(3) For 1957-61 computed on the basis of the preceding column of partnership results allowing for 
allocation to the general partner based upon the present partnership agreement, but before monthly 
withdrawals by limited partners.
Buffett Partnership Letters 1957 to 1970
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Although we revise valuations of our controlled companies only at yearend, it presently appears that our share of 
their 1968 earnings will be something over $3 million. Those with primary responsibility for their operations, 
Ken Chace at Berkshire Hathaway, Louis Kohn at Hochschild Kohn, Jack Ringwalt at National Indemnity and 
Ben Rosner at Associated Cotton Shops, continue to meld effort and ability into results.
This year, Diversified Retailing Company (owner of Hochschild Kohn and Associated Cotton Shops) issued its 
first published annual report. This was occasioned by the public sale of debentures to approximately 1,000 
investors last December. Thus, DRC is in the rather unusual position of being a public company from a 
creditors' viewpoint, but a private one (there are three stockholders -BPL owns 80%) for ownership purposes. I 
am enclosing the DRC report with this letter (except where duplicates go to one house hold) and plan to 
continue to send them along with future mid-year letters.
As I have mentioned before, we cannot make the same sort of money out of permanent ownership of controlled 
businesses that can be made from buying and reselling such businesses, or from skilled investment in 
marketable securities. Nevertheless, they offer a pleasant long term form of activity (when conducted in 
conjunction with high grade, able people) at satisfactory rates of return.
Investment Companies
On the following page is the form sheet on the usual investment companies: 
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8%
1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4%
First Half 
1968
5.1% 2.8% 4.4% 2.0% 0.9% 13.5%
Cumulative 
Results
175.7% 154.5% 218.6% 186.7% 167.7% 1072.0%
Annual 
Compounded 
Rate
9.2% 8.5% 10.6% 9.6% 8.9% 23.8%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1968 Moody's Bank & Finance Manual for 1957 -1967. Estimated for first half of 1968.
Due to a sluggish performance by the Dow in the last few years, the four big funds now have, on average, about 
a one-half point per annum advantage over the Dow for the full period.
The Present Environment
Buffett Partnership Letters 1957 to 1970
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I make no effort to predict the course of general business or the stock market. Period. However, currently there 
are practices snowballing in the security markets and business world which, while devoid of short term 
predictive value, bother me as to possible long term consequences.
I know that some of you are not particularly interested (and shouldn't be) in what is taking place on the financial 
stage. For those who are, I am enclosing a reprint of an unusually clear and simple article which lays bare just 
what is occurring on a mushrooming scale. Spectacular amounts of money are being made by those participating 
(whether as originators, top employees. professional advisors, investment bankers, stock speculators, etc… ) in 
the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and 
the cynical. To create the proper illusions, it frequently requires accounting distortions (one particularly 
progressive entrepreneur told me he believed in "bold, imaginative accounting"), tricks of capitalization and 
camouflage of the true nature of the operating businesses involved. The end product is popular, respectable and 
immensely profitable (I'll let the philosophers figure in which order those adjectives should be placed).
Quite candidly, our own performance has been substantially improved on an indirect basis because of the fall￾out from such activities. To create an ever widening circle of chain letters requires increasing amounts of 
corporate raw material and this has caused many intrinsically cheap (and not so cheap) stocks to come to life. 
When we have been the owners of such stocks, we have reaped market rewards much more promptly than might 
otherwise have been the case. The appetite for such companies, however, tends to substantially diminish the 
number of fundamentally attractive investments which remain.
I believe the odds are good that, when the stock market and business history of this period is being written, the 
phenomenon described in Mr. May's article will be regarded as of major importance, and perhaps characterized 
as a mania. You should realize, however, that his "The Emperor Has No Clothes" approach is at odds (or 
dismissed with a “SO What?” or an "Enjoy, Enjoy”) with the views of most investment banking houses and 
currently successful investment managers. We live in an investment world, populated not by those who must be 
logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.
Finally, for a magnificent account of the current financial scene, you should hurry out and get a copy of “The 
Money Game” by Adam Smith. It is loaded with insights and supreme wit. (Note: Despite my current “Support 
Your Local Postmaster” drive, I am not enclosing the book with this letter - it retails for $6.95.)
Taxes
Several unusual factors make the tax figure even more difficult than usual to estimate this year. We will 
undoubtedly have an above average amount of ordinary income. The picture on short term and long term capital 
gain is subject to unusually substantial variance. At the beginning of the year, I suggested that you use an 8% 
ordinary income factor (it won't come in this manner but this figure embodies an adjustment for long term 
capital gain) applied to your BPL capital account on an interim basis to compute quarterly tax estimates. If a 
figure different from 8% seems more appropriate for your September 15th quarterly estimate. I will let you 
know by September 5th. If no change is necessary, you will next hear from me on November 1st with the 
Commitment Letter for 1969.
Cordially, 
Warren E. Buffett 
WEB/glk 
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
January 22nd, 1969 
Our Performance in 1968
Everyone makes mistakes.
At the beginning of 1968, I felt prospects for BPL performance looked poorer than at any time in our history. 
However, due in considerable measure to one simple but sound idea whose time had come (investment ideas, 
like women are often more exciting than punctual), we recorded an overall gain of $40,032,691.
Naturally, you all possess sufficient intellectual purity to dismiss the dollar result and demand an accounting of 
performance relative to the Dow-Jones Industrial Average. We established a new mark at plus 58.8% versus an 
overall plus 7.7 % for the Dow, including dividends which would have been received through ownership of the 
Average throughout the year. This result should be treated as a freak like picking up thirteen spades in a bridge 
game. You bid the slam, make it look modest, pocket the money and then get back to work on the part scores. 
We will also have our share of hands when we go set.
The following summarizes the year-by-year performance of the Dow, the Partnership before allocation (one 
quarter of the excess over 6%) to the General Partner and the results for limited partners:
Year Overall Results 
From Dow (1)
Partnership Results 
(2)
Limited Partners’ 
Results (3)
1957 -8.4% 10.4% 9.3%
1958 38.5% 40.9% 32.2%
1959 20.0% 25.9% 20.9%
1960 -6.2% 22.8% 18.6%
1961 22.4% 45.9% 35.9%
1962 -7.6% 13.9% 11.9%
1963 20.6% 38.7% 30.5%
1964 18.7% 27.8% 22.3%
1965 14.2% 47.2% 36.9%
1966 -15.6% 20.4% 16.8%
1967 19.0% 35.9% 28.4%
1968 7.7% 58.8% 45.6%
(1) Based on yearly changes in the value of the Dow plus dividends that would have been received through 
ownership of the Dow during that year. The table includes all complete years of Partnership activity.
(2) For 1957-61 consists of combined results of all predecessor limited partnerships operating throughout 
the entire year after all expenses, but before distributions to partners or allocations to the General 
Partner.
(3) For 1957-61 computed on the basis of the preceding column of Partnership results allowing for 
allocation to the General Partner based upon the present Partnership Agreement, but before monthly 
withdrawals by limited partners.
Buffett Partnership Letters 1957 to 1970
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On a cumulative or compounded basis, the results are:
Year Overall Results From 
Dow
Partnership Results Limited Partners’ 
Results
1957 -8.4% 10.4% 9.3%
1957 – 58 26.9% 55.6% 44.5%
1957 – 59 52.3% 95.9% 74.7%
1957 – 60 42.9% 140.6% 107.2%
1957 – 61 74.9% 251.0% 181.6%
1957 – 62 61.6% 299.8% 215.1%
1957 – 63 95.1% 454.5% 311.2%
1957 – 64 131.3% 608.7% 402.9%
1957 – 65 164.1% 943.2% 588.5%
1957 – 66 122.9% 1156.0% 704.2%
1957 – 67 165.3% 1606.9% 932.6%
1957 – 68 185.7% 2610.6% 1403.5%
Annual Compounded 
Rate
9.1% 31.6% 25.3%
Investment Companies
On the following page is the usual tabulation showing the results of what were the two largest mutual funds 
(they stood at the top in size from 1957 through 1966 - they are still number two and three) that follow a policy 
of being, typically, 95 -100% invested in common stocks, and the two largest diversified closed-end investment 
companies.
Year Mass. Inv. 
Trust (1)
Investors 
Stock (1)
Lehman (2) Tri-Cont 
(2)
Dow Limited 
Partners
1957 -11.4% -12.4% -11.4% -2.4% -8.4% 9.3%
1958 42.7% 47.5% 40.8% 33.2% 38.5% 32.2%
1959 9.0% 10.3% 8.1% 8.4% 20.0% 20.9%
1960 -1.0% -0.6% 2.5% 2.8% -6.2% 18.6%
1961 25.6% 24.9% 23.6% 22.5% 22.4% 35.9%
1962 -9.8% -13.4% -14.4% -10.0% -7.6% 11.9%
1963 20.0% 16.5% 23.7% 18.3% 20.6% 30.5%
1964 15.9% 14.3% 13.6% 12.6% 18.7% 22.3%
1965 10.2% 9.8% 19.0% 10.7% 14.2% 36.9%
1966 -7.7% -10.0% -2.6% -6.9% -15.6% 16.8%
1967 20.0% 22.8% 28.0% 25.4% 19.0% 28.4%
1968 10.3% 8.1% 6.7% 6.8% 7.7% 45.6%
Cumulative 
Results
189.3% 167.7% 225.6% 200.2% 185.7% 1403.5%
Annual 
Compounded 
Rate
9.3% 8.6% 10.3% 9.6% 9.1% 25.3%
(1) Computed from changes in asset value plus any distributions to holders of record during year.
(2) From 1968 Moody's Bank & Finance Manual for 1957-1967. Estimated for 1968.
Buffett Partnership Letters 1957 to 1970
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It is interesting that after twelve years these four funds (which presently aggregate well over $5 billion and 
account for over 10% of the investment company industry) have averaged only a fraction of one percentage 
point annually better than the Dow.
Some of the so-called “go-go” funds have recently been re-christened “no-go” funds. For example, Gerald Tsai's 
Manhattan Fund, perhaps the world's best-known aggressive investment vehicle, came in at minus 6.9% for 
1968. Many smaller investment entities continued to substantially outperform the general market in 1968, but in 
nothing like the quantities of 1966 and 1967.
The investment management business, which I used to severely chastise in this section for excessive lethargy, 
has now swung in many quarters to acute hypertension. One investment manager, representing an organization 
(with an old established name you would recognize) handling mutual funds aggregating well over $1 billion, 
said upon launching a new advisory service in 1968:
“The complexities of national and international economics make money management a full-time job. A 
good money manager cannot maintain a study of securities on a week-by-week or even a day-by-day 
basis. Securities must be studied in a minute-by-minute program.”
Wow!
This sort of stuff makes me feel guilty when I go out for a Pepsi. When practiced by large and increasing 
numbers of highly motivated people with huge amounts of money on a limited quantity of suitable securities, the 
result becomes highly unpredictable. In some ways it is fascinating to watch and in other ways it is appalling.
Analysis of 1968 Results
All four main categories of our investment operation worked out well in 1968. Our total overall gain of 
$40,032,691 was divided as follows:
Category Average Investment Overall Gain
Controls $24,996,998 $5,886,109
Generals – Private Owner $16,363,100 $21,994,736
Generals – Relatively 
Undervalued
$8,766,878 $4,271,825
Workouts $18,980,602 $7,317,128
Miscellaneous, primarily US 
Treasury Bills
$12,744,973 $839,496
Total Income $40,309,294
Less – General Expense, 
including Interest
$276,603
Overall Gain $40,032,691
A few caveats, as mentioned in my letter two years ago, are again in order (non-doctoral candidates may 
proceed to next section):
1. An explanation of the various categories listed above was made in the January 18, 1965 letter. If your 
memory needs refreshing and your favorite newsstand does not have the pocketbook edition. We'll be 
glad to give you a copy.
2. The classifications are not iron clad. Nothing is changed retroactively, but the initial decision as to 
category is sometimes arbitrary. Sometimes later classification proves difficult; e.g. a workout that falls 
Buffett Partnership Letters 1957 to 1970
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through but that I continue to hold for reasons unrelated or only partially related to the original decision 
(like stubbornness).
3. Percentage returns calculated on the average investment base by category would be significantly 
understated relative to Partnership percentage returns which are calculated on a beginning investment 
base. In the foregoing figures, a security purchased by us at 100 on January 1 which appreciated at an 
even rate to 200 on December 31 would have an average investment of 150 producing a 66-2/3% result 
contrasted to a 100% result by the customary approach. In other words, the foregoing figures use a 
monthly average of market values in calculating the average investment.
4. All results are based on a 100% ownership, non-leverage basis. Interest and other general expenses are 
deducted from total performance and not segregated by category. Expenses directly related to specific 
investment operations, such as dividends paid on short stock, are deducted by category. When securities 
are borrowed directly and sold short, the net investment (longs minus shorts) is shown for the applicable 
category's average investment.
5. The foregoing table has only limited use. The results applicable to each category are dominated by one 
or two investments. They do not represent a collection of great quantities of stable data (mortality rates 
of all American males or something of the sort) from which conclusions can be drawn and projections 
made. Instead, they represent infrequent, non-homogeneous phenomena leading to very tentative 
suggestions regarding various courses of action and are so used by us.
6. Finally, these calculations are not made with the same loving care we apply to counting the money and 
are subject to possible clerical or mathematical error since they are not entirely se1f-checking.
Controls
Overall, the controlled companies turned in a decent performance during 1968. Diversified Retailing Company 
Inc. (80% owned) and Berkshire Hathaway Inc. (70% owned) had combined after-tax earnings of over $5 
million.
Particularly outstanding performances were turned in by Associated Cotton Shops, a subsidiary of DRC run by 
Ben Rosner, and National Indemnity Company, a subsidiary of B-H run by Jack Ringwalt. Both of these 
companies earned about 20% on capital employed in their businesses. Among Fortune's “500” (the largest 
manufacturing entities in the country, starting with General Motors), only 37 companies achieved this figure in 
1967, and our boys outshone such mildly better-known (but not better appreciated) companies as IBM, General 
Electric, General Motors, Procter & Gamble, DuPont, Control Data, Hewlett-Packard, etc...
I still sometimes get comments from partners like: "Say, Berkshire is up four points - that's great!" or "What's 
happening to us, Berkshire was down three last week?" Market price is irrelevant to us in the valuation of our 
controlling interests. We valued B-H at 25 at yearend 1967 when the market was about 20 and 31 at yearend 
1968 when the market was about 37. We would have done the same thing if the markets had been 15 and 50 
respectively. ("Price is what you pay. value is what you get"). We will prosper or suffer in controlled 
investments in relation to the operating performances of our businesses - we will not attempt to profit by playing 
various games in the securities markets.
Generals -Private Owner
Over the years this has been our best category, measured by average return, and has also maintained by far the 
best percentage of profitable transactions. This approach was the way I was taught the business, and it formerly 
accounted for a large proportion of all our investment ideas. Our total individual profits in this category during 
Buffett Partnership Letters 1957 to 1970
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the twelve year BPL history are probably fifty times or more our total losses. The cash register really rang on 
one simple industry idea (implemented in several ways) in this area in 1968. We even received a substantial fee 
(included in Other Income in the audit) for some work in this field.
Our total investment in this category (which is where I feel by far the greatest certainty regarding consistently 
decent results) is presently under $2 million and I have nothing at all in the hopper to bolster this. What came 
through like the Johnstown flood in 1968 looks more like a leaky faucet in Altoona for 1969.
Generals - Relatively Undervalued
This category produced about two-thirds of the overall gain in 1966 and 1967 combined. I mentioned last year 
that the great two-year performance here had largely come from one idea. I also said, "We have nothing in this 
group remotely approaching the size or potential which formerly existed in this investment.” It gives me great 
pleasure to announce that this statement was absolutely correct. It gives me somewhat less pleasure to announce 
that it must be repeated this year.
Workouts
This category, which was a disaster in 1967, did well during 1968. Our relatively heavy concentration in just a 
few situations per year (some of the large arbitrage houses may become involved in fifty or more workouts per 
annum) gives more variation in yearly results than an across-the-board approach. I feel the average profitability 
will be as good with our policy and 1968 makes me feel better about that conclusion than 1967 did.
It should again be stated that our results in the Workout area (as well as in other categories) are somewhat 
understated compared to the more common method of determining results computed on an initial base figure 
and utilizing borrowed money (which is often a sensible part of the Workout business).
******************************
I can't emphasize too strongly that the quality and quantity of ideas is presently at an all time low - the product 
of the factors mentioned in my October 9th, 1967 letter, which have largely been intensified since then.
Sometimes I feel we should have a plaque in our office like the one at the headquarters of Texas Instruments in 
Dallas which reads: “We don't believe in miracles, we rely on them.” It is possible for an old, overweight ball 
player, whose legs and batting eye are gone, to tag a fast ball on the nose for a pinch-hit home run, but you don't 
change your line-up because of it.
We have a number of important negatives operating on our future and, while they shouldn't add up to futility, 
they certainly don't add up to more than an average of quite moderate profitability.
Memorabilia
As one of my older friends says, “Nostalgia just isn't what it used to be.” Let's take a stab at it, anyway.
Buffett Associates, Ltd., the initial predecessor partnership, was formed May 5, 1956 with seven limited partners 
(four family, three close friends), contributing $105,000, and the General Partner putting his money where his 
mouth was by investing $100. Two additional single-family limited partnerships were formed during 1956, so 
that on January 1, 1957 combined net assets were $303,726. During 1957, we had a gain of $31,615.97, leading 
to the 10.4% figure shown on page one. During 1968 I would guess that the New York Stock Exchange was 
open around 1,200 hours, giving us a gain of about $33,000 per hour (sort of makes you wish they had stayed 
with the 5-1/2 hour, 5 day week, doesn't it), or roughly the same as the full year gain in 1957.
Buffett Partnership Letters 1957 to 1970
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On January 1, 1962 we consolidated the predecessor limited partnerships moved out of the bedroom and hired 
our first full-time employees. Net assets at that time were $7,178,500. From that point to our present net assets 
of $104,429,431 we have added one person to the payroll. Since 1963 (Assets $9,405,400) rent has gone from 
$3,947 to $5,823 (Ben Rosner would never have forgiven me if I had signed a percentage lease) travel from 
$3,206 to $3,603, and dues and subscriptions from $900 to $994. If one of Parkinson's Laws is operating, at 
least the situation hasn't gotten completely out of control.
In making our retrospective survey of our financial assets, our conclusion need not parallel that of Gypsy Rose 
Lee who opined, when reviewing her physical assets on her fifty-fifth birthday: “I have everything I had twenty 
years ago - it's just that it's all lower.”
Miscellaneous
Although the investment environment is difficult, the office environment is superb. With Donna, Gladys, Bill 
and John, we have an organization that functions speedily, efficiently and pleasantly. They are the best.
The office group, along with spouses (one apiece - I still haven't figured out how I should handle that plural) and 
children have over $27 million invested in BPL on January 1, 1969. Assorted sizes and shapes of aunts, uncles, 
parents, in-laws, brothers, sisters and cousins make the BPL membership list read like “Our Crowd” - which, so 
far as I am concerned, is exactly what it is.
Within a few days, you will receive:
1. A tax letter giving you all BPL information needed for your 1968 federal income tax return. This letter 
is the only item that counts for tax purposes.
2. An audit from Peat Marwick. Mitchell & Co. (they have again done an excellent job) for 1968, setting 
forth the operations and financial position of BPL, as well as your own capital account.
3. A letter signed by me setting forth the status of your BPL interest on January 1, 1969. This is identical 
with the figures developed in the audit.
Let me know if anything in this letter or that occurs during the year needs clarifying. My next letter will be 
about July 10th
, summarizing the first half of this year.
Cordially,
Warren E. Buffett
WEB/glk
Buffett Partnership Letters 1957 to 1970
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
May 29th, 1969 
To My Partners:
About eighteen months ago I wrote to you regarding changed environmental and personal factors causing me to 
modify our future performance objectives.
The investing environment I discussed at that time (and on which I have commented in various other letters has 
generally become more negative and frustrating as time has passed. Maybe I am merely suffering from a lack of 
mental flexibility. (One observer commenting on security analysts over forty stated: “They know too many 
things that are no longer true.”)
However, it seems to me that: (1) opportunities for investment that are open to the analyst who stresses 
quantitative factors have virtually disappeared, after rather steadily drying up over the past twenty years; (2) our 
$100 million of assets further eliminates a large portion of this seemingly barren investment world, since 
commitments of less than about $3 million cannot have a real impact on our overall performance, and this 
virtually rules out companies with less than about $100 million of common stock at market value; and (3) a 
swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) 
more speculative market.
The October 9th, 1967 letter stated that personal considerations were the most important factor among those 
causing me to modify our objectives. I expressed a desire to be relieved of the (self-imposed) necessity of 
focusing 100% on BPL. I have flunked this test completely during the last eighteen months. The letter said: I 
hope limited objectives will make for more limited effort. It hasn't worked out that way. As long as I am “on 
stage”, publishing a regular record and assuming responsibility for management of what amounts to virtually 
100% of the net worth of many partners, I will never be able to put sustained effort into any non-BPL activity. If 
I am going to participate publicly. I can't help being competitive. I know I don't want to be totally occupied with 
out-pacing an investment rabbit all my life. The only way to slow down is to stop.
Therefore, before yearend. I intend to give all limited partners the required formal notice of my intention to 
retire. There are, of course, a number of tax and legal problems in connection with liquidating the Partnership, 
but overall, I am concerned with working out a plan that attains the following objectives:
1. The most important item is that I have an alternative regarding money management to suggest to the 
many partners who do not want to handle this themselves. Some partners of course, have alternatives of 
their own in which they have confidence and find quite acceptable. To the others, however, I will not 
hand over their money with a "good luck". I intend to suggest an alternative money manager to whom I 
will entrust funds of my relatives and others for whom I have lifetime financial responsibility. This 
manager has integrity and ability and will probably perform as well or better than I would in the future 
(although nowhere close to what he or I have achieved in the past). He will be available to any partner, 
so that no minimum size for accounts will cause any of you a problem. I intend, in the future, to keep in 
general touch with what he is doing, but only on an infrequent basis with any advice on my part largely 
limited to a negative type.
2. I want all partners to have the option of receiving cash and possibly readily marketable securities (there 
will probably be only one where this will apply) where I like both the prospects and price but which 
Buffett Partnership Letters 1957 to 1970
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partners will be able to freely convert to cash if they wish.
3. However, I also want all partners to have the option of maintaining their proportional interests in our 
two controlled companies (Diversified Retailing Company Inc. and Berkshire Hathaway Inc.) and one 
other small "restricted" holding. Because these securities will be valued unilaterally by me at fair value, 
I feel it is essential that, if you wish, you can maintain your proportionate interest at such valuation.
However, these securities are not freely marketable (various SEC restrictions apply to “control” 
stock and non-registered stock) and they will probably be both non-transferable and non-income -
producing for a considerable period of time. Therefore, I want you to be able to go either way in our 
liquidation - either stick with the restricted securities or take cash equivalent. I strongly like all of the 
people running our controlled businesses (joined now by the Illinois National Bank and Trust Company 
of Rockford, Illinois, a $100 million plus, extremely well-run bank, purchased by Berkshire Hathaway 
earlier this year), and want the relationship to be life long. I certainly have no desire to sell a good 
controlled business run by people I like and admire, merely to obtain a fancy price. However, specific 
conditions may cause the sale of one operating unit at some point.
I believe we will have a liquidation program which will accomplish the above objectives. Our activities in this 
regard should cause no change in your tax planning for 1969.
One final objective, I would like very much to achieve (but which just isn't going to happen) is to go out with a 
bang. I hate to end with a poor year, but we are going to have one in 1969. My best guess is that at yearend, 
allowing for a substantial increase in value of controlled companies (against which all partners except me will 
have the option of taking cash), we will show a breakeven result for 1969 before any monthly payments to 
partners. This will be true even if the market should advance substantially between now and yearend, since we 
will not be in any important position which will expose us to much upside potential.
Our experience in workouts this year has been atrocious - during this period I have felt like the bird that 
inadvertently flew into the middle of a badminton game. We are not alone in such experience, but it came at a 
time when we were toward the upper limit of what has been our historical range of percentage commitment in 
this category.
Documenting one's boners is unpleasant business. I find "selective reporting" even more distasteful. Our poor 
experience this year is 100% my fault. It did not reflect bad luck, but rather an improper assessment of a very 
fast-developing governmental trend. Paradoxically, I have long believed the government should have been doing 
(in terms of the problem attacked – not necessarily the means utilized) what it finally did - in other words, on an 
overall basis, I believe the general goal of the activity which has cost us substantial money is socially desirable 
and have so preached for some time. Nevertheless, I didn't think it would happen. I never believe in mixing what 
I think should happen (socially) with what I think will happen in making decisions - in this case, we would be 
some millions better off if I had.
Quite frankly, in spite of any factors set forth on the earlier pages. I would continue to operate the Partnership in 
1970, or even 1971, if I had some really first class ideas. Not because I want to, but simply because I would so 
much rather end with a good year than a poor one. However. I just don't see anything available that gives any 
reasonable hope of delivering such a good year and I have no desire to grope around, hoping to "get lucky" with 
other people's money. I am not attuned to this market environment and I don't want to spoil a decent record by 
trying to play a game I don't understand just so I can go out a hero.
Therefore, we will be liquidating holdings throughout the year, working toward a residual of the controlled 
companies, the one "investment letter" security, the one marketable security with favorable long-term prospects, 
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and the miscellaneous "stubs", etc. of small total value which will take several years to clean up in the Workout 
category.
I have written this letter a little early in lieu of the mid-year letter. Once I made a decision, I wanted you to 
know. I also wanted to be available in Omaha for a period after you received this letter to clear up anything that 
may be confusing in it. In July, I expect to be in California.
Some of you are going to ask, "What do you plan to do?" I don't have an answer to that question. I do know that 
when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20. 
Therefore, unless I now divorce myself from the activity that has consumed virtually all of my time and energies 
during the first eighteen years of my adult life, I am unlikely to develop activities that will be appropriate to new 
circumstances in subsequent years.
We will have a letter out in the Fall, probably October, elaborating on the liquidation procedure, the investment 
advisor suggestion, etc…
Cordially,
Warren E. Buffett 
WEB/glk
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
October 9th, 1969 
To My Partners:
Here is my present estimate of the BPL calendar for the months to come:
(1) This letter - to tell you something of Bill Ruane, the money manager within my knowledge who ranks 
the highest when combining the factors of integrity, ability and continued availability to all partners. I 
also want to comment upon the present range of expectations involved in deciding on a bond-stock mix.
(2) Late November - the required thirty days formal notice of my intent to retire from the Partnership at the 
end of the year.
(3) Early December - a package of publicly available material, as well as some general comments by me 
relating to our controlled companies. Berkshire Hathaway Inc. (owning the textile business, Illinois 
National Bank and Trust Company of Rockford, Illinois, National Indemnity Company and National 
Fire and Marine Insurance Company and Sun Newspapers) and Diversified Retailing Company (owning 
Hochschild, Kohn & Co. and Associated Cotton Shops). I want you to have ample time to study the 
material relating to such companies before you make any decision to hold, sell or buy such securities 
after distribution to you in early January. I will solicit written questions from partners (I don't want to 
talk to you individually about such companies, as I want all partners to obtain exactly the same 
information) and then have a further mailing late in December, giving all questions received relating to 
these companies along with my answers, if possible. I still anticipate having a plan enabling partners to 
promptly convert such controlled company holdings to cash, if they wish.
(4) About January 5th - (a) a cash distribution amounting to at least 56% (probably more - depending upon 
what percentage of our remaining holdings are sold before yearend) of your January 1, 1969 capital, less 
any distributions (the regular monthly payments many of you receive) or borrowings by you during 
1969, (b) your proportional share of our holdings in Diversified Retailing Company Inc. and Berkshire 
Hathaway Inc. I which, if you dispose of them, will bring 30% - 35% (my estimate of value will be 
made at yearend) of your January 1, 1969 capital.
We may make substantial additional sales before yearend - if so, the early January cash distribution will 
be somewhat larger than the 56% mentioned above. If we don't, such sales will be made during the first 
half of 1970 and an interim distribution made. Residual assets will be sold at appropriate times and I 
believe not more than 10% of our present asset value will remain after June 30th, 1970 pending a final 
distribution when all assets and liabilities have been cleaned up.
Unless there is a further substantial decline in the market. I still expect about a breakeven performance 
before any monthly payments for 1969. We were lucky - if we had not been in liquidation this year, our 
results would have been significantly worse. Ideas that looked potentially interesting on a "continuing" 
basis have on balance performed poorly to date. We have only two items of real size left - one we are 
selling as I write this and the other is a holding of limited marketability representing about 7-1/2% of the 
outstanding stock of Blue Chip Stamps which we may sell via a registered public offering around 
yearend, depending upon market conditions and other factors.
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(5) March 1st. 1970 - John Harding expects to leave Buffett Partnership. Ltd. and open a branch office in 
Omaha for Ruane, Cunniff & Stires. Bill Scott and I will be available at BPL offices to help any 
partners who are desirous of purchasing bonds, tax-free or taxable. We will set aside the month of 
March to make our services available without cost to those who want to acquire bonds. Because of some 
experience we have in analysis and purchasing, as well as the access we have to wholesale markets. I 
think it is likely we can save material elements of cost as well as help select better relative values for 
those of you who wish to invest in bonds. After April 1st, however, we want to be out of any form of 
personal advisory activity.
(6) After March, 1970 - Bill and I will continue to office in Kiewit Plaza, spending a very minor portion of 
our time completing the wind-up of BPL. This will mean filing tax returns for 1970 and probably 1971 
resolving minor assets and liabilities etc.
Now, to Bill Ruane - we met in Ben Graham's class at Columbia University in 1951 and I have had considerable 
opportunity to observe his qualities of character, temperament and intellect since that time. If Susie and I were to 
die while our children are minors, he is one of three trustees who have carte blanche on investment matters - the 
other two are not available for continuous investment management for all partners, large or small.
There is no way to eliminate the possibility of error when judging humans particularly in regard to future 
behavior in an unknown environment. However, decisions have to be made - whether actively or passively - and 
I consider Bill to be an exceptionally high probability decision on character and a high probability one on 
investment performance. I also consider it likely that Bill will continue as a money manager for many years to 
come.
Bill has recently formed a New York Stock Exchange firm, Ruane, Cunniff & Stires, Inc., 85 Broad Street, New 
York, N.Y. 10004, telephone number (212) 344-6700. John Harding presently plans to establish an office for the 
firm in Omaha about March 1st, 1970. Bill manages accounts individually on a fee basis and also executes 
brokerage for the accounts - presently with some portion of the brokerage commissions used to offset a portion 
of the investment advisory fee. His method of operation allows monthly withdrawals on a basis similar to BPL -
as a percentage of capital and unrelated to realized or unrealized gain or loss. It is possible he may form some 
sort of pooled account but such determinations will be made between him and those of you who elect to go with 
him. I, of course, will not be involved with his operation. I am making my list of partners available to him and 
he will be writing you fairly soon regarding a trip he plans to make before yearend to Omaha, Los Angeles and 
Chicago, so that those of you who wish to meet him may do so. Any of you who are going to be in New York 
during the next few months can contact him directly.
Bill's overall record has been very good-averaging fairly close to BPL's, but with considerably greater variation. 
From 1956-1961 and from 1964-1968, a composite of his individual accounts averaged over 40% per annum. 
However, in 1962, undoubtedly somewhat as a product of the euphoric experience of the earlier years, he was 
down about 50%. As he re-oriented his thinking, 1963 was about breakeven.
While two years may sound like a short time when included in a table of performance, it may feel like a long 
time when your net worth is down 50%. I think you run this sort of short-term risk with virtually any money 
manager operating in stocks and it is a factor to consider in deciding the portion of your capital to commit to 
equities. To date in 1969, Bill is down about 15%, which I believe to be fairly typical of most money managers. 
Bill, of course, has not been in control situations or workouts, which have usually tended to moderate the swings 
in BPL year-to-year performance. Even excluding these factors, I believe his performance would have been 
somewhat more volatile (but not necessarily poorer by any means) than mine - his style is different, and while 
his typical portfolio (under most conditions) would tend to have a mild overlap with mine, there would always 
be very significant differences.
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Bill has achieved his results working with an average of $5 to $10 million. I consider the three most likely 
negative factors in his future to be: (1) the probability of managing significantly larger sums - this is a problem 
you are going to have rather quickly with any successful money manager, and it will tend to moderate 
performance; I believe Bill's firm is now managing $20 -$30 million and, of course, they will continue to add 
accounts; (2) the possibility of Bill's becoming too involved in the detail of his operation rather than spending all 
of his time simply thinking about money management. The problems of being the principal factor in a NYSE 
firm as well as handling many individual accounts can mean that he, like most investment advisors, will be 
subject to pressures to spend much of his time in activities that do nothing to lead to superior investment 
performance. In this connection, I have asked Bill to make his services available to all BPL partners - large or 
small and he will, but I have also told him he is completely a free agent if he finds particular clients diverting 
him from his main job; (3) the high probability that even excellent investment management during the next 
decade will only produce limited advantages over passive management. I will comment on this below.
The final point regarding the negatives listed above is that they are not the sort of drawbacks leading to horrible 
performance, but more likely the sort of things that lead to average performance. I think this is the main risk you 
run with Bill - and average performance is just not that terrible a risk.
In recommending Bill, I am engaging in the sort of activity I have tried to avoid in BPL portfolio activities - a 
decision where there is nothing to gain (personally) and considerable to lose. Some of my friends who are not in 
the Partnership have suggested that I make no recommendation since, if results were excellent it would do me 
no good and, if something went wrong, I might well get a portion of the blame. If you and I had just had a 
normal commercial relationship, such reasoning might be sound. However, the degree of trust partners have 
extended to me and the cooperation manifested in various ways precludes such a "hands off" policy. Many of 
you are professional investors or close thereto and need no advice from me on managers - you may well do 
better yourself. For those partners who are financially inexperienced. I feel it would be totally unfair for me to 
assume a passive position and deliver you to the most persuasive salesman who happened to contact you early in 
1970.
Finally, a word about expectations. A decade or so ago was quite willing to set a target of ten percentage points 
per annum better than the Dow, with the expectation that the Dow would average about 7%. This meant an 
expectancy for us of around 17%, with wide variations and no guarantees, of course - but, nevertheless, an 
expectancy. Tax-free bonds at the time yielded about 3%. While stocks had the disadvantage of irregular 
performance, overall they seemed much the more desirable option. I also stressed this preference for stocks in 
teaching classes, participating in panel discussions, etc…
For the first time in my investment lifetime. I now believe there is little choice for the average investor between 
professionally managed money in stocks and passive investment in bonds. If correct. this view has important 
implications. Let me briefly (and in somewhat oversimplified form) set out the situation as I see it:
(1) I am talking about the situation for, say, a taxpayer in a 40% Federal Income Tax bracket who also has 
some State Income Tax to pay. Various changes are being proposed in the tax laws, which may 
adversely affect net results from presently tax-exempt income, capital gains, and perhaps other types of 
investment income. More proposals will probably come in the future. Overall, I feel such changes over 
the years will not negate my relative expectations about after-tax income from presently tax-free bonds 
versus common stocks, and may well even mildly reinforce them.
(2) I am talking about expectations over the next ten years - not the next weeks or months. I find it much 
easier to think about what should develop over a relatively long period of time than what is likely in any 
short period. As Ben Graham said: “In the long run, the market is a weighing machine - in the short run, 
a voting machine.” I have always found it easier to evaluate weights dictated by fundamentals than 
votes dictated by psychology.
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(3) Purely passive investment in tax-free bonds will now bring about 6-1/2%. This yield can be achieved 
with excellent quality and locked up for just about any period for which the investor wishes to contract. 
Such conditions may not exist in March when Bill and I will be available to assist you in bond 
purchases, but they exist today.
(4) The ten year expectation for corporate stocks as a group is probably not better than 9% overall. say 3% 
dividends and 6% gain in value. I would doubt that Gross National Product grows more than 6% per 
annum - I don't believe corporate profits are likely to grow significantly as a percentage of GNP - and if 
earnings multipliers don't change (and with these assumptions and present interest rates they shouldn't) 
the aggregate valuation of American corporate enterprise should not grow at a long-term compounded 
rate above 6% per annum. This typical experience in stocks might produce (for the taxpayer described 
earlier) 1-3/4% after tax from dividends and 4-3/4% after tax from capital gain, for a total after-tax 
return of about 6-1/2%. The pre-tax mix between dividends and capital gains might be more like 4% and 
5%, giving a slightly lower aftertax result. This is not far from historical experience and overall, I 
believe future tax rules on capital gains are likely to be stiffer than in the past.
(5) Finally, probably half the money invested in stocks over the next decade will be professionally 
managed. Thus, by definition virtually, the total investor experience with professionally managed 
money will be average results (or 6-1/2% after tax if my assumptions above are correct).
My judgment would be that less than 10% of professionally managed money (which might imply an 
average of $40 billion just for this superior segment) handled consistently for the decade would average 
2 points per annum over group expectancy. So-called "aggressively run" money is unlikely to do 
significantly better than the general run of professionally managed money. There is probably $50 billion 
in various gradations of this "aggressive" category now - maybe 100 times that of a decade ago - and 
$50 billion just can't "perform".
If you are extremely fortunate and select advisors who achieve results in the top 1% to 2% of the 
country (but who will be working with material sums of money because they are that good), I think it is 
unlikely you will do much more than 4 points per annum better than the group expectancy. I think the 
odds are good that Bill Ruane is in this select category. My estimate . therefore, is that over the next 
decade the results of really excellent management for our "typical taxpayer" after tax might be 1-3/4% 
from dividends and 7-3/4% from capital gain. or 9 –1.2% overall.
(6) The rather startling conclusion is that under today's historically unusual conditions, passive investment 
in tax-free bonds is likely to be fully the equivalent of expectations from professionally managed money 
in stocks, and only modestly inferior to extremely well-managed equity money.
(7) A word about inflation - it has very little to do with the above calculation except that it enters into the 
6% assumed growth rate in GNP and contributes to the causes producing 6-1/2% on tax-free bonds. If
stocks should produce 8% after tax and bonds 4%, stocks are better to own than bonds, regardless of 
whether prices go up, down or sidewise. The converse is true if bonds produce 6-1/2% after tax. and 
stocks 6%. The simple truth, of course, is that the best expectable after-tax rate of return makes the most 
sense - given a rising, declining or stable dollar.
All of the above should be viewed with all the suspicion properly accorded to assessments of the future. It does 
seem to me to be the most realistic evaluation of what is always an uncertain future - I present it with no great 
feeling regarding its approximate accuracy, but only so you will know what I think at this time.
You will have to make your own decision as between bonds and stocks and, if the latter, who advises you on 
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such stocks. In many cases, I think the decision should largely reflect your tangible and intangible 
(temperamental) needs for regularity of income and absence of large principal fluctuation, perhaps balanced 
against psychic needs for some excitement and the fun associated with contemplating and perhaps enjoying 
really juicy results. If you would like to talk over the problem with me, I will be very happy to help.
Sincerely, 
Warren E. Buffett 
WEB/glk 
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
December 5th , 1969
To My Partners:
This letter is to supply you with some published information relating to our two controlled companies (and their 
four principal operating components), as well as to give you my general views regarding their operations. My 
comments are not designed to give you loads of detailed information prospectus-style, but only my general 
"slant" as I see the businesses at this time.
At yearend, BPL will own 800,000 of 1,000,000 shares outstanding of Diversified Retailing Company. First 
Manhattan Company and Wheeler, Munger & Company will each own 100,000 shares. DRC previously owned 
100% of Hochschild, Kohn & Company of Baltimore, and currently owns 100% of Associated Retail Stores 
(formerly named Associated Cotton Shops). On December 1st, DRC sold its entire interest in H-K to 
Supermarkets General Corp. for $5,045,205 of cash plus non-interest bearing SGC notes for $2 million due 2-1-
70, and $4,540,000 due 2-1-71. The present value of these notes approximates $6.0 million so, effectively, DRC 
received about $11 million on the sale. Various warranties were made by DRC in connection with the sale, and, 
while we expect no claims pursuant to the contract, a remote contingent liability always exists while warranties 
are in force.
Associated Retail Stores has a net worth of about $7.5 million. It is an excellent business with a strong financial 
position, good operating margins and a record of increasing sales and earnings in recent years. Last year, sales 
were about $37.5 million and net income about $1 million. This 
year should see new records in sales and earnings, with my guess on the latter to be in the area of $1.1 million 
after full taxes.
DRC has $6.6 million in debentures outstanding (prospectus with full description of the business as of 
December 18th, 1967 and the debenture terms will be sent you upon request) which have one unusual feature in 
that if I, or an entity controlled by me, is not the largest shareholder of DRC, the debentureholders have the right 
to present their debentures for payment by the company at par.
Thus, DRC has tangible net assets of about $11.50 - $12.00 per share, an excellent operating business and 
substantial funds available for reinvestment in other operating businesses. On an interim basis, such funds will 
be employed in marketable securities.
Berkshire Hathaway Inc. has 983,582 shares outstanding, of which BPL owns 691,441. B-H has three main 
operating businesses, the textile operation, the insurance operation (conducted by National Indemnity Company 
and National Fire & Marine Insurance Company, which will be collectively called the insurance company) and 
the Illinois National Bank and Trust Company of Rockford, Illinois. It also owns Sun Newspapers Inc, Blacker 
Printing Company and 70% of Gateway Underwriters, but these operations are not financially significant 
relative to the total. 
The textile operation presently employs about $16 per share in capital and, while I think it has made some 
progress relative to the textile industry generally, cannot be judged a satisfactory business. Its return on capital 
has not been sufficient to support the assets employed in the business and, realistically, an adequate return has 
less than an even chance of being averaged in the future. It represents the best segments of the business that 
existed when we purchased control four and one-half years ago. Capital from the other segments has been 
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successfully redeployed - first, on an interim basis into marketable securities and, now on a permanent basis into 
insurance and banking. I like the textile operating people - they have worked hard to improve the business under 
difficult conditions - and, despite the poor return, we expect to continue the textile operation as long as it 
produces near current levels.
The insurance operation (of which B-H owns virtually 100%) and the bank (where B-H owns 97.7%) present a 
much happier picture. Both are first-class businesses, earning good returns on capital and stacking up well on 
any absolute or comparative analysis of operating statistics. The bank has about $17 per share of net tangible 
assets applicable to B-H, and the insurance company approximately $15. I would estimate their normal current 
earning power to be about $4 per share (compared to about $3.40 from operations pro-forma in 1968), with good 
prospects for future growth on the combined $32 of tangible net assets in the bank and insurance company. 
Adding in the textile business and miscellaneous assets, and subtracting parent company bank debt of about $7 
million, gives a tangible net asset value of about $43 per share for B-H, or about $45 stated book value, allowing 
for the premium over tangible assets paid for the bank.
One caveat - when I talk above of tangible net assets. I am valuing the $75 million of bonds held by the 
insurance company and bank at amortized cost. This is in accord with standard accounting procedures used in 
those industries and also in accord with the realities of their business operations where it is quite unlikely that 
bonds will have to be sold before maturity. At today's historically low bond prices, however, our bonds have a 
market value substantially below carrying value, probably on the order of $10 per share of B-H stock.
Between DRC and B-H, we have four main operating businesses with three of them in my opinion, definitely 
first class by any of the usual standards of evaluation. The three excellent businesses are all run by men over 
sixty who are largely responsible for building each operation from scratch. These men are hard working, 
wealthy, and good – extraordinarily good. Their age is a negative, but it is the only negative applicable to them. 
One of the reasons I am happy to have a large segment of my capital in B-H and DRC is because we have such 
excellent men in charge of the operating businesses.
We have various annual reports, audits, interim reports, proxy materials prospectuses, etc… applicable to our 
control holdings and we will be glad to supply you with any item you request. I also solicit your written 
questions and will send to all partners the questions and answers shortly before yearend. Don't hesitate to ask 
any question at all that comes to mind - if it isn't clear to you, it probably isn't clear to others - and there is no 
reason for any of you to be wondering about something that I might clear up.
DRC and B-H presently pay no dividends and will probably pay either no dividends or very modest dividends 
for some years to come. There are a number of reasons for this. Both parent companies have borrowed money -
we want to maintain a good level of protection for depositors at the bank and policyholders at the insurance 
company - some of the operating companies have very satisfactory ways to utilize additional capital - and we are 
hopeful of finding new businesses to both diversify and augment our earning power.
My personal opinion is that the intrinsic value of DRC and B-H will grow substantially over the years. While no 
one knows the future, I would be disappointed if such growth wasn't at a rate of approximately 10% per annum. 
Market prices for stocks fluctuate at great amplitudes around intrinsic value but, over the long term, intrinsic 
value is virtually always reflected at some point in market price. Thus, I think both securities should be very 
decent long-term holdings and I am happy to have a substantial portion of my net worth invested in them. You 
should be unconcerned about short-term price action when you own the securities directly, just as you were 
unconcerned when you owned them indirectly through BPL. I think about them as businesses, not “stocks”, and 
if the business does all right over the long term, so will the stock.
I want to stress that I will not be in a managerial or partnership status with you regarding your future holdings of 
such securities. You will be free to do what you wish with your stock in the future and so, of course, will I. I 
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think that there is a very high probability that I will maintain my investment in DRC and B-H for a very long 
period, but I want no implied moral commitment to do so nor do so nor do I wish to advise others over an 
indefinite future period regarding their holdings. The companies, of course, will keep all shareholders advised of 
their activities and you will receive reports as issued by them, probably on a semi-annual basis. Should I 
continue to hold the securities, as I fully expect to do, my degree of involvement in their activities may vary 
depending upon my other interests. The odds are that I will take an important position on matters of policy, but I 
want no moral obligation to be other than a passive shareholder, should my interests develop elsewhere.
We presently plan to make the initial BPL cash distribution on January 5th, which will now come to at least 
64% of January 1, 1969 capital less any distributions (including monthly payments) you have received from us 
since January 1, 1969. There is now pending a public offering, headed by Merrill, Lynch, Pierce, Fenner & 
Smith, of our Blue Chip Stamps holdings which, if completed this month as expected, should bring the figure to 
at least 70%.
If you wish Bill and me to give you our ideas regarding bonds in March, you should purchase U.S. Treasury 
Bills maturing in late March with the applicable portion of the January 5th distribution. Then advise us in the 
last week of February of the amount you wish to invest in bonds and we will let you know our thoughts.
About the middle of January (as soon as the exact amounts are figured and shares are received from the Transfer 
Agent after having been registered in your name) we will distribute the DRC and B-H stock applicable to your 
partnership interest and subsequently advise you of your tax basis and acquisition date attributable to the stock. 
Such shares will be "legended" as described in the enclosed letter from Monen, Seidler & Ryan. These stock 
certificates are valuable and should be kept in a safe place.
In past letters I had expressed the hope that BPL could supply a mechanism whereby you could, if you wished, 
automatically convert your DRC and B-H to cash. I have had two law firms consider extensively the status of 
these shares in your hands following the liquidation and the accompanying letters (which should be saved and 
kept with the shares) give their conclusions. As you can see, it is not an area that produces simple, clear-cut 
guidelines. I see no prudent way to implement the alternatives I had previously been considering. Therefore, you 
must follow the guidelines they set forth if you wish to dispose of your shares. As you probably realize, the 
restrictions on subsequent sale apply more severely to Susie and me (because of my continued "insider" 
position) than they probably do to you. Substantial quantities of securities often are sold via the "private sale" 
option described in paragraph (3) of the opinion. If the rules become clearer or more simplified in the future, I 
will be sure to let you know.
At the time of distribution of DRC and B-H, I will advise you of the values applied to such shares at 1969 
yearend. You will receive our audit and tax letter about the end of January. It presently appears that sale of our 
Blue Chip shares and a substantial increase in value of DRC and B- H will bring our overall gain for the year to 
slightly over 6%.
My next letter will be in late December, summarizing the questions and answers regarding DRC and B-H. and 
also supplying a final estimate on the January 5th cash distribution.
Warren E. Buffett
WEBI glk 
Enclosures: 
Legal opinion. Monen, Seidler & Ryan 
Concurring opinion, Munger, Tolles. Hills & Rickershauser 1968 Annual Report. Berkshire Hathaway. Inc. 
1969 Semi-Annual Report. Berkshire Hathaway. Inc. 
April 3. 1969 letter to Shareholders. Berkshire Hathaway. Inc. 1968 Annual Report. Diversified Retailing 
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Company. Inc. 
Financial information regarding Associated Retail Stores. Inc. Financial information regarding Illinois National 
Bank & Trust Co. 1969 Best's Report. National Indemnity Company 
1969 Best's Report. National Fire & Marine Insurance Company 
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
December 26, 1969 
To My Partners: 
Our plans regarding the initial cash distribution have been finalized and we expect to mail to you on January 3rd 
a check dated January 5th
, 1970 for approximately 64% of your January 1st. 1969 capital, less any distributions 
made to you (including monthly payments) since January 1st. 1969. If you have taken no monthly payments 
during 1969, there will be a small interest adjustment in your favor; if you have had loans from BPL, there will 
be an interest charge. I couldn't be more delighted about the action of the bond and stock markets from the 
standpoint of the timing of our liquidation. I believe practically all partners - whether they would have invested 
in bonds or stocks - will be far better off receiving the cash now than if we had liquidated at the end of last year. 
Those seeking income will receive about 40% more after tax on the same principal investment than they would 
have achieved only a year ago at what then seemed like generous yields.
Our tax picture is virtually complete and it appears that you will have ordinary income (dividends plus interest 
income less ordinary loss) for Federal tax purposes of about 3 –3/4% of your January 1st. 1969 capital (item 1 in 
enclosed letter), no significant long-term capital gain or loss, and a short-term capital loss of about 8-1/2% of 
your January 1st, 1969 unrealized appreciation (item 3). These estimates are just rough approximations -
definitive figures will reach you in early February.
The sale of our 371,400 shares of Blue Chip Stamps was not completed in 1969. When the stock went into 
registration, it was selling at about $24 per share. The underwriters indicated a range where they expected to 
offer our shares (along with others) with heavy weight placed on a comparison with Sperry & Hutchinson. 
Shortly before the stock was to be offered, with the Dow-Jones Industrials much lower but S & H virtually 
unchanged, they indicated a price below their former range. We reluctantly agreed and felt we had a deal but, on 
the next business day, they stated that our agreed price was not feasible. We then withdrew and a much smaller 
offering was done.
I intend to hold our block of Blue Chip Stamps in BPL for a more advantageous disposal or eventual distribution 
to our partners. The odds are decent that we will do better in this manner -even if it takes a year or two - than if 
we had participated in a very large sale into a somewhat distressed market. Unless there is a material change in 
the market in the next few days, I plan to value our Blue Chip holdings at yearend at the price received by 
selling shareholders on the public offering after underwriting discount and expenses.
Various questions have been asked pursuant to the last letter:
1. If we are not getting a good return on the textile business of Berkshire Hathaway Inc., why do we 
continue to operate it?
Pretty much for the reasons outlined in my letter. I don't want to liquidate a business employing 1100 people 
when the Management has worked hard to improve their relative industry position, with reasonable results, 
and as long as the business does not require substantial additional capital investment. I have no desire to 
trade severe human dislocations for a few percentage points additional return per annum. Obviously, if we 
faced material compulsory additional investment or sustained operating losses, the decision might have to be 
different, but I don't anticipate such alternatives.
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2. How large is our investment in Sun Newspapers, etc., and do we intend to expand in the newspaper, 
radio and TV business?
The combined investment in Sun, Blacker Printing and Gateway Underwriters is a little over $1 per share of 
Berkshire Hathaway, and earns something less than 10 cent per share. We have no particular plans to 
expand in the communication field.
3. What does Gateway Underwriters do?
Gateway Underwriters serves primarily as a General Agent for National Indemnity Company in the State of 
Missouri.
4. Are there good "second men" to take over from the men running the three excellent operating 
businesses?
In any company where the founder and chief driving force behind the enterprise is still active, it is very 
difficult to evaluate "second men". The only real way to see how someone is going to do when running a 
company is to let him run it. Some of our businesses have certainly been more "one-man shows" than the 
typical corporation. Subject to the foregoing caveat, I think that we do have some good “second men” 
coming along.
5. In what area do you plan to invest the cash in Diversified Retailing Company and do you intend to stick 
primarily to the retailing field?
While we prefer the retailing field, we do not preclude anything that will make sense. We have been looking 
without success for two years for an intelligent acquisition for DRC, so we are not about to rule out any 
industry, if the business looks good. Pending such time as we find one or more operating businesses to buy, 
the money will be invested in marketable securities.
6. Why didn't DRC payout the money it received on the sale of Hochschild, Kohn & Company?
In addition to the fact that such a payment would constitute a dividend, taxable in significant part as 
ordinary income, there are restrictions in the bond indenture which prevent such a pay-out without turning 
over control of the company to the bondholders.
7. Will distribution of the DRC stock cause the DRC debentures to be called?
After distribution of the stock, I will be the largest stockholder in DRC and, hence, the call provision will 
not apply.
8. How would we know if the DRC debentures were called?
All stockholders and debenture holders would find out directly from the company through regular or special 
reports that the company issues to its security holders. There is no intention at all of calling the debentures.
9. Why did you not register our Berkshire Hathaway and Diversified Retailing shares so that the stock, 
when received by the partners, would be freely marketable?
We considered this possibility but rejected it for both practical and legal considerations. I will just discuss 
the practicalities, since they would independently dictate the decision we made.
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There is presently no existing market for Diversified Retailing, and our holdings of Berkshire Hathaway are 
probably four or five times the present floating supply of this stock. An attempt to quickly buy or sell a few 
thousand shares can easily move BH stock several points or more. We own 691,441 shares. Were we to 
distribute these stocks to you via a registration without an underwriting, and with the possibility that a 
substantial portion would be offered for sale by many sellers operating individually but virtually 
simultaneously, there is a real likelihood, particularly in a stock market environment such as we have seen 
recently, that the market for these two stocks would be little short of chaotic. It has not seemed to me that 
this was the kind of situation with which I should leave you, both from the standpoint of the price level 
which might prevail, as well as for the reason that different partners might well have to liquidate at widely 
varying price levels. The more sophisticated partners might have an important edge on the less sophisticated 
ones, and I believe many partner’s might have no chance to realize the prices I anticipate using for yearend 
valuation. This would rightly seem most unfair to you, since I would have received some allocation of 1969 
BPL profits based upon these yearend valuations. If the markets were to become distressed, I would 
probably come in for criticism, whether I personally bought at lower prices or, perhaps more so, if I 
refrained from buying.
Were we to attempt to sponsor an underwriting in connection with a registration for those partners who 
might wish to sell, there would be, in my opinion, the likelihood that the result would still be far less than 
satisfactory. We have just been around this track with our holdings of Blue Chip Stamps, where we watched 
the price of our stock go from 24 to 16-1/2 after announcement of the underwriting, of which we originally 
were to be a part. I did not want this sort of result for the partners with respect to their holdings of Berkshire 
and Diversified.
It is my belief that, by confining sales to private placements, those partners who wish to sell will realize 
more for their stock (with the sophisticated partners having no marketing edge on the less knowledgeable) 
than would be achieved, through an underwriting at this time. Also, the stock should be more likely to find 
its way into the hands of long-term investment-minded holders, which should mean less volatile markets in 
the future. We have had several phone calls from persons indicating that they wish to make private sales -
we anticipate there will be no difficulty in effectuating such sales at prices related to our yearend valuations.
Those partners who would prefer an underwritten distribution always have the option of having a 
registration of their own. I will be glad to facilitate this by placing all partners in touch with each other who 
indicate to me their desire to sell via a registered underwriting, at their expense and through an underwriter 
of their choice. In this way the expense of an underwriting, which can be considerable, would be borne by 
the selling partners and not by the partners as a whole.
I have also had partners ask if they could participate in a registered offering in the future if I should sell 
shares in this manner. I think it is almost certain I will never sell stock via public offering but, should it ever 
happen, I will be glad to let any of you participate in any underwritten offering in which I might be 
involved. In all probability, if it ever did happen, your stock would already be “free”, although mine would 
still be restricted. I cannot make the same commitment to you regarding any private sale I might make in the 
future, just as I can't expect you to restrict any sale options you might have in order to include me.
10. Will you let us know if you sell your holdings of BH or DRC?
You would undoubtedly know from corporate communications, reports in the press and reports to 
Government agencies if I disposed of my holdings. I have no intention at all of doing so in the foreseeable 
future - I merely make no commitment not to. However, former BPL partners will have no priority over 
other BH or DRC security holders in obtaining information relating to their corporate activities.
11. Should I hold my BH or DRC stock?
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I can’t give you the answer on this one. All I can say is that I’m going to do so and I plan to buy more. I am 
very happy to have a material portion of my net worth invested in these companies on a long term basis. 
Obviously, I think they will be worth significantly more money five or ten years hence. Compared to most 
stocks, I think there is a low risk of loss. I hope their price patterns follow a rather moderate range related to 
business results rather than behaving in a volatile manner related to speculative enthusiasm or depression. 
Obviously, I cannot control the latter phenomena, but there is no intent to "promote" the stocks a la much of 
the distasteful general financial market activity of recent years.
12. Can I give either BH or DRC shares to my wife or children?
We are advised by counsel that this is permissible but, of course the same restrictions on transfer that 
applied to you would apply to the donee of the gift.
13. Why are you waiting until March to give us your suggestions regarding bonds?
January and February promise to be very busy months. Many partners may want to talk to me about their 
questions and objectives regarding bonds. I want to have all important BPL matters out of the way before I 
talk with any of them on an individual basis. I make no forecasts regarding the bond market (or stock 
market) - it may be higher or lower in March than now. After my October letter, several partners became 
very eager to buy bonds immediately - to date they are much better off by waiting. The excellent quality tax￾free bonds I talked about at that time with yields of 6 -1/2% can now be bought to yield about 7%.
Cordially,
Warren E. Buffett
WEB/glk 
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BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
TELEPHONE 042-4110
February 25th, 1970 
To My Partners: 
This letter will attempt to provide a very elementary education regarding tax-exempt bonds with emphasis on 
the types and maturities of bonds which we expect to help partners in purchasing next month. If you expect to 
use our help in the purchase of bonds, it is important that you carefully read (and, if necessary , reread) this letter 
as it will serve as background for the specific purchases I suggest. If you disagree with me as to conclusions 
regarding types of bonds or maturities (and you would have been right and I would have been wrong if you had 
disagreed with me on the latter point either one or two years ago), you may well be correct, but we cannot be of 
assistance to you in the purchase of bonds outside our area. We will simply have our hands full concentrating in 
our recommended area, so will be unavailable to assist or advise in the purchase of convertible bonds, corporate 
bonds or short term issues. 
I have tried to boil this letter down as much as possible. Some of it will be a little weighty - some a little over￾simplified. I apologize for the shortcomings in advance. I have a feeling I am trying to put all the meat of a 100 
page book in 10 pages - and have it read like the funny papers.
*************
I am sure you understand that our aid in the purchase of bonds will involve no future assistance regarding either 
these specific bonds or general investment decisions. I want to be available at this time to be of help because of 
the unusual amount of cash you have received in one distribution from us. I have no desire to be in the 
investment counseling business, directly or indirectly, and will not be available for discussion of financial 
matters after March 31st.
*************
The mechanics of Tax-Free Bonds.
For those who wish our help, we will arrange the purchase of bonds directly from municipal bond dealers 
throughout the country and have them confirm sale of the bonds directly to you. The confirmation should be 
saved as a basic document for tax purposes. You should not send a check to the bond dealer since he will deliver 
the bonds to your bank, along with a draft which the bank will pay by charging your account with them. In the 
case of bonds purchased in the secondary market (issues already outstanding), this settlement date will usually 
be about a week after confirmation date whereas, on new issues, the settlement date may be as much as a month 
later. The settlement date is shown plainly on the confirmation ticket (in the case of new issues this will be the 
second and final ticket rather than the preliminary "when issued" ticket), and you should have the funds at your 
bank ready to pay for the bonds on the settlement date. If you presently own Treasury Bills, they can be sold on 
a couple of days notice by your bank upon your instructions, so you should experience no problems in having 
the money available on time. Interest begins to accrue to you on the settlement date, even if the bond dealer is 
late in getting them delivered to your bank.
Bonds will be delivered in negotiable form (so-called "bearer" form which makes them like currency) with 
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coupons attached. Usually the bonds are in $5,000 denominations and frequently they can be exchanged for 
registered bonds (sometimes at considerable expense and sometimes free-it depends upon the terms). Bonds in 
registered form are nonnegotiable without assignment by you, since you are the registered owner on the Transfer 
Agent's books. Bonds trade almost exclusively on a bearer basis and it is virtually impossible to sell registered 
bonds without converting them back into bearer form. Thus, unless you are going to own great physical 
quantities of bonds. I recommend keeping bonds in bearer form. This means keeping them in a very safe place 
and clipping the coupons every six months. Such coupons, when clipped, can be deposited in your bank account 
just like checks. If you have $250,000 in bonds, this probably means about fifty separate pieces of paper ($5,000 
denominations) and perhaps six or eight trips a year to the safe deposit section to cut and deposit coupons.
It is also possible to open a custody account with a bank where, for a fairly nominal cost, they will keep the 
bonds, collect the interest and preserve your records for you. For example, a bank will probably perform the 
custodial service for you for about $200 a year on a $250,000 portfolio. If you are interested in a custodial 
account, you should talk to a Trust Officer at your commercial bank as to the nature of their services and cost. 
Otherwise, you should have a safe deposit box.
Taxation 
The interest received upon the deposit of coupons from tax-free bonds is, of course, free from Federal Income 
Taxes. This means if you are at a 30% top Federal Income Tax bracket, a 6% return from tax-free bonds is 
equivalent to about 8-1/2% from taxable bonds. Thus, for most of our partners, excluding minors or some retired 
people, tax-free bonds will be more attractive than taxable bonds. For people with little or no income from 
wages or dividends, but with substantial capital, it is possible that a combination of taxable bonds (to bring 
taxable income up to about the 25% or 30% bracket) plus tax-free bonds will bring the highest total after-tax 
income. Where appropriate, we will work with you to achieve such a balance.
The situation in respect to State Income Taxes is more complicated. In Nebraska. where the State Income Tax is 
computed as a percentage of the Federal Income Tax, the effect is that there is no state tax on interest from tax￾free bonds. My understanding of both the New York and California law is that tax-free bonds of entities within 
the home state are not subject to State Income Tax, but tax-free bonds from other states are subject to the local 
State Income Tax. I also believe that the New York City Income Tax exempts tax-free bonds of entities based 
within the State of New York, but taxes those from other states. I am no expert on state income taxes and make 
no attempt to post myself on changes taking place within the various states or cities. Therefore, I defer to your 
local tax advisor, but simply mention these few general impressions so that you will be alert to the existence of a 
potential problem. In Nebraska there is no need to have any local considerations enter into the after-tax 
calculation. Where out-of-state issues are subject to local taxation, the effective cost of your State or Municipal 
Income Tax is reduced by the benefit received from deducting it on your Federal Income Tax return. This, of 
course, varies with the individual. Additionally, in some states there are various taxes on intangible property 
which may apply to all tax-free bonds or just those of out-of-state entities. There are none of these in Nebraska, 
but I cannot advise on the other states.
When bonds are bought at a discount from par and later are sold or mature (come due and get paid), the 
difference between the proceeds and cost is subject to capital gain or loss treatment. (There are minor exceptions 
to this statement as, unfortunately, there are to most general statements on investments and taxes but they will be 
pointed out to you should they affect any securities we recommend). This reduces the net after-tax yield by a 
factor involving the general rate of future capital gains taxes and the specific future tax position of the 
individual. Later on, we will discuss the impact of such capital gains taxes in calculating the relative
attractiveness of discount bonds versus "full coupon" bonds.
Finally, one most important point. Although the law is not completely clear, you should probably not 
contemplate owning tax-free bonds if you have, or expect to have, general purpose bank or other indebtedness. 
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The law excludes the deductibility of interest on loans incurred or continued to purchase or carry tax-free bonds, 
and the interpretation of this statute will probably tend to be broadened as the years pass. For example, my 
impression is that you have no problem if you have a mortgage against real property (unless the debt was 
incurred in order to acquire municipal bonds) in deducting the mortgage interest on your Federal Tax return, 
even though you own tax-free bonds at the same time. However, I believe that if you have a general bank loan, 
even though the proceeds were directly used to purchase stocks, a handball court, etc. and the tax-free bonds are 
not used for security for the loan, you are asking for trouble if you deduct the interest and, at the same time, are 
the owner of tax-free bonds. Therefore, I would pay off bank loans before owning tax-free bonds, but I leave 
detailed examination of this question to you and your tax advisor. I merely mention it to make you aware of the 
potential problem.
Marketability
Tax-free bonds are materially different from common stocks or corporate bonds in that there are literally 
hundreds of thousands of issues, with the great majority having very few holders. This substantially inhibits the 
development of close, active markets. Whenever the City of New York or Philadelphia wants to raise money it 
sells perhaps twenty, thirty or forty non-identical securities, since it will offer an issue with that many different 
maturities. A 6% bond of New York coming due in 1980 is a different animal from a 6% bond of New York 
coming due in 1981. One cannot be exchanged for the other, and a seller has to find a buyer for the specific item 
he holds. When you consider that New York may offer bonds several times a year, it is easy to see why just this 
one city may have somewhere in the neighborhood of 1,000 issues outstanding. Grand Island, Nebraska may 
have 75 issues outstanding. The average amount of each issue might be $100,000 and the average number of 
holders may be six or eight per issue. Thus, it is absolutely impossible to have quoted markets at all times for all 
issues and spreads between bids and offers may be very wide. You can't set forth in the morning to buy a 
specific Grand Island issue of your choosing. It may not be offered at any price, anywhere, and if you do find 
one seller, there is no reason why he has to be realistic compared to other offerings of similar quality. On the 
other hand, there are single issues such as those of the Ohio Turnpike, Illinois Turnpike, etc. that amount to 
$200 million or more and have thousands of bondholders owning a single entirely homogeneous and 
interchangeable issue. Obviously, here you get a high degree of marketability.
My impression is that marketability is generally a function of the following three items, in descending order of 
importance: (1) the size of the particular issue; (2) the size of the issuer (a $100,000 issue of the State of Ohio 
will be more marketable than a $100,000 issue of Podunk, Ohio); and (3) the quality of the issuer. By far the 
most sales effort goes into the selling of new issues of bonds. An average of over $200 million per week of new 
issues comes up for sale, and the machinery of bond distribution is geared to get them sold, large or small. In my 
opinion, there is frequently insufficient differential in yield at time of issue for the marketability differences that 
will exist once the initial sales push is terminated. We have frequently run into markets in bonds where the 
spread between bid and asked prices may get to 15%. There is no need to buy bonds with the potential for such 
grotesque markets (although the profit spread to the dealer who originally offers them is frequently wider than 
on more marketable bonds) and we will not be buying them for you. The bonds we expect to buy will usually 
tend to have spreads (reflecting the difference between what you would pay net for such bonds on purchase and 
receive net on sale at the same point in time) of from 2% to 5%. Such a spread would be devastating if you 
attempted to trade in such bonds, but I don't believe it should be a deterrent for a long-term investor. The real 
necessity is to stay away from bonds of very limited marketability - which frequently are the type local bond 
dealers have the greatest monetary incentive to push.
Specific Areas of Purchase
We will probably concentrate our purchases in the following general areas:
(1) Large revenue-producing public entities such as toll roads, electric power districts, water districts, etc. 
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Many of these issues possess high marketability, are subject to quantitative analysis, and sometimes 
have favorable sinking fund or other factors which tend not to receive full valuation in the market place.
(2) Industrial Development Authority bonds which arise when a public entity holds title to property leased 
to a private corporation. For example, Lorain, Ohio holds title to an $80 million project for U.S. Steel 
Corp. The Development Authority Board issued bonds to pay for the project and has executed a net and 
absolute lease with U.S. Steel to cover the bond payments. The credit of the city or state is not behind 
the bonds and they are only as good as the company that is on the lease. Many top-grade corporations 
stand behind an aggregate of several billion dollars of these obligations, although new ones are being 
issued only in small amounts ($5 million per project or less) because of changes in the tax laws. For a 
period of time there was a very substantial prejudice against such issues, causing them to sell at yields 
considerably higher than those commensurate with their inherent credit standing. This prejudice has 
tended to diminish, reducing the premium yields available, but I still consider it a most attractive field. 
Our insurance company owns a majority of its bonds in this category.
(3) Public Housing Authority Issues for those of you who wish the very highest grade of tax-free bonds. In 
effect, these bonds bear the guarantee of the U.S. Government, so they are all rated AAA. In states 
where local taxes put a premium on buying in-state issues, and I can’t fill your needs from (1) and (2) , 
my tendency would be to put you into Housing Authority issues rather than try to select from among 
credits that I don't understand. If you direct me to buy obligations of your home state, you should expect 
substantial quantities of Housing Authority issues. There is no need to diversify among such issues, as 
they all represent the top credit available.
(4) State obligations of a direct or indirect nature.
You will notice I am not buying issues of large cities. I don't have the faintest idea how to analyze a New York 
City, Chicago, Philadelphia, etc. (a friend mentioned the other day when Newark was trying to sell bonds at a 
very fancy rate that the Mafia was getting very upset because Newark was giving them a bad name). Your 
analysis of a New York City - and I admit it is hard to imagine them not paying their bills for any extended 
period of time - would be as good as mine. My approach to bonds is pretty much like my approach to stocks. If I 
can't understand something, I tend to forget it. Passing an opportunity which I don't understand - even if 
someone else is perceptive enough to analyze it and get paid well for doing it - doesn't bother me. All I want to 
be sure of is that I get paid well for the things I do feel capable of handling - and that I am right when I make 
affirmative decisions.
We will probably tend to purchase somewhere between five and ten issues for most of you. However, if you 
wish to limit me to your home state, it may be fewer issues - and perhaps those will only be Housing 
Authorities. We will try not to buy in smaller than $25,000 pieces and will prefer larger amounts where 
appropriate. Smaller lots of bonds are usually penalized upon resale, sometimes substantially. The bond 
salesman doesn't usually explain this to you when you buy the $10,000 of bonds from him, but it gets explained 
when you later try to sell the $10,000 to him. We may make exceptions where we are buying secondary market 
issues in smaller pieces - but only if we are getting an especially good price on the buy side because of the small 
size of the offering.
Callable Bonds
We will not buy bonds where the issuer of the bonds has a right to call (retire) the bonds on a basis which 
substantially loads the contract in his favor. It is amazing to me to see people buy bonds which are due in forty 
years, but where the issuer has the right to call the bonds at a tiny premium in five or ten years. Such a contract 
essentially means that you have made a forty year deal if it is advantageous to the issuer (and disadvantageous to 
you) and a five year deal if the initial contract turns out to be advantageous to you (and disadvantageous to the 
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issuer). Such contracts are really outrageous and exist because bond investors can't think through the 
implications of such a contract form and bond dealers don't insist on better terms for their customers. One 
extremely interesting fact is that bonds with very unattractive call features sell at virtually the same yield as 
otherwise identical bonds which are noncallable.
It should be pointed out that most Nebraska bonds carry highly unfair call provisions. Despite this severe 
contractual disadvantage, they do not offer higher yields than bonds with more equitable terms.
One way to avoid this problem is to buy bonds which are totally noncallable. Another way is to buy discount 
bonds where the right of the issuer to call the bond is at a price so far above your cost as to render the possible 
call inconsequential. If you buy a bond at 60 which is callable at 103, the effective cost to you of granting the 
issuer the right to prematurely terminate the contract (which is a right you never have) is insignificant. But to 
buy a bond of the Los Angeles Department of Water and Power at 100 to come due at 100 in 1999 or to come 
due at 
104 in 1974, depending on which is to the advantage of the issuer and to your disadvantage, is the height of 
foolishness when comparable yields are available on similar credits without such an unfair contract. 
Nevertheless, just such a bond was issued in October, 1969 and similar bonds continue to be issued every day. I 
only write at such length about an obvious point, since it is apparent from the continual sale of such bonds that 
many investors haven't the faintest notion how this loads the dice against them and many bond salesmen aren't 
about to tell them.
Maturity and the Mathematics of Bonds 
Many people, in buying bonds, select maturities based on how long they think they are going to want to hold 
bonds, how long they are going to live, etc. While this is not a silly approach, it is not necessarily the most 
logical. The primary determinants in selection of maturity should probably be (1) the shape of the yield curve; 
(2) your expectations regarding future levels of interest rates and (3) the degree of quotational fluctuation you 
are willing to endure or hope to possibly profit from. Of course, (2) is the most important but by far the most 
difficult upon which to comment intelligently.
Let's tackle the yield curve first. When other aspects of quality are identical, there will be a difference in interest 
rates paid based upon the length of the bond being offered. For example, a top grade bond being offered now 
might have a yield of 4.75% if it came due in six or nine months, 5.00% in two years, 5.25% in five years, 
5.50% in ten years and 6.25% in twenty years. When long rates are substantially higher than short rates, the 
curve is said to be strongly positive. In the U. S. Government bond market, rates recently have tended to 
produce a negative yield curve; that is, a long term Government bond over the last year or so has consistently 
yielded less than a short term one. Sometimes the yield curve has been very flat, and sometimes it is positive out 
to a given point, such as ten years, and then flattens out. What you should understand is that it varies, often very 
substantially, and that on an historical basis the present slope tends to be in the high positive range. This doesn't 
mean that long bonds are going to be worth more but it does mean that you are being paid more to extend 
maturity than in many periods. If yields remained constant for several years, you would do better with longer 
bonds than shorter bonds, regardless of how long you intended to hold them.
The second factor in determining maturity selection is expectations regarding future rate levels. Anyone who has 
done much predicting in this field has tended to look very foolish very fast. I did not regard rates as unattractive 
one year ago, and I was proved very wrong almost immediately. I believe present rates are not unattractive and I 
may look foolish again. Nevertheless, a decision has to be made and you can make just as great a mistake if you 
buy short term securities now and rates available on reinvestment in a few years are much lower.
The final factor involves your tolerance for quotational fluctuation. This involves the mathematics of bond 
investment and may be a little difficult for you to understand. Nevertheless, it is important that you get a general 
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grasp of the principles. Let's assume for the moment a perfectly flat yield curve and a non-callable bond. Further 
assume present rates are 5% and that you buy two bonds, one due in two years and one due in twenty years. 
Now assume one year later that yields on new issues have gone to 3% and that you wish to sell your bonds. 
Forgetting about market spreads, commissions, etc. , you will receive $1,019.60 for the original two year $1,000 
bond (now with one year to run) and $1,288.10 for the nineteen year bond (originally twenty years). At these 
prices, a purchaser will get exactly 3% on his money after amortizing the premium he has paid and cashing the 
stream of 5% coupons attached to each bond. It is a matter of indifference to him whether to buy your nineteen 
year 5% bond at $1,288.10 or a new 3% bond (which we have assumed is the rate current - one year later) at 
$1,000.00. On the other hand, let's assume rates went to 7%. Again we will ignore commissions, capital gains 
taxes on the discount, etc. Now the buyer will only pay $981.00 for the bond with one year remaining until 
maturity and $791.60 for the bond with nineteen years left. Since he can get 7% on new issues, he is only 
willing to buy your bond at a discount sufficient so that accrual of this discount will give him the same 
economic benefits from your 5% coupon that a 7% coupon at $1,000.00 would give him.
The principle is simple. The wider the swings in interest rates and the longer the bond, the more the value of a 
bond can go up or down on an interim basis before maturity. It should be pointed out in the first example where 
rates went to 3%, our long term bond would only have appreciated to about $1,070.00 if it had been callable in 
five years at par, although it would have gone down just as much if 7% rates had occurred. This just illustrates 
the inherent unfairness of call provisions.
For over two decades, interest rates on tax-free bonds have almost continuously gone higher and buyers of long 
term bonds have continuously suffered. This does not mean it is bad now to buy long term bonds - it simply 
means that the illustration in the above paragraph has worked in only one direction for a long period of time and 
people are much more conscious of the downside risks from higher rates than the upside potential from lower 
ones.
If it is a 50-50 chance as to the future general level of interest rates and the yield curve is substantially positive, 
then the odds are better in buying long term non-callable bonds than shorter term ones. This reflects my current 
conclusion and, therefore, I intend to buy bonds within the ten to twenty-five year range. If you have any 
preferences within that range, we will try to select bonds reflecting such preferences, but if you are interested in 
shorter term bonds, we will not be able to help you as we are not searching out bonds in this area.
Before you decide to buy a twenty year bond, go back and read the paragraph showing how prices change based 
upon changes in interest rates. Of course, if you hold the bond straight through, you are going to get the 
contracted rate of interest, but if you sell earlier, you are going to be subject to the mathematical forces 
described in that paragraph, for better or for worse. Bond prices also change because of changes in quality over 
the years but, in the tax-free area, this has tended to be - and probably will continue to be - a relatively minor 
factor compared to the impact of changes in the general structure of interest rates.
Discount Versus Full Coupon Bonds
You will have noticed in the above discussion that if you now wanted to buy a 7% return on a nineteen year 
bond, you had a choice between buying a new nineteen year bond with a 7% coupon rate or buying a bond with 
a 5% coupon at $791.60, which would pay you $1,000.00 in nineteen years. Either purchase would have yielded 
exactly 7% compounded semi-annually to you. Mathematically, they are the same. In the case of tax-free bonds 
the equation is complicated, however, by the fact that the $70.00 coupon is entirely tax-free to you, whereas the 
bond purchased at a discount gives you tax-free income of $50.00 per year but a capital gain at the end of the 
nineteenth year of $208.40. Under the present tax law, you would owe anything from a nominal tax, if the gain 
from realization of the discount was your only taxable income in the nineteenth year, up to a tax of over $70.00 
if it came on top of very large amounts of capital gain at that time (the new tax law provides for capital gain 
rates of 35%, and even slightly higher on an indirect basis in 1972 and thereafter for those realizing very large 
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gains.) In addition to this, you might have some state taxes to pay on the capital gain.
Obviously, under these circumstances you are not going to pay the $791.60 for the 5% coupon and feel you are 
equally as well off as with the 7% coupon at $1,000.00. Neither is anyone else. Therefore, identical quality 
securities with identical maturities sell at considerably higher gross yields when they have low coupons and are 
priced at discounts than if they bear current high coupons.
Interestingly enough, for most taxpayers, such higher gross yields over-compensate for the probable tax to be 
paid. This is due to several factors. First, no one knows what the tax law will be when the bonds mature and it is 
both natural and probably correct to assume the tax rate will be stiffer at that time than now. Second, even 
though a 5% coupon on a $1,000.00 bond purchased at $791.60 due in nineteen years is the equivalent of a 7% 
coupon on a $1,000.00 bond purchased at par with the same maturity, people prefer to get the higher current 
return in their pocket. The owner of the 5% coupon bond is only getting around 6.3% current yield on his 
$791.60 with the balance necessary to get him up to 7% coming from the extra $208.40 he picks up at the end. 
Finally, the most important factor affecting prices currently on discount bonds (and which will keep affecting 
them) is that banks have been taken out of the market as buyers of discount tax-free bonds by changes brought 
about in bank tax treatment through the 1969 Tax Reform Act. Banks have historically been the largest 
purchasers and owners of tax-free bonds and anything that precludes them from one segment of the market has 
dramatic effects on the supply-demand situation in that segment. This may tend to give some edge to individuals 
in the discount tax-free market, particularly those who are not likely to be in a high tax bracket when the bonds 
mature or are sold.
If I can get a significantly higher effective after-tax yield (allowing for sensible estimates of your particular 
future tax rate possibilities), I intend to purchase discount bonds for you. I know some partners prefer full 
coupon bonds, even though their effective yield is less, since they prefer to maximize the current cash yield and 
if they will so advise me, we will stick to full coupon issues (or very close thereto) in their cases.
Procedure
I intend to be in the office solidly through March (including every Saturday except March 7th) and will be glad 
to see any partner or talk with him by phone. To aid in scheduling, please make an appointment with Gladys (or 
me). The only request I make is that you absorb as much as possible of this letter before we talk. As you can see, 
it would be an enormous problem if I had to explain each item to all of you.
If you decide you want us to help you in buying bonds, you should let us know:
(1) Whether you want to restrict purchases to your home state for local tax reasons;
(2) Whether you want to restrict us to full coupon issues or let us use our judgment as to where you get the 
best value;
(3) Your preference as to maturity in the ten to twenty-five year range or if you prefer to let us use our 
judgment in that area;
(4) How much you want to invest - we may end up several per cent short of the figure you name, but we 
will never go over;
(5) On what bank the bonds should be drafted.
We will advise you by phone or letter as we buy bonds. Bill and John will be doing much of the mechanical 
work. Needless to say, none of us will have any financial interest in any transaction. Should you have any 
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questions regarding the mechanics, please direct them to John or Bill as I will probably be swamped and they 
will be more familiar with specific transactions. After March 31st, I don't expect to be around the office for 
several months. Therefore, if you want to talk things over, come in by then. The completion of all purchases 
may go into April, but Bill will be taking care of this and the mechanics will all be set up.
You should realize that because of the enormous diversity of issues mentioned earlier, it is impossible to say just 
what will be bought. Sometimes the tax-free bond market has more similarities to real estate than to stocks. 
There are hundreds of thousands of items of varying comparability, some with no sellers, some with reluctant 
sellers and some with eager sellers. Which may be the best buy depends on the quality of what is being offered, 
how well it fits your needs and the eagerness of the seller. The standard of comparison is always new issues 
where an average of several hundred million dollars worth have to be sold each week - however, specific 
secondary market opportunities (issues already outstanding) may be more attractive than new issues and we can 
only find out how attractive they are when we are ready to make bids.
Although markets can change, it looks as if we will have no difficulty in getting in the area of 6-1/2% after tax 
(except from Housing Authority issues) on bonds in the twenty-year maturity range.
Cordially,
Warren E. Buffett
WEBI glk
Berkshire Hathaway Letter 1971
To the Stockholders of Berkshire Hathaway Inc.:
It is a pleasure to report that operating earnings in 1971, excluding capital gains, amounted to 
more than 14% of beginning shareholders’ equity. This result—considerably above the average 
of American industry—was achieved in the face of inadequate earnings in our textile operation, 
making clear the benefits of redeployment of capital inaugurated five years ago. It will continue 
to be the objective of management to improve return on total capitalization (long term debt plus 
equity), as well as the return on equity capital. However, it should be realized that merely 
maintaining the present relatively high rate of return may well prove more difficult than was 
improvement from the very low levels of return which prevailed throughout most of the 1960’s.
Textile Operations
We, in common with most of the textile industry, continued to struggle throughout 1971 with 
inadequate gross margins. Strong efforts to hammer down costs and a continuous search for less 
price-sensitive fabrics produced only marginal profits. However, without these efforts we would 
have operated substantially in the red. Employment was more stable throughout the year as our 
program to improve control of inventories achieved reasonable success.
As mentioned last year, Ken Chace and his management group have been swimming against a 
strong industry tide. This negative environment has only caused them to intensify their efforts. 
Currently we are witnessing a mild industry pickup which we intend to maximize with our 
greatly strengthened sales force. With the improvement now seen in volume and mix of business, 
we would expect better profitability—although not of a dramatic nature—from our textile 
operation in 1972.
Insurance Operations
An unusual combination of factors—reduced auto accident frequency, sharply higher effective 
rates in large volume lines, and the absence of major catastrophes—produced an extraordinarily 
good year for the property and casualty insurance industry. We shared in these benefits, although 
they are not without their negative connotations.
Our traditional business—and still our largest segment—is in the specialized policy or non￾standard insured. When standard markets become tight because of unprofitable industry 
underwriting, we experience substantial volume increases as producers look to us. This was the 
condition several years ago, and largely accounts for the surge of direct volume experienced in 
1970 and 1971. Now that underwriting has turned very profitable on an industry-wide basis, 
more companies are seeking the insureds they were rejecting a short while back and rates are 
being cut in some areas. We continue to have underwriting profitability as our primary goal and 
this may well mean a substantial decrease in National Indemnity’s direct volume during 1972. 
Jack Ringwalt and Phil Liesche continue to guide this operation in a manner matched by very 
few in the business.
Our reinsurance business, which has been developed to a substantial operation in just two years 
by the outstanding efforts of George Young, faces much the same situation. We entered the 
reinsurance business late in 1969 at a time when rates had risen substantially and capacity was 
tight. The reinsurance industry was exceptionally profitable in 1971, and we are now seeing rate￾cutting as well as the formation of well-capitalized aggressive new competitors. These lower 
rates are frequently accompanied by greater exposure. Against this background we expect to see 
our business curtailed somewhat in 1972. We set no volume goals in our insurance business 
generally—and certainly not in reinsurance—as virtually any volume can be achieved if 
profitability standards are ignored. When catastrophes occur and underwriting experience sours, 
we plan to have the resources available to handle the increasing volume which we will then 
expect to be available at proper prices.
We inaugurated our “home-state” insurance operation in 1970 by the formation of Cornhusker 
Casualty Company. To date, this has worked well from both a marketing and an underwriting 
standpoint. We have therefore further developed this approach by the formation of Lakeland Fire 
& Casualty Company in Minnesota during 1971, and Texas United Insurance in 1972. Each of 
these companies will devote its entire efforts to a single state seeking to bring the agents and 
insureds of its area a combination of large company capability and small company accessibility 
and sensitivity. John Ringwalt has been in overall charge of this operation since inception. 
Combining hard work with imagination and intelligence, he has transformed an idea into a well 
organized business. The “home-state” companies are still very small, accounting for a little over 
$1.5 million in premium volume during 1971. It looks as though this volume will more than 
double in 1972 and we will develop a more creditable base upon which to evaluate underwriting 
performance.
A highlight of 1971 was the acquisition of Home & Automobile Insurance Company, located in 
Chicago. This company was built by Victor Raab from a small initial investment into a major 
auto insurer in Cook County, writing about $7.5 million in premium volume during 1971. Vic is 
cut from the same cloth as Jack Ringwalt and Gene Abegg, with a talent for operating profitably 
accompanied by enthusiasm for his business. These three men have built their companies from 
scratch and, after selling their ownership position for cash, retain every bit of the proprietary 
interest and pride that they have always had.
While Vic has multiplied the original equity of Home & Auto many times since its founding, his 
ideas and talents have always been circumscribed by his capital base. We have added capital 
funds to the company, which will enable it to establish branch operations extending its highly￾concentrated and on-the-spot marketing and claims approach to other densely populated areas.
All in all, it is questionable whether volume added by Home & Auto, plus the “home-state” 
business in 1972, will offset possible declines in direct and reinsurance business of National 
Indemnity Company. However, our large volume gains in 1970 and 1971 brought in additional 
funds for investment at a time of high interest rates, which will be of continuing benefit in future 
years. Thus, despite the unimpressive prospects regarding premium volume, the outlook for 
investment income and overall earnings from insurance in 1972 is reasonably good.
Banking Operations
Our banking subsidiary, The Illinois National Bank & Trust Company, continued to lead its 
industry as measured by earnings as a percentage of deposits. In 1971, Illinois National earned 
well over 2% after tax on average deposits while (1) not using borrowed funds except for very 
occasional reserve balancing transactions; (2) maintaining a liquidity position far above average; 
(3) recording loan losses far below average; and (4) utilizing a mix of over 50% time deposits 
with all consumer savings accounts receiving maximum permitted interest rates throughout the 
year. This reflects a superb management job by Gene Abegg and Bob Kline.
Interest rates received on loans and investments were down substantially throughout the banking 
industry during 1971. In the last few years, Illinois National’s mix of deposits has moved 
considerably more than the industry average away from demand money to much more expensive 
time money. For example, interest paid on deposits has gone from under $1.7 million in 1969 to 
over $2.7 million in 1971. Nevertheless, the unusual profitability of the Bank has been 
maintained. Marketing efforts were intensified during the year, with excellent results.
With interest rates even lower now than in 1971, the banking industry is going to have trouble 
achieving gains in earnings during 1972. Our deposit gains at Illinois National continue to come 
in the time money area, which produces only very marginal incremental income at present. It 
will take very close cost control to enable Illinois National to maintain its 1971 level of earnings 
during 1972.
Financial
Because of the volume gains being experienced by our insurance subsidiaries early in 1971, we 
re-cast Berkshire Hathaway’s bank loan so as to provide those companies with additional capital 
funds. This financing turned out to be particularly propitious when the opportunity to purchase 
Home & Auto occurred later in the year.
Our insurance and banking subsidiaries possess a fiduciary relationship with the public. We 
retain a fundamental belief in operating from a very strongly financed position so as to be in a 
position to unquestionably fulfill our responsibilities. Thus, we will continue to map our 
financial future for maximum financial strength in our subsidiaries as well as at the parent 
company level.
Warren E. Buffett
Chairman of the Board
March 13, 1972
Ber kshire Hathaway Letter 1972
To the Stockholders of Berkshire Hathaway Inc.:
Operating earnings of Berkshire Hathaway during 1972 amounted to a highly satisfactory 19.8% 
of beginning shareholders’ equity. Significant improvement was recorded in all of our major 
lines of business, but the most dramatic gains were in insurance underwriting profit. Due to an 
unusual convergence of favorable factors—diminishing auto accident frequency, moderating 
accident severity, and an absence of major catastrophes—underwriting profit margins achieved a 
level far above averages of the past or expectations of the future.
While we anticipate a modest decrease in operating earnings during 1973, it seems clear that our 
diversification moves of recent years have established a significantly higher base of normal 
earning power. Your present management assumed policy control of the company in May, 1965. 
Eight years later, our 1972 operating earnings of $11,116,256 represent a return many-fold 
higher than would have been produced had we continued to devote our resources entirely to the 
textile business. At the end of the 1964 fiscal year, shareholders’ equity totaled $22,138,753. 
Since that time, no additional equity capital has been introduced into the business, either through 
cash sale or through merger. On the contrary, some stock has been reacquired, reducing 
outstanding shares by 14%. The increase in book value per share from $19.46 at fiscal year-end 
1964 to $69.72 at 1972 year-end amounts to about 16.5% compounded annually.
Our three major acquisitions of recent years have all worked out exceptionally well—from both 
the financial and human standpoints. In all three cases, the founders were major sellers and 
received significant proceeds in cash—and, in all three cases, the same individuals, Jack 
Ringwalt, Gene Abegg and Vic Raab, have continued to run the businesses with undiminished 
energy and imagination which have resulted in further improvement of the fine records 
previously established.
We will continue to search for logical extensions of our present operations, and also for new 
operations which will allow us to continue to employ our capital effectively.
Textile Operations
As predicted in last year’s annual report, the textile industry experienced a pickup in 1972. In 
recent years, Ken Chace and Ralph Rigby have developed an outstanding sales organization 
enjoying a growing reputation for service and reliability. Manufacturing capabilities have been 
restructured to complement our sales strengths.
Helped by the industry recovery, we experienced some payoff from these efforts in 1972. 
Inventories were controlled, minimizing close-out losses in addition to minimizing capital 
requirements; product mix was greatly improved. While the general level of profitability of the 
industry will always be the primary factor in determining the level of our textile earnings, we 
believe that our relative position within the industry has noticeably improved. The outlook for 
1973 is good.
Insurance Underwriting
Our exceptional underwriting profits during 1972 in the large traditional area of our insurance 
business at National Indemnity present a paradox. They served to swell substantially total 
corporate profits for 1972, but the factors which produced such profits induced exceptional 
amounts of new competition at what we believe to be a non-compensatory level of rates. Over￾all, we probably would have retained better prospects for the next five years if profits had not 
risen so dramatically this year.
Substantial new competition was forecast in our annual report for last year and we experienced 
in 1972 the decline in premium volume that we stated such competition implied. Our belief is 
that industry underwriting profit margins will narrow substantially in 1973 or 1974 and, in time, 
this may produce an environment in which our historical growth can be resumed. Unfortunately, 
there is a lag between deterioration of underwriting results and tempering of competition. During 
this period we expect to continue to have negative volume comparisons in our traditional 
operation. Our seasoned management, headed by Jack Ringwalt and Phil Liesche, will continue 
to underwrite to produce a profit, although not at the level of 1972, and base our rates on long￾term expectations rather than short-term hopes. Although this approach has meant dips in volume 
from time to time in the past, it has produced excellent long-term results.
Also as predicted in last year’s report, our reinsurance division experienced many of the same 
competitive factors in 1972. A multitude of new organizations entered what has historically been 
a rather small field, and rates were often cut substantially, and we believe unsoundly, particularly 
in the catastrophe area. The past year turned out to be unusually free of catastrophes and our 
underwriting experience was good.
George Young has built a substantial and profitable reinsurance operation in just a few years. In 
the longer term we plan to be a very major factor in the reinsurance field, but an immediate 
expansion of volume is not sensible against a background of deteriorating rates. In our view, 
underwriting exposures are greater than ever. When the loss potential inherent in such exposures 
becomes an actuality, repricing will take place which should give us a chance to expand 
significantly.
In the “home state” operation, our oldest and largest such company, Cornhusker Casualty 
Company, operating in Nebraska only, achieved good underwriting results. In the second full 
year, the home state marketing appeal has been proven with the attainment of volume on the 
order of one-third of that achieved by “old line” giants who have operated in the state for many 
decades.
Our two smaller companies, in Minnesota and Texas, had unsatisfactory loss ratios on very small 
volume. The home state managements understand that underwriting profitably is the yardstick of 
success and that operations can only be expanded significantly when it is clear that we are doing 
the right job in the underwriting area. Expense ratios at the new companies are also high, but that 
is to be expected when they are in the development stage.
John Ringwalt has done an excellent job of launching this operation, and plans to expand into at 
least one additional state during 1973. While there is much work yet to be done, the home state 
operation appears to have major long-range potential.
Last year it was reported that we had acquired Home and Automobile Insurance Company of 
Chicago. We felt good about the acquisition at the time, and we feel even better now. Led by Vic 
Raab, this company continued its excellent record in 1972. During 1973 we expect to enter the 
Florida (Dade County) and California (Los Angeles) markets with the same sort of specialized 
urban auto coverage which Home and Auto has practiced so successfully in Cook County. Vic 
has the managerial capacity to run a much larger operation. Our expectation is that Home and 
Auto will expand significantly within a few years.
Insurance Investment Results
We were most fortunate to experience dramatic gains in premium volume from 1969 to 1971 
coincidental with virtually record-high interest rates. Large amounts of investable funds were 
thus received at a time when they could be put to highly advantageous use. Most of these funds 
were placed in tax-exempt bonds and our investment income, which has increased from 
$2,025,201 in 1969 to $6,755,242 in 1972, is subject to a low effective tax rate.
Our bond portfolio possesses unusually good call protection, and we will benefit for many years 
to come from the high average yield of the present portfolio. The lack of current premium 
growth, however, will moderate substantially the growth in investment income during the next 
several years.
Banking Operations
Our banking subsidiary, The Illinois Bank and Trust Co. of Rockford, maintained its position of 
industry leadership in profitability. After-tax earnings of 2.2% on average deposits in 1972 are 
the more remarkable when evaluated against such moderating factors as: (1) a mix of 50% time 
deposits heavily weighted toward consumer savings instruments, all paying the maximum rates 
permitted by law; (2) an unvaryingly strong liquid position and avoidance of money-market 
borrowings; (3) a loan policy which has produced a net charge-off ratio in the last two years of 
about 5% of that of the average commercial bank. This record is a direct tribute to the leadership 
of Gene Abegg and Bob Kline who run a bank where the owners and the depositors can both eat 
well and sleep well.
During 1972, interest paid to depositors was double the amount paid in 1969. We have 
aggressively sought consumer time deposits, but have not pushed for large “money market” 
certificates of deposit although, during the past several years, they have generally been a less 
costly source of time funds.
During the past year, loans to our customers expanded approximately 38%. This is considerably 
more than indicated by the enclosed balance sheet which includes $10.9 million in short-term 
commercial paper in the 1971 loan total, but which has no such paper included at the end of 
1972.
Our position as “Rockford’s Leading Bank” was enhanced during 1972. Present rate structures, a 
decrease in investable funds due to new Federal Reserve collection procedures, and a probable 
increase in already substantial non-federal taxes make it unlikely that Illinois National will be 
able to increase its earnings during 1973.
F inancial
On March 15, 1973, Berkshire Hathaway borrowed $20 million at 8% from twenty institutional 
lenders. This loan is due March 1, 1993, with principal repayments beginning March 1, 1979. 
From the proceeds, $9 million was used to repay our bank loan and the balance is being invested 
in insurance subsidiaries. Periodically, we expect that there will be opportunities to achieve 
significant expansion in our insurance business and we intend to have the financial resources 
available to maximize such opportunities.
Our subsidiaries in banking and insurance have major fiduciary responsibilities to their 
customers. In these operations we maintain capital strength far above industry norms, but still 
achieve a good level of profitability on such capital. We will continue to adhere to the former 
objective and make every effort to continue to maintain the latter.
Warren E. Buffett
Chairman of the Board
March 16, 1973
Berkshire Hathaway Letter 1973
To the Stockholders of Berkshire Hathaway Inc.:
Our financial results for 1973 were satisfactory, with operating earnings of $11,930,592, 
producing a return of 17.4% on beginning stockholders’ equity. Although operating earnings 
improved from $11.43 to $12.18 per share, earnings on equity decreased from the 19.8% of 
1972. This decline occurred because the gain in earnings was not commensurate with the 
increase in shareholders’ investment. We had forecast in last year’s report that such a decline 
was likely. Unfortunately, our forecast proved to be correct.
Our textile, banking, and most insurance operations had good years, but certain segments of the 
insurance business turned in poor results. Overall, our insurance business continues to be a most 
attractive area in which to employ capital.
Management’s objective is to achieve a return on capital over the long term which averages 
somewhat higher than that of American industry generally—while utilizing sound accounting 
and debt policies. We have achieved this goal in the last few years, and are trying to take those 
steps which will enable us to maintain this performance in the future. Prospects for 1974 indicate 
some further decline in rate of return on our enlarged capital base.
Textile Operations
Textile demand remained unusually strong throughout 1973. Our main problems revolved 
around shortages of fiber, which complicated operations and resulted in something less than full 
utilization of loom capacity. Prices of some fibers skyrocketed during the year.
Cost of Living Council regulations prevented the pricing of many finished products at levels of 
some of our competitors. However, profits were reasonably commensurate with our capital 
investment, although below those that apparently might have been achieved had we been able to 
price at market levels. The textile business has been highly cyclical and price controls may have
served to cut down some of the hills while still leaving us with the inevitable valleys.
Because of the extraordinary price rises in raw materials during 1973, which show signs of 
continuing in 1974, we have elected to adopt the “lifo” method of inventory pricing. This method 
more nearly matches current costs against current revenues, and minimizes inventory “profits” 
included in reported earnings. Further information on this change is included in the footnotes to 
our financial statements.
Insurance Operations
During 1973, Jack Ringwalt retired as President of National Indemnity Company after an 
absolutely brilliant record since founding the business in 1940. He was succeeded by Phil 
Liesche who, fortunately for us, possesses the same underwriting and managerial philosophy that 
worked so well for Jack.
Our traditional business, specialized auto and general liability lines conducted through National 
Indemnity Company and National Fire and Marine Insurance Company, had an exceptionally 
fine underwriting year during 1973. We again experienced a decline in volume. Competition was 
intense, and we passed up the chance to match rate-cutting by more optimistic underwriters. 
There currently are faint indications that some of these competitors are learning of the 
inadequacy of their rates (and also of their loss reserves) which may result in easing of market 
pressures as the year develops. If so, we may again experience volume increases.
Our reinsurance operation had a somewhat similar year—good underwriting experience, but 
difficulty in maintaining previous volume levels. This operation, guided by the tireless and well￾directed efforts of George Young, has been a major profit producer since its inception in 1969.
Our “home state” insurance companies made excellent progress in Nebraska and Minnesota, 
with both good growth in volume and acceptable loss ratios. We began operations late in the year 
in Iowa. To date, our big problem has been Texas. In that state we virtually had to start over 
during 1973 as the initial management we selected proved incapable of underwriting 
successfully. The Texas experience has been expensive, and we still have our work cut out for 
us. Overall, however, the home state operation appears to have a promising potential.
Our specialized urban auto operation, Home and Automobile Insurance Company, experienced 
very poor underwriting in Chicago during 1973. It would appear that rates are inadequate in our 
primary Cook County marketing area, although the current energy situation confuses the picture. 
The question is whether possible lowered accident frequency because of reduced driving will 
more than offset continuing inflation in medical and repair costs, as well as jury awards. We 
believe that inflation will hurt us more than reduced driving will help us, but some of our 
competitors appear to believe otherwise.
Home and Auto expanded into Florida and California during the year, but it is too early to know 
how these moves will prove out financially.
A contributing factor in our unsatisfactory earnings at Home and Auto during 1973 was an 
accounting system which was not bringing information to management on a sufficiently timely 
basis.
On the investment side of our insurance operation, we made substantial additional commitments 
in common stocks during 1973. We had significant unrealized depreciation—over $12 million—
in our common stock holdings at year-end, as indicated in our financial statements. Nevertheless, 
we believe that our common stock portfolio at cost represents good value in terms of intrinsic 
business worth. In spite of the large unrealized loss at year-end, we would expect satisfactory 
results from the portfolio over the longer term.
Banking Operations
The Illinois National Bank & Trust Co. of Rockford again had a record year in 1973. Average 
deposits were approximately $130 million, of which approximately 60% were time deposits. 
Interest rates were increased substantially in the important consumer savings area when 
regulatory maximums were raised at mid-year.
Despite this mix heavily weighted toward interest bearing deposits, our operating earnings after 
taxes (including a new Illinois state income tax) were again over 2.1% of average deposits.
We continue to be the largest bank in Rockford. We continue to maintain unusual liquidity. We 
continue to meet the increasing loan demands of our customers. And we continue to maintain our 
unusual profitability. This is a direct tribute to the abilities of Gene Abegg, Chairman, who has 
been running the Bank since it opened its doors in 1931, and Bob Kline, our President.
Merger With Diversified Retailing Company, Inc.
Your Directors have approved the merger of Diversified Retailing Company, Inc. into Berkshire 
Hathaway Inc. on terms involving issuance of 195,000 shares of Berkshire stock for the 
1,000,000 shares of Diversified stock outstanding. Because Diversified and its subsidiaries own 
109,551 shares of Berkshire, the net increase in the number of shares of Berkshire outstanding 
after giving effect to this transaction will not exceed 85,449. Various regulatory approvals must 
be obtained before this merger can be completed, and proxy material will be submitted to you 
later this year so that you may vote upon it.
Diversified Retailing Company, Inc., though subsidiaries, operates a chain of popular-priced 
women’s apparel stores and also conducts a reinsurance business. In the opinion of management, 
its most important asset is 16% of the stock of Blue Chip Stamps.
Blue Chip Stamps
Our holdings of stock in Blue Chip Stamps at year-end amounted to approximately 19% of that 
company’s outstanding shares. Since year-end, we have increased our holdings so that they now 
represent approximately 22.5%: implementation of the proposed merger with Diversified 
Retailing Company, Inc. would increase this figure to about 38.5%.
Our equity in earnings of Blue Chip Stamps became significant for the first time in 1973, and 
posed an accounting question as to just what period’s earnings should be recognized by 
Berkshire Hathaway Inc. as applicable to the financial statements covered by this annual report.
Blue Chip’s fiscal year ends on the Saturday closest to February 28, or two months after the 
fiscal year-end of Berkshire Hathaway Inc. Or, viewed alternatively, their year ends ten months 
prior to Berkshire Hathaway’s. An acceptable accounting choice for us, and one which, if made, 
would not have required an auditor’s disclaimer as to scope, was to recognize in our 1973 
income an equity of $632,000 in Blue Chip’s earnings for their year ended March 3, 1973 with 
regard to the fewer shares of Blue Chip we owned during this earlier period. But such an 
approach seemed at odds with reality, and would have meant a ten month lag each year in the 
future. Therefore, we chose to reflect as 1973 income our equity of $1,008,000 in Blue Chip’s 
earnings based upon unaudited interim earnings through November as publicly reported by Blue 
Chip Stamps and with regard to our shareholdings during 1973. Because we made this choice of 
unaudited but current figures, as opposed to the alternative of audited but far from current 
figures, Peat, Marwick, Mitchell & Co. were unable to express an opinion on our 1973 earnings 
attributable to Blue Chip Stamps.
The annual report of Blue Chip Stamps, which will contain financial statements for the year 
ending March 2, 1974 audited by Price, Waterhouse and Company, will be available in early 
May. Any shareholder of Berkshire Hathaway Inc. who desires an annual report of Blue Chip 
Stamps may obtain it at that time by writing Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 
5801 South Eastern Avenue, Los Angeles, California 90040.
Blue Chip’s trading stamp business has declined drastically over the past year or so, but it has 
important sources of earning power in its See’s Candy Shops subsidiary as well as Wesco 
Financial Corporation, a 54% owned subsidiary engaged in the savings and loan business. We 
expect Blue Chip Stamps to achieve satisfactory earnings in future years related to capital 
employed, although certainly at a much lower level than would have been achieved if the trading 
stamp business had been maintained at anything close to former levels.
Your Chairman is on the Board of Directors of Blue Chip Stamps, as well as Wesco Financial 
Corporation, and is Chairman of the Board of See’s Candy Shops Incorporated. Operating 
management of all three entities is in the hands of first-class, able, experienced executives.
Sun Newspapers, Inc.
In the 1969 annual report we commented on the purchase of Sun Newspapers Inc., a group of 
weekly papers published in the metropolitan Omaha area. Since that time we have not 
commented on their operations in the text of our annual reports, nor have we consolidated their 
financial results since the operation, because of the small investment involved, has been 
“financially insignificant.”
During 1973 it was made quite apparent that such insignificance did not extend to publishing 
quality. On May 7th Sun Newspapers was awarded a Pulitzer Prize for local investigative 
reporting (the first time in history that a weekly had won in this category) for its special section 
of March 30,1972 relating to Boys Town. We reported the extraordinary contrast between 
decreasing services and mounting wealth that had taken place since Father Flanagan’s death in 
1948.
In addition to the Pulitzer Prize, the reporting job also won the Public Service Award of Sigma 
Delta Chi, the national society of professional journalists, as well as seven other national awards.
Our congratulations go to Paul Williams, Editor, and Stan Lipsey, Publisher, as well as the entire 
editorial staff of Sun Newspapers for their achievement, which vividly illustrated that size need 
not be equated with significance in publishing.
Warren E. Buffett
Chairman of the Board
March 29, 1974
Berkshire Hathaway Letter 1974
To the Stockholders of Berkshire Hathaway Inc.:
Operating results for 1974 overall were unsatisfactory due to the poor performance of our 
insurance business. In last year’s annual report some decline in profitability was predicted but 
the extent of this decline, which accelerated during the year, was a surprise. Operating earnings 
for 1974 were $8,383,576, or $8.56 per share, for a return on beginning shareholders’ equity of 
10.3%. This is the lowest return on equity realized since 1970. Our textile division and our bank 
both performed very well, turning in improved results against the already good figures of 1973. 
However, insurance underwriting, which has been mentioned in the last several annual reports as 
running at levels of unsustainable profitability, turned dramatically worse as the year progressed.
The outlook for 1975 is not encouraging. We undoubtedly will have sharply negative 
comparisons in our textile operation and probably a moderate decline in banking earnings. 
Insurance underwriting is a large question mark at this time—it certainly won’t be a satisfactory 
year in this area, and could be an extremely poor one. Prospects are reasonably good for an 
improvement in both insurance investment income and our equity in earnings of Blue Chip 
Stamps. During this period we plan to continue to build financial strength and liquidity, 
preparing for the time when insurance rates become adequate and we can once again 
aggressively pursue opportunities for growth in this area.
Textile Operations
During the first nine months of 1974 textile demand was exceptionally strong, resulting in very 
firm prices. However, in the fourth quarter significant weaknesses began to appear, which have 
continued into 1975.
We currently are operating at about one-third of capacity. Obviously, at such levels operating 
losses must result. As shipments have fallen, we continuously have adjusted our level of 
operations downward so as to avoid building inventory.
Our products are largely in the curtain goods area. During a period of consumer uncertainty, 
curtains may well be high on the list of deferrable purchases. Very low levels of housing starts 
also serve to dampen demand. In addition, retailers have been pressing to cut inventories 
generally, and we probably are feeling some effect from these efforts. These negative trends 
should reverse in due course, and we are attempting to minimize losses until that time comes.
Insurance Underwriting
In the last few years we consistently have commented on the unusual profitability in insurance 
underwriting. This seemed certain eventually to attract unintelligent competition with consequent 
inadequate rates. It also has been apparent that many insurance organizations, major as well as 
minor, have been guilty of significant underreserving of losses, which inevitably produces faulty 
information as to the true cost of the product being sold. In 1974, these factors, along with a high 
rate of inflation, combined to produce a rapid erosion in underwriting results.
The costs of the product we deliver (auto repair, medical payments, compensation benefits, etc.) 
are increasing at a rate we estimate to be in the area of 1% per month. Of course, this increase 
doesn’t proceed in an even flow but, inexorably, inflation grinds very heavily at the repair 
services—to humans and to property—that we provide. However, rates virtually have been 
unchanged in the property and casualty field for the last few years. With costs moving forward 
rapidly and prices remaining unchanged, it was not hard to predict what would happen to profit 
margins.
Best’s, the authoritative voice of the insurance industry, estimates that in 1974 all auto insurance 
premiums in the United States increased only about 2%. Such a growth in the pool of dollars 
available to pay insured losses and expenses was woefully inadequate. Obviously, medical costs 
applicable to people injured during the year, jury awards for pain and suffering, and body shop 
charges for repairing damaged cars increased at a dramatically greater rate during the year. Since 
premiums represent the sales dollar and the latter items represent the cost of goods sold, profit 
margins turned sharply negative.
As this report is being written, such deterioration continues. Loss reserves for many giant 
companies still appear to be understated by significant amounts, which means that these 
competitors continue to underestimate their true costs. Not only must rates be increased 
sufficiently to match the month-by-month increase in cost levels, but the existed expense￾revenue gap must be overcome. At this time it appears that insurors must experience even more 
devastating underwriting results before they take appropriate pricing action.
All major areas of insurance operations, except for the “home state” companies, experienced 
significantly poorer results for the year.
The direct business of National Indemnity Company, our largest area of insurance activity, 
produced an underwriting loss of approximately 4% after several years of high profitability. 
Volume increased somewhat, but we are not encouraging such increases until rates are more 
adequate. At some point in the cycle, after major insurance companies have had their fill of red 
ink, history indicates that we will experience an inflow of business at compensatory rates. This 
operation, headed by Phil Liesche, a most able underwriter, is staffed by highly profit-oriented 
people and we believe it will provide excellent earnings in most future years, as it has in the past.
Intense competition in the reinsurance business has produced major losses for practically every 
company operating in the area. We have been no exception. Our underwriting loss was 
something over 12%—a horrendous figure, but probably little different from the average of the 
industry. What is even more frightening is that, while about the usual number of insurance 
catastrophes occurred during 1974, there really was no “super disaster” which might have 
accounted for the poor figures of the industry. Rather, a condition of inadequate rates prevails, 
particularly in the casualty area where we have significant exposure. Our reinsurance department 
is run by George Young, an exceptionally competent and hardworking manager. He has 
cancelled a great many contracts where prices are totally inadequate, and is making no attempt to 
increase volume except in areas where premiums are commensurate with risk. Based upon 
present rate levels, it seems highly unlikely that the reinsurance industry generally, or we, 
specifically, will have a profitable year in 1975.
Our “home state” companies, under the leadership of John Ringwalt, made good progress in 
1974. We appear to be developing a sound agency group, capable of producing business with 
acceptable loss ratios. Our expense ratios still are much too high, but will come down as the 
operation develops into units of economic size. The Texas problem which was commented upon 
in last year’s report seems to be improving. We consider the “home state” operation one of our 
most promising areas for the future.
Our efforts to expand Home and Automobile Insurance Company into Florida proved disastrous. 
The underwriting loss from operations in that market will come to over $2 million, a very large 
portion of which was realized in 1974. We made the decision to drop out of the Florida market in 
the middle of 1974, but losses in substantial amounts have continued since that time because of 
the term nature of insurance contracts, as well as adverse development of outstanding claims. We 
can’t blame external insurance industry conditions for this mistake. In retrospect, it is apparent 
that our management simply did not have the underwriting information and the pricing 
knowledge necessary to be operating in the area. In Cook County, where Home and Auto’s 
volume traditionally has been concentrated, evidence also became quite clear during 1974 that 
rates were inadequate. Therefore, rates were increased during the middle of the year but 
competition did not follow; consequently, our volume has dropped significantly in this area as 
competitors take business from us at prices that we regard as totally unrealistic.
While the tone of this section is pessimistic as to 1974 and 1975, we consider the insurance 
business to be inherently attractive. Our overall return on capital employed in this area—even 
including the poor results of 1974—remains high. We have made every effort to be realistic in 
the calculation of loss and administrative expense. Because of accruals, this had a double effect 
at both the bank and corporate level in 1974.
Under present money market conditions, we expect bank earnings to be down somewhat in 1975 
although we believe they still are likely to compare favorably with those of practically any 
banking institution in the country.
Blue Chip Stamps
During 1974 we increased our holdings of Blue Chip Stamps to approximately 25.5% of the 
outstanding shares of that company. Overall, we are quite happy about the results of Blue Chip 
and its prospects for the future. Stamp sales continue at a greatly reduced level, but the Blue 
Chip management has done an excellent job of adjusting operating costs. The See’s Candy 
Shops, Inc. subsidiary had an outstanding year, and has excellent prospects for the future.
Your Chairman is on the Board of Directors of Blue Chip Stamps, as well as Wesco Financial 
Corporation, a 64% owned subsidiary, and is Chairman of the Board of See’s Candy Shops, Inc. 
We expect Blue Chip Stamps to be a source of continued substantial earning power for Berkshire 
Hathaway Inc.
The annual report of Blue Chip Stamps, which will contain financial statements for the year 
ended March 1, 1975 audited by Price, Waterhouse and Company, will be available in May. Any 
shareholder of Berkshire Hathaway Inc. who desires an annual report of Blue Chip Stamps may 
obtain it at any time by writing Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South 
Eastern Avenue, Los Angeles, California 90040.
Merger with Diversified Retailing Company, Inc.
As you previously have been informed, the proposed merger with Diversified Retailing 
Company, Inc. was terminated by the respective Boards of Directors on January 28, 1975. We 
continue to view such a merger as eventually desirable, and hope to reopen the subject at some 
future time.
Warren E. Buffett
Chairman of the Board
March 31, 1975
Berkshire Hathaway Letter 1975
To the Stockholders of Berkshire Hathaway Inc.:
Last year, when discussing the prospects for 1975, we stated “the outlook for 1975 is not 
encouraging.” This forecast proved to be distressingly accurate. Our operating earnings for 1975 
were $6,713,592, or $6.85 per share, producing a return on beginning shareholders’ equity of 
7.6%. This is the lowest return on equity experienced since 1967. Furthermore, as explained later 
in this letter, a large segment of these earnings resulted from Federal income tax refunds which 
will not be available to assist performance in 1976.
On balance, however, current trends indicate a somewhat brighter 1976. Operations and 
prospects will be discussed in greater detail below, under specific industry titles. Our expectation 
is that significantly better results in textiles, earnings added from recent acquisitions, an increase 
in equity in earnings of Blue Chip Stamps resulting from an enlarged ownership interest, and at 
least a moderate improvement in insurance underwriting results will more than offset other 
possible negatives to produce greater earnings in 1976. The major variable—and by far the most 
difficult to predict with any feeling of confidence—is the insurance underwriting result. Present 
very tentative indications are that underwriting improvement is in prospect. If such improvement 
is moderate, our overall gain in earnings in 1976 likewise will prove moderate. More significant 
underwriting improvement could give us a major gain in earnings.
Textile Operations
During the first half of 1975 sales of textile products were extremely depressed, resulting in 
major production curtailments. Operations ran at a significant loss, with employment down as 
much as 53% from a year earlier.
In contrast with previous cyclical slumps, however, most textile producers quickly reduced 
production to match incoming orders, thus preventing massive industry-wide accumulation of 
inventories. Such cutbacks caused quite prompt reflection at the mill operating level when 
demand revived at retail. As a result, beginning about midyear business rebounded at a fairly 
rapid rate. This “V” shaped textile depression, while one of the sharpest on record, also became 
one of the shortest ones in our experience. The fourth quarter produced an excellent profit for our 
textile division, bringing results for the year into the black.
On April 28, 1975 we acquired Waumbec Mills Incorporated and Waumbec Dyeing and 
Finishing Co., Inc. located in Manchester, New Hampshire. These companies have long sold 
woven goods into the drapery and apparel trade. Such drapery materials complement and extend 
the line already marketed through the Home Fabrics Division of Berkshire Hathaway. In the 
period prior to our acquisition, the company had run at a very substantial loss, with only about 
55% of looms in operation and the finishing plant operating at about 50% of capacity. Losses 
continued on a reduced basis for a few months after acquisition. Outstanding efforts by our 
manufacturing, administrative and sales people now have produced major improvements, which, 
coupled with the general revival in textiles, have moved Waumbec into a significant profit 
position.
We expect a good level of profits from textiles in 1976. Continued progress is being made in the 
movement of Waumbec goods into areas of traditional marketing strength of Berkshire 
Hathaway, productivity should improve in both the weaving and finishing areas at Manchester, 
and textile demand continues to firm at decent prices.
We have great confidence in the ability of Ken Chace and his team to maximize our strengths in 
textiles. Therefore, we continue to look for ways to increase further our scale of operations while 
avoiding major capital investment in new fixed assets which we consider unwise, considering the 
relatively low returns historically earned on large scale investment in new textile equipment.
Insurance Underwriting
The property and casualty insurance industry had its worst year in history during 1975. We did 
our share—unfortunately, even somewhat more. Really disastrous results were concentrated in 
auto and long-tail (contracts where settlement of loss usually occurs long after the loss event) 
lines.
Economic inflation, with the increase in cost of repairing humans and property far outstripping 
the general rate of inflation, produced ultimate loss costs which soared beyond premium levels 
established in a different cost environment. “Social” inflation caused the liability concept to be 
expanded continuously, far beyond limits contemplated when rates were established—in effect, 
adding coverage beyond what was paid for. Such social inflation increased significantly both the 
propensity to sue and the possibility of collecting mammoth jury awards for events not 
previously considered statistically significant in the establishment of rates. Furthermore, losses to 
policyholders which otherwise would result from mushrooming insolvencies of companies 
inadequately reacting to these problems are divided through Guaranty Funds among remaining 
solvent insurers. These trends will continue, and should moderate any optimism which otherwise
might be justified by the sharply increased rates now taking effect.
Berkshire Hathaway’s insurance subsidiaries have a disproportionate concentration of business 
in precisely the lines which produced the worst underwriting results in 1975. Such lines produce 
unusually high investment income and, therefore, have been particularly attractive to us under 
previous underwriting conditions. However, our “mix” has been very disadvantageous during the 
past two years and it well may be that we will remain positioned in the more difficult part of the 
insurance spectrum during the inflationary years ahead.
The only segment to show improved results for us during 1975 was the “home state” operation, 
which has made continuous progress under the leadership of John Ringwalt. Although still 
operating at a significant underwriting loss, the combined ratio improved from 1974. Adjusted 
for excess costs attributable to operations still in the start-up phase, underwriting results are 
satisfactory. Texas United Insurance Company, a major problem a few years ago, has made 
outstanding progress since George Billing has assumed command. With an almost totally new 
agency force, Texas United was the winner of the “Chairman’s Cup” for achievement of the 
lowest loss ratio among the home state companies. Cornhusker Casualty Company, oldest and 
largest of the home state companies, continues its outstanding operation with major gains in 
premium volume and a combined ratio slightly under 100. Substantial premium growth is 
expected at the home state operation during 1976; the measurement of success, however, will 
continue to be the achievement of a low combined ratio.
Our traditional business at National Indemnity Company, representing well over half of our 
insurance volume, had an extraordinarily bad underwriting year in 1975. Although rates were 
increased frequently and significantly, they continually lagged loss experience throughout the 
year. Several special programs instituted in the early 1970s have caused significant losses, as 
well as a heavy drain on managerial time and energies. Present indications are that premium 
volume will show a major increase in 1976, and we hope that underwriting results will improve.
Reinsurance suffered the same problems as our direct business during 1975. The same remedial 
efforts were attempted. Because reinsurance contract settlements lag those of direct business, it 
well may be that any upturn in results from our direct insurance business will precede those of 
the reinsurance segment.
At our Home and Automobile Insurance Company subsidiary, now writing auto business only in 
the Cook County area of Illinois, experience continued very bad in 1975 resulting in a 
management change in October. John Seward was made President at that time, and has 
energetically and imaginatively implemented a completely revamped underwriting approach.
Overall, our insurance operation will produce a substantial gain in premium volume during 1976. 
Much of this will reflect increased rates rather than more policies. Under normal circumstances 
such a gain in volume would be welcome, but our emotions are mixed at present. Underwriting 
experience should improve—and we expect it to—but our confidence level is not high. While 
our efforts will be devoted to obtaining a combined ratio below 100, it is unlikely to be attained 
during 1976.
Insurance Investments
Gains in investment income were moderate during 1975 because premium volume remained flat 
and underwriting losses reduced funds available for investment. Invested assets, measured at cost 
at yearend, were close to identical with the level at the beginning of the year.
At the end of 1974 the net unrealized loss in the stock section of our portfolio amounted to about 
$17 million, but we expressed the opinion, nevertheless, that this portfolio overall represented 
good value at its carrying value of cost. During 1975 a net capital loss of $2,888,000 before tax 
credits was realized, but our present expectation is that 1976 will be a year of realized capital 
gain. On March 31, 1976 our net unrealized gains applicable to equities amounted to about $15 
million. Our equity investments are heavily concentrated in a few companies which are selected 
based on favorable economic characteristics, competent and honest management, and a purchase 
price attractive when measured against the yardstick of value to a private owner.
When such criteria are maintained, our intention is to hold for a long time; indeed, our largest 
equity investment is 467,150 shares of Washington Post “B” stock with a cost of $10.6 million, 
which we expect to hold permanently.
With this approach, stock market fluctuations are of little importance to us—except as they may 
provide buying opportunities—but business performance is of major importance. On this score 
we have been delighted with progress made by practically all of the companies in which we now 
have significant investments.
We have continued to maintain a strong liquid position in our insurance companies. In last year’s 
annual report we explained how variations of 1/10 of 1% in interest rates result in million dollar 
swings in market value of our bonds. We consider such market fluctuation of minor importance 
as our liquidity and general financial strength make it highly improbable that bonds will have to 
be sold at times other than those of our choice.
Banking
It is difficult to find adjectives to describe the performance of Eugene Abegg, Chief Executive of 
Illinois National Bank and Trust of Rockford, Illinois, our banking subsidiary.
In a year when many banking operations experienced major troubles, Illinois National continued 
its outstanding record. Against average loans of about $65 million, net loan losses were $24,000, 
or .04%. Unusually high liquidity is maintained with obligations of the U. S. Government and its 
agencies, all due within one year, at yearend amounting to about 75% of demand deposits. 
Maximum rates of interest are paid on all consumer savings instruments which make up more 
than $2 million, it consistently has generated favorable earnings. Positioned as we now are with 
respect to income taxes, the addition of a solid source of taxable income is particularly welcome.
General Review
Your present management assumed responsibility at Berkshire Hathaway in May, 1965. At the 
end of the prior fiscal year (September, 1964) the net worth of the Company was $22.1 million, 
and 1,137,778 common shares were outstanding, with a resulting book value of $19.46 per share. 
Ten years earlier, Berkshire Hathaway’s net worth had been $53.4 million. Dividends and stock 
repurchases accounted for over $21 million of the decline in company net worth, but aggregate 
net losses of $9.8 million had been incurred on sales of $595 million during the decade.
In 1965, two New England textile mills were the company’s only sources of earning power and, 
before Ken Chace assumed responsibility for the operation, textile earnings had been erratic and, 
cumulatively, something less than zero subsequent to the merger of Berkshire Fine Spinning and 
Hathaway Manufacturing. Since 1964, net worth has been built to $92.9 million, or $94.92 per 
share. We have acquired total, or virtually total ownership of six businesses through negotiated 
purchases for cash (or cash and notes) from private owners, started four others, purchased a 
31.5% interest in a large affiliate enterprise and reduced the number of outstanding shares of 
Berkshire Hathaway to 979,569. Overall, equity per share has compounded at an annual rate of 
slightly over 15%.
While 1975 was a major disappointment, efforts will continue to develop growing and 
diversified sources of earnings. Our objective is a conservatively financed and highly liquid 
business—possessing extra margins of balance sheet strength consistent with the fiduciary 
obligations inherent in the banking and insurance industries—which will produce a long term 
rate of return on equity capital exceeding that of American industry as a whole.
Warren E. Buffett, Chairman
Ber kshire Hathaway Letter 1976
To the Stockholders of Berkshire Hathaway Inc.:
After two dismal years, operating results in 1976 improved significantly. Last year we said the 
degree of progress in insurance underwriting would determine whether our gain in earnings 
would be “moderate” or “major.” As it turned out, earnings exceeded even the high end of our 
expectations. In large part, this was due to the outstanding efforts of Phil Liesche’s managerial 
group at National Indemnity Company.
In dollar terms, operating earnings came to $16,073,000, or $16.47 per share. While this is a 
record figure, we consider return on shareholders’ equity to be a much more significant yardstick 
of economic performance. Here our result was 17.3%, moderately above our long-term average 
and even further above the average of American industry, but well below our record level of 
19.8% achieved in 1972.
Our present estimate, subject to all the caveats implicit in forecasting, is that dollar operating 
earnings are likely to improve somewhat in 1977, but that return on equity may decline a bit 
from the 1976 figure.
Textile Operations
Our textile division was a significant disappointment during 1976. Earnings, measured either by 
return on sales or by return on capital employed, were inadequate. In part, this was due to 
industry conditions which did not measure up to expectations of a year ago. But equally 
important were our own shortcomings. Marketing efforts and mill capabilities were not properly 
matched in our new Waumbec operation. Unfavorable manufacturing cost variances were 
produced by improper evaluation of machinery and personnel capabilities. Ken Chace, as 
always, has been candid in reporting problems and has worked diligently to correct them. He is a 
pleasure to work with—even under difficult operating conditions.
While the first quarter outlook is for red ink, our quite tentative belief is that textile earnings in 
1977 will equal, or exceed modestly, those of 1976. Despite disappointing current results, we 
continue to look for ways to build our textile operation and presently have one moderate-size 
acquisition under consideration. It should be recognized that the textile business does not offer 
the expectation of high returns on investment. Nevertheless, we maintain a commitment to this 
division—a very important source of employment in New Bedford and Manchester—and believe 
reasonable returns on average are possible.
Insurance Underwriting
Casualty insurers enjoyed some rebound from the disaster levels of 1975 as rate increases finally 
outstripped relentless cost increases. Preliminary figures indicate that the stockholder owned 
portion of the property and casualty industry had a combined ratio of 103.0 in 1976, compared to 
108.3 in 1975. (100 represents a break-even position on underwriting—and higher figures 
represent underwriting losses.) We are unusually concentrated in auto lines where stock 
companies had an improvement from 113.5 to 107.4. Our own overall improvement was even 
more dramatic, from 115.4 to 98.7.
Our major insurance sector in insurance, the traditional auto and general liability business of 
National Indemnity Company, had an outstanding year, achieving profit levels significantly 
better than the industry generally. Credit for this performance must be given to Phil Liesche, 
aided particularly by Roland Miller in Underwriting and Bill Lyons in Claims.
Volume at National Indemnity Company grew rapidly during 1976 as competitors finally reacted 
to the inadequacy of past rates. But, as mentioned in last year’s annual report, we are 
concentrated heavily in lines that are particularly susceptible to both economic and social 
inflation. Thus present rates, which are adequate for today, will not be adequate tomorrow. Our 
opinion is that before long, perhaps in 1978, the industry will fall behind on rates as temporary 
prosperity produces unwise competition. If this happens, we must be prepared to meet the next 
wave of inadequate pricing by a significant reduction in volume.
Reinsurance underwriting has lagged the improvement in direct business. When mistakes are 
made in the pricing of reinsurance, the effects continue for even longer than when similar 
mistakes are made in direct underwriting. George Young, an outstanding manager, has worked 
tirelessly to achieve his goal of profitable underwriting, and has cancelled a great many contracts 
where appropriate rate adjustments were not obtainable. Here, as in the direct business, we have 
had a concentration in casualty lines which have been particularly hard hit by inflationary 
conditions. The near term outlook still is not good for our reinsurance business.
Our “home state” operation continues to make substantial progress under the management of 
John Ringwalt. The combined ratio improved from 108.4 in 1975 to 102.7 in 1976. There still 
are some excess costs reflected in the combined ratio which result from the small size of several 
operations. Cornhusker Casualty Company, oldest and largest of the home state companies, was 
the winner of the Chairman’s Cup in 1976 for achievement of the lowest loss ratio among the 
home state companies. Cornhusker also achieved the lowest combined ratio in its history at 94.4, 
marking the fifth time in its six full years of existence that a ratio below 100 has been recorded. 
Premium growth was 78% at the home state companies in 1976, as market position improved 
significantly. We presently plan a new home state operation later this year.
Our Home and Automobile Insurance Company subsidiary, writing primarily automobile 
business in the Cook County area of Illinois, experienced a strong recovery in 1976. This is 
directly attributable to John Seward who, in his first full year, has revamped significantly both 
rating methods and marketing. The auto business has been shifted to a six month direct bill 
policy, which permits a faster reaction time to underwriting trends. Our general liability business 
at Home and Automobile has been expanded significantly with good results. While it remains to 
be proven that we can achieve sustained underwriting profitability at Home and Auto, we are 
delighted with the progress John Seward has achieved.
Overall, we expect a good year in insurance in 1977. Volume is high and present rate levels 
should allow profitable underwriting. Longer term, however, there are significant negatives in 
the insurance picture. Auto lines, in particular, seem highly vulnerable to pricing and regulatory 
problems produced by political and social factors beyond the control of individual companies.
Insurance Investments
Pre-tax investment income in 1976 improved to $10,820,000 from $8,918,000 as invested assets 
built up substantially, both from better levels of profitability and from gains in premium volume.
In recent reports we have noted the unrealized depreciation in our bond account, but stated that 
we considered such market fluctuations of minor importance as our liquidity and general 
financial strength made it improbable that bonds would have to be sold at times other than those 
of our choice. The bond market rallied substantially in 1976, giving us moderate net unrealized 
gains at yearend in the bond portfolios of both our bank and insurance companies. This, too, is of 
minor importance since our intention is to hold a large portion of our bonds to maturity. The 
corollary to higher bond prices is that lower earnings are produced by the new funds generated 
for investment. On balance, we prefer a situation where our bond portfolio has a current market 
value less than carrying value, but more attractive rates are available on issues purchased with 
newly-generated funds.
Last year we stated that we expected 1976 to be a year of realized capital gains and, indeed, 
gains of $9,962,000 before tax, primarily from stocks, were realized during the year. It presently 
appears that 1977 also will be a year of net realized capital gains. We now have a substantial 
unrealized gain in our stock portfolio as compared to a substantial unrealized loss several years 
ago. Here again we consider such market fluctuations from year to year relatively unimportant; 
unrealized appreciation in our equity holdings, which amounted to $45.7 million at yearend, has 
declined by about $5 million as this is written on March 21st.
However, we consider the yearly business progress of the companies in which we own stocks to 
be very important. And here, we have been delighted by the 1976 business performance achieved 
by most of our portfolio companies. If the business results continue excellent over a period of 
years, we are certain eventually to achieve good financial results from our stock holdings, 
regardless of wide year-to-year fluctuations in market values.
Our equity holdings with a market value of over $3 million on December 31, 1976 were as 
follows:
No. of Shares Company Cost
141,987 California Water Service Company $3,608,711
1,986,953 Government Employees Insurance Company Covertible Preferred 19,416,635
1,294,308 Government Employees Insurance Company Common Stock 4,115,670
395,100 Interpublic Group of Companies 4,530,615
562,900 Kaiser Industries, Inc. 8,270,871
188,900 Munsingwear, Inc. 3,398,404
83,400 National Presto Industries, Inc. 1,689,896
170,800 Ogilvy & Mather International 2,762,433
934,300 The Washington Post Company Class B 10,627,604
Total $58,420,839
All other Holdings 16,974,375
Total Equities $75,395,214
You will notice that our major equity holdings are relatively few. We select such investments on 
a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an 
operating business: (1) favorable long-term economic characteristics; (2) competent and honest 
management; (3) purchase price attractive when measured against the yardstick of value to a 
private owner; and (4) an industry with which we are familiar and whose long-term business 
characteristics we feel competent to judge. It is difficult to find investments meeting such a test, 
and that is one reason for our concentration of holdings. We simply can’t find one hundred 
different securities that conform to our investment requirements. However, we feel quite 
comfortable concentrating our holdings in the much smaller number that we do identify as 
attractive.
Our intention usually is to maintain equity positions for a long time, but sometimes we will make 
a purchase with a shorter expected time horizon such as Kaiser Industries. Here a distribution of 
securities and cash from the parent company is expected to be initiated in 1977. Purchases were 
made in 1976 after the announcement of the distribution plan by Kaiser management.
Banking
Eugene Abegg, Chief Executive of Illinois National Bank and Trust Company of Rockford, 
Illinois, our banking subsidiary, continues to lead the parade among bankers—just as he has even 
since he opened the bank in 1931.
Recently, National City Corp. of Cleveland, truly an outstandingly well-managed bank, ran an ad 
stating “the ratio of earnings to average assets was 1.34% in 1976 which we believe to be the 
best percentage for any major banking company.” Among the really large banks this was the best 
earnings achievement but, at the Illinois National Bank, earnings were close to 50% better than 
those of National City, or approximately 2% of average assets.
This outstanding earnings record again was achieved while:
(1) paying maximum rates of interest on all consumer savings instruments (time deposits now 
make up well over two-thirds of the deposit base at the Illinois National Bank),
(2) maintaining an outstanding liquidity position (Federal Funds sold plus U. S. Government and 
Agency issues of under six months’ duration presently are approximately equal to demand 
deposits), and
(3) avoiding high-yield but second-class loans (net loan losses in 1976 came to about $12,000, or 
.02% of outstanding loans, a very tiny fraction of the ratio prevailing in 1976 in the banking 
industry).
Cost control is an important factor in the bank’s success. Employment is still at about the level 
existing at the time of purchase in 1969 despite growth in consumer time deposits from $30 
million to $90 million and considerable expansion in other activities such as trust, travel and data 
processing.
Blue Chip Stamps
During 1976 we increased our interest in Blue Chip Stamps, and by yearend we held about 33% 
of that company’s outstanding shares. Our interest in Blue Chip Stamps is of growing 
importance to us. Summary financial reports of Blue Chip Stamps are contained in the footnotes 
to our attached financial statements. Moreover, shareholders of Berkshire Hathaway Inc. are 
urged to obtain the current and subsequent annual reports of Blue Chip Stamps by requesting 
them from Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los 
Angeles, California 90040.
Miscellaneous
K & W Products has performed well in its first year as a subsidiary of Berkshire Hathaway Inc. 
Both sales and earnings were up moderately over 1975.
We have less than four years remaining to comply with requirement that our bank be divested by 
December 31, 1980. We intend to accomplish such a divestiture in a manner that minimizes 
disruption to the bank and produces good results for our shareholders. Most probably this will 
involve a spin-off of bank shares in 1980.
We also hope at some point to merge with Diversified Retailing Company, Inc. Both corporate 
simplification and enhanced ownership position in Blue Chip Stamps would be benefits of such a 
merger. However, it is unlikely that anything will be proposed in this regard during 1977.
Warren E. Buffett, Chairman
March 21, 1977
BERKSHIRE HATHAWAY INC.
To the Stockholders of Berkshire Hathaway Inc.:
 Operating earnings in 1977 of $21,904,000, or $22.54 per 
share, were moderately better than anticipated a year ago. Of 
these earnings, $1.43 per share resulted from substantial 
realized capital gains by Blue Chip Stamps which, to the extent 
of our proportional interest in that company, are included in our 
operating earnings figure. Capital gains or losses realized 
directly by Berkshire Hathaway Inc. or its insurance subsidiaries 
are not included in our calculation of operating earnings. While 
too much attention should not be paid to the figure for any 
single year, over the longer term the record regarding aggregate 
capital gains or losses obviously is of significance.
 Textile operations came in well below forecast, while the 
results of the Illinois National Bank as well as the operating 
earnings attributable to our equity interest in Blue Chip Stamps 
were about as anticipated. However, insurance operations, led 
again by the truly outstanding results of Phil Liesche’s 
managerial group at National Indemnity Company, were even better 
than our optimistic expectations.
 Most companies define “record” earnings 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. After all, even a totally dormant savings account will 
produce steadily rising interest earnings each year because of 
compounding.
 Except for special cases (for example, companies with 
unusual debt-equity ratios or those with important assets carried 
at unrealistic balance sheet values), we believe a more 
appropriate measure of managerial economic performance to be 
return on equity capital. In 1977 our operating earnings on 
beginning equity capital amounted to 19%, slightly better than 
last year and above both our own long-term average and that of 
American industry in aggregate. But, while our operating 
earnings per share were up 37% from the year before, our 
beginning capital was up 24%, making the gain in earnings per 
share considerably less impressive than it might appear at first 
glance.
 We expect difficulty in matching our 1977 rate of return 
during the forthcoming year. Beginning equity capital is up 23% 
from a year ago, and we expect the trend of insurance 
underwriting profit margins to turn down well before the end of 
the year. Nevertheless, we expect a reasonably good year and our 
present estimate, subject to the usual caveats regarding the 
frailties of forecasts, is that operating earnings will improve 
somewhat on a per share basis during 1978.
Textile Operations
 The textile business again had a very poor year in 1977. We 
have mistakenly predicted better results in each of the last two 
years. This may say something about our forecasting abilities, 
the nature of the textile industry, or both. Despite strenuous 
efforts, problems in marketing and manufacturing have persisted. 
Many difficulties experienced in the marketing area are due 
primarily to industry conditions, but some of the problems have 
been of our own making.
 A few shareholders have questioned the wisdom of remaining 
in the textile business which, over the longer term, is unlikely 
to produce returns on capital comparable to those available in 
many other businesses. Our reasons are several: (1) Our mills in 
both New Bedford and Manchester are among the largest employers 
in each town, utilizing a labor force of high average age 
possessing relatively non-transferable skills. Our workers and 
unions have exhibited unusual understanding and effort in 
cooperating with management to achieve a cost structure and 
product mix which might allow us to maintain a viable operation. 
(2) Management also has been energetic and straightforward in its 
approach to our textile problems. In particular, Ken Chace’s 
efforts after the change in corporate control took place in 1965 
generated capital from the textile division needed to finance the 
acquisition and expansion of our profitable insurance operation. 
(3) With hard work and some imagination regarding manufacturing 
and marketing configurations, it seems reasonable that at least 
modest profits in the textile division can be achieved in the 
future.
Insurance Underwriting
 Our insurance operation continued to grow significantly in 
1977. It was early in 1967 that we made our entry into this 
industry through the purchase of National Indemnity Company and 
National Fire and Marine Insurance Company (sister companies) for 
approximately $8.6 million. In that year their premium volume 
amounted to $22 million. In 1977 our aggregate insurance premium 
volume was $151 million. No additional shares of Berkshire 
Hathaway stock have been issued to achieve any of this growth.
 Rather, this almost 600% increase has been achieved through 
large gains in National Indemnity’s traditional liability areas 
plus the starting of new companies (Cornhusker Casualty Company 
in 1970, Lakeland Fire and Casualty Company in 1971, Texas United 
Insurance Company in 1972, The Insurance Company of Iowa in 1973, 
and Kansas Fire and Casualty Company in late 1977), the purchase 
for cash of other insurance companies (Home and Automobile 
Insurance Company in 1971, Kerkling Reinsurance Corporation, now 
named Central Fire and Casualty Company, in 1976, and Cypress 
Insurance Company at yearend 1977), and finally through the 
marketing of additional products, most significantly reinsurance, 
within the National Indemnity Company corporate structure.
 In aggregate, the insurance business has worked out very 
well. But it hasn’t been a one-way street. Some major mistakes 
have been made during the decade, both in products and personnel. 
We experienced significant problems from (1) a surety operation 
initiated in 1969, (2) the 1973 expansion of Home and 
Automobile’s urban auto marketing into the Miami, Florida area, 
(3) a still unresolved aviation “fronting” arrangement, and (4) 
our Worker’s Compensation operation in California, which we 
believe retains an interesting potential upon completion of a 
reorganization now in progress. It is comforting to be in a 
business where some mistakes can be made and yet a quite 
satisfactory overall performance can be achieved. In a sense, 
this is the opposite case from our textile business where even 
very good management probably can average only modest results. 
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.
 In 1977 the winds in insurance underwriting were squarely 
behind us. Very large rate increases were effected throughout 
the industry in 1976 to offset the disastrous underwriting 
results of 1974 and 1975. But, because insurance policies 
typically are written for one-year periods, with pricing mistakes 
capable of correction only upon renewal, it was 1977 before the 
full impact was felt upon earnings of those earlier rate 
increases.
 The pendulum now is beginning to swing the other way. We 
estimate that costs involved in the insurance areas in which we 
operate rise at close to 1% per month. This is due to continuous 
monetary inflation affecting the cost of repairing humans and 
property, as well as “social inflation”, a broadening definition 
by society and juries of what is covered by insurance policies. 
Unless rates rise at a comparable 1% per month, underwriting 
profits must shrink. Recently the pace of rate increases has 
slowed dramatically, and it is our expectation that underwriting 
margins generally will be declining by the second half of the 
year.
 We must again give credit to Phil Liesche, greatly assisted 
by Roland Miller in Underwriting and Bill Lyons in Claims, for an 
extraordinary underwriting achievement in National Indemnity’s 
traditional auto and general liability business during 1977. 
Large volume gains have been accompanied by excellent 
underwriting margins following contraction or withdrawal by many 
competitors in the wake of the 1974-75 crisis period. These 
conditions will reverse before long. In the meantime, National 
Indemnity’s underwriting profitability has increased dramatically 
and, in addition, large sums have been made available for 
investment. As markets loosen and rates become inadequate, we 
again will face the challenge of philosophically accepting 
reduced volume. Unusual managerial discipline will be required, 
as it runs counter to normal institutional behavior to let the 
other fellow take away business - even at foolish prices.
 Our reinsurance department, managed by George Young, 
improved its underwriting performance during 1977. Although the 
combined ratio (see definition on page 12) of 107.1 was 
unsatisfactory, its trend was downward throughout the year. In 
addition, reinsurance generates unusually high funds for 
investment as a percentage of premium volume.
 At Home and Auto, John Seward continued to make progress on 
all fronts. John was a battlefield promotion several years ago 
when Home and Auto’s underwriting was awash in red ink and the 
company faced possible extinction. Under his management it 
currently is sound, profitable, and growing.
 John Ringwalt’s homestate operation now consists of five 
companies, with Kansas Fire and Casualty Company becoming 
operational late in 1977 under the direction of Floyd Taylor. 
The homestate companies had net premium volume of $23 million, up 
from $5.5 million just three years ago. All four companies that 
operated throughout the year achieved combined ratios below 100, 
with Cornhusker Casualty Company, at 93.8, the leader. In 
addition to actively supervising the other four homestate 
operations, John Ringwalt manages the operations of Cornhusker 
which has recorded combined ratios below 100 in six of its seven 
full years of existence and, from a standing start in 1970, has 
grown to be one of the leading insurance companies operating in 
Nebraska utilizing the conventional independent agency system. 
Lakeland Fire and Casualty Company, managed by Jim Stodolka, was 
the winner of the Chairman’s Cup in 1977 for achieving the lowest 
loss ratio among the homestate companies. All in all, the 
homestate operation continues to make excellent progress.
 The newest addition to our insurance group is Cypress 
Insurance Company of South Pasadena, California. This Worker’s 
Compensation insurer was purchased for cash in the final days of 
1977 and, therefore, its approximate $12.5 million of volume for 
that year was not included in our results. Cypress and National 
Indemnity’s present California Worker’s Compensation operation 
will not be combined, but will operate independently utilizing 
somewhat different marketing strategies. Milt Thornton, 
President of Cypress since 1968, runs a first-class operation for 
policyholders, agents, employees and owners alike. We look 
forward to working with him.
 Insurance companies offer standardized policies which can be 
copied by anyone. Their only products are promises. It is not 
difficult to be licensed, and rates are an open book. There are 
no important advantages from trademarks, patents, location, 
corporate longevity, raw material sources, etc., and very little 
consumer differentiation to produce insulation from competition. 
It is commonplace, in corporate annual reports, to stress the 
difference that people make. Sometimes this is true and 
sometimes it isn’t. But there is no question that the nature of 
the insurance business magnifies the effect which individual 
managers have on company performance. We are very fortunate to 
have the group of managers that are associated with us.
Insurance Investments
 During the past two years insurance investments at cost 
(excluding the investment in our affiliate, Blue Chip Stamps) 
have grown from $134.6 million to $252.8 million. Growth in 
insurance reserves, produced by our large gain in premium volume, 
plus retained earnings, have accounted for this increase in 
marketable securities. In turn, net investment income of the 
Insurance Group has improved from $8.4 million pre-tax in 1975 to 
$12.3 million pre-tax in 1977.
 In addition to this income from dividends and interest, we 
realized capital gains of $6.9 million before tax, about one￾quarter from bonds and the balance from stocks. Our unrealized 
gain in stocks at yearend 1977 was approximately $74 million but 
this figure, like any other figure of a single date (we had an 
unrealized loss of $17 million at the end of 1974), should not be 
taken too seriously. Most of our large stock positions are going 
to be held for many years and the scorecard on our investment 
decisions will be provided by business results over that period, 
and not by prices on any given day. Just as it would be foolish 
to focus unduly on short-term prospects when acquiring an entire 
company, we think it equally unsound to become mesmerized by 
prospective near term earnings or recent trends in earnings when 
purchasing small pieces of a company; i.e., marketable common 
stocks.
 A little digression illustrating this point may be 
interesting. Berkshire Fine Spinning Associates and Hathaway 
Manufacturing were merged in 1955 to form Berkshire Hathaway Inc. 
In 1948, on a pro forma combined basis, they had earnings after 
tax of almost $18 million and employed 10,000 people at a dozen 
large mills throughout New England. In the business world of 
that period they were an economic powerhouse. For example, in 
that same year earnings of IBM were $28 million (now $2.7 
billion), Safeway Stores, $10 million, Minnesota Mining, $13 
million, and Time, Inc., $9 million. But, in the decade 
following the 1955 merger aggregate sales of $595 million 
produced an aggregate loss for Berkshire Hathaway of $10 million. 
By 1964 the operation had been reduced to two mills and net worth 
had shrunk to $22 million, from $53 million at the time of the 
merger. So much for single year snapshots as adequate portrayals 
of a business.
 Equity holdings of our insurance companies with a market 
value of over $5 million on December 31, 1977 were as follows:
No. of Shares Company Cost Market
------------- ------- -------- --------
 (000’s omitted)
 220,000 Capital Cities Communications, Inc. ..... $ 10,909 $ 13,228 
 1,986,953 Government Employees Insurance 
 Company Convertible Preferred ........ 19,417 33,033 
 1,294,308 Government Employees Insurance 
 Company Common Stock ................. 4,116 10,516
 592,650 The Interpublic Group of Companies, Inc. 4,531 17,187 
 324,580 Kaiser Aluminum& Chemical Corporation ... 11,218 9,981
 1,305,800 Kaiser Industries, Inc. ................. 778 6,039
 226,900 Knight-Ridder Newspapers, Inc. .......... 7,534 8,736
 170,800 Ogilvy & Mather International, Inc. ..... 2,762 6,960
 934,300 The Washington Post Company Class B ..... 10,628 33,401
 -------- --------
 Total ................................... $ 71,893 $139,081
 All Other Holdings ...................... 34,996 41,992
 -------- --------
 Total Equities .......................... $106,889 $181,073
 ======== ========
 We select our marketable equity securities in much the same 
way we would evaluate a business for acquisition in its entirety. 
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. 
We ordinarily make no attempt to buy equities for anticipated 
favorable stock price behavior in the short term. In fact, 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.
 Our experience has been that pro-rata portions of truly 
outstanding businesses sometimes sell in the securities markets 
at very large discounts from the prices they would command in 
negotiated transactions involving entire companies. 
Consequently, bargains in business ownership, which simply are 
not available directly through corporate acquisition, can be 
obtained indirectly through stock ownership. When prices are 
appropriate, we are willing to take very large positions in 
selected companies, not with any intention of taking control and 
not foreseeing sell-out or merger, but with the expectation that 
excellent business results by corporations will translate over 
the long term into correspondingly excellent market value and 
dividend results for owners, minority as well as majority.
 Such investments initially may have negligible impact on our 
operating earnings. For example, we invested $10.9 million in 
Capital Cities Communications during 1977. Earnings attributable 
to the shares we purchased totaled about $1.3 million last year. 
But only the cash dividend, which currently provides $40,000 
annually, is reflected in our operating earnings figure.
 Capital Cities possesses both extraordinary properties and 
extraordinary management. And these management skills extend 
equally to operations and employment of corporate capital. To 
purchase, directly, properties such as Capital Cities owns would 
cost in the area of twice our cost of purchase via the stock 
market, and direct ownership would offer no important advantages 
to us. While control would give us the opportunity - and the 
responsibility - to manage operations and corporate resources, we 
would not be able to provide management in either of those 
respects equal to that now in place. In effect, we can obtain a 
better management result through non-control than control. This 
is an unorthodox view, but one we believe to be sound.
Banking
 In 1977 the Illinois National Bank continued to achieve a 
rate of earnings on assets about three times that of most large 
banks. As usual, this record was achieved while the bank paid 
maximum rates to savers and maintained an asset position 
combining low risk and exceptional liquidity. Gene Abegg formed 
the bank in 1931 with $250,000. In its first full year of 
operation, earnings amounted to $8,782. Since that time, no new 
capital has been contributed to the bank; on the contrary, since 
our purchase in 1969, dividends of $20 million have been paid. 
Earnings in 1977 amounted to $3.6 million, more than achieved by 
many banks two or three times its size.
 Late last year Gene, now 80 and still running a banking 
operation without peer, asked that a successor be brought in. 
Accordingly, Peter Jeffrey, formerly President and Chief 
Executive Officer of American National Bank of Omaha, has joined 
the Illinois National Bank effective March 1st as President and 
Chief Executive Officer.
 Gene continues in good health as Chairman. We expect a 
continued successful operation at Rockford’s leading bank.
Blue Chip Stamps
 We again increased our equity interest in Blue Chip Stamps, 
and owned approximately 36 1/2% at the end of 1977. Blue Chip 
had a fine year, earning approximately $12.9 million from 
operations and, in addition, had realized securities gains of 
$4.1 million.
 Both Wesco Financial Corp., an 80% owned subsidiary of Blue 
Chip Stamps, managed by Louis Vincenti, and See’s Candies, a 99% 
owned subsidiary, managed by Chuck Huggins, made good progress in 
1977. Since See’s was purchased by Blue Chip Stamps at the 
beginning of 1972, pre-tax operating earnings have grown from 
$4.2 million to $12.6 million with little additional capital 
investment. See’s achieved this record while operating in an 
industry experiencing practically no unit growth. Shareholders 
of Berkshire Hathaway Inc. may obtain the annual report of Blue 
Chip Stamps by requesting it from Mr. Robert H. Bird, Blue Chip 
Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040.
 Warren E. Buffett, Chairman
March 14,1978
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 First, a few words about accounting. The merger with 
Diversified Retailing Company, Inc. at yearend adds two new 
complications in the presentation of our financial results. 
After the merger, our ownership of Blue Chip Stamps increased to 
approximately 58% and, therefore, the accounts of that company 
must be fully consolidated in the Balance Sheet and Statement of 
Earnings presentation of Berkshire. In previous reports, our 
share of the net earnings only of Blue Chip had been included as 
a single item on Berkshire’s Statement of Earnings, and there had 
been a similar one-line inclusion on our Balance Sheet of our 
share of their net assets.
 This full consolidation of sales, expenses, receivables, 
inventories, debt, etc. produces an aggregation of figures from 
many diverse businesses - textiles, insurance, candy, newspapers, 
trading stamps - with dramatically different economic 
characteristics. In some of these your ownership is 100% but, in 
those businesses which are owned by Blue Chip but fully 
consolidated, your ownership as a Berkshire shareholder is only 
58%. (Ownership by others of the balance of these businesses is 
accounted for by the large minority interest item on the 
liability side of the Balance Sheet.) Such a grouping of Balance 
Sheet and Earnings items - some wholly owned, some partly owned - 
tends to obscure economic reality more than illuminate it. In 
fact, it represents a form of presentation that we never prepare 
for internal use during the year and which is of no value to us 
in any management activities.
 For that reason, throughout the report we provide much 
separate financial information and commentary on the various 
segments of the business to help you evaluate Berkshire’s 
performance and prospects. Much of this segmented information is 
mandated by SEC disclosure rules and covered in “Management’s 
Discussion” on pages 29 to 34. And in this letter we try to 
present to you a view of our various operating entities from the 
same perspective that we view them managerially.
 A second complication arising from the merger is that the 
1977 figures shown in this report are different from the 1977 
figures shown in the report we mailed to you last year. 
Accounting convention requires that when two entities such as 
Diversified and Berkshire are merged, all financial data 
subsequently must be presented as if the companies had been 
merged at the time they were formed rather than just recently. 
So the enclosed financial statements, in effect, pretend that in 
1977 (and earlier years) the Diversified-Berkshire merger already 
had taken place, even though the actual merger date was December 
30, 1978. This shifting base makes comparative commentary 
confusing and, from time to time in our narrative report, we will 
talk of figures and performance for Berkshire shareholders as 
historically reported to you rather than as restated after the 
Diversified merger.
 With that preamble it can be stated that, with or without 
restated figures, 1978 was a good year. Operating earnings, 
exclusive of capital gains, at 19.4% of beginning shareholders’ 
investment were within a fraction of our 1972 record. While we 
believe it is improper to include capital gains or losses in 
evaluating the performance of a single year, they are an 
important component of the longer term record. Because of such 
gains, Berkshire’s long-term growth in equity per share has been 
greater than would be indicated by compounding the returns from 
operating earnings that we have reported annually.
 For example, over the last three years - generally a bonanza 
period for the insurance industry, our largest profit producer - 
Berkshire’s per share net worth virtually has doubled, thereby 
compounding at about 25% annually through a combination of good 
operating earnings and fairly substantial capital gains. Neither 
this 25% equity gain from all sources nor the 19.4% equity gain 
from operating earnings in 1978 is sustainable. The insurance 
cycle has turned downward in 1979, and it is almost certain that 
operating earnings measured by return on equity will fall this 
year. However, operating earnings measured in dollars are likely 
to increase on the much larger shareholders’ equity now employed 
in the business.
 In contrast to this cautious view about near term return 
from operations, we are optimistic about prospects for long term 
return from major equity investments held by our insurance 
companies. We make no attempt to predict how security markets 
will behave; successfully forecasting short term stock price 
movements is something we think neither we nor anyone else can 
do. In the longer run, however, we feel that many of our major 
equity holdings are going to be worth considerably more money 
than we paid, and that investment gains will add significantly to 
the operating returns of the insurance group.
Sources of Earnings
 To give you a better picture of just where Berkshire’s 
earnings are produced, we show below a table which requires a 
little explanation. Berkshire owns close to 58% of Blue Chip 
which, in addition to 100% ownership of several businesses, owns 
80% of Wesco Financial Corporation. Thus, Berkshire’s equity in 
Wesco’s earnings is about 46%. In aggregate, businesses that we 
control have about 7,000 full-time employees and generate 
revenues of over $500 million.
 The table shows the overall earnings of each major operating 
category on a pre-tax basis (several of the businesses have low 
tax rates because of significant amounts of tax-exempt interest 
and dividend income), as well as the share of those earnings 
belonging to Berkshire both on a pre-tax and after-tax basis. 
Significant capital gains or losses attributable to any of the 
businesses are not shown in the operating earnings figure, but 
are aggregated on the “Realized Securities Gain” line at the 
bottom of the table. Because of various accounting and tax 
intricacies, the figures in the table should not be treated as 
holy writ, but rather viewed as close approximations of the 1977 
and 1978 earnings contributions of our constituent businesses.
 Net Earnings
 Earnings Before Income Taxes After Tax
 -------------------------------------- ------------------
 Total Berkshire Share Berkshire Share
 ------------------ ------------------ ------------------
(in thousands of dollars) 1978 1977 1978 1977 1978 1977
 -------- -------- -------- -------- -------- --------
Total - all entities ......... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
 ======== ======== ======== ======== ======== ========
Earnings from operations:
 Insurance Group:
 Underwriting ............. $ 3,001 $ 5,802 $ 3,000 $ 5,802 $ 1,560 $ 3,017
 Net investment income .... 19,705 12,804 19,691 12,804 16,400 11,360
 Berkshire-Waumbec textiles 2,916 (620) 2,916 (620) 1,342 (322)
 Associated Retail 
 Stores, Inc. ............ 2,757 2,775 2,757 2,775 1,176 1,429
 See’s Candies .............. 12,482 12,840 7,013 6,598 3,049 2,974
 Buffalo Evening News ....... (2,913) 751 (1,637) 389 (738) 158
 Blue Chip Stamps - Parent .. 2,133 1,091 1,198 566 1,382 892
 Illinois National Bank
 and Trust Company ....... 4,822 3,800 4,710 3,706 4,262 3,288
 Wesco Financial
 Corporation - Parent .... 1,771 2,006 777 813 665 419
 Mutual Savings and
 Loan Association ........ 10,556 6,779 4,638 2,747 3,042 1,946
 Interest on Debt ........... (5,566) (5,302) (4,546) (4,255) (2,349) (2,129)
 Other ...................... 720 165 438 102 261 48
 -------- -------- -------- -------- -------- --------
 Total Earnings from
 Operations ............ $52,384 $42,891 $40,955 $31,427 $30,052 $23,080
Realized Securities Gain ..... 13,796 14,198 13,395 10,807 9,190 7,313
 -------- -------- -------- -------- -------- --------
 Total Earnings ........... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
 ======== ======== ======== ======== ======== ========
 Blue Chip and Wesco are public companies with reporting 
requirements of their own. Later in this report we are 
reproducing the narrative reports of the principal executives of 
both companies, describing their 1978 operations. Some of the 
figures they utilize will not match to the penny the ones we use 
in this report, again because of accounting and tax complexities. 
But their comments should be helpful to you in understanding the 
underlying economic characteristics of these important partly￾owned businesses. A copy of the full annual report of either 
company will be mailed to any shareholder of Berkshire upon 
request to Mr. Robert H. Bird for Blue Chips Stamps, 5801 South 
Eastern Avenue, Los Angeles, California 90040, or to Mrs. Bette 
Deckard for Wesco Financial Corporation, 315 East Colorado 
Boulevard, Pasadena, California 91109.
Textiles
 Earnings of $1.3 million in 1978, while much improved from 
1977, still represent a low return on the $17 million of capital 
employed in this business. Textile plant and equipment are on 
the books for a very small fraction of what it would cost to 
replace such equipment today. And, despite the age of the 
equipment, much of it is functionally similar to new equipment 
being installed by the industry. But despite this “bargain cost” 
of fixed assets, capital turnover is relatively low reflecting 
required high investment levels in receivables and inventory 
compared to sales. Slow capital turnover, coupled with low 
profit margins on sales, inevitably produces inadequate returns 
on capital. Obvious approaches to improved profit margins 
involve differentiation of product, lowered manufacturing costs 
through more efficient equipment or better utilization of people, 
redirection toward fabrics enjoying stronger market trends, etc. 
Our management is diligent in pursuing such objectives. The 
problem, of course, is that our competitors are just as 
diligently doing the same thing.
 The textile industry illustrates in textbook style how 
producers of relatively undifferentiated goods in capital 
intensive businesses must earn inadequate returns except under 
conditions of tight supply or real shortage. As long as excess 
productive capacity exists, prices tend to reflect direct 
operating costs rather than capital employed. Such a supply￾excess condition appears likely to prevail most of the time in 
the textile industry, and our expectations are for profits of 
relatively modest amounts in relation to capital.
 We hope we don’t get into too many more businesses with such 
tough economic characteristics. But, as we have stated before: 
(1) our textile businesses are very important employers in their 
communities, (2) management has been straightforward in reporting 
on problems and energetic in attacking them, (3) labor has been 
cooperative and understanding in facing our common problems, and 
(4) the business should average modest cash returns relative to 
investment. As long as these conditions prevail - and we expect 
that they will - we intend to continue to support our textile 
business despite more attractive alternative uses for capital.
Insurance Underwriting
 The number one contributor to Berkshire’s overall excellent 
results in 1978 was the segment of National Indemnity Company’s 
insurance operation run by Phil Liesche. On about $90 million of 
earned premiums, an underwriting profit of approximately $11 
million was realized, a truly extraordinary achievement even 
against the background of excellent industry conditions. Under 
Phil’s leadership, with outstanding assistance by Roland Miller 
in Underwriting and Bill Lyons in Claims, this segment of 
National Indemnity (including National Fire and Marine Insurance 
Company, which operates as a running mate) had one of its best 
years in a long history of performances which, in aggregate, far 
outshine those of the industry. Present successes reflect credit 
not only upon present managers, but equally upon the business 
talents of Jack Ringwalt, founder of National Indemnity, whose 
operating philosophy remains etched upon the company.
 Home and Automobile Insurance Company had its best year 
since John Seward stepped in and straightened things out in 1975. 
Its results are combined in this report with those of Phil 
Liesche’s operation under the insurance category entitled 
“Specialized Auto and General Liability”.
 Worker’s Compensation was a mixed bag in 1978. In its first 
year as a subsidiary, Cypress Insurance Company, managed by Milt 
Thornton, turned in outstanding results. The worker’s 
compensation line can cause large underwriting losses when rapid 
inflation interacts with changing social concepts, but Milt has a 
cautious and highly professional staff to cope with these 
problems. His performance in 1978 has reinforced our very good 
feelings about this purchase.
 Frank DeNardo came with us in the spring of 1978 to 
straighten out National Indemnity’s California Worker’s 
Compensation business which, up to that point, had been a 
disaster. Frank has the experience and intellect needed to 
correct the major problems of the Los Angeles office. Our volume 
in this department now is running only about 25% of what it was 
eighteen months ago, and early indications are that Frank is 
making good progress.
 George Young’s reinsurance department continues to produce 
very large sums for investment relative to premium volume, and 
thus gives us reasonably satisfactory overall results. However, 
underwriting results still are not what they should be and can 
be. It is very easy to fool yourself regarding underwriting 
results in reinsurance (particularly in casualty lines involving 
long delays in settlement), and we believe this situation 
prevails with many of our competitors. Unfortunately, self￾delusion in company reserving almost always leads to inadequate 
industry rate levels. If major factors in the market don’t know 
their true costs, the competitive “fall-out” hits all - even 
those with adequate cost knowledge. George is quite willing to 
reduce volume significantly, if needed, to achieve satisfactory 
underwriting, and we have a great deal of confidence in the long 
term soundness of this business under his direction.
 The homestate operation was disappointing in 1978. Our 
unsatisfactory underwriting, even though partially explained by 
an unusual incidence of Midwestern storms, is particularly 
worrisome against the backdrop of very favorable industry results 
in the conventional lines written by our homestate group. We 
have confidence in John Ringwalt’s ability to correct this 
situation. The bright spot in the group was the performance of 
Kansas Fire and Casualty in its first full year of business. 
Under Floyd Taylor, this subsidiary got off to a truly remarkable 
start. Of course, it takes at least several years to evaluate 
underwriting results, but the early signs are encouraging and 
Floyd’s operation achieved the best loss ratio among the 
homestate companies in 1978.
 Although some segments were disappointing, overall our 
insurance operation had an excellent year. But of course we 
should expect a good year when the industry is flying high, as in 
1978. It is a virtual certainty that in 1979 the combined ratio 
(see definition on page 31) for the industry will move up at 
least a few points, perhaps enough to throw the industry as a 
whole into an underwriting loss position. For example, in the 
auto lines - by far the most important area for the industry and 
for us - CPI figures indicate rates overall were only 3% higher 
in January 1979 than a year ago. But the items that make up loss 
costs - auto repair and medical care costs - were up over 9%. 
How different than yearend 1976 when rates had advanced over 22% 
in the preceding twelve months, but costs were up 8%.
 Margins will remain steady only if rates rise as fast as 
costs. This assuredly will not be the case in 1979, and 
conditions probably will worsen in 1980. Our present thinking is 
that our underwriting performance relative to the industry will 
improve somewhat in 1979, but every other insurance management 
probably views its relative prospects with similar optimism - 
someone is going to be disappointed. Even if we do improve 
relative to others, we may well have a higher combined ratio and 
lower underwriting profits in 1979 than we achieved last year.
 We continue to look for ways to expand our insurance 
operation. But your reaction to this intent should not be 
unrestrained joy. Some of our expansion efforts - largely 
initiated by your Chairman have been lackluster, others have been 
expensive failures. We entered the business in 1967 through 
purchase of the segment which Phil Liesche now manages, and it 
still remains, by a large margin, the best portion of our 
insurance business. It is not easy to buy a good insurance 
business, but our experience has been that it is easier to buy 
one than create one. However, we will continue to try both 
approaches, since the rewards for success in this field can be 
exceptional.
Insurance Investments
 We confess considerable optimism regarding our insurance 
equity investments. Of course, our enthusiasm for stocks is not 
unconditional. Under some circumstances, common stock 
investments by insurers make very little sense.
 We get excited enough to commit a big percentage of 
insurance company net worth to equities only when we find (1) 
businesses we can understand, (2) with favorable long-term 
prospects, (3) operated by honest and competent people, and (4) 
priced very attractively. We usually can identify a small number 
of potential investments meeting requirements (1), (2) and (3), 
but (4) often prevents action. For example, in 1971 our total 
common stock position at Berkshire’s insurance subsidiaries 
amounted to only $10.7 million at cost, and $11.7 million at 
market. There were equities of identifiably excellent companies 
available - but very few at interesting prices. (An irresistible 
footnote: in 1971, pension fund managers invested a record 122% 
of net funds available in equities - at full prices they couldn’t 
buy enough of them. In 1974, after the bottom had fallen out, 
they committed a then record low of 21% to stocks.)
 The past few years have been a different story for us. At 
the end of 1975 our insurance subsidiaries held common equities 
with a market value exactly equal to cost of $39.3 million. At 
the end of 1978 this position had been increased to equities 
(including a convertible preferred) with a cost of $129.1 million 
and a market value of $216.5 million. During the intervening 
three years we also had realized pre-tax gains from common 
equities of approximately $24.7 million. Therefore, our overall 
unrealized and realized pre-tax gains in equities for the three 
year period came to approximately $112 million. During this same 
interval the Dow-Jones Industrial Average declined from 852 to 
805. It was a marvelous period for the value-oriented equity 
buyer.
 We continue to find for our insurance portfolios small 
portions of really outstanding businesses that are available, 
through the auction pricing mechanism of security markets, at 
prices dramatically cheaper than the valuations inferior 
businesses command on negotiated sales.
 This program of acquisition of small fractions of businesses 
(common stocks) at bargain prices, for which little enthusiasm 
exists, contrasts sharply with general corporate acquisition 
activity, for which much enthusiasm exists. It seems quite clear 
to us that either corporations are making very significant 
mistakes in purchasing entire businesses at prices prevailing in 
negotiated transactions and takeover bids, or that we eventually 
are going to make considerable sums of money buying small 
portions of such businesses at the greatly discounted valuations 
prevailing in the stock market. (A second footnote: in 1978 
pension managers, a group that logically should maintain the 
longest of investment perspectives, put only 9% of net available 
funds into equities - breaking the record low figure set in 1974 
and tied in 1977.)
 We are not concerned with whether the market quickly 
revalues upward securities that we believe are selling at bargain 
prices. In fact, we prefer just the opposite since, in most 
years, we expect to have funds available to be a net buyer of 
securities. And consistent attractive purchasing is likely to 
prove to be of more eventual benefit to us than any selling 
opportunities provided by a short-term run up in stock prices to 
levels at which we are unwilling to continue buying.
 Our policy is to concentrate holdings. We try to avoid 
buying a little of this or that when we are only lukewarm about 
the business or its price. When we are convinced as to 
attractiveness, we believe in buying worthwhile amounts.
Equity holdings of our insurance companies with a market value of 
over $8 million on December 31, 1978 were as follows:
No. of
Shares Company Cost Market
---------- ------- ---------- ----------
 (000s omitted)
 246,450 American Broadcasting Companies, Inc. ... $ 6,082 $ 8,626
1,294,308 Government Employees Insurance Company
 Common Stock ......................... 4,116 9,060
1,986,953 Government Employees Insurance Company 
 Convertible Preferred ................ 19,417 28,314
 592,650 Interpublic Group of Companies, Inc. .... 4,531 19,039
1,066,934 Kaiser Aluminum and Chemical Corporation 18,085 18,671
 453,800 Knight-Ridder Newspapers, Inc. .......... 7,534 10,267
 953,750 SAFECO Corporation ...................... 23,867 26,467
 934,300 The Washington Post Company ............. 10,628 43,445
 ---------- ----------
 Total ................................... $ 94,260 $163,889
 All Other Holdings ...................... 39,506 57,040
 ---------- ----------
 Total Equities .......................... $133,766 $220,929
 ========== ==========
 In some cases our indirect interest in earning power is 
becoming quite substantial. For example, note our holdings of 
953,750 shares of SAFECO Corp. SAFECO probably is the best run 
large property and casualty insurance company in the United 
States. Their underwriting abilities are simply superb, their 
loss reserving is conservative, and their investment policies 
make great sense.
 SAFECO is a much better insurance operation than our own 
(although we believe certain segments of ours are much better 
than average), is better than one we could develop and, 
similarly, is far better than any in which we might negotiate 
purchase of a controlling interest. Yet our purchase of SAFECO 
was made at substantially under book value. We paid less than 
100 cents on the dollar for the best company in the business, 
when far more than 100 cents on the dollar is being paid for 
mediocre companies in corporate transactions. And there is no 
way to start a new operation - with necessarily uncertain 
prospects - at less than 100 cents on the dollar.
 Of course, with a minor interest we do not have the right to 
direct or even influence management policies of SAFECO. But why 
should we wish to do this? The record would indicate that they 
do a better job of managing their operations than we could do 
ourselves. While there may be less excitement and prestige in 
sitting back and letting others do the work, we think that is all 
one loses by accepting a passive participation in excellent 
management. Because, quite clearly, if one controlled a company 
run as well as SAFECO, the proper policy also would be to sit 
back and let management do its job.
 Earnings attributable to the shares of SAFECO owned by 
Berkshire at yearend amounted to $6.1 million during 1978, but 
only the dividends received (about 18% of earnings) are reflected 
in our operating earnings. We believe the balance, although not 
reportable, to be just as real in terms of eventual benefit to us 
as the amount distributed. In fact, SAFECO’s retained earnings 
(or those of other well-run companies if they have opportunities 
to employ additional capital advantageously) may well eventually 
have a value to shareholders greater than 100 cents on the 
dollar.
 We are not at all unhappy when our wholly-owned businesses 
retain all of their earnings if they can utilize internally those 
funds at attractive rates. Why should we feel differently about 
retention of earnings by companies in which we hold small equity 
interests, but where the record indicates even better prospects 
for profitable employment of capital? (This proposition cuts the 
other way, of course, in industries with low capital 
requirements, or if management has a record of plowing capital 
into projects of low profitability; then earnings should be paid 
out or used to repurchase shares - often by far the most 
attractive option for capital utilization.)
 The aggregate level of such retained earnings attributable 
to our equity interests in fine companies is becoming quite 
substantial. It does not enter into our reported operating 
earnings, but we feel it well may have equal long-term 
significance to our shareholders. Our hope is that conditions 
continue to prevail in securities markets which allow our 
insurance companies to buy large amounts of underlying earning 
power for relatively modest outlays. At some point market 
conditions undoubtedly will again preclude such bargain buying 
but, in the meantime, we will try to make the most of 
opportunities.
Banking
 Under Gene Abegg and Pete Jeffrey, the Illinois National 
Bank and Trust Company in Rockford continues to establish new 
records. Last year’s earnings amounted to approximately 2.1% of 
average assets, about three times the level averaged by major 
banks. In our opinion, this extraordinary level of earnings is 
being achieved while maintaining significantly less asset risk 
than prevails at most of the larger banks.
 We purchased the Illinois National Bank in March 1969. It 
was a first-class operation then, just as it had been ever since 
Gene Abegg opened the doors in 1931. Since 1968, consumer time 
deposits have quadrupled, net income has tripled and trust 
department income has more than doubled, while costs have been 
closely controlled.
 Our experience has been that the manager of an already high￾cost operation frequently is uncommonly resourceful in finding 
new ways to add to overhead, while the manager of a tightly-run 
operation usually continues to find additional methods to curtail 
costs, even when his costs are already well below those of his 
competitors. No one has demonstrated this latter ability better 
than Gene Abegg.
 We are required to divest our bank by December 31, 1980. 
The most likely approach is to spin it off to Berkshire 
shareholders some time in the second half of 1980.
Retailing
 Upon merging with Diversified, we acquired 100% ownership of 
Associated Retail Stores, Inc., a chain of about 75 popular 
priced women’s apparel stores. Associated was launched in 
Chicago on March 7, 1931 with one store, $3200, and two 
extraordinary partners, Ben Rosner and Leo Simon. After Mr. 
Simon’s death, the business was offered to Diversified for cash 
in 1967. Ben was to continue running the business - and run it, 
he has.
 Associated’s business has not grown, and it consistently has 
faced adverse demographic and retailing trends. But Ben’s 
combination of merchandising, real estate and cost-containment 
skills has produced an outstanding record of profitability, with 
returns on capital necessarily employed in the business often in 
the 20% after-tax area.
 Ben is now 75 and, like Gene Abegg, 81, at Illinois National 
and Louie Vincenti, 73, at Wesco, continues daily to bring an 
almost passionately proprietary attitude to the business. This 
group of top managers must appear to an outsider to be an 
overreaction on our part to an OEO bulletin on age 
discrimination. While unorthodox, these relationships have been 
exceptionally rewarding, both financially and personally. It is 
a real pleasure to work with managers who enjoy coming to work 
each morning and, once there, instinctively and unerringly think 
like owners. We are associated with some of the very best.
 Warren E. Buffett, Chairman
March 26, 1979
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Again, we must lead off with a few words about accounting. 
Since our last annual report, the accounting profession has 
decided that equity securities owned by insurance companies must 
be carried on the balance sheet at market value. We previously 
have carried such equity securities at the lower of aggregate 
cost or aggregate market value. Because we have large unrealized 
gains in our insurance equity holdings, the result of this new 
policy is to increase substantially both the 1978 and 1979 
yearend net worth, even after the appropriate liability is 
established for taxes on capital gains that would be payable 
should equities be sold at such market valuations.
 As you know, Blue Chip Stamps, our 60% owned subsidiary, is 
fully consolidated in Berkshire Hathaway’s financial statements. 
However, Blue Chip still is required to carry its equity 
investments at the lower of aggregate cost or aggregate market 
value, just as Berkshire Hathaway’s insurance subsidiaries did 
prior to this year. Should the same equities be purchased at an 
identical price by an insurance subsidiary of Berkshire Hathaway 
and by Blue Chip Stamps, present accounting principles often 
would require that they end up carried on our consolidated 
balance sheet at two different values. (That should keep you on 
your toes.) Market values of Blue Chip Stamps’ equity holdings 
are given in footnote 3 on page 18.
1979 Operating Results
 We continue to feel that the ratio of operating earnings 
(before securities gains or losses) to shareholders’ equity with 
all securities valued at cost is the most appropriate way to 
measure any single year’s operating performance.
 Measuring such results against shareholders’ equity with 
securities valued at market could significantly distort the 
operating performance percentage because of wide year-to-year 
market value changes in the net worth figure that serves as the 
denominator. For example, a large decline in securities values 
could result in a very low “market value” net worth that, in 
turn, could cause mediocre operating earnings to look 
unrealistically good. Alternatively, the more successful that 
equity investments have been, the larger the net worth base 
becomes and the poorer the operating performance figure appears. 
Therefore, we will continue to report operating performance 
measured against beginning net worth, with securities valued at 
cost.
 On this basis, we had a reasonably good operating 
performance in 1979 - but not quite as good as that of 1978 - 
with operating earnings amounting to 18.6% of beginning net 
worth. Earnings per share, of course, increased somewhat (about 
20%) but we regard this as an improper figure upon which to 
focus. We had substantially more capital to work with in 1979 
than in 1978, and our performance in utilizing that capital fell 
short of the earlier year, even though per-share earnings rose. 
“Earnings per share” will rise constantly on a dormant savings 
account or on a U.S. Savings Bond bearing a fixed rate of return 
simply because “earnings” (the stated interest rate) are 
continuously plowed back and added to the capital base. Thus, 
even a “stopped clock” can look like a growth stock if the 
dividend payout ratio is low.
 The primary test of managerial economic performance is the 
achievement of a high earnings rate on equity capital employed 
(without undue leverage, accounting gimmickry, etc.) and not the 
achievement of consistent gains in earnings per share. In our 
view, many businesses would be better understood by their 
shareholder owners, as well as the general public, if managements 
and financial analysts modified the primary emphasis they place 
upon earnings per share, and upon yearly changes in that figure.
Long Term Results
 In measuring long term economic performance - in contrast to 
yearly performance - we believe it is appropriate to recognize 
fully any realized capital gains or losses as well as 
extraordinary items, and also to utilize financial statements 
presenting equity securities at market value. Such capital gains 
or losses, either realized or unrealized, are fully as important 
to shareholders over a period of years as earnings realized in a 
more routine manner through operations; it is just that their 
impact is often extremely capricious in the short run, a 
characteristic that makes them inappropriate as an indicator of 
single year managerial performance.
 The book value per share of Berkshire Hathaway on September 
30, 1964 (the fiscal yearend prior to the time that your present 
management assumed responsibility) was $19.46 per share. At 
yearend 1979, book value with equity holdings carried at market 
value was $335.85 per share. The gain in book value comes to 
20.5% compounded annually. This figure, of course, is far higher 
than any average of our yearly operating earnings calculations, 
and reflects the importance of capital appreciation of insurance 
equity investments in determining the overall results for our 
shareholders. It probably also is fair to say that the quoted 
book value in 1964 somewhat overstated the intrinsic value of the 
enterprise, since the assets owned at that time on either a going 
concern basis or a liquidating value basis were not worth 100 
cents on the dollar. (The liabilities were solid, however.)
 We have achieved this result while utilizing a low amount of 
leverage (both financial leverage measured by debt to equity, and 
operating leverage measured by premium volume to capital funds of 
our insurance business), and also without significant issuance or 
repurchase of shares. Basically, we have worked with the capital 
with which we started. From our textile base we, or our Blue 
Chip and Wesco subsidiaries, have acquired total ownership of 
thirteen businesses through negotiated purchases from private 
owners for cash, and have started six others. (It’s worth a 
mention that those who have sold to us have, almost without 
exception, treated us with exceptional honor and fairness, both 
at the time of sale and subsequently.)
 But before we drown in a sea of self-congratulation, a 
further - and crucial - observation must be made. A few years 
ago, a business whose per-share net worth compounded at 20% 
annually would have guaranteed its owners a highly successful 
real investment return. Now such an outcome seems less certain. 
For the inflation rate, coupled with individual tax rates, will 
be the ultimate determinant as to whether our internal operating 
performance produces successful investment results - i.e., a 
reasonable gain in purchasing power from funds committed - for 
you as shareholders.
 Just as the original 3% savings bond, a 5% passbook savings 
account or an 8% U.S. Treasury Note have, in turn, been 
transformed by inflation into financial instruments that chew up, 
rather than enhance, purchasing power over their investment 
lives, a business earning 20% on capital can produce a negative 
real return for its owners under inflationary conditions not much 
more severe than presently prevail.
 If we should continue to achieve a 20% compounded gain - not 
an easy or certain result by any means - and this gain is 
translated into a corresponding increase in the market value of 
Berkshire Hathaway stock as it has been over the last fifteen 
years, your after-tax purchasing power gain is likely to be very 
close to zero at a 14% inflation rate. Most of the remaining six 
percentage points will go for income tax any time you wish to 
convert your twenty percentage points of nominal annual gain into 
cash.
 That combination - the inflation rate plus the percentage of 
capital that must be paid by the owner to transfer into his own 
pocket the annual earnings achieved by the business (i.e., 
ordinary income tax on dividends and capital gains tax on 
retained earnings) - can be thought of as an “investor’s misery 
index”. When this index exceeds the rate of return earned on 
equity by the business, the investor’s purchasing power (real 
capital) shrinks even though he consumes nothing at all. We have 
no corporate solution to this problem; high inflation rates will 
not help us earn higher rates of return on equity.
 One friendly but sharp-eyed commentator on Berkshire has 
pointed out that our book value at the end of 1964 would have 
bought about one-half ounce of gold and, fifteen years later, 
after we have plowed back all earnings along with much blood, 
sweat and tears, the book value produced will buy about the same 
half ounce. A similar comparison could be drawn with Middle 
Eastern oil. The rub has been that government has been 
exceptionally able in printing money and creating promises, but 
is unable to print gold or create oil.
 We intend to continue to do as well as we can in managing 
the internal affairs of the business. But you should understand 
that external conditions affecting the stability of currency may 
very well be the most important factor in determining whether 
there are any real rewards from your investment in Berkshire 
Hathaway.
Sources of Earnings
 We again present a table showing the sources of Berkshire’s 
earnings. As explained last year, Berkshire owns about 60% of 
Blue Chip Stamps which, in turn, owns 80% of Wesco Financial 
Corporation. The table shows both aggregate earnings of the 
various business entities, as well as Berkshire’s share. All of 
the significant capital gains or losses attributable to any of 
the business entities are aggregated in the realized securities 
gain figure at the bottom of the table, and are not included in 
operating earnings.
 Net Earnings
 Earnings Before Income Taxes After Tax
 -------------------------------------- ------------------
 Total Berkshire Share Berkshire Share
 ------------------ ------------------ ------------------
(in thousands of dollars) 1979 1978 1979 1978 1979 1978
 -------- -------- -------- -------- -------- --------
Total - all entities ......... $68,632 $66,180 $56,427 $54,350 $42,817 $39,242
 ======== ======== ======== ======== ======== ========
Earnings from Operations:
 Insurance Group:
 Underwriting ............ $ 3,742 $ 3,001 $ 3,741 $ 3,000 $ 2,214 $ 1,560
 Net Investment Income ... 24,224 19,705 24,216 19,691 20,106 16,400
 Berkshire-Waumbec textiles 1,723 2,916 1,723 2,916 848 1,342
 Associated Retail 
 Stores, Inc. ........... 2,775 2,757 2,775 2,757 1,280 1,176
 See’s Candies ............. 12,785 12,482 7,598 7,013 3,448 3,049
 Buffalo Evening News ...... (4,617) (2,913) (2,744) (1,637) (1,333) (738)
 Blue Chip Stamps - Parent 2,397 2,133 1,425 1,198 1,624 1,382
 Illinois National Bank and
 Trust Company .......... 5,747 4,822 5,614 4,710 5,027 4,262
 Wesco Financial 
 Corporation - Parent ... 2,413 1,771 1,098 777 937 665
 Mutual Savings and Loan
 Association ............ 10,447 10,556 4,751 4,638 3,261 3,042
 Precision Steel ........... 3,254 -- 1,480 -- 723 --
 Interest on Debt .......... (8,248) (5,566) (5,860) (4,546) (2,900) (2,349)
 Other ..................... 1,342 720 996 438 753 261
 -------- -------- -------- -------- -------- --------
 Total Earnings from
 Operations .......... $57,984 $52,384 $46,813 $40,955 $35,988 $30,052
 Realized Securities Gain 10,648 13,796 9,614 13,395 6,829 9,190
 -------- -------- -------- -------- -------- --------
 Total Earnings ......... $68,632 $66,180 $56,427 $54,350 $42,817 $39,242
 ======== ======== ======== ======== ======== ========
 Blue Chip and Wesco are public companies with reporting 
requirements of their own. On pages 37-43 of this report, we 
have reproduced the narrative reports of the principal executives 
of both companies, in which they describe 1979 operations. Some 
of the numbers they mention in their reports are not precisely 
identical to those in the above table because of accounting and 
tax complexities. (The Yanomamo Indians employ only three 
numbers: one, two, and more than two. Maybe their time will 
come.) However, the commentary in those reports should be helpful 
to you in understanding the underlying economic characteristics 
and future prospects of the important businesses that they 
manage.
 A copy of the full annual report of either company will be 
mailed to any shareholder of Berkshire upon request to Mr. 
Robert H. Bird for Blue Chip Stamps, 5801 South Eastern Avenue, 
Los Angeles, California 90040, or to Mrs. Bette Deckard for Wesco 
Financial Corporation, 315 East Colorado Boulevard, Pasadena, 
California 91109.
Textiles and Retailing
 The relative significance of these two areas has diminished 
somewhat over the years as our insurance business has grown 
dramatically in size and earnings. Ben Rosner, at Associated 
Retail Stores, continues to pull rabbits out of the hat - big 
rabbits from a small hat. Year after year, he produces very 
large earnings relative to capital employed - realized in cash 
and not in increased receivables and inventories as in many other 
retail businesses - in a segment of the market with little growth 
and unexciting demographics. Ben is now 76 and, like our other 
“up-and-comers”, Gene Abegg, 82, at Illinois National and Louis 
Vincenti, 74, at Wesco, regularly achieves more each year.
 Our textile business also continues to produce some cash, 
but at a low rate compared to capital employed. This is not a 
reflection on the managers, but rather on the industry in which 
they operate. In some businesses - a network TV station, for 
example - it is virtually impossible to avoid earning 
extraordinary returns on tangible capital employed in the 
business. And assets in such businesses sell at equally 
extraordinary prices, one thousand cents or more on the dollar, a 
valuation reflecting the splendid, almost unavoidable, economic 
results obtainable. Despite a fancy price tag, the “easy” 
business may be the better route to go.
 We can speak from experience, having tried the other route. 
Your Chairman made the decision a few years ago to purchase 
Waumbec Mills in Manchester, New Hampshire, thereby expanding our 
textile commitment. By any statistical test, the purchase price 
was an extraordinary bargain; we bought well below the working 
capital of the business and, in effect, got very substantial 
amounts of machinery and real estate for less than nothing. But 
the purchase was a mistake. While we labored mightily, new 
problems arose as fast as old problems were tamed.
 Both our operating and investment experience cause us to 
conclude that “turnarounds” seldom turn, and that the same 
energies and talent are much better employed in a good business 
purchased at a fair price than in a poor business purchased at a 
bargain price. Although a mistake, the Waumbec acquisition has 
not been a disaster. Certain portions of the operation are 
proving to be valuable additions to our decorator line (our 
strongest franchise) at New Bedford, and it’s possible that we 
may be able to run profitably on a considerably reduced scale at 
Manchester. However, our original rationale did not prove out.
Insurance Underwriting
 We predicted last year that the combined underwriting ratio 
(see definition on page 36) for the insurance industry would 
“move up at least a few points, perhaps enough to throw the 
industry as a whole into an underwriting loss position”. That is 
just about the way it worked out. The industry underwriting 
ratio rose in 1979 over three points, from roughly 97.4% to 
100.7%. We also said that we thought our underwriting performance 
relative to the industry would improve somewhat in 1979 and, 
again, things worked out as expected. Our own underwriting ratio 
actually decreased from 98.2% to 97.1%. Our forecast for 1980 is 
similar in one respect; again we feel that the industry’s 
performance will worsen by at least another few points. However, 
this year we have no reason to think that our performance 
relative to the industry will further improve. (Don’t worry - we 
won’t hold back to try to validate that forecast.)
 Really extraordinary results were turned in by the portion 
of National Indemnity Company’s insurance operation run by Phil 
Liesche. Aided by Roland Miller in Underwriting and Bill Lyons 
in Claims, this section of the business produced an underwriting 
profit of $8.4 million on about $82 million of earned premiums. 
Only a very few companies in the entire industry produced a 
result comparable to this.
 You will notice that earned premiums in this segment were 
down somewhat from those of 1978. We hear a great many insurance 
managers talk about being willing to reduce volume in order to 
underwrite profitably, but we find that very few actually do so. 
Phil Liesche is an exception: if business makes sense, he writes 
it; if it doesn’t, he rejects it. It is our policy not to lay 
off people because of the large fluctuations in work load 
produced by such voluntary volume changes. We would rather have 
some slack in the organization from time to time than keep 
everyone terribly busy writing business on which we are going to 
lose money. Jack Ringwalt, the founder of National Indemnity 
Company, instilled this underwriting discipline at the inception 
of the company, and Phil Liesche never has wavered in maintaining 
it. We believe such strong-mindedness is as rare as it is sound 
- and absolutely essential to the running of a first-class 
casualty insurance operation.
 John Seward continues to make solid progress at Home and 
Automobile Insurance Company, in large part by significantly 
expanding the marketing scope of that company in general 
liability lines. These lines can be dynamite, but the record to 
date is excellent and, in John McGowan and Paul Springman, we 
have two cautious liability managers extending our capabilities.
 Our reinsurance division, led by George Young, continues to 
give us reasonably satisfactory overall results after allowing 
for investment income, but underwriting performance remains 
unsatisfactory. We think the reinsurance business is a very 
tough business that is likely to get much tougher. In fact, the 
influx of capital into the business and the resulting softer 
price levels for continually increasing exposures may well 
produce disastrous results for many entrants (of which they may 
be blissfully unaware until they are in over their heads; much 
reinsurance business involves an exceptionally “long tail”, a 
characteristic that allows catastrophic current loss experience 
to fester undetected for many years). It will be hard for us to 
be a whole lot smarter than the crowd and thus our reinsurance 
activity may decline substantially during the projected prolonged 
period of extraordinary competition.
 The Homestate operation was disappointing in 1979. 
Excellent results again were turned in by George Billings at 
Texas United Insurance Company, winner of the annual award for 
the low loss ratio among Homestate companies, and Floyd Taylor at 
Kansas Fire and Casualty Company. But several of the other 
operations, particularly Cornhusker Casualty Company, our first 
and largest Homestate operation and historically a winner, had 
poor underwriting results which were accentuated by data 
processing, administrative and personnel problems. We have made 
some major mistakes in reorganizing our data processing 
activities, and those mistakes will not be cured immediately or 
without cost. However, John Ringwalt has thrown himself into the 
task of getting things straightened out and we have confidence 
that he, aided by several strong people who recently have been 
brought aboard, will succeed.
 Our performance in Worker’s Compensation was far, far better 
than we had any right to expect at the beginning of 1979. We had 
a very favorable climate in California for the achievement of 
good results but, beyond this, Milt Thornton at Cypress Insurance 
Company and Frank DeNardo at National Indemnity’s California 
Worker’s Compensation operation both performed in a simply 
outstanding manner. We have admitted - and with good reason - 
some mistakes on the acquisition front, but the Cypress purchase 
has turned out to be an absolute gem. Milt Thornton, like Phil 
Liesche, follows the policy of sticking with business that he 
understands and wants, without giving consideration to the impact 
on volume. As a result, he has an outstanding book of business 
and an exceptionally well functioning group of employees. Frank 
DeNardo has straightened out the mess he inherited in Los Angeles 
in a manner far beyond our expectations, producing savings 
measured in seven figures. He now can begin to build on a sound 
base.
 At yearend we entered the specialized area of surety 
reinsurance under the management of Chet Noble. At least 
initially, this operation will be relatively small since our 
policy will be to seek client companies who appreciate the need 
for a long term “partnership” relationship with their reinsurers. 
We are pleased by the quality of the insurers we have attracted, 
and hope to add several more of the best primary writers as our 
financial strength and stability become better known in the 
surety field.
 The conventional wisdom is that insurance underwriting 
overall will be poor in 1980, but that rates will start to firm 
in a year or so, leading to a turn in the cycle some time in 
1981. We disagree with this view. Present interest rates 
encourage the obtaining of business at underwriting loss levels 
formerly regarded as totally unacceptable. Managers decry the 
folly of underwriting at a loss to obtain investment income, but 
we believe that many will. Thus we expect that competition will 
create a new threshold of tolerance for underwriting losses, and 
that combined ratios will average higher in the future than in 
the past.
 To some extent, the day of reckoning has been postponed 
because of marked reduction in the frequency of auto accidents - 
probably brought on in major part by changes in driving habits 
induced by higher gas prices. In our opinion, if the habits 
hadn’t changed, auto insurance rates would have been very little 
higher and underwriting results would have been much worse. This 
dosage of serendipity won’t last indefinitely.
 Our forecast is for an average combined ratio for the 
industry in the 105 area over the next five years. While we have 
a high degree of confidence that certain of our operations will 
do considerably better than average, it will be a challenge to us 
to operate below the industry figure. You can get a lot of 
surprises in insurance.
 Nevertheless, we believe that insurance can be a very good 
business. It tends to magnify, to an unusual degree, human 
managerial talent - or the lack of it. We have a number of 
managers whose talent is both proven and growing. (And, in 
addition, we have a very large indirect interest in two truly 
outstanding management groups through our investments in SAFECO 
and GEICO.) Thus we expect to do well in insurance over a period 
of years. However, the business has the potential for really 
terrible results in a single specific year. If accident 
frequency should turn around quickly in the auto field, we, along 
with others, are likely to experience such a year.
Insurance Investments
 In recent years we have written at length in this section 
about our insurance equity investments. In 1979 they continued 
to perform well, largely because the underlying companies in 
which we have invested, in practically all cases, turned in 
outstanding performances. Retained earnings applicable to our 
insurance equity investments, not reported in our financial 
statements, continue to mount annually and, in aggregate, now 
come to a very substantial number. We have faith that the 
managements of these companies will utilize those retained 
earnings effectively and will translate a dollar retained by them 
into a dollar or more of subsequent market value for us. In 
part, our unrealized gains reflect this process.
 Below we show the equity investments which had a yearend 
market value of over $5 million:
No. of Sh. Company Cost Market
---------- ------- ---------- ----------
 (000s omitted)
 289,700 Affiliated Publications, Inc. ........... $ 2,821 $ 8,800
 112,545 Amerada Hess ............................ 2,861 5,487
 246,450 American Broadcasting Companies, Inc. ... 6,082 9,673
5,730,114 GEICO Corp. (Common Stock) .............. 28,288 68,045
 328,700 General Foods, Inc. ..................... 11,437 11,053
1,007,500 Handy & Harman .......................... 21,825 38,537
 711,180 Interpublic Group of Companies, Inc. .... 4,531 23,736
1,211,834 Kaiser Aluminum & Chemical Corp. ........ 20,629 23,328
 282,500 Media General, Inc. ..................... 4,545 7,345
 391,400 Ogilvy & Mather International ........... 3,709 7,828
 953,750 SAFECO Corporation ...................... 23,867 35,527
1,868,000 The Washington Post Company ............. 10,628 39,241
 771,900 F. W. Woolworth Company ................. 15,515 19,394
 ---------- ----------
 Total ................................... $156,738 $297,994
 All Other Holdings ...................... 28,675 38,686
 ---------- ----------
 Total Equities .......................... $185,413 $336,680
 ========== ==========
 We currently believe that equity markets in 1980 are likely 
to evolve in a manner that will result in an underperformance by 
our portfolio for the first time in recent years. We very much 
like the companies in which we have major investments, and plan 
no changes to try to attune ourselves to the markets of a 
specific year.
 Since we have covered our philosophy regarding equities 
extensively in recent annual reports, a more extended discussion 
of bond investments may be appropriate for this one, particularly 
in light of what has happened since yearend. An extraordinary 
amount of money has been lost by the insurance industry in the 
bond area - notwithstanding the accounting convention that allows 
insurance companies to carry their bond investments at amortized 
cost, regardless of impaired market value. Actually, that very 
accounting convention may have contributed in a major way to the 
losses; had management been forced to recognize market values, 
its attention might have been focused much earlier on the dangers 
of a very long-term bond contract.
 Ironically, many insurance companies have decided that a 
one-year auto policy is inappropriate during a time of inflation, 
and six-month policies have been brought in as replacements. 
“How,” say many of the insurance managers, “can we be expected to 
look forward twelve months and estimate such imponderables as 
hospital costs, auto parts prices, etc.?” But, having decided 
that one year is too long a period for which to set a fixed price 
for insurance in an inflationary world, they then have turned 
around, taken the proceeds from the sale of that six-month 
policy, and sold the money at a fixed price for thirty or forty 
years.
 The very long-term bond contract has been the last major 
fixed price contract of extended duration still regularly 
initiated in an inflation-ridden world. The buyer of money to be 
used between 1980 and 2020 has been able to obtain a firm price 
now for each year of its use while the buyer of auto insurance, 
medical services, newsprint, office space - or just about any 
other product or service - would be greeted with laughter if he 
were to request a firm price now to apply through 1985. For in 
virtually all other areas of commerce, parties to long-term 
contracts now either index prices in some manner, or insist on 
the right to review the situation every year or so.
 A cultural lag has prevailed in the bond area. The buyers 
(borrowers) and middlemen (underwriters) of money hardly could be 
expected to raise the question of whether it all made sense, and 
the sellers (lenders) slept through an economic and contractual 
revolution.
 For the last few years our insurance companies have not been 
a net purchaser of any straight long-term bonds (those without 
conversion rights or other attributes offering profit 
possibilities). There have been some purchases in the straight 
bond area, of course, but they have been offset by sales or 
maturities. Even prior to this period, we never would buy thirty 
or forty-year bonds; instead we tried to concentrate in the 
straight bond area on shorter issues with sinking funds and on 
issues that seemed relatively undervalued because of bond market 
inefficiencies.
 However, the mild degree of caution that we exercised was an 
improper response to the world unfolding about us. You do not 
adequately protect yourself by being half awake while others are 
sleeping. It was a mistake to buy fifteen-year bonds, and yet we 
did; we made an even more serious mistake in not selling them (at 
losses, if necessary) when our present views began to 
crystallize. (Naturally, those views are much clearer and 
definite in retrospect; it would be fair for you to ask why we 
weren’t writing about this subject last year.)
 Of course, we must hold significant amounts of bonds or 
other fixed dollar obligations in conjunction with our insurance 
operations. In the last several years our net fixed dollar 
commitments have been limited to the purchase of convertible 
bonds. We believe that the conversion options obtained, in 
effect, give that portion of the bond portfolio a far shorter 
average life than implied by the maturity terms of the issues 
(i.e., at an appropriate time of our choosing, we can terminate 
the bond contract by conversion into stock).
 This bond policy has given us significantly lower unrealized 
losses than those experienced by the great majority of property 
and casualty insurance companies. We also have been helped by 
our strong preference for equities in recent years that has kept 
our overall bond segment relatively low. Nevertheless, we are 
taking our lumps in bonds and feel that, in a sense, our mistakes 
should be viewed less charitably than the mistakes of those who 
went about their business unmindful of the developing problems.
 Harking back to our textile experience, we should have 
realized the futility of trying to be very clever (via sinking 
funds and other special type issues) in an area where the tide 
was running heavily against us.
 We have severe doubts as to whether a very long-term fixed￾interest bond, denominated in dollars, remains an appropriate 
business contract in a world where the value of dollars seems 
almost certain to shrink by the day. Those dollars, as well as 
paper creations of other governments, simply may have too many 
structural weaknesses to appropriately serve as a unit of long 
term commercial reference. If so, really long bonds may turn out 
to be obsolete instruments and insurers who have bought those 
maturities of 2010 or 2020 could have major and continuing 
problems on their hands. We, likewise, will be unhappy with our 
fifteen-year bonds and will annually pay a price in terms of 
earning power that reflects that mistake.
 Some of our convertible bonds appear exceptionally 
attractive to us, and have the same sort of earnings retention 
factor (applicable to the stock into which they may be converted) 
that prevails in our conventional equity portfolio. We expect to 
make money in these bonds (we already have, in a few cases) and 
have hopes that our profits in this area may offset losses in 
straight bonds.
 And, of course, there is the possibility that our present 
analysis is much too negative. The chances for very low rates of 
inflation are not nil. Inflation is man-made; perhaps it can be 
man-mastered. The threat which alarms us may also alarm 
legislators and other powerful groups, prompting some appropriate 
response.
 Furthermore, present interest rates incorporate much higher 
inflation projections than those of a year or two ago. Such 
rates may prove adequate or more than adequate to protect bond 
buyers. We even may miss large profits from a major rebound in 
bond prices. However, our unwillingness to fix a price now for a 
pound of See’s candy or a yard of Berkshire cloth to be delivered 
in 2010 or 2020 makes us equally unwilling to buy bonds which set 
a price on money now for use in those years. Overall, we opt for 
Polonius (slightly restated): “Neither a short-term borrower nor 
a long-term lender be.”
Banking
 This will be the last year that we can report on the 
Illinois National Bank and Trust Company as a subsidiary of 
Berkshire Hathaway. Therefore, it is particularly pleasant to 
report that, under Gene Abegg’s and Pete Jeffrey’s management, 
the bank broke all previous records and earned approximately 2.3% 
on average assets last year, a level again over three times that 
achieved by the average major bank, and more than double that of 
banks regarded as outstanding. The record is simply 
extraordinary, and the shareholders of Berkshire Hathaway owe a 
standing ovation to Gene Abegg for the performance this year and 
every year since our purchase in 1969.
 As you know, the Bank Holding Company Act of 1969 requires 
that we divest the bank by December 31, 1980. For some years we 
have expected to comply by effecting a spin-off during 1980. 
However, the Federal Reserve Board has taken the firm position 
that if the bank is spun off, no officer or director of Berkshire 
Hathaway can be an officer or director of the spun-off bank or 
bank holding company, even in a case such as ours in which one 
individual would own over 40% of both companies.
 Under these conditions, we are investigating the possible 
sale of between 80% and 100% of the stock of the bank. We will 
be most choosy about any purchaser, and our selection will not be 
based solely on price. The bank and its management have treated 
us exceptionally well and, if we have to sell, we want to be sure 
that they are treated equally as well. A spin-off still is a 
possibility if a fair price along with a proper purchaser cannot 
be obtained by early fall.
 However, you should be aware that we do not expect to be 
able to fully, or even in very large part, replace the earning 
power represented by the bank from the proceeds of the sale of 
the bank. You simply can’t buy high quality businesses at the 
sort of price/earnings multiple likely to prevail on our bank 
sale.
Financial Reporting
 During 1979, NASDAQ trading was initiated in the stock of 
Berkshire Hathaway This means that the stock now is quoted on the 
Over-the-Counter page of the Wall Street journal under 
“Additional OTC Quotes”. Prior to such listing, the Wall Street 
journal and the Dow-Jones news ticker would not report our 
earnings, even though such earnings were one hundred or more 
times the level of some companies whose reports they regularly 
picked up.
 Now, however, the Dow-Jones news ticker reports our 
quarterly earnings promptly after we release them and, in 
addition, both the ticker and the Wall Street journal report our 
annual earnings. This solves a dissemination problem that had 
bothered us.
 In some ways, our shareholder group is a rather unusual one, 
and this affects our manner of reporting to you. For example, at 
the end of each year about 98% of the shares outstanding are held 
by people who also were shareholders at the beginning of the 
year. Therefore, in our annual report we build upon what we have 
told you in previous years instead of restating a lot of 
material. You get more useful information this way, and we don’t 
get bored.
 Furthermore, perhaps 90% of our shares are owned by 
investors for whom Berkshire is their largest security holding, 
very often far and away the largest. Many of these owners are 
willing to spend a significant amount of time with the annual 
report, and we attempt to provide them with the same information 
we would find useful if the roles were reversed.
 In contrast, we include no narrative with our quarterly 
reports. Our owners and managers both have very long time￾horizons in regard to this business, and it is difficult to say 
anything new or meaningful each quarter about events of long-term 
significance.
 But when you do receive a communication from us, it will 
come from the fellow you are paying to run the business. Your 
Chairman has a firm belief that owners are entitled to hear 
directly from the CEO as to what is going on and how he evaluates 
the business, currently and prospectively. You would demand that 
in a private company; you should expect no less in a public 
company. A once-a-year report of stewardship should not be 
turned over to a staff specialist or public relations consultant 
who is unlikely to be in a position to talk frankly on a manager￾to-owner basis.
 We feel that you, as owners, are entitled to the same sort 
of reporting by your manager as we feel is owed to us at 
Berkshire Hathaway by managers of our business units. Obviously, 
the degree of detail must be different, particularly where 
information would be useful to a business competitor or the like. 
But the general scope, balance, and level of candor should be 
similar. We don’t expect a public relations document when our 
operating managers tell us what is going on, and we don’t feel 
you should receive such a document.
 In large part, companies obtain the shareholder constituency 
that they seek and deserve. If they focus their thinking and 
communications on short-term results or short-term stock market 
consequences they will, in large part, attract shareholders who 
focus on the same factors. And if they are cynical in their 
treatment of investors, eventually that cynicism is highly likely 
to be returned by the investment community.
 Phil Fisher, a respected investor and author, once likened 
the policies of the corporation in attracting shareholders to 
those of a restaurant attracting potential customers. A 
restaurant could seek a given clientele - patrons of fast foods, 
elegant dining, Oriental food, etc. - and eventually obtain an 
appropriate group of devotees. If the job were expertly done, 
that clientele, pleased with the service, menu, and price level 
offered, would return consistently. But the restaurant could not 
change its character constantly and end up with a happy and 
stable clientele. If the business vacillated between French 
cuisine and take-out chicken, the result would be a revolving 
door of confused and dissatisfied customers.
 So it is with corporations and the shareholder constituency 
they seek. You can’t be all things to all men, simultaneously 
seeking different owners whose primary interests run from high 
current yield to long-term capital growth to stock market 
pyrotechnics, etc.
 The reasoning of managements that seek large trading 
activity in their shares puzzles us. In effect, such managements 
are saying that they want a good many of the existing clientele 
continually to desert them in favor of new ones - because you 
can’t add lots of new owners (with new expectations) without 
losing lots of former owners.
 We much prefer owners who like our service and menu and who 
return year after year. It would be hard to find a better group 
to sit in the Berkshire Hathaway shareholder “seats” than those 
already occupying them. So we hope to continue to have a very 
low turnover among our owners, reflecting a constituency that 
understands our operation, approves of our policies, and shares 
our expectations. And we hope to deliver on those expectations.
Prospects
 Last year we said that we expected operating earnings in 
dollars to improve but return on equity to decrease. This turned 
out to be correct. Our forecast for 1980 is the same. If we are 
wrong, it will be on the downside. In other words, we are 
virtually certain that our operating earnings expressed as a 
percentage of the new equity base of approximately $236 million, 
valuing securities at cost, will decline from the 18.6% attained 
in 1979. There is also a fair chance that operating earnings in 
aggregate dollars will fall short of 1979; the outcome depends 
partly upon the date of disposition of the bank, partly upon the 
degree of slippage in insurance underwriting profitability, and 
partly upon the severity of earnings problems in the savings and 
loan industry.
 We continue to feel very good about our insurance equity 
investments. Over a period of years, we expect to develop very 
large and growing amounts of underlying earning power 
attributable to our fractional ownership of these companies. In 
most cases they are splendid businesses, splendidly managed, 
purchased at highly attractive prices.
 Your company is run on the principle of centralization of 
financial decisions at the top (the very top, it might be added), 
and rather extreme delegation of operating authority to a number 
of key managers at the individual company or business unit level. 
We could just field a basketball team with our corporate 
headquarters group (which utilizes only about 1500 square feet of 
space).
 This approach produces an occasional major mistake that 
might have been eliminated or minimized through closer operating 
controls. But it also eliminates large layers of costs and 
dramatically speeds decision-making. Because everyone has a 
great deal to do, a very great deal gets done. Most important of 
all, it enables us to attract and retain some extraordinarily 
talented individuals - people who simply can’t be hired in the 
normal course of events - who find working for Berkshire to be 
almost identical to running their own show.
 We have placed much trust in them - and their achievements 
have far exceeded that trust.
 Warren E. Buffett, Chairman
March 3, 1980
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Operating earnings improved to $41.9 million in 1980 from 
$36.0 million in 1979, but return on beginning equity capital 
(with securities valued at cost) fell to 17.8% from 18.6%. We 
believe the latter yardstick to be the most appropriate measure 
of single-year managerial economic performance. Informed use of 
that yardstick, however, requires an understanding of many 
factors, including accounting policies, historical carrying 
values of assets, financial leverage, and industry conditions.
 In your evaluation of our economic performance, we suggest 
that two factors should receive your special attention - one of a 
positive nature peculiar, to a large extent, to our own 
operation, and one of a negative nature applicable to corporate 
performance generally. Let’s look at the bright side first.
Non-Controlled Ownership Earnings
 When one company owns part of another company, appropriate 
accounting procedures pertaining to that ownership interest must 
be selected from one of three major categories. The percentage 
of voting stock that is owned, in large part, determines which 
category of accounting principles should be utilized.
 Generally accepted accounting principles require (subject to 
exceptions, naturally, as with our former bank subsidiary) full 
consolidation of sales, expenses, taxes, and earnings of business 
holdings more than 50% owned. Blue Chip Stamps, 60% owned by 
Berkshire Hathaway Inc., falls into this category. Therefore, 
all Blue Chip income and expense items are included in full in 
Berkshire’s Consolidated Statement of Earnings, with the 40% 
ownership interest of others in Blue Chip’s net earnings 
reflected in the Statement as a deduction for “minority 
interest”.
 Full inclusion of underlying earnings from another class of 
holdings, companies owned 20% to 50% (usually called 
“investees”), also normally occurs. Earnings from such companies 
- for example, Wesco Financial, controlled by Berkshire but only 
48% owned - are included via a one-line entry in the owner’s 
Statement of Earnings. Unlike the over-50% category, all items 
of revenue and expense are omitted; just the proportional share 
of net income is included. Thus, if Corporation A owns one-third 
of Corporation B, one-third of B’s earnings, whether or not 
distributed by B, will end up in A’s earnings. There are some 
modifications, both in this and the over-50% category, for 
intercorporate taxes and purchase price adjustments, the 
explanation of which we will save for a later day. (We know you 
can hardly wait.)
 Finally come holdings representing less than 20% ownership 
of another corporation’s voting securities. In these cases, 
accounting rules dictate that the owning companies include in 
their earnings only dividends received from such holdings. 
Undistributed earnings are ignored. Thus, should we own 10% of 
Corporation X with earnings of $10 million in 1980, we would 
report in our earnings (ignoring relatively minor taxes on 
intercorporate dividends) either (a) $1 million if X declared the 
full $10 million in dividends; (b) $500,000 if X paid out 50%, or 
$5 million, in dividends; or (c) zero if X reinvested all 
earnings.
 We impose this short - and over-simplified - course in 
accounting upon you because Berkshire’s concentration of 
resources in the insurance field produces a corresponding 
concentration of its assets in companies in that third (less than 
20% owned) category. Many of these companies pay out relatively 
small proportions of their earnings in dividends. This means 
that only a small proportion of their current earning power is 
recorded in our own current operating earnings. But, while our 
reported operating earnings reflect only the dividends received 
from such companies, our economic well-being is determined by 
their earnings, not their dividends.
 Our holdings in this third category of companies have 
increased dramatically in recent years as our insurance business 
has prospered and as securities markets have presented 
particularly attractive opportunities in the common stock area. 
The large increase in such holdings, plus the growth of earnings 
experienced by those partially-owned companies, has produced an 
unusual result; the part of “our” earnings that these companies 
retained last year (the part not paid to us in dividends) 
exceeded the total reported annual operating earnings of 
Berkshire Hathaway. Thus, conventional accounting only allows 
less than half of our earnings “iceberg” to appear above the 
surface, in plain view. Within the corporate world such a result 
is quite rare; in our case it is likely to be recurring.
 Our own analysis of earnings reality differs somewhat from 
generally accepted accounting principles, particularly when those 
principles must be applied in a world of high and uncertain rates 
of inflation. (But it’s much easier to criticize than to improve 
such accounting rules. The inherent problems are monumental.) We 
have owned 100% of businesses whose reported earnings were not 
worth close to 100 cents on the dollar to us even though, in an 
accounting sense, we totally controlled their disposition. (The 
“control” was theoretical. Unless we reinvested all earnings, 
massive deterioration in the value of assets already in place 
would occur. But those reinvested earnings had no prospect of 
earning anything close to a market return on capital.) We have 
also owned small fractions of businesses with extraordinary 
reinvestment possibilities whose retained earnings had an 
economic value to us far in excess of 100 cents on the dollar.
 The value to Berkshire Hathaway of retained earnings is not 
determined by whether we own 100%, 50%, 20% or 1% of the 
businesses in which they reside. Rather, the value of those 
retained earnings is determined by the use to which they are put 
and the subsequent level of earnings produced by that usage. 
This is true whether we determine the usage, or whether managers 
we did not hire - but did elect to join - determine that usage. 
(It’s the act that counts, not the actors.) And the value is in 
no way affected by the inclusion or non-inclusion of those 
retained earnings in our own reported operating earnings. If a 
tree grows in a forest partially owned by us, but we don’t record 
the growth in our financial statements, we still own part of the 
tree.
 Our view, we warn you, is non-conventional. But we would 
rather have earnings for which we did not get accounting credit 
put to good use in a 10%-owned company by a management we did not 
personally hire, than have earnings for which we did get credit 
put into projects of more dubious potential by another management 
- even if we are that management.
 (We can’t resist pausing here for a short commercial. One 
usage of retained earnings we often greet with special enthusiasm 
when practiced by companies in which we have an investment 
interest is repurchase of their own shares. The reasoning is 
simple: if a fine business is selling in the market place for far 
less than intrinsic value, what more certain or more profitable 
utilization of capital can there be than significant enlargement 
of the interests of all owners at that bargain price? The 
competitive nature of corporate acquisition activity almost 
guarantees the payment of a full - frequently more than full 
price when a company buys the entire ownership of another 
enterprise. But the auction nature of security markets often 
allows finely-run companies the opportunity to purchase portions 
of their own businesses at a price under 50% of that needed to 
acquire the same earning power through the negotiated acquisition 
of another enterprise.)
Long-Term Corporate Results
 As we have noted, we evaluate single-year corporate 
performance by comparing operating earnings to shareholders’ 
equity with securities valued at cost. Our long-term yardstick 
of performance, however, includes all capital gains or losses, 
realized or unrealized. We continue to achieve a long-term 
return on equity that considerably exceeds the average of our 
yearly returns. The major factor causing this pleasant result is 
a simple one: the retained earnings of those non-controlled 
holdings we discussed earlier have been translated into gains in 
market value.
 Of course, this translation of retained earnings into market 
price appreciation is highly uneven (it goes in reverse some 
years), unpredictable as to timing, and unlikely to materialize 
on a precise dollar-for-dollar basis. And a silly purchase price 
for a block of stock in a corporation can negate the effects of a 
decade of earnings retention by that corporation. But when 
purchase prices are sensible, some long-term market recognition 
of the accumulation of retained earnings almost certainly will 
occur. Periodically you even will receive some frosting on the 
cake, with market appreciation far exceeding post-purchase 
retained earnings.
 In the sixteen years since present management assumed 
responsibility for Berkshire, book value per share with 
insurance-held equities valued at market has increased from 
$19.46 to $400.80, or 20.5% compounded annually. (You’ve done 
better: the value of the mineral content in the human body 
compounded at 22% annually during the past decade.) It is 
encouraging, moreover, to realize that our record was achieved 
despite many mistakes. The list is too painful and lengthy to 
detail here. But it clearly shows that a reasonably competitive 
corporate batting average can be achieved in spite of a lot of 
managerial strikeouts.
 Our insurance companies will continue to make large 
investments in well-run, favorably-situated, non-controlled 
companies that very often will pay out in dividends only small 
proportions of their earnings. Following this policy, we would 
expect our long-term returns to continue to exceed the returns 
derived annually from reported operating earnings. Our 
confidence in this belief can easily be quantified: if we were to 
sell the equities that we hold and replace them with long-term 
tax-free bonds, our reported operating earnings would rise 
immediately by over $30 million annually. Such a shift tempts us 
not at all. 
 So much for the good news.
Results for Owners
 Unfortunately, earnings reported in corporate financial 
statements are no longer the dominant variable that determines 
whether there are any real earnings for you, the owner. For only 
gains in purchasing power represent real earnings on investment. 
If you (a) forego ten hamburgers to purchase an investment; (b) 
receive dividends which, after tax, buy two hamburgers; and (c) 
receive, upon sale of your holdings, after-tax proceeds that will 
buy eight hamburgers, then (d) you have had no real income from 
your investment, no matter how much it appreciated in dollars. 
You may feel richer, but you won’t eat richer.
 High rates of inflation create a tax on capital that makes 
much corporate investment unwise - at least if measured by the 
criterion of a positive real investment return to owners. This 
“hurdle rate” the return on equity that must be achieved by a 
corporation in order to produce any real return for its 
individual owners - has increased dramatically in recent years. 
The average tax-paying investor is now running up a down 
escalator whose pace has accelerated to the point where his 
upward progress is nil.
 For example, in a world of 12% inflation a business earning 
20% on equity (which very few manage consistently to do) and 
distributing it all to individuals in the 50% bracket is chewing 
up their real capital, not enhancing it. (Half of the 20% will go 
for income tax; the remaining 10% leaves the owners of the 
business with only 98% of the purchasing power they possessed at 
the start of the year - even though they have not spent a penny 
of their “earnings”). The investors in this bracket would 
actually be better off with a combination of stable prices and 
corporate earnings on equity capital of only a few per cent.
 Explicit income taxes alone, unaccompanied by any implicit 
inflation tax, never can turn a positive corporate return into a 
negative owner return. (Even if there were 90% personal income 
tax rates on both dividends and capital gains, some real income 
would be left for the owner at a zero inflation rate.) But the 
inflation tax is not limited by reported income. Inflation rates 
not far from those recently experienced can turn the level of 
positive returns achieved by a majority of corporations into 
negative returns for all owners, including those not required to 
pay explicit taxes. (For example, if inflation reached 16%, 
owners of the 60% plus of corporate America earning less than 
this rate of return would be realizing a negative real return - 
even if income taxes on dividends and capital gains were 
eliminated.)
 Of course, the two forms of taxation co-exist and interact 
since explicit taxes are levied on nominal, not real, income. 
Thus you pay income taxes on what would be deficits if returns to 
stockholders were measured in constant dollars.
 At present inflation rates, we believe individual owners in 
medium or high tax brackets (as distinguished from tax-free 
entities such as pension funds, eleemosynary institutions, etc.) 
should expect no real long-term return from the average American 
corporation, even though these individuals reinvest the entire 
after-tax proceeds from all dividends they receive. The average 
return on equity of corporations is fully offset by the 
combination of the implicit tax on capital levied by inflation 
and the explicit taxes levied both on dividends and gains in 
value produced by retained earnings.
 As we said last year, Berkshire has no corporate solution to 
the problem. (We’ll say it again next year, too.) Inflation does 
not improve our return on equity.
 Indexing is the insulation that all seek against inflation. 
But the great bulk (although there are important exceptions) of 
corporate capital is not even partially indexed. Of course, 
earnings and dividends per share usually will rise if significant 
earnings are “saved” by a corporation; i.e., reinvested instead 
of paid as dividends. But that would be true without inflation. 
A thrifty wage earner, likewise, could achieve regular annual 
increases in his total income without ever getting a pay increase 
- if he were willing to take only half of his paycheck in cash 
(his wage “dividend”) and consistently add the other half (his 
“retained earnings”) to a savings account. Neither this high￾saving wage earner nor the stockholder in a high-saving 
corporation whose annual dividend rate increases while its rate 
of return on equity remains flat is truly indexed.
 For capital to be truly indexed, return on equity must rise, 
i.e., business earnings consistently must increase in proportion 
to the increase in the price level without any need for the 
business to add to capital - including working capital - 
employed. (Increased earnings produced by increased investment 
don’t count.) Only a few businesses come close to exhibiting this 
ability. And Berkshire Hathaway isn’t one of them.
 We, of course, have a corporate policy of reinvesting 
earnings for growth, diversity and strength, which has the 
incidental effect of minimizing the current imposition of 
explicit taxes on our owners. However, on a day-by-day basis, 
you will be subjected to the implicit inflation tax, and when you 
wish to transfer your investment in Berkshire into another form 
of investment, or into consumption, you also will face explicit 
taxes.
Sources of Earnings
 The table below shows the sources of Berkshire’s reported 
earnings. Berkshire owns about 60% of Blue Chip Stamps, which in 
turn owns 80% of Wesco Financial Corporation. The table shows 
aggregate earnings of the various business entities, as well as 
Berkshire’s share of those earnings. All of the significant 
capital gains and losses attributable to any of the business 
entities are aggregated in the realized securities gains figure 
at the bottom of the table, and are not included in operating 
earnings. Our calculation of operating earnings also excludes 
the gain from sale of Mutual’s branch offices. In this respect 
it differs from the presentation in our audited financial 
statements that includes this item in the calculation of 
“Earnings Before Realized Investment Gain”.
 Net Earnings
 Earnings Before Income Taxes After Tax
 -------------------------------------- ------------------
 Total Berkshire Share Berkshire Share
 ------------------ ------------------ ------------------
(in thousands of dollars) 1980 1979 1980 1979 1980 1979
 -------- -------- -------- -------- -------- --------
Total Earnings - all entities $ 85,945 $ 68,632 $ 70,146 $ 56,427 $ 53,122 $ 42,817
 ======== ======== ======== ======== ======== ========
Earnings from Operations:
 Insurance Group:
 Underwriting ............ $ 6,738 $ 3,742 $ 6,737 $ 3,741 $ 3,637 $ 2,214
 Net Investment Income ... 30,939 24,224 30,927 24,216 25,607 20,106
 Berkshire-Waumbec Textiles (508) 1,723 (508) 1,723 202 848
 Associated Retail Stores .. 2,440 2,775 2,440 2,775 1,169 1,280
 See’s Candies ............. 15,031 12,785 8,958 7,598 4,212 3,448
 Buffalo Evening News ...... (2,805) (4,617) (1,672) (2,744) (816) (1,333)
 Blue Chip Stamps - Parent 7,699 2,397 4,588 1,425 3,060 1,624
 Illinois National Bank .... 5,324 5,747 5,200 5,614 4,731 5,027
 Wesco Financial - Parent .. 2,916 2,413 1,392 1,098 1,044 937
 Mutual Savings and Loan ... 5,814 10,447 2,775 4,751 1,974 3,261
 Precision Steel ........... 2,833 3,254 1,352 1,480 656 723
 Interest on Debt .......... (12,230) (8,248) (9,390) (5,860) (4,809) (2,900)
 Other ..................... 2,170 1,342 1,590 996 1,255 753
 -------- -------- -------- -------- -------- --------
 Total Earnings from
 Operations ........... $ 66,361 $ 57,984 $ 54,389 $ 46,813 $ 41,922 $ 35,988
 Mutual Savings and Loan -
 sale of branches ....... 5,873 -- 2,803 -- 1,293 --
Realized Securities Gain .... 13,711 10,648 12,954 9,614 9,907 6,829
 -------- -------- -------- -------- -------- --------
Total Earnings - all entities $ 85,945 $ 68,632 $ 70,146 $ 56,427 $ 53,122 $ 42,817
 ======== ======== ======== ======== ======== ========
 Blue Chip Stamps and Wesco are public companies with 
reporting requirements of their own. On pages 40 to 53 of this 
report we have reproduced the narrative reports of the principal 
executives of both companies, in which they describe 1980 
operations. We recommend a careful reading, and suggest that you 
particularly note the superb job done by Louie Vincenti and 
Charlie Munger in repositioning Mutual Savings and Loan. A copy 
of the full annual report of either company will be mailed to any 
Berkshire shareholder upon request to Mr. Robert H. Bird for Blue 
Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 
90040, or to Mrs. Bette Deckard for Wesco Financial Corporation, 
315 East Colorado Boulevard, Pasadena, California 91109.
 As indicated earlier, undistributed earnings in companies we 
do not control are now fully as important as the reported 
operating earnings detailed in the preceding table. The 
distributed portion, of course, finds its way into the table 
primarily through the net investment income section of Insurance 
Group earnings.
 We show below Berkshire’s proportional holdings in those 
non-controlled businesses for which only distributed earnings 
(dividends) are included in our own earnings.
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted)
 434,550 (a) Affiliated Publications, Inc. ......... $ 2,821 $ 12,222
 464,317 (a) Aluminum Company of America ........... 25,577 27,685
 475,217 (b) Cleveland-Cliffs Iron Company ......... 12,942 15,894
1,983,812 (b) General Foods, Inc. ................... 62,507 59,889
7,200,000 (a) GEICO Corporation ..................... 47,138 105,300
2,015,000 (a) Handy & Harman ........................ 21,825 58,435
 711,180 (a) Interpublic Group of Companies, Inc. .. 4,531 22,135
1,211,834 (a) Kaiser Aluminum & Chemical Corp. ...... 20,629 27,569
 282,500 (a) Media General ......................... 4,545 8,334
 247,039 (b) National Detroit Corporation .......... 5,930 6,299
 881,500 (a) National Student Marketing ............ 5,128 5,895
 391,400 (a) Ogilvy & Mather Int’l. Inc. ........... 3,709 9,981
 370,088 (b) Pinkerton’s, Inc. ..................... 12,144 16,489
 245,700 (b) R. J. Reynolds Industries ............. 8,702 11,228
1,250,525 (b) SAFECO Corporation .................... 32,062 45,177
 151,104 (b) The Times Mirror Company .............. 4,447 6,271
1,868,600 (a) The Washington Post Company ........... 10,628 42,277
 667,124 (b) E W Woolworth Company ................. 13,583 16,511
 ---------- ----------
 $298,848 $497,591
 All Other Common Stockholdings ........ 26,313 32,096
 ---------- ----------
 Total Common Stocks ................... $325,161 $529,687
 ========== ==========
(a) All owned by Berkshire or its insurance subsidiaries.
(b) Blue Chip and/or Wesco own shares of these companies. All 
 numbers represent Berkshire’s net interest in the larger 
 gross holdings of the group.
 From this table, you can see that our sources of underlying 
earning power are distributed far differently among industries 
than would superficially seem the case. For example, our 
insurance subsidiaries own approximately 3% of Kaiser Aluminum, 
and 1 1/4% of Alcoa. Our share of the 1980 earnings of those 
companies amounts to about $13 million. (If translated dollar for 
dollar into a combination of eventual market value gain and 
dividends, this figure would have to be reduced by a significant, 
but not precisely determinable, amount of tax; perhaps 25% would 
be a fair assumption.) Thus, we have a much larger economic 
interest in the aluminum business than in practically any of the 
operating businesses we control and on which we report in more 
detail. If we maintain our holdings, our long-term performance 
will be more affected by the future economics of the aluminum 
industry than it will by direct operating decisions we make 
concerning most companies over which we exercise managerial 
control.
GEICO Corp.
 Our largest non-controlled holding is 7.2 million shares of 
GEICO Corp., equal to about a 33% equity interest. Normally, an 
interest of this magnitude (over 20%) would qualify as an 
“investee” holding and would require us to reflect a 
proportionate share of GEICO’s earnings in our own. However, we 
purchased our GEICO stock pursuant to special orders of the 
District of Columbia and New York Insurance Departments, which 
required that the right to vote the stock be placed with an 
independent party. Absent the vote, our 33% interest does not 
qualify for investee treatment. (Pinkerton’s is a similar 
situation.) 
 Of course, whether or not the undistributed earnings of 
GEICO are picked up annually in our operating earnings figure has 
nothing to do with their economic value to us, or to you as 
owners of Berkshire. The value of these retained earnings will 
be determined by the skill with which they are put to use by 
GEICO management.
 On this score, we simply couldn’t feel better. GEICO 
represents the best of all investment worlds - the coupling of a 
very important and very hard to duplicate business advantage with 
an extraordinary management whose skills in operations are 
matched by skills in capital allocation.
 As you can see, our holdings cost us $47 million, with about 
half of this amount invested in 1976 and most of the remainder 
invested in 1980. At the present dividend rate, our reported 
earnings from GEICO amount to a little over $3 million annually. 
But we estimate our share of its earning power is on the order of 
$20 million annually. Thus, undistributed earnings applicable to 
this holding alone may amount to 40% of total reported operating 
earnings of Berkshire.
 We should emphasize that we feel as comfortable with GEICO 
management retaining an estimated $17 million of earnings 
applicable to our ownership as we would if that sum were in our 
own hands. In just the last two years GEICO, through repurchases 
of its own stock, has reduced the share equivalents it has 
outstanding from 34.2 million to 21.6 million, dramatically 
enhancing the interests of shareholders in a business that simply 
can’t be replicated. The owners could not have been better 
served.
 We have written in past reports about the disappointments 
that usually result from purchase and operation of “turnaround” 
businesses. Literally hundreds of turnaround possibilities in 
dozens of industries have been described to us over the years 
and, either as participants or as observers, we have tracked 
performance against expectations. Our conclusion is that, with 
few exceptions, when a management with a reputation for 
brilliance tackles a business with a reputation for poor 
fundamental economics, it is the reputation of the business that 
remains intact.
 GEICO may appear to be an exception, having been turned 
around from the very edge of bankruptcy in 1976. It certainly is 
true that managerial brilliance was needed for its resuscitation, 
and that Jack Byrne, upon arrival in that year, supplied that 
ingredient in abundance.
 But it also is true that the fundamental business advantage 
that GEICO had enjoyed - an advantage that previously had 
produced staggering success - was still intact within the 
company, although submerged in a sea of financial and operating 
troubles.
 GEICO was designed to be the low-cost operation in an 
enormous marketplace (auto insurance) populated largely by 
companies whose marketing structures restricted adaptation. Run 
as designed, it could offer unusual value to its customers while 
earning unusual returns for itself. For decades it had been run 
in just this manner. Its troubles in the mid-70s were not 
produced by any diminution or disappearance of this essential 
economic advantage.
 GEICO’s problems at that time put it in a position analogous 
to that of American Express in 1964 following the salad oil 
scandal. Both were one-of-a-kind companies, temporarily reeling 
from the effects of a fiscal blow that did not destroy their 
exceptional underlying economics. The GEICO and American Express 
situations, extraordinary business franchises with a localized 
excisable cancer (needing, to be sure, a skilled surgeon), should 
be distinguished from the true “turnaround” situation in which 
the managers expect - and need - to pull off a corporate 
Pygmalion.
 Whatever the appellation, we are delighted with our GEICO 
holding which, as noted, cost us $47 million. To buy a similar 
$20 million of earning power in a business with first-class 
economic characteristics and bright prospects would cost a 
minimum of $200 million (much more in some industries) if it had 
to be accomplished through negotiated purchase of an entire 
company. A 100% interest of that kind gives the owner the 
options of leveraging the purchase, changing managements, 
directing cash flow, and selling the business. It may also 
provide some excitement around corporate headquarters (less 
frequently mentioned).
 We find it perfectly satisfying that the nature of our 
insurance business dictates we buy many minority portions of 
already well-run businesses (at prices far below our share of the 
total value of the entire business) that do not need management 
change, re-direction of cash flow, or sale. There aren’t many 
Jack Byrnes in the managerial world, or GEICOs in the business 
world. What could be better than buying into a partnership with 
both of them?
Insurance Industry Conditions
 The insurance industry’s underwriting picture continues to 
unfold about as we anticipated, with the combined ratio (see 
definition on page 37) rising from 100.6 in 1979 to an estimated 
103.5 in 1980. It is virtually certain that this trend will 
continue and that industry underwriting losses will mount, 
significantly and progressively, in 1981 and 1982. To understand 
why, we recommend that you read the excellent analysis of 
property-casualty competitive dynamics done by Barbara Stewart of 
Chubb Corp. in an October 1980 paper. (Chubb’s annual report 
consistently presents the most insightful, candid and well￾written discussion of industry conditions; you should get on the 
company’s mailing list.) Mrs. Stewart’s analysis may not be 
cheerful, but we think it is very likely to be accurate.
 And, unfortunately, a largely unreported but particularly 
pernicious problem may well prolong and intensify the coming 
industry agony. It is not only likely to keep many insurers 
scrambling for business when underwriting losses hit record 
levels - it is likely to cause them at such a time to redouble 
their efforts.
 This problem arises from the decline in bond prices and the 
insurance accounting convention that allows companies to carry 
bonds at amortized cost, regardless of market value. Many 
insurers own long-term bonds that, at amortized cost, amount to 
two to three times net worth. If the level is three times, of 
course, a one-third shrink from cost in bond prices - if it were 
to be recognized on the books - would wipe out net worth. And 
shrink they have. Some of the largest and best known property￾casualty companies currently find themselves with nominal, or 
even negative, net worth when bond holdings are valued at market. 
Of course their bonds could rise in price, thereby partially, or 
conceivably even fully, restoring the integrity of stated net 
worth. Or they could fall further. (We believe that short-term 
forecasts of stock or bond prices are useless. The forecasts may 
tell you a great deal about the forecaster; they tell you nothing 
about the future.)
 It might strike some as strange that an insurance company’s 
survival is threatened when its stock portfolio falls 
sufficiently in price to reduce net worth significantly, but that 
an even greater decline in bond prices produces no reaction at 
all. The industry would respond by pointing out that, no matter 
what the current price, the bonds will be paid in full at 
maturity, thereby eventually eliminating any interim price 
decline. It may take twenty, thirty, or even forty years, this 
argument says, but, as long as the bonds don’t have to be sold, 
in the end they’ll all be worth face value. Of course, if they 
are sold even if they are replaced with similar bonds offering 
better relative value - the loss must be booked immediately. 
And, just as promptly, published net worth must be adjusted 
downward by the amount of the loss.
 Under such circumstances, a great many investment options 
disappear, perhaps for decades. For example, when large 
underwriting losses are in prospect, it may make excellent 
business logic for some insurers to shift from tax-exempt bonds 
into taxable bonds. Unwillingness to recognize major bond losses 
may be the sole factor that prevents such a sensible move.
 But the full implications flowing from massive unrealized 
bond losses are far more serious than just the immobilization of 
investment intellect. For the source of funds to purchase and 
hold those bonds is a pool of money derived from policyholders 
and claimants (with changing faces) - money which, in effect, is 
temporarily on deposit with the insurer. As long as this pool 
retains its size, no bonds must be sold. If the pool of funds 
shrinks - which it will if the volume of business declines 
significantly - assets must be sold to pay off the liabilities. 
And if those assets consist of bonds with big unrealized losses, 
such losses will rapidly become realized, decimating net worth in 
the process.
 Thus, an insurance company with a bond market value 
shrinkage approaching stated net worth (of which there are now 
many) and also faced with inadequate rate levels that are sure to 
deteriorate further has two options. One option for management 
is to tell the underwriters to keep pricing according to the 
exposure involved - “be sure to get a dollar of premium for every 
dollar of expense cost plus expectable loss cost”.
 The consequences of this directive are predictable: (a) with 
most business both price sensitive and renewable annually, many 
policies presently on the books will be lost to competitors in 
rather short order; (b) as premium volume shrinks significantly, 
there will be a lagged but corresponding decrease in liabilities 
(unearned premiums and claims payable); (c) assets (bonds) must 
be sold to match the decrease in liabilities; and (d) the 
formerly unrecognized disappearance of net worth will become 
partially recognized (depending upon the extent of such sales) in 
the insurer’s published financial statements.
 Variations of this depressing sequence involve a smaller 
penalty to stated net worth. The reaction of some companies at 
(c) would be to sell either stocks that are already carried at 
market values or recently purchased bonds involving less severe 
losses. This ostrich-like behavior - selling the better assets 
and keeping the biggest losers - while less painful in the short 
term, is unlikely to be a winner in the long term.
 The second option is much simpler: just keep writing 
business regardless of rate levels and whopping prospective 
underwriting losses, thereby maintaining the present levels of 
premiums, assets and liabilities - and then pray for a better 
day, either for underwriting or for bond prices. There is much 
criticism in the trade press of “cash flow” underwriting; i.e., 
writing business regardless of prospective underwriting losses in 
order to obtain funds to invest at current high interest rates. 
This second option might properly be termed “asset maintenance” 
underwriting - the acceptance of terrible business just to keep 
the assets you now have.
 Of course you know which option will be selected. And it 
also is clear that as long as many large insurers feel compelled 
to choose that second option, there will be no better day for 
underwriting. For if much of the industry feels it must maintain 
premium volume levels regardless of price adequacy, all insurers 
will have to come close to meeting those prices. Right behind 
having financial problems yourself, the next worst plight is to 
have a large group of competitors with financial problems that 
they can defer by a “sell-at-any-price” policy.
 We mentioned earlier that companies that were unwilling - 
for any of a number of reasons, including public reaction, 
institutional pride, or protection of stated net worth - to sell 
bonds at price levels forcing recognition of major losses might 
find themselves frozen in investment posture for a decade or 
longer. But, as noted, that’s only half of the problem. 
Companies that have made extensive commitments to long-term bonds 
may have lost, for a considerable period of time, not only many 
of their investment options, but many of their underwriting 
options as well.
 Our own position in this respect is satisfactory. We 
believe our net worth, valuing bonds of all insurers at amortized 
cost, is the strongest relative to premium volume among all large 
property-casualty stockholder-owned groups. When bonds are 
valued at market, our relative strength becomes far more 
dramatic. (But lest we get too puffed up, we remind ourselves 
that our asset and liability maturities still are far more 
mismatched than we would wish and that we, too, lost important 
sums in bonds because your Chairman was talking when he should 
have been acting.)
 Our abundant capital and investment flexibility will enable 
us to do whatever we think makes the most sense during the 
prospective extended period of inadequate pricing. But troubles 
for the industry mean troubles for us. Our financial strength 
doesn’t remove us from the hostile pricing environment now 
enveloping the entire property-casualty insurance industry. It 
just gives us more staying power and more options.
Insurance Operations
 The National Indemnity managers, led by Phil Liesche with 
the usual able assistance of Roland Miller and Bill Lyons, outdid 
themselves in 1980. While volume was flat, underwriting margins 
relative to the industry were at an all-time high. We expect 
decreased volume from this operation in 1981. But its managers 
will hear no complaints from corporate headquarters, nor will 
employment or salaries suffer. We enormously admire the National 
Indemnity underwriting discipline - embedded from origin by the 
founder, Jack Ringwalt - and know that this discipline, if 
suspended, probably could not be fully regained.
 John Seward at Home and Auto continues to make good progress 
in replacing a diminishing number of auto policies with volume 
from less competitive lines, primarily small-premium general 
liability. Operations are being slowly expanded, both 
geographically and by product line, as warranted by underwriting 
results.
 The reinsurance business continues to reflect the excesses 
and problems of the primary writers. Worse yet, it has the 
potential for magnifying such excesses. Reinsurance is 
characterized by extreme ease of entry, large premium payments in 
advance, and much-delayed loss reports and loss payments. 
Initially, the morning mail brings lots of cash and few claims. 
This state of affairs can produce a blissful, almost euphoric, 
feeling akin to that experienced by an innocent upon receipt of 
his first credit card.
 The magnetic lure of such cash-generating characteristics, 
currently enhanced by the presence of high interest rates, is 
transforming the reinsurance market into “amateur night”. 
Without a super catastrophe, industry underwriting will be poor 
in the next few years. If we experience such a catastrophe, 
there could be a bloodbath with some companies not able to live 
up to contractual commitments. George Young continues to do a 
first-class job for us in this business. Results, with 
investment income included, have been reasonably profitable. We 
will retain an active reinsurance presence but, for the 
foreseeable future, we expect no premium growth from this 
activity.
 We continue to have serious problems in the Homestate 
operation. Floyd Taylor in Kansas has done an outstanding job 
but our underwriting record elsewhere is considerably below 
average. Our poorest performer has been Insurance Company of 
Iowa, at which large losses have been sustained annually since 
its founding in 1973. Late in the fall we abandoned underwriting 
in that state, and have merged the company into Cornhusker 
Casualty. There is potential in the homestate concept, but much 
work needs to be done in order to realize it.
 Our Workers Compensation operation suffered a severe loss 
when Frank DeNardo died last year at 37. Frank instinctively 
thought like an underwriter. He was a superb technician and a 
fierce competitor; in short order he had straightened out major 
problems at the California Workers Compensation Division of 
National Indemnity. Dan Grossman, who originally brought Frank 
to us, stepped in immediately after Frank’s death to continue 
that operation, which n
BERKSHIRE HATHAWAY INC.
 February 26, 1982
To the Shareholders of Berkshire Hathaway Inc.:
 Operating earnings of $39.7 million in 1981 amounted to 
15.2% of beginning equity capital (valuing securities at cost) 
compared to 17.8% in 1980. Our new plan that allows stockholders 
to designate corporate charitable contributions (detailed later) 
reduced earnings by about $900,000 in 1981. This program, which 
we expect to continue subject to annual evaluation of our 
corporate tax position, had not been initiated in 1980.
Non-Controlled Ownership Earnings
 In the 1980 annual report we discussed extensively the 
concept of non-controlled ownership earnings, i.e., Berkshire’s 
share of the undistributed earnings of companies we don’t control 
or significantly influence but in which we, nevertheless, have 
important investments. (We will be glad to make available to new 
or prospective shareholders copies of that discussion or others 
from earlier reports to which we refer in this report.) No 
portion of those undistributed earnings is included in the 
operating earnings of Berkshire.
 However, our belief is that, in aggregate, those 
undistributed and, therefore, unrecorded earnings will be 
translated into tangible value for Berkshire shareholders just as 
surely as if subsidiaries we control had earned, retained - and 
reported - similar earnings.
 We know that this translation of non-controlled ownership 
earnings into corresponding realized and unrealized capital gains 
for Berkshire will be extremely irregular as to time of 
occurrence. While market values track business values quite well 
over long periods, in any given year the relationship can gyrate 
capriciously. Market recognition of retained earnings also will 
be unevenly realized among companies. It will be disappointingly 
low or negative in cases where earnings are employed non￾productively, and far greater than dollar-for-dollar of retained 
earnings in cases of companies that achieve high returns with 
their augmented capital. Overall, if a group of non-controlled 
companies is selected with reasonable skill, the group result 
should be quite satisfactory.
 In aggregate, our non-controlled business interests have 
more favorable underlying economic characteristics than our 
controlled businesses. That’s understandable; the area of choice 
has been far wider. Small portions of exceptionally good 
businesses are usually available in the securities markets at 
reasonable prices. But such businesses are available for 
purchase in their entirety only rarely, and then almost always at 
high prices.
General Acquisition Behavior
 As our history indicates, we are comfortable both with total 
ownership of businesses and with marketable securities 
representing small portions of businesses. We continually look 
for ways to employ large sums in each area. (But we try to avoid 
small commitments - “If something’s not worth doing at all, it’s 
not worth doing well”.) Indeed, the liquidity requirements of our 
insurance and trading stamp businesses mandate major investments 
in marketable securities.
 Our acquisition decisions will be aimed at maximizing real 
economic benefits, not at maximizing either managerial domain or 
reported numbers for accounting purposes. (In the long run, 
managements stressing accounting appearance over economic 
substance usually achieve little of either.)
 Regardless of the impact upon immediately reportable 
earnings, we would rather buy 10% of Wonderful Business T at X 
per share than 100% of T at 2X per share. Most corporate 
managers prefer just the reverse, and have no shortage of stated 
rationales for their behavior.
 However, we suspect three motivations - usually unspoken - 
to be, singly or in combination, the important ones in most high￾premium takeovers:
 (1) Leaders, business or otherwise, seldom are deficient in 
 animal spirits and often relish increased activity and 
 challenge. At Berkshire, the corporate pulse never 
 beats faster than when an acquisition is in prospect.
 (2) Most organizations, business or otherwise, measure 
 themselves, are measured by others, and compensate their 
 managers far more by the yardstick of size than by any 
 other yardstick. (Ask a Fortune 500 manager where his 
 corporation stands on that famous list and, invariably, 
 the number responded will be from the list ranked by 
 size of sales; he may well not even know where his 
 corporation places on the list Fortune just as 
 faithfully compiles ranking the same 500 corporations by 
 profitability.)
 (3) Many managements apparently were overexposed in 
 impressionable childhood years to the story in which the 
 imprisoned handsome prince is released from a toad’s 
 body by a kiss from a beautiful princess. Consequently, 
 they are certain their managerial kiss will do wonders 
 for the profitability of Company T(arget).
 Such optimism is essential. Absent that rosy view, 
 why else should the shareholders of Company A(cquisitor) 
 want to own an interest in T at the 2X takeover cost 
 rather than at the X market price they would pay if they 
 made direct purchases on their own?
 In other words, investors can always buy toads at the 
 going price for toads. If investors instead bankroll 
 princesses who wish to pay double for the right to kiss 
 the toad, those kisses had better pack some real 
 dynamite. We’ve observed many kisses but very few 
 miracles. Nevertheless, many managerial princesses 
 remain serenely confident about the future potency of 
 their kisses - even after their corporate backyards are 
 knee-deep in unresponsive toads.
 In fairness, we should acknowledge that some acquisition 
records have been dazzling. Two major categories stand out.
 The first involves companies that, through design or 
accident, have purchased only businesses that are particularly 
well adapted to an inflationary environment. Such favored 
business must have two characteristics: (1) an ability to 
increase prices rather easily (even when product demand is flat 
and capacity is not fully utilized) without fear of significant 
loss of either market share or unit volume, and (2) an ability to 
accommodate large dollar volume increases in business (often 
produced more by inflation than by real growth) with only minor 
additional investment of capital. Managers of ordinary ability, 
focusing solely on acquisition possibilities meeting these tests, 
have achieved excellent results in recent decades. However, very 
few enterprises possess both characteristics, and competition to 
buy those that do has now become fierce to the point of being 
self-defeating.
 The second category involves the managerial superstars - men 
who can recognize that rare prince who is disguised as a toad, 
and who have managerial abilities that enable them to peel away 
the disguise. We salute such managers as Ben Heineman at 
Northwest Industries, Henry Singleton at Teledyne, Erwin Zaban at 
National Service Industries, and especially Tom Murphy at Capital 
Cities Communications (a real managerial “twofer”, whose 
acquisition efforts have been properly focused in Category 1 and 
whose operating talents also make him a leader of Category 2). 
From both direct and vicarious experience, we recognize the 
difficulty and rarity of these executives’ achievements. (So do 
they; these champs have made very few deals in recent years, and 
often have found repurchase of their own shares to be the most 
sensible employment of corporate capital.)
 Your Chairman, unfortunately, does not qualify for Category 
2. And, despite a reasonably good understanding of the economic 
factors compelling concentration in Category 1, our actual 
acquisition activity in that category has been sporadic and 
inadequate. Our preaching was better than our performance. (We 
neglected the Noah principle: predicting rain doesn’t count, 
building arks does.)
 We have tried occasionally to buy toads at bargain prices 
with results that have been chronicled in past reports. Clearly 
our kisses fell flat. We have done well with a couple of princes 
- but they were princes when purchased. At least our kisses 
didn’t turn them into toads. And, finally, we have occasionally 
been quite successful in purchasing fractional interests in 
easily-identifiable princes at toad-like prices.
Berkshire Acquisition Objectives
 We will continue to seek the acquisition of businesses in 
their entirety at prices that will make sense, even should the 
future of the acquired enterprise develop much along the lines of 
its past. We may very well pay a fairly fancy price for a 
Category 1 business if we are reasonably confident of what we are 
getting. But we will not normally pay a lot in any purchase for 
what we are supposed to bring to the party - for we find that we 
ordinarily don’t bring a lot.
 During 1981 we came quite close to a major purchase 
involving both a business and a manager we liked very much. 
However, the price finally demanded, considering alternative uses 
for the funds involved, would have left our owners worse off than 
before the purchase. The empire would have been larger, but the 
citizenry would have been poorer.
 Although we had no success in 1981, from time to time in the 
future we will be able to purchase 100% of businesses meeting our 
standards. Additionally, we expect an occasional offering of a 
major “non-voting partnership” as discussed under the Pinkerton’s 
heading on page 47 of this report. We welcome suggestions 
regarding such companies where we, as a substantial junior 
partner, can achieve good economic results while furthering the 
long-term objectives of present owners and managers.
 Currently, we find values most easily obtained through the 
open-market purchase of fractional positions in companies with 
excellent business franchises and competent, honest managements. 
We never expect to run these companies, but we do expect to 
profit from them.
 We expect that undistributed earnings from such companies 
will produce full value (subject to tax when realized) for 
Berkshire and its shareholders. If they don’t, we have made 
mistakes as to either: (1) the management we have elected to 
join; (2) the future economics of the business; or (3) the price 
we have paid.
 We have made plenty of such mistakes - both in the purchase 
of non-controlling and controlling interests in businesses. 
Category (2) miscalculations are the most common. Of course, it 
is necessary to dig deep into our history to find illustrations 
of such mistakes - sometimes as deep as two or three months back. 
For example, last year your Chairman volunteered his expert 
opinion on the rosy future of the aluminum business. Several 
minor adjustments to that opinion - now aggregating approximately 
180 degrees - have since been required.
 For personal as well as more objective reasons, however, we 
generally have been able to correct such mistakes far more 
quickly in the case of non-controlled businesses (marketable 
securities) than in the case of controlled subsidiaries. Lack of 
control, in effect, often has turned out to be an economic plus.
 As we mentioned last year, the magnitude of our non-recorded 
“ownership” earnings has grown to the point where their total is 
greater than our reported operating earnings. We expect this 
situation will continue. In just four ownership positions in 
this category - GEICO Corporation, General Foods Corporation, R. 
J. Reynolds Industries, Inc. and The Washington Post Company - 
our share of undistributed and therefore unrecorded earnings 
probably will total well over $35 million in 1982. 
BERKSHIRE HATHAWAY INC.
 March 3, 1983
To the Stockholders of Berkshire Hathaway Inc.:
 Operating earnings of $31.5 million in 1982 amounted to only 
9.8% of beginning equity capital (valuing securities at cost), 
down from 15.2% in 1981 and far below our recent high of 19.4% in 
1978. This decline largely resulted from:
 (1) a significant deterioration in insurance underwriting 
 results;
 (2) a considerable expansion of equity capital without a 
 corresponding growth in the businesses we operate 
 directly; and
 (3) a continually-enlarging commitment of our resources to 
 investment in partially-owned, nonoperated businesses; 
 accounting rules dictate that a major part of our 
 pro-rata share of earnings from such businesses must be 
 excluded from Berkshire’s reported earnings.
 It was only a few years ago that we told you that the 
operating earnings/equity capital percentage, with proper 
allowance for a few other variables, was the most important 
yardstick of single-year managerial performance. While we still 
believe this to be the case with the vast majority of companies, 
we believe its utility in our own case has greatly diminished. 
You should be suspicious of such an assertion. Yardsticks seldom 
are discarded while yielding favorable readings. But when 
results deteriorate, most managers favor disposition of the 
yardstick rather than disposition of the manager.
 To managers faced with such deterioration, a more flexible 
measurement system often suggests itself: just shoot the arrow of 
business performance into a blank canvas and then carefully draw 
the bullseye around the implanted arrow. We generally believe in 
pre-set, long-lived and small bullseyes. However, because of the 
importance of item (3) above, further explained in the following 
section, we believe our abandonment of the operating 
earnings/equity capital bullseye to be warranted.
Non-Reported Ownership Earnings
 The appended financial statements reflect “accounting” 
earnings that generally include our proportionate share of 
earnings from any underlying business in which our ownership is 
at least 20%. Below the 20% ownership figure, however, only our 
share of dividends paid by the underlying business units is 
included in our accounting numbers; undistributed earnings of 
such less-than-20%-owned businesses are totally ignored.
 There are a few exceptions to this rule; e.g., we own about 
35% of GEICO Corporation but, because we have assigned our voting 
rights, the company is treated for accounting purposes as a less￾than-20% holding. Thus, dividends received from GEICO in 1982 of 
$3.5 million after tax are the only item included in our 
“accounting”earnings. An additional $23 million that represents 
our share of GEICO’s undistributed operating earnings for 1982 is 
totally excluded from our reported operating earnings. If GEICO 
had earned less money in 1982 but had paid an additional $1 
million in dividends, our reported earnings would have been 
larger despite the poorer business results. Conversely, if GEICO 
had earned an additional $100 million - and retained it all - our 
reported earnings would have been unchanged. Clearly 
“accounting” earnings can seriously misrepresent economic 
reality.
 We prefer a concept of “economic” earnings that includes all 
undistributed earnings, regardless of ownership percentage. In 
our view, the value to all owners of the retained earnings of a 
business enterprise is determined by the effectiveness with which 
those earnings are used - and not by the size of one’s ownership 
percentage. If you have owned .01 of 1% of Berkshire during the 
past decade, you have benefited economically in full measure from 
your share of our retained earnings, no matter what your 
accounting system. Proportionately, you have done just as well 
as if you had owned the magic 20%. But if you have owned 100% of 
a great many capital-intensive businesses during the decade, 
retained earnings that were credited fully and with painstaking 
precision to you under standard accounting methods have resulted 
in minor or zero economic value. This is not a criticism of 
accounting procedures. We would not like to have the job of 
designing a better system. It’s simply to say that managers and 
investors alike must understand that accounting numbers are the 
beginning, not the end, of business valuation.
 In most corporations, less-than-20% ownership positions are 
unimportant (perhaps, in part, because they prevent maximization 
of cherished reported earnings) and the distinction between 
accounting and economic results we have just discussed matters 
little. But in our own case, such positions are of very large 
and growing importance. Their magnitude, we believe, is what 
makes our reported operating earnings figure of limited 
significance.
 In our 1981 annual report we predicted that our share of 
undistributed earnings from four of our major non-controlled 
holdings would aggregate over $35 million in 1982. With no 
change in our holdings of three of these companies - GEICO, 
General Foods and The Washington Post - and a considerable 
increase in our ownership of the fourth, R. J. Reynolds 
Industries, our share of undistributed 1982 operating earnings of 
this group came to well over $40 million. This number - not 
reflected at all in our earnings - is greater than our total 
reported earnings, which include only the $14 million in 
dividends received from these companies. And, of course, we have 
a number of smaller ownership interests that, in aggregate, had 
substantial additional undistributed earnings.
 We attach real significance to the general magnitude of 
these numbers, but we don’t believe they should be carried to ten 
decimal places. Realization by Berkshire of such retained 
earnings through improved market valuations is subject to very 
substantial, but indeterminate, taxation. And while retained 
earnings over the years, and in the aggregate, have translated 
into at least equal market value for shareholders, the 
translation has been both extraordinarily uneven among companies 
and irregular and unpredictable in timing.
 However, this very unevenness and irregularity offers 
advantages to the value-oriented purchaser of fractional portions 
of businesses. This investor may select from almost the entire 
array of major American corporations, including many far superior 
to virtually any of the businesses that could be bought in their 
entirety in a negotiated deal. And fractional-interest purchases 
can be made in an auction market where prices are set by 
participants with behavior patterns that sometimes resemble those 
of an army of manic-depressive lemmings.
 Within this gigantic auction arena, it is our job to select 
businesses with economic characteristics allowing each dollar of 
retained earnings to be translated eventually into at least a 
dollar of market value. Despite a lot of mistakes, we have so 
far achieved this goal. In doing so, we have been greatly 
assisted by Arthur Okun’s patron saint for economists - St. 
Offset. In some cases, that is, retained earnings attributable 
to our ownership position have had insignificant or even negative 
impact on market value, while in other major positions a dollar 
retained by an investee corporation has been translated into two 
or more dollars of market value. To date, our corporate over￾achievers have more than offset the laggards. If we can continue 
this record, it will validate our efforts to maximize “economic” 
earnings, regardless of the impact upon “accounting” earnings.
 Satisfactory as our partial-ownership approach has been, 
what really makes us dance is the purchase of 100% of good 
businesses at reasonable prices. We’ve accomplished this feat a 
few times (and expect to do so again), but it is an 
extraordinarily difficult job - far more difficult than the 
purchase at attractive prices of fractional interests.
 As we look at the major acquisitions that others made during 
1982, our reaction is not envy, but relief that we were non￾participants. For in many of these acquisitions, managerial 
intellect wilted in competition with managerial adrenaline The 
thrill of the chase blinded the pursuers to the consequences of 
the catch. Pascal’s observation seems apt: “It has struck me 
that all men’s misfortunes spring from the single cause that they 
are unable to stay quietly in one room.”
 (Your Chairman left the room once too often last year and 
almost starred in the Acquisition Follies of 1982. In 
retrospect, our major accomplishment of the year was that a very 
large purchase to which we had firmly committed was unable to be 
completed for reasons totally beyond our control. Had it come 
off, this transaction would have consumed extraordinary amounts 
of time and energy, all for a most uncertain payoff. If we were 
to introduce graphics to this report, illustrating favorable 
business developments of the past year, two blank pages depicting 
this blown deal would be the appropriate centerfold.)
 Our partial-ownership approach can be continued soundly only 
as long as portions of attractive businesses can be acquired at 
attractive prices. We need a moderately-priced stock market to 
assist us in this endeavor. The market, like the Lord, helps 
those who help themselves. But, unlike the Lord, the market does 
not forgive those who know not what they do. For the investor, a 
too-high purchase price for the stock of an excellent company can 
undo the effects of a subsequent decade of favorable business 
developments.
 Should the stock market advance to considerably higher 
levels, our ability to utilize capital effectively in partial￾ownership positions will be reduced or eliminated. This will 
happen periodically: just ten years ago, at the height of the 
two-tier market mania (with high-return-on-equity businesses bid 
to the sky by institutional investors), Berkshire’s insurance 
subsidiaries owned only $18 million in market value of equities, 
excluding their interest in Blue Chip Stamps. At that time, such 
equity holdings amounted to about 15% of our insurance company 
investments versus the present 80%. There were as many good 
businesses around in 1972 as in 1982, but the prices the stock 
market placed upon those businesses in 1972 looked absurd. While 
high stock prices in the future would make our performance look 
good temporarily, they would hurt our long-term business 
prospects rather than help them. We currently are seeing early 
traces of this problem.
Long-Term Corporate Performance
 Our gain in net worth during 1982, valuing equities held by 
our insurance subsidiaries at market value (less capital gain 
taxes payable if unrealized gains were actually realized) 
amounted to $208 million. On a beginning net worth base of $519 
million, the percentage gain was 40%.
 During the 18-year tenure of present management, book value 
has grown from $19.46 per share to $737.43 per share, or 22.0% 
compounded annually. You can be certain that this percentage 
will diminish in the future. Geometric progressions eventually 
forge their own anchors.
 Berkshire’s economic goal remains to produce a long-term 
rate of return well above the return achieved by the average 
large American corporation. Our willingness to purchase either 
partial or total ownership positions in favorably-situated 
businesses, coupled with reasonable discipline about the prices 
we are willing to pay, should give us a good chance of achieving 
our goal.
 Again this year the gain in market valuation of partially￾owned businesses outpaced the gain in underlying economic value 
of those businesses. For example, $79 million of our $208 
million gain is attributable to an increased market price for 
GEICO. This company continues to do exceptionally well, and we 
are more impre
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 This past year our registered shareholders increased from 
about 1900 to about 2900. Most of this growth resulted from our 
merger with Blue Chip Stamps, but there also was an acceleration 
in the pace of “natural” increase that has raised us from the 
1000 level a few years ago.
 With so many new shareholders, it’s appropriate to summarize 
the major business principles we follow that pertain to the 
manager-owner relationship:
 o Although our form is corporate, our attitude is 
partnership. Charlie Munger and I think of our shareholders as 
owner-partners, and of ourselves as managing partners. (Because 
of the size of our shareholdings we also are, for better or 
worse, controlling partners.) We do not view the company itself 
as the ultimate owner of our business assets but, instead, view 
the company as a conduit through which our shareholders own the 
assets.
 o In line with this owner-orientation, our directors are all 
major shareholders of Berkshire Hathaway. In the case of at 
least four of the five, over 50% of family net worth is 
represented by holdings of Berkshire. We eat our own cooking.
 o Our long-term economic goal (subject to some qualifications 
mentioned later) is to maximize the average annual rate of gain 
in intrinsic business value on a per-share basis. We do not 
measure the economic significance or performance of Berkshire by 
its size; we measure by per-share progress. We are certain that 
the rate of per-share progress will diminish in the future - a 
greatly enlarged capital base will see to that. But we will be 
disappointed if our rate does not exceed that of the average 
large American corporation.
 o Our preference would be to reach this goal by directly 
owning a diversified group of businesses that generate cash and 
consistently earn above-average returns on capital. Our second 
choice is to own parts of similar businesses, attained primarily 
through purchases of marketable common stocks by our insurance 
subsidiaries. The price and availability of businesses and the 
need for insurance capital determine any given year’s capital 
allocation.
 o Because of this two-pronged approach to business ownership 
and because of the limitations of conventional accounting, 
consolidated reported earnings may reveal relatively little about 
our true economic performance. Charlie and I, both as owners and 
managers, virtually ignore such consolidated numbers. However, 
we will also report to you the earnings of each major business we 
control, numbers we consider of great importance. These figures, 
along with other information we will supply about the individual 
businesses, should generally aid you in making judgments about 
them.
 o Accounting consequences do not influence our operating or 
capital-allocation decisions. When acquisition costs are 
similar, we much prefer to purchase $2 of earnings that is not 
reportable by us under standard accounting principles than to 
purchase $1 of earnings that is reportable. This is precisely 
the choice that often faces us since entire businesses (whose 
earnings will be fully reportable) frequently sell for double the 
pro-rata price of small portions (whose earnings will be largely 
unreportable). In aggregate and over time, we expect the 
unreported earnings to be fully reflected in our intrinsic 
business value through capital gains.
 o We rarely use much debt and, when we do, we attempt to 
structure it on a long-term fixed rate basis. We will reject 
interesting opportunities rather than over-leverage our balance 
sheet. This conservatism has penalized our results but it is the 
only behavior that leaves us comfortable, considering our 
fiduciary obligations to policyholders, depositors, lenders and 
the many equity holders who have committed unusually large 
portions of their net worth to our care.
 o A managerial “wish list” will not be filled at shareholder 
expense. We will not diversify by purchasing entire businesses 
at control prices that ignore long-term economic consequences to 
our shareholders. We will only do with your money what we would 
do with our own, weighing fully the values you can obtain by 
diversifying your own portfolios through direct purchases in the 
stock market.
 o We feel noble intentions should be checked periodically 
against results. We test the wisdom of retaining earnings by 
assessing whether retention, over time, delivers shareholders at 
least $1 of market value for each $1 retained. To date, this 
test has been met. We will continue to apply it on a five-year 
rolling basis. As our net worth grows, it is more difficult to 
use retained earnings wisely.
 o We will issue common stock only when we receive as much in 
business value as we give. This rule applies to all forms of 
issuance - not only mergers or public stock offerings, but stock 
for-debt swaps, stock options, and convertible securities as 
well. We will not sell small portions of your company - and that 
is what the issuance of shares amounts to - on a basis 
inconsistent with the value of the entire enterprise.
 o You should be fully aware of one attitude Charlie and I 
share that hurts our financial performance: regardless of price, 
we have no interest at all in selling any good businesses that 
Berkshire owns, and are very reluctant to sell sub-par businesses 
as long as we expect them to generate at least some cash and as 
long as we feel good about their managers and labor relations. 
We hope not to repeat the capital-allocation mistakes that led us 
into such sub-par businesses. And we react with great caution to 
suggestions that our poor businesses can be restored to 
satisfactory profitability by major capital expenditures. (The 
projections will be dazzling - the advocates will be sincere - 
but, in the end, major additional investment in a terrible 
industry usually is about as rewarding as struggling in 
quicksand.) Nevertheless, gin rummy managerial behavior (discard 
your least promising business at each turn) is not our style. We 
would rather have our overall results penalized a bit than engage 
in it.
 o We will be candid in our reporting to you, emphasizing the 
pluses and minuses important in appraising business value. Our 
guideline is to tell you the business facts that we would want to 
know if our positions were reversed. We owe you no less. 
Moreover, as a company with a major communications business, it 
would be inexcusable for us to apply lesser standards of 
accuracy, balance and incisiveness when reporting on ourselves 
than we would expect our news people to apply when reporting on 
others. We also believe candor benefits us as managers: the CEO 
who misleads others in public may eventually mislead himself in 
private.
 o Despite our policy of candor, we will discuss our 
activities in marketable securities only to the extent legally 
required. Good investment ideas are rare, valuable and subject 
to competitive appropriation just as good product or business 
acquisition ideas are. Therefore, we normally will not talk 
about our investment ideas. This ban extends even to securities 
we have sold (because we may purchase them again) and to stocks 
we are incorrectly rumored to be buying. If we deny those 
reports but say “no comment” on other occasions, the no-comments 
become confirmation.
 That completes the catechism, and we can now move on to the 
high point of 1983 - the acquisition of a majority interest in 
Nebraska Furniture Mart and our association with Rose Blumkin and 
her family.
Nebraska Furniture Mart
 Last year, in discussing how managers with bright, but 
adrenalin-soaked minds scramble after foolish acquisitions, I 
quoted Pascal: “It has struck me that all the misfortunes of men 
spring from the single cause that they are unable to stay quietly 
in one room.”
 Even Pascal would have left the room for Mrs. Blumkin.
 About 67 years ago Mrs. Blumkin, then 23, talked her way 
past a border guard to leave Russia for America. She had no 
formal education, not even at the grammar school level, and knew 
no English. After some years in this country, she learned the 
language when her older daughter taught her, every evening, the 
words she had learned in school during the day.
 In 1937, after many years of selling used clothing, Mrs. 
Blumkin had saved $500 with which to realize her dream of opening 
a furniture store. Upon seeing the American Furniture Mart in 
Chicago - then the center of the nation’s wholesale furniture 
activity - she decided to christen her dream Nebraska Furniture 
Mart.
 She met every obstacle you would expect (and a few you 
wouldn’t) when a business endowed with only $500 and no 
locational or product advantage goes up against rich, long￾entrenched competition. At one early point, when her tiny 
resources ran out, “Mrs. B” (a personal trademark now as well 
recognized in Greater Omaha as Coca-Cola or Sanka) coped in a way 
not taught at business schools: she simply sold the furniture and 
appliances from her home in order to pay creditors precisely as 
promised.
 Omaha retailers began to recognize that Mrs. B would offer 
customers far better deals than they had been giving, and they 
pressured furniture and carpet manufacturers not to sell to her. 
But by various strategies she obtained merchandise and cut prices 
sharply. Mrs. B was then hauled into court for violation of Fair 
Trade laws. She not only won all the cases, but received 
invaluable publicity. At the end of one case, after 
demonstrating to the court that she could profitably sell carpet 
at a huge discount from the prevailing price, she sold the judge 
$1400 worth of carpet.
 Today Nebraska Furniture Mart generates over $100 million of 
sales annually out of one 200,000 square-foot store. No other 
home furnishings store in the country comes close to that volume. 
That single store also sells more furniture, carpets, and 
appliances than do all Omaha competitors combined.
 One question I always ask myself in appraising a business is 
how I would like, assuming I had ample capital and skilled 
personnel, to compete with it. I’d rather wrestle grizzlies than 
compete with Mrs. B and her progeny. They buy brilliantly, they 
operate at expense ratios competitors don’t even dream about, and 
they then pass on to their customers much of the savings. It’s 
the ideal business - one built upon exceptional value to the 
customer that in turn translates into exceptional economics for 
its owners.
 Mrs. B is wise as well as smart and, for far-sighted family 
reasons, was willing to sell the business last year. I had 
admired both the family and the business for decades, and a deal 
was quickly made. But Mrs. B, now 90, is not one to go home and 
risk, as she puts it, “losing her marbles”. She remains Chairman 
and is on the sales floor seven days a week. Carpet sales are 
her specialty. She personally sells quantities that would be a 
good departmental total for other carpet retailers.
 We purchased 90% of the business - leaving 10% with members 
of the family who are involved in management - and have optioned 
10% to certain key young family managers.
 And what managers they are. Geneticists should do 
handsprings over the Blumkin family. Louie Blumkin, Mrs. B’s 
son, has been President of Nebraska Furniture Mart for many years 
and is widely regarded as the shrewdest buyer of furniture and 
appliances in the country. Louie says he had the best teacher, 
and Mrs. B says she had the best student. They’re both right. 
Louie and his three sons all have the Blumkin business ability, 
work ethic, and, most important, character. On top of that, they 
are really nice people. We are delighted to be in partnership 
with them.
Corporate Performance
 During 1983 our book value increased from $737.43 per share 
to $975.83 per share, or by 32%. We never take the one-year 
figure very seriously. After all, why should the time required 
for a planet to circle the sun synchronize precisely with the 
time required for business actions to pay off? Instead, we 
recommend not less than a five-year test as a rough yardstick of 
economic performance. Red lights should start flashing if the 
five-year average annual gain falls much below the return on 
equity earned over the period by American industry in aggregate. 
(Watch out for our explanation if that occurs as Goethe observed, 
“When ideas fail, words come in very handy.”)
 During the 19-year tenure of present management, book value 
has grown from $19.46 per share to $975.83, or 22.6% compounded 
annually. Considering our present size, nothing close to this 
rate of return can be sustained. Those who believe otherwise 
should pursue a career in sales, but avoid one in mathematics.
 We report our progress in terms of book value because in our 
case (though not, by any means, in all cases) it is a 
conservative but reasonably adequate proxy for growth in 
intrinsic business value - the measurement that really counts. 
Book value’s virtue as a score-keeping measure is that it is easy 
to calculate and doesn’t involve the subjective (but important) 
judgments employed in calculation of intrinsic business value. 
It is important to understand, however, that the two terms - book 
value and intrinsic business value - have very different 
meanings.
 Book value is an accounting concept, recording the 
accumulated financial input from both contributed capital and 
retained earnings. Intrinsic business value is an economic 
concept, estimating future cash output discounted to present 
value. Book value tells you what has been put in; intrinsic 
business value estimates what can be taken out.
 An analogy will suggest the difference. Assume you spend 
identical amounts putting each of two children through college. 
The book value (measured by financial input) of each child’s 
education would be the same. But the present value of the future 
payoff (the intrinsic business value) might vary enormously - 
from zero to many times the cost of the education. So, also, do 
businesses having equal financial input end up with wide 
variations in value.
 At Berkshire, at the beginning of fiscal 1965 when the 
present management took over, the $19.46 per share book value 
considerably overstated intrinsic business value. All of that 
book value consisted of textile assets that could not earn, on 
average, anything close to an appropriate rate of return. In the 
terms of our analogy, the investment in textile assets resembled 
investment in a largely-wasted education.
 Now, however, our intrinsic business value considerably 
exceeds book value. There are two major reasons:
 (1) Standard accounting principles require that common 
 stocks held by our insurance subsidiaries be stated on 
 our books at market value, but that other stocks we own 
 be carried at the lower of aggregate cost or market. 
 At the end of 1983, the market value of this latter 
 group exceeded carrying value by $70 million pre-tax, 
 or about $50 million after tax. This excess belongs in 
 our intrinsic business value, but is not included in 
 the calculation of book value;
 (2) More important, we own several businesses that possess 
 economic Goodwill (which is properly includable in 
 intrinsic business value) far larger than the 
 accounting Goodwill that is carried on our balance 
 sheet and reflected in book value.
 Goodwill, both economic and accounting, is an arcane subject 
and requires more explanation than is appropriate here. The 
appendix that follows this letter - “Goodwill and its 
Amortization: The Rules and The Realities” - explains why 
economic and accounting Goodwill can, and usually do, differ 
enormously.
 You can live a full and rewarding life without ever thinking 
about Goodwill and its amortization. But students of investment 
and management should understand the nuances of the subject. My 
own thinking has changed drastically from 35 years ago when I was 
taught to favor tangible assets and to shun businesses whose 
value depended largely upon economic Goodwill. This bias caused 
me to make many important business mistakes of omission, although 
relatively few of commission.
 Keynes identified my problem: “The difficulty lies not in 
the new ideas but in escaping from the old ones.” My escape was 
long delayed, in part because most of what I had been taught by 
the same teacher had been (and continues to be) so 
extraordinarily valuable. Ultimately, business experience, 
direct and vicarious, produced my present strong preference for 
businesses that possess large amounts of enduring Goodwill and 
that utilize a minimum of tangible assets.
 I recommend the Appendix to those who are comfortable with 
accounting terminology and who have an interest in understanding 
the business aspects of Goodwill. Whether or not you wish to 
tackle the Appendix, you should be aware that Charlie and I 
believe that Berkshire possesses very significant economic 
Goodwill value above that reflected in our book value.
Sources of Reported Earnings
 The table below shows the sources of Berkshire’s reported 
earnings. In 1982, Berkshire owned about 60% of Blue Chip Stamps 
whereas, in 1983, our ownership was 60% throughout the first six 
months and 100% thereafter. In turn, Berkshire’s net interest in 
Wesco was 48% during 1982 and the first six months of 1983, and 
80% for the balance of 1983. Because of these changed ownership 
percentages, the first two columns of the table provide the best 
measure of underlying business performance.
 All of the significant gains and losses attributable to 
unusual sales of assets by any of the business entities are 
aggregated with securities transactions on the line near the 
bottom of the table, and are not included in operating earnings. 
(We regard any annual figure for realized capital gains or losses 
as meaningless, but we regard the aggregate realized and 
unrealized capital gains over a period of years as very 
important.) Furthermore, amortization of Goodwill is not charged 
against the specific businesses but, for reasons outlined in the 
Appendix, is set forth as a separate item.
 Net Earnings
 Earnings Before Income Taxes After Tax
 -------------------------------------- ------------------
 Total Berkshire Share Berkshire Share
 ------------------ ------------------ ------------------
 1983 1982 1983 1982 1983 1982
 -------- -------- -------- -------- -------- --------
 (000s omitted)
Operating Earnings:
 Insurance Group:
 Underwriting ............ $(33,872) $(21,558) $(33,872) $(21,558) $(18,400) $(11,345)
 Net Investment Income ... 43,810 41,620 43,810 41,620 39,114 35,270
 Berkshire-Waumbec Textiles (100) (1,545) (100) (1,545) (63) (862)
 Associated Retail Stores .. 697 914 697 914 355 446
 Nebraska Furniture Mart(1) 3,812 -- 3,049 -- 1,521 --
 See’s Candies ............. 27,411 23,884 24,526 14,235 12,212 6,914
 Buffalo Evening News ...... 19,352 (1,215) 16,547 (724) 8,832 (226)
 Blue Chip Stamps(2) ....... (1,422) 4,182 (1,876) 2,492 (353) 2,472
 Wesco Financial - Parent .. 7,493 6,156 4,844 2,937 3,448 2,210
 Mutual Savings and Loan ... (798) (6) (467) (2) 1,917 1,524
 Precision Steel ........... 3,241 1,035 2,102 493 1,136 265
 Interest on Debt .......... (15,104) (14,996) (13,844) (12,977) (7,346) (6,951)
 Special GEICO Distribution 21,000 -- 21,000 -- 19,551 --
 Shareholder-Designated
 Contributions .......... (3,066) (891) (3,066) (891) (1,656) (481)
 Amortization of Goodwill .. (532) 151 (563) 90 (563) 90
 Other ..................... 10,121 3,371 9,623 2,658 8,490 2,171
 -------- -------- -------- -------- -------- --------
Operating Earnings .......... 82,043 41,102 72,410 27,742 68,195 31,497
Sales of securities and
 unusual sales of assets .. 67,260 36,651 65,089 21,875 45,298 14,877
 -------- -------- -------- -------- -------- --------
Total Earnings .............. $149,303 $ 77,753 $137,499 $ 49,617 $113,493 $ 46,374
 ======== ======== ======== ======== ======== ========
(1) October through December
(2) 1982 and 1983 are not comparable; major assets were 
 transferred in the merger.
 For a discussion of the businesses owned by Wesco, please 
read Charlie Munger’s report on pages 46-51. Charlie replaced 
Louie Vincenti as Chairman of Wesco late in 1983 when health 
forced Louie’s retirement at age 77. In some instances, “health” 
is a euphemism, but in Louie’s case nothing but health would 
cause us to consider his retirement. Louie is a marvelous man 
and has been a marvelous manager.
 The special GEICO distribution reported in the table arose 
when that company made a tender offer for a portion of its stock, 
buying both from us and other shareholders. At GEICO’s request, 
we tendered a quantity of shares that kept our ownership 
percentage the same after the transaction as before. The 
proportional nature of our sale permitted us to treat the 
proceeds as a dividend. Unlike individuals, corporations net 
considerably more when earnings are derived from dividends rather 
than from capital gains, since the effective Federal income tax 
rate on dividends is 6.9% versus 28% on capital gains.
 Even with this special item added in, our total dividends 
from GEICO in 1983 were considerably less than our share of 
GEICO’s earnings. Thus it is perfectly appropriate, from both an 
accounting and economic standpoint, to include the redemption 
proceeds in our reported earnings. It is because the item is 
large and unusual that we call your attention to it.
 The table showing you our sources of earnings includes 
dividends from those non-controlled companies whose marketable 
equity securities we own. But the table does not include 
earnings those companies have retained that are applicable to our 
ownership. In aggregate and over time we expect those 
undistributed earnings to be reflected in market prices and to 
increase our intrinsic business value on a dollar-for-dollar 
basis, just as if those earnings had been under our control and 
reported as part of our profits. That does not mean we expect 
all of our holdings to behave uniformly; some will disappoint us, 
others will deliver pleasant surprises. To date our experience 
has been better than we originally anticipated, In aggregate, we 
have received far more than a dollar of market value gain for 
every dollar of earnings retained.
 The following table shows our 1983 yearend net holdings in 
marketable equities. All numbers represent 100% of Berkshire’s 
holdings, and 80% of Wesco’s holdings. The portion attributable 
to minority shareholders of Wesco has been excluded.
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted)
 690,975 Affiliated Publications, Inc. .... $ 3,516 $ 26,603
 4,451,544 General Foods Corporation(a) ..... 163,786 228,698
 6,850,000 GEICO Corporation ................ 47,138 398,156
 2,379,200 Handy & Harman ................... 27,318 42,231
 636,310 Interpublic Group of Companies, Inc. 4,056 33,088
 197,200 Media General .................... 3,191 11,191
 250,400 Ogilvy & Mather International .... 2,580 12,833
 5,618,661 R. J. Reynolds Industries, Inc.(a) 268,918 341,334
 901,788 Time, Inc. ....................... 27,732 56,860
 1,868,600 The Washington Post Company ...... 10,628 136,875
 ---------- ----------
 $558,863 $1,287,869
 All Other Common Stockholdings ... 7,485 18,044
 ---------- ----------
 Total Common Stocks .............. $566,348 $1,305,913
 ========== ==========
(a) WESCO owns shares in these companies.
 Based upon present holdings and present dividend rates - 
excluding any special items such as the GEICO proportional 
redemption last year - we would expect reported dividends from 
this group to be approximately $39 million in 1984. We can also 
make a very rough guess about the earnings this group will retain 
that will be attributable to our ownership: these may total about 
$65 million for the year. These retained earnings could well 
have no immediate effect on market prices of the securities. 
Over time, however, we feel they will have real meaning.
 In addition to the figures already supplied, information 
regarding the businesses we control appears in Management’s 
Discussion on pages 40-44. The most significant of these are 
Buffalo Evening News, See’s, and the Insurance Group, to which we 
will give some special attention here.
Buffalo Evening News
 First, a clarification: our corporate name is Buffalo 
Evening News, Inc. but the name of the newspaper, since we began 
a morning edition a little over a year ago, is Buffalo News.
 In 1983 the News somewhat exceeded its targeted profit 
margin of 10% after tax. Two factors were responsible: (1) a 
state income tax cost that was subnormal because of a large loss 
carry-forward, now fully utilized, and (2) a large drop in the 
per-ton cost of newsprint (an unanticipated fluke that will be 
reversed in 1984).
 Although our profit margins in 1983 were about average for 
newspapers such as the News, the paper’s performance, 
nevertheless, was a significant achievement considering the 
economic and retailing environment in Buffalo.
 Buffalo has a concentration of heavy industry, a segment of 
the economy that was hit particularly hard by the recent 
recession and that has lagged the recovery. As Buffalo consumers 
have suffered, so also have the paper’s retailing customers. 
Their numbers have shrunk over the past few years and many of 
those surviving have cut their linage.
 Within this environment the News has one exceptional 
strength: its acceptance by the public, a matter measured by the 
paper’s “penetration ratio” - the percentage of households within 
the community purchasing the paper each day. Our ratio is 
superb: for the six months ended September 30, 1983 the News 
stood number one in weekday penetration among the 100 largest 
papers in the United States (the ranking is based on “city zone” 
numbers compiled by the Audit Bureau of Circulations).
 In interpreting the standings, it is important to note that 
many large cities have two papers, and that in such cases the 
penetration of either paper is necessarily lower than if there 
were a single paper, as in Buffalo. Nevertheless, the list of 
the 100 largest papers includes many that have a city to 
themselves. Among these, the News is at the top nationally, far 
ahead of many of the country’s best-known dailies.
 Among Sunday editions of these same large dailies, the News 
ranks number three in penetration - ten to twenty percentage 
points ahead of many well-known papers. It was not always this 
way in Buffalo. Below we show Sunday circulation in Buffalo in 
the years prior to 1977 compared with the present period. In 
that earlier period the Sunday paper was the Courier-Express (the 
News was not then publishing a Sunday paper). Now, of course, it 
is the News.
 Average Sunday Circulation
 --------------------------
 Year Circulation
 ---- -----------
 1970 314,000
 1971 306,000
 1972 302,000
 1973 290,000
 1974 278,000
 1975 269,000
 1976 270,000
 1984 (Current) 376,000
 We believe a paper’s penetration ratio to be the best 
measure of the strength of its franchise. Papers with unusually 
high penetration in the geographical area that is of prime 
interest to major local retailers, and with relatively little 
circulation elsewhere, are exceptionally efficient buys for those 
retailers. Low-penetration papers have a far less compelling 
message to present to advertisers.
 In our opinion, three factors largely account for the 
unusual acceptance of the News in the community. Among these, 
points 2 and 3 also may explain the popularity of the Sunday News 
compared to that of the Sunday Courier-Express when it was the 
sole Sunday paper:
 (1) The first point has nothing to do with merits of the 
 News. Both emigration and immigration are relatively 
 low in Buffalo. A stable population is more interested 
 and involved in the activities of its community than is 
 a shifting population - and, as a result, is more 
 interested in the content of the local daily paper. 
 Increase the movement in and out of a city and 
 penetration ratios will fall.
 (2) The News has a reputation for editorial quality and 
 integrity that was honed by our longtime editor, the 
 legendary Alfred Kirchhofer, and that has been preserved 
 and extended by Murray Light. This reputation was 
 enormously important to our success in establishing a 
 Sunday paper against entrenched competition. And without 
 a Sunday edition, the News would not have survived in the 
 long run.
 (3) The News lives up to its name - it delivers a very 
 unusual amount of news. During 1983, our “news hole” 
 (editorial material - not ads) amounted to 50% of the 
 newspaper’s content (excluding preprinted inserts). 
 Among papers that dominate their markets and that are of 
 comparable or larger size, we know of only one whose news 
 hole percentage exceeds that of the News. Comprehensive 
 figures are not available, but a sampling indicates an 
 average percentage in the high 30s. In other words, page 
 for page, our mix gives readers over 25% more news than 
 the typical paper. This news-rich mixture is by intent. 
 Some publishers, pushing for higher profit margins, have 
 cut their news holes during the past decade. We have 
 maintained ours and will continue to do so. Properly 
 written and edited, a full serving of news makes our 
 paper more valuable to the reader and contributes to our 
 unusual penetration ratio.
 Despite the strength of the News’ franchise, gains in ROP 
linage (advertising printed within the newspaper pages as 
contrasted to preprinted inserts) are going to be very difficult 
to achieve. We had an enormous gain in preprints during 1983: 
lines rose from 9.3 million to 16.4 million, revenues from $3.6 
million to $8.1 million. These gains are consistent with 
national trends, but exaggerated in our case by business we 
picked up when the Courier-Express closed.
 On balance, the shift from ROP to preprints has negative 
economic implications for us. Profitability on preprints is less 
and the business is more subject to competition from alternative 
means of delivery. Furthermore, a reduction in ROP linage means 
less absolute space devoted to news (since the news hole 
percentage remains constant), thereby reducing the utility of the 
paper to the reader.
 Stan Lipsey became Publisher of the Buffalo News at midyear 
upon the retirement of Henry Urban. Henry never flinched during 
the dark days of litigation and losses following our introduction 
of the Sunday paper - an introduction whose wisdom was questioned 
by many in the newspaper business, including some within our own 
building. Henry is admired by the Buffalo business community, 
he’s admired by all who worked for him, and he is admired by 
Charlie and me. Stan worked with Henry for several years, and 
has worked for Berkshire Hathaway since 1969. He has been 
personally involved in all nuts-and-bolts aspects of the 
newspaper business from editorial to circulation. We couldn’t do 
better.
See’s Candy Shops
 The financial results at See’s continue to be exceptional. 
The business possesses a valuable and solid consumer franchise 
and a manager equally valuable and solid.
 In recent years See’s has encountered two important 
problems, at least one of which is well on its way toward 
solution. That problem concerns costs, except those for raw 
materials. We have enjoyed a break on raw material costs in 
recent years though so, of course, have our competitors. One of 
these days we will get a nasty surprise in the opposite 
direction. In effect, raw material costs are largely beyond our 
control since we will, as a matter of course, buy the finest 
ingredients that we can, regardless of changes in their price 
levels. We regard product quality as sacred.
 But other kinds of costs are more controllable, and it is in 
this area that we have had problems. On a per-pound basis, our 
costs (not including those for raw materials) have increased in 
the last few years at a rate significantly greater than the 
increase in the general price level. It is vital to our 
competitive position and profit potential that we reverse this 
trend.
 In recent months much better control over costs has been 
attained and we feel certain that our rate of growth in these 
costs in 1984 will be below the rate of inflation. This 
confidence arises out of our long experience with the managerial 
talents of Chuck Huggins. We put Chuck in charge the day we took 
over, and his record has been simply extraordinary, as shown by 
the following table:
 52-53 Week Year Operating Number of Number of
 Ended About Sales Profits Pounds of Stores Open
 December 31 Revenues After Taxes Candy Sold at Year End
------------------- ------------ ----------- ---------- -----------
1983 (53 weeks) ... $133,531,000 $13,699,000 24,651,000 207
1982 .............. 123,662,000 11,875,000 24,216,000 202
1981 .............. 112,578,000 10,779,000 24,052,000 199
1980 .............. 97,715,000 7,547,000 24,065,000 191
1979 .............. 87,314,000 6,330,000 23,985,000 188
1978 .............. 73,653,000 6,178,000 22,407,000 182
1977 .............. 62,886,000 6,154,000 20,921,000 179
1976 (53 weeks) ... 56,333,000 5,569,000 20,553,000 173
1975 .............. 50,492,000 5,132,000 19,134,000 172
1974 .............. 41,248,000 3,021,000 17,883,000 170
1973 .............. 35,050,000 1,940,000 17,813,000 169
1972 .............. 31,337,000 2,083,000 16,954,000 167
 The other problem we face, as the table suggests, is our 
recent inability to achieve meaningful gains in pounds sold. The 
industry has the same problem. But for many years we 
outperformed the industry in this respect and now we are not.
 The poundage volume in our retail stores has been virtually 
unchanged each year for the past four, despite small increases 
every year in the number of shops (and in distribution expense as 
well). Of course, dollar volume has increased because we have 
raised prices significantly. But we regard the most important 
measure of retail trends to be units sold per store rather than 
dollar volume. On a same-store basis (counting only shops open 
throughout both years) with all figures adjusted to a 52-week 
year, poundage was down .8 of 1% during 1983. This small decline 
was our best same-store performance since 1979; the cumulative 
decline since then has been about 8%. Quantity-order volume, 
about 25% of our total, has plateaued in recent years following 
very large poundage gains throughout the 1970s.
 We are not sure to what extent this flat volume - both in 
the retail shop area and the quantity order area - is due to our 
pricing policies and to what extent it is due to static industry 
volume, the recession, and the extraordinary share of market we 
already enjoy in our primary marketing area. Our price increase 
for 1984 is much more modest than has been the case in the past 
few years, and we hope that next year we can report better volume 
figures to you. But we have no basis to forecast these.
 Despite the volume problem, See’s strengths are many and 
important. In our primary marketing area, the West, our candy is 
preferred by an enormous margin to that of any competitor. In 
fact, we believe most lovers of chocolate prefer it to candy 
costing two or three times as much. (In candy, as in stocks, 
price and value can differ; price is what you give, value is what 
you get.) The quality of customer service in our shops - operated 
throughout the country by us and not by franchisees is every bit 
as good as the product. Cheerful, helpful personnel are as much 
a trademark of See’s as is the logo on the box. That’s no small 
achievement in a business that requires us to hire about 2000 
seasonal workers. We know of no comparably-sized organization 
that betters the quality of customer service delivered by Chuck 
Huggins and his associates.
 Because we have raised prices so modestly in 1984, we expect 
See’s profits this year to be about the same as in 1983. 
Insurance - Controlled Operations
 We both operate insurance companies and have a large 
economic interest in an insurance business we don’t operate, 
GEICO. The results for all can be summed up easily: in 
aggregate, the companies we operate and whose underwriting 
results reflect the consequences of decisions that were my 
responsibility a few years ago, had absolutely terrible results. 
Fortunately, GEICO, whose policies I do not influence, simply 
shot the lights out. The inference you draw from this summary is 
the correct one. I made some serious mistakes a few years ago 
that came home to roost.
 The industry had its worst underwriting year in a long time, 
as indicated by the table below:
 Yearly Change Combined Ratio
 in Premiums after Policy-
 Written (%) holder Dividends
 ------------- ----------------
1972 .................... 10.2 96.2
1973 .................... 8.0 99.2
1974 .................... 6.2 105.4
1975 .................... 11.0 107.9
1976 .................... 21.9 102.4
1977 .................... 19.8 97.2
1978 .................... 12.8 97.5
1979 .................... 10.3 100.6
1980 .................... 6.0 103.1
1981 .................... 3.9 106.0
1982 (Revised) .......... 4.4 109.7
1983 (Estimated) ........ 4.6 111.0
Source: Best’s Aggregates and Averages.
 Best’s data reflect the experience of practically the entire 
industry, including stock, mutual, and reciprocal companies. The 
combined ratio represents total insurance costs (losses incurred 
plus expenses) compared to revenue from premiums; a ratio below 
100 indicates an underwriting profit and one above 100 indicates 
a loss.
 For the reasons outlined in last year’s report, we expect 
the poor industry experience of 1983 to be more or less typical 
for a good many years to come. (As Yogi Berra put it: “It will be 
deja vu all over again.”) That doesn’t mean we think the figures 
won’t bounce around a bit; they are certain to. But we believe 
it highly unlikely that the combined ratio during the balance of 
the decade will average significantly below the 1981-1983 level. 
Based on our expectations regarding inflation - and we are as 
pessimistic as ever on that front - industry premium volume must 
grow about 10% annually merely to stabilize loss ratios at 
present levels.
 Our own combined ratio in 1983 was 121. Since Mike Goldberg 
recently took over most of the responsibility for the insurance 
operation, it would be nice for me if our shortcomings could be 
placed at his doorstep rather than mine. But unfortunately, as 
we have often pointed out, the insurance business has a long 
lead-time. Though business policies may be changed and personnel 
improved, a significant period must pass before the effects are 
seen. (This characteristic of the business enabled us to make a 
great deal of money in GEICO; we could picture what was likely to 
happen well before it actually occurred.) So the roots of the 
1983 results are operating and personnel decisions made two or 
more years back when I had direct managerial responsibility for 
the insurance group.
 Despite our poor results overall, several of our managers 
did truly outstanding jobs. Roland Miller guided the auto and 
general liability business of National Indemnity Company and 
National Fire and Marine Insurance Company to improved results, 
while those of competitors deteriorated. In addition, Tom Rowley 
at Continental Divide Insurance - our fledgling Colorado 
homestate company - seems certain to be a winner. Mike found him 
a little over a year ago, and he was an important acquisition.
 We have become active recently - and hope to become much 
more active - in reinsurance transactions where the buyer’s 
overriding concern should be the seller’s long-term 
creditworthiness. In such transactions our premier financial 
strength should make us the number one choice of both claimants 
and insurers who must rely on the reinsurer’s promises for a 
great many years to come.
 A major source of such business is structured settlements - 
a procedure for settling losses under which claimants receive 
periodic payments (almost always monthly, for life) rather than a 
single lump sum settlement. This form of settlement has 
important tax advantages for the claimant and also prevents his 
squandering a large lump-sum payment. Frequently, some inflation 
protection is built into the settlement. Usually the claimant 
has been seriously injured, and thus the periodic payments must 
be unquestionably secure for decades to come. We believe we 
offer unparalleled security. No other insurer we know of - even 
those with much larger gross assets - has our financial strength.
 We also think our financial strength should recommend us to 
companies wishing to transfer loss reserves. In such 
transactions, other insurance companies pay us lump sums to 
assume all (or a specified portion of) future loss payments 
applicable to large blocks of expired business. Here also, the 
company transferring such claims needs to be certain of the 
transferee’s financial strength for many years to come. Again, 
most of our competitors soliciting such business appear to us to 
have a financial condition that is materially inferior to ours.
 Potentially, structured settlements and the assumption of 
loss reserves could become very significant to us. Because of 
their potential size and because these operations generate large 
amounts of investment income compared to premium volume, we will 
show underwriting results from those businesses on a separate 
line in our insurance segment data. We also will exclude their 
effect in reporting our combined ratio to you. We “front end” no 
profit on structured settlement or loss reserve transactions, and 
all attributable overhead is expensed currently. Both businesses 
are run by Don Wurster at National Indemnity Company.
Insurance - GEICO
 Geico’s performance during 1983 was as good as our own 
insurance performance was poor. Compared to the industry’s 
combined ratio of 111, GEICO wrote at 96 after a large voluntary 
accrual for policyholder dividends. A few years ago I would not 
have thought GEICO could so greatly outperform the industry. Its 
superiority reflects the combination of a truly exceptional 
business idea and an exceptional management.
 Jack Byrne and Bill Snyder have maintained extraordinary 
discipline in the underwriting area (including, crucially, 
provision for full and proper loss reserves), and their efforts 
are now being further rewarded by significant gains in new 
business. Equally important, Lou Simpson is the class of the 
field among insurance investment managers. The three of them are 
some team.
 We have approximately a one-third interest in GEICO. That 
gives us a $270 million share in the company’s premium volume, an 
amount some 80% larger than our own volume. Thus, the major 
portion of our total insurance business comes from the best 
insurance book in the country. This fact does not moderate by an 
iota the need for us to improve our own operation.
Stock Splits and Stock Activity
 We often are asked why Berkshire does not split its stock. 
The assumption behind this question usually appears to be that a 
split would be a pro-shareholder action. We disagree. Let me 
tell you why.
 One of our goals is to have Berkshire Hathaway stock sell at 
a price rationally related to its intrinsic business value. (But 
note “rationally related”, not “identical”: if well-regarded 
companies are generally selling in the market at large discounts 
from value, Berkshire might well be priced similarly.) The key to 
a rational stock price is rational shareholders, both current and 
prospective.
 If the holders of a company’s stock and/or the prospective 
buyers attracted to it are prone to make irrational or emotion￾based decisions, some pretty silly stock prices are going to 
appear periodically. Manic-depressive personalities produce 
manic-depressive valuations. Such aberrations may help us in 
buying and selling the stocks of other companies. But we think 
it is in both your interest and ours to minimize their occurrence 
in the market for Berkshire.
 To obtain only high quality shareholders is no cinch. Mrs. 
Astor could select her 400, but anyone can buy any stock. 
Entering members of a shareholder “club” cannot be screened for 
intellectual capacity, emotional stability, moral sensitivity or 
acceptable dress. Shareholder eugenics, therefore, might appear 
to be a hopeless undertaking.
 In large part, however, we feel that high quality ownership 
can be attracted and maintained if we consistently communicate 
our business and ownership philosophy - along with no other 
conflicting messages - and then let self selection follow its 
course. For example, self selection will draw a far different 
crowd to a musical event advertised as an opera than one 
advertised as a rock concert even though anyone can buy a ticket 
to either.
 Through our policies and communications - our 
“advertisements” - we try to attract investors who will 
understand our operations, attitudes and expectations. (And, 
fully as important, we try to dissuade those who won’t.) We want 
those who think of themselves as business owners and invest in 
companies with the intention of staying a long time. And, we 
want those who keep their eyes focused on business results, not 
market prices.
 Investors possessing those characteristics are in a small 
minority, but we have an exceptional collection of them. I 
believe well over 90% - probably over 95% - of our shares are 
held by those who were shareholders of Berkshire or Blue Chip 
five years ago. And I would guess that over 95% of our shares 
are held by investors for whom the holding is at least double the 
size of their next largest. Among companies with at least 
several thousand public shareholders and more than $1 billion of 
market value, we are almost certainly the leader in the degree to 
which our shareholders think and act like owners. Upgrading a 
shareholder group that possesses these characteristics is not 
easy.
 Were we to split the stock or take other actions focusing on 
stock price rather than business value, we would attract an 
entering class of buyers inferior to the exiting class of 
sellers. At $1300, there are very few investors who can’t afford 
a Berkshire share. Would a potential one-share purchaser be 
better off if we split 100 for 1 so he could buy 100 shares? 
Those who think so and who would buy the stock because of the 
split or in anticipation of one would definitely downgrade the 
quality of our present shareholder group. (Could we really 
improve our shareholder group by trading some of our present 
clear-thinking members for impressionable new ones who, 
preferring paper to value, feel wealthier with nine $10 bills 
than with one $100 bill?) People who buy for non-value reasons 
are likely to sell for non-value reasons. Their presence in the 
picture will accentuate erratic price swings unrelated to 
underlying business developments.
 We will try to avoid policies that attract buyers with a 
short-term focus on our stock price and try to follow policies 
that attract informed long-term investors focusing on business 
values. just as you purchased your Berkshire shares in a market 
populated by rational informed investors, you deserve a chance to 
sell - should you ever want to - in the same kind of market. We 
will work to keep it in existence.
 One of the ironies of the stock market is the emphasis on 
activity. Brokers, using terms such as “marketability” and 
“liquidity”, sing the praises of companies with high share 
turnover (those who cannot fill your pocket will confidently fill 
your ear). But investors should understand that what is good for 
the croupier is not good for the customer. A hyperactive stock 
market is the pickpocket of enterprise.
 For example, consider a typical company earning, say, 12% on 
equity. Assume a very high turnover rate in its shares of 100% 
per year. If a purchase and sale of the stock each extract 
commissions of 1% (the rate may be much higher on low-priced 
stocks) and if the stock trades at book value, the owners of our 
hypothetical company will pay, in aggregate, 2% of the company’s 
net worth annually for the privilege of transferring ownership. 
This activity does nothing for the earnings of the business, and 
means that 1/6 of them are lost to the owners through the 
“frictional” cost of transfer. (And this calculation does not 
count option trading, which would increase frictional costs still 
further.)
 All that makes for a rather expensive game of musical 
chairs. Can you imagine the agonized cry that would arise if a 
governmental unit were to impose a new 16 2/3% tax on earnings of 
corporations or investors? By market activity, investors can 
impose upon themselves the equivalent of such a tax.
 Days when the market trades 100 million shares (and that 
kind of volume, when over-the-counter trading is included, is 
today abnormally low) are a curse for owners, not a blessing - 
for they mean that owners are paying twice as much to change 
chairs as they are on a 50-million-share day. If 100 million￾share days persist for a year and the average cost on each 
purchase and sale is 15 cents a share, the chair-changing tax for 
investors in aggregate would total about $7.5 billion - an amount 
roughly equal to the combined 1982 profits of Exxon, General 
Motors, Mobil and Texaco, the four largest companies in the 
Fortune 500.
 These companies had a combined net worth of $75 billion at 
yearend 1982 and accounted for over 12% of both net worth and net 
income of the entire Fortune 500 list. Under our assumption 
investors, in aggregate, every year forfeit all earnings from 
this staggering sum of capital merely to satisfy their penchant 
for “financial flip-flopping”. In addition, investment 
management fees of over $2 billion annua
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1984 was $152.6 million, or 
$133 per share. This sounds pretty good but actually it’s 
mediocre. Economic gains must be evaluated by comparison with 
the capital that produces them. Our twenty-year compounded 
annual gain in book value has been 22.1% (from $19.46 in 1964 to 
$1108.77 in 1984), but our gain in 1984 was only 13.6%.
 As we discussed last year, the gain in per-share intrinsic 
business value is the economic measurement that really counts. 
But calculations of intrinsic business value are subjective. In 
our case, book value serves as a useful, although somewhat 
understated, proxy. In my judgment, intrinsic business value and 
book value increased during 1984 at about the same rate.
 Using my academic voice, I have told you in the past of the 
drag that a mushrooming capital base exerts upon rates of return. 
Unfortunately, my academic voice is now giving way to a 
reportorial voice. Our historical 22% rate is just that - 
history. To earn even 15% annually over the next decade 
(assuming we continue to follow our present dividend policy, 
about which more will be said later in this letter) we would need 
profits aggregating about $3.9 billion. Accomplishing this will 
require a few big ideas - small ones just won’t do. Charlie 
Munger, my partner in general management, and I do not have any 
such ideas at present, but our experience has been that they pop 
up occasionally. (How’s that for a strategic plan?)
Sources of Reported Earnings
 The table on the following page shows the sources of 
Berkshire’s reported earnings. Berkshire’s net ownership 
interest in many of the constituent businesses changed at midyear 
1983 when the Blue Chip merger took place. Because of these 
changes, the first two columns of the table provide the best 
measure of underlying business performance.
 All of the significant gains and losses attributable to 
unusual sales of assets by any of the business entities are 
aggregated with securities transactions on the line near the 
bottom of the table, and are not included in operating earnings. 
(We regard any annual figure for realized capital gains or losses 
as meaningless, but we regard the aggregate realized and 
unrealized capital gains over a period of years as very 
important.) 
 Furthermore, amortization of Goodwill is not charged against 
the specific businesses but, for reasons outlined in the Appendix 
to my letter in the 1983 annual report, is set forth as a 
separate item.
 (000s omitted)
 ----------------------------------------------------------
 Net Earnings
 Earnings Before Income Taxes After Tax
 -------------------------------------- ------------------
 Total Berkshire Share Berkshire Share
 ------------------ ------------------ ------------------
 1984 1983 1984 1983 1984 1983
 -------- -------- -------- -------- -------- --------
Operating Earnings:
 Insurance Group: 
 Underwriting ............ $(48,060) $(33,872) $(48,060) $(33,872) $(25,955) $(18,400)
 Net Investment Income ... 68,903 43,810 68,903 43,810 62,059 39,114
 Buffalo News .............. 27,328 19,352 27,328 16,547 13,317 8,832
 Nebraska Furniture Mart(1) 14,511 3,812 11,609 3,049 5,917 1,521
 See’s Candies ............. 26,644 27,411 26,644 24,526 13,380 12,212
 Associated Retail Stores .. (1,072) 697 (1,072) 697 (579) 355
 Blue Chip Stamps(2) (1,843) (1,422) (1,843) (1,876) (899) (353)
 Mutual Savings and Loan ... 1,456 (798) 1,166 (467) 3,151 1,917
 Precision Steel ........... 4,092 3,241 3,278 2,102 1,696 1,136
 Textiles .................. 418 (100) 418 (100) 226 (63)
 Wesco Financial ........... 9,777 7,493 7,831 4,844 4,828 3,448
 Amortization of Goodwill .. (1,434) (532) (1,434) (563) (1,434) (563)
 Interest on Debt .......... (14,734) (15,104) (14,097) (13,844) (7,452) (7,346)
 Shareholder-Designated
 Contributions .......... (3,179) (3,066) (3,179) (3,066) (1,716) (1,656)
 Other ..................... 4,932 10,121 4,529 9,623 3,476 8,490
 -------- -------- -------- -------- -------- --------
Operating Earnings .......... 87,739 61,043 82,021 51,410 70,015 48,644
Special GEICO Distribution .. -- 19,575 -- 19,575 -- 18,224
Special Gen. Foods Distribution 8,111 -- 7,896 -- 7,294 --
Sales of securities and
 unusual sales of assets .. 104,699 67,260 101,376 65,089 71,587 45,298
 -------- -------- -------- -------- -------- --------
Total Earnings - all entities $200,549 $147,878 $191,293 $136,074 $148,896 $112,166
 ======== ======== ======== ======== ======== ========
(1) 1983 figures are those for October through December.
(2) 1984 and 1983 are not comparable; major assets were 
 transferred in the mid-year 1983 merger of Blue Chip Stamps.
 Sharp-eyed shareholders will notice that the amount of the 
special GEICO distribution and its location in the table have 
been changed from the presentation of last year. Though they 
reclassify and reduce “accounting” earnings, the changes are 
entirely of form, not of substance. The story behind the 
changes, however, is interesting.
 As reported last year: (1) in mid-1983 GEICO made a tender 
offer to buy its own shares; (2) at the same time, we agreed by 
written contract to sell GEICO an amount of its shares that would 
be proportionately related to the aggregate number of shares 
GEICO repurchased via the tender from all other shareholders; (3) 
at completion of the tender, we delivered 350,000 shares to 
GEICO, received $21 million cash, and were left owning exactly 
the same percentage of GEICO that we owned before the tender; (4) 
GEICO’s transaction with us amounted to a proportionate 
redemption, an opinion rendered us, without qualification, by a 
leading law firm; (5) the Tax Code logically regards such 
proportionate redemptions as substantially equivalent to 
dividends and, therefore, the $21 million we received was taxed 
at only the 6.9% inter-corporate dividend rate; (6) importantly, 
that $21 million was far less than the previously-undistributed 
earnings that had inured to our ownership in GEICO and, thus, 
from the standpoint of economic substance, was in our view 
equivalent to a dividend.
 Because it was material and unusual, we highlighted the 
GEICO distribution last year to you, both in the applicable 
quarterly report and in this section of the annual report. 
Additionally, we emphasized the transaction to our auditors, 
Peat, Marwick, Mitchell & Co. Both the Omaha office of Peat 
Marwick and the reviewing Chicago partner, without objection, 
concurred with our dividend presentation.
 In 1984, we had a virtually identical transaction with 
General Foods. The only difference was that General Foods 
repurchased its stock over a period of time in the open market, 
whereas GEICO had made a “one-shot” tender offer. In the General 
Foods case we sold to the company, on each day that it 
repurchased shares, a quantity of shares that left our ownership 
percentage precisely unchanged. Again our transaction was 
pursuant to a written contract executed before repurchases began. 
And again the money we received was far less than the retained 
earnings that had inured to our ownership interest since our 
purchase. Overall we received $21,843,601 in cash from General 
Foods, and our ownership remained at exactly 8.75%.
 At this point the New York office of Peat Marwick came into 
the picture. Late in 1984 it indicated that it disagreed with 
the conclusions of the firm’s Omaha office and Chicago reviewing 
partner. The New York view was that the GEICO and General Foods 
transactions should be treated as sales of stock by Berkshire 
rather than as the receipt of dividends. Under this accounting 
approach, a portion of the cost of our investment in the stock of 
each company would be charged against the redemption payment and 
any gain would be shown as a capital gain, not as dividend 
income. This is an accounting approach only, having no bearing 
on taxes: Peat Marwick agrees that the transactions were 
dividends for IRS purposes.
 We disagree with the New York position from both the 
viewpoint of economic substance and proper accounting. But, to 
avoid a qualified auditor’s opinion, we have adopted herein Peat 
Marwick’s 1984 view and restated 1983 accordingly. None of this, 
however, has any effect on intrinsic business value: our 
ownership interests in GEICO and General Foods, our cash, our 
taxes, and the market value and tax basis of our holdings all 
remain the same.
 This year we have again entered into a contract with General 
Foods whereby we will sell them shares concurrently with open 
market purchases that they make. The arrangement provides that 
our ownership interest will remain unchanged at all times. By 
keeping it so, we will insure ourselves dividend treatment for 
tax purposes. In our view also, the economic substance of this 
transaction again is the creation of dividend income. However, 
we will account for the redemptions as sales of stock rather than 
dividend income unless accounting rules are adopted that speak 
directly to this point. We will continue to prominently identify 
any such special transactions in our reports to you.
 While we enjoy a low tax charge on these proportionate 
redemptions, and have participated in several of them, we view 
such repurchases as at least equally favorable for shareholders 
who do not sell. When companies with outstanding businesses and 
comfortable financial positions find their shares selling far 
below intrinsic value in the marketplace, no alternative action 
can benefit shareholders as surely as repurchases.
 (Our endorsement of repurchases is limited to those dictated 
by price/value relationships and does not extend to the 
“greenmail” repurchase - a practice we find odious and repugnant. 
In these transactions, two parties achieve their personal ends by 
exploitation of an innocent and unconsulted third party. The 
players are: (1) the “shareholder” extortionist who, even before 
the ink on his stock certificate dries, delivers his “your￾money-or-your-life” message to managers; (2) the corporate 
insiders who quickly seek peace at any price - as long as the 
price is paid by someone else; and (3) the shareholders whose 
money is used by (2) to make (1) go away. As the dust settles, 
the mugging, transient shareholder gives his speech on “free 
enterprise”, the muggee management gives its speech on “the best 
interests of the company”, and the innocent shareholder standing 
by mutely funds the payoff.)
 The companies in which we have our largest investments have 
all engaged in significant stock repurhases at times when wide 
discrepancies existed between price and value. As shareholders, 
we find this encouraging and rewarding for two important reasons 
- one that is obvious, and one that is subtle and not always 
understood. The obvious point involves basic arithmetic: major 
repurchases at prices well below per-share intrinsic business 
value immediately increase, in a highly significant way, that 
value. When companies purchase their own stock, they often find 
it easy to get $2 of present value for $1. Corporate acquisition 
programs almost never do as well and, in a discouragingly large 
number of cases, fail to get anything close to $1 of value for 
each $1 expended.
 The other benefit of repurchases is less subject to precise 
measurement but can be fully as important over time. By making 
repurchases when a company’s market value is well below its 
business value, management clearly demonstrates that it is given 
to actions that enhance the wealth of shareholders, rather than 
to actions that expand management’s domain but that do nothing 
for (or even harm) shareholders. Seeing this, shareholders and 
potential shareholders increase their estimates of future returns 
from the business. This upward revision, in turn, produces 
market prices more in line with intrinsic business value. These 
prices are entirely rational. Investors should pay more for a 
business that is lodged in the hands of a manager with 
demonstrated pro-shareholder leanings than for one in the hands 
of a self-interested manager marching to a different drummer. (To 
make the point extreme, how much would you pay to be a minority 
shareholder of a company controlled by Robert Wesco?)
 The key word is “demonstrated”. A manager who consistently 
turns his back on repurchases, when these clearly are in the 
interests of owners, reveals more than he knows of his 
motivations. No matter how often or how eloquently he mouths 
some public relations-inspired phrase such as “maximizing 
shareholder wealth” (this season’s favorite), the market 
correctly discounts assets lodged with him. His heart is not 
listening to his mouth - and, after a while, neither will the 
market.
 We have prospered in a very major way - as have other 
shareholders - by the large share repurchases of GEICO, 
Washington Post, and General Foods, our three largest holdings. 
(Exxon, in which we have our fourth largest holding, has also 
wisely and aggressively repurchased shares but, in this case, we 
have only recently established our position.) In each of these 
companies, shareholders have had their interests in outstanding 
businesses materially enhanced by repurchases made at bargain 
prices. We feel very comfortable owning interests in businesses 
such as these that offer excellent economics combined with 
shareholder-conscious managements.
 The following table shows our 1984 yearend net holdings in 
marketable equities. All numbers exclude the interests 
attributable to minority shareholders of Wesco and Nebraska 
Furniture Mart.
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted)
 690,975 Affiliated Publications, Inc. ....... $ 3,516 $ 32,908
 740,400 American Broadcasting Companies, Inc. 44,416 46,738
 3,895,710 Exxon Corporation ................... 173,401 175,307
 4,047,191 General Foods Corporation ........... 149,870 226,137
 6,850,000 GEICO Corporation ................... 45,713 397,300
 2,379,200 Handy & Harman ...................... 27,318 38,662
 818,872 Interpublic Group of Companies, Inc. 2,570 28,149
 555,949 Northwest Industries 26,581 27,242
 2,553,488 Time, Inc. .......................... 89,327 109,162
 1,868,600 The Washington Post Company ......... 10,628 149,955
 ---------- ----------
 $573,340 $1,231,560
 All Other Common Stockholdings 11,634 37,326
 ---------- ----------
 Total Common Stocks $584,974 $1,268,886
 ========== ==========
 It’s been over ten years since it has been as difficult as 
now to find equity investments that meet both our qualitative 
standards and our quantitative standards of value versus price. 
We try to avoid compromise of these standards, although we find 
doing nothing the most difficult task of all. (One English 
statesman attributed his country’s greatness in the nineteenth 
century to a policy of “masterly inactivity”. This is a strategy 
that is far easier for historians to commend than for 
participants to follow.)
 In addition to the figures supplied at the beginning of this 
section, information regarding the businesses we own appears in 
Management’s Discussion on pages 42-47. An amplified discussion 
of Wesco’s businesses appears in Charlie Munger’s report on pages 
50-59. You will find particularly interesting his comments about 
conditions in the thrift industry. Our other major controlled 
businesses are Nebraska Furniture Mart, See’s, Buffalo Evening 
News, and the Insurance Group, to which we will give some special 
attention here.
Nebraska Furniture Mart
 Last year I introduced you to Mrs. B (Rose Blumkin) and her 
family. I told you they were terrific, and I understated the 
case. After another year of observing their remarkable talents 
and character, I can honestly say that I never have seen a 
managerial group that either functions or behaves better than the 
Blumkin family.
 Mrs. B, Chairman of the Board, is now 91, and recently was 
quoted in the local newspaper as saying, “I come home to eat and 
sleep, and that’s about it. I can’t wait until it gets daylight 
so I can get back to the business”. Mrs. B is at the store seven 
days a week, from opening to close, and probably makes more 
decisions in a day than most CEOs do in a year (better ones, 
too).
 In May Mrs. B was granted an Honorary Doctorate in 
Commercial Science by New York University. (She’s a “fast track” 
student: not one day in her life was spent in a school room prior 
to her receipt of the doctorate.) Previous recipients of honorary 
degrees in business from NYU include Clifton Garvin, Jr., CEO of 
Exxon Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary, 
then CEO of IBM; Tom Murphy, then CEO of General Motors; and, 
most recently, Paul Volcker. (They are in good company.)
 The Blumkin blood did not run thin. Louie, Mrs. B’s son, 
and his three boys, Ron, Irv, and Steve, all contribute in full 
measure to NFM’s amazing success. The younger generation has 
attended the best business school of them all - that conducted by 
Mrs. B and Louie - and their training is evident in their 
performance.
 Last year NFM’s net sales increased by $14.3 million, 
bringing the total to $115 million, all from the one store in 
Omaha. That is by far the largest volume produced by a single 
home furnishings store in the United States. In fact, the gain 
in sales last year was itself greater than the annual volume of 
many good-sized successful stores. The business achieves this 
success because it deserves this success. A few figures will 
tell you why.
 In its fiscal 1984 10-K, the largest independent specialty 
retailer of home furnishings in the country, Levitz Furniture, 
described its prices as “generally lower than the prices charged 
by conventional furniture stores in its trading area”. Levitz, 
in that year, operated at a gross margin of 44.4% (that is, on 
average, customers paid it $100 for merchandise that had cost it 
$55.60 to buy). The gross margin at NFM is not much more than 
half of that. NFM’s low mark-ups are possible because of its 
exceptional efficiency: operating expenses (payroll, occupancy, 
advertising, etc.) are about 16.5% of sales versus 35.6% at 
Levitz.
 None of this is in criticism of Levitz, which has a well￾managed operation. But the NFM operation is simply extraordinary 
(and, remember, it all comes from a $500 investment by Mrs. B in 
1937). By unparalleled efficiency and astute volume purchasing, 
NFM is able to earn excellent returns on capital while saving its 
customers at least $30 million annually from what, on average, it 
would cost them to buy the same merchandise at stores maintaining 
typical mark-ups. Such savings enable NFM to constantly widen 
its geographical reach and thus to enjoy growth well beyond the 
natural growth of the Omaha market.
 I have been asked by a number of people just what secrets 
the Blumkins bring to their business. These are not very 
esoteric. All members of the family: (1) apply themselves with 
an enthusiasm and energy that would make Ben Franklin and Horatio 
Alger look like dropouts; (2) define with extraordinary realism 
their area of special competence and act decisively on all 
matters within it; (3) ignore even the most enticing propositions 
failing outside of that area of special competence; and, (4) 
unfailingly behave in a high-grade manner with everyone they deal 
with. (Mrs. B boils it down to “sell cheap and tell the truth”.)
 Our evaluation of the integrity of Mrs. B and her family was 
demonstrated when we purchased 90% of the business: NFM had never 
had an audit and we did not request one; we did not take an 
inventory nor verify the receivables; we did not check property 
titles. We gave Mrs. B a check for $55 million and she gave us 
her word. That made for an even exchange.
 You and I are fortunate to be in partnership with the 
Blumkin family.
See’s Candy Shops, Inc.
 Below is our usual recap of See’s performance since the time 
of purchase by Blue Chip Stamps:
 52-53 Week Year Operating Number of Number of
 Ended About Sales Profits Pounds of Stores Open
 December 31 Revenues After Taxes Candy Sold at Year End
------------------- ------------ ----------- ---------- -----------
1984 .............. $135,946,000 $13,380,000 24,759,000 214
1983 (53 weeks) ... 133,531,000 13,699,000 24,651,000 207
1982 .............. 123,662,000 11,875,000 24,216,000 202
1981 .............. 112,578,000 10,779,000 24,052,000 199
1980 .............. 97,715,000 7,547,000 24,065,000 191
1979 .............. 87,314,000 6,330,000 23,985,000 188
1978 .............. 73,653,000 6,178,000 22,407,000 182
1977 .............. 62,886,000 6,154,000 20,921,000 179
1976 (53 weeks) ... 56,333,000 5,569,000 20,553,000 173
1975 .............. 50,492,000 5,132,000 19,134,000 172
1974 .............. 41,248,000 3,021,000 17,883,000 170
1973 .............. 35,050,000 1,940,000 17,813,000 169
1972 .............. 31,337,000 2,083,000 16,954,000 167
 This performance has not been produced by a generally rising 
tide. To the contrary, many well-known participants in the 
boxed-chocolate industry either have lost money in this same 
period or have been marginally profitable. To our knowledge, 
only one good-sized competitor has achieved high profitability. 
The success of See’s reflects the combination of an exceptional 
product and an exceptional manager, Chuck Huggins.
 During 1984 we increased prices considerably less than has 
been our practice in recent years: per-pound realization was 
$5.49, up only 1.4% from 1983. Fortunately, we made good 
progress on cost control, an area that has caused us problems in 
recent years. Per-pound costs - other than those for raw 
materials, a segment of expense largely outside of our control - 
increased by only 2.2% last year.
 Our cost-control problem has been exacerbated by the problem 
of modestly declining volume (measured by pounds, not dollars) on 
a same-store basis. Total pounds sold through shops in recent 
years has been maintained at a roughly constant level only by the 
net addition of a few shops annually. This more-shops-to-get￾the-same-volume situation naturally puts heavy pressure on per￾pound selling costs.
 In 1984, same-store volume declined 1.1%. Total shop volume, 
however, grew 0.6% because of an increase in stores. (Both 
percentages are adjusted to compensate for a 53-week fiscal year 
in 1983.)
 See’s business tends to get a bit more seasonal each year. 
In the four weeks prior to Christmas, we do 40% of the year’s 
volume and earn about 75% of the year’s profits. We also earn 
significant sums in the Easter and Valentine’s Day periods, but 
pretty much tread water the rest of the year. In recent years, 
shop volume at Christmas has grown in relative importance, and so 
have quantity orders and mail orders. The increased 
concentration of business in the Christmas period produces a 
multitude of managerial problems, all of which have been handled 
by Chuck and his associates with exceptional skill and grace.
 Their solutions have in no way involved compromises in 
either quality of service or quality of product. Most of our 
larger competitors could not say the same. Though faced with 
somewhat less extreme peaks and valleys in demand than we, they 
add preservatives or freeze the finished product in order to 
smooth the production cycle and thereby lower unit costs. We 
reject such techniques, opting, in effect, for production 
headaches rather than product modification.
 Our mall stores face a host of new food and snack vendors 
that provide particularly strong competition at non-holiday 
periods. We need new products to fight back and during 1984 we 
introduced six candy bars that, overall, met with a good 
reception. Further product introductions are planned.
 In 1985 we will intensify our efforts to keep per-pound cost 
increases below the rate of inflation. Continued success in 
these efforts, however, will require gains in same-store 
poundage. Prices in 1985 should average 6% - 7% above those of 
1984. Assuming no change in same-store volume, profits should 
show a moderate gain.
Buffalo Evening News
 Profits at the News in 1984 were considerably greater than 
we expected. As at See’s, excellent progress was made in 
controlling costs. Excluding hours worked in the newsroom, total 
hours worked decreased by about 2.8%. With this productivity 
improvement, overall costs increased only 4.9%. This performance 
by Stan Lipsey and his management team was one of the best in the 
industry.
 However, we now face an acceleration in costs. In mid-1984 
we entered into new multi-year union contracts that provided for 
a large “catch-up” wage increase. This catch-up is entirely 
appropriate: the cooperative spirit of our unions during the 
unprofitable 1977-1982 period was an important factor in our 
success in remaining cost competitive with The Courier-Express. 
Had we not kept costs down, the outcome of that struggle might 
well have been different.
 Because our new union contracts took effect at varying 
dates, little of the catch-up increase was reflected in our 1984 
costs. But the increase will be almost totally effective in 1985 
and, therefore, our unit labor costs will rise this year at a 
rate considerably greater than that of the industry. We expect 
to mitigate this increase by continued small gains in 
productivity, but we cannot avoid significantly higher wage costs 
this year. Newsprint price trends also are less favorable now 
than they were in 1984. Primarily because of these two factors, 
we expect at least a minor contraction in margins at the News.
 Working in our favor at the News are two factors of major 
economic importance:
 (1) Our circulation is concentrated to an unusual degree 
 in the area of maximum utility to our advertisers. 
 “Regional” newspapers with wide-ranging circulation, on 
 the other hand, have a significant portion of their 
 circulation in areas that are of negligible utility to 
 most advertisers. A subscriber several hundred miles 
 away is not much of a prospect for the puppy you are 
 offering to sell via a classified ad - nor for the 
 grocer with stores only in the metropolitan area. 
 “Wasted” circulation - as the advertisers call it - 
 hurts profitability: expenses of a newspaper are 
 determined largely by gross circulation while 
 advertising revenues (usually 70% - 80% of total 
 revenues) are responsive only to useful circulation; 
 (2) Our penetration of the Buffalo retail market is 
 exceptional; advertisers can reach almost all of their 
 potential customers using only the News.
 Last year I told you about this unusual reader acceptance: 
among the 100 largest newspapers in the country, we were then 
number one, daily, and number three, Sunday, in penetration. The 
most recent figures show us number one in penetration on weekdays 
and number two on Sunday. (Even so, the number of households in 
Buffalo has declined, so our current weekday circulation is down 
slightly; on Sundays it is unchanged.)
 I told you also that one of the major reasons for this 
unusual acceptance by readers was the unusual quantity of news 
that we delivered to them: a greater percentage of our paper is 
devoted to news than is the case at any other dominant paper in 
our size range. In 1984 our “news hole” ratio was 50.9%, (versus 
50.4% in 1983), a level far above the typical 35% - 40%. We will 
continue to maintain this ratio in the 50% area. Also, though we 
last year reduced total hours worked in other departments, we 
maintained the level of employment in the newsroom and, again, 
will continue to do so. Newsroom costs advanced 9.1% in 1984, a 
rise far exceeding our overall cost increase of 4.9%.
 Our news hole policy costs us significant extra money for 
newsprint. As a result, our news costs (newsprint for the news 
hole plus payroll and expenses of the newsroom) as a percentage 
of revenue run higher than those of most dominant papers of our 
size. There is adequate room, however, for our paper or any 
other dominant paper to sustain these costs: the difference 
between “high” and “low” news costs at papers of comparable size 
runs perhaps three percentage points while pre-tax profit margins 
are often ten times that amount.
 The economics of a dominant newspaper are excellent, among 
the very best in the business world. Owners, naturally, would 
like to believe that their wonderful profitability is achieved 
only because they unfailingly turn out a wonderful product. That 
comfortable theory wilts before an uncomfortable fact. While 
first-class newspapers make excellent profits, the profits of 
third-rate papers are as good or better - as long as either class 
of paper is dominant within its community. Of course, product 
quality may have been crucial to the paper in achieving 
dominance. We believe this was the case at the News, in very 
large part because of people such as Alfred Kirchhofer who 
preceded us.
 Once dominant, the newspaper itself, not the marketplace, 
determines just how good or how bad the paper will be. Good or 
bad, it will prosper. That is not true of most businesses: 
inferior quality generally produces inferior economics. But even 
a poor newspaper is a bargain to most citizens simply because of 
its “bulletin board” value. Other things being equal, a poor 
product will not achieve quite the level of readership achieved 
by a first-class product. A poor product, however, will still 
remain essential to most citizens, and what commands their 
attention will command the attention of advertisers.
 Since high standards are not imposed by the marketplace, 
management must impose its own. Our commitment to an above￾average expenditure for news represents an important quantitative 
standard. We have confidence that Stan Lipsey and Murray Light 
will continue to apply the far-more important qualitative 
standards. Charlie and I believe that newspapers are very 
special institutions in society. We are proud of the News, and 
intend an even greater pride to be justified in the years ahead.
Insurance Operations
 Shown below is an updated version of our usual table listing 
two key figures for the insurance industry:
 Yearly Change Combined Ratio
 in Premiums after Policy-holder
 Written (%) Dividends
 ------------- -------------------
1972 .............................. 10.2 96.2
1973 .............................. 8.0 99.2
1974 .............................. 6.2 105.4
1975 .............................. 11.0 107.9
1976 .............................. 21.9 102.4
1977 .............................. 19.8 97.2
1978 .............................. 12.8 97.5
1979 .............................. 10.3 100.6
1980 .............................. 6.0 103.1
1981 .............................. 3.9 106.0
1982 .............................. 4.4 109.7
1983 (Revised) .................... 4.5 111.9
1984 (Estimated) .................. 8.1 117.7
Source: Best’s Aggregates and Averages
 Best’s data reflect the experience of practically the entire 
industry, including stock, mutual, and reciprocal companies. The 
combined ratio represents total insurance costs (losses incurred 
plus expenses) compared to revenue from premiums; a ratio below 
100 indicates an underwriting profit, and one above 100 indicates 
a loss.
 For a number of years, we have told you that an annual 
increase by the industry of about 10% per year in premiums 
written is necessary for the combined ratio to remain roughly 
unchanged. We assumed in making that assertion that expenses as 
a percentage of premium volume would stay relatively stable and 
that losses would grow at about 10% annually because of the 
combined influence of unit volume increases, inflation, and 
judicial rulings that expand what is covered by the insurance 
policy.
 Our opinion is proving dismayingly accurate: a premium 
increase of 10% per year since 1979 would have produced an 
aggregate increase through 1984 of 61% and a combined ratio in 
1984 almost identical to the 100.6 of 1979. Instead, the 
industry had only a 30% increase in premiums and a 1984 combined 
ratio of 117.7. Today, we continue to believe that the key index 
to the trend of underwriting profitability is the year-to-year 
percentage change in industry premium volume.
 It now appears that premium volume in 1985 will grow well 
over 10%. Therefore, assuming that catastrophes are at a 
“normal” level, we would expect the combined ratio to begin 
easing downward toward the end of the year. However, under our 
industrywide loss assumptions (i.e., increases of 10% annually), 
five years of 15%-per-year increases in premiums would be 
required to get the combined ratio back to 100. This would mean 
a doubling of industry volume by 1989, an outcome that seems 
highly unlikely to us. Instead, we expect several years of 
premium gains somewhat above the 10% level, followed by highly￾competitive pricing that generally will produce combined ratios 
in the 108-113 range.
 Our own combined ratio in 1984 was a humbling 134. (Here, as 
throughout this report, we exclude structured settlements and the 
assumption of loss reserves in reporting this ratio. Much 
additional detail, including the effect of discontinued 
operations on the ratio, appears on pages 42-43). This is the 
third year in a row that our underwriting performance has been 
far poorer than that of the industry. We expect an improvement 
in the combined ratio in 1985, and also expect our improvement to 
be substantially greater than that of the industry. Mike 
Goldberg has corrected many of the mistakes I made before he took 
over insurance operations. Moreover, our business is 
concentrated in lines that have experienced poorer-than-average 
results during the past several years, and that circumstance has 
begun to subdue many of our competitors and even eliminate some. 
With the competition shaken, we were able during the last half of 
1984 to raise prices significantly in certain important lines 
with little loss of business.
 For some years I have told you that there could be a day 
coming when our premier financial strength would make a real 
difference in the competitive position of our insurance 
operation. That day may have arrived. We are almost without 
question the strongest property/casualty insurance operation in 
the country, with a capital position far superior to that of 
well-known companies of much greater size.
 Equally important, our corporate policy is to retain that 
superiority. The buyer of insurance receives only a promise in 
exchange for his cash. The value of that promise should be 
appraised against the possibility of adversity, not prosperity. 
At a minimum, the promise should appear able to withstand a 
prolonged combination of depressed financial markets and 
exceptionally unfavorable underwriting results. Our insurance 
subsidiaries are both willing and able to keep their promises in 
any such environment - and not too many other companies clearly 
are.
 Our financial strength is a particular asset in the business 
of structured settlements and loss reserve assumptions that we 
reported on last year. The claimant in a structured settlement 
and the insurance company that has reinsured loss reserves need 
to be completely confident that payments will be forthcoming for 
decades to come. Very few companies in the property/casualty 
field can meet this test of unquestioned long-term strength. (In 
fact, only a handful of companies exists with which we will 
reinsure our own liabilities.)
 We have grown in these new lines of business: funds that we 
hold to offset assumed liabilities grew from $16.2 million to 
$30.6 million during the year. We expect growth to continue and 
perhaps to greatly accelerate. To support this projected growth 
we have added substantially to the capital of Columbia Insurance 
Company, our reinsurance unit specializing in structured 
settlements and loss reserve assumptions. While these businesses 
are very competitive, returns should be satisfactory.
 At GEICO the news, as usual, is mostly good. That company 
achieved excellent unit growth in its primary insurance business 
during 1984, and the performance of its investment portfolio 
continued to be extraordinary. Though underwriting results 
deteriorated late in the year, they still remain far better than 
those of the industry. Our ownership in GEICO at yearend 
amounted to 36% and thus our interest in their direct 
property/casualty volume of $885 million amounted to $320 
million, or well over double our own premium volume.
 I have reported to you in the past few years that the 
performance of GEICO’s stock has considerably exceeded that 
company’s business performance, brilliant as the latter has been. 
In those years, the carrying value of our GEICO investment on our 
balance sheet grew at a rate greater than the growth in GEICO’s 
intrinsic business value. I warned you that over performance by 
the stock relative to the performance of the business obviously 
could not occur every year, and that in some years the stock must 
under perform the business. In 1984 that occurred and the 
carrying value of our interest in GEICO changed hardly at all, 
while the intrinsic business value of that interest increased 
substantially. Since 27% of Berkshire’s net worth at the 
beginning of 1984 was represented by GEICO, its static market 
value had a significant impact upon our rate of gain for the 
year. We are not at all unhappy with such a result: we would far 
rather have the business value of GEICO increase by X during the 
year, while market value decreases, than have the intrinsic value 
increase by only 1/2 X with market value soaring. In GEICO’s 
case, as in all of our investments, we look to business 
performance, not market performance. If we are correct in 
expectations regarding the business, the market eventually will 
follow along.
 You, as shareholders of Berkshire, have benefited in 
enormous measure from the talents of GEICO’s Jack Byrne, Bill 
Snyder, and Lou Simpson. In its core business - low-cost auto 
and homeowners insurance - GEICO has a major, sustainable 
competitive advantage. That is a rare asset in business 
generally, and it’s almost non-existent in the field of financial 
services. (GEICO, itself, illustrates this point: despite the 
company’s excellent management, superior profitability has eluded 
GEICO in all endeavors other than its core business.) In a large 
industry, a competitive advantage such as GEICO’s provides the 
potential for unusual economic rewards, and Jack and Bill 
continue to exhibit great skill in realizing that potential.
 Most of the funds generated by GEICO’s core insurance 
operation are made available to Lou for investment. Lou has the 
rare combination of temperamental and intellectual 
characteristics that produce outstanding long-term investment 
performance. Operating with below-average risk, he has generated 
returns that have been by far the best in the insurance industry. 
I applaud and appreciate the efforts and talents of these three 
outstanding managers.
Errors in Loss Reserving
 Any shareholder in a company with important interests in the 
property/casualty insurance business should have some 
understanding of the weaknesses inherent in the reporting of 
current earnings in that industry. Phil Graham, when publisher 
of the Washington Post, described the daily newspaper as “a first 
rough draft of history”. Unfortunately, the financial statements 
of a property/casualty insurer provide, at best, only a first 
rough draft of earnings and financial condition.
 The determination of costs is the main problem. Most of an 
insurer’s costs result from losses on claims, and many of the 
losses that should be charged against the current year’s revenue 
are exceptionally difficult to estimate. Sometimes the extent of 
these losses, or even their existence, is not known for decades.
 The loss expense charged in a property/casualty company’s 
current income statement represents: (1) losses that occurred and 
were paid during the year; (2) estimates for losses that occurred 
and were reported to the insurer during the year, but which have 
yet to be settled; (3) estimates of ultimate dollar costs for 
losses that occurred during the year but of which the insurer is 
unaware (termed “IBNR”: incurred but not reported); and (4) the 
net effect of revisions this year of similar estimates for (2) 
and (3) made in past years.
 Such revisions may be long delayed, but eventually any 
estimate of losses that causes the income for year X to be 
misstated must be corrected, whether it is in year X + 1, or 
X + 10. This, perforce, means that earnings in the year of 
correction also are misstated. For example, assume a claimant 
was injured by one of our insureds in 1979 and we thought a 
settlement was likely to be made for $10,000. That year we would 
have charged $10,000 to our earnings statement for the estimated 
cost of the loss and, correspondingly, set up a liability reserve 
on the balance sheet for that amount. If we settled the claim in 
1984 for $100,000, we would charge earnings with a loss cost of 
$90,000 in 1984, although that cost was truly an expense of 1979. 
And if that piece of business was our only activity in 1979, we 
would have badly misled ourselves as to costs, and you as to 
earnings.
 The necessarily-extensive use of estimates in assembling the 
figures that appear in such deceptively precise form in the 
income statement of property/casualty companies means that some 
error must seep in, no matter how proper the intentions of 
management. In an attempt to minimize error, most insurers use 
various statistical techniques to adjust the thousands of 
individual loss evaluations (called case reserves) that comprise 
the raw data for estimation of aggregate liabilities. The extra 
reserves created by these adjustments are variously labeled 
“bulk”, “development”, or “supplemental” reserves. The goal of 
the adjustments should be a loss-reserve total that has a 50-50 
chance of being proved either slightly too high or slightly too 
low when all losses that occurred prior to the date of the 
financial statement are ultimately paid.
 At Berkshire, we have added what we thought were appropriate 
supplemental reserves but in recent years they have not been 
adequate. It is important that you understand the magnitude of 
the errors that have been involved in our reserving. You can 
thus see for yourselves just how imprecise the process is, and 
also judge whether we may have some systemic bias that should 
make you wary of our current and future figures.
 The following table shows the results from insurance 
underwriting as we have reported them to you in recent years, and 
also gives you calculations a year later on an “if-we-knew-then￾what-we think-we-know-now” basis. I say “what we think we know 
now” because the adjusted figures still include a great many 
estimates for losses that occurred in the earlier years. 
However, many claims from the earlier years have been settled so 
that our one-year-later estimate contains less guess work than 
our earlier estimate:
 Underwriting Results Corrected Figures
 as Reported After One Year’s
 Year to You Experience
 ---- -------------------- -----------------
 1980 $ 6,738,000 $ 14,887,000
 1981 1,478,000 (1,118,000)
 1982 (21,462,000) (25,066,000)
 1983 (33,192,000) (50,974,000)
 1984 (45,413,000) ?
 Our structured settlement and loss-reserve assumption 
 businesses are not included in this table. Important 
 additional information on loss reserve experience appears 
 on pages 43-45.
 To help you understand this table, here is an explanation of 
the most recent figures: 1984’s reported pre-tax underwriting 
loss of $45.4 million consists of $27.6 million we estimate that 
we lost on 1984’s business, plus the increased loss of $17.8 
million reflected in the corrected figure for 1983.
 As you can see from reviewing the table, my errors in 
reporting to you have been substantial and recently have always 
presented a better underwriting picture than was truly the case. 
This is a source of particular chagrin to me because: (1) I like 
for you to be able to count on what I say; (2) our insurance 
managers and I undoubtedly acted with less urgency than we would 
have had we understood the full extent of our losses; and (3) we 
paid income taxes calculated on overstated earnings and thereby 
gave the government money that we didn’t need to. (These 
overpayments eventually correct themselves, but the delay is long 
and we don’t receive interest on the amounts we overpaid.)
 Because our business is weighted toward casualty and 
reinsurance lines, we have more problems in estimating loss costs 
than companies that specialize in property insurance. (When a 
building that you have insured burns down, you get a much faster 
fix on your costs than you do when an employer you have insured 
finds out that one of his retirees has contracted a disease 
attributable to work he did decades earlier.) But I still find 
our errors embarrassing. In our direct business, we have far 
underestimated the mushrooming tendency of juries and courts to 
make the “deep pocket” pay, regardless of the factual situation 
and the past precedents for establishment of liability. We also 
have underestimated the contagious effect that publicity 
regarding giant awards has on juries. In the reinsurance area, 
where we have had our worst experience in under reserving, our 
customer insurance companies have made the same mistakes. Since 
we set reserves based on information they supply us, their 
mistakes have become our mistakes.
 I heard a story recently that is applicable to our insurance 
accounting problems: a man was traveling abroad when he received 
a call from his sister informing him that their father had died 
unexpectedly. It was physically impossible for the brother to 
get back home for the funeral, but he told his sister to take 
care of the funeral arrangements and to send the bill to him. 
After returning home he received a bill for several thousand 
dollars, which he promptly paid. The following month another 
bill came along for $15, and he paid that too. Another month 
followed, with a similar bill. When, in the next month, a third 
bill for $15 was presented, he called his sister to ask what was 
going on. “Oh”, she said. “I forgot to tell you. We buried Dad 
in a rented suit.”
 If you’ve been in the insurance business in recent years - 
particularly the reinsurance business - this story hurts. We 
have tried to include all of our “rented suit” liabilities in our 
current financial statement, but our record of past error should 
make us humble, and you suspicious. I will continue to report to 
you the errors, plus or minus, that surface each year.
 Not all reserving errors in the industry have been of the 
innocent-but-dumb variety. With underwriting results as bad as 
they have been in recent years - and with managements having as 
much discretion as they do in the presentation of financial 
statements - some unattractive aspects of human nature have 
manifested themselves. Companies that would be out of business 
if they realistically appraised their loss costs have, in some 
cases, simply preferred to take an extraordinarily optimistic 
view about these yet-to-be-paid sums. Others have engaged in 
various transactions to hide true current loss costs.
 Both of these approaches can “work” for a considerable time: 
external auditors cannot effectively police the financial 
statements of property/casualty insurers. If liabilities of an 
insurer, correctly stated, would exceed assets, it falls to the 
insurer to volunteer this morbid information. In other words, 
the corpse is supposed to file the death certificate. Under this 
“honor system” of mortality, the corpse sometimes gives itself 
the benefit of the doubt.
 In most businesses, of course, insolvent companies run out 
of cash. Insurance is different: you can be broke but flush. 
Since cash comes in at the inception of an insurance policy and 
losses are paid much later, insolvent insurers don’t run out of 
cash until long after they have run out of net worth. In fact, 
these “walking dead” often redouble their efforts to write 
business, accepting almost any price or risk, simply to keep the 
cash flowing in. With an attitude like that of an embezzler who 
has gambled away his purloined funds, these companies hope that 
somehow they can get lucky on the next batch of business and 
thereby cover up earlier shortfalls. Even if they don’t get 
lucky, the penalty to managers is usually no greater for a $100 
million shortfall than one of $10 million; in the meantime, while 
the losses mount, the managers keep their jobs and perquisites.
 The loss-reserving errors of other property/casualty 
companies are of more than academic interest to Berkshire. Not 
only does Berkshire suffer from sell-at-any-price competition by 
the “walking dead”, but we also suffer when their insolvency is 
finally acknowledged. Through various state guarantee funds that 
levy assessments, Berkshire ends up paying a portion of the 
insolvent insurers’ asset deficiencies, swollen as they usually 
are by the delayed detection that results from wrong reporting. 
There is even some potential for cascading trouble. The 
insolvency of a few large insurers and the assessments by state 
guarantee funds that would follow could imperil weak-but￾previously-solvent insurers. Such dangers can be mitigated if 
state regulators become better at prompt identification and 
termination of insolvent insurers, but progress on that front has 
been slow.
Washington Public Power Supply System
 From October, 1983 through June, 1984 Berkshire’s insurance 
subsidiaries continuously purchased large quantities of bonds of 
Projects 1, 2, and 3 of Washington Public Power Supply System 
(“WPPSS”). This is the same entity that, on July 1, 1983, 
defaulted on $2.2 billion of bonds issued to finance partial 
construction of the now-abandoned Projects 4 and 5. While there 
are material differences in the obligors, promises, and 
properties underlying the two categories of bonds, the problems 
of Projects 4 and 5 have cast a major cloud ove
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 You may remember the wildly upbeat message of last year’s 
report: nothing much was in the works but our experience had been 
that something big popped up occasionally. This carefully￾crafted corporate strategy paid off in 1985. Later sections of 
this report discuss (a) our purchase of a major position in 
Capital Cities/ABC, (b) our acquisition of Scott & Fetzer, (c) 
our entry into a large, extended term participation in the 
insurance business of Fireman’s Fund, and (d) our sale of our 
stock in General Foods.
 Our gain in net worth during the year was $613.6 million, or 
48.2%. It is fitting that the visit of Halley’s Comet coincided 
with this percentage gain: neither will be seen again in my 
lifetime. Our gain in per-share book value over the last twenty￾one years (that is, since present management took over) has been 
from $19.46 to $1643.71, or 23.2% compounded annually, another 
percentage that will not be repeated.
 Two factors make anything approaching this rate of gain 
unachievable in the future. One factor probably transitory - is 
a stock market that offers very little opportunity compared to 
the markets that prevailed throughout much of the 1964-1984 
period. Today we cannot find significantly-undervalued equities 
to purchase for our insurance company portfolios. The current 
situation is 180 degrees removed from that existing about a 
decade ago, when the only question was which bargain to choose.
 This change in the market also has negative implications for 
our present portfolio. In our 1974 annual report I could say: 
“We consider several of our major holdings to have great 
potential for significantly increased values in future years.” I 
can’t say that now. It’s true that our insurance companies 
currently hold major positions in companies with exceptional 
underlying economics and outstanding managements, just as they 
did in 1974. But current market prices generously appraise these 
attributes, whereas they were ignored in 1974. Today’s 
valuations mean that our insurance companies have no chance for 
future portfolio gains on the scale of those achieved in the 
past.
 The second negative factor, far more telling, is our size. 
Our equity capital is more than twenty times what it was only ten 
years ago. And an iron law of business is that growth eventually 
dampens exceptional economics. just look at the records of high￾return companies once they have amassed even $1 billion of equity 
capital. None that I know of has managed subsequently, over a 
ten-year period, to keep on earning 20% or more on equity while 
reinvesting all or substantially all of its earnings. Instead, 
to sustain their high returns, such companies have needed to shed 
a lot of capital by way of either dividends or repurchases of 
stock. Their shareholders would have been far better off if all 
earnings could have been reinvested at the fat returns earned by 
these exceptional businesses. But the companies simply couldn’t 
turn up enough high-return opportunities to make that possible.
 Their problem is our problem. Last year I told you that we 
needed profits of $3.9 billion over the ten years then coming up 
to earn 15% annually. The comparable figure for the ten years 
now ahead is $5.7 billion, a 48% increase that corresponds - as 
it must mathematically - to the growth in our capital base during 
1985. (Here’s a little perspective: leaving aside oil companies, 
only about 15 U.S. businesses have managed to earn over $5.7 
billion during the past ten years.)
 Charlie Munger, my partner in managing Berkshire, and I are 
reasonably optimistic about Berkshire’s ability to earn returns 
superior to those earned by corporate America generally, and you 
will benefit from the company’s retention of all earnings as long 
as those returns are forthcoming. We have several things going 
for us: (1) we don’t have to worry about quarterly or annual 
figures but, instead, can focus on whatever actions will maximize 
long-term value; (2) we can expand the business into any areas 
that make sense - our scope is not circumscribed by history, 
structure, or concept; and (3) we love our work. All of these 
help. Even so, we will also need a full measure of good fortune 
to average our hoped-for 15% - far more good fortune than was 
required for our past 23.2%.
 We need to mention one further item in the investment 
equation that could affect recent purchasers of our stock. 
Historically, Berkshire shares have sold modestly below intrinsic 
business value. With the price there, purchasers could be 
certain (as long as they did not experience a widening of this 
discount) that their personal investment experience would at 
least equal the financial experience of the business. But 
recently the discount has disappeared, and occasionally a modest 
premium has prevailed.
 The elimination of the discount means that Berkshire’s 
market value increased even faster than business value (which, 
itself, grew at a pleasing pace). That was good news for any 
owner holding while that move took place, but it is bad news for 
the new or prospective owner. If the financial experience of new 
owners of Berkshire is merely to match the future financial 
experience of the company, any premium of market value over 
intrinsic business value that they pay must be maintained.
 Management cannot determine market prices, although it can, 
by its disclosures and policies, encourage rational behavior by 
market participants. My own preference, as perhaps you’d guess, 
is for a market price that consistently approximates business 
value. Given that relationship, all owners prosper precisely as 
the business prospers during their period of ownership. Wild 
swings in market prices far above and below business value do not 
change the final gains for owners in aggregate; in the end, 
investor gains must equal business gains. But long periods of 
substantial undervaluation and/or overvaluation will cause the 
gains of the business to be inequitably distributed among various 
owners, with the investment result of any given owner largely 
depending upon how lucky, shrewd, or foolish he happens to be.
 Over the long term there has been a more consistent 
relationship between Berkshire’s market value and business value 
than has existed for any other publicly-traded equity with which 
I am familiar. This is a tribute to you. Because you have been 
rational, interested, and investment-oriented, the market price 
for Berkshire stock has almost always been sensible. This 
unusual result has been achieved by a shareholder group with 
unusual demographics: virtually all of our shareholders are 
individuals, not institutions. No other public company our size 
can claim the same.
 You might think that institutions, with their large staffs 
of highly-paid and experienced investment professionals, would be 
a force for stability and reason in financial markets. They are 
not: stocks heavily owned and constantly monitored by 
institutions have often been among the most inappropriately 
valued.
 Ben Graham told a story 40 years ago that illustrates why 
investment professionals behave as they do: An oil prospector, 
moving to his heavenly reward, was met by St. Peter with bad 
news. “You’re qualified for residence”, said St. Peter, “but, as 
you can see, the compound reserved for oil men is packed. 
There’s no way to squeeze you in.” After thinking a moment, the 
prospector asked if he might say just four words to the present 
occupants. That seemed harmless to St. Peter, so the prospector 
cupped his hands and yelled, “Oil discovered in hell.” 
Immediately the gate to the compound opened and all of the oil 
men marched out to head for the nether regions. Impressed, St. 
Peter invited the prospector to move in and make himself 
comfortable. The prospector paused. “No,” he said, “I think 
I’ll go along with the rest of the boys. There might be some 
truth to that rumor after all.”
Sources of Reported Earnings
 The table on the next page shows the major sources of 
Berkshire’s reported earnings. These numbers, along with far 
more detailed sub-segment numbers, are the ones that Charlie and 
I focus upon. We do not find consolidated figures an aid in 
either managing or evaluating Berkshire and, in fact, never 
prepare them for internal use.
 Segment information is equally essential for investors 
wanting to know what is going on in a multi-line business. 
Corporate managers always have insisted upon such information 
before making acquisition decisions but, until a few years ago, 
seldom made it available to investors faced with acquisition and 
disposition decisions of their own. Instead, when owners wishing 
to understand the economic realities of their business asked for 
data, managers usually gave them a we-can’t-tell-you-what-is￾going-on-because-it-would-hurt-the-company answer. Ultimately 
the SEC ordered disclosure of segment data and management began 
supplying real answers. The change in their behavior recalls an 
insight of Al Capone: “You can get much further with a kind word 
and a gun than you can with a kind word alone.”
In the table, amortization of Goodwill is not charged against the 
specific businesses but, for reasons outlined in the Appendix to 
my letter in the 1983 annual report, is aggregated as a separate 
item. (A compendium of the 1977-1984 letters is available upon 
request.) In the Business Segment Data and Management’s 
Discussion sections on pages 39-41 and 49-55, much additional 
information regarding our businesses is provided, including 
Goodwill and Goodwill Amortization figures for each of the 
segments. I urge you to read those sections as well as Charlie 
Munger’s letter to Wesco shareholders, which starts on page 56.
 (000s omitted) 
 -----------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ------------------- -------------------
 1985 1984 1985 1984 
 -------- -------- -------- --------
Operating Earnings:
 Insurance Group:
 Underwriting ................ $(44,230) $(48,060) $(23,569) $(25,955)
 Net Investment Income ....... 95,217 68,903 79,716 62,059
 Associated Retail Stores ...... 270 (1,072) 134 (579)
 Blue Chip Stamps .............. 5,763 (1,843) 2,813 (899)
 Buffalo News .................. 29,921 27,328 14,580 13,317
 Mutual Savings and Loan ....... 2,622 1,456 4,016 3,151
 Nebraska Furniture Mart ....... 12,686 14,511 5,181 5,917
 Precision Steel ............... 3,896 4,092 1,477 1,696
 See’s Candies ................. 28,989 26,644 14,558 13,380
 Textiles ...................... (2,395) 418 (1,324) 226
 Wesco Financial ............... 9,500 9,777 4,191 4,828
 Amortization of Goodwill ...... (1,475) (1,434) (1,475) (1,434)
 Interest on Debt .............. (14,415) (14,734) (7,288) (7,452)
 Shareholder-Designated 
 Contributions .............. (4,006) (3,179) (2,164) (1,716)
 Other ......................... 3,106 4,932 2,102 3,475
 -------- -------- -------- --------
Operating Earnings .............. 125,449 87,739 92,948 70,014
Special General Foods Distribution 4,127 8,111 3,779 7,294
Special Washington Post 
 Distribution ................. 14,877 --- 13,851 ---
Sales of Securities ............. 468,903 104,699 325,237 71,587
 -------- -------- -------- --------
Total Earnings - all entities ... $613,356 $200,549 $435,815 $148,895
 ======== ======== ======== ======== 
 Our 1985 results include unusually large earnings from the 
sale of securities. This fact, in itself, does not mean that we 
had a particularly good year (though, of course, we did). 
Security profits in a given year bear similarities to a college 
graduation ceremony in which the knowledge gained over four years 
is recognized on a day when nothing further is learned. We may 
hold a stock for a decade or more, and during that period it may 
grow quite consistently in both business and market value. In 
the year in which we finally sell it there may be no increase in 
value, or there may even be a decrease. But all growth in value 
since purchase will be reflected in the accounting earnings of 
the year of sale. (If the stock owned is in our insurance 
subsidiaries, however, any gain or loss in market value will be 
reflected in net worth annually.) Thus, reported capital gains or 
losses in any given year are meaningless as a measure of how well 
we have done in the current year.
 A large portion of the realized gain in 1985 ($338 million 
pre-tax out of a total of $488 million) came about through the 
sale of our General Foods shares. We held most of these shares 
since 1980, when we had purchased them at a price far below what 
we felt was their per/share business value. Year by year, the 
managerial efforts of Jim Ferguson and Phil Smith substantially 
increased General Foods’ business value and, last fall, Philip 
Morris made an offer for the company that reflected the increase. 
We thus benefited from four factors: a bargain purchase price, a 
business with fine underlying economics, an able management 
concentrating on the interests of shareholders, and a buyer 
willing to pay full business value. While that last factor is 
the only one that produces reported earnings, we consider 
identification of the first three to be the key to building value 
for Berkshire shareholders. In selecting common stocks, we 
devote our attention to attractive purchases, not to the 
possibility of attractive sales.
 We have again reported substantial income from special 
distributions, this year from Washington Post and General Foods. 
(The General Foods transactions obviously took place well before 
the Philip Morris offer.) Distributions of this kind occur when 
we sell a portion of our shares in a company back to it 
simultaneously with its purchase of shares from other 
shareholders. The number of shares we sell is contractually set 
so as to leave our percentage ownership in the company precisely 
the same after the sale as before. Such a transaction is quite 
properly regarded by the IRS as substantially equivalent to a 
dividend since we, as a shareholder, receive cash while 
maintaining an unchanged ownership interest. This tax treatment 
benefits us because corporate taxpayers, unlike individual 
taxpayers, incur much lower taxes on dividend income than on 
income from long-term capital gains. (This difference will be 
widened further if the House-passed tax bill becomes law: under 
its provisions, capital gains realized by corporations will be 
taxed at the same rate as ordinary income.) However, accounting 
rules are unclear as to proper treatment for shareholder 
reporting. To conform with last year’s treatment, we have shown 
these transactions as capital gains.
 Though we have not sought out such transactions, we have 
agreed to them on several occasions when managements initiated 
the idea. In each case we have felt that non-selling 
shareholders (all of whom had an opportunity to sell at the same 
price we received) benefited because the companies made their 
repurchases at prices below intrinsic business value. The tax 
advantages we receive and our wish to cooperate with managements 
that are increasing values for all shareholders have sometimes 
led us to sell - but only to the extent that our proportional 
share of the business was undiminished.
 At this point we usually turn to a discussion of some of our 
major business units. Before doing so, however, we should first 
look at a failure at one of our smaller businesses. Our Vice 
Chairman, Charlie Munger, has always emphasized the study of 
mistakes rather than successes, both in business and other 
aspects of life. He does so in the spirit of the man who said: 
“All I want to know is where I’m going to die so I’ll never go 
there.” You’ll immediately see why we make a good team: Charlie 
likes to study errors and I have generated ample material for 
him, particularly in our textile and insurance businesses.
Shutdown of Textile Business
 In July we decided to close our textile operation, and by 
yearend this unpleasant job was largely completed. The history 
of this business is instructive.
 When Buffett Partnership, Ltd., an investment partnership of 
which I was general partner, bought control of Berkshire Hathaway 
21 years ago, it had an accounting net worth of $22 million, all 
devoted to the textile business. The company’s intrinsic 
business value, however, was considerably less because the 
textile assets were unable to earn returns commensurate with 
their accounting value. Indeed, during the previous nine years 
(the period in which Berkshire and Hathaway operated as a merged 
company) aggregate sales of $530 million had produced an 
aggregate loss of $10 million. Profits had been reported from 
time to time but the net effect was always one step forward, two 
steps back.
 At the time we made our purchase, southern textile plants - 
largely non-union - were believed to have an important 
competitive advantage. Most northern textile operations had 
closed and many people thought we would liquidate our business as 
well.
 We felt, however, that the business would be run much better 
by a long-time employee whom. we immediately selected to be 
president, Ken Chace. In this respect we were 100% correct: Ken 
and his recent successor, Garry Morrison, have been excellent 
managers, every bit the equal of managers at our more profitable 
businesses.
 In early 1967 cash generated by the textile operation was 
used to fund our entry into insurance via the purchase of 
National Indemnity Company. Some of the money came from earnings 
and some from reduced investment in textile inventories, 
receivables, and fixed assets. This pullback proved wise: 
although much improved by Ken’s management, the textile business 
never became a good earner, not even in cyclical upturns.
 Further diversification for Berkshire followed, and 
gradually the textile operation’s depressing effect on our 
overall return diminished as the business became a progressively 
smaller portion of the corporation. We remained in the business 
for reasons that I stated in the 1978 annual report (and 
summarized at other times also): “(1) our textile businesses are 
very important employers in their communities, (2) management has 
been straightforward in reporting on problems and energetic in 
attacking them, (3) labor has been cooperative and understanding 
in facing our common problems, and (4) the business should 
average modest cash returns relative to investment.” I further 
said, “As long as these conditions prevail - and we expect that 
they will - we intend to continue to support our textile business 
despite more attractive alternative uses for capital.”
 It turned out that I was very wrong about (4). Though 1979 
was moderately profitable, the business thereafter consumed major 
amounts of cash. By mid-1985 it became clear, even to me, that 
this condition was almost sure to continue. Could we have found 
a buyer who would continue operations, I would have certainly 
preferred to sell the business rather than liquidate it, even if 
that meant somewhat lower proceeds for us. But the economics 
that were finally obvious to me were also obvious to others, and 
interest was nil.
 I won’t close down businesses of sub-normal profitability 
merely to add a fraction of a point to our corporate rate of 
return. However, I also feel it inappropriate for even an 
exceptionally profitable company to fund an operation once it 
appears to have unending losses in prospect. Adam Smith would 
disagree with my first proposition, and Karl Marx would disagree 
with my second; the middle ground is the only position that 
leaves me comfortable.
 I should reemphasize that Ken and Garry have been 
resourceful, energetic and imaginative in attempting to make our 
textile operation a success. Trying to achieve sustainable 
profitability, they reworked product lines, machinery 
configurations and distribution arrangements. We also made a 
major acquisition, Waumbec Mills, with the expectation of 
important synergy (a term widely used in business to explain an 
acquisition that otherwise makes no sense). But in the end 
nothing worked and I should be faulted for not quitting sooner. 
A recent Business Week article stated that 250 textile mills have 
closed since 1980. Their owners were not privy to any 
information that was unknown to me; they simply processed it more 
objectively. I ignored Comte’s advice - “the intellect should be 
the servant of the heart, but not its slave” - and believed what 
I preferred to believe.
 The domestic textile industry operates in a commodity 
business, competing in a world market in which substantial excess 
capacity exists. Much of the trouble we experienced was 
attributable, both directly and indirectly, to competition from 
foreign countries whose workers are paid a small fraction of the 
U.S. minimum wage. But that in no way means that our labor force 
deserves any blame for our closing. In fact, in comparison with 
employees of American industry generally, our workers were poorly 
paid, as has been the case throughout the textile business. In 
contract negotiations, union leaders and members were sensitive 
to our disadvantageous cost position and did not push for 
unrealistic wage increases or unproductive work practices. To 
the contrary, they tried just as hard as we did to keep us 
competitive. Even during our liquidation period they performed 
superbly. (Ironically, we would have been better off financially 
if our union had behaved unreasonably some years ago; we then 
would have recognized the impossible future that we faced, 
promptly closed down, and avoided significant future losses.)
 Over the years, we had the option of making large capital 
expenditures in the textile operation that would have allowed us 
to somewhat reduce variable costs. Each proposal to do so looked 
like an immediate winner. Measured by standard return-on￾investment tests, in fact, these proposals usually promised 
greater economic benefits than would have resulted from 
comparable expenditures in our highly-profitable candy and 
newspaper businesses.
 But the promised benefits from these textile investments 
were illusory. Many of our competitors, both domestic and 
foreign, were stepping up to the same kind of expenditures and, 
once enough companies did so, their reduced costs became the 
baseline for reduced prices industrywide. Viewed individually, 
each company’s capital investment decision appeared cost￾effective and rational; viewed collectively, the decisions 
neutralized each other and were irrational (just as happens when 
each person watching a parade decides he can see a little better 
if he stands on tiptoes). After each round of investment, all 
the players had more money in the game and returns remained 
anemic.
 Thus, we faced a miserable choice: huge capital investment 
would have helped to keep our textile business alive, but would 
have left us with terrible returns on ever-growing amounts of 
capital. After the investment, moreover, the foreign competition 
would still have retained a major, continuing advantage in labor 
costs. A refusal to invest, however, would make us increasingly 
non-competitive, even measured against domestic textile 
manufacturers. I always thought myself in the position described 
by Woody Allen in one of his movies: “More than any other time in 
history, mankind faces a crossroads. One path leads to despair 
and utter hopelessness, the other to total extinction. Let us 
pray we have the wisdom to choose correctly.”
 For an understanding of how the to-invest-or-not-to-invest 
dilemma plays out in a commodity business, it is instructive to 
look at Burlington Industries, by far the largest U.S. textile 
company both 21 years ago and now. In 1964 Burlington had sales 
of $1.2 billion against our $50 million. It had strengths in 
both distribution and production that we could never hope to 
match and also, of course, had an earnings record far superior to 
ours. Its stock sold at 60 at the end of 1964; ours was 13.
 Burlington made a decision to stick to the textile business, 
and in 1985 had sales of about $2.8 billion. During the 1964-85 
period, the company made capital expenditures of about $3 
billion, far more than any other U.S. textile company and more 
than $200-per-share on that $60 stock. A very large part of the 
expenditures, I am sure, was devoted to cost improvement and 
expansion. Given Burlington’s basic commitment to stay in 
textiles, I would also surmise that the company’s capital 
decisions were quite rational.
 Nevertheless, Burlington has lost sales volume in real 
dollars and has far lower returns on sales and equity now than 20 
years ago. Split 2-for-1 in 1965, the stock now sells at 34 -- 
on an adjusted basis, just a little over its $60 price in 1964. 
Meanwhile, the CPI has more than tripled. Therefore, each share 
commands about one-third the purchasing power it did at the end 
of 1964. Regular dividends have been paid but they, too, have 
shrunk significantly in purchasing power.
 This devastating outcome for the shareholders indicates what 
can happen when much brain power and energy are applied to a 
faulty premise. The situation is suggestive of Samuel Johnson’s 
horse: “A horse that can count to ten is a remarkable horse - not 
a remarkable mathematician.” Likewise, a textile company that 
allocates capital brilliantly within its industry is a remarkable 
textile company - but not a remarkable business.
 My conclusion from my own experiences and from much 
observation of other businesses is that a good managerial record 
(measured by economic returns) is far more a function of what 
business boat you get into than it is of how effectively you row 
(though intelligence and effort help considerably, of course, in 
any business, good or bad). Some years ago I wrote: “When a 
management with a reputation for brilliance tackles a business 
with a reputation for poor fundamental economics, it is the 
reputation of the business that remains intact.” Nothing has 
since changed my point of view on that matter. Should you find 
yourself in a chronically-leaking boat, energy devoted to 
changing vessels is likely to be more productive than energy 
devoted to patching leaks.
 * * *
 There is an investment postscript in our textile saga. Some 
investors weight book value heavily in their stock-buying 
decisions (as I, in my early years, did myself). And some 
economists and academicians believe replacement values are of 
considerable importance in calculating an appropriate price level 
for the stock market as a whole. Those of both persuasions would 
have received an education at the auction we held in early 1986 
to dispose of our textile machinery.
 The equipment sold (including some disposed of in the few 
months prior to the auction) took up about 750,000 square feet of 
factory space in New Bedford and was eminently usable. It 
originally cost us about $13 million, including $2 million spent 
in 1980-84, and had a current book value of $866,000 (after 
accelerated depreciation). Though no sane management would have 
made the investment, the equipment could have been replaced new 
for perhaps $30-$50 million.
 Gross proceeds from our sale of this equipment came to 
$163,122. Allowing for necessary pre- and post-sale costs, our 
net was less than zero. Relatively modern looms that we bought 
for $5,000 apiece in 1981 found no takers at $50. We finally 
sold them for scrap at $26 each, a sum less than removal costs.
 Ponder this: the economic goodwill attributable to two paper 
routes in Buffalo - or a single See’s candy store - considerably 
exceeds the proceeds we received from this massive collection of 
tangible assets that not too many years ago, under different 
competitive conditions, was able to employ over 1,000 people.
Three Very Good Businesses (and a Few Thoughts About Incentive 
Compensation)
 When I was 12, I lived with my grandfather for about four 
months. A grocer by trade, he was also working on a book and 
each night he dictated a few pages to me. The title - brace 
yourself - was “How to Run a Grocery Store and a Few Things I 
Have Learned About Fishing”. My grandfather was sure that 
interest in these two subjects was universal and that the world 
awaited his views. You may conclude from this section’s title 
and contents that I was overexposed to Grandpa’s literary style 
(and personality).
 I am merging the discussion of Nebraska Furniture Mart, 
See’s Candy Shops, and Buffalo Evening News here because the 
economic strengths, weaknesses, and prospects of these businesses 
have changed little since I reported to you a year ago. The 
shortness of this discussion, however, is in no way meant to 
minimize the importance of these businesses to us: in 1985 they 
earned an aggregate of $72 million pre-tax. Fifteen years ago, 
before we had acquired any of them, their aggregate earnings were 
about $8 million pre-tax.
 While an increase in earnings from $8 million to $72 million 
sounds terrific - and usually is - you should not automatically 
assume that to be the case. You must first make sure that 
earnings were not severely depressed in the base year. If they 
were instead substantial in relation to capital employed, an even 
more important point must be examined: how much additional 
capital was required to produce the additional earnings?
 In both respects, our group of three scores well. First, 
earnings 15 years ago were excellent compared to capital then 
employed in the businesses. Second, although annual earnings are 
now $64 million greater, the businesses require only about $40 
million more in invested capital to operate than was the case 
then.
 The dramatic growth in earning power of these three 
businesses, accompanied by their need for only minor amounts of 
capital, illustrates very well the power of economic goodwill 
during an inflationary period (a phenomenon explained in detail 
in the 1983 annual report). The financial characteristics of 
these businesses have allowed us to use a very large portion of 
the earnings they generate elsewhere. Corporate America, 
however, has had a different experience: in order to increase 
earnings significantly, most companies have needed to increase 
capital significantly also. The average American business has 
required about $5 of additional capital to generate an additional 
$1 of annual pre-tax earnings. That business, therefore, would 
have required over $300 million in additional capital from its 
owners in order to achieve an earnings performance equal to our 
group of three.
 When returns on capital are ordinary, an earn-more-by￾putting-up-more record is no great managerial achievement. You 
can get the same result personally while operating from your 
rocking chair. just quadruple the capital you commit to a savings 
account and you will quadruple your earnings. You would hardly 
expect hosannas for that particular accomplishment. Yet, 
retirement announcements regularly sing the praises of CEOs who 
have, say, quadrupled earnings of their widget company during 
their reign - with no one examining whether this gain was 
attributable simply to many years of retained earnings and the 
workings of compound interest.
 If the widget company consistently earned a superior return 
on capital throughout the period, or if capital employed only 
doubled during the CEO’s reign, the praise for him may be well 
deserved. But if return on capital was lackluster and capital 
employed increased in pace with earnings, applause should be 
withheld. A savings account in which interest was reinvested 
would achieve the same year-by-year increase in earnings - and, 
at only 8% interest, would quadruple its annual earnings in 18 
years.
 The power of this simple math is often ignored by companies 
to the detriment of their shareholders. Many corporate 
compensation plans reward managers handsomely for earnings 
increases produced solely, or in large part, by retained earnings 
- i.e., earnings withheld from owners. For example, ten-year, 
fixed-price stock options are granted routinely, often by 
companies whose dividends are only a small percentage of 
earnings.
 An example will illustrate the inequities possible under 
such circumstances. Let’s suppose that you had a $100,000 
savings account earning 8% interest and “managed” by a trustee 
who could decide each year what portion of the interest you were 
to be paid in cash. Interest not paid out would be “retained 
earnings” added to the savings account to compound. And let’s 
suppose that your trustee, in his superior wisdom, set the “pay￾out ratio” at one-quarter of the annual earnings.
 Under these assumptions, your account would be worth 
$179,084 at the end of ten years. Additionally, your annual 
earnings would have increased about 70% from $8,000 to $13,515 
under this inspired management. And, finally, your “dividends” 
would have increased commensurately, rising regularly from $2,000 
in the first year to $3,378 in the tenth year. Each year, when 
your manager’s public relations firm prepared his annual report 
to you, all of the charts would have had lines marching skyward.
 Now, just for fun, let’s push our scenario one notch further 
and give your trustee-manager a ten-year fixed-price option on 
part of your “business” (i.e., your savings account) based on its 
fair value in the first year. With such an option, your manager 
would reap a substantial profit at your expense - just from 
having held on to most of your earnings. If he were both 
Machiavellian and a bit of a mathematician, your manager might 
also have cut the pay-out ratio once he was firmly entrenched.
 This scenario is not as farfetched as you might think. Many 
stock options in the corporate world have worked in exactly that 
fashion: they have gained in value simply because management 
retained earnings, not because it did well with the capital in 
its hands.
 Managers actually apply a double standard to options. 
Leaving aside warrants (which deliver the issuing corporation 
immediate and substantial compensation), I believe it is fair to 
say that nowhere in the business world are ten-year fixed-price 
options on all or a portion of a business granted to outsiders. 
Ten months, in fact, would be regarded as extreme. It would be 
particularly unthinkable for managers to grant a long-term option 
on a business that was regularly adding to its capital. Any 
outsider wanting to secure such an option would be required to 
pay fully for capital added during the option period.
 The unwillingness of managers to do-unto-outsiders, however, 
is not matched by an unwillingness to do-unto-themselves. 
(Negotiating with one’s self seldom produces a barroom brawl.) 
Managers regularly engineer ten-year, fixed-price options for 
themselves and associates that, first, totally ignore the fact 
that retained earnings automatically build value and, second, 
ignore the carrying cost of capital. As a result, these managers 
end up profiting much as they would have had they had an option 
on that savings account that was automatically building up in 
value.
 Of course, stock options often go to talented, value-adding 
managers and sometimes deliver them rewards that are perfectly 
appropriate. (Indeed, managers who are really exceptional almost 
always get far less than they should.) But when the result is 
equitable, it is accidental. Once granted, the option is blind 
to individual performance. Because it is irrevocable and 
unconditional (so long as a manager stays in the company), the 
sluggard receives rewards from his options precisely as does the 
star. A managerial Rip Van Winkle, ready to doze for ten years, 
could not wish for a better “incentive” system.
 (I can’t resist commenting on one long-term option given an 
“outsider”: that granted the U.S. Government on Chrysler shares 
as partial consideration for the government’s guarantee of some 
lifesaving loans. When these options worked out well for the 
government, Chrysler sought to modify the payoff, arguing that 
the rewards to the government were both far greater than intended 
and outsize in relation to its contribution to Chrysler’s 
recovery. The company’s anguish over what it saw as an imbalance 
between payoff and performance made national news. That anguish 
may well be unique: to my knowledge, no managers - anywhere - 
have been similarly offended by unwarranted payoffs arising from 
options granted to themselves or their colleagues.)
 Ironically, the rhetoric about options frequently describes 
them as desirable because they put managers and owners in the 
same financial boat. In reality, the boats are far different. 
No owner has ever escaped the burden of capital costs, whereas a 
holder of a fixed-price option bears no capital costs at all. An 
owner must weigh upside potential against downside risk; an 
option holder has no downside. In fact, the business project in 
which you would wish to have an option frequently is a project in 
which you would reject ownership. (I’ll be happy to accept a 
lottery ticket as a gift - but I’ll never buy one.)
 In dividend policy also, the option holders’ interests are 
best served by a policy that may ill serve the owner. Think back 
to the savings account example. The trustee, holding his option, 
would benefit from a no-dividend policy. Conversely, the owner 
of the account should lean to a total payout so that he can 
prevent the option-holding manager from sharing in the account’s 
retained earnings.
 Despite their shortcomings, options can be appropriate under 
some circumstances. My criticism relates to their indiscriminate 
use and, in that connection, I would like to emphasize three 
points:
 First, stock options are inevitably tied to the overall 
performance of a corporation. Logically, therefore, they should 
be awarded only to those managers with overall responsibility. 
Managers with limited areas of responsibility should have 
incentives that pay off in relation to results under their 
control. The .350 hitter expects, and also deserves, a big 
payoff for his performance - even if he plays for a cellar￾dwelling team. And the .150 hitter should get no reward - even 
if he plays for a pennant winner. Only those with overall 
responsibility for the team should have their rewards tied to its 
results.
 Second, options should be structured carefully. Absent 
special factors, they should have built into them a retained￾earnings or carrying-cost factor. Equally important, they should 
be priced realistically. When managers are faced with offers for 
their companies, they unfailingly point out how unrealistic 
market prices can be as an index of real value. But why, then, 
should these same depressed prices be the valuations at which 
managers sell portions of their businesses to themselves? (They 
may go further: officers and directors sometimes consult the Tax 
Code to determine the lowest prices at which they can, in effect, 
sell part of the business to insiders. While they’re at it, they 
often elect plans that produce the worst tax result for the 
company.) Except in highly unusual cases, owners are not well 
served by the sale of part of their business at a bargain price - 
whether the sale is to outsiders or to insiders. The obvious 
conclusion: options should be priced at true business value.
 Third, I want to emphasize that some managers whom I admire 
enormously - and whose operating records are far better than mine 
- disagree with me regarding fixed-price options. They have 
built corporate cultures that work, and fixed-price options have 
been a tool that helped them. By their leadership and example, 
and by the use of options as incentives, these managers have 
taught their colleagues to think like owners. Such a Culture is 
rare and when it exists should perhaps be left intact - despite 
inefficiencies and inequities that may infest the option program. 
“If it ain’t broke, don’t fix it” is preferable to “purity at any 
price”.
 At Berkshire, however, we use an incentive@compensation 
system that rewards key managers for meeting targets in their own 
bailiwicks. If See’s does well, that does not produce incentive 
compensation at the News - nor vice versa. Neither do we look at 
the price of Berkshire stock when we write bonus checks. We 
believe good unit performance should be rewarded whether 
Berkshire stock rises, falls, or stays even. Similarly, we think 
average performance should earn no special rewards even if our 
stock should soar. “Performance”, furthermore, is defined in 
different ways depending upon the underlying economics of the 
business: in some our managers enjoy tailwinds not of their own 
making, in others they fight unavoidable headwinds.
 The rewards that go with this system can be large. At our 
various business units, top managers sometimes receive incentive 
bonuses of five times their base salary, or more, and it would 
appear possible that one manager’s bonus could top $2 million in 
1986. (I hope so.) We do not put a cap on bonuses, and the 
potential for rewards is not hierarchical. The manager of a 
relatively small unit can earn far more than the manager of a 
larger unit if results indicate he should. We believe, further, 
that such factors as seniority and age should not affect 
incentive compensation (though they sometimes influence basic 
compensation). A 20-year-old who can hit .300 is as valuable to 
us as a 40-year-old performing as well.
 Obviously, all Berkshire managers can use their bonus money 
(or other funds, including borrowed money) to buy our stock in 
the market. Many have done just that - and some now have large 
holdings. By accepting both the risks and the carrying costs 
that go with outright purchases, these managers truly walk in the 
shoes of owners.
 Now let’s get back - at long last - to our three businesses:
 At Nebraska Furniture Mart our basic strength is an 
exceptionally low-cost operation that allows the business to 
regularly offer customers the best values available in home 
furnishings. NFM is the largest store of its kind in the 
country. Although the already-depressed farm economy worsened 
considerably in 1985, the store easily set a new sales record. I 
also am happy to report that NFM’s Chairman, Rose Blumkin (the 
legendary “Mrs. B”), continues at age 92 to set a pace at the 
store that none of us can keep up with. She’s there wheeling and 
dealing seven days a week, and I hope that any of you who visit 
Omaha will go out to the Mart and see her in action. It will 
inspire you, as it does me.
 At See’s we continue to get store volumes that are far 
beyond those achieved by any competitor we know of. Despite the 
unmatched consumer acceptance we enjoy, industry trends are not 
good, and we continue to experience slippage in poundage sales on 
a same-store basis. This puts pressure on per-pound costs. We 
now are willing to increase prices only modestly and, unless we 
can stabilize per-shop poundage, profit margins will narrow.
 At the News volume gains are also difficult to achieve. 
Though linage increased during 1985, the gain was more than 
accounted for by preprints. ROP linage (advertising printed on 
our own pages) declined. Preprints are far less profitable than 
ROP ads, and also more vulnerable to competition. In 1985, the 
News again controlled costs well and our household penetration 
continues to be exceptional.
 One problem these three operations do not have is 
management. At See’s we have Chuck Huggins, the man we put in 
charge the day we bought the business. Selecting him remains one 
of our best business decisions. At the News we have Stan Lipsey, 
a manager of equal caliber. Stan has been with us 17 years, and 
his unusual business talents have become more evident with every 
additional level of responsibility he has tackled. And, at the 
Mart, we have the amazing Blumkins - Mrs. B, Louie, Ron, Irv, and 
Steve - a three-generation miracle of management.
 I consider myself extraordinarily lucky to be able to work 
with managers such as these. I like them personally as much as I 
admire them professionally.
Insurance Operations
 Shown below is an updated version of our usual table, 
listing two key figures for the insurance industry:
 Yearly Change Combined Ratio
 in Premiums after Policyholder
 Written (%) Dividends
 ------------- ------------------
 1972 ............... 10.2 96.2
 1973 ............... 8.0 99.2
 1974 ............... 6.2 105.4
 1975 ............... 11.0 107.9
 1976 ............... 21.9 102.4
 1977 ............... 19.8 97.2
 1978 ............... 12.8 97.5
 1979 ............... 10.3 100.6
 1980 ............... 6.0 103.1
 1981 ............... 3.9 106.0
 1982 ............... 4.4 109.7
 1983 ............... 4.5 111.9
 1984 (Revised) ..... 9.2 117.9
 1985 (Estimated) ... 20.9 118.0
Source: Best’s Aggregates and Averages
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: a 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss.
 The industry’s 1985 results were highly unusual. The 
revenue gain was exceptional, and had insured losses grown at 
their normal rate of most recent years - that is, a few points 
above the inflation rate - a significant drop in the combined 
ratio would have occurred. But losses in 1985 didn’t cooperate, 
as they did not in 1984. Though inflation slowed considerably in 
these years, insured losses perversely accelerated, growing by 
16% in 1984 and by an even more startling 17% in 1985. The 
year’s growth in losses therefore exceeds the inflation rate by 
over 13 percentage points, a modern record.
 Catastrophes were not the culprit in this explosion of loss 
cost. True, there were an unusual number of hurricanes in 1985, 
but the aggregate damage caused by all catastrophes in 1984 and 
1985 was about 2% of premium volume, a not unusual proportion. 
Nor was there any burst in the number of insured autos, houses, 
employers, or other kinds of “exposure units”.
 A partial explanation for the surge in the loss figures is 
all the additions to reserves that the industry made in 1985. As 
results for the year were reported, the scene resembled a revival 
meeting: shouting “I’ve sinned, I’ve sinned”, insurance managers 
rushed forward to confess they had under reserved in earlier 
years. Their corrections significantly affected 1985 loss 
numbers.
 A more disturbing ingredient in the loss surge is the 
acceleration in “social” or “judicial” inflation. The insurer’s 
ability to pay has assumed overwhelming importance with juries 
and judges in the assessment of both liability and damages. More 
and more, “the deep pocket” is being sought and found, no matter 
what the policy wording, the facts, or the precedents.
 This judicial inflation represents a wild card in the 
industry’s future, and makes forecasting difficult. 
Nevertheless, the short-term outlook is good. Premium growth 
improved as 1985 went along (quarterly gains were an estimated 
15%, 19%, 24%, and 22%) and, barring a supercatastrophe, the 
industry’s combined ratio should fall sharply in 1986.
 The profit improvement, however, is likely to be of short 
duration. Two economic principles will see to that. First, 
commodity businesses achieve good levels of profitability only 
when prices are fixed in some manner or when capacity is short. 
Second, managers quickly add to capacity when prospects start to 
improve and capital is available.
 In my 1982 report to you, I discussed the commodity nature 
of the insurance industry extensively. The typical policyholder 
does not differentiate between products but concentrates instead 
on price. For many decades a cartel-like procedure kept prices 
up, but this arrangement has disappeared for good. The insurance 
product now is priced as any other commodity for which a free 
market exists: when capacity is tight, prices will be set 
remuneratively; otherwise, they will not be.
 Capacity currently is tight in many lines of insurance - 
though in this industry, unlike most, capacity is an attitudinal 
concept, not a physical fact. Insurance managers can write 
whatever amount of business they feel comfortable writing, 
subject only to pressures applied by regulators and Best’s, the 
industry’s authoritative rating service. The comfort level of 
both managers and regulators is tied to capital. More capital 
means more comfort, which in turn means more capacity. In the 
typical commodity business, furthermore, such as aluminum or 
steel, a long gestation precedes the birth of additional 
capacity. In the insurance industry, capital can be secured 
instantly. Thus, any capacity shortage can be eliminated in 
short order.
 That’s exactly what’s going on right now. In 1985, about 15 
insurers raised well over $3 billion, piling up capital so that 
they can write all the business possible at the better prices now 
available. The capital-raising trend has accelerated 
dramatically so far in 1986.
 If capacity additions continue at this rate, it won’t be 
long before serious price-cutting appears and next a fall in 
profitability. When the fall comes, it will be the fault of the 
capital-raisers of 1985 and 1986, not the price-cutters of 198X. 
(Critics should be understanding, however: as was the case in our 
textile example, the dynamics of capitalism cause each insurer to 
make decisions that for itself appear sensible, but that 
collectively slash profitability.)
 In past reports, I have told you that Berkshire’s strong 
capital position - the best in the industry - should one day 
allow us to claim a distinct competitive advantage in the 
insurance market. With the tightening of the market, that day 
arrived. Our premium volume more than tripled last year, 
following a long period of stagnation. Berkshire’s financial 
strength (and our record of maintaining unusual strength through 
thick and thin) is now a major asset for us in securing good 
business.
 We correctly foresaw a flight to quality by many large 
buyers of insurance and reinsurance who belatedly recognized that 
a policy is only an IOU - and who, in 1985, could not collect on 
many of their IOUs. These buyers today are attracted to 
Berkshire because of its strong capital position. But, in a 
development we did not foresee, we also are finding buyers drawn 
to us because our ability to insure substantial risks sets us 
apart from the crowd.
 To understand this point, you need a few background facts 
about large risks. Traditionally, many insurers have wanted to 
write this kind of business. However, their willingness to do so 
has been almost always based upon reinsurance arrangements that 
allow the insurer to keep just a small portion of the risk itself 
while passing on (“laying off”) most of the risk to its 
reinsurers. Imagine, for example, a directors and officers 
(“D & O”) liability policy providing $25 million of coverage. 
By various “excess-of-loss” reinsurance contracts, the company 
issuing that policy might keep the liability for only the first 
$1 million of any loss that occurs. The liability for any loss 
above that amount up to $24 million would be borne by the 
reinsurers of the issuing insurer. In trade parlance, a company 
that issues large policies but retains relatively little of the 
risk for its own account writes a large gross line but a small 
net line.
 In any reinsurance arrangement, a key question is how the 
premiums paid for the policy should be divided among the various 
“layers” of risk. In our D & O policy, for example. what part of 
the premium received should be kept by the issuing company to 
compensate it fairly for taking the first $1 million of risk and 
how much should be passed on to the reinsurers to compensate them 
fairly for taking the risk between $1 million and $25 million?
 One way to solve this problem might be deemed the Patrick 
Henry approach: “I have but one lamp by which my feet are guided, 
and that is the lamp of experience.” In other words, how much of 
the total premium would reinsurers have needed in the past to 
compensate them fairly for the losses they actually had to bear?
 Unfortunately, the lamp of experience has always provided 
imperfect illumination for reinsurers because so much of their 
business is “long-tail”, meaning it takes many years before they 
know what their losses are. Lately, however, the light has not 
only been dim but also grossly misleading in the images it has 
revealed. That is, the courts’ tendency to grant awards that are 
both huge and lacking in precedent makes reinsurers’ usual 
extrapolations or inferences from past data a formula for 
disaster. Out with Patrick Henry and in with Pogo: “The future 
ain’t what it used to be.”
 The burgeoning uncertainties of the business, coupled with 
the entry into reinsurance of many unsophisticated participants, 
worked in recent years in favor of issuing companies writing a 
small net line: they were able to keep a far greater percentage 
of the premiums than the risk. By doing so, the issuing 
companies sometimes made money on business that was distinctly 
unprofitable for the issuing and reinsuring companies combined. 
(This result was not necessarily by intent: issuing companies 
generally knew no more than reinsurers did about the ultimate 
costs that would be experienced at higher layers of risk.) 
Inequities of this sort have been particularly pronounced in 
lines of insurance in which much change was occurring and losses 
were soaring; e.g., professional malpractice, D & 0, products 
liability, etc. Given these circumstances, it is not surprising 
that issuing companies remained enthusiastic about writing 
business long after premiums became woefully inadequate on a 
gross basis.
 An example of just how disparate results have been for 
issuing companies versus their reinsurers is provided by the 1984 
financials of one of the leaders in large and unusual risks. In 
that year the company wrote about $6 billion of business and kept 
around $2 1/2 billion of the premiums, or about 40%. It gave the 
remaining $3 1/2 billion to reinsurers. On the part of the 
business kept, the company’s underwriting loss was less than $200 
million - an excellent result in that year. Meanwhile, the part 
laid off produced a loss of over $1.5 billion for the reinsurers. 
Thus, the issuing company wrote at a combined ratio of well under 
110 while its reinsurers, participating in precisely the same 
policies, came in considerably over 140. This result was not 
attributable to natural catastrophes; it came from run-of-the￾mill insurance losses (occurring, however, in surprising 
frequency and size). The issuing company’s 1985 report is not 
yet available, but I would predict it will show that dramatically 
unbalanced results continued.
 A few years such as this, and even slow-witted reinsurers 
can lose interest, particularly in explosive lines where the 
proper split in premium between issuer and reinsurer remains 
impossible to even roughly estimate. The behavior of reinsurers 
finally becomes like that of Mark Twain’s cat: having once sat on 
a hot stove, it never did so again - but it never again sat on a 
cold stove, either. Reinsurers have had so many unpleasant 
surprises in long-tail casualty lines that many have decided 
(probably correctly) to give up the game entirely, regardless of 
price inducements. Consequently, there has been a dramatic pull￾back of reinsurance capacity in certain important lines.
 This development has left many issuing companies under 
pressure. They can no longer commit their reinsurers, time after 
time, for tens of millions per policy as they so easily could do 
only a year or two ago, and they do not have the capital and/or 
appetite to take on large risks for their own account. For many 
issuing companies, gross capacity has shrunk much closer to net 
capacity - and that is often small, indeed.
 At Berkshire we have never played the lay-it-off-at-a-profit 
game and, until recently, that put us at a severe disadvantage in 
certain lines. Now the tables are turned: we have the 
underwriting capability whereas others do not. If we believe the 
price to be right, we are willing to write a net line larger than 
that of any but the largest insurers. For instance, we are 
perfectly willing to risk losing $10 million of our own money on 
a single event, as long as we believe that the price is right and 
that the risk of loss is not significantly correlated with other 
risks we are insuring. Very few insurers are willing to risk 
half that much on single events - although, just a short while 
ago, many were willing to lose five or ten times that amount as 
long as virtually all of the loss was for the account of their 
reinsurers.
 In mid-1985 our largest insurance company, National 
Indemnity Company, broadcast its willingness to underwrite large 
risks by running an ad in three issues of an insurance weekly. 
The ad solicited policies of only large size: those with a 
minimum premium of $1 million. This ad drew a remarkable 600 
replies and ultimately produced premiums totaling about $50 
million. (Hold the applause: it’s all long-tail business and it 
will be at least five years before we know whether this marketing 
success was also an underwriting success.) Today, our insurance 
subsidiaries continue to be sought out by brokers searching for 
large net capacity.
 As I have said, this period of tightness will pass; insurers 
and reinsurers will return to underpricing. But for a year or 
two we should do well in several segments of our insurance 
business. Mike Goldberg has made many important improvements in 
the operation (prior mismanagement by your Chairman having 
provided him ample opportunity to do so). He has been 
particularly successful recently in hiring young managers with 
excellent potential. They will have a chance to show their stuff 
in 1986.
 Our combined ratio has improved - from 134 in 1984 to 111 in 
1985 - but continues to reflect past misdeeds. Last year I told 
you of the major mistakes I had made in loss-reserving, and 
promised I would update you annually on loss-development figures. 
Naturally, I made this promise thinking my future record would be 
much improved. So far this has not been the case. Details on 
last year’s loss development are on pages 50-52. They reveal 
significant underreserving at the end of 1984, as they did in the 
several years preceding.
 The only bright spot in this picture is that virtually all 
of the underreserving revealed in 1984 occurred in the 
reinsurance area - and there, in very large part, in a few 
contracts that were discontinued several years ago. This 
explanation, however, recalls all too well a story told me many 
years ago by the then Chairman of General Reinsurance Company. 
He said that every year his managers told him that “except for 
the Florida hurricane” or “except for Midwestern tornadoes”, they 
would have had a terrific year. Finally he called the group 
together and suggested that they form a new operation - the 
Except-For Insurance Company - in which they would henceforth 
place all of the business that they later wouldn’t want to count.
 In any business, insurance or otherwise, “except for” should 
be excised from the lexicon. If you are going to play the game, 
you must count the runs scored against you in all nine innings. 
Any manager who consistently says “except for” and then reports 
on the lessons he has learned from his mistakes may be missing 
the only important lesson - namely, that the real mistake is not 
the act, but the actor.
 Inevitably, of course, business errors will occur and the 
wise manager will try to find the proper lessons in them. But 
the trick is to learn most lessons from the experiences of 
others. Managers who have learned much from personal experience 
in the past usually are destined to learn much from personal 
experience in the future.
 GEICO, 38%-owned by Berkshire, reported an excellent year in 
1985 in premium growth and investment results, but a poor year - 
by its lofty standards - in underwriting. Private passenger auto 
and homeowners insurance were the only important lines in the 
industry whose results deteriorated significantly during the 
year. GEICO did not escape the trend, although its record was 
far better than that of virtually all its major competitors.
 Jack Byrne left GEICO at mid-year to head Fireman’s Fund, 
leaving behind Bill Snyder as Chairman and Lou Simpson as Vice 
Chairman. Jack’s performance in reviving GEICO from near￾bankruptcy was truly extraordinary, and his work resulted in 
enormous gains for Berkshire. We owe him a great deal for that.
 We are equally indebted to Jack for an achievement that 
eludes most outstanding leaders: he found managers to succeed him 
who have talents as valuable as his own. By his skill in 
identifying, attracting and developing Bill and Lou, Jack 
extended the benefits of his managerial stewardship well beyond 
his tenure.
Fireman’s Fund Quota-Share Contract
 Never one to let go of a meal ticket, we have followed Jack 
Byrne to Fireman’s Fund (“FFIC”) where he is Chairman and CEO of 
the holding company.
 On September 1, 1985 we became a 7% participant in all of 
the business in force of the FFIC group, with the exception of 
reinsurance they write for unaffiliated companies. Our contract 
runs for four years, and provides that our losses and costs will 
be proportionate to theirs throughout the contract period. If 
there is no extension, we will thereafter have no participation 
in any ongoing business. However, for a great many years in the 
future, we will be reimbursing FFIC for our 7% of the losses that 
occurred in the September 1, 1985 - August 31, 1989 period.
 Under the contract FFIC remits premiums to us promptly and 
we reimburse FFIC promptly for expenses and losses it has paid. 
Thus, funds generated by our share of the business are held by us 
for investment. As part of the deal, I’m available to FFIC for 
consultation about general investment strategy. I’m not 
involved, however, in specific investment decisions of FFIC, nor 
is Berkshire involved in any aspect of the company’s underwriting 
activities.
 Currently FFIC is doing about $3 billion of business, and it 
will probably do more as rates rise. The company’s September 1, 
1985 unearned premium reserve was $1.324 billion, and it 
therefore transferred 7% of this, or $92.7 million, to us at 
initiation of the contract. We concurrently paid them $29.4 
million representing the underwriting expenses that they had 
incurred on the transferred premium. All of the FFIC business is 
written by National Indemnity Company, but two-sevenths of it is 
passed along to Wesco-Financial Insurance Company (“Wes-FIC”), a 
new company organized by our 80%-owned subsidiary, Wesco 
Financial Corporation. Charlie Munger has some interesting 
comments about Wes-FIC and the reinsurance business on pages 60-
62.
 To the Insurance Segment tables on page 41, we have added a 
new line, labeled Major Quota Share Contracts. The 1985 results 
of the FFIC contract are reported there, though the newness of 
the arrangement makes these results only very rough 
approximations.
After the end of the year, we secured another quota-share 
contract, whose 1986 volume should be over $50 million. We hope 
to develop more of this business, and industry conditions suggest 
that we could: a significant number of companies are generating 
more business than they themselves can prudently handle. Our 
financial strength makes us an attractive partner for such 
companies.
Marketable Securities
We show below our 1985 yearend net holdings in marketable 
equities. All positions with a market value over $25 million are 
listed, and the interests attributable to minority shareholders 
of Wesco and Nebraska Furniture Mart are excluded.
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted)
 1,036,461 Affiliated Publications, Inc. ....... $ 3,516 $ 55,710
 900,800 American Broadcasting Companies, Inc. 54,435 108,997
 2,350,922 Beatrice Companies, Inc. ............ 106,811 108,142
 6,850,000 GEICO Corporation ................... 45,713 595,950
 2,379,200 Handy & Harman ...................... 27,318 43,718
 847,788 Time, Inc. .......................... 20,385 52,669
 1,727,765 The Washington Post Company ......... 9,731 205,172
 ---------- ----------
 267,909 1,170,358
 All Other Common Stockholdings ...... 7,201 27,963
 ---------- ----------
 Total Common Stocks $275,110 $1,198,321
 ========== ==========
 We mentioned earlier that in the past decade the investment 
environment has changed from one in which great businesses were 
totally unappreciated to one in which they are appropriately 
recognized. The Washington Post Company (“WPC”) provides an 
excellent example.
 We bought all of our WPC holdings in mid-1973 at a price of 
not more than one-fourth of the then per-share business value of 
the enterprise. Calculating the price/value ratio required no 
unusual insights. Most security analysts, media brokers, and 
media executives would have estimated WPC’s intrinsic business 
value at $400 to $500 million just as we did. And its $100 
million stock market valuation was published daily for all to 
see. Our advantage, rather, was attitude: we had learned from 
Ben Graham that the key to successful investing was the purchase 
of shares in good businesses when market prices were at a large 
discount from underlying business values.
 Most institutional investors in the early 1970s, on the 
other hand, regarded business value as of only minor relevance 
when they were deciding the prices at which they would buy or 
sell. This now seems hard to believe. However, these 
institutions were then under the spell of academics at 
prestigious business schools who were preaching a newly-fashioned 
theory: the stock market was totally efficient, and therefore 
calculations of business value - and even thought, itself - were 
of no importance in investment activities. (We are enormously 
indebted to those academics: what could be more advantageous in 
an intellectual contest - whether it be bridge, chess, or stock 
selection than to have opponents who have been taught that 
thinking is a waste of energy?)
 Through 1973 and 1974, WPC continued to do fine as a 
business, and intrinsic value grew. Nevertheless, by yearend 
1974 our WPC holding showed a loss of about 25%, with market 
value at $8 million against our cost of $10.6 million. What we 
had thought ridiculously cheap a year earlier had become a good 
bit cheaper as the market, in its infinite wisdom, marked WPC 
stock down to well below 20 cents on the dollar of intrinsic 
value.
 You know the happy outcome. Kay Graham, CEO of WPC, had the 
brains and courage to repurchase large quantities of stock for 
the company at those bargain prices, as well as the managerial 
skills necessary to dramatically increase business values. 
Meanwhile, investors began to recognize the exceptional economics 
of the business and the stock price moved closer to underlying 
value. Thus, we experienced a triple dip: the company’s business 
value soared upward, per-share business value increased 
considerably faster because of stock repurchases and, with a 
narrowing of the discount, the stock price outpaced the gain in 
per-share business value.
 We hold all of the WPC shares we bought in 1973, except for 
those sold back to the company in 1985’s proportionate 
redemption. Proceeds from the redemption plus yearend market 
value of our holdings total $221 million.
 If we had invested our $10.6 million in any of a half-dozen 
media companies that were investment favorites in mid-1973, the 
value of our holdings at yearend would have been in the area of 
$40 - $60 million. Our gain would have far exceeded the gain in 
the general market, an outcome reflecting the exceptional 
economics of the media business. The extra $160 million or so we 
gained through ownership of WPC came, in very large part, from 
the superior nature of the managerial decisions made by Kay as 
compared to those made by managers of most media companies. Her 
stunning business success has in large part gone unreported but 
among Berkshire shareholders it should not go unappreciated.
 Our Capital Cities purchase, described in the next section, 
required me to leave the WPC Board early in 1986. But we intend 
to hold indefinitely whatever WPC stock FCC rules allow us to. 
We expect WPC’s business values to grow at 
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1986 was $492.5 million, or 
26.1%. Over the last 22 years (that is, since present management 
took over), our per-share book value has grown from $19.46 to 
$2,073.06, or 23.3% compounded annually. Both the numerator and 
denominator are important in the per-share book value 
calculation: during the 22-year period our corporate net worth 
has increased 10,600% while shares outstanding have increased 
less than 1%.
 In past reports I have noted that book value at most 
companies differs widely from intrinsic business value - the 
number that really counts for owners. In our own case, however, 
book value has served for more than a decade as a reasonable if 
somewhat conservative proxy for business value. That is, our 
business value has moderately exceeded our book value, with the 
ratio between the two remaining fairly steady.
 The good news is that in 1986 our percentage gain in 
business value probably exceeded the book value gain. I say 
"probably" because business value is a soft number: in our own 
case, two equally well-informed observers might make judgments 
more than 10% apart.
 A large measure of our improvement in business value 
relative to book value reflects the outstanding performance of 
key managers at our major operating businesses. These managers - 
the Blumkins, Mike Goldberg, the Heldmans, Chuck Huggins, Stan 
Lipsey, and Ralph Schey - have over the years improved the 
earnings of their businesses dramatically while, except in the 
case of insurance, utilizing little additional capital. This 
accomplishment builds economic value, or "Goodwill," that does 
not show up in the net worth figure on our balance sheet, nor in 
our per-share book value. In 1986 this unrecorded gain was 
substantial.
 So much for the good news. The bad news is that my 
performance did not match that of our managers. While they were 
doing a superb job in running our businesses, I was unable to 
skillfully deploy much of the capital they generated.
 Charlie Munger, our Vice Chairman, and I really have only 
two jobs. One is to attract and keep outstanding managers to run 
our various operations. This hasn’t been all that difficult. 
Usually the managers came with the companies we bought, having 
demonstrated their talents throughout careers that spanned a wide 
variety of business circumstances. They were managerial stars 
long before they knew us, and our main contribution has been to 
not get in their way. This approach seems elementary: if my job 
were to manage a golf team - and if Jack Nicklaus or Arnold 
Palmer were willing to play for me - neither would get a lot of 
directives from me about how to swing.
 Some of our key managers are independently wealthy (we hope 
they all become so), but that poses no threat to their continued 
interest: they work because they love what they do and relish the 
thrill of outstanding performance. They unfailingly think like 
owners (the highest compliment we can pay a manager) and find all 
aspects of their business absorbing.
 (Our prototype for occupational fervor is the Catholic 
tailor who used his small savings of many years to finance a 
pilgrimage to the Vatican. When he returned, his parish held a 
special meeting to get his first-hand account of the Pope. "Tell 
us," said the eager faithful, "just what sort of fellow is he?" 
Our hero wasted no words: "He’s a forty-four, medium.")
 Charlie and I know that the right players will make almost 
any team manager look good. We subscribe to the philosophy of 
Ogilvy & Mather’s founding genius, David Ogilvy: "If each of us 
hires people who are smaller than we are, we shall become a 
company of dwarfs. But, if each of us hires people who are 
bigger than we are, we shall become a company of giants."
 A by-product of our managerial style is the ability it gives 
us to easily expand Berkshire’s activities. We’ve read 
management treatises that specify exactly how many people should 
report to any one executive, but they make little sense to us. 
When you have able managers of high character running businesses 
about which they are passionate, you can have a dozen or more 
reporting to you and still have time for an afternoon nap. 
Conversely, if you have even one person reporting to you who is 
deceitful, inept or uninterested, you will find yourself with 
more than you can handle. Charlie and I could work with double 
the number of managers we now have, so long as they had the rare 
qualities of the present ones.
 We intend to continue our practice of working only with 
people whom we like and admire. This policy not only maximizes 
our chances for good results, it also ensures us an 
extraordinarily good time. On the other hand, working with 
people who cause your stomach to churn seems much like marrying 
for money - probably a bad idea under any circumstances, but 
absolute madness if you are already rich.
 The second job Charlie and I must handle is the allocation 
of capital, which at Berkshire is a considerably more important 
challenge than at most companies. Three factors make that so: we 
earn more money than average; we retain all that we earn; and, we 
are fortunate to have operations that, for the most part, require 
little incremental capital to remain competitive and to grow. 
Obviously, the future results of a business earning 23% annually 
and retaining it all are far more affected by today’s capital 
allocations than are the results of a business earning 10% and 
distributing half of that to shareholders. If our retained 
earnings - and those of our major investees, GEICO and Capital 
Cities/ABC, Inc. - are employed in an unproductive manner, the 
economics of Berkshire will deteriorate very quickly. In a 
company adding only, say, 5% to net worth annually, capital￾allocation decisions, though still important, will change the 
company’s economics far more slowly.
 Capital allocation at Berkshire was tough work in 1986. We 
did make one business acquisition - The Fechheimer Bros. 
Company, which we will discuss in a later section. Fechheimer is 
a company with excellent economics, run by exactly the kind of 
people with whom we enjoy being associated. But it is relatively 
small, utilizing only about 2% of Berkshire’s net worth.
 Meanwhile, we had no new ideas in the marketable equities 
field, an area in which once, only a few years ago, we could 
readily employ large sums in outstanding businesses at very 
reasonable prices. So our main capital allocation moves in 1986 
were to pay off debt and stockpile funds. Neither is a fate 
worse than death, but they do not inspire us to do handsprings 
either. If Charlie and I were to draw blanks for a few years in 
our capital-allocation endeavors, Berkshire’s rate of growth 
would slow significantly.
 We will continue to look for operating businesses that meet 
our tests and, with luck, will acquire such a business every 
couple of years. But an acquisition will have to be large if it 
is to help our performance materially. Under current stock 
market conditions, we have little hope of finding equities to buy 
for our insurance companies. Markets will change significantly - 
you can be sure of that and some day we will again get our turn 
at bat. However, we haven’t the faintest idea when that might 
happen.
 It can’t be said too often (although I’m sure you feel I’ve 
tried) that, even under favorable conditions, our returns are 
certain to drop substantially because of our enlarged size. We 
have told you that we hope to average a return of 15% on equity 
and we maintain that hope, despite some negative tax law changes 
described in a later section of this report. If we are to 
achieve this rate of return, our net worth must increase $7.2 
billion in the next ten years. A gain of that magnitude will be 
possible only if, before too long, we come up with a few very big 
(and good) ideas. Charlie and I can’t promise results, but we do 
promise you that we will keep our efforts focused on our goals.
Sources of Reported Earnings
 The table on the next page shows the major sources of 
Berkshire’s reported earnings. This table differs in several 
ways from the one presented last year. We have added four new 
lines of business because of the Scott Fetzer and Fechheimer 
acquisitions. In the case of Scott Fetzer, the two major units 
acquired were World Book and Kirby, and each is presented 
separately. Fourteen other businesses of Scott Fetzer are 
aggregated in Scott Fetzer - Diversified Manufacturing. SF 
Financial Group, a credit company holding both World Book and 
Kirby receivables, is included in "Other." This year, because 
Berkshire is so much larger, we also have eliminated separate 
reporting for several of our smaller businesses.
 In the table, amortization of Goodwill is not charged 
against the specific businesses but, for reasons outlined in the 
Appendix to my letter in the 1983 Annual Report, is aggregated as 
a separate item. (A Compendium of earlier letters, including the 
Goodwill discussion, is available upon request.) Both the Scott 
Fetzer and Fechheimer acquisitions created accounting Goodwill, 
which is why the amortization charge for Goodwill increased in 
1986.
 Additionally, the Scott Fetzer acquisition required other 
major purchase-price accounting adjustments, as prescribed by 
generally accepted accounting principles (GAAP). The GAAP 
figures, of course, are the ones used in our consolidated 
financial statements. But, in our view, the GAAP figures are not 
necessarily the most useful ones for investors or managers. 
Therefore, the figures shown for specific operating units are 
earnings before purchase-price adjustments are taken into 
account. In effect, these are the earnings that would have been 
reported by the businesses if we had not purchased them.
 A discussion of our reasons for preferring this form of 
presentation is in the Appendix to this letter. This Appendix 
will never substitute for a steamy novel and definitely is not 
required reading. However, I know that among our 6,000 
shareholders there are those who are thrilled by my essays on 
accounting - and I hope that both of you enjoy the Appendix.
 In the Business Segment Data on pages 41-43 and in the 
Management’s Discussion section on pages 45-49, you will find 
much additional information about our businesses. I urge you to 
read those sections, as well as Charlie Munger’s letter to Wesco 
shareholders, describing the various businesses of that 
subsidiary, which starts on page 50.
 (000s omitted) 
 ------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ------------------- -------------------
 1986 1985 1986 1985 
 -------- -------- -------- --------
Operating Earnings: 
 Insurance Group: 
 Underwriting ............... $(55,844) $(44,230) $(29,864) $(23,569)
 Net Investment Income ...... 107,143 95,217 96,440 79,716
 Buffalo News ................. 34,736 29,921 16,918 14,580
 Fechheimer (Acquired 6/3/86) 8,400 --- 3,792 ---
 Kirby ........................ 20,218 --- 10,508 ---
 Nebraska Furniture Mart ...... 17,685 12,686 7,192 5,181
 Scott Fetzer - Diversified Mfg. 25,358 --- 13,354 ---
 See’s Candies ................ 30,347 28,989 15,176 14,558
 Wesco - other than insurance 5,542 16,018 5,550 9,684
 World Book ................... 21,978 --- 11,670 ---
 Amortization of Goodwill (2,555) (1,475) (2,555) (1,475)
 Other purchase-price 
 accounting charges ........ (10,033) --- (11,031) ---
 Interest on Debt and 
 Pre-Payment penalty ....... (23,891) (14,415) (12,213) (7,288)
 Shareholder-Designated 
 Contributions ............. (3,997) (4,006) (2,158) (2,164)
 Other ........................ 20,770 6,744 8,685 3,725
 -------- -------- -------- --------
Operating Earnings ............. 195,857 125,449 131,464 92,948
Special General Foods 
 Distribution ................ --- 4,127 --- 3,779
Special Washington Post 
 Distribution ................ --- 14,877 --- 13,851
Sales of securities ............ 216,242 468,903 150,897 325,237
 -------- -------- -------- --------
Total Earnings - all entities .. $412,099 $613,356 $282,361 $435,815
 ======== ======== ======== ========
 As you can see, operating earnings substantially improved 
during 1986. Some of the improvement came from the insurance 
operation, whose results I will discuss in a later section. 
Fechheimer also will be discussed separately. Our other major 
businesses performed as follows:
 o Operating results at The Buffalo News continue to reflect a 
truly superb managerial job by Stan Lipsey. For the third year 
in a row, man-hours worked fell significantly and other costs 
were closely controlled. Consequently, our operating margins 
improved materially in 1986, even though our advertising rate 
increases were well below those of most major newspapers.
 Our cost-control efforts have in no way reduced our 
commitment to news. We continue to deliver a 50% "news hole" 
(the portion of the total space in the paper devoted to news), a 
higher percentage, we believe, than exists at any dominant 
newspaper in this country of our size or larger.
 The average news hole at papers comparable to the News is 
about 40%. The difference between 40% and 50% is more important 
than it might first seem: a paper with 30 pages of ads and a 40% 
news hole delivers 20 pages of news a day, whereas our paper 
matches 30 pages of ads with 30 pages of news. Therefore, given 
ad pages equal in number, we end up delivering our readers no 
less than 50% more news.
 We believe this heavy commitment to news is one of the 
reasons The Buffalo News has the highest weekday penetration rate 
(the percentage of households in the paper’s primary marketing 
area purchasing it each day) among any of the top 50 papers in 
the country. Our Sunday penetration, where we are also number 
one, is even more impressive. Ten years ago, the only Sunday 
paper serving Buffalo (the Courier-Express) had circulation of 
271,000 and a penetration ratio of about 63%. The Courier￾Express had served the area for many decades and its penetration 
ratio - which was similar to those existing in many metropolitan 
markets - was thought to be a "natural" one, accurately 
reflecting the local citizenry’s appetite for a Sunday product.
 Our Sunday paper was started in late 1977. It now has a 
penetration ratio of 83% and sells about 100,000 copies more each 
Sunday than did the Courier-Express ten years ago - even though 
population in our market area has declined during the decade. In 
recent history, no other city that has long had a local Sunday 
paper has experienced a penetration gain anywhere close to 
Buffalo’s.
 Despite our exceptional market acceptance, our operating 
margins almost certainly have peaked. A major newsprint price 
increase took effect at the end of 1986, and our advertising rate 
increases in 1987 will again be moderate compared to those of the 
industry. However, even if margins should materially shrink, we 
would not reduce our news-hole ratio.
 As I write this, it has been exactly ten years since we 
purchased The News. The financial rewards it has brought us have 
far exceeded our expectations and so, too, have the non-financial 
rewards. Our respect for the News - high when we bought it - has 
grown consistently ever since the purchase, as has our respect 
and admiration for Murray Light, the editor who turns out the 
product that receives such extraordinary community acceptance. 
The efforts of Murray and Stan, which were crucial to the News 
during its dark days of financial reversals and litigation, have 
not in the least been lessened by prosperity. Charlie and I are 
grateful to them.
 o The amazing Blumkins continue to perform business miracles 
at Nebraska Furniture Mart. Competitors come and go (mostly go), 
but Mrs. B. and her progeny roll on. In 1986 net sales increased 
10.2% to $132 million. Ten years ago sales were $44 million and, 
even then, NFM appeared to be doing just about all of the 
business available in the Greater Omaha Area. Given NFM’s 
remarkable dominance, Omaha’s slow growth in population and the 
modest inflation rates that have applied to the goods NFM sells, 
how can this operation continue to rack up such large sales 
gains? The only logical explanation is that the marketing 
territory of NFM’s one-and-only store continues to widen because 
of its ever-growing reputation for rock-bottom everyday prices 
and the broadest of selections. In preparation for further 
gains, NFM is expanding the capacity of its warehouse, located a 
few hundred yards from the store, by about one-third.
 Mrs. B, Chairman of Nebraska Furniture Mart, continues at 
age 93 to outsell and out-hustle any manager I’ve ever seen. 
She’s at the store seven days a week, from opening to close. 
Competing with her represents a triumph of courage over judgment.
 It’s easy to overlook what I consider to be the critical 
lesson of the Mrs. B saga: at 93, Omaha based Board Chairmen have 
yet to reach their peak. Please file this fact away to consult 
before you mark your ballot at the 2024 annual meeting of 
Berkshire.
 o At See’s, sales trends improved somewhat from those of 
recent years. Total pounds sold rose about 2%. (For you 
chocaholics who like to fantasize, one statistic: we sell over 
12,000 tons annually.) Same-store sales, measured in pounds, were 
virtually unchanged. In the previous six years, same store 
poundage fell, and we gained or maintained poundage volume only 
by adding stores. But a particularly strong Christmas season in 
1986 stemmed the decline. By stabilizing same-store volume and 
making a major effort to control costs, See’s was able to 
maintain its excellent profit margin in 1986 though it put 
through only minimal price increases. We have Chuck Huggins, our 
long-time manager at See’s, to thank for this significant 
achievement.
 See’s has a one-of-a-kind product "personality" produced by 
a combination of its candy’s delicious taste and moderate price, 
the company’s total control of the distribution process, and the 
exceptional service provided by store employees. Chuck 
rightfully measures his success by the satisfaction of our 
customers, and his attitude permeates the organization. Few 
major retailing companies have been able to sustain such a 
customer-oriented spirit, and we owe Chuck a great deal for 
keeping it alive and well at See’s.
 See’s profits should stay at about their present level. We 
will continue to increase prices very modestly, merely matching 
prospective cost increases.
 o World Book is the largest of 17 Scott Fetzer operations 
that joined Berkshire at the beginning of 1986. Last year I 
reported to you enthusiastically about the businesses of Scott 
Fetzer and about Ralph Schey, its manager. A year’s experience 
has added to my enthusiasm for both. Ralph is a superb 
businessman and a straight shooter. He also brings exceptional 
versatility and energy to his job: despite the wide array of 
businesses that he manages, he is on top of the operations, 
opportunities and problems of each. And, like our other 
managers, Ralph is a real pleasure to work with. Our good 
fortune continues.
 World Book’s unit volume increased for the fourth 
consecutive year, with encyclopedia sales up 7% over 1985 and 45% 
over 1982. Childcraft’s unit sales also grew significantly.
 World Book continues to dominate the U.S. direct-sales 
encyclopedia market - and for good reasons. Extraordinarily 
well-edited and priced at under 5 cents per page, these books are 
a bargain for youngster and adult alike. You may find one 
editing technique interesting: World Book ranks over 44,000 words 
by difficulty. Longer entries in the encyclopedia include only 
the most easily comprehended words in the opening sections, with 
the difficulty of the material gradually escalating as the 
exposition proceeds. As a result, youngsters can easily and 
profitably read to the point at which subject matter gets too 
difficult, instead of immediately having to deal with a 
discussion that mixes up words requiring college-level 
comprehension with others of fourth-grade level. 
 Selling World Book is a calling. Over one-half of our 
active salespeople are teachers or former teachers, and another 
5% have had experience as librarians. They correctly think of 
themselves as educators, and they do a terrific job. If you 
don’t have a World Book set in your house, I recommend one.
 o Kirby likewise recorded its fourth straight year of unit 
volume gains. Worldwide, unit sales grew 4% from 1985 and 33% 
from 1982. While the Kirby product is more expensive than most 
cleaners, it performs in a manner that leaves cheaper units far 
behind ("in the dust," so to speak). Many 30- and 40-year-old 
Kirby cleaners are still in active duty. If you want the best, 
you buy a Kirby.
 Some companies that historically have had great success in 
direct sales have stumbled in recent years. Certainly the era of 
the working woman has created new challenges for direct sales 
organizations. So far, the record shows that both Kirby and 
World Book have responded most successfully.
 The businesses described above, along with the insurance 
operation and Fechheimer, constitute our major business units. 
The brevity of our descriptions is in no way meant to diminish 
the importance of these businesses to us. All have been 
discussed in past annual reports and, because of the tendency of 
Berkshire owners to stay in the fold (about 98% of the stock at 
the end of each year is owned by people who were owners at the 
start of the year), we want to avoid undue repetition of basic 
facts. You can be sure that we will immediately report to you in 
detail if the underlying economics or competitive position of any 
of these businesses should materially change. In general, the 
businesses described in this section can be characterized as 
having very strong market positions, very high returns on capital 
employed, and the best of operating managements.
The Fechheimer Bros. Co.
 Every year in Berkshire’s annual report I include a 
description of the kind of business that we would like to buy. 
This "ad" paid off in 1986.
 On January 15th of last year I received a letter from Bob 
Heldman of Cincinnati, a shareholder for many years and also 
Chairman of Fechheimer Bros. Until I read the letter, however, I 
did not know of either Bob or Fechheimer. Bob wrote that he ran 
a company that met our tests and suggested that we get together, 
which we did in Omaha after their results for 1985 were compiled.
 He filled me in on a little history: Fechheimer, a uniform 
manufacturing and distribution business, began operations in 
1842. Warren Heldman, Bob’s father, became involved in the 
business in 1941 and his sons, Bob and George (now President), 
along with their sons, subsequently joined the company. Under 
the Heldmans’ management, the business was highly successful.
 In 1981 Fechheimer was sold to a group of venture 
capitalists in a leveraged buy out (an LBO), with management 
retaining an equity interest. The new company, as is the case 
with all LBOS, started with an exceptionally high debt/equity 
ratio. After the buy out, however, operations continued to be 
very successful. So by the start of last year debt had been paid 
down substantially and the value of the equity had increased 
dramatically. For a variety of reasons, the venture capitalists 
wished to sell and Bob, having dutifully read Berkshire’s annual 
reports, thought of us.
 Fechheimer is exactly the sort of business we like to buy. 
Its economic record is superb; its managers are talented, high￾grade, and love what they do; and the Heldman family wanted to 
continue its financial interest in partnership with us. 
Therefore, we quickly purchased about 84% of the stock for a 
price that was based upon a $55 million valuation for the entire 
business.
 The circumstances of this acquisition were similar to those 
prevailing in our purchase of Nebraska Furniture Mart: most of 
the shares were held by people who wished to employ funds 
elsewhere; family members who enjoyed running their business 
wanted to continue both as owners and managers; several 
generations of the family were active in the business, providing 
management for as far as the eye can see; and the managing family 
wanted a purchaser who would not re-sell, regardless of price, 
and who would let the business be run in the future as it had 
been in the past. Both Fechheimer and NFM were right for us, and 
we were right for them.
 You may be amused to know that neither Charlie nor I have 
been to Cincinnati, headquarters for Fechheimer, to see their 
operation. (And, incidentally, it works both ways: Chuck Huggins, 
who has been running See’s for 15 years, has never been to 
Omaha.) If our success were to depend upon insights we developed 
through plant inspections, Berkshire would be in big trouble. 
Rather, in considering an acquisition, we attempt to evaluate the 
economic characteristics of the business - its competitive 
strengths and weaknesses - and the quality of the people we will 
be joining. Fechheimer was a standout in both respects. In 
addition to Bob and George Heldman, who are in their mid-60s - 
spring chickens by our standards - there are three members of the 
next generation, Gary, Roger and Fred, to insure continuity.
 As a prototype for acquisitions, Fechheimer has only one 
drawback: size. We hope our next acquisition is at least several 
times as large but a carbon copy in all other respects. Our 
threshold for minimum annual after-tax earnings of potential 
acquisitions has been moved up to $10 million from the $5 million 
level that prevailed when Bob wrote to me.
 Flushed with success, we repeat our ad. If you have a 
business that fits, call me or, preferably, write.
 Here’s what we’re looking for: 
 (1) large purchases (at least $10 million of after-tax 
 earnings), 
 (2) demonstrated consistent earning power (future 
 projections are of little interest to us, nor are 
 "turn-around" situations), 
 (3) businesses earning good returns on equity while 
 employing little or no debt. 
 (4) management in place (we can’t supply it), 
 (5) simple businesses (if there’s lots of technology, we 
 won’t understand it), 
 (6) an offering price (we don’t want to waste our time 
 or that of the seller by talking, even preliminarily, 
 about a transaction when price is unknown).
 We will not engage in unfriendly takeovers. We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we’re interested. We prefer 
to buy for cash, but will consider issuing stock when we receive 
as much in intrinsic business value as we give. Indeed, 
following recent advances in the price of Berkshire stock, 
transactions involving stock issuance may be quite feasible. We 
invite potential sellers to check us out by contacting people 
with whom we have done business in the past. For the right 
business - and the right people - we can provide a good home. 
 On the other hand, we frequently get approached about 
acquisitions that don’t come close to meeting our tests: new 
ventures, turnarounds, auction-like sales, and the ever-popular 
(among brokers) "I’m-sure-something-will-work-out-if-you-people￾get-to-know-each-other." None of these attracts us in the least.
 * * *
 Besides being interested in the purchases of entire 
businesses as described above, we are also interested in the 
negotiated purchase of large, but not controlling, blocks of 
stock, as in our Cap Cities purchase. Such purchases appeal to 
us only when we are very comfortable with both the economics of 
the business and the ability and integrity of the people running 
the operation. We prefer large transactions: in the unusual case 
we might do something as small as $50 million (or even smaller), 
but our preference is for commitments many times that size.
Insurance Operations
 We present our usual table of industry figures, expanded 
this year to include data about incurred losses and the GNP 
inflation index. The contrast in 1986 between the growth in 
premiums and growth in incurred losses will show you why 
underwriting results for the year improved materially:
 Statutory
 Yearly Change Combined Ratio Yearly Change Inflation Rate 
 in Premiums After Policyholder in Incurred Measured by 
 Written (%) Dividends Losses (%) GNP Deflator (%)
 ------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.7
1982 ..... 4.4 109.8 8.4 6.4
1983 ..... 4.6 112.0 6.8 3.9
1984 ..... 9.2 117.9 16.9 3.8
1985 ..... 22.1 116.5 16.1 3.3
1986 (Est.) 22.6 108.5 15.5 2.6
Source: Best’s Insurance Management Reports
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: a 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss. When the investment income that an insurer 
earns from holding on to policyholders’ funds ("the float") is 
taken into account, a combined ratio in the 107-112 range 
typically produces an overall break-even result, exclusive of 
earnings on the funds provided by shareholders.
 The math of the insurance business, encapsulated by the 
table, is not very complicated. In years when the industry’s 
annual gain in revenues (premiums) pokes along at 4% or 5%, 
underwriting losses are sure to mount. This is not because auto 
accidents, fires, windstorms and the like are occurring more 
frequently, nor has it lately been the fault of general 
inflation. Today, social and judicial inflation are the major 
culprits; the cost of entering a courtroom has simply ballooned. 
Part of the jump in cost arises from skyrocketing verdicts, and 
part from the tendency of judges and juries to expand the 
coverage of insurance policies beyond that contemplated by the 
insurer when the policies were written. Seeing no let-up in 
either trend, we continue to believe that the industry’s revenues 
must grow at close to 10% annually for it to just hold its own 
in terms of profitability, even though general inflation may be 
running only 2% - 4%.
 In 1986, as noted, the industry’s premium volume soared even 
faster than loss costs. Consequently, the underwriting loss of 
the industry fell dramatically. In last year’s report we 
predicted this sharp improvement but also predicted that 
prosperity would be fleeting. Alas, this second prediction is 
already proving accurate. The rate of gain in the industry’s 
premium volume has slowed significantly (from an estimated 27.1% 
in 1986’s first quarter, to 23.5% in the second, to 21.8% in the 
third, to 18.7% in the fourth), and we expect further slowing in 
1987. Indeed, the rate of gain may well fall below my 10% 
"equilibrium" figure by the third quarter.
 Nevertheless, underwriting results in 1987, assuming they 
are not dragged down by a major natural catastrophe, will again 
improve materially because price increases are recognized in 
revenues on a lagged basis. In effect, the good news in earnings 
follows the good news in prices by six to twelve months. But the 
improving trend in earnings will probably end by late 1988 or 
early 1989. Thereafter the industry is likely to head south in a 
hurry.
 Pricing behavior in the insurance industry continues to be 
exactly what can be expected in a commodity-type business. Only 
under shortage conditions are high profits achieved, and such 
conditions don’t last long. When the profit sun begins to shine, 
long-established insurers shower investors with new shares in 
order to build capital. In addition, newly-formed insurers rush 
to sell shares at the advantageous prices available in the new￾issue market (prices advantageous, that is, to the insiders 
promoting the company but rarely to the new shareholders). These 
moves guarantee future trouble: capacity soars, competitive 
juices flow, and prices fade.
 It’s interesting to observe insurance leaders beseech their 
colleagues to behave in a more "statesmanlike" manner when 
pricing policies. "Why," they ask, "can’t we learn from history, 
even out the peaks and valleys, and consistently price to make 
reasonable profits?" What they wish, of course, is pricing that 
resembles, say, that of The Wall Street journal, whose prices are 
ample to start with and rise consistently each year.
 Such calls for improved behavior have all of the efficacy of 
those made by a Nebraska corn grower asking his fellow growers, 
worldwide, to market their corn with more statesmanship. What’s 
needed is not more statesmen, but less corn. By raising large 
amounts of capital in the last two years, the insurance industry 
has, to continue our metaphor, vastly expanded its plantings of 
corn. The resulting increase in "crop" - i.e., the proliferation 
of insurance capacity - will have the same effect on prices and 
profits that surplus crops have had since time immemorial.
 Our own insurance operation did well in 1986 and is also 
likely to do well in 1987. We have benefited significantly from 
industry conditions. But much of our prosperity arises from the 
efforts and ability of Mike Goldberg, manager of all insurance 
operations.
 Our combined ratio (on a statutory basis and excluding 
structured settlements and financial reinsurance) fell from 111 
in 1985 to 103 in 1986. In addition, our premium growth has been 
exceptional: although final figures aren’t available, I believe 
that over the past two years we were the fastest growing company 
among the country’s top 100 insurers. Some of our growth, it is 
true, came from our large quota-share contract with Fireman’s 
Fund, described in last year’s report and updated in Charlie’s 
letter on page 54. But even if the premiums from that contract 
are excluded from the calculation, we probably still ranked first 
in growth.
 Interestingly, we were the slowest-growing large insurer in 
the years immediately preceding 1985. In fact, we shrank - and 
we will do so again from time to time in the future. Our large 
swings in volume do not mean that we come and go from the 
insurance marketplace. Indeed, we are its most steadfast 
participant, always standing ready, at prices we believe 
adequate, to write a wide variety of high-limit coverages. The 
swings in our volume arise instead from the here-today, gone￾tomorrow behavior of other insurers. When most insurers are 
"gone," because their capital is inadequate or they have been 
frightened by losses, insureds rush to us and find us ready to 
do business. But when hordes of insurers are "here," and are 
slashing prices far below expectable costs, many customers 
naturally leave us in order to take advantage of the bargains 
temporarily being offered by our competition.
 Our firmness on prices works no hardship on the consumer: he 
is being bombarded by attractively priced insurance offers at 
those times when we are doing little business. And it works no 
hardship on our employees: we don’t engage in layoffs when we 
experience a cyclical slowdown at one of our generally-profitable 
insurance operations. This no-layoff practice is in our self￾interest. Employees who fear that large layoffs will accompany 
sizable reductions in premium volume will understandably produce 
scads of business through thick and thin (mostly thin).
 The trends in National Indemnity’s traditional business - 
the writing of commercial auto and general liability policies 
through general agents - suggest how gun-shy other insurers 
became for a while and how brave they are now getting. In the 
last quarter of 1984, NICO’s monthly volume averaged $5 million, 
about what it had been running for several years. By the first 
quarter of 1986, monthly volume had climbed to about $35 million. 
In recent months, a sharp decline has set in. Monthly volume is 
currently about $20 million and will continue to fall as new 
competitors surface and prices are cut. Ironically, the managers 
of certain major new competitors are the very same managers that 
just a few years ago bankrupted insurers that were our old 
competitors. Through state-mandated guaranty funds, we must pay 
some of the losses these managers left unpaid, and now we find 
them writing the same sort of business under a new name. C’est 
la guerre.
 The business we call "large risks" expanded significantly 
during 1986, and will be important to us in the future. In this 
operation, we regularly write policies with annual premiums of $1 
- $3 million, or even higher. This business will necessarily be 
highly volatile - both in volume and profitability - but our 
premier capital position and willingness to write large net lines 
make us a very strong force in the market when prices are right. 
On the other hand, our structured settlement business has become 
near-dormant because present prices make no sense to us.
 The 1986 loss reserve development of our insurance group is 
chronicled on page 46. The figures show the amount of error in 
our yearend 1985 liabilities that a year of settlements and 
further evaluation has revealed. As you can see, what I told you 
last year about our loss liabilities was far from true - and that 
makes three years in a row of error. If the physiological rules 
that applied to Pinocchio were to apply to me, my nose would now 
draw crowds.
 When insurance executives belatedly establish proper 
reserves, they often speak of "reserve strengthening," a term 
that has a rather noble ring to it. They almost make it sound as 
if they are adding extra layers of strength to an already-solid 
balance sheet. That’s not the case: instead the term is a 
euphemism for what should more properly be called "correction of 
previous untruths" (albeit non-intentional ones).
 We made a special effort at the end of 1986 to reserve 
accurately. However, we tried just as hard at the end of 1985. 
Only time will tell whether we have finally succeeded in 
correctly estimating our insurance liabilities.
 Despite the difficulties we have had in reserving and the 
commodity economics of the industry, we expect our insurance 
business to both grow and make significant amounts of money - but 
progress will be distinctly irregular and there will be major 
unpleasant surprises from time to time. It’s a treacherous 
business and a wary attitude is essential. We must heed Woody 
Allen: "While the lamb may lie down with the lion, the lamb 
shouldn’t count on getting a whole lot of sleep."
 In our insurance operations we have an advantage in 
attitude, we have an advantage in capital, and we are developing 
an advantage in personnel. Additionally, I like to think we have 
some long-term edge in investing the float developed from 
policyholder funds. The nature of the business suggests that we 
will need all of these advantages in order to prosper.
 * * *
 GEICO Corporation, 41% owned by Berkshire, had an 
outstanding year in 1986. Industrywide, underwriting experience 
in personal lines did not improve nearly as much as it did in 
commercial lines. But GEICO, writing personal lines almost 
exclusively, improved its combined ratio to 96.9 and recorded a 
16% gain in premium volume. GEICO also continued to repurchase 
its own shares and ended the year with 5.5% fewer shares 
outstanding than it had at the start of the year. Our share of 
GEICO’s premium volume is over $500 million, close to double that 
of only three years ago. GEICO’s book of business is one of the 
best in the world of insurance, far better indeed than 
Berkshire’s own book.
 The most important ingredient in GEICO’s success is rock￾bottom operating costs, which set the company apart from 
literally hundreds of competitors that offer auto insurance. The 
total of GEICO’s underwriting expense and loss adjustment expense 
in 1986 was only 23.5% of premiums. Many major companies show 
percentages 15 points higher than that. Even such huge direct 
writers as Allstate and State Farm incur appreciably higher costs 
than does GEICO.
 The difference between GEICO’s costs and those of its 
competitors is a kind of moat that protects a valuable and much￾sought-after business castle. No one understands this moat￾around-the-castle concept better than Bill Snyder, Chairman of 
GEICO. He continually widens the moat by driving down costs 
still more, thereby defending and strengthening the economic 
franchise. Between 1985 and 1986, GEICO’s total expense ratio 
dropped from 24.1% to the 23.5% mentioned earlier and, under 
Bill’s leadership, the ratio is almost certain to drop further. 
If it does - and if GEICO maintains its service and underwriting 
standards - the company’s future will be brilliant indeed.
 The second stage of the GEICO rocket is fueled by Lou 
Simpson, Vice Chairman, who has run the company’s investments 
since late 1979. Indeed, it’s a little embarrassing for me, the 
fellow responsible for investments at Berkshire, to chronicle 
Lou’s performance at GEICO. Only my ownership of a controlling 
block of Berkshire stock makes me secure enough to give you the 
following figures, comparing the overall return of the equity 
portfolio at GEICO to that of the Standard & Poor’s 500:
 Year GEICO’s Equities S&P 500
 ---- ---------------- -------
 1980 .................. 23.7% 32.3%
 1981 .................. 5.4 (5.0)
 1982 .................. 45.8 21.4
 1983 .................. 36.0 22.4
 1984 .................. 21.8 6.2
 1985 .................. 45.8 31.6
 1986 .................. 38.7 18.6
 These are not only terrific figures but, fully as important, 
they have been achieved in the right way. Lou has consistently 
invested in undervalued common stocks that, individually, were 
unlikely to present him with a permanent loss and that, 
collectively, were close to risk-free.
 In sum, GEICO is an exceptional business run by exceptional 
managers. We are fortunate to be associated with them.
Marketable Securities
 During 1986, our insurance companies purchased about $700 
million of tax-exempt bonds, most having a maturity of 8 to 12 
years. You might think that this commitment indicates a 
considerable enthusiasm for such bonds. Unfortunately, that’s 
not so: at best, the bonds are mediocre investments. They simply 
seemed the least objectionable alternative at the time we bought 
them, and still seem so. (Currently liking neither stocks nor 
bonds, I find myself the polar opposite of Mae West as she 
declared: "I like only two kinds of men - foreign and domestic.")
 We must, of necessity, hold marketable securities in our 
insurance companies and, as money comes in, we have only five 
directions to go: (1) long-term common stock investments; (2) 
long-term fixed-income securities; (3) medium-term fixed-income 
securities; (4) short-term cash equivalents; and (5) short-term 
arbitrage commitments.
 Common stocks, of course, are the most fun. When conditions 
are right that is, when companies with good economics and good 
management sell well below intrinsic business value - stocks 
sometimes provide grand-slam home runs. But we currently find no 
equities that come close to meeting our tests. This statement in 
no way translates into a stock market prediction: we have no idea 
- and never have had - whether the market is going to go up, 
down, or sideways in the near- or intermediate term future.
 What we do know, however, is that occasional outbreaks of 
those two super-contagious diseases, fear and greed, will forever 
occur in the investment community. The timing of these epidemics 
will be unpredictable. And the market aberrations produced by 
them will be equally unpredictable, both as to duration and 
degree. Therefore, we never try to anticipate the arrival or 
departure of either disease. Our goal is more modest: we simply 
attempt to be fearful when others are greedy and to be greedy 
only when others are fearful.
 As this is written, little fear is visible in Wall Street. 
Instead, euphoria prevails - and why not? What could be more 
exhilarating than to participate in a bull market in which the 
rewards to owners of businesses become gloriously uncoupled from 
the plodding performances of the businesses themselves. 
Unfortunately, however, stocks can’t outperform businesses 
indefinitely.
 Indeed, because of the heavy transaction and investment 
management costs they bear, stockholders as a whole and over the 
long term must inevitably underperform the companies they own. 
If American business, in aggregate, earns about 12% on equity 
annually, investors must end up earning significantly less. Bull 
markets can obscure mathematical laws, but they cannot repeal 
them.
 The second category of investments open to our insurance 
companies is long-term bonds. These are unlikely to be of 
interest to us except in very special situations, such as the 
Washington Public Power Supply System #1, #2 and #3 issues, 
discussed in our 1984 report. (At yearend, we owned WPPSS issues 
having an amortized cost of $218 million and a market value of 
$310 million, paying us $31.7 million in annual tax-exempt 
income.) Our aversion to long-term bonds relates to our fear that 
we will see much higher rates of inflation within the next 
decade. Over time, the behavior of our currency will be 
determined by the behavior of our legislators. This relationship 
poses a continuing threat to currency stability - and a 
corresponding threat to the owners of long-term bonds.
 We continue to periodically employ money in the arbitrage 
field. However, unlike most arbitrageurs, who purchase dozens of 
securities each year, we purchase only a few. We restrict 
ourselves to large deals that have been announced publicly and do 
not bet on the come. Therefore, our potential profits are apt to 
be small; but, with luck, our disappointments will also be few.
 Our yearend portfolio shown below includes one arbitrage 
commitment, Lear-Siegler. Our balance sheet also includes a 
receivable for $145 million, representing the money owed us (and 
paid a few days later) by Unilever, then in the process of 
purchasing Chesebrough-Ponds, another of our arbitrage holdings. 
Arbitrage is an alternative to Treasury Bills as a short-term 
parking place for money - a choice that combines potentially 
higher returns with higher risks. To date, our returns from the 
funds committed to arbitrage have been many times higher than 
they would have been had we left those funds in Treasury Bills. 
Nonetheless, one bad experience could change the scorecard 
markedly.
 We also, though it takes some straining, currently view 
medium-term tax-exempt bonds as an alternative to short-term 
Treasury holdings. Buying these bonds, we run a risk of 
significant loss if, as seems probable, we sell many of them well 
before maturity. However, we believe this risk is more than 
counter-balanced first, by the much higher after-tax returns 
currently realizable from these securities as compared to 
Treasury Bills and second, by the possibility that sales will 
produce an overall profit rather than a loss. Our expectation of 
a higher total return, after allowing for the possibility of loss 
and after taking into account all tax effects, is a relatively 
close call and could well be wrong. Even if we sell our bonds at 
a fairly large loss, however, we may end up reaping a higher 
after-tax return than we would have realized by repeatedly 
rolling over Treasury Bills.
 In any event, you should know that our expectations for both 
the stocks and bonds we now hold are exceptionally modest, given 
current market levels. Probably the best thing that could happen 
to us is a market in which we would choose to sell many of our 
bond holdings at a significant loss in order to re-allocate funds 
to the far-better equity values then very likely to exist. The 
bond losses I am talking about would occur if high interest rates 
came along; the same rates would probably depress common stocks 
considerably more than medium-term bonds.
 We show below our 1986 yearend net holdings in marketable 
equities. All positions with a market value of over $25 million 
are listed, and the interests attributable to minority 
shareholdings of Wesco Financial Corp. and Nebraska Furniture 
Mart are excluded.
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted)
 2,990,000 Capital Cities/ABC, Inc. ....... $515,775 $ 801,694
 6,850,000 GEICO Corporation .............. 45,713 674,725
 2,379,200 Handy & Harman ................. 27,318 46,989
 489,300 Lear Siegler, Inc. ............. 44,064 44,587
 1,727,765 The Washington Post Company .... 9,731 269,531
 ---------- ----------
 642,601 1,837,526
 All Other Common Stockholdings 12,763 36,507
 ---------- ----------
 Total Common Stocks ............ $655,364 $1,874,033
 We should note that we expect to keep permanently our three 
primary holdings, Capital Cities/ABC, Inc., GEICO Corporation, 
and The Washington Post. Even if these securities were to appear 
significantly overpriced, we would not anticipate selling them, 
just as we would not sell See’s or Buffalo Evening News if 
someone were to offer us a price far above what we believe those 
businesses are worth.
 This attitude may seem old-fashioned in a corporate world in 
which activity has become the order of the day. The modern 
manager refers to his "portfolio" of businesses - meaning that 
all of them are candidates for "restructuring" whenever such a 
move is dictated by Wall Street preferences, operating conditions 
or a new corporate "concept." (Restructuring is defined narrowly, 
however: it extends only to dumping offending businesses, not to 
dumping the officers and directors who bought the businesses in 
the first place. "Hate the sin but love the sinner" is a 
theology as popular with the Fortune 500 as it is with the 
Salvation Army.)
 Investment managers are even more hyperkinetic: their 
behavior during trading hours makes whirling dervishes appear 
sedated by comparison. Indeed, the term "institutional investor" 
is becoming one of those self-contradictions called an oxymoron, 
comparable to "jumbo shrimp," "lady mudwrestler" and "inexpensive 
lawyer."
 Despite the enthusiasm for activity that has swept business 
and financial America, we will stick with our ‘til-death-do-us￾part policy. It’s the only one with which Charlie and I are 
comfortable, it produces decent results, and it lets our managers 
and those of our investees run their businesses free of 
distractions.
NHP, Inc.
 Last year we paid $23.7 million for about 50% of NHP, Inc., 
a developer, syndicator, owner and manager of multi-family rental 
housing. Should all executive stock options that have been 
authorized be granted and exercised, our equity interest will 
decline to slightly over 45%.
 NHP, Inc. has a most unusual genealogy. In 1967, President 
Johnson appointed a commission of business and civic leaders, led 
by Edgar Kaiser, to study ways to increase the supply of 
multifamily housing for low- and moderate-income tenants. 
Certain members of the commission subsequently formed and 
promoted two business entities to foster this goal. Both are now 
owned by NHP, Inc. and one operates under unusual ground rules: 
three of its directors must be appointed by the President, with 
the advice and consent of the Senate, and it is also required by 
law to submit an annual report to the President.
 Over 260 major corporations, motivated more by the idea of 
public service than profit, invested $42 million in the two 
original entities, which promptly began, through partnerships, to 
develop government-subsidized rental property. The typical 
partnership owned a single property and was largely financed by a 
non-recourse mortgage. Most of the equity money for each 
partnership was supplied by a group of limited partners who were 
primarily attracted by the large tax deductions that went with 
the investment. NHP acted as general partner and also purchased 
a small portion of each partnership’s equity.
 The Government’s housing policy has, of course, shifted and 
NHP has necessarily broadened its activities to include non￾subsidized apartments commanding market-rate rents. In addition, 
a subsidiary of NHP builds single-family homes in the Washington, 
D.C. area, realizing revenues of about $50 million annually.
 NHP now oversees about 500 partnership properties that are 
located in 40 states, the District of Columbia and Puerto Rico, 
and that include about 80,000 housing units. The cost of these 
properties was more than $2.5 billion and they have been well 
maintained. NHP directly manages about 55,000 of the housing 
units and supervises the management of the rest. The company’s 
revenues from management are about $16 million annually, and 
growing.
 In addition to the equity interests it purchased upon the 
formation of each partnership, NHP owns varying residual 
interests that come into play when properties are disposed of and 
distributions are made to the limited partners. The residuals on 
many of NHP’s "deep subsidy" properties are unlikely to be of 
much value. But residuals on certain other properties could 
prove quite valuable, particularly if inflation should heat up.
 The tax-oriented syndication of properties to individuals 
has been halted by the Tax Reform Act of 1986. In the main, NHP 
is currently trying to develop equity positions or significant 
residual interests in non-subsidized rental properties of quality 
and size (typically 200 to 500 units). In projects of this kind, 
NHP usually works with one or more large institutional investors 
or lenders. NHP will continue to seek ways to develop low- and 
moderate-income apartment housing, but will not likely meet 
success unless government policy changes.
 Besides ourselves, the large shareholders in NHP are 
Weyerhauser (whose interest is about 25%) and a management group 
led by Rod Heller, chief executive of NHP. About 60 major 
corporations also continue to hold small interests, none larger 
than 2%.
Taxation
 The Tax Reform Act of 1986 affects our various businesses in 
important and divergent ways. Although we find much to praise in 
the Act, the net financial effect for Berkshire is negative: our 
rate of increase in business value is likely to be at least 
moderately slower under the new law than under the old. The net 
effect for our shareholders is even more negative: every dollar 
of increase in per-share business value, assuming the increase is 
accompanied by an equivalent dollar gain in the market value of 
Berkshire stock, will produce 72 cents of after-tax gain for our 
shareholders rather than the 80 cents produced under the old law. 
This result, of course, reflects the rise in the maximum tax rate 
on personal capital gains from 20% to 28%.
 Here are the main tax changes that affect Berkshire:
 o The tax rate on corporate ordinary income is scheduled to 
decrease from 46% in 1986 to 34% in 1988. This change obviously 
affects us positively - and it also has a significant positive 
effect on two of our three major investees, Capital Cities/ABC 
and The Washington Post Company.
 I say this knowing that over the years there has been a lot 
of fuzzy and often partisan commentary about who really pays 
corporate taxes - businesses or their customers. The argument, 
of course, has usually turned around tax increases, not 
decreases. Those people resisting increases in corporate rates 
frequently argue that corporations in reality pay none of the 
taxes levied on them but, instead, act as a sort of economic 
pipeline, passing all taxes through to consumers. According to 
these advocates, any corporate-tax increase will simply lead to 
higher prices that, for the corporation, offset the increase. 
Having taken this position, proponents of the "pipeline" theory 
must also conclude that a tax decrease for corporations will not 
help profits but will instead flow through, leading to 
correspondingly lower prices for consumers.
 Conversely, others argue that corporations not only pay the 
taxes levied upon them, but absorb them also. Consumers, this 
school says, will be unaffected by changes in corporate rates.
 What really happens? When the corporate rate is cut, do 
Berkshire, The Washington Post, Cap Cities, etc., themselves soak 
up the benefits, or do these companies pass the benefits along to 
their customers in the form of lower prices? This is an 
important question for investors and managers, as well as for 
policymakers.
 Our conclusion is that in some cases the benefits of lower 
corporate taxes fall exclusively, or almost exclusively, upon the 
corporation and its shareholders, and that in other cases the 
benefits are entirely, or almost entirely, passed through to the 
customer. What determines the outcome is the strength of the 
corporation’s business franchise and whether the profitability of 
that franchise is regulated.
 For example, when the franchise is strong and after-tax 
profits are regulated in a relatively precise manner, as is the 
case with electric utilities, changes in corporate tax rates are 
largely reflected in prices, not in profits. When taxes are cut, 
prices will usually be reduced in short order. When taxes are 
increased, prices will rise, though often not as promptly.
 A similar result occurs in a second arena - in the price￾competitive industry, whose companies typically operate with very 
weak business franchises. In such industries, the free market 
"regulates" after-tax profits in a delayed and irregular, but 
generally effective, manner. The marketplace, in effect, 
performs much the same function in dealing with the price￾competitive industry as the Public Utilities Commission does in 
dealing with electric utilities. In these industries, therefore, 
tax changes eventually affect prices more than profits.
 In the case of unregulated businesses blessed with strong 
franchises, however, it’s a different story: the corporation 
and its shareholders are then the major beneficiaries of tax 
cuts. These companies benefit from a tax cut much as the 
electric company would if it lacked a regulator to force down 
prices.
 Many of our businesses, both those we own in whole and in 
part, possess such franchises. Consequently, reductions in their 
taxes largely end up in our pockets rather than the pockets of 
our customers. While this may be impolitic to state, it is 
impossible to deny. If you are tempted to believe otherwise, 
think for a moment of the most able brain surgeon or lawyer in 
your area. Do you really expect the fees of this expert (the 
local "franchise-holder" in his or her specialty) to be reduced 
now that the top personal tax rate is being cut from 50% to 28%?
 Your joy at our conclusion that lower rates benefit a number 
of our operating businesses and investees should be severely 
tempered, however, by another of our convictions: scheduled 1988 
tax rates, both individual and corporate, seem totally 
unrealistic to us. These rates will very likely bestow a fiscal 
problem on Washington that will prove incompatible with price 
stability. We believe, therefore, that ultimately - within, say, 
five years - either higher tax rates or higher inflation rates 
are almost certain to materialize. And it would not surprise us 
to see both.
 o Corporate capital gains tax rates have been increased from 
28% to 34%, effective in 1987. This change will have an 
important adverse effect on Berkshire because we expect much of 
our gain in business value in the future, as in the past, to 
arise from capital gains. For example, our three major 
investment holdings - Cap Cities, GEICO, and Washington Post - at 
yearend had a market value of over $1.7 billion, close to 75% of 
the total net worth of Berkshire, and yet they deliver us only 
about $9 million in annual income. Instead, all three retain a 
very high percentage of their earnings, which we expect to 
eventually deliver us capital gains.
 The new law increases the rate for all gains realized in the 
future, including the unrealized gains that existed before the 
law was enacted. At yearend, we had $1.2 billion of such 
unrealized gains in our equity investments. The effect of the new 
law on our balance sheet will be delayed because a GAAP rule 
stipulates that the deferred tax liability applicable to 
unrealized gains should be stated at last year’s 28% tax rate 
rather than the current 34% rate. This rule is expected to change 
soon. The moment it does, about $73 million will disappear from 
our GAAP net worth and be added to the deferred tax account.
 o Dividend and interest income received by our insurance 
companies will be taxed far more heavily under the new law. 
First, all corporations will be taxed on 20% of the dividends 
they receive from other domestic corporations, up from 15% under 
the old law. Second, there is a change concerning the residual 
80% that applies only to property/casualty companies: 15% of that 
residual will be taxed if the stocks paying the dividends were 
purchased after August 7, 1986. A third change, again applying 
only to property/casualty companies, concerns tax-exempt bonds: 
interest on bonds purchased by insurers after August 7, 1986 will 
only be 85% tax-exempt.
 The last two changes are very important. They mean that our 
income from the investments we make in future years will be 
significantly lower than would have been the case under the old 
law. My best guess is that these changes alone will eventually 
reduce the earning power of our insurance operation by at least 
10% from what we could previously have expected.
 o The new tax law also materially changes the timing of tax 
payments by property/casualty insurance companies. One new rule 
requires us to discount our loss reserves in our tax returns, a 
change that will decrease deductions and increase taxable income. 
Another rule, to be phased in over six years, requires us to 
include 20% of our unearned premium reserve in taxable income.
 Neither rule changes the amount of the annual tax accrual in 
our reports to you, but each materially accelerates the schedule 
of payments. That is, taxes formerly deferred will now be front￾ended, a change that will significantly cut the profitability of 
our business. An analogy will suggest the toll: if, upon turning 
21, you were required to immediately pay tax on all income you 
were due to receive throughout your life, both your lifetime 
wealth and your estate would be a small fraction of what they 
would be if all taxes on your income were payable only when you 
died.
 Attentive readers may spot an inconsistency in what we say. 
Earlier, discussing companies in price-competitive industries, we 
suggested that tax increases or reductions affect these companies 
relatively little, but instead are largely passed along to their 
customers. But now we are saying that tax increases will affect 
profits of Berkshire’s property/casualty companies even though 
they operate in an intensely price-competitive industry.
 The reason this industry is likely to be an exception to our 
general rule is that not all major insurers will be working with 
identical tax equations. Important differences will exist for 
several reasons: a new alternative minimum tax will materially 
affect some companies but not others; certain major insurers have 
huge loss carry-forwards that will largely shield their income 
from significant taxes for at least a few years; and the results 
of some large insurers will be folded into the consolidated 
returns of companies with non-insurance businesses. These 
disparate conditions will produce widely varying marginal tax 
rates in the property/casualty industry. That will not be the 
case, however, in most other price-competitive industries, such 
as aluminum, autos and department stores, in which the major 
players will generally contend with similar tax equations.
 The absence of a common tax calculus for property/casualty 
companies means that the increased taxes falling on the industry 
will probably not be passed along to customers to the degree that 
they would in a typical price-competitive industry. Insurers, in 
other words, will themselves bear much of the new tax burdens.
 o A partial offset to these burdens is a "fresh start" 
adjustment that occurred on January 1, 1987 when our December 31, 
1986 loss reserve figures were converted for tax purposes to the 
newly-required discounted basis. (In our reports to you, however, 
reserves will remain on exactly the same basis as in the past - 
undiscounted except in special cases such as structured 
settlements.) The net effect of the "fresh start" is to give us a 
double deduction: we will get a tax deduction in 1987 and future 
years for a portion of our-incurred-but-unpaid insurance losses 
that have already been fully deducted as costs in 1986 and 
earlier years.
 The increase in net worth that is produced by this change is 
not yet reflected in our financial statements. Rather, under 
present GAAP rules (which may be changed), the benefit will flow 
into the earnings statement and, consequently, into net worth 
over the next few years by way of reduced tax charges. We expect 
the total benefit from the fresh-start adjustment to be in the 
$30 - $40 million range. It should be noted, however, that this 
is a one-time benefit, whereas the negative impact of the other 
insurance-related tax changes is not only ongoing but, in 
important respects, will become more severe as time passes.
 o The General Utilities Doctrine was repealed by the new tax 
law. This means that in 1987 and thereafter there will be a 
double tax on corporate liquidations, one at the corporate level 
and another at the shareholder level. In the past, the tax at 
the corporate level could be avoided, If Berkshire, for example, 
were to be liquidated - which it most certainly won’t be - 
shareholders would, under the new law, receive far less from the 
sales of our properties than they would have if the properties 
had been sold in the past, assuming identical prices in each 
sale. Though this outcome is theoretical in our case, the change 
in the law will very materially affect many companies. 
Therefore, it also affects our evaluations of prospective 
investments. Take, for example, producing oil and gas 
businesses, selected media companies, real estate companies, etc. 
that might wish to sell out. The values that their shareholders 
can realize are likely to be significantly reduced simply because 
the General Utilities Doctrine has been repealed - though the 
companies’ operating economics will not have changed adversely at 
all. My impression is that this important change in the law has 
not yet been fully comprehended by either investors or managers.
 This section of our report has been longer and more 
complicated than I would have liked. But the changes in the law 
are many and important, particularly for property/casualty 
insurers. As I have noted, the new law will hurt Berkshire’s 
results, but the negative impact is impossible to quantify with 
any precision.
Miscellaneous
 We bought a corporate jet last year. What you have heard about such 
planes is true: they are very expensive and a luxury in 
situations like ours where little travel to out-of-the-way places 
is required. And planes not only cost a lot to operate, they cost 
a lot just to look at. Pre-tax, cost of capital plus depreciation 
on a new $15 million plane probably runs $3 million annually. On 
our own plane, bought for $850,000 used, such costs run close to 
$200,000 annually.
 Cognizant of such figures, your Chairman, unfortunately, has 
in the past made a number of rather intemperate remarks about 
corporate jets. Accordingly, prior to our purchase, I was forced 
into my Galileo mode. I promptly experienced the necessary 
"counter-revelation" and travel is now considerably easier - and 
considerably costlier - than in the past. Whether Berkshire will 
get its money’s worth from the plane is an open question, but I 
will work at achieving some business triumph that I can (no 
matter how dubiously) attribute to it. I’m afraid Ben Franklin 
had my number. Said he: "So convenient a thing it is to be a 
reasonable creature, since it enables one to find or make a 
reason for everything one has a mind to do."
 About 97% of all eligible shares participated in Berkshire’s 
1986 shareholder-designated contributions program. Contributions 
made through the program were $4 million, and 1,934 charities 
were recipients.
 We urge new shareholders to read the description of our 
shareholder-designated contributions program that appears on 
pages 58 and 59. If you wish to participate in future programs, 
we strongly urge that you immediately make sure your shares are 
registered in the name of the actual owner, not in "street" name 
or nominee name. Shares not so registered on September 30, 1987 
will be ineligible for the 1987 program.
 * * *
 Last year almost 450 people attended our shareholders’ 
meeting, up from about 250 the year before (and from about a 
dozen ten years ago). I hope you can join us on May 19th in 
Omaha. Charlie and I like to answer owner-related questions 
and I can promise you that our shareholders will pose many good 
ones. Finishing up the questions may take quite a while - we 
had about 65 last year so you should feel free to leave once 
your own have been answered.
 Last year, after the meeting, one shareholder from New 
Jersey and another from New York went to the Furniture Mart, 
where each purchased a $5,000 Oriental rug from Mrs. B. (To be 
precise, they purchased rugs that might cost $10,000 elsewhere 
for which they were charged about $5,000.) Mrs. B was pleased - 
but not satisfied - and she will be looking for you at the store 
after this year’s meeting. Unless our shareholders top last 
year’s record, I’ll be in trouble. So do me (and yourself) a 
favor, and go see her.
 Warren E. Buffett
February 27, 1987 Chairman of the Board
Appendix
Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy
First a short quiz: below are abbreviated 1986 statements of earnings for two companies. Which business is the
more valuable?
Company O Company N
(000s Omitted)
Revenues………………………. $677,240 $677,240
Costs of Goods Sold:
Historical costs, excluding
depreciation……………………. $341,170 $341,170
Special non-cash inventory
costs……………………………. 4,979 (1)
Depreciation of plant and
equipment ……………………... 8,301 13,355 (2)
349,471 359,504
$327,769 $317,736
Gross Profit
…………………….
Selling & Admin. Expense........ $260,286 $260,286
Amortization of Goodwill
......... ______ ____595 (3)
260,286 260,881
Operating Profit .....................
…
$ 67,483 $ 56,855
Other Income, Net .................
… 4,135 4,135
Pre-Tax Income ......................
…
$ 71,618 $ 60,990
Applicable Income Tax:
Historical deferred and
current tax
………………………………. $ 31,387 $ 31,387
Non-Cash Inter-period
Allocation Adjustment ............. ______ _____998 (4)
31,387 32,385
Net Income ............ $40,231 $28,605
 ======= =======
(Numbers (1) through (4) designate items discussed later in this section.)
As you've probably guessed, Companies O and N are the same business - Scott Fetzer. In the "O" (for "old")
column we have shown what the company's 1986 GAAP earnings would have been if we had not purchased it; in the
"N" (for "new") column we have shown Scott Fetzer's GAAP earnings as actually reported by Berkshire.
It should be emphasized that the two columns depict identical economics - i.e., the same sales, wages, taxes, etc.
And both "companies" generate the same amount of cash for owners. Only the accounting is different.
So, fellow philosophers, which column presents truth? Upon which set of numbers should managers and investors
focus?
Before we tackle those questions, let's look at what produces the disparity between O and N. We will simplify our
discussion in some respects, but the simplification should not produce any inaccuracies in analysis or conclusions.
The contrast between O and N comes about because we paid an amount for Scott Fetzer that was different from
its stated net worth. Under GAAP, such differences - such premiums or discounts - must be accounted for by
"purchase-price adjustments." In Scott Fetzer's case, we paid $315 million for net assets that were carried on its
books at $172.4 million. So we paid a premium of $142.6 million.
The first step in accounting for any premium paid is to adjust the carrying value of current assets to current values.
In practice, this requirement usually does not affect receivables, which are routinely carried at current value, but
often affects inventories. Because of a $22.9 million LIFO reserve and other accounting intricacies, Scott Fetzer's
inventory account was carried at a $37.3 million discount from current value. So, making our first accounting move,
we used $37.3 million of our $142.6 million premium to increase the carrying value of the inventory.
Assuming any premium is left after current assets are adjusted, the next step is to adjust fixed assets to current
value. In our case, this adjustment also required a few accounting acrobatics relating to deferred taxes. Since this
has been billed as a simplified discussion, I will skip the details and give you the bottom line: $68.0 million was
added to fixed assets and $13.0 million was eliminated from deferred tax liabilities. After making this $81.0 million
adjustment, we were left with $24.3 million of premium to allocate.
Had our situation called for them two steps would next have been required: the adjustment of intangible assets
other than Goodwill to current fair values, and the restatement of liabilities to current fair values, a requirement that
typically affects only long-term debt and unfunded pension liabilities. In Scott Fetzer's case, however, neither of
these steps was necessary.
The final accounting adjustment we needed to make, after recording fair market values for all assets and liabilities,
was the assignment of the residual premium to Goodwill (technically known as "excess of cost over the fair value of
net assets acquired"). This residual amounted to $24.3 million. Thus, the balance sheet of Scott Fetzer immediately
before the acquisition, which is summarized below in column O, was transformed by the purchase into the balance
sheet shown in column N. In real terms, both balance sheets depict the same assets and liabilities - but, as you can
see, certain figures differ significantly.
Company O Company N
(000s Omitted)
Assets
Cash and Cash Equivalents
…………………………...
$ 3,593 $ 3,593
Receivables, net
………………………………………..
90,919 90,919
Inventories
……………………………………………
77,489 114,764
Other
…………………………………………………….
5,954 5,954
Total Current Assets
…………………………………..
177,955 215,230
Property, Plant, and Equipment, net
………………….
80,967 148,960
Investments in and Advances to
Unconsolidated Subsidiaries and Joint
Ventures ……………………… 93,589 93,589
Other Assets, including Goodwill
…………………….
9,836 34,210
$362,347 $491,989
Liabilities
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1987 was $464 million, or 
19.5%. Over the last 23 years (that is, since present management 
took over), our per-share book value has grown from $19.46 to 
$2,477.47, or at a rate of 23.1% compounded annually. 
 What counts, of course, is the rate of gain in per-share 
business value, not book value. In many cases, a corporation's 
book value and business value are almost totally unrelated. For 
example, just before they went bankrupt, LTV and Baldwin-United 
published yearend audits showing their book values to be $652 
million and $397 million, respectively. Conversely, Belridge Oil 
was sold to Shell in 1979 for $3.6 billion although its book 
value was only $177 million. 
 At Berkshire, however, the two valuations have tracked 
rather closely, with the growth rate in business value over the 
last decade moderately outpacing the growth rate in book value. 
This good news continued in 1987. 
 Our premium of business value to book value has widened for 
two simple reasons: We own some remarkable businesses and they 
are run by even more remarkable managers. 
 You have a right to question that second assertion. After 
all, CEOs seldom tell their shareholders that they have assembled 
a bunch of turkeys to run things. Their reluctance to do so 
makes for some strange annual reports. Oftentimes, in his 
shareholders' letter, a CEO will go on for pages detailing 
corporate performance that is woefully inadequate. He will 
nonetheless end with a warm paragraph describing his managerial 
comrades as "our most precious asset." Such comments sometimes 
make you wonder what the other assets can possibly be. 
 At Berkshire, however, my appraisal of our operating 
managers is, if anything, understated. To understand why, first 
take a look at page 7, where we show the earnings (on an 
historical-cost accounting basis) of our seven largest non￾financial units: Buffalo News, Fechheimer, Kirby, Nebraska 
Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, 
and World Book. In 1987, these seven business units had combined 
operating earnings before interest and taxes of $180 million. 
 By itself, this figure says nothing about economic 
performance. To evaluate that, we must know how much total 
capital - debt and equity - was needed to produce these earnings. 
Debt plays an insignificant role at our seven units: Their net 
interest expense in 1987 was only $2 million. Thus, pre-tax 
earnings on the equity capital employed by these businesses 
amounted to $178 million. And this equity - again on an 
historical-cost basis - was only $175 million. 
 If these seven business units had operated as a single 
company, their 1987 after-tax earnings would have been 
approximately $100 million - a return of about 57% on equity 
capital. You'll seldom see such a percentage anywhere, let alone 
at large, diversified companies with nominal leverage. Here's a 
benchmark: In its 1988 Investor's Guide issue, Fortune reported 
that among the 500 largest industrial companies and 500 largest 
service companies, only six had averaged a return on equity of 
over 30% during the previous decade. The best performer among 
the 1000 was Commerce Clearing House at 40.2%. 
 Of course, the returns that Berkshire earns from these seven 
units are not as high as their underlying returns because, in 
aggregate, we bought the businesses at a substantial premium to 
underlying equity capital. Overall, these operations are carried 
on our books at about $222 million above the historical 
accounting values of the underlying assets. However, the 
managers of the units should be judged by the returns they 
achieve on the underlying assets; what we pay for a business does 
not affect the amount of capital its manager has to work with. 
(If, to become a shareholder and part owner of Commerce Clearing 
House, you pay, say, six times book value, that does not change 
CCH's return on equity.) 
 Three important inferences can be drawn from the figures I 
have cited. First, the current business value of these seven 
units is far above their historical book value and also far above 
the value at which they are carried on Berkshire's balance sheet. 
Second, because so little capital is required to run these 
businesses, they can grow while concurrently making almost all of 
their earnings available for deployment in new opportunities. 
Third, these businesses are run by truly extraordinary managers. 
The Blumkins, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph 
Schey all meld unusual talent, energy and character to achieve 
exceptional financial results. 
 For good reasons, we had very high expectations when we 
joined with these managers. In every case, however, our 
experience has greatly exceeded those expectations. We have 
received far more than we deserve, but we are willing to accept 
such inequities. (We subscribe to the view Jack Benny expressed 
upon receiving an acting award: "I don't deserve this, but then, 
I have arthritis and I don't deserve that either.") 
 Beyond the Sainted Seven, we have our other major unit, 
insurance, which I believe also has a business value well above 
the net assets employed in it. However, appraising the business 
value of a property-casualty insurance company is a decidedly 
imprecise process. The industry is volatile, reported earnings 
oftentimes are seriously inaccurate, and recent changes in the 
Tax Code will severely hurt future profitability. Despite these 
problems, we like the business and it will almost certainly 
remain our largest operation. Under Mike Goldberg's management, 
the insurance business should treat us well over time. 
 With managers like ours, my partner, Charlie Munger, and I 
have little to do with operations. in fact, it is probably fair 
to say that if we did more, less would be accomplished. We have 
no corporate meetings, no corporate budgets, and no performance 
reviews (though our managers, of course, oftentimes find such 
procedures useful at their operating units). After all, what can 
we tell the Blumkins about home furnishings, or the Heldmans 
about uniforms? 
 Our major contribution to the operations of our subsidiaries 
is applause. But it is not the indiscriminate applause of a 
Pollyanna. Rather it is informed applause based upon the two 
long careers we have spent intensively observing business 
performance and managerial behavior. Charlie and I have seen so 
much of the ordinary in business that we can truly appreciate a 
virtuoso performance. Only one response to the 1987 performance 
of our operating managers is appropriate: sustained, deafening 
applause. 
Sources of Reported Earnings 
 The table on the following page shows the major sources of 
Berkshire's reported earnings. In the table, amortization of 
Goodwill and other major purchase-price accounting adjustments 
are not charged against the specific businesses to which they 
apply but, instead, are aggregated and shown separately. In 
effect, this procedure presents the earnings of our businesses as 
they would have been reported had we not purchased them. In 
appendixes to my letters in the 1983 and 1986 annual reports, I 
explained why this form of presentation seems to us to be more 
useful to investors and managers than the standard GAAP 
presentation, which makes purchase-price adjustments on a 
business-by business basis. The total net earnings we show in 
the table are, of course, identical to the GAAP figures in our 
audited financial statements. 
 In the Business Segment Data on pages 36-38 and in the 
Management's Discussion section on pages 40-44 you will find much 
additional information about our businesses. In these sections 
you will also find our segment earnings reported on a GAAP basis. 
I urge you to read that material, as well as Charlie Munger's 
letter to Wesco shareholders, describing the various businesses 
of that subsidiary, which starts on page 45. 
 (000s omitted) 
 ------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ------------------- -------------------
 1987 1986 1987 1986 
 -------- -------- -------- --------
Operating Earnings: 
 Insurance Group: 
 Underwriting ............... $(55,429) $(55,844) $(20,696) $(29,864) 
 Net Investment Income ...... 152,483 107,143 136,658 96,440 
 Buffalo News ................. 39,410 34,736 21,304 16,918 
 Fechheimer (Acquired 6/3/86) 13,332 8,400 6,580 3,792 
 Kirby ........................ 22,408 20,218 12,891 10,508 
 Nebraska Furniture Mart ...... 16,837 17,685 7,554 7,192 
 Scott Fetzer Mfg. Group ...... 30,591 25,358 17,555 13,354 
 See's Candies ................ 31,693 30,347 17,363 15,176 
 Wesco - other than Insurance 6,209 5,542 4,978 5,550 
 World Book ................... 25,745 21,978 15,136 11,670 
 Amortization of Goodwill ..... (2,862) (2,555) (2,862) (2,555) 
 Other Purchase-Price 
 Accounting Adjustments .... (5,546) (10,033) (6,544) (11,031) 
 Interest on Debt and 
 Pre-Payment Penalty ....... (11,474) (23,891) (5,905) (12,213) 
 Shareholder-Designated 
 Contributions ............. (4,938) (3,997) (2,963) (2,158) 
 Other ........................ 22,460 20,770 13,696 8,685 
 -------- -------- -------- --------
 Operating Earnings ........... 280,919 195,857 214,745 131,464 
 Sales of Securities .......... 27,319 216,242 19,807 150,897 
 -------- -------- -------- --------
Total Earnings - All Entities .. $308,238 $412,099 $234,552 $282,361 
 ======== ======== ======== ========
 Gypsy Rose Lee announced on one of her later birthdays: "I 
have everything I had last year; it's just that it's all two 
inches lower." As the table shows, during 1987 almost all of our 
businesses aged in a more upbeat way. 
 There's not a lot new to report about these businesses - and 
that's good, not bad. Severe change and exceptional returns 
usually don't mix. Most investors, of course, behave as if just 
the opposite were true. That is, they usually confer the highest 
price-earnings ratios on exotic-sounding businesses that hold out 
the promise of feverish change. That prospect lets investors 
fantasize about future profitability rather than face today's 
business realities. For such investor-dreamers, any blind date 
is preferable to one with the girl next door, no matter how 
desirable she may be. 
 Experience, however, indicates that the best business 
returns are usually achieved by companies that are doing 
something quite similar today to what they were doing five or ten 
years ago. That is no argument for managerial complacency. 
Businesses always have opportunities to improve service, product 
lines, manufacturing techniques, and the like, and obviously 
these opportunities should be seized. But a business that 
constantly encounters major change also encounters many chances 
for major error. Furthermore, economic terrain that is forever 
shifting violently is ground on which it is difficult to build a 
fortress-like business franchise. Such a franchise is usually 
the key to sustained high returns. 
 The Fortune study I mentioned earlier supports our view. 
Only 25 of the 1,000 companies met two tests of economic 
excellence - an average return on equity of over 20% in the ten 
years, 1977 through 1986, and no year worse than 15%. These 
business superstars were also stock market superstars: During the 
decade, 24 of the 25 outperformed the S&P 500. 
 The Fortune champs may surprise you in two respects. First, 
most use very little leverage compared to their interest-paying 
capacity. Really good businesses usually don't need to borrow. 
Second, except for one company that is "high-tech" and several 
others that manufacture ethical drugs, the companies are in 
businesses that, on balance, seem rather mundane. Most sell non￾sexy products or services in much the same manner as they did ten 
years ago (though in larger quantities now, or at higher prices, 
or both). The record of these 25 companies confirms that making 
the most of an already strong business franchise, or 
concentrating on a single winning business theme, is what usually 
produces exceptional economics. 
 Berkshire's experience has been similar. Our managers have 
produced extraordinary results by doing rather ordinary things - 
but doing them exceptionally well. Our managers protect their 
franchises, they control costs, they search for new products and 
markets that build on their existing strengths and they don't get 
diverted. They work exceptionally hard at the details of their 
businesses, and it shows. 
 Here's an update: 
 o Agatha Christie, whose husband was an archaeologist, said 
that was the perfect profession for one's spouse: "The older you 
become, the more interested they are in you." It is students of 
business management, not archaeologists, who should be interested 
in Mrs. B (Rose Blumkin), the 94-year-old chairman of Nebraska 
Furniture Mart. 
 Fifty years ago Mrs. B started the business with $500, and 
today NFM is far and away the largest home furnishings store in 
the country. Mrs. B continues to work seven days a week at the 
job from the opening of each business day until the close. She 
buys, she sells, she manages - and she runs rings around the 
competition. It's clear to me that she's gathering speed and may 
well reach her full potential in another five or ten years. 
Therefore, I've persuaded the Board to scrap our mandatory 
retirement-at-100 policy. (And it's about time: With every 
passing year, this policy has seemed sillier to me.) 
 Net sales of NFM were $142.6 million in 1987, up 8% from 
1986. There's nothing like this store in the country, and 
there's nothing like the family Mrs. B has produced to carry on: 
Her son Louie, and his three boys, Ron, Irv and Steve, possess 
the business instincts, integrity and drive of Mrs. B. They work 
as a team and, strong as each is individually, the whole is far 
greater than the sum of the parts. 
 The superb job done by the Blumkins benefits us as owners, 
but even more dramatically benefits NFM's customers. They saved 
about $30 million in 1987 by buying from NFM. In other words, 
the goods they bought would have cost that much more if purchased 
elsewhere. 
 You'll enjoy an anonymous letter I received last August: 
"Sorry to see Berkshire profits fall in the second quarter. One 
way you may gain back part of your lost. (sic) Check the pricing 
at The Furniture Mart. You will find that they are leaving 10% 
to 20% on the table. This additional profit on $140 million of 
sells (sic) is $28 million. Not small change in anyone's pocket! 
Check out other furniture, carpet, appliance and T.V. dealers. 
Your raising prices to a reasonable profit will help. Thank you. 
/signed/ A Competitor." 
 NFM will continue to grow and prosper by following Mrs. B's 
maxim: "Sell cheap and tell the truth." 
 o Among dominant papers of its size or larger, the Buffalo 
News continues to be the national leader in two important ways: 
(1) its weekday and Sunday penetration rate (the percentage of 
households in the paper's primary market area that purchase it); 
and (2) its "news-hole" percentage (the portion of the paper 
devoted to news).
 It may not be coincidence that one newspaper leads in both 
categories: an exceptionally "newsrich" product makes for broad 
audience appeal, which in turn leads to high penetration. Of 
course, quantity must be matched by quality. This not only 
means good reporting and good writing; it means freshness and 
relevance. To be indispensable, a paper must promptly tell its 
readers many things they want to know but won't otherwise learn 
until much later, if ever. 
 At the News, we put out seven fresh editions every 24 hours, 
each one extensively changed in content. Here's a small example 
that may surprise you: We redo the obituary page in every edition 
of the News, or seven times a day. Any obituary added runs 
through the next six editions until the publishing cycle has been 
completed. 
 It's vital, of course, for a newspaper to cover national and 
international news well and in depth. But it is also vital for 
it to do what only a local newspaper can: promptly and 
extensively chronicle the personally-important, otherwise￾unreported details of community life. Doing this job well 
requires a very broad range of news - and that means lots of 
space, intelligently used. 
 Our news hole was about 50% in 1987, just as it has been 
year after year. If we were to cut it to a more typical 40%, we 
would save approximately $4 million annually in newsprint costs. 
That interests us not at all - and it won't interest us even if, 
for one reason or another, our profit margins should 
significantly shrink. 
 Charlie and I do not believe in flexible operating budgets, 
as in "Non-direct expenses can be X if revenues are Y, but must 
be reduced if revenues are Y - 5%." Should we really cut our news 
hole at the Buffalo News, or the quality of product and service 
at See's, simply because profits are down during a given year or 
quarter? Or, conversely, should we add a staff economist, a 
corporate strategist, an institutional advertising campaign or 
something else that does Berkshire no good simply because the 
money currently is rolling in? 
 That makes no sense to us. We neither understand the adding 
of unneeded people or activities because profits are booming, nor 
the cutting of essential people or activities because 
profitability is shrinking. That kind of yo-yo approach is 
neither business-like nor humane. Our goal is to do what makes 
sense for Berkshire's customers and employees at all times, and 
never to add the unneeded. ("But what about the corporate jet?" 
you rudely ask. Well, occasionally a man must rise above 
principle.) 
 Although the News' revenues have grown only moderately since 
1984, superb management by Stan Lipsey, its publisher, has 
produced excellent profit growth. For several years, I have 
incorrectly predicted that profit margins at the News would fall. 
This year I will not let vou down: Margins will, without 
question, shrink in 1988 and profit may fall as well. 
Skyrocketing newsprint costs will be the major cause. 
 o Fechheimer Bros. Company is another of our family 
businesses - and, like the Blumkins, what a family. Three 
generations of Heldmans have for decades consistently, built the 
sales and profits of this manufacturer and distributor of 
uniforms. In the year that Berkshire acquired its controlling 
interest in Fechheimer - 1986 - profits were a record. The 
Heldmans didn't slow down after that. Last year earnings 
increased substantially and the outlook is good for 1988. 
 There's nothing magic about the Uniform business; the only 
magic is in the Heldmans. Bob, George, Gary, Roger and Fred know 
the business inside and out, and they have fun running it. We 
are fortunate to be in partnership with them. 
 o Chuck Huggins continues to set new records at See's, just as 
he has ever since we put him in charge on the day of our purchase 
some 16 years ago. In 1987, volume hit a new high at slightly 
Under 25 million pounds. For the second year in a row, moreover, 
same-store sales, measured in pounds, were virtually unchanged. 
In case you are wondering, that represents improvement: In each 
of the previous six years, same-store sales had fallen. 
 Although we had a particularly strong 1986 Christmas season, 
we racked up better store-for-store comparisons in the 1987 
Christmas season than at any other time of the year. Thus, the 
seasonal factor at See's becomes even more extreme. In 1987, 
about 85% of our profit was earned during December. 
 Candy stores are fun to visit, but most have not been fun 
for their owners. From what we can learn, practically no one 
besides See's has made significant profits in recent years from 
the operation of candy shops. Clearly, Chuck's record at See's 
is not due to a rising industry tide. Rather, it is a one-of-a￾kind performance. 
 His achievement requires an excellent product - which we 
have - but it also requires genuine affection for the customer. 
Chuck is 100% customer-oriented, and his attitude sets the tone 
for the rest of the See's organization. 
 Here's an example of Chuck in action: At See's we regularly 
add new pieces of candy to our mix and also cull a few to keep 
our product line at about 100 varieties. Last spring we selected 
14 items for elimination. Two, it turned out, were badly missed 
by our customers, who wasted no time in letting us know what they 
thought of our judgment: "A pox on all in See's who participated 
in the abominable decision...;" "May your new truffles melt in 
transit, may they sour in people's mouths, may your costs go up 
and your profits go down...;" "We are investigating the 
possibility of obtaining a mandatory injunction requiring you to 
supply...;" You get the picture. In all, we received many hundreds of 
letters. 
 Chuck not only reintroduced the pieces, he turned this 
miscue into an opportunity. Each person who had written got a 
complete and honest explanation in return. Said Chuck's letter: 
"Fortunately, when I make poor decisions, good things often 
happen as a result...;" And with the letter went a special gift 
certificate. 
 See's increased prices only slightly in the last two years. 
In 1988 we have raised prices somewhat more, though still 
moderately. To date, sales have been weak and it may be 
difficult for See's to improve its earnings this year. 
 o World Book, Kirby, and the Scott Fetzer Manufacturing Group 
are all under the management of Ralph Schey. And what a lucky 
thing for us that they are. I told you last year that Scott 
Fetzer performance in 1986 had far exceeded the expectations that 
Charlie and I had at the time of our purchase. Results in 1987 
were even better. Pre-tax earnings rose 10% while average 
capital employed declined significantly. 
 Ralph's mastery of the 19 businesses for which he is 
responsible is truly amazing, and he has also attracted some 
outstanding managers to run them. We would love to find a few 
additional units that could be put under Ralph's wing. 
 The businesses of Scott Fetzer are too numerous to describe 
in detail. Let's just update you on one of our favorites: At the 
end of 1987, World Book introduced its most dramatically-revised 
edition since 1962. The number of color photos was increased 
from 14,000 to 24,000; over 6,000 articles were revised; 840 new 
contributors were added. Charlie and I recommend this product to 
you and your family, as we do World Book's products for younger 
children, Childcraft and Early World of Learning. 
 In 1987, World Book unit sales in the United States 
increased for the fifth consecutive year. International sales 
and profits also grew substantially. The outlook is good for 
Scott Fetzer operations in aggregate, and for World Book in 
particular. 
Insurance Operations 
 Shown below is an updated version of our usual table 
presenting key figures for the insurance industry: 
 Statutory
 Yearly Change Combined Ratio Yearly Change Inflation Rate 
 in Premiums After Policyholder in Incurred Measured by 
 Written (%) Dividends Losses (%) GNP Deflator (%)
 ------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.6 
1982 ..... 4.4 109.8 8.4 6.4 
1983 ..... 4.6 112.0 6.8 3.8 
1984 ..... 9.2 117.9 16.9 3.7 
1985 ..... 22.1 116.3 16.1 3.2 
1986 (Rev.) 22.2 108.0 13.5 2.6 
1987 (Est.) 8.7 104.7 6.8 3.0 
Source: Best's Insurance Management Reports 
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: A 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss. When the investment income that an insurer 
earns from holding on to policyholders' funds ("the float") is 
taken into account, a combined ratio in the 107-111 range 
typically produces an overall break-even result, exclusive of 
earnings on the funds provided by shareholders. 
 The math of the insurance business, encapsulated by the 
table, is not very complicated. In years when the industry's 
annual gain in revenues (premiums) pokes along at 4% or 5%, 
underwriting losses are sure to mount. That is not because auto 
accidents, fires, windstorms and the like are occurring more 
frequently, nor has it lately been the fault of general 
inflation. Today, social and judicial inflation are the major 
culprits; the cost of entering a courtroom has simply ballooned. 
Part of the jump in cost arises from skyrocketing verdicts, and 
part from the tendency of judges and juries to expand the 
coverage of insurance policies beyond that contemplated by the 
insurer when the policies were written. Seeing no let-up in 
either trend, we continue to believe that the industry's revenues 
must grow at about 10% annually for it to just hold its own in 
terms of profitability, even though general inflation may be 
running at a considerably lower rate. 
 The strong revenue gains of 1985-87 almost guaranteed the 
industry an excellent underwriting performance in 1987 and, 
indeed, it was a banner year. But the news soured as the 
quarters rolled by: Best's estimates that year-over-year volume 
increases were 12.9%, 11.1%, 5.7%, and 5.6%. In 1988, the
revenue gain is certain to be far below our 10% "equilibrium" 
figure. Clearly, the party is over. 
 However, earnings will not immediately sink. A lag factor 
exists in this industry: Because most policies are written for a 
one-year term, higher or lower insurance prices do not have their 
full impact on earnings until many months after they go into 
effect. Thus, to resume our metaphor, when the party ends and 
the bar is closed, you are allowed to finish your drink. If 
results are not hurt by a major natural catastrophe, we predict a 
small climb for the industry's combined ratio in 1988, followed 
by several years of larger increases. 
 The insurance industry is cursed with a set of dismal 
economic characteristics that make for a poor long-term outlook: 
hundreds of competitors, ease of entry, and a product that cannot 
be differentiated in any meaningful way. In such a commodity￾like business, only a very low-cost operator or someone operating 
in a protected, and usually small, niche can sustain high 
profitability levels. 
 When shortages exist, however, even commodity businesses 
flourish. The insurance industry enjoyed that kind of climate 
for a while but it is now gone. One of the ironies of capitalism 
is that most managers in commodity industries abhor shortage 
conditions - even though those are the only circumstances 
permitting them good returns. Whenever shortages appear, the 
typical manager simply can't wait to expand capacity and thereby 
plug the hole through which money is showering upon him. This is 
precisely what insurance managers did in 1985-87, confirming 
again Disraeli's observation: "What we learn from history is that 
we do not learn from history." 
 At Berkshire, we work to escape the industry's commodity 
economics in two ways. First, we differentiate our product by our 
financial strength, which exceeds that of all others in the 
industry. This strength, however, is limited in its usefulness. 
It means nothing in the personal insurance field: The buyer of 
an auto or homeowners policy is going to get his claim paid even 
if his insurer fails (as many have). It often means nothing in 
the commercial insurance arena: When times are good, many major 
corporate purchasers of insurance and their brokers pay scant 
attention to the insurer's ability to perform under the more 
adverse conditions that may exist, say, five years later when a 
complicated claim is finally resolved. (Out of sight, out of mind 
- and, later on, maybe out-of-pocket.) 
 Periodically, however, buyers remember Ben Franklin's 
observation that it is hard for an empty sack to stand upright 
and recognize their need to buy promises only from insurers that 
have enduring financial strength. It is then that we have a 
major competitive advantage. When a buyer really focuses on 
whether a $10 million claim can be easily paid by his insurer 
five or ten years down the road, and when he takes into account 
the possibility that poor underwriting conditions may then 
coincide with depressed financial markets and defaults by 
reinsurer, he will find only a few companies he can trust. 
Among those, Berkshire will lead the pack. 
 Our second method of differentiating ourselves is the total 
indifference to volume that we maintain. In 1989, we will be 
perfectly willing to write five times as much business as we 
write in 1988 - or only one-fifth as much. We hope, of course, 
that conditions will allow us large volume. But we cannot 
control market prices. If they are unsatisfactory, we will 
simply do very little business. No other major insurer acts with 
equal restraint. 
 Three conditions that prevail in insurance, but not in most 
businesses, allow us our flexibility. First, market share is not 
an important determinant of profitability: In this business, in 
contrast to the newspaper or grocery businesses, the economic 
rule is not survival of the fattest. Second, in many sectors of 
insurance, including most of those in which we operate, 
distribution channels are not proprietary and can be easily 
entered: Small volume this year does not preclude huge volume 
next year. Third, idle capacity - which in this industry largely 
means people - does not result in intolerable costs. In a way 
that industries such as printing or steel cannot, we can operate 
at quarter-speed much of the time and still enjoy long-term 
prosperity. 
 We follow a price-based-on-exposure, not-on-competition 
policy because it makes sense for our shareholders. But we're 
happy to report that it is also pro-social. This policy means 
that we are always available, given prices that we believe are 
adequate, to write huge volumes of almost any type of property￾casualty insurance. Many other insurers follow an in-and-out 
approach. When they are "out" - because of mounting losses, 
capital inadequacy, or whatever - we are available. Of course, 
when others are panting to do business we are also available - 
but at such times we often find ourselves priced above the 
market. In effect, we supply insurance buyers and brokers with a 
large reservoir of standby capacity. 
 One story from mid-1987 illustrates some consequences of our 
pricing policy: One of the largest family-owned insurance 
brokers in the country is headed by a fellow who has long been a 
shareholder of Berkshire. This man handles a number of large 
risks that are candidates for placement with our New York office. 
Naturally, he does the best he can for his clients. And, just as 
naturally, when the insurance market softened dramatically in 
1987 he found prices at other insurers lower than we were willing 
to offer. His reaction was, first, to place all of his business 
elsewhere and, second, to buy more stock in Berkshire. Had we 
been really competitive, he said, we would have gotten his 
insurance business but he would not have bought our stock. 
 Berkshire's underwriting experience was excellent in 1987, 
in part because of the lag factor discussed earlier. Our 
combined ratio (on a statutory basis and excluding structured 
settlements and financial reinsurance) was 105. Although the 
ratio was somewhat less favorable than in 1986, when it was 103, 
our profitability improved materially in 1987 because we had the 
use of far more float. This trend will continue to run in our 
favor: Our ratio of float to premium volume will increase very 
significantly during the next few years. Thus, Berkshire's 
insurance profits are quite likely to improve during 1988 and 
1989, even though we expect our combined ratio to rise. 
 Our insurance business has also made some important non￾financial gains during the last few years. Mike Goldberg, its 
manager, has assembled a group of talented professionals to write 
larger risks and unusual coverages. His operation is now well 
equipped to handle the lines of business that will occasionally 
offer us major opportunities. 
 Our loss reserve development, detailed on pages 41-42, looks 
better this year than it has previously. But we write lots of 
"long-tail" business - that is, policies generating claims that 
often take many years to resolve. Examples would be product 
liability, or directors and officers liability coverages. With a 
business mix like this, one year of reserve development tells you 
very little. 
 You should be very suspicious of any earnings figures 
reported by insurers (including our own, as we have unfortunately 
proved to you in the past). The record of the last decade shows 
that a great many of our best-known insurers have reported 
earnings to shareholders that later proved to be wildly 
erroneous. In most cases, these errors were totally innocent: 
The unpredictability of our legal system makes it impossible for 
even the most conscientious insurer to come close to judging the 
eventual cost of long-tail claims. 
 Nevertheless, auditors annually certify the numbers given 
them by management and in their opinions unqualifiedly state that 
these figures "present fairly" the financial position of their 
clients. The auditors use this reassuring language even though 
they know from long and painful experience that the numbers so 
certified are likely to differ dramatically from the true 
earnings of the period. Despite this history of error, investors 
understandably rely upon auditors' opinions. After all, a 
declaration saying that "the statements present fairly" hardly 
sounds equivocal to the non-accountant. 
 The wording in the auditor's standard opinion letter is 
scheduled to change next year. The new language represents 
improvement, but falls far short of describing the limitations of 
a casualty-insurer audit. If it is to depict the true state of 
affairs, we believe the standard opinion letter to shareholders 
of a property-casualty company should read something like: "We 
have relied upon representations of management in respect to the 
liabilities shown for losses and loss adjustment expenses, the 
estimate of which, in turn, very materially affects the earnings 
and financial condition herein reported. We can express no 
opinion about the accuracy of these figures. Subject to that 
important reservation, in our opinion, etc." 
 If lawsuits develop in respect to wildly inaccurate 
financial statements (which they do), auditors will definitely 
say something of that sort in court anyway. Why should they not 
be forthright about their role and its limitations from the 
outset? 
 We want to emphasize that we are not faulting auditors for 
their inability to accurately assess loss reserves (and therefore 
earnings). We fault them only for failing to publicly 
acknowledge that they can't do this job. 
 From all appearances, the innocent mistakes that are 
constantly made in reserving are accompanied by others that are 
deliberate. Various charlatans have enriched themselves at the 
expense of the investing public by exploiting, first, the 
inability of auditors to evaluate reserve figures and, second, 
the auditors' willingness to confidently certify those figures as 
if they had the expertise to do so. We will continue to see such 
chicanery in the future. Where "earnings" can be created by the 
stroke of a pen, the dishonest will gather. For them, long-tail 
insurance is heaven. The audit wording we suggest would at least 
serve to put investors on guard against these predators. 
 The taxes that insurance companies pay - which increased 
materially, though on a delayed basis, upon enactment of the Tax 
Reform Act of 1986 - took a further turn for the worse at the end 
of 1987. We detailed the 1986 changes in last year's report. We 
also commented on the irony of a statute that substantially 
increased 1987 reported earnings for insurers even as it 
materially reduced both their long-term earnings potential and 
their business value. At Berkshire, the temporarily-helpful 
"fresh start" adjustment inflated 1987 earnings by $8.2 million. 
 In our opinion, the 1986 Act was the most important economic 
event affecting the insurance industry over the past decade. The 
1987 Bill further reduced the intercorporate dividends-received 
credit from 80% to 70%, effective January 1, 1988, except for 
cases in which the taxpayer owns at least 20% of an investee. 
 Investors who have owned stocks or bonds through corporate 
intermediaries other than qualified investment companies have 
always been disadvantaged in comparison to those owning the same 
securities directly. The penalty applying to indirect ownership 
was greatly increased by the 1986 Tax Bill and, to a lesser 
extent, by the 1987 Bill, particularly in instances where the 
intermediary is an insurance company. We have no way of 
offsetting this increased level of taxation. It simply means 
that a given set of pre-tax investment returns will now translate 
into much poorer after-tax results for our shareholders. 
 All in all, we expect to do well in the insurance business, 
though our record is sure to be uneven. The immediate outlook is 
for substantially lower volume but reasonable earnings 
improvement. The decline in premium volume will accelerate after 
our quota-share agreement with Fireman's Fund expires in 1989. 
At some point, likely to be at least a few years away, we may see 
some major opportunities, for which we are now much better 
prepared than we were in 1985. 
Marketable Securities - Permanent Holdings
 Whenever Charlie and I buy common stocks for Berkshire's 
insurance companies (leaving aside arbitrage purchases, discussed 
later) we approach the transaction as if we were buying into a 
private business. We look at the economic prospects of the 
business, the people in charge of running it, and the price we 
must pay. We do not have in mind any time or price for sale. 
Indeed, we are willing to hold a stock indefinitely so long as we 
expect the business to increase in intrinsic value at a 
satisfactory rate. When investing, we view ourselves as business 
analysts - not as market analysts, not as macroeconomic analysts, 
and not even as security analysts. 
 Our approach makes an active trading market useful, since it 
periodically presents us with mouth-watering opportunities. But 
by no means is it essential: a prolonged suspension of trading in 
the securities we hold would not bother us any more than does the 
lack of daily quotations on World Book or Fechheimer. 
Eventually, our economic fate will be determined by the economic 
fate of the business we own, whether our ownership is partial or 
total. 
 Ben Graham, my friend and teacher, long ago described the 
mental attitude toward market fluctuations that I believe to be 
most conducive to investment success. He said that you should 
imagine market quotations as coming from a remarkably 
accommodating fellow named Mr. Market who is your partner in a 
private business. Without fail, Mr. Market appears daily and 
names a price at which he will either buy your interest or sell 
you his. 
 Even though the business that the two of you own may have 
economic characteristics that are stable, Mr. Market's quotations 
will be anything but. For, sad to say, the poor fellow has 
incurable emotional problems. At times he feels euphoric and can 
see only the favorable factors affecting the business. When in 
that mood, he names a very high buy-sell price because he fears 
that you will snap up his interest and rob him of imminent gains. 
At other times he is depressed and can see nothing but trouble 
ahead for both the business and the world. On these occasions he 
will name a very low price, since he is terrified that you will 
unload your interest on him. 
 Mr. Market has another endearing characteristic: He doesn't 
mind being ignored. If his quotation is uninteresting to you 
today, he will be back with a new one tomorrow. Transactions are 
strictly at your option. Under these conditions, the more manic￾depressive his behavior, the better for you. 
 But, like Cinderella at the ball, you must heed one warning 
or everything will turn into pumpkins and mice: Mr. Market is 
there to serve you, not to guide you. It is his pocketbook, not 
his wisdom, that you will find useful. If he shows up some day 
in a particularly foolish mood, you are free to either ignore him 
or to take advantage of him, but it will be disastrous if you 
fall under his influence. Indeed, if you aren't certain that you 
understand and can value your business far better than Mr. 
Market, you don't belong in the game. As they say in poker, "If 
you've been in the game 30 minutes and you don't know who the 
patsy is, you're the patsy." 
 Ben's Mr. Market allegory may seem out-of-date in today's 
investment world, in which most professionals and academicians 
talk of efficient markets, dynamic hedging and betas. Their 
interest in such matters is understandable, since techniques 
shrouded in mystery clearly have value to the purveyor of 
investment advice. After all, what witch doctor has ever 
achieved fame and fortune by simply advising "Take two aspirins"? 
 The value of market esoterica to the consumer of investment 
advice is a different story. In my opinion, investment success 
will not be produced by arcane formulae, computer programs or 
signals flashed by the price behavior of stocks and markets. 
Rather an investor will succeed by coupling good business 
judgment with an ability to insulate his thoughts and behavior 
from the super-contagious emotions that swirl about the 
marketplace. In my own efforts to stay insulated, I have found 
it highly useful to keep Ben's Mr. Market concept firmly in mind. 
 Following Ben's teachings, Charlie and I let our marketable 
equities tell us by their operating results - not by their daily, 
or even yearly, price quotations - whether our investments are 
successful. The market may ignore business success for a while, 
but eventually will confirm it. As Ben said: "In the short run, 
the market is a voting machine but in the long run it is a 
weighing machine." The speed at which a business's success is 
recognized, furthermore, is not that important as long as the 
company's intrinsic value is increasing at a satisfactory rate. 
In fact, delayed recognition can be an advantage: It may give us 
the chance to buy more of a good thing at a bargain price. 
 Sometimes, of course, the market may judge a business to be 
more valuable than the underlying facts would indicate it is. In 
such a case, we will sell our holdings. Sometimes, also, we will 
sell a security that is fairly valued or even undervalued because 
we require funds for a still more undervalued investment or one 
we believe we understand better. 
 We need to emphasize, however, that we do not sell holdings 
just because they have appreciated or because we have held them 
for a long time. (Of Wall Street maxims the most foolish may be 
"You can't go broke taking a profit.") We are quite content to 
hold any security indefinitely, so long as the prospective return 
on equity capital of the underlying business is satisfactory, 
management is competent and honest, and the market does not 
overvalue the business. 
 However, our insurance companies own three marketable common 
stocks that we would not sell even though they became far 
overpriced in the market. In effect, we view these investments 
exactly like our successful controlled businesses - a permanent 
part of Berkshire rather than merchandise to be disposed of once 
Mr. Market offers us a sufficiently high price. To that, I will 
add one qualifier: These stocks are held by our insurance 
companies and we would, if absolutely necessary, sell portions of 
our holdings to pay extraordinary insurance losses. We intend, 
however, to manage our affairs so that sales are never required. 
 A determination to have and to hold, which Charlie and I 
share, obviously involves a mixture of personal and financial 
considerations. To some, our stand may seem highly eccentric. 
(Charlie and I have long followed David Oglivy's advice: "Develop 
your eccentricities while you are young. That way, when you get 
old, people won't think you're going ga-ga.") Certainly, in the 
transaction-fixated Wall Street of recent years, our posture must 
seem odd: To many in that arena, both companies and stocks are 
seen only as raw material for trades. 
 Our attitude, however, fits our personalities and the way we 
want to live our lives. Churchill once said, "You shape your 
houses and then they shape you." We know the manner in which we 
wish to be shaped. For that reason, we would rather achieve a 
return of X while associating with people whom we strongly like 
and admire than realize 110% of X by exchanging these 
relationships for uninteresting or unpleasant ones. And we will 
never find people we like and admire more than some of the main 
participants at the three companies - our permanent holdings - 
shown below: 
No. of Shares Cost Market
------------- ---------- ----------
 (000s omitted) 
 3,000,000 Capital Cities/ABC, Inc. ........... $517,500 $1,035,000 
 6,850,000 GEICO Corporation .................. 45,713 756,925 
 1,727,765 The Washington Post Company ........ 9,731 323,092 
 We really don't see many fundamental differences between the 
purchase of a controlled business and the purchase of marketable 
holdings such as these. In each case we try to buy into 
businesses with favorable long-term economics. Our goal is to 
find an outstanding business at a sensible price, not a mediocre 
business at a bargain price. Charlie and I have found that 
making silk purses out of silk is the best that we can do; with 
sow's ears, we fail. 
 (It must be noted that your Chairman, always a quick study, 
required only 20 years to recognize how important it was to buy 
good businesses. In the interim, I searched for "bargains" - and 
had the misfortune to find some. My punishment was an education 
in the economics of short-line farm implement manufacturers, 
third-place department stores, and New England textile 
manufacturers.) 
 Of course, Charlie and I may misread the fundamental 
economics of a business. When that happens, we will encounter 
problems whether that business is a wholly-owned subsidiary or a 
marketable security, although it is usually far easier to exit 
from the latter. (Indeed, businesses can be misread: Witness the 
European reporter who, after being sent to this country to 
profile Andrew Carnegie, cabled his editor, "My God, you'll never 
believe the sort of money there is in running libraries.") 
 In making both control purchases and stock purchases, we try 
to buy not only good businesses, but ones run by high-grade, 
talented and likeable managers. If we make a mistake about the 
managers we link up with, the controlled company offers a certain 
advantage because we have the power to effect change. In 
practice, however, this advantage is somewhat illusory: 
Management changes, like marital changes, are painful, time￾consuming and chancy. In any event, at our three marketable-but 
permanent holdings, this point is moot: With Tom Murphy and Dan 
Burke at Cap Cities, Bill Snyder and Lou Simpson at GEICO, and 
Kay Graham and Dick Simmons at The Washington Post, we simply 
couldn't be in better hands. 
 I would say that the controlled company offers two main 
advantages. First, when we control a company we get to allocate 
capital, whereas we are likely to have little or nothing to say 
about this process with marketable holdings. This point can be 
important because the heads of many companies are not skilled in 
capital allocation. Their inadequacy is not surprising. Most 
bosses rise to the top because they have excelled in an area such 
as marketing, production, engineering, administration or, 
sometimes, institutional politics. 
 Once they become CEOs, they face new responsibilities. They 
now must make capital allocation decisions, a critical job that 
they may have never tackled and that is not easily mastered. To 
stretch the point, it's as if the final step for a highly￾talented musician was not to perform at Carnegie Hall but, 
instead, to be named Chairman of the Federal Reserve. 
 The lack of skill that many CEOs have at capital allocation 
is no small matter: After ten years on the job, a CEO whose 
company annually retains earnings equal to 10% of net worth will 
have been responsible for the deployment of more than 60% of all 
the capital at work in the business. 
 CEOs who recognize their lack of capital-allocation skills 
(which not all do) will often try to compensate by turning to 
their staffs, management consultants, or investment bankers. 
Charlie and I have frequently observed the consequences of such 
"help." On balance, we feel it is more likely to accentuate the 
capital-allocation problem than to solve it. 
 In the end, plenty of unintelligent capital allocation takes 
place in corporate America. (That's why you hear so much about 
"restructuring.") Berkshire, however, has been fortunate. At the 
companies that are our major non-controlled holdings, capital has 
generally been well-deployed and, in some cases, brilliantly so. 
 The second advantage of a controlled company over a 
marketable security has to do with taxes. Berkshire, as a 
corporate holder, absorbs some significant tax costs through the 
ownership of partial positions that we do not when our ownership 
is 80%, or greater. Such tax disadvantages have long been with 
us, but changes in the tax code caused them to increase 
significantly during the past year. As a consequence, a given 
business result can now deliver Berkshire financial results that 
are as much as 50% better if they come from an 80%-or-greater 
holding rather than from a lesser holding. 
 The disadvantages of owning marketable securities are 
sometimes offset by a huge advantage: Occasionally the stock 
market offers us the chance to buy non-controlling pieces of 
extraordinary businesses at truly ridiculous prices - 
dramatically below those commanded in negotiated transactions 
that transfer control. For example, we purchased our Washington 
Post stock in 1973 at $5.63 per share, and per-share operating 
earnings in 1987 after taxes were $10.30. Similarly, Our GEICO 
stock was purchased in 1976, 1979 and 1980 at an average of $6.67 
per share, and after-tax operating earnings per share last year 
were $9.01. In cases such as these, Mr. Market has proven to be a 
mighty good friend. 
 An interesting accounting irony overlays a comparison of the 
reported financial results of our controlled companies with those 
of the permanent minority holdings listed above. As you can see, 
those three stocks have a market value of over $2 billion. Yet 
they produced only $11 million in reported after-tax earnings for 
Berkshire in 1987. 
 Accounting rules dictate that we take into income only the 
dividends these companies pay us - which are little more than 
nominal - rather than our share of their earnings, which in 1987 
amounted to well over $100 million. On the other hand, 
accounting rules provide that the carrying value of these three 
holdings - owned, as they are, by insurance companies - must be 
recorded on our balance sheet at current market prices. The 
result: GAAP accounting lets us reflect in our net worth the up￾to-date underlying values of the businesses we partially own, but 
does not let us reflect their underlying earnings in our income 
account. 
 In the case of our controlled companies, just the opposite 
is true. Here, we show full earnings in our income account but 
never change asset values on our balance sheet, no matter how 
much the value of a business might have increased since we 
purchased it. 
 Our mental approach to this accounting schizophrenia is to 
ignore GAAP figures and to focus solely on the future earning 
power of both our controlled and non-controlled businesses. 
Using this approach, we establish our own ideas of business 
value, keeping these independent from both the accounting values 
shown on our books for controlled companies and the values placed 
by a sometimes foolish market on our partially-owned companies. 
It is this business value that we hope to increase at a 
reasonable (or, preferably, unreasonable) rate in the years 
ahead. 
Marketable Securities - Other
 In addition to our three permanent common stock holdings, we 
hold large quantities of marketable securities in our insurance 
companies. In selecting these, we can choose among five major 
categories: (1) long-term common stock investments, (2) medium￾term fixed-income securities, (3) long-term fixed income 
securities, (4) short-term cash equivalents, and (5) short-term 
arbitrage commitments. 
 We have no particular bias when it comes to choosing from 
these categories. We just continuously search among them for the 
highest after-tax returns as measured by "mathematical 
expectation," limiting ourselves always to investment 
alternatives we think we understand. Our criteria have nothing 
to do with maximizing immediately reportable earnings; our goal, 
rather, is to maximize eventual net worth. 
 o Let's look first at common stocks. During 1987 the stock 
market was an area of much excitement but little net movement: 
The Dow advanced 2.3% for the year. You are aware, of course, of 
the roller coaster ride that produced this minor change. Mr. 
Market was on a manic rampage until October and then experienced 
a sudden, massive seizure. 
 We have "professional" investors, those who manage many 
billions, to thank for most of this turmoil. Instead of focusing 
on what businesses will do in the years ahead, many prestigious 
money managers now focus on what they expect other money managers 
to do in the days ahead. For them, stocks are merely tokens in a 
game, like the thimble and flatiron in Monopoly. 
 An extreme example of what their attitude leads to is 
"portfolio insurance," a money-management strategy that many 
leading investment advisors embraced in 1986-1987. This strategy 
- which is simply an exotically-labeled version of the small 
speculator's stop-loss order dictates that ever increasing 
portions of a stock portfolio, or their index-future equivalents, 
be sold as prices decline. The strategy says nothing else 
matters: A downtick of a given magnitude automatically produces a 
huge sell order. According to the Brady Report, $60 billion to 
$90 billion of equities were poised on this hair trigger in mid￾October of 1987. 
 If you've thought that investment advisors were hired to 
invest, you may be bewildered by this technique. After buying a 
farm, would a rational owner next order his real estate agent to 
start selling off pieces of it whenever a neighboring property 
was sold at a lower price? Or would you sell your house to 
whatever bidder was available at 9:31 on some morning merely 
because at 9:30 a similar house sold for less than it would have 
brought on the previous day? 
 Moves like that, however, are what portfolio insurance tells 
a pension fund or university to make when it owns a portion of 
enterprises such as Ford or General Electric. The less these 
companies are being valued at, says this approach, the more 
vigorously they should be sold. As a "logical" corollary, the 
approach commands the institutions to repurchase these companies 
- I'm not making this up - once their prices have rebounded 
significantly. Considering that huge sums are controlled by 
managers following such Alice-in-Wonderland practices, is it any 
surprise that markets sometimes behave in aberrational fashion? 
 Many commentators, however, have drawn an incorrect 
conclusion upon observing recent events: They are fond of saying 
that the small investor has no chance in a market now dominated 
by the erratic behavior of the big boys. This conclusion is dead 
wrong: Such markets are ideal for any investor - small or large - 
so long as he sticks to his investment knitting. Volatility 
caused by money managers who speculate irrationally with huge 
sums will offer the true investor more chances to make 
intelligent investment moves. He can be hurt by such volatility 
only if he is forced, by either financial or psychological 
pressures, to sell at untoward times. 
 At Berkshire, we have found little to do in stocks during 
the past few years. During the break in October, a few stocks 
fell to prices that interested us, but we were unable to make 
meaningful purchases before they rebounded. At yearend 1987 we 
had no major common stock investments (that is, over $50 million) 
other than those we consider permanent or arbitrage holdings. 
However, Mr. Market will offer us opportunities - you can be sure 
of that - and, when he does, we will be willing and able to 
participate. 
 o In the meantime, our major parking place for money is 
medium-term tax-exempt bonds, whose limited virtues I explained 
in last year's annual report. Though we both bought and sold 
some of these bonds in 1987, our position changed little overall, 
holding around $900 million. A large portion of our bonds are 
"grandfathered" under the Tax Reform Act of 1986, which means 
they are fully tax-exempt. Bonds currently purchased by 
insurance companies are not. 
 As an alternative to short-term cash equivalents, our 
medium-term tax-exempts have - so far served us well. They have 
produced substantial extra income for us and are currently worth 
a bit above our cost. Regardless of their market price, we are 
ready to dispose of our bonds whenever something better comes 
along. 
 o We continue to have an aversion to long-term bonds (and may 
be making a serious mistake by not disliking medium-term bonds as 
well). Bonds are no better than the currency in which they are 
denominated, and nothing we have seen in the past year - or past 
decade - makes us enthusiastic about the long-term future of U.S. 
currency. 
 Our enormous trade deficit is causing various forms of 
"claim checks" - U.S. government and corporate bonds, bank 
deposits, etc. - to pile up in the hands of foreigners at a 
distressing rate. By default, our government has adopted an 
approach to its finances patterned on that of Blanche DuBois, of 
A Streetcar Named Desire, who said, "I have always depended on 
the kindness of strangers." In this case, of course, the 
"strangers" are relying on the integrity of our claim checks 
although the plunging dollar has already made that proposition 
expensive for them. 
 The faith that foreigners are placing in us may be 
misfounded. When the claim checks outstanding grow sufficiently 
numerous and when the issuing party can unilaterally determine 
their purchasing power, the pressure on the issuer to dilute 
their value by inflating the currency becomes almost 
irresistible. For the debtor government, the weapon of inflation 
is the economic equivalent of the "H" bomb, and that is why very 
few countries have been allowed to swamp the world with debt 
denominated in their own currency. Our past, relatively good 
record for fiscal integrity has let us break this rule, but the 
generosity accorded us is likely to intensify, rather than 
relieve, the eventual pressure on us to inflate. If we do 
succumb to that pressure, it won't be just the foreign holders of 
our claim checks who will suffer. It will be all of us as well. 
 Of course, the U.S. may take steps to stem our trade deficit 
well before our position as a net debtor gets out of hand. (In 
that respect, the falling dollar will help, though unfortunately 
it will hurt in other ways.) Nevertheless, our government's 
behavior in this test of its mettle is apt to be consistent with 
its Scarlett O'Hara approach generally: "I'll think about it 
tomorrow." And, almost inevitably, procrastination in facing up 
to fiscal problems will have inflationary consequences. 
 Both the timing and the sweep of those consequences are 
unpredictable. But our inability to quantify or time the risk 
does not mean we should ignore it. While recognizing the 
possibility that we may be wrong and that present interest rates 
may adequately compensate for the inflationary risk, we retain a 
general fear of long-term bonds. 
 We are, however, willing to invest a moderate portion of our 
funds in this category if we think we have a significant edge in 
a specific security. That willingness explains our holdings of 
the Washington Public Power Supply Systems #1, #2 and #3 issues, 
discussed in our 1984 report. We added to our WPPSS position 
during 1987. At yearend, we had holdings with an amortized cost 
of $240 million and a market value of $316 million, paying us 
tax-exempt income of $34 million annually. 
 o We continued to do well in arbitrage last year, though - or 
perhaps because - we operated on a very limited scale. We enter 
into only a few arbitrage commitments each year and restrict 
ourselves to large transactions that have been publicly 
announced. We do not participate in situations in which green￾mailers are attempting to put a target company "in play." 
 We have practiced arbitrage on an opportunistic basis for 
decades and, to date, our results have been quite good. Though 
we've never made an exact calculation, I believe that overall we 
have averaged annual pre-tax returns of at least 25% from 
arbitrage. I'm quite sure we did better than that in 1987. But 
it should be emphasized that a really bad experience or two - 
such as many arbitrage operations suffered in late 1987 - could 
change the figures dramatically. 
 Our only $50 million-plus arbitrage position at yearend 1987 
was 1,096,200 shares of Allegis, with a cost of $76 million and a 
market value of $78 million. 
 o We had two other large holdings at yearend that do not fit 
precisely into any of our five categories. One was various 
Texaco, Inc. bonds with short maturities, all purchased after 
Texaco went into bankruptcy. Were it not for the extraordinarily 
strong capital position of our insurance companies, it would be 
inappropriate for us to buy defaulted bonds. At prices 
prevailing after Texaco's bankruptcy filing, however, we regarded 
these issues as by far the most attractive bond investment 
available to us. 
 On a worst-case basis with respect to the Pennzoil 
litigation, we felt the bonds were likely to be worth about what 
we paid for them. Given a sensible settlement, which seemed 
likely, we expected the bonds to be worth considerably more. At 
yearend our Texaco bonds were carried on our books at $104 
million and had a market value of $119 million. 
 By far our largest - and most publicized - investment in 
1987 was a $700 million purchase of Salomon Inc 9% preferred 
stock. This preferred is convertible after three years into 
Salomon common stock at $38 per share and, if not converted, will 
be redeemed ratably over five years beginning October 31, 1995. 
From most standpoints, this commitment fits into the medium-term 
fixed-income securities category. In addition, we have an 
interesting conversion possibility. 
 We, of course, have no special insights regarding the 
direction or future profitability of investment banking. By 
their nature, the economics of this industry are far less 
predictable than those of most other industries in which we have 
major Commitments. This unpredictability is one of the reasons 
why our participation is in the form of a convertible preferred. 
 What we do have a strong feeling about is the ability and 
integrity of John Gutfreund, CEO of Salomon Inc. Charlie and I 
like, admire and trust John. We first got to know him in 1976 
when he played a key role in GEICO's escape from near-bankruptcy. 
Several times since, we have seen John steer clients away from 
transactions that would have been unwise, but that the client 
clearly wanted to make - even though his advice provided no fee 
to Salomon and acquiescence would have delivered a large fee. 
Such service-above-self behavior is far from automatic in Wall 
Street. 
 For the reasons Charlie outlines on page 50, at yearend we 
valued our Salomon investment at 98% of par, $14 million less 
than our cost. However, we believe there is a reasonable 
likelihood that a leading, high-quality capital-raising and 
market-making operation can average good returns on equity. If 
so, our conversion right will eventually prove to be valuable. 
 Two further comments about our investments in marketable 
securities are appropriate. First, we give you our usual 
warning: Our holdings have changed since yearend and will 
continue to do so without notice. 
 The second comment is related: During 1987, as in some 
earlier years, there was speculation in the press from time to 
time about our purchase or sale of various securities. These 
stories were sometimes true, sometimes partially true, and other 
times completely untrue. Interestingly, there has been no 
correlation between the size and prestige of the publication and 
the accuracy of the report. One dead-wrong rumor was given 
considerable prominence by a major national magazine, and another 
leading publication misled its readers by writing about an 
arbitrage position as if it were a long-term investment 
commitment. (In not naming names, I am observing the old warning 
that it's not wise to pick fights with people who buy ink by the 
barrel.) 
 You should understand that we simply don't comment in any 
way on rumors, whether they are true or false. If we were to 
deny the incorrect reports and refuse comment on the correct 
ones, we would in effect be commenting on all. 
 In a world in which big investment ideas are both limited 
and valuable, we have no interest in telling potential 
competitors what we are doing except to the extent required by 
law. We certainly don't expect others to tell us of their 
investment ideas. Nor would we expect a media company to 
disclose news of acquisitions it was privately pursuing or a 
journalist to tell his competitors about stories on which he is 
working or sources he is using. 
 I find it uncomfortable when friends or acquaintances 
mention that they are buying X because it has been reported - 
incorrectly - that Berkshire is a buyer. However, I do not set 
them straight. If they want to participate in whatever Berkshire 
actually is buying, they can always purchase Berkshire stock. 
But perhaps that is too simple. Usually, I suspect, they find it 
more exciting to buy what is being talked about. Whether that 
strategy is more profitable is another question. 
Financing
 Shortly after yearend, Berkshire sold two issues of 
debentures, totaling $250 million. Both issues mature in 2018 
and will be retired at an even pace through sinking fund 
operations that begin in 1999. Our overall interest cost, after 
allowing for expenses of issuance, is slightly over 10%. Salomon 
was our investment banker, and its service was excellent. 
 Despite our pessimistic views about inflation, our taste for 
debt is quite limited. To be sure, it is likely that Berkshire 
could improve its return on equity by moving to a much higher, 
though still conventional, debt-to-business-value ratio. It's 
even more likely that we could handle such a ratio, without 
problems, under economic conditions far worse than any that have 
prevailed since the early 1930s. 
 But we do not wish it to be only likely that we can meet our 
obligations; we wish that to be certain. Thus we adhere to 
policies - both in regard to debt and all other matters - that 
will allow us to achieve acceptable long-term results under 
extraordinarily adverse conditions, rather than optimal results 
under a normal range of conditions. 
 Good business or investment decisions will eventually 
produce quite satisfactory economic results, with no aid from 
leverage. Therefore, it seems to us to be both foolish and 
improper to risk what is important (including, necessarily, the 
welfare of innocent bystanders such as policyholders and 
employees) for some extra returns that are relatively 
unimportant. This view is not the product of either our 
advancing age or prosperity: Our opinions about debt have 
remained constant. 
 However, we are not phobic about borrowing. (We're far from 
believing that there is no fate worse than debt.) We are willing 
to borrow an amount that we believe - on a worst-case basis - 
will pose no threat to Berkshire's well-being. Analyzing what 
that amount might be, we can look to some important strengths 
that would serve us well if major problems should engulf our 
economy: Berkshire's earnings come from many diverse and well￾entrenched businesses; these businesses seldom require much 
capital investment; what debt we have is structured well; and we 
maintain major holdings of liquid assets. Clearly, we could be 
comfortable with a higher debt-to-business-value ratio than we 
now have. 
 One further aspect of our debt policy deserves comment: 
Unlike many in the business world, we prefer to finance in 
anticipation of need rather than in reaction to it. A business 
obtains the best financial results possible by managing both 
sides of its balance sheet well. This means obtaining the 
highest-possible return on assets and the lowest-possible cost on 
liabilities. It would be convenient if opportunities for 
intelligent action on both fronts coincided. However, reason 
tells us that just the opposite is likely to be the case: Tight 
money conditions, which translate into high costs for 
liabilities, will create the best opportunities for acquisitions, 
and cheap money will cause assets to be bid to the sky. Our 
conclusion: Action on the liability side should sometimes be 
taken independent of any action on the asset side. 
 Alas, what is "tight" and "cheap" money is far from clear at 
any particular time. We have no ability to forecast interest 
rates and - maintaining our usual open-minded spirit - believe 
that no one else can. Therefore, we simply borrow when 
conditions seem non-oppressive and hope that we will later find 
intelligent expansion or acquisition opportunities, which - as we 
have said - are most likely to pop up when conditions in the debt 
market are clearly oppressive. Our basic principle is that if 
you want to shoot rare, fast-moving elephants, you should always 
carry a loaded gun. 
 Our fund-first, buy-or-expand-later policy almost always 
penalizes near-term earnings. For example, we are now earning 
about 6 1/2% on the $250 million we recently raised at 10%, a 
disparity that is currently costing us about $160,000 per week. 
This negative spread is unimportant to us and will not cause us 
to stretch for either acquisitions or higher-yielding short-term 
instruments. If we find the right sort of business elephant 
within the next five years or so, the wait will have been 
worthwhile. 
Miscellaneous 
 We hope to buy more businesses that are similar to the ones 
we have, and we can use some help. If you have a business that 
fits the following criteria, call me or, preferably, write. 
 Here's what we're looking for: 
 (1) large purchases (at least $10 million of after-tax 
 earnings), 
 (2) demonstrated consistent earning power (future 
 projections are of little interest to us, nor are 
 "turnaround" situations), 
 (3) businesses earning good returns on equity while 
 employing little or no debt, 
 (4) management in place (we can't supply it), 
 (5) simple businesses (if there's lots of technology, 
 we won't understand it), 
 (6) an offering price (we don't want to waste our time 
 or that of the seller by talking, even preliminarily, 
 about a transaction when price is unknown). 
 We will not engage in unfriendly takeovers. We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we're interested. We prefer 
to buy for cash, but will consider issuing stock when we receive 
as much in intrinsic business value as we give. We invite 
potential sellers to check us out by contacting people with whom 
we have done business in the past. For the right business - and 
the right people - we can provide a good home. 
 On the other hand, we frequently get approached about 
acquisitions that don't come close to meeting our tests: new 
ventures, turnarounds, auction-like sales, and the ever-popular 
(among brokers) "I'm-sure-something-will-work-out-if-you-people￾get-to-know-each-other." None of these attracts us in the least. 
 Besides being interested in the purchases of entire 
businesses as described above, we are also interested in the 
negotiated purchase of large, but not controlling, blocks of 
stock comparable to those we hold in Cap Cities and Salomon. We 
have a special interest in purchasing convertible preferreds as a 
long-term investment, as we did at Salomon. 
 * * * 
 And now a bit of deja vu. Most of Berkshire's major 
stockholders received their shares at yearend 1969 in a 
liquidating distribution from Buffett Partnership, Ltd. Some of 
these former partners will remember that in 1962 I encountered 
severe managerial problems at Dempster Mill Manufacturing Co., a 
pump and farm implement manufacturing company that BPL 
controlled. 
 At that time, like now, I went to Charlie with problems that 
were too tough for me to solve. Charlie suggested the solution 
might lie in a California friend of his, Harry Bottle, whose 
special knack was never forgetting the fundamental. I met Harry 
in Los Angeles on April 17, 1962, and on April 23 he was in 
Beatrice, Nebraska, running Dempster. Our problems disappeared 
almost immediately. In my 1962 annual letter to partners, I 
named Harry "Man of the Year." 
 Fade to 24 years later: The scene is K & W Products, a small 
Berkshire subsidiary that produces automotive compounds. For 
years K & W did well, but in 1985-86 it stumbled badly, as it 
pursued the unattainable to the neglect of the achievable. 
Charlie, who oversees K & W, knew there was no need to consult 
me. Instead, he called Harry, now 68 years old, made him CEO, 
and sat back to await the inevitable. He didn't wait long. In 
1987 K & W's profits set a record, up more than 300% from 1986. 
And, as profits went up, capital employed went down: K & W's 
investment in accounts receivable and inventories has decreased 
20%. 
 If we run into another managerial problem ten or twenty 
years down the road, you know whose phone will ring. 
 * * * 
 About 97.2% of all eligible shares participated in 
Berkshire's 1987 shareholder-designated contributions program. 
Contributions made through the program were $4.9 million, and 
2,050 charities were recipients. 
 A recent survey reported that about 50% of major American 
companies match charitable contributions made by directors 
(sometimes by a factor of three to one). In effect, these 
representatives of the owners direct funds to their favorite 
charities, and never consult the owners as to their charitable 
preferences. (I wonder how they would feel if the process were 
reversed and shareholders could invade the directors' pockets for 
charities favored by the shareholders.) When A takes money from B 
to give to C and A is a legislator, the process is called 
taxation. But when A is an officer or director of a corporation, 
it is called philanthropy. We continue to believe that 
contributions, aside from those with quite clear direct benefits 
to the company, should reflect the charitable preferences of 
owners rather than those of officers and directors. 
 We urge new shareholders to read the description of our 
shareholder-designated contributions program that appears on 
pages 54 and 55. If you wish to participate in future programs, 
we strongly urge that you immediately make sure your shares are 
registered in the name of the actual owner, not in "street" name 
or nominee name. Shares not so registered on September 30, l988 
will be ineligible for the 1988 program. 
 * * * 
 Last year we again had about 450 shareholders at our annual 
meeting. The 60 or so questions they asked were, as always, 
excellent. At many companies, the annual meeting is a waste of 
time because exhibitionists turn it into a sideshow. Ours, 
however, is different. It is informative for shareholders and 
fun for us. (At Berkshire's meetings, the exhibitionists are on 
the dais.) 
 This year our meeting will be on May 23, 1988 in Omaha, and 
we hope that you come. The meeting provides the forum for you to 
ask any owner-related questions you may have, and we will keep 
answering until all (except those dealing with portfolio 
activities or other proprietary information) have been dealt 
with. 
 Last year we rented two buses - for $100 - to take 
shareholders interested in the trip to the Furniture Mart. Your 
actions demonstrated your good judgment: You snapped up about 
$40,000 of bargains. Mrs. B regards this expense/sales ratio as 
on the high side and attributes it to my chronic inattention to 
costs and generally sloppy managerial practices. But, gracious 
as always, she has offered me another chance and we will again 
have buses available following the meeting. Mrs. B says you must 
beat last year's sales figures, and I have told her she won't be 
disappointed. 
 Warren E. Buffett 
February 29, 1988 Chairman of the Board 
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1988 was $569 million, or 
20.0%. Over the last 24 years (that is, since present management 
took over), our per-share book value has grown from $19.46 to 
$2,974.52, or at a rate of 23.0% compounded annually.
 We’ve emphasized in past reports that what counts, however, 
is intrinsic business value - the figure, necessarily an 
estimate, indicating what all of our constituent businesses are 
worth. By our calculations, Berkshire’s intrinsic business value 
significantly exceeds its book value. Over the 24 years, 
business value has grown somewhat faster than book value; in 
1988, however, book value grew the faster, by a bit.
 Berkshire’s past rates of gain in both book value and 
business value were achieved under circumstances far different 
from those that now exist. Anyone ignoring these differences 
makes the same mistake that a baseball manager would were he to 
judge the future prospects of a 42-year-old center fielder on the 
basis of his lifetime batting average.
 Important negatives affecting our prospects today are: (1) a 
less attractive stock market than generally existed over the past 
24 years; (2) higher corporate tax rates on most forms of 
investment income; (3) a far more richly-priced market for the 
acquisition of businesses; and (4) industry conditions for 
Capital Cities/ABC, Inc., GEICO Corporation, and The Washington 
Post Company - Berkshire’s three permanent investments, 
constituting about one-half of our net worth - that range from 
slightly to materially less favorable than those existing five to 
ten years ago. All of these companies have superb management and 
strong properties. But, at current prices, their upside 
potential looks considerably less exciting to us today than it 
did some years ago.
 The major problem we face, however, is a growing capital 
base. You’ve heard that from us before, but this problem, like 
age, grows in significance each year. (And also, just as with 
age, it’s better to have this problem continue to grow rather 
than to have it “solved.”)
 Four years ago I told you that we needed profits of $3.9 
billion to achieve a 15% annual return over the decade then 
ahead. Today, for the next decade, a 15% return demands profits 
of $10.3 billion. That seems like a very big number to me and to 
Charlie Munger, Berkshire’s Vice Chairman and my partner. (Should 
that number indeed prove too big, Charlie will find himself, in 
future reports, retrospectively identified as the senior 
partner.)
 As a partial offset to the drag that our growing capital 
base exerts upon returns, we have a very important advantage now 
that we lacked 24 years ago. Then, all our capital was tied up 
in a textile business with inescapably poor economic 
characteristics. Today part of our capital is invested in some 
really exceptional businesses.
 Last year we dubbed these operations the Sainted Seven: 
Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott 
Fetzer Manufacturing Group, See’s, and World Book. In 1988 the 
Saints came marching in. You can see just how extraordinary 
their returns on capital were by examining the historical-cost 
financial statements on page 45, which combine the figures of the 
Sainted Seven with those of several smaller units. With no 
benefit from financial leverage, this group earned about 67% on 
average equity capital.
 In most cases the remarkable performance of these units 
arises partially from an exceptional business franchise; in all 
cases an exceptional management is a vital factor. The 
contribution Charlie and I make is to leave these managers alone.
 In my judgment, these businesses, in aggregate, will 
continue to produce superb returns. We’ll need these: Without 
this help Berkshire would not have a chance of achieving our 15% 
goal. You can be sure that our operating managers will deliver; 
the question mark in our future is whether Charlie and I can 
effectively employ the funds that they generate.
 In that respect, we took a step in the right direction early 
in 1989 when we purchased an 80% interest in Borsheim’s, a 
jewelry business in Omaha. This purchase, described later in 
this letter, delivers exactly what we look for: an outstanding 
business run by people we like, admire, and trust. It’s a great 
way to start the year.
Accounting Changes
 We have made a significant accounting change that was 
mandated for 1988, and likely will have another to make in 1990. 
When we move figures around from year to year, without any change 
in economic reality, one of our always-thrilling discussions of 
accounting is necessary.
 First, I’ll offer my customary disclaimer: Despite the 
shortcomings of generally accepted accounting principles (GAAP), 
I would hate to have the job of devising a better set of rules. 
The limitations of the existing set, however, need not be 
inhibiting: CEOs are free to treat GAAP statements as a beginning 
rather than an end to their obligation to inform owners and 
creditors - and indeed they should. After all, any manager of a 
subsidiary company would find himself in hot water if he reported 
barebones GAAP numbers that omitted key information needed by his 
boss, the parent corporation’s CEO. Why, then, should the CEO 
himself withhold information vitally useful to his bosses - the 
shareholder-owners of the corporation?
 What needs to be reported is data - whether GAAP, non-GAAP, 
or extra-GAAP - that helps financially-literate readers answer 
three key questions: (1) Approximately how much is this company 
worth? (2) What is the likelihood that it can meet its future 
obligations? and (3) How good a job are its managers doing, given 
the hand they have been dealt?
 In most cases, answers to one or more of these questions are 
somewhere between difficult and impossible to glean from the 
minimum GAAP presentation. The business world is simply too 
complex for a single set of rules to effectively describe 
economic reality for all enterprises, particularly those 
operating in a wide variety of businesses, such as Berkshire.
 Further complicating the problem is the fact that many 
managements view GAAP not as a standard to be met, but as an 
obstacle to overcome. Too often their accountants willingly 
assist them. (“How much,” says the client, “is two plus two?” 
Replies the cooperative accountant, “What number did you have in 
mind?”) Even honest and well-intentioned managements sometimes 
stretch GAAP a bit in order to present figures they think will 
more appropriately describe their performance. Both the 
smoothing of earnings and the “big bath” quarter are “white lie” 
techniques employed by otherwise upright managements.
 Then there are managers who actively use GAAP to deceive and 
defraud. They know that many investors and creditors accept GAAP 
results as gospel. So these charlatans interpret the rules 
“imaginatively” and record business transactions in ways that 
technically comply with GAAP but actually display an economic 
illusion to the world.
 As long as investors - including supposedly sophisticated 
institutions - place fancy valuations on reported “earnings” that 
march steadily upward, you can be sure that some managers and 
promoters will exploit GAAP to produce such numbers, no matter 
what the truth may be. Over the years, Charlie and I have 
observed many accounting-based frauds of staggering size. Few of 
the perpetrators have been punished; many have not even been 
censured. It has been far safer to steal large sums with a pen 
than small sums with a gun.
 Under one major change mandated by GAAP for 1988, we have 
been required to fully consolidate all our subsidiaries in our 
balance sheet and earnings statement. In the past, Mutual 
Savings and Loan, and Scott Fetzer Financial (a credit company 
that primarily finances installment sales of World Book and Kirby 
products) were consolidated on a “one-line” basis. That meant we 
(1) showed our equity in their combined net worths as a single￾entry asset on Berkshire’s consolidated balance sheet and (2) 
included our equity in their combined annual earnings as a 
single-line income entry in our consolidated statement of 
earnings. Now the rules require that we consolidate each asset 
and liability of these companies in our balance sheet and each 
item of their income and expense in our earnings statement.
 This change underscores the need for companies also to 
report segmented data: The greater the number of economically 
diverse business operations lumped together in conventional 
financial statements, the less useful those presentations are and 
the less able investors are to answer the three questions posed 
earlier. Indeed, the only reason we ever prepare consolidated 
figures at Berkshire is to meet outside requirements. On the 
other hand, Charlie and I constantly study our segment data.
 Now that we are required to bundle more numbers in our GAAP 
statements, we have decided to publish additional supplementary 
information that we think will help you measure both business 
value and managerial performance. (Berkshire’s ability to 
discharge its obligations to creditors - the third question we 
listed - should be obvious, whatever statements you examine.) In 
these supplementary presentations, we will not necessarily follow 
GAAP procedures, or even corporate structure. Rather, we will 
attempt to lump major business activities in ways that aid 
analysis but do not swamp you with detail. Our goal is to give 
you important information in a form that we would wish to get it 
if our roles were reversed.
 On pages 41-47 we show separate combined balance sheets and 
earnings statements for: (1) our subsidiaries engaged in finance￾type operations, which are Mutual Savings and Scott Fetzer 
Financial; (2) our insurance operations, with their major 
investment positions itemized; (3) our manufacturing, publishing 
and retailing businesses, leaving aside certain non-operating 
assets and purchase-price accounting adjustments; and (4) an all￾other category that includes the non-operating assets (primarily 
marketable securities) held by the companies in (3) as well as 
various assets and debts of the Wesco and Berkshire parent 
companies.
 If you combine the earnings and the net worths of these four 
segments, you will derive totals matching those shown on our GAAP 
statements. However, we want to emphasize that our new 
presentation does not fall within the purview of our auditors, 
who in no way bless it. (In fact, they may be horrified; I don’t 
want to ask.)
 I referred earlier to a major change in GAAP that is 
expected in 1990. This change relates to the calculation of 
deferred taxes, and is both complicated and controversial - so 
much so that its imposition, originally scheduled for 1989, was 
postponed for a year.
 When implemented, the new rule will affect us in various 
ways. Most important, we will be required to change the way we 
calculate our liability for deferred taxes on the unrealized 
appreciation of stocks held by our insurance companies.
 Right now, our liability is layered. For the unrealized 
appreciation that dates back to 1986 and earlier years, $1.2 
billion, we have booked a 28% tax liability. For the unrealized 
appreciation built up since, $600 million, the tax liability has 
been booked at 34%. The difference reflects the increase in tax 
rates that went into effect in 1987.
 It now appears, however, that the new accounting rule will 
require us to establish the entire liability at 34% in 1990, 
taking the charge against our earnings. Assuming no change in 
tax rates by 1990, this step will reduce our earnings in that 
year (and thereby our reported net worth) by $71 million. The 
proposed rule will also affect other items on our balance sheet, 
but these changes will have only a minor impact on earnings and 
net worth.
 We have no strong views about the desirability of this 
change in calculation of deferred taxes. We should point out, 
however, that neither a 28% nor a 34% tax liability precisely 
depicts economic reality at Berkshire since we have no plans to 
sell the stocks in which we have the great bulk of our gains.
 To those of you who are uninterested in accounting, I 
apologize for this dissertation. I realize that many of you do 
not pore over our figures, but instead hold Berkshire primarily 
because you know that: (1) Charlie and I have the bulk of our 
money in Berkshire; (2) we intend to run things so that your 
gains or losses are in direct proportion to ours; and (3) the 
record has so far been satisfactory. There is nothing 
necessarily wrong with this kind of “faith” approach to 
investing. Other shareholders, however, prefer an “analysis” 
approach and we want to supply the information they need. In our 
own investing, we search for situations in which both approaches 
give us the same answer.
Sources of Reported Earnings
 In addition to supplying you with our new four-sector 
accounting material, we will continue to list the major sources 
of Berkshire’s reported earnings just as we have in the past.
 In the following table, amortization of Goodwill and other 
major purchase-price accounting adjustments are not charged 
against the specific businesses to which they apply but are 
instead aggregated and shown separately. This procedure lets you 
view the earnings of our businesses as they would have been 
reported had we not purchased them. I’ve explained in past 
reports why this form of presentation seems to us to be more 
useful to investors and managers than the standard GAAP 
presentation, which makes purchase-price adjustments on a 
business-by-business basis. The total net earnings we show in 
the table are, of course, identical to the GAAP total in our 
audited financial statements.
 Further information about these businesses is given in the 
Business Segment section on pages 32-34, and in the Management’s 
Discussion section on pages 36-40. In these sections you also 
will find our segment earnings reported on a GAAP basis. For 
information on Wesco’s businesses, I urge you to read Charlie 
Munger’s letter, which starts on page 52. It contains the best 
description I have seen of the events that produced the present 
savings-and-loan crisis. Also, take special note of Dave 
Hillstrom’s performance at Precision Steel Warehouse, a Wesco 
subsidiary. Precision operates in an extremely competitive 
industry, yet Dave consistently achieves good returns on invested 
capital. Though data is lacking to prove the point, I think it 
is likely that his performance, both in 1988 and years past, 
would rank him number one among his peers.
 (000s omitted) 
 ------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ------------------- -------------------
 1988 1987 1988 1987 
 -------- -------- -------- --------
Operating Earnings:
 Insurance Group:
 Underwriting ............... $(11,081) $(55,429) $ (1,045) $(20,696)
 Net Investment Income ...... 231,250 152,483 197,779 136,658
 Buffalo News ................. 42,429 39,410 25,462 21,304
 Fechheimer ................... 14,152 13,332 7,720 6,580
 Kirby ........................ 26,891 22,408 17,842 12,891
 Nebraska Furniture Mart ...... 18,439 16,837 9,099 7,554
 Scott Fetzer 
 Manufacturing Group ....... 28,542 30,591 17,640 17,555
 See’s Candies ................ 32,473 31,693 19,671 17,363
 Wesco - other than Insurance 16,133 6,209 10,650 4,978
 World Book ................... 27,890 25,745 18,021 15,136
 Amortization of Goodwill ..... (2,806) (2,862) (2,806) (2,862)
 Other Purchase-Price 
 Accounting Charges ........ (6,342) (5,546) (7,340) (6,544)
 Interest on Debt* ............ (35,613) (11,474) (23,212) (5,905)
 Shareholder-Designated 
 Contributions ............. (4,966) (4,938) (3,217) (2,963)
 Other ........................ 41,059 23,217 27,177 13,697
 -------- -------- -------- --------
Operating Earnings ............. 418,450 281,676 313,441 214,746
Sales of Securities ............ 131,671 28,838 85,829 19,806
 -------- -------- -------- --------
Total Earnings - All Entities .. $550,121 $310,514 $399,270 $234,552
*Excludes interest expense of Scott Fetzer Financial Group.
 The earnings achieved by our operating businesses are 
superb, whether measured on an absolute basis or against those of 
their competitors. For that we thank our operating managers: You 
and I are fortunate to be associated with them.
 At Berkshire, associations like these last a long time. We 
do not remove superstars from our lineup merely because they have 
attained a specified age - whether the traditional 65, or the 95 
reached by Mrs. B on the eve of Hanukkah in 1988. Superb 
managers are too scarce a resource to be discarded simply because 
a cake gets crowded with candles. Moreover, our experience with 
newly-minted MBAs has not been that great. Their academic 
records always look terrific and the candidates always know just 
what to say; but too often they are short on personal commitment 
to the company and general business savvy. It’s difficult to 
teach a new dog old tricks.
 Here’s an update on our major non-insurance operations:
 o At Nebraska Furniture Mart, Mrs. B (Rose Blumkin) and her 
cart roll on and on. She’s been the boss for 51 years, having 
started the business at 44 with $500. (Think what she would have 
done with $1,000!) With Mrs. B, old age will always be ten years 
away.
 The Mart, long the largest home furnishings store in the 
country, continues to grow. In the fall, the store opened a 
detached 20,000 square foot Clearance Center, which expands our 
ability to offer bargains in all price ranges.
 Recently Dillard’s, one of the most successful department 
store operations in the country, entered the Omaha market. In 
many of its stores, Dillard’s runs a full furniture department, 
undoubtedly doing well in this line. Shortly before opening in 
Omaha, however, William Dillard, chairman of the company, 
announced that his new store would not sell furniture. Said he, 
referring to NFM: “We don’t want to compete with them. We think 
they are about the best there is.”
 At the Buffalo News we extol the value of advertising, and 
our policies at NFM prove that we practice what we preach. Over 
the past three years NFM has been the largest ROP advertiser in 
the Omaha World-Herald. (ROP advertising is the kind printed in 
the paper, as contrasted to the preprinted-insert kind.) In no 
other major market, to my knowledge, is a home furnishings 
operation the leading customer of the newspaper. At times, we 
also run large ads in papers as far away as Des Moines, Sioux 
City and Kansas City - always with good results. It truly does 
pay to advertise, as long as you have something worthwhile to 
offer.
 Mrs. B’s son, Louie, and his boys, Ron and Irv, complete the 
winning Blumkin team. It’s a joy to work with this family. All 
its members have character that matches their extraordinary 
abilities.
 o Last year I stated unequivocally that pre-tax margins at 
The Buffalo News would fall in 1988. That forecast would have 
proved correct at almost any other newspaper our size or larger. 
But Stan Lipsey - bless him - has managed to make me look 
foolish.
 Though we increased our prices a bit less than the industry 
average last year, and though our newsprint costs and wage rates 
rose in line with industry norms, Stan actually improved margins 
a tad. No one in the newspaper business has a better managerial 
record. He has achieved it, furthermore, while running a paper 
that gives readers an extraordinary amount of news. We believe 
that our “newshole” percentage - the portion of the paper devoted 
to news - is bigger than that of any other dominant paper of our 
size or larger. The percentage was 49.5% in 1988 versus 49.8% in 
1987. We are committed to keeping it around 50%, whatever the 
level or trend of profit margins.
 Charlie and I have loved the newspaper business since we 
were youngsters, and we have had great fun with the News in the 
12 years since we purchased it. We were fortunate to find Murray 
Light, a top-flight editor, on the scene when we arrived and he 
has made us proud of the paper ever since.
 o See’s Candies sold a record 25.1 million pounds in 1988. 
Prospects did not look good at the end of October, but excellent 
Christmas volume, considerably better than the record set in 
1987, turned the tide.
 As we’ve told you before, See’s business continues to become 
more Christmas-concentrated. In 1988, the Company earned a 
record 90% of its full-year profits in December: $29 million out 
of $32.5 million before tax. (It’s enough to make you believe in 
Santa Claus.) December’s deluge of business produces a modest 
seasonal bulge in Berkshire’s corporate earnings. Another small 
bulge occurs in the first quarter, when most World Book annuals 
are sold.
 Charlie and I put Chuck Huggins in charge of See’s about 
five minutes after we bought the company. Upon reviewing his 
record, you may wonder what took us so long.
 o At Fechheimer, the Heldmans - Bob, George, Gary, Roger and 
Fred - are the Cincinnati counterparts of the Blumkins. Neither 
furniture retailing nor uniform manufacturing has inherently 
attractive economics. In these businesses, only exceptional 
managements can deliver high returns on invested capital. And 
that’s exactly what the five Heldmans do. (As Mets announcer 
Ralph Kiner once said when comparing pitcher Steve Trout to his 
father, Dizzy Trout, the famous Detroit Tigers pitcher: “There’s 
a lot of heredity in that family.”)
 Fechheimer made a fairly good-sized acquisition in 1988. 
Charlie and I have such confidence in the business savvy of the 
Heldman family that we okayed the deal without even looking at 
it. There are very few managements anywhere - including those 
running the top tier companies of the Fortune 500 - in which we 
would exhibit similar confidence.
 Because of both this acquisition and some internal growth, 
sales at Fechheimer should be up significantly in 1989.
 o All of the operations managed by Ralph Schey - World Book, 
Kirby, and The Scott Fetzer Manufacturing Group - performed 
splendidly in 1988. Returns on the capital entrusted to Ralph 
continue to be exceptional.
 Within the Scott Fetzer Manufacturing Group, particularly 
fine progress was recorded at its largest unit, Campbell 
Hausfeld. This company, the country’s leading producer of small 
and medium-sized air compressors, has more than doubled earnings 
since 1986.
 Unit sales at both Kirby and World Book were up 
significantly in 1988, with export business particularly strong. 
World Book became available in the Soviet Union in September, 
when that country’s largest American book store opened in Moscow. 
Ours is the only general encyclopedia offered at the store.
 Ralph’s personal productivity is amazing: In addition to 
running 19 businesses in superb fashion, he is active at The 
Cleveland Clinic, Ohio University, Case Western Reserve, and a 
venture capital operation that has spawned sixteen Ohio-based 
companies and resurrected many others. Both Ohio and Berkshire 
are fortunate to have Ralph on their side.
Borsheim’s
 It was in 1983 that Berkshire purchased an 80% interest in 
The Nebraska Furniture Mart. Your Chairman blundered then by 
neglecting to ask Mrs. B a question any schoolboy would have 
thought of: “Are there any more at home like you?” Last month I 
corrected the error: We are now 80% partners with another branch 
of the family.
 After Mrs. B came over from Russia in 1917, her parents and 
five siblings followed. (Her two other siblings had preceded 
her.) Among the sisters was Rebecca Friedman who, with her 
husband, Louis, escaped in 1922 to the west through Latvia in a 
journey as perilous as Mrs. B’s earlier odyssey to the east 
through Manchuria. When the family members reunited in Omaha 
they had no tangible assets. However, they came equipped with an 
extraordinary combination of brains, integrity, and enthusiasm 
for work - and that’s all they needed. They have since proved 
themselves invincible.
 In 1948 Mr. Friedman purchased Borsheim’s, a small Omaha 
jewelry store. He was joined in the business by his son, Ike, in 
1950 and, as the years went by, Ike’s son, Alan, and his sons-in￾law, Marvin Cohn and Donald Yale, came in also.
 You won’t be surprised to learn that this family brings to 
the jewelry business precisely the same approach that the 
Blumkins bring to the furniture business. The cornerstone for 
both enterprises is Mrs. B’s creed: “Sell cheap and tell the 
truth.” Other fundamentals at both businesses are: (1) single 
store operations featuring huge inventories that provide 
customers with an enormous selection across all price ranges, (2) 
daily attention to detail by top management, (3) rapid turnover, 
(4) shrewd buying, and (5) incredibly low expenses. The 
combination of the last three factors lets both stores offer 
everyday prices that no one in the country comes close to 
matching.
 Most people, no matter how sophisticated they are in other 
matters, feel like babes in the woods when purchasing jewelry. 
They can judge neither quality nor price. For them only one rule 
makes sense: If you don’t know jewelry, know the jeweler.
 I can assure you that those who put their trust in Ike 
Friedman and his family will never be disappointed. The way in 
which we purchased our interest in their business is the ultimate 
testimonial. Borsheim’s had no audited financial statements; 
nevertheless, we didn’t take inventory, verify receivables or 
audit the operation in any way. Ike simply told us what was so -
- and on that basis we drew up a one-page contract and wrote a 
large check.
 Business at Borsheim’s has mushroomed in recent years as the 
reputation of the Friedman family has spread. Customers now come 
to the store from all over the country. Among them have been 
some friends of mine from both coasts who thanked me later for 
getting them there.
 Borsheim’s new links to Berkshire will change nothing in the 
way this business is run. All members of the Friedman family 
will continue to operate just as they have before; Charlie and I 
will stay on the sidelines where we belong. And when we say “all 
members,” the words have real meaning. Mr. and Mrs. Friedman, at 
88 and 87, respectively, are in the store daily. The wives of 
Ike, Alan, Marvin and Donald all pitch in at busy times, and a 
fourth generation is beginning to learn the ropes.
 It is great fun to be in business with people you have long 
admired. The Friedmans, like the Blumkins, have achieved success 
because they have deserved success. Both families focus on 
what’s right for the customer and that, inevitably, works out 
well for them, also. We couldn’t have better partners.
Insurance Operations
 Shown below is an updated version of our usual table 
presenting key figures for the insurance industry:
 Statutory
 Yearly Change Combined Ratio Yearly Change Inflation Rate 
 in Premiums After Policyholder in Incurred Measured by 
 Written (%) Dividends Losses (%) GNP Deflator (%)
 ------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.6
1982 ..... 3.7 109.6 8.4 6.4
1983 ..... 5.0 112.0 6.8 3.8
1984 ..... 8.5 118.0 16.9 3.7
1985 ..... 22.1 116.3 16.1 3.2
1986 ..... 22.2 108.0 13.5 2.7
1987 ..... 9.4 104.6 7.8 3.3
1988 (Est.) 3.9 105.4 4.2 3.6
Source: A.M. Best Co.
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: A 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss. When the investment income that an insurer 
earns from holding on to policyholders’ funds (“the float”) is 
taken into account, a combined ratio in the 107-111 range 
typically produces an overall break-even result, exclusive of 
earnings on the funds provided by shareholders.
 For the reasons laid out in previous reports, we expect the 
industry’s incurred losses to grow by about 10% annually, even in 
years when general inflation runs considerably lower. If premium 
growth meanwhile materially lags that 10% rate, underwriting 
losses will mount, though the industry’s tendency to underreserve 
when business turns bad may obscure their size for a time. As 
the table shows, the industry’s underwriting loss grew in 1988. 
This trend is almost certain to continue - and probably will 
accelerate - for at least two more years.
 The property-casualty insurance industry is not only 
subnormally profitable, it is subnormally popular. (As Sam 
Goldwyn philosophized: “In life, one must learn to take the 
bitter with the sour.”) One of the ironies of business is that 
many relatively-unprofitable industries that are plagued by 
inadequate prices habitually find themselves beat upon by irate 
customers even while other, hugely profitable industries are 
spared complaints, no matter how high their prices. 
 Take the breakfast cereal industry, whose return on invested 
capital is more than double that of the auto insurance industry 
(which is why companies like Kellogg and General Mills sell at 
five times book value and most large insurers sell close to 
book). The cereal companies regularly impose price increases, 
few of them related to a significant jump in their costs. Yet 
not a peep is heard from consumers. But when auto insurers raise 
prices by amounts that do not even match cost increases, 
customers are outraged. If you want to be loved, it’s clearly 
better to sell high-priced corn flakes than low-priced auto 
insurance.
 The antagonism that the public feels toward the industry can 
have serious consequences: Proposition 103, a California 
initiative passed last fall, threatens to push auto insurance 
prices down sharply, even though costs have been soaring. The 
price cut has been suspended while the courts review the 
initiative, but the resentment that brought on the vote has not 
been suspended: Even if the initiative is overturned, insurers 
are likely to find it tough to operate profitably in California. 
(Thank heavens the citizenry isn’t mad at bonbons: If Proposition 
103 applied to candy as well as insurance, See’s would be forced 
to sell its product for $5.76 per pound. rather than the $7.60 we 
charge - and would be losing money by the bucketful.)
 The immediate direct effects on Berkshire from the 
initiative are minor, since we saw few opportunities for profit 
in the rate structure that existed in California prior to the 
vote. However, the forcing down of prices would seriously affect 
GEICO, our 44%-owned investee, which gets about 10% of its 
premium volume from California. Even more threatening to GEICO 
is the possibility that similar pricing actions will be taken in 
other states, through either initiatives or legislation.
 If voters insist that auto insurance be priced below cost, 
it eventually must be sold by government. Stockholders can 
subsidize policyholders for a short period, but only taxpayers 
can subsidize them over the long term. At most property-casualty 
companies, socialized auto insurance would be no disaster for 
shareholders. Because of the commodity characteristics of the 
industry, most insurers earn mediocre returns and therefore have 
little or no economic goodwill to lose if they are forced by 
government to leave the auto insurance business. But GEICO, 
because it is a low-cost producer able to earn high returns on 
equity, has a huge amount of economic goodwill at risk. In turn, 
so do we.
 At Berkshire, in 1988, our premium volume continued to fall, 
and in 1989 we will experience a large decrease for a special 
reason: The contract through which we receive 7% of the business 
of Fireman’s Fund expires on August 31. At that time, we will 
return to Fireman’s Fund the unearned premiums we hold that 
relate to the contract. This transfer of funds will show up in 
our “premiums written” account as a negative $85 million or so 
and will make our third-quarter figures look rather peculiar. 
However, the termination of this contract will not have a 
significant effect on profits.
 Berkshire’s underwriting results continued to be excellent 
in 1988. Our combined ratio (on a statutory basis and excluding 
structured settlements and financial reinsurance) was 104. 
Reserve development was favorable for the second year in a row, 
after a string of years in which it was very unsatisfactory. 
Details on both underwriting and reserve development appear on 
pages 36-38.
 Our insurance volume over the next few years is likely to 
run very low, since business with a reasonable potential for 
profit will almost certainly be scarce. So be it. At Berkshire, 
we simply will not write policies at rates that carry the 
expectation of economic loss. We encounter enough troubles when 
we expect a gain.
 Despite - or perhaps because of - low volume, our profit 
picture during the next few years is apt to be considerably 
brighter than the industry’s. We are sure to have an exceptional 
amount of float compared to premium volume, and that augurs well 
for profits. In 1989 and 1990 we expect our float/premiums 
ratio to be at least three times that of the typical 
property/casualty company. Mike Goldberg, with special help from 
Ajit Jain, Dinos Iordanou, and the National Indemnity managerial 
team, has positioned us well in that respect.
 At some point - we don’t know when - we will be deluged with 
insurance business. The cause will probably be some major 
physical or financial catastrophe. But we could also experience 
an explosion in business, as we did in 1985, because large and 
increasing underwriting losses at other companies coincide with 
their recognition that they are far underreserved. in the 
meantime, we will retain our talented professionals, protect our 
capital, and try not to make major mistakes.
Marketable Securities
 In selecting marketable securities for our insurance 
companies, we can choose among five major categories: (1) long￾term common stock investments, (2) medium-term fixed-income 
securities, (3) long-term fixed-income securities, (4) short-term 
cash equivalents, and (5) short-term arbitrage commitments.
 We have no particular bias when it comes to choosing from 
these categories. We just continuously search among them for the 
highest after-tax returns as measured by “mathematical 
expectation,” limiting ourselves always to investment 
alternatives we think we understand. Our criteria have nothing 
to do with maximizing immediately reportable earnings; our goal, 
rather, is to maximize eventual net worth.
 o Below we list our common stock holdings having a value over 
$100 million, not including arbitrage commitments, which will be 
discussed later. A small portion of these investments belongs to 
subsidiaries of which Berkshire owns less than 100%.
 Shares Company Cost Market
 ------ ------- ---------- ----------
 (000s omitted) 
 3,000,000 Capital Cities/ABC, Inc. .............. $517,500 $1,086,750
14,172,500 The Coca-Cola Company ................. 592,540 632,448
 2,400,000 Federal Home Loan Mortgage 
 Corporation Preferred* ............. 71,729 121,200
 6,850,000 GEICO Corporation ..................... 45,713 849,400
 1,727,765 The Washington Post Company ........... 9,731 364,126
*Although nominally a preferred stock, this security is 
 financially equivalent to a common stock.
 Our permanent holdings - Capital Cities/ABC, Inc., GEICO 
Corporation, and The Washington Post Company - remain unchanged. 
Also unchanged is our unqualified admiration of their 
managements: Tom Murphy and Dan Burke at Cap Cities, Bill Snyder 
and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The 
Washington Post. Charlie and I appreciate enormously the talent 
and integrity these managers bring to their businesses.
 Their performance, which we have observed at close range, 
contrasts vividly with that of many CEOs, which we have 
fortunately observed from a safe distance. Sometimes these CEOs 
clearly do not belong in their jobs; their positions, 
nevertheless, are usually secure. The supreme irony of business 
management is that it is far easier for an inadequate CEO to keep 
his job than it is for an inadequate subordinate.
 If a secretary, say, is hired for a job that requires typing 
ability of at least 80 words a minute and turns out to be capable 
of only 50 words a minute, she will lose her job in no time. 
There is a logical standard for this job; performance is easily 
measured; and if you can’t make the grade, you’re out. 
Similarly, if new sales people fail to generate sufficient 
business quickly enough, they will be let go. Excuses will not 
be accepted as a substitute for orders.
 However, a CEO who doesn’t perform is frequently carried 
indefinitely. One reason is that performance standards for his 
job seldom exist. When they do, they are often fuzzy or they may 
be waived or explained away, even when the performance shortfalls 
are major and repeated. At too many companies, the boss shoots 
the arrow of managerial performance and then hastily paints the 
bullseye around the spot where it lands.
 Another important, but seldom recognized, distinction 
between the boss and the foot soldier is that the CEO has no 
immediate superior whose performance is itself getting measured. 
The sales manager who retains a bunch of lemons in his sales 
force will soon be in hot water himself. It is in his immediate 
self-interest to promptly weed out his hiring mistakes. 
Otherwise, he himself may be weeded out. An office manager who 
has hired inept secretaries faces the same imperative.
 But the CEO’s boss is a Board of Directors that seldom 
measures itself and is infrequently held to account for 
substandard corporate performance. If the Board makes a mistake 
in hiring, and perpetuates that mistake, so what? Even if the 
company is taken over because of the mistake, the deal will 
probably bestow substantial benefits on the outgoing Board 
members. (The bigger they are, the softer they fall.)
 Finally, relations between the Board and the CEO are 
expected to be congenial. At board meetings, criticism of the 
CEO’s performance is often viewed as the social equivalent of 
belching. No such inhibitions restrain the office manager from 
critically evaluating the substandard typist.
 These points should not be interpreted as a blanket 
condemnation of CEOs or Boards of Directors: Most are able and 
hard-working, and a number are truly outstanding. But the 
management failings that Charlie and I have seen make us thankful 
that we are linked with the managers of our three permanent 
holdings. They love their businesses, they think like owners, 
and they exude integrity and ability.
 o In 1988 we made major purchases of Federal Home Loan 
Mortgage Pfd. (“Freddie Mac”) and Coca Cola. We expect to hold 
these securities for a long time. In fact, when we own portions 
of outstanding businesses with outstanding managements, our 
favorite holding period is forever. We are just the opposite of 
those who hurry to sell and book profits when companies perform 
well but who tenaciously hang on to businesses that disappoint. 
Peter Lynch aptly likens such behavior to cutting the flowers and 
watering the weeds. Our holdings of Freddie Mac are the maximum 
allowed by law, and are extensively described by Charlie in his 
letter. In our consolidated balance sheet these shares are 
carried at cost rather than market, since they are owned by 
Mutual Savings and Loan, a non-insurance subsidiary.
 We continue to concentrate our investments in a very few 
companies that we try to understand well. There are only a 
handful of businesses about which we have strong long-term 
convictions. Therefore, when we find such a business, we want to 
participate in a meaningful way. We agree with Mae West: “Too 
much of a good thing can be wonderful.”
 o We reduced our holdings of medium-term tax-exempt bonds by 
about $100 million last year. All of the bonds sold were 
acquired after August 7, 1986. When such bonds are held by 
property-casualty insurance companies, 15% of the “tax-exempt” 
interest earned is subject to tax.
 The $800 million position we still hold consists almost 
entirely of bonds “grandfathered” under the Tax Reform Act of 
1986, which means they are entirely tax-exempt. Our sales 
produced a small profit and our remaining bonds, which have an 
average maturity of about six years, are worth modestly more than 
carrying value.
 Last year we described our holdings of short-term and 
intermediate-term bonds of Texaco, which was then in bankruptcy. 
During 1988, we sold practically all of these bonds at a pre-tax 
profit of about $22 million. This sale explains close to $100 
million of the reduction in fixed-income securities on our 
balance sheet.
 We also told you last year about our holdings of another 
security whose predominant characteristics are those of an 
intermediate fixed-income issue: our $700 million position in 
Salomon Inc 9% convertible preferred. This preferred has a 
sinking fund that will retire it in equal annual installments 
from 1995 to 1999. Berkshire carries this holding at cost. For 
reasons discussed by Charlie on page 69, the estimated market 
value of our holding has improved from moderately under cost at 
the end of last year to moderately over cost at 1988 year end.
 The close association we have had with John Gutfreund, CEO 
of Salomon, during the past year has reinforced our admiration 
for him. But we continue to have no great insights about the 
near, intermediate or long-term economics of the investment 
banking business: This is not an industry in which it is easy to 
forecast future levels of profitability. We continue to believe 
that our conversion privilege could well have important value 
over the life of our preferred. However, the overwhelming 
portion of the preferred’s value resides in its fixed-income 
characteristics, not its equity characteristics.
 o We have not lost our aversion to long-term bonds. We will 
become enthused about such securities only when we become 
enthused about prospects for long-term stability in the 
purchasing power of money. And that kind of stability isn’t in 
the cards: Both society and elected officials simply have too 
many higher-ranking priorities that conflict with purchasing￾power stability. The only long-term bonds we hold are those of 
Washington Public Power Supply Systems (WPPSS). A few of our 
WPPSS bonds have short maturities and many others, because of 
their high coupons, are likely to be refunded and paid off in a 
few years. Overall, our WPPSS holdings are carried on our 
balance sheet at $247 million and have a market value of about 
$352 million.
 We explained the reasons for our WPPSS purchases in the 1983 
annual report, and are pleased to tell you that this commitment 
has worked out about as expected. At the time of purchase, most 
of our bonds were yielding around 17% after taxes and carried no 
ratings, which had been suspended. Recently, the bonds were 
rated AA- by Standard & Poor’s. They now sell at levels only 
slightly below those enjoyed by top-grade credits.
 In the 1983 report, we compared the economics of our WPPSS 
purchase to those involved in buying a business. As it turned 
out, this purchase actually worked out better than did the 
general run of business acquisitions made in 1983, assuming both 
are measured on the basis of unleveraged, after tax returns 
achieved through 1988. 
 Our WPPSS experience, though pleasant, does nothing to alter 
our negative opinion about long-term bonds. It only makes us 
hope that we run into some other large stigmatized issue, whose 
troubles have caused it to be significantly misappraised by the 
market.
Arbitrage
 In past reports we have told you that our insurance 
subsidiaries sometimes engage in arbitrage as an alternative to 
holding short-term cash equivalents. We prefer, of course, to 
make major long-term commitments, but we often have more cash 
than good ideas. At such times, arbitrage sometimes promises 
much greater returns than Treasury Bills and, equally important, 
cools any temptation we may have to relax our standards for long￾term investments. (Charlie’s sign off after we’ve talked about 
an arbitrage commitment is usually: “Okay, at least it will keep 
you out of bars.”)
 During 1988 we made unusually large profits from arbitrage, 
measured both by absolute dollars and rate of return. Our pre￾tax gain was about $78 million on average invested funds of about 
$147 million.
 This level of activity makes some detailed discussion of 
arbitrage and our approach to it appropriate. Once, the word 
applied only to the simultaneous purchase and sale of securities 
or foreign exchange in two different markets. The goal was to 
exploit tiny price differentials that might exist between, say, 
Royal Dutch stock trading in guilders in Amsterdam, pounds in 
London, and dollars in New York. Some people might call this 
scalping; it won’t surprise you that practitioners opted for the 
French term, arbitrage.
 Since World War I the definition of arbitrage - or “risk 
arbitrage,” as it is now sometimes called - has expanded to 
include the pursuit of profits from an announced corporate event 
such as sale of the company, merger, recapitalization, 
reorganization, liquidation, self-tender, etc. In most cases the 
arbitrageur expects to profit regardless of the behavior of the 
stock market. The major risk he usually faces instead is that 
the announced event won’t happen. 
 Some offbeat opportunities occasionally arise in the 
arbitrage field. I participated in one of these when I was 24 
and working in New York for Graham-Newman Corp. Rockwood & Co., 
a Brooklyn based chocolate products company of limited 
profitability, had adopted LIFO inventory valuation in 1941 
when cocoa was selling for 5¢ per pound. In 1954 a 
temporary shortage of cocoa caused the price to soar to over 
60¢. Consequently Rockwood wished to unload its valuable 
inventory - quickly, before the price dropped. But if the cocoa 
had simply been sold off, the company would have owed close to 
a 50% tax on the proceeds.
 The 1954 Tax Code came to the rescue. It contained an 
arcane provision that eliminated the tax otherwise due on LIFO 
profits if inventory was distributed to shareholders as part of a 
plan reducing the scope of a corporation’s business. Rockwood 
decided to terminate one of its businesses, the sale of cocoa 
butter, and said 13 million pounds of its cocoa bean inventory 
was attributable to that activity. Accordingly, the company 
offered to repurchase its stock in exchange for the cocoa beans 
it no longer needed, paying 80 pounds of beans for each share. 
 For several weeks I busily bought shares, sold beans, and 
made periodic stops at Schroeder Trust to exchange stock 
certificates for warehouse receipts. The profits were good and 
my only expense was subway tokens.
 The architect of Rockwood’s restructuring was an unknown, 
but brilliant Chicagoan, Jay Pritzker, then 32. If you’re 
familiar with Jay’s subsequent record, you won’t be surprised to 
hear the action worked out rather well for Rockwood’s continuing 
shareholders also. From shortly before the tender until shortly 
after it, Rockwood stock appreciated from 15 to 100, even though 
the company was experiencing large operating losses. Sometimes 
there is more to stock valuation than price-earnings ratios.
 In recent years, most arbitrage operations have involved 
takeovers, friendly and unfriendly. With acquisition fever 
rampant, with anti-trust challenges almost non-existent, and with 
bids often ratcheting upward, arbitrageurs have prospered 
mightily. They have not needed special talents to do well; the 
trick, a la Peter Sellers in the movie, has simply been “Being 
There.” In Wall Street the old proverb has been reworded: “Give a 
man a fish and you feed him for a day. Teach him how to 
arbitrage and you feed him forever.” (If, however, he studied at 
the Ivan Boesky School of Arbitrage, it may be a state 
institution that supplies his meals.)
 To evaluate arbitrage situations you must answer four 
questions: (1) How likely is it that the promised event will 
indeed occur? (2) How long will your money be tied up? (3) What 
chance is there that something still better will transpire - a 
competing takeover bid, for example? and (4) What will happen if 
the event does not take place because of anti-trust action, 
financing glitches, etc.?
 Arcata Corp., one of our more serendipitous arbitrage 
experiences, illustrates the twists and turns of the business. 
On September 28, 1981 the directors of Arcata agreed in principle 
to sell the company to Kohlberg, Kravis, Roberts & Co. (KKR), 
then and now a major leveraged-buy out firm. Arcata was in the 
printing and forest products businesses and had one other thing 
going for it: In 1978 the U.S. Government had taken title to 
10,700 acres of Arcata timber, primarily old-growth redwood, to 
expand Redwood National Park. The government had paid $97.9 
million, in several installments, for this acreage, a sum Arcata 
was contesting as grossly inadequate. The parties also disputed 
the interest rate that should apply to the period between the 
taking of the property and final payment for it. The enabling 
legislation stipulated 6% simple interest; Arcata argued for a 
much higher and compounded rate.
 Buying a company with a highly-speculative, large-sized 
claim in litigation creates a negotiating problem, whether the 
claim is on behalf of or against the company. To solve this 
problem, KKR offered $37.00 per Arcata share plus two-thirds of 
any additional amounts paid by the government for the redwood 
lands.
 Appraising this arbitrage opportunity, we had to ask 
ourselves whether KKR would consummate the transaction since, 
among other things, its offer was contingent upon its obtaining 
“satisfactory financing.” A clause of this kind is always 
dangerous for the seller: It offers an easy exit for a suitor 
whose ardor fades between proposal and marriage. However, we 
were not particularly worried about this possibility because 
KKR’s past record for closing had been good.
 We also had to ask ourselves what would happen if the KKR 
deal did fall through, and here we also felt reasonably 
comfortable: Arcata’s management and directors had been shopping 
the company for some time and were clearly determined to sell. 
If KKR went away, Arcata would likely find another buyer, though 
of course, the price might be lower.
 Finally, we had to ask ourselves what the redwood claim 
might be worth. Your Chairman, who can’t tell an elm from an 
oak, had no trouble with that one: He coolly evaluated the claim 
at somewhere between zero and a whole lot.
 We started buying Arcata stock, then around $33.50, on 
September 30 and in eight weeks purchased about 400,000 shares, 
or 5% of the company. The initial announcement said that the 
$37.00 would be paid in January, 1982. Therefore, if everything 
had gone perfectly, we would have achieved an annual rate of 
return of about 40% - not counting the redwood claim, which would 
have been frosting.
 All did not go perfectly. In December it was announced that 
the closing would be delayed a bit. Nevertheless, a definitive 
agreement was signed on January 4. Encouraged, we raised our 
stake, buying at around $38.00 per share and increasing our 
holdings to 655,000 shares, or over 7% of the company. Our 
willingness to pay up - even though the closing had been 
postponed - reflected our leaning toward “a whole lot” rather 
than “zero” for the redwoods.
 Then, on February 25 the lenders said they were taking a 
“second look” at financing terms “ in view of the severely 
depressed housing industry and its impact on Arcata’s outlook.” 
The stockholders’ meeting was postponed again, to April. An 
Arcata spokesman said he “did not think the fate of the 
acquisition itself was imperiled.” When arbitrageurs hear such 
reassurances, their minds flash to the old saying: “He lied like 
a finance minister on the eve of devaluation.”
 On March 12 KKR said its earlier deal wouldn’t work, first 
cutting its offer to $33.50, then two days later raising it to 
$35.00. On March 15, however, the directors turned this bid down 
and accepted another group’s offer of $37.50 plus one-half of any 
redwood recovery. The shareholders okayed the deal, and the 
$37.50 was paid on June 4.
 We received $24.6 million versus our cost of $22.9 million; 
our average holding period was close to six months. Considering 
the trouble this transaction encountered, our 15% annual rate of 
return excluding any value for the redwood claim - was more than 
satisfactory.
 But the best was yet to come. The trial judge appointed two 
commissions, one to look at the timber’s value, the other to 
consider the interest rate questions. In January 1987, the first 
commission said the redwoods were worth $275.7 million and the 
second commission recommended a compounded, blended rate of 
return working out to about 14%.
 In August 1987 the judge upheld these conclusions, which 
meant a net amount of about $600 million would be due Arcata. 
The government then appealed. In 1988, though, before this 
appeal was heard, the claim was settled for $519 million. 
Consequently, we received an additional $29.48 per share, or 
about $19.3 million. We will get another $800,000 or so in 1989.
 Berkshire’s arbitrage activities differ from those of many 
arbitrageurs. First, we participate in only a few, and usually 
very large, transactions each year. Most practitioners buy into 
a great many deals perhaps 50 or more per year. With that many 
irons in the fire, they must spend most of their time monitoring 
both the progress of deals and the market movements of the 
related stocks. This is not how Charlie nor I wish to spend our 
lives. (What’s the sense in getting rich just to stare at a 
ticker tape all day?)
 Because we diversify so little, one particularly profitable 
or unprofitable transaction will affect our yearly result from 
arbitrage far more than it will the typical arbitrage operation. 
So far, Berkshire has not had a really bad experience. But we 
will - and when it happens we’ll report the gory details to you.
 The other way we differ from some arbitrage operations is 
that we participate only in transactions that have been publicly 
announced. We do not trade on rumors or try to guess takeover 
candidates. We just read the newspapers, think about a few of 
the big propositions, and go by our own sense of probabilities.
 At yearend, our only major arbitrage position was 3,342,000 
shares of RJR Nabisco with a cost of $281.8 million and a market 
value of $304.5 million. In January we increased our holdings to 
roughly four million shares and in February we eliminated our 
position. About three million shares were accepted when we 
tendered our holdings to KKR, which acquired RJR, and the 
returned shares were promptly sold in the market. Our pre-tax 
profit was a better-than-expected $64 million.
 Earlier, another familiar face turned up in the RJR bidding 
contest: Jay Pritzker, who was part of a First Boston group that 
made a tax-oriented offer. To quote Yogi Berra; “It was deja vu 
all over again.”
 During most of the time when we normally would have been 
purchasers of RJR, our activities in the stock were restricted 
because of Salomon’s participation in a bidding group. 
Customarily, Charlie and I, though we are directors of Salomon, 
are walled off from information about its merger and acquisition 
work. We have asked that it be that way: The information would 
do us no good and could, in fact, occasionally inhibit 
Berkshire’s arbitrage operations.
 However, the unusually large commitment that Salomon 
proposed to make in the RJR deal required that all directors be 
fully informed and involved. Therefore, Berkshire’s purchases of 
RJR were made at only two times: first, in the few days 
immediately following management’s announcement of buyout plans, 
before Salomon became involved; and considerably later, after the 
RJR board made its decision in favor of KKR. Because we could 
not buy at other times, our directorships cost Berkshire 
significant money.
 Considering Berkshire’s good results in 1988, you might 
expect us to pile into arbitrage during 1989. Instead, we expect 
to be on the sidelines.
 One pleasant reason is that our cash holdings are down - 
because our position in equities that we expect to hold for a 
very long time is substantially up. As regular readers of this 
report know, our new commitments are not based on a judgment 
about short-term prospects for the stock market. Rather, they 
reflect an opinion about long-term business prospects for 
specific companies. We do not have, never have had, and never 
will have an opinion about where the stock market, interest 
rates, or business activity will be a year from now.
 Even if we had a lot of cash we probably would do little in 
arbitrage in 1989. Some extraordinary excesses have developed in 
the takeover field. As Dorothy says: “Toto, I have a feeling 
we’re not in Kansas any more.”
 We have no idea how long the excesses will last, nor do we 
know what will change the attitudes of government, lender and 
buyer that fuel them. But we do know that the less the prudence 
with which others conduct their affairs, the greater the prudence 
with which we should conduct our own affairs. We have no desire 
to arbitrage transactions that reflect the unbridled - and, in 
our view, often unwarranted - optimism of both buyers and 
lenders. In our activities, we will heed the wisdom of Herb 
Stein: “If something can’t go on forever, it will end.”
Efficient Market Theory
 The preceding discussion about arbitrage makes a small 
discussion of “efficient market theory” (EMT) also seem relevant. 
This doctrine became highly fashionable - indeed, almost holy 
scripture in academic circles during the 1970s. Essentially, it 
said that analyzing stocks was useless because all public 
information about them was appropriately reflected in their 
prices. In other words, the market always knew everything. As a 
corollary, the professors who taught EMT said that someone 
throwing darts at the stock tables could select a stock portfolio 
having prospects just as good as one selected by the brightest, 
most hard-working security analyst. Amazingly, EMT was embraced 
not only by academics, but by many investment professionals and 
corporate managers as well. Observing correctly that the market 
was frequently efficient, they went on to conclude incorrectly 
that it was always efficient. The difference between these 
propositions is night and day.
 In my opinion, the continuous 63-year arbitrage experience 
of Graham-Newman Corp. Buffett Partnership, and Berkshire 
illustrates just how foolish EMT is. (There’s plenty of other 
evidence, also.) While at Graham-Newman, I made a study of its 
earnings from arbitrage during the entire 1926-1956 lifespan of 
the company. Unleveraged returns averaged 20% per year. 
Starting in 1956, I applied Ben Graham’s arbitrage principles, 
first at Buffett Partnership and then Berkshire. Though I’ve not 
made an exact calculation, I have done enough work to know that 
the 1956-1988 returns averaged well over 20%. (Of course, I 
operated in an environment far more favorable than Ben’s; he had 
1929-1932 to contend with.)
 All of the conditions are present that are required for a 
fair test of portfolio performance: (1) the three organizations 
traded hundreds of different securities while building this 63-
year record; (2) the results are not skewed by a few fortunate 
experiences; (3) we did not have to dig for obscure facts or 
develop keen insights about products or managements - we simply 
acted on highly-publicized events; and (4) our arbitrage 
positions were a clearly identified universe - they have not been 
selected by hindsight.
 Over the 63 years, the general market delivered just under a 
10% annual return, including dividends. That means $1,000 would 
have grown to $405,000 if all income had been reinvested. A 20% 
rate of return, however, would have produced $97 million. That 
strikes us as a statistically-significant differential that 
might, conceivably, arouse one’s curiosity.
 Yet proponents of the theory have never seemed interested in 
discordant evidence of this type. True, they don’t talk quite as 
much about their theory today as they used to. But no one, to my 
knowledge, has ever said he was wrong, no matter how many 
thousands of students he has sent forth misinstructed. EMT, 
moreover, continues to be an integral part of the investment 
curriculum at major business schools. Apparently, a reluctance 
to recant, and thereby to demystify the priesthood, is not 
limited to theologians.
 Naturally the disservice done students and gullible 
investment professionals who have swallowed EMT has been an 
extraordinary service to us and other followers of Graham. In 
any sort of a contest - financial, mental, or physical - it’s an 
enormous advantage to have opponents who have been taught that 
it’s useless to even try. From a selfish point of view, 
Grahamites should probably endow chairs to ensure the perpetual 
teaching of EMT.
 All this said, a warning is appropriate. Arbitrage has 
looked easy recently. But this is not a form of investing that 
guarantees profits of 20% a year or, for that matter, profits of 
any kind. As noted, the market is reasonably efficient much of 
the time: For every arbitrage opportunity we seized in that 63-
year period, many more were foregone because they seemed 
properly-priced.
 An investor cannot obtain superior profits from stocks by 
simply committing to a specific investment category or style. He 
can earn them only by carefully evaluating facts and continuously 
exercising discipline. Investing in arbitrage situations, per 
se, is no better a strategy than selecting a portfolio by 
throwing darts.
New York Stock Exchange Listing
 Berkshire’s shares were listed on the New York Stock 
Exchange on November 29, 1988. On pages 50-51 we reproduce the 
letter we sent to shareholders concerning the listing.
 Let me clarify one point not dealt with in the letter: 
Though our round lot for trading on the NYSE is ten shares, any 
number of shares from one on up can be bought or sold.
 As the letter explains, our primary goal in listing was to 
reduce transaction costs, and we believe this goal is being 
achieved. Generally, the spread between the bid and asked price 
on the NYSE has been well below the spread that prevailed in the 
over-the-counter market.
 Henderson Brothers, Inc., the specialist in our shares, is 
the oldest continuing specialist firm on the Exchange; its 
progenitor, William Thomas Henderson, bought his seat for $500 on 
September 8, 1861. (Recently, seats were selling for about 
$625,000.) Among the 54 firms acting as specialists, HBI ranks 
second in number of stocks assigned, with 83. We were pleased 
when Berkshire was allocated to HBI, and have been delighted with 
the firm’s performance. Jim Maguire, Chairman of HBI, personally 
manages the trading in Berkshire, and we could not be in better 
hands.
 In two respects our goals probably differ somewhat from 
those of most listed companies. First, we do not want to 
maximize the price at which Berkshire shares trade. We wish 
instead for them to trade in a narrow range centered at intrinsic 
business value (which we hope increases at a reasonable - or, 
better yet, unreasonable - rate). Charlie and I are bothered as 
much by significant overvaluation as significant undervaluation. 
Both extremes will inevitably produce results for many 
shareholders that will differ sharply from Berkshire’s business 
results. If our stock price instead consistently mirrors 
business value, each of our shareholders will receive an 
investment result that roughly parallels the business results of 
Berkshire during his holding period.
 Second, we wish for very little trading activity. If we ran 
a private business with a few passive partners, we would be 
disappointed if those partners, and their replacements, 
frequently wanted to leave the partnership. Running a public 
company, we feel the same way.
 Our goal is to attract long-term owners who, at the time of 
purchase, have no timetable or price target for sale but plan 
instead to stay with us indefinitely. We don’t understand the 
CEO who wants lots of stock activity, for that can be achieved 
only if many of his owners are constantly exiting. At what other 
organization - school, club, church, etc. - do leaders cheer when 
members leave? (However, if there were a broker whose livelihood 
depended upon the membership turnover in such organizations, you 
could be sure that there would be at least one proponent of 
activity, as in: “There hasn’t been much going on in Christianity 
for a while; maybe we should switch to Buddhism next week.“)
 Of course, some Berkshire owners will need or want to sell 
from time to time, and we wish for good replacements who will pay 
them a fair price. Therefore we try, through our policies, 
performance, and communications, to attract new shareholders who 
understand our operations, share our time horizons, and measure 
us as we measure ourselves. If we can continue to attract this 
sort of shareholder - and, just as important, can continue to be 
uninteresting to those with short-term or unrealistic 
expectations - Berkshire shares should consistently sell at 
prices reasonably related to business value.
David L. Dodd
 Dave Dodd, my friend and teacher for 38 years, died last 
year at age 93. Most of you don’t know of him. Yet any long￾time shareholder of Berkshire is appreciably wealthier because of 
the indirect influence he had upon our company.
 Dave spent a lifetime teaching at Columbia University, and 
he co-authored Security Analysis with Ben Graham. From the 
moment I arrived at Columbia, Dave personally encouraged and 
educated me; one influence was as important as the other. 
Everything he taught me, directly or through his book, made 
sense. Later, through dozens of letters, he continued my 
education right up until his death.
 I have known many professors of finance and investments but 
I have never seen any, except for Ben Graham, who was the match 
of Dave. The proof of his talent is the record of his students: 
No other teacher of investments has sent forth so many who have 
achieved unusual success.
 When students left Dave’s classroom, they were equipped to 
invest intelligently for a lifetime because the principles he 
taught were simple, sound, useful, and enduring. Though these 
may appear to be unremarkable virtues, the teaching of principles 
embodying them has been rare.
 It’s particularly impressive that Dave could practice as 
well as preach. just as Keynes became wealthy by applying his 
academic ideas to a very small purse, so, too, did Dave. Indeed, 
his financial performance far outshone that of Keynes, who began 
as a market-timer (leaning on business and credit-cycle theory) 
and converted, after much thought, to value investing. Dave was 
right from the start.
 In Berkshire’s investments, Charlie and I have employed the 
principles taught by Dave and Ben Graham. Our prosperity is the 
fruit of their intellectual tree.
Miscellaneous
 We hope to buy more businesses that are similar to the ones 
we have, and we can use some help. If you have a business that 
fits the following criteria, call me or, preferably, write.
 Here’s what we’re looking for:
 (1) large purchases (at least $10 million of after-tax 
 earnings),
 (2) demonstrated consistent earning power (future projections 
 are of little interest to us, nor are “turnaround” 
 situations),
 (3) businesses earning good returns on equity while employing 
 little or no debt,
 (4) management in place (we can’t supply it),
 (5) simple businesses (if there’s lots of technology, we won’t 
 understand it),
 (6) an offering price (we don’t want to waste our time or that 
 of the seller by talking, even preliminarily, about a 
 transaction when price is unknown).
 We will not engage in unfriendly takeovers. We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we’re interested. We prefer 
to buy for cash, but will consider issuing stock when we receive 
as much in intrinsic business value as we give.
 Our favorite form of purchase is one fitting the Blumkin￾Friedman-Heldman mold. In cases like these, the company’s owner￾managers wish to generate significant amounts of cash, sometimes 
for themselves, but often for their families or inactive 
shareholders. However, these managers also wish to remain 
significant owners who continue to run their companies just as 
they have in the past. We think we offer a particularly good fit 
for owners with these objectives and invite potential sellers to 
check us out by contacting people with whom we have done business 
in the past.
 Charlie and I frequently get approached about acquisitions 
that don’t come close to meeting our tests: We’ve found that if 
you advertise an interest in buying collies, a lot of people will 
call hoping to sell you their cocker spaniels. Our interest in 
new ventures, turnarounds, or auction-like sales can best be 
expressed by another Goldwynism: “Please include me out.”
 Besides being interested in the purchase of businesses as 
described above, we are also interested in the negotiated 
purchase of large, but not controlling, blocks of stock 
comparable to those we hold in Cap Cities and Salomon. We have a 
special interest in purchasing convertible preferreds as a long￾term investment, as we did at Salomon.
 * * *
 We received some good news a few weeks ago: Standard & 
Poor’s raised our credit rating to AAA, which is the highest 
rating it bestows. Only 15 other U.S. industrial or property￾casualty companies are rated AAA, down from 28 in 1980.
 Corporate bondholders have taken their lumps in the past few 
years from “event risk.” This term refers to the overnight 
degradation of credit that accompanies a heavily-leveraged 
purchase or recapitalization of a business whose financial 
policies, up to then, had been conservative. In a world of 
takeovers inhabited by few owner-managers, most corporations 
present such a risk. Berkshire does not. Charlie and I promise 
bondholders the same respect we afford shareholders.
 * * *
 About 97.4% of all eligible shares participated in 
Berkshire’s 1988 shareholder-designated contributions program. 
Contributions made through the program were $5 million, and 2,319 
charities were recipients. If we achieve reasonable business 
results, we plan to increase the per-share contributions in 1989.
 We urge new shareholders to read the description of our 
shareholder-designated contributions program that appears on 
pages 48-49. If you wish to participate in future programs, we 
strongly urge that you immediately make sure your shares are 
registered in the name of the actual owner, not in the nominee 
name of a broker, bank or depository. Shares not so registered 
on September 30, 1989 will be ineligible for the 1989 program.
 * * *
 Berkshire’s annual meeting will be held in Omaha on Monday, 
April 24, 1989, and I hope you will come. The meeting provides 
the forum for you to ask any owner-related questions you may 
have, and we will keep answering until all (except those dealing 
with portfolio activities or other proprietary information) have 
been dealt with.
 After the meeting we will have several buses available to 
take you to visit Mrs. B at The Nebraska Furniture Mart and Ike 
Friedman at Borsheim’s. Be prepared for bargains.
 Out-of-towners may prefer to arrive early and visit Mrs. B 
during the Sunday store hours of noon to five. (These Sunday 
hours seem ridiculously short to Mrs. B, who feels they scarcely 
allow her time to warm up; she much prefers the days on which the 
store remains open from 10 a.m. to 9 p.m.) Borsheims, however, is 
not open on Sunday.
 Ask Mrs. B the secret of her astonishingly low carpet 
prices. She will confide to you - as she does to everyone - how 
she does it: “I can sell so cheap ‘cause I work for this dummy 
who doesn’t know anything about carpet.”
 Warren E. Buffett
February 28, 1989 Chairman of the Board
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 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.
 What counts, however, is intrinsic value - the figure 
indicating what all of our constituent businesses are rationally 
worth. With perfect foresight, this number can be calculated by 
taking all future cash flows of a business - in and out - and 
discounting them at prevailing interest rates. So valued, all 
businesses, from manufacturers of buggy whips to operators of 
cellular phones, become economic equals. 
 Back when Berkshire's book value was $19.46, intrinsic 
value was somewhat less because the book value was entirely tied 
up in a textile business not worth the figure at which it was 
carried. Now most of our businesses are worth far more than their 
carrying values. This agreeable evolution from a discount to a 
premium means that Berkshire's intrinsic business value has 
compounded at a rate that somewhat exceeds our 23.8% annual 
growth in book value.
 The rear-view mirror is one thing; the windshield is 
another. A large portion of our book value is represented by 
equity securities that, with minor exceptions, are carried on our 
balance sheet at current market values. At yearend these 
securities were valued at higher prices, relative to their own 
intrinsic business values, than has been the case in the past. 
One reason is the buoyant 1989 stock market. More important, the 
virtues of these businesses have been widely recognized. Whereas 
once their stock prices were inappropriately low, they are not 
now.
 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.
 We face another obstacle: In a finite world, high growth 
rates must self-destruct. If the base from which the growth is 
taking place is tiny, this law may not operate for a time. But 
when the base balloons, the party ends: A high growth rate 
eventually forges its own anchor.
 Carl Sagan has entertainingly described this phenomenon, 
musing about the destiny of bacteria that reproduce by dividing 
into two every 15 minutes. Says Sagan: "That means four doublings 
an hour, and 96 doublings a day. Although a bacterium weighs only 
about a trillionth of a gram, its descendants, after a day of 
wild asexual abandon, will collectively weigh as much as a 
mountain...in two days, more than the sun - and before very long, 
everything in the universe will be made of bacteria." Not to 
worry, says Sagan: Some obstacle always impedes this kind of 
exponential growth. "The bugs run out of food, or they poison 
each other, or they are shy about reproducing in public." 
 Even on bad days, Charlie Munger (Berkshire's Vice Chairman 
and my partner) and I do not think of Berkshire as a bacterium. 
Nor, to our unending sorrow, have we found a way to double its 
net worth every 15 minutes. Furthermore, we are not the least bit 
shy about reproducing - financially - in public. Nevertheless, 
Sagan's observations apply. From Berkshire's present base of $4.9 
billion in net worth, we will find it much more difficult to 
average 15% annual growth in book value than we did to average 
23.8% from the $22 million we began with.
Taxes
 Our 1989 gain of $1.5 billion was achieved after we took a 
charge of about $712 million for income taxes. In addition, 
Berkshire's share of the income taxes paid by its five major 
investees totaled about $175 million. 
 Of this year's tax charge, about $172 million will be paid 
currently; the remainder, $540 million, is deferred. Almost all 
of the deferred portion relates to the 1989 increase in 
unrealized profits in our common stock holdings. Against this 
increase, we have reserved a 34% tax.
 We also carry reserves at that rate against all unrealized 
profits generated in 1987 and 1988. But, as we explained last 
year, the unrealized gains we amassed before 1987 - about $1.2 
billion - carry reserves booked at the 28% tax rate that then 
prevailed. 
 A new accounting rule is likely to be adopted that will 
require companies to reserve against all gains at the current tax 
rate, whatever it may be. With the rate at 34%, such a rule would 
increase our deferred tax liability, and decrease our net worth, 
by about $71 million - the result of raising the reserve on our 
pre-1987 gain by six percentage points. Because the proposed rule 
has sparked widespread controversy and its final form is unclear, 
we have not yet made this change.
 As you can see from our balance sheet on page 27, we would 
owe taxes of more than $1.1 billion were we to sell all of our 
securities at year-end market values. Is this $1.1 billion 
liability equal, or even similar, to a $1.1 billion liability 
payable to a trade creditor 15 days after the end of the year? 
Obviously not - despite the fact that both items have exactly the 
same effect on audited net worth, reducing it by $1.1 billion.
 On the other hand, is this liability for deferred taxes a 
meaningless accounting fiction because its payment can be 
triggered only by the sale of stocks that, in very large part, we 
have no intention of selling? Again, the answer is no. 
 In economic terms, the liability resembles an interest-free 
loan from the U.S. Treasury that comes due only at our election 
(unless, of course, Congress moves to tax gains before they are 
realized). This "loan" is peculiar in other respects as well: It 
can be used only to finance the ownership of the particular, 
appreciated stocks and it fluctuates in size - daily as market 
prices change and periodically if tax rates change. In effect, 
this deferred tax liability is equivalent to a very large 
transfer tax that is payable only if we elect to move from one 
asset to another. Indeed, we sold some relatively small holdings 
in 1989, incurring about $76 million of "transfer" tax on $224 
million of gains.
 Because of the way the tax law works, the Rip Van Winkle 
style of investing that we favor - if successful - has an 
important mathematical edge over a more frenzied approach. Let's 
look at an extreme comparison.
 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. 
 The sole reason for this staggering difference in results 
would be the timing of tax payments. Interestingly, the 
government would gain from Scenario 2 in exactly the same 27:1 
ratio as we - taking in taxes of $356,500 vs. $13,000 - though, 
admittedly, it would have to wait for its money.
 We have not, we should stress, adopted our strategy 
favoring long-term investment commitments because of these 
mathematics. Indeed, it is possible we could earn greater after￾tax returns by moving rather frequently from one investment to 
another. Many years ago, that's exactly what Charlie and I did.
 Now we would rather stay put, even if that means slightly 
lower returns. Our reason is simple: We have found splendid 
business relationships to be so rare and so enjoyable that we 
want to retain all we develop. This decision is particularly 
easy for us because we feel that these relationships will produce
good - though perhaps not optimal - financial results. 
Considering that, we think it makes little sense for us to give 
up time with people we know to be interesting and admirable for 
time with others we do not know and who are likely to have human 
qualities far closer to average. That would be akin to marrying 
for money - a mistake under most circumstances, insanity if one 
is already rich.
Sources of Reported Earnings
 The table below shows the major sources of Berkshire's 
reported earnings. In this presentation, amortization of Goodwill 
and other major purchase-price accounting adjustments are not 
charged against the specific businesses to which they apply, but 
are instead aggregated and shown separately. This procedure lets 
you view the earnings of our businesses as they would have been 
reported had we not purchased them. I've explained in past 
reports why this form of presentation seems to us to be more 
useful to investors and managers than one utilizing generally 
accepted accounting principles (GAAP), which require purchase￾price adjustments to be made on a business-by-business basis. The 
total net earnings we show in the table are, of course, identical 
to the GAAP total in our audited financial statements.
 Further information about these businesses is given in the 
Business Segment section on pages 37-39, and in the Management's 
Discussion section on pages 40-44. In these sections you also 
will find our segment earnings reported on a GAAP basis. For 
information on Wesco's businesses, I urge you to read Charlie 
Munger's letter, which starts on page 54. In addition, we have 
reprinted on page 71 Charlie's May 30, 1989 letter to the U. S. 
League of Savings Institutions, which conveyed our disgust with 
its policies and our consequent decision to resign.
 (000s omitted) 
 ----------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ---------------------- ----------------------
 1989 1988 1989 1988
 ---------- ---------- ---------- ----------
Operating Earnings:
 Insurance Group:
 Underwriting ............ $(24,400) $(11,081) $(12,259) $ (1,045)
 Net Investment Income ... 243,599 231,250 213,642 197,779
 Buffalo News .............. 46,047 42,429 27,771 25,462
 Fechheimer ................ 12,621 14,152 6,789 7,720
 Kirby ..................... 26,114 26,891 16,803 17,842
 Nebraska Furniture Mart ... 17,070 18,439 8,441 9,099
 Scott Fetzer 
 Manufacturing Group .... 33,165 28,542 19,996 17,640
 See's Candies ............. 34,235 32,473 20,626 19,671
 Wesco - other than Insurance 13,008 16,133 9,810 10,650
 World Book ................ 25,583 27,890 16,372 18,021
 Amortization of Goodwill .. (3,387) (2,806) (3,372) (2,806)
 Other Purchase-Price 
 Accounting Charges ........ (5,740) (6,342) (6,668) (7,340)
 Interest Expense* ......... (42,389) (35,613) (27,098) (23,212)
 Shareholder-Designated 
 Contributions .......... (5,867) (4,966) (3,814) (3,217)
 Other ..................... 23,755 41,059 12,863 27,177
 ---------- ---------- ---------- ----------
Operating Earnings .......... 393,414 418,450 299,902 313,441
Sales of Securities ......... 223,810 131,671 147,575 85,829
 ---------- ---------- ---------- ----------
Total Earnings - All Entities $617,224 $550,121 $447,477 $399,270
*Excludes interest expense of Scott Fetzer Financial Group and 
 Mutual Savings & Loan.
 We refer you also to pages 45-51, where we have rearranged 
Berkshire's financial data into four segments. These correspond 
to the way Charlie and I think about the business and should help 
you calculate Berkshire's intrinsic value. Shown on these pages 
are balance sheets and earnings statements for: (1) our 
insurance operations, with their major investment positions 
itemized; (2) our manufacturing, publishing and retailing 
businesses, leaving aside certain non-operating assets and 
purchase-price accounting adjustments; (3) our subsidiaries 
engaged in finance-type operations, which are Mutual Savings and 
Scott Fetzer Financial; and (4) an all-other category that 
includes the non-operating assets (primarily marketable 
securities) held by the companies in segment (2), all purchase 
price accounting adjustments, and various assets and debts of the 
Wesco and Berkshire parent companies.
 If you combine the earnings and net worths of these four 
segments, you will derive totals matching those shown on our GAAP 
statements. However, I want to emphasize that this four-category 
presentation does not fall within the purview of our auditors, 
who in no way bless it.
 In addition to our reported earnings, we also benefit from 
significant earnings of investees that standard accounting rules 
do not permit us to report. On page 15, we list five major 
investees from which we received dividends in 1989 of about $45 
million, after taxes. However, our share of the retained earnings 
of these investees totaled about $212 million last year, not 
counting large capital gains realized by GEICO and Coca-Cola. If 
this $212 million had been distributed to us, our own operating 
earnings, after the payment of additional taxes, would have been 
close to $500 million rather than the $300 million shown in the 
table.
 The question you must decide is whether these undistributed 
earnings are as valuable to us as those we report. We believe 
they are - and even think they may be more valuable. The reason 
for this a-bird-in-the-bush-may-be-worth-two-in-the-hand 
conclusion is that earnings retained by these investees will 
be deployed by talented, owner-oriented managers who 
sometimes have better uses for these funds in their own 
businesses than we would have in ours. I would not make such a 
generous assessment of most managements, but it is appropriate in 
these cases.
 In our view, Berkshire's fundamental earning power is best 
measured by a "look-through" approach, in which we append our 
share of the operating earnings retained by our investees to our 
own reported operating earnings, excluding capital gains in both 
instances. For our intrinsic business value to grow at an average 
of 15% per year, our "look-through" earnings must grow at about 
the same pace. We'll need plenty of help from our present 
investees, and also need to add a new one from time to time, in 
order to reach this 15% goal.
Non-Insurance Operations
 In the past, we have labeled our major manufacturing, 
publishing and retail operations "The Sainted Seven." With our 
acquisition of Borsheim's early in 1989, the challenge was to 
find a new title both alliterative and appropriate. We failed: 
Let's call the group "The Sainted Seven Plus One."
 This divine assemblage - Borsheim's, The Buffalo News, 
Fechheimer Bros., Kirby, Nebraska Furniture Mart, Scott Fetzer 
Manufacturing Group, See's Candies, World Book - is a collection 
of businesses with economic characteristics that range from good 
to superb. Its managers range from superb to superb.
 Most of these managers have no need to work for a living; 
they show up at the ballpark because they like to hit home runs. 
And that's exactly what they do. Their combined financial 
statements (including those of some smaller operations), shown on 
page 49, illustrate just how outstanding their performance is. On 
an historical accounting basis, after-tax earnings of these 
operations were 57% on average equity capital. Moreover, this 
return was achieved with no net leverage: Cash equivalents have 
matched funded debt. When I call off the names of our managers - 
the Blumkin, Friedman and Heldman families, Chuck Huggins, Stan 
Lipsey, and Ralph Schey - I feel the same glow that Miller 
Huggins must have experienced when he announced the lineup of his 
1927 New York Yankees.
 Let's take a look, business by business:
o In its first year with Berkshire, Borsheim's met all 
expectations. Sales rose significantly and are now considerably 
better than twice what they were four years ago when the company 
moved to its present location. In the six years prior to the 
move, sales had also doubled. Ike Friedman, Borsheim's managing 
genius - and I mean that - has only one speed: fast-forward.
 If you haven't been there, you've never seen a jewelry store 
like Borsheim's. Because of the huge volume it does at one 
location, the store can maintain an enormous selection across all 
price ranges. For the same reason, it can hold its expense ratio 
to about one-third that prevailing at jewelry stores offering 
comparable merchandise. The store's tight control of expenses, 
accompanied by its unusual buying power, enable it to offer 
prices far lower than those of other jewelers. These prices, in 
turn, generate even more volume, and so the circle goes 'round 
and 'round. The end result is store traffic as high as 4,000 
people on seasonally-busy days.
 Ike Friedman is not only a superb businessman and a great 
showman but also a man of integrity. We bought the business 
without an audit, and all of our surprises have been on the plus 
side. "If you don't know jewelry, know your jeweler" makes sense 
whether you are buying the whole business or a tiny diamond.
 A story will illustrate why I enjoy Ike so much: Every two 
years I'm part of an informal group that gathers to have fun and 
explore a few subjects. Last September, meeting at Bishop's Lodge 
in Santa Fe, we asked Ike, his wife Roz, and his son Alan to come 
by and educate us on jewels and the jewelry business.
 Ike decided to dazzle the group, so he brought from Omaha 
about $20 million of particularly fancy merchandise. I was 
somewhat apprehensive - Bishop's Lodge is no Fort Knox - and I 
mentioned my concern to Ike at our opening party the evening 
before his presentation. Ike took me aside. "See that safe?" he 
said. "This afternoon we changed the combination and now even the 
hotel management doesn't know what it is." I breathed easier. Ike 
went on: "See those two big fellows with guns on their hips? 
They'll be guarding the safe all night." I now was ready to 
rejoin the party. But Ike leaned closer: "And besides, Warren," 
he confided, "the jewels aren't in the safe."
 How can we miss with a fellow like that - particularly when 
he comes equipped with a talented and energetic family, Alan, 
Marvin Cohn, and Don Yale.
o At See's Candies we had an 8% increase in pounds sold, even 
though 1988 was itself a record year. Included in the 1989 
performance were excellent same-store poundage gains, our first 
in many years.
 Advertising played an important role in this outstanding 
performance. We increased total advertising expenditures from $4 
million to $5 million and also got copy from our agency, Hal 
Riney & Partners, Inc., that was 100% on the money in conveying 
the qualities that make See's special.
 In our media businesses, such as the Buffalo News, we sell 
advertising. In other businesses, such as See's, we are buyers. 
When we buy, we practice exactly what we preach when we sell. At 
See's, we more than tripled our expenditures on newspaper 
advertising last year, to the highest percentage of sales that I 
can remember. The payoff was terrific, and we thank both Hal 
Riney and the power of well-directed newspaper advertising for 
this result.
 See's splendid performances have become routine. But there 
is nothing routine about the management of Chuck Huggins: His 
daily involvement with all aspects of production and sales 
imparts a quality-and-service message to the thousands of 
employees we need to produce and distribute over 27 million 
pounds of candy annually. In a company with 225 shops and a 
massive mail order and phone business, it is no small trick to 
run things so that virtually every customer leaves happy. Chuck 
makes it look easy. 
o The Nebraska Furniture Mart had record sales and excellent 
earnings in 1989, but there was one sad note. Mrs. B - Rose 
Blumkin, who started the company 52 years ago with $500 - quit in 
May, after disagreeing with other members of the Blumkin 
family/management about the remodeling and operation of the 
carpet department.
 Mrs. B probably has made more smart business decisions than 
any living American, but in this particular case I believe the 
other members of the family were entirely correct: Over the past 
three years, while the store's other departments increased sales 
by 24%, carpet sales declined by 17% (but not because of any lack 
of sales ability by Mrs. B, who has always personally sold far 
more merchandise than any other salesperson in the store).
 You will be pleased to know that Mrs. B continues to make 
Horatio Alger's heroes look like victims of tired blood. At age 
96 she has started a new business selling - what else? - carpet 
and furniture. And as always, she works seven days a week.
 At the Mart Louie, Ron, and Irv Blumkin continue to propel 
what is by far the largest and most successful home furnishings 
store in the country. They are outstanding merchants, outstanding 
managers, and a joy to be associated with. One reading on their 
acumen: In the fourth quarter of 1989, the carpet department 
registered a 75.3% consumer share in the Omaha market, up from 
67.7% a year earlier and over six times that of its nearest 
competitor.
 NFM and Borsheim's follow precisely the same formula for 
success: (1) unparalleled depth and breadth of merchandise at one 
location; (2) the lowest operating costs in the business; (3) the 
shrewdest of buying, made possible in part by the huge volumes 
purchased; (4) gross margins, and therefore prices, far below 
competitors'; and (5) friendly personalized service with family 
members on hand at all times.
 Another plug for newspapers: NFM increased its linage in the 
local paper by over 20% in 1989 - off a record 1988 - and remains 
the paper's largest ROP advertiser by far. (ROP advertising is 
the kind printed in the paper, as opposed to that in preprinted 
inserts.) To my knowledge, Omaha is the only city in which a home 
furnishings store is the advertising leader. Many retailers cut 
space purchases in 1989; our experience at See's and NFM would 
indicate they made a major mistake.
o The Buffalo News continued to star in 1989 in three 
important ways: First, among major metropolitan papers, both 
daily and Sunday, the News is number one in household penetration 
- the percentage of local households that purchase it each day. 
Second, in "news hole" - the portion of the paper devoted to news 
- the paper stood at 50.1% in 1989 vs. 49.5% in 1988, a level 
again making it more news-rich than any comparable American 
paper. Third, in a year that saw profits slip at many major 
papers, the News set its seventh consecutive profit record.
 To some extent, these three factors are related, though 
obviously a high-percentage news hole, by itself, reduces profits 
significantly. A large and intelligently-utilized news hole, 
however, attracts a wide spectrum of readers and thereby boosts 
penetration. High penetration, in turn, makes a newspaper 
particularly valuable to retailers since it allows them to talk 
to the entire community through a single "megaphone." A low￾penetration paper is a far less compelling purchase for many 
advertisers and will eventually suffer in both ad rates and 
profits.
 It should be emphasized that our excellent penetration is 
neither an accident nor automatic. The population of Erie County, 
home territory of the News, has been falling - from 1,113,000 in 
1970 to 1,015,000 in 1980 to an estimated 966,000 in 1988. 
Circulation figures tell a different story. In 1975, shortly 
before we started our Sunday edition, the Courier-Express, a 
long-established Buffalo paper, was selling 207,500 Sunday copies 
in Erie County. Last year - with population at least 5% lower - 
the News sold an average of 292,700 copies. I believe that in no 
other major Sunday market has there been anything close to that 
increase in penetration.
 When this kind of gain is made - and when a paper attains an 
unequaled degree of acceptance in its home town - someone is 
doing something right. In this case major credit clearly belongs 
to Murray Light, our long-time editor who daily creates an 
informative, useful, and interesting product. Credit should go 
also to the Circulation and Production Departments: A paper that 
is frequently late, because of production problems or 
distribution weaknesses, will lose customers, no matter how 
strong its editorial content.
 Stan Lipsey, publisher of the News, has produced profits 
fully up to the strength of our product. I believe Stan's 
managerial skills deliver at least five extra percentage points 
in profit margin compared to the earnings that would be achieved 
by an average manager given the same circumstances. That is an 
amazing performance, and one that could only be produced by a 
talented manager who knows - and cares - about every nut and bolt 
of the business. 
 Stan's knowledge and talents, it should be emphasized, 
extend to the editorial product. His early years in the business 
were spent on the news side and he played a key role in 
developing and editing a series of stories that in 1972 won a 
Pulitzer Prize for the Sun Newspaper of Omaha. Stan and I have 
worked together for over 20 years, through some bad times as well 
as good, and I could not ask for a better partner.
o At Fechheimer, the Heldman clan - Bob, George, Gary, 
Roger and Fred - continue their extraordinary performance. Profits 
in 1989 were down somewhat because of problems the business 
experienced in integrating a major 1988 acquisition. These 
problems will be ironed out in time. Meanwhile, return on invested 
capital at Fechheimer remains splendid.
 Like all of our managers, the Heldmans have an exceptional 
command of the details of their business. At last year's annual 
meeting I mentioned that when a prisoner enters San Quentin, Bob 
and George probably know his shirt size. That's only a slight 
exaggeration: No matter what area of the country is being 
discussed, they know exactly what is going on with major 
customers and with the competition.
 Though we purchased Fechheimer four years ago, Charlie and I 
have never visited any of its plants or the home office in 
Cincinnati. We're much like the lonesome Maytag repairman: The 
Heldman managerial product is so good that a service call is 
never needed.
o Ralph Schey continues to do a superb job in managing 
our largest group - World Book, Kirby, and the Scott Fetzer 
Manufacturing Companies. Aggregate earnings of these businesses 
have increased every year since our purchase and returns on 
invested capital continue to be exceptional. Ralph is running an 
enterprise large enough, were it standing alone, to be on the 
Fortune 500. And he's running it in a fashion that would put him 
high in the top decile, measured by return on equity.
 For some years, World Book has operated out of a single 
location in Chicago's Merchandise Mart. Anticipating the imminent 
expiration of its lease, the business is now decentralizing into 
four locations. The expenses of this transition are significant; 
nevertheless profits in 1989 held up well. It will be another 
year before costs of the move are fully behind us.
 Kirby's business was particularly strong last year, 
featuring large gains in export sales. International business has 
more than doubled in the last two years and quintupled in the 
past four; its share of unit sales has risen from 5% to 20%. Our 
largest capital expenditures in 1989 were at Kirby, in 
preparation for a major model change in 1990.
 Ralph's operations contribute about 40% of the total 
earnings of the non-insurance group whose results are shown on 
page 49. When we bought Scott Fetzer at the start of 1986, our 
acquisition of Ralph as a manager was fully as important as our 
acquisition of the businesses. In addition to generating 
extraordinary earnings, Ralph also manages capital extremely 
well. These abilities have produced funds for Berkshire that, in 
turn, have allowed us to make many other profitable commitments.
 And that completes our answer to the 1927 Yankees.
Insurance Operations
 Shown below is an updated version of our usual table 
presenting key figures for the pr
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Last year we made a prediction: "A reduction [in Berkshire's net worth] is almost certain
in at least one of the next three years." During much of 1990's second half, we were on the
road to quickly proving that forecast accurate. But some strengthening in stock prices late in
the year enabled us to close 1990 with net worth up by $362 million, or 7.3%. Over the last
26 years (that is, since present management took over) our per-share book value has grown
from $19.46 to $4,612.06, or at a rate of 23.2% compounded annually.
Our growth rate was lackluster in 1990 because our four major common stock holdings,
in aggregate, showed little change in market value. Last year I told you that though these
companies - Capital Cities/ABC, Coca-Cola, GEICO, and Washington Post - had fine
businesses and superb managements, widespread recognition of these attributes had pushed
the stock prices of the four to lofty levels. The market prices of the two media companies
have since fallen significantly - for good reasons relating to evolutionary industry
developments that I will discuss later - and the price of Coca-Cola stock has increased
significantly for what I also believe are good reasons. Overall, yearend 1990 prices of our
"permanent four," though far from enticing, were a bit more appealing than they were a year
earlier.
Berkshire's 26-year record is meaningless in forecasting future results; so also, we hope,
is the one-year record. We continue to aim for a 15% average annual gain in intrinsic value.
But, as we never tire of telling you, this goal becomes ever more difficult to reach as our
equity base, now $5.3 billion, increases.
If we do attain that 15% average, our shareholders should fare well. However, Berkshire's
corporate gains will produce an identical gain for a specific shareholder only if he eventually
sells his shares at the same relationship to intrinsic value that existed when he bought them.
For example, if you buy at a 10% premium to intrinsic value; if intrinsic value subsequently
grows at 15% a year; and if you then sell at a 10% premium, your own return will
correspondingly be 15% compounded. (The calculation assumes that no dividends are paid.)
If, however, you buy at a premium and sell at a smaller premium, your results will be
somewhat inferior to those achieved by the company.
Ideally, the results of every Berkshire shareholder would closely mirror those of the
company during his period of ownership. That is why Charlie Munger, Berkshire's Vice
Chairman and my partner, and I hope for Berkshire to sell consistently at about intrinsic value.
We prefer such steadiness to the value-ignoring volatility of the past two years: In 1989
intrinsic value grew less than did book value, which was up 44%, while the market price rose
85%; in 1990 book value and intrinsic value increased by a small amount, while the market
price fell 23%.
Berkshire's intrinsic value continues to exceed book value by a substantial margin. We
can't tell you the exact differential because intrinsic value is necessarily an estimate; Charlie
and I might, in fact, differ by 10% in our appraisals. We do know, however, that we own some
exceptional businesses that are worth considerably more than the values at which they are
carried on our books.
Much of the extra value that exists in our businesses has been created by the managers
now running them. Charlie and I feel free to brag about this group because we had nothing to
do with developing the skills they possess: These superstars just came that way. Our job is
merely to identify talented managers and provide an environment in which they can do their
stuff. Having done it, they send their cash to headquarters and we face our only other task:
the intelligent deployment of these funds.
My own role in operations may best be illustrated by a small tale concerning my
granddaughter, Emily, and her fourth birthday party last fall. Attending were other children,
adoring relatives, and Beemer the Clown, a local entertainer who includes magic tricks in his
act.
Beginning these, Beemer asked Emily to help him by waving a "magic wand" over "the
box of wonders." Green handkerchiefs went into the box, Emily waved the wand, and Beemer
removed blue ones. Loose handkerchiefs went in and, upon a magisterial wave by Emily,
emerged knotted. After four such transformations, each more amazing than its predecessor,
Emily was unable to contain herself. Her face aglow, she exulted: "Gee, I'm really good at
this."
And that sums up my contribution to the performance of Berkshire's business magicians
- the Blumkins, the Friedman family, Mike Goldberg, the Heldmans, Chuck Huggins, Stan
Lipsey and Ralph Schey. They deserve your applause.
Sources of Reported Earnings
The table below shows the major sources of Berkshire's reported earnings. In this
presentation, amortization of Goodwill and other major purchase-price accounting
adjustments are not charged against the specific businesses to which they apply, but are
instead aggregated and shown separately. This procedure lets you view the earnings of our
businesses as they would have been reported had we not purchased them. I've explained in
past reports why this form of presentation seems to us to be more useful to investors and
managers than one utilizing generally accepted accounting principles (GAAP), which require
purchase-price adjustments to be made on a business-by-business basis. The total net
earnings we show in the table are, of course, identical to the GAAP total in our audited
financial statements.
Much additional information about these businesses is given on pages 39-46, where you
also will find our segment earnings reported on a GAAP basis. For information on Wesco's
businesses, I urge you to read Charlie Munger's letter, which starts on page 56. His letter also
contains the clearest and most insightful discussion of the banking industry that I have seen.
 (000s omitted) 
 -----------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ------------------- ------------------- 
 1990 1989 1990 1989
 -------- -------- -------- --------
Operating Earnings:
 Insurance Group:
 Underwriting ................ $(26,647) $(24,400) $(14,936) $(12,259)
 Net Investment Income ....... 327,048 243,599 282,613 213,642 
 Buffalo News .................. 43,954 46,047 25,981 27,771 
 Fechheimer .................... 12,450 12,621 6,605 6,789 
 Kirby ......................... 27,445 26,114 17,613 16,803 
 Nebraska Furniture Mart ....... 17,248 17,070 8,485 8,441 
 Scott Fetzer Manufacturing Group 30,378 33,165 18,458 19,996 
 See
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1991 was $2.1 billion, or 
39.6%. Over the last 27 years (that is, since present management 
took over) our per-share book value has grown from $19 to $6,437, 
or at a rate of 23.7% compounded annually.
 The size of our equity capital - which now totals $7.4 
billion - makes it certain that we cannot maintain our past rate 
of gain or, for that matter, come close to doing so. As Berkshire 
grows, the universe of opportunities that can significantly 
influence the company's performance constantly shrinks. When we 
were working with capital of $20 million, an idea or business 
producing $1 million of profit added five percentage points to 
our return for the year. Now we need a $370 million idea (i.e., 
one contributing over $550 million of pre-tax profit) to achieve 
the same result. And there are many more ways to make $1 million 
than to make $370 million.
 Charlie Munger, Berkshire's Vice Chairman, and I have set a 
goal of attaining a 15% average annual increase in Berkshire's 
intrinsic value. If our growth in book value is to keep up with a 
15% pace, we must earn $22 billion during the next decade. Wish 
us luck - we'll need it.
 Our outsized gain in book value in 1991 resulted from a 
phenomenon not apt to be repeated: a dramatic rise in the price￾earnings ratios of Coca-Cola and Gillette. These two stocks 
accounted for nearly $1.6 billion of our $2.1 billion growth in 
net worth last year. When we loaded up on Coke three years ago, 
Berkshire's net worth was $3.4 billion; now our Coke stock alone 
is worth more than that.
 Coca-Cola and Gillette are two of the best companies in the 
world and we expect their earnings to grow at hefty rates in the 
years ahead. Over time, also, the value of our holdings in these 
stocks should grow in rough proportion. Last year, however, the 
valuations of these two companies rose far faster than their 
earnings. In effect, we got a double-dip benefit, delivered 
partly by the excellent earnings growth and even more so by the 
market's reappraisal of these stocks. We believe this reappraisal 
was warranted. But it can't recur annually: We'll have to settle 
for a single dip in the future.
A Second Job
 In 1989 when I - a happy consumer of five cans of Cherry 
Coke daily - announced our purchase of $1 billion worth of Coca￾Cola stock, I described the move as a rather extreme example of 
putting our money where my mouth was. On August 18 of last year, 
when I was elected Interim Chairman of Salomon Inc, it was a 
different story: I put my mouth where our money was.
 You've all read of the events that led to my appointment. My 
decision to take the job carried with it an implicit but 
important message: Berkshire's operating managers are so 
outstanding that I knew I could materially reduce the time I was 
spending at the company and yet remain confident that its 
economic progress would not skip a beat. The Blumkins, the 
Friedman family, Mike Goldberg, the Heldmans, Chuck Huggins, Stan 
Lipsey, Ralph Schey and Frank Rooney (CEO of H.H. Brown, our 
latest acquisition, which I will describe later) are all masters 
of their operations and need no help from me. My job is merely to 
treat them right and to allocate the capital they generate. 
Neither function is impeded by my work at Salomon.
 The role that Charlie and I play in the success of our 
operating units can be illustrated by a story about George Mira, 
the one-time quarterback of the University of Miami, and his 
coach, Andy Gustafson. Playing Florida and near its goal line, 
Mira dropped back to pass. He spotted an open receiver but found 
his right shoulder in the unshakable grasp of a Florida 
linebacker. The right-handed Mira thereupon switched the ball to 
his other hand and threw the only left-handed pass of his life - 
for a touchdown. As the crowd erupted, Gustafson calmly turned to 
a reporter and declared: "Now that's what I call coaching."
 Given the managerial stars we have at our operating units, 
Berkshire's performance is not affected if Charlie or I slip away 
from time to time. You should note, however, the "interim" in my 
Salomon title. Berkshire is my first love and one that will never 
fade: At the Harvard Business School last year, a student asked 
me when I planned to retire and I replied, "About five to ten 
years after I die."
Sources of Reported Earnings
 The table below shows the major sources of Berkshire's 
reported earnings. In this presentation, amortization of Goodwill 
and other major purchase-price accounting adjustments are not 
charged against the specific businesses to which they apply, but 
are instead aggregated and shown separately. This procedure lets 
you view the earnings of our businesses as they would have been 
reported had we not purchased them. I've explained in past 
reports why this form of presentation seems to us to be more 
useful to investors and managers than one utilizing generally 
accepted accounting principles (GAAP), which require purchase￾price adjustments to be made on a business-by-business basis. The 
total net earnings we show in the table are, of course, identical 
to the GAAP total in our audited financial statements.
 A large amount of additional information about these 
businesses is given on pages 33-47, where you also will find 
our segment earnings reported on a GAAP basis. However, we will 
not in this letter discuss each of our non-insurance operations, 
as we have in the past. Our businesses have grown in number - and 
will continue to grow - so it now makes sense to rotate coverage, 
discussing one or two in detail each year.
 
 (000s omitted)
 ----------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ---------------------- ---------------------- 
 1991 1990 1991 1990
 ---------- ---------- ---------- ----------
Operating Earnings:
 Insurance Group:
 Underwriting ............ $(119,593) $ (26,647) $ (77,229) $ (14,936)
 Net Investment Income ... 331,846 327,047 285,173 282,613 
 H. H. Brown (acquired 7/1/91) 13,616 --- 8,611 --- 
 Buffalo News .............. 37,113 43,954 21,841 25,981 
 Fechheimer ................ 12,947 12,450 6,843 6,605 
 Kirby ..................... 35,726 27,445 22,555 17,613 
 Nebraska Furniture Mart ... 14,384 17,248 6,993 8,485 
 Scott Fetzer 
 Manufacturing Group .... 26,123 30,378 15,901 18,458 
 See's Candies ............. 42,390 39,580 25,575 23,892 
 Wesco - other than Insurance 12,230 12,441 8,777 9,676 
 World Book ................ 22,483 31,896 15,487 20,420 
 Amortization of Goodwill .. (4,113) (3,476) (4,098) (3,461)
 Other Purchase-Price 
 Accounting Charges ..... (6,021) (5,951) (7,019) (6,856)
 Interest Expense* ......... (89,250) (76,374) (57,165) (49,726)
 Shareholder-Designated 
 Contributions .......... (6,772) (5,824) (4,388) (3,801)
 Other ..................... 77,399 58,310 47,896 35,782 
 ---------- ---------- ---------- ----------
Operating Earnings 400,508 482,477 315,753 370,745 
Sales of Securities 192,478 33,989 124,155 23,348 
Total Earnings - All Entities $ 592,986 $ 516,466 $ 439,908 $ 394,093 
*Excludes interest expense of Scott Fetzer Financial Group and 
 Mutual Savings & Loan.
"Look-Through" Earnings
 We've previously discussed look-through earnings, which 
consist of: (1) the operating earnings reported in the previous 
section, plus; (2) the retained operating earnings of major 
investees that, under GAAP accounting, are not reflected in our 
profits, less; (3) an allowance for the tax that would be paid by 
Berkshire if these retained earnings of investees had instead been 
distributed to us.
 I've told you that over time look-through earnings must 
increase at about 15% annually if our intrinsic business value is 
to grow at that rate. Indeed, since present management took over in 
1965, our look-through earnings have grown at almost the identical 
23% rate of gain recorded for book value.
 Last year, however, our look-through earnings did not grow at 
all but rather declined by 14%. To an extent, the decline was 
precipitated by two forces that I discussed in last year's report 
and that I warned you would have a negative effect on look-through 
earnings.
 First, I told you that our media earnings - both direct and 
look-through - were "sure to decline" and they in fact did. The 
second force came into play on April 1, when the call of our 
Gillette preferred stock required us to convert it into common. The 
after-tax earnings in 1990 from our preferred had been about $45 
million, an amount somewhat higher than the combination in 1991 of 
three months of dividends on our preferred plus nine months of 
look-through earnings on the common.
 Two other outcomes that I did not foresee also hurt look￾through earnings in 1991. First, we had a break-even result from 
our interest in Wells Fargo (dividends we received from the company 
were offset by negative retained earnings). Last year I said that 
such a result at Wells was "a low-level possibility - not a 
likelihood." Second, we recorded significantly lower - though still 
excellent - insurance profits.
 The following table shows you how we calculate look-through 
earnings, although I warn you that the figures are necessarily very 
rough. (The dividends paid to us by these investees have been 
included in the operating earnings itemized on page 6, mostly 
under "Insurance Group: Net Investment Income.")
 Berkshire's Share 
 of Undistributed
 Berkshire's Approximate Operating Earnings 
Berkshire's Major Investees Ownership at Yearend (in millions)
--------------------------- ----------------------- ------------------ 
 1991 1990 1991 1990
 ------ ------ -------- --------
Capital Cities/ABC Inc. ........ 18.1% 17.9% $ 61 $ 85
The Coca-Cola Company .......... 7.0% 7.0% 69 58
Federal Home Loan Mortgage Corp. 3.4%(1) 3.2%(1) 15 10
The Gillette Company ........... 11.0% --- 23(2) --- 
GEICO Corp. .................... 48.2% 46.1% 69 76
The Washington Post Company .... 14.6% 14.6% 10 18
Wells Fargo & Company .......... 9.6% 9.7% (17) 19(3)
 -------- --------
Berkshire's share of 
 undistributed earnings of major investees $230 $266
Hypothetical tax on these undistributed investee earnings (30) (35)
Reported operating earnings of Berkshire 316 371 
 -------- --------
 Total look-through earnings of Berkshire $516 $602 
 ======== ========
 (1) Net of minority interest at Wesco
 (2) For the nine months after Berkshire converted its 
 preferred on April 1
 (3) Calculated on average ownership for the year
 * * * * * * * * * * * *
 We also believe that investors can benefit by focusing on 
their own look-through earnings. To calculate these, they should 
determine the underlying earnings attributable to the shares they 
hold in their portfolio and total these. The goal of each investor 
should be to create a portfolio (in effect, a "company") that will 
deliver him or her the highest possible look-through earnings a 
decade or so from now. 
 An approach of this kind will force the investor to think 
about long-term business prospects rather than short-term stock 
market prospects, a perspective likely to improve results. It's 
true, of course, that, in the long run, the scoreboard for 
investment decisions is market price. But prices will be determined 
by future earnings. In investing, just as in baseball, to put runs 
on the scoreboard one must watch the playing field, not the 
scoreboard.
A Change in Media Economics and Some Valuation Math
 In last year's report, I stated my opinion that the decline in 
the profitability of media companies reflected secular as well as 
cyclical factors. The events of 1991 have fortified that case: The 
economic strength of once-mighty media enterprises continues to 
erode as retailing patterns change and advertising and 
entertainment choices proliferate. In the business world, 
unfortunately, the rear-view mirror is always clearer than the 
windshield: A few years back no one linked to the media business - 
neither lenders, owners nor financial analysts - saw the economic 
deterioration that was in store for the industry. (But give me a 
few years and I'll probably convince myself that I did.)
 The fact is that newspaper, television, and magazine 
properties have begun to resemble businesses more than franchises
in their economic behavior. Let's take a quick look at the 
characteristics separating these two classes of enterprise, keeping 
in mind, however, that many operations fall in some middle ground 
and can best be described as weak franchises or strong businesses.
 An economic franchise arises from a product or service that: 
(1) is needed or desired; (2) is thought by its customers to have 
no close substitute and; (3) is not subject to price regulation. 
The existence of all three conditions will be demonstrated by a 
company's ability to regularly price its product or service 
aggressively and thereby to earn high rates of return on capital. 
Moreover, franchises can tolerate mis-management. Inept managers 
may diminish a franchise's profitability, but they cannot inflict 
mortal damage.
 In contrast, "a business" earns exceptional profits only if it 
is the low-cost operator or if supply of its product or service is 
tight. Tightness in supply usually does not last long. With 
superior management, a company may maintain its status as a low￾cost operator for a much longer time, but even then unceasingly 
faces the possibility of competitive attack. And a business, unlike 
a franchise, can be killed by poor management.
 Until recently, media properties possessed the three 
characteristics of a franchise and consequently could both price 
aggressively and be managed loosely. Now, however, consumers 
looking for information and entertainment (their primary interest 
being the latter) enjoy greatly broadened choices as to where to 
find them. Unfortunately, demand can't expand in response to this 
new supply: 500 million American eyeballs and a 24-hour day are all 
that's available. The result is that competition has intensified, 
markets have fragmented, and the media industry has lost some - 
though far from all - of its franchise strength.
 * * * * * * * * * * * *
 The industry's weakened franchise has an impact on its value 
that goes far beyond the immediate effect on earnings. For an 
understanding of this phenomenon, let's look at some much over￾simplified, but relevant, math.
 A few years ago the conventional wisdom held that a newspaper, 
television or magazine property would forever increase its earnings 
at 6% or so annually and would do so without the employment of 
additional capital, for the reason that depreciation charges would 
roughly match capital expenditures and working capital requirements 
would be minor. Therefore, reported earnings (before amortization 
of intangibles) were also freely-distributable earnings, which 
meant that ownership of a media property could be construed as akin 
to owning a perpetual annuity set to grow at 6% a year. Say, next, 
that a discount rate of 10% was used to determine the present value 
of that earnings stream. One could then calculate that it was 
appropriate to pay a whopping $25 million for a property with 
current after-tax earnings of $1 million. (This after-tax multiplier 
of 25 translates to a multiplier on pre-tax earnings of about 16.)
 Now change the assumption and posit that the $1 million 
represents "normal earning power" and that earnings will bob around 
this figure cyclically. A "bob-around" pattern is indeed the lot of 
most businesses, whose income stream grows only if their owners are 
willing to commit more capital (usually in the form of retained 
earnings). Under our revised assumption, $1 million of earnings, 
discounted by the same 10%, translates to a $10 million valuation. 
Thus a seemingly modest shift in assumptions reduces the property's 
valuation to 10 times after-tax earnings (or about 6 1/2 times 
pre-tax earnings).
 Dollars are dollars whether they are derived from the 
operation of media properties or of steel mills. What in the past 
caused buyers to value a dollar of earnings from media far higher 
than a dollar from steel was that the earnings of a media property 
were expected to constantly grow (without the business requiring 
much additional capital), whereas steel earnings clearly fell in 
the bob-around category. Now, however, expectations for media have 
moved toward the bob-around model. And, as our simplified example 
illustrates, valuations must change dramatically when expectations 
are revised.
 We have a significant investment in media - both through our 
direct ownership of Buffalo News and our shareholdings in The 
Washington Post Company and Capital Cities/ABC - and the intrinsic 
value of this investment has declined materially because of the 
secular transformation that the industry is experiencing. (Cyclical 
factors have also hurt our current look-through earnings, but these 
factors do not reduce intrinsic value.) However, as our Business 
Principles on page 2-3 note, one of the rules by which we run 
Berkshire is that we do not sell businesses - or investee holdings 
that we have classified as permanent - simply because we see ways 
to use the money more advantageously elsewhere. (We did sell 
certain other media holdings sometime back, but these were 
relatively small.)
 The intrinsic value losses that we have suffered have been 
moderated because the Buffalo News, under Stan Lipsey's leadership, 
has done far better than most newspapers and because both Cap 
Cities and Washington Post are exceptionally well-managed. In 
particular, these companies stayed on the sidelines during the late 
1980's period in which purchasers of media properties regularly 
paid irrational prices. Also, the debt of both Cap Cities and 
Washington Post is small and roughly offset by cash that they hold. 
As a result, the shrinkage in the value of their assets has not 
been accentuated by the effects of leverage. Among publicly-owned 
media companies, our two investees are about the only ones 
essentially free of debt. Most of the other companies, through a 
combination of the aggressive acquisition policies they pursued and 
shrinking earnings, find themselves with debt equal to five or more 
times their current net income.
 The strong balance sheets and strong managements of Cap Cities 
and Washington Post leave us more comfortable with these 
investments than we would be with holdings in any other media 
companies. Moreover, most media properties continue to have far 
better economic characteristics than those possessed by the average 
American business. But gone are the days of bullet-proof franchises 
and cornucopian economics.
Twenty Years in a Candy Store
 We've just passed a milestone: Twenty years ago, on January 3, 
1972, Blue Chip Stamps (then an affiliate of Berkshire and later 
merged into it) bought control of See's Candy Shops, a West Coast 
manufacturer and retailer of boxed-chocolates. The nominal price 
that the sellers were asking - calculated on the 100% ownership we 
ultimately attained - was $40 million. But the company had $10 
million of excess cash, and therefore the true offering price was 
$30 million. Charlie and I, not yet fully appreciative of the value 
of an economic franchise, looked at the company's mere $7 million 
of tangible net worth and said $25 million was as high as we would 
go (and we meant it). Fortunately, the sellers accepted our offer.
 The sales of trading stamps by Blue Chip thereafter declined 
from $102.5 million in 1972 to $1.2 million in 1991. But See's 
candy sales in the same period increased from $29 million to $196 
million. Moreover, profits at See's grew even faster than sales, 
from $4.2 million pre-tax in 1972 to $42.4 million last year.
 For an increase in profits to be evaluated properly, it must 
be compared with the incremental capital investment required to 
produce it. On this score, See's has been astounding: The company 
now operates comfortably with only $25 million of net worth, which 
means that our beginning base of $7 million has had to be 
supplemented by only $18 million of reinvested earnings. Meanwhile, 
See's remaining pre-tax profits of $410 million were distributed to 
Blue Chip/Berkshire during the 20 years for these companies to 
deploy (after payment of taxes) in whatever way made most sense.
 In our See's purchase, Charlie and I had one important 
insight: We saw that the business had untapped pricing power. 
Otherwise, we were lucky twice over. First, the transaction was not 
derailed by our dumb insistence on a $25 million price. Second, we 
found Chuck Huggins, then See's executive vice-president, whom we 
instantly put in charge. Both our business and personal experiences 
with Chuck have been outstanding. One example: When the purchase 
was made, we shook hands with Chuck on a compensation arrangement - 
conceived in about five minutes and never reduced to a written 
contract - that remains unchanged to this day.
 In 1991, See's sales volume, measured in dollars, matched that 
of 1990. In pounds, however, volume was down 4%. All of that 
slippage took place in the last two months of the year, a period 
that normally produces more than 80% of annual profits. Despite the 
weakness in sales, profits last year grew 7%, and our pre-tax 
profit margin was a record 21.6%.
 Almost 80% of See's sales come from California and our 
business clearly was hurt by the recession, which hit the state 
with particular force late in the year. Another negative, however, 
was the mid-year initiation in California of a sales tax of 7%-8«% 
(depending on the county involved) on "snack food" that was deemed 
applicable to our candy.
 Shareholders who are students of epistemological shadings will 
enjoy California's classifications of "snack" and "non-snack" 
foods:
 Taxable "Snack" Foods Non-Taxable "Non-Snack" Foods
 --------------------- -----------------------------
 Ritz Crackers Soda Crackers
 Popped Popcorn Unpopped Popcorn
 Granola Bars Granola Cereal
 Slice of Pie (Wrapped) Whole Pie
 Milky Way Candy Bar Milky Way Ice Cream Bar
 What - you are sure to ask - is the tax status of a melted
Milky Way ice cream bar? In that androgynous form, does it more 
resemble an ice cream bar or a candy bar that has been left in the 
sun? It's no wonder that Brad Sherman, Chairman of California's 
State Board of Equalization, who opposed the snack food bill but 
must now administer it, has said: "I came to this job as a 
specialist in tax law. Now I find my constituents should have 
elected Julia Child."
 Charlie and I have many reasons to be thankful for our 
association with Chuck and See's. The obvious ones are that we've 
earned exceptional returns and had a good time in the process. 
Equally important, ownership of See's has taught us much about the 
evaluation of franchises. We've made significant money in certain 
common stocks because of the lessons we learned at See's.
H. H. Brown
 We made a sizable acquisition in 1991 - the H. H. Brown 
Company - and behind this business is an interesting history. In 
1927 a 29-year-old businessman named Ray Heffernan purchased the 
company, then located in North Brookfield, Massachusetts, for 
$10,000 and began a 62-year career of running it. (He also found 
time for other pursuits: At age 90 he was still joining new golf 
clubs.) By Mr. Heffernan's retirement in early 1990 H. H. Brown had 
three plants in the United States and one in Canada; employed close 
to 2,000 people; and earned about $25 million annually before 
taxes.
 Along the way, Frances Heffernan, one of Ray's daughters, 
married Frank Rooney, who was sternly advised by Mr. Heffernan 
before the wedding that he had better forget any ideas he might 
have about working for his father-in-law. That was one of Mr. 
Heffernan's few mistakes: Frank went on to become CEO of Melville 
Shoe (now Melville Corp.). During his 23 years as boss, from 1964 
through 1986, Melville's earnings averaged more than 20% on equity 
and its stock (adjusted for splits) rose from $16 to $960. And a 
few years after Frank retired, Mr. Heffernan, who had fallen ill, 
asked him to run Brown.
 After Mr. Heffernan died late in 1990, his family decided to 
sell the company - and here we got lucky. I had known Frank for a 
few years but not well enough for him to think of Berkshire as a 
possible buyer. He instead gave the assignment of selling Brown to 
a major investment banker, which failed also to think of us. But 
last spring Frank was playing golf in Florida with John Loomis, a 
long-time friend of mine as well as a Berkshire shareholder, who is 
always on the alert for something that might fit us. Hearing about 
the impending sale of Brown, John told Frank that the company 
should be right up Berkshire's alley, and Frank promptly gave me a 
call. I thought right away that we would make a deal and before 
long it was done.
 Much of my enthusiasm for this purchase came from Frank's 
willingness to continue as CEO. Like most of our managers, he has 
no financial need to work but does so because he loves the game and 
likes to excel. Managers of this stripe cannot be "hired" in the 
normal sense of the word. What we must do is provide a concert hall 
in which business artists of this class will wish to perform.
 Brown (which, by the way, has no connection to Brown Shoe of 
St. Louis) is the leading North American manufacturer of work shoes 
and boots, and it has a history of earning unusually fine margins 
on sales and assets. Shoes are a tough business - of the billion 
pairs purchased in the United States each year, about 85% are 
imported - and most manufacturers in the industry do poorly. The 
wide range of styles and sizes that producers offer causes 
inventories to be heavy; substantial capital is also tied up in 
receivables. In this kind of environment, only outstanding managers 
like Frank and the group developed by Mr. Heffernan can prosper.
 A distinguishing characteristic of H. H. Brown is one of the 
most unusual compensation systems I've encountered - but one that 
warms my heart: A number of key managers are paid an annual salary 
of $7,800, to which is added a designated percentage of the profits 
of the company after these are reduced by a charge for capital 
employed. These managers therefore truly stand in the shoes of 
owners. In contrast, most managers talk the talk but don't walk the 
walk, choosing instead to employ compensation systems that are long 
on carrots but short on sticks (and that almost invariably treat 
equity capital as if it were cost-free). The arrangement at Brown, 
in any case, has served both the company and its managers 
exceptionally well, which should be no surprise: Managers eager to 
bet heavily on their abilities usually have plenty of ability to 
bet on.
 * * * * * * * * * * * *
 It's discouraging to note that though we have on four 
occasions made major purchases of companies whose sellers were 
represented by prominent investment banks, we were in only one of 
these instances contacted by the investment bank. In the other 
three cases, I myself or a friend initiated the transaction at some 
point after the investment bank had solicited its own list of 
prospects. We would love to see an intermediary earn its fee by 
thinking of us - and therefore repeat here what we're looking for:
 (1) Large purchases (at least $10 million of after-tax 
 earnings),
 (2) Demonstrated consistent earning power (future projections 
 are of little interest to us, nor are "turnaround" 
 situations),
 (3) Businesses earning good returns on equity while employing 
 little or no debt,
 (4) Management in place (we can't supply it),
 (5) Simple businesses (if there's lots of technology, we 
 won't understand it),
 (6) An offering price (we don't want to waste our time or 
 that of the seller by talking, even preliminarily, 
 about a transaction when price is unknown).
 We will not engage in unfriendly takeovers. We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we're interested. (With Brown, 
we didn't even need to take five.) We prefer to buy for cash, but 
will consider issuing stock when we receive as much in intrinsic 
business value as we give.
 Our favorite form of purchase is one fitting the pattern 
through which we acquired Nebraska Furniture Mart, Fechheimer's and 
Borsheim's. In cases like these, the company's owner-managers wish 
to generate significant amounts of cash, sometimes for themselves, 
but often for their families or inactive shareholders. At the same 
time, these managers wish to remain significant owners who continue 
to run their companies just as they have in the past. We think we 
offer a particularly good fit for owners with such objectives and 
we invite potential sellers to check us out by contacting people 
with whom we have done business in the past.
 Charlie and I frequently get approached about acquisitions 
that don't come close to meeting our tests: We've found that if 
you advertise an interest in buying collies, a lot of people will 
call hoping to sell you their cocker spaniels. A line from a 
country song expresses our feeling about new ventures, turnarounds, 
or auction-like sales: "When the phone don't ring, you'll know it's 
me."
 Besides being interested in the purchase of businesses as 
described above, we are also interested in the negotiated purchase 
of large, but not controlling, blocks of stock comparable to those 
we hold in Capital Cities, Salomon, Gillette, USAir, Champion, and 
American Express. We are not interested, however, in receiving 
suggestions about purchases we might make in the general stock 
market.
Insurance Operations
 Shown below is an updated version of our usual table 
presenting key figures for the property-casualty insurance 
industry:
 Yearly Change Combined Ratio Yearly Change Inflation Rate 
 in Premiums After Policyholder in Incurred Measured by 
 Written (%) Dividends Losses (%) GDP Deflator (%)
 ------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 10.0
1982 ..... 3.7 109.6 8.4 6.2
1983 ..... 5.0 112.0 6.8 4.0
1984 ..... 8.5 118.0 16.9 4.5
1985 ..... 22.1 116.3 16.1 3.7
1986 ..... 22.2 108.0 13.5 2.7
1987 ..... 9.4 104.6 7.8 3.1
1988 ..... 4.4 105.4 5.5 3.9
1989 ..... 3.2 109.2 7.7 4.4
1990 (Revised) 4.4 109.6 4.8 4.1 
1991 (Est.) 3.1 109.1 2.9 3.7
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: A 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss. The higher the ratio, the worse the year. 
When the investment income that an insurer earns from holding 
policyholders' funds ("the float") is taken into account, a 
combined ratio in the 107 - 111 range typically produces an 
overall break-even result, exclusive of earnings on the funds 
provided by shareholders.
 For the reasons laid out in previous reports, we expect the 
industry's incurred losses to grow at close to 10% annually, even 
in periods when general inflation runs considerably lower. (Over 
the last 25 years, incurred losses have in reality grown at a 
still faster rate, 11%.) If premium growth meanwhile materially 
lags that 10% rate, underwriting losses will mount.
 However, the industry's tendency to under-reserve when 
business turns bad may obscure the picture for a time - and that 
could well describe the situation last year. Though premiums did 
not come close to growing 10%, the combined ratio failed to 
deteriorate as I had expected but instead slightly improved. 
Loss-reserve data for the industry indicate that there is reason 
to be skeptical of that outcome, and it may turn out that 1991's 
ratio should have been worse than was reported. In the long run, 
of course, trouble awaits managements that paper over operating 
problems with accounting maneuvers. Eventually, managements of 
this kind achieve the same result as the seriously-ill patient 
who tells his doctor: "I can't afford the operation, but would 
you accept a small payment to touch up the x-rays?"
 Berkshire's insurance business has changed in ways that make 
combined ratios, our own or the industry's, largely irrelevant 
to our performance. What counts with us is the "cost of funds 
developed from insurance," or in the vernacular, "the cost of 
float."
 Float - which we generate in exceptional amounts - is the 
total of loss reserves, loss adjustment expense reserves and 
unearned premium reserves minus agents balances, prepaid 
acquisition costs and deferred charges applicable to assumed 
reinsurance. And the cost of float is measured by our 
underwriting loss.
 The table below shows our cost of float since we entered the 
business in 1967.
 (1) (2) Yearend Yield
 Underwriting Approximate on Long-Term
 Loss Average Float Cost of Funds Govt. Bonds
 ------------ ------------- --------------- -------------
 (In $ Millions) (Ratio of 1 to 2)
1967 ........ profit $17.3 less than zero 5.50%
1968 ........ profit 19.9 less than zero 5.90%
1969 ........ profit 23.4 less than zero 6.79%
1970 ........ $0.37 32.4 1.14% 6.25%
1971 ........ profit 52.5 less than zero 5.81%
1972 ........ profit 69.5 less than zero 5.82%
1973 ........ profit 73.3 less than zero 7.27%
1974 ........ 7.36 79.1 9.30% 8.13%
1975 ........ 11.35 87.6 12.96% 8.03%
1976 ........ profit 102.6 less than zero 7.30%
1977 ........ profit 139.0 less than zero 7.97%
1978 ........ profit 190.4 less than zero 8.93%
1979 ........ profit 227.3 less than zero 10.08%
1980 ........ profit 237.0 less than zero 11.94%
1981 ........ profit 228.4 less than zero 13.61%
1982 ........ 21.56 220.6 9.77% 10.64%
1983 ........ 33.87 231.3 14.64% 11.84%
1984 ........ 48.06 253.2 18.98% 11.58%
1985 ........ 44.23 390.2 11.34% 9.34%
1986 ........ 55.84 797.5 7.00% 7.60%
1987 ........ 55.43 1,266.7 4.38% 8.95%
1988 ........ 11.08 1,497.7 0.74% 9.00%
1989 ........ 24.40 1,541.3 1.58% 7.97%
1990 ........ 26.65 1,637.3 1.63% 8.24%
1991 ........ 119.6 1,895.0 6.31% 7.40%
 As you can see, our cost of funds in 1991 was well below the 
U. S. Government's cost on newly-issued long-term bonds. We have in 
fact beat the government's rate in 20 of the 25 years we have been 
in the insurance business, often by a wide margin. We have over 
that time also substantially increased the amount of funds we hold, 
which counts as a favorable development but only because the cost 
of funds has been satisfactory. Our float should continue to grow; 
the challenge will be to garner these funds at a reasonable cost.
 Berkshire continues to be a very large writer - perhaps the 
largest in the world - of "super-cat" insurance, which is coverage 
that other insurance companies buy to protect themselves against 
major catastrophic losses. Profits in this business are enormously 
volatile. As I mentioned last year, $100 million in super-cat 
premiums, which is roughly our annual expectation, could deliver us 
anything from a $100 million profit (in a year with no big 
catastrophe) to a $200 million loss (in a year in which a couple of 
major hurricanes and/or earthquakes come along).
 We price this business expecting to pay out, over the long 
term, about 90% of the premiums we receive. In any given year, 
however, we are likely to appear either enormously profitable or 
enormously unprofitable. That is true in part because GAAP 
accounting does not allow us to set up reserves in the catastrophe￾free years for losses that are certain to be experienced in other 
years. In effect, a one-year accounting cycle is ill-suited to the 
nature of this business - and that is a reality you should be aware 
of when you assess our annual results.
 Last year there appears to have been, by our definition, one 
super-cat, but it will trigger payments from only about 25% of our 
policies. Therefore, we currently estimate the 1991 underwriting 
profit from our catastrophe business to have been about $11 
million. (You may be surprised to learn the identity of the biggest 
catastrophe in 1991: It was neither the Oakland fire nor Hurricane 
Bob, but rather a September typhoon in Japan that caused the 
industry an insured loss now estimated at about $4-$5 billion. At 
the higher figure, the loss from the typhoon would surpass that 
from Hurricane Hugo, the previous record-holder.)
 Insurers will always need huge amounts of reinsurance 
protection for marine and aviation disasters as well as for natural 
catastrophes. In the 1980's much of this reinsurance was supplied 
by "innocents" - that is, by insurers that did not understand the 
risks of the business - but they have now been financially burned 
beyond recognition. (Berkshire itself was an innocent all too often 
when I was personally running the insurance operation.) Insurers, 
though, like investors, eventually repeat their mistakes. At some 
point - probably after a few catastrophe-scarce years - innocents 
will reappear and prices for super-cat policies will plunge to 
silly levels.
 As long as apparently-adequate rates prevail, however, we will 
be a major participant in super-cat coverages. In marketing this 
product, we enjoy a significant competitive advantage because of 
our premier financial strength. Thinking insurers know that when 
"the big one" comes, many reinsurers who found it easy to write 
policies will find it difficult to write checks. (Some reinsurers 
can say what Jackie Mason does: "I'm fixed for life - as long as I 
don't buy anything.") Berkshire's ability to fulfill all its 
commitments under conditions of even extreme adversity is 
unquestioned.
 Overall, insurance offers Berkshire its greatest 
opportunities. Mike Goldberg has accomplished wonders with this 
operation since he took charge and it has become a very valuable 
asset, albeit one that can't be appraised with any precision.
Marketable Common Stocks
 On the next page we list our common stock holdings having a 
value of over $100 million. A small portion of these investments 
belongs to subsidiaries of which Berkshire owns less than 100%.
 12/31/91
 Shares Company Cost Market
 ------ ------- ---------- ----------
 (000s omitted)
 3,000,000 Capital Cities/ABC, Inc. ............ $ 517,500 $1,300,500
46,700,000 The Coca-Cola Company. .............. 1,023,920 3,747,675
 2,495,200 Federal Home Loan Mortgage Corp. .... 77,245 343,090 
 6,850,000 GEICO Corp. ......................... 45,713 1,363,150
24,000,000 The Gillette Company ................ 600,000 1,347,000
31,247,000 Guinness PLC ........................ 264,782 296,755
 1,727,765 The Washington Post Company ......... 9,731 336,050
 5,000,000 Wells Fargo & Company 289,431 290,000
 As usual the list reflects our Rip Van Winkle approach to 
investing. Guinness is a new position. But we held the other seven 
stocks a year ago (making allowance for the conversion of our 
Gillette position from preferred to common) and in six of those we 
hold an unchanged number of shares. The exception is Federal Home 
Loan Mortgage ("Freddie Mac"), in which our shareholdings increased 
slightly. Our stay-put behavior reflects our view that the stock 
market serves as a relocation center at which money is moved from 
the active to the patient. (With tongue only partly in check, I 
suggest that recent events indicate that the much-maligned "idle 
rich" have received a bad rap: They have maintained or increased 
their wealth while many of the "energetic rich" - aggressive real 
estate operators, corporate acquirers, oil drillers, etc. - have 
seen their fortunes disappear.)
 Our Guinness holding represents Berkshire's first significant 
investment in a company domiciled outside the United States. 
Guinness, however, earns its money in much the same fashion as 
Coca-Cola and Gillette, U.S.-based companies that garner most of 
their profits from international operations. Indeed, in the sense 
of where they earn their profits - continent-by-continent - Coca￾Cola and Guinness display strong similarities. (But you'll never 
get their drinks confused - and your Chairman remains unmovably in 
the Cherry Coke camp.)
 We continually search for large businesses with 
understandable, enduring and mouth-watering economics that are run 
by able and shareholder-oriented managements. This focus doesn't 
guarantee results: We both have to buy at a sensible price and get 
business performance from our companies that validates our 
assessment. But this investment approach - searching for the 
superstars - offers us our only chance for real success. Charlie 
and I are simply not smart enough, considering the large sums we 
work with, to get great results by adroitly buying and selling 
portions of far-from-great businesses. Nor do we think many others 
can achieve long-term investment success by flitting from flower to 
flower. Indeed, we believe that according the name "investors" to 
institutions that trade actively is like calling someone who 
repeatedly engages in one-night stands a romantic.
 If my universe of business possibilities was limited, say, to 
private companies in Omaha, I would, first, try to assess the long￾term economic characteristics of each business; second, assess the 
quality of the people in charge of running it; and, third, try to 
buy into a few of the best operations at a sensible price. I 
certainly would not wish to own an equal part of every business in 
town. Why, then, should Berkshire take a different tack when 
dealing with the larger universe of public companies? And since 
finding great businesses and outstanding managers is so difficult, 
why should we discard proven products? (I was tempted to say "the 
real thing.") Our motto is: "If at first you do succeed, quit 
trying."
 John Maynard Keynes, whose brilliance as a practicing investor 
matched his brilliance in thought, wrote a letter to a business 
associate, F. C. Scott, on August 15, 1934 that says it all: "As 
time goes on, I get more and more convinced that the right method 
in investment is to put fairly large sums into enterprises which 
one thinks one knows something about and in the management of which 
one thoroughly believes. It is a mistake to think that one limits 
one's risk by spreading too much between enterprises about which 
one knows little and has no reason for special confidence. . . . 
One's knowledge and experience are definitely limited and there are 
seldom more than two or three enterprises at any given time in 
which I personally feel myself entitled to put full confidence."
Mistake Du Jour
 In the 1989 annual report I wrote about "Mistakes of the First 
25 Years" and promised you an update in 2015. My experiences in the 
first few years of this second "semester" indicate that my backlog 
of matters to be discussed will become unmanageable if I stick to 
my original plan. Therefore, I will occasionally unburden myself in 
these pages in the hope that public confession may deter further 
bumblings. (Post-mortems prove useful for hospitals and football 
teams; why not for businesses and investors?)
 Typically, our most egregious mistakes fall in the omission, 
rather than the commission, category. That may spare Charlie and me 
some embarrassment, since you don't see these errors; but their 
invisibility does not reduce their cost. In this mea culpa, I am 
not talking about missing out on some company that depends upon an 
esoteric invention (such as Xerox), high-technology (Apple), or 
even brilliant merchandising (Wal-Mart). We will never develop the 
competence to spot such businesses early. Instead I refer to 
business situations that Charlie and I can understand and that seem 
clearly attractive - but in which we nevertheless end up sucking 
our thumbs rather than buying.
 Every writer knows it helps to use striking examples, but I 
wish the one I now present wasn't quite so dramatic: In early 1988, 
we decided to buy 30 million shares (adjusted for a subsequent 
split) of Federal National Mortgage Association (Fannie Mae), which 
would have been a $350-$400 million investment. We had owned the 
stock some years earlier and understood the company's business. 
Furthermore, it was clear to us that David Maxwell, Fannie Mae's 
CEO, had dealt superbly with some problems that he had inherited 
and had established the company as a financial powerhouse - with 
the best yet to come. I visited David in Washington and confirmed 
that he would not be uncomfortable if we were to take a large 
position.
 After we bought about 7 million shares, the price began to 
climb. In frustration, I stopped buying (a mistake that, 
thankfully, I did not repeat when Coca-Cola stock rose similarly 
during our purchase program). In an even sillier move, I 
surrendered to my distaste for holding small positions and sold the 
7 million shares we owned.
 I wish I could give you a halfway rational explanation for my 
amateurish behavior vis-a-vis Fannie Mae. But there isn't one. 
What I can give you is an estimate as of yearend 1991 of the 
approximate gain that Berkshire didn't make because of your 
Chairman's mistake: about $1.4 billion.
Fixed-Income Securities
 We made several significant changes in our fixed-income 
portfolio during 1991. As I noted earlier, our Gillette preferred 
was called for redemption, which forced us to convert to common 
stock; we eliminated our holdings of an RJR Nabisco issue that was 
subject to an exchange offer and subsequent call; and we purchased 
fixed-income securities of American Express and First Empire State 
Corp., a Buffalo-based bank holding company. We also added to a 
small position in ACF Industries that we had established in late 
1990. Our largest holdings at yearend were:
 (000s omitted) 
 --------------------------------------- 
 Cost of Preferreds and
 Issuer Amortized Value of Bonds Market
 ------ ------------------------ ------------
 ACF Industries ................ $ 93,918(2) $118,683
 American Express .............. 300,000 263,265(1)(2)
 Champion International ........ 300,000(2) 300,000(1)
 First Empire State 40,000 50,000(1)(2)
 RJR Nabisco 222,148(2) 285,683
 Salomon 700,000(2) 714,000(1)
 USAir 358,000(2) 232,700(1)
 Washington Public Power Systems 158,553(2) 203,071
(1) Fair value as determined by Charlie and me
(2) Carrying value in our financial statements
 Our $40 million of First Empire State preferred carries a 9% 
coupon, is non-callable until 1996 and is convertible at $78.91 per 
share. Normally I would think a purchase of this size too small for 
Berkshire, but I have enormous respect for Bob Wilmers, CEO of 
First Empire, and like being his partner on any scale.
 Our American Express preferred is not a normal fixed-income 
security. Rather it is a "Perc," which carries a fixed dividend of 
8.85% on our $300 million cost. Absent one exception mentioned 
later, our preferred must be converted three years after issuance, 
into a maximum of 12,244,898 shares. If necessary, a downward 
adjustment in the conversion ratio will be made in order to limit 
to $414 million the total value of the common we receive. Though 
there is thus a ceiling on the value of the common stock that we 
will receive upon conversion, there is no floor. The terms of the 
preferred, however, include a provision allowing us to extend the 
conversion date by one year if the common stock is below $24.50 on 
the third anniversary of our purchase.
 Overall, our fixed-income investments have treated us well, 
both over the long term and recently. We have realized large 
capital gains from these holdings, including about $152 million in 
1991. Additionally, our after-tax yields have considerably exceeded 
those earned by most fixed-income portfolios.
 Nevertheless, we have had some surprises, none greater than 
the need for me to involve myself personally and intensely in the 
Salomon situation. As I write this letter, I am also writing a 
letter for inclusion in Salomon's annual report and I refer you to 
that report for an update on the company. (Write to: Corporate 
Secretary, Salomon Inc, Seven World Trade Center, New York, NY 
10048) Despite the company's travails, Charlie and I believe our 
Salomon preferred stock increased slightly in value during 1991. 
Lower interest rates and a higher price for Salomon's common 
produced this result.
 Last year I told you that our USAir investment "should work 
out all right unless the industry is decimated during the next few 
years." Unfortunately 1991 was a decimating period for the 
industry, as Midway, Pan Am and America West all entered 
bankruptcy. (Stretch the period to 14 months and you can add 
Continental and TWA.)
 The low valuation that we have given USAir in our table 
reflects the risk that the industry will remain unprofitable for 
virtually all participants in it, a risk that is far from 
negligible. The risk is heightened by the fact that the courts have 
been encouraging bankrupt carriers to continue operating. These 
carriers can temporarily charge fares that are below the industry's 
cost
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our per-share book value increased 20.3% during 1992. Over 
the last 28 years (that is, since present management took over) 
book value has grown from $19 to $7,745, or at a rate of 23.6% 
compounded annually.
 During the year, Berkshire's net worth increased by $1.52 
billion. More than 98% of this gain came from earnings and 
appreciation of portfolio securities, with the remainder coming 
from the issuance of new stock. These shares were issued as a 
result of our calling our convertible debentures for redemption 
on January 4, 1993, and of some holders electing to receive 
common shares rather than the cash that was their alternative. 
Most holders of the debentures who converted into common waited 
until January to do it, but a few made the move in December and 
therefore received shares in 1992. To sum up what happened to 
the $476 million of bonds we had outstanding: $25 million were 
converted into shares before yearend; $46 million were converted 
in January; and $405 million were redeemed for cash. The 
conversions were made at $11,719 per share, so altogether we 
issued 6,106 shares.
 Berkshire now has 1,152,547 shares outstanding. That 
compares, you will be interested to know, to 1,137,778 shares 
outstanding on October 1, 1964, the beginning of the fiscal year 
during which Buffett Partnership, Ltd. acquired control of the 
company.
 We have a firm policy about issuing shares of Berkshire, 
doing so only when we receive as much value as we give. Equal 
value, however, has not been easy to obtain, since we have always 
valued our shares highly. So be it: We wish to increase 
Berkshire's size only when doing that also increases the wealth 
of its owners.
 Those two objectives do not necessarily go hand-in-hand as an 
amusing but value-destroying experience in our past illustrates. 
On that occasion, we had a significant investment in a bank 
whose management was hell-bent on expansion. (Aren't they all?) 
When our bank wooed a smaller bank, its owner demanded a stock 
swap on a basis that valued the acquiree's net worth and earning 
power at over twice that of the acquirer's. Our management - 
visibly in heat - quickly capitulated. The owner of the acquiree 
then insisted on one other condition: "You must promise me," he 
said in effect, "that once our merger is done and I have become a 
major shareholder, you'll never again make a deal this dumb."
 You will remember that our goal is to increase our per-share 
intrinsic value - for which our book value is a conservative, but 
useful, proxy - at a 15% annual rate. This objective, however, 
cannot be attained in a smooth manner. Smoothness is 
particularly elusive because of the accounting rules that apply 
to the common stocks owned by our insurance companies, whose 
portfolios represent a high proportion of Berkshire's net worth. 
Since 1979, generally accepted accounting principles (GAAP) have 
required that these securities be valued at their market prices 
(less an adjustment for tax on any net unrealized appreciation) 
rather than at the lower of cost or market. Run-of-the-mill 
fluctuations in equity prices therefore cause our annual results 
to gyrate, especially in comparison to those of the typical 
industrial company.
 To illustrate just how volatile our progress has been - and 
to indicate the impact that market movements have on short-term 
results - we show on the facing page our annual change in per￾share net worth and compare it with the annual results (including 
dividends) of the S&P 500.
 You should keep at least three points in mind as you 
evaluate this data. The first point concerns the many businesses 
we operate whose annual earnings are unaffected by changes in 
stock market valuations. The impact of these businesses on both 
our absolute and relative performance has changed over the years. 
Early on, returns from our textile operation, which then 
represented a significant portion of our net worth, were a major 
drag on performance, averaging far less than would have been the 
case if the money invested in that business had instead been 
invested in the S&P 500. In more recent years, as we assembled 
our collection of exceptional businesses run by equally 
exceptional managers, the returns from our operating businesses 
have been high - usually well in excess of the returns achieved 
by the S&P.
 A second important factor to consider - and one that 
significantly hurts our relative performance - is that both the 
income and capital gains from our securities are burdened by a 
substantial corporate tax liability whereas the S&P returns are 
pre-tax. To comprehend the damage, imagine that Berkshire had 
owned nothing other than the S&P index during the 28-year period 
covered. In that case, the tax bite would have caused our 
corporate performance to be appreciably below the record shown in 
the table for the S&P. Under present tax laws, a gain for the 
S&P of 18% delivers a corporate holder of that index a return 
well short of 13%. And this problem would be intensified if 
corporate tax rates were to rise. This is a structural 
disadvantage we simply have to live with; there is no antidote 
for it.
 The third point incorporates two predictions: Charlie 
Munger, Berkshire's Vice Chairman and my partner, and I are 
virtually certain that the return over the next decade from an 
investment in the S&P index will be far less than that of the 
past decade, and we are dead certain that the drag exerted by 
Berkshire's expanding capital base will substantially reduce our 
historical advantage relative to the index.
 Making the first prediction goes somewhat against our grain: 
We've long felt that the only value of stock forecasters is to 
make fortune tellers look good. Even now, Charlie and I continue 
to believe that short-term market forecasts are poison and should 
be kept locked up in a safe place, away from children and also 
from grown-ups who behave in the market like children. However, 
it is clear that stocks cannot forever overperform their 
underlying businesses, as they have so dramatically done for some 
time, and that fact makes us quite confident of our forecast that 
the rewards from investing in stocks over the next decade will be 
significantly smaller than they were in the last. Our second 
conclusion - that an increased capital base will act as an anchor 
on our relative performance - seems incontestable. The only open 
question is whether we can drag the anchor along at some 
tolerable, though slowed, pace.
 We will continue to experience considerable volatility in 
our annual results. That's assured by the general volatility of 
the stock market, by the concentration of our equity holdings in 
just a few companies, and by certain business decisions we have 
made, most especially our move to commit large resources to 
super-catastrophe insurance. We not only accept this volatility 
but welcome it: A tolerance for short-term swings improves our 
long-term prospects. In baseball lingo, our performance 
yardstick is slugging percentage, not batting average.
The Salomon Interlude
 Last June, I stepped down as Interim Chairman of Salomon Inc 
after ten months in the job. You can tell from Berkshire's 1991-
92 results that the company didn't miss me while I was gone. But 
the reverse isn't true: I missed Berkshire and am delighted to 
be back full-time. There is no job in the world that is more fun 
than running Berkshire and I count myself lucky to be where I am.
 The Salomon post, though far from fun, was interesting and 
worthwhile: In Fortune's annual survey of America's Most Admired 
Corporations, conducted last September, Salomon ranked second 
among 311 companies in the degree to which it improved its 
reputation. Additionally, Salomon Brothers, the securities 
subsidiary of Salomon Inc, reported record pre-tax earnings last 
year - 34% above the previous high.
 Many people helped in the resolution of Salomon's problems 
and the righting of the firm, but a few clearly deserve special 
mention. It is no exaggeration to say that without the combined 
efforts of Salomon executives Deryck Maughan, Bob Denham, Don 
Howard, and John Macfarlane, the firm very probably would not 
have survived. In their work, these men were tireless, 
effective, supportive and selfless, and I will forever be 
grateful to them.
 Salomon's lead lawyer in its Government matters, Ron Olson 
of Munger, Tolles & Olson, was also key to our success in getting 
through this trouble. The firm's problems were not only severe, 
but complex. At least five authorities - the SEC, the Federal 
Reserve Bank of New York, the U.S. Treasury, the U.S. Attorney 
for the Southern District of New York, and the Antitrust Division 
of the Department of Justice - had important concerns about 
Salomon. If we were to resolve our problems in a coordinated and 
prompt manner, we needed a lawyer with exceptional legal, 
business and human skills. Ron had them all.
Acquisitions
 Of all our activities at Berkshire, the most exhilarating 
for Charlie and me is the acquisition of a business with 
excellent economic characteristics and a management that we like, 
trust and admire. Such acquisitions are not easy to make but we 
look for them constantly. In the search, we adopt the same 
attitude one might find appropriate in looking for a spouse: It 
pays to be active, interested and open-minded, but it does not 
pay to be in a hurry.
 In the past, I've observed that many acquisition-hungry 
managers were apparently mesmerized by their childhood reading of 
the story about the frog-kissing princess. Remembering her 
success, they pay dearly for the right to kiss corporate toads, 
expecting wondrous transfigurations. Initially, disappointing 
results only deepen their desire to round up new toads. 
("Fanaticism," said Santyana, "consists of redoubling your effort 
when you've forgotten your aim.") Ultimately, even the most 
optimistic manager must face reality. Standing knee-deep in 
unresponsive toads, he then announces an enormous "restructuring" 
charge. In this corporate equivalent of a Head Start program, 
the CEO receives the education but the stockholders pay the 
tuition.
 In my early days as a manager I, too, dated a few toads. 
They were cheap dates - I've never been much of a sport - but my 
results matched those of acquirers who courted higher-priced 
toads. I kissed and they croaked.
 After several failures of this type, I finally remembered 
some useful advice I once got from a golf pro (who, like all pros 
who have had anything to do with my game, wishes to remain 
anonymous). Said the pro: "Practice doesn't make perfect; 
practice makes permanent." And thereafter I revised my strategy 
and tried to buy good businesses at fair prices rather than fair 
businesses at good prices.
 Last year, in December, we made an acquisition that is a 
prototype of what we now look for. The purchase was 82% of 
Central States Indemnity, an insurer that makes monthly payments 
for credit-card holders who are unable themselves to pay because 
they have become disabled or unemployed. Currently the company's 
annual premiums are about $90 million and profits about $10 
million. Central States is based in Omaha and managed by Bill 
Kizer, a friend of mine for over 35 years. The Kizer family - 
which includes sons Bill, Dick and John - retains 18% ownership 
of the business and will continue to run things just as it has in 
the past. We could not be associated with better people.
 Coincidentally, this latest acquisition has much in common 
with our first, made 26 years ago. At that time, we purchased 
another Omaha insurer, National Indemnity Company (along with a 
small sister company) from Jack Ringwalt, another long-time 
friend. Jack had built the business from scratch and, as was the 
case with Bill Kizer, thought of me when he wished to sell. 
(Jack's comment at the time: "If I don't sell the company, my 
executor will, and I'd rather pick the home for it.") National 
Indemnity was an outstanding business when we bought it and 
continued to be under Jack's management. Hollywood has had good 
luck with sequels; I believe we, too, will.
 Berkshire's acquisition criteria are described on page 23. 
Beyond purchases made by the parent company, however, our 
subsidiaries sometimes make small "add-on" acquisitions that 
extend their product lines or distribution capabilities. In this 
manner, we enlarge the domain of managers we already know to be 
outstanding - and that's a low-risk and high-return proposition. 
We made five acquisitions of this type in 1992, and one was not 
so small: At yearend, H. H. Brown purchased Lowell Shoe Company, 
a business with $90 million in sales that makes Nursemates, a 
leading line of shoes for nurses, and other kinds of shoes as 
well. Our operating managers will continue to look for add-on 
opportunities, and we would expect these to contribute modestly 
to Berkshire's value in the future.
 Then again, a trend has emerged that may make further 
acquisitions difficult. The parent company made one purchase in 
1991, buying H. H. Brown, which is run by Frank Rooney, who has 
eight children. In 1992 our only deal was with Bill Kizer, 
father of nine. It won't be easy to keep this string going in 
1993.
Sources of Reported Earnings
 The table below shows the major sources of Berkshire's 
reported earnings. In this presentation, amortization of 
Goodwill and other major purchase-price accounting adjustments 
are not charged against the specific businesses to which they 
apply, but are instead aggregated and shown separately. This 
procedure lets you view the earnings of our businesses as they 
would have been reported had we not purchased them. I've 
explained in past reports why this form of presentation seems to 
us to be more useful to investors and managers than one utilizing 
GAAP, which requires purchase-price adjustments to be made on a 
business-by-business basis. The total net earnings we show in 
the table are, of course, identical to the GAAP total in our 
audited financial statements.
 
 (000s omitted)
 -----------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 ---------------------- ---------------------- 
 1992 1991 1992 1991
 ---------- ---------- ---------- ----------
Operating Earnings:
 Insurance Group:
 Underwriting ............ $(108,961) $(119,593) $ (71,141) $ (77,229)
 Net Investment Income.... 355,067 331,846 305,763 285,173 
 H. H. Brown (acquired 7/1/91) 27,883 13,616 17,340 8,611 
 Buffalo News .............. 47,863 37,113 28,163 21,841 
 Fechheimer ................ 13,698 12,947 7,267 6,843 
 Kirby ..................... 35,653 35,726 22,795 22,555 
 Nebraska Furniture Mart ... 17,110 14,384 8,072 6,993 
 Scott Fetzer 
 Manufacturing Group .... 31,954 26,123 19,883 15,901 
 See's Candies ............. 42,357 42,390 25,501 25,575 
 Wesco - other than Insurance 15,153 12,230 9,195 8,777 
 World Book ................ 29,044 22,483 19,503 15,487 
 Amortization of Goodwill .. (4,702) (4,113) (4,687) (4,098)
 Other Purchase-Price 
 Accounting Charges ..... (7,385) (6,021) (8,383) (7,019)
 Interest Expense* ......... (98,643) (89,250) (62,899) (57,165)
 Shareholder-Designated 
 Contributions .......... (7,634) (6,772) (4,913) (4,388)
 Other ..................... 72,223 77,399 36,267 47,896 
 ---------- ---------- ---------- ----------
Operating Earnings .......... 460,680 400,508 347,726 315,753 
Sales of Securities ......... 89,937 192,478 59,559 124,155 
 ---------- ---------- ---------- ----------
Total Earnings - All Entities $ 550,617 $ 592,986 $ 407,285 $ 439,908 
 ========== ========== ========== ==========
*Excludes interest expense of Scott Fetzer Financial Group and Mutual 
 Savings & Loan. Includes $22.5 million in 1992 and $5.7 million in 
 1991 of premiums paid on the early redemption of debt.
 A large amount of additional information about these 
businesses is given on pages 37-47, where you will also find our 
segment earnings reported on a GAAP basis. Our goal is to give you 
all of the financial information that Charlie and I consider 
significant in making our own evaluation of Berkshire.
"Look-Through" Earnings
 We've previously discussed look-through earnings, which 
consist of: (1) the operating earnings reported in the previous 
section, plus; (2) the retained operating earnings of major 
investees that, under GAAP accounting, are not reflected in our 
profits, less; (3) an allowance for the tax that would be paid by 
Berkshire if these retained earnings of investees had instead been 
distributed to us. Though no single figure can be perfect, we 
believe that the look-through number more accurately portrays the 
earnings of Berkshire than does the GAAP number.
 I've told you that over time look-through earnings must 
increase at about 15% annually if our intrinsic business value is 
to grow at that rate. Our look-through earnings in 1992 were $604 
million, and they will need to grow to more than $1.8 billion by 
the year 2000 if we are to meet that 15% goal. For us to get 
there, our operating subsidiaries and investees must deliver 
excellent performances, and we must exercise some skill in capital 
allocation as well.
 We cannot promise to achieve the $1.8 billion target. Indeed, 
we may not even come close to it. But it does guide our decision￾making: When we allocate capital today, we are thinking about what 
will maximize look-through earnings in 2000.
 We do not, however, see this long-term focus as eliminating 
the need for us to achieve decent short-term results as well. 
After all, we were thinking long-range thoughts five or ten years 
ago, and the moves we made then should now be paying off. If 
plantings made confidently are repeatedly followed by disappointing 
harvests, something is wrong with the farmer. (Or perhaps with the 
farm: Investors should understand that for certain companies, and 
even for some industries, there simply is no good long-term 
strategy.) Just as you should be suspicious of managers who pump 
up short-term earnings by accounting maneuvers, asset sales and the 
like, so also should you be suspicious of those managers who fail 
to deliver for extended periods and blame it on their long-term 
focus. (Even Alice, after listening to the Queen lecture her about 
"jam tomorrow," finally insisted, "It must come sometimes to jam 
today.")
 The following table shows you how we calculate look-through 
earnings, though I warn you that the figures are necessarily very
rough. (The dividends paid to us by these investees have been 
included in the operating earnings itemized on page 8, mostly 
under "Insurance Group: Net Investment Income.") 
 Berkshire's Share
 of Undistributed
 Berkshire's Approximate Operating Earnings 
Berkshire's Major Investees Ownership at Yearend (in millions) 
--------------------------- ----------------------- ------------------
 1992 1991 1992 1991
 -------- -------- -------- --------
Capital Cities/ABC Inc. ....... 18.2% 18.1% $ 70 $ 61
The Coca-Cola Company ......... 7.1% 7.0% 82 69
Federal Home Loan Mortgage Corp. 8.2%(1) 3.4%(1) 29(2) 15
GEICO Corp. ................... 48.1% 48.2% 34(3) 69(3)
General Dynamics Corp. ........ 14.1% -- 11(2) -- 
The Gillette Company .......... 10.9% 11.0% 38 23(2)
Guinness PLC .................. 2.0% 1.6% 7 -- 
The Washington Post Company ... 14.6% 14.6% 11 10
Wells Fargo & Company ......... 11.5% 9.6% 16(2) (17)(2)
 -------- -------- -------- --------
Berkshire's share of 
 undistributed earnings of major investees $298 $230
Hypothetical tax on these 
 undistributed investee earnings (42) (30)
Reported operating earnings of Berkshire 348 316 
 -------- --------
 Total look-through earnings of Berkshire $604 $516 
 (1) Net of minority interest at Wesco
 (2) Calculated on average ownership for the year
 (3) Excludes realized capital gains, which have been both 
recurring and significant
Insurance Operations
 Shown below is an updated version of our usual table 
presenting key figures for the property-casualty insurance 
industry:
 Yearly Change Combined Ratio 
 in Premiums After Policyholder
 Written (%) Dividends
 ------------- ------------------
1981 ........................... 3.8 106.0
1982 ........................... 3.7 109.6
1983 ........................... 5.0 112.0
1984 ........................... 8.5 118.0
1985 ........................... 22.1 116.3
1986 ........................... 22.2 108.0
1987 ........................... 9.4 104.6
1988 ........................... 4.5 105.4
1989 ........................... 3.2 109.2
1990 ........................... 4.5 109.6
1991 (Revised) ................. 2.4 108.8
1992 (Est.) .................... 2.7 114.8
 The combined ratio represents total insurance costs (losses 
incurred plus expenses) compared to revenue from premiums: A 
ratio below 100 indicates an underwriting profit, and one above 
100 indicates a loss. The higher the ratio, the worse the year. 
When the investment income that an insurer earns from holding 
policyholders' funds ("the float") is taken into account, a 
combined ratio in the 106 - 110 range typically produces an 
overall break-even result, exclusive of earnings on the funds 
provided by shareholders.
 About four points in the industry's 1992 combined ratio can 
be attributed to Hurricane Andrew, which caused the largest 
insured loss in history. Andrew destroyed a few small insurers. 
Beyond that, it awakened some larger companies to the fact that 
their reinsurance protection against catastrophes was far from 
adequate. (It's only when the tide goes out that you learn who's 
been swimming naked.) One major insurer escaped insolvency 
solely because it had a wealthy parent that could promptly supply 
a massive transfusion of capital.
 Bad as it was, however, Andrew could easily have been far 
more damaging if it had hit Florida 20 or 30 miles north of where 
it actually did and had hit Louisiana further east than was the 
case. All in all, many companies will rethink their reinsurance 
programs in light of the Andrew experience.
 As you know we are a large writer - perhaps the largest in 
the world - of "super-cat" coverages, which are the policies that 
other insurance companies buy to protect themselves against major 
catastrophic losses. Consequently, we too took our lumps from 
Andrew, suffering losses from it of about $125 million, an amount 
roughly equal to our 1992 super-cat premium income. Our other 
super-cat losses, though, were negligible. This line of business 
therefore produced an overall loss of only $2 million for the 
year. (In addition, our investee, GEICO, suffered a net loss 
from Andrew, after reinsurance recoveries and tax savings, of 
about $50 million, of which our share is roughly $25 million. 
This loss did not affect our operating earnings, but did reduce 
our look-through earnings.)
 In last year's report I told you that I hoped that our 
super-cat business would over time achieve a 10% profit margin. 
But I also warned you that in any given year the line was likely 
to be "either enormously profitable or enormously unprofitable." 
Instead, both 1991 and 1992 have come in close to a break-even 
level. Nonetheless, I see these results as aberrations and stick 
with my prediction of huge annual swings in profitability from 
this business.
 Let me remind you of some characteristics of our super-cat 
policies. Generally, they are activated only when two things 
happen. First, the direct insurer or reinsurer we protect must 
suffer losses of a given amount - that's the policyholder's 
"retention" - from a catastrophe; and second, industry-wide 
insured losses from the catastrophe must exceed some minimum 
level, which usually is $3 billion or more. In most cases, the 
policies we issue cover only a specific geographical area, such 
as a portion of the U.S., the entire U.S., or everywhere other 
than the U.S. Also, many policies are not activated by the first 
super-cat that meets the policy terms, but instead cover only a 
"second-event" or even a third- or fourth-event. Finally, some 
policies are triggered only by a catastrophe of a specific type, 
such as an earthquake. Our exposures are large: We have one 
policy that calls for us to pay $100 million to the policyholder 
if a specified catastrophe occurs. (Now you know why I suffer 
eyestrain: from watching The Weather Channel.)
 Currently, Berkshire is second in the U.S. property-casualty 
industry in net worth (the leader being State Farm, which neither 
buys nor sells reinsurance). Therefore, we have the capacity to 
assume risk on a scale that interests virtually no other company. 
We have the appetite as well: As Berkshire's net worth and 
earnings grow, our willingness to write business increases also. 
But let me add that means good business. The saying, "a fool 
and his money are soon invited everywhere," applies in spades in 
reinsurance, and we actually reject more than 98% of the business 
we are offered. Our ability to choose between good and bad 
proposals reflects a management strength that matches our 
financial strength: Ajit Jain, who runs our reinsurance 
operation, is simply the best in this business. In combination, 
these strengths guarantee that we will stay a major factor in the 
super-cat business so long as prices are appropriate.
 What constitutes an appropriate price, of course, is 
difficult to determine. Catastrophe insurers can't simply 
extrapolate past experience. If there is truly "global warming," 
for example, the odds would shift, since tiny changes in 
atmospheric conditions can produce momentous changes in weather 
patterns. Furthermore, in recent years there has been a 
mushrooming of population and insured values in U.S. coastal 
areas that are particularly vulnerable to hurricanes, the number 
one creator of super-cats. A hurricane that caused x dollars of 
damage 20 years ago could easily cost 10x now.
 Occasionally, also, the unthinkable happens. Who would have 
guessed, for example, that a major earthquake could occur in 
Charleston, S.C.? (It struck in 1886, registered an estimated 6.6 
on the Richter scale, and caused 60 deaths.) And who could have 
imagined that our country's most serious quake would occur at New 
Madrid, Missouri, which suffered an estimated 8.7 shocker in 
1812. By comparison, the 1989 San Francisco quake was a 7.1 - 
and remember that each one-point Richter increase represents a 
ten-fold increase in strength. Someday, a U.S. earthquake 
occurring far from California will cause enormous losses for 
insurers.
 When viewing our quarterly figures, you should understand 
that our accounting for super-cat premiums differs from our 
accounting for other insurance premiums. Rather than recording 
our super-cat premiums on a pro-rata basis over the life of a 
given policy, we defer recognition of revenue until a loss occurs 
or until the policy expires. We take this conservative approach 
because the likelihood of super-cats causing us losses is 
particularly great toward the end of the year. It is then that 
weather tends to kick up: Of the ten largest insured losses in 
U.S. history, nine occurred in the last half of the year. In 
addition, policies that are not triggered by a first event are 
unlikely, by their very terms, to cause us losses until late in 
the year.
 The bottom-line effect of our accounting procedure for 
super-cats is this: Large losses may be reported in any quarter 
of the year, but significant profits will only be reported in the 
fourth quarter.
 * * * * * * * * * * * *
 As I've told you in each of the last few years, what counts 
in our insurance business is "the cost of funds developed from 
insurance," or in the vernacular, "the cost of float." Float - 
which we generate in exceptional amounts - is the total of loss 
reserves, loss adjustment expense reserves and unearned premium 
reserves minus agents' balances, prepaid acquisition costs and 
deferred charges applicable to assumed reinsurance. The cost of 
float is measured by our underwriting loss.
 The table below shows our cost of float since we entered the 
business in 1967.
 (1) (2) Yearend Yield
 Underwriting Approximate on Long-Term
 Loss Average Float Cost of Funds Govt. Bonds 
 ------------ ------------- --------------- -------------
 (In $ Millions) (Ratio of 1 to 2)
1967 ......... profit $17.3 less than zero 5.50%
1968 ......... profit 19.9 less than zero 5.90%
1969 ......... profit 23.4 less than zero 6.79%
1970 ......... $ 0.37 32.4 1.14% 6.25%
1971 ......... profit 52.5 less than zero 5.81%
1972 ......... profit 69.5 less than zero 5.82%
1973 ......... profit 73.3 less than zero 7.27%
1974 ......... 7.36 79.1 9.30% 8.13%
1975 ......... 11.35 87.6 12.96% 8.03%
1976 ......... profit 102.6 less than zero 7.30%
1977 ......... profit 139.0 less than zero 7.97%
1978 ......... profit 190.4 less than zero 8.93%
1979 ......... profit 227.3 less than zero 10.08%
1980 ......... profit 237.0 less than zero 11.94%
1981 ......... profit 228.4 less than zero 13.61%
1982 ......... 21.56 220.6 9.77% 10.64%
1983 ......... 33.87 231.3 14.64% 11.84%
1984 ......... 48.06 253.2 18.98% 11.58%
1985 ......... 44.23 390.2 11.34% 9.34%
1986 ......... 55.84 797.5 7.00% 7.60%
1987 ......... 55.43 1,266.7 4.38% 8.95%
1988 ......... 11.08 1,497.7 0.74% 9.00%
1989 ......... 24.40 1,541.3 1.58% 7.97%
1990 ......... 26.65 1,637.3 1.63% 8.24%
1991 ......... 119.59 1,895.0 6.31% 7.40%
1992 ......... 108.96 2,290.4 4.76% 7.39%
 Last year, our insurance operation again generated funds at a 
cost below that incurred by the U.S. Government on its newly-issued 
long-term bonds. This means that in 21 years out of the 26 years 
we have been in the insurance business we have beaten the 
Government's rate, and often we have done so by a wide margin. 
(If, on average, we didn't beat the Government's rate, there would 
be no economic reason for us to be in the business.)
 In 1992, as in previous years, National Indemnity's commercial 
auto and general liability business, led by Don Wurster, and our 
homestate operation, led by Rod Eldred, made excellent 
contributions to our low cost of float. Indeed, both of these 
operations recorded an underwriting profit last year, thereby 
generating float at a less-than-zero cost. The bulk of our float, 
meanwhile, comes from large transactions developed by Ajit. His 
efforts are likely to produce a further growth in float during 
1993.
 Charlie and I continue to like the insurance business, which 
we expect to be our main source of earnings for decades to come. 
The industry is huge; in certain sectors we can compete world-wide; 
and Berkshire possesses an important competitive advantage. We 
will look for ways to expand our participation in the business, 
either indirectly as we have done through GEICO or directly as we 
did by acquiring Central States Indemnity.
Common Stock Investments
 Below we list our common stock holdings having a value of over 
$100 million. A small portion of these investments belongs to 
subsidiaries of which Berkshire owns less than 100%.
 12/31/92
 Shares Company Cost Market
 ------ ------- ---------- ----------
 (000s omitted)
 3,000,000 Capital Cities/ABC, Inc. ............. $ 517,500 $1,523,500
93,400,000 The Coca-Cola Company. ............... 1,023,920 3,911,125
16,196,700 Federal Home Loan Mortgage Corp. 
 ("Freddie Mac") ................... 414,257 783,515 
34,250,000 GEICO Corp. .......................... 45,713 2,226,250
 4,350,000 General Dynamics Corp. ............... 312,438 450,769
24,000,000 The Gillette Company ................. 600,000 1,365,000
38,335,000 Guinness PLC ......................... 333,019 299,581
 1,727,765 The Washington Post Company .......... 9,731 396,954
 6,358,418 Wells Fargo & Company ................ 380,983 485,624
 Leaving aside splits, the number of shares we held in these 
companies changed during 1992 in only four cases: We added 
moderately to our holdings in Guinness and Wells Fargo, we more 
than doubled our position in Freddie Mac, and we established a new 
holding in General Dynamics. We like to buy.
 Selling, however, is a different story. There, our pace of 
activity resembles that forced upon a traveler who found himself 
stuck in tiny Podunk's only hotel. With no T.V. in his room, he 
faced an evening of boredom. But his spirits soared when he spied 
a book on the night table entitled "Things to do in Podunk." 
Opening it, he found just a single sentence: "You're doing it."
 We were lucky in our General Dynamics purchase. I had paid 
little attention to the company until last summer, when it 
announced it would repurchase about 30% of its shares by way of a 
Dutch tender. Seeing an arbitrage opportunity, I began buying the 
stock for Berkshire, expecting to tender our holdings for a small 
profit. We've made the same sort of commitment perhaps a half￾dozen times in the last few years, reaping decent rates of return 
for the short periods our money has been tied up.
 But then I began studying the company and the accomplishments 
of Bill Anders in the brief time he'd been CEO. And what I saw 
made my eyes pop: Bill had a clearly articulated and rational 
strategy; he had been focused and imbued with a sense of urgency in 
carrying it out; and the results were truly remarkable.
 In short order, I dumped my arbitrage thoughts and decided 
that Berkshire should become a long-term investor with Bill. We 
were helped in gaining a large position by the fact that a tender 
greatly swells the volume of trading in a stock. In a one-month 
period, we were able to purchase 14% of the General Dynamics shares 
that remained outstanding after the tender was completed.
 * * * * * * * * * * * *
 Our equity-investing strategy remains little changed from what 
it was fifteen years ago, when we said in the 1977 annual report: 
"We select our marketable equity securities in much the way we 
would evaluate a business for acquisition in its entirety. We want 
the business to be one (a) that we can understand; (b) with 
favorable long-term prospects; (c) operated by honest and competent 
people; and (d) available at a very attractive price." We have 
seen cause to make only one change in this creed: Because of both 
market conditions and our size, we now substitute "an attractive 
price" for "a very attractive price."
 But how, you will ask, does one decide what's "attractive"? 
In answering this question, most analysts feel they must choose 
between two approaches customarily thought to be in opposition: 
"value" and "growth." Indeed, many investment professionals see 
any mixing of the two terms as a form of intellectual cross￾dressing.
 We view that as fuzzy thinking (in which, it must be 
confessed, I myself engaged some years ago). In our opinion, the 
two approaches are joined at the hip: Growth is always a component 
in the calculation of value, constituting a variable whose 
importance can range from negligible to enormous and whose impact 
can be negative as well as positive.
 In addition, we think the very term "value investing" is 
redundant. What is "investing" if it is not the act of seeking 
value at least sufficient to justify the amount paid? Consciously 
paying more for a stock than its calculated value - in the hope 
that it can soon be sold for a still-higher price - should be 
labeled speculation (which is neither illegal, immoral nor - in our 
view - financially fattening).
 Whether appropriate or not, the term "value investing" is 
widely used. Typically, it connotes the purchase of stocks having 
attributes such as a low ratio of price to book value, a low price￾earnings ratio, or a high dividend yield. Unfortunately, such 
characteristics, even if they appear in combination, are far from 
determinative as to whether an investor is indeed buying something 
for what it is worth and is therefore truly operating on the 
principle of obtaining value in his investments. Correspondingly, 
opposite characteristics - a high ratio of price to book value, a 
high price-earnings ratio, and a low dividend yield - are in no way 
inconsistent with a "value" purchase.
 Similarly, business growth, per se, tells us little about 
value. It's true that growth often has a positive impact on value, 
sometimes one of spectacular proportions. But such an effect is 
far from certain. For example, investors have regularly poured 
money into the domestic airline business to finance profitless (or 
worse) growth. For these investors, it would have been far better 
if Orville had failed to get off the ground at Kitty Hawk: The more 
the industry has grown, the worse the disaster for owners.
 Growth benefits investors only when the business in point can 
invest at incremental returns that are enticing - in other words, 
only when each dollar used to finance the growth creates over a 
dollar of long-term market value. In the case of a low-return 
business requiring incremental funds, growth hurts the investor.
 In The Theory of Investment Value, written over 50 years ago, 
John Burr Williams set forth the equation for value, which we 
condense here: The value of any stock, bond or business today is 
determined by the cash inflows and outflows - discounted at an 
appropriate interest rate - that can be expected to occur during 
the remaining life of the asset. Note that the formula is the same 
for stocks as for bonds. Even so, there is an important, and 
difficult to deal with, difference between the two: A bond has a 
coupon and maturity date that define future cash flows; but in the 
case of equities, the investment analyst must himself estimate the 
future "coupons." Furthermore, the quality of management affects 
the bond coupon only rarely - chiefly when management is so inept 
or dishonest that payment of interest is suspended. In contrast, 
the ability of management can dramatically affect the equity 
"coupons."
 The investment shown by the discounted-flows-of-cash 
calculation to be the cheapest is the one that the investor should 
purchase - irrespective of whether the business grows or doesn't, 
displays volatility or smoothness in its earnings, or carries a 
high price or low in relation to its current earnings and book 
value. Moreover, though the value equation has usually shown 
equities to be cheaper than bonds, that result is not inevitable: 
When bonds are calculated to be the more attractive investment, 
they should be bought.
 Leaving the question of price aside, the best business to own 
is one that over an extended period can employ large amounts of 
incremental capital at very high rates of return. The worst 
business to own is one that must, or will, do the opposite - that 
is, consistently employ ever-greater amounts of capital at very low 
rates of return. Unfortunately, the first type of business is very 
hard to find: Most high-return businesses need relatively little 
capital. Shareholders of such a business usually will benefit if 
it pays out most of its earnings in dividends or makes significant 
stock repurchases.
 Though the mathematical calculations required to evaluate 
equities are not difficult, an analyst - even one who is 
experienced and intelligent - can easily go wrong in estimating 
future "coupons." At Berkshire, we attempt to deal with this 
problem in two ways. First, we try to stick to businesses we 
believe we understand. That means they must be relatively simple 
and stable in character. If a business is complex or subject to 
constant change, we're not smart enough to predict future cash 
flows. Incidentally, that shortcoming doesn't bother us. What 
counts for most people in investing is not how much they know, but 
rather how realistically they define what they don't know. An 
investor needs to do very few things right as long as he or she 
avoids big mistakes.
 Second, and equally important, we insist on a margin of safety 
in our purchase price. If we calculate the value of a common stock 
to be only slightly higher than its price, we're not interested in 
buying. We believe this margin-of-safety principle, so strongly 
emphasized by Ben Graham, to be the cornerstone of investment 
success.
Fixed-Income Securities
 Below we list our largest holdings of fixed-income securities:
 (000s omitted) 
 ------------------------------------
 Cost of Preferreds and
 Issuer Amortized Value of Bonds Market
 ------ ------------------------ ----------
 ACF Industries Debentures ...... $133,065(1) $163,327
 American Express "Percs" ....... 300,000 309,000(1)(2)
 Champion International Conv. Pfd. 300,000(1) 309,000(2)
 First Empire State Conv. Pfd. .. 40,000 68,000(1)(2)
 Salomon Conv. Pfd. ............. 700,000(1) 756,000(2)
 USAir Conv. Pfd. ............... 358,000(1) 268,500(2)
 Washington Public Power Systems Bonds 58,768(1) 81,002
 (1) Carrying value in our financial statements
 (2) Fair value as determined by Charlie and me
 During 1992 we added to our holdings of ACF debentures, had 
some of our WPPSS bonds called, and sold our RJR Nabisco position.
 Over the years, we've done well with fixed-income investments, 
having realized from them both large capital gains (including $80 
million in 1992) and exceptional current income. Chrysler 
Financial, Texaco, Time-Warner, WPPSS and RJR Nabisco were 
particularly good investments for us. Meanwhile, our fixed-income 
losses have been negligible: We've had thrills but so far no 
spills.
 Despite the success we experienced with our Gillette 
preferred, which converted to common stock in 1991, and despite our 
reasonable results with other negotiated purchases of preferreds, 
our overall performance with such purchases has been inferior to 
that we have achieved with purchases made in the secondary market. 
This is actually the result we expected. It corresponds with our 
belief that an intelligent investor in common stocks will do better 
in the secondary market than he will do buying new issues.
 The reason has to do with the way prices are set in each 
instance. The secondary market, which is periodically ruled by 
mass folly, is constantly setting a "clearing" price. No matter 
how foolish that price may be, it's what counts for the holder of a 
stock or bond who needs or wishes to sell, of whom there are always 
going to be a few at any moment. In many instances, shares worth x
in business value have sold in the market for 1/2x or less.
 The new-issue market, on the other hand, is ruled by 
controlling stockholders and corporations, who can usually select 
the timing of offerings or, if the market looks unfavorable, can 
avoid an offering altogether. Understandably, these sellers are 
not going to offer any bargains, either by way of a public offering 
or in a negotiated transaction: It's rare you'll find x for
1/2x here. Indeed, in the case of common-stock offerings, selling 
shareholders are often motivated to unload only when they feel the 
market is overpaying. (These sellers, of course, would state that 
proposition somewhat differently, averring instead that they simply 
resist selling when the market is underpaying for their goods.)
 To date, our negotiated purchases, as a group, have fulfilled 
but not exceeded the expectation we set forth in our 1989 Annual 
Report: "Our preferred stock investments should produce returns 
modestly above those achieved by most fixed-income portfolios." In 
truth, we would have done better if we could have put the money 
that went into our negotiated transactions into open-market 
purchases of the type we like. But both our size and the general 
strength of the markets made that difficult to do.
 There was one other memorable line in the 1989 Annual Report: 
"We have no ability to forecast the economics of the investment 
banking business, the airline industry, or the paper industry." At 
the time some of you may have doubted this confession of ignorance. 
Now, however, even my mother acknowledges its truth.
 In the case of our commitment to USAir, industry economics had 
soured before the ink dried on our check. As I've previously 
mentioned, it was I who happily jumped into the pool; no one pushed 
me. Yes, I knew the industry would be ruggedly competitive, but I 
did not expect its leaders to engage in prolonged kamikaze 
behavior. In the last two years, airline companies have acted as 
if they are members of a competitive tontine, which they wish to 
bring to its conclusion as rapidly as possible.
 Amidst this turmoil, Seth Schofield, CEO of USAir, has done a 
truly extraordinary job in repositioning the airline. He was 
particularly courageous in accepting a strike last fall that, had 
it been lengthy, might well have bankrupted the company. 
Capitulating to the striking union, however, would have been 
equally disastrous: The company was burdened with wage costs and 
work rules that were considerably more onerous than those 
encumbering its major competitors, and it was clear that over time 
any high-cost producer faced extinction. Happily for everyone, the 
strike was settled in a few days.
 A competitively-beset business such as USAir requires far more 
managerial skill than does a business with fine economics. 
Unfortunately, though, the near-term reward for skill in the 
airline business is simply survival, not prosperity.
 In early 1993, USAir took a major step toward assuring 
survival - and eventual prosperity - by accepting British Airways' 
offer to make a substantial, but minority, investment in the 
company. In connection with this transaction, Charlie and I were 
asked to join the USAir board. We agreed, though this makes five 
outside board memberships for me, which is more than I believe 
advisable for an active CEO. Even so, if an investee's management 
and directors believe it particularly important that Charlie and I 
join its board, we are glad to do so. We expect the managers of 
our investees to work hard to increase the value of the businesses 
they run, and there are times when large owners should do their bit 
as well.
Two New Accounting Rules and a Plea for One More
 A new accounting rule having to do with deferred taxes becomes 
effective in 1993. It undoes a dichotomy in our books that I have 
described in previous annual reports and that relates to the 
accrued taxes carried against the unrealized appreciation in our 
investment portfolio. At yearend 1992, that appreciation amounted 
to $7.6 billion. Against $6.4 billion of that, we carried taxes at 
the current 34% rate. Against the remainder of $1.2 billion, we 
carried an accrual of 28%, the tax rate in effect when that portion 
of the appreciation occurred. The new accounting rule says we must 
henceforth accrue all deferred tax at the current rate, which to us 
seems sensible.
 The new marching orders mean that in the first quarter of 1993 
we will apply a 34% rate to all of our unrealized appreciation, 
thereby increasing the tax liability and reducing net worth by $70 
million. The new rule also will cause us to make other minor 
changes in our calculation of deferred taxes.
 Future changes in tax rates will be reflected immediately in 
the liability for deferred taxes and, correspondingly, in net 
worth. The impact could well be substantial. Nevertheless, what 
is important in the end is the tax rate at the time we sell 
securities, when unrealized appreciation becomes realized.
 Another major accounting change, whose implementation is 
required by January 1, 1993, mandates that businesses recognize 
their present-value liability for post-retirement health benefits. 
Though GAAP has previously required recognition of pensions to be 
paid in the future, it has illogically ignored the costs that 
companies will then have to bear for health benefits. The new rule 
will force many companies to record a huge balance-sheet liability 
(and a consequent reduction in net worth) and also henceforth to 
recognize substantially higher costs when they are calculating 
annual profits.
 In making acquisitions, Charlie and I have tended to avoid 
companies with significant post-retirement liabilities. As a 
result, Berkshire's present liability and future costs for post￾retirement health benefits - though we now have 22,000 employees - 
are inconsequential. I need to admit, though, that we had a near 
miss: In 1982 I made a huge mistake in committing to buy a company 
burdened by extraordinary post-retirement health obligations. 
Luckily, though, the transaction fell through for reasons beyond 
our control. Reporting on this episode in the 1982 annual report, 
I said: "If we were to introduce graphics to this report, 
illustrating favorable business developments of the past year, two 
blank pages depicting this blown deal would be the appropriate 
centerfold." Even so, I wasn't expecting things to get as bad as 
they did. Another buyer appeared, the business soon went bankrupt 
and was shut down, and thousands of workers found those bountiful 
health-care promises to be largely worthless.
 In recent decades, no CEO would have dreamed of going to his 
board with the proposition that his company become an insurer of 
uncapped post-retirement health benefits that other corporations 
chose to install. A CEO didn't need to be a medical expert to know 
that lengthening life expectancies and soaring health costs would 
guarantee an insurer a financial battering from such a business. 
Nevertheless, many a manager blithely committed his own company to 
a self-insurance plan embodying precisely the same promises - and 
thereby doomed his shareholders to suffer the inevitable 
consequences. In health-care, open-ended promises have created 
open-ended liabilities that in a few cases loom so large as to 
threaten the global competitiveness of major American industries.
 I believe part of the reason for this reckless behavior was 
that accounting rules did not, for so long, require the booking of 
post-retirement health costs as they were incurred. Instead, the 
rules allowed cash-basis accounting, which vastly understated the 
liabilities that were building up. In effect, the attitude of both 
managements and their accountants toward these liabilities was 
"out-of-sight, out-of-mind." Ironically, some of these same 
managers would be quick to criticize Congress for employing "cash￾basis" thinking in respect to Social Security promises or other 
programs creating future liabilities of size.
 Managers thinking about accounting issues should never forget 
one of Abraham Lincoln's favorite riddles: "How many legs does a 
dog have if you call his tail a leg?" The answer: "Four, because 
calling a tail a leg does not make it a leg." It behooves managers 
to remember that Abe's right even if an auditor is willing to 
certify that the tail is a leg.
 * * * * * * * * * * * *
 The most egregious case of let's-not-face-up-to-reality 
behavior by executives and accountants has occurred in the world of 
stock options. In Berkshire's 1985 annual report, I laid out my 
opinions about the use and misuse of options. But even when 
options are structured properly, they are accounted for in ways 
that make no sense. The lack of logic is not accidental: For 
decades, much of the business world has waged war against 
accounting rulemakers, trying to keep the costs of stock options 
from being reflected in the profits of the corporations that issue 
them.
 Typically, executives have argued that options are hard to 
value and that therefore their costs should be ignored. At other 
times managers have said that assigning a cost to options would 
injure small start-up businesses. Sometimes they have even 
solemnly declared that "out-of-the-money" options (those with an 
exercise price equal to or above the current market price) have no 
value when they are issued.
 Oddly, the Council of Institutional Investors has chimed in 
with a variation on that theme, opining that options should not be 
viewed as a cost because they "aren't dollars out of a company's 
coffers." I see this line of reasoning as offering exciting 
possibilities to American corporations for instantly improving 
their reported profits. For example, they could eliminate the cost 
of insurance by paying for it with options. So if you're a CEO and 
subscribe to this "no cash-no cost" theory of accounting, I'll make 
you an offer you can't refuse: Give us a call at Berkshire and we 
will happily sell you insurance in exchange for a bundle of long￾term options on your company's stock.
 Shareholders should understand that companies incur costs when 
they deliver something of value to another party and not just when 
cash changes hands. Moreover, it is both silly and cynical to say 
that an important item of cost should not be recognized simply 
because it can't be quantified with pinpoint precision. Right now, 
accounting abounds with imprecision. After all, no manager or 
auditor knows how long a 747 is going to last, which means he also 
does not know what the yearly depreciation charge for the plane 
should be. No one knows with any certainty what a bank's annual 
loan loss charge ought to be. And the estimates of losses that 
property-casualty companies make are notoriously inaccurate.
 Does this mean that these important items of cost should be 
ignored simply because they can't be quantified with absolute 
accuracy? Of course not. Rather, these costs should be estimated 
by honest and experienced people and then recorded. When you get 
right down to it, what other item of major but hard-to-precisely￾calculate cost - other, that is, than stock options - does the 
accounting profession say should be ignored in the calculation of 
earnings?
 Moreover, options are just not that difficult to value. 
Admittedly, the difficulty is increased by the fact that the 
options given to executives are restricted in various ways. These 
restrictions affect value. They do not, however, eliminate it. In 
fact, since I'm in the mood for offers, I'll make one to any 
executive who is granted a restricted option, even though it may be 
out of the money: On the day of issue, Berkshire will pay him or 
her a substantial sum for the right to any future gain he or she 
realizes on the option. So if you find a CEO who says his newly￾issued options have little or no value, tell him to try us out. In 
truth, we have far more confidence in our ability to determine an 
appropriate price to pay for an option than we have in our ability 
to determine the proper depreciation rate for our corporate jet.
 It seems to me that the realities of stock options can be 
summarized quite simply: If options aren't a form of compensation, 
what are they? If compensation isn't an expense, what is it? And, 
if expenses shouldn't go into the calculation of earnings, where in 
the world should they go?
 The accounting profession and the SEC should be shamed by the 
fact that they have long let themselves be muscled by business 
executives on the option-accounting issue. Additionally, the 
lobbying that executives engage in may have an unfortunate by￾product: In my opinion, the business elite risks losing its 
credibility on issues of significance to society - about which it 
may have much of value to say - when it advocates the incredible on 
issues of significance to itself.
Miscellaneous
 We have two pieces of regrettable news this year. First, 
Gladys Kaiser, my friend and assistant for twenty-five years, will 
give up the latter post after the 1993 annual meeting, though she 
will certainly remain my friend forever. Gladys and I have been a 
team, and though I knew her retirement was coming, it is still a 
jolt.
 Secondly, in September, Verne McKenzie relinquished his role 
as Chief Financial Officer after a 30-year association with me that 
began when he was the outside auditor of Buffett Partnership, Ltd. 
Verne is staying on as a consultant, and though that job 
description is often a euphemism, in this case it has real meaning. 
I expect Verne to continue to fill an important role at Berkshire 
but to do so at his own pace. Marc Hamburg, Verne's understudy for 
five years, has succeeded him as Chief Financial Officer.
 I recall that one woman, upon being asked to describe the 
perfect spouse, specified an archeologist: "The older I get," she 
said, "the more he'll be interested in me." She would have liked 
my tastes: I treasure those extraordinary Berkshire managers who 
are working well past normal retirement age and who concomitantly 
are achieving results much superior to those of their younger 
competitors. While I understand and empathize with the decision of 
Verne and Gladys to retire when the calendar says it's time, theirs 
is not a step I wish to encourage. It's hard to teach a new dog 
old tricks.
 * * * * * * * * * * * * 
 I am a moderate in my views about retirement compared to Rose 
Blumkin, better known as Mrs. B. At 99, she continues to work 
seven days a week. And about her, I have some particularly good 
news.
 You will remember that after her family sold 80% of Nebraska 
Furniture Mart (NFM) to Berkshire in 1983, Mrs. B continued to be 
Chairman and run the carpet operation. In 1989, however, she left 
because of a managerial disagreement and opened up her own 
operation next door in a large building that she had owned for 
several years. In her new business, she ran the carpet section but 
leased out other home-furnishings departments.
 At the end of last year, Mrs. B decided to sell her building 
and land to NFM. She'll continue, however, to run her carpet 
business at its current location (no sense slowing down just when 
you're hitting full stride). NFM will set up shop alongside her, 
in that same building, thereby making a major addition to its 
furniture business.
 I am delighted that Mrs. B has again linked up with us. Her 
business story has no parallel and I have always been a fan of 
hers, whether she was a partner or a competitor. But believe me, 
partner is better.
 This time around, Mrs. B graciously offered to sign a non￾compete agreement - and I, having been incautious on this point 
when she was 89, snapped at the deal. Mrs. B belongs in the 
Guinness Book of World Records on many counts. Signing a non￾compete at 99 merely adds one more.
 * * * * * * * * * * * *
 Ralph Schey, CEO of Scott Fetzer and a manager who I hope is 
with us at 99 also, hit a grand slam last year when that company 
earned a record $110 million pre-tax. What's even more impressive 
is that Scott Fetzer achieved such earnings while employing only 
$116 million of equity capital. This extraordinary result is not 
the product of leverage: The company uses only minor amounts of 
borrowed money (except for the debt it employs - appropriately - in 
its finance subsidiary).
 Scott Fetzer now operates with a significantly smaller 
investment in both inventory and fixed assets than it had when we 
bought it in 1986. This means the company has been able to 
distribute more than 100% of its earnings to Berkshire during our 
seven years of ownership while concurrently increasing its earnings 
stream - which was excellent to begin with - by a lot. Ralph just 
keeps on outdoing himself, and Berkshire shareholders owe him a 
great deal.
 * * * * * * * * * * * *
 Those readers with particularly sharp eyes will note that our 
corporate expense fell from $5.6 million in 1991 to $4.2 million in 
1992. Perhaps you will think that I have sold our corporate jet, 
The Indefensible. Forget it! I find the thought of retiring the 
plane even more revolting than the thought of retiring the 
Chairman. (In this matter I've demonstrated uncharacteristic 
flexibility: For years I argued passionately against corporate 
jets. But finally my dogma was run over by my karma.)
 Our reduction in corporate overhead actually came about 
because those expenses were especially high in 1991, when we 
incurred a one-time environmental charge relating to alleged pre-
1970 actions of our textile operation. Now that things are back to 
normal, our after-tax overhead costs are under 1% of our reported 
operating earnings and less than 1/2 of 1% of our look-through 
earnings. We have no legal, personnel, public relations, investor 
relations, or strategic planning departments. In turn this means 
we don't need support personnel such as guards, drivers, 
messengers, etc. Finally, except for Verne, we employ no 
consultants. Professor Parkinson would like our operation - though 
Charlie, I must say, still finds it outrageously fat.
 At some companies, corporate expense runs 10% or more of 
operating earnings. The tithing that operations thus makes to 
headquarters not only hurts earnings, but more importantly slashes 
capital values. If the business that spends 10% on headquarters' 
costs achieves earnings at its operating levels identical to those 
achieved by the business that incurs costs of only 1%, shareholders 
of the first enterprise suffer a 9% loss in the value of their 
holdings simply because of corporate overhead. Charlie and I have 
observed no correlation between high corporate costs and good 
corporate performance. In fact, we see the simpler, low-cost 
operation as more likely to operate effectively than its 
bureaucratic brethren. We're admirers of the Wal-Mart, Nucor, 
Dover, GEICO, Golden West Financial and Price Co. models.
 * * * * * * * * * * * *
 Late last year Berkshire's stock price crossed $10,000. 
Several shareholders have mentioned to me that the high price 
causes them problems: They like to give shares away each year and 
find themselves impeded by the tax rule that draws a distinction 
between annual gifts of $10,000 or under to a single individual and 
those above $10,000. That is, those gifts no greater than $10,000 
are completely tax-free; those above $10,000 require the donor to 
use up a portion of his or her lifetime exemption from gift and 
estate taxes, or, if that exemption has been exhausted, to pay gift 
taxes.
 I can suggest three ways to address this problem. The first 
would be useful to a married shareholder, who can give up to 
$20,000 annually to a single recipient, as long as the donor files 
a gift tax return containing his or her spouse's written consent to 
gifts made during the year.
 Secondly, a shareholder, married or not, can make a bargain 
sale. Imagine, for example, that Berkshire is selling for $12,000 
and that one wishes to make only a $10,000 gift. In that case, 
sell the stock to the giftee for $2,000. (Caution: You will be 
taxed on the amount, if any, by which the sales price to your 
giftee exceeds your tax basis.)
 Finally, you can establish a partnership with people to whom 
you are making gifts, fund it with Berkshire shares, and simply 
give percentage interests in the partnership away each year. These 
interests can be for any value that you select. If the value is 
$10,000 or less, the gift will be tax-free.
 We issue the customary warning: Consult with your own tax 
advisor before taking action on any of the more esoteric methods of 
gift-making.
 We hold to the view about stock splits that we set forth in 
the 1983 Annual Report. Overall, we believe our owner-related 
policies - including the no-split policy - have helped us assemble 
a body of shareholders that is the best associated with any widely￾held American corporation. Our shareholders think and behave like 
rational long-term owners and view the business much as Charlie and 
I do. Consequently, our stock consistently trades in a price range 
that is sensibly related to intrinsic value.
 Additionally, we believe that our shares turn over far less 
actively than do the shares of any other widely-held company. The 
frictional costs of trading - which act as a major "tax" on the 
owners of many companies - are virtually non-existent at Berkshire. 
(The market-making skills of Jim Maguire, our New York Stock 
Exchange specialist, definitely help to keep these costs low.) 
Obviously a split would not change this situation dramatically. 
Nonetheless, there is no way that our shareholder group would be 
upgraded by the new shareholders enticed by a split. Instead we 
believe that modest degradation would occur.
 * * * * * * * * * * * *
 As I mentioned earlier, on December 16th we called our zero￾coupon, convertible debentures for payment on January 4, 1993. 
These obligations bore interest at 5 1/2%, a low cost for funds 
when they were issued in 1989, but an unattractive rate for us at 
the time of call.
 The debentures could have been redeemed at the option of the 
holder in September 1994, and 5 1/2% money available for no longer 
than that is not now of interest to us. Furthermore, Berkshire 
shareholders are disadvantaged by having a conversion option 
outstanding. At the time we issued the debentures, this 
disadvantage was offset by the attractive interest rate they 
carried; by late 1992, it was not.
 In general, we continue to have an aversion to debt, 
particularly the short-term kind. But we are willing to incur 
modest amounts of debt when it is both properly structured and of 
significant benefit to shareholders.
 * * * * * * * * * * * *
 About 97% of all eligible shares participated in Berkshire's 
1992 shareholder-designated contributions program. Contributions 
made through the program were $7.6 million, and 2,810 charities 
were recipients. I'm considering increasing these contributions in 
the future at a rate greater than the increase in Berkshire's book 
value, and I would be glad to hear from you as to your thinking 
about this idea.
 We suggest that new shareholders read the description of our 
shareholder-designated contributions program that appears on pages 
48-49. To participate in future programs, you must make sure your 
shares are registered in the name of the actual owner, not in the 
nominee name of a broker, bank or depository. Shares not so 
registered on August 31, 1993 will be ineligible for the 1993 
program.
 In addition to the shareholder-designated contributions that 
Berkshire distributes, managers of our operating businesses make 
contributions, including merchandise, averaging about $2.0 million 
annually. These contributions support local charities, such as The 
United Way, and produce roughly commensurate benefits for our 
businesses.
 However, neither our operating managers nor officers of the 
parent company use Berkshire funds to make contributions to broad 
national programs or charitable activities of special personal 
interest to them, except to the extent they do so as shareholders. 
If your employees, including your CEO, wish to give to their alma 
maters or other institutions to which they feel a personal 
attachment, we believe they should use their own money, not yours.
 * * * * * * * * * * * *
 This year the Annual Meeting will be held at the Orpheum 
Theater in downtown Omaha at 9:30 a.m. on Monday, April 26, 1993. 
A record 1,700 people turned up for the meeting last year, but that 
number still leaves plenty of room at the Orpheum.
 We recommend that you get your hotel reservations early at one 
of these hotels: (1) The Radisson-Redick Tower, a small (88 rooms) 
but nice hotel across the street from the Orpheum; (2) the much 
larger Red Lion Hotel, located about a five-minute walk from the 
Orpheum; or (3) the Marriott, located in West Omaha about 100 yards 
from Borsheim's, which is a twenty minute drive from downtown. We 
will have buses at the Marriott that will leave at 8:30 and 8:45 
for the meeting and return after it ends.
 Charlie and I always enjoy the meeting, and we hope you can 
make it. The quality of our shareholders is reflected in the 
quality of the questions we get: We have never attended an annual 
meeting anywhere that features such a consistently high level of 
intelligent, owner-related questions.
 An attachment to our proxy material explains how you can 
obtain the card you will need for admission to the meeting. With 
the admission card, we will enclose information about parking 
facilities located near the Orpheum. If you are driving, come a 
little early. Nearby lots fill up quickly and you may have to walk 
a few blocks.
 As usual, we will have buses to take you to Nebraska Furniture 
Mart and Borsheim's after the meeting and to take you from there to 
downtown hotels or the airport later. I hope that you will allow 
plenty of time to fully explore the attractions of both stores. 
Those of you arriving early can visit the Furniture Mart any day of 
the week; it is open from 10 a.m. to 5:30 p.m. on Saturdays and 
from noon to 5:30 p.m. on Sundays. While there, stop at the See's 
Candy Cart and find out for yourself why Charlie and I are a good 
bit wider than we were back in 1972 when we bought See's.
 Borsheim's normally is closed on Sunday but will be open for 
shareholders and their guests from noon to 6 p.m. on Sunday, April 
25. Charlie and I will be in attendance, sporting our jeweler's 
loupes, and ready to give advice about gems to anyone foolish 
enough to listen. Also available will be plenty of Cherry Cokes, 
See's candies, and other lesser goodies. I hope you will join us.
 Warren E. Buffett
March 1, 1993 Chairman of the Board
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our per-share book value increased 14.3% during 1993. Over 
the last 29 years (that is, since present management took over) 
book value has grown from $19 to $8,854, or at a rate of 23.3% 
compounded annually.
 During the year, Berkshire's net worth increased by $1.5 
billion, a figure affected by two negative and two positive non￾operating items. For the sake of completeness, I'll explain them 
here. If you aren't thrilled by accounting, however, feel free 
to fast-forward through this discussion:
 1. The first negative was produced by a change in 
 Generally Accepted Accounting Principles (GAAP) 
 having to do with the taxes we accrue against 
 unrealized appreciation in the securities we 
 carry at market value. The old rule said that 
 the tax rate used should be the one in effect 
 when the appreciation took place. Therefore, 
 at the end of 1992, we were using a rate of 34% 
 on the $6.4 billion of gains generated after 
 1986 and 28% on the $1.2 billion of gains 
 generated before that. The new rule stipulates 
 that the current tax rate should be applied to 
 all gains. The rate in the first quarter of 
 1993, when this rule went into effect, was 34%. 
 Applying that rate to our pre-1987 gains 
 reduced net worth by $70 million.
 2. The second negative, related to the first, came 
 about because the corporate tax rate was raised 
 in the third quarter of 1993 to 35%. This 
 change required us to make an additional charge 
 of 1% against all of our unrealized gains, and 
 that charge penalized net worth by $75 million. 
 Oddly, GAAP required both this charge and the 
 one described above to be deducted from the 
 earnings we report, even though the unrealized 
 appreciation that gave rise to the charges was 
 never included in earnings, but rather was 
 credited directly to net worth.
 3. Another 1993 change in GAAP affects the value 
 at which we carry the securities that we own. 
 In recent years, both the common stocks and 
 certain common-equivalent securities held by 
 our insurance companies have been valued at 
 market, whereas equities held by our non-
 insurance subsidiaries or by the parent company 
 were carried at their aggregate cost or market, 
 whichever was lower. Now GAAP says that all
 common stocks should be carried at market, a 
 rule we began following in the fourth quarter 
 of 1993. This change produced a gain in 
 Berkshire's reported net worth of about $172 
 million.
 4. Finally, we issued some stock last year. In a 
 transaction described in last year's Annual 
 Report, we issued 3,944 shares in early 
 January, 1993 upon the conversion of $46 
 million convertible debentures that we had 
 called for redemption. Additionally, we issued 
 25,203 shares when we acquired Dexter Shoe, a 
 purchase discussed later in this report. The 
 overall result was that our shares outstanding 
 increased by 29,147 and our net worth by about 
 $478 million. Per-share book value also grew, 
 because the shares issued in these transactions 
 carried a price above their book value.
 Of course, it's per-share intrinsic value, not book value, 
that counts. Book value is an accounting term that measures the 
capital, including retained earnings, that has been put into a 
business. Intrinsic value is a present-value estimate of the 
cash that can be taken out of a business during its remaining 
life. At most companies, the two values are unrelated. 
Berkshire, however, is an exception: Our book value, though 
significantly below our intrinsic value, serves as a useful 
device for tracking that key figure. In 1993, each measure grew 
by roughly 14%, advances that I would call satisfactory but 
unexciting.
 These gains, however, were outstripped by a much larger gain 
- 39% - in Berkshire's market price. 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 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.
 From 1991 to 1993, Coke and Gillette increased their annual 
operating earnings per share by 38% and 37% respectively, but 
their market prices moved up only 11% and 6%. In other words, 
the companies overperformed their stocks, a result that no doubt 
partly reflects Wall Street's new apprehension about brand names. 
Whatever the reason, what will count over time is the earnings 
performance of these companies. If they prosper, Berkshire will 
also prosper, though not in a lock-step manner.
 Let me add a lesson from history: Coke went public in 1919 
at $40 per share. By the end of 1920 the market, coldly 
reevaluating Coke's future prospects, had battered the stock down 
by more than 50%, to $19.50. At yearend 1993, that single share, 
with dividends reinvested, was worth more than $2.1 million. As 
Ben Graham said: "In the short-run, the market is a voting 
machine - reflecting a voter-registration test that requires only 
money, not intelligence or emotional stability - but in the long￾run, the market is a weighing machine."
 So how should Berkshire's over-performance in the market 
last year be viewed? Clearly, Berkshire was selling at a higher 
percentage of intrinsic value at the end of 1993 than was the 
case at the beginning of the year. On the other hand, in a world 
of 6% or 7% long-term interest rates, Berkshire's market price 
was not inappropriate if - and you should understand that this is 
a huge if - Charlie Munger, Berkshire's Vice Chairman, and I can 
attain our long-standing goal of increasing Berkshire's per-share 
intrinsic value at an average annual rate of 15%. We have not 
retreated from this goal. But we again emphasize, as we have for 
many years, that the growth in our capital base makes 15% an 
ever-more difficult target to hit.
 What we have going for us is a growing collection of good￾sized operating businesses that possess economic characteristics 
ranging from good to terrific, run by managers whose performance 
ranges from terrific to terrific. You need have no worries about 
this group.
 The capital-allocation work that Charlie and I do at the 
parent company, using the funds that our managers deliver to us, 
has a less certain outcome: It is not easy to find new 
businesses and managers comparable to those we have. Despite 
that difficulty, Charlie and I relish the search, and we are 
happy to report an important success in 1993.
Dexter Shoe
 What we did last year was build on our 1991 purchase of H. 
H. Brown, a superbly-run manufacturer of work shoes, boots and 
other footwear. Brown has been a real winner: Though we had 
high hopes to begin with, these expectations have been 
considerably exceeded thanks to Frank Rooney, Jim Issler and the 
talented managers who work with them. Because of our confidence 
in Frank's team, we next acquired Lowell Shoe, at the end of 
1992. Lowell was a long-established manufacturer of women's and 
nurses' shoes, but its business needed some fixing. Again, 
results have surpassed our expectations. So we promptly jumped 
at the chance last year to acquire Dexter Shoe of Dexter, Maine, 
which manufactures popular-priced men's and women's shoes. 
Dexter, I can assure you, needs no fixing: It is one of the 
best-managed companies Charlie and I have seen in our business 
lifetimes.
 Harold Alfond, who started working in a shoe factory at 25 
cents an hour when he was 20, founded Dexter in 1956 with $10,000 
of capital. He was joined in 1958 by Peter Lunder, his nephew. 
The two of them have since built a business that now produces over 
7.5 million pairs of shoes annually, most of them made in Maine 
and the balance in Puerto Rico. As you probably know, the 
domestic shoe industry is generally thought to be unable to 
compete with imports from low-wage countries. But someone forgot 
to tell this to the ingenious managements of Dexter and H. H. 
Brown and to their skilled labor forces, which together make the 
U.S. plants of both companies highly competitive against all 
comers.
 Dexter's business includes 77 retail outlets, located 
primarily in the Northeast. The company is also a major 
manufacturer of golf shoes, producing about 15% of U.S. output. 
Its bread and butter, though, is the manufacture of traditional 
shoes for traditional retailers, a job at which it excels: Last 
year both Nordstrom and J.C. Penney bestowed special awards upon 
Dexter for its performance as a supplier during 1992.
 Our 1993 results include Dexter only from our date of 
merger, November 7th. In 1994, we expect Berkshire's shoe 
operations to have more than $550 million in sales, and we would 
not be surprised if the combined pre-tax earnings of these 
businesses topped $85 million. Five years ago we had no thought 
of getting into shoes. Now we have 7,200 employees in that 
industry, and I sing "There's No Business Like Shoe Business" as 
I drive to work. So much for strategic plans.
 At Berkshire, we have no view of the future that dictates 
what businesses or industries we will enter. Indeed, we think 
it's usually poison for a corporate giant's shareholders if it 
embarks upon new ventures pursuant to some grand vision. We 
prefer instead to focus on the economic characteristics of 
businesses that we wish to own and the personal characteristics 
of managers with whom we wish to associate - and then to hope we 
get lucky in finding the two in combination. At Dexter, we did.
 * * * * * * * * * * * *
 And now we pause for a short commercial: Though they owned 
a business jewel, we believe that Harold and Peter (who were not 
interested in cash) made a sound decision in exchanging their 
Dexter stock for shares of Berkshire. What they did, in effect, 
was trade a 100% interest in a single terrific business for a 
smaller interest in a large group of terrific businesses. They 
incurred no tax on this exchange and now own a security that can 
be easily used for charitable or personal gifts, or that can be 
converted to cash in amounts, and at times, of their own 
choosing. Should members of their families desire to, they can 
pursue varying financial paths without running into the 
complications that often arise when assets are concentrated in a 
private business.
 For tax and other reasons, private companies also often find 
it difficult to diversify outside their industries. Berkshire, 
in contrast, can diversify with ease. So in shifting their 
ownership to Berkshire, Dexter's shareholders solved a 
reinvestment problem. Moreover, though Harold and Peter now have 
non-controlling shares in Berkshire, rather than controlling 
shares in Dexter, they know they will be treated as partners and 
that we will follow owner-oriented practices. If they elect to 
retain their Berkshire shares, their investment result from the 
merger date forward will exactly parallel my own result. Since I 
have a huge percentage of my net worth committed for life to 
Berkshire shares - and since the company will issue me neither 
restricted shares nor stock options - my gain-loss equation will 
always match that of all other owners.
 Additionally, Harold and Peter know that at Berkshire we can 
keep our promises: There will be no changes of control or 
culture at Berkshire for many decades to come. Finally, and of 
paramount importance, Harold and Peter can be sure that they will 
get to run their business - an activity they dearly love - 
exactly as they did before the merger. At Berkshire, we do not 
tell .400 hitters how to swing.
 What made sense for Harold and Peter probably makes sense 
for a few other owners of large private businesses. So, if you 
have a business that might fit, let me hear from you. Our 
acquisition criteria are set forth in the appendix on page 22.
Sources of Reported Earnings
 The table below shows the major sources of Berkshire's 
reported earnings. In this presentation, amortization of 
Goodwill and other major purchase-price accounting adjustments 
are not charged against the specific businesses to which they 
apply, but are instead aggregated and shown separately. This 
procedure lets you view the earnings of our businesses as they 
would have been reported had we not purchased them. I've 
explained in past reports why this form of presentation seems to 
us to be more useful to investors and managers than one utilizing 
GAAP, which requires purchase-price adjustments to be made on a 
business-by-business basis. The total net earnings we show in 
the table are, of course, identical to the GAAP total in our 
audited financial statements.
 (000s omitted) 
 ------------------------------------------
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests) 
 ---------------------- ------------------
 1993 1992 1993 1992 
 ---------- ---------- -------- --------
Operating Earnings:
 Insurance Group:
 Underwriting ............... $ 30,876 $(108,961) $ 20,156 $(71,141) 
 Net Investment Income ...... 375,946 355,067 321,321 305,763 
 H. H. Brown, Lowell, 
 and Dexter ............... 44,025* 27,883 28,829 17,340 
 Buffalo News ................. 50,962 47,863 29,696 28,163 
 Commercial & Consumer Finance 22,695 19,836 14,161 12,664 
 Fechheimer ................... 13,442 13,698 6,931 7,267 
 Kirby
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1994 was $1.45 billion or 13.9%. 
Over the last 30 years (that is, since present management took 
over) our per-share book value has grown from $19 to $10,083, or 
at a rate of 23% compounded annually.
 Charlie Munger, Berkshire's Vice Chairman and my partner, 
and I make few predictions. One we will confidently offer, 
however, is that the future performance of Berkshire won't come 
close to matching the performance of the past.
 The problem is not that what has worked in the past will 
cease to work in the future. To the contrary, we believe that 
our formula - the purchase at sensible prices of businesses that 
have good underlying economics and are run by honest and able 
people - is certain to produce reasonable success. We expect, 
therefore, to keep on doing well.
 A fat wallet, however, is the enemy of superior investment 
results. And Berkshire now has a net worth of $11.9 billion 
compared to about $22 million when Charlie and I began to manage 
the company. Though there are as many good businesses as ever, 
it is useless for us to make purchases that are inconsequential 
in relation to Berkshire's capital. (As Charlie regularly 
reminds me, "If something is not worth doing at all, it's not 
worth doing well.") We now consider a security for purchase only 
if we believe we can deploy at least $100 million in it. Given 
that minimum, Berkshire's investment universe has shrunk 
dramatically.
 Nevertheless, we will stick with the approach that got us 
here and try not to relax our standards. Ted Williams, in 
The Story of My Life, explains why: "My argument is, to be 
a good hitter, you've got to get a good ball to hit. It's the 
first rule in the book. If I have to bite at stuff that is out 
of my happy zone, I'm not a .344 hitter. I might only be a .250 
hitter." Charlie and I agree and will try to wait for 
opportunities that are well within our own "happy zone."
 We will continue to ignore political and economic forecasts, 
which are an expensive distraction for many investors and 
businessmen. Thirty years ago, no one could have foreseen the 
huge expansion of the Vietnam War, wage and price controls, two 
oil shocks, the resignation of a president, the dissolution of 
the Soviet Union, a one-day drop in the Dow of 508 points, or 
treasury bill yields fluctuating between 2.8% and 17.4%.
 But, surprise - none of these blockbuster events made the 
slightest dent in Ben Graham's investment principles. Nor did 
they render unsound the negotiated purchases of fine businesses 
at sensible prices. Imagine the cost to us, then, if we had let 
a fear of unknowns cause us to defer or alter the deployment of 
capital. Indeed, we have usually made our best purchases when 
apprehensions about some macro event were at a peak. Fear is the 
foe of the faddist, but the friend of the fundamentalist.
 A different set of major shocks is sure to occur in the next 
30 years. We will neither try to predict these nor to profit 
from them. If we can identify businesses similar to those we 
have purchased in the past, external surprises will have little 
effect on our long-term results.
 What we promise you - along with more modest gains - is that 
during your ownership of Berkshire, you will fare just as Charlie 
and I do. If you suffer, we will suffer; if we prosper, so will 
you. And we will not break this bond by introducing compensation 
arrangements that give us a greater participation in the upside 
than the downside.
 We further promise you that our personal fortunes will 
remain overwhelmingly concentrated in Berkshire shares: We will 
not ask you to invest with us and then put our own money 
elsewhere. In addition, Berkshire dominates both the investment 
portfolios of most members of our families and of a great many 
friends who belonged to partnerships that Charlie and I ran in 
the 1960's. We could not be more motivated to do our best.
 Luckily, we have a good base from which to work. Ten years 
ago, in 1984, Berkshire's insurance companies held securities 
having a value of $1.7 billion, or about $1,500 per Berkshire 
share. Leaving aside all income and capital gains from those 
securities, Berkshire's pre-tax earnings that year were only 
about $6 million. We had earnings, yes, from our various 
manufacturing, retailing and service businesses, but they were 
almost entirely offset by the combination of underwriting losses 
in our insurance business, corporate overhead and interest 
expense.
 Now we hold securities worth $18 billion, or over $15,000 
per Berkshire share. If you again exclude all income from these 
securities, our pre-tax earnings in 1994 were about $384 million. 
During the decade, employment has grown from 5,000 to 22,000 
(including eleven people at World Headquarters).
 We achieved our gains through the efforts of a superb corps 
of operating managers who get extraordinary results from some 
ordinary-appearing businesses. Casey Stengel described managing 
a baseball team as "getting paid for home runs other fellows 
hit." That's my formula at Berkshire, also.
 The businesses in which we have partial interests are 
equally important to Berkshire's success. A few statistics will 
illustrate their significance: In 1994, Coca-Cola sold about 280 
billion 8-ounce servings and earned a little less than a penny on 
each. But pennies add up. Through Berkshire's 7.8% ownership of 
Coke, we have an economic interest in 21 billion of its servings, 
which produce "soft-drink earnings" for us of nearly $200 
million. Similarly, by way of its Gillette stock, Berkshire has 
a 7% share of the world's razor and blade market (measured by 
revenues, not by units), a proportion according us about $250 
million of sales in 1994. And, at Wells Fargo, a $53 billion 
bank, our 13% ownership translates into a $7 billion "Berkshire 
Bank" that earned about $100 million during 1994.
 It's far better to own a significant portion of the Hope 
diamond than 100% of a rhinestone, and the companies just 
mentioned easily qualify as rare gems. Best of all, we aren't 
limited to simply a few of this breed, but instead possess a 
growing collection.
 Stock prices will continue to fluctuate - sometimes sharply 
- and the economy will have its ups and down. Over time, 
however, we believe it highly probable that the sort of 
businesses we own will continue to increase in value at a 
satisfactory rate.
Book Value and Intrinsic Value
 We regularly report our per-share book value, an easily 
calculable number, though one of limited use. Just as regularly, 
we tell you that what counts is intrinsic value, a number that is 
impossible to pinpoint but essential to estimate.
 For example, in 1964, we could state with certitude that 
Berkshire's per-share book value was $19.46. However, that 
figure considerably overstated the stock's intrinsic value since 
all of the company's resources were tied up in a sub-profitable 
textile business. Our textile assets had neither going-concern 
nor liquidation values equal to their carrying values. In 1964, 
then, anyone inquiring into the soundness of Berkshire's balance 
sheet might well have deserved the answer once offered up by a 
Hollywood mogul of dubious reputation: "Don't worry, the 
liabilities are solid."
 Today, Berkshire's situation has reversed: Many of the 
businesses we control are worth far more than their carrying 
value. (Those we don't control, such as Coca-Cola or Gillette, 
are carried at current market values.) We continue to give you 
book value figures, however, because they serve as a rough, 
albeit significantly understated, tracking measure for Berkshire's 
intrinsic value. Last year, in fact, the two measures moved in 
concert: Book value gained 13.9%, and that was the approximate 
gain in intrinsic value also.
 We define intrinsic value as the discounted value of the 
cash that can be taken out of a business during its remaining 
life. Anyone calculating intrinsic value necessarily comes up 
with a highly subjective figure that will change both as 
estimates of future cash flows are revised and as interest rates 
move. Despite its fuzziness, however, intrinsic value is all￾important and is the only logical way to evaluate the relative 
attractiveness of investments and businesses.
 To see how historical input (book value) and future output 
(intrinsic value) can diverge, let's look at another form of 
investment, a college education. Think of the education's cost 
as its "book value." If it is to be accurate, the cost should 
include the earnings that were foregone by the student because he 
chose college rather than a job.
 For this exercise, we will ignore the important non-economic 
benefits of an education and focus strictly on its economic 
value. First, we must estimate the earnings that the graduate 
will receive over his lifetime and subtract from that figure an 
estimate of what he would have earned had he lacked his 
education. That gives us an excess earnings figure, which must 
then be discounted, at an appropriate interest rate, back to 
graduation day. The dollar result equals the intrinsic economic 
value of the education.
 Some graduates will find that the book value of their 
education exceeds its intrinsic value, which means that whoever 
paid for the education didn't get his money's worth. In other 
cases, the intrinsic value of an education will far exceed its 
book value, a result that proves capital was wisely deployed. In 
all cases, what is clear is that book value is meaningless as an 
indicator of intrinsic value.
 Now let's get less academic and look at Scott Fetzer, an 
example from Berkshire's own experience. This account will not 
only illustrate how the relationship of book value and intrinsic 
value can change but also will provide an accounting lesson that 
I know you have been breathlessly awaiting. Naturally, I've 
chosen here to talk about an acquisition that has turned out to 
be a huge winner.
 Berkshire purchased Scott Fetzer at the beginning of 1986. 
At the time, the company was a collection of 22 businesses, and 
today we have exactly the same line-up - no additions and no 
disposals. Scott Fetzer's main operations are World Book, Kirby, 
and Campbell Hausfeld, but many other units are important 
contributors to earnings as well.
 We paid $315.2 million for Scott Fetzer, which at the time 
had $172.6 million of book value. The $142.6 million premium we 
handed over indicated our belief that the company's intrinsic 
value was close to double its book value.
 In the table below we trace the book value of Scott Fetzer, 
as well as its earnings and dividends, since our purchase.
 
 (1) (4)
 Beginning (2) (3) Ending
Year Book Value Earnings Dividends Book Value
---- ---------- -------- --------- ----------
 (In $ Millions) (1)+(2)-(3)
1986 ............... $172.6 $ 40.3 $125.0 $ 87.9
1987 ............... 87.9 48.6 41.0 95.5
1988 ............... 95.5 58.0 35.0 118.6
1989 ............... 118.6 58.5 71.5 105.5
1990 ............... 105.5 61.3 33.5 133.3
1991 ............... 133.3 61.4 74.0 120.7
1992 ............... 120.7 70.5 80.0 111.2
1993 ............... 111.2 77.5 98.0 90.7
1994 ............... 90.7 79.3 76.0 94.0
 Because it had excess cash when our deal was made, Scott 
Fetzer was able to pay Berkshire dividends of $125 million in 
1986, though it earned only $40.3 million. I should mention that 
we have not introduced leverage into Scott Fetzer's balance 
sheet. In fact, the company has gone from very modest debt when 
we purchased it to virtually no debt at all (except for debt used 
by its finance subsidiary). Similarly, we have not sold plants 
and leased them back, nor sold receivables, nor the like. 
Throughout our years of ownership, Scott Fetzer has operated as a 
conservatively-financed and liquid enterprise.
 As you can see, Scott Fetzer's earnings have increased 
steadily since we bought it, but book value has not grown 
commensurately. Consequently, return on equity, which was 
exceptional at the time of our purchase, has now become truly 
extraordinary. Just how extraordinary is illustrated by 
comparing Scott Fetzer's performance to that of the Fortune 500, 
a group it would qualify for if it were a stand-alone company.
 Had Scott Fetzer been on the 1993 500 list - the latest 
available for inspection - the company's return on equity would 
have ranked 4th. But that is far from the whole story. The top 
three companies in return on equity were Insilco, LTV and Gaylord 
Container, each of which emerged from bankruptcy in 1993 and none 
of which achieved meaningful earnings that year except for those 
they realized when they were accorded debt forgiveness in 
bankruptcy proceedings. Leaving aside such non-operating 
windfalls, Scott Fetzer's return on equity would have ranked it 
first on the Fortune 500, well ahead of number two. Indeed, 
Scott Fetzer's return on equity was double that of the company 
ranking tenth.
 You might expect that Scott Fetzer's success could only be 
explained by a cyclical peak in earnings, a monopolistic 
position, or leverage. But no such circumstances apply. Rather, 
the company's success comes from the managerial expertise of CEO 
Ralph Schey, of whom I'll tell you more later.
 First, however, the promised accounting lesson: When we 
paid a $142.6 million premium over book value for Scott Fetzer, 
that figure had to be recorded on Berkshire's balance sheet. 
I'll spare you the details of how this worked (these were laid 
out in an appendix to our 1986 Annual Report) and get to the 
bottom line: After a premium is initially recorded, it must in 
almost all cases be written off over time through annual charges 
that are shown as costs in the acquiring company's earnings 
statement.
 The following table shows, first, the annual charges 
Berkshire has made to gradually extinguish the Scott Fetzer 
acquisition premium and, second, the premium that remains on our 
books. These charges have no effect on cash or the taxes we pay, 
and are not, in our view, an economic cost (though many 
accountants would disagree with us). They are merely a way for 
us to reduce the carrying value of Scott Fetzer on our bo
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1995 was $5.3 billion, or 
45.0%. Per-share book value grew by a little less, 43.1%, 
because we paid stock for two acquisitions, increasing our shares 
outstanding by 1.3%. Over the last 31 years (that is, since 
present management took over) per-share book value has grown from 
$19 to $14,426, or at a rate of 23.6% compounded annually.
 There's no reason to do handsprings over 1995's gains. This 
was a year in which any fool could make a bundle in the stock 
market. And we did. To paraphrase President Kennedy, a rising 
tide lifts all yachts.
 Putting aside the financial results, there was plenty of 
good news at Berkshire last year: We negotiated three 
acquisitions of exactly the type we desire. Two of these, 
Helzberg's Diamond Shops and R.C. Willey Home Furnishings, are 
included in our 1995 financial statements, while our largest 
transaction, the purchase of GEICO, closed immediately after the 
end of the year. (I'll tell you more about all three 
acquisitions later in the report.)
 These new subsidiaries roughly double our revenues. Even 
so, the acquisitions neither materially increased our shares 
outstanding nor our debt. And, though these three operations 
employ over 11,000 people, our headquarters staff grew only from 
11 to 12. (No sense going crazy.)
 Charlie Munger, Berkshire's Vice Chairman and my partner, 
and I want to build a collection of companies - both wholly- and 
partly-owned - that have excellent economic characteristics and 
that are run by outstanding managers. Our favorite acquisition 
is the negotiated transaction that allows us to purchase 100% of 
such a business at a fair price. But we are almost as happy when 
the stock market offers us the chance to buy a modest percentage 
of an outstanding business at a pro-rata price well below what it 
would take to buy 100%. This double-barrelled approach - 
purchases of entire businesses through negotiation or purchases 
of part-interests through the stock market - gives us an 
important advantage over capital-allocators who stick to a single 
course. Woody Allen once explained why eclecticism works: "The 
real advantage of being bisexual is that it doubles your chances 
for a date on Saturday night."
 Over the years, we've been Woody-like in our thinking, 
attempting to increase our marketable investments in wonderful 
businesses, while simultaneously trying to buy similar businesses 
in their entirety. The following table illustrates our progress 
on both fronts. In the tabulation, we show the marketable 
securities owned per share of Berkshire at ten-year intervals. A 
second column lists our per-share operating earnings (before 
taxes and purchase-price adjustments but after interest and 
corporate overhead) from all other activities. In other words, 
the second column shows what we earned excluding the dividends, 
interest and capital gains that we realized from investments. 
Purchase-price accounting adjustments are ignored for reasons we 
have explained at length in previous reports and which, as an act 
of mercy, we won't repeat. (We'll be glad to send masochists the 
earlier explanations, however.)
 Pre-tax Earnings Per Share
 Marketable Securities Excluding All Income from
 Year Per Share Investments 
 ---- --------------------- --------------------------
 1965 ................ $ 4 $ 4.08 
 1975 ................ 159 (6.48)
 1985 ................ 2,443 18.86 
 1995 ................ 22,088 258.20 
 Yearly Growth Rate: 1965-95 33.4% 14.7% 
 These results have not sprung from some master plan that we 
concocted in 1965. In a general way, we knew then what we hoped 
to accomplish but had no idea what specific opportunities might 
make it possible. Today we remain similarly unstructured: Over 
time, we expect to improve the figures in both columns but have 
no road map to tell us how that will come about.
 We proceed with two advantages: First, our operating 
managers are outstanding and, in most cases, have an unusually 
strong attachment to Berkshire. Second, Charlie and I have had 
considerable experience in allocating capital and try to go at 
that job rationally and objectively. The giant disadvantage we 
face is size: In the early years, we needed only good ideas, but 
now we need good big ideas. Unfortunately, the difficulty of 
finding these grows in direct proportion to our financial 
success, a problem that increasingly erodes our strengths.
 I will have more to say about Berkshire's prospects later in 
this report, when I discuss our proposed recapitalization.
Acquisitions 
 It may seem strange that we exult over a year in which we 
made three acquisitions, given that we have regularly used these 
pages to question the acquisition activities of most managers. 
Rest assured, Charlie and I haven't lost our skepticism: We 
believe most deals do damage to the shareholders of the acquiring 
company. Too often, the words from HMS Pinafore apply: "Things 
are seldom what they seem, skim milk masquerades as cream." 
Specifically, sellers and their representatives invariably 
present financial projections having more entertainment value 
than educational value. In the production of rosy scenarios, 
Wall Street can hold its own against Washington.
 In any case, why potential buyers even look at projections 
prepared by sellers baffles me. Charlie and I never give them a 
glance, but instead keep in mind the story of the man with an 
ailing horse. Visiting the vet, he said: "Can you help me? 
Sometimes my horse walks just fine and sometimes he limps." The 
vet's reply was pointed: "No problem - when he's walking fine, 
sell him." In the world of mergers and acquisitions, that horse 
would be peddled as Secretariat.
 At Berkshire, we have all the difficulties in perceiving the 
future that other acquisition-minded companies do. Like they 
also, we face the inherent problem that the seller of a business 
practically always knows far more about it than the buyer and 
also picks the time of sale - a time when the business is likely 
to be walking "just fine."
 Even so, we do have a few advantages, perhaps the greatest 
being that we don't have a strategic plan. Thus we feel no need 
to proceed in an ordained direction (a course leading almost 
invariably to silly purchase prices) but can instead simply 
decide what makes sense for our owners. In doing that, we always 
mentally compare any move we are contemplating with dozens of 
other opportunities open to us, including the purchase of small 
pieces of the best businesses in the world via the stock market. 
Our practice of making this comparison - acquisitions against 
passive investments - is a discipline that managers focused 
simply on expansion seldom use.
 Talking to Time Magazine a few years back, Peter Drucker got 
to the heart of things: "I will tell you a secret: Dealmaking 
beats working. Dealmaking is exciting and fun, and working is 
grubby. Running anything is primarily an enormous amount of 
grubby detail work . . . dealmaking is romantic, sexy. That's 
why you have deals that make no sense."
 In making acquisitions, we have a further advantage: As 
payment, we can offer sellers a stock backed by an extraordinary 
collection of outstanding businesses. An individual or a family 
wishing to dispose of a single fine business, but also wishing to 
defer personal taxes indefinitely, is apt to find Berkshire stock 
a particularly comfortable holding. I believe, in fact, that 
this calculus played an important part in the two acquisitions 
for which we paid shares in 1995.
 Beyond that, sellers sometimes care about placing their 
companies in a corporate home that will both endure and provide 
pleasant, productive working conditions for their managers. Here 
again, Berkshire offers something special. Our managers operate 
with extraordinary autonomy. Additionally, our ownership 
structure enables sellers to know that when I say we are buying 
to keep, the promise means something. For our part, we like 
dealing with owners who care what happens to their companies and 
people. A buyer is likely to find fewer unpleasant surprises 
dealing with that type of seller than with one simply auctioning 
off his business.
 In addition to the foregoing being an explanation of our 
acquisition style, it is, of course, a not-so-subtle sales pitch. 
If you own or represent a business earning $25 million or more 
before tax, and it fits the criteria listed on page 23, just 
give me a call. Our discussion will be confidential. And if you 
aren't interested now, file our proposition in the back of your 
mind: We are never going to lose our appetite for buying 
companies with good economics and excellent management.
 Concluding this little dissertation on acquisitions, I can't 
resist repeating a tale told me last year by a corporate 
executive. The business he grew up in was a fine one, with a 
long-time record of leadership in its industry. Its main 
product, however, was distressingly glamorless. So several 
decades ago, the company hired a management consultant who - 
naturally - advised diversification, the then-current fad. 
("Focus" was not yet in style.) Before long, the company 
acquired a number of businesses, each after the consulting firm 
had gone through a long - and expensive - acquisition study. And 
the outcome? Said the executive sadly, "When we started, we were 
getting 100% of our earnings from the original business. After 
ten years, we were getting 150%."
Helzberg's Diamond Shops
 A few years back, management consultants popularized a 
technique called "management by walking around" (MBWA). At 
Berkshire, we've instituted ABWA (acquisitions by walking 
around).
 In May 1994, a week or so after the Annual Meeting, I was 
crossing the street at 58th and Fifth Avenue in New York, when a 
woman called out my name. I listened as she told me she'd been 
to, and had enjoyed, the Annual Meeting. A few seconds later, a 
man who'd heard the woman stop me did so as well. He turned out 
to be Barnett Helzberg, Jr., who owned four shares of Berkshire 
and had also been at our meeting.
 In our few minutes of conversation, Barnett said he had a 
business we might be interested in. When people say that, it 
usually turns out they have a lemonade stand - with potential, of 
course, to quickly grow into the next Microsoft. So I simply 
asked Barnett to send me particulars. That, I thought to myself. 
will be the end of that.
 Not long after, Barnett sent me the financial statements of 
Helzberg's Diamond Shops. The company had been started by his 
grandfather in 1915 from a single store in Kansas City and had 
developed by the time we met into a group with 134 stores in 23 
states. Sales had grown from $10 million in 1974 to $53 million 
in 1984 and $282 million in 1994. We weren't talking lemonade 
stands.
 Barnett, then 60, loved the business but also wanted to feel 
free of it. In 1988, as a step in that direction, he had brought 
in Jeff Comment, formerly President of Wanamaker's, to help him 
run things. The hiring of Jeff turned out to be a homerun, but 
Barnett still found that he couldn't shake a feeling of ultimate 
responsibility. Additionally, he owned a valuable asset that was 
subject to the vagaries of a single, very competitive industry, 
and he thought it prudent to diversify his family's holdings.
 Berkshire was made to order for him. It took us awhile to 
get together on price, but there was never any question in my 
mind that, first, Helzberg's was the kind of business that we 
wanted to own and, second, Jeff was our kind of manager. In 
fact, we would not have bought the business if Jeff had not been 
there to run it. Buying a retailer without good management is 
like buying the Eiffel Tower without an elevator.
 We completed the Helzberg purchase in 1995 by means of a 
tax-free exchange of stock, the only kind of transaction that 
interested Barnett. Though he was certainly under no obligation 
to do so, Barnett shared a meaningful part of his proceeds from 
the sale with a large number of his associates. When someone 
behaves that generously, you know you are going to be treated 
right as a buyer.
 The average Helzberg's store has annual sales of about $2 
million, far more than competitors operating similarly-sized 
stores achieve. This superior per-store productivity is the key 
to Helzberg's excellent profits. If the company continues its 
first-rate performance - and we believe it will - it could grow 
rather quickly to several times its present size.
 Helzberg's, it should be added, is an entirely different 
sort of operation from Borsheim's, our Omaha jewelry business, 
and the two companies will operate independently of each other. 
Borsheim's had an excellent year in 1995, with sales up 11.7%. 
Susan Jacques, its 36-year-old CEO, had an even better year, 
giving birth to her second son at the start of the Christmas 
season. Susan has proved to be a terrific leader in the two 
years since her promotion.
R.C. Willey Home Furnishings 
 It was Nebraska Furniture Mart's Irv Blumkin who did the 
walking around in the case of R.C. Willey, long the leading home 
furnishings business in Utah. Over the years, Irv had told me 
about the strengths of that company. And he had also told Bill 
Child, CEO of R.C. Willey, how pleased the Blumkin family had 
been with its Berkshire relationship. So in early 1995, Bill 
mentioned to Irv that for estate tax and diversification reasons, 
he and the other owners of R.C. Willey might be interested in 
selling.
 From that point forward, things could not have been simpler. 
Bill sent me some figures, and I wrote him a letter indicating 
my idea of value. We quickly agreed on a number, and found our 
personal chemistry to be perfect. By mid-year, the merger was 
completed.
 R.C. Willey is an amazing story. Bill took over the 
business from his father-in-law in 1954 when sales were about 
$250,000. From this tiny base, Bill employed Mae West's 
philosophy: "It's not what you've got - it's what you do with 
what you've got." Aided by his brother, Sheldon, Bill has built 
the company to its 1995 sales volume of $257 million, and it now 
accounts for over 50% of the furniture business in Utah. Like 
Nebraska Furnitur
BERKSHIRE HATHAWAY INC.
Chairman's Letter
 
To the Shareholders of Berkshire Hathaway Inc.:
 Our gain in net worth during 1996 was $6.2 billion, or 36.1%. Per￾share book value, however, grew by less, 31.8%, because the number of 
Berkshire shares increased: We issued stock in acquiring FlightSafety 
International and also sold new Class B shares.* Over the last 32 years 
(that is, since present management took over) per-share book value has 
grown from $19 to $19,011, or at a rate of 23.8% compounded annually.
 * Each Class B share has an economic interest equal to 1/30th of 
 that possessed by a Class A share, which is the new designation for 
 the only stock that Berkshire had outstanding before May 1996. 
 Throughout this report, we state all per-share figures in terms of
 "Class A equivalents," which are the sum of the Class A shares 
 outstanding and 1/30th of the Class B shares outstanding.
 For technical reasons, we have restated our 1995 financial 
statements, a matter that requires me to present one of my less-than￾thrilling explanations of accounting arcana. I'll make it brief.
 The restatement was required because GEICO became a wholly-owned 
subsidiary of Berkshire on January 2, 1996, whereas it was previously 
classified as an investment. From an economic viewpoint - taking into 
account major tax efficiencies and other benefits we gained - the value 
of the 51% of GEICO we owned at year-end 1995 increased significantly 
when we acquired the remaining 49% of the company two days later. 
Accounting rules applicable to this type of "step acquisition," however, 
required us to write down the value of our 51% at the time we moved to 
100%. That writedown - which also, of course, reduced book value - 
amounted to $478.4 million. As a result, we now carry our original 51% 
of GEICO at a value that is both lower than its market value at the time 
we purchased the remaining 49% of the company and lower than the value at 
which we carry that 49% itself.
 There is an offset, however, to the reduction in book value I have 
just described: Twice during 1996 we issued Berkshire shares at a 
premium to book value, first in May when we sold the B shares for cash 
and again in December when we used both A and B shares as part-payment 
for FlightSafety. In total, the three non-operational items affecting 
book value contributed less than one percentage point to our 31.8% per￾share gain last year.
 I dwell on this rise in per-share book value because it roughly 
indicates our economic progress during the year. But, as Charlie Munger, 
Berkshire's Vice Chairman, and I have repeatedly told you, what counts at 
Berkshire is intrinsic value, not book value. The last time you got that 
message from us was in the Owner's Manual, sent to you in June after we 
issued the Class B shares. In that manual, we not only defined certain 
key terms - such as intrinsic value - but also set forth our economic 
principles.
 For many years, we have listed these principles in the front of our 
annual report, but in this report, on pages 58 to 67, we reproduce the 
entire Owner's Manual. In this letter, we will occasionally refer to the 
manual so that we can avoid repeating certain definitions and 
explanations. For example, if you wish to brush up on "intrinsic value," 
see pages 64 and 65.
 Last year, for the first time, we supplied you with a table that 
Charlie and I believe will help anyone trying to estimate Berkshire's 
intrinsic value. In the updated version of that table, which follows, we 
trace two key indices of value. The first column lists our per-share 
ownership of investments (including cash and equivalents) and the second 
column shows our per-share earnings from Berkshire's operating businesses 
before taxes and purchase-accounting adjustments but after all interest 
and corporate overhead expenses. The operating-earnings column excludes
all dividends, interest and capital gains that we realized from the 
investments presented in the first column. In effect, the two columns 
show what Berkshire would have reported had it been broken into two parts.
 Pre-tax Earnings Per Share
 Investments Excluding All Income from
Year Per Share Investments 
---- ----------- -------------------------
1965................................$ 4 $ 4.08
1975................................ 159 (6.48)
1985................................ 2,443 18.86
1995................................ 22,088 258.20
1996................................ 28,500 421.39
Annual Growth Rate, 1965-95......... 33.4% 14.7% 
One-Year Growth Rate, 1995-96 ...... 29.0% 63.2% 
 As the table tells you, our investments per share increased in 1996 
by 29.0% and our non-investment earnings grew by 63.2%. Our goal is to 
keep the numbers in both columns moving ahead at a reasonable (or, better 
yet, unreasonable) pace.
 Our expectations, however, are tempered by two realities. First, 
our past rates of growth cannot be matched nor even approached: 
Berkshire's equity capital is now large - in fact, fewer than ten 
businesses in America have capital larger - and an abundance of funds 
tends to dampen returns. Second, whatever our rate of progress, it will 
not be smooth: Year-to-year moves in the first column of the table above 
will be influenced in a major way by fluctuations in securities markets; 
the figures in the second column will be affected by wide swings in the 
profitability of our catastrophe-reinsurance business.
 In the table, the donations made pursuant to our shareholder￾designated contributions program are charged against the second column, 
though we view them as a shareholder benefit rather than as an expense. 
All other corporate expenses are also charged against the second column. 
These costs may be lower than those of any other large American 
corporation: Our after-tax headquarters expense amounts to less than two 
basis points (1/50th of 1%) measured against net worth. Even so, Charlie 
used to think this expense percentage outrageously high, blaming it on my 
use of Berkshire's corporate jet, The Indefensible. But Charlie has 
recently experienced a "counter-revelation": With our purchase of 
FlightSafety, whose major activity is the training of corporate pilots, 
he now rhapsodizes at the mere mention of jets.
 Seriously, costs matter. For example, equity mutual funds incur 
corporate expenses - largely payments to the funds' managers - that 
average about 100 basis points, a levy likely to cut the returns their 
investors earn by 10% or more over time. Charlie and I make no promises 
about Berkshire's results. We do promise you, however, that virtually 
all of the gains Berkshire makes will end up with shareholders. We are 
here to make money with you, not off you.
The Relationship of Intrinsic Value to Market Price
 In last year's letter, with Berkshire shares selling at $36,000, I 
told you: (1) Berkshire's gain in market value in recent years had 
outstripped its gain in intrinsic value, even though the latter gain had 
been highly satisfactory; (2) that kind of overperformance could not 
continue indefinitely; (3) Charlie and I did not at that moment consider 
Berkshire to be undervalued.
 Since I set down those cautions, Berkshire's intrinsic value has 
increased very significantly - aided in a major way by a stunning 
performance at GEICO that I will tell you more about later - while the 
market price of our shares has changed little. This, of course, means 
that in 1996 Berkshire's stock underperformed the business. 
Consequently, today's price/value relationship is both much different 
from what it was a year ago and, as Charlie and I see it, more 
appropriate.
 Over time, the aggregate gains made by Berkshire shareholders must 
of necessity match the business gains of the company. When the stock 
temporarily overperforms or underperforms the business, a limited number 
of shareholders - either sellers or buyers - receive outsized benefits at 
the expense of those they trade with. Generally, the sophisticated have 
an edge over the innocents in this game.
 Though our primary goal is to maximize the amount that our 
shareholders, in total, reap from their ownership of Berkshire, we wish 
also to minimize the benefits going to some shareholders at the expense 
of others. These are goals we would have were we managing a family 
partnership, and we believe they make equal sense for the manager of a 
public company. In a partnership, fairness requires that partnership 
interests be valued equitably when partners enter or exit; in a public 
company, fairness prevails when market price and intrinsic value are in 
sync. Obviously, they won't always meet that ideal, but a manager - by 
his policies and communications - can do much to foster equity.
 Of course, the longer a shareholder holds his shares, the more 
bearing Berkshire's business results will have on his financial 
experience - and the less it will matter what premium or discount to 
intrinsic value prevails when he buys and sells his stock. That's one 
reason we hope to attract owners with long-term horizons. Overall, I 
think we have succeeded in that pursuit. Berkshire probably ranks number 
one among large American corporations in the percentage of its shares 
held by owners with a long-term view.
Acquisitions of 1996
 We made two acquisitions in 1996, both possessing exactly the 
qualities we seek - excellent business economics and an outstanding 
manager.
 The first acquisition was Kansas Bankers Surety (KBS), an insurance 
company whose name describes its specialty. The company, which does 
business in 22 states, has an extraordinary underwriting record, achieved 
through the efforts of Don Towle, an extraordinary manager. Don has 
developed first-hand relationships with hundreds of bankers and knows 
every detail of his operation. He thinks of himself as running a company 
that is "his," an attitude we treasure at Berkshire. Because of its 
relatively small size, we placed KBS with Wesco, our 80%-owned 
subsidiary, which has wanted to expand its insurance operations.
 You might be interested in the carefully-crafted and sophisticated 
acquisition strategy that allowed Berkshire to nab this deal. Early in 
1996 I was invited to the 40th birthday party of my nephew's wife, Jane 
Rogers. My taste for social events being low, I immediately, and in my 
standard, gracious way, began to invent reasons for skipping the event. 
The party planners then countered brilliantly by offering me a seat next 
to a man I always enjoy, Jane's dad, Roy Dinsdale - so I went.
 The party took place on January 26. Though the music was loud - Why 
must bands play as if they will be paid by the decibel? - I just managed 
to hear Roy say he'd come from a directors meeting at Kansas Bankers 
Surety, a company I'd always admired. I shouted back that he should let 
me know if it ever became available for purchase.
 On February 12, I got the following letter from Roy: "Dear Warren: 
Enclosed is the annual financial information on Kansas Bankers Surety. 
This is the company that we talked about at Janie's party. If I can be 
of any further help, please let me know." On February 13, I told Roy we 
would pay $75 million for the company - and before long we had a deal. 
I'm now scheming to get invited to Jane's next party.
 Our other acquisition in 1996 - FlightSafety International, the 
world's leader in the training of pilots - was far larger, at about $1.5 
billion, but had an equally serendipitous origin. The heroes of this 
story are first, Richard Sercer, a Tucson aviation consultant, and 
second, his wife, Alma Murphy, an ophthalmology graduate of Harvard 
Medical School, who in 1990 wore down her husband's reluctance and got 
him to buy Berkshire stock. Since then, the two have attended all our 
Annual Meetings, but I didn't get to know them personally.
 Fortunately, Richard had also been a long-time shareholder of 
FlightSafety, and it occurred to him last year that the two companies 
would make a good fit. He knew our acquisition criteria, and he thought 
that Al Ueltschi, FlightSafety's 79-year-old CEO, might want to make a 
deal that would both give him a home for his company and a security in 
payment that he would feel comfortable owning throughout his lifetime. 
So in July, Richard wrote Bob Denham, CEO of Salomon Inc, suggesting that 
he explore the possibility of a merger.
 Bob took it from there, and on September 18, Al and I met in New 
York. I had long been familiar with FlightSafety's business, and in 
about 60 seconds I knew that Al was exactly our kind of manager. A month 
later, we had a contract. Because Charlie and I wished to minimize the 
issuance of Berkshire shares, the transaction we structured gave 
FlightSafety shareholders a choice of cash or stock but carried terms 
that encouraged those who were tax-indifferent to take cash. This nudge 
led to about 51% of FlightSafety's shares being exchanged for cash, 41% 
for Berkshire A and 8% for Berkshire B.
 Al has had a lifelong love affair with aviation and actually piloted 
Charles Lindbergh. After a barnstorming career in the 1930s, he began 
working for Juan Trippe, Pan Am's legendary chief. In 1951, while still 
at Pan Am, Al founded FlightSafety, subsequently building it into a 
simulator manufacturer and a worldwide trainer of pilots (single-engine, 
helicopter, jet and marine). The company operates in 41 locations, 
outfitted with 175 simulators of planes ranging from the very small, such 
as Cessna 210s, to Boeing 747s. Simulators are not cheap - they can cost 
as much as $19 million - so this business, unlike many of our 
operations, is capital intensive. About half of the company's revenues 
are derived from the training of corporate pilots, with most of the 
balance coming from airlines and the military.
 Al may be 79, but he looks and acts about 55. He will run 
operations just as he has in the past: We never fool with success. I 
have told him that though we don't believe in splitting Berkshire stock, 
we will split his age 2-for-1 when he hits 100.
 An observer might conclude from our hiring practices that Charlie 
and I were traumatized early in life by an EEOC bulletin on age 
discrimination. The real explanation, however, is self-interest: It's 
difficult to teach a new dog old tricks. The many Berkshire managers who 
are past 70 hit home runs today at the same pace that long ago gave them 
reputations as young slugging sensations. Therefore, to get a job with 
us, just employ the tactic of the 76-year-old who persuaded a dazzling 
beauty of 25 to marry him. "How did you ever get her to accept?" asked 
his envious contemporaries. The comeback: "I told her I was 86."
 * * * * * * * * * * * *
 And now we pause for our usual commercial: If you own a large 
business with good economic characteristics and wish to become associated 
with an exceptional collection of businesses having similar 
characteristics, Berkshire may well be the home you seek. Our 
requirements are set forth on page 21. If your company meets them - and 
if I fail to make the next birthday party you attend - give me a call.
Insurance Operations - Overview
 Our insurance business was terrific in 1996. In both primary 
insurance, where GEICO is our main unit, and in our "super-cat" 
reinsurance business, results were outstanding.
 As we've explained in past reports, what counts in our insurance 
business is, first, the amount of "float" we generate and, second, its 
cost to us. These are matters that are important for you to understand 
because float is a major component of Berkshire's intrinsic value that is 
not reflected in book value.
 To begin with, float is money we hold but don't own. In an 
insurance operation, float arises because premiums are received before 
losses are paid. Secondly, the premiums that an insurer takes in 
typically do not cover the losses and expenses it eventually must pay. 
That leaves it running an "underwriting loss," which is the cost of 
float. An insurance business has value if its cost of float over time is 
less than the cost the company would otherwise incur to obtain funds. 
But the business is an albatross if the cost of its float is higher than 
market rates for money.
 As the numbers in the following table show, Berkshire's insurance 
business has been a huge winner. For the table, we have calculated our 
float - which we generate in large amounts relative to our premium 
volume - by adding loss reserves, loss adjustment reserves, funds held 
under reinsurance assumed and unearned premium reserves, and then 
subtracting agents' balances, prepaid acquisition costs, prepaid taxes 
and deferred charges applicable to assumed reinsurance. Our cost of 
float is determined by our underwriting loss or profit. In those years 
when we have had an underwriting profit, such as the last four, our cost 
of float has been negative. In effect, we have been paid for holding 
money.
 (1) (2) Yearend Yield
 Underwriting Approximat on Long-Term
 Loss Average Float Cost of Funds Govt. Bonds 
 ------------ ------------- ---------------- -------------
 (In $ Millions) (Ratio of 1 to 2)
1967.......... profit 17.3 less than zero 5.50%
1968.......... profit 19.9 less than zero 5.90%
1969.......... profit 23.4 less than zero 6.79%
1970.......... 0.37 32.4 1.14% 6.25%
1971.......... profit 52.5 less than zero 5.81%
1972.......... profit 69.5 less than zero 5.82%
1973.......... profit 73.3 less than zero 7.27%
1974.......... 7.36 79.1 9.30% 8.13%
1975.......... 11.35 87.6 12.96% 8.03%
1976.......... profit 102.6 less than zero 7.30%
1977.......... profit 139.0 less than zero 7.97%
1978.......... profit 190.4 less than zero 8.93%
1979.......... profit 227.3 less than zero 10.08%
1980.......... profit 237.0 less than zero 11.94%
1981.......... profit 228.4 less than zero 13.61%
1982.......... 21.56 220.6 9.77% 10.64%
1983.......... 33.87 231.3 14.64% 11.84%
1984.......... 48.06 253.2 18.98% 11.58%
1985.......... 44.23 390.2 11.34% 9.34%
1986.......... 55.84 797.5 7.00% 7.60%
1987.......... 55.43 1,266.7 4.38% 8.95%
1988.......... 11.08 1,497.7 0.74% 9.00%
1989.......... 24.40 1,541.3 1.58% 7.97%
1990.......... 26.65 1,637.3 1.63% 8.24%
1991.......... 119.59 1,895.0 6.31% 7.40%
1992.......... 108.96 2,290.4 4.76% 7.39%
1993.......... profit 2,624.7 less than zero 6.35%
1994.......... profit 3,056.6 less than zero 7.88%
1995.......... profit 3,607.2 less than zero 5.95%
1996.......... profit 6,702.0 less than zero 6.64%
 Since 1967, when we entered the insurance business, our float has 
grown at an annual compounded rate of 22.3%. In more years than not, our 
cost of funds has been less than nothing. This access to "free" money has 
boosted Berkshire's performance in a major way. Moreover, our acquisition 
of GEICO materially increases the probability that we can continue to 
obtain "free" funds in increasing amounts.
Super-Cat Insurance
 As in the past three years, we once again stress that the good results 
we are reporting for Berkshire stem in part from our super-cat business 
having a lucky year. In this operation, we sell policies that insurance 
and reinsurance companies buy to protect themselves from the effects of 
mega-catastrophes. Since truly major catastrophes are rare occurrences, 
our super-cat business can be expected to show large profits in most years 
- and to record a huge loss occasionally. In other words, the 
attractiveness of our super-cat business will take a great many years to 
measure. What you must understand, however, is that a truly terrible year 
in the super-cat business is not a possibility - it's a certainty. The 
only question is when it will come.
 I emphasize this lugubrious point because I would not want you to 
panic and sell your Berkshire stock upon hearing that some large 
catastrophe had cost us a significant amount. If you would tend to react 
that way, you should not own Berkshire shares now, just as you should 
entirely avoid owning stocks if a crashing market would lead you to panic 
and sell. Selling fine businesses on "scary" news is usually a bad 
decision. (Robert Woodruff, the business genius who built Coca-Cola over 
many decades and who owned a huge position in the company, was once asked 
when it might be a good time to sell Coke stock. Woodruff had a simple 
answer: "I don't know. I've never sold any.")
 In our super-cat operation, our customers are insurers that are 
exposed to major earnings volatility and that wish to reduce it. The 
product we sell - for what we hope is an appropriate price - is our 
willingness to shift that volatility to our own books. Gyrations in 
Berkshire's earnings don't bother us in the least: Charlie and I would 
much rather earn a lumpy 15% over time than a smooth 12%. (After all, our 
earnings swing wildly on a daily and weekly basis - why should we demand 
that smoothness accompany each orbit that the earth makes of the sun?) We 
are most comfortable with that thinking, however, when we have 
shareholder/partners who can also accept volatility, and that's why we 
regularly repeat our cautions.
 We took on some major super-cat exposures during 1996. At mid-year we 
wrote a contract with Allstate that covers Florida hurricanes, and though 
there are no definitive records that would allow us to prove this point, we 
believe that to have then been the largest single catastrophe risk ever 
assumed by one company for its own account. Later in the year, however, we 
wrote a policy for the California Earthquake Authority that goes into 
effect on April 1, 1997, and that exposes us to a loss more than twice that 
possible under the Florida contract. Again we retained all the risk for 
our own account. Large as these coverages are, Berkshire's after-tax 
"worst-case" loss from a true mega-catastrophe is probably no more than 
$600 million, which is less than 3% of our book value and 1.5% of our market 
value. To gain some perspective on this exposure, look at the table on 
page 2 and note the much greater volatility that security markets have 
delivered us.
 In the super-cat business, we have three major competitive advantages. 
First, the parties buying reinsurance from us know that we both can and 
will pay under the most adverse of circumstances. Were a truly cataclysmic 
disaster to occur, it is not impossible that a financial panic would 
quickly follow. If that happened, there could well be respected reinsurers 
that would have difficulty paying at just the moment that their clients 
faced extraordinary needs. Indeed, one reason we never "lay off" part of 
the risks we insure is that we have reservations about our ability to 
collect from others when disaster strikes. When it's Berkshire promising, 
insureds know with certainty that they can collect promptly.
 Our second advantage - somewhat related - is subtle but important. 
After a mega-catastrophe, insurers might well find it difficult to obtain 
reinsurance even though their need for coverage would then be particularly 
great. At such a time, Berkshire would without question have very 
substantial capacity available - but it will naturally be our long-standing 
clients that have first call on it. That business reality has made major 
insurers and reinsurers throughout the world realize the desirability of 
doing business with us. Indeed, we are currently getting sizable "stand￾by" fees from reinsurers that are simply nailing down their ability to get 
coverage from us should the market tighten.
 Our final competitive advantage is that we can provide dollar 
coverages of a size neither matched nor approached elsewhere in the 
industry. Insurers looking for huge covers know that a single call to 
Berkshire will produce a firm and immediate offering.
 A few facts about our exposure to California earthquakes - our largest 
risk - seem in order. The Northridge quake of 1994 laid homeowners' losses 
on insurers that greatly exceeded what computer models had told them to 
expect. Yet the intensity of that quake was mild compared to the "worst￾case" possibility for California. Understandably, insurers became - ahem - 
shaken and started contemplating a retreat from writing earthquake coverage 
into their homeowners' policies.
 In a thoughtful response, Chuck Quackenbush, California's insurance 
commissioner, designed a new residential earthquake policy to be written by 
a state-sponsored insurer, The California Earthquake Authority. This 
entity, which went into operation on December 1, 1996, needed large layers 
of reinsurance - and that's where we came in. Berkshire's layer of 
approximately $1 billion will be called upon if the Authority's aggregate 
losses in the period ending March 31, 2001 exceed about $5 billion. (The 
press originally reported larger figures, but these would have applied only 
if all California insurers had entered into the arrangement; instead only 
72% signed up.)
 So what are the true odds of our having to make a payout during the 
policy's term? We don't know - nor do we think computer models will help 
us, since we believe the precision they project is a chimera. In fact, 
such models can lull decision-makers into a false sense of security and 
thereby increase their chances of making a really huge mistake. We've 
already seen such debacles in both insurance and investments. Witness 
"portfolio insurance," whose destructive effects in the 1987 market crash 
led one wag to observe that it was the computers that should have been 
jumping out of windows.
 Even if perfection in assessing risks is unattainable, insurers can 
underwrite sensibly. After all, you need not know a man's precise age to 
know that he is old enough to vote nor know his exact weight to recognize 
his need to diet. In insurance, it is essential to remember that virtually 
all surprises are unpleasant, and with that in mind we try to price our 
super-cat exposures so that about 90% of total premiums end up being 
eventually paid out in losses and expenses. Over time, we will find out 
how smart our pricing has been, but that will not be quickly. The super￾cat business is just like the investment business in that it often takes a 
long time to find out whether you knew what you were doing.
 What I can state with certainty, however, is that we have the best 
person in the world to run our super-cat business: Ajit Jain, whose value 
to Berkshire is simply enormous. In the reinsurance field, disastrous 
propositions abound. I know that because I personally embraced all too 
many of these in the 1970s and also because GEICO has a large runoff 
portfolio made up of foolish contracts written in the early-1980s, able 
though its then-management was. Ajit, I can assure you, won't make 
mistakes of this type.
 I have mentioned that a mega-catastrophe might cause a catastrophe in 
the financial markets, a possibility that is unlikely but not far-fetched. 
Were the catastrophe a quake in California of sufficient magnitude to tap 
our coverage, we would almost certainly be damaged in other ways as well. 
For example, See's, Wells Fargo and Freddie Mac could be hit hard. All in 
all, though, we can handle this aggregation of exposures.
 In this respect, as in others, we try to "reverse engineer" our future 
at Berkshire, bearing in mind Charlie's dictum: "All I want to know is 
where I'm going to die so I'll never go there." (Inverting really works: 
Try singing country western songs backwards and you will quickly regain 
your house, your car and your wife.) If we can't tolerate a possible 
consequence, remote though it may be, we steer clear of planting its seeds. 
That is why we don't borrow big amounts and why we make sure that our 
super-cat business losses, large though the maximums may sound, will not 
put a major dent in Berkshire's intrinsic value. 
Insurance - GEICO and Other Primary Operations
 When we moved to total ownership of GEICO early last year, our 
expectations were high - and they are all being exceeded. That is true 
from both a business and personal perspective: GEICO's operating chief, 
Tony Nicely, is a superb business manager and a delight to work with. 
Under almost any conditions, GEICO would be an exceptionally valuable 
asset. With Tony at the helm, it is reaching levels of performance that 
the organization would only a few years ago have thought impossible.
 There's nothing esoteric about GEICO's success: The company's 
competitive strength flows directly from its position as a low-cost 
operator. Low costs permit low prices, and low prices attract and retain 
good policyholders. The final segment of a virtuous circle is drawn when 
policyholders recommend us to their friends. GEICO gets more than one 
million referrals annually and these produce more than half of our new 
business, an advantage that gives us enormous savings in acquisition 
expenses - and that makes our costs still lower.
 This formula worked in spades for GEICO in 1996: Its voluntary auto 
policy count grew 10%. During the previous 20 years, the company's best￾ever growth for a year had been 8%, a rate achieved only once. Better yet, 
the growth in voluntary policies accelerated during the year, led by major 
gains in the nonstandard market, which has been an underdeveloped area at 
GEICO. I focus here on voluntary policies because the involuntary business 
we get from assigned risk pools and the like is unprofitable. Growth in 
that sector is most unwelcome.
 GEICO's growth would mean nothing if it did not produce reasonable 
underwriting profits. Here, too, the news is good: Last year we hit our 
underwriting targets and then some. Our goal, however, is not to widen our 
profit margin but rather to enlarge the price advantage we offer customers. 
Given that strategy, we believe that 1997's growth will easily top that of 
last year.
 We expect new competitors to enter the direct-response market, and 
some of our existing competitors are likely to expand geographically. 
Nonetheless, the economies of scale we enjoy should allow us to maintain or 
even widen the protective moat surrounding our economic castle. We do best 
on costs in geographical areas in which we enjoy high market penetration. 
As our policy count grows, concurrently delivering gains in penetration, we 
expect to drive costs materially lower. GEICO's sustainable cost advantage 
is what attracted me to the company way back in 1951, when the entire 
business was valued at $7 million. It is also why I felt Berkshire should 
pay $2.3 billion last year for the 49% of the company that we didn't then 
own.
 Maximizing the results of a wonderful business requires management and 
focus. Lucky for us, we have in Tony a superb manager whose business focus 
never wavers. Wanting also to get the entire GEICO organization 
concentrating as he does, we needed a compensation plan that was itself 
sharply focused - and immediately after our purchase, we put one in.
 Today, the bonuses received by dozens of top executives, starting with 
Tony, are based upon only two key variables: (1) growth in voluntary auto 
policies and (2) underwriting profitability on "seasoned" auto business 
(meaning policies that have been on the books for more than one year). In 
addition, we use the same yardsticks to calculate the annual contribution 
to the company's profit-sharing plan. Everyone at GEICO knows what counts.
 The GEICO plan exemplifies Berkshire's incentive compensation 
principles: Goals should be (1) tailored to the economics of the specific 
operating business; (2) simple in character so that the degree to which 
they are being realized can be easily measured; and (3) directly related to 
the daily activities of plan participants. As a corollary, we shun 
"lottery ticket" arrangements, such as options on Berkshire shares, whose 
ultimate value - which could range from zero to huge - is totally out of 
the control of the person whose behavior we would like to affect. In our 
view, a system that produces quixotic payoffs will not only be wasteful for 
owners but may actually discourage the focused behavior we value in 
managers.
 Every quarter, all 9,000 GEICO associates can see the results that 
determine our profit-sharing plan contribution. In 1996, they enjoyed the 
experience because the plan literally went off the chart that had been 
constructed at the start of the year. Even I knew the answer to that 
problem: Enlarge the chart. Ultimately, the results called for a record 
contribution of 16.9% ($40 million), compared to a five-year average of 
less than 10% for the comparable plans previously in effect. Furthermore, 
at Berkshire, we never greet good work by raising the bar. If GEICO's 
performance continues to improve, we will happily keep on making larger 
charts.
 Lou Simpson continues to manage GEICO's money in an outstanding 
manner: Last year, the equities in his portfolio outdid the S&P 500 by 6.2 
percentage points. In Lou's part of GEICO's operation, we again tie 
compensation to performance - but to investment performance over a four￾year period, not to underwriting results nor to the performance of GEICO as 
a whole. We think it foolish for an insurance company to pay bonuses that 
are tied to overall corporate results when great work on one side of the 
business - underwriting or investment - could conceivably be completely 
neutralized by bad work on the other. If you bat .350 at Berkshire, you 
can be sure you will get paid commensurately even if the rest of the team 
bats .200. In Lou and Tony, however, we are lucky to have Hall-of-Famers 
in both key positions.
 * * * * * * * * * * * *
 Though they are, of course, smaller than GEICO, our other primary 
insurance operations turned in equally stunning results last year. 
National Indemnity's traditional business had a combined ratio of 74.2 and, 
as usual, developed a large amount of float compared to premium volume. 
Over the last three years, this segment of our business, run by Don 
Wurster, has had an average combined ratio of 83.0. Our homestate 
operation, managed by Rod Eldred, recorded a combined ratio of 87.1 even 
though it absorbed the expenses of expanding to new states. Rod's three￾year combined ratio is an amazing 83.2. Berkshire's workers' compensation 
business, run out of California by Brad Kinstler, has now moved into six 
other states and, despite the costs of that expansion, again achieved an 
excellent underwriting profit. Finally, John Kizer, at Central States 
Indemnity, set new records for premium volume while generating good 
earnings from underwriting. In aggregate, our smaller insurance operations 
(now including Kansas Bankers Surety) have an underwriting record virtually 
unmatched in the industry. Don, Rod, Brad and John have all created 
significant value for Berkshire, and we believe there is more to come.
Taxes
 In 1961, President Kennedy said that we should ask not what our 
country can do for us, but rather ask what we can do for our country. Last 
year we decided to give his suggestion a try - and who says it never hurts 
to ask? We were told to mail $860 million in income taxes to the U.S. 
Treasury.
 Here's a little perspective on that figure: If an equal amount had 
been paid by only 2,000 other taxpayers, the government would have had a 
balanced budget in 1996 without needing a dime of taxes - income or Social 
Security or what have you - from any other American. Berkshire 
shareholders can truly say, "I gave at the office."
 Charlie and I believe that large tax payments by Berkshire are 
entirely fitting. The contribution we thus make to society's well-being is 
at most only proportional to its contribution to ours. Berkshire prospers 
in America as it would nowhere else.
Sources of Reported Earnings
 The table that follows shows the main sources of Berkshire's reported 
earnings. In this presentation, purchase-accounting adjustments are not 
assigned to the specific businesses to which they apply, but are instead 
aggregated and shown separately. This procedure lets you view the earnings 
of our businesses as they would have been reported had we not purchased 
them. For the reasons discussed on pages 65 and 66, this form of 
presentation seems to us to be more useful to investors and managers than 
one utilizing generally-accepted accounting principles (GAAP), which 
require purchase-premiums to be charged off business-by-business. The 
total earnings we show in the table are, of course, identical to the GAAP 
total in our audited financial statements.
 (in millions) 
 --------------------------------------
 Berkshire's Share
 of Net Earnings 
 (after taxes and 
 Pre-tax Earnings minority interests) 
 ---------------- -------------------
 1996 1995(1) 1996 1995(1) 
 ------- -------- ------- -------
Operating Earnings:
 Insurance Group:
Underwriting.....................$ 222.1 $ 20.5 $ 142.8 $ 11.3 
Net Investment Income............ 726.2 501.6 593.1 417.7 
 Buffalo News........................... 50.4 46.8 29.5 27.3 
 Fechheimer............................. 17.3 16.9 9.3 8.8 
 Finance Businesses..................... 23.1 20.8 14.9 12.6 
 Home Furnishings....................... 43.8 29.7(2) 24.8 16.7(2) 
 Jewelry................................ 27.8 33.9(3) 16.1 19.1(3) 
 Kirby.................................. 58.5 50.2 39.9 32.1 
 Scott Fetzer Manufacturing Group....... 50.6 34.1 32.2 21.2 
 See's Candies.......................... 51.9 50.2 30.8 29.8 
 Shoe Group............................. 61.6 58.4 41.0 37.5 
 World Book............................. 12.6 8.8 9.5 7.0 
 Purchase-Accounting Adjustments........ (75.7) (27.0) (70.5) (23.4) 
 Interest Expense(4).................... (94.3) (56.0) (56.6) (34.9) 
 Shareholder-Designated Contributions... (13.3) (11.6) (8.5) (7.0) 
 Other.................................. 58.8 37.4 34.8 24.4 
 ------- -------- -------- -------
Operating Earnings.......................1,221.4 814.7 883.1 600.2 
Sales of Securities......................2,484.5 194.1 1,605.5 125.0 
 ------- -------- -------- -------
Total Earnings - All Entities...........$3,705.9 $1,008.8 $2,488.6 $ 725.2 
 ======= ======== ======== =======
(1) Before the GEICO-related restatement. (3) Includes Helzberg's from
 April 30, 1995.
(2) Includes R.C. Willey from June 29, 1995. (4) Excludes interest expense
 of Finance Businesses.
 In this section last year, I discussed three businesses that reported 
a decline in earnings - Buffalo News, Shoe Group and World Book. All, I'm 
happy to say, recorded gains in 1996.
 World Book, however, did not find it easy: Despite the operation's 
new status as the only direct-seller of encyclopedias in the country 
(Encyclopedia Britannica exited the field last year), its unit volume fell. 
Additionally, World Book spent heavily on a new CD-ROM product that began 
to take in revenues only in early 1997, when it was launched in association 
with IBM. In the face of these factors, earnings would have evaporated had 
World Book not revamped distribution methods and cut overhead at 
headquarters, thereby dramatically reducing its fixed costs. Overall, the 
company has gone a long way toward assuring its long-term viability in both 
the print and electronic marketplaces.
 Our only disappointment last year was in jewelry: Borsheim's did 
fine, but Helzberg's suffered a material decline in earnings. Its expense 
levels had been geared to a sizable increase in same-store sales, 
consistent with the gains achieved in recent years. When sales were 
instead flat, profit margins fell. Jeff Comment, CEO of Helzberg's, is 
addressing the expense problem in a decisive manner, and the company's 
earnings should improve in 1997.
 Overall, our operating businesses continue to perform exceptionally, 
far outdoing their industry norms. For this, Charlie and I thank our 
managers. If you should see any of them at the Annual Meeting, add your 
thanks as well.
 More information about our various businesses is given on pages 36-
46, where you will also find our segment earnings reported on a GAAP 
basis. In addition, on pages 51-57, we have rearranged Berkshire's 
financial data into four segments on a non-GAAP basis, a presentation 
that corresponds to the way Charlie and I think about the company. Our 
intent is to supply you with the financial information that we would wish 
you to give us if our positions were reversed. 
"Look-Through" Earnings
 Reported earnings are a poor measure of economic progress at 
Berkshire, in part because the numbers shown in the table presented 
earlier include only the dividends we receive from investees - though 
these dividends typically represent only a small fraction of the earnings 
attributable to our ownership. Not that we mind this division of money, 
since on balance we regard the undistributed earnings of investees as 
more valuable to us than the portion paid out. The reason is simple: 
Our investees often have the opportunity to reinvest earnings at high 
rates of return. So why should we want them paid out?
 To depict something closer to economic reality at Berkshire than 
reported earnings, though, we employ the concept of "look-through" 
earnings. As we calculate these, they consist of: (1) the operating 
earnings reported in the previous section, plus; (2) our share of the 
retained operating earnings of major investees that, under GAAP 
accounting, are not reflected in our profits, less; (3) an allowance for 
the tax that would be paid by Berkshire if these retained earnings of 
investees had instead been distributed to us. When tabulating "operating 
earnings" here, we exclude purchase-accounting adjustments as well as 
capital gains and other major non-recurring items.
 The following table sets forth our 1996 look-through earnings, 
though I warn you that the figures can be no more than approximate, since 
they are based on a number of judgment calls. (The dividends paid to us 
by these investees have been included in the operating earnings itemized 
on page 12, mostly under "Insurance Group: Net Investment Income.") 
 Berkshire's Share
 of Undistributed
 Berkshire's Approximate Operating Earnings 
Berkshire's Major Investees Ownership at Yearend(1) (in millions)(2) 
-------------------------------- ----------------------- ------------------
American Express Company........ 10.5% $ 132
The Coca-Cola Company........... 8.1% 180
The Walt Disney Company......... 3.6% 50
Federal Home Loan Mortgage Corp. 8.4% 77
The Gillette Company............ 8.6% 73
McDonald's Corporation.......... 4.3% 38
The Washington Post Company..... 15.8% 27
Wells Fargo & Company........... 8.0% 84 
 ------
Berkshire's share of undistributed earnings of major investees.. 661 
Hypothetical tax on these undistributed investee earnings(3).... (93) 
Reported operating earnings of Berkshire........................ 954
 ------
 Total look-through earnings of Berkshire..................$1,522 
 ======
 (1) Does not include shares allocable to minority interests
 (2) Calculated on average ownership for the year
 (3) The tax rate used is 14%, which is the rate Berkshire pays on 
 the dividends it receives
Common Stock Investments
 Below we present our common stock investments. Those with a market 
value of more than $500 million are itemized. 
 12/31/96
 Shares Company Cost* Market
 ----------- --------------------------------- -------- ---------
 (dollars in millions)
 49,456,900 American Express Company...........$1,392.7 $ 2,794.3
 200,000,000 The Coca-Cola Company.............. 1,298.9 10,525.0
 24,614,214 The Walt Disney Company............ 577.0 1,716.8
 64,246,000 Federal Home Loan Mortgage Corp.... 333.4 1,772.8
 48,000,000 The Gillette Company............... 600.0 3,732.0
 30,156,600 McDonald's Corporation............. 1,265.3 1,368.4
 1,727,765 The Washington Post Company........ 10.6 579.0
 7,291,418 Wells Fargo & Company.............. 497.8 1,966.9
 Others............................. 1,934.5 3,295.4
 -------- ---------
 Total Common Stocks................$7,910.2 $27,750.6
 ======== =========
 * Represents tax-basis cost which, in aggregate, is $1.2 billion 
 less than GAAP cost.
 Our portfolio shows little change: We continue to make more money 
when snoring than when active.
 Inactivity strikes us as intelligent behavior. Neither we nor most 
business managers would dream of feverishly trading highly-profitable 
subsidiaries because a small move in the Federal Reserve's discount rate 
was predicted or because some Wall Street pundit had reversed his views 
on the market. Why, then, should we behave differently with our minority 
positions in wonderful
BERKSHIRE HATHAWAY INC.
1997 Chairman's Letter
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1997 was $8.0 billion, which increased the per-share book
value of both our Class A and Class B stock by 34.1%. Over the last 33 years (that is, since
present management took over) per-share book value has grown from $19 to $25,488, a rate
of 24.1% compounded annually.
(1)
 
 1. All figures used in this report apply to Berkshire's A shares,
 the successor to the only stock that the company had outstanding
 before 1996. The B shares have an economic interest equal to 1/30th
 that of the A.
 
Given our gain of 34.1%, it is tempting to declare victory and move on. But last year's
performance was no great triumph: Any investor can chalk up large returns when stocks soar,
as they did in 1997. In a bull market, one must avoid the error of the preening duck that
quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to
rise in the world. A right-thinking duck would instead compare its position after the downpour
to that of the other ducks on the pond.
So what's our duck rating for 1997? The table on the facing page shows that though we
paddled furiously last year, passive ducks that simply invested in the S&P Index rose almost
as fast as we did. Our appraisal of 1997's performance, then: Quack.
When the market booms, we tend to suffer in comparison with the S&P Index. The Index
bears no tax costs, nor do mutual funds, since they pass through all tax liabilities to their
owners. Last year, on the other hand, Berkshire paid or accrued $4.2 billion for federal
income tax, or about 18% of our beginning net worth.
Berkshire will always have corporate taxes to pay, which means it needs to overcome
their drag in order to justify its existence. Obviously, Charlie Munger, Berkshire's Vice
Chairman and my partner, and I won't be able to lick that handicap every year. But we expect
over time to maintain a modest advantage over the Index, and that is the yardstick against
which you should measure us. We will not ask you to adopt the philosophy of the Chicago
Cubs fan who reacted to a string of lackluster seasons by saying, "Why get upset? Everyone
has a bad century now and then."
Gains in book value are, of course, not the bottom line at Berkshire. What truly counts
are gains in per-share intrinsic business value. Ordinarily, though, the two measures tend to
move roughly in tandem, and in 1997 that was the case: Led by a blow-out performance at
GEICO, Berkshire's intrinsic value (which far exceeds book value) grew at nearly the same
pace as book value.
For more explanation of the term, intrinsic value, you may wish to refer to our Owner's
Manual, reprinted on pages 62 to 71. This manual sets forth our owner-related business
principles, information that is important to all of Berkshire's shareholders.
In our last two annual reports, we furnished you a table that Charlie and I believe is
central to estimating Berkshire's intrinsic value. In the updated version of that table, which
follows, we trace our two key components of value. The first column lists our per-share
ownership of investments (including cash and equivalents) and the second column shows our
per-share earnings from Berkshire's operating businesses before taxes and purchase￾accounting adjustments (discussed on pages 69 and 70), but after all interest and corporate
expenses. The second column excludes all dividends, interest and capital gains that we
realized from the investments presented in the first column. In effect, the columns show what
Berkshire would look like were it split into two parts, with one entity holding our investments
and the other operating all of our businesses and bearing all corporate costs.
 Pre-tax Earnings Per Share
 Investments Excluding All Income from
 Year Per Share Investments 
 1967 $ 41 $ 1.09
 1977 372 12.44 
 1987 3,910 108.14 
 1997 38,043 717.82 
Pundits who ignore what our 38,000 employees contribute to the company, and instead
simply view Berkshire as a de facto investment company, should study the figures in the
second column. We made our first business acquisition in 1967, and since then our pre-tax
operating earnings have grown from $1 million to $888 million. Furthermore, as noted, in this
exercise we have assigned all of Berkshire's corporate expenses -- overhead of $6.6 million,
interest of $66.9 million and shareholder contributions of $15.4 million -- to our business
operations, even though a portion of these could just as well have been assigned to the
investment side.
Here are the growth rates of the two segments by decade:
 Pre-tax Earnings Per Share
 Investments Excluding All Income from
 Decade Ending Per Share Investments 
 1977 24.6% 27.6%
 1987 26.5% 24.1%
 1997 25.5% 20.8%
 Annual Growth
 Rate, 1967-1997 25.6% 24.2%
During 1997, both parts of our business grew at a satisfactory rate, with investments
increasing by $9,543 per share, or 33.5%, and operating earnings growing by $296.43 per
share, or 70.3%. One important caveat: Because we were lucky in our super-cat insurance
business (to be discussed later) and because GEICO's underwriting gain was well above what
we can expect in most years, our 1997 operating earnings were much better than we
anticipated and also more than we expect for 1998.
Our rate of progress in both investments and operations is certain to fall in the future.
For anyone deploying capital, nothing recedes like success. My own history makes the point:
Back in 1951, when I was attending Ben Graham's class at Columbia, an idea giving me a
$10,000 gain improved my investment performance for the year by a full 100 percentage
points. Today, an idea producing a $500 million pre-tax profit for Berkshire adds one
percentage point to our performance. It's no wonder that my annual results in the 1950s were
better by nearly thirty percentage points than my annual gains in any subsequent decade.
Charlie's experience was similar. We weren't smarter then, just smaller. At our present size,
any performance superiority we achieve will be minor.
We will be helped, however, by the fact that the businesses to which we have already
allocated capital -- both operating subsidiaries and companies in which we are passive
investors -- have splendid long-term prospects. We are also blessed with a managerial corps
that is unsurpassed in ability and focus. Most of these executives are wealthy and do not
need the pay they receive from Berkshire to maintain their way of life. They are motivated by
the joy of accomplishment, not by fame or fortune.
Though we are delighted with what we own, we are not pleased with our prospects for
committing incoming funds. Prices are high for both businesses and stocks. That does not
mean that the prices of either will fall -- we have absolutely no view on that matter -- but it
does mean that we get relatively little in prospective earnings when we commit fresh money.
Under these circumstances, we try to exert a Ted Williams kind of discipline. In his book
The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size
of a baseball. Swinging only at balls in his "best" cell, he knew, would allow him to bat .400;
reaching for balls in his "worst" spot, the low outside corner of the strike zone, would reduce
him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame;
swinging indiscriminately would mean a ticket to the minors.
If they are in the strike zone at all, the business "pitches" we now see are just catching
the lower outside corner. If we swing, we will be locked into low returns. But if we let all of
today's balls go by, there can be no assurance that the next ones we see will be more to our
liking. Perhaps the attractive prices of the past were the aberrations, not the full prices of
today. Unlike Ted, we can't be called out if we resist three pitches that are barely in the strike
zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my
idea of fun.
Unconventional Commitments
When we can't find our favorite commitment -- a well-run and sensibly-priced business
with fine economics -- we usually opt to put new money into very short-term instruments of
the highest quality. Sometimes, however, we venture elsewhere. Obviously we believe that the
alternative commitments we make are more likely to result in profit than loss. But we also
realize that they do not offer the certainty of profit that exists in a wonderful business
secured at an attractive price. Finding that kind of opportunity, we know that we are going to
make money -- the only question being when. With alternative investments, we think that we
are going to make money. But we also recognize that we will sometimes realize losses,
occasionally of substantial size.
We had three non-traditional positions at yearend. The first was derivative contracts for
14.0 million barrels of oil, that being what was then left of a 45.7 million barrel position we
established in 1994-95. Contracts for 31.7 million barrels were settled in 1995-97, and these
supplied us with a pre-tax gain of about $61.9 million. Our remaining contracts expire during
1998 and 1999. In these, we had an unrealized gain of $11.6 million at yearend. Accounting
rules require that commodity positions be carried at market value. Therefore, both our annual
and quarterly financial statements reflect any unrealized gain or loss in these contracts. When
we established our contracts, oil for future delivery seemed modestly underpriced. Today,
though, we have no opinion as to its attractiveness.
Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million
ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in
1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I
anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal's
fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and
last summer Charlie and I concluded that a higher price would be needed to establish
equilibrium between supply and demand. Inflation expectations, it should be noted, play no
part in our calculation of silver's value.
Finally, our largest non-traditional position at yearend was $4.6 billion, at amortized
cost, of long-term zero-coupon obligations of the U.S. Treasury. These securities pay no
interest. Instead, they provide their holders a return by way of the discount at which they are
purchased, a characteristic that makes their market prices move rapidly when interest rates
change. If rates rise, you lose heavily with zeros, and if rates fall, you make outsized gains.
Since rates fell in 1997, we ended the year with an unrealized pre-tax gain of $598.8 million
in our zeros. Because we carry the securities at market value, that gain is reflected in yearend
book value.
In purchasing zeros, rather than staying with cash-equivalents, we risk looking very
foolish: A macro-based commitment such as this never has anything close to a 100%
probability of being successful. However, you pay Charlie and me to use our best judgment -
- not to avoid embarrassment -- and we will occasionally make an unconventional move
when we believe the odds favor it. Try to think kindly of us when we blow one. Along with
President Clinton, we will be feeling your pain: The Munger family has more than 90% of its
net worth in Berkshire and the Buffetts more than 99%.
How We Think About Market Fluctuations
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle
producer, should you wish for higher or lower prices for beef? Likewise, if you are going to
buy a car from time to time but are not an auto manufacturer, should you prefer higher or
lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years,
should you hope for a higher or lower stock market during that period? Many investors get
this one wrong. Even though they are going to be net buyers of stocks for many years to
come, they are elated when stock prices rise and depressed when they fall. In effect, they
rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction
makes no sense. Only those who will be sellers of equities in the near future should be happy
at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To
begin with, our owners are automatically saving even if they spend every dime they personally
earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to
purchase businesses and securities. Clearly, the more cheaply we make these buys, the more
profitable our owners' indirect savings program will be.
Furthermore, through Berkshire you own major positions in companies that consistently
repurchase their shares. The benefits that these programs supply us grow as prices fall: When
stock prices are low, the funds that an investee spends on repurchases increase our
ownership of that company by a greater amount than is the case when prices are higher. For
example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in
past years at very low prices benefitted Berkshire far more than do today's repurchases,
made at loftier prices.
At the end of every year, about 97% of Berkshire's shares are held by the same investors
who owned them at the start of the year. That makes them savers. They should therefore
rejoice when markets decline and allow both us and our investees to deploy funds more
advantageously.
So smile when you read a headline that says "Investors lose as market falls." Edit it in
your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often
forget this truism, there is a buyer for every seller and what hurts one necessarily helps the
other. (As they say in golf matches: "Every putt makes someone happy.")
We gained enormously from the low prices placed on many equities and businesses in
the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to
those taking up permanent residence. In recent years, the actions we took in those decades
have been validated, but we have found few new opportunities. In its role as a corporate
"saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some
time before we find opportunities that get us truly excited.
Insurance Operations -- Overview
What does excite us, however, is our insurance business. GEICO is flying, and we expect
that it will continue to do so. Before we expound on that, though, let's discuss "float" and
how to measure its cost. Unless you understand this subject, it will be impossible for you to
make an informed judgment about Berkshire's intrinsic value.
To begin with, float is money we hold but don't own. In an insurance operation, float
arises because premiums are received before losses are paid, an interval that sometimes
extends over many years. During that time, the insurer invests the money. Typically, this
pleasant activity carries with it a downside: The premiums that an insurer takes in usually do
not cover the losses and expenses it eventually must pay. That leaves it running an
"underwriting loss," which is the cost of float. An insurance business has value if its cost of
float over time is less than the cost the company would otherwise incur to obtain funds. But
the business is a lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have
enormous latitude in figuring their underwriting results, and that makes it very difficult for
investors to calculate a company's true cost of float. Estimating errors, usually innocent but
sometimes not, can be huge. The consequences of these miscalculations flow directly into
earnings. An experienced observer can usually detect large-scale errors in reserving, but the
general public can typically do no more than accept what's presented, and at times I have
been amazed by the numbers that big-name auditors have implicitly blessed. As for
Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to
you, because we have found that virtually all surprises in insurance are unpleasant ones.
As the numbers in the following table show, Berkshire's insurance business has been a
huge winner. For the table, we have calculated our float -- which we generate in large
amounts relative to our premium volume -- by adding net loss reserves, loss adjustment
reserves, funds held under reinsurance assumed and unearned premium reserves, and then
subtracting agents' balances, prepaid acquisition costs, prepaid taxes and deferred charges
applicable to assumed reinsurance. Our cost of float is determined by our underwriting loss or
profit. In those years when we have had an underwriting profit, such as the last five, our cost
of float has been negative. In effect, we have been paid for holding money.
 (1) (2) Yearend Yield
 Underwriting Approximate on Long-Term
 Loss Average Float Cost of Funds Govt. Bonds 
 (In $ Millions) (Ratio of 1 to 2)
1967 profit 17.3 less than zero 5.50%
1968 profit 19.9 less than zero 5.90%
1969 profit 23.4 less than zero 6.79%
1970 0.37 32.4 1.14% 6.25%
1971 profit 52.5 less than zero 5.81%
1972 profit 69.5 less than zero 5.82%
1973 profit 73.3 less than zero 7.27%
1974 7.36 79.1 9.30% 8.13%
1975 11.35 87.6 12.96% 8.03%
1976 profit 102.6 less than zero 7.30%
1977 profit 139.0 less than zero 7.97%
1978 profit 190.4 less than zero 8.93%
1979 profit 227.3 less than zero 10.08%
1980 profit 237.0 less than zero 11.94%
1981 profit 228.4 less than zero 13.61%
1982 21.56 220.6 9.77% 10.64%
1983 33.87 231.3 14.64% 11.84%
1984 48.06 253.2 18.98% 11.58%
1985 44.23 390.2 11.34% 9.34%
1986 55.84 797.5 7.00% 7.60%
1987 55.43 1,266.7 4.38% 8.95%
1988 11.08 1,497.7 0.74% 9.00%
1989 24.40 1,541.3 1.58% 7.97%
1990 26.65 1,637.3 1.63% 8.24%
1991 119.59 1,895.0 6.31% 7.40%
1992 108.96 2,290.4 4.76% 7.39%
1993 profit 2,624.7 less than zero 6.35%
1994 profit 3,056.6 less than zero 7.88%
1995 profit 3,607.2 less than zero 5.95%
1996 profit 6,702.0 less than zero 6.64%
1997 profit 7,093.1 less than zero 5.92%
Since 1967, when we entered the insurance business, our float has grown at an annual
compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money.
Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability,
it has had a value to Berkshire greater than an equal amount of net worth would have had.
The expiration of several large contracts will cause our float to decline during the first
quarter of 1998, but we expect it to grow substantially over the long term. We also believe
that our cost of float will continue to be highly favorable.
Super-Cat Insurance
Occasionally, however, the cost of our float will spike severely. That will occur because
of our heavy involvement in the super-cat business, which by its nature is the most volatile of
all insurance lines. In this operation, we sell policies that insurance and reinsurance
companies purchase in order to limit their losses when mega-catastrophes strike. Berkshire is
the preferred market for sophisticated buyers: When the "big one" hits, the financial strength
of super-cat writers will be tested, and Berkshire has no peer in this respect.
Since truly major catastrophes are rare occurrences, our super-cat business can be
expected to show large profits in most years -- and to record a huge loss occasionally. In
other words, the attractiveness of our super-cat business will take a great many years to
measure. What you must understand, however, is that a truly terrible year in the super-cat
business is not a possibility -- it's a certainty. The only question is when it will come.
Last year, we were very lucky in our super-cat operation. The world suffered no
catastrophes that caused huge amounts of insured damage, so virtually all premiums that we
received dropped to the bottom line. This pleasant result has a dark side, however. Many
investors who are "innocents" -- meaning that they rely on representations of salespeople
rather than on underwriting knowledge of their own -- have come into the reinsurance
business by means of purchasing pieces of paper that are called "catastrophe bonds." The
second word in this term, though, is an Orwellian misnomer: A true bond obliges the issuer to
pay; these bonds, in effect, are contracts that lay a provisional promise to pay on the
purchaser.
This convoluted arrangement came into being because the promoters of the contracts
wished to circumvent laws that prohibit the writing of insurance by entities that haven't been
licensed by the state. A side benefit for the promoters is that calling the insurance contract a
"bond" may also cause unsophisticated buyers to assume that these instruments involve far
less risk than is actually the case.
Truly outsized risks will exist in these contracts if they are not properly priced. A
pernicious aspect of catastrophe insurance, however, makes it likely that mispricing, even of a
severe variety, will not be discovered for a very long time. Consider, for example, the odds of
throwing a 12 with a pair of dice -- 1 out of 36. Now assume that the dice will be thrown
once a year; that you, the "bond-buyer," agree to pay $50 million if a 12 appears; and that for
"insuring" this risk you take in an annual "premium" of $1 million. That would mean you had
significantly underpriced the risk. Nevertheless, you could go along for years thinking you
were making money -- indeed, easy money. There is actually a 75.4% probability that you
would go for a decade without paying out a dime. Eventually, however, you would go broke.
In this dice example, the odds are easy to figure. Calculations involving monster
hurricanes and earthquakes are necessarily much fuzzier, and the best we can do at Berkshire
is to estimate a range of probabilities for such events. The lack of precise data, coupled with
the rarity of such catastrophes, plays into the hands of promoters, who typically employ an
"expert" to advise the potential bond-buyer about the probability of losses. The expert puts
no money on the table. Instead, he receives an up-front payment that is forever his no matter
how inaccurate his predictions. Surprise: When the stakes are high, an expert can invariably
be found who will affirm -- to return to our example -- that the chance of rolling a 12 is not 1
in 36, but more like 1 in 100. (In fairness, we should add that the expert will probably believe
that his odds are correct, a fact that makes him less reprehensible -- but more dangerous.)
The influx of "investor" money into catastrophe bonds -- which may well live up to their
name -- has caused super-cat prices to deteriorate materially. Therefore, we will write less
business in 1998. We have some large multi-year contracts in force, however, that will
mitigate the drop. The largest of these are two policies that we described in last year's report
-- one covering hurricanes in Florida and the other, signed with the California Earthquake
Authority, covering earthquakes in that state. Our "worst-case" loss remains about $600
million after-tax, the maximum we could lose under the CEA policy. Though this loss potential
may sound large, it is only about 1% of Berkshire's market value. Indeed, if we could get
appropriate prices, we would be willing to significantly increase our "worst-case" exposure.
Our super-cat business was developed from scratch by Ajit Jain, who has contributed to
Berkshire's success in a variety of other ways as well. Ajit possesses both the discipline to
walk away from business that is inadequately priced and the imagination to then find other
opportunities. Quite simply, he is one of Berkshire's major assets. Ajit would have been a star
in whatever career he chose; fortunately for us, he enjoys insurance.
Insurance -- GEICO (1-800-555-2756) and Other Primary Operations
Last year I wrote about GEICO's Tony Nicely and his terrific management skills. If I had
known then what he had in store for us in 1997, I would have searched for still greater
superlatives. Tony, now 54, has been with GEICO for 36 years and last year was his best. As
CEO, he has transmitted vision, energy and enthusiasm to all members of the GEICO family -
- raising their sights from what has been achieved to what can be achieved.
We measure GEICO's performance by first, the net increase in its voluntary auto policies
(that is, not including policies assigned us by the state) and, second, the profitability of
"seasoned" auto business, meaning policies that have been with us for more than a year and
are thus past the period in which acquisition costs cause them to be money-losers. In 1996,
in-force business grew 10%, and I told you how pleased I was, since that rate was well above
anything we had seen in two decades. Then, in 1997, growth jumped to 16%.
Below are the new business and in-force figures for the last five years:
 New Voluntary Voluntary Auto
 Years Auto Policies Policies in Force
 1993 354,882 2,011,055 
 1994 396,217 2,147,549
 1995 461,608 2,310,037
 1996 617,669 2,543,699
 1997 913,176 2,949,439
Of course, any insurer can grow rapidly if it gets careless about underwriting. GEICO's
underwriting profit for the year, though, was 8.1% of premiums, far above its average. Indeed,
that percentage was higher than we wish it to be: Our goal is to pass on most of the benefits
of our low-cost operation to our customers, holding ourselves to about 4% in underwriting
profit. With that in mind, we reduced our average rates a bit during 1997 and may well cut
them again this year. Our rate changes varied, of course, depending on the policyholder and
where he lives; we strive to charge a rate that properly reflects the loss expectancy of each
driver.
GEICO is not the only auto insurer obtaining favorable results these days. Last year, the
industry recorded profits that were far better than it anticipated or can sustain. Intensified
competition will soon squeeze margins very significantly. But this is a development we
welcome: Long term, a tough market helps the low-cost operator, which is what we are and
intend to remain.
Last year I told you about the record 16.9% profit-sharing contribution that GEICO's
associates had earned and explained that two simple variables set the amount: policy growth
and profitability of seasoned business. I further explained that 1996's performance was so
extraordinary that we had to enlarge the chart delineating the possible payouts. The new
configuration didn't make it through 1997: We enlarged the chart's boundaries again and
awarded our 10,500 associates a profit-sharing contribution amounting to 26.9% of their
base compensation, or $71 million. In addition, the same two variables -- policy growth and
profitability of seasoned business -- determined the cash bonuses that we paid to dozens of
top executives, starting with Tony.
At GEICO, we are paying in a way that makes sense for both our owners and our
managers. We distribute merit badges, not lottery tickets: In none of Berkshire's subsidiaries
do we relate compensation to our stock price, which our associates cannot affect in any
meaningful way. Instead, we tie bonuses to each unit's business performance, which is the
direct product of the unit's people. When that performance is terrific -- as it has been at
GEICO -- there is nothing Charlie and I enjoy more than writing a big check.
GEICO's underwriting profitability will probably fall in 1998, but the company's growth
could accelerate. We're planning to step on the gas: GEICO's marketing expenditures this
year will top $100 million, up 50% from 1997. Our market share today is only 3%, a level of
penetration that should increase dramatically in the next decade. The auto insurance industry
is huge -- it does about $115 billion of volume annually -- and there are tens of millions of
drivers who would save substantial money by switching to us.
* * * * * * * * * * * *
In the 1995 report, I described the enormous debt that you and I owe to Lorimer
Davidson. On a Saturday early in 1951, he patiently explained the ins and outs of both GEICO
and its industry to me -- a 20-year-old stranger who'd arrived at GEICO's headquarters
uninvited and unannounced. Davy later became the company's CEO and has remained my
friend and teacher for 47 years. The huge rewards that GEICO has heaped on Berkshire would
not have materialized had it not been for his generosity and wisdom. Indeed, had I not met
Davy, I might never have grown to understand the whole field of insurance, which over the
years has played such a key part in Berkshire's success.
Davy turned 95 last year, and it's difficult for him to travel. Nevertheless, Tony and I hope
that we can persuade him to attend our annual meeting, so that our shareholders can properly
thank him for his important contributions to Berkshire. Wish us luck.
* * * * * * * * * * * *
Though they are, of course, far smaller than GEICO, our other primary insurance
operations turned in results last year that, in aggregate, were fully as stunning. National
Indemnity's traditional business had an underwriting profit of 32.9% and, as usual, developed
a large amount of float compared to premium volume. Over the last three years, this segment
of our business, run by Don Wurster, has had a profit of 24.3%. Our homestate operation,
managed by Rod Eldred, recorded an underwriting profit of 14.1% even though it continued to
absorb the expenses of geographical expansion. Rod's three-year record is an amazing
15.1%. Berkshire's workers' compensation business, run out of California by Brad Kinstler, had
a modest underwriting loss in a difficult environment; its three-year underwriting record is a
positive 1.5%. John Kizer, at Central States Indemnity, set a new volume record while
generating good underwriting earnings. At Kansas Bankers Surety, Don Towle more than lived
up to the high expectations we had when we purchased the company in 1996.
In aggregate, these five operations recorded an underwriting profit of 15.0%. The two
Dons, along with Rod, Brad and John, have created significant value for Berkshire, and we
believe there is more to come.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this
presentation, purchase-accounting adjustments are not assigned to the specific businesses
to which they apply, but are instead aggregated and shown separately. This procedure lets
you view the earnings of our businesses as they would have been reported had we not
purchased them. For the reasons discussed on pages 69 and 70, this form of presentation
seems to us to be more useful to investors and managers than one utilizing generally￾accepted accounting principles (GAAP), which require purchase-premiums to be charged off
business-by-business. The total earnings we show in the table are, of course, identical to the
GAAP total in our audited financial statements.
 (in millions) 
 Berkshire's Share 
 of Net Earnings 
 (after taxes and 
 Pre-Tax Earnings minority interests)
 1997 1996 1997 1996 
Operating Earnings:
 Insurance Group:
 Underwriting -- Super-Cat. . . . . . . .$ 283.0 $ 167.0 $ 182.7 $ 107.4
 Underwriting -- Other Reinsurance. . . . (155.2) (174.8) (100.1) (112.4)
 Underwriting -- GEICO. . . . . . . . . . 280.7 171.4 181.1 110.2
 Underwriting -- Other Primary. . . . . . 52.9 58.5 34.1 37.6
 Net Investment Income. . . . . . . . . . 882.3 726.2 703.6 593.1
 Buffalo News . . . . . . . . . . . . . . . 55.9 50.4 32.7 29.5
 Finance Businesses . . . . . . . . . . . . 28.1 23.1 18.0 14.9
 FlightSafety . . . . . . . . . . . . . . . 139.5 3.1(1) 84.4 1.9(1)
 Home Furnishings . . . . . . . . . . . . . 56.8(2) 43.8 32.2(2) 24.8
 Jewelry. . . . . . . . . . . . . . . . . . 31.6 27.8 18.3 16.1
 Scott Fetzer(excluding finance operation). 118.9 121.7 77.3 81.6
 See's Candies. . . . . . . . . . . . . . . 58.6 51.9 35.0 30.8
 Shoe Group . . . . . . . . . . . . . . . . 48.8 61.6 32.2 41.0
 Purchase-Accounting Adjustments. . . . . . (104.9) (75.7) (97.0) (70.5)
 Interest Expense(3). . . . . . . . . . . . (106.6) (94.3) (67.1) (56.6)
 Shareholder-Designated Contributions . . . (15.4) (13.3) (9.9) (8.5)
 Other. . . . . . . . . . . . . . . . . . . 60.7 73.0 37.0 42.2
 -------- -------- -------- -------- 
Operating Earnings . . . . . . . . . . . . . 1,715.7 1,221.4 1,194.5 883.1 
Capital Gains from Investments . . . . . . . 1,111.9 2,484.5 707.1 1,605.5
 -------- -------- -------- --------
Total Earnings - All Entities. . . . . . . .$2,827.6 $3,705.9 $1,901.6 $2,488.6
 ======== ======== ======== ========
(1) From date of acquisition, December 23, 1996.
(2)
Includes Star Furniture from July 1, 1997.
(3) Excludes interest expense of Finance Businesses.
Overall, our operating businesses continue to perform exceptionally well, far outdoing
their industry norms. We are particularly pleased that profits improved at Helzberg's after a
disappointing 1996. Jeff Comment, Helzberg's CEO, took decisive steps early in 1997 that
enabled the company to gain real momentum by the crucial Christmas season. In the early
part of this year, as well, sales remained strong.
Casual observers may not appreciate just how extraordinary the performance of many of
our businesses has been: If the earnings history of, say, Buffalo News or Scott Fetzer is
compared to the records of their publicly-owned peers, their performance might seem to
have been unexceptional. But most public companies retain two-thirds or more of their
earnings to fund their corporate growth. In contrast, those Berkshire subsidiaries have paid
100% of their earnings to us, their parent company, to fund our growth.
In effect, the records of the public companies reflect the cumulative benefits of the
earnings they have retained, while the records of our operating subsidiaries get no such
boost. Over time, however, the earnings these subsidiaries have distributed have created truly
huge amounts of earning power elsewhere in Berkshire. The News, See's and Scott Fetzer
have alone paid us $1.8 billion, which we have gainfully employed elsewhere. We owe their
managements our gratitude for much more than the earnings that are detailed in the table.
Additional information about our various businesses is given on pages 36 - 50, where
you will also find our segment earnings reported on a GAAP basis. In addition, on pages 55 -
61, we have rearranged Berkshire's financial data into four segments on a non-GAAP basis, a
presentation that corresponds to the way Charlie and I think about the company. Our intent is
to supply you with the financial information that we would wish you to give us if our positions
were reversed.
Look-Through Earnings
Reported earnings are a poor measure of economic progress at Berkshire, in part
because the numbers shown in the table presented earlier include only the dividends we
receive from investees -- though these dividends typically represent only a small fraction of
the earnings attributable to our ownership. Not that we mind this division of money, since on
balance we regard the undistributed earnings of investees as more valuable to us than the
portion paid out. The reason is simple: Our investees often have the opportunity to reinvest
earnings at high rates of return. So why should we want them paid out?
To depict something closer to economic reality at Berkshire than reported earnings,
though, we employ the concept of "look-through" earnings. As we calculate these, they
consist of: (1) the operating earnings reported in the previous section, plus; (2) our share of
the retained operating earnings of major investees that, under GAAP accounting, are not
reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if
these retained earnings of investees had instead been distributed to us. When tabulating
"operating earnings" here, we exclude purchase-accounting adjustments as well as capital
gains and other major non-recurring items.
The following table sets forth our 1997 look-through earnings, though I warn you that the
figures can be no more than approximate, since they are based on a number of judgment
calls. (The dividends paid to us by these investees have been included in the operating
earnings itemized on page 11, mostly under "Insurance Group: Net Investment Income.")
 Berkshire's Share
 of Undistributed
 Berkshire's Approximate Operating Earnings 
Berkshire's Major Investees Ownership at Yearend(1) (in millions)(2) 
American Express Company 10.7% $161
The Coca-Cola Company 8.1% 216
The Walt Disney Company 3.2% 65
Freddie Mac 8.6% 86
The Gillette Company 8.6% 82
The Washington Post Company 16.5% 30
Wells Fargo & Company 7.8% 103
 ------
Berkshire's share of undistributed earnings of major investees 743 
Hypothetical tax on these undistributed investee earnings(3) (105)
Reported operating earnings of Berkshire 1,292
 ------
 Total look-through earnings of Berkshire $1,930 
 ======
      (1) Does not include shares allocable to minority interests
      (2) Calculated on average ownership for the year
      (3) The tax rate used is 14%, which is the rate Berkshire
       pays on the dividends it receives
Acquisitions of 1997
In 1997, we agreed to acquire Star Furniture and International Dairy Queen (a deal that
closed early in 1998). Both businesses fully meet our criteria: They are understandable;
possess excellent economics; and are run by outstanding people.
The Star transaction has an interesting history. Whenever we buy into an industry whose
leading participants aren't known to me, I always ask our new partners, "Are there any more
at home like you?" Upon our purchase of Nebraska Furniture Mart in 1983, therefore, the
Blumkin family told me about three outstanding furniture retailers in other parts of the
country. At the time, however, none was for sale.
Many years later, Irv Blumkin learned that Bill Child, CEO of R.C. Willey -- one of the
recommended three -- might be interested in merging, and we promptly made the deal
described in the 1995 report. We have been delighted with that association -- Bill is the
perfect partner. Furthermore, when we asked Bill about industry standouts, he came up with
the remaining two names given me by the Blumkins, one of these being Star Furniture of
Houston. But time went by without there being any indication that either of the two was
available.
On the Thursday before last year's annual meeting, however, Bob Denham of Salomon
told me that Melvyn Wolff, the long-time controlling shareholder and CEO of Star, wanted to
talk. At our invitation, Melvyn came to the meeting and spent his time in Omaha confirming
his positive feelings about Berkshire. I, meanwhile, looked at Star's financials, and liked what I
saw.
A few days later, Melvyn and I met in New York and made a deal in a single, two-hour
session. As was the case with the Blumkins and Bill Child, I had no need to check leases,
work out employment contracts, etc. I knew I was dealing with a man of integrity and that's
what counted.
Though the Wolff family's association with Star dates back to 1924, the business
struggled until Melvyn and his sister Shirley Toomin took over in 1962. Today Star operates 12
stores -- ten in Houston and one each in Austin and Bryan -- and will soon move into San
Antonio as well. We won't be surprised if Star is many times its present size a decade from
now.
Here's a story illustrating what Melvyn and Shirley are like: When they told their
associates of the sale, they also announced that Star would make large, special payments to
those who had helped them succeed -- and then defined that group as everyone in the
business. Under the terms of our deal, it was Melvyn and Shirley's money, not ours, that
funded this distribution. Charlie and I love it when we become partners with people who
behave like that.
The Star transaction closed on July 1. In the months since, we've watched Star's already￾excellent sales and earnings growth accelerate further. Melvyn and Shirley will be at the
annual meeting, and I hope you get a chance to meet them.
Next acquisition: International Dairy Queen. There are 5,792 Dairy Queen stores
operating in 23 countries -- all but a handful run by franchisees -- and in addition IDQ
franchises 409 Orange Julius operations and 43 Karmelkorn operations. In 190 locations,
"treat centers" provide some combination of the three products.
For many years IDQ had a bumpy history. Then, in 1970, a Minneapolis group led by John
Mooty and Rudy Luther took control. The new managers inherited a jumble of different
franchising agreements, along with some unwise financing arrangements that had left the
company in a precarious condition. In the years that followed, management rationalized the
operation, extended food service to many more locations, and, in general, built a strong
organization.
Last summer Mr. Luther died, which meant his estate needed to sell stock. A year earlier,
Dick Kiphart of William Blair & Co., had introduced me to John Mooty and Mike Sullivan, IDQ's
CEO, and I had been impressed with both men. So, when we got the chance to merge with
IDQ, we offered a proposition patterned on our FlightSafety acquisition, extending selling
shareholders the option of choosing either cash or Berkshire shares having a slightly lower
immediate value. By tilting the consideration as we did, we encouraged holders to opt for
cash, the type of payment we by far prefer. Even then, only 45% of IDQ shares elected cash.
Charlie and I bring a modicum of product expertise to this transaction: He has been
patronizing the Dairy Queens in Cass Lake and Bemidji, Minnesota, for decades, and I have
been a regular in Omaha. We have put our money where our mouth is.
A Confession
I've mentioned that we strongly prefer to use cash rather than Berkshire stock in
acquisitions. A study of the record will tell you why: If you aggregate all of our stock-only
mergers (excluding those we did with two affiliated companies, Diversified Retailing and Blue
Chip Stamps), you will find that our shareholders are slightly worse off than they would have
been had I not done the transactions. Though it hurts me to say it, when I've issued stock, I've
cost you money.
Be clear about one thing: This cost has not occurred because we were misled in any way
by sellers or because they thereafter failed to manage with diligence and skill. On the
contrary, the sellers were completely candid when we were negotiating our deals and have
been energetic and effective ever since.
Instead, our problem has been that we own a truly marvelous collection of businesses,
which means that trading away a portion of them for something new almost never makes
sense. When we issue shares in a merger, we reduce your ownership in all of our businesses
-- partly-owned companies such as Coca-Cola, Gillette and American Express, and all of our
terrific operating companies as well. An example from sports will illustrate the difficulty we
face: For a baseball team, acquiring a player who can be expected to bat .350 is almost
always a wonderful event -- except when the team must trade a .380 hitter to make the deal.
Because our roster is filled with .380 hitters, we have tried to pay cash for acquisitions,
and here our record has been far better. Starting with National Indemnity in 1967, and
continuing with, among others, See's, Buffalo News, Scott Fetzer and GEICO, we have
acquired -- for cash -- a number of large businesses that have performed incredibly well
since we bought them. These acquisitions have delivered Berkshire tremendous value --
indeed, far more than I anticipated when we made our purchases.
We believe that it is almost impossible for us to "trade up" from our present businesses
and managements. Our situation is the opposite of Camelot's Mordred, of whom Guenevere
commented, "The one thing I can say for him is that he is bound to marry well. Everybody is
above him." Marrying well is extremely difficult for Berkshire.
So you can be sure that Charlie and I will be very reluctant to issue shares in the future.
In those cases when we simply must do so -- when certain shareholders of a desirable
acquiree insist on getting stock -- we will include an attractive cash option in order to tempt
as many of the sellers to take cash as is possible.
Merging with public companies presents a special problem for us. If we are to offer any
premium to the acquiree, one of two conditions must be present: Either our own stock must
be overvalued relative to the acquiree's, or the two companies together must be expected to
earn more than they would if operated separately. Historically, Berkshire has seldom been
overvalued. In this market, moreover, undervalued acquirees are almost impossible to find.
That other possibility -- synergy gains -- is usually unrealistic, since we expect acquirees to
operate after we've bought them just as they did before. Joining with Berkshire does not
normally raise their revenues nor cut their costs.
Indeed, their reported costs (but not their true ones) will rise after they are bought by
Berkshire if the acquiree has been granting options as part of its compensation packages. In
these cases, "earnings" of the acquiree have been overstated because they have followed the
standard -- but, in our view, dead wrong -- accounting practice of ignoring the cost to a
business of issuing options. When Berkshire acquires an option-issuing company, we
promptly substitute a cash compensation plan having an economic value equivalent to that of
the previous option plan. The acquiree's true compensation cost is thereby brought out of the
closet and charged, as it should be, against earnings.
The reasoning that Berkshire applies to the merger of public companies should be the
calculus for all buyers. Paying a takeover premium does not make sense for any acquirer
unless a) its stock is overvalued relative to the acquiree's or b) the two enterprises will earn
more combined than they would separately. Predictably, acquirers normally hew to the second
argument because very few are willing to acknowledge that their stock is overvalued.
However, voracious buyers -- the ones that issue shares as fast as they can print them --
are tacitly conceding that point. (Often, also, they are running Wall Street's version of a
chain-letter scheme.)
In some mergers there truly are major synergies -- though oftentimes the acquirer pays
too much to obtain them -- but at other times the cost and revenue benefits that are
projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a
particularly foolish acquisition, both his internal staff and his outside advisors will come up
with whatever projections are needed to justify his stance. Only in fairy tales are emperors
told that they are naked.
Common Stock Investments
Below we present our common stock investments. Those with a market value of more
than $750 million are itemized.
 12/31/97
 Shares Company Cost* Market 
 (dollars in millions)
 49,456,900 American Express Company $1,392.7 $ 4,414.0
 200,000,000 The Coca-Cola Company 1,298.9 13,337.5
 21,563,414 The Walt Disney Company 381.2 2,134.8
 63,977,600 Freddie Mac 329.4 2,683.1
 48,000,000 The Gillette Company 600.0 4,821.0
 23,733,198 Travelers Group Inc. 604.4 1,278.6
 1,727,765 The Washington Post Company 10.6 840.6
 6,690,218 Wells Fargo & Company 412.6 2,270.9
 Others 2,177.1 4,467.2
 -------- ----------
 Total Common Stocks $7,206.9 $ 36,247.7
 ======== ==========
* Represents tax-basis cost which, in aggregate, is $1.8 billion less than GAAP cost.
We made net sales during the year that amounted to about 5% of our beginning
portfolio. In these, we significantly reduced a few of our holdings that are below the $750
million threshold for itemization, and we also modestly trimmed a few of the larger positions
that we detail. Some of the sales we made during 1997 were aimed at changing our bond￾stock ratio moderately in response to the relative values that we saw in each market, a
realignment we have continued in 1998.
Our reported positions, we should add, sometimes reflect the investment decisions of
GEICO's Lou Simpson. Lou independently runs an equity portfolio of nearly $2 billion that may
at times overlap the portfolio that I manage, and occasionally he makes moves that differ
from mine.
Though we don't attempt to predict the movements of the stock market, we do try, in a
very rough way, to value it. At the annual meeting last year, with the Dow at 7,071 and long￾term Treasury yields at 6.89%, Charlie and I stated that we did not consider the market
overvalued if 1) interest rates remained where they were or fell, and 2) American business
continued to earn the remarkable returns on equity that it had recently recorded. So far,
interest rates have fallen -- that's one requisite satisfied -- and returns on equity still remain
exceptionally high. If they stay there -- and if interest rates hold near recent levels -- there
is no reason to think of stocks as generally overvalued. On the other hand, returns on equity
are not a sure thing to remain at, or even near, their present levels.
In the summer of 1979, when equities looked cheap to me, I wrote a Forbes article
entitled "You pay a very high price in the stock market for a cheery consensus." At that time
skepticism and disappointment prevailed, and my point was that investors should be glad of
the fact, since pessimism drives down prices to truly attractive levels. Now, however, we have
a very cheery consensus. That does not necessarily mean this is the wrong time to buy
stocks: Corporate America is now earning far more money than it was just a few years ago,
and in the presence of lower interest rates, every dollar of earnings becomes more valuable.
Today's price levels, though, have materially eroded the "margin of safety" that Ben Graham
identified as the cornerstone of intelligent investing.
* * * * * * * * * * * *
In last year's annual report, I discussed Coca-Cola, our largest holding. Coke continues
to increase its market dominance throughout the world, but, tragically, it has lost the leader
responsible for its outstanding performance. Roberto Goizueta, Coke's CEO since 1981, died
in October. After his death, I read every one of the more than 100 letters and notes he had
written me during the past nine years. Those messages could well serve as a guidebook for
success in both business and life.
In these communications, Roberto displayed a brilliant and clear strategic vision that was
always aimed at advancing the well-being of Coke shareholders. Roberto knew where he was
leading the company, how he was going to get there, and why this path made the most sense
for his owners -- and, equally important, he had a burning sense of urgency about reaching
his goals. An excerpt from one handwritten note he sent to me illustrates his mind-set: "By
the way, I have told Olguita that what she refers to as an obsession, you call focus. I like your
term much better." Like all who knew Roberto, I will miss him enormously.
Consistent with his concern for the company, Roberto prepared for a seamless
succession long before it seemed necessary. Roberto knew that Doug Ivester was the right
man to take over and worked with Doug over the years to ensure that no momentum would be
lost when the time for change arrived. The Coca-Cola Company will be the same steamroller
under Doug as it was under Roberto.
Convertible Preferreds
Two years ago, I gave you an update on the five convertible preferreds that we
purchased through private placements in the 1987-1991 period. At the time of that earlier
report, we had realized a small profit on the sale of our Champion International holding. The
four remaining preferred commitments included two, Gillette and First Empire State, that we
had converted into common stock in which we had large unrealized gains, and two others,
USAir and Salomon, that had been trouble-prone. At times, the last two had me mouthing a
line from a country song: "How can I miss you if you won't go away?"
Since I delivered that report, all four holdings have grown significantly in value. The
common stocks of both Gillette and First Empire have risen substantially, in line with the
companies' excellent performance. At yearend, the $600 million we put into Gillette in 1989
had appreciated to $4.8 billion, and the $40 million we committed to First Empire in 1991 had
risen to $236 million.
Our two laggards, meanwhile, have come to life in a very major way. In a transaction that
finally rewarded its long-suffering shareholders, Salomon recently merged into Travelers
Group. All of Berkshire's shareholders -- including me, very personally -- owe a huge debt to
Deryck Maughan and Bob Denham for, first, playing key roles in saving Salomon from
extinction following its 1991 scandal and, second, restoring the vitality of the company to a
level that made it an attractive acquisition for Travelers. I have often said that I wish to work
with executives that I like, trust and admire. No two fit that description better than Deryck and
Bob.
Berkshire's final results from its Salomon investment won't be tallied for some time, but
it is safe to say that they will be far better than I anticipated two years ago. Looking back, I
think of my Salomon experience as having been both fascinating and instructional, though for
a time in 1991-92 I felt like the drama critic who wrote: "I would have enjoyed the play except
that I had an unfortunate seat. It faced the stage."
The resuscitation of US Airways borders on the miraculous. Those who have watched my
moves in this investment know that I have compiled a record that is unblemished by success. I
was wrong in originally purchasing the stock, and I was wrong later, in repeatedly trying to
unload our holdings at 50 cents on the dollar.
Two changes at the company coincided with its remarkable rebound: 1) Charlie and I left
the board of directors and 2) Stephen Wolf became CEO. Fortunately for our egos, the
second event was the key: Stephen Wolf's accomplishments at the airline have been
phenomenal.
There still is much to do at US Airways, but survival is no longer an issue. Consequently,
the company made up the dividend arrearages on our preferred during 1997, adding extra
payments to compensate us for the delay we suffered. The company's common stock,
furthermore, has risen from a low of $4 to a recent high of $73.
Our preferred has been called for redemption on March 15. But the rise in the company's
stock has given our conversion rights, which we thought worthless not long ago, great value.
It is now almost certain that our US Airways shares will produce a decent profit -- that is, if
my cost for Maalox is excluded -- and the gain could even prove indecent.
Next time I make a big, dumb decision, Berkshire shareholders will know what to do:
Phone Mr. Wolf.
* * * * * * * * * * * *
In addition to the convertible preferreds, we purchased one other private placement in
1991, $300 million of American Express Percs. This security was essentially a common stock
that featured a tradeoff in its first three years: We received extra dividend payments during
that period, but we were also capped in the price appreciation we could realize. Despite the
cap, this holding has proved extraordinarily profitable thanks to a move by your Chairman that
combined luck and skill -- 110% luck, the balance skill.
Our Percs were due to convert into common stock in August 1994, and in the month
before I was mulling whether to sell upon conversion. One reason to hold was Amex's
outstanding CEO, Harvey Golub, who seemed likely to maximize whatever potential the
company had (a supposition that has since been proved -- in spades). But the size of that
potential was in question: Amex faced relentless competition from a multitude of card￾issuers, led by Visa. Weighing the arguments, I leaned toward sale.
Here's where I got lucky. During that month of decision, I played golf at Prouts Neck,
Maine with Frank Olson, CEO of Hertz. Frank is a brilliant manager, with intimate knowledge
of the card business. So from the first tee on I was quizzing him about the industry. By the
time we reached the second green, Frank had convinced me that Amex's corporate card was
a terrific franchise, and I had decided not to sell. On the back nine I turned buyer, and in a
few months Berkshire owned 10% of the company.
We now have a $3 billion gain in our Amex shares, and I naturally feel very grateful to
Frank. But George Gillespie, our mutual friend, says that I am confused about where my
gratitude should go. After all, he points out, it was he who arranged the game and assigned
me to Frank's foursome.
Quarterly Reports to Shareholders
In last year's letter, I described the growing costs we incur in mailing quarterly reports
and the problems we have encountered in delivering them to "street-name" shareholders. I
asked for your opinion about the desirability of our continuing to print reports, given that we
now publish our quarterly and annual communications on the Internet, at our site,
www.berkshirehathaway.com. Relatively few shareholders responded, but it is clear that at
least a small number who want the quarterly information have no interest in getting it off the
Internet. Being a life-long sufferer from technophobia, I can empathize with this group.
The cost of publishing quarterlies, however, continues to balloon, and we have therefore
decided to send printed versions only to shareholders who request them. If you wish the
quarterlies, please complete the reply card that is bound into this report. In the meantime, be
assured that all shareholders will continue to receive the annual report in printed form.
Those of you who enjoy the computer should check out our home page. It contains a
large amount of current information about Berkshire and also all of our annual letters since
1977. In addition, our website includes links to the home pages of many Berkshire
subsidiaries. On these sites you can learn more about our subsidiaries' products and -- yes -
- even place orders for them.
We are required to file our quarterly information with the SEC no later than 45 days after
the end of each quarter. One of our goals in posting communications on the Internet is to
make this material information -- in full detail and in a form unfiltered by the media --
simultaneously available to all interested parties at a time when markets are closed.
Accordingly, we plan to send our 1998 quarterly information to the SEC on three Fridays, May
15, August 14, and November 13, and on those nights to post the same information on the
Internet. This procedure will put all of our shareholders, whether they be direct or "street￾name," on an equal footing. Similarly, we will post our 1998 annual report on the Internet on
Saturday, March 13, 1999, and mail it at about the same time.
Shareholder-Designated Contributions
About 97.7% of all eligible shares participated in Berkshire's 1997 shareholder-des
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1998 was $25.9 billion, which increased the per-share book value of both our Class
A and Class B stock by 48.3%. Over the last 34 years (that is, since present management took over) per-share book value
has grown from $19 to $37,801, a rate of 24.7% compounded annually.*
Normally, a gain of 48.3% would call for handsprings — but not this year. Remember Wagner, whose music
has been described as better than it sounds? Well, Berkshire’s progress in 1998 — though more than satisfactory — was not
as good as it looks. That’s because most of that 48.3% gain came from our issuing shares in acquisitions.
To explain: Our stock sells at a large premium over book value, which means that any issuing of shares we do
— whether for cash or as consideration in a merger — instantly increases our per-share book-value figure, even though
we’ve earned not a dime. What happens is that we get more per-share book value in such transactions than we give up.
These transactions, however, do not deliver us any immediate gain in per-share intrinsic value, because in this respect
what we give and what we get are roughly equal. And, as Charlie Munger, Berkshire’s Vice Chairman and my partner,
and I can’t tell you too often (though you may feel that we try), it’s the per-share gain in intrinsic value that counts rather
than the per-share gain in book value. Though Berkshire’s intrinsic value grew very substantially in 1998, the gain fell
well short of the 48.3% recorded for book value. Nevertheless, intrinsic value still far exceeds book value. (For a more
extensive discussion of these terms, and other investment and accounting concepts, please refer to our Owner’s Manual,
on pages 56-64, in which we set forth our owner-related business principles. Intrinsic value is discussed on pages 61 and
62.)
We entered 1999 with the best collection of businesses and managers in our history. The two companies we
acquired in 1998, General Re and Executive Jet, are first-class in every way — more about both later — and the
performance of our operating businesses last year exceeded my hopes. GEICO, once again, simply shot the lights out.
On the minus side, several of the public companies in which we have major investments experienced significant operating
shortfalls that neither they nor I anticipated early in the year. Consequently, our equity portfolio did not perform nearly
as well as did the S&P 500. The problems of these companies are almost certainly temporary, and Charlie and I believe
that their long-term prospects are excellent.
In our last three annual reports, we furnished you a table that we regard as central to estimating Berkshire's
intrinsic value. In the updated version of that table, which follows, we trace our two key components of value, including
General Re on a pro-forma basis as if we had owned it throughout the year. The first column lists our per-share
ownership of investments (including cash and equivalents but excluding securities held in our financial products
operation) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and
purchase-accounting adjustments (discussed on pages 62 and 63), but after all interest and corporate expenses. The
second column excludes all dividends, interest and capital gains that we realized from the investments presented in the
first column. In effect, the columns show how Berkshire would look if it were split into two parts, with one entity holding
our investments and the other operating all of our businesses and bearing all corporate costs.
 *All figures used in this report apply to Berkshire's A shares, the successor to the only stock that the company
had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.
3
4
Pre-tax Earnings Per Share
Investments With All Income from
Year Per Share Investments Excluded
1968 ........................................... $ 53 $ 2.87
1978 ........................................... 465 12.85
1988 ........................................... 4,876 145.77
1998 ........................................... 47,647 474.45
Here are the growth rates of the two segments by decade:
Pre-tax Earnings Per Share
Investments With All Income from
Decade Ending Per Share Investments Excluded
1978 ........................................... 24.2% 16.2%
1988 ........................................... 26.5% 27.5%
1998 ........................................... 25.6% 12.5%
Annual Growth Rate, 1968-1998 ...................... 25.4% 18.6%
During 1998, our investments increased by $9,604 per share, or 25.2%, but per-share operating earnings fell by
33.9%. General Re (included, as noted, on a pro-forma basis) explains both facts. This company has very large
investments, and these greatly increased our per-share investment figure. But General Re also had an underwriting loss
in 1998, and that hurt operating earnings. Had we not acquired General Re, per-share operating earnings would have
shown a modest gain.
Though certain of our acquisitions and operating strategies may from time to time affect one column more than the
other, we continually work to increase the figures in both. But one thing is certain: Our future rates of gain will fall far
short of those achieved in the past. Berkshire’s capital base is now simply too large to allow us to earn truly outsized
returns. If you believe otherwise, you should consider a career in sales but avoid one in mathematics (bearing in mind
that there are really only three kinds of people in the world: those who can count and those who can’t).
Currently we are working to compound a net worth of $57.4 billion, the largest of any American corporation
(though our figure will be eclipsed if the merger of Exxon and Mobil takes place). Of course, our lead in net worth does
not mean that Berkshire outranks all other businesses in value: Market value is what counts for owners and General
Electric and Microsoft, for example, have valuations more than three times Berkshire’s. Net worth, though, measures
the capital that managers must deploy, and at Berkshire that figure has indeed become huge.
Nonetheless, Charlie and I will do our best to increase intrinsic value in the future at an average rate of 15%, a
result we consider to be at the very peak of possible outcomes. We may have years when we exceed 15%, but we will
most certainly have other years when we fall far short of that — including years showing negative returns — and those
will bring our average down. In the meantime, you should understand just what an average gain of 15% over the next
five years implies: It means we will need to increase net worth by $58 billion. Earning this daunting 15% will require
us to come up with big ideas: Popcorn stands just won’t do. Today’s markets are not friendly to our search for
“elephants,” but you can be sure that we will stay focused on the hunt.
Whatever the future holds, I make you one promise: I’ll keep at least 99% of my net worth in Berkshire for as long
as I am around. How long will that be? My model is the loyal Democrat in Fort Wayne who asked to be buried in
Chicago so that he could stay active in the party. To that end, I’ve already selected a “power spot” at the office for my
urn.
* * * * * * * * * * * *
Our financial growth has been matched by employment growth: We now have 47,566 on our payroll, with the
acquisitions of 1998 bringing 7,074 employees to us and internal growth adding another 2,500. To balance this gain 
of 9,500 in hands-on employees, we have enlarged the staff at world headquarters from 12 to 12.8. (The .8 doesn’t refer
to me or Charlie: We have a new person in accounting, working four days a week.) Despite this alarming trend toward
corporate bloat, our after-tax overhead last year was about $3.5 million, or well under one basis point (.01 of 1%) of the
value of the assets we manage.
Taxes
One beneficiary of our increased size has been the U.S. Treasury. The federal income taxes that Berkshire and
General Re have paid, or will soon pay, in respect to 1998 earnings total $2.7 billion. That means we shouldered all of
the U.S. Government’s expenses for more than a half-day.
Follow that thought a little further: If only 625 other U.S. taxpayers had paid the Treasury as much as we and
General Re did last year, no one else — neither corporations nor 270 million citizens — would have had to pay federal
income taxes or any other kind of federal tax (for example, social security or estate taxes). Our shareholders can truly
say that they “gave at the office.”
Writing checks to the IRS that include strings of zeros does not bother Charlie or me. Berkshire as a corporation,
and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some
other part of the world and completely escaped taxes, I’m sure we would be worse off financially (and in many other ways
as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to
the government rather than one requiring the government to regularly write checks to us — say, because we are disabled
or unemployed.
Berkshire’s tax situation is sometimes misunderstood. First, capital gains have no special attraction for us: A
corporation pays a 35% rate on taxable income, whether it comes from capital gains or from ordinary operations. This
means that Berkshire’s tax on a long-term capital gain is fully 75% higher than what an individual would pay on an
identical gain.
Some people harbor another misconception, believing that we can exclude 70% of all dividends we receive from
our taxable income. Indeed, the 70% rate applies to most corporations and also applies to Berkshire in cases where we
hold stocks in non-insurance subsidiaries. However, almost all of our equity investments are owned by our insurance
companies, and in that case the exclusion is 59.5%. That still means a dollar of dividends is considerably more valuable
to us than a dollar of ordinary income, but not to the degree often assumed.
* * * * * * * * * * * *
Berkshire truly went all out for the Treasury last year. In connection with the General Re merger, we wrote a $30
million check to the government to pay an SEC fee tied to the new shares created by the deal. We understand that this
payment set an SEC record. Charlie and I are enormous admirers of what the Commission has accomplished for
American investors. We would rather, however, have found another way to show our admiration.
GEICO (1-800-847-7536)
Combine a great idea with a great manager and you’re certain to obtain a great result. That mix is alive and well
at GEICO. The idea is low-cost auto insurance, made possible by direct-to-customer marketing, and the manager is Tony
Nicely. Quite simply, there is no one in the business world who could run GEICO better than Tony does. His instincts
are unerring, his energy is boundless, and his execution is flawless. While maintaining underwriting discipline, Tony
is building an organization that is gaining market share at an accelerating rate.
This pace has been encouraged by our compensation policies. The direct writing of insurance — that is, without
there being an agent or broker between the insurer and its policyholder — involves a substantial front-end investment.
First-year business is therefore unprofitable in a major way. At GEICO, we do not wish this cost to deter our associates
from the aggressive pursuit of new business — which, as it renews, will deliver significant profits — so we leave it out
of our compensation formulas. What’s included then? We base 50% of our associates’ bonuses and profit sharing on
5
6
the earnings of our “seasoned” book, meaning policies that have been with us for more than a year. The other 50% is
tied to growth in policyholders — and here we have stepped on the gas.
In 1995, the year prior to its acquisition by Berkshire, GEICO spent $33 million on marketing and had 652
telephone counselors. Last year the company spent $143 million, and the counselor count grew to 2,162. The effects
that these efforts had at the company are shown by the new business and in-force figures below:
New Auto Auto Policies
Years Policies* In-Force*
1993 1,354,882 2,011,055
1994 1,396,217 2,147,549
1995 1,461,608 2,310,037
1996 1,617,669 2,543,699
1997 1,913,176 2,949,439
1998 1,317,761 3,562,644
* “Voluntary” only; excludes assigned risks and the like.
In 1999, we will again increase our marketing budget, spending at least $190 million. In fact, there is no limit to
what Berkshire is willing to invest in GEICO’s new-business activity, as long as we can concurrently build the
infrastructure the company needs to properly serve its policyholders.
Because of the first-year costs, companies that are concerned about quarterly or annual earnings would shy from
similar investments, no matter how intelligent these might be in terms of building long-term value. Our calculus is
different: We simply measure whether we are creating more than a dollar of value per dollar spent — and if that
calculation is favorable, the more dollars we spend the happier I am.
There is far more to GEICO’s success, of course, than low prices and a torrent of advertising. The handling of
claims must also be fair, fast and friendly — and ours is. Here’s an impartial scorecard on how we shape up: In New
York, our largest-volume state, the Insurance Department recently reported that GEICO’s complaint ratio in 1997 was
not only the lowest of the five largest auto insurers but was also less than half the average of the other four.
GEICO’s 1998 profit margin of 6.7% was better than we had anticipated — and, indeed, better than we wished.
Our results reflect an industry-wide phenomenon: In recent years, both the frequency of auto accidents and their severity
have unexpectedly declined. We responded by reducing rates 3.3% in 1998, and we will reduce them still more in 1999.
These moves will soon bring profit margins down — at the least to 4%, which is our target, and perhaps considerably
lower. Whatever the case, we believe that our margins will continue to be much better than those of the industry.
With GEICO’s growth and profitability both outstanding in 1998, so also were its profit-sharing and bonus
payments. Indeed, the profit-sharing payment of $103 million or 32.3% of salary — which went to all 9,313 associates
who had been with us for more than a year — may well have been the highest percentage payment at any large company
in the country. (In addition, associates benefit from a company-funded pension plan.)
The 32.3% may turn out to be a high-water mark, given that the profitability component in our profit-sharing
calculation is almost certain to come down in the future. The growth component, though, may well increase. Overall,
we expect the two benchmarks together to dictate very significant profit-sharing payments for decades to come. For our
associates, growth pays off in other ways as well: Last year we promoted 4,612 people.
Impressive as the GEICO figures are, we have far more to do. Our market share improved significantly in 1998
— but only from 3% to 3½%. For every policyholder we now have, there are another ten who should be giving us their
business.
Some of you who are reading this may be in that category. About 40% of those who check our rates find that they
can save money by doing business with us. The proportion is not 100% because insurers differ in their underwriting
judgements, with some giving more credit than we do to drivers who live in certain geographical areas or work at certain
occupations. We believe, however, that we more frequently offer the low price than does any other national carrier
selling insurance to all comers. Furthermore, in 40 states we can offer a special discount — usually 8% — to our
shareholders. So give us a call and check us out.
* * * * * * * * * * * *
You may think that one commercial in this section is enough. But I have another to present, this one directed at
managers of publicly-owned companies.
At Berkshire we feel that telling outstanding CEOs, such as Tony, how to run their companies would be the height
of foolishness. Most of our managers wouldn’t work for us if they got a lot of backseat driving. (Generally, they don’t
have to work for anyone, since 75% or so are independently wealthy.) Besides, they are the Mark McGwires of the
business world and need no advice from us as to how to hold the bat or when to swing.
Nevertheless, Berkshire’s ownership may make even the best of managers more effective. First, we eliminate all
of the ritualistic and nonproductive activities that normally go with the job of CEO. Our managers are totally in charge
of their personal schedules. Second, we give each a simple mission: Just run your business as if: 1) you own 100% of
it; 2) it is the only asset in the world that you and your family have or will ever have; and 3) you can’t sell or merge it
for at least a century. As a corollary, we tell them they should not let any of their decisions be affected even slightly by
accounting considerations. We want our managers to think about what counts, not how it will be counted.
Very few CEOs of public companies operate under a similar mandate, mainly because they have owners who focus
on short-term prospects and reported earnings. Berkshire, however, has a shareholder base — which it will have for
decades to come — that has the longest investment horizon to be found in the public-company universe. Indeed, a
majority of our shares are held by investors who expect to die still holding them. We can therefore ask our CEOs to
manage for maximum long-term value, rather than for next quarter’s earnings. We certainly don’t ignore the current
results of our businesses — in most cases, they are of great importance — but we never want them to be achieved at the
expense of our building ever-greater competitive strengths.
I believe the GEICO story demonstrates the benefits of Berkshire’s approach. Charlie and I haven’t taught Tony
a thing — and never will — but we have created an environment that allows him to apply all of his talents to what’s
important. He does not have to devote his time or energy to board meetings, press interviews, presentations by investment
bankers or talks with financial analysts. Furthermore, he need never spend a moment thinking about financing, credit
ratings or “Street” expectations for earnings per share. Because of our ownership structure, he also knows that this
operational framework will endure for decades to come. In this environment of freedom, both Tony and his company
can convert their almost limitless potential into matching achievements.
If you are running a large, profitable business that will thrive in a GEICO-like environment, check our acquisition
criteria on page 21 and give me a call. I promise a fast answer and will mention your inquiry to no one except
Charlie.
Executive Jet Aviation (1-800-848-6436)
To understand the huge potential at Executive Jet Aviation (EJA), you need some understanding of its business,
which is selling fractional shares of jets and operating the fleet for its many owners. Rich Santulli, CEO of EJA, created
the fractional ownership industry in 1986, by visualizing an important new way of using planes. Then he combined guts
and talent to turn his idea into a major business.
In a fractional ownership plan, you purchase a portion — say 1
/8th — of any of a wide variety of jets that EJA
offers. That purchase entitles you to 100 hours of flying time annually. (“Dead-head” hours don’t count against your
allotment, and you are also allowed to average your hours over five years.) In addition, you pay both a monthly
management fee and a fee for hours actually flown.
Then, on a few hours notice, EJA makes your plane, or another at least as good, available to you at your choice of
the 5500 airports in the U.S. In effect, calling up your plane is like phoning for a taxi. 
7
I first heard about the NetJets® program, as it is called, about four years ago from Frank Rooney, our manager at
H.H. Brown. Frank had used and been delighted with the service and suggested that I meet Rich to investigate signing
up for my family’s use. It took Rich about 15 minutes to sell me a quarter (200 hours annually) of a Hawker 1000. Since
then, my family has learned firsthand — through flying 900 hours on 300 trips — what a friendly, efficient, and safe
operation EJA runs. Quite simply, they love this service. In fact, they quickly grew so enthusiastic that I did a
testimonial ad for EJA long before I knew there was any possibility of our purchasing the business. I did, however, ask
Rich to give me a call if he ever got interested in selling. Luckily, he phoned me last May, and we quickly made a $725
million deal, paying equal amounts of cash and stock.
EJA, which is by far the largest operator in its industry, has more than 1,000 customers and 163 aircraft (including
23 “core” aircraft that are owned or leased by EJA itself, so that it can make sure that service is first-class even during
the times when demand is heaviest). Safety, of course, is the paramount issue in any flight operation, and Rich’s pilots
— now numbering about 650 — receive extensive training at least twice a year from FlightSafety International, another
Berkshire subsidiary and the world leader in pilot training. The bottom line on our pilots: I’ve sold the Berkshire plane
and will now do all of my business flying, as well as my personal flying, with NetJets’ crews.
Being the leader in this industry is a major advantage for all concerned. Our customers gain because we have an
armada of planes positioned throughout the country at all times, a blanketing that allows us to provide unmatched service.
Meanwhile, we gain from the blanketing because it reduces dead-head costs. Another compelling attraction for our
clients is that we offer products from Boeing, Gulfstream, Falcon, Cessna, and Raytheon, whereas our two competitors
are owned by manufacturers that offer only their own planes. In effect, NetJets is like a physician who can recommend
whatever medicine best fits the needs of each patient; our competitors, in contrast, are producers of a “house” brand that
they must prescribe for one and all.
In many cases our clients, both corporate and individual, own fractions of several different planes and can therefore
match specific planes to specific missions. For example, a client might own 1
/16th of three different jets (each giving it
50 hours of flying time), which in total give it a virtual fleet, obtained for a small fraction of the cost of a single plane.
Significantly, it is not only small businesses that can benefit from fractional ownership. Already, some of America’s
largest companies use NetJets as a supplement to their own fleet. This saves them big money in both meeting peak
requirements and in flying missions that would require their wholly-owned planes to log a disproportionate amount of
dead-head hours.
When a plane is slated for personal use, the clinching argument is that either the client signs up now or his children
likely will later. That’s an equation I explained to my wonderful Aunt Alice 40 years ago when she asked me whether
she could afford a fur coat. My reply settled the issue: “Alice, you aren’t buying it; your heirs are.”
EJA’s growth has been explosive: In 1997, it accounted for 31% of all corporate jets ordered in the world.
Nonetheless, Rich and I believe that the potential of fractional ownership has barely been scratched. If many thousands
of owners find it sensible to own 100% of a plane — which must be used 350-400 hours annually if it’s to make
economic sense — there must be a large multiple of that number for whom fractional ownership works.
In addition to being a terrific executive, Rich is fun. Like most of our managers, he has no economic need
whatsoever to work. Rich spends his time at EJA because it’s his baby — and he wants to see how far he can take it.
We both already know the answer, both literally and figuratively: to the ends of the earth.
* * * * * * * * * * * *
And now a small hint to Berkshire directors: Last year I spent more than nine times my salary at Borsheim’s and
EJA. Just think how Berkshire’s business would boom if you’d only spring for a raise.
8
General Re
On December 21, we completed our $22 billion acquisition of General Re Corp. In addition to owning 100% of
General Reinsurance Corporation, the largest U.S. property-casualty reinsurer, the company also owns (including stock
it has an arrangement to buy) 82% of the oldest reinsurance company in the world, Cologne Re. The two companies
together reinsure all lines of insurance and operate in 124 countries.
For many decades, General Re’s name has stood for quality, integrity and professionalism in reinsurance — and
under Ron Ferguson’s leadership, this reputation has been burnished still more. Berkshire can add absolutely nothing
to the skills of General Re’s and Cologne Re’s managers. On the contrary, there is a lot that they can teach us.
Nevertheless, we believe that Berkshire’s ownership will benefit General Re in important ways and that its earnings
a decade from now will materially exceed those that would have been attainable absent the merger. We base this
optimism on the fact that we can offer General Re’s management a freedom to operate in whatever manner will best allow
the company to exploit its strengths.
Let’s look for a moment at the reinsurance business to understand why General Re could not on its own do what
it can under Berkshire. Most of the demand for reinsurance comes from primary insurers who want to escape the wide
swings in earnings that result from large and unusual losses. In effect, a reinsurer gets paid for absorbing the volatility
that the client insurer wants to shed.
Ironically, though, a publicly-held reinsurer gets graded by both its owners and those who evaluate its credit on the
smoothness of its own results. Wide swings in earnings hurt both credit ratings and p/e ratios, even when the business
that produces such swings has an expectancy of satisfactory profits over time. This market reality sometimes causes a
reinsurer to make costly moves, among them laying off a significant portion of the business it writes (in transactions that
are called “retrocessions”) or rejecting good business simply because it threatens to bring on too much volatility.
Berkshire, in contrast, happily accepts volatility, just as long as it carries with it the expectation of increased profits
over time. Furthermore, we are a Fort Knox of capital, and that means volatile earnings can’t impair our premier credit
ratings. Thus we have the perfect structure for writing — and retaining — reinsurance in virtually any amount. In fact,
we’ve used this strength over the past decade to build a powerful super-cat business.
What General Re gives us, however, is the distribution force, technical facilities and management that will allow
us to employ our structural strength in every facet of the industry. In particular, General Re and Cologne Re can now
accelerate their push into international markets, where the preponderance of industry growth will almost certainly occur.
As the merger proxy statement spelled out, Berkshire also brings tax and investment benefits to General Re. But the most
compelling reason for the merger is simply that General Re’s outstanding management can now do what it does best,
unfettered by the constraints that have limited its growth.
Berkshire is assuming responsibility for General Re’s investment portfolio, though not for Cologne Re’s. We will
not, however, be involved in General Re’s underwriting. We will simply ask the company to exercise the discipline of
the past while increasing the proportion of its business that is retained, expanding its product line, and widening its
geographical coverage — making these moves in recognition of Berkshire’s financial strength and tolerance for wide
swings in earnings. As we’ve long said, we prefer a lumpy 15% return to a smooth 12%.
Over time, Ron and his team will maximize General Re’s new potential. He and I have known each other for
many years, and each of our companies has initiated significant business that it has reinsured with the other. Indeed,
General Re played a key role in the resuscitation of GEICO from its near-death status in 1976.
Both Ron and Rich Santulli plan to be at the annual meeting, and I hope you get a chance to say hello to them.
9
10
The Economics of Property-Casualty Insurance
With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes more important than ever
that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the
business generates; (2) its cost; and (3) most important of all, the long-term outlook for both of these factors.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are
received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests
the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually
do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the
cost of float. An insurance business has value if its cost of float over time is less than the cost the company would
otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring
their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Errors
of estimation, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly
into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can
typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name
auditors have implicitly blessed. As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting
results to you, because we have found that virtually all surprises in insurance are unpleasant ones.
The table that follows shows the float generated by Berkshire’s insurance operations since we entered the business
32 years ago. The data are for every fifth year and also the last, which includes General Re’s huge float. For the table
we have calculated our float — which we generate in large amounts relative to our premium volume — by adding net
loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then
subtracting agents balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed
reinsurance. (Got that?)
Year Average Float
(in $ millions)
1967 17
1972 70
1977 139
1982 221
1987 1,267
1992 2,290
1997 7,093
1998 22,762 (yearend)
Impressive as the growth in our float has been — 25.4% compounded annually — what really counts is the cost
of this item. If that becomes too high, growth in float becomes a curse rather than a blessing. 
At Berkshire, the news is all good: Our average cost over the 32 years has been well under zero. In aggregate, we
have posted a substantial underwriting profit, which means that we have been paid for holding a large and growing
amount of money. This is the best of all worlds. Indeed, though our net float is recorded on our balance sheet as a
liability, it has had more economic value to us than an equal amount of net worth would have had. As long as we can
continue to achieve an underwriting profit, float will continue to outrank net worth in value.
During the next few years, Berkshire’s growth in float may well be modest. The reinsurance market is soft, and
in this business, relationships change slowly. Therefore, General Re’s float — 2
/3rds of our total — is unlikely to
increase significantly in the near term. We do expect, however, that our cost of float will remain very attractive compared
to that of other insurers.
11
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation, purchase￾accounting adjustments are not assigned to the specific businesses to which they apply, but are instead aggregated and
shown separately. This procedure lets you view the earnings of our businesses as they would have been reported had we
not purchased them. For the reasons discussed on pages 62 and 63, this form of presentation seems to us to be more
useful to investors and managers than one utilizing generally-accepted accounting principles (GAAP), which require
purchase-premiums to be charged off business-by-business. The total earnings we show in the table are, of course,
identical to the GAAP total in our audited financial statements.
(in millions)
 Berkshire’s Share
 of Net Earnings
 (after taxes and
 Pre-Tax Earnings minority interests)
1998 1997 1998 1997
Operating Earnings:
 Insurance Group:
 Underwriting — Super-Cat .................. $154 $283 $100 $183
 Underwriting — Other Reinsurance ........... (175) (155) (114) (100)
 Underwriting — GEICO .................... 269 281 175 181
 Underwriting — Other Primary ............... 17 53 10 34
 Net Investment Income ..................... 974 882 731 704
 Buffalo News .............................. 53 56 32 33
 Finance and Financial Products Businesses ....... 205 28 133 18
 Flight Services ............................. 181 140 110 84
(1) (1)
 Home Furnishings .......................... 72 57 41 32
(2) (2)
 International Dairy Queen .................... 58 — 35 —
 Jewelry .................................. 39 32 23 18
 Scott Fetzer (excluding finance operation) ........ 137 119 85 77
 See’s Candies ............................. 62 59 40 35
 Shoe Group ............................... 33 49 23 32
 General Re ............................... 26 — 16 —
(3) (3)
 Purchase-Accounting Adjustments ............. (123) (101) (118) (94)
 Interest Expense (4)
.......................... (100) (107) (63) (67)
 Shareholder-Designated Contributions .......... (17) (15) (11) (10)
 Other .................................... 34 60 29 37
Operating Earnings .......................... 1,899 1,721 1,277 1,197
Capital Gains from Investments ................. 2,415 1,106 1,553 704
Total Earnings - All Entities ................... $4,314 $2,827 $ 2,830 $1,901
 Includes Executive Jet from August 7, 1998 . From date of acquisition, December 21, 1998. (1) (3)
 Includes Star Furniture from July 1, 1997. Excludes interest expense of Finance Businesses. (2) (4)
You can be proud of our operating managers. They almost invariably deliver earnings that are at the very top of
what conditions in their industries allow, meanwhile fortifying their businesses’ long-term competitive strengths. In
aggregate, they have created many billions of dollars of value for you.
An example: In my 1994 letter, I reported on Ralph Schey’s extraordinary performance at Scott Fetzer. Little did
I realize that he was just warming up. Last year Scott Fetzer, operating with no leverage (except for a conservative level
of debt in its finance subsidiary), earned a record $96.5 million after-tax on its $112 million net worth.
12
Today, Berkshire has an unusually large number of individuals, such as Ralph, who are truly legends in their
industries. Many of these joined us when we purchased their companies, but in recent years we have also identified a
number of strong managers internally. We further expanded our corps of all-stars in an important way when we acquired
General Re and EJA.
Charlie and I have the easy jobs at Berkshire: We do very little except allocate capital. And, even then, we are not
all that energetic. We have one excuse, though: In allocating capital, activity does not correlate with achievement.
Indeed, in the fields of investments and acquisitions, frenetic behavior is often counterproductive. Therefore, Charlie
and I mainly just wait for the phone to ring.
Our managers, however, work very hard — and it shows. Naturally, they want to be paid fairly for their efforts,
but pay alone can’t explain their extraordinary accomplishments. Instead, each is primarily motivated by a vision of just
how far his or her business can go — and by a desire to be the one who gets it there. Charlie and I thank them on your
behalf and ours.
* * * * * * * * * * * *
Additional information about our various businesses is given on pages 39-53, where you will also find our segment
earnings reported on a GAAP basis. In addition, on pages 65-71, we have rearranged Berkshire's financial data into
four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the company.
Normally, we follow this section with one on “Look-Through” Earnings. Because the General Re acquisition
occurred near yearend, though, neither a historical nor a pro-forma calculation of a 1998 number seems relevant. We
will resume the look-through calculation in next year’s report. 
Investments
Below we present our common stock investments. Those with a market value of more than $750 million are
itemized.
12/31/98
Shares Company Cost* Market
(dollars in millions)
50,536,900 American Express Company ................................ $1,470 $ 5,180
200,000,000 The Coca-Cola Company ................................... 1,299 13,400
51,202,242 The Walt Disney Company ................................. 281 1,536
60,298,000 Freddie Mac ............................................ 308 3,885
96,000,000 The Gillette Company ..................................... 600 4,590
1,727,765 The Washington Post Company .............................. 11 999
63,595,180 Wells Fargo & Company ................................... 392 2,540
Others ................................................. 2,683 5,135
Total Common Stocks ..................................... $ 7,044 $ 37,265
 * Represents tax-basis cost which, in aggregate, is $1.5 billion less than GAAP cost.
During the year, we slightly increased our holdings in American Express, one of our three largest
commitments, and left the other two unchanged. However, we trimmed or substantially cut many of our smaller
positions. Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our
gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have
been better off last year if I had regularly snuck off to the movies during market hours.
At yearend, we held more than $15 billion in cash equivalents (including high-grade securities due in less
than one year). Cash never makes us happy. But it’s better to have the money burning a hole in Berkshire’s
pocket than resting comfortably in someone else’s. Charlie and I will continue our search for large equity
investments or, better yet, a really major business acquisition that would absorb our liquid assets. Currently,
however, we see nothing on the horizon.
Once we knew that the General Re merger would definitely take place, we asked the company to dispose of
the equities that it held. (As mentioned earlier, we do not manage the Cologne Re portfolio, which includes many
equities.) General Re subsequently eliminated its positions in about 250 common stocks, incurring $935 million
of taxes in the process. This “clean sweep” approach reflects a basic principle that Charlie and I employ in
business and investing: We don’t back into decisions.
Last year I deviated from my standard practice of not disclosing our investments (other than those we are
legally required to report) and told you about three unconventional investments we had made. There were several
reasons behind that disclosure. First, questions about our silver position that we had received from regulatory
authorities led us to believe that they wished us to publicly acknowledge this investment. Second, our holdings
of zero-coupon bonds were so large that we wanted our owners to know of this investment’s potential impact on
Berkshire’s net worth. Third, we simply wanted to alert you to the fact that we sometimes do make unconventional
commitments.
Normally, however, as discussed in the Owner’s Manual on page 61, we see no advantage in talking about
specific investment actions. Therefore — unless we again take a position that is particularly large — we will not
post you as to what we are doing in respect to any specific holding of an unconventional sort. We can report,
however, that we have eliminated certain of the positions discussed last year and added certain others.
Our never-comment-even-if-untrue policy in regard to investments may disappoint “piggybackers” but will
benefit owners: Your Berkshire shares would be worth less if we discussed what we are doing. Incidentally, we
should warn you that media speculation about our investment moves continues in most cases to be incorrect.
People who rely on such commentary do so at their own peril.
Accounting — Part 1
Our General Re acquisition put a spotlight on an egregious flaw in accounting procedure. Sharp-eyed
shareholders reading our proxy statement probably noticed an unusual item on page 60. In the pro-forma
statement of income — which detailed how the combined 1997 earnings of the two entities would have been
affected by the merger — there was an item stating that compensation expense would have been increased by $63
million.
This item, we hasten to add, does not signal that either Charlie or I have experienced a major personality
change. (He still travels coach and quotes Ben Franklin.) Nor does it indicate any shortcoming in General Re’s
accounting practices, which have followed GAAP to the letter. Instead, the pro-forma adjustment came about
because we are replacing General Re’s longstanding stock option plan with a cash plan that ties the incentive
compensation of General Re managers to their operating achievements. Formerly what counted for these managers
was General Re’s stock price; now their payoff will come from the business performance they deliver.
The new plan and the terminated option arrangement have matching economics, which means that the rewards
they deliver to employees should, for a given level of performance, be the same. But what these people could have
formerly anticipated earning from new option grants will now be paid in cash. (Options granted in past years
remain outstanding.)
Though the two plans are an economic wash, the cash plan we are putting in will produce a vastly different
accounting result. This Alice-in-Wonderland outcome occurs because existing accounting principles ignore the cost
of stock options when earnings are being calculated, even though options are a huge and increasing expense at a
great many corporations. In effect, accounting principles offer management a choice: Pay employees in one form
and count the cost, or pay them in another form and ignore the cost. Small wonder then that the use of options
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has mushroomed. This lop-sided choice has a big downside for owners, however: Though options, if properly
structured, can be an appropriate, and even ideal, way to compensate and motivate top managers, they are more
often wildly capricious in their distribution of rewards, inefficient as motivators, and inordinately expensive for
shareholders.
Whatever the merits of options may be, their accounting treatment is outrageous. Think for a moment of that
$190 million we are going to spend for advertising at GEICO this year. Suppose that instead of paying cash for
our ads, we paid the media in ten-year, at-the-market Berkshire options. Would anyone then care to argue
that Berkshire had not borne a cost for advertising, or should not be charged this cost on its books?
Perhaps Bishop Berkeley — you may remember him as the philosopher who mused about trees falling in a
forest when no one was around — would believe that an expense unseen by an accountant does not exist. Charlie
and I, however, have trouble being philosophical about unrecorded costs. When we consider investing in an option￾issuing company, we make an appropriate downward adjustment to reported earnings, simply subtracting an amount
equal to what the company could have realized by publicly selling options of like quantity and structure. Similarly,
if we contemplate an acquisition, we include in our evaluation the cost of replacing any option plan. Then, if we
make a deal, we promptly take that cost out of hiding.
Readers who disagree with me about options will by this time be mentally quarreling with my equating the
cost of options issued to employees with those that might theoretically be sold and traded publicly. It is true, to
state one of these arguments, that employee options are sometimes forfeited — that lessens the damage done to
shareholders — whereas publicly-offered options would not be. It is true, also, that companies receive a tax
deduction when employee options are exercised; publicly-traded options deliver no such benefit. But there’s an
offset to these points: Options issued to employees are often repriced, a transformation that makes them much more
costly than the public variety.
It’s sometimes argued that a non-transferable option given to an employee is less valuable to him than would
be a publicly-traded option that he could freely sell. That fact, however, does not reduce the cost of the non￾transferable option: Giving an employee a company car that can only be used for certain purposes diminishes its
value to the employee, but does not in the least diminish its cost to the employer. 
The earning revisions that Charlie and I have made for options in recent years have frequently cut the
reported per-share figures by 5%, with 10% not all that uncommon. On occasion, the downward adjustment has
been so great that it has affected our portfolio decisions, causing us either to make a sale or to pass on a stock
purchase we might otherwise have made. 
A few years ago we asked three questions in these pages to which we have not yet received an answer: “If
options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if
expenses shouldn’t go into the calculation of earnings, where in the world should they go?”
Accounting — Part 2
The role that managements have played in stock-option accounting has hardly been benign: A distressing
number of both CEOs and auditors have in recent years bitterly fought FASB’s attempts to replace option fiction
with truth and virtually none have spoken out in support of FASB. Its opponents even enlisted Congress in the
fight, pushing the case that inflated figures were in the national interest.
Still, I believe that the behavior of managements has been even worse when it comes to restructurings and
merger accounting. Here, many managements purposefully work at manipulating numbers and deceiving investors.
And, as Michael Kinsley has said about Washington: “The scandal isn’t in what’s done that’s illegal but rather
in what’s legal.”
It was once relatively easy to tell the good guys in accounting from the bad: The late 1960's, for example,
brought on an orgy of what one charlatan dubbed “bold, imaginative accounting” (the practice of which,
incidentally, made him loved for a time by Wall Street because he never missed expectations). But most investors
14
of that period knew who was playing games. And, to their credit, virtually all of America’s most-admired
companies then shunned deception.
In recent years, probity has eroded. Many major corporations still play things straight, but a significant and
growing number of otherwise high-grade managers — CEOs you would be happy to have as spouses for your
children or as trustees under your will — have come to the view that it’s okay to manipulate earnings to satisfy
what they believe are Wall Street’s desires. Indeed, many CEOs think this kind of manipulation is not only okay,
but actually their duty.
These managers start with the assumption, all too common, that their job at all times is to encourage the
highest stock price possible (a premise with which we adamantly disagree). To pump the price, they strive,
admirably, for operational excellence. But when operations don’t produce the result hoped for, these CEOs resort
to unadmirable accounting stratagems. These either manufacture the desired “earnings” or set the stage for them
in the future.
Rationalizing this behavior, these managers often say that their shareholders will be hurt if their currency
for doing deals — that is, their stock — is not fully-priced, and they also argue that in using accounting
shenanigans to get the figures they want, they are only doing what everybody else does. Once such an
everybody’s-doing-it attitude takes hold, ethical misgivings vanish. Call this behavior Son of Gresham: Bad
accounting drives out good.
The distortion du jour is the “restructuring charge,” an accounting entry that can, of course, be legitimate
but that too often is a device for manipulating earnings. In this bit of legerdemain, a large chunk of costs that
should properly be attributed to a number of years is dumped into a single quarter, typically one already fated to
disappoint investors. In some cases, the purpose of the charge is to clean up earnings misrepresentations of the
past, and in others it is to prepare the ground for future misrepresentations. In either case, the size and timing
of these charges is dictated by the cynical proposition that Wall Street will not mind if earnings fall short by $5
per share in a given quarter, just as long as this deficiency ensures that quarterly earnings in the future will
consistently exceed expectations by five cents per share.
This dump-everything-into-one-quarter behavior suggests a corresponding “bold, imaginative” approach to
— golf scores. In his first round of the season, a golfer should ignore his actual performance and simply fill his
card with atrocious numbers — double, triple, quadruple bogeys — and then turn in a score of, say, 140. Having
established this “reserve,” he should go to the golf shop and tell his pro that he wishes to “restructure” his
imperfect swing. Next, as he takes his new swing onto the course, he should count his good holes, but not the
bad ones. These remnants from his old swing should be charged instead to the reserve established earlier. At
the end of five rounds, then, his record will be 140, 80, 80, 80, 80 rather than 91, 94, 89, 94, 92. On Wall
Street, they will ignore the 140 — which, after all, came from a “discontinued” swing — and will classify our
hero as an 80 shooter (and one who never disappoints).
For those who prefer to cheat up front, there would be a variant of this strategy. The golfer, playing alone
with a cooperative caddy-auditor, should defer the recording of bad holes, take four 80s, accept the plaudits he
gets for such athleticism and consistency, and then turn in a fifth card carrying a 140 score. After rectifying his
earlier scorekeeping sins with this “big bath,” he may mumble a few apologies but will refrain from returning
the sums he has previously collected from comparing scorecards in the clubhouse. (The caddy, need we add, will
have acquired a loyal patron.)
Unfortunately, CEOs who use variations of these scoring schemes in real life tend to become addicted to the
games they’re playing — after all, it’s easier to fiddle with the scorecard than to spend hours on the practice tee
— and never muster the will to give them up. Their behavior brings to mind Voltaire’s comment on sexual
experimentation: “Once a philosopher, twice a pervert.”
In the acquisition arena, restructuring has been raised to an art form: Managements now frequently use
mergers to dishonestly rearrange the value of assets and liabilities in ways that will allow them to both smooth
and swell future earnings. Indeed, at deal time, major auditing firms sometimes point out the possibilities for a
little accounting magic (or for a lot). Getting this push from the pulpit, first-class people will frequently stoop
15
to third-class tactics. CEOs understandably do not find it easy to reject auditor-blessed strategies that lead to
increased future “earnings.”
An example from the property-casualty insurance industry will illuminate the possibilities. When a p-c
company is acquired, the buyer sometimes simultaneously increases its loss reserves, often substantially. This boost
may merely reflect the previous inadequacy of reserves — though it is uncanny how often an actuarial “revelation”
of this kind coincides with the inking of a deal. In any case, the move sets up the possibility of ‘earnings”
flowing into income at some later date, as reserves are released.
Berkshire has kept entirely clear of these practices: If we are to disappoint you, we would rather it be with
our earnings than with our accounting. In all of our acquisitions, we have left the loss reserve figures exactly
as we found them. After all, we have consistently joined with insurance managers knowledgeable about their
business and honest in their financial reporting. When deals occur in which liabilities are increased immediately
and substantially, simple logic says that at least one of those virtues must have been lacking — or, alternatively,
that the acquirer is laying the groundwork for future infusions of “earnings.”
Here’s a true story that illustrates an all-too-common view in corporate America. The CEOs of two large
banks, one of them a man who’d made many acquisitions, were involved not long ago in a friendly merger
discussion (which in the end didn’t produce a deal). The veteran acquirer was expounding on the merits of the
possible combination, only to be skeptically interrupted by the other CEO: “But won’t that mean a huge charge,”
he asked, “perhaps as much as $1 billion?” The “sophisticate” wasted no words: “We’ll make it bigger than that
— that’s why we’re doing the deal.”
A preliminary tally by R. G. Associates, of Baltimore, of special charges taken or announced during 1998
— that is, charges for restructuring, in-process R&D, merger-related items, and write-downs — identified no less
than 1,369 of these, totaling $72.1 billion. That is a staggering amount as evidenced by this bit of perspective:
The 1997 earnings of the 500 companies in Fortune’s famous list totaled $324 billion.
Clearly the attitude of disrespect that many executives have today for accurate reporting is a business
disgrace. And auditors, as we have already suggested, have done little on the positive side. Though auditors
should regard the investing public as their client, they tend to kowtow instead to the managers who choose them
and dole out their pay. (“Whose bread I eat, his song I sing.”)
A big piece of news, however, is that the SEC, led by its chairman, Arthur Levitt, seems determined to get
corporate America to clean up its act. In a landmark speech last September, Levitt called for an end to “earnings
management.” He correctly observed, “Too many corporate managers, auditors and analysts are participants in
a game of nods and winks.” And then he laid on a real indictment: “Managing may be giving way to
manipulating; integrity may be losing out to illusion.”
I urge you to read the Chairman’s speech (you can find it on the Internet at www.sec.gov) and to support
him in his efforts to get corporate America to deliver a straight story to its owners. Levitt’s job will be
Herculean, but it is hard to think of another more important for him to take on.
Reports to Shareholders
Berkshire’s Internet site, www.berkshirehathaway.com, has become a prime source for information about the
company. While we continue to send an annual report to all shareholders, we now send quarterlies only to those
who request them, letting others read these at our site. In this report, we again enclose a card that can be
returned by those wanting to get printed quarterlies in 1999.
Charlie and I have two simple goals in reporting: 1) We want to give you the information that we would
wish you to give us if our positions were reversed; and 2) We want to make Berkshire’s information accessible
to all of you simultaneously. Our ability to reach that second goal is greatly helped by the Internet.
In another portion of his September speech, Arthur Levitt deplored what he called “selective disclosure.”
His remarks were timely: Today, many companies matter-of-factly favor Wall Street analysts and institutional
16
investors in a variety of ways that often skirt or cross the line of unfairness. These practices leave the great bulk
of shareholders at a distinct disadvantage to a favored class.
At Berkshire, we regard the holder of one share of B stock as the equal of our large institutional investors.
We, of course, warmly welcome institutions as owners and have gained a number of them through the General
Re merger. We hope also that these new holders find that our owner’s manual and annual reports offer them
more insights and information about Berkshire than they garner about other companies from the investor relations
departments that these corporations typically maintain. But if it is “earnings guidance” or the like that
shareholders or analysts seek, we will simply guide them to our public documents.
This year we plan to post our quarterly reports on the Internet after the close of the market on May 14,
August 13, and November 12. We also expect to put the 1999 annual report on our website on Saturday, March
11, 2000, and to mail the print version at roughly the same time.
We promptly post press releases on our website. This means that you do not need to rely on the versions
of these reported by the media but can instead read the full text on your computer.
Despite the pathetic technical skills of your Chairman, I’m delighted to report that GEICO, Borsheim’s,
See’s, and The Buffalo News are now doing substantial business via the Internet. We’ve also recently begun to
offer annuity products on our website. This business was developed by Ajit Jain, who over the last decade has
personally accounted for a significant portion of Berkshire’s operating earnings. While Charlie and I sleep, Ajit
keeps thinking of new ways to add value to Berkshire.
Shareholder-Designated Contributions
About 97.5% of all eligible shares participated in Berkshire's 1998 shareholder-designated contributions
program, with contributions totaling $16.9 million. A full description of the program appears on pages 54-55.
Cumulatively, over the 18 years of the program, Berkshire has made contributions of $130 million pursuant
to the instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries, which stick
to the philanthropic patterns that prevailed before they were acquired (except that their former owners themselves
take on the responsibility for their personal charities). In aggregate, our subsidiaries made contributions of $12.5
million in 1998, including in-kind donations of $2.0 million.
To participate in future programs, you must own Class A shares that are registered in the name of the actual
owner, not the nominee name of a broker, bank or depository. Shares not so registered on August 31, 1999, will
be ineligible for the 1999 program. When you get the contributions form from us, return it promptly so that it
does not get put aside or forgotten. Designations received after the due date will not be honored.
The Annual Meeting
This year’s Woodstock for Capitalists will be held May 1-3, and we may face a problem. Last year more
than 10,000 people attended our annual meeting, and our shareholders list has since doubled. So we don’t quite
know what attendance to expect this year. To be safe, we have booked both Aksarben Coliseum, which holds
about 14,000 and the Holiday Convention Centre, which can seat an additional 5,000. Because we know that our
Omaha shareholders will want to be good hosts to the out-of-towners (many of them come from outside the U.S),
we plan to give those visitors first crack at the Aksarben tickets and to subsequently allocate these to greater
Omaha residents on a first-come, first-served basis. If we exhaust the Aksarben tickets, we will begin distributing
Holiday tickets to Omaha shareholders.
If we end up using both locations, Charlie and I will split our pre-meeting time between the two.
Additionally, we will have exhibits and also the Berkshire movie, large television screens and microphones at both
sites. When we break for lunch, many attendees will leave Aksarben, which means that those at Holiday can,
if they wish, make the five-minute trip to Aksarben and finish out the day there. Buses will be available to
transport people who don’t have cars.
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The doors will open at both locations at 7 a.m. on Monday, and at 8:30 we will premier the 1999 Berkshire
movie epic, produced by Marc Hamburg, our CFO. The meeting will last from 9:30 until 3:30, interrupted only
by the short lunch break.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the badge
you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we have
again signed up American Express (800-799-6634) to give you special help. In our normal fashion, we will run
buses from the larger hotels to the meeting. After the meeting, these will make trips back to the hotels and to
Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you are likely to find a car useful.
The full line of Berkshire products will be available at Aksarben, and the more popular items will also be
at Holiday. Last year we set sales records across-the-board, moving 3,700 pounds of See’s candy, 1,635 pairs of
Dexter shoes, 1,150 sets of Quikut knives and 3,104 Berkshire shirts and hats. Additionally, $26,944 of World
Book products were purchased as well as more than 2,000 golf balls with the Berkshire Hathaway logo. Charlie
and I are pleased but not satisfied with these numbers and confidently predict new records in all categories this
year. Our 1999 apparel line will be unveiled at the meeting, so please defer your designer purchases until you
view our collection.
Dairy Queen will also be on hand and will again donate all proceeds to the Children’s Miracle Network.
Last year we sold about 4,000 Dilly®
 bars, fudge bars and vanilla/orange bars. Additionally, GEICO will have
a booth that will be manned by a number of our top counselors from around the country, all of them ready to
supply you with auto insurance quotes. In almost all cases, GEICO will be able to offer you a special
shareholder’s discount. Check out whether we can save you some money.
The piece de resistance of our one-company trade show will be a 79-foot-long, nearly 12-foot-wide, fully￾outfitted cabin of a 737 Boeing Business Jet (“BBJ”), which is NetJets’ newest product. This plane has a 14-hour
range; is designed to carry 19 passengers; and offers a bedroom, an office, and two showers. Deliveries to
fractional owners will begin in the first quarter of 2000.
The BBJ will be available for your inspection on May 1-3 near the entrance to the Aksarben hall. You
should be able to minimize your wait by making your visit on Saturday or Sunday. Bring along your checkbook
in case you decide to make an impulse purchase.
NFM's multi-stored complex, located on a 75-acre site about a mile from Aksarben, is open from 10 a.m.
to 9 p.m. on weekdays, and 10 a.m. to 6 p.m. on Saturdays and Sundays. This operation did $300 million in
business during 1998 and offers an unrivaled breadth of merchandise — furniture, electronics, appliances, carpets
and computers — all at can’t-be-beat prices. During the April 30th to May 4th period, shareholders presenting
their meeting badge will receive a discount that is customarily given only to its employees.
Borsheim's normally is closed on Sunday but will be open for shareholders from 10 a.m. to 6 p.m. on May
2nd. On annual meeting weekend last year, the store did an incredible amount of business. Sales were double
those of the previous year, and the store’s volume on Sunday greatly exceeded volume for any day in Borsheim’s
history. Charlie attributes this record to the fact that he autographed sales tickets that day and, while I have my
doubts about this proposition, we are not about to mess with a winning formula. Please give him writer’s cramp.
On last year’s Sunday, Borsheim’s wrote 2,501 tickets during the eight hours it was open. For those of you who
are mathematically challenged, that is one ticket every 11½ seconds.
Shareholders who wish to avoid Sunday’s crowd can visit Borsheim’s on Saturday (10 a.m.-5:30 p.m.) or
on Monday (10 a.m.-8 p.m.). Be sure to identify yourself as a Berkshire owner so that Susan Jacques, Borsheim’s
CEO, can quote you a ”shareholder-weekend” price. Susan joined us in 1983 as a $4-per-hour salesperson and
was made CEO in 1994. This move ranks as one of my best managerial decisions.
Bridge players can look forward to a thrill on Sunday, when Bob Hamman — the best the game has ever
seen — will turn up to play with our shareholders in the mall outside of Borsheim’s. Bob plays without sorting
his cards — hey, maybe that’s what’s wrong with my game. We will also have a couple of other tables at which
another expert or two will be playing.
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19
Gorat’s — my favorite steakhouse — will again be open especially for Berkshire shareholders on the Sunday
night before the meeting. Though Gorat’s served from 4 p.m. until about 1 a.m. last year, its crew was swamped,
and some of our shareholders had an uncomfortable wait. This year fewer reservations will be accepted, and we
ask that you don’t come on Sunday without a reservation. In other years, many of our shareholders have chosen
to visit Gorat’s on Friday, Saturday or Monday. You can make reservations beginning on April 1 (but not before)
by calling 402-551-3733. The cognoscenti will continue to order rare T-bones with double orders of hash browns.
The Omaha Golden Spikes (neé the Omaha Royals) will meet the Iowa Cubs on Saturday evening, May 1st,
at Rosenblatt Stadium. Your Chairman, whose breaking ball had the crowd buzzing last year, will again take
the mound. This year I plan to introduce my “flutterball.” It’s a real source of irritation to me that many view
our annual meeting as a financial event rather than the sports classic I consider it to be. Once the world sees
my flutterball, that misperception will be erased.
Our proxy statement includes instructions about obtaining tickets to the game and also a large quantity of
other information that should help you to enjoy your visit. I particularly urge the 60,000 shareholders that we
gained through the Gen Re merger to join us. Come and meet your fellow capitalists.
* * * * * * * * * * * *
It wouldn’t be right to close without a word about the 11.8 people who work with me in Berkshire’s
corporate office. In addition to handling the myriad of tax, regulatory and administrative matters that come with
owning dozens of businesses, this group efficiently and cheerfully manages various special projects, some of which
generate hundreds of inquiries. Here’s a sample of what went on in 1998:
• 6,106 shareholders designated 3,880 charities to receive contributions.
• Kelly Muchemore processed about 17,500 admission tickets for the annual meeting, along with
orders and checks for 3,200 baseball tickets.
• Kelly and Marc Hamburg produced and directed the Aksarben extravaganza, a job that required
them to arrange the presentations made by our subsidiaries, prepare our movie, and sometimes lend
people a hand with travel and lodging.
• Debbie Bosanek satisfied the varying needs of the 46 media organizations (13 of them non-U.S.)
that covered the meeting, and meanwhile, as always, skillfully assisted me in every aspect of my
job.
• Debbie and Marc assembled the data for our annual report and oversaw the production and
distribution of 165,000 copies. (This year the number will be 325,000.)
• Marc handled 95% of the details — and much of the substance — connected with our completing
two major mergers.
• Kelly, Debbie and Deb Ray dealt efficiently with tens of thousands of requests for annual reports
and financial information that came through the office.
You and I are paying for only 11.8 people, but we are getting what would at most places be the output of
100. To all of the 11.8, my thanks.
Warren E. Buffett
March 1, 1999 Chairman of the Board
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1999 was $358 million, which increased the per-share book value of both our
Class A and Class B stock by 0.5%. Over the last 35 years (that is, since present management took over) per-share
book value has grown from $19 to $37,987, a rate of 24.0% compounded annually.*
The numbers on the facing page show just how poor our 1999 record was. We had the worst absolute
performance of my tenure and, compared to the S&P, the worst relative performance as well. Relative results are what
concern us: Over time, bad relative numbers will produce unsatisfactory absolute results.
Even Inspector Clouseau could find last year’s guilty party: your Chairman. My performance reminds me of
the quarterback whose report card showed four Fs and a D but who nonetheless had an understanding coach. “Son,”
he drawled, “I think you’re spending too much time on that one subject.”
My “one subject” is capital allocation, and my grade for 1999 most assuredly is a D. What most hurt us during
the year was the inferior performance of Berkshire’s equity portfolio — and responsibility for that portfolio, leaving
aside the small piece of it run by Lou Simpson of GEICO, is entirely mine. Several of our largest investees badly
lagged the market in 1999 because they’ve had disappointing operating results. We still like these businesses and are
content to have major investments in them. But their stumbles damaged our performance last year, and it’s no sure
thing that they will quickly regain their stride.
The fallout from our weak results in 1999 was a more-than-commensurate drop in our stock price. In 1998,
to go back a bit, the stock outperformed the business. Last year the business did much better than the stock, a
divergence that has continued to the date of this letter. Over time, of course, the performance of the stock must roughly
match the performance of the business.
Despite our poor showing last year, Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect
that the gain in Berkshire’s intrinsic value over the next decade will modestly exceed the gain from owning the S&P.
We can’t guarantee that, of course. But we are willing to back our conviction with our own money. To repeat a fact
you’ve heard before, well over 99% of my net worth resides in Berkshire. Neither my wife nor I have ever sold a share
of Berkshire and — unless our checks stop clearing — we have no intention of doing so.
Please note that I spoke of hoping to beat the S&P “modestly.” For Berkshire, truly large superiorities over
that index are a thing of the past. They existed then because we could buy both businesses and stocks at far more
attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed
us to consider a much wider range of investment opportunities than are available to us today.
Our optimism about Berkshire’s performance is also tempered by the expectation — indeed, in our minds,
the virtual certainty — that the S&P will do far less well in the next decade or two than it has done since 1982. A
recent article in Fortune expressed my views as to why this is inevitable, and I’m enclosing a copy with this report.
Our goal is to run our present businesses well — a task made easy because of the outstanding managers we
have in place — and to acquire additional businesses having economic characteristics and managers comparable to
those we already own. We made important progress in this respect during 1999 by acquiring Jordan’s Furniture and
contracting to buy a major portion of MidAmerican Energy. We will talk more about these companies later in the
report but let me emphasize one point here: We bought both for cash, issuing no Berkshire shares. Deals of that kind
aren’t always possible, but that is the method of acquisition that Charlie and I vastly prefer.
 *All figures used in this report apply to Berkshire's A shares, the successor to the only stock that the company
had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.
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Guides to Intrinsic Value
I often talk in these pages about intrinsic value, a key, though far from precise, measurement we utilize in our
acquisitions of businesses and common stocks. (For an extensive discussion of this, and other investment and
accounting terms and concepts, please refer to our Owner’s Manual on pages 55 - 62. Intrinsic value is discussed on
page 60.)
In our last four reports, we have furnished you a table that we regard as useful in estimating Berkshire’s
intrinsic value. In the updated version of that table, which follows, we trace two key components of value. The first
column lists our per-share ownership of investments (including cash and equivalents but excluding assets held in our
financial products operation) and the second column shows our per-share earnings from Berkshire’s operating
businesses before taxes and purchase-accounting adjustments (discussed on page 61), but after all interest and corporate
expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments
presented in the first column. In effect, the columns show how Berkshire would look if it were split into two parts, with
one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.
Pre-tax Earnings
 (Loss) Per Share
Investments With All Income from
Year Per Share Investments Excluded
1969 ............................................ $ 45 $ 4.39 
1979 ............................................ 577 13.07 
1989 ............................................ 7,200 108.86
1999 ............................................ 47,339 (458.55)
Here are the growth rates of the two segments by decade:
Pre-tax Earnings Per Share
Investments With All Income from
Decade Ending Per Share Investments Excluded
1979 ........................................... 29.0% 11.5%
1989 ........................................... 28.7% 23.6%
1999 ........................................... 20.7% N.A.
Annual Growth Rate, 1969-1999 ...................... 25.4% N.A.
In 1999, our per-share investments changed very little, but our operating earnings, affected by negatives that
overwhelmed some strong positives, fell apart. Most of our operating managers deserve a grade of A for delivering
fine results and for having widened the difference between the intrinsic value of their businesses and the value at which
these are carried on our balance sheet. But, offsetting this, we had a huge — and, I believe, aberrational —
underwriting loss at General Re. Additionally, GEICO’s underwriting profit fell, as we had predicted it would.
GEICO’s overall performance, though, was terrific, outstripping my ambitious goals.
We do not expect our underwriting earnings to improve in any dramatic way this year. Though GEICO’s
intrinsic value should grow by a highly satisfying amount, its underwriting performance is almost certain to weaken.
That’s because auto insurers, as a group, will do worse in 2000, and because we will materially increase our marketing
expenditures. At General Re, we are raising rates and, if there is no mega-catastrophe in 2000, the company’s
underwriting loss should fall considerably. It takes some time, however, for the full effect of rate increases to kick in,
and General Re is therefore likely to have another unsatisfactory underwriting year.
You should be aware that one item regularly working to widen the amount by which intrinsic value exceeds book
value is the annual charge against income we take for amortization of goodwill — an amount now running about $500
million. This charge reduces the amount of goodwill we show as an asset and likewise the amount that is included in
our book value. This is an accounting matter having nothing to do with true economic goodwill, which increases in most
years. But even if economic goodwill were to remain constant, the annual amortization charge would persistently widen
the gap between intrinsic value and book value.
Though we can’t give you a precise figure for Berkshire’s intrinsic value, or even an approximation, Charlie and
I can assure you that it far exceeds our $57.8 billion book value. Businesses such as See’s and Buffalo News are now
worth fifteen to twenty times the value at which they are carried on our books. Our goal is to continually widen this
spread at all subsidiaries.
A Managerial Story You Will Never Read Elsewhere
Berkshire’s collection of managers is unusual in several important ways. As one example, a very high percentage
of these men and women are independently wealthy, having made fortunes in the businesses that they run. They work
neither because they need the money nor because they are contractually obligated to — we have no contracts at Berkshire.
Rather, they work long and hard because they love their businesses. And I use the word “their” advisedly, since these
managers are truly in charge — there are no show-and-tell presentations in Omaha, no budgets to be approved by
headquarters, no dictums issued about capital expenditures. We simply ask our managers to run their companies as if
these are the sole asset of their families and will remain so for the next century.
Charlie and I try to behave with our managers just as we attempt to behave with Berkshire’s shareholders, treating
both groups as we would wish to be treated if our positions were reversed. Though “working” means nothing to me
financially, I love doing it at Berkshire for some simple reasons: It gives me a sense of achievement, a freedom to act as
I see fit and an opportunity to interact daily with people I like and trust. Why should our managers — accomplished
artists at what they do — see things differently?
In their relations with Berkshire, our managers often appear to be hewing to President Kennedy’s charge, “Ask
not what your country can do for you; ask what you can do for your country.” Here’s a remarkable story from last year:
It’s about R. C. Willey, Utah’s dominant home furnishing business, which Berkshire purchased from Bill Child and his
family in 1995. Bill and most of his managers are Mormons, and for this reason R. C. Willey’s stores have never
operated on Sunday. This is a difficult way to do business: Sunday is the favorite shopping day for many customers.
Bill, nonetheless, stuck to his principles -- and while doing so built his business from $250,000 of annual sales in 1954,
when he took over, to $342 million in 1999.
Bill felt that R. C. Willey could operate successfully in markets outside of Utah and in 1997 suggested that we open
a store in Boise. I was highly skeptical about taking a no-Sunday policy into a new territory where we would be up
against entrenched rivals open seven days a week. Nevertheless, this was Bill’s business to run. So, despite my
reservations, I told him to follow both his business judgment and his religious convictions.
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store — for
about $9 million as it turned out — and would sell it to us at his cost if it proved to be successful. On the other hand,
if sales fell short of his expectations, we could exit the business without paying Bill a cent. This outcome, of course, would
leave him with a huge investment in an empty building. I told him that I appreciated his offer but felt that if Berkshire
was going to get the upside it should also take the downside. Bill said nothing doing: If there was to be failure because
of his religious beliefs, he wanted to take the blow personally.
The store opened last August and immediately became a huge success. Bill thereupon turned the property over
to us — including some extra land that had appreciated significantly — and we wrote him a check for his cost. And get
this: Bill refused to take a dime of interest on the capital he had tied up over the two years.
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If a manager has behaved similarly at some other public corporation, I haven’t heard about it. You can understand
why the opportunity to partner with people like Bill Child causes me to tap dance to work every morning.
* * * * * * * * * * * *
A footnote: After our “soft” opening in August, we had a grand opening of the Boise store about a month later.
Naturally, I went there to cut the ribbon (your Chairman, I wish to emphasize, is good for something). In my talk I told
the crowd how sales had far exceeded expectations, making us, by a considerable margin, the largest home furnishings
store in Idaho. Then, as the speech progressed, my memory miraculously began to improve. By the end of my talk, it
all had come back to me: Opening a store in Boise had been my idea.
The Economics of Property/Casualty Insurance
Our main business — though we have others of great importance — is insurance. To understand Berkshire,
therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the
amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these
factors.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are
received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests
the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually
do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the
cost of float. An insurance business has value if its cost of float over time is less than the cost the company would
otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring
their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Errors
of estimation, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly
into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can
typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name
auditors have implicitly blessed. In 1999 a number of insurers announced reserve adjustments that made a mockery of
the “earnings” that investors had relied on earlier when making their buy and sell decisions. At Berkshire, we strive to
be conservative and consistent in our reserving. Even so, we warn you that an unpleasant surprise is always possible.
The table that follows shows (at intervals) the float generated by the various segments of Berkshire’s insurance
operations since we entered the business 33 years ago upon acquiring National Indemnity Company (whose traditional
lines are included in the segment “Other Primary”). For the table we have calculated our float — which we generate in
large amounts relative to our premium volume — by adding net loss reserves, loss adjustment reserves, funds held under
reinsurance assumed and unearned premium reserves, and then subtracting agents balances, prepaid acquisition costs,
prepaid taxes and deferred charges applicable to assumed reinsurance. (Got that?)
Yearend Float (in $ millions)
Year GEICO General Re Reinsurance Primary Total
Other Other
1967 20 20
1977 40 131 171
1987 701 807 1,508
1997 2,917 4,014 455 7,386
1998 3,125 14,909 4,305 415 22,754
1999 3,444 15,166 6,285 403 25,298
Growth of float is important — but its cost is what’s vital. Over the years we have usually recorded only a small
underwriting loss — which means our cost of float was correspondingly low — or actually had an underwriting profit,
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which means we were being paid for holding other people’s money. Indeed, our cumulative result through 1998 was an
underwriting profit. In 1999, however, we incurred a $1.4 billion underwriting loss that left us with float cost of 5.8%.
One mildly mitigating factor: We enthusiastically welcomed $400 million of the loss because it stems from business that
will deliver us exceptional float over the next decade. The balance of the loss, however, was decidedly unwelcome, and
our overall result must be judged extremely poor. Absent a mega-catastrophe, we expect float cost to fall in 2000, but
any decline will be tempered by our aggressive plans for GEICO, which we will discuss later.
There are a number of people who deserve credit for manufacturing so much “no-cost” float over the years.
Foremost is Ajit Jain. It’s simply impossible to overstate Ajit’s value to Berkshire: He has from scratch built an
outstanding reinsurance business, which during his tenure has earned an underwriting profit and now holds $6.3 billion
of float.
In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks; the realism to forget
about those he can’t evaluate; the courage to write huge policies when the premium is appropriate; and the discipline to
reject even the smallest risk when the premium is inadequate. It is rare to find a person possessing any one of these
talents. For one person to have them all is remarkable.
Since Ajit specializes in super-cat reinsurance, a line in which losses are infrequent but extremely large when they
occur, his business is sure to be far more volatile than most insurance operations. To date, we have benefitted from good
luck on this volatile book. Even so, Ajit’s achievements are truly extraordinary.
In a smaller but nevertheless important way, our “other primary” insurance operation has also added to Berkshire’s
intrinsic value. This collection of insurers has delivered a $192 million underwriting profit over the past five years while
supplying us with the float shown in the table. In the insurance world, results like this are uncommon, and for their feat
we thank Rod Eldred, Brad Kinstler, John Kizer, Don Towle and Don Wurster.
As I mentioned earlier, the General Re operation had an exceptionally poor underwriting year in 1999 (though
investment income left the company well in the black). Our business was extremely underpriced, both domestically and
internationally, a condition that is improving but not yet corrected. Over time, however, the company should develop
a growing amount of low-cost float. At both General Re and its Cologne subsidiary, incentive compensation plans are
now directly tied to the variables of float growth and cost of float, the same variables that determine value for owners.
Even though a reinsurer may have a tightly focused and rational compensation system, it cannot count on every
year coming up roses. Reinsurance is a highly volatile business, and neither General Re nor Ajit’s operation is immune
to bad pricing behavior in the industry. But General Re has the distribution , the underwriting skills, the culture, and
— with Berkshire’s backing — the financial clout to become the world’s most profitable reinsurance company. Getting
there will take time, energy and discipline, but we have no doubt that Ron Ferguson and his crew can make it happen.
GEICO (1-800-847-7536 or GEICO.com)
GEICO made exceptional progress in 1999. The reasons are simple: We have a terrific business idea being
implemented by an extraordinary manager, Tony Nicely. When Berkshire purchased GEICO at the beginning of 1996,
we handed the keys to Tony and asked him to run the operation exactly as if he owned 100% of it. He has done the rest.
Take a look at his scorecard:
New Auto Auto Policies
Years Policies In-Force (1)(2) (1)
1993 346,882 2,011,055
1994 384,217 2,147,549
1995 443,539 2,310,037
1996 592,300 2,543,699
1997 868,430 2,949,439
1998 1,249,875 3,562,644
1999 1,648,095 4,328,900
(1) “Voluntary” only; excludes assigned risks and the like.
(2) Revised to exclude policies moved from one GEICO company to another.
In 1995, GEICO spent $33 million on marketing and had 652 telephone counselors. Last year the company spent
$242 million, and the counselor count grew to 2,631. And we are just starting: The pace will step up materially in 2000.
Indeed, we would happily commit $1 billion annually to marketing if we knew we could handle the business smoothly
and if we expected the last dollar spent to produce new business at an attractive cost.
Currently two trends are affecting acquisition costs. The bad news is that it has become more expensive to develop
inquiries. Media rates have risen, and we are also seeing diminishing returns — that is, as both we and our competitors
step up advertising, inquiries per ad fall for all of us. These negatives are partly offset, however, by the fact that our
closure ratio — the percentage of inquiries converted to sales — has steadily improved. Overall, we believe that our
cost of new business, though definitely rising, is well below that of the industry. Of even greater importance, our
operating costs for renewal business are the lowest among broad-based national auto insurers. Both of these major
competitive advantages are sustainable. Others may copy our model, but they will be unable to replicate our economics.
The table above makes it appear that GEICO’s retention of policyholders is falling, but for two reasons
appearances are in this case deceiving. First, in the last few years our business mix has moved away from “preferred”
policyholders, for whom industrywide retention rates are high, toward “standard” and “non-standard” policyholders for
whom retention rates are much lower. (Despite the nomenclature, the three classes have similar profit prospects.)
Second, retention rates for relatively new policyholders are always lower than those for long-time customers — and
because of our accelerated growth, our policyholder ranks now include an increased proportion of new customers.
Adjusted for these two factors, our retention rate has changed hardly at all.
We told you last year that underwriting margins for both GEICO and the industry would fall in 1999, and they
did. We make a similar prediction for 2000. A few years ago margins got too wide, having enjoyed the effects of an
unusual and unexpected decrease in the frequency and severity of accidents. The industry responded by reducing rates
— but now is having to contend with an increase in loss costs. We would not be surprised to see the margins of auto
insurers deteriorate by around three percentage points in 2000.
Two negatives besides worsening frequency and severity will hurt the industry this year. First, rate increases go
into effect only slowly, both because of regulatory delay and because insurance contracts must run their course before
new rates can be put in. Second, reported earnings of many auto insurers have benefitted in the last few years from
reserve releases, made possible because the companies overestimated their loss costs in still-earlier years. This reservoir
of redundant reserves has now largely dried up, and future boosts to earnings from this source will be minor at best. 
In compensating its associates — from Tony on down — GEICO continues to use two variables, and only two,
in determining what bonuses and profit-sharing contributions will be: 1) its percentage growth in policyholders and 2)
the earnings of its “seasoned” business, meaning policies that have been with us for more than a year. We did
outstandingly well on both fronts during 1999 and therefore made a profit-sharing payment of 28.4% of salary (in total,
$113.3 million) to the great majority of our associates. Tony and I love writing those checks.
At Berkshire, we want to have compensation policies that are both easy to understand and in sync with what we
wish our associates to accomplish. Writing new business is expensive (and, as mentioned, getting more expensive).
If we were to include those costs in our calculation of bonuses — as managements did before our arrival at GEICO —
we would be penalizing our associates for garnering new policies, even though these are very much in Berkshire’s
interest. So, in effect, we say to our associates that we will foot the bill for new business. Indeed, because percentage
growth in policyholders is part of our compensation scheme, we reward our associates for producing this initially￾unprofitable business. And then we reward them additionally for holding down costs on our seasoned business.
Despite the extensive advertising we do, our best source of new business is word-of-mouth recommendations from
existing policyholders, who on the whole are pleased with our prices and service. An article published last year by
Kiplinger’s Personal Finance Magazine gives a good picture of where we stand in customer satisfaction: The
magazine’s survey of 20 state insurance departments showed that GEICO’s complaint ratio was well below the ratio
for most of its major competitors.
Our strong referral business means that we probably could maintain our policy count by spending as little as $50
million annually on advertising. That’s a guess, of course, and we will never know whether it is accurate because
Tony’s foot is going to stay on the advertising pedal (and my foot will be on his). Nevertheless, I want to emphasize
that a major percentage of the $300-$350 million we will spend in 2000 on advertising, as well as large additional costs
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we will incur for sales counselors, communications and facilities, are optional outlays we choose to make so that we
can both achieve significant growth and extend and solidify the promise of the GEICO brand in the minds of Americans.
Personally, I think these expenditures are the best investment Berkshire can make. Through its advertising,
GEICO is acquiring a direct relationship with a huge number of households that, on average, will send us $1,100 year
after year. That makes us — among all companies, selling whatever kind of product — one of the country’s leading
direct merchandisers. Also, as we build our long-term relationships with more and more families, cash is pouring in
rather than going out (no Internet economics here). Last year, as GEICO increased its customer base by 766,256, it
gained $590 million of cash from operating earnings and the increase in float.
In the past three years, we have increased our market share in personal auto insurance from 2.7% to 4.1%. But
we rightfully belong in many more households — maybe even yours. Give us a call and find out. About 40% of those
people checking our rates find that they can save money by doing business with us. The proportion is not 100% because
insurers differ in their underwriting judgments, with some giving more credit than we do to drivers who live in certain
geographic areas or work at certain occupations. Our closure rate indicates, however, that we more frequently offer the
low price than does any other national carrier selling insurance to all comers. Furthermore, in 40 states we can offer
a special discount — usually 8% — to our shareholders. Just be sure to identify yourself as a Berkshire owner so that
our sales counselor can make the appropriate adjustment.
* * * * * * * * * * * *
It’s with sadness that I report to you that Lorimer Davidson, GEICO’s former Chairman, died last November, a
few days after his 97th birthday. For GEICO, Davy was a business giant who moved the company up to the big leagues.
For me, he was a friend, teacher and hero. I have told you of his lifelong kindnesses to me in past reports. Clearly, my
life would have developed far differently had he not been a part of it. Tony, Lou Simpson and I visited Davy in August
and marveled at his mental alertness — particularly in all matters regarding GEICO. He was the company’s number
one supporter right up to the end, and we will forever miss him.
Aviation Services
Our two aviation services companies — FlightSafety International (“FSI”) and Executive Jet Aviation (“EJA”)
— are both runaway leaders in their field. EJA, which sells and manages the fractional ownership of jet aircraft,
through its NetJets® program, is larger than its next two competitors combined. FSI trains pilots (as well as other
transportation professionals) and is five times or so the size of its nearest competitor.
Another common characteristic of the companies is that they are still managed by their founding entrepreneurs.
Al Ueltschi started FSI in 1951 with $10,000, and Rich Santulli invented the fractional-ownership industry in 1986.
These men are both remarkable managers who have no financial need to work but thrive on helping their companies
grow and excel.
Though these two businesses have leadership positions that are similar, they differ in their economic
characteristics. FSI must lay out huge amounts of capital. A single flight simulator can cost as much as $15 million
— and we have 222. Only one person at a time, furthermore, can be trained in a simulator, which means that the capital
investment per dollar of revenue at FSI is exceptionally high. Operating margins must therefore also be high, if we are
to earn a reasonable return on capital. Last year we made capital expenditures of $215 million at FSI and FlightSafety
Boeing, its 50%-owned affiliate.
At EJA, in contrast, the customer owns the equipment, though we, of course, must invest in a core fleet of our own
planes to ensure outstanding service. For example, the Sunday after Thanksgiving, EJA’s busiest day of the year, strains
our resources since fractions of 169 planes are owned by 1,412 customers, many of whom are bent on flying home
between 3 and 6 p.m. On that day, and certain others, we need a supply of company-owned aircraft to make sure all
parties get where they want, when they want.
Still, most of the planes we fly are owned by customers, which means that modest pre-tax margins in this business
can produce good returns on equity. Currently, our customers own planes worth over $2 billion, and in addition we have
$4.2 billion of planes on order. Indeed, the limiting factor in our business right now is the availability of planes. We
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now are taking delivery of about 8% of all business jets manufactured in the world, and we wish we could get a bigger
share than that. Though EJA was supply-constrained in 1999, its recurring revenues — monthly management fees plus
hourly flight fees — increased 46%.
The fractional-ownership industry is still in its infancy. EJA is now building critical mass in Europe, and over
time we will expand around the world. Doing that will be expensive — very expensive — but we will spend what it
takes. Scale is vital to both us and our customers: The company with the most planes in the air worldwide will be able
to offer its customers the best service. “Buy a fraction, get a fleet” has real meaning at EJA.
EJA enjoys another important advantage in that its two largest competitors are both subsidiaries of aircraft
manufacturers and sell only the aircraft their parents make. Though these are fine planes, these competitors are severely
limited in the cabin styles and mission capabilities they can offer. EJA, in contrast, offers a wide array of planes from
five suppliers. Consequently, we can give the customer whatever he needs to buy — rather than his getting what the
competitor’s parent needs to sell.
Last year in this report, I described my family’s delight with the one-quarter (200 flight hours annually) of a
Hawker 1000 that we had owned since 1995. I got so pumped up by my own prose that shortly thereafter I signed up
for one-sixteenth of a Cessna V Ultra as well. Now my annual outlays at EJA and Borsheim’s, combined, total ten times
my salary. Think of this as a rough guideline for your own expenditures with us. 
During the past year, two of Berkshire’s outside directors have also signed on with EJA. (Maybe we’re paying
them too much.) You should be aware that they and I are charged exactly the same price for planes and service as is
any other customer: EJA follows a “most favored nations” policy, with no one getting a special deal.
And now, brace yourself. Last year, EJA passed the ultimate test: Charlie signed up. No other endorsement could
speak more eloquently to the value of the EJA service. Give us a call at 1-800-848-6436 and ask for our “white paper”
on fractional ownership.
Acquisitions of 1999
At both GEICO and Executive Jet, our best source of new customers is the happy ones we already have. Indeed,
about 65% of our new owners of aircraft come as referrals from current owners who have fallen in love with the service.
Our acquisitions usually develop in the same way. At other companies, executives may devote themselves to
pursuing acquisition possibilities with investment bankers, utilizing an auction process that has become standardized.
In this exercise the bankers prepare a “book” that makes me think of the Superman comics of my youth. In the Wall
Street version, a formerly mild-mannered company emerges from the investment banker’s phone booth able to leap over
competitors in a single bound and with earnings moving faster than a speeding bullet. Titillated by the book’s
description of the acquiree’s powers, acquisition-hungry CEOs — Lois Lanes all, beneath their cool exteriors —
promptly swoon.
What’s particularly entertaining in these books is the precision with which earnings are projected for many years
ahead. If you ask the author-banker, however, what his own firm will earn next month, he will go into a protective
crouch and tell you that business and markets are far too uncertain for him to venture a forecast.
Here’s one story I can’t resist relating: In 1985, a major investment banking house undertook to sell Scott Fetzer,
offering it widely — but with no success. Upon reading of this strikeout, I wrote Ralph Schey, then and now Scott
Fetzer’s CEO, expressing an interest in buying the business. I had never met Ralph, but within a week we had a deal.
Unfortunately, Scott Fetzer’s letter of engagement with the banking firm provided it a $2.5 million fee upon sale, even
if it had nothing to do with finding the buyer. I guess the lead banker felt he should do something for his payment, so
he graciously offered us a copy of the book on Scott Fetzer that his firm had prepared. With his customary tact, Charlie
responded: “I’ll pay $2.5 million not to read it.”
At Berkshire, our carefully-crafted acquisition strategy is simply to wait for the phone to ring. Happily, it
sometimes does so, usually because a manager who sold to us earlier has recommended to a friend that he think about
following suit.
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Which brings us to the furniture business. Two years ago I recounted how the acquisition of Nebraska Furniture
Mart in 1983 and my subsequent association with the Blumkin family led to follow-on transactions with R. C. Willey
(1995) and Star Furniture (1997). For me, these relationships have all been terrific. Not only did Berkshire acquire
three outstanding retailers; these deals also allowed me to become friends with some of the finest people you will ever
meet.
Naturally, I have persistently asked the Blumkins, Bill Child and Melvyn Wolff whether there are any more out
there like you. Their invariable answer was the Tatelman brothers of New England and their remarkable furniture
business, Jordan’s.
I met Barry and Eliot Tatelman last year and we soon signed an agreement for Berkshire to acquire the company.
Like our three previous furniture acquisitions, this business had long been in the family — in this case since 1927, when
Barry and Eliot’s grandfather began operations in a Boston suburb. Under the brothers’ management, Jordan’s has
grown ever more dominant in its region, becoming the largest furniture retailer in New Hampshire as well as
Massachusetts.
The Tatelmans don’t just sell furniture or manage stores. They also present customers with a dazzling
entertainment experience called “shoppertainment.” A family visiting a store can have a terrific time, while
concurrently viewing an extraordinary selection of merchandise. The business results are also extraordinary: Jordan’s
has the highest sales per square foot of any major furniture operation in the country. I urge you to visit one of their
stores if you are in the Boston area — particularly the one at Natick, which is Jordan’s newest. Bring money.
Barry and Eliot are classy people — just like their counterparts at Berkshire’s three other furniture operations.
When they sold to us, they elected to give each of their employees at least 50¢ for every hour that he or she had worked
for Jordan’s. This payment added up to $9 million, which came from the Tatelmans’ own pockets, not from Berkshire’s.
And Barry and Eliot were thrilled to write the checks.
Each of our furniture operations is number one in its territory. We now sell more furniture than anyone else in
Massachusetts, New Hampshire, Texas, Nebraska, Utah and Idaho. Last year Star’s Melvyn Wolff and his sister, Shirley
Toomim, scored two major successes: a move into San Antonio and a significant enlargement of Star’s store in Austin.
There’s no operation in the furniture retailing business remotely like the one assembled by Berkshire. It’s fun for
me and profitable for you. W. C. Fields once said, “It was a woman who drove me to drink, but unfortunately I never
had the chance to thank her.” I don’t want to make that mistake. My thanks go to Louie, Ron and Irv Blumkin for
getting me started in the furniture business and for unerringly guiding me as we have assembled the group we now have.
* * * * * * * * * * * *
Now, for our second acquisition deal: It came to us through my good friend, Walter Scott, Jr., chairman of Level
3 Communications and a director of Berkshire. Walter has many other business connections as well, and one of them
is with MidAmerican Energy, a utility company in which he has substantial holdings and on whose board he sits. At
a conference in California that we both attended last September, Walter casually asked me whether Berkshire might be
interested in making a large investment in MidAmerican, and from the start the idea of being in partnership with Walter
struck me as a good one. Upon returning to Omaha, I read some of MidAmerican’s public reports and had two short
meetings with Walter and David Sokol, MidAmerican’s talented and entrepreneurial CEO. I then said that, at an
appropriate price, we would indeed like to make a deal.
Acquisitions in the electric utility industry are complicated by a variety of regulations including the Public Utility
Holding Company Act of 1935. Therefore, we had to structure a transaction that would avoid Berkshire gaining voting
control. Instead we are purchasing an 11% fixed-income security, along with a combination of common stock and
exchangeable preferred that will give Berkshire just under 10% of the voting power of MidAmerican but about 76% of
the equity interest. All told, our investment will be about $2 billion.
Walter characteristically backed up his convictions with real money: He and his family will buy more
MidAmerican stock for cash when the transaction closes, bringing their total investment to about $280 million. Walter
will also be the controlling shareholder of the company, and I can’t think of a better person to hold that post.
Though there are many regulatory constraints in the utility industry, it’s possible that we will make additional
commitments in the field. If we do, the amounts involved could be large.
11
Acquisition Accounting
Once again, I would like to make some comments about accounting, in this case about its application to
acquisitions. This is currently a very contentious topic and, before the dust settles, Congress may even intervene (a truly
terrible idea).
When a company is acquired, generally accepted accounting principles (“GAAP”) currently condone two very
different ways of recording the transaction: “purchase” and “pooling.” In a pooling, stock must be the currency; in a
purchase, payment can be made in either cash or stock. Whatever the currency, managements usually detest purchase
accounting because it almost always requires that a “goodwill” account be established and subsequently written off —
a process that saddles earnings with a large annual charge that normally persists for decades. In contrast, pooling avoids
a goodwill account, which is why managements love it.
Now, the Financial Accounting Standards Board (“FASB”) has proposed an end to pooling, and many CEOs are
girding for battle. It will be an important fight, so we’ll venture some opinions. To begin with, we agree with the many
managers who argue that goodwill amortization charges are usually spurious. You’ll find my thinking about this in the
appendix to our 1983 annual report, which is available on our website, and in the Owner’s Manual on pages 55 - 62.
For accounting rules to mandate amortization that will, in the usual case, conflict with reality is deeply
troublesome: Most accounting charges relate to what’s going on, even if they don’t precisely measure it. As an
example, depreciation charges can’t with precision calibrate the decline in value that physical assets suffer, but these
charges do at least describe something that is truly occurring: Physical assets invariably deteriorate. Correspondingly,
obsolescence charges for inventories, bad debt charges for receivables and accruals for warranties are among the charges
that reflect true costs. The annual charges for these expenses can’t be exactly measured, but the necessity for estimating
them is obvious.
In contrast, economic goodwill does not, in many cases, diminish. Indeed, in a great many instances — perhaps
most — it actually grows in value over time. In character, economic goodwill is much like land: The value of both
assets is sure to fluctuate, but the direction in which value is going to go is in no way ordained. At See’s, for example,
economic goodwill has grown, in an irregular but very substantial manner, for 78 years. And, if we run the business
right, growth of that kind will probably continue for at least another 78 years. 
To escape from the fiction of goodwill charges, managers embrace the fiction of pooling. This accounting
convention is grounded in the poetic notion that when two rivers merge their streams become indistinguishable. Under
this concept, a company that has been merged into a larger enterprise has not been “purchased” (even though it will
often have received a large “sell-out” premium). Consequently, no goodwill is created, and those pesky subsequent
charges to earnings are eliminated. Instead, the accounting for the ongoing entity is handled as if the businesses had
forever been one unit.
So much for poetry. The reality of merging is usually far different: There is indisputably an acquirer and an
acquiree, and the latter has been “purchased,” no matter how the deal has been structured. If you think otherwise, just
ask employees severed from their jobs which company was the conqueror and which was the conquered. You will find
no confusion. So on this point the FASB is correct: In most mergers, a purchase has been made. Yes, there are some
true “mergers of equals,” but they are few and far between.
Charlie and I believe there’s a reality-based approach that should both satisfy the FASB, which correctly wishes
to record a purchase, and meet the objections of managements to nonsensical charges for diminution of goodwill. We
would first have the acquiring company record its purchase price — whether paid in stock or cash — at fair value. In
most cases, this procedure would create a large asset representing economic goodwill. We would then leave this asset
on the books, not requiring its amortization. Later, if the economic goodwill became impaired, as it sometimes would,
it would be written down just as would any other asset judged to be impaired.
If our proposed rule were to be adopted, it should be applied retroactively so that acquisition accounting would
be consistent throughout America — a far cry from what exists today. One prediction: If this plan were to take effect,
managements would structure acquisitions more sensibly, deciding whether to use cash or stock based on the real
consequences for their shareholders rather than on the unreal consequences for their reported earnings.
* * * * * * * * * * * *
12
13
In our purchase of Jordan’s, we followed a procedure that will maximize the cash produced for our shareholders
but minimize the earnings we report to you. Berkshire purchased assets for cash, an approach that on our tax returns
permits us to amortize the resulting goodwill over a 15-year period. Obviously, this tax deduction materially increases
the amount of cash delivered by the business. In contrast, when stock, rather than assets, is purchased for cash, the
resulting writeoffs of goodwill are not tax-deductible. The economic difference between these two approaches is
substantial.
From the economic standpoint of the acquiring company, the worst deal of all is a stock-for-stock acquisition.
Here, a huge price is often paid without there being any step-up in the tax basis of either the stock of the acquiree or its
assets. If the acquired entity is subsequently sold, its owner may owe a large capital gains tax (at a 35% or greater rate),
even though the sale may truly be producing a major economic loss.
We have made some deals at Berkshire that used far-from-optimal tax structures. These deals occurred because
the sellers insisted on a given structure and because, overall, we still felt the acquisition made sense. We have never
done an inefficiently-structured deal, however, in order to make our figures look better.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation, purchase￾accounting adjustments are not assigned to the specific businesses to which they apply, but are instead aggregated and
shown separately. This procedure lets you view the earnings of our businesses as they would have been reported had
we not purchased them. For the reasons discussed on page 61, this form of presentation seems to us to be more useful
to investors and managers than one utilizing generally accepted accounting principles (GAAP), which require purchase￾premiums to be charged off business-by-business. The total earnings we show in the table are, of course, identical to
the GAAP total in our audited financial statements.
(in millions)
Berkshire’s Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
1999 1998 1999 1998
Operating Earnings:
 Insurance Group:
 Underwriting — Reinsurance ............... $(1,440) $(21) $(927) $(14)
 Underwriting — GEICO ................... 24 269 16 175 
 Underwriting — Other Primary .............. 22 17 14 10 
 Net Investment Income .................... 2,482 974 1,764 731 
 Buffalo News ............................. 55 53 34 32 
 Finance and Financial Products Businesses ...... 125 205 86 133 
 Flight Services ............................ 225 181 132 110 
(1) (1)
 Home Furnishings ......................... 79 72 46 41 
(2) (2)
 International Dairy Queen ................... 56 58 35 35 
 Jewelry ................................. 51 39 31 23 
 Scott Fetzer (excluding finance operation) ....... 147 137 92 85 
 See’s Candies ............................ 74 62 46 40 
 Shoe Group .............................. 17 33 11 23 
 Purchase-Accounting Adjustments ............ (739) (123) (648) (118)
 Interest Expense (3)
......................... (109) (100) (70) (63)
 Shareholder-Designated Contributions ......... (17) (17) (11) (11)
 Other ................................... 33 60 20 45 
(4) (4)
Operating Earnings ......................... 1,085 1,899 671 1,277 
Capital Gains from Investments ................ 1,365 2,415 886 1,553 
Total Earnings - All Entities ............... $2,450 $4,314 $1,557 $ 2,830 
 Includes Executive Jet from August 7, 1998 . Excludes interest expense of Finance Businesses. (1) (3)
 Includes Jordan’s Furniture from November 13, 1999. Includes General Re operations for ten days in 1998. (2) (4)
Almost all of our manufacturing, retailing and service businesses had excellent results in 1999. The exception
was Dexter Shoe, and there the shortfall did not occur because of managerial problems: In skills, energy and devotion
to their work, the Dexter executives are every bit the equal of our other managers. But we manufacture shoes primarily
in the U.S., and it has become extremely difficult for domestic producers to compete effectively. In 1999, approximately
93% of the 1.3 billion pairs of shoes purchased in this country came from abroad, where extremely low-cost labor is the
rule.
Counting both Dexter and H. H. Brown, we are currently the leading domestic manufacturer of shoes, and we are
likely to continue to be. We have loyal, highly-skilled workers in our U.S. plants, and we want to retain every job here
that we can. Nevertheless, in order to remain viable, we are sourcing more of our output internationally. In doing that,
we have incurred significant severance and relocation costs that are included in the earnings we show in the table.
A few years back, Helzberg’s, our 200-store jewelry operation, needed to make operating adjustments to restore
margins to appropriate levels. Under Jeff Comment’s leadership, the job was done and profits have dramatically
rebounded. In the shoe business, where we have Harold Alfond, Peter Lunder, Frank Rooney and Jim Issler in charge,
I believe we will see a similar improvement over the next few years.
See’s Candies deserves a special comment, given that it achieved a record operating margin of 24% last year.
Since we bought See’s for $25 million in 1972, it has earned $857 million pre-tax. And, despite its growth, the business
has required very little additional capital. Give the credit for this performance to Chuck Huggins. Charlie and I put
him in charge the day of our purchase, and his fanatical insistence on both product quality and friendly service has
rewarded customers, employees and owners.
Chuck gets better every year. When he took charge of See’s at age 46, the company’s pre-tax profit, expressed
in millions, was about 10% of his age. Today he’s 74, and the ratio has increased to 100%. Having discovered this
mathematical relationship — let’s call it Huggins’ Law — Charlie and I now become giddy at the mere thought of
Chuck’s birthday.
* * * * * * * * * * * *
Additional information about our various businesses is given on pages 39 - 54, where you will also find our
segment earnings reported on a GAAP basis. In addition, on pages 63 - 69, we have rearranged Berkshire's financial
data into four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the
company.
Look-Through Earnings
Reported earnings are an inadequate measure of economic progress at Berkshire, in part because the numbers
shown in the table presented earlier include only the dividends we receive from investees — though these dividends
typically represent only a small fraction of the earnings attributable to our ownership. Not that we mind this division
of money, since on balance we regard the undistributed earnings of investees as more valuable to us than the portion
paid out. The reason for our thinking is simple: Our investees often have the opportunity to reinvest earnings at high
rates of return. So why should we want them paid out?
To depict something closer to economic reality at Berkshire than reported earnings, though, we employ the concept
of "look-through" earnings. As we calculate these, they consist of: (1) the operating earnings reported in the previous
section, plus; (2) our share of the retained operating earnings of major investees that, under GAAP accounting, are not
reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of
investees had instead been distributed to us. When tabulating "operating earnings" here, we exclude purchase￾accounting adjustments as well as capital gains and other major non-recurring items.
The following table sets forth our 1999 look-through earnings, though I warn you that the figures can be no more
than approximate, since they are based on a number of judgment calls. (The dividends paid to us by these investees have
been included in the operating earnings itemized on page 13, mostly under "Insurance Group: Net Investment Income.")
14
15
Berkshire's Approximate Berkshire's Share of Undistributed
Berkshire's Major Investees Ownership at Yearend Operating Earnings (in millions) (1) (2)
American Express Company .............. 11.3% $228
The Coca-Cola Company ................. 8.1% 144
Freddie Mac .......................... 8.6% 127
The Gillette Company ................... 9.0% 53
M&T Bank ........................... 6.5% 17
The Washington Post Company ............ 18.3% 30 
Wells Fargo & Company ................. 3.6% 108 
Berkshire's share of undistributed earnings of major investees 707 
Hypothetical tax on these undistributed investee earnings (99) (3) 
Reported operating earnings of Berkshire 1,318 
 Total look-through earnings of Berkshire $ 1,926 
 (1) Does not include shares allocable to minority interests
 (2) Calculated on average ownership for the year
 (3) The tax rate used is 14%, which is the rate Berkshire pays on the dividends it receives
Investments
Below we present our common stock investments. Those that had a market value of more than $750 million
at the end of 1999 are itemized.
12/31/99
Shares Company Cost* Market
(dollars in millions)
50,536,900 American Express Company ................................ $1,470 $ 8,402
200,000,000 The Coca-Cola Company ................................... 1,299 11,650
59,559,300 Freddie Mac ............................................ 294 2,803
96,000,000 The Gillette Company ..................................... 600 3,954
1,727,765 The Washington Post Company .............................. 11 960
59,136,680 Wells Fargo & Company ................................... 349 2,391
Others ................................................. 4,180 6,848
Total Common Stocks ..................................... $8,203 $37,008
 * Represents tax-basis cost which, in aggregate, is $691 million less than GAAP cost.
We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large
investments had disappointing business results last year. Nevertheless, we believe these companies have important
competitive advantages that will endure over time. This attribute, which makes for good long-term investment results,
is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high
degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the
general view that our society will be transformed by their products and services. Our problem — which we can’t solve
by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive
advantage.
Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in
which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it
comes to evaluating patents, manufacturing processes or geological prospects. So we simply don’t get into judgments
in those fields.
If we have a strength, it is in recognizing when we are operating well within our circle of competence and when
we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing
industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have
their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick
with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted
hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do
well within the circle we’ve staked out.
Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel
much better about the businesses than their stocks. That’s why we haven’t added to our present holdings. Nevertheless,
we haven’t yet scaled back our portfolio in a major way: If the choice is between a questionable business at a
comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our
attention, however, is a comfortable business at a comfortable price.
Our reservations about the prices of securities we own apply also to the general level of equity prices. We have
never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not
trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in
their expectations about future returns.
We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see
GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no
particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities
(TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going
to be higher than that, you can profit by simply buying TIPS and shorting Governments.
If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is
unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities
that are dramatically less than most investors have either experienced in the past or expect in the future. If investor
expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe,
particularly in sectors in which speculation has been concentrated.
Berkshire will someday have opportunities to deploy major amounts of cash in equity markets — we are confident
of that. But, as the song goes, “Who knows where or when?” Meanwhile, if anyone starts explaining to you what is
going on in the truly-manic portions of this “enchanted” market, you might remember still another line of song: “Fools
give you reasons, wise men never try.”
Share Repurchases
Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests
were rationally based, but a few leaned on spurious logic.
There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the
company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business
and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add
a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise,
insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We
have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.
The business “needs” that I speak of are of two kinds: First, expenditures that a company must make to maintain
its competitive position (e.g., the remodeling of stores at Helzberg’s) and, second, optional outlays, aimed at business
growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey’s
expansion into Idaho).
When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can
buy new businesses or repurchase shares. If a company’s stock is selling well below intrinsic value, repurchases usually
make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few
responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been
16
pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were
large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a
shareholder-oriented management.
That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view,
ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted
by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic
value. Buying dollar bills for $1.10 is not good business for those who stick around.
Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and
then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that
many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In
defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They
also know a whole lot more about them than I do. However, I can’t help but feel that too often today’s repurchases are
dictated by management’s desire to “show confidence” or be in fashion rather than by a desire to enhance per-share
value.
Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted
at much lower prices are exercised. This “buy high, sell low” strategy is one many unfortunate investors have employed
— but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.
Of course, both option grants and repurchases may make sense — but if that’s the case, it’s not because the two
activities are logically related. Rationally, a company’s decision to repurchase shares or to issue them should stand on
its own feet. Just because stock has been issued to satisfy options — or for any other reason — does not mean that stock
should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value
should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).
You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of
Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have
therefore missed some opportunities — though Berkshire’s trading volume at these points was too light for us to have
done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say,
2% of a company’s shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at
most — and even less if the funds could alternatively have been deployed in value-building moves.)
Some of the letters we’ve received clearly imply that the writer is unconcerned about intrinsic value considerations
but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer
wants to sell tomorrow, his thinking makes sense — for him! — but if he intends to hold, he should instead hope the
stock falls and trades in enough volume for us to buy a lot of it. That’s the only way a repurchase program can have
any real benefit for a continuing shareholder.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value,
conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever
told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders — and potential shareholders — the
same valuation-related information we would wish to have if our positions were reversed.
Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to
delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find
that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we
will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call
Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the
NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not
engage in transactions involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in
Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the
Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our
stock’s intrinsic value.
17
18
Shareholder-Designated Contributions
About 97.3% of all eligible shares participated in Berkshire's 1999 shareholder-designated contributions program,
with contributions totaling $17.2 million. A full description of the program appears on pages 70 - 71.
Cumulatively, over the 19 years of the program, Berkshire has made contributions of $147 million pursuant to the
instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries, which stick to the
philanthropic patterns that prevailed before they were acquired (except that their former owners themselves take on the
responsibility for their personal charities). In aggregate, our subsidiaries made contributions of $13.8 million in 1999,
including in-kind donations of $2.5 million.
To participate in future programs, you must own Class A shares that are registered in the name of the actual
owner, not the nominee name of a broker, bank or depository. Shares not so registered on August 31, 2000, will be
ineligible for the 2000 program. When you get the contributions form from us, return it promptly so that it does not
get put aside or forgotten. Designations received after the due date will not be honored.
The Annual Meeting
This year’s Woodstock Weekend for Capitalists will follow a format slightly different from that of recent years.
We need to make a change because the Aksarben Coliseum, which served us well the past three years, is gradually being
closed down. Therefore, we are relocating to the Civic Auditorium (which is on Capitol Avenue between 18 and 19 ,
th th
behind the Doubletree Hotel), the only other facility in Omaha offering the space we require.
The Civic, however, is located in downtown Omaha, and we would create a parking and traffic nightmare if we
were to meet there on a weekday. We will, therefore, convene on Saturday, April 29, with the doors opening at 7 a.m.,
the movie beginning at 8:30 and the meeting itself commencing at 9:30. As in the past, we will run until 3:30 with a
short break at noon for food, which will be available at the Civic’s concession stands.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential
you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we have again
signed up American Express (800-799-6634) to give you special help. In our normal fashion, we will run buses from
the larger hotels to the meeting. After the meeting, the buses will make trips back to the hotels and to Nebraska
Furniture Mart, Borsheim’s and the airport. Even so, you are likely to find a car useful.
We have scheduled the meeting in 2002 and 2003 on the customary first Saturday in May. In 2001, however, the
Civic is already booked on that Saturday, so we will meet on April 28. The Civic should fit our needs well on any
weekend, since there will then be more than ample parking in nearby lots and garages as well as on streets. We will
also be able to greatly enlarge the space we give exhibitors. So, overcoming my normal commercial reticence, I will
see that you have a wide display of Berkshire products at the Civic that you can purchase. As a benchmark, in 1999
shareholders bought 3,059 pounds of See’s candy, $16,155 of World Book Products, 1,928 pairs of Dexter shoes, 895
sets of Quikut knives, 1,752 golf balls with the Berkshire Hathaway logo and 3,446 items of Berkshire apparel. I know
you can do better.
Last year, we also initiated the sale of at least eight fractions of Executive Jet aircraft. We will again have an array
of models at the Omaha airport for your inspection on Saturday and Sunday. Ask an EJA representative at the Civic
about viewing any of these planes.
Dairy Queen will also be on hand at the Civic and again will donate all proceeds to the Children’s Miracle
Network. Last year we sold 4,586 Dilly® bars, fudge bars and vanilla/orange bars. Additionally, GEICO will have
a booth that will be staffed by a number of our top counselors from around the country, all of them ready to supply you
with auto insurance quotes. In most cases, GEICO will be able to offer you a special shareholder’s discount. Bring the
details of your existing insurance, and check out whether we can save you some money.
Finally, Ajit Jain and his associates will be on hand to offer both no-commission annuities and a liability policy
with jumbo limits of a size rarely available elsewhere. Talk to Ajit and learn how to protect yourself and your family
against a $10 million judgment.
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NFM’s newly remodeled complex, located on a 75-acre site on 72nd Street between Dodge and Pacific, is open from
10 a.m. to 9 p.m. on weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays. This operation offers an unrivaled
breadth of merchandise — furniture, electronics, appliances, carpets and computers — all at can’t-be-beat prices. In
1999 NFM did more than $300 million of business at its 72nd Street location, which in a metropolitan area of 675,000
is an absolute miracle. During the Thursday, April 27 to Monday, May 1 period, any shareholder presenting his or her
meeting credential will receive a discount that is customarily given only to employees. We have offered this break to
shareholders the last couple of years, and sales have been amazing. In last year’s five-day “Berkshire Weekend,” NFM’s
volume was $7.98 million, an increase of 26% from 1998 and 51% from 1997.
Borsheim’s — the largest jewelry store in the country except for Tiffany’s Manhattan store — will have two
shareholder-only events. The first will be a champagne and dessert party from 6 p.m.-10 p.m. on Friday, April 28. The
second, the main gala, will be from 9 a.m. to 6 p.m. on Sunday, April 30. On that day, Charlie and I will be on hand
to sign sales tickets. Shareholder prices will be available Thursday through Monday, so if you wish to avoid the largest
crowds, which will form on Friday evening and Sunday, come at other times and identify yourself as a shareholder. On
Saturday, we will be open until 7 p.m. Borsheim’s operates on a gross margin that is fully twenty percentage points
below that of its major rivals, so be prepared to be blown away by both our prices and selection.
In the mall outside of Borsheim’s, we will again have Bob Hamman — the best bridge player the game has ever
seen — available to play with our shareholders on Sunday. We will also have a few other experts playing at additional
tables. In 1999, we had more demand than tables, but we will cure that problem this year.
Patrick Wolff, twice US chess champion, will again be in the mall playing blindfolded against all comers. He tells
me that he has never tried to play more than four games simultaneously while handicapped this way but might try to
bump that limit to five or six this year. If you’re a chess fan, take Patrick on — but be sure to check his blindfold before
your first move.
Gorat’s — my favorite steakhouse — will again be open exclusively for Berkshire shareholders on Sunday, April
30, and will be serving from 4 p.m. until about midnight. Please remember that you can’t come to Gorat’s on Sunday
without a reservation. To make one, call 402-551-3733 on April 3 (but not before). If Sunday is sold out, try Gorat’s
on one of the other evenings you will be in town. I make a “quality check” of Gorat’s about once a week and can report
that their rare T-bone (with a double order of hash browns) is still unequaled throughout the country.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on Saturday night. This year the Omaha
Golden Spikes will play the Iowa Cubs. Come early, because that’s when the real action takes place. Those who
attended last year saw your Chairman pitch to Ernie Banks.
This encounter proved to be the titanic duel that the sports world had long awaited. After the first few pitches —
which were not my best, but when have I ever thrown my best? — I fired a brushback at Ernie just to let him know who
was in command. Ernie charged the mound, and I charged the plate. But a clash was avoided because we became
exhausted before reaching each other.
Ernie was dissatisfied with his performance last year and has been studying the game films all winter. As you may
know, Ernie had 512 home runs in his career as a Cub. Now that he has spotted telltale weaknesses in my delivery, he
expects to get #513 on April 29. I, however, have learned new ways to disguise my “flutterball.” Come and watch this
matchup.
I should add that I have extracted a promise from Ernie that he will not hit a “come-backer” at me since I would
never be able to duck in time to avoid it. My reflexes are like Woody Allen’s, who said his were so slow that he was
once hit by a car being pushed by two guys.
Our proxy statement contains instructions about obtaining tickets to the game and also a large quantity of other
information that should help you enjoy your visit in Omaha. Join us at the Capitalist Caper on Capitol Avenue.
Warren E. Buffett
March 1, 2000 Chairman of the Board
2
Note: The following table appears in the printed Annual Report on the facing page of the
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500
 Annual Percentage Change 
in Per-Share in S&P 500
Book Value of with Dividends Relative
Berkshire Included Results
Year (1) (2) (1)-(2) 
1965 ............................................... 23.8 10.0 13.8
1966 ............................................... 20.3 (11.7) 32.0
1967 ............................................... 11.0 30.9 (19.9)
1968 ............................................... 19.0 11.0 8.0
1969 ............................................... 16.2 (8.4) 24.6
1970 ............................................... 12.0 3.9 8.1
1971 ............................................... 16.4 14.6 1.8
1972 ............................................... 21.7 18.9 2.8
1973 ............................................... 4.7 (14.8) 19.5
1974 ............................................... 5.5 (26.4) 31.9
1975 ............................................... 21.9 37.2 (15.3)
1976 ............................................... 59.3 23.6 35.7
1977 ............................................... 31.9 (7.4) 39.3
1978 ............................................... 24.0 6.4 17.6
1979 ............................................... 35.7 18.2 17.5
1980 ............................................... 19.3 32.3 (13.0)
1981 ............................................... 31.4 (5.0) 36.4
1982 ............................................... 40.0 21.4 18.6
1983 ............................................... 32.3 22.4 9.9
1984 ............................................... 13.6 6.1 7.5
1985 ............................................... 48.2 31.6 16.6
1986 ............................................... 26.1 18.6 7.5
1987 ............................................... 19.5 5.1 14.4
1988 ............................................... 20.1 16.6 3.5
1989 ............................................... 44.4 31.7 12.7
1990 ............................................... 7.4 (3.1) 10.5
1991 ............................................... 39.6 30.5 9.1
1992 ............................................... 20.3 7.6 12.7
1993 ............................................... 14.3 10.1 4.2
1994 ............................................... 13.9 1.3 12.6
1995 ............................................... 43.1 37.6 5.5
1996 ............................................... 31.8 23.0 8.8
1997 ............................................... 34.1 33.4 .7
1998 ............................................... 48.3 28.6 19.7
1999 ............................................... .5 21.0 (20.5)
2000 ............................................... 6.5 (9.1) 15.6
Average Annual Gain - 1965-2000 23.6% 11.8% 11.8%
Overall Gain - 1964-2000 207,821% 5,383% 202,438%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated
using the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P
500 in years when that index showed a positive return, but would have exceeded the S&P in years when the index
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2000 was $3.96 billion, which increased the per-share book value of both
our Class A and Class B stock by 6.5%. Over the last 36 years (that is, since present management took over) per￾share book value has grown from $19 to $40,442, a gain of 23.6% compounded annually.*
Overall, we had a decent year, our book-value gain having outpaced the performance of the S&P 500.
And, though this judgment is necessarily subjective, we believe Berkshire’s gain in per-share intrinsic value
moderately exceeded its gain in book value. (Intrinsic value, as well as other key investment and accounting terms
and concepts, are explained in our Owner’s Manual on pages 59-66. Intrinsic value is discussed on page 64.)
Furthermore, we completed two significant acquisitions that we negotiated in 1999 and initiated six more.
All told, these purchases have cost us about $8 billion, with 97% of that amount paid in cash and 3% in stock. The
eight businesses we’ve acquired have aggregate sales of about $13 billion and employ 58,000 people. Still, we
incurred no debt in making these purchases, and our shares outstanding have increased only 1
/3 of 1%. Better yet,
we remain awash in liquid assets and are both eager and ready for even larger acquisitions.
I will detail our purchases in the next section of the report. But I will tell you now that we have embraced
the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your
excitement.
On the minus side, policyholder growth at GEICO slowed to a halt as the year progressed. It has become
much more expensive to obtain new business. I told you last year that we would get our money’s worth from
stepped-up advertising at GEICO in 2000, but I was wrong. We’ll examine the reasons later in the report.
Another negative — which has persisted for several years — is that we see our equity portfolio as only
mildly attractive. We own stocks of some excellent businesses, but most of our holdings are fully priced and are
unlikely to deliver more than moderate returns in the future. We’re not alone in facing this problem: The long￾term prospect for equities in general is far from exciting.
Finally, there is the negative that recurs annually: Charlie Munger, Berkshire’s Vice Chairman and my
partner, and I are a year older than when we last reported to you. Mitigating this adverse development is the
indisputable fact that the age of your top managers is increasing at a considerably lower rate — percentage-wise —
than is the case at almost all other major corporations. Better yet, this differential will widen in the future.
Charlie and I continue to aim at increasing Berkshire’s per-share value at a rate that, over time, will
modestly exceed the gain from owning the S&P 500. As the table on the facing page shows, a small annual
advantage in our favor can, if sustained, produce an anything-but-small long-term advantage. To reach our goal
we will need to add a few good businesses to Berkshire’s stable each year, have the businesses we own generally
gain in value, and avoid any material increase in our outstanding shares. We are confident about meeting the last
two objectives; the first will require some luck.
It’s appropriate here to thank two groups that made my job both easy and fun last year æ just as they do
every year. First, our operating managers continue to run their businesses in splendid fashion, which allows me to
spend my time allocating capital rather than supervising them. (I wouldn’t be good at that anyway.)
 
*All figures used in this report apply to Berkshire's A shares, the successor to the only stock that the
company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.
3
4
Our managers are a very special breed. At most large companies, the truly talented divisional managers
seldom have the job they really want. Instead they yearn to become CEOs, either at their present employer or
elsewhere. Indeed, if they stay put, they and their colleagues are likely to feel they have failed.
At Berkshire, our all-stars have exactly the jobs they want, ones that they hope and expect to keep
throughout their business lifetimes. They therefore concentrate solely on maximizing the long-term value of the
businesses that they “own” and love. If the businesses succeed, they have succeeded. And they stick with us: In
our last 36 years, Berkshire has never had a manager of a significant subsidiary voluntarily leave to join another
business.
The other group to which I owe enormous thanks is the home-office staff. After the eight acquisitions
more than doubled our worldwide workforce to about 112,000, Charlie and I went soft last year and added one
more person at headquarters. (Charlie, bless him, never lets me forget Ben Franklin’s advice: “A small leak can
sink a great ship.”) Now we have 13.8 people.
This tiny band works miracles. In 2000 it handled all of the details connected with our eight acquisitions,
processed extensive regulatory and tax filings (our tax return covers 4,896 pages), smoothly produced an annual
meeting to which 25,000 tickets were issued, and accurately dispensed checks to 3,660 charities designated by our
shareholders. In addition, the group dealt with all the routine tasks served up by a company with a revenue run￾rate of $40 billion and more than 300,000 owners. And, to add to all of this, the other 12.8 are a delight to be
around.
I should pay to have my job.
Acquisitions of 2000
Our acquisition technique at Berkshire is simplicity itself: We answer the phone. I’m also glad to report
that it rings a bit more often now, because owners and/or managers increasingly wish to join their companies with
Berkshire. Our acquisition criteria are set forth on page 23, and the number to call is 402-346-1400.
Let me tell you a bit about the businesses we have purchased during the past 14 months, starting with the
two transactions that were initiated in 1999, but closed in 2000. (This list excludes some smaller purchases that
were made by the managers of our subsidiaries and that, in most cases, will be integrated into their operations.)
·
I described the first purchase — 76% of MidAmerican Energy — in last year’s report. Because
of regulatory constraints on our voting privileges, we perform only a “one-line” consolidation of
MidAmerican’s earnings and equity in our financial statements. If we instead fully consolidated
the company’s figures, our revenues in 2000 would have been $5 billion greater than we
reported, though net income would remain the same.
·
On November 23, 1999, I received a one-page fax from Bruce Cort that appended a Washington
Post article describing an aborted buyout of CORT Business Services. Despite his name, Bruce
has no connection with CORT. Rather, he is an airplane broker who had sold Berkshire a jet in
1986 and who, before the fax, had not been in touch with me for about ten years.
I knew nothing about CORT, but I immediately printed out its SEC filings and liked what I saw.
That same day I told Bruce I had a possible interest and asked him to arrange a meeting with
Paul Arnold, CORT’s CEO. Paul and I got together on November 29, and I knew at once that we
had the right ingredients for a purchase: a fine though unglamorous business, an outstanding
manager, and a price (going by that on the failed deal) that made sense.
Operating out of 117 showrooms, CORT is the national leader in “rent-to-rent” furniture,
primarily used in offices but also by temporary occupants of apartments. This business, it should
be noted, has no similarity to “rent-to-own” operations, which usually involve the sale of home
furnishings and electronics to people having limited income and poor credit.
5
We quickly purchased CORT for Wesco, our 80%-owned subsidiary, paying about $386 million
in cash. You will find more details about CORT’s operations in Wesco’s 1999 and 2000 annual
reports. Both Charlie and I enjoy working with Paul, and CORT looks like a good bet to beat our
original expectations.
·
Early last year, Ron Ferguson of General Re put me in contact with Bob Berry, whose family had
owned U.S. Liability for 49 years. This insurer, along with two sister companies, is a medium￾sized, highly-respected writer of unusual risks — “excess and surplus lines” in insurance jargon.
After Bob and I got in touch, we agreed by phone on a half-stock, half-cash deal.
In recent years, Tom Nerney has managed the operation for the Berry family and has achieved a
rare combination of excellent growth and unusual profitability. Tom is a powerhouse in other
ways as well. In addition to having four adopted children (two from Russia), he has an extended
family: the Philadelphia Belles, a young-teen girls basketball team that Tom coaches. The team
had a 62-4 record last year and finished second in the AAU national tournament.
Few property-casualty companies are outstanding businesses. We have far more than our share,
and U.S. Liability adds luster to the collection.
·
Ben Bridge Jeweler was another purchase we made by phone, prior to any face-to-face meeting
between me and the management. Ed Bridge, who with his cousin, Jon, manages this 65-store
West Coast retailer, is a friend of Barnett Helzberg, from whom we bought Helzberg Diamonds
in 1995. Upon learning that the Bridge family proposed to sell its company, Barnett gave
Berkshire a strong recommendation. Ed then called and explained his business to me, also
sending some figures, and we made a deal, again half for cash and half for stock.
Ed and Jon are fourth generation owner-managers of a business started 89 years ago in Seattle.
Both the business and the family— including Herb and Bob, the fathers of Jon and Ed — enjoy
extraordinary reputations. Same-store sales have increased by 9%, 11%, 13%, 10%, 12%, 21%
and 7% over the past seven years, a truly remarkable record.
It was vital to the family that the company operate in the future as in the past. No one wanted
another jewelry chain to come in and decimate the organization with ideas about synergy and
cost saving (which, though they would never work, were certain to be tried). I told Ed and Jon
that they would be in charge, and they knew I could be believed: After all, it’s obvious that your
Chairman would be a disaster at actually running a store or selling jewelry (though there are
members of his family who have earned black belts as purchasers).
In their typically classy way, the Bridges allocated a substantial portion of the proceeds from their
sale to the hundreds of co-workers who had helped the company achieve its success. We’re
proud to be associated with both the family and the company.
·
In July we acquired Justin Industries, the leading maker of Western boots — including the
Justin, Tony Lama, Nocona, and Chippewa brands æ and the premier producer of brick in Texas
and five neighboring states.
Here again, our acquisition involved serendipity. On May 4th, I received a fax from Mark Jones,
a stranger to me, proposing that Berkshire join a group to acquire an unnamed company. I faxed
him back, explaining that with rare exceptions we don’t invest with others, but would happily
pay him a commission if he sent details and we later made a purchase. He replied that the
“mystery company” was Justin. I then went to Fort Worth to meet John Roach, chairman of the
company and John Justin, who had built the business and was its major shareholder. Soon after,
we bought Justin for $570 million in cash.
John Justin loved Justin Industries but had been forced to retire because of severe health problems
(which sadly led to his death in late February). John was a class act æ as a citizen, businessman
and human being. Fortunately, he had groomed two outstanding managers, Harrold Melton at
Acme and Randy Watson at Justin Boot, each of whom runs his company autonomously.
6
Acme, the larger of the two operations, produces more than one billion bricks per year at its 22
plants, about 11.7% of the industry’s national output. The brick business, however, is necessarily
regional, and in its territory Acme enjoys unquestioned leadership. When Texans are asked to
name a brand of brick, 75% respond Acme, compared to 16% for the runner-up. (Before our
purchase, I couldn’t have named a brand of brick. Could you have?) This brand recognition is
not only due to Acme’s product quality, but also reflects many decades of extraordinary
community service by both the company and John Justin.
I can’t resist pointing out that Berkshire — whose top management has long been mired in the
19th century — is now one of the very few authentic “clicks-and-bricks” businesses around. We
went into 2000 with GEICO doing significant business on the Internet, and then we added Acme.
You can bet this move by Berkshire is making them sweat in Silicon Valley.
·
In June, Bob Shaw, CEO of Shaw Industries, the world’s largest carpet manufacturer, came to
see me with his partner, Julian Saul, and the CEO of a second company with which Shaw was
mulling a merger. The potential partner, however, faced huge asbestos liabilities from past
activities, and any deal depended on these being eliminated through insurance.
The executives visiting me wanted Berkshire to provide a policy that would pay all future
asbestos costs. I explained that though we could write an exceptionally large policy — far larger
than any other insurer would ever think of offering — we would never issue a policy that lacked
a cap.
Bob and Julian decided that if we didn’t want to bet the ranch on the extent of the acquiree’s
liability, neither did they. So their deal died. But my interest in Shaw was sparked, and a few
months later Charlie and I met with Bob to work out a purchase by Berkshire. A key feature of
the deal was that both Bob and Julian were to continue owning at least 5% of Shaw. This leaves
us associated with the best in the business as shown by Bob and Julian’s record: Each built a
large, successful carpet business before joining forces in 1998.
Shaw has annual sales of about $4 billion, and we own 87.3% of the company. Leaving aside our
insurance operation, Shaw is by far our largest business. Now, if people walk all over us, we
won’t mind.
·
In July, Bob Mundheim, a director of Benjamin Moore Paint, called to ask if Berkshire might
be interested in acquiring it. I knew Bob from Salomon, where he was general counsel during
some difficult times, and held him in very high regard. So my answer was “Tell me more.”
In late August, Charlie and I met with Richard Roob and Yvan Dupuy, past and present CEOs of
Benjamin Moore. We liked them; we liked the business; and we made a $1 billion cash offer on
the spot. In October, their board approved the transaction, and we completed it in December.
Benjamin Moore has been making paint for 117 years and has thousands of independent dealers
that are a vital asset to its business. Make sure you specify our product for your next paint job.
·
Finally, in late December, we agreed to buy Johns Manville Corp. for about $1.8 billion. This
company’s incredible odyssey over the last few decades æ too multifaceted to be chronicled here
æ was shaped by its long history as a manufacturer of asbestos products. The much-publicized
health problems that affected many people exposed to asbestos led to JM’s declaring bankruptcy
in 1982.
Subsequently, the bankruptcy court established a trust for victims, the major asset of which was a
controlling interest in JM. The trust, which sensibly wanted to diversify its assets, agreed last
June to sell the business to an LBO buyer. In the end, though, the LBO group was unable to
obtain financing.
Consequently, the deal was called off on Friday, December 8th. The following Monday, Charlie
and I called Bob Felise, chairman of the trust, and made an all-cash offer with no financing
contingencies. The next day the trustees voted tentatively to accept our offer, and a week later we
signed a contract.
JM is the nation’s leading producer of commercial and industrial insulation and also has major
positions in roofing systems and a variety of engineered products. The company’s sales exceed
$2 billion and the business has earned good, if cyclical, returns. Jerry Henry, JM’s CEO, had
announced his retirement plans a year ago, but I’m happy to report that Charlie and I have
convinced him to stick around.
* * * * * * * * * * * *
Two economic factors probably contributed to the rush of acquisition activity we experienced last year.
First, many managers and owners foresaw near-term slowdowns in their businesses æ and, in fact, we purchased
several companies whose earnings will almost certainly decline this year from peaks they reached in 1999 or 2000.
The declines make no difference to us, given that we expect all of our businesses to now and then have ups and
downs. (Only in the sales presentations of investment banks do earnings move forever upward.) We don’t care
about the bumps; what matters are the overall results. But the decisions of other people are sometimes affected by
the near-term outlook, which can both spur sellers and temper the enthusiasm of purchasers who might otherwise
compete with us.
A second factor that helped us in 2000 was that the market for junk bonds dried up as the year progressed.
In the two preceding years, junk bond purchasers had relaxed their standards, buying the obligations of ever￾weaker issuers at inappropriate prices. The effects of this laxity were felt last year in a ballooning of defaults. In
this environment, “financial” buyers of businesses æ those who wish to buy using only a sliver of equity æ
became unable to borrow all they thought they needed. What they could still borrow, moreover, came at a high
price. Consequently, LBO operators became less aggressive in their bidding when businesses came up for sale last
year. Because we analyze purchases on an all-equity basis, our evaluations did not change, which means we
became considerably more competitive.
Aside from the economic factors that benefited us, we now enjoy a major and growing advantage in
making acquisitions in that we are often the buyer of choice for the seller. That fact, of course, doesn’t assure a
deal æ sellers have to like our price, and we have to like their business and management æ but it does help.
We find it meaningful when an owner cares about whom he sells to. We like to do business with someone
who loves his company, not just the money that a sale will bring him (though we certainly understand why he likes
that as well). When this emotional attachment exists, it signals that important qualities will likely be found within
the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a
strong sense of direction. The reverse is apt to be true, also. When an owner auctions off his business, exhibiting a
total lack of interest in what follows, you will frequently find that it has been dressed up for sale, particularly when
the seller is a “financial owner.” And if owners behave with little regard for their business and its people, their
conduct will often contaminate attitudes and practices throughout the company.
When a business masterpiece has been created by a lifetime — or several lifetimes — of unstinting care
and exceptional talent, it should be important to the owner what corporation is entrusted to carry on its history.
Charlie and I believe Berkshire provides an almost unique home. We take our obligations to the people who
created a business very seriously, and Berkshire’s ownership structure ensures that we can fulfill our promises.
When we tell John Justin that his business will remain headquartered in Fort Worth, or assure the Bridge family
that its operation will not be merged with another jeweler, these sellers can take those promises to the bank.
How much better it is for the “painter” of a business Rembrandt to personally select its permanent home
than to have a trust officer or uninterested heirs auction it off. Throughout the years we have had great experiences
with those who recognize that truth and apply it to their business creations. We’ll leave the auctions to others.
7
8
The Economics of Property/Casualty Insurance
Our main business — though we have others of great importance — is insurance. To understand
Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key
determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the
long-term outlook for both of these factors.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because
premiums are received before losses are paid, an interval that sometimes extends over many years. During that
time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that
an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an
"underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less
than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is
higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in
figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost
of float. Errors of estimation, usually innocent but sometimes not, can be huge. The consequences of these
miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in
reserving, but the general public can typically do no more than accept what's presented, and at times I have been
amazed by the numbers that big-name auditors have implicitly blessed. Both the income statements and balance
sheets of insurers can be minefields.
At Berkshire, we strive to be both consistent and conservative in our reserving. But we will make
mistakes. And we warn you that there is nothing symmetrical about surprises in the insurance business: They
almost always are unpleasant.
The table that follows shows (at intervals) the float generated by the various segments of Berkshire’s
insurance operations since we entered the business 34 years ago upon acquiring National Indemnity Company
(whose traditional lines are included in the segment “Other Primary”). For the table we have calculated our float
— which we generate in large amounts relative to our premium volume — by adding net loss reserves, loss
adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting
insurance-related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed
reinsurance. (Don’t panic, there won’t be a quiz.)
Yearend Float (in $ millions)
Other Other
Year GEICO General Re Reinsurance Primary Total
1967 20 20
1977 40 131 171
1987 701 807 1,508
1997 2,917 4,014 455 7,386
1998 3,125 14,909 4,305 415 22,754
1999 3,444 15,166 6,285 403 25,298
2000 3,943 15,525 7,805 598 27,871
We’re pleased by the growth in our float during 2000 but not happy with its cost. Over the years, our cost
of float has been very close to zero, with the underwriting profits realized in most years offsetting the occasional
terrible year such as 1984, when our cost was a staggering 19%. In 2000, however, we had an underwriting loss of
$1.6 billion, which gave us a float cost of 6%. Absent a mega-catastrophe, we expect our float cost to fall in 2001
æ perhaps substantially æ in large part because of corrections in pricing at General Re that should increasingly be
felt as the year progresses. On a smaller scale, GEICO may experience the same improving trend.
There are two factors affecting our cost of float that are very rare at other insurers but that now loom large
at Berkshire. First, a few insurers that are currently experiencing large losses have offloaded a significant portion of
these on us in a manner that penalizes our current earnings but gives us float we can use for many years to come.
After the loss that we incur in the first year of the policy, there are no further costs attached to this business.
When these policies are properly priced, we welcome the pain-today, gain-tomorrow effects they have. In
1999, $400 million of our underwriting loss (about 27.8% of the total) came from business of this kind and in 2000
the figure was $482 million (34.4% of our loss). We have no way of predicting how much similar business we will
write in the future, but what we do get will typically be in large chunks. Because these transactions can materially
distort our figures, we will tell you about them as they occur.
Other reinsurers have little taste for this insurance. They simply can’t stomach what huge underwriting
losses do to their reported results, even though these losses are produced by policies whose overall economics are
certain to be favorable. You should be careful, therefore, in comparing our underwriting results with those of other
insurers.
An even more significant item in our numbers — which, again, you won’t find much of elsewhere —
arises from transactions in which we assume past losses of a company that wants to put its troubles behind it. To
illustrate, the XYZ insurance company might have last year bought a policy obligating us to pay the first $1 billion
of losses and loss adjustment expenses from events that happened in, say, 1995 and earlier years. These contracts
can be very large, though we always require a cap on our exposure. We entered into a number of such transactions
in 2000 and expect to close several more in 2001.
Under GAAP accounting, this “retroactive” insurance neither benefits nor penalizes our current earnings.
Instead, we set up an asset called “deferred charges applicable to assumed reinsurance,” in an amount reflecting
the difference between the premium we receive and the (higher) losses we expect to pay (for which reserves are
immediately established). We then amortize this asset by making annual charges to earnings that create equivalent
underwriting losses. You will find the amount of the loss that we incur from these transactions in both our
quarterly and annual management discussion. By their nature, these losses will continue for many years, often
stretching into decades. As an offset, though, we have the use of float æ lots of it.
Clearly, float carrying an annual cost of this kind is not as desirable as float we generate from policies that
are expected to produce an underwriting profit (of which we have plenty). Nevertheless, this retroactive insurance
should be decent business for us.
The net of all this is that a) I expect our cost of float to be very attractive in the future but b) rarely to
return to a “no-cost” mode because of the annual charge that retroactive reinsurance will lay on us. Also —
obviously æ the ultimate benefits that we derive from float will depend not only on its cost but, fully as important,
how effectively we deploy it.
Our retroactive business is almost single-handedly the work of Ajit Jain, whose praises I sing annually. It
is impossible to overstate how valuable Ajit is to Berkshire. Don’t worry about my health; worry about his.
Last year, Ajit brought home a $2.4 billion reinsurance premium, perhaps the largest in history, from a
policy that retroactively covers a major U.K. company. Subsequently, he wrote a large policy protecting the Texas
Rangers from the possibility that Alex Rodriguez will become permanently disabled. Assports fans know, “A-Rod”
was signed for $252 million, a record, and we think that our policy probably also set a record for disability
insurance. We cover many other sports figures as well.
In another example of his versatility, Ajit last fall negotiated a very interesting deal with Grab.com, an
Internet company whose goal was to attract millions of people to its site and there to extract information from them
that would be useful to marketers. To lure these people, Grab.com held out the possibility of a $1 billion prize
(having a $170 million present value) and we insured its payment. A message on the site explained that the
chance of anyone winning the prize was low, and indeed no one won. But the possibility of a win was far from nil.
Writing such a policy, we receive a modest premium, face the possibility of a huge loss, and get good
odds. Very few insurers like that equation. And they’re unable to cure their unhappiness by reinsurance. Because
each policy has unusual æ and sometimes unique æ characteristics, insurers can’t lay off the occasional shock loss
9
10
through their standard reinsurance arrangements. Therefore, any insurance CEO doing a piece of business like this
must run the small, but real, risk of a horrible quarterly earnings number, one that he would not enjoy explaining to
his board or shareholders. Charlie and I, however, like any proposition that makes compelling mathematical sense,
regardless of its effect on reported earnings.
At General Re, the news has turned considerably better: Ron Ferguson, along with Joe Brandon, Tad
Montross, and a talented supporting cast took many actions during 2000 to bring that company’s profitability back
to past standards. Though our pricing is not fully corrected, we have significantly repriced business that was
severely unprofitable or dropped it altogether. If there’s no mega-catastrophe in 2001, General Re’s float cost
should fall materially.
The last couple of years haven’t been any fun for Ron and his crew. But they have stepped up to tough
decisions, and Charlie and I applaud them for these. General Re has several important and enduring business
advantages. Better yet, it has managers who will make the most of them.
In aggregate, our smaller insurance operations produced an excellent underwriting profit in 2000 while
generating significant float — just as they have done for more than a decade. If these companies were a single and
separate operation, people would consider it an outstanding insurer. Because the companies instead reside in an
enterprise as large as Berkshire, the world may not appreciate their accomplishments — but I sure do. Last year I
thanked Rod Eldred, John Kizer, Don Towle and Don Wurster, and I again do so. In addition, we now also owe
thanks to Tom Nerney at U.S. Liability and Michael Stearns, the new head of Cypress.
You may notice that Brad Kinstler, who was CEO of Cypress and whose praises I’ve sung in the past, is no
longer in the list above. That’s because we needed a new manager at Fechheimer Bros., our Cincinnati-based
uniform company, and called on Brad. We seldom move Berkshire managers from one enterprise to another, but
maybe we should try it more often: Brad is hitting home runs in his new job, just as he always did at Cypress.
GEICO (1-800-847-7536 or GEICO.com)
We show below the usual table detailing GEICO’s growth. Last year I enthusiastically told you that we
would step up our expenditures on advertising in 2000 and that the added dollars were the best investment that
GEICO could make. I was wrong: The extra money we spent did not produce a commensurate increase in
inquiries. Additionally, the percentage of inquiries that we converted into sales fell for the first time in many
years. These negative developments combined to produce a sharp increase in our per-policy acquisition cost.
New Auto Auto Policies
Years Policies(1) In-Force(1)
1993 346,882 2,011,055
1994 384,217 2,147,549
1995 443,539 2,310,037
1996 592,300 2,543,699
1997 868,430 2,949,439
1998 1,249,875 3,562,644
1999 1,648,095 4,328,900
2000 1,472,853 4,696,842
(1) “Voluntary” only; excludes assigned risks and the like.
Agonizing over errors is a mistake. But acknowledging and analyzing them can be useful, though that
practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid post-mortem of
a failed decision, particularly one involving an acquisition. A notable exception to this never-look-back approach is
that of The Washington Post Company, which unfailingly and objectively reviews its acquisitions three years after
they are made. Elsewhere, triumphs are trumpeted, but dumb decisions either get no follow-up or are rationalized.
The financial consequences of these boners are regularly dumped into massive restructuring charges or
write-offs that are casually waved off as “nonrecurring.” Managements just love these. Indeed, in recent years it
has seemed that no earnings statement is complete without them. The origins of these charges, though, are never
explored. When it comes to corporate blunders, CEOs invoke the concept of the Virgin Birth.
To get back to our examination of GEICO: There are at least four factors that could account for the
increased costs we experienced in obtaining new business last year, and all probably contributed in some manner.
First, in our advertising we have pushed “frequency” very hard, and we probably overstepped in certain
media. We’ve always known that increasing the number of messages through any medium would eventually
produce diminishing returns. The third ad in an hour on a given cable channel is simply not going to be as effective
as the first.
Second, we may have already picked much of the low-hanging fruit. Clearly, the willingness to do
business with a direct marketer of insurance varies widely among individuals: Indeed, some percentage of
Americans æ particularly older ones æ are reluctant to make direct purchases of any kind. Over the years,
however, this reluctance will ebb. A new generation with new habits will find the savings from direct purchase of
their auto insurance too compelling to ignore.
Another factor that surely decreased the conversion of inquiries into sales was stricter underwriting by
GEICO. Both the frequency and severity of losses increased during the year, and rates in certain areas became
inadequate, in some cases substantially so. In these instances, we necessarily tightened our underwriting standards.
This tightening, as well as the many rate increases we put in during the year, made our offerings less attractive to
some prospects.
A high percentage of callers, it should be emphasized, can still save money by insuring with us.
Understandably, however, some prospects will switch to save $200 per year but will not switch to save $50.
Therefore, rate increases that bring our prices closer to those of our competitors will hurt our acceptance rate, even
when we continue to offer the best deal.
Finally, the competitive picture changed in at least one important respect: State Farm æ by far the largest
personal auto insurer, with about 19% of the market — has been very slow to raise prices. Its costs, however, are
clearly increasing right along with those of the rest of the industry. Consequently, State Farm had an underwriting
loss last year from auto insurance (including rebates to policyholders) of 18% of premiums, compared to 4% at
GEICO. Our loss produced a float cost for us of 6.1%, an unsatisfactory result. (Indeed, at GEICO we expect float,
over time, to be free.) But we estimate that State Farm’s float cost in 2000 was about 23%. The willingness of the
largest player in the industry to tolerate such a cost makes the economics difficult for other participants.
That does not take away from the fact that State Farm is one of America’s greatest business stories. I’ve
urged that the company be studied at business schools because it has achieved fabulous success while following a
path that in many ways defies the dogma of those institutions. Studying counter-evidence is a highly useful activity,
though not one always greeted with enthusiasm at citadels of learning.
State Farm was launched in 1922, by a 45-year-old, semi-retired Illinois farmer, to compete with long￾established insurers æ haughty institutions in New York, Philadelphia and Hartford æ that possessed
overwhelming advantages in capital, reputation, and distribution. Because State Farm is a mutual company, its
board members and managers could not be owners, and it had no access to capital markets during its years of fast
growth. Similarly, the business never had the stock options or lavish salaries that many people think vital if an
American enterprise is to attract able managers and thrive.
In the end, however, State Farm eclipsed all its competitors. In fact, by 1999 the company had amassed a
tangible net worth exceeding that of all but four American businesses. If you want to read how this happened, get a
copy of The Farmer from Merna.
11
12
Despite State Farm’s strengths, however, GEICO has much the better business model, one that embodies
significantly lower operating costs. And, when a company is selling a product with commodity-like economic
characteristics, being the low-cost producer is all-important. This enduring competitive advantage of GEICO æ
one it possessed in 1951 when, as a 20-year-old student, I first became enamored with its stock æ is the reason that
over time it will inevitably increase its market share significantly while simultaneously achieving excellent profits.
Our growth will be slow, however, if State Farm elects to continue bearing the underwriting losses that it is now
suffering.
Tony Nicely, GEICO’s CEO, remains an owner’s dream. Everything he does makes sense. He never
engages in wishful thinking or otherwise distortsreality, as so many managers do when the unexpected happens. As
2000 unfolded, Tony cut back on advertising that was not cost-effective, and he will continue to do that in 2001 if
cutbacks are called for (though we will always maintain a massive media presence). Tony has also aggressively
filed for price increases where we need them. He looks at the loss reports every day and is never behind the curve.
To steal a line from a competitor, we are in good hands with Tony.
I’ve told you about our profit-sharing arrangement at GEICO that targets only two variables — growth in
policies and the underwriting results of seasoned business. Despite the headwinds of 2000, we still had a
performance that produced an 8.8% profit-sharing payment, amounting to $40.7 million.
GEICO will be a huge part of Berkshire’s future. Because of its rock-bottom operating costs, it offers a
great many Americans the cheapest way to purchase a high-ticket product that they must buy. The company then
couples this bargain with service that consistently ranks high in independent surveys. That’s a combination
inevitably producing growth and profitability.
In just the last few years, far more drivers have learned to associate the GEICO brand with saving money
on their insurance. We will pound that theme relentlessly until all Americans are aware of the value that we offer.
Investments
Below we present our common stock investments. Those that had a market value of more than $1 billion
at the end of 2000 are itemized.
12/31/00
Shares Company Cost Market
(dollars in millions)
151,610,700 American Express Company.................................................................. $1,470 $ 8,329
200,000,000 The Coca-Cola Company ....................................................................... 1,299 12,188
96,000,000 The Gillette Company............................................................................ 600 3,468
1,727,765 The Washington Post Company ............................................................. 11 1,066
55,071,380 Wells Fargo & Company........................................................................ 319 3,067
Others.................................................................................................... 6,703 9,501
Total Common Stocks............................................................................ $10,402 $_37,619
In 2000, we sold nearly all of our Freddie Mac and Fannie Mae shares, established 15% positions in several
mid-sized companies, bought the high-yield bonds of a few issuers (very few — the category is not labeled junk
without reason) and added to our holdings of high-grade, mortgage-backed securities. There are no “bargains”
among our current holdings: We’re content with what we own but far from excited by it.
Many people assume that marketable securities are Berkshire’s first choice when allocating capital, but
that’s not true: Ever since we first published our economic principles in 1983, we have consistently stated that we
would rather purchase businesses than stocks. (See number 4 on page 60.) One reason for that preference is
personal, in that I love working with our managers. They are high-grade, talented and loyal. And, frankly, I find
their business behavior to be more rational and owner-oriented than that prevailing at many public companies.
But there’s also a powerful financial reason behind the preference, and that has to do with taxes. The tax
code makes Berkshire’s owning 80% or more of a business far more profitable for us, proportionately, than our
owning a smaller share. When a company we own all of earns $1 million after tax, the entire amount inures to our
benefit. If the $1 million is upstreamed to Berkshire, we owe no tax on the dividend. And, if the earnings are
retained and we were to sell the subsidiary æ not likely at Berkshire! æ for $1million more than we paid for it, we
would owe no capital gains tax. That’s because our “tax cost” upon sale would include both what we paid for the
business and all earnings it subsequently retained.
Contrast that situation to what happens when we own an investment in a marketable security. There, if we
own a 10% stake in a business earning $10 million after tax, our $1 million share of the earnings is subject to
additional state and federal taxes of (1) about $140,000 if it is distributed to us (our tax rate on most dividends is
14%); or (2) no less than $350,000 if the $1 million is retained and subsequently captured by us in the form of a
capital gain (on which our tax rate is usually about 35%, though it sometimes approaches 40%). We may defer
paying the $350,000 by not immediately realizing our gain, but eventually we must pay the tax. In effect, the
government is our “partner” twice when we own part of a business through a stock investment, but only once when
we own at least 80%.
Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the
formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by
a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).
The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in
the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain
are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the
risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three
questions, you will know the maximum value of the bush æ and the maximum number of the birds you now
possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.
Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays
for farms, oilroyalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam
engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the
Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital
throughout the universe.
Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth
rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash
flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a
project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.
Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting
approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component æ
usually a plus, sometimes a minus æ in the value equation.
Alas, though Aesop’s proposition and the third variable æ that is, interest rates æ are simple, plugging in
numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a
range of possibilities is the better approach.
Usually, the range must be so wide that no useful conclusion can be reached. Occasionally, though, even
very conservative estimates about the future emergence of birds reveal that the price quoted is startlingly low in
relation to value. (Let’s call this phenomenon the IBT æ Inefficient Bush Theory.) To be sure, an investor needs
some general understanding of business economics as well as the ability to think independently to reach a well￾founded positive conclusion. But the investor does not need brilliance nor blinding insights.
At the other extreme, there are many times when the most brilliant of investors can’t muster a conviction
about the birds to emerge, not even when a very broad range of estimates is employed. This kind of uncertainty
frequently occurs when new businesses and rapidly changing industries are under examination. In cases of this sort,
any capital commitment must be labeled speculative.
13
Now, speculation — in which the focus is not on what an asset will produce but rather on what the next
fellow will pay for it — is neither illegal, immoral nor un-American. But it is not a game in which Charlie and I
wish to play. We bring nothing to the party, so why should we expect to take anything home?
The line separating investment and speculation, which is never bright and clear, becomes blurred still
further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses
of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that
of Cinderella at the ball. They know that overstaying the festivities æ that is, continuing to speculate in companies
that have gigantic valuations relative to the cash they are likely to generate in the future æ will eventually bring on
pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the
giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in
a room in which the clocks have no hands.
Last year, we commented on the exuberance æ and, yes, it was irrational æ that prevailed, noting that
investor expectations had grown to be several multiples of probable returns. One piece of evidence came from a
Paine Webber-Gallup survey of investors conducted in December 1999, in which the participants were asked their
opinion about the annual returns investors could expect to realize over the decade ahead. Their answers averaged
19%. That, for sure, was an irrational expectation: For American business as a whole, there couldn’t possibly be
enough birds in the 2009 bush to deliver such a return.
Far more irrational still were the huge valuations that market participants were then putting on businesses
almost certain to end up being of modest or no value. Yet investors, mesmerized by soaring stock prices and
ignoring all else, piled into these enterprises. It was as if some virus, racing wildly among investment professionals
as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from
the values of the businesses that underlay them.
This surreal scene was accompanied by much loose talk about “value creation.” We readily acknowledge
that there has been a huge amount of true value created in the past decade by new or young businesses, and that
there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime,
no matter how high its interim valuation may get.
What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly
merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the
public to their own purses (and to those of their friends and associates). The fact is that a bubblemarket has allowed
the creation of bubble companies, entities designed more with an eye to making money off investors rather than for
them. Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the “business
model” for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers
acted as eager postmen.
But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns
some very old lessons: First, many in Wall Street æ a community in which quality control is not prized æ will sell
investors anything they will buy. Second, speculation is most dangerous when it looks easiest.
At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven
enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old
equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when
they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five
in the phonebook.”). Obviously, we can never precisely predict the timing of cash flows in and out of a business or
their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business
surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember,
who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department
stores.
Lately, the most promising “bushes” have been negotiated transactions for entire businesses, and that
pleases us. You should clearly understand, however, that these acquisitions will at best provide us only reasonable
returns. Really juicy results from negotiated deals can be anticipated only when capital markets are severely
constrained and the whole business world is pessimistic. We are 180 degrees from that point.
14
15
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation,
purchase-accounting adjustments are not assigned to the specific businesses to which they apply, but are instead
aggregated and shown separately. This procedure lets you view the earnings of our businesses as they would have
been reported had we not purchased them. For the reasons discussed on page 65, this form of presentation seems to
usto bemore useful to investors and managers than one utilizing generally accepted accounting principles (GAAP),
which require purchase-premiums to be charged off business-by-business. The total net earnings we show in the
table are, of course, identical to the GAAP total in our audited financial statements.
(in millions)
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
2000 1999 2000 1999
Operating Earnings:
Insurance Group:
Underwriting – Reinsurance................................. $(1,399) $(1,440) $(899) $(927)
Underwriting – GEICO........................................ (224) 24 (146) 16
Underwriting – Other Primary ............................. 38 22 24 14
Net Investment Income ........................................ 2,747 2,482 1,929 1,764
Finance and Financial Products Business................ 556 125 360 86
Flight Services........................................................ 213 225 126 132
MidAmerican Energy (76% owned)........................ 197 -- 109 --
Retail Operations.................................................... 175 130 104 77
Scott Fetzer (excluding finance operation) .............. 122 147 80 92
Other Businesses .................................................... 225 210 134 131
Purchase-Accounting Adjustments.......................... (881) (739) (843) (648)
Corporate Interest Expense ..................................... (92) (109) (61) (70)
Shareholder-Designated Contributions.................... (17) (17) (11) (11)
Other...................................................................... 39 25 30 15
Operating Earnings................................................... 1,699 1,085 936 671
Capital Gains from Investments................................. 3,955 1,365 2,392 886
Total Earnings – All Entities..................................... $5,654 $2,450 $3,328 $1,557
Most of our manufacturing, retailing and service businesses did at least reasonably well last year.
The exception was shoes, particularly at Dexter. In our shoe businesses generally, our attempt to keep the
bulk of our production in domestic factories has cost us dearly. We face another very tough year in 2001 also, as
we make significant changes in how we do business.
I clearly made a mistake in paying what I did for Dexter in 1993. Furthermore, I compounded that
mistake in a huge way by using Berkshire shares in payment. Last year, to recognize my error, we charged off all
the remaining accounting goodwill that was attributable to the Dexter transaction. We may regain some economic
goodwill at Dexter in the future, but we clearly have none at present.
The managers of our shoe businesses are first-class from both a business and human perspective. They
are working very hard at a tough æ and often terribly painful æ job, even though their personal financial
circumstances don’t require them to do so. They have my admiration and thanks.
On a more pleasant note, we continue to be the undisputed leader in two branches of Aircraft Services æ
pilot training at FlightSafety (FSI) and fractional ownership of business jets at Executive Jet (EJA). Both
companies are run by their remarkable founders.
Al Ueltschi at FSI is now 83 and continues to operate at full throttle. Though I am not a fan of stock splits,
I am planning to split Al’s age 2-for-1 when he hits 100. (If it works, guess who’s next.)
We spent $272 million on flight simulators in 2000, and we’ll spend a similar amount this year. Anyone
who thinks that the annual charges for depreciation don’t reflect a real cost æ every bit as real as payroll or raw
materials æ should get an internship at a simulator company. Every year we spend amounts equal to our
depreciation charge simply to stay in the same economic place æ and then spend additional sums to grow. And
growth is in prospect for FSI as far as the eye can see.
Even faster growth awaits EJA (whose fractional-ownership program is called NetJets‚). Rich Santulli is
the dynamo behind this business.
Last year I told you that EJA’s recurring revenue from monthly management fees and hourly usage grew
by 46% in 1999. In 2000 the growth was 49%. I also told you that this was a low-margin business, in which
survivors will be few. Margins were indeed slim at EJA last year, in part because of the major costs we are
incurring in developing our business in Europe.
Regardless of the cost, you can be sure that EJA’s spending on safety will be whatever is needed.
Obviously, we would follow this policy under any circumstances, but there’s some self-interest here as well: I, my
wife, my children, my sisters, my 94-year-old aunt, all but one of our directors, and at least nine Berkshire managers
regularly fly in the NetJets program. Given that cargo, I applaud Rich’s insistence on unusually high amounts of
pilot training (an average of 23 days a year). In addition, our pilots cement their skills by flying 800 or so hours a
year. Finally, each flies only one model of aircraft, which means our crews do no switching around among planes
with different cockpit and flight characteristics.
EJA’s business continues to be constrained by the availability of new aircraft. Still, our customers will
take delivery of more than 50 new jets in 2001, 7% of world output. We are confident we will remain the world
leader in fractional ownership, in respect to number of planes flying, quality of service, and standards of safety.
* * * * * * * * * *
Additional information about our various businesses is given on pages 42-58, where you will also find our
segment earnings reported on a GAAP basis. In addition, on pages 67-73, we have rearranged Berkshire’s financial
data into four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about
the company.
Look-Through Earnings
Reported earnings are an inadequate measure of economic progress at Berkshire, in part because the
numbers shown in the table on page 15 include only the dividends we receive from investees æ though these
dividends typically represent only a small fraction of the earnings attributable to our ownership. To depict
something closer to economic reality at Berkshire than reported earnings, though, we employ the concept of "look￾through" earnings. As we calculate these, they consist of: (1) the operating earnings reported on page 15; plus; (2)
our share of the retained operating earnings of major investees that, under GAAP accounting, are not reflected in
our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of investees
had instead been distributed to us. When tabulating "operating earnings" here, we exclude purchase-accounting
adjustments as well as capital gains and other major non-recurring items.
The following table sets forth our 2000 look-through earnings, though I warn you that the figures can be no
more than approximate, since they are based on a number of judgment calls. (The dividends paid to us by these
investees have been included in the operating earnings itemized on page 15, mostly under "Insurance Group: Net
Investment Income.")
16
17
Berkshire's Approximate Berkshire's Share of Undistributed
Berkshire's Major Investees Ownership at Yearend(1) Operating Earnings (in millions)(2)
 
American Express Company ............................. 11.4% $265
The Coca-Cola Company .................................. 8.1% 160
Freddie Mac ..................................................... 0.3% 106
The Gillette Company....................................... 9.1% 51
M&T Bank ....................................................... 7.2% 23
The Washington Post Company ........................ 18.3% 18
Wells Fargo & Company................................... 3.2% 117
Berkshire's share of undistributed earnings of major investees 740
Hypothetical tax on these undistributed investee earnings(3) (104)
Reported operating earnings of Berkshire 1,779 
 Total look-through earnings of Berkshire $ 2,415
 (1) Does not include shares allocable to minority interests
 (2) Calculated on average ownership for the year
 (3) The tax rate used is 14%, which is the rate Berkshire pays on most dividends it receives
Full and Fair Reporting 
At Berkshire, full reporting means giving you the information that we would wish you to give to us if our
positions were reversed. What Charlie and I would want under that circumstance would be all the important facts
about current operations as well as the CEO’s frank view of the long-term economic characteristics of the business.
We would expect both a lot of financial details and a discussion of any significant data we would need to interpret
what was presented.
When Charlie and I read reports, we have no interest in pictures of personnel, plants or products.
References to EBITDA make us shudder æ does management think the tooth fairy pays for capital expenditures?
We’re very suspicious of accounting methodology that is vague or unclear, since too often that means management
wishes to hide something. And we don’t want to read messages that a public relations department or consultant has
turned out. Instead, we expect a company’s CEO to explain in his or her own words what’s happening.
For us, fair reporting means getting information to our 300,000 “partners” simultaneously, or as close to
that mark as possible. We therefore put our annual and quarterly financials on the Internet between the close of the
market on a Friday and the following morning. By our doing that, shareholders and other interested investors have
timely access to these important releases and also have a reasonable amount of time to digest the information they
include before the markets open on Monday. This year our quarterly information will be available on the Saturdays
of May 12, August 11, and November 10. The 2001 annual report will be posted on March 9.
We applaud the work that Arthur Levitt, Jr., until recently Chairman of the SEC, has done in cracking
down on the corporate practice of “selective disclosure” that had spread like cancer in recent years. Indeed, it had
become virtually standard practice for major corporations to “guide” analysts or large holders to earnings
expectationsthat were intended either to be on the nose or a tiny bit below what the company truly expected to earn.
Through the selectively dispersed hints, winks and nods that companies engaged in, speculatively-minded
institutions and advisors were given an information edge over investment-oriented individuals. This was corrupt
behavior, unfortunately embraced by both Wall Street and corporate America.
Thanks to Chairman Levitt, whose general efforts on behalf of investors were both tireless and effective,
corporations are now required to treat all of their owners equally. The fact that this reform came about because of
coercion rather than conscience should be a matter of shame for CEOs and their investor relations departments.
One further thought while I’m on my soapbox: Charlie and I think it is both deceptive and dangerous for
CEOs to predict growth rates for their companies. They are, of course, frequently egged on to do so by both
analysts and their own investor relations departments. They should resist, however, because too often these
predictions lead to trouble.
It’s fine for a CEO to have his own internal goals and, in our view, it’s even appropriate for the CEO to
publicly express some hopes about the future, if these expectations are accompanied by sensible caveats. But for a
major corporation to predict that its per-share earnings will grow over the long term at,say, 15% annually is to court
trouble.
That’s true because a growth rate of that magnitude can only be maintained by a very small percentage of
large businesses. Here’s a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980
and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that
only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable
companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years.
The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more
troublesome is the fact that they corrode CEO behavior. Over the years, Charlie and I have observed many
instances in which CEOs engaged in uneconomic operating maneuversso that they could meet earnings targets they
had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide
variety of accounting games to “make the numbers.” These accounting shenanigans have a way of snowballing:
Once a company moves earnings from one period to another, operating shortfalls that occur thereafter require it to
engage in further accounting maneuvers that must be even more “heroic.” These can turn fudging into fraud.
(More money, it has been noted, has been stolen with the point of a pen than at the point of a gun.)
Charlie and I tend to be leery of companies run by CEOs who woo investors with fancy predictions. A few
of these managers will prove prophetic — but others will turn out to be congenital optimists, or even charlatans.
Unfortunately, it’s not easy for investors to know in advance which species they are dealing with.
* * * * * * * * * * * *
I’ve warned you in the past that you should not believe everything you read or hear about Berkshire æ
even when it is published or broadcast by a prestigious news organization. Indeed, erroneous reports are
particularly dangerous when they are circulated by highly-respected members of the media, simply because most
readers and listeners know these outlets to be generally credible and therefore believe what they say.
An example is a glaring error about Berkshire’s activities that appeared in the December 29 issue of The
Wall Street Journal, a generally excellent paper that I have for all of my life found useful. On the front page (and
above the fold, as they say) The Journal published a news brief that said, in unequivocal terms, that we were buying
bonds of Conseco and Finova. This item directed the reader to the lead story of the Money and Investing section.
There, in the second paragraph of the story, The Journal reported, again without any qualification, that Berkshire
was buying Conseco and Finova bonds, adding that Berkshire had invested “several hundred million dollars” in
each. Only in the 18th paragraph of the story (which by that point had jumped to an inside page) did the paper hedge
a bit, saying that our Conseco purchases had been disclosed by “people familiar with the matter.”
Well, not that familiar. True, we had purchased bonds and bank debt of Finova æ though the report was
wildly inaccurate as to the amount. But to this day neither Berkshire nor I have ever bought a share of stock or a
bond of Conseco.
Berkshire is normally covered by a Journal reporter in Chicago who is both accurate and conscientious. In
this case, however, the “scoop” was the product of a New York reporter for the paper. Indeed, the 29th was a busy
day for him: By early afternoon, he had repeated the story on CNBC. Immediately, in lemming-like manner, other
respected news organizations, relying solely on the Journal, began relating the same “facts.” The result: Conseco
stock advanced sharply during the day on exceptional volume that placed it ninth on the NYSE most-active list.
During all of the story’s iterations, I never heard or read the word “rumor.” Apparently reporters and
editors, who generally pride themselves on their careful use of language, just can’t bring themselves to attach this
word to their accounts. But what description would fit more precisely? Certainly not the usual “sources say” or “it
has been reported.”
18
A column entitled “Today’s Rumors,” however, would not equate with the self-image of the many news
organizations that think themselves above such stuff. These members of the media would feel that publishing such
acknowledged fluff would be akin to L’Osservatore Romano initiating a gossip column. But rumors are what these
organizations often publish and broadcast, whatever euphemism they duck behind. At a minimum, readers deserve
honest terminology æ a warning label that will protect their financial health in the same way that smokers whose
physical health is at risk are given a warning.
The Constitution’s First Amendment allows the media to print or say almost anything. Journalism’s First
Principle should require that the media be scrupulous in deciding what that will be.
Miscellaneous
In last year’s report we examined the battle then raging over the use of “pooling” in accounting for
mergers. It seemed to us that both sides were voicing arguments that were strong in certain respects and seriously
flawed in others. We are pleased that the Financial Accounting Standards Board has since gone to an alternative
approach that strikes us as very sound.
If the proposed rule becomes final, we will no longer incur a large annual charge for amortization of
intangibles. Consequently, our reported earnings will more closely reflect economic reality. (See page 65.) None
of this will have an effect on Berkshire’s intrinsic value. Your Chairman, however, will personally benefit in that
there will be one less item to explain in these letters.
* * * * * * * * * * * *
I’m enclosing a report æ generously supplied by Outstanding Investor Digest æ of Charlie’s remarks at
last May’s Wesco annual meeting. Charlie thinks about business economics and investment matters better than
anyone I know, and I’ve learned a lot over the years by listening to him. Reading his comments will improve your
understanding of Berkshire.
* * * * * * * * * * * *
In 1985, we purchased Scott Fetzer, acquiring not only a fine business but the services of Ralph Schey, a
truly outstanding CEO, as well. Ralph was then 61. Most companies, focused on the calendar rather than ability,
would have benefited from Ralph’s talents for only a few years.
At Berkshire, in contrast, Ralph ran Scott Fetzer for 15 years until hisretirement at the end of 2000. Under
his leadership, the company distributed $1.03 billion to Berkshire against our net purchase price of $230 million.
We used these funds, in turn, to purchase other businesses. All told, Ralph’s contributions to Berkshire’s present
value extend well into the billions of dollars.
As a manager, Ralph belongs in Berkshire’s Hall of Fame, and Charlie and I welcome him to it.
* * * * * * * * * * * *
A bit of nostalgia: It was exactly 50 years ago that I entered Ben Graham’s class at Columbia. During the
decade before, I had enjoyed æ make that loved ¾ analyzing, buying and selling stocks. But my results were no
better than average.
Beginning in 1951 my performance improved. No, I hadn’t changed my diet or taken up exercise. The
only new ingredient was Ben’s ideas. Quite simply, a few hours spent at the feet of the master proved far more
valuable to me than had ten years of supposedly original thinking.
In addition to being a great teacher, Ben was a wonderful friend. My debt to him is incalculable.
19
Shareholder-Designated Contributions
About 97% of all eligible shares participated in Berkshire's 2000 shareholder-designated contributions
program, with contributions totaling $16.9 million. A full description of the program appears on pages 74-75.
Cumulatively, over the 20 years of the program, Berkshire has made contributions of $164 million
pursuant to the instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries, which
stick to the philanthropic patterns that prevailed before they were acquired (except that their former owners
themselves take on the responsibility for their personal charities). In aggregate, our subsidiaries made contributions
of $18.3 million in 2000, including in-kind donations of $3 million.
To participate in future programs, you must own Class A shares that are registered in the name of the
actual owner, not the nominee name of a broker, bank or depository. Shares not so registered on August 31, 2001
will be ineligible for the 2001 program. When you get the contributions form from us, return it promptly so that it
does not get put aside or forgotten. Designations received after the due date will not be honored.
The Annual Meeting
Last year we moved the annual meeting to the Civic Auditorium, and it worked very well for us. We will
meet there again on Saturday, April 28. The doors will open at 7 a.m., the movie will begin at 8:30, and the meeting
itself will commence at 9:30. There will be a short break at noon for food, with sandwiches available at the Civic’s
concession stands. Except for that interlude, Charlie and I will answer questions until 3:30.
For the next couple of years, the Civic is our only choice. We must therefore hold the meeting on either
Saturday or Sunday to avoid the traffic and parking nightmare that would occur on a weekday. Shortly, however,
Omaha will have a new Convention Center with ample parking. Assuming that the Center is then available to us, I
will poll shareholders to see whether you wish to return to a Monday meeting. We will decide that vote based on
the wishes of a majority of shareholders, not shares.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to this year’s meeting and other events. As for plane, hotel and car
reservations, we have again signed up American Express (800-799-6634) to give you special help. In our normal
fashion, we will run buses from the larger hotels to the meeting. After the meeting, the buses will make trips back
to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you are likely to find a car
useful.
We have added so many new companies to Berkshire this year that I’m not going to detail all of the
products that we will be selling at the meeting. But come prepared to carry home everything from bricks to candy.
One new product, however, deserves special note: Bob Shaw has designed a 3 x 5 rug featuring an excellent
likeness of Charlie. Obviously, it would be embarrassing for Charlie æ make that humiliating æ if slow sales
forced us to slash the rug’s price, so step up and do your part.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of them
ready to supply you with auto insurance quotes. In most cases, GEICO will be able to offer you a special
shareholder’s discount (usually 8%). Bring the details of your existing insurance and check out whether we can
save you some money.
At the Omaha airport on Saturday, we will have the usual array of aircraft from Executive Jet available for
your inspection. Just ask an EJA representative at the Civic about viewing any of these planes. If you buy what we
consider an appropriate number of items during the weekend, you may well need your own plane to take them
home.
At Nebraska Furniture Mart, located on a 75-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a discount that is
customarily given only to employees. We initiated this special pricing at NFM four years ago and sales during the
“Weekend” grew from $5.3 million in 1997 to $9.1 million in 2000.
20
21
To get the discount, you must make your purchases between Wednesday, April 25 and Monday, April 30
and also present your meeting credential. The period’s special pricing will even apply to the products of several
prestige manufacturersthat normally have ironclad rules against discounting but that, in the spirit of our shareholder
weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m.
on weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays.
Borsheim’s æ the largest jewelry store in the country except for Tiffany’s Manhattan store æ will have
two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, April 27. The
second, the main gala, will be from 9 a.m. to 5 p.m. on Sunday, April 29. Shareholder prices will be available
Thursday through Monday, so if you wish to avoid the large crowds that will assemble on Friday evening and
Sunday, come at other times and identify yourself as a shareholder. On Saturday, we will be open until 6 p.m.
Borsheim’s operates on a gross margin that is fully twenty percentage points below that of its major rivals, so the
more you buy, the more you save (or at least that’s what my family always tells me).
In the mall outside of Borsheim’s, we will have local bridge experts available to play with our shareholders
on Sunday. Bob Hamman, who normally is with us, will be in Africa this year. He has promised, however, to be on
hand in 2002. Patrick Wolff, twice U.S. chess champion, will also be in the mall, taking on all comers æ
blindfolded! Last year, Patrick played as many as six games simultaneously æ with his blindfold securely in place
æ and demolished his opponents.
As if all this isn’t enough to test your skills, our Borsheim’s Olympiad this year will also include Bill
Robertie, one of only two players to twice win the backgammon world championship. Backgammon can be a big
money game, so bring along your stock certificates.
Gorat’s æmy favorite steakhouse æ will again be open exclusively for Berkshire shareholders on Sunday,
April 29, and will be serving from 4 p.m. until 10 p.m. Please remember that you can’t come to Gorat’s on Sunday
without a reservation. To make one, call 402-551-3733 on April 2 (but not before). If Sunday is sold out, try
Gorat’s on one of the other evenings you will be in town. If you order a rare T-bone with a double order of hash
browns, you will establish your credentials as an epicure.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on Saturday night. This year the
Omaha Golden Spikes will play the New Orleans Zephyrs. Ernie Banks is again going to be on hand to æ bravely
æ face my fastball (once clocked at 95 mpm æ miles per month).
My performance last year was not my best: It took me five pitches to throw anything resembling a strike.
And, believe me, it gets lonely on the mound when you can’t find the plate. Finally, I got one over, and Ernie
lashed a line drive to left field. After I was yanked from the game, the many sports writers present asked what I had
served up to Ernie. I quoted what Warren Spahn said after Willie Mays hit one of his pitches for a home run
(Willie’s first in the majors): “It was a helluva pitch for the first sixty feet.”
It will be a different story this year. I don’t want to tip my hand, so let’s just say Ernie will have to deal
with a pitch he has never seen before.
Our proxy statement contains instructions about obtaining tickets to the game and also a large quantity of
other information that should help you enjoy your visit in Omaha. There will be plenty of action in town. So come
for Woodstock Weekend and join our Celebration of Capitalism at the Civic.
Warren E. Buffett
February 28, 2001 Chairman of the Board
2
Note: The following table appears in the printed Annual Report on the facing page of the
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500
 Annual Percentage Change 
in Per-Share in S&P 500
Book Value of with Dividends Relative
Berkshire Included Results
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8
1966 .................................................. 20.3 (11.7) 32.0
1967 .................................................. 11.0 30.9 (19.9)
1968 .................................................. 19.0 11.0 8.0
1969 .................................................. 16.2 (8.4) 24.6
1970 .................................................. 12.0 3.9 8.1
1971 .................................................. 16.4 14.6 1.8
1972 .................................................. 21.7 18.9 2.8
1973 .................................................. 4.7 (14.8) 19.5
1974 .................................................. 5.5 (26.4) 31.9
1975 .................................................. 21.9 37.2 (15.3)
1976 .................................................. 59.3 23.6 35.7
1977 .................................................. 31.9 (7.4) 39.3
1978 .................................................. 24.0 6.4 17.6
1979 .................................................. 35.7 18.2 17.5
1980 .................................................. 19.3 32.3 (13.0)
1981 .................................................. 31.4 (5.0) 36.4
1982 .................................................. 40.0 21.4 18.6
1983 .................................................. 32.3 22.4 9.9
1984 .................................................. 13.6 6.1 7.5
1985 .................................................. 48.2 31.6 16.6
1986 .................................................. 26.1 18.6 7.5
1987 .................................................. 19.5 5.1 14.4
1988 .................................................. 20.1 16.6 3.5
1989 .................................................. 44.4 31.7 12.7
1990 .................................................. 7.4 (3.1) 10.5
1991 .................................................. 39.6 30.5 9.1
1992 .................................................. 20.3 7.6 12.7
1993 .................................................. 14.3 10.1 4.2
1994 .................................................. 13.9 1.3 12.6
1995 .................................................. 43.1 37.6 5.5
1996 .................................................. 31.8 23.0 8.8
1997 .................................................. 34.1 33.4 .7
1998 .................................................. 48.3 28.6 19.7
1999 .................................................. .5 21.0 (20.5)
2000 .................................................. 6.5 (9.1) 15.6
2001 .................................................. (6.2) (11.9) 5.7
Average Annual Gain – 1965-2001 22.6% 11.0% 11.6%
Overall Gain – 1964-2001 194,936% 4,742% 190,194%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshireís loss in net worth during 2001 was $3.77 billion, which decreased the per-share book value of
both our Class A and Class B stock by 6.2%. Over the last 37 years (that is, since present management took over)
per-share book value has grown from $19 to $37,920, a rate of 22.6% compounded annually.∗
Per-share intrinsic grew somewhat faster than book value during these 37 years, and in 2001 it probably
decreased a bit less. We explain intrinsic value in our Ownerís Manual, which begins on page 62. I urge new
shareholders to read this manual to become familiar with Berkshireís key economic principles.
Two years ago, reporting on 1999, I said that we had experienced both the worst absolute and relative
performance in our history. I added that ìrelative results are what concern us,î a viewpoint Iíve had since forming
my first investment partnership on May 5, 1956. Meeting with my seven founding limited partners that evening, I
gave them a short paper titled ìThe Ground Rulesî that included this sentence: ìWhether we do a good job or a
poor job is to be measured against the general experience in securities.î We initially used the Dow Jones Industrials
as our benchmark, but shifted to the S&P 500 when that index became widely used. Our comparative record since
1965 is chronicled on the facing page; last year Berkshireís advantage was 5.7 percentage points.
Some people disagree with our focus on relative figures, arguing that ìyou canít eat relative performance.î
But if you expect ñ as Charlie Munger, Berkshireís Vice Chairman, and I do ñ that owning the S&P 500 will
produce reasonably satisfactory results over time, it follows that, for long-term investors, gaining small advantages
annually over that index must prove rewarding. Just as you can eat well throughout the year if you own a profitable,
but highly seasonal, business such as Seeís (which loses considerable money during the summer months) so, too,
can you regularly feast on investment returns that beat the averages, however variable the absolute numbers may be.
Though our corporate performance last year was satisfactory, my performance was anything but. I manage
most of Berkshireís equity portfolio, and my results were poor, just as they have been for several years. Of even
more importance, I allowed General Re to take on business without a safeguard I knew was important, and on
September 11th, this error caught up with us. Iíll tell you more about my mistake later and what we are doing to
correct it.
Another of my 1956 Ground Rules remains applicable: ìI cannot promise results to partners.î But Charlie
and I can promise that your economic result from Berkshire will parallel ours during the period of your ownership:
We will not take cash compensation, restricted stock or option grants that would make our results superior to yours.
Additionally, I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a
share nor do we intend to. Charlie and I are disgusted by the situation, so common in the last few years, in which
shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these
disasters have walked away with extraordinary wealth. Indeed, many of these people were urging investors to buy
shares while concurrently dumping their own, sometimes using methods that hid their actions. To their shame, these
business leaders view shareholders as patsies, not partners.
Though Enron has become the symbol for shareholder abuse, there is no shortage of egregious conduct
elsewhere in corporate America. One story Iíve heard illustrates the all-too-common attitude of managers toward
 ∗
All figures used in this report apply to Berkshire's A shares, the successor to the only stock that the
company had outstanding before 1996. The B shares have an ec onomic interest equal to 1/30th that of the A.
3
owners: A gorgeous woman slinks up to a CEO at a party and through moist lips purrs, ìIíll do anything ñ anything
ñ you want. Just tell me what you would like.î With no hesitation, he replies, ìReprice my options.î
One final thought about Berkshire: In the future we wonít come close to replicating our past record. To be
sure, Charlie and I will strive for above-average performance and will not be satisfied with less. But two conditions
at Berkshire are far different from what they once were: Then, we could often buy businesses and securities at much
lower valuations than now prevail; and more important, we were then working with far less money than we now
have. Some years back, a good $10 million idea could do wonders for us (witness our investment in Washington
Post in 1973 or GEICO in 1976). Today, the combination of ten such ideas and a triple in the value of each would
increase the net worth of Berkshire by only º of 1%. We need ìelephantsî to make significant gains now ñ and
they are hard to find.
On the positive side, we have as fine an array of operating managers as exists at any company. (You can
read about many of them in a new book by Robert P. Miles: The Warren Buffett CEO.) In large part, moreover, they
are running businesses with economic characteristics ranging from good to superb. The ability, energy and loyalty
of these managers is simply extraordinary. We now have completed 37 Berkshire years without having a CEO of
an operating business elect to leave us to work elsewhere.
Our star-studded group grew in 2001. First, we completed the purchases of two businesses that we had
agreed to buy in 2000 ñ Shaw and Johns Manville. Then we acquired two others, MiTek and XTRA, and
contracted to buy two more: Larson-Juhl, an acquisition that has just closed, and Fruit of the Loom, which will close
shortly if creditors approve our offer. All of these businesses are led by smart, seasoned and trustworthy CEOs.
Additionally, all of our purchases last year were for cash, which means our shareholders became owners of
these additional businesses without relinquishing any interest in the fine companies they already owned. We will
continue to follow our familiar formula, striving to increase the value of the excellent businesses we have, adding
new businesses of similar quality, and issuing shares only grudgingly.
Acquisitions of 2001
A few days before last yearís annual meeting, I received a heavy package from St. Louis, containing an
unprepossessing chunk of metal whose function I couldnít imagine. There was a letter in the package, though, from
Gene Toombs, CEO of a company called MiTek. He explained that MiTek is the worldís leading producer of this
thing Iíd received, a ìconnector plate,î which is used in making roofing trusses. Gene also said that the U.K. parent
of MiTek wished to sell the company and that Berkshire seemed to him the ideal buyer. Liking the sound of his
letter, I gave Gene a call. It took me only a minute to realize that he was our kind of manager and MiTek our kind
of business. We made a cash offer to the U.K. owner and before long had a deal.
Geneís managerial crew is exceptionally enthusiastic about the company and wanted to participate in the
purchase. Therefore, we arranged for 55 members of the MiTek team to buy 10% of the company, with each
putting up a minimum of $100,000 in cash. Many borrowed money so they could participate.
As they would not be if they had options, all of these managers are true owners. They face the downside of
decisions as well as the upside. They incur a cost of capital. And they canít ìrepriceî their stakes: What they paid
is what they live with.
Charlie and I love the high-grade, truly entrepreneurial attitude that exists at MiTek, and we predict it will
be a winner for all involved.
* * * * * * * * * * * *
In early 2000, my friend, Julian Robertson, announced that he would terminate his investment partnership,
Tiger Fund, and that he would liquidate it entirely except for four large holdings. One of these was XTRA, a
leading lessor of truck trailers. I then called Julian, asking whether he might consider selling his XTRA block or
whether, for that matter, the companyís management might entertain an offer for the entire company. Julian
referred me to Lew Rubin, XTRAís CEO. He and I had a nice conversation, but it was apparent that no deal was to
be done.
Then in June 2001, Julian called to say that he had decided to sell his XTRA shares, and I resumed
conversations with Lew. The XTRA board accepted a proposal we made, which was to be effectuated through a
tender offer expiring on September 11th. The tender conditions included the usual ìout,î allowing us to withdraw if
4
the stock market were to close before the offerís expiration. Throughout much of the 11th, Lew went through a
particularly wrenching experience: First, he had a son-in-law working in the World Trade Center who couldnít be
located; and second, he knew we had the option of backing away from our purchase. The story ended happily:
Lewís son-in-law escaped serious harm, and Berkshire completed the transaction.
Trailer leasing is a cyclical business but one in which we should earn decent returns over time. Lew brings
a new talent to Berkshire, and we hope to expand in leasing.
* * * * * * * * * * * *
On December 3rd, I received a call from Craig Ponzio, owner of Larson-Juhl, the U.S. leader in custom￾made picture frames. Craig had bought the company in 1981 (after first working at its manufacturing plant while
attending college) and thereafter increased its sales from $3 million to $300 million. Though I had never heard of
Larson-Juhl before Craigís call, a few minutes talk with him made me think we would strike a deal. He was
straightforward in describing the business, cared about who bought it, and was realistic as to price. Two days later,
Craig and Steve McKenzie, his CEO, came to Omaha and in ninety minutes we reached an agreement. In ten days
we had signed a contract.
Larson-Juhl serves about 18,000 framing shops in the U.S. and is also the industry leader in Canada and
much of Europe. We expect to see opportunities for making complementary acquisitions in the future.
* * * * * * * * * * *
As I write this letter, creditors are considering an offer we have made for Fruit of the Loom. The company
entered bankruptcy a few years back, a victim both of too much debt and poor management. And, a good many
years before that, I had some Fruit of the Loom experience of my own.
In August 1955, I was one of five employees, including two secretaries, working for the three managers of
Graham-Newman Corporation, a New York investment company. Graham-Newman controlled Philadelphia and
Reading Coal and Iron (ìP&Rî), an anthracite producer that had excess cash, a tax loss carryforward, and a
declining business. At the time, I had a significant portion of my limited net worth invested in P&R shares,
reflecting my faith in the business talents of my bosses, Ben Graham, Jerry Newman and Howard (Micky) Newman.
This faith was rewarded when P&R purchased the Union Underwear Company from Jack Goldfarb for $15
million. Union (though it was then only a licensee of the name) produced Fruit of the Loom underwear. The
company possessed $5 million in cash ñ $2.5 million of which P&R used for the purchase ñ and was earning about
$3 million pre-tax, earnings that could be sheltered by the tax position of P&R. And, oh yes: Fully $9 million of the
remaining $12.5 million due was satisfied by non-interest-bearing notes, payable from 50% of any earnings Union
had in excess of $1 million. (Those were the days; I get goosebumps just thinking about such deals.)
Subsequently, Union bought the licensor of the Fruit of the Loom name and, along with P&R, was merged
into Northwest Industries. Fruit went on to achieve annual pre-tax earnings exceeding $200 million.
John Holland was responsible for Fruitís operations in its most bountiful years. In 1996, however, John
retired, and management loaded the company with debt, in part to make a series of acquisitions that proved
disappointing. Bankruptcy followed. John was then rehired, and he undertook a major reworking of operations.
Before Johnís return, deliveries were chaotic, costs soared and relations with key customers deteriorated. While
correcting these problems, John also reduced employment from a bloated 40,000 to 23,000. In short, heís been
restoring the old Fruit of the Loom, albeit in a much more competitive environment.
Stepping into Fruitís bankruptcy proceedings, we made a proposal to creditors to which we attached no
financing conditions, even though our offer had to remain outstanding for many months. We did, however, insist on
a very unusual proviso: John had to be available to continue serving as CEO after we took over. To us, John and
the brand are Fruitís key assets.
I was helped in this transaction by my friend and former boss, Micky Newman, now 81. What goes around
truly does come around.
* * * * * * * * * * * *
5
Our operating companies made several ìbolt-onî acquisitions during the year, and I canít resist telling you
about one. In December, Frank Rooney called to tell me H.H. Brown was buying the inventory and trademarks of
Acme Boot for $700,000.
That sounds like small potatoes. But ñ would you believe it? ñ Acme was the second purchase of P&R, an
acquisition that took place just before I left Graham-Newman in the spring of 1956. The price was $3.2 million,
part of it again paid with non-interest bearing notes, for a business with sales of $7 million.
After P&R merged with Northwest, Acme grew to be the worldís largest bootmaker, delivering annual
profits many multiples of what the company had cost P&R. But the business eventually hit the skids and never
recovered, and that resulted in our purchasing Acmeís remnants.
In the frontispiece to Security Analysis, Ben Graham and Dave Dodd quoted Horace: ìMany shall be
restored that now are fallen and many shall fall that are now in honor.î Fifty-two years after I first read those lines,
my appreciation for what they say about business and investments continues to grow.
* * * * * * * * * * * *
In addition to bolt-on acquisitions, our managers continually look for ways to grow internally. In that
regard, hereís a postscript to a story I told you two years ago about R.C. Willeyís move to Boise. As you may
remember, Bill Child, R.C. Willeyís chairman, wanted to extend his home-furnishings operation beyond Utah, a
state in which his company does more than $300 million of business (up, it should be noted, from $250,000 when
Bill took over 48 years ago). The company achieved this dominant position, moreover, with a ìclosed on Sundayî
policy that defied conventional retailing wisdom. I was skeptical that this policy could succeed in Boise or, for that
matter, anyplace outside of Utah. After all, Sunday is the day many consumers most like to shop.
Bill then insisted on something extraordinary: He would invest $11 million of his own money to build the
Boise store and would sell it to Berkshire at cost (without interest!) if the venture succeeded. If it failed, Bill would
keep the store and eat the loss on its disposal. As I told you in the 1999 annual report, the store immediately
became a huge success ― and it has since grown.
Shortly after the Boise opening, Bill suggested we try Las Vegas, and this time I was even more skeptical.
How could we do business in a metropolis of that size and be closed on Sundays, a day that all of our competitors
would be exploiting? Buoyed by the Boise experience, however, we proceeded to locate in Henderson, a
mushrooming city adjacent to Las Vegas.
The result: This store outsells all others in the R.C. Willey chain, doing a volume of business that far
exceeds the volume of any competitor and that is twice what I had anticipated. I cut the ribbon at the grand opening
in October ñ this was after a ìsoftî opening and a few weeks of exceptional sales ñ and, just as I did at Boise, I
suggested to the crowd that the new store was my idea.
It didnít work. Today, when I pontificate about retailing, Berkshire people just say, ìWhat does Bill
think?î (Iím going to draw the line, however, if he suggests that we also close on Saturdays.)
The Economics of Property/Casualty Insurance
Our main business ó though we have others of great importance ó is insurance. To understand
Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key
determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the
long-term outlook for both of these factors.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because
premiums are received before losses are paid, an interval that sometimes extends over many years. During that
time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that
an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an
"underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less
than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is
higher than market rates for money.
6
7
Historically, Berkshire has obtained its float at a very low cost. Indeed, our cost has been less than zero in
about half of the years in which weíve operated; that is, weíve actually been paid for holding other peopleís money.
Over the last few years, however, our cost has been too high, and in 2001 it was terrible.
The table that follows shows (at intervals) the float generated by the various segments of Berkshireís
insurance operations since we entered the business 35 years ago upon acquiring National Indemnity Company
(whose traditional lines are included in the segment ìOther Primaryî). For the table we have calculated our float ó
which we generate in large amounts relative to our premium volume ó by adding net loss reserves, loss adjustment
reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting insurance￾related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance.
(Got that?)
Yearend Float (in $ millions)
Other Other
Year GEICO General Re Reinsurance Primary Total
1967 20 20
1977 40 131 171
1987 701 807 1,508
1997 2,917 4,014 455 7,386
1998 3,125 14,909 4,305 415 22,754
1999 3,444 15,166 6,285 403 25,298
2000 3,943 15,525 7,805 598 27,871
2001 4,251 19,310 11,262 685 35,508
Last year I told you that, barring a mega-catastrophe, our cost of float would probably drop from its 2000
level of 6%. I had in mind natural catastrophes when I said that, but instead we were hit by a man-made catastrophe
on September 11th ñ an event that delivered the insurance industry its largest loss in history. Our float cost therefore
came in at a staggering 12.8%. It was our worst year in float cost since 1984, and a result that to a significant
degree, as I will explain in the next section, we brought upon ourselves.
If no mega-catastrophe occurs, I ñ once again ñ expect the cost of our float to be low in the coming year.
We will indeed need a low cost, as will all insurers. Some years back, float costing, say, 4% was tolerable because
government bonds yielded twice as much, and stocks prospectively offered still loftier returns. Today, fat returns
are nowhere to be found (at least we canít find them) and short-term funds earn less than 2%. Under these
conditions, each of our insurance operations, save one, must deliver an underwriting profit if it is to be judged a
good business. The exception is our retroactive reinsurance operation (a business we explained in last yearís annual
report), which has desirable economics even though it currently hits us with an annual underwriting loss of about
$425 million.
Principles of Insurance Underwriting
When property/casualty companies are judged by their cost of float, very few stack up as satisfactory
businesses. And interestingly ñ unlike the situation prevailing in many other industries ñ neither size nor brand
name determines an insurerís profitability. Indeed, many of the biggest and best-known companies regularly
deliver mediocre results. What counts in this business is underwriting discipline. The winners are those that
unfailingly stick to three key principles:
1. They accept only those risks that they are able to properly evaluate (staying within their circle of
competence) and that, after they have evaluated all relevant factors including remote loss
scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and
are sanguine about losing business to competitors that are offering foolish prices or policy
conditions.
2. They limit the business they accept in a manner that guarantees they will suffer no aggregation of
losses from a single event or from related events that will threaten their solvency. They
ceaselessly search for possible correlation among seemingly-unrelated risks.
8
3. They avoid business involving moral risk: No matter what the rate, trying to write good contracts
with bad people doesn’t work. While most policyholders and clients are honorable and ethical,
doing business with the few exceptions is usually expensive, sometimes extraordinarily so.
The events of September 11th made it clear that our implementation of rules 1 and 2 at General Re had been
dangerously weak. In setting prices and also in evaluating aggregation risk, we had either overlooked or dismissed
the possibility of large-scale terrorism losses. That was a relevant underwriting factor, and we ignored it.
In pricing property coverages, for example, we had looked to the past and taken into account only costs we
might expect to incur from windstorm, fire, explosion and earthquake. But what will be the largest insured property
loss in history (after adding related business-interruption claims) originated from none of these forces. In short, all
of us in the industry made a fundamental underwriting mistake by focusing on experience, rather than exposure,
thereby assuming a huge terrorism risk for which we received no premium.
Experience, of course, is a highly useful starting point in underwriting most coverages. For example, itís
important for insurers writing California earthquake policies to know how many quakes in the state during the past
century have registered 6.0 or greater on the Richter scale. This information will not tell you the exact probability
of a big quake next year, or where in the state it might happen. But the statistic has utility, particularly if you are
writing a huge statewide policy, as National Indemnity has done in recent years.
At certain times, however, using experience as a guide to pricing is not only useless, but actually
dangerous. Late in a bull market, for example, large losses from directors and officers liability insurance (ìD&Oî)
are likely to be relatively rare. When stocks are rising, there are a scarcity of targets to sue, and both questionable
accounting and management chicanery often go undetected. At that juncture, experience on high-limit D&O may
look great.
But thatís just when exposure is likely to be exploding, by way of ridiculous public offerings, earnings
manipulation, chain-letter-like stock promotions and a potpourri of other unsavory activities. When stocks fall,
these sins surface, hammering investors with losses that can run into the hundreds of billions. Juries deciding
whether those losses should be borne by small investors or big insurance companies can be expected to hit insurers
with verdicts that bear little relation to those delivered in bull-market days. Even one jumbo judgment, moreover,
can cause settlement costs in later cases to mushroom. Consequently, the correct rate for D&O ìexcessî (meaning
the insurer or reinsurer will pay losses above a high threshold) might well, if based on exposure, be five or more
times the premium dictated by experience.
Insurers have always found it costly to ignore new exposures. Doing that in the case of terrorism,
however, could literally bankrupt the industry. No one knows the probability of a nuclear detonation in a major
metropolis this year (or even multiple detonations, given that a terrorist organization able to construct one bomb
might not stop there). Nor can anyone, with assurance, assess the probability in this year, or another, of deadly
biological or chemical agents being introduced simultaneously (say, through ventilation systems) into multiple
office buildings and manufacturing plants. An attack like that would produce astronomical workersí compensation
claims.
Hereís what we do know:
(a) The probability of such mind-boggling disasters, though likely very low at present, is not zero.
(b) The probabilities are increasing, in an irregular and immeasurable manner, as knowledge and
materials become available to those who wish us ill. Fear may recede with time, but the danger
wonít ñ the war against terrorism can never be won. The best the nation can achieve is a long
succession of stalemates. There can be no checkmate against hydra-headed foes.
(c) Until now, insurers and reinsurers have blithely assumed the financial consequences from the
incalculable risks I have described.
(d) Under a ìclose-to-worst-caseî scenario, which could conceivably involve $1 trillion of damage,
the insurance industry would be destroyed unless it manages in some manner to dramatically limit
its assumption of terrorism risks. Only the U.S. Government has the resources to absorb such a
blow. If it is unwilling to do so on a prospective basis, the general citizenry must bear its own
risks and count on the Government to come to its rescue after a disaster occurs.
Why, you might ask, didnít I recognize the above facts before September 11th? The answer, sadly, is that I
did ñ but I didnít convert thought into action. I violated the Noah rule: Predicting rain doesnít count; building arks
does. I consequently let Berkshire operate with a dangerous level of risk ñ at General Re in particular. Iím sorry to
say that much risk for which we havenít been compensated remains on our books, but it is running off by the day.
At Berkshire, it should be noted, we have for some years been willing to assume more risk than any other
insurer has knowingly taken on. Thatís still the case. We are perfectly willing to lose $2 billion to $2½ billion in a
single event (as we did on September 11th) if we have been paid properly for assuming the risk that caused the loss
(which on that occasion we werenít).
Indeed, we have a major competitive advantage because of our tolerance for huge losses. Berkshire has
massive liquid resources, substantial non-insurance earnings, a favorable tax position and a knowledgeable
shareholder constituency willing to accept volatility in earnings. This unique combination enables us to assume
risks that far exceed the appetite of even our largest competitors. Over time, insuring these jumbo risks should be
profitable, though periodically they will bring on a terrible year.
The bottom-line today is that we will write some coverage for terrorist-related losses, including a few non￾correlated policies with very large limits. But we will not knowingly expose Berkshire to losses beyond what we
can comfortably handle. We will control our total exposure, no matter what the competition does.
Insurance Operations in 2001
Over the years, our insurance business has provided ever-growing, low-cost funds that have fueled much
of Berkshireís growth. Charlie and I believe this will continue to be the case. But we stumbled in a big way in
2001, largely because of underwriting losses at General Re.
In the past I have assured you that General Re was underwriting with discipline ñ and I have been proven
wrong. Though its managersí intentions were good, the company broke each of the three underwriting rules I set
forth in the last section and has paid a huge price for doing so. One obvious cause for its failure is that it did not
reserve correctly ñ more about this in the next section ñ and therefore severely miscalculated the cost of the product
it was selling. Not knowing your costs will cause problems in any business. In long-tail reinsurance, where years
of unawareness will promote and prolong severe underpricing, ignorance of true costs is dynamite.
Additionally, General Re was overly-competitive in going after, and retaining, business. While all
concerned may intend to underwrite with care, it is nonetheless difficult for able, hard-driving professionals to curb
their urge to prevail over competitors. If ìwinning,î however, is equated with market share rather than profits,
trouble awaits. ìNoî must be an important part of any underwriterís vocabulary.
At the risk of sounding Pollyannaish, I now assure you that underwriting discipline is being restored at
General Re (and its Cologne Re subsidiary) with appropriate urgency. Joe Brandon was appointed General Reís
CEO in September and, along with Tad Montross, its new president, is committed to producing underwriting
profits. Last fall, Charlie and I read Jack Welchís terrific book, Jack, Straight from the Gut (get a copy!). In
discussing it, we agreed that Joe has many of Jackís characteristics: He is smart, energetic, hands-on, and expects
much of both himself and his organization.
When it was an independent company, General Re often shone, and now it also has the considerable
strengths Berkshire brings to the table. With that added advantage and with underwriting discipline restored,
General Re should be a huge asset for Berkshire. I predict that Joe and Tad will make it so.
* * * * * * * * * * * *
At the National Indemnity reinsurance operation, Ajit Jain continues to add enormous value to Berkshire.
Working with only 18 associates, Ajit manages one of the worldís largest reinsurance operations measured by
assets, and the largest, based upon the size of individual risks assumed.
I have known the details of almost every policy that Ajit has written since he came with us in 1986, and
never on even a single occasion have I seen him break any of our three underwriting rules. His extraordinary
discipline, of course, does not eliminate losses; it does, however, prevent foolish losses. And thatís the key: Just as
is the case in investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather
than by making brilliant ones.
9
Since September 11th, Ajit has been particularly busy. Among the policies we have written and retained
entirely for our own account are (1) $578 million of property coverage for a South American refinery once a loss
there exceeds $1 billion; (2) $1 billion of non-cancelable third-party liability coverage for losses arising from acts of
terrorism at several large international airlines; (3) £500 million of property coverage on a large North Sea oil
platform, covering losses from terrorism and sabotage, above £600 million that the insured retained or reinsured
elsewhere; and (4) significant coverage on the Sears Tower, including losses caused by terrorism, above a $500
million threshold. We have written many other jumbo risks as well, such as protection for the World Cup Soccer
Tournament and the 2002 Winter Olympics. In all cases, however, we have attempted to avoid writing groups of
policies from which losses might seriously aggregate. We will not, for example, write coverages on a large number
of office and apartment towers in a single metropolis without excluding losses from both a nuclear explosion and
the fires that would follow it.
No one can match the speed with which Ajit can offer huge policies. After September 11th, his quickness
to respond, always important, has become a major competitive advantage. So, too, has our unsurpassed financial
strength. Some reinsurers ñ particularly those who, in turn, are accustomed to laying off much of their business on a
second layer of reinsurers known as retrocessionaires ñ are in a weakened condition and would have difficulty
surviving a second mega-cat. When a daisy chain of retrocessionaires exists, a single weak link can pose trouble for
all. In assessing the soundness of their reinsurance protection, insurers must therefore apply a stress test to all
participants in the chain, and must contemplate a catastrophe loss occurring during a very unfavorable economic
environment. After all, you only find out who is swimming naked when the tide goes out. At Berkshire, we retain
our risks and depend on no one. And whatever the worldís problems, our checks will clear.
Ajitís business will ebb and flow ñ but his underwriting principles wonít waver. Itís impossible to
overstate his value to Berkshire.
* * * * * * * * * * * *
GEICO, by far our largest primary insurer, made major progress in 2001, thanks to Tony Nicely, its CEO,
and his associates. Quite simply, Tony is an ownerís dream.
GEICOís premium volume grew 6.6% last year, its float grew $308 million, and it achieved an
underwriting profit of $221 million. This means we were actually paid that amount last year to hold the $4.25
billion in float, which of course doesnít belong to Berkshire but can be used by us for investment.
The only disappointment at GEICO in 2001 ñ and itís an important one ñ was our inability to add
policyholders. Our preferred customers (81% of our total) grew by 1.6% but our standard and non-standard policies
fell by 10.1%. Overall, policies in force fell .8%.
New business has improved in recent months. Our closure rate from telephone inquiries has climbed, and
our Internet business continues its steady growth. We, therefore, expect at least a modest gain in policy count
during 2002. Tony and I are eager to commit much more to marketing than the $219 million we spent last year, but
at the moment we cannot see how to do so effectively. In the meantime, our operating costs are low and far below
those of our major competitors; our prices are attractive; and our float is cost-free and growing.
* * * * * * * * * * * *
Our other primary insurers delivered their usual fine results last year. These operations, run by Rod
Eldred, John Kizer, Tom Nerney, Michael Stearns, Don Towle and Don Wurster had combined premium volume of
$579 million, up 40% over 2000. Their float increased 14.5% to $685 million, and they recorded an underwriting
profit of $30 million. In aggregate, these companies are one of the finest insurance operations in the country, and
their 2002 prospects look excellent.
 “Loss Development” and Insurance Accounting
Bad terminology is the enemy of good thinking. When companies or investment professionals use terms
such as ìEBITDAî and ìpro forma,î they want you to unthinkingly accept concepts that are dangerously flawed.
(In golf, my score is frequently below par on a pro forma basis: I have firm plans to ìrestructureî my putting stroke
and therefore only count the swings I take before reaching the green.)
10
In insurance reporting, ìloss developmentî is a widely used term ñ and one that is seriously misleading.
First, a definition: Loss reserves at an insurer are not funds tucked away for a rainy day, but rather a liability
account. If properly calculated, the liability states the amount that an insurer will have to pay for all losses
(including associated costs) that have occurred prior to the reporting date but have not yet been paid. When
calculating the reserve, the insurer will have been notified of many of the losses it is destined to pay, but others will
not yet have been reported to it. These losses are called IBNR, for incurred but not reported. Indeed, in some cases
(involving, say, product liability or embezzlement) the insured itself will not yet be aware that a loss has occurred.
Itís clearly difficult for an insurer to put a figure on the ultimate cost of all such reported and unreported
events. But the ability to do so with reasonable accuracy is vital. Otherwise the insurerís managers wonít know
what its actual loss costs are and how these compare to the premiums being charged. GEICO got into huge trouble
in the early 1970s because for several years it severely underreserved, and therefore believed its product (insurance
protection) was costing considerably less than was truly the case. Consequently, the company sailed blissfully
along, underpricing its product and selling more and more policies at ever-larger losses.
When it becomes evident that reserves at past reporting dates understated the liability that truly existed at
the time, companies speak of ìloss development.î In the year discovered, these shortfalls penalize reported
earnings because the ìcatch-upî costs from prior years must be added to current-year costs when results are
calculated. This is what happened at General Re in 2001: a staggering $800 million of loss costs that actually
occurred in earlier years, but that were not then recorded, were belatedly recognized last year and charged against
current earnings. The mistake was an honest one, I can assure you of that. Nevertheless, for several years, this
underreserving caused us to believe that our costs were much lower than they truly were, an error that contributed to
woefully inadequate pricing. Additionally, the overstated profit figures led us to pay substantial incentive
compensation that we should not have and to incur income taxes far earlier than was necessary.
We recommend scrapping the term ìloss developmentî and its equally ugly twin, ìreserve strengthening.î
(Can you imagine an insurer, upon finding its reserves excessive, describing the reduction that follows as ìreserve
weakeningî?) ìLoss developmentî suggests to investors that some natural, uncontrollable event has occurred in the
current year, and ìreserve strengtheningî implies that adequate amounts have been further buttressed. The truth,
however, is that management made an error in estimation that in turn produced an error in the earnings previously
reported. The losses didnít ìdevelopî ñ they were there all along. What developed was managementís
understanding of the losses (or, in the instances of chicanery, managementís willingness to finally fess up).
A more forthright label for the phenomenon at issue would be ìloss costs we failed to recognize when they
occurredî (or maybe just ìoopsî). Underreserving, it should be noted, is a common ñ and serious ñ problem
throughout the property/casualty insurance industry. At Berkshire we told you of our own problems with
underestimation in 1984 and 1986. Generally, however, our reserving has been conservative.
Major underreserving is common in cases of companies struggling for survival. In effect, insurance
accounting is a self-graded exam, in that the insurer gives some figures to its auditing firm and generally doesnít get
an argument. (What the auditor gets, however, is a letter from management that is designed to take his firm off the
hook if the numbers later look silly.) A company experiencing financial difficulties ñ of a kind that, if truly faced,
could put it out of business ñ seldom proves to be a tough grader. Who, after all, wants to prepare his own
execution papers?
Even when companies have the best of intentions, itís not easy to reserve properly. Iíve told the story in
the past about the fellow traveling abroad whose sister called to tell him that their dad had died. The brother replied
that it was impossible for him to get home for the funeral; he volunteered, however, to shoulder its cost. Upon
returning, the brother received a bill from the mortuary for $4,500, which he promptly paid. A month later, and a
month after that also, he paid $10 pursuant to an add-on invoice. When a third $10 invoice came, he called his
sister for an explanation. ìOh,î she replied, ìI forgot to tell you. We buried dad in a rented suit.î
There are a lot of ìrented suitsî buried in the past operations of insurance companies. Sometimes the
problems they signify lie dormant for decades, as was the case with asbestos liability, before virulently manifesting
themselves. Difficult as the job may be, itís managementís responsibility to adequately account for all possibilities.
Conservatism is essential. When a claims manager walks into the CEOís office and says ìGuess what just
happened,î his boss, if a veteran, does not expect to hear itís good news. Surprises in the insurance world have
been far from symmetrical in their effect on earnings.
11
12
Because of this one-sided experience, it is folly to suggest, as some are doing, that all property/casualty
insurance reserves be discounted, an approach reflecting the fact that they will be paid in the future and that
therefore their present value is less than the stated liability for them. Discounting might be acceptable if reserves
could be precisely established. They canít, however, because a myriad of forces ñ judicial broadening of policy
language and medical inflation, to name just two chronic problems ñ are constantly working to make reserves
inadequate. Discounting would exacerbate this already-serious situation and, additionally, would provide a new
tool for the companies that are inclined to fudge.
Iíd say that the effects from telling a profit-challenged insurance CEO to lower reserves through
discounting would be comparable to those that would ensue if a father told his 16-year-old son to have a normal sex
life. Neither party needs that kind of push.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation,
purchase-accounting adjustments (primarily relating to ìgoodwillî) are not assigned to the specific businesses to
which they apply, but are instead aggregated and shown separately. This procedure lets you view the earnings of
our businesses as they would have been reported had we not purchased them. In recent years, our ìexpenseî for
goodwill amortization has been large. Going forward, generally accepted accounting principles (ìGAAPî) will no
longer require amortization of goodwill. This change will increase our reported earnings (though not our true
economic earnings) and simplify this section of the report.
(in millions)
Berkshire’s Share
of Net Earnings
(after taxes and
Pre-Tax Earnings Minority interests)
2001 2000 2001 2000
Operating Earnings:
Insurance Group:
Underwriting ñ Reinsurance................................... $(4,318) $(1,416) $(2,824) $(911)
Underwriting ñ GEICO .......................................... 221 (224) 144 (146)
Underwriting ñ Other Primary ............................... 30 25 18 16
Net Investment Income .......................................... 2,824 2,773 1,968 1,946
Building Products(1)................................................... 461 34 287 21
Finance and Financial Products Business ................. 519 530 336 343
Flight Services........................................................... 186 213 105 126
MidAmerican Energy (76% owned) ......................... 600 197 230 109
Retail Operations....................................................... 175 175 101 104
Scott Fetzer (excluding finance operation) ............... 129 122 83 80
Shaw Industries(2) ...................................................... 292 -- 156 --
Other Businesses ....................................................... 179 221 103 133
Purchase-Accounting Adjustments ........................... (726) (881) (699) (843)
Corporate Interest Expense ....................................... (92) (92) (60) (61)
Shareholder-Designated Contributions ..................... (17) (17) (11) (11)
Other ......................................................................... 25 39 16 30
Operating Earnings ...................................................... 488 1,699 (47) 936
Capital Gains from Investments................................... 1,320 3,955 842 2,392
Total Earnings ñ All Entities........................................ $1,808 $5,654 $ 795 $3,328
(1) Includes Acme Brick from August 1, 2000; Benjamin Moore from December 18, 2000; Johns Manville from February 27,
2001; and MiTek from July 31, 2001.
(2) From date of acquisition, January 8, 2001.
13
Here are some highlights (and lowlights) from 2001 relating to our non-insurance activities:
• Our shoe operations (included in ìother businessesî) lost $46.2 million pre-tax, with profits at H.H. Brown
and Justin swamped by losses at Dexter.
Iíve made three decisions relating to Dexter that have hurt you in a major way: (1) buying it in the first place;
(2) paying for it with stock and (3) procrastinating when the need for changes in its operations was obvious. I
would like to lay these mistakes on Charlie (or anyone else, for that matter) but they were mine. Dexter, prior
to our purchase ñ and indeed for a few years after ñ prospered despite low-cost foreign competition that was
brutal. I concluded that Dexter could continue to cope with that problem, and I was wrong.
We have now placed the Dexter operation ñ which is still substantial in size ñ under the management of Frank
Rooney and Jim Issler at H.H. Brown. These men have performed outstandingly for Berkshire, skillfully
contending with the extraordinary changes that have bedeviled the footwear industry. During part of 2002,
Dexter will be hurt by unprofitable sales commitments it made last year. After that, we believe our shoe
business will be reasonably profitable.
• MidAmerican Energy, of which we own 76% on a fully-diluted basis, had a good year in 2001. Its reported
earnings should also increase considerably in 2002 given that the company has been shouldering a large
charge for the amortization of goodwill and that this ìcostî will disappear under the new GAAP rules.
Last year MidAmerican swapped some properties in England, adding Yorkshire Electric, with its 2.1 million
customers. We are now serving 3.6 million customers in the U.K. and are its 2nd largest electric utility. We
have an equally important operation in Iowa as well as major generating facilities in California and the
Philippines.
At MidAmerican ñ this may surprise you ñ we also own the second-largest residential real estate brokerage
business in the country. We are market-share leaders in a number of large cities, primarily in the Midwest, and
have recently acquired important firms in Atlanta and Southern California. Last year, operating under various
names that are locally familiar, we handled about 106,000 transactions involving properties worth nearly $20
billion. Ron Peltier has built this business for us, and itís likely he will make more acquisitions in 2002 and
the years to come.
• Considering the recessionary environment plaguing them, our retailing operations did well in 2001. In
jewelry, same-store sales fell 7.6% and pre-tax margins were 8.9% versus 10.7% in 2000. Return on invested
capital remains high.
Same-store sales at our home-furnishings retailers were unchanged and so was the margin ñ 9.1% pre-tax ñ
these operations earned. Here, too, return on invested capital is excellent.
We continue to expand in both jewelry and home-furnishings. Of particular note, Nebraska Furniture Mart is
constructing a mammoth 450,000 square foot store that will serve the greater Kansas City area beginning in
the fall of 2003. Despite Bill Childís counter-successes, we will keep this store open on Sundays.
• The large acquisitions we initiated in late 2000 ñ Shaw, Johns Manville and Benjamin Moore ñ all came
through their first year with us in great fashion. Charlie and I knew at the time of our purchases that we were
in good hands with Bob Shaw, Jerry Henry and Yvan Dupuy, respectively ñ and we admire their work even
more now. Together these businesses earned about $659 million pre-tax.
Shortly after yearend we exchanged 4,740 Berkshire A shares (or their equivalent in B shares) for the 12.7%
minority interest in Shaw, which means we now own 100% of the company. Shaw is our largest non￾insurance operation and will play a big part in Berkshireís future.
• All of the income shown for Flight Services in 2001 ñ and a bit more ñ came from FlightSafety, our pilot￾training subsidiary. Its earnings increased 2.5%, though return on invested capital fell slightly because of the
$258 million investment we made last year in simulators and other fixed assets. My 84-year-old friend, Al
Ueltschi, continues to run FlightSafety with the same enthusiasm and competitive spirit that he has exhibited
since 1951, when he invested $10,000 to start the company. If I line Al up with a bunch of 60-year-olds at the
annual meeting, you will not be able to pick him out.
14
After September 11th, training for commercial airlines fell, and today it remains depressed. However, training
for business and general aviation, our main activity, is at near-normal levels and should continue to grow. In
2002, we expect to spend $162 million for 27 simulators, a sum far in excess of our annual depreciation charge
of $95 million. Those who believe that EBITDA is in any way equivalent to true earnings are welcome to pick
up the tab.
Our NetJetsÆ fractional ownership program sold a record number of planes last year and also showed a gain of
21.9% in service income from management fees and hourly charges. Nevertheless, it operated at a small loss,
versus a small profit in 2000. We made a little money in the U.S., but these earnings were more than offset by
European losses. Measured by the value of our customersí planes, NetJets accounts for about half of the
industry. We believe the other participants, in aggregate, lost significant money.
Maintaining a premier level of safety, security and service was always expensive, and the cost of sticking to
those standards was exacerbated by September 11th. No matter how much the cost, we will continue to be the
industry leader in all three respects. An uncompromising insistence on delivering only the best to his
customers is embedded in the DNA of Rich Santulli, CEO of the company and the inventor of fractional
ownership. Iím delighted with his fanaticism on these matters for both the companyís sake and my familyís: I
believe the Buffetts fly more fractional-ownership hours ñ we log in excess of 800 annually ñ than does any
other family. In case youíre wondering, we use exactly the same planes and crews that serve NetJetís other
customers.
NetJets experienced a spurt in new orders shortly after September 11th, but its sales pace has since returned to
normal. Per-customer usage declined somewhat during the year, probably because of the recession.
Both we and our customers derive significant operational benefits from our being the runaway leader in the
fractional ownership business. We have more than 300 planes constantly on the go in the U.S. and can
therefore be wherever a customer needs us on very short notice. The ubiquity of our fleet also reduces our
ìpositioningî costs below those incurred by operators with smaller fleets.
These advantages of scale, and others we have, give NetJets a significant economic edge over competition.
Under the competitive conditions likely to prevail for a few years, however, our advantage will at best produce
modest profits.
• Our finance and financial products line of business now includes XTRA, General Re Securities (which is in a
run-off mode that will continue for an extended period) and a few other relatively small operations. The bulk
of the assets and liabilities in this segment, however, arise from a few fixed-income strategies, involving
highly-liquid AAA securities, that I manage. This activity, which only makes sense when certain market
relationships exist, has produced good returns in the past and has reasonable prospects for continuing to do so
over the next year or two.
Investments
Below we present our common stock investments. Those that had a market value of more than $500
million at the end of 2001 are itemized.
12/31/01
Shares Company Cost Market
(dollars in millions)
151,610,700 American Express Company..................................................................... $ 1,470 $ 5,410
200,000,000 The Coca-Cola Company.......................................................................... 1,299 9,430
96,000,000 The Gillette Company ............................................................................... 600 3,206
15,999,200 H&R Block, Inc. ....................................................................................... 255 715
24,000,000 Moodyís Corporation................................................................................ 499 957
1,727,765 The Washington Post Company................................................................ 11 916
53,265,080 Wells Fargo & Company .......................................................................... 306 2,315
Others........................................................................................................ 4,103 5,726
Total Common Stocks............................................................................... $8,543 $28,675
We made few changes in our portfolio during 2001. As a group, our larger holdings have performed
poorly in the last few years, some because of disappointing operating results. Charlie and I still like the basic
businesses of all the companies we own. But we do not believe Berkshireís equity holdings as a group are
undervalued.
Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the
prospects for stocks in general over the next decade or so. I expressed my views about equity returns in a speech I
gave at an Allen and Company meeting in July (which was a follow-up to a similar presentation I had made two
years earlier) and an edited version of my comments appeared in a December 10th Fortune article. Iím enclosing a
copy of that article. You can also view the Fortune version of my 1999 talk at our website
www.berkshirehathaway.com.
Charlie and I believe that American business will do fine over time but think that todayís equity prices
presage only moderate returns for investors. The market outperformed business for a very long period, and that
phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many
investors disappointed, particularly those relatively new to the game.
Hereís one for those who enjoy an odd coincidence: The Great Bubble ended on March 10, 2000 (though
we didnít realize that fact until some months later). On that day, the NASDAQ (recently 1,731) hit its all-time high
of 5,132. That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997.
* * * * * * * * * * * *
During 2001, we were somewhat more active than usual in ìjunkî bonds. These are not, we should
emphasize, suitable investments for the general public, because too often these securities live up to their name. We
have never purchased a newly-issued junk bond, which is the only kind most investors are urged to buy. When
losses occur in this field, furthermore, they are often disastrous: Many issues end up at a small fraction of their
original offering price and some become entirely worthless.
Despite these dangers, we periodically find a few ñ a very few ñ junk securities that are interesting to us.
And, so far, our 50-year experience in distressed debt has proven rewarding. In our 1984 annual report, we
described our purchases of Washington Public Power System bonds when that issuer fell into disrepute. Weíve
also, over the years, stepped into other apparent calamities such as Chrysler Financial, Texaco and RJR Nabisco ñ
all of which returned to grace. Still, if we stay active in junk bonds, you can expect us to have losses from time to
time.
Occasionally, a purchase of distressed bonds leads us into something bigger. Early in the Fruit of the
Loom bankruptcy, we purchased the companyís public and bank debt at about 50% of face value. This was an
unusual bankruptcy in that interest payments on senior debt were continued without interruption, which meant we
earned about a 15% current return. Our holdings grew to 10% of Fruitís senior debt, which will probably end up
returning us about 70% of face value. Through this investment, we indirectly reduced our purchase price for the
whole company by a small amount.
In late 2000, we began purchasing the obligations of FINOVA Group, a troubled finance company, and
that, too, led to our making a major transaction. FINOVA then had about $11 billion of debt outstanding, of which
we purchased 13% at about two-thirds of face value. We expected the company to go into bankruptcy, but believed
that liquidation of its assets would produce a payoff for creditors that would be well above our cost. As default
loomed in early 2001, we joined forces with Leucadia National Corporation to present the company with a
prepackaged plan for bankruptcy.
The plan as subsequently modified (and Iím simplifying here) provided that creditors would be paid 70%
of face value (along with full interest) and that they would receive a newly-issued 7½% note for the 30% of their
claims not satisfied by cash. To fund FINOVAís 70% distribution, Leucadia and Berkshire formed a jointly-owned
entity ñ mellifluently christened Berkadia ñ that borrowed $5.6 billion through FleetBoston and, in turn, re-lent this
sum to FINOVA, concurrently obtaining a priority claim on its assets. Berkshire guaranteed 90% of the Berkadia
borrowing and also has a secondary guarantee on the 10% for which Leucadia has primary responsibility. (Did I
mention that I am simplifying?).
15
There is a spread of about two percentage points between what Berkadia pays on its borrowing and what it
receives from FINOVA, with this spread flowing 90% to Berkshire and 10% to Leucadia. As I write this, each loan
has been paid down to $3.9 billion.
As part of the bankruptcy plan, which was approved on August 10, 2001, Berkshire also agreed to offer
70% of face value for up to $500 million principal amount of the $3.25 billion of new 7½% bonds that were issued
by FINOVA. (Of these, we had already received $426.8 million in principal amount because of our 13% ownership
of the original debt.) Our offer, which was to run until September 26, 2001, could be withdrawn under a variety of
conditions, one of which became operative if the New York Stock Exchange closed during the offering period.
When that indeed occurred in the week of September 11th, we promptly terminated the offer.
Many of FINOVAís loans involve aircraft assets whose values were significantly diminished by the events
of September 11th. Other receivables held by the company also were imperiled by the economic consequences of
the attack that day. FINOVAís prospects, therefore, are not as good as when we made our proposal to the
bankruptcy court. Nevertheless we feel that overall the transaction will prove satisfactory for Berkshire. Leucadia
has day-to-day operating responsibility for FINOVA, and we have long been impressed with the business acumen
and managerial talent of its key executives.
* * * * * * * * * * * *
Itís dÈj‡ vu time again: In early 1965, when the investment partnership I ran took control of Berkshire, that
company had its main banking relationships with First National Bank of Boston and a large New York City bank.
Previously, I had done no business with either.
Fast forward to 1969, when I wanted Berkshire to buy the Illinois National Bank and Trust of Rockford.
We needed $10 million, and I contacted both banks. There was no response from New York. However, two
representatives of the Boston bank immediately came to Omaha. They told me they would supply the money for
our purchase and that we would work out the details later.
For the next three decades, we borrowed almost nothing from banks. (Debt is a four-letter word around
Berkshire.) Then, in February, when we were structuring the FINOVA transaction, I again called Boston, where
First National had morphed into FleetBoston. Chad Gifford, the companyís president, responded just as Bill Brown
and Ira Stepanian had back in 1969 ñ ìyouíve got the money and weíll work out the details later.î
And thatís just what happened. FleetBoston syndicated a loan for $6 billion (as it turned out, we didnít
need $400 million of it), and it was quickly oversubscribed by 17 banks throughout the world. Sooooo . . . if you
ever need $6 billion, just give Chad a call ñ assuming, that is, your credit is AAA.
* * * * * * * * * * * *
One more point about our investments: The media often report that ìBuffett is buyingî this or that security,
having picked up the ìfactî from reports that Berkshire files. These accounts are sometimes correct, but at other
times the transactions Berkshire reports are actually being made by Lou Simpson, who runs a $2 billion portfolio for
GEICO that is quite independent of me. Normally, Lou does not tell me what he is buying or selling, and I learn of
his activities only when I look at a GEICO portfolio summary that I receive a few days after the end of each month.
Louís thinking, of course, is quite similar to mine, but we usually end up in different securities. Thatís largely
because heís working with less money and can therefore invest in smaller companies than I. Oh, yes, thereís also
another minor difference between us: In recent years, Louís performance has been far better than mine.
16
Charitable Contributions
Berkshire follows a highly unusual policy in respect to charitable contributions ñ but itís one that Charlie
and I believe is both rational and fair to owners.
First, we let our operating subsidiaries make their own charitable decisions, requesting only that the
owners/managers who once ran these as independent companies make all donations to their personal charities from
their own funds, instead of using company money. When our managers are using company funds, we trust them to
make gifts in a manner that delivers commensurate tangible or intangible benefits to the operations they manage.
Last year contributions from Berkshire subsidiaries totaled $19.2 million.
At the parent company level, we make no contributions except those designated by shareholders. We do
not match contributions made by directors or employees, nor do we give to the favorite charities of the Buffetts or
the Mungers. However, prior to our purchasing them, a few of our subsidiaries had employee-match programs and
we feel fine about their continuing them: Itís not our style to tamper with successful business cultures.
To implement our owners’ charitable desires, each year we notify registered holders of A shares (Aís
represent 86.6% of our equity capital) of a per-share amount that they can instruct us to contribute to as many as
three charities. Shareholders name the charity; Berkshire writes the check. Any organization that qualifies under
the Internal Revenue Code can be designated by shareholders. Last year Berkshire made contributions of $16.7
million at the direction of 5,700 shareholders, who named 3,550 charities as recipients. Since we started this
program, our shareholdersí gifts have totaled $181 million.
Most public corporations eschew gifts to religious institutions. These, however, are favorite charities of
our shareholders, who last year named 437 churches and synagogues to receive gifts. Additionally, 790 schools
were recipients. A few of our larger shareholders, including Charlie and me, designate their personal foundations to
get gifts, so that those entities can, in turn, disburse their funds widely.
I get a few letters every week criticizing Berkshire for contributing to Planned Parenthood. These letters
are usually prompted by an organization that wishes to see boycotts of Berkshire products. The letters are
invariably polite and sincere, but their writers are unaware of a key point: Itís not Berkshire, but rather its owners
who are making charitable decisions ñ and these owners are about as diverse in their opinions as you can imagine.
For example, they are probably on both sides of the abortion issue in roughly the same proportion as the American
population. Weíll follow their instructions, whether they designate Planned Parenthood or Metro Right to Life, just
as long as the charity possesses 501(c)(3) status. Itís as if we paid a dividend, which the shareholder then donated.
Our form of disbursement, however, is more tax-efficient.
In neither the purchase of goods nor the hiring of personnel, do we ever consider the religious views, the
gender, the race or the sexual orientation of the persons we are dealing with. It would not only be wrong to do so, it
would be idiotic. We need all of the talent we can find, and we have learned that able and trustworthy managers,
employees and suppliers come from a very wide spectrum of humanity.
* * * * * * * * * * *
To participate in our future charitable contribution programs, you must own Class A shares that are
registered in the name of the actual owner, not the nominee name of a broker, bank or depository. Shares not so
registered on August 31, 2002 will be ineligible for the 2002 program. When you get the contributions form from
us, return it promptly. Designations received after the due date will not be honored.
17
The Annual Meeting
This year’s annual meeting will be on Saturday, May 4, and we will again be at the Civic Auditorium. The
doors will open at 7 a.m., the movie will begin at 8:30, and the meeting itself will commence at 9:30. There will be
a short break at noon for food. (Sandwiches can be bought at the Civic’s concession stands.) Except for that
interlude, Charlie and I will answer questions until 3:30. Give us your best shot.
For at least the next year, the Civic, located downtown, is the only site available to us. We must therefore
hold the meeting on either Saturday or Sunday to avoid the traffic and parking nightmare sure to occur on a
weekday. Shortly, however, Omaha will have a new Convention Center with plenty of parking facilities. Assuming
that we then head for the Center, I will poll shareholders to see whether you wish to return to the Monday meeting
that was standard until 2000. We will decide that vote based on a count of shareholders, not shares. (This is not a
system, however, we will ever institute to decide who should be CEO.)
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we
have again signed up American Express (800-799-6634) to give you special help. They do a terrific job for us each
year, and I thank them for it.
In our usual fashion, we will run buses from the larger hotels to the meeting. Afterwards, the buses will
make trips back to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you are likely to
find a car useful.
We have added so many new companies to Berkshire this year that I’m not going to detail all of the
products that we will be selling at the meeting. But come prepared to carry home everything from bricks to candy.
And underwear, of course. Assuming our Fruit of the Loom purchase has closed by May 4, we will be selling
Fruit’s latest styles, which will make you your neighborhood’s fashion leader. Buy a lifetime supply.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of them
ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a special
shareholder discount (usually 8%). This special offer is permitted by 41 of the 49 jurisdictions in which we operate.
Bring the details of your existing insurance and check out whether we can save you money.
At the Omaha airport on Saturday, we will have the usual array of aircraft from NetJets® available for your
inspection. Just ask a representative at the Civic about viewing any of these planes. If you buy what we consider an
appropriate number of items during the weekend, you may well need your own plane to take them home. And, if
you buy a fraction of a plane, we might even throw in a three-pack of briefs or boxers.
At Nebraska Furniture Mart, located on a 75-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a discount that is
customarily given only to employees. We initiated this special pricing at NFM five years ago, and sales during the
“Weekend” grew from $5.3 million in 1997 to $11.5 million in 2001.
To get the discount, you must make your purchases on Thursday, May 2 through Monday, May 6 and also
present your meeting credential. The period’s special pricing will even apply to the products of several prestigious
manufacturers that normally have ironclad rules against discounting but that, in the spirit of our shareholder
weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m.
on weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays.
Borsheim’s  the largest jewelry store in the country except for Tiffany’s Manhattan store  will have
two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May 3. The
second, the main gala, will be from 9 a.m. to 5 p.m. on Sunday, May 5. Shareholder prices will be available
Thursday through Monday, so if you wish to avoid the large crowds that will assemble on Friday evening and
Sunday, come at other times and identify yourself as a shareholder. On Saturday, we will be open until 6 p.m.
Borsheim’s operates on a gross margin that is fully twenty percentage points below that of its major rivals, so the
more you buy, the more you save (or at least that’s what my wife and daughter tell me). Come by and let us
perform a walletectomy on you.
In the mall outside of Borsheim’s, we will have some of the world’s top bridge experts available to play
with our shareholders on Sunday afternoon. We expect Bob and Petra Hamman along with Sharon Osberg to host
tables. Patrick Wolff, twice U.S. chess champion, will also be in the mall, taking on all comers  blindfolded!
18
Last year, Patrick played as many as six games simultaneously  with his blindfold securely in place  and this
year will try for seven. Finally, Bill Robertie, one of only two players who have twice won the backgammon world
championship, will be on hand to test your skill at that game. Come to the mall on Sunday for the Mensa Olympics.
Gorat’s  my favorite steakhouse  will again be open exclusively for Berkshire shareholders on Sunday,
May 5, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on Sunday, you must
have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If Sunday is sold out, try Gorat’s
on one of the other evenings you will be in town. Show your sophistication by ordering a rare T-bone with a double
order of hash browns.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on Saturday night. This year the
Omaha Royals will play the Oklahoma RedHawks. Last year, in an attempt to emulate the career switch of Babe
Ruth, I gave up pitching and tried batting. Bob Gibson, an Omaha native, was on the mound and I was terrified,
fearing Bob’s famous brush-back pitch. Instead, he delivered a fast ball in the strike zone, and with a Mark
McGwire-like swing, I managed to connect for a hard grounder, which inexplicably died in the infield. I didn’t run
it out: At my age, I get winded playing a hand of bridge.
I’m not sure what will take place at the ballpark this year, but come out and be surprised. Our proxy
statement contains instructions for obtaining tickets to the game. Those people ordering tickets to the annual
meeting will receive a booklet containing all manner of information that should help you enjoy your visit in Omaha.
There will be plenty of action in town. So come for Woodstock Weekend and join our Celebration of Capitalism at
the Civic.
* * * * * * * * * * * *
Finally, I would like to thank the wonderful and incredibly productive crew at World Headquarters (all
5,246.5 square feet of it) who make my job so easy. Berkshire added about 40,000 employees last year, bringing
our workforce to 110,000. At headquarters we added one employee and now have 14.8. (I’ve tried in vain to get
JoEllen Rieck to change her workweek from four days to five; I think she likes the national recognition she gains by
being .8.)
The smooth handling of the array of duties that come with our current size and scope – as well as some
additional activities almost unique to Berkshire, such as our shareholder gala and designated-gifts program – takes a
very special group of people. And that we most definitely have.
Warren E. Buffett
February 28, 2002 Chairman of the Board
19
2
Note: The following table appears in the printed Annual Report on the facing page of the
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500
 Annual Percentage Change 
in Per-Share in S&P 500
Book Value of with Dividends Relative
Berkshire Included Results
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8
1966 .................................................. 20.3 (11.7) 32.0
1967 .................................................. 11.0 30.9 (19.9)
1968 .................................................. 19.0 11.0 8.0
1969 .................................................. 16.2 (8.4) 24.6
1970 .................................................. 12.0 3.9 8.1
1971 .................................................. 16.4 14.6 1.8
1972 .................................................. 21.7 18.9 2.8
1973 .................................................. 4.7 (14.8) 19.5
1974 .................................................. 5.5 (26.4) 31.9
1975 .................................................. 21.9 37.2 (15.3)
1976 .................................................. 59.3 23.6 35.7
1977 .................................................. 31.9 (7.4) 39.3
1978 .................................................. 24.0 6.4 17.6
1979 .................................................. 35.7 18.2 17.5
1980 .................................................. 19.3 32.3 (13.0)
1981 .................................................. 31.4 (5.0) 36.4
1982 .................................................. 40.0 21.4 18.6
1983 .................................................. 32.3 22.4 9.9
1984 .................................................. 13.6 6.1 7.5
1985 .................................................. 48.2 31.6 16.6
1986 .................................................. 26.1 18.6 7.5
1987 .................................................. 19.5 5.1 14.4
1988 .................................................. 20.1 16.6 3.5
1989 .................................................. 44.4 31.7 12.7
1990 .................................................. 7.4 (3.1) 10.5
1991 .................................................. 39.6 30.5 9.1
1992 .................................................. 20.3 7.6 12.7
1993 .................................................. 14.3 10.1 4.2
1994 .................................................. 13.9 1.3 12.6
1995 .................................................. 43.1 37.6 5.5
1996 .................................................. 31.8 23.0 8.8
1997 .................................................. 34.1 33.4 .7
1998 .................................................. 48.3 28.6 19.7
1999 .................................................. .5 21.0 (20.5)
2000 .................................................. 6.5 (9.1) 15.6
2001 .................................................. (6.2) (11.9) 5.7
2002 .................................................. 10.0 (22.1) 32.1
Average Annual Gain  1965-2002 22.2 10.0 12.2
Overall Gain  1964-2002 214,433 3,663
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
3
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2002 was $6.1 billion, which increased the per-share book value of
both our Class A and Class B stock by 10.0%. Over the last 38 years (that is, since present management
took over) per-share book value has grown from $19 to $41,727, a rate of 22.2% compounded annually.∗
In all respects 2002 was a banner year. I’ll provide details later, but here’s a summary:
• Our various non-insurance operations performed exceptionally well, despite a sluggish economy.
A decade ago Berkshire’s annual pre-tax earnings from our non-insurance businesses was $272
million. Now, from our ever-expanding collection of manufacturing, retailing, service and finance
businesses, we earn that sum monthly.
• Our insurance group increased its float to $41.2 billion, a hefty gain of $5.7 billion. Better yet, the
use of these funds in 2002 cost us only 1%. Getting back to low-cost float feels good, particularly
after our poor results during the three previous years. Berkshire’s reinsurance division and
GEICO shot the lights out in 2002, and underwriting discipline was restored at General Re.
• Berkshire acquired some important new businesses – with economic characteristics ranging from
good to great, run by managers ranging from great to great. Those attributes are two legs of our
“entrance” strategy, the third being a sensible purchase price. Unlike LBO operators and private
equity firms, we have no “exit” strategy – we buy to keep. That’s one reason why Berkshire is
usually the first – and sometimes the only – choice for sellers and their managers.
• Our marketable securities outperformed most indices. For Lou Simpson, who manages equities at
GEICO, this was old stuff. But, for me, it was a welcome change from the last few years, during
which my investment record was dismal.
The confluence of these favorable factors in 2002 caused our book-value gain to outstrip the
performance of the S&P 500 by 32.1 percentage points. This result is aberrational: Charlie Munger,
Berkshire’s vice chairman and my partner, and I hope to achieve – at most – an average annual advantage
of a few points. In the future, there will be years in which the S&P soundly trounces us. That will in fact
almost certainly happen during a strong bull market, because the portion of our assets committed to
common stocks has significantly declined. This change, of course, helps our relative performance in down
markets such as we had in 2002.
I have another caveat to mention about last year’s results. If you’ve been a reader of financial
reports in recent years, you’ve seen a flood of “pro-forma” earnings statements – tabulations in which
managers invariably show “earnings” far in excess of those allowed by their auditors. In these
presentations, the CEO tells his owners “don’t count this, don’t count that – just count what makes earnings
fat.” Often, a forget-all-this-bad-stuff message is delivered year after year without management so much as
blushing.
 ∗
All figures used in this report apply to Berkshire's A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of
the A.
We’ve yet to see a pro-forma presentation disclosing that audited earnings were somewhat high.
So let’s make a little history: Last year, on a pro-forma basis, Berkshire had lower earnings than those we
actually reported.
That is true because two favorable factors aided our reported figures. First, in 2002 there was no
megacatastrophe, which means that Berkshire (and other insurers as well) earned more from insurance than
if losses had been normal. In years when the reverse is true – because of a blockbuster hurricane,
earthquake or man-made disaster – many insurers like to report that they would have earned X “except for”
the unusual event. The implication is that since such megacats are infrequent, they shouldn’t be counted
when “true” earnings are calculated. That is deceptive nonsense. “Except for” losses will forever be part
of the insurance business, and they will forever be paid with shareholders’ money.
Nonetheless, for the purposes of this exercise, we’ll take a page from the industry’s book. For last
year, when we didn’t have any truly major disasters, a downward adjustment is appropriate if you wish to
“normalize” our underwriting result.
Secondly, the bond market in 2002 favored certain strategies we employed in our finance and
financial products business. Gains from those strategies will certainly diminish within a year or two – and
may well disappear.
Soooo . . . “except for” a couple of favorable breaks, our pre-tax earnings last year would have
been about $500 million less than we actually reported. We’re happy, nevertheless, to bank the excess. As
Jack Benny once said upon receiving an award: “I don’t deserve this honor – but, then, I have arthritis, and
I don’t deserve that either.”
* * * * * * * * * * * *
We continue to be blessed with an extraordinary group of managers, many of whom haven’t the
slightest financial need to work. They stick around, though: In 38 years, we’ve never had a single CEO of
a subsidiary elect to leave Berkshire to work elsewhere. Counting Charlie, we now have six managers over
75, and I hope that in four years that number increases by at least two (Bob Shaw and I are both 72). Our
rationale: “It’s hard to teach a new dog old tricks.”
Berkshire’s operating CEOs are masters of their crafts and run their businesses as if they were
their own. My job is to stay out of their way and allocate whatever excess capital their businesses generate.
It’s easy work.
My managerial model is Eddie Bennett, who was a batboy. In 1919, at age 19, Eddie began his
work with the Chicago White Sox, who that year went to the World Series. The next year, Eddie switched
to the Brooklyn Dodgers, and they, too, won their league title. Our hero, however, smelled trouble.
Changing boroughs, he joined the Yankees in 1921, and they promptly won their first pennant in history.
Now Eddie settled in, shrewdly seeing what was coming. In the next seven years, the Yankees won five
American League titles.
What does this have to do with management? It’s simple – to be a winner, work with winners. In
1927, for example, Eddie received $700 for the 1/8th World Series share voted him by the legendary
Yankee team of Ruth and Gehrig. This sum, which Eddie earned by working only four days (because New
York swept the Series) was roughly equal to the full-year pay then earned by batboys who worked with
ordinary associates.
Eddie understood that how he lugged bats was unimportant; what counted instead was hooking up
with the cream of those on the playing field. I’ve learned from Eddie. At Berkshire, I regularly hand bats
to many of the heaviest hitters in American business.
Acquisitions
We added some sluggers to our lineup last year. Two acquisitions pending at yearend 2001 were
completed: Albecca (which operates under the name Larson-Juhl), the U.S. leader in custom-made picture
frames; and Fruit of the Loom, the producer of about 33.3% of the men’s and boy’s underwear sold in the
U.S. and of other apparel as well.
4
5
Both companies came with outstanding CEOs: Steve McKenzie at Albecca and John Holland at
Fruit. John, who had retired from Fruit in 1996, rejoined it three years ago and rescued the company from
the disastrous path it had gone down after he’d left. He’s now 70, and I am trying to convince him to make
his next retirement coincident with mine (presently scheduled for five years after my death – a date subject,
however, to extension).
We initiated and completed two other acquisitions last year that were somewhat below our normal
size threshold. In aggregate, however, these businesses earn more than $60 million pre-tax annually. Both
operate in industries characterized by tough economics, but both also have important competitive strengths
that enable them to earn decent returns on capital.
The newcomers are:
(a) CTB, a worldwide leader in equipment for the poultry, hog, egg production and grain
industries; and
(b) Garan, a manufacturer of children’s apparel, whose largest and best-known line is
Garanimals®.
These two companies came with the managers responsible for their impressive records: Vic
Mancinelli at CTB and Seymour Lichtenstein at Garan.
The largest acquisition we initiated in 2002 was The Pampered Chef, a company with a fascinating
history dating back to 1980. Doris Christopher was then a 34-year-old suburban Chicago home economics
teacher with a husband, two little girls, and absolutely no business background. Wanting, however, to
supplement her family’s modest income, she turned to thinking about what she knew best – food
preparation. Why not, she wondered, make a business out of marketing kitchenware, focusing on the items
she herself had found most useful?
To get started, Doris borrowed $3,000 against her life insurance policy – all the money ever
injected into the company – and went to the Merchandise Mart on a buying expedition. There, she picked
up a dozen each of this and that, and then went home to set up operations in her basement.
Her plan was to conduct in-home presentations to small groups of women, gathered at the homes
of their friends. While driving to her first presentation, though, Doris almost talked herself into returning
home, convinced she was doomed to fail.
But the women she faced that evening loved her and her products, purchased $175 of goods, and
TPC was underway. Working with her husband, Jay, Doris did $50,000 of business in the first year.
Today – only 22 years later – TPC does more than $700 million of business annually, working through
67,000 kitchen consultants.
I’ve been to a TPC party, and it’s easy to see why the business is a success. The company’s
products, in large part proprietary, are well-styled and highly useful, and the consultants are knowledgeable
and enthusiastic. Everyone has a good time. Hurry to pamperedchef.com on the Internet to find where to
attend a party near you.
Two years ago, Doris brought in Sheila O’Connell Cooper, now CEO, to share the management
load, and in August they met with me in Omaha. It took me about ten seconds to decide that these were
two managers with whom I wished to partner, and we promptly made a deal. Berkshire shareholders
couldn’t be luckier than to be associated with Doris and Sheila.
* * * * * * * * * * * *
Berkshire also made some important acquisitions last year through MidAmerican Energy Holdings
(MEHC), a company in which our equity interest is 80.2%. Because the Public Utility Holding Company
Act (PUHCA) limits us to 9.9% voting control, however, we are unable to fully consolidate MEHC’s
financial statements.
Despite the voting-control limitation – and the somewhat strange capital structure at MEHC it has
engendered – the company is a key part of Berkshire. Already it has $18 billion of assets and delivers our
largest stream of non-insurance earnings. It could well grow to be huge.
Last year MEHC acquired two important gas pipelines. The first, Kern River, extends from
Southwest Wyoming to Southern California. This line moves about 900 million cubic feet of gas a day and
is undergoing a $1.2 billion expansion that will double throughput by this fall. At that point, the line will
carry enough gas to generate electricity for ten million homes.
The second acquisition, Northern Natural Gas, is a 16,600 mile line extending from the Southwest
to a wide range of Midwestern locations. This purchase completes a corporate odyssey of particular
interest to Omahans.
From its beginnings in the 1930s, Northern Natural was one of Omaha’s premier businesses, run
by CEOs who regularly distinguished themselves as community leaders. Then, in July, 1985, the company
– which in 1980 had been renamed InterNorth – merged with Houston Natural Gas, a business less than
half its size. The companies announced that the enlarged operation would be headquartered in Omaha,
with InterNorth’s CEO continuing in that job.
Within a year, those promises were broken. By then, the former CEO of Houston Natural had
taken over the top job at InterNorth, the company had been renamed, and the headquarters had been moved
to Houston. These switches were orchestrated by the new CEO – Ken Lay – and the name he chose was
Enron.
Fast forward 15 years to late 2001. Enron ran into the troubles we’ve heard so much about and
borrowed money from Dynegy, putting up the Northern Natural pipeline operation as collateral. The two
companies quickly had a falling out, and the pipeline’s ownership moved to Dynegy. That company, in
turn, soon encountered severe financial problems of its own.
MEHC received a call on Friday, July 26, from Dynegy, which was looking for a quick and
certain cash sale of the pipeline. Dynegy phoned the right party: On July 29, we signed a contract, and
shortly thereafter Northern Natural returned home.
When 2001 began, Charlie and I had no idea that Berkshire would be moving into the pipeline
business. But upon completion of the Kern River expansion, MEHC will transport about 8% of all gas
used in the U.S. We continue to look for large energy-related assets, though in the electric utility field
PUHCA constrains what we can do.
* * * * * * * * * * * *
A few years ago, and somewhat by accident, MEHC found itself in the residential real estate
brokerage business. It is no accident, however, that we have dramatically expanded the operation.
Moreover, we are likely to keep on expanding in the future.
We call this business HomeServices of America. In the various communities it serves, though, it
operates under the names of the businesses it has acquired, such as CBS in Omaha, Edina Realty in
Minneapolis and Iowa Realty in Des Moines. In most metropolitan areas in which we operate, we are the
clear market leader.
HomeServices is now the second largest residential brokerage business in the country. On one
side or the other (or both), we participated in $37 billion of transactions last year, up 100% from 2001.
Most of our growth came from three acquisitions we made during 2002, the largest of which was
Prudential California Realty. Last year, this company, the leading realtor in a territory consisting of Los
Angeles, Orange and San Diego Counties, participated in $16 billion of closings.
In a very short period, Ron Peltier, the company’s CEO, has increased HomeServices’ revenues –
and profits – dramatically. Though this business will always be cyclical, it’s one we like and in which we
continue to have an appetite for sensible acquisitions.
* * * * * * * * * * * *
Dave Sokol, MEHC’s CEO, and Greg Abel, his key associate, are huge assets for Berkshire. They
are dealmakers, and they are managers. Berkshire stands ready to inject massive amounts of money into
MEHC – and it will be fun to watch how far Dave and Greg can take the business.
6
7
The Economics of Property/Casualty Insurance
Our core business — though we have others of great importance — is insurance. To understand
Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key
determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all,
the long-term outlook for both of these factors.
To begin with, float is money we hold but don't own. In an insurance operation, float arises
because premiums are received before losses are paid, an interval that sometimes extends over many years.
During that time, the insurer invests the money. This pleasant activity typically carries with it a downside:
The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay.
That leaves it running an “underwriting loss,” which is the cost of float. An insurance business has value if
its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the
business is a lemon if its cost of float is higher than market rates for money. Moreover, the downward
trend of interest rates in recent years has transformed underwriting losses that formerly were tolerable into
burdens that move insurance businesses deeply into the lemon category.
Historically, Berkshire has obtained its float at a very low cost. Indeed, our cost has been less than
zero in many years; that is, we’ve actually been paid for holding other people’s money. In 2001, however,
our cost was terrible, coming in at 12.8%, about half of which was attributable to World Trade Center
losses. Back in 1983-84, we had years that were even worse. There’s nothing automatic about cheap float.
The table that follows shows (at intervals) the float generated by the various segments of
Berkshire’s insurance operations since we entered the business 36 years ago upon acquiring National
Indemnity Company (whose traditional lines are included in the segment “Other Primary”). For the table
we have calculated our float — which we generate in large amounts relative to our premium volume — by
adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned
premium reserves, and then subtracting insurance-related receivables, prepaid acquisition costs, prepaid
taxes and deferred charges applicable to assumed reinsurance. (Got that?)
Yearend Float (in $ millions)
Other Other
Year GEICO General Re Reinsurance Primary Total
1967 20 20
1977 40 131 171
1987 701 807 1,508
1997 2,917 4,014 455 7,386
1998 3,125 14,909 4,305 415 22,754
1999 3,444 15,166 6,285 403 25,298
2000 3,943 15,525 7,805 598 27,871
2001 4,251 19,310 11,262 685 35,508
2002 4,678 22,207 13,396 943 41,224
Last year our cost of float was 1%. As I mentioned earlier, you should temper your enthusiasm
about this favorable result given that no megacatastrophe occurred in 2002. We’re certain to get one of
these disasters periodically, and when we do our float-cost will spike.
Our 2002 results were hurt by 1) a painful charge at General Re for losses that should have been
recorded as costs in earlier years, and 2) a “desirable” charge we incur annually for retroactive insurance (see
the next section for more about these items). These costs totaled $1.75 billion, or about 4.6% of float.
Fortunately, our overall underwriting experience on 2002 business was excellent, which allowed us, even
after the charges noted, to approach a no-cost result.
Absent a megacatastrophe, I expect our cost of float in 2003 to again be very low – perhaps even less
than zero. In the rundown of our insurance operations that follows, you will see why I’m optimistic that, over
time, our underwriting results will both surpass those achieved by the industry and deliver us investable funds
at minimal cost.
Insurance Operations
If our insurance operations are to generate low-cost float over time, they must: (a) underwrite with
unwavering discipline; (b) reserve conservatively; and (c) avoid an aggregation of exposures that would allow
a supposedly “impossible” incident to threaten their solvency. All of our major insurance businesses, with
one exception, have regularly met those tests.
The exception is General Re, and there was much to do at that company last year to get it up to
snuff. I’m delighted to report that under Joe Brandon’s leadership, and with yeoman assistance by Tad
Montross, enormous progress has been made on each of the fronts described.
When I agreed in 1998 to merge Berkshire with Gen Re, I thought that company stuck to the three
rules I’ve enumerated. I had studied the operation for decades and had observed underwriting discipline that
was consistent and reserving that was conservative. At merger time, I detected no slippage in Gen Re’s
standards.
I was dead wrong. Gen Re’s culture and practices had substantially changed and unbeknownst to
management – and to me – the company was grossly mispricing its current business. In addition, Gen Re had
accumulated an aggregation of risks that would have been fatal had, say, terrorists detonated several large￾scale nuclear bombs in an attack on the U.S. A disaster of that scope was highly improbable, of course, but it
is up to insurers to limit their risks in a manner that leaves their finances rock-solid if the “impossible”
happens. Indeed, had Gen Re remained independent, the World Trade Center attack alone would have
threatened the company’s existence.
When the WTC disaster occurred, it exposed weaknesses in Gen Re’s operations that I should have
detected earlier. But I was lucky: Joe and Tad were on hand, freshly endowed with increased authority and
eager to rapidly correct the errors of the past. They knew what to do – and they did it.
It takes time for insurance policies to run off, however, and 2002 was well along before we managed
to reduce our aggregation of nuclear, chemical and biological risk (NCB) to a tolerable level. That problem is
now behind us.
On another front, Gen Re’s underwriting attitude has been dramatically altered: The entire
organization now understands that we wish to write only properly-priced business, whatever the effect on
volume. Joe and Tad judge themselves only by Gen Re’s underwriting profitability. Size simply doesn’t
count.
Finally, we are making every effort to get our reserving right. If we fail at that, we can’t know our
true costs. And any insurer that has no idea what its costs are is heading for big trouble.
8
At yearend 2001, General Re attempted to reserve adequately for all losses that had occurred prior to
that date and were not yet paid – but we failed badly. Therefore the company’s 2002 underwriting results
were penalized by an additional $1.31 billion that we recorded to correct the estimation mistakes of earlier
years. When I review the reserving errors that have been uncovered at General Re, a line from a country song
seems apt: “I wish I didn’t know now what I didn’t know then.”
I can promise you that our top priority going forward is to avoid inadequate reserving. But I can’t
guarantee success. The natural tendency of most casualty-insurance managers is to underreserve, and they
must have a particular mindset – which, it may surprise you, has nothing to do with actuarial expertise – if
they are to overcome this devastating bias. Additionally, a reinsurer faces far more difficulties in reserving
properly than does a primary insurer. Nevertheless, at Berkshire, we have generally been successful in our
reserving, and we are determined to be at General Re as well.
In summary, I believe General Re is now well positioned to deliver huge amounts of no-cost float to
Berkshire and that its sink-the-ship catastrophe risk has been eliminated. The company still possesses the
important competitive strengths that I’ve outlined in the past. And it gained another highly significant
advantage last year when each of its three largest worldwide competitors, previously rated AAA, was
demoted by at least one rating agency. Among the giants, General Re, rated AAA across-the-board, is now in
a class by itself in respect to financial strength.
No attribute is more important. Recently, in contrast, one of the world’s largest reinsurers – a
company regularly recommended to primary insurers by leading brokers – has all but ceased paying claims,
including those both valid and due. This company owes many billions of dollars to hundreds of primary
insurers who now face massive write-offs. “Cheap” reinsurance is a fool’s bargain: When an insurer lays out
money today in exchange for a reinsurer’s promise to pay a decade or two later, it’s dangerous – and possibly
life-threatening – for the insurer to deal with any but the strongest reinsurer around.
Berkshire shareholders owe Joe and Tad a huge thank you for their accomplishments in 2002. They
worked harder during the year than I would wish for anyone – and it is paying off.
* * * * * * * * * * * *
At GEICO, everything went so well in 2002 that we should pinch ourselves. Growth was
substantial, profits were outstanding, policyholder retention was up and sales productivity jumped
significantly. These trends continue in early 2003.
Thank Tony Nicely for all of this. As anyone who knows him will attest, Tony has been in love with
GEICO for 41 years – ever since he went to work for the company at 18 – and his results reflect this passion.
He is proud of the money we save policyholders – about $1 billion annually versus what other insurers, on
average, would have charged them. He is proud of the service we provide these policyholders: In a key
industry survey, GEICO was recently ranked above all major competitors. He is proud of his 19,162
associates, who last year were awarded profit-sharing payments equal to 19% of their base salary because of
the splendid results they achieved. And he is proud of the growing profits he delivers to Berkshire
shareholders.
GEICO took in $2.9 billion in premiums when Berkshire acquired full ownership in 1996. Last
year, its volume was $6.9 billion, with plenty of growth to come. Particularly promising is the company’s
Internet operation, whose new business grew by 75% last year. Check us out at GEICO.com (or call 800-
847-7536). In most states, shareholders get a special 8% discount.
Here’s one footnote to GEICO’s 2002 earnings that underscores the need for insurers to do business
with only the strongest of reinsurers. In 1981-1983, the managers then running GEICO decided to try their
hand at writing commercial umbrella and product liability insurance. The risks seemed modest: the company
took in only $3,051,000 from this line and used almost all of it – $2,979,000 – to buy reinsurance in order to
limit its losses. GEICO was left with a paltry $72,000 as compensation for the minor portion of the risk that
it retained. But this small bite of the apple was more than enough to make the experience memorable.
GEICO’s losses from this venture now total a breathtaking $94.1 million or about 130,000% of the net
premium it received. Of the total loss, uncollectable receivables from deadbeat reinsurers account for no less
than $90.3 million (including $19 million charged in 2002). So much for “cheap” reinsurance.
* * * * * * * * * * * *
9
Ajit Jain’s reinsurance division was the major reason our float cost us so little last year. If we ever
put a photo in a Berkshire annual report, it will be of Ajit. In color!
Ajit’s operation has amassed $13.4 billion of float, more than all but a handful of insurers have ever
built up. He accomplished this from a standing start in 1986, and even now has a workforce numbering only
20. And, most important, he has produced underwriting profits.
His profits are particularly remarkable if you factor in some accounting arcana that I am about to lay
on you. So prepare to eat your spinach (or, alternatively, if debits and credits aren’t your thing, skip the next
two paragraphs).
Ajit’s 2002 underwriting profit of $534 million came after his operation recognized a charge of $428
million attributable to “retroactive” insurance he has written over the years. In this line of business, we
assume from another insurer the obligation to pay up to a specified amount for losses they have already
incurred – often for events that took place decades earlier – but that are yet to be paid (for example, because a
worker hurt in 1980 will receive monthly payments for life). In these arrangements, an insurer pays us a large
upfront premium, but one that is less than the losses we expect to pay. We willingly accept this differential
because a) our payments are capped, and b) we get to use the money until loss payments are actually made,
with these often stretching out over a decade or more. About 80% of the $6.6 billion in asbestos and
environmental loss reserves that we carry arises from capped contracts, whose costs consequently can’t
skyrocket.
When we write a retroactive policy, we immediately record both the premium and a reserve for the
expected losses. The difference between the two is entered as an asset entitled “deferred charges –
reinsurance assumed.” This is no small item: at yearend, for all retroactive policies, it was $3.4 billion. We
then amortize this asset downward by charges to income over the expected life of each policy. These charges
– $440 million in 2002, including charges at Gen Re – create an underwriting loss, but one that is intentional
and desirable. And even after this drag on reported results, Ajit achieved a large underwriting gain last year.
We want to emphasize, however, that we assume risks in Ajit’s operation that are huge – far larger
than those retained by any other insurer in the world. Therefore, a single event could cause a major swing in
Ajit’s results in any given quarter or year. That bothers us not at all: As long as we are paid appropriately, we
love taking on short-term volatility that others wish to shed. At Berkshire, we would rather earn a lumpy
15% over time than a smooth 12%.
If you see Ajit at our annual meeting, bow deeply.
* * * * * * * * * * * *
Berkshire’s smaller insurers had an outstanding year. Their aggregate float grew by 38%, and they
realized an underwriting profit of $32 million, or 4.5% of premiums. Collectively, these operations would
make one of the finest insurance companies in the country.
Included in these figures, however, were terrible results in our California workers’ compensation
operation. There, we have work to do. There, too, our reserving severely missed the mark. Until we figure
out how to get this business right, we will keep it small.
For the fabulous year they had in 2002, we thank Rod Eldred, John Kizer, Tom Nerney, Don Towle
and Don Wurster. They added a lot of value to your Berkshire investment.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire’s reported earnings. You will notice that
“Purchase-Accounting Adjustments” dropped sharply in 2002, the reason being that GAAP rules changed
then, no longer requiring the amortization of goodwill. This change increases our reported earnings, but has
no effect on our economic earnings.
10
11
(in millions)
Berkshire’s Share
of Net Earnings
(after taxes and
Pre-Tax Earnings Minority interests)
2002 2001 2002 2001
Operating Earnings:
Insurance Group:
Underwriting – General Re.................................... $(1,393) $(3,671) $(930) $(2,391)
Underwriting – Berkshire Group ........................... 534 (647) 347 (433)
Underwriting – GEICO.......................................... 416 221 271 144
Underwriting – Other Primary............................... 32 30 20 18
Net Investment Income.......................................... 3,050 2,824 2,096 1,968
Apparel(1) .................................................................. 229 (33) 156 (28)
Building Products(2) .................................................. 516 461 313 287
Finance and Financial Products Business................. 1,016 519 659 336
Flight Services.......................................................... 225 186 133 105
MidAmerican Energy (80% owned)......................... 613 565 359 230
Retail Operations...................................................... 166 175 97 101
Scott Fetzer (excluding finance operation)............... 129 129 83 83
Shaw Industries(3)...................................................... 424 292 258 156
Other Businesses....................................................... 256 212 160 131
Purchase-Accounting Adjustments........................... (119) (726) (65) (699)
Corporate Interest Expense....................................... (86) (92) (55) (60)
Shareholder-Designated Contributions..................... (17) (17) (11) (11)
Other......................................................................... 19 25 12 16
Operating Earnings...................................................... 6,010 453 3,903 (47)
Capital Gains from Investments .................................. 603 1,320 383 842
Total Earnings – All Entities....................................... $6,613 $1,773 $4,286 $ 795
(1) Includes Fruit of the Loom from April 30, 2002 and Garan from September 4, 2002.
(2) Includes Johns Manville from February 27, 2001 and MiTek from July 31, 2001.
(3) From date of acquisition, January 8, 2001.
Here’s a summary of major developments at our non-insurance businesses:
• MidAmerican Energy’s earnings grew in 2002 and will likely do so again this year. Most of the
increase, both present and expected, results from the acquisitions described earlier. To fund these,
Berkshire purchased $1,273 million of MidAmerican junior debt (bringing our total holdings of
these 11% obligations to $1,728 million) and also invested $402 million in a “common-equivalent”
stock. We now own (on a fully-diluted basis) 80.2% of MidAmerican’s equity. MidAmerican’s
financial statements are presented in detail on page 37.
• Last year I told you of the problems at Dexter that led to a huge loss in our shoe business. Thanks to
Frank Rooney and Jim Issler of H.H. Brown, the Dexter operation has been turned around. Despite
the cost of unwinding our problems there, we earned $24 million in shoes last year, an upward swing
of $70 million from 2001.
Randy Watson at Justin also contributed to this improvement, increasing margins significantly while
trimming invested capital. Shoes are a tough business, but we have terrific managers and believe
that in the future we will earn reasonable returns on the capital we employ in this operation.
12
• In a so-so year for home-furnishing and jewelry retailers, our operations did well. Among our eight
retailing operations, the best performer was Homemaker’s in Des Moines. There, the talented
Merschman family achieved outstanding gains in both sales and profits.
Nebraska Furniture Mart will open a new blockbuster store in metropolitan Kansas City in August.
With 450,000 square feet of retail space, it could well produce the second largest volume of any
furniture store in the country – the Omaha operation being the national champion. I hope Berkshire
shareholders in the Kansas City area will come out for the opening (and keep coming).
• Our home and construction-related businesses – Acme Brick, Benjamin Moore Paint, Johns￾Manville, MiTek and Shaw – delivered $941 million of pre-tax earnings last year. Of particular
significance was Shaw’s gain from $292 million in 2001 to $424 million. Bob Shaw and Julian Saul
are terrific operators. Carpet prices increased only 1% last year, but Shaw’s productivity gains and
excellent expense control delivered significantly improved margins.
We cherish cost-consciousness at Berkshire. Our model is the widow who went to the local
newspaper to place an obituary notice. Told there was a 25-cents-a-word charge, she requested
“Fred Brown died.” She was then informed there was a seven-word minimum. “Okay” the
bereaved woman replied, “make it ‘Fred Brown died, golf clubs for sale’.”
• Earnings from flight services increased last year – but only because we realized a special pre-tax
gain of $60 million from the sale of our 50% interest in FlightSafety Boeing. Without this gain,
earnings from our training business would have fallen slightly in concert with the slowdown in
business-aviation activity. FlightSafety training continues to be the gold standard for the industry,
and we expect growth in the years to come.
At NetJets, our fractional-ownership operation, we are the runaway leader of the four-company field.
FAA records indicate that our industry share in 2002 was 75%, meaning that clients purchased or
leased planes from us that were valued at triple those recorded by our three competitors combined.
Last year, our fleet flew 132.7 million nautical miles, taking clients to 130 countries.
Our preeminence is directly attributable to Rich Santulli, NetJets’ CEO. He invented the business in
1986 and ever since has exhibited an unbending devotion to the highest levels of service, safety and
security. Rich, Charlie and I insist on planes (and personnel) worthy of carrying our own families –
because they regularly do.
Though NetJets revenues set a record in 2002, the company again lost money. A small profit in the
U.S. was more than offset by losses in Europe. Overall, the fractional-ownership industry lost
significant sums last year, and that is almost certain to be the outcome in 2003 as well. The bald fact
is that airplanes are costly to operate.
Over time, this economic reality should work to our advantage, given that for a great many
companies, private aircraft are an essential business tool. And for most of these companies, NetJets
makes compelling sense as either a primary or supplementary supplier of the aircraft they need.
Many businesses could save millions of dollars annually by flying with us. Indeed, the yearly
savings at some large companies could exceed $10 million. Equally important, these companies
would actually increase their operational capabilities by using us. A fractional ownership of a single
NetJets plane allows a client to have several planes in the air simultaneously. Additionally, through
the interchange arrangement we make available, an owner of an interest in one plane can fly any of
12 other models, using whatever plane makes most sense for a mission. (One of my sisters owns a
fraction of a Falcon 2000, which she uses for trips to Hawaii, but – exhibiting the Buffett gene – she
interchanges to a more economical Citation Excel for short trips in the U.S.)
The roster of NetJets users confirms the advantages we offer major businesses. Take General
Electric, for example. It has a large fleet of its own but also has an unsurpassed knowledge of how
to utilize aircraft effectively and economically. And it is our largest customer.
• Our finance and financial products line covers a variety of operations, among them certain activities
in high-grade fixed-income securities that proved highly profitable in 2002. Earnings in this arena
will probably continue for a while, but are certain to decrease – and perhaps disappear – in time.
This category also includes a highly satisfactory – but rapidly diminishing – income stream from our
Berkadia investment in Finova (described in last year’s report). Our partner, Leucadia National
Corp., has managed this operation with great skill, willingly doing far more than its share of the
heavy lifting. I like this division of labor and hope to join with Leucadia in future transactions.
On the minus side, the Finance line also includes the operations of General Re Securities, a
derivatives and trading business. This entity lost $173 million pre-tax last year, a result that, in part,
is a belated acknowledgment of faulty, albeit standard, accounting it used in earlier periods.
Derivatives, in fact, deserve an extensive look, both in respect to the accounting their users employ
and to the problems they may pose for both individual companies and our economy.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with
them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though
the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be
determined by one or more reference items, such as interest rates, stock prices or currency values. If, for
example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives
transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of
varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the
creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the
counterparties record profits and losses – often huge in amount – in their current earnings statements without
so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years
in the future, were put on the books. Or say you want to write a contract speculating on the number of twins
to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie
and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and
are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before
we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and
derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either
industry, once you write a contract – which may require a large payment decades later – you are usually stuck
with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind
leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are
often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates
whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s
commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market
accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model”
is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving
multiple reference items and distant settlement dates increase the opportunities for counterparties to use
fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use
differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model
degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384
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contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus
value derived from one or more reference items, including some of mind-boggling complexity. Valuing a
portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds
have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies
used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually
tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then
turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the
CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited
from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into
for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a
company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a
company is downgraded because of general adversity and that its derivatives instantly kick in with their
requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to
meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more
downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay
off much of their business with others. In both cases, huge receivables from many counterparties tend to
build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a
liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit
exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous
event that causes the receivable from Company A to go bad will also affect those from Companies B through
Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more
tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put
sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The
Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of
preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain.
When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how
we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear
certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize
the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what
they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in
order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives
dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these
counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a
problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in
the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic
problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term
Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue
effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the
outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred
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people – could well have posed a serious threat to the stability of American markets. In other words, the Fed
acted because its leaders were fearful of what might have happened to other financial institutions had the
LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for
weeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate
100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts
up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a
future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the
risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and
analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with
derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities
of major banks, the only thing we understand is that we don’t understand how much risk the institution is
running.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous
they are has already permeated the electricity and gas businesses, in which the eruption of major troubles
caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business
continues to expand unchecked. Central banks and governments have so far found no effective way to
control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and
that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives
contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are
potentially lethal.
Investments
Below we show our common stock investments. Those that had a market value of more than $500
million at the end of 2002 are itemized.
12/31/02
Shares Company Cost Market
(dollars in millions)
151,610,700 American Express Company ..................................................................... $ 1,470 $ 5,359
200,000,000 The Coca-Cola Company .......................................................................... 1,299 8,768
96,000,000 The Gillette Company................................................................................ 600 2,915
15,999,200 H&R Block, Inc......................................................................................... 255 643
6,708,760 M&T Bank................................................................................................. 103 532
24,000,000 Moody’s Corporation................................................................................. 499 991
1,727,765 The Washington Post Company ................................................................ 11 1,275
53,265,080 Wells Fargo & Company........................................................................... 306 2,497
Others ........................................................................................................ 4,621 5,383
Total Common Stocks ............................................................................... $9,164 $28,363
We continue to do little in equities. Charlie and I are increasingly comfortable with our holdings in
Berkshire’s major investees because most of them have increased their earnings while their valuations have
decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don’t
yet believe their shares are undervalued.
In our view, the same conclusion fits stocks generally. Despite three years of falling prices, which
have significantly improved the attractiveness of common stocks, we still find very few that even mildly
interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble.
Unfortunately, the hangover may prove to be proportional to the binge.
The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning
common stocks – if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years
have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very
high probability of at least 10% pre-tax returns (which translate to 6½-7% after corporate tax), we will sit on
the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But
occasionally successful investing requires inactivity.
Last year we were, however, able to make sensible investments in a few “junk” bonds and loans.
Overall, our commitments in this sector sextupled, reaching $8.3 billion by yearend.
Investing in junk bonds and investing in stocks are alike in certain ways: Both activities require us to
make a price-value calculation and also to scan hundreds of securities to find the very few that have attractive
reward/risk ratios. But there are important differences between the two disciplines as well. In stocks, we
expect every commitment to work out well because we concentrate on conservatively financed businesses
with strong competitive strengths, run by able and honest people. If we buy into these companies at sensible
prices, losses should be rare. Indeed, during the 38 years we have run the company’s affairs, gains from the
equities we manage at Berkshire (that is, excluding those managed at General Re and GEICO) have exceeded
losses by a ratio of about 100 to one.
Purchasing junk bonds, we are dealing with enterprises that are far more marginal. These businesses
are usually overloaded with debt and often operate in industries characterized by low returns on capital.
Additionally, the quality of management is sometimes questionable. Management may even have interests
that are directly counter to those of debtholders. Therefore, we expect that we will have occasional large
losses in junk issues. So far, however, we have done reasonably well in this field.
Corporate Governance
Both the ability and fidelity of managers have long needed monitoring. Indeed, nearly 2,000 years
ago, Jesus Christ addressed this subject, speaking (Luke 16:2) approvingly of “a certain rich man” who told
his manager, “Give an account of thy stewardship; for thou mayest no longer be steward.”
Accountability and stewardship withered in the last decade, becoming qualities deemed of little
importance by those caught up in the Great Bubble. As stock prices went up, the behavioral norms of
managers went down. By the late ’90s, as a result, CEOs who traveled the high road did not encounter heavy
traffic.
Most CEOs, it should be noted, are men and women you would be happy to have as trustees for your
children’s assets or as next-door neighbors. Too many of these people, however, have in recent years
behaved badly at the office, fudging numbers and drawing obscene pay for mediocre business achievements.
These otherwise decent people simply followed the career path of Mae West: “I was Snow White but I
drifted.”
In theory, corporate boards should have prevented this deterioration of conduct. I last wrote about
the responsibilities of directors in the 1993 annual report. (We will send you a copy of this discussion on
request, or you may read it on the Internet in the Corporate Governance section of the 1993 letter.) There, I
said that directors “should behave as if there was a single absentee owner, whose long-term interest they
should try to further in all proper ways.” This means that directors must get rid of a manager who is mediocre
or worse, no matter how likable he may be. Directors must react as did the chorus-girl bride of an 85-year￾old multimillionaire when he asked whether she would love him if he lost his money. “Of course,” the young
beauty replied, “I would miss you, but I would still love you.”
In the 1993 annual report, I also said directors had another job: “If able but greedy managers over￾reach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands.” Since I wrote
that, over-reaching has become common but few hands have been slapped.
Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate
laws – it’s always been clear that directors are obligated to represent the interests of shareholders – but rather
in what I’d call “boardroom atmosphere.”
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It’s almost impossible, for example, in a boardroom populated by well-mannered people, to raise the
question of whether the CEO should be replaced. It’s equally awkward to question a proposed acquisition
that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and
unanimously support his decision. (They wouldn’t be in the room if they didn’t.) Finally, when the
compensation committee – armed, as always, with support from a high-paid consultant – reports on a
megagrant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the
committee reconsider.
These “social” difficulties argue for outside directors regularly meeting without the CEO – a reform
that is being instituted and that I enthusiastically endorse. I doubt, however, that most of the other new
governance rules and recommendations will provide benefits commensurate with the monetary and other
costs they impose.
The current cry is for “independent” directors. It is certainly true that it is desirable to have directors
who think and speak independently – but they must also be business-savvy, interested and shareholder￾oriented. In my 1993 commentary, those are the three qualities I described as essential.
Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire’s) and have
interacted with perhaps 250 directors. Most of them were “independent” as defined by today’s rules. But the
great majority of these directors lacked at least one of the three qualities I value. As a result, their
contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and
intelligent though they were, simply did not know enough about business and/or care enough about
shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully
add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be
counter to the interests of shareholders. In those cases, collegiality trumped independence.
So that we may further see the failings of “independence,” let’s look at a 62-year case study covering
thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of
investment companies (most of these mutual funds) be independent. The requirement was originally 40% and
now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as
independent.
These directors and the entire board have many perfunctory duties, but in actuality have only two
important responsibilities: obtaining the best possible investment manager and negotiating with that manager
for the lowest possible fee. When you are seeking investment help yourself, those two goals are the only ones
that count, and directors acting for other investors should have exactly the same priorities. Yet when it comes
to independent directors pursuing either goal, their record has been absolutely pathetic.
Many thousands of investment-company boards meet annually to carry out the vital job of selecting
who will manage the savings of the millions of owners they represent. Year after year the directors of Fund
A select manager A, Fund B directors select manager B, etc. … in a zombie-like process that makes a
mockery of stewardship. Very occasionally, a board will revolt. But for the most part, a monkey will type
out a Shakespeare play before an “independent” mutual-fund director will suggest that his fund look at other
managers, even if the incumbent manager has persistently delivered substandard performance. When they are
handling their own money, of course, directors will look to alternative advisors – but it never enters their
minds to do so when they are acting as fiduciaries for others.
The hypocrisy permeating the system is vividly exposed when a fund management company – call it
“A” – is sold for a huge sum to Manager “B”. Now the “independent” directors experience a “counter￾revelation” and decide that Manager B is the best that can be found – even though B was available (and
ignored) in previous years. Not so incidentally, B also could formerly have been hired at a far lower rate than
is possible now that it has bought Manager A. That’s because B has laid out a fortune to acquire A, and B
must now recoup that cost through fees paid by the A shareholders who were “delivered” as part of the deal.
(For a terrific discussion of the mutual fund business, read John Bogle’s Common Sense on Mutual Funds.)
A few years ago, my daughter was asked to become a director of a family of funds managed by a
major institution. The fees she would have received as a director were very substantial, enough to have
increased her annual income by about 50% (a boost, she will tell you, she could use!). Legally, she would
have been an independent director. But did the fund manager who approached her think there was any
chance that she would think independently as to what advisor the fund should employ? Of course not. I am
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proud to say that she showed real independence by turning down the offer. The fund, however, had no
trouble filling the slot (and – surprise – the fund has not changed managers).
Investment company directors have failed as well in negotiating management fees (just as
compensation committees of many American companies have failed to hold the compensation of their CEOs
to sensible levels). If you or I were empowered, I can assure you that we could easily negotiate materially
lower management fees with the incumbent managers of most mutual funds. And, believe me, if directors
were promised a portion of any fee savings they realized, the skies would be filled with falling fees. Under
the current system, though, reductions mean nothing to “independent” directors while meaning everything to
managers. So guess who wins?
Having the right money manager, of course, is far more important to a fund than reducing the
manager’s fee. Both tasks are nonetheless the job of directors. And in stepping up to these all-important
responsibilities, tens of thousands of “independent” directors, over more than six decades, have failed
miserably. (They’ve succeeded, however, in taking care of themselves; their fees from serving on multiple
boards of a single “family” of funds often run well into six figures.)
When the manager cares deeply and the directors don’t, what’s needed is a powerful countervailing
force – and that’s the missing element in today’s corporate governance. Getting rid of mediocre CEOs and
eliminating overreaching by the able ones requires action by owners – big owners. The logistics aren’t that
tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be
easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest
institutions, acting together, could effectively reform corporate governance at a given company, simply by
withholding their votes for directors who were tolerating odious behavior. In my view, this kind of concerted
action is the only way that corporate stewardship can be meaningfully improved.
Unfortunately, certain major investing institutions have “glass house” problems in arguing for better
governance elsewhere; they would shudder, for example, at the thought of their own performance and fees
being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis
Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners
properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they
support these men.
The acid test for reform will be CEO compensation. Managers will cheerfully agree to board
“diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight,
however, is a hard look at their own pay and perks.
In recent years compensation committees too often have been tail-wagging puppy dogs meekly
following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who
pay their fees. (If you can’t tell whose side someone is on, they are not on yours.) True, each committee is
required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate
written by the company’s lawyers or its human-relations department.
This costly charade should cease. Directors should not serve on compensation committees unless
they are themselves capable of negotiating on behalf of owners. They should explain both how they think
about pay and how they measure performance. Dealing with shareholders’ money, moreover, they should
behave as they would were it their own.
In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s,
America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their
shareholders have experienced financial disasters.
Directors should stop such piracy. There’s nothing wrong with paying well for truly exceptional
business performance. But, for anything short of that, it’s time for directors to shout “Less!” It would be a
travesty if the bloated pay of recent years became a baseline for future compensation. Compensation
committees should go back to the drawing boards.
* * * * * * * * * * * *
Rules that have been proposed and that are almost certain to go into effect will require changes in
Berkshire’s board, obliging us to add directors who meet the codified requirements for “independence.”
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Doing so, we will add a test that we believe is important, but far from determinative, in fostering
independence: We will select directors who have huge and true ownership interests (that is, stock that they or
their family have purchased, not been given by Berkshire or received via options), expecting those interests to
influence their actions to a degree that dwarfs other considerations such as prestige and board fees.
That gets to an often-overlooked point about directors’ compensation, which at public companies
averages perhaps $50,000 annually. It baffles me how the many directors who look to these dollars for
perhaps 20% or more of their annual income can be considered independent when Ron Olson, for example,
who is on our board, may be deemed not independent because he receives a tiny percentage of his very large
income from Berkshire legal fees. As the investment company saga suggests, a director whose moderate
income is heavily dependent on directors’ fees – and who hopes mightily to be invited to join other boards in
order to earn more fees – is highly unlikely to offend a CEO or fellow directors, who in a major way will
determine his reputation in corporate circles. If regulators believe that “significant” money taints
independence (and it certainly can), they have overlooked a massive class of possible offenders.
At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance.
Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don’t
provide them with officers’ and directors’ liability insurance (an unorthodoxy that, not so incidentally, has
saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our
directors to be driven by the effect their decisions will have on their family’s net worth, not by their
compensation. That’s the equation for Charlie and me as managers, and we think it’s the right one for
Berkshire directors as well.
To find new directors, we will look through our shareholders list for people who directly, or in their
family, have had large Berkshire holdings – in the millions of dollars – for a long time. Individuals making
that cut should automatically meet two of our tests, namely that they be interested in Berkshire and
shareholder-oriented. In our third test, we will look for business savvy, a competence that is far from
commonplace.
Finally, we will continue to have members of the Buffett family on the board. They are not there to
run the business after I die, nor will they then receive compensation of any kind. Their purpose is to ensure,
for both our shareholders and managers, that Berkshire’s special culture will be nurtured when I’m succeeded
by other CEOs.
Any change we make in the composition of our board will not alter the way Charlie and I run
Berkshire. We will continue to emphasize substance over form in our work and waste as little time as
possible during board meetings in show-and-tell and perfunctory activities. The most important job of our
board is likely to be the selection of successors to Charlie and me, and that is a matter upon which it will
focus.
The board we have had up to now has overseen a shareholder-oriented business, consistently run in
accord with the economic principles set forth on pages 68-74 (which I urge all new shareholders to read).
Our goal is to obtain new directors who are equally devoted to those principles.
The Audit Committee
Audit committees can’t audit. Only a company’s outside auditor can determine whether the earnings
that a management purports to have made are suspect. Reforms that ignore this reality and that instead focus
on the structure and charter of the audit committee will accomplish little.
As we’ve discussed, far too many managers have fudged their company’s numbers in recent years,
using both accounting and operational techniques that are typically legal but that nevertheless materially
mislead investors. Frequently, auditors knew about these deceptions. Too often, however, they remained
silent. The key job of the audit committee is simply to get the auditors to divulge what they know.
To do this job, the committee must make sure that the auditors worry more about misleading its
members than about offending management. In recent years auditors have not felt that way. They have
instead generally viewed the CEO, rather than the shareholders or directors, as their client. That has been a
natural result of day-to-day working relationships and also of the auditors’ understanding that, no matter what
the book says, the CEO and CFO pay their fees and determine whether they are retained for both auditing and
other work. The rules that have been recently instituted won’t materially change this reality. What will break
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this cozy relationship is audit committees unequivocally putting auditors on the spot, making them understand
they will become liable for major monetary penalties if they don’t come forth with what they know or
suspect.
In my opinion, audit committees can accomplish this goal by asking four questions of auditors, the
answers to which should be recorded and reported to shareholders. These questions are:
1. If the auditor were solely responsible for preparation of the company’s financial statements,
would they have in any way been prepared differently from the manner selected by
management? This question should cover both material and nonmaterial differences. If the
auditor would have done something differently, both management’s argument and the
auditor’s response should be disclosed. The audit committee should then evaluate the facts.
2. If the auditor were an investor, would he have received – in plain English – the information
essential to his understanding the company’s financial performance during the reporting
period?
3. Is the company following the same internal audit procedure that would be followed if the
auditor himself were CEO? If not, what are the differences and why?
4. Is the auditor aware of any actions – either accounting or operational – that have had the
purpose and effect of moving revenues or expenses from one reporting period to another?
If the audit committee asks these questions, its composition – the focus of most reforms – is of minor
importance. In addition, the procedure will save time and expense. When auditors are put on the spot, they
will do their duty. If they are not put on the spot . . . well, we have seen the results of that.
The questions we have enumerated should be asked at least a week before an earnings report is
released to the public. That timing will allow differences between the auditors and management to be aired
with the committee and resolved. If the timing is tighter – if an earnings release is imminent when the
auditors and committee interact – the committee will feel pressure to rubberstamp the prepared figures. Haste
is the enemy of accuracy. My thinking, in fact, is that the SEC’s recent shortening of reporting deadlines will
hurt the quality of information that shareholders receive. Charlie and I believe that rule is a mistake and
should be rescinded.
The primary advantage of our four questions is that they will act as a prophylactic. Once the
auditors know that the audit committee will require them to affirmatively endorse, rather than merely
acquiesce to, management’s actions, they will resist misdoings early in the process, well before specious
figures become embedded in the company’s books. Fear of the plaintiff’s bar will see to that.
 * * * * * * * * * * * *
The Chicago Tribune ran a four-part series on Arthur Andersen last September that did a great job of
illuminating how accounting standards and audit quality have eroded in recent years. A few decades ago, an
Arthur Andersen audit opinion was the gold standard of the profession. Within the firm, an elite Professional
Standards Group (PSG) insisted on honest reporting, no matter what pressures were applied by the client.
Sticking to these principles, the PSG took a stand in 1992 that the cost of stock options should be recorded as
the expense it clearly was. The PSG’s position was reversed, however, by the “rainmaking” partners of
Andersen who knew what their clients wanted – higher reported earnings no matter what the reality. Many
CEOs also fought expensing because they knew that the obscene megagrants of options they craved would be
slashed if the true costs of these had to be recorded.
Soon after the Andersen reversal, the independent accounting standards board (FASB) voted 7-0 for
expensing options. Predictably, the major auditing firms and an army of CEOs stormed Washington to
pressure the Senate – what better institution to decide accounting questions? – into castrating the FASB. The
voices of the protesters were amplified by their large political contributions, usually made with corporate
money belonging to the very owners about to be bamboozled. It was not a sight for a civics class.
To its shame, the Senate voted 88-9 against expensing. Several prominent Senators even called for
the demise of the FASB if it didn’t abandon its position. (So much for independence.) Arthur Levitt, Jr., then
Chairman of the SEC – and generally a vigilant champion of shareholders – has since described his reluctant
bowing to Congressional and corporate pressures as the act of his chairmanship that he most regrets. (The
details of this sordid affair are related in Levitt’s excellent book, Take on the Street.)
With the Senate in its pocket and the SEC outgunned, corporate America knew that it was now boss
when it came to accounting. With that, a new era of anything-goes earnings reports – blessed and, in some
cases, encouraged by big-name auditors – was launched. The licentious behavior that followed quickly
became an air pump for The Great Bubble.
After being threatened by the Senate, FASB backed off its original position and adopted an “honor
system” approach, declaring expensing to be preferable but also allowing companies to ignore the cost if they
wished. The disheartening result: Of the 500 companies in the S&P, 498 adopted the method deemed less
desirable, which of course let them report higher “earnings.” Compensation-hungry CEOs loved this
outcome: Let FASB have the honor; they had the system.
In our 1992 annual report, discussing the unseemly and self-serving behavior of so many CEOs, I
said “the business elite risks losing its credibility on issues of significance to society – about which it may
have much of value to say – when it advocates the incredible on issues of significance to itself.”
That loss of credibility has occurred. The job of CEOs is now to regain America’s trust – and for the
country’s sake it’s important that they do so. They will not succeed in this endeavor, however, by way of
fatuous ads, meaningless policy statements, or structural changes of boards and committees. Instead, CEOs
must embrace stewardship as a way of life and treat their owners as partners, not patsies. It’s time for CEOs
to walk the walk.
* * * * * * * * * * * *
Three suggestions for investors: First, beware of companies displaying weak accounting. If a
company still does not expense options, or if its pension assumptions are fanciful, watch out. When
managements take the low road in aspects that are visible, it is likely they are following a similar path behind
the scenes. There is seldom just one cockroach in the kitchen.
Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly
pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash”
charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay
it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if
you will, that at the beginning of this year a company paid all of its employees for the next ten years of their
service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine
years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset
established this year. Would anyone care to argue that the recording of the expense in years two through ten
would be simply a bookkeeping formality?
Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t
understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to.
Enron’s descriptions of certain transactions still baffle me.
Finally, be suspicious of companies that trumpet earnings projections and growth expectations.
Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance
smoothly (except, of course, in the offering books of investment bankers).
Charlie and I not only don’t know today what our businesses will earn next year – we don’t even
know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know
the future – and we become downright incredulous if they consistently reach their declared targets. Managers
that always promise to “make the numbers” will at some point be tempted to make up the numbers.
Shareholder-Designated Contributions
About 97.3% of all eligible shares participated in Berkshire's 2002 shareholder-designated
contributions program, with contributions totaling $16.5 million.
Cumulatively, over the 22 years of the program, Berkshire has made contributions of $197 million
pursuant to the instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries,
which stick to the philanthropic patterns that prevailed before they were acquired (except that their former
21
owners themselves take on the responsibility for their personal charities). In aggregate, our subsidiaries made
contributions of $24 million in 2002, including in-kind donations of $4 million.
To participate in future programs, you must own Class A shares that are registered in the name of
the actual owner, not the nominee name of a broker, bank or depository. Shares not so registered on August
31, 2003 will be ineligible for the 2003 program. When you get the contributions form from us, return it
promptly so that it does not get put aside or forgotten. Designations received after the due date will not be
honored.
The Annual Meeting
This year’s annual meeting will be held on Saturday, May 3, and once again we will be at the Civic
Auditorium. The doors will open at 7 a.m., the movie will begin at 8:30, and the meeting itself will
commence at 9:30. There will be a short break at noon for food. (Sandwiches will be available at the Civic’s
concession stands.) That interlude aside, Charlie and I will answer questions until 3:30. Give us your best
shot.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car
reservations, we have again signed up American Express (800-799-6634) to give you special help. They do a
terrific job for us each year, and I thank them for it.
In our usual fashion, we will run vans from the larger hotels to the meeting. Afterwards, the vans
will make trips back to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you
are likely to find a car useful.
Our exhibit area for Berkshire goods and services will be bigger and better than ever this year. So be
prepared to spend. I think you will particularly enjoy visiting The Pampered Chef display, where you may
run into Doris and Sheila.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
special shareholder discount (usually 8%). This special offer is permitted by 41 of the 49 jurisdictions in
which we operate. Bring the details of your existing insurance and check out whether we can save you
money.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets® available
for your inspection. Just ask a representative at the Civic about viewing any of these planes. If you buy what
we consider an appropriate number of items during the weekend, you may well need your own plane to take
them home. Furthermore, if you buy a fraction of a plane, I’ll personally see that you get a three-pack of
briefs from Fruit of the Loom.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a
discount that is customarily given only to employees. We initiated this special pricing at NFM six years ago,
and sales during the “Weekend” grew from $5.3 million in 1997 to $14.2 million in 2002.
To get the discount, you must make your purchases during the Thursday, May 1 through Monday,
May 5 period and also present your meeting credential. The period’s special pricing will even apply to the
products of several prestigious manufacturers that normally have ironclad rules against discounting but that,
in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation.
NFM is open from 10 a.m. to 9 p.m. on weekdays and 10 a.m. to 6 p.m. on Sundays. On Saturday this year,
from 6 p.m. to 10 p.m., we are having a special affair for shareholders only. I’ll be there, eating hot dogs and
drinking Coke.
Borsheim’s  the largest jewelry store in the country except for Tiffany’s Manhattan store  will
have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday,
May 2. The second, the main gala, will be from 9 a.m. to 5 p.m. on Sunday, May 4. Ask Charlie to
autograph your sales ticket.
Shareholder prices will be available Thursday through Monday, so if you wish to avoid the large
crowds that will assemble on Friday evening and Sunday, come at other times and identify yourself as a
22
shareholder. On Saturday, we will be open until 6 p.m. Borsheim’s operates on a gross margin that is fully
twenty percentage points below that of its major rivals, so the more you buy, the more you save (or at least
that’s what my wife and daughter tell me).
In the mall outside of Borsheim’s, we will have some of the world’s top bridge experts available to
play with our shareholders on Sunday afternoon. We expect Bob Hamman, Sharon Osberg, Fred Gitelman
and Sheri Winestock to host tables. Patrick Wolff, twice U.S. chess champion, will also be in the mall, taking
on all comers  blindfolded! Last year, Patrick played six games simultaneously  with his blindfold
securely in place  and for the first time suffered a loss. (He won the other five games, however.) He’s
been training overtime ever since and is planning to start a new streak this year.
Additionally, Bill Robertie, one of only two players who have twice won the backgammon world
championship, will be on hand to test your skill at that game. Finally, we will have a newcomer: Peter
Morris, the winner of the World Scrabble Championship in 1991. Peter will play on five boards
simultaneously (no blindfold for him, however) and will also allow his challengers to consult a Scrabble
dictionary.
We are also going to test your vocal chords at the mall. My friend, Al Oehrle of Philadelphia, will
be at the piano to play any song in any key. Susie and I will lead the singing. She is good.
Gorat’s  my favorite steakhouse  will again be open exclusively for Berkshire shareholders on
Sunday, May 4, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on
Sunday, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If
Sunday is sold out, try Gorat’s on one of the other evenings you will be in town. Show your sophistication by
ordering a rare T-bone with a double order of hash browns.
There won’t be a ball game this year. After my fastball was clocked at 5 mph last year, I decided to
hang up my spikes. So I’ll see you on Saturday night at NFM instead.
* * * * * * * * * * * *
Next year our meeting will be held at Omaha’s new convention center. This switch in locations will
allow us to hold the event on either Saturday or Monday, whichever the majority of you prefer. Using the
enclosed special ballot, please vote for your preference – but only if you are likely to attend in the future.
We will make the Saturday/Monday decision based upon a count of shareholders, not shares. That
is, a Class B shareholder owning one share will have a vote equal to that of a Class A shareholder owning
many shares. If the vote is close, we will go with the preference of out-of-towners.
Again, please vote only if there is a reasonable chance that you will be attending some meetings in
the future.
Warren E. Buffett
February 21, 2003 Chairman of the Board
23
2
Note: The following table appears in the printed Annual Report on the facing page of the
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500
 Annual Percentage Change 
in Per-Share in S&P 500
Book Value of with Dividends Relative
Berkshire Included Results
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8
1966 .................................................. 20.3 (11.7) 32.0
1967 .................................................. 11.0 30.9 (19.9)
1968 .................................................. 19.0 11.0 8.0
1969 .................................................. 16.2 (8.4) 24.6
1970 .................................................. 12.0 3.9 8.1
1971 .................................................. 16.4 14.6 1.8
1972 .................................................. 21.7 18.9 2.8
1973 .................................................. 4.7 (14.8) 19.5
1974 .................................................. 5.5 (26.4) 31.9
1975 .................................................. 21.9 37.2 (15.3)
1976 .................................................. 59.3 23.6 35.7
1977 .................................................. 31.9 (7.4) 39.3
1978 .................................................. 24.0 6.4 17.6
1979 .................................................. 35.7 18.2 17.5
1980 .................................................. 19.3 32.3 (13.0)
1981 .................................................. 31.4 (5.0) 36.4
1982 .................................................. 40.0 21.4 18.6
1983 .................................................. 32.3 22.4 9.9
1984 .................................................. 13.6 6.1 7.5
1985 .................................................. 48.2 31.6 16.6
1986 .................................................. 26.1 18.6 7.5
1987 .................................................. 19.5 5.1 14.4
1988 .................................................. 20.1 16.6 3.5
1989 .................................................. 44.4 31.7 12.7
1990 .................................................. 7.4 (3.1) 10.5
1991 .................................................. 39.6 30.5 9.1
1992 .................................................. 20.3 7.6 12.7
1993 .................................................. 14.3 10.1 4.2
1994 .................................................. 13.9 1.3 12.6
1995 .................................................. 43.1 37.6 5.5
1996 .................................................. 31.8 23.0 8.8
1997 .................................................. 34.1 33.4 .7
1998 .................................................. 48.3 28.6 19.7
1999 .................................................. .5 21.0 (20.5)
2000 .................................................. 6.5 (9.1) 15.6
2001 .................................................. (6.2) (11.9) 5.7
2002 .................................................. 10.0 (22.1) 32.1
2003 .................................................. 21.0 28.7 (7.7)
Average Annual Gain — 1965-2003 22.2 10.4 11.8
Overall Gain — 1964-2003 259,485 4,743
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2003 was $13.6 billion, which increased the per-share book value of
both our Class A and Class B stock by 21%. Over the last 39 years (that is, since present management took
over) per-share book value has grown from $19 to $50,498, a rate of 22.2% compounded annually.*
It’s per-share intrinsic value that counts, however, not book value. Here, the news is good:
Between 1964 and 2003, Berkshire morphed from a struggling northern textile business whose intrinsic
value was less than book into a widely diversified enterprise worth far more than book. Our 39-year gain
in intrinsic value has therefore somewhat exceeded our 22.2% gain in book. (For a better understanding of
intrinsic value and the economic principles that guide Charlie Munger, my partner and Berkshire’s vice￾chairman, and me in running Berkshire, please read our Owner’s Manual, beginning on page 69.)
Despite their shortcomings, book value calculations are useful at Berkshire as a slightly
understated gauge for measuring the long-term rate of increase in our intrinsic value. The calculation is
less relevant, however, than it once was in rating any single year’s performance versus the S&P 500 index
(a comparison we display on the facing page). Our equity holdings, including convertible preferreds, have
fallen considerably as a percentage of our net worth, from an average of 114% in the 1980s, for example, to
an average of 50% in 2000-03. Therefore, yearly movements in the stock market now affect a much
smaller portion of our net worth than was once the case.
Nonetheless, Berkshire’s long-term performance versus the S&P remains all-important. Our
shareholders can buy the S&P through an index fund at very low cost. Unless we achieve gains in per￾share intrinsic value in the future that outdo the S&P’s performance, Charlie and I will be adding nothing to
what you can accomplish on your own.
If we fail, we will have no excuses. Charlie and I operate in an ideal environment. To begin with,
we are supported by an incredible group of men and women who run our operating units. If there were a
Corporate Cooperstown, its roster would surely include many of our CEOs. Any shortfall in Berkshire’s
results will not be caused by our managers.
Additionally, we enjoy a rare sort of managerial freedom. Most companies are saddled with
institutional constraints. A company’s history, for example, may commit it to an industry that now offers
limited opportunity. A more common problem is a shareholder constituency that pressures its manager to
dance to Wall Street’s tune. Many CEOs resist, but others give in and adopt operating and capital￾allocation policies far different from those they would choose if left to themselves. 
At Berkshire, neither history nor the demands of owners impede intelligent decision-making.
When Charlie and I make mistakes, they are – in tennis parlance – unforced errors.
 
*All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of
the A.
3
4
Operating Earnings
When valuations are similar, we strongly prefer owning businesses to owning stocks. During
most of our years of operation, however, stocks were much the cheaper choice. We therefore sharply tilted
our asset allocation in those years toward equities, as illustrated by the percentages cited earlier.
In recent years, however, we’ve found it hard to find significantly undervalued stocks, a difficulty
greatly accentuated by the mushrooming of the funds we must deploy. Today, the number of stocks that
can be purchased in large enough quantities to move the performance needle at Berkshire is a small fraction
of the number that existed a decade ago. (Investment managers often profit far more from piling up assets
than from handling those assets well. So when one tells you that increased funds won’t hurt his investment
performance, step back: His nose is about to grow.)
The shortage of attractively-priced stocks in which we can put large sums doesn’t bother us,
providing we can find companies to purchase that (1) have favorable and enduring economic charac￾teristics; (2) are run by talented and honest managers and (3) are available at a sensible price. We have
purchased a number of such businesses in recent years, though not enough to fully employ the gusher of
cash that has come our way. In buying businesses, I’ve made some terrible mistakes, both of commission
and omission. Overall, however, our acquisitions have led to decent gains in per-share earnings.
Below is a table that quantifies that point. But first we need to warn you that growth-rate
presentations can be significantly distorted by a calculated selection of either initial or terminal dates. For
example, if earnings are tiny in a beginning year, a long-term performance that was only mediocre can be
made to appear sensational. That kind of distortion can come about because the company at issue was
minuscule in the base year – which means that only a handful of insiders actually benefited from the touted
performance – or because a larger company was then operating at just above breakeven. Picking a terminal
year that is particularly buoyant will also favorably bias a calculation of growth.
The Berkshire Hathaway that present management assumed control of in 1965 had long been
sizable. But in 1964, it earned only $175,586 or 15 cents per share, so close to breakeven that any
calculation of earnings growth from that base would be meaningless. At the time, however, even those
meager earnings looked good: Over the decade following the 1955 merger of Berkshire Fine Spinning
Associates and Hathaway Manufacturing, the combined operation had lost $10.1 million and many
thousands of employees had been let go. It was not a marriage made in heaven.
Against this background, we give you a picture of Berkshire’s earnings growth that begins in
1968, but also includes subsequent base years spaced five years apart. A series of calculations is presented
so that you can decide for yourself which period is most meaningful. I’ve started with 1968 because it was
the first full year we operated National Indemnity, the initial acquisition we made as we began to expand
Berkshire’s business.
I don’t believe that using 2003 as the terminal year distorts our calculations. It was a terrific year
for our insurance business, but the big boost that gave to earnings was largely offset by the pathetically low
interest rates we earned on our large holdings of cash equivalents (a condition that will not last). All
figures shown below, it should be noted, exclude capital gains.
Operating Earnings Operating Earnings Subsequent Compounded
Year in $ millions Per Share in $ Growth Rate of Per-Share Earnings
1964 .2 .15 Not meaningful (1964-2003)
1968 2.7 2.69 22.8% (1968-2003)
1973 11.9 12.18 20.8% (1973-2003)
1978 30.0 29.15 21.1% (1978-2003)
1983 48.6 45.60 24.3% (1983-2003)
1988 313.4 273.37 18.6% (1988-2003)
1993 477.8 413.19 23.9% (1993-2003)
1998 1,277.0 1,020.49 28.2% (1998-2003)
2003 5,422.0 3,531.32
We will continue the capital allocation practices we have used in the past. If stocks become
significantly cheaper than entire businesses, we will buy them aggressively. If selected bonds become
attractive, as they did in 2002, we will again load up on these securities. Under any market or economic
conditions, we will be happy to buy businesses that meet our standards. And, for those that do, the bigger
the better. Our capital is underutilized now, but that will happen periodically. It’s a painful condition to be
in – but not as painful as doing something stupid. (I speak from experience.)
Overall, we are certain Berkshire’s performance in the future will fall far short of what it has been
in the past. Nonetheless, Charlie and I remain hopeful that we can deliver results that are modestly above
average. That’s what we’re being paid for.
Acquisitions
As regular readers know, our acquisitions have often come about in strange ways. None, however,
had a more unusual genesis than our purchase last year of Clayton Homes.
The unlikely source was a group of finance students from the University of Tennessee, and their
teacher, Dr. Al Auxier. For the past five years, Al has brought his class to Omaha, where the group tours
Nebraska Furniture Mart and Borsheim’s, eats at Gorat’s and then comes to Kiewit Plaza for a session with
me. Usually about 40 students participate.
After two hours of give-and-take, the group traditionally presents me with a thank-you gift. (The
doors stay locked until they do.) In past years it’s been items such as a football signed by Phil Fulmer and
a basketball from Tennessee’s famous women’s team.
This past February, the group opted for a book – which, luckily for me, was the recently-published
autobiography of Jim Clayton, founder of Clayton Homes. I already knew the company to be the class act
of the manufactured housing industry, knowledge I acquired after earlier making the mistake of buying
some distressed junk debt of Oakwood Homes, one of the industry’s largest companies. At the time of that
purchase, I did not understand how atrocious consumer-financing practices had become throughout most of
the manufactured housing industry. But I learned: Oakwood rather promptly went bankrupt.
Manufactured housing, it should be emphasized, can deliver very good value to home purchasers.
Indeed, for decades, the industry has accounted for more than 15% of the homes built in the U.S. During
those years, moreover, both the quality and variety of manufactured houses consistently improved.
Progress in design and construction was not matched, however, by progress in distribution and
financing. Instead, as the years went by, the industry’s business model increasingly centered on the ability
of both the retailer and manufacturer to unload terrible loans on naive lenders. When “securitization” then
became popular in the 1990s, further distancing the supplier of funds from the lending transaction, the
industry’s conduct went from bad to worse. Much of its volume a few years back came from buyers who
shouldn’t have bought, financed by lenders who shouldn’t have lent. The consequence has been huge
numbers of repossessions and pitifully low recoveries on the units repossessed.
Oakwood participated fully in the insanity. But Clayton, though it could not isolate itself from
industry practices, behaved considerably better than its major competitors.
Upon receiving Jim Clayton’s book, I told the students how much I admired his record and they
took that message back to Knoxville, home of both the University of Tennessee and Clayton Homes. Al
then suggested that I call Kevin Clayton, Jim’s son and the CEO, to express my views directly. As I talked
with Kevin, it became clear that he was both able and a straight-shooter.
Soon thereafter, I made an offer for the business based solely on Jim’s book, my evaluation of
Kevin, the public financials of Clayton and what I had learned from the Oakwood experience. Clayton’s
board was receptive, since it understood that the large-scale financing Clayton would need in the future
might be hard to get. Lenders had fled the industry and securitizations, when possible at all, carried far
5
more expensive and restrictive terms than was previously the case. This tightening was particularly serious
for Clayton, whose earnings significantly depended on securitizations.
Today, the manufactured housing industry remains awash in problems. Delinquencies continue
high, repossessed units still abound and the number of retailers has been halved. A different business
model is required, one that eliminates the ability of the retailer and salesman to pocket substantial money
up front by making sales financed by loans that are destined to default. Such transactions cause hardship to
both buyer and lender and lead to a flood of repossessions that then undercut the sale of new units. Under a
proper model – one requiring significant down payments and shorter-term loans – the industry will likely
remain much smaller than it was in the 90s. But it will deliver to home buyers an asset in which they will
have equity, rather than disappointment, upon resale.
In the “full circle” department, Clayton has agreed to buy the assets of Oakwood. When the
transaction closes, Clayton’s manufacturing capacity, geographical reach and sales outlets will be
substantially increased. As a byproduct, the debt of Oakwood that we own, which we bought at a deep
discount, will probably return a small profit to us. 
And the students? In October, we had a surprise “graduation” ceremony in Knoxville for the 40
who sparked my interest in Clayton. I donned a mortarboard and presented each student with both a PhD
(for phenomenal, hard-working dealmaker) from Berkshire and a B share. Al got an A share. If you meet
some of the new Tennessee shareholders at our annual meeting, give them your thanks. And ask them if
they’ve read any good books lately.
* * * * * * * * * * * *
In early spring, Byron Trott, a Managing Director of Goldman Sachs, told me that Wal-Mart
wished to sell its McLane subsidiary. McLane distributes groceries and nonfood items to convenience
stores, drug stores, wholesale clubs, mass merchandisers, quick service restaurants, theaters and others. It’s
a good business, but one not in the mainstream of Wal-Mart’s future. It’s made to order, however, for us.
McLane has sales of about $23 billion, but operates on paper-thin margins – about 1% pre-tax –
and will swell Berkshire’s sales figures far more than our income. In the past, some retailers had shunned
McLane because it was owned by their major competitor. Grady Rosier, McLane’s superb CEO, has
already landed some of these accounts – he was in full stride the day the deal closed – and more will come.
For several years, I have given my vote to Wal-Mart in the balloting for Fortune Magazine’s
“Most Admired” list. Our McLane transaction reinforced my opinion. To make the McLane deal, I had a
single meeting of about two hours with Tom Schoewe, Wal-Mart’s CFO, and we then shook hands. (He
did, however, first call Bentonville). Twenty-nine days later Wal-Mart had its money. We did no “due
diligence.” We knew everything would be exactly as Wal-Mart said it would be – and it was.
I should add that Byron has now been instrumental in three Berkshire acquisitions. He
understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to
say this – earns his fee. I’m looking forward to deal number four (as, I am sure, is he).
Taxes
On May 20, 2003, The Washington Post ran an op-ed piece by me that was critical of the Bush tax
proposals. Thirteen days later, Pamela Olson, Assistant Secretary for Tax Policy at the U.S. Treasury,
delivered a speech about the new tax legislation saying, “That means a certain midwestern oracle, who, it
must be noted, has played the tax code like a fiddle, is still safe retaining all his earnings.” I think she was
talking about me.
Alas, my “fiddle playing” will not get me to Carnegie Hall – or even to a high school recital.
Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum
equaling 2½% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire’s
market valuation is about 1% of the value of all American corporations.) Our payment will almost
6
certainly place us among our country’s top ten taxpayers. Indeed, if only 540 taxpayers paid the amount
Berkshire will pay, no other individual or corporation would have to pay anything to Uncle Sam. That’s
right: 290 million Americans and all other businesses would not have to pay a dime in income, social
security, excise or estate taxes to the federal government. (Here’s the math: Federal tax receipts, including
social security receipts, in fiscal 2003 totaled $1.782 trillion and 540 “Berkshires,” each paying $3.3
billion, would deliver the same $1.782 trillion.)
Our federal tax return for 2002 (2003 is not finalized), when we paid $1.75 billion, covered a mere
8,905 pages. As is required, we dutifully filed two copies of this return, creating a pile of paper seven feet
tall. At World Headquarters, our small band of 15.8, though exhausted, momentarily flushed with pride:
Berkshire, we felt, was surely pulling its share of our country’s fiscal load.
But Ms. Olson sees things otherwise. And if that means Charlie and I need to try harder, we are
ready to do so.
I do wish, however, that Ms. Olson would give me some credit for the progress I’ve already made.
In 1944, I filed my first 1040, reporting my income as a thirteen-year-old newspaper carrier. The return
covered three pages. After I claimed the appropriate business deductions, such as $35 for a bicycle, my tax
bill was $7. I sent my check to the Treasury and it – without comment – promptly cashed it. We lived in
peace.
* * * * * * * * * * * *
I can understand why the Treasury is now frustrated with Corporate America and prone to
outbursts. But it should look to Congress and the Administration for redress, not to Berkshire.
Corporate income taxes in fiscal 2003 accounted for 7.4% of all federal tax receipts, down from a
post-war peak of 32% in 1952. With one exception (1983), last year’s percentage is the lowest recorded
since data was first published in 1934.
Even so, tax breaks for corporations (and their investors, particularly large ones) were a major part
of the Administration’s 2002 and 2003 initiatives. If class warfare is being waged in America, my class is
clearly winning. Today, many large corporations – run by CEOs whose fiddle-playing talents make your
Chairman look like he is all thumbs – pay nothing close to the stated federal tax rate of 35%.
In 1985, Berkshire paid $132 million in federal income taxes, and all corporations paid $61
billion. The comparable amounts in 1995 were $286 million and $157 billion respectively. And, as
mentioned, we will pay about $3.3 billion for 2003, a year when all corporations paid $132 billion. We
hope our taxes continue to rise in the future – it will mean we are prospering – but we also hope that the
rest of Corporate America antes up along with us. This might be a project for Ms. Olson to work on.
Corporate Governance
In judging whether Corporate America is serious about reforming itself, CEO pay remains the acid
test. To date, the results aren’t encouraging. A few CEOs, such as Jeff Immelt of General Electric, have
led the way in initiating programs that are fair to managers and shareholders alike. Generally, however, his
example has been more admired than followed.
It’s understandable how pay got out of hand. When management hires employees, or when
companies bargain with a vendor, the intensity of interest is equal on both sides of the table. One party’s
gain is the other party’s loss, and the money involved has real meaning to both. The result is an honest-to￾God negotiation.
But when CEOs (or their representatives) have met with compensation committees, too often one
side – the CEO’s – has cared far more than the other about what bargain is struck. A CEO, for example,
will always regard the difference between receiving options for 100,000 shares or for 500,000 as
monumental. To a comp committee, however, the difference may seem unimportant – particularly if, as
7
has been the case at most companies, neither grant will have any effect on reported earnings. Under these
conditions, the negotiation often has a “play-money” quality.
Overreaching by CEOs greatly accelerated in the 1990s as compensation packages gained by the
most avaricious– a title for which there was vigorous competition – were promptly replicated elsewhere.
The couriers for this epidemic of greed were usually consultants and human relations departments, which
had no trouble perceiving who buttered their bread. As one compensation consultant commented: “There
are two classes of clients you don’t want to offend – actual and potential.”
In proposals for reforming this malfunctioning system, the cry has been for “independent”
directors. But the question of what truly motivates independence has largely been neglected.
In last year’s report, I took a look at how “independent” directors – as defined by statute – had
performed in the mutual fund field. The Investment Company Act of 1940 mandated such directors, and
that means we’ve had an extended test of what statutory standards produce. In our examination last year,
we looked at the record of fund directors in respect to the two key tasks board members should perform –
whether at a mutual fund business or any other. These two all-important functions are, first, to obtain (or
retain) an able and honest manager and then to compensate that manager fairly.
Our survey was not encouraging. Year after year, at literally thousands of funds, directors had
routinely rehired the incumbent management company, however pathetic its performance had been. Just as
routinely, the directors had mindlessly approved fees that in many cases far exceeded those that could have
been negotiated. Then, when a management company was sold – invariably at a huge price relative to
tangible assets – the directors experienced a “counter-revelation” and immediately signed on with the new
manager and accepted its fee schedule. In effect, the directors decided that whoever would pay the most
for the old management company was the party that should manage the shareholders’ money in the future.
Despite the lapdog behavior of independent fund directors, we did not conclude that they are bad
people. They’re not. But sadly, “boardroom atmosphere” almost invariably sedates their fiduciary genes.
On May 22, 2003, not long after Berkshire’s report appeared, the Chairman of the Investment
Company Institute addressed its membership about “The State of our Industry.” Responding to those who
have “weighed in about our perceived failings,” he mused, “It makes me wonder what life would be like if
we’d actually done something wrong.”
Be careful what you wish for. 
Within a few months, the world began to learn that many fund-management companies had
followed policies that hurt the owners of the funds they managed, while simultaneously boosting the fees of
the managers. Prior to their transgressions, it should be noted, these management companies were earning
profit margins and returns on tangible equity that were the envy of Corporate America. Yet to swell profits
further, they trampled on the interests of fund shareholders in an appalling manner.
So what are the directors of these looted funds doing? As I write this, I have seen none that have
terminated the contract of the offending management company (though naturally that entity has often fired
some of its employees). Can you imagine directors who had been personally defrauded taking such a boys￾will-be-boys attitude?
To top it all off, at least one miscreant management company has put itself up for sale,
undoubtedly hoping to receive a huge sum for “delivering” the mutual funds it has managed to the highest
bidder among other managers. This is a travesty. Why in the world don’t the directors of those funds
simply select whomever they think is best among the bidding organizations and sign up with that party
directly? The winner would consequently be spared a huge “payoff” to the former manager who, having
flouted the principles of stewardship, deserves not a dime. Not having to bear that acquisition cost, the
winner could surely manage the funds in question for a far lower ongoing fee than would otherwise have
been the case. Any truly independent director should insist on this approach to obtaining a new manager.
8
The reality is that neither the decades-old rules regulating investment company directors nor the
new rules bearing down on Corporate America foster the election of truly independent directors. In both
instances, an individual who is receiving 100% of his income from director fees – and who may wish to
enhance his income through election to other boards – is deemed independent. That is nonsense. The same
rules say that Berkshire director and lawyer Ron Olson, who receives from us perhaps 3% of his very large
income, does not qualify as independent because that 3% comes from legal fees Berkshire pays his firm
rather than from fees he earns as a Berkshire director. Rest assured, 3% from any source would not torpedo
Ron’s independence. But getting 20%, 30% or 50% of their income from director fees might well temper
the independence of many individuals, particularly if their overall income is not large. Indeed, I think it’s
clear that at mutual funds, it has.
* * * * * * * * * * *
Let me make a small suggestion to “independent” mutual fund directors. Why not simply affirm
in each annual report that “(1) We have looked at other management companies and believe the one we
have retained for the upcoming year is among the better operations in the field; and (2) we have negotiated
a fee with our managers comparable to what other clients with equivalent funds would negotiate.”
It does not seem unreasonable for shareholders to expect fund directors – who are often receiving
fees that exceed $100,000 annually – to declare themselves on these points. Certainly these directors
would satisfy themselves on both matters were they handing over a large chunk of their own money to the
manager. If directors are unwilling to make these two declarations, shareholders should heed the maxim
“If you don’t know whose side someone is on, he’s probably not on yours.”
Finally, a disclaimer. A great many funds have been run well and conscientiously despite the
opportunities for malfeasance that exist. The shareholders of these funds have benefited, and their
managers have earned their pay. Indeed, if I were a director of certain funds, including some that charge
above-average fees, I would enthusiastically make the two declarations I have suggested. Additionally,
those index funds that are very low-cost (such as Vanguard’s) are investor-friendly by definition and are
the best selection for most of those who wish to own equities.
I am on my soapbox now only because the blatant wrongdoing that has occurred has betrayed the
trust of so many millions of shareholders. Hundreds of industry insiders had to know what was going on,
yet none publicly said a word. It took Eliot Spitzer, and the whistleblowers who aided him, to initiate a
housecleaning. We urge fund directors to continue the job. Like directors throughout Corporate America,
these fiduciaries must now decide whether their job is to work for owners or for managers.
Berkshire Governance
True independence – meaning the willingness to challenge a forceful CEO when something is
wrong or foolish – is an enormously valuable trait in a director. It is also rare. The place to look for it is
among high-grade people whose interests are in line with those of rank-and-file shareholders – and are in
line in a very big way.
We’ve made that search at Berkshire. We now have eleven directors and each of them, combined
with members of their families, owns more than $4 million of Berkshire stock. Moreover, all have held
major stakes in Berkshire for many years. In the case of six of the eleven, family ownership amounts to at
least hundreds of millions and dates back at least three decades. All eleven directors purchased their
holdings in the market just as you did; we’ve never passed out options or restricted shares. Charlie and I
love such honest-to-God ownership. After all, who ever washes a rental car?
In addition, director fees at Berkshire are nominal (as my son, Howard, periodically reminds me).
Thus, the upside from Berkshire for all eleven is proportionately the same as the upside for any Berkshire
shareholder. And it always will be.
9
The downside for Berkshire directors is actually worse than yours because we carry no directors
and officers liability insurance. Therefore, if something really catastrophic happens on our directors’
watch, they are exposed to losses that will far exceed yours. 
The bottom line for our directors: You win, they win big; you lose, they lose big. Our approach
might be called owner-capitalism. We know of no better way to engender true independence. (This
structure does not guarantee perfect behavior, however: I’ve sat on boards of companies in which Berkshire
had huge stakes and remained silent as questionable proposals were rubber-stamped.)
In addition to being independent, directors should have business savvy, a shareholder orientation
and a genuine interest in the company. The rarest of these qualities is business savvy – and if it is lacking,
the other two are of little help. Many people who are smart, articulate and admired have no real
understanding of business. That’s no sin; they may shine elsewhere. But they don’t belong on corporate
boards. Similarly, I would be useless on a medical or scientific board (though I would likely be welcomed
by a chairman who wanted to run things his way). My name would dress up the list of directors, but I
wouldn’t know enough to critically evaluate proposals. Moreover, to cloak my ignorance, I would keep my
mouth shut (if you can imagine that). In effect, I could be replaced, without loss, by a potted plant.
Last year, as we moved to change our board, I asked for self-nominations from shareholders who
believed they had the requisite qualities to be a Berkshire director. Despite the lack of either liability
insurance or meaningful compensation, we received more than twenty applications. Most were good,
coming from owner-oriented individuals having family holdings of Berkshire worth well over $1 million.
After considering them, Charlie and I – with the concurrence of our incumbent directors – asked four
shareholders who did not nominate themselves to join the board: David Gottesman, Charlotte Guyman,
Don Keough and Tom Murphy. These four people are all friends of mine, and I know their strengths well.
They bring an extraordinary amount of business talent to Berkshire’s board.
The primary job of our directors is to select my successor, either upon my death or disability, or
when I begin to lose my marbles. (David Ogilvy had it right when he said: “Develop your eccentricities
when young. That way, when you get older, people won’t think you are going gaga.” Charlie’s family and
mine feel that we overreacted to David’s advice.) 
At our directors’ meetings we cover the usual run of housekeeping matters. But the real
discussion – both with me in the room and absent – centers on the strengths and weaknesses of the four
internal candidates to replace me. 
Our board knows that the ultimate scorecard on its performance will be determined by the record
of my successor. He or she will need to maintain Berkshire’s culture, allocate capital and keep a group of
America’s best managers happy in their jobs. This isn’t the toughest task in the world – the train is already
moving at a good clip down the track – and I’m totally comfortable about it being done well by any of the
four candidates we have identified. I have more than 99% of my net worth in Berkshire and will be happy
to have my wife or foundation (depending on the order in which she and I die) continue this concentration.
Sector Results
As managers, Charlie and I want to give our owners the financial information and commentary we
would wish to receive if our roles were reversed. To do this with both clarity and reasonable brevity
becomes more difficult as Berkshire’s scope widens. Some of our businesses have vastly different
economic characteristics from others, which means that our consolidated statements, with their jumble of
figures, make useful analysis almost impossible.
On the following pages, therefore, we will present some balance sheet and earnings figures from
our four major categories of businesses along with commentary about each. We particularly want you to
understand the limited circumstances under which we will use debt, since typically we shun it. We will
not, however, inundate you with data that has no real value in calculating Berkshire’s intrinsic value.
Doing so would likely obfuscate the most important facts. One warning: When analyzing Berkshire, be
10
11
sure to remember that the company should be viewed as an unfolding movie, not as a still photograph.
Those who focused in the past on only the snapshot of the day sometimes reached erroneous conclusions.
Insurance
Let’s start with insurance – since that’s where the money is.
The fountain of funds we enjoy in our insurance operations comes from “float,” which is money
that doesn’t belong to us but that we temporarily hold. Most of our float arises because (1) premiums are
paid upfront though the service we provide – insurance protection – is delivered over a period that usually
covers a year and; (2) loss events that occur today do not always result in our immediately paying claims,
since it sometimes takes years for losses to be reported (think asbestos), negotiated and settled.
Float is wonderful – if it doesn’t come at a high price. The cost of float is determined by
underwriting results, meaning how losses and expenses paid compare with premiums received. The
property-casualty industry as a whole regularly operates at a substantial underwriting loss, and therefore
often has a cost of float that is unattractive.
Overall, our results have been good. True, we’ve had five terrible years in which float cost us
more than 10%. But in 18 of the 37 years Berkshire has been in the insurance business, we have operated
at an underwriting profit, meaning we were actually paid for holding money. And the quantity of this
cheap money has grown far beyond what I dreamed it could when we entered the business in 1967.
Yearend Float (in $ millions)
Other Other
Year GEICO General Re Reinsurance Primary Total
1967 20 20
1977 40 131 171
1987 701 807 1,508
1997 2,917 4,014 455 7,386
1998 3,125 14,909 4,305 415 22,754
1999 3,444 15,166 6,285 403 25,298
2000 3,943 15,525 7,805 598 27,871
2001 4,251 19,310 11,262 685 35,508
2002 4,678 22,207 13,396 943 41,224
2003 5,287 23,654 13,948 1,331 44,220
Last year was a standout. Float reached record levels and it came without cost as all major
segments contributed to Berkshire’s $1.7 billion pre-tax underwriting profit.
Our results have been exceptional for one reason: We have truly exceptional managers. Insurers
sell a non-proprietary piece of paper containing a non-proprietary promise. Anyone can copy anyone else’s
product. No installed base, key patents, critical real estate or natural resource position protects an insurer’s
competitive position. Typically, brands do not mean much either.
The critical variables, therefore, are managerial brains, discipline and integrity. Our managers
have all of these attributes – in spades. Let’s take a look at these all-stars and their operations.
• General Re had been Berkshire’s problem child in the years following our acquisition of it in
1998. Unfortunately, it was a 400-pound child, and its negative impact on our overall
performance was large.
That’s behind us: Gen Re is fixed. Thank Joe Brandon, its CEO, and his partner, Tad
Montross, for that. When I wrote you last year, I thought that discipline had been restored to
both underwriting and reserving, and events during 2003 solidified my view.
That does not mean we will never have setbacks. Reinsurance is a business that is certain to
deliver blows from time to time. But, under Joe and Tad, this operation will be a powerful
engine driving Berkshire’s future profitability.
Gen Re’s financial strength, unmatched among reinsurers even as we started 2003, further
improved during the year. Many of the company’s competitors suffered credit downgrades
last year, leaving Gen Re, and its sister operation at National Indemnity, as the only AAA￾rated companies among the world’s major reinsurers.
When insurers purchase reinsurance, they buy only a promise – one whose validity may not
be tested for decades – and there are no promises in the reinsurance world equaling those
offered by Gen Re and National Indemnity. Furthermore, unlike most reinsurers, we retain
virtually all of the risks we assume. Therefore, our ability to pay is not dependent on the
ability or willingness of others to reimburse us. This independent financial strength could be
enormously important when the industry experiences the mega-catastrophe it surely will.
• Regular readers of our annual reports know of Ajit Jain’s incredible contributions to
Berkshire’s prosperity over the past 18 years. He continued to pour it on in 2003. With a
staff of only 23, Ajit runs one of the world’s largest reinsurance operations, specializing in
mammoth and unusual risks.
Often, these involve assuming catastrophe risks – say, the threat of a large California
earthquake – of a size far greater than any other reinsurer will accept. This means Ajit’s
results (and Berkshire’s) will be lumpy. You should, therefore, expect his operation to have
an occasional horrible year. Over time, however, you can be confident of a terrific result from
this one-of-a-kind manager.
Ajit writes some very unusual policies. Last year, for example, PepsiCo promoted a drawing
that offered participants a chance to win a $1 billion prize. Understandably, Pepsi wished to
lay off this risk, and we were the logical party to assume it. So we wrote a $1 billion policy,
retaining the risk entirely for our own account. Because the prize, if won, was payable over
time, our exposure in present-value terms was $250 million. (I helpfully suggested that any
winner be paid $1 a year for a billion years, but that proposal didn’t fly.) The drawing was
held on September 14. Ajit and I held our breath, as did the finalist in the contest, and we left
happier than he. PepsiCo has renewed for a repeat contest in 2004.
• GEICO was a fine insurance company when Tony Nicely took over as CEO in 1992. Now it
is a great one. During his tenure, premium volume has increased from $2.2 billion to $8.1
billion, and our share of the personal-auto market has grown from 2.1% to 5.0%. More
important, GEICO has paired these gains with outstanding underwriting performance.
(We now pause for a commercial)
It’s been 67 years since Leo Goodwin created a great business idea at GEICO, one designed
to save policyholders significant money. Go to Geico.com or call 1-800-847-7536 to see
what we can do for you.
(End of commercial)
In 2003, both the number of inquiries coming into GEICO and its closure rate on these
increased significantly. As a result our preferred policyholder count grew 8.2%, and our
standard and non-standard policies grew 21.4%.
GEICO’s business growth creates a never-ending need for more employees and facilities.
Our most recent expansion, announced in December, is a customer service center in – I’m
delighted to say – Buffalo. Stan Lipsey, the publisher of our Buffalo News, was instrumental
in bringing the city and GEICO together.
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13
The key figure in this matter, however, was Governor George Pataki. His leadership and
tenacity are why Buffalo will have 2,500 new jobs when our expansion is fully rolled out.
Stan, Tony, and I – along with Buffalo – thank him for his help.
• Berkshire’s smaller insurers had another terrific year. This group, run by Rod Eldred, John
Kizer, Tom Nerney, Don Towle and Don Wurster, increased its float by 41%, while
delivering an excellent underwriting profit. These men, though operating in unexciting ways,
produce truly exciting results.
* * * * * * * * * * * *
We should point out again that in any given year a company writing long-tail insurance (coverages
giving rise to claims that are often settled many years after the loss-causing event takes place) can report
almost any earnings that the CEO desires. Too often the industry has reported wildly inaccurate figures by
misstating liabilities. Most of the mistakes have been innocent. Sometimes, however, they have been
intentional, their object being to fool investors and regulators. Auditors and actuaries have usually failed to
prevent both varieties of misstatement.
I have failed on occasion too, particularly in not spotting Gen Re’s unwitting underreserving a few
years back. Not only did that mean we reported inaccurate figures to you, but the error also resulted in our
paying very substantial taxes earlier than was necessary. Aaarrrggghh. I told you last year, however, that I
thought our current reserving was at appropriate levels. So far, that judgment is holding up.
Here are Berkshire’s pre-tax underwriting results by segment:
Gain (Loss) in $ millions
2003 2002
Gen Re...................................................................................................... $ 145 $(1,393)
Ajit’s business excluding retroactive contracts ........................................ 1,434 980
Ajit’s retroactive contracts* ..................................................................... (387) (433)
GEICO...................................................................................................... 452 416
Other Primary........................................................................................... 74 32
Total ......................................................................................................... $1,718 $ (398)
*These contracts were explained on page 10 of the 2002 annual report, available on the Internet at
www.berkshirehathaway.com. In brief, this segment consists of a few jumbo policies that are likely to
produce underwriting losses (which are capped) but also provide unusually large amounts of float.
Regulated Utility Businesses
Through MidAmerican Energy Holdings, we own an 80.5% (fully diluted) interest in a wide
variety of utility operations. The largest are (1) Yorkshire Electricity and Northern Electric, whose 3.7
million electric customers make it the third largest distributor of electricity in the U.K.; (2) MidAmerican
Energy, which serves 689,000 electric customers in Iowa and; (3) Kern River and Northern Natural
pipelines, which carry 7.8% of the natural gas transported in the United States.
Berkshire has three partners, who own the remaining 19.5%: Dave Sokol and Greg Abel, the
brilliant managers of the business, and Walter Scott, a long-time friend of mine who introduced me to the
company. Because MidAmerican is subject to the Public Utility Holding Company Act (“PUHCA”),
Berkshire’s voting interest is limited to 9.9%. Walter has the controlling vote.
Our limited voting interest forces us to account for MidAmerican in our financial statements in an
abbreviated manner. Instead of our fully including its assets, liabilities, revenues and expenses in our
statements, we record only a one-line entry in both our balance sheet and income account. It’s likely that
14
some day, perhaps soon, either PUHCA will be repealed or accounting rules will change. Berkshire’s
consolidated figures would then take in all of MidAmerican, including the substantial debt it utilizes.
The size of this debt (which is not now, nor will it be, an obligation of Berkshire) is entirely
appropriate. MidAmerican’s diverse and stable utility operations assure that, even under harsh economic
conditions, aggregate earnings will be ample to very comfortably service all debt.
At yearend, $1.578 billion of MidAmerican’s most junior debt was payable to Berkshire. This
debt has allowed acquisitions to be financed without our three partners needing to increase their already
substantial investments in MidAmerican. By charging 11% interest, Berkshire is compensated fairly for
putting up the funds needed for purchases, while our partners are spared dilution of their equity interests.
MidAmerican also owns a significant non-utility business, Home Services of America, the second
largest real estate broker in the country. Unlike our utility operations, this business is highly cyclical, but
nevertheless one we view enthusiastically. We have an exceptional manager, Ron Peltier, who, through
both his acquisition and operational skills, is building a brokerage powerhouse.
Last year, Home Services participated in $48.6 billion of transactions, a gain of $11.7 billion from
2002. About 23% of the increase came from four acquisitions made during the year. Through our 16
brokerage firms – all of which retain their local identities – we employ 16,343 brokers in 16 states. Home
Services is almost certain to grow substantially in the next decade as we continue to acquire leading
localized operations.
* * * * * * * * * * * *
Here’s a tidbit for fans of free enterprise. On March 31, 1990, the day electric utilities in the U.K.
were denationalized, Northern and Yorkshire had 6,800 employees in functions these companies continue
today to perform. Now they employ 2,539. Yet the companies are serving about the same number of
customers as when they were government owned and are distributing more electricity.
This is not, it should be noted, a triumph of deregulation. Prices and earnings continue to be
regulated in a fair manner by the government, just as they should be. It is a victory, however, for those who
believe that profit-motivated managers, even though they recognize that the benefits will largely flow to
customers, will find efficiencies that government never will.
Here are some key figures on MidAmerican’s operations:
Earnings (in $ millions)
2003 2002
U.K. Utilities ...................................................................................................... $ 289 $ 267
Iowa.................................................................................................................... 269 241
Pipelines ............................................................................................................. 261 104
Home Services.................................................................................................... 113 70
Other (Net) ......................................................................................................... 144 108
Earnings before corporate interest and tax ......................................................... 1,076 790
Corporate Interest, other than to Berkshire......................................................... (225) (192)
Interest Payments to Berkshire........................................................................... (184) (118)
Tax...................................................................................................................... (251) (100)
Net Earnings....................................................................................................... $ 416 $ 380
Earnings Applicable to Berkshire*..................................................................... $ 429 $ 359
Debt Owed to Others.......................................................................................... 10,296 10,286
Debt Owed to Berkshire ..................................................................................... 1,578 1,728
*Includes interest paid to Berkshire (net of related income taxes) of $118 in 2003 and $75 in 2002.
Finance and Financial Products
This sector includes a wide-ranging group of activities. Here’s some commentary on the most
important.
• I manage a few opportunistic strategies in AAA fixed-income securities that have been quite
profitable in the last few years. These opportunities come and go – and at present, they are
going. We sped their departure somewhat last year, thereby realizing 24% of the capital gains
we show in the table that follows.
Though far from foolproof, these transactions involve no credit risk and are conducted in
exceptionally liquid securities. We therefore finance the positions almost entirely with
borrowed money. As the assets are reduced, so also are the borrowings. The smaller
portfolio we now have means that in the near future our earnings in this category will decline
significantly. It was fun while it lasted, and at some point we’ll get another turn at bat.
• A far less pleasant unwinding operation is taking place at Gen Re Securities, the trading and
derivatives operation we inherited when we purchased General Reinsurance.
When we began to liquidate Gen Re Securities in early 2002, it had 23,218 outstanding tickets
with 884 counterparties (some having names I couldn’t pronounce, much less
creditworthiness I could evaluate). Since then, the unit’s managers have been skillful and
diligent in unwinding positions. Yet, at yearend – nearly two years later – we still had 7,580
tickets outstanding with 453 counterparties. (As the country song laments, “How can I miss
you if you won’t go away?”)
The shrinking of this business has been costly. We’ve had pre-tax losses of $173 million in
2002 and $99 million in 2003. These losses, it should be noted, came from a portfolio of
contracts that – in full compliance with GAAP – had been regularly marked-to-market with
standard allowances for future credit-loss and administrative costs. Moreover, our liquidation
has taken place both in a benign market – we’ve had no credit losses of significance – and in
an orderly manner. This is just the opposite of what might be expected if a financial crisis
forced a number of derivatives dealers to cease operations simultaneously.
If our derivatives experience – and the Freddie Mac shenanigans of mind-blowing size and
audacity that were revealed last year – makes you suspicious of accounting in this arena,
consider yourself wised up. No matter how financially sophisticated you are, you can’t
possibly learn from reading the disclosure documents of a derivatives-intensive company
what risks lurk in its positions. Indeed, the more you know about derivatives, the less you
will feel you can learn from the disclosures normally proffered you. In Darwin’s words,
“Ignorance more frequently begets confidence than does knowledge.”
* * * * * * * * * * * *
And now it’s confession time: I’m sure I could have saved you $100 million or so, pre-tax, if I
had acted more promptly to shut down Gen Re Securities. Both Charlie and I knew at the
time of the General Reinsurance merger that its derivatives business was unattractive.
Reported profits struck us as illusory, and we felt that the business carried sizable risks that
could not effectively be measured or limited. Moreover, we knew that any major problems
the operation might experience would likely correlate with troubles in the financial or
insurance world that would affect Berkshire elsewhere. In other words, if the derivatives
business were ever to need shoring up, it would commandeer the capital and credit of
Berkshire at just the time we could otherwise deploy those resources to huge advantage. (A
historical note: We had just such an experience in 1974 when we were the victim of a major
insurance fraud. We could not determine for some time how much the fraud would ultimately
cost us and therefore kept more funds in cash-equivalents than we normally would have. 
15
Absent this precaution, we would have made larger purchases of stocks that were then
extraordinarily cheap.)
Charlie would have moved swiftly to close down Gen Re Securities – no question about that.
I, however, dithered. As a consequence, our shareholders are paying a far higher price than
was necessary to exit this business.
• Though we include Gen Re’s sizable life and health reinsurance business in the “insurance”
sector, we show the results for Ajit Jain’s life and annuity business in this section. That’s
because this business, in large part, involves arbitraging money. Our annuities range from a
retail product sold directly on the Internet to structured settlements that require us to make
payments for 70 years or more to people severely injured in accidents.
We’ve realized some extra income in this business because of accelerated principal payments
we received from certain fixed-income securities we had purchased at discounts. This
phenomenon has ended, and earnings are therefore likely to be lower in this segment during
the next few years.
• We have a $604 million investment in Value Capital, a partnership run by Mark Byrne, a
member of a family that has helped Berkshire over the years in many ways. Berkshire is a
limited partner in, and has no say in the management of, Mark’s enterprise, which specializes
in highly-hedged fixed-income opportunities. Mark is smart and honest and, along with his
family, has a significant investment in Value.
Because of accounting abuses at Enron and elsewhere, rules will soon be instituted that are
likely to require that Value’s assets and liabilities be consolidated on Berkshire’s balance
sheet. We regard this requirement as inappropriate, given that Value’s liabilities – which
usually are above $20 billion – are in no way ours. Over time, other investors will join us as
partners in Value. When enough do, the need for us to consolidate Value will disappear.
• We have told you in the past about Berkadia, the partnership we formed three years ago with
Leucadia to finance and manage the wind-down of Finova, a bankrupt lending operation. The
plan was that we would supply most of the capital and Leucadia would supply most of the
brains. And that’s the way it has worked. Indeed, Joe Steinberg and Ian Cumming, who
together run Leucadia, have done such a fine job in liquidating Finova’s portfolio that the $5.6
billion guarantee we took on in connection with the transaction has been extinguished. The
unfortunate byproduct of this fast payoff is that our future income will be much reduced.
Overall, Berkadia has made excellent money for us, and Joe and Ian have been terrific
partners.
• Our leasing businesses are XTRA (transportation equipment) and CORT (office furniture).
Both operations have had poor earnings during the past two years as the recession caused
demand to drop considerably more than was anticipated. They remain leaders in their fields,
and I expect at least a modest improvement in their earnings this year.
• Through our Clayton purchase, we acquired a significant manufactured-housing finance
operation. Clayton, like others in this business, had traditionally securitized the loans it
originated. The practice relieved stress on Clayton’s balance sheet, but a by-product was the
“front-ending” of income (a result dictated by GAAP).
We are in no hurry to record income, have enormous balance-sheet strength, and believe that
over the long-term the economics of holding our consumer paper are superior to what we can
now realize through securitization. So Clayton has begun to retain its loans.
We believe it’s appropriate to finance a soundly-selected book of interest-bearing receivables
almost entirely with debt (just as a bank would). Therefore, Berkshire will borrow money to
finance Clayton’s portfolio and re-lend these funds to Clayton at our cost plus one percentage
16
17
point. This markup fairly compensates Berkshire for putting its exceptional creditworthiness
to work, but it still delivers money to Clayton at an attractive price.
In 2003, Berkshire did $2 billion of such borrowing and re-lending, with Clayton using much
of this money to fund several large purchases of portfolios from lenders exiting the business.
A portion of our loans to Clayton also provided “catch-up” funding for paper it had generated
earlier in the year from its own operation and had found difficult to securitize.
You may wonder why we borrow money while sitting on a mountain of cash. It’s because of
our “every tub on its own bottom” philosophy. We believe that any subsidiary lending money
should pay an appropriate rate for the funds needed to carry its receivables and should not be
subsidized by its parent. Otherwise, having a rich daddy can lead to sloppy decisions.
Meanwhile, the cash we accumulate at Berkshire is destined for business acquisitions or for
the purchase of securities that offer opportunities for significant profit. Clayton’s loan
portfolio will likely grow to at least $5 billion in not too many years and, with sensible credit
standards in place, should deliver significant earnings.
For simplicity’s sake, we include all of Clayton’s earnings in this sector, though a sizable
portion is derived from areas other than consumer finance.
(in $ millions)
Pre-Tax Earnings Interest-bearing Liabilities
2003 2002 2003 2002
Trading – Ordinary Income ........................... $ 379 $ 553 $7,826 $13,762
Gen Re Securities ........................................... (99) (173) 8,041* 10,631*
Life and annuity operation.............................. 99 83 2,331 1,568
Value Capital.................................................. 31 61 18,238* 20,359*
Berkadia ......................................................... 101 115 525 2,175
Leasing operations.......................................... 34 34 482 503
Manufactured housing finance (Clayton) ....... 37** — 2,032 —
Other............................................................... 84 102 618 630
Income before capital gains............................ 666 775
Trading – Capital Gains.................................. 1,215 578 N.A. N.A.
Total ............................................................... $1,881 $1,353
* Includes all liabilities
** From date of acquisition, August 7, 2003
Manufacturing, Service and Retailing Operations
Our activities in this category cover the waterfront. But let’s look at a simplified balance sheet
and earnings statement consolidating the entire group.
Balance Sheet 12/31/03 (in $ millions)
Assets Liabilities and Equity
Cash and equivalents ................................. $ 1,250 Notes payable ............................... $ 1,593
Accounts and notes receivable .................. 2,796 Other current liabilities................. 4,300
Inventory ................................................... 3,656 Total current liabilities ................. 5,893
Other current assets ................................... 262
Total current assets.................................... 7,964
Goodwill and other intangibles.................. 8,351 Deferred taxes............................... 105
Fixed assets ............................................... 5,898 Term debt and other liabilities...... 1,890
Other assets ............................................... 1,054 Equity ........................................... 15,379
$23,267 $23,267
18
Earnings Statement (in $ millions)
2003 2002
Revenues ............................................................................................................ $32,106 $16,970
Operating expenses (including depreciation of $605 in 2003
and $477 in 2002)........................................................................................ 29,885 14,921
Interest expense (net).......................................................................................... 64 108
Pre-tax income.................................................................................................... 2,157 1,941
Income taxes....................................................................................................... 813 743
Net income ......................................................................................................... $ 1,344 $ 1,198
This eclectic group, which sells products ranging from Dilly Bars to B-737s, earned a hefty 20.7%
on average tangible net worth last year. However, we purchased these businesses at substantial premiums
to net worth – that fact is reflected in the goodwill item shown on the balance sheet – and that reduces the
earnings on our average carrying value to 9.2%.
Here are the pre-tax earnings for the larger categories or units.
Pre-Tax Earnings
(in $ millions)
2003 2002
Building Products ................................................................................................... $ 559 $ 516
Shaw Industries ...................................................................................................... 436 424
Apparel................................................................................................................... 289 229
Retail Operations.................................................................................................... 224 219
Flight Services........................................................................................................ 72 225
McLane *................................................................................................................ 150 —
Other businesses..................................................................................................... 427 328
$2,157 $1,941
* From date of acquisition, May 23, 2003.
• Three of our building-materials businesses – Acme Brick, Benjamin Moore and MiTek – had record
operating earnings last year. And earnings at Johns Manville, the fourth, were trending upward at
yearend. Collectively, these companies earned 21.0% on tangible net worth.
• Shaw Industries, the world’s largest manufacturer of broadloom carpet, also had a record year. Led by
Bob Shaw, who built this huge enterprise from a standing start, the company will likely set another
earnings record in 2004. In November, Shaw acquired various carpet operations from Dixie Group,
which should add about $240 million to sales this year, boosting Shaw’s volume to nearly $5 billion.
• Within the apparel group, Fruit of the Loom is our largest operation. Fruit has three major assets: a
148-year-old universally-recognized brand, a low-cost manufacturing operation, and John Holland, its
CEO. In 2003, Fruit accounted for 42.3% of the men’s and boys’ underwear that was sold by mass
marketers (Wal-Mart, Target, K-Mart, etc.) and increased its share of the women’s and girls’ business
in that channel to 13.9%, up from 11.3% in 2002.
• In retailing, our furniture group earned $106 million pre-tax, our jewelers $59 million and See’s, which
is both a manufacturer and retailer, $59 million.
Both R.C. Willey and Nebraska Furniture Mart (“NFM”) opened hugely successful stores last year,
Willey in Las Vegas and NFM in Kansas City, Kansas. Indeed, we believe the Kansas City store is the
country’s largest-volume home-furnishings store. (Our Omaha operation, while located on a single
plot of land, consists of three units.)
NFM was founded by Rose Blumkin (“Mrs. B”) in 1937 with $500. She worked until she was 103
(hmmm . . . not a bad idea). One piece of wisdom she imparted to the generations following her was,
“If you have the lowest price, customers will find you at the bottom of a river.” Our store serving
greater Kansas City, which is located in one of the area’s more sparsely populated parts, has proved
Mrs. B’s point. Though we have more than 25 acres of parking, the lot has at times overflowed.
“Victory,” President Kennedy told us after the Bay of Pigs disaster, “has a thousand fathers, but defeat
is an orphan.” At NFM, we knew we had a winner a month after the boffo opening in Kansas City,
when our new store attracted an unexpected paternity claim. A speaker there, referring to the Blumkin
family, asserted, “They had enough confidence and the policies of the Administration were working
such that they were able to provide work for 1,000 of our fellow citizens.” The proud papa at the
podium? President George W. Bush. 
• In flight services, FlightSafety, our training operation, experienced a drop in “normal” operating
earnings from $183 million to $150 million. (The abnormals: In 2002 we had a $60 million pre-tax
gain from the sale of a partnership interest to Boeing, and in 2003 we recognized a $37 million loss
stemming from the premature obsolescence of simulators.) The corporate aviation business has slowed
significantly in the past few years, and this fact has hurt FlightSafety’s results. The company
continues, however, to be far and away the leader in its field. Its simulators have an original cost of
$1.2 billion, which is more than triple the cost of those operated by our closest competitor.
NetJets, our fractional-ownership operation lost $41 million pre-tax in 2003. The company had a
modest operating profit in the U.S., but this was more than offset by a $32 million loss on aircraft
inventory and by continued losses in Europe.
NetJets continues to dominate the fractional-ownership field, and its lead is increasing: Prospects
overwhelmingly turn to us rather than to our three major competitors. Last year, among the four of us,
we accounted for 70% of net sales (measured by value).
An example of what sets NetJets apart from competitors is our Mayo Clinic Executive Travel
Response program, a free benefit enjoyed by all of our owners. On land or in the air, anywhere in the
world and at any hour of any day, our owners and their families have an immediate link to Mayo.
Should an emergency occur while they are traveling here or abroad, Mayo will instantly direct them to
an appropriate doctor or hospital. Any baseline data about the patient that Mayo possesses is
simultaneously made available to the treating physician. Many owners have already found this service
invaluable, including one who needed emergency brain surgery in Eastern Europe.
The $32 million inventory write-down we took in 2003 occurred because of falling prices for used
aircraft early in the year. Specifically, we bought back fractions from withdrawing owners at
prevailing prices, and these fell in value before we were able to remarket them. Prices are now stable.
The European loss is painful. But any company that forsakes Europe, as all of our competitors have
done, is destined for second-tier status. Many of our U.S. owners fly extensively in Europe and want
the safety and security assured by a NetJets plane and pilots. Despite a slow start, furthermore, we are
now adding European customers at a good pace. During the years 2001 through 2003, we had gains of
88%, 61% and 77% in European management-and-flying revenues. We have not, however, yet
succeeded in stemming the flow of red ink.
Rich Santulli, NetJets’ extraordinary CEO, and I expect our European loss to diminish in 2004 and also
anticipate that it will be more than offset by U.S. profits. Overwhelmingly, our owners love the
NetJets experience. Once a customer has tried us, going back to commercial aviation is like going
back to holding hands. NetJets will become a very big business over time and will be one in which we
are preeminent in both customer satisfaction and profits. Rich will see to that.
19
20
Investments
The table that follows shows our common stock investments. Those that had a market value of
more than $500 million at the end of 2003 are itemized.
12/31/03
Shares Company
Percentage of
Company Owned Cost Market
(in $ millions)
151,610,700 American Express Company ................ 11.8 $ 1,470 $ 7,312
200,000,000 The Coca-Cola Company ..................... 8.2 1,299 10,150
96,000,000 The Gillette Company .......................... 9.5 600 3,526
14,610,900 H&R Block, Inc.................................... 8.2 227 809
15,476,500 HCA Inc. .............................................. 3.1 492 665
6,708,760 M&T Bank Corporation ....................... 5.6 103 659
24,000,000 Moody’s Corporation ........................... 16.1 499 1,453
2,338,961,000 PetroChina Company Limited .............. 1.3 488 1,340
1,727,765 The Washington Post Company ........... 18.1 11 1,367
56,448,380 Wells Fargo & Company...................... 3.3 463 3,324
Others ................................................... 2,863 4,682
Total Common Stocks .......................... $ 8,515 $35,287
We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last
changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post
in 1973, and Moody’s in 2000. Brokers don’t love us.
We are neither enthusiastic nor negative about the portfolio we hold. We own pieces of excellent
businesses – all of which had good gains in intrinsic value last year – but their current prices reflect their
excellence. The unpleasant corollary to this conclusion is that I made a big mistake in not selling several of
our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I
was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I.
In 2002, junk bonds became very cheap, and we purchased about $8 billion of these. The
pendulum swung quickly though, and this sector now looks decidedly unattractive to us. Yesterday’s
weeds are today being priced as flowers.
We’ve repeatedly emphasized that realized gains at Berkshire are meaningless for analytical
purposes. We have a huge amount of unrealized gains on our books, and our thinking about when, and if,
to cash them depends not at all on a desire to report earnings at one specific time or another. Nevertheless,
to see the diversity of our investment activities, you may be interested in the following table, categorizing
the gains we reported during 2003:
Category Pre-Tax Gain
(in $ million)
Common Stocks .............................................................................................................. $ 448
U.S. Government Bonds.................................................................................................. 1,485
Junk Bonds...................................................................................................................... 1,138
Foreign Exchange Contracts ........................................................................................... 825
Other................................................................................................................................ 233
$4,129
The common stock profits occurred around the edges of our portfolio – not, as we already
mentioned, from our selling down our major positions. The profits in governments arose from our
liquidation of long-term strips (the most volatile of government securities) and from certain strategies I
follow within our finance and financial products division. We retained most of our junk portfolio, selling
only a few issues. Calls and maturing bonds accounted for the rest of the gains in the junk category.
During 2002 we entered the foreign currency market for the first time in my life, and in 2003 we
enlarged our position, as I became increasingly bearish on the dollar. I should note that the cemetery for
seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at
Berkshire, and we have seldom seen others make them with sustained success.
We have – and will continue to have – the bulk of Berkshire’s net worth in U.S. assets. But in
recent years our country’s trade deficit has been force-feeding huge amounts of claims on, and ownership
in, America to the rest of the world. For a time, foreign appetite for these assets readily absorbed the
supply. Late in 2002, however, the world started choking on this diet, and the dollar’s value began to slide
against major currencies. Even so, prevailing exchange rates will not lead to a material letup in our trade
deficit. So whether foreign investors like it or not, they will continue to be flooded with dollars. The
consequences of this are anybody’s guess. They could, however, be troublesome – and reach, in fact, well
beyond currency markets.
As an American, I hope there is a benign ending to this problem. I myself suggested one possible
solution – which, incidentally, leaves Charlie cold – in a November 10, 2003 article in Fortune Magazine.
Then again, perhaps the alarms I have raised will prove needless: Our country’s dynamism and resiliency
have repeatedly made fools of naysayers. But Berkshire holds many billions of cash-equivalents
denominated in dollars. So I feel more comfortable owning foreign-exchange contracts that are at least a
partial offset to that position.
These contracts are subject to accounting rules that require changes in their value to be
contemporaneously included in capital gains or losses, even though the contracts have not been closed. We
show these changes each quarter in the Finance and Financial Products segment of our earnings statement.
At yearend, our open foreign exchange contracts totaled about $12 billion at market values and were spread
among five currencies. Also, when we were purchasing junk bonds in 2002, we tried when possible to buy
issues denominated in Euros. Today, we own about $1 billion of these.
When we can’t find anything exciting in which to invest, our “default” position is U.S. Treasuries,
both bills and repos. No matter how low the yields on these instruments go, we never “reach” for a little
more income by dropping our credit standards or by extending maturities. Charlie and I detest taking even
small risks unless we feel we are being adequately compensated for doing so. About as far as we will go
down that path is to occasionally eat cottage cheese a day after the expiration date on the carton.
* * * * * * * * * * * *
A 2003 book that investors can learn much from is Bull! by Maggie Mahar. Two other books I’d
recommend are The Smartest Guys in the Room by Bethany McLean and Peter Elkind, and In an Uncertain
World by Bob Rubin. All three are well-reported and well-written. Additionally, Jason Zweig last year did
a first-class job in revising The Intelligent Investor, my favorite book on investing.
Designated Gifts Program
From 1981 through 2002, Berkshire administered a program whereby shareholders could direct
Berkshire to make gifts to their favorite charitable organizations. Over the years we disbursed $197 million
pursuant to this program. Churches were the most frequently named designees, and many thousands of
other organizations benefited as well. We were the only major public company that offered such a program
to shareholders, and Charlie and I were proud of it.
We reluctantly terminated the program in 2003 because of controversy over the abortion issue.
Over the years numerous organizations on both sides of this issue had been designated by our shareholders
to receive contributions. As a result, we regularly received some objections to the gifts designated for pro￾choice operations. A few of these came from people and organizations that proceeded to boycott products
21
of our subsidiaries. That did not concern us. We refused all requests to limit the right of our owners to
make whatever gifts they chose (as long as the recipients had 501(c)(3) status).
In 2003, however, many independent associates of The Pampered Chef began to feel the boycotts.
This development meant that people who trusted us – but who were neither employees of ours nor had a
voice in Berkshire decision-making – suffered serious losses of income.
For our shareholders, there was some modest tax efficiency in Berkshire doing the giving rather
than their making their gifts directly. Additionally, the program was consistent with our “partnership”
approach, the first principle set forth in our Owner’s Manual. But these advantages paled when they were
measured against damage done loyal associates who had with great personal effort built businesses of their
own. Indeed, Charlie and I see nothing charitable in harming decent, hard-working people just so we and
other shareholders can gain some minor tax efficiencies.
Berkshire now makes no contributions at the parent company level. Our various subsidiaries
follow philanthropic policies consistent with their practices prior to their acquisition by Berkshire, except
that any personal contributions that former owners had earlier made from their corporate pocketbook are
now funded by them personally.
The Annual Meeting
Last year, I asked you to vote as to whether you wished our annual meeting to be held on Saturday
or Monday. I was hoping for Monday. Saturday won by 2 to 1. It will be a while before shareholder
democracy resurfaces at Berkshire.
But you have spoken, and we will hold this year’s annual meeting on Saturday, May 1 at the new
Qwest Center in downtown Omaha. The Qwest offers us 194,000 square feet for exhibition by our
subsidiaries (up from 65,000 square feet last year) and much more seating capacity as well. The Qwest’s
doors will open at 7 a.m., the movie will begin at 8:30, and the meeting itself will commence at 9:30.
There will be a short break at noon for food. (Sandwiches will be available at the Qwest’s concession
stands.) That interlude aside, Charlie and I will answer questions until 3:30. We will tell you everything
we know . . . and, at least in my case, more.
An attachment to the proxy material that is enclosed with this report explains how you can obtain
the credential you will need for admission to the meeting and other events. As for plane, hotel and car
reservations, we have again signed up American Express (800-799-6634) to give you special help. They do
a terrific job for us each year, and I thank them for it.
In our usual fashion, we will run vans from the larger hotels to the meeting. Afterwards, the vans
will make trips back to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so,
you are likely to find a car useful.
Our exhibition of Berkshire goods and services will blow you away this year. On the floor, for
example, will be a 1,600 square foot Clayton home (featuring Acme brick, Shaw carpet, Johns-Manville
insulation, MiTek fasteners, Carefree awnings, and outfitted with NFM furniture). You’ll find it a far cry
from the mobile-home stereotype of a few decades ago.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
special shareholder discount (usually 8%). This special offer is permitted by 41 of the 49 jurisdictions in
which we operate. Bring the details of your existing insurance and check out whether we can save you
money.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets®
available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes.
If you buy what we consider an appropriate number of items during the weekend, you may well need your
own plane to take them home.
22
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific,
we will again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a
discount that is customarily given only to employees. We initiated this special pricing at NFM seven years
ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $17.3 million in 2003. Every year
has set a new record.
To get the discount, you must make your purchases between Thursday, April 29 and Monday,
May 3 inclusive, and also present your meeting credential. The period’s special pricing will even apply to
the products of several prestigious manufacturers that normally have ironclad rules against discounting but
that, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their
cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on
Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., we are having a special affair for shareholders
only. I’ll be there, eating barbeque and drinking Coke.
Borsheim’s ⎯ the largest jewelry store in the country except for Tiffany’s Manhattan store ⎯ will
have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday,
April 30. The second, the main gala, will be from 9 a.m. to 4 p.m. on Sunday, May 2. Ask Charlie to
autograph your sales ticket.
Shareholder prices will be available Thursday through Monday, so if you wish to avoid the large
crowds that will assemble on Friday evening and Sunday, come at other times and identify yourself as a
shareholder. On Saturday, we will be open until 6 p.m. Borsheim’s operates on a gross margin that is fully
twenty percentage points below that of its major rivals, so the more you buy, the more you save – at least
that’s what my wife and daughter tell me. (Both were impressed early in life by the story of the boy who,
after missing a street car, walked home and proudly announced that he had saved 5¢ by doing so. His
father was irate: “Why didn’t you miss a cab and save 85¢?”)
In the mall outside of Borsheim’s, we will have Bob Hamman and Sharon Osberg, two of the
world’s top bridge experts, available to play with our shareholders on Sunday afternoon. Additionally,
Patrick Wolff, twice U.S. chess champion, will be in the mall, taking on all comers ⎯ blindfolded! I’ve
watched, and he doesn’t peek.
Gorat’s ⎯ my favorite steakhouse ⎯ will again be open exclusively for Berkshire shareholders on
Sunday, May 2, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on
Sunday, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If
Sunday is sold out, try Gorat’s on one of the other evenings you will be in town. Flaunt your mastery of
fine dining by ordering, as I do, a rare T-bone with a double order of hash browns.
We will have a special reception on Saturday afternoon from 4:00 to 5:00 for shareholders who
come from outside of North America. Every year our meeting draws many people from around the globe,
and Charlie and I want to be sure we personally meet those who have come so far. Any shareholder who
comes from other than the U.S. or Canada will be given special credentials and instructions for attending
this function.
Charlie and I have a great time at the annual meeting. And you will, too. So join us at the Qwest
for our annual Woodstock for Capitalists.
Warren E. Buffett
February 27, 2004 Chairman of the Board
23
2 
Note: The following table appears in the printed Annual Report on the facing page of the 
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500 
 Annual Percentage Change 
in Per-Share in S&P 500 
Book Value of with Dividends Relative 
Berkshire Included Results 
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8 
1966 .................................................. 20.3 (11.7) 32.0 
1967 .................................................. 11.0 30.9 (19.9) 
1968 .................................................. 19.0 11.0 8.0 
1969 .................................................. 16.2 (8.4) 24.6 
1970 .................................................. 12.0 3.9 8.1 
1971 .................................................. 16.4 14.6 1.8 
1972 .................................................. 21.7 18.9 2.8 
1973 .................................................. 4.7 (14.8) 19.5 
1974 .................................................. 5.5 (26.4) 31.9 
1975 .................................................. 21.9 37.2 (15.3) 
1976 .................................................. 59.3 23.6 35.7 
1977 .................................................. 31.9 (7.4) 39.3 
1978 .................................................. 24.0 6.4 17.6 
1979 .................................................. 35.7 18.2 17.5 
1980 .................................................. 19.3 32.3 (13.0) 
1981 .................................................. 31.4 (5.0) 36.4 
1982 .................................................. 40.0 21.4 18.6 
1983 .................................................. 32.3 22.4 9.9 
1984 .................................................. 13.6 6.1 7.5 
1985 .................................................. 48.2 31.6 16.6 
1986 .................................................. 26.1 18.6 7.5 
1987 .................................................. 19.5 5.1 14.4 
1988 .................................................. 20.1 16.6 3.5 
1989 .................................................. 44.4 31.7 12.7 
1990 .................................................. 7.4 (3.1) 10.5 
1991 .................................................. 39.6 30.5 9.1 
1992 .................................................. 20.3 7.6 12.7 
1993 .................................................. 14.3 10.1 4.2 
1994 .................................................. 13.9 1.3 12.6 
1995 .................................................. 43.1 37.6 5.5 
1996 .................................................. 31.8 23.0 8.8 
1997 .................................................. 34.1 33.4 .7 
1998 .................................................. 48.3 28.6 19.7 
1999 .................................................. .5 21.0 (20.5) 
2000 .................................................. 6.5 (9.1) 15.6 
2001 .................................................. (6.2) (11.9) 5.7 
2002 .................................................. 10.0 (22.1) 32.1 
2003 .................................................. 21.0 28.7 (7.7) 
2004 .................................................. 10.5 10.9 (.4) 
Average Annual Gain — 1965-2004 21.9 10.4 11.5 
Overall Gain — 1964-2004 286,865 5,318 
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 
 Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market 
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results 
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using 
the numbers originally reported. 
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire 
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 
in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a 
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.: 
Our gain in net worth during 2004 was $8.3 billion, which increased the per-share book value of 
both our Class A and Class B stock by 10.5%. Over the last 40 years (that is, since present management
took over) book value has grown from $19 to $55,824, a rate of 21.9% compounded annually.* 
It’s per-share intrinsic value that counts, however, not book value. Here, the news is good:
Between 1964 and 2004, Berkshire morphed from a struggling northern textile business whose intrinsic 
value was less than book into a diversified enterprise worth far more than book. Our 40-year gain in 
intrinsic value has therefore somewhat exceeded our 21.9% gain in book. (For an explanation of intrinsic
value and the economic principles that guide Charlie Munger, my partner and Berkshire’s vice-chairman, 
and me in running Berkshire, please read our Owner’s Manual, beginning on page 73.)
Despite their shortcomings, yearly calculations of book value are useful at Berkshire as a slightly 
understated gauge for measuring the long-term rate of increase in our intrinsic value. The calculations are
less relevant, however, than they once were in rating any single year’s performance versus the S&P 500 
index (a comparison we display on the facing page). Our equity holdings (including convertible preferreds) 
have fallen considerably as a percentage of our net worth, from an average of 114% in the 1980s, for 
example, to less than 50% in recent years. Therefore, yearly movements in the stock market now affect a
much smaller portion of our net worth than was once the case, a fact that will normally cause us to
underperform in years when stocks rise substantially and overperform in years when they fall.
However the yearly comparisons work out, Berkshire’s long-term performance versus the S&P 
remains all-important. Our shareholders can buy the S&P through an index fund at very low cost. Unless 
we achieve gains in per-share intrinsic value in the future that outdo the S&P, Charlie and I will be adding 
nothing to what you can accomplish on your own. 
Last year, Berkshire’s book-value gain of 10.5% fell short of the index’s 10.9% return. Our
lackluster performance was not due to any stumbles by the CEOs of our operating businesses: As always, 
they pulled more than their share of the load. My message to them is simple: Run your business as if it 
were the only asset your family will own over the next hundred years. Almost invariably they do just that
and, after taking care of the needs of their business, send excess cash to Omaha for me to deploy. 
I didn’t do that job very well last year. My hope was to make several multi-billion dollar 
acquisitions that would add new and significant streams of earnings to the many we already have. But I 
struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year
with $43 billion of cash equivalents, not a happy position. Charlie and I will work to translate some of this 
hoard into more interesting assets during 2005, though we can’t promise success. 
In one respect, 2004 was a remarkable year for the stock market, a fact buried in the maze of
numbers on page 2. If you examine the 35 years since the 1960s ended, you will find that an investor’s 
return, including dividends, from owning the S&P has averaged 11.2% annually (well above what we
expect future returns to be). But if you look for years with returns anywhere close to that 11.2% – say, 
between 8% and 14% – you will find only one before 2004. In other words, last year’s “normal” return is 
anything but. 
 *All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of
the A. 
3
Over the 35 years, American business has delivered terrific results. It should therefore have been
easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a
diversified, low-expense way. An index fund that they never touched would have done the job. Instead 
many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded
excessively or spent far too much on investment management; second, portfolio decisions based on tips and
fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to 
the market marked by untimely entries (after an advance has been long underway) and exits (after periods 
of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And
if they insist on trying to time their participation in equities, they should try to be fearful when others are 
greedy and greedy only when others are fearful.
Sector Results
As managers, Charlie and I want to give our owners the financial information and commentary we 
would wish to receive if our roles were reversed. To do this with both clarity and reasonable brevity 
becomes more difficult as Berkshire’s scope widens. Some of our businesses have vastly different
economic characteristics from others, which means that our consolidated statements, with their jumble of
figures, make useful analysis almost impossible. 
On the following pages, therefore, we will present some balance sheet and earnings figures from
our four major categories of businesses along with commentary about each. We particularly want you to 
understand the limited circumstances under which we will use debt, given that we typically shun it. We
will not, however, inundate you with data that has no real value in estimating Berkshire’s intrinsic value. 
Doing so would tend to obfuscate the facts that count. 
Regulated Utility Businesses
We have an 80.5% (fully diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.7 million electric customers make it the third largest distributor of electricity in the U.K.; (2) 
MidAmerican Energy, which serves 698,000 electric customers, primarily in Iowa; and (3) Kern River and 
Northern Natural pipelines, which carry 7.9% of the natural gas consumed in the U.S. 
The remaining 19.5% of MidAmerican is owned by three partners of ours: Dave Sokol and Greg
Abel, the brilliant managers of these businesses, and Walter Scott, a long-time friend of mine who 
introduced me to the company. Because MidAmerican is subject to the Public Utility Holding Company
Act (“PUHCA”), Berkshire’s voting interest is limited to 9.9%. Voting control rests with Walter. 
Our limited voting interest forces us to account for MidAmerican in an abbreviated manner.
Instead of our fully incorporating the company’s assets, liabilities, revenues and expenses into Berkshire’s 
statements, we make one-line entries only in both our balance sheet and income account. It’s likely, 
though, that PUHCA will someday – perhaps soon – be repealed or that accounting rules will change. 
Berkshire’s consolidated figures would then incorporate all of MidAmerican, including the substantial debt
it utilizes (though this debt is not now, nor will it ever be, an obligation of Berkshire). 
At yearend, $1.478 billion of MidAmerican’s junior debt was payable to Berkshire. This debt has 
allowed acquisitions to be financed without our partners needing to increase their already substantial 
investments in MidAmerican. By charging 11% interest, Berkshire is compensated fairly for putting up the 
funds needed for purchases, while our partners are spared dilution of their equity interests. Because 
MidAmerican made no large acquisitions last year, it paid down $100 million of what it owes us. 
4
MidAmerican also owns a significant non-utility business, HomeServices of America, the second
largest real estate broker in the country. Unlike our utility operations, this business is highly cyclical, but
nevertheless one we view enthusiastically. We have an exceptional manager, Ron Peltier, who through 
both his acquisition and operational skills is building a brokerage powerhouse. 
HomeServices participated in $59.8 billion of transactions in 2004, a gain of $11.2 billion from
2003. About 24% of the increase came from six acquisitions made during the year. Through our 17 
brokerage firms – all of which retain their local identities – we employ more than 18,000 brokers in 18
states. HomeServices is almost certain to grow substantially in the next decade as we continue to acquire
leading localized operations. 
Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated
in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our 
California geothermal operations, and we believed we could profitably extract the metal. For many
months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil 
exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, 
another popped up. In September, we threw in the towel.
Our failure here illustrates the importance of a guideline – stay with simple propositions – that we 
usually apply in investments as well as operations. If only one variable is key to a decision, and the 
variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But 
if ten independent variables need to break favorably for a successful result, and each has a 90% probability 
of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the
problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its
weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains. 
A breakdown of MidAmerican’s results follows. In 2004, the “other” category includes a $72.2 
million profit from sale of an Enron receivable that was thrown in when we purchased Northern Natural 
two years earlier. Walter, Dave and I, as natives of Omaha, view this unanticipated gain as war reparations
– partial compensation for the loss our city suffered in 1986 when Ken Lay moved Northern to Houston, 
after promising to leave the company here. (For details, see Berkshire’s 2002 annual report.)
Here are some key figures on MidAmerican’s operations: 
Earnings (in $ millions)
2004 2003
U.K. utilities....................................................................................................... $ 326 $ 289 
Iowa utility ......................................................................................................... 268 269
Pipelines............................................................................................................. 288 261
HomeServices..................................................................................................... 130 113
Other (net) .......................................................................................................... 172 190
Loss from zinc project........................................................................................ (579) (46) 
Earnings before corporate interest and taxes...................................................... 605 1,076
Interest, other than to Berkshire ......................................................................... (212) (225)
Interest on Berkshire junior debt ........................................................................ (170) (184) 
Income tax .......................................................................................................... (53) (251) 
Net earnings........................................................................................................ $ 170 $ 416
Earnings applicable to Berkshire*...................................................................... $ 237 $ 429 
Debt owed to others............................................................................................ 10,528 10,296
Debt owed to Berkshire ...................................................................................... 1,478 1,578
*Includes interest earned by Berkshire (net of related income taxes) of $110 in 2004 and $118 in 2003.
5
Insurance 
Since Berkshire purchased National Indemnity (“NICO”) in 1967, property-casualty insurance has
been our core business and the propellant of our growth. Insurance has provided a fountain of funds with
which we’ve acquired the securities and businesses that now give us an ever-widening variety of earnings
streams. So in this section, I will be spending a little time telling you how we got where we are. 
The source of our insurance funds is “float,” which is money that doesn’t belong to us but that we
temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we
provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events
that occur today do not always result in our immediately paying claims, because it sometimes takes many 
years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20
million of float that came with our 1967 purchase has now increased – both by way of internal growth and
acquisitions – to $46.1 billion.
Float is wonderful – if it doesn’t come at a high price. Its cost is determined by underwriting 
results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have
received. When an underwriting profit is achieved – as has been the case at Berkshire in about half of the
38 years we have been in the insurance business – float is better than free. In such years, we are actually
paid for holding other people’s money. For most insurers, however, life has been far more difficult: In 
aggregate, the property-casualty industry almost invariably operates at an underwriting loss. When that 
loss is large, float becomes expensive, sometimes devastatingly so. 
Insurers have generally earned poor returns for a simple reason: They sell a commodity-like
product. Policy forms are standard, and the product is available from many suppliers, some of whom are 
mutual companies (“owned” by policyholders rather than stockholders) with profit goals that are limited.
Moreover, most insureds don’t care from whom they buy. Customers by the millions say “I need some
Gillette blades” or “I’ll have a Coke” but we wait in vain for “I’d like a National Indemnity policy, please.”
Consequently, price competition in insurance is usually fierce. Think airline seats. 
So, you may ask, how do Berkshire’s insurance operations overcome the dismal economics of the 
industry and achieve some measure of enduring competitive advantage? We’ve attacked that problem in
several ways. Let’s look first at NICO’s strategy. 
When we purchased the company – a specialist in commercial auto and general liability insurance 
– it did not appear to have any attributes that would overcome the industry’s chronic troubles. It was not
well-known, had no informational advantage (the company has never had an actuary), was not a low-cost
operator, and sold through general agents, a method many people thought outdated. Nevertheless, for 
almost all of the past 38 years, NICO has been a star performer. Indeed, had we not made this acquisition, 
Berkshire would be lucky to be worth half of what it is today. 
What we’ve had going for us is a managerial mindset that most insurers find impossible to
replicate. Take a look at the facing page. Can you imagine any public company embracing a business
model that would lead to the decline in revenue that we experienced from 1986 through 1999? That
colossal slide, it should be emphasized, did not occur because business was unobtainable. Many billions of
premium dollars were readily available to NICO had we only been willing to cut prices. But we instead 
consistently priced to make a profit, not to match our most optimistic competitor. We never left customers 
– but they left us. 
Most American businesses harbor an “institutional imperative” that rejects extended decreases in 
volume. What CEO wants to report to his shareholders that not only did business contract last year but that 
it will continue to drop? In insurance, the urge to keep writing business is also intensified because the 
consequences of foolishly-priced policies may not become apparent for some time. If an insurer is
optimistic in its reserving, reported earnings will be overstated, and years may pass before true loss costs 
are revealed (a form of self-deception that nearly destroyed GEICO in the early 1970s). 
6
Portrait of a Disciplined Underwriter 
National Indemnity Company 
Year
Written Premium 
(In $ millions)
No. of
Employees at 
Year-End
Ratio of
Operating Expenses 
to
Written Premium
Underwriting Profit 
(Loss) as a Per￾centage of Premiums 
(Calculated as of 
year end 2004)*
1980 ........................... $79.6 372 32.3% 8.2%
1981 ........................... 59.9 353 36.1% (.8%)
1982 ........................... 52.5 323 36.7% (15.3%)
1983 ........................... 58.2 308 35.6% (18.7%)
1984 ........................... 62.2 342 35.5% (17.0%)
1985 ........................... 160.7 380 28.0% 1.9%
1986 ........................... 366.2 403 25.9% 30.7%
1987 ........................... 232.3 368 29.5% 27.3%
1988 ........................... 139.9 347 31.7% 24.8%
1989 ........................... 98.4 320 35.9% 14.8%
1990 ........................... 87.8 289 37.4% 7.0%
1991 ........................... 88.3 284 35.7% 13.0%
1992 ........................... 82.7 277 37.9% 5.2%
1993 ........................... 86.8 279 36.1% 11.3%
1994 ........................... 85.9 263 34.6% 4.6%
1995 ........................... 78.0 258 36.6% 9.2%
1996 ........................... 74.0 243 36.5% 6.8%
1997 ........................... 65.3 240 40.4% 6.2%
1998 ........................... 56.8 231 40.4% 9.4%
1999 ........................... 54.5 222 41.2% 4.5%
2000 ........................... 68.1 230 38.4% 2.9%
2001 ........................... 161.3 254 28.8% (11.6%)
2002 ........................... 343.5 313 24.0% 16.8%
2003 ........................... 594.5 337 22.2% 18.1%
2004 ........................... 605.6 340 22.5% 5.1%
*It takes a long time to learn the true profitability of any given year. First, many claims are received after 
the end of the year, and we must estimate how many of these there will be and what they will cost. (In 
insurance jargon, these claims are termed IBNR – incurred but not reported.) Second, claims often take
years, or even decades, to settle, which means there can be many surprises along the way. 
For these reasons, the results in this column simply represent our best estimate at the end of 2004 as to how 
we have done in prior years. Profit margins for the years through 1999 are probably close to correct
because these years are “mature,” in the sense that they have few claims still outstanding. The more recent 
the year, the more guesswork is involved. In particular, the results shown for 2003 and 2004 are apt to 
change significantly. 
7
Finally, there is a fear factor at work, in that a shrinking business usually leads to layoffs. To
avoid pink slips, employees will rationalize inadequate pricing, telling themselves that poorly-priced 
business must be tolerated in order to keep the organization intact and the distribution system happy. If this
course isn’t followed, these employees will argue, the company will not participate in the recovery that
they invariably feel is just around the corner. 
To combat employees’ natural tendency to save their own skins, we have always promised
NICO’s workforce that no one will be fired because of declining volume, however severe the contraction. 
(This is not Donald Trump’s sort of place.) NICO is not labor-intensive, and, as the table suggests, can live 
with excess overhead. It can’t live, however, with underpriced business and the breakdown in underwriting
discipline that accompanies it. An insurance organization that doesn’t care deeply about underwriting at a 
profit this year is unlikely to care next year either. 
Naturally, a business that follows a no-layoff policy must be especially careful to avoid 
overstaffing when times are good. Thirty years ago Tom Murphy, then CEO of Cap Cities, drove this point
home to me with a hypothetical tale about an employee who asked his boss for permission to hire an
assistant. The employee assumed that adding $20,000 to the annual payroll would be inconsequential. But
his boss told him the proposal should be evaluated as a $3 million decision, given that an additional person
would probably cost at least that amount over his lifetime, factoring in raises, benefits and other expenses 
(more people, more toilet paper). And unless the company fell on very hard times, the employee added
would be unlikely to be dismissed, however marginal his contribution to the business. 
It takes real fortitude – embedded deep within a company’s culture – to operate as NICO does.
Anyone examining the table can scan the years from 1986 to 1999 quickly. But living day after day with 
dwindling volume – while competitors are boasting of growth and reaping Wall Street’s applause – is an
experience few managers can tolerate. NICO, however, has had four CEOs since its formation in 1940 and
none have bent. (It should be noted that only one of the four graduated from college. Our experience tells
us that extraordinary business ability is largely innate.) 
The current managerial star – make that superstar – at NICO is Don Wurster (yes, he’s “the
graduate”), who has been running things since 1989. His slugging percentage is right up there with Barry
Bonds’ because, like Barry, Don will accept a walk rather than swing at a bad pitch. Don has now amassed 
$950 million of float at NICO that over time is almost certain to be proved the negative-cost kind. Because 
insurance prices are falling, Don’s volume will soon decline very significantly and, as it does, Charlie and I 
will applaud him ever more loudly. 
* * * * * * * * * * * * 
Another way to prosper in a commodity-type business is to be the low-cost operator. Among auto
insurers operating on a broad scale, GEICO holds that cherished title. For NICO, as we have seen, an ebb￾and-flow business model makes sense. But a company holding a low-cost advantage must pursue an
unrelenting foot-to-the-floor strategy. And that’s just what we do at GEICO. 
A century ago, when autos first appeared, the property-casualty industry operated as a cartel. The 
major companies, most of which were based in the Northeast, established “bureau” rates and that was it. 
No one cut prices to attract business. Instead, insurers competed for strong, well-regarded agents, a focus 
that produced high commissions for agents and high prices for consumers. 
In 1922, State Farm was formed by George Mecherle, a farmer from Merna, Illinois, who aimed to
take advantage of the pricing umbrella maintained by the high-cost giants of the industry. State Farm
employed a “captive” agency force, a system keeping its acquisition costs lower than those incurred by the 
bureau insurers (whose “independent” agents successfully played off one company against another). With
its low-cost structure, State Farm eventually captured about 25% of the personal lines (auto and 
homeowners) business, far outdistancing its once-mighty competitors. Allstate, formed in 1931, put a
similar distribution system into place and soon became the runner-up in personal lines to State Farm.
Capitalism had worked its magic, and these low-cost operations looked unstoppable. 
8
But a man named Leo Goodwin had an idea for an even more efficient auto insurer and, with a 
skimpy $200,000, started GEICO in 1936. Goodwin’s plan was to eliminate the agent entirely and to deal
instead directly with the auto owner. Why, he asked himself, should there be any unnecessary and
expensive links in the distribution mechanism when the product, auto insurance, was both mandatory and 
costly. Purchasers of business insurance, he reasoned, might well require professional advice, but most 
consumers knew what they needed in an auto policy. That was a powerful insight. 
Originally, GEICO mailed its low-cost message to a limited audience of government employees.
Later, it widened its horizons and shifted its marketing emphasis to the phone, working inquiries that came
from broadcast and print advertising. And today the Internet is coming on strong. 
Between 1936 and 1975, GEICO grew from a standing start to a 4% market share, becoming the
country’s fourth largest auto insurer. During most of this period, the company was superbly managed,
achieving both excellent volume gains and high profits. It looked unstoppable. But after my friend and
hero Lorimer Davidson retired as CEO in 1970, his successors soon made a huge mistake by under￾reserving for losses. This produced faulty cost information, which in turn produced inadequate pricing. By
1976, GEICO was on the brink of failure. 
Jack Byrne then joined GEICO as CEO and, almost single-handedly, saved the company by heroic
efforts that included major price increases. Though GEICO’s survival required these, policyholders fled 
the company, and by 1980 its market share had fallen to 1.8%. Subsequently, the company embarked on
some unwise diversification moves. This shift of emphasis away from its extraordinary core business
stunted GEICO’s growth, and by 1993 its market share had grown only fractionally, to 1.9%. Then Tony
Nicely took charge. 
And what a difference that’s made: In 2005 GEICO will probably secure a 6% market share.
Better yet, Tony has matched growth with profitability. Indeed, GEICO delivers all of its constituents
major benefits: In 2004 its customers saved $1 billion or so compared to what they would otherwise have
paid for coverage, its associates earned a $191 million profit-sharing bonus that averaged 24.3% of salary,
and its owner – that’s us – enjoyed excellent financial returns. 
There’s more good news. When Jack Byrne was rescuing the company in 1976, New Jersey 
refused to grant him the rates he needed to operate profitably. He therefore promptly – and properly – 
withdrew from the state. Subsequently, GEICO avoided both New Jersey and Massachusetts, recognizing 
them as two jurisdictions in which insurers were destined to struggle. 
In 2003, however, New Jersey took a new look at its chronic auto-insurance problems and enacted 
legislation that would curb fraud and allow insurers a fair playing field. Even so, one might have expected
the state’s bureaucracy to make change slow and difficult. 
But just the opposite occurred. Holly Bakke, the New Jersey insurance commissioner, who would 
be a success in any line of work, was determined to turn the law’s intent into reality. With her staff’s 
cooperation, GEICO ironed out the details for re-entering the state and was licensed last August. Since
then, we’ve received a response from New Jersey drivers that is multiples of my expectations. 
We are now serving 140,000 policyholders – about 4% of the New Jersey market – and saving
them substantial sums (as we do drivers everywhere). Word-of-mouth recommendations within the state 
are causing inquiries to pour in. And once we hear from a New Jersey prospect, our closure rate – the 
percentage of policies issued to inquiries received – is far higher in the state than it is nationally. 
We make no claim, of course, that we can save everyone money. Some companies, using rating 
systems that are different from ours, will offer certain classes of drivers a lower rate than we do. But we 
believe GEICO offers the lowest price more often than any other national company that serves all segments 
of the public. In addition, in most states, including New Jersey, Berkshire shareholders receive an 8%
discount. So gamble fifteen minutes of your time and go to GEICO.com – or call 800-847-7536 – to see
9
whether you can save big money (which you might want to use, of course, to buy other Berkshire
products). 
* * * * * * * * * * * * 
Reinsurance – insurance sold to other insurers who wish to lay off part of the risks they have 
assumed – should not be a commodity product. At bottom, any insurance policy is simply a promise, and
as everyone knows, promises vary enormously in their quality. 
At the primary insurance level, nevertheless, just who makes the promise is often of minor 
importance. In personal-lines insurance, for example, states levy assessments on solvent companies to pay 
the policyholders of companies that go broke. In the business-insurance field, the same arrangement 
applies to workers’ compensation policies. “Protected” policies of these types account for about 60% of
the property-casualty industry’s volume. Prudently-run insurers are irritated by the need to subsidize poor 
or reckless management elsewhere, but that’s the way it is. 
Other forms of business insurance at the primary level involve promises that carry greater risks for
the insured. When Reliance Insurance and Home Insurance were run into the ground, for example, their 
promises proved to be worthless. Consequently, many holders of their business policies (other than those 
covering workers’ compensation) suffered painful losses. 
The solvency risk in primary policies, however, pales in comparison to that lurking in reinsurance 
policies. When a reinsurer goes broke, staggering losses almost always strike the primary companies it has 
dealt with. This risk is far from minor: GEICO has suffered tens of millions in losses from its careless 
selection of reinsurers in the early 1980s. 
Were a true mega-catastrophe to occur in the next decade or two – and that’s a real possibility –
some reinsurers would not survive. The largest insured loss to date is the World Trade Center disaster,
which cost the insurance industry an estimated $35 billion. Hurricane Andrew cost insurers about $15.5
billion in 1992 (though that loss would be far higher in today’s dollars). Both events rocked the insurance 
and reinsurance world. But a $100 billion event, or even a larger catastrophe, remains a possibility if either 
a particularly severe earthquake or hurricane hits just the wrong place. Four significant hurricanes struck
Florida during 2004, causing an aggregate of $25 billion or so in insured losses. Two of these – Charley
and Ivan – could have done at least three times the damage they did had they entered the U.S. not far from
their actual landing points. 
Many insurers regard a $100 billion industry loss as “unthinkable” and won’t even plan for it. But 
at Berkshire, we are fully prepared. Our share of the loss would probably be 3% to 5%, and earnings from
our investments and other businesses would comfortably exceed that cost. When “the day after” arrives, 
Berkshire’s checks will clear. 
Though the hurricanes hit us with a $1.25 billion loss, our reinsurance operations did well last 
year. At General Re, Joe Brandon has restored a long-admired culture of underwriting discipline that, for a 
time, had lost its way. The excellent results he realized in 2004 on current business, however, were offset
by adverse developments from the years before he took the helm. At NICO’s reinsurance operation, Ajit
Jain continues to successfully underwrite huge risks that no other reinsurer is willing or able to accept. 
Ajit’s value to Berkshire is enormous. 
* * * * * * * * * * * * 
Our insurance managers, maximizing the competitive strengths I’ve mentioned in this section,
again delivered first-class underwriting results last year. As a consequence, our float was better than
costless. Here’s the scorecard: 
10
(in $ millions)
Underwriting Profit Yearend Float
Insurance Operations 2004 2004 2003
General Re ....................... $ 3 $23,120 $23,654 
B-H Reinsurance.............. 417 15,278 13,948 
GEICO ............................. 970 5,960 5,287
Other Primary*................. 161 1,736 1,331
Total................................. $1,551 $46,094 $44,220
*Includes, in addition to National Indemnity, a variety of other exceptional insurance businesses, 
run by Rod Eldred, John Kizer, Tom Nerney and Don Towle. 
Berkshire’s float increased $1.9 billion in 2004, even though a few insureds opted to commute
(that is, unwind) certain reinsurance contracts. We agree to such commutations only when we believe the
economics are favorable to us (after giving due weight to what we might earn in the future on the money 
we are returning). 
To summarize, last year we were paid more than $1.5 billion to hold an average of about $45.2
billion. In 2005 pricing will be less attractive than it has been. Nevertheless, absent a mega-catastrophe, 
we have a decent chance of achieving no-cost float again this year. 
Finance and Finance Products 
Last year in this section we discussed a potpourri of activities. In this report, we’ll skip over 
several that are now of lesser importance: Berkadia is down to tag ends; Value Capital has added other 
investors, negating our expectation that we would need to consolidate its financials into ours; and the
trading operation that I run continues to shrink. 
• Both of Berkshire’s leasing operations rebounded last year. At CORT (office furniture), earnings
remain inadequate, but are trending upward. XTRA disposed of its container and intermodal
businesses in order to concentrate on trailer leasing, long its strong suit. Overhead has been 
reduced, asset utilization is up and decent profits are now being achieved under Bill Franz, the 
company’s new CEO. 
• The wind-down of Gen Re Securities continues. We decided to exit this derivative operation three 
years ago, but getting out is easier said than done. Though derivative instruments are purported to
be highly liquid – and though we have had the benefit of a benign market while liquidating ours –
we still had 2,890 contracts outstanding at yearend, down from 23,218 at the peak. Like Hell, 
derivative trading is easy to enter but difficult to leave. (Other similarities come to mind as well.) 
Gen Re’s derivative contracts have always been required to be marked to market, and I believe the 
company’s management conscientiously tried to make realistic “marks.” The market prices of
derivatives, however, can be very fuzzy in a world in which settlement of a transaction is 
sometimes decades away and often involves multiple variables as well. In the interim the marks 
influence the managerial and trading bonuses that are paid annually. It’s small wonder that 
phantom profits are often recorded. 
Investors should understand that in all types of financial institutions, rapid growth sometimes
masks major underlying problems (and occasionally fraud). The real test of the earning power of
a derivatives operation is what it achieves after operating for an extended period in a no-growth
mode. You only learn who has been swimming naked when the tide goes out.
• After 40 years, we’ve finally generated a little synergy at Berkshire: Clayton Homes is doing well 
and that’s in part due to its association with Berkshire. The manufactured home industry
11
continues to reside in the intensive care unit of Corporate America, having sold less than 135,000 
new homes last year, about the same as in 2003. Volume in these years was the lowest since 
1962, and it was also only about 40% of annual sales during the years 1995-99. That era, 
characterized by irresponsible financing and naïve funders, was a fool’s paradise for the industry. 
Because one major lender after another has fled the field, financing continues to bedevil 
manufacturers, retailers and purchasers of manufactured homes. Here Berkshire’s support has 
proven valuable to Clayton. We stand ready to fund whatever makes sense, and last year
Clayton’s management found much that qualified. 
As we explained in our 2003 report, we believe in using borrowed money to support profitable, 
interest-bearing receivables. At the beginning of last year, we had borrowed $2 billion to relend to 
Clayton (at a one percentage-point markup) and by January 2005 the total was $7.35 billion. Most
of the dollars added were borrowed by us on January 4, 2005, to finance a seasoned portfolio that
Clayton purchased on December 30, 2004 from a bank exiting the business. 
We now have two additional portfolio purchases in the works, totaling about $1.6 billion, but it’s 
quite unlikely that we will secure others of any significance. Therefore, Clayton’s receivables (in 
which originations will roughly offset payoffs) will probably hover around $9 billion for some
time and should deliver steady earnings. This pattern will be far different from that of the past, in
which Clayton, like all major players in its industry, “securitized” its receivables, causing earnings
to be front-ended. In the last two years, the securitization market has dried up. The limited funds 
available today come only at higher cost and with harsh terms. Had Clayton remained
independent in this period, it would have had mediocre earnings as it struggled with financing. 
In April, Clayton completed the acquisition of Oakwood Homes and is now the industry’s largest 
producer and retailer of manufactured homes. We love putting more assets in the hands of Kevin 
Clayton, the company’s CEO. He is a prototype Berkshire manager. Today, Clayton has 11,837
employees, up from 7,136 when we purchased it, and Charlie and I are pleased that Berkshire has 
been useful in facilitating this growth. 
For simplicity’s sake, we include all of Clayton’s earnings in this sector, though a sizable portion 
of these are derived from areas other than consumer finance.
(in $ millions)
Pre-Tax Earnings Interest-Bearing Liabilities
2004 2003 2004 2003
Trading – ordinary income ............................ $ 264 $ 355 $5,751 $7,826 
Gen Re Securities........................................... (44) (99) 5,437* 8,041* 
Life and annuity operation.............................. (57) 85 2,467 2,331
Value Capital.................................................. 30 31 N/A N/A
Berkadia ......................................................... 1 101 — 525
Leasing operations.......................................... 92 34 391 482
Manufactured housing finance (Clayton)....... 220 37** 3,636 2,032
Other............................................................... 78 75 N/A N/A
Income before capital gains............................ 584 619 
Trading – capital gains ................................... 1,750 1,215
Total ............................................................... $2,334 $1,834
* Includes all liabilities 
** From date of acquisition, August 7, 2003
12
Manufacturing, Service and Retailing Operations 
Our activities in this category cover the waterfront. But let’s look at a summary balance sheet and
earnings statement consolidating the entire group. 
Balance Sheet 12/31/04 (in $ millions)
Assets Liabilities and Equity
Cash and equivalents................................. $ 899 Notes payable ............................... $ 1,143 
Accounts and notes receivable .................. 3,074 Other current liabilities................. 4,685
Inventory ................................................... 3,842 Total current liabilities ................. 5,828 
Other current assets................................... 254
Total current assets.................................... 8,069 
Goodwill and other intangibles.................. 8,362 Deferred taxes............................... 248
Fixed assets................................................ 6,161 Term debt and other liabilities...... 1,965 
Other assets................................................ 1,044 Equity ........................................... 15,595
$23,636 $23,636
Earnings Statement (in $ millions)
2004 2003
Revenues ................................................................................................................. $44,142 $32,106
Operating expenses (including depreciation of $676 in 2004
and $605 in 2003)............................................................................................. 41,604 29,885
Interest expense (net)............................................................................................... 57 64
Pre-tax earnings....................................................................................................... 2,481 2,157
Income taxes............................................................................................................ 941 813
Net income .............................................................................................................. $ 1,540 $ 1,344
This eclectic group, which sells products ranging from Dilly Bars to fractional interests in Boeing
737s, earned a very respectable 21.7% on average tangible net worth last year, compared to 20.7% in 2003. 
It’s noteworthy that these operations used only minor financial leverage in achieving these returns. Clearly,
we own some very good businesses. We purchased many of them, however, at substantial premiums to net
worth – a matter that is reflected in the goodwill item shown on the balance sheet – and that fact reduces 
the earnings on our average carrying value to 9.9%. 
Here are the pre-tax earnings for the larger categories or units. 
Pre-Tax Earnings
(in $ millions)
2004 2003
Building Products.................................................................................................... $ 643 $ 559
Shaw Industries ....................................................................................................... 466 436
Apparel & Footwear................................................................................................ 325 289
Retailing of Jewelry, Home Furnishings and Candy ............................................... 215 224 
Flight Services......................................................................................................... 191 72
McLane.................................................................................................................... 228 150*
Other businesses...................................................................................................... 413 427
$2,481 $2,157
* From date of acquisition, May 23, 2003. 
• In the building-products sector and at Shaw, we’ve experienced staggering cost increases for both raw￾materials and energy. By December, for example, steel costs at MiTek (whose primary business is 
connectors for roof trusses) were running 100% over a year earlier. And MiTek uses 665 million 
pounds of steel every year. Nevertheless, the company continues to be an outstanding performer. 
13
Since we purchased MiTek in 2001, Gene Toombs, its CEO, has made some brilliant “bolt-on” 
acquisitions and is on his way to creating a mini-Berkshire. 
Shaw fielded a barrage of price increases in its main fiber materials during the year, a hit that added 
more than $300 million to its costs. (When you walk on carpet you are, in effect, stepping on 
processed oil.) Though we followed these hikes in costs with price increases of our own, there was an
inevitable lag. Therefore, margins narrowed as the year progressed and remain under pressure today.
Despite these roadblocks, Shaw, led by Bob Shaw and Julian Saul, earned an outstanding 25.6% on
tangible equity in 2004. The company is a powerhouse and has a bright future. 
• In apparel, Fruit of the Loom increased unit sales by 10 million dozen, or 14%, with shipments of 
intimate apparel for women and girls growing by 31%. Charlie, who is far more knowledgeable than I 
am on this subject, assures me that women are not wearing more underwear. With this expert input, I 
can only conclude that our market share in the women’s category must be growing rapidly. Thanks to
John Holland, Fruit is on the move. 
A smaller operation, Garan, also had an excellent year. Led by Seymour Lichtenstein and Jerry
Kamiel, this company manufactures the popular Garanimals line for children. Next time you are in a 
Wal-Mart, check out this imaginative product. 
• Among our retailers, Ben Bridge (jewelry) and R. C. Willey (home furnishings) were particular
standouts last year. 
At Ben Bridge same-store sales grew 11.4%, the best gain among the publicly-held jewelers whose
reports I have seen. Additionally, the company’s profit margin widened. Last year was not a fluke: 
During the past decade, the same-store sales gains of the company have averaged 8.8%. 
Ed and Jon Bridge are fourth-generation managers and run the business exactly as if it were their own
– which it is in every respect except for Berkshire’s name on the stock certificates. The Bridges have 
expanded successfully by securing the right locations and, more importantly, by staffing these stores 
with enthusiastic and knowledgeable associates. We will move into Minneapolis-St. Paul this year. 
At Utah-based R. C. Willey, the gains from expansion have been even more dramatic, with 41.9% of
2004 sales coming from out-of-state stores that didn’t exist before 1999. The company also improved
its profit margin in 2004, propelled by its two new stores in Las Vegas. 
I would like to tell you that these stores were my idea. In truth, I thought they were mistakes. I knew, 
of course, how brilliantly Bill Child had run the R. C. Willey operation in Utah, where its market share 
had long been huge. But I felt our closed-on-Sunday policy would prove disastrous away from home.
Even our first out-of-state store in Boise, which was highly successful, left me unconvinced. I kept
asking whether Las Vegas residents, conditioned to seven-day-a-week retailers, would adjust to us.
Our first Las Vegas store, opened in 2001, answered this question in a resounding manner,
immediately becoming our number one unit. 
Bill and Scott Hymas, his successor as CEO, then proposed a second Las Vegas store, only about 20 
minutes away. I felt this expansion would cannibalize the first unit, adding significant costs but only
modest sales. The result? Each store is now doing about 26% more volume than any other store in the 
chain and is consistently showing large year-over-year gains. 
R. C. Willey will soon open in Reno. Before making this commitment, Bill and Scott again asked for 
my advice. Initially, I was pretty puffed up about the fact that they were consulting me. But then it
dawned on me that the opinion of someone who is always wrong has its own special utility to decision￾makers.
14
• Earnings improved in flight services. At FlightSafety, the world’s leader in pilot training, profits rose 
as corporate aviation rebounded and our business with regional airlines increased. We now operate
283 simulators with an original cost of $1.2 billion. Pilots are trained one at a time on this expensive 
equipment. This means that as much as $3.50 of capital investment is required to produce $1 of annual
revenue. With this level of capital intensity, FlightSafety requires very high operating margins in order
to obtain reasonable returns on capital, which means that utilization rates are all-important. Last year, 
FlightSafety’s return on tangible equity improved to 15.1% from 8.4% in 2003. 
In another 2004 event, Al Ueltschi, who founded FlightSafety in 1951 with $10,000, turned over the 
CEO position to Bruce Whitman, a 43-year veteran at the company. (But Al’s not going anywhere; I 
won’t let him.) Bruce shares Al’s conviction that flying an aircraft is a privilege to be extended only to
people who regularly receive the highest quality of training and are undeniably competent. A few 
years ago, Charlie was asked to intervene with Al on behalf of a tycoon friend whom FlightSafety had
flunked. Al’s reply to Charlie: “Tell your pal he belongs in the back of the plane, not the cockpit.” 
FlightSafety’s number one customer is NetJets, our aircraft fractional-ownership subsidiary. Its 2,100
pilots spend an average of 18 days a year in training. Additionally, these pilots fly only one aircraft
type whereas many flight operations juggle pilots among several types. NetJets’ high standards on
both fronts are two of the reasons I signed up with the company years before Berkshire bought it.
Fully as important in my decisions to both use and buy NetJets, however, was the fact that the
company was managed by Rich Santulli, the creator of the fractional-ownership industry and a fanatic 
about safety and service. I viewed the selection of a flight provider as akin to picking a brain surgeon:
you simply want the best. (Let someone else experiment with the low bidder.) 
Last year NetJets again gained about 70% of the net new business (measured by dollar value) going to
the four companies that dominate the industry. A portion of our growth came from the 25-hour card
offered by Marquis Jet Partners. Marquis is not owned by NetJets, but is instead a customer that
repackages the purchases it makes from us into smaller packages that it sells through its card. Marquis 
deals exclusively with NetJets, utilizing the power of our reputation in its marketing. 
Our U.S. contracts, including Marquis customers, grew from 3,877 to 4,967 in 2004 (versus
approximately 1,200 contracts when Berkshire bought NetJets in 1998). Some clients (including me)
enter into multiple contracts because they wish to use more than one type of aircraft, selecting for any 
given trip whichever type best fits the mission at hand. 
NetJets earned a modest amount in the U.S. last year. But what we earned domestically was largely
offset by losses in Europe. We are now, however, generating real momentum abroad. Contracts 
(including 25-hour cards that we ourselves market in Europe) increased from 364 to 693 during the
year. We will again have a very significant European loss in 2005, but domestic earnings will likely 
put us in the black overall.
Europe has been expensive for NetJets – far more expensive than I anticipated – but it is essential to
building a flight operation that will forever be in a class by itself. Our U.S. owners already want a 
quality service wherever they travel and their wish for flight hours abroad is certain to grow
dramatically in the decades ahead. Last year, U.S. owners made 2,003 flights in Europe, up 22% from 
the previous year and 137% from 2000. Just as important, our European owners made 1,067 flights in
the U.S., up 65% from 2003 and 239% from 2000. 
15
Investments 
We show below our common stock investments. Those that had a market value of more than $600
million at the end of 2004 are itemized. 
12/31/04
Percentage of
Shares Company Company Owned Cost* Market
(in $ millions)
151,610,700 American Express Company ................... 12.1 $1,470 $ 8,546
200,000,000 The Coca-Cola Company ........................ 8.3 1,299 8,328 
96,000,000 The Gillette Company ............................. 9.7 600 4,299
14,350,600 H&R Block, Inc....................................... 8.7 223 703 
6,708,760 M&T Bank Corporation .......................... 5.8 103 723
24,000,000 Moody’s Corporation .............................. 16.2 499 2,084
2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 488 1,249
1,727,765 The Washington Post Company .............. 18.1 11 1,698 
56,448,380 Wells Fargo & Company......................... 3.3 463 3,508 
1,724,200 White Mountains Insurance..................... 16.0 369 1,114
Others...................................................... 3,531 5,465
Total Common Stocks............................. $9,056 $37,717
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required. 
Some people may look at this table and view it as a list of stocks to be bought and sold based upon 
chart patterns, brokers’ opinions, or estimates of near-term earnings. Charlie and I ignore such distractions
and instead view our holdings as fractional ownerships in businesses. This is an important distinction.
Indeed, this thinking has been the cornerstone of my investment behavior since I was 19. At that time I
read Ben Graham’s The Intelligent Investor, and the scales fell from my eyes. (Previously, I had been 
entranced by the stock market, but didn’t have a clue about how to invest.)
Let’s look at how the businesses of our “Big Four” – American Express, Coca-Cola, Gillette and 
Wells Fargo – have fared since we bought into these companies. As the table shows, we invested $3.83 
billion in the four, by way of multiple transactions between May 1988 and October 2003. On a composite 
basis, our dollar-weighted purchase date is July 1992. By yearend 2004, therefore, we had held these 
“business interests,” on a weighted basis, about 12½ years.
In 2004, Berkshire’s share of the group’s earnings amounted to $1.2 billion. These earnings might 
legitimately be considered “normal.” True, they were swelled because Gillette and Wells Fargo omitted 
option costs in their presentation of earnings; but on the other hand they were reduced because Coke had a 
non-recurring write-off.
Our share of the earnings of these four companies has grown almost every year, and now amounts
to about 31.3% of our cost. Their cash distributions to us have also grown consistently, totaling $434 
million in 2004, or about 11.3% of cost. All in all, the Big Four have delivered us a satisfactory, though far
from spectacular, business result. 
That’s true as well of our experience in the market with the group. Since our original purchases, 
valuation gains have somewhat exceeded earnings growth because price/earnings ratios have increased. On 
a year-to-year basis, however, the business and market performances have often diverged, sometimes to an
extraordinary degree. During The Great Bubble, market-value gains far outstripped the performance of the
businesses. In the aftermath of the Bubble, the reverse was true. 
16
Clearly, Berkshire’s results would have been far better if I had caught this swing of the pendulum.
That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, 
however, it’s the windshield through which investors must peer, and that glass is invariably fogged. Our
huge positions add to the difficulty of our nimbly dancing in and out of holdings as valuations swing. 
Nevertheless, I can properly be criticized for merely clucking about nose-bleed valuations during
the Bubble rather than acting on my views. Though I said at the time that certain of the stocks we held
were priced ahead of themselves, I underestimated just how severe the overvaluation was. I talked when I 
should have walked. 
What Charlie and I would like is a little action now. We don’t enjoy sitting on $43 billion of cash 
equivalents that are earning paltry returns. Instead, we yearn to buy more fractional interests similar to
those we now own or – better still – more large businesses outright. We will do either, however, only when
purchases can be made at prices that offer us the prospect of a reasonable return on our investment. 
* * * * * * * * * * * * 
We’ve repeatedly emphasized that the “realized” gains that we report quarterly or annually are 
meaningless for analytical purposes. We have a huge amount of unrealized gains on our books, and our 
thinking about when, and if, to cash them depends not at all on a desire to report earnings at one specific
time or another. A further complication in our reported gains occurs because GAAP requires that foreign
exchange contracts be marked to market, a stipulation that causes unrealized gains or losses in these 
holdings to flow through our published earnings as if we had sold our positions. 
Despite the problems enumerated, you may be interested in a breakdown of the gains we reported 
in 2003 and 2004. The data reflect actual sales except in the case of currency gains, which are a 
combination of sales and marks to market. 
Category Pre-Tax Gain (in $ millions)
2004 2003
Common Stocks ............................. $ 870 $ 448 
U.S. Government Bonds................. 104 1,485
Junk Bonds..................................... 730 1,138 
Foreign Exchange Contracts........... 1,839 825
Other............................................... (47) 233
Total ............................................... $3,496 $4,129
The junk bond profits include a foreign exchange component. When we bought these bonds in
2001 and 2002, we focused first, of course, on the credit quality of the issuers, all of which were American
corporations. Some of these companies, however, had issued bonds denominated in foreign currencies. 
Because of our views on the dollar, we favored these for purchase when they were available. 
As an example, we bought €254 million of Level 3 bonds (10 ¾% of 2008) in 2001 at 51.7% of
par, and sold these at 85% of par in December 2004. This issue was traded in Euros that cost us 88¢ at the
time of purchase but that brought $1.29 when we sold. Thus, of our $163 million overall gain, about $85 
million came from the market’s revised opinion about Level 3’s credit quality, with the remaining $78 
million resulting from the appreciation of the Euro. (In addition, we received cash interest during our
holding period that amounted to about 25% annually on our dollar cost.)
* * * * * * * * * * * * 
The media continue to report that “Buffett buys” this or that stock. Statements like these are 
almost always based on filings Berkshire makes with the SEC and are therefore wrong. As I’ve said
before, the stories should say “Berkshire buys.” 
17
Portrait of a Disciplined Investor 
Lou Simpson 
Return from
Year GEICO Equities S&P Return Relative Results
1980 ................................................ 23.7% 32.3% (8.6%)
1981 ................................................ 5.4% (5.0%) 10.4%
1982 ................................................ 45.8% 21.4% 24.4%
1983 ................................................ 36.0% 22.4% 13.6%
1984 ................................................ 21.8% 6.1% 15.7%
1985 ................................................ 45.8% 31.6% 14.2%
1986 ................................................ 38.7% 18.6% 20.1%
1987 ................................................ (10.0%) 5.1% (15.1%)
1988 ................................................ 30.0% 16.6% 13.4%
1989 ................................................ 36.1% 31.7% 4.4%
1990 ................................................ (9.9%) (3.1%) (6.8%)
1991 ................................................ 56.5% 30.5% 26.0%
1992 ................................................ 10.8% 7.6% 3.2%
1993 ................................................ 4.6% 10.1% (5.5%)
1994 ................................................ 13.4% 1.3% 12.1%
1995 ................................................ 39.8% 37.6% 2.2%
1996 ................................................ 29.2% 23.0% 6.2%
1997 ................................................ 24.6% 33.4% (8.8%)
1998 ................................................ 18.6% 28.6% (10.0%)
1999 ................................................ 7.2% 21.0% (13.8%)
2000 ................................................ 20.9% (9.1%) 30.0%
2001 ................................................ 5.2% (11.9%) 17.1%
2002 ................................................ (8.1%) (22.1%) 14.0%
2003 ................................................ 38.3% 28.7% 9.6%
2004 ................................................ 16.9% 10.9% 6.0%
Average Annual Gain 1980-2004 20.3% 13.5% 6.8%
18
Even then, it is typically not I who make the buying decisions. Lou Simpson manages about $2½
billion of equities that are held by GEICO, and it is his transactions that Berkshire is usually reporting.
Customarily his purchases are in the $200-$300 million range and are in companies that are smaller than 
the ones I focus on. Take a look at the facing page to see why Lou is a cinch to be inducted into the
investment Hall of Fame. 
You may be surprised to learn that Lou does not necessarily inform me about what he is doing.
When Charlie and I assign responsibility, we truly hand over the baton – and we give it to Lou just as we 
do to our operating managers. Therefore, I typically learn of Lou’s transactions about ten days after the 
end of each month. Sometimes, it should be added, I silently disagree with his decisions. But he’s usually right.
Foreign Currencies 
Berkshire owned about $21.4 billion of foreign exchange contracts at yearend, spread among 12 
currencies. As I mentioned last year, holdings of this kind are a decided change for us. Before March
2002, neither Berkshire nor I had ever traded in currencies. But the evidence grows that our trade policies
will put unremitting pressure on the dollar for many years to come – so since 2002 we’ve heeded that
warning in setting our investment course. (As W.C. Fields once said when asked for a handout: “Sorry,
son, all my money’s tied up in currency.”)
Be clear on one point: In no way does our thinking about currencies rest on doubts about America. 
We live in an extraordinarily rich country, the product of a system that values market economics, the rule 
of law and equality of opportunity. Our economy is far and away the strongest in the world and will 
continue to be. We are lucky to live here. 
But as I argued in a November 10, 2003 article in Fortune, (available at berkshirehathaway.com),
our country’s trade practices are weighing down the dollar. The decline in its value has already been
substantial, but is nevertheless likely to continue. Without policy changes, currency markets could even
become disorderly and generate spillover effects, both political and financial. No one knows whether these 
problems will materialize. But such a scenario is a far-from-remote possibility that policymakers should be
considering now. Their bent, however, is to lean toward not-so-benign neglect: A 318-page Congressional
study of the consequences of unremitting trade deficits was published in November 2000 and has been 
gathering dust ever since. The study was ordered after the deficit hit a then-alarming $263 billion in 1999; 
by last year it had risen to $618 billion. 
Charlie and I, it should be emphasized, believe that true trade – that is, the exchange of goods and 
services with other countries – is enormously beneficial for both us and them. Last year we had $1.15
trillion of such honest-to-God trade and the more of this, the better. But, as noted, our country also 
purchased an additional $618 billion in goods and services from the rest of the world that was 
unreciprocated. That is a staggering figure and one that has important consequences. 
The balancing item to this one-way pseudo-trade — in economics there is always an offset — is a
transfer of wealth from the U.S. to the rest of the world. The transfer may materialize in the form of IOUs
our private or governmental institutions give to foreigners, or by way of their assuming ownership of our 
assets, such as stocks and real estate. In either case, Americans end up owning a reduced portion of our 
country while non-Americans own a greater part. This force-feeding of American wealth to the rest of the 
world is now proceeding at the rate of $1.8 billion daily, an increase of 20% since I wrote you last year. 
Consequently, other countries and their citizens now own a net of about $3 trillion of the U.S. A decade
ago their net ownership was negligible. 
The mention of trillions numbs most brains. A further source of confusion is that the current
account deficit (the sum of three items, the most important by far being the trade deficit) and our national 
budget deficit are often lumped as “twins.” They are anything but. They have different causes and 
different consequences. 
19
A budget deficit in no way reduces the portion of the national pie that goes to Americans. As long 
as other countries and their citizens have no net ownership of the U.S., 100% of our country’s output 
belongs to our citizens under any budget scenario, even one involving a huge deficit.
As a rich “family” awash in goods, Americans will argue through their legislators as to how 
government should redistribute the national output – that is who pays taxes and who receives governmental
benefits. If “entitlement” promises from an earlier day have to be reexamined, “family members” will 
angrily debate among themselves as to who feels the pain. Maybe taxes will go up; maybe promises will 
be modified; maybe more internal debt will be issued. But when the fight is finished, all of the family’s 
huge pie remains available for its members, however it is divided. No slice must be sent abroad. 
Large and persisting current account deficits produce an entirely different result. As time passes, 
and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world 
enjoys an ever-growing royalty on American output. Here, we are like a family that consistently
overspends its income. As time passes, the family finds that it is working more and more for the “finance
company” and less for itself. 
Should we continue to run current account deficits comparable to those now prevailing, the net 
ownership of the U.S. by other countries and their citizens a decade from now will amount to roughly $11 
trillion. And, if foreign investors were to earn only 5% on that net holding, we would need to send a net of
$.55 trillion of goods and services abroad every year merely to service the U.S. investments then held by
foreigners. At that date, a decade out, our GDP would probably total about $18 trillion (assuming low 
inflation, which is far from a sure thing). Therefore, our U.S. “family” would then be delivering 3% of its
annual output to the rest of the world simply as tribute for the overindulgences of the past. In this case, 
unlike that involving budget deficits, the sons would truly pay for the sins of their fathers. 
This annual royalty paid the world – which would not disappear unless the U.S. massively
underconsumed and began to run consistent and large trade surpluses – would undoubtedly produce
significant political unrest in the U.S. Americans would still be living very well, indeed better than now 
because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to
their creditors and owners abroad. A country that is now aspiring to an “Ownership Society” will not find
happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society.” But that’s precisely
where our trade policies, supported by Republicans and Democrats alike, are taking us. 
Many prominent U.S. financial figures, both in and out of government, have stated that our 
current-account deficits cannot persist. For instance, the minutes of the Federal Reserve Open Market
Committee of June 29-30, 2004 say: “The staff noted that outsized external deficits could not be sustained 
indefinitely.” But, despite the constant handwringing by luminaries, they offer no substantive suggestions
to tame the burgeoning imbalance. 
In the article I wrote for Fortune 16 months ago, I warned that “a gently declining dollar would
not provide the answer.” And so far it hasn’t. Yet policymakers continue to hope for a “soft landing,”
meanwhile counseling other countries to stimulate (read “inflate”) their economies and Americans to save 
more. In my view these admonitions miss the mark: There are deep-rooted structural problems that will
cause America to continue to run a huge current-account deficit unless trade policies either change 
materially or the dollar declines by a degree that could prove unsettling to financial markets. 
Proponents of the trade status quo are fond of quoting Adam Smith: “What is prudence in the
conduct of every family can scarce be folly in that of a great kingdom. If a foreign country can supply us
with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the
produce of our own industry, employed in a way in which we have some advantage.” 
I agree. Note, however, that Mr. Smith’s statement refers to trade of product for product, not of
wealth for product as our country is doing to the tune of $.6 trillion annually. Moreover, I am sure that he
would never have suggested that “prudence” consisted of his “family” selling off part of its farm every day 
20
in order to finance its overconsumption. Yet that is just what the “great kingdom” called the United States
is doing.
If the U.S. was running a $.6 trillion current-account surplus, commentators worldwide would
violently condemn our policy, viewing it as an extreme form of “mercantilism” – a long-discredited
economic strategy under which countries fostered exports, discouraged imports, and piled up treasure. I
would condemn such a policy as well. But, in effect if not in intent, the rest of the world is practicing 
mercantilism in respect to the U.S., an act made possible by our vast store of assets and our pristine credit 
history. Indeed, the world would never let any other country use a credit card denominated in its own 
currency to the insatiable extent we are employing ours. Presently, most foreign investors are sanguine:
they may view us as spending junkies, but they know we are rich junkies as well. 
Our spendthrift behavior won’t, however, be tolerated indefinitely. And though it’s impossible to
forecast just when and how the trade problem will be resolved, it’s improbable that the resolution will 
foster an increase in the value of our currency relative to that of our trading partners. 
We hope the U.S. adopts policies that will quickly and substantially reduce the current-account 
deficit. True, a prompt solution would likely cause Berkshire to record losses on its foreign-exchange
contracts. But Berkshire’s resources remain heavily concentrated in dollar-based assets, and both a strong
dollar and a low-inflation environment are very much in our interest. 
If you wish to keep abreast of trade and currency matters, read The Financial Times. This 
London-based paper has long been the leading source for daily international financial news and now has an 
excellent American edition. Both its reporting and commentary on trade are first-class. 
* * * * * * * * * * * * 
And, again, our usual caveat: macro-economics is a tough game in which few people, Charlie and 
I included, have demonstrated skill. We may well turn out to be wrong in our currency judgments. 
(Indeed, the fact that so many pundits now predict weakness for the dollar makes us uneasy.) If so, our 
mistake will be very public. The irony is that if we chose the opposite course, leaving all of Berkshire’s
assets in dollars even as they declined significantly in value, no one would notice our mistake. 
John Maynard Keynes said in his masterful The General Theory: “Worldly wisdom teaches that it 
is better for reputation to fail conventionally than to succeed unconventionally.” (Or, to put it in less elegant 
terms, lemmings as a class may be derided but never does an individual lemming get criticized.) From a
reputational standpoint, Charlie and I run a clear risk with our foreign-exchange commitment. But we 
believe in managing Berkshire as if we owned 100% of it ourselves. And, were that the case, we would not
be following a dollar-only policy. 
Miscellaneous 
• Last year I told you about a group of University of Tennessee finance students who played a key 
role in our $1.7 billion acquisition of Clayton Homes. Earlier, they had been brought to Omaha by
their professor, Al Auxier – he brings a class every year – to tour Nebraska Furniture Mart and
Borsheim’s, eat at Gorat’s and have a Q&A session with me at Kiewit Plaza. These visitors, like
those who come for our annual meeting, leave impressed by both the city and its friendly
residents. 
Other colleges and universities have now come calling. This school year we will have visiting 
classes, ranging in size from 30 to 100 students, from Chicago, Dartmouth (Tuck), Delaware State, 
Florida State, Indiana, Iowa, Iowa State, Maryland, Nebraska, Northwest Nazarene, Pennsylvania 
(Wharton), Stanford, Tennessee, Texas, Texas A&M, Toronto (Rotman), Union and Utah. Most
of the students are MBA candidates, and I’ve been impressed by their quality. They are keenly
interested in business and investments, but their questions indicate that they also have more on
their minds than simply making money. I always feel good after meeting them. 
21
At our sessions, I tell the newcomers the story of the Tennessee group and its spotting of Clayton 
Homes. I do this in the spirit of the farmer who enters his hen house with an ostrich egg and 
admonishes the flock: “I don’t like to complain, girls, but this is just a small sample of what the 
competition is doing.” To date, our new scouts have not brought us deals. But their mission in 
life has been made clear to them. 
• You should be aware of an accounting rule that mildly distorts our financial statements in a pain￾today, gain-tomorrow manner. Berkshire purchases life insurance policies from individuals and
corporations who would otherwise surrender them for cash. As the new holder of the policies, we 
pay any premiums that become due and ultimately – when the original holder dies – collect the 
face value of the policies. 
The original policyholder is usually in good health when we purchase the policy. Still, the price 
we pay for it is always well above its cash surrender value (“CSV”). Sometimes the original 
policyholder has borrowed against the CSV to make premium payments. In that case, the
remaining CSV will be tiny and our purchase price will be a large multiple of what the original
policyholder would have received, had he cashed out by surrendering it. 
Under accounting rules, we must immediately charge as a realized capital loss the excess over 
CSV that we pay upon purchasing the policy. We also must make additional charges each year for 
the amount by which the premium we pay to keep the policy in force exceeds the increase in CSV.
But obviously, we don’t think these bookkeeping charges represent economic losses. If we did, 
we wouldn’t buy the policies. 
During 2004, we recorded net “losses” from the purchase of policies (and from the premium
payments required to maintain them) totaling $207 million, which was charged against realized
investment gains in our earnings statement (included in “other” in the table on page 17). When
the proceeds from these policies are received in the future, we will record as realized investment
gain the excess over the then-CSV. 
• Two post-bubble governance reforms have been particularly useful at Berkshire, and I fault myself
for not putting them in place many years ago. The first involves regular meetings of directors 
without the CEO present. I’ve sat on 19 boards, and on many occasions this process would have
led to dubious plans being examined more thoroughly. In a few cases, CEO changes that were 
needed would also have been made more promptly. There is no downside to this process, and
there are many possible benefits. 
The second reform concerns the “whistleblower line,” an arrangement through which employees 
can send information to me and the board’s audit committee without fear of reprisal. Berkshire’s
extreme decentralization makes this system particularly valuable both to me and the committee.
(In a sprawling “city” of 180,000 – Berkshire’s current employee count – not every sparrow that
falls will be noticed at headquarters.) Most of the complaints we have received are of “the guy 
next to me has bad breath” variety, but on occasion I have learned of important problems at our 
subsidiaries that I otherwise would have missed. The issues raised are usually not of a type 
discoverable by audit, but relate instead to personnel and business practices. Berkshire would be
more valuable today if I had put in a whistleblower line decades ago.
• Charlie and I love the idea of shareholders thinking and behaving like owners. Sometimes that
requires them to be pro-active. And in this arena large institutional owners should lead the way. 
So far, however, the moves made by institutions have been less than awe-inspiring. Usually, 
they’ve focused on minutiae and ignored the three questions that truly count. First, does the 
company have the right CEO? Second, is he/she overreaching in terms of compensation? Third,
are proposed acquisitions more likely to create or destroy per-share value?
22
On such questions, the interests of the CEO may well differ from those of the shareholders. 
Directors, moreover, sometimes lack the knowledge or gumption to overrule the CEO. Therefore, 
it’s vital that large owners focus on these three questions and speak up when necessary. 
Instead many simply follow a “checklist” approach to the issue du jour. Last year I was on the
receiving end of a judgment reached in that manner. Several institutional shareholders and their 
advisors decided I lacked “independence” in my role as a director of Coca-Cola. One group 
wanted me removed from the board and another simply wanted me booted from the audit 
committee. 
My first impulse was to secretly fund the group behind the second idea. Why anyone would wish
to be on an audit committee is beyond me. But since directors must be assigned to one committee
or another, and since no CEO wants me on his compensation committee, it’s often been my lot to
get an audit committee assignment. As it turned out, the institutions that opposed me failed and I 
was re-elected to the audit job. (I fought off the urge to ask for a recount.) 
Some institutions questioned my “independence” because, among other things, McLane and Dairy 
Queen buy lots of Coke products. (Do they want us to favor Pepsi?) But independence is defined 
in Webster’s as “not subject to control by others.” I’m puzzled how anyone could conclude that 
our Coke purchases would “control” my decision-making when the counterweight is the well￾being of $8 billion of Coke stock held by Berkshire. Assuming I’m even marginally rational,
elementary arithmetic should make it clear that my heart and mind belong to the owners of Coke, 
not to its management. 
I can’t resist mentioning that Jesus understood the calibration of independence far more clearly
than do the protesting institutions. In Matthew 6:21 He observed: “For where your treasure is,
there will your heart be also.” Even to an institutional investor, $8 billion should qualify as
“treasure” that dwarfs any profits Berkshire might earn on its routine transactions with Coke. 
Measured by the biblical standard, the Berkshire board is a model: (a) every director is a member
of a family owning at least $4 million of stock; (b) none of these shares were acquired from 
Berkshire via options or grants; (c) no directors receive committee, consulting or board fees from 
the company that are more than a tiny portion of their annual income; and (d) although we have a 
standard corporate indemnity arrangement, we carry no liability insurance for directors. 
At Berkshire, board members travel the same road as shareholders. 
* * * * * * * * * * * * 
Charlie and I have seen much behavior confirming the Bible’s “treasure” point. In our view, 
based on our considerable boardroom experience, the least independent directors are likely to be
those who receive an important fraction of their annual income from the fees they receive for 
board service (and who hope as well to be recommended for election to other boards and thereby
to boost their income further). Yet these are the very board members most often classed as
“independent.”
Most directors of this type are decent people and do a first-class job. But they wouldn’t be human 
if they weren’t tempted to thwart actions that would threaten their livelihood. Some may go on to
succumb to such temptations. 
Let’s look at an example based upon circumstantial evidence. I have first-hand knowledge of a 
recent acquisition proposal (not from Berkshire) that was favored by management, blessed by the
company’s investment banker and slated to go forward at a price above the level at which the 
stock had sold for some years (or now sells for). In addition, a number of directors favored the
transaction and wanted it proposed to shareholders. 
23
Several of their brethren, however, each of whom received board and committee fees totaling 
about $100,000 annually, scuttled the proposal, which meant that shareholders never learned of 
this multi-billion offer. Non-management directors owned little stock except for shares they had
received from the company. Their open-market purchases in recent years had meanwhile been 
nominal, even though the stock had sold far below the acquisition price proposed. In other words,
these directors didn’t want the shareholders to be offered X even though they had consistently
declined the opportunity to buy stock for their own account at a fraction of X. 
I don’t know which directors opposed letting shareholders see the offer. But I do know that 
$100,000 is an important portion of the annual income of some of those deemed “independent,”
clearly meeting the Matthew 6:21 definition of “treasure.” If the deal had gone through, these fees
would have ended.
Neither the shareholders nor I will ever know what motivated the dissenters. Indeed they
themselves will not likely know, given that self-interest inevitably blurs introspection. We do
know one thing, though: At the same meeting at which the deal was rejected, the board voted itself 
a significant increase in directors’ fees. 
• While we are on the subject of self-interest, let’s turn again to the most important accounting
mechanism still available to CEOs who wish to overstate earnings: the non-expensing of stock 
options. The accomplices in perpetuating this absurdity have been many members of Congress
who have defied the arguments put forth by all Big Four auditors, all members of the Financial
Accounting Standards Board and virtually all investment professionals. 
I’m enclosing an op-ed piece I wrote for The Washington Post describing a truly breathtaking bill
that was passed 312-111 by the House last summer. Thanks to Senator Richard Shelby, the Senate
didn’t ratify the House’s foolishness. And, to his great credit, Bill Donaldson, the investor￾minded Chairman of the SEC, has stood firm against massive political pressure, generated by the
check-waving CEOs who first muscled Congress in 1993 about the issue of option accounting and 
then repeated the tactic last year. 
Because the attempts to obfuscate the stock-option issue continue, it’s worth pointing out that no 
one – neither the FASB, nor investors generally, nor I – are talking about restricting the use of
options in any way. Indeed, my successor at Berkshire may well receive much of his pay via
options, albeit logically-structured ones in respect to 1) an appropriate strike price, 2) an escalation 
in price that reflects the retention of earnings, and 3) a ban on his quickly disposing of any shares 
purchased through options. We cheer arrangements that motivate managers, whether these be
cash bonuses or options. And if a company is truly receiving value for the options it issues, we 
see no reason why recording their cost should cut down on their use. 
The simple fact is that certain CEOs know their own compensation would be far more rationally 
determined if options were expensed. They also suspect that their stock would sell at a lower price 
if realistic accounting were employed, meaning that they would reap less in the market when they
unloaded their personal holdings. To these CEOs such unpleasant prospects are a fate to be fought
with all the resources they have at hand – even though the funds they use in that fight normally 
don’t belong to them, but are instead put up by their shareholders. 
Option-expensing is scheduled to become mandatory on June 15th. You can therefore expect 
intensified efforts to stall or emasculate this rule between now and then. Let your Congressman
and Senators know what you think on this issue. 
24
The Annual Meeting
There are two changes this year concerning the annual meeting. First, we have scheduled the
meeting for the last Saturday in April (the 30th), rather than the usual first Saturday in May. This year 
Mother’s Day falls on May 8, and it would be unfair to ask the employees of Borsheim’s and Gorat’s to
take care of us at that special time – so we’ve moved everything up a week. Next year we’ll return to our
regular timing, holding the meeting on May 6, 2006. 
Additionally, we are changing the sequence of events on meeting day, April 30. Just as always, 
the doors will open at the Qwest Center at 7 a.m. and the movie will be shown at 8:30. At 9:30, however,
we will go directly to the question and answer period, which (allowing for lunch at the Qwest’s stands) will
last until 3:00. Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. 
We have made this change because a number of shareholders complained last year about the time
consumed by two speakers who advocated proposals of limited interest to the majority of the audience – 
and who were no doubt relishing their chance to talk to a captive group of about 19,500. With our new 
procedure, those shareholders who wish to hear it all can stick around for the formal meeting and those who
don’t can leave – or better yet shop. 
There will be plenty of opportunity for that pastime in the vast exhibition hall that adjoins the 
meeting area. Kelly Muchemore, the Flo Ziegfeld of Berkshire, put on a magnificent shopping
extravaganza last year, and she says that was just a warm-up for this year. (Kelly, I am delighted to report,
is getting married in October. I’m giving her away and suggested that she make a little history by holding 
the wedding at the annual meeting. She balked, however, when Charlie insisted that he be the ringbearer.) 
Again we will showcase a 2,100 square foot Clayton home (featuring Acme brick, Shaw carpet, 
Johns Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). Take a tour through
the home. Better yet, buy it. 
GEICO will have a booth staffed by a number of its top counselors from around the country, all of 
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a 
special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in
which we operate. Bring the details of your existing insurance and check out whether we can save you 
money.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets® 
available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. 
Come to Omaha by bus; leave in your new plane. 
The Bookworm shop did a terrific business last year selling Berkshire-related books. Displaying
18 titles, they sold 2,920 copies for $61,000. Since we charge the shop no rent (I must be getting soft), it 
gives shareholders a 20% discount. This year I’ve asked The Bookworm to add Graham Allison’s Nuclear
Terrorism: The Ultimate Preventable Catastrophe, a must-read for those concerned with the safety of our
country. In addition, the shop will premiere Poor Charlie’s Almanack, a book compiled by Peter Kaufman. 
Scholars have for too long debated whether Charlie is the reincarnation of Ben Franklin. This book should 
settle the question.
An attachment to the proxy material that is enclosed with this report explains how you can obtain
the credential you will need for admission to the meeting and other events. As for plane, hotel and car 
reservations, we have again signed up American Express (800-799-6634) to give you special help. They do
a terrific job for us each year, and I thank them for it. 
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, 
we will again be having “Berkshire Weekend” pricing. We initiated this special event at NFM eight years 
ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $25.1 million in 2004 (up 45%
25
from a year earlier). Every year has set a new record, and on Saturday of last year, we had the largest
single-day sales in NFM’s history – $6.1 million. 
To get the discount, you must make your purchases between Thursday, April 28 and Monday, 
May 2 inclusive, and also present your meeting credential. The period’s special pricing will even apply to
the products of several prestigious manufacturers that normally have ironclad rules against discounting but
that, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their 
cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on
Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m. we are having a special affair for shareholders
only. I’ll be there, eating barbeque and drinking Coke. 
Borsheim’s – the largest jewelry store in the country except for Tiffany’s Manhattan store – will 
have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, 
April 29. The second, the main gala, will be from 9 a.m. to 4 p.m. on Sunday, May 1. On Saturday, we 
will be open until 6 p.m. 
We will have huge crowds at Borsheim’s throughout the weekend. For your convenience, 
therefore, shareholder prices will be available from Monday, April 25 through Saturday, May 7. During 
that period, just identify yourself as a shareholder through your meeting credentials or a brokerage 
statement. 
Borsheim’s operates on a gross margin that is fully twenty percentage points below that of its 
major rivals, even before the shareholders’ discount. Last year, business over the weekend increased 73% 
from 2003, setting a record that will be tough to beat. Show me it can be done. 
In a tent outside of Borsheim’s, Patrick Wolff, twice U.S. chess champion, will take on all comers 
in groups of six – blindfolded. Additionally, we will have Bob Hamman and Sharon Osberg, two of the 
world’s top bridge experts, available to play with our shareholders on Sunday afternoon. They plan to keep 
their eyes open – but Bob never sorts his cards, even when playing for a national championship. 
Gorat’s – my favorite steakhouse – will again be open exclusively for Berkshire shareholders on
Sunday, May 1, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on
that day, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If 
Sunday is sold out, try Gorat’s on one of the other evenings you will be in town. Enhance your reputation 
as an epicure by ordering, as I do, a rare T-bone with a double helping of hash browns. 
We will again have a special reception from 4:00 to 5:30 on Saturday afternoon for shareholders 
who have come from outside of North America. Every year our meeting draws many people from around
the globe, and Charlie and I want to be sure we personally greet those who have come so far. Last year we
enjoyed meeting more than 400 of you including at least 100 from Australia. Any shareholder who comes
from other than the U.S. or Canada will be given a special credential and instructions for attending this
function. 
* * * * * * * * * * * * 
Charlie and I are lucky. We have jobs that we love and are helped every day in a myriad of ways
by talented and cheerful associates. No wonder we tap-dance to work. But nothing is more fun for us than
getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on April 30th at the
Qwest for our annual Woodstock for Capitalists. 
February 28, 2005 Warren E. Buffett 
 Chairman of the Board 
26
Note: The following table appears in the printed Annual Report on the facing page of the Chairman's Letter
2 
Berkshire’s Corporate Performance vs. the S&P 500 
 Annual Percentage Change 
in Per-Share in S&P 500 
Book Value of with Dividends Relative 
Berkshire Included Results 
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8 
1966 .................................................. 20.3 (11.7) 32.0 
1967 .................................................. 11.0 30.9 (19.9) 
1968 .................................................. 19.0 11.0 8.0 
1969 .................................................. 16.2 (8.4) 24.6 
1970 .................................................. 12.0 3.9 8.1 
1971 .................................................. 16.4 14.6 1.8 
1972 .................................................. 21.7 18.9 2.8 
1973 .................................................. 4.7 (14.8) 19.5 
1974 .................................................. 5.5 (26.4) 31.9 
1975 .................................................. 21.9 37.2 (15.3) 
1976 .................................................. 59.3 23.6 35.7 
1977 .................................................. 31.9 (7.4) 39.3 
1978 .................................................. 24.0 6.4 17.6 
1979 .................................................. 35.7 18.2 17.5 
1980 .................................................. 19.3 32.3 (13.0) 
1981 .................................................. 31.4 (5.0) 36.4 
1982 .................................................. 40.0 21.4 18.6 
1983 .................................................. 32.3 22.4 9.9 
1984 .................................................. 13.6 6.1 7.5 
1985 .................................................. 48.2 31.6 16.6 
1986 .................................................. 26.1 18.6 7.5 
1987 .................................................. 19.5 5.1 14.4 
1988 .................................................. 20.1 16.6 3.5 
1989 .................................................. 44.4 31.7 12.7 
1990 .................................................. 7.4 (3.1) 10.5 
1991 .................................................. 39.6 30.5 9.1 
1992 .................................................. 20.3 7.6 12.7 
1993 .................................................. 14.3 10.1 4.2 
1994 .................................................. 13.9 1.3 12.6 
1995 .................................................. 43.1 37.6 5.5 
1996 .................................................. 31.8 23.0 8.8 
1997 .................................................. 34.1 33.4 .7 
1998 .................................................. 48.3 28.6 19.7 
1999 .................................................. .5 21.0 (20.5) 
2000 .................................................. 6.5 (9.1) 15.6 
2001 .................................................. (6.2) (11.9) 5.7 
2002 .................................................. 10.0 (22.1) 32.1 
2003 .................................................. 21.0 28.7 (7.7) 
2004 .................................................. 10.5 10.9 (.4) 
2005 .................................................. 6.4 4.9 1.5 
Average Annual Gain — 1965-2005 21.5 10.3 11.2 
Overall Gain — 1964-2005 305,134 5,583 
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 
 Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market 
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results 
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using 
the numbers originally reported. 
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire 
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index 
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.: 
Our gain in net worth during 2005 was $5.6 billion, which increased the per-share book value of 
both our Class A and Class B stock by 6.4%. Over the last 41 years (that is, since present management
took over) book value has grown from $19 to $59,377, a rate of 21.5% compounded annually.* 
Berkshire had a decent year in 2005. We initiated five acquisitions (two of which have yet to
close) and most of our operating subsidiaries prospered. Even our insurance business in its entirety did
well, though Hurricane Katrina inflicted record losses on both Berkshire and the industry. We estimate our 
loss from Katrina at $2.5 billion – and her ugly sisters, Rita and Wilma, cost us an additional $.9 billion. 
Credit GEICO – and its brilliant CEO, Tony Nicely – for our stellar insurance results in a disaster￾ridden year. One statistic stands out: In just two years, GEICO improved its productivity by 32%. 
Remarkably, employment fell by 4% even as policy count grew by 26% – and more gains are in store. 
When we drive unit costs down in such a dramatic manner, we can offer ever-greater value to our
customers. The payoff: Last year, GEICO gained market-share, earned commendable profits and 
strengthened its brand. If you have a new son or grandson in 2006, name him Tony. 
* * * * * * * * * * * * 
My goal in writing this report is to give you the information you need to estimate Berkshire’s 
intrinsic value. I say “estimate” because calculations of intrinsic value, though all-important, are
necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more
possibility there is that the calculation will be wildly off-base. (For an explanation of intrinsic value, see 
pages 77 – 78.) Here Berkshire has some advantages: a wide variety of relatively-stable earnings streams, 
combined with great liquidity and minimum debt. These factors mean that Berkshire’s intrinsic value can
be more precisely calculated than can the intrinsic value of most companies. 
Yet if precision is aided by Berkshire’s financial characteristics, the job of calculating intrinsic 
value has been made more complex by the mere presence of so many earnings streams. Back in 1965, 
when we owned only a small textile operation, the task of calculating intrinsic value was a snap. Now we 
own 68 distinct businesses with widely disparate operating and financial characteristics. This array of 
unrelated enterprises, coupled with our massive investment holdings, makes it impossible for you to simply
examine our consolidated financial statements and arrive at an informed estimate of intrinsic value. 
We have attempted to ease this problem by clustering our businesses into four logical groups, each
of which we discuss later in this report. In these discussions, we will provide the key figures for both the 
group and its important components. Of course, the value of Berkshire may be either greater or less than
the sum of these four parts. The outcome depends on whether our many units function better or worse by
being part of a larger enterprise and whether capital allocation improves or deteriorates when it is under the 
direction of a holding company. In other words, does Berkshire ownership bring anything to the party, or
would our shareholders be better off if they directly owned shares in each of our 68 businesses? These are
important questions but ones that you will have to answer for yourself. 
Before we look at our individual businesses, however, let’s review two sets of figures that show
where we’ve come from and where we are now. The first set is the amount of investments (including cash 
and cash-equivalents) we own on a per-share basis. In making this calculation, we exclude investments 
held in our finance operation because these are largely offset by borrowings: 
 *All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of
the A. 
3
Year Per-Share Investments* 
1965 ..................................................................... $ 4 
1975 ..................................................................... 159
1985 ..................................................................... 2,407
1995 ..................................................................... 21,817 
2005 ..................................................................... $74,129
Compound Growth Rate 1965-2005.................... 28.0% 
Compound Growth Rate 1995-2005.................... 13.0% 
 *Net of minority interests 
In addition to these marketable securities, which with minor exceptions are held in our insurance 
companies, we own a wide variety of non-insurance businesses. Below, we show the pre-tax earnings 
(excluding goodwill amortization) of these businesses, again on a per-share basis: 
Year Per-Share Earnings* 
1965 ..................................................................... $ 4 
1975 ..................................................................... 4
1985 ..................................................................... 52
1995 ..................................................................... 175
2005 ..................................................................... $2,441
Compound Growth Rate 1965-2005.................... 17.2% 
Compound Growth Rate 1995-2005.................... 30.2% 
*Pre-tax and net of minority interests 
When growth rates are under discussion, it will pay you to be suspicious as to why the beginning 
and terminal years have been selected. If either year was aberrational, any calculation of growth will be 
distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but
meaningless, growth rate. In the table above, however, the base year of 1965 was abnormally good; 
Berkshire earned more money in that year than it did in all but one of the previous ten.
As you can see from the two tables, the comparative growth rates of Berkshire’s two elements of
value have changed in the last decade, a result reflecting our ever-increasing emphasis on business
acquisitions. Nevertheless, Charlie Munger, Berkshire’s Vice Chairman and my partner, and I want to 
increase the figures in both tables. In this ambition, we hope – metaphorically – to avoid the fate of the
elderly couple who had been romantically challenged for some time. As they finished dinner on their 50th
anniversary, however, the wife – stimulated by soft music, wine and candlelight – felt a long-absent tickle 
and demurely suggested to her husband that they go upstairs and make love. He agonized for a moment
and then replied, “I can do one or the other, but not both.” 
Acquisitions 
Over the years, our current businesses, in aggregate, should deliver modest growth in operating 
earnings. But they will not in themselves produce truly satisfactory gains. We will need major acquisitions
to get that job done. 
In this quest, 2005 was encouraging. We agreed to five purchases: two that were completed last 
year, one that closed after yearend and two others that we expect to close soon. None of the deals involve 
the issuance of Berkshire shares. That’s a crucial, but often ignored, point: When a management proudly
acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their
interest in everything they own. I’ve made this kind of deal a few times myself – and, on balance, my
actions have cost you money.
4
Here are last year’s purchases: 
• On June 30 we bought Medical Protective Company (“MedPro”), a 106-year-old medical
malpractice insurer based in Fort Wayne. Malpractice insurance is tough to underwrite and has 
proved to be a graveyard for many insurers. MedPro nevertheless should do well. It will have the 
attitudinal advantage that all Berkshire insurers share, wherein underwriting discipline trumps all
other goals. Additionally, as part of Berkshire, MedPro has financial strength far exceeding that of
its competitors, a quality assuring doctors that long-to-settle claims will not end up back on their 
doorstep because their insurer failed. Finally, the company has a smart and energetic CEO, Tim 
Kenesey, who instinctively thinks like a Berkshire manager. 
• Forest River, our second acquisition, closed on August 31. A couple of months earlier, on June
21, I received a two-page fax telling me – point by point – why Forest River met the acquisition 
criteria we set forth on page 25 of this report. I had not before heard of the company, a 
recreational vehicle manufacturer with $1.6 billion of sales, nor of Pete Liegl, its owner and 
manager. But the fax made sense, and I immediately asked for more figures. These came the next
morning, and that afternoon I made Pete an offer. On June 28, we shook hands on a deal.
Pete is a remarkable entrepreneur. Some years back, he sold his business, then far smaller than
today, to an LBO operator who promptly began telling him how to run the place. Before long, 
Pete left, and the business soon sunk into bankruptcy. Pete then repurchased it. You can be sure
that I won’t be telling Pete how to manage his operation. 
Forest River has 60 plants, 5,400 employees and has consistently gained share in the RV business,
while also expanding into other areas such as boats. Pete is 61 – and definitely in an acceleration 
mode. Read the piece from RV Business that accompanies this report, and you’ll see why Pete and 
Berkshire are made for each other. 
• On November 12, 2005, an article ran in The Wall Street Journal dealing with Berkshire’s unusual
acquisition and managerial practices. In it Pete declared, “It was easier to sell my business than to 
renew my driver’s license.” 
In New York, Cathy Baron Tamraz read the article, and it struck a chord. On November 21, she 
sent me a letter that began, “As president of Business Wire, I’d like to introduce you to my
company, as I believe it fits the profile of Berkshire Hathaway subsidiary companies as detailed in
a recent Wall Street Journal article.” 
By the time I finished Cathy’s two-page letter, I felt Business Wire and Berkshire were a fit. I
particularly liked her penultimate paragraph: “We run a tight ship and keep unnecessary spending 
under wraps. No secretaries or management layers here. Yet we’ll invest big dollars to gain a
technological advantage and move the business forward.” 
I promptly gave Cathy a call, and before long Berkshire had reached agreement with Business 
Wire’s controlling shareholder, Lorry Lokey, who founded the company in 1961 (and who had 
just made Cathy CEO). I love success stories like Lorry’s. Today 78, he has built a company that 
disseminates information in 150 countries for 25,000 clients. His story, like those of many
entrepreneurs who have selected Berkshire as a home for their life’s work, is an example of what
can happen when a good idea, a talented individual and hard work converge. 
• In December we agreed to buy 81% of Applied Underwriters, a company that offers a combination 
of payroll services and workers’ compensation insurance to small businesses. A majority of
Applied’s customers are located in California. 
5
In 1998, though, when the company had 12 employees, it acquired an Omaha-based operation
with 24 employees that offered a somewhat-similar service. Sid Ferenc and Steve Menzies, who
have built Applied’s remarkable business, concluded that Omaha had many advantages as an 
operational base – a brilliant insight, I might add – and today 400 of the company’s 479 
employees are located here. 
Less than a year ago, Applied entered into a large reinsurance contract with Ajit Jain, the 
extraordinary manager of National Indemnity’s reinsurance division. Ajit was impressed by Sid 
and Steve, and they liked Berkshire’s method of operation. So we decided to join forces. We are
pleased that Sid and Steve retain 19% of Applied. They started on a shoestring only 12 years ago,
and it will be fun to see what they can accomplish with Berkshire’s backing. 
• Last spring, MidAmerican Energy, our 80.5% owned subsidiary, agreed to buy PacifiCorp, a 
major electric utility serving six Western states. An acquisition of this sort requires many
regulatory approvals, but we’ve now obtained these and expect to close this transaction soon. 
Berkshire will then buy $3.4 billion of MidAmerican’s common stock, which MidAmerican will 
supplement with $1.7 billion of borrowing to complete the purchase. You can’t expect to earn 
outsized profits in regulated utilities, but the industry offers owners the opportunity to deploy large 
sums at fair returns – and therefore, it makes good sense for Berkshire. A few years back, I said 
that we hoped to make some very large purchases in the utility field. Note the plural – we’ll be
looking for more. 
In addition to buying these new operations, we continue to make “bolt-on” acquisitions. Some
aren’t so small: Shaw, our carpet operation, spent about $550 million last year on two purchases that
furthered its vertical integration and should improve its profit margin in the future. XTRA and Clayton
Homes also made value-enhancing acquisitions. 
Unlike many business buyers, Berkshire has no “exit strategy.” We buy to keep. We do, though,
have an entrance strategy, looking for businesses in this country or abroad that meet our six criteria and are
available at a price that will produce a reasonable return. If you have a business that fits, give me a call.
Like a hopeful teenage girl, I’ll be waiting by the phone. 
Insurance 
Let’s now talk about our four sectors and start with insurance, our core business. What counts 
here is the amount of “float” and its cost over time. 
For new readers, let me explain. “Float” is money that doesn’t belong to us but that we 
temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we
provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events
that occur today do not always result in our immediately paying claims, because it sometimes takes many 
years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20
million of float that came with our 1967 entry into insurance has now increased – both by way of internal
growth and acquisitions – to $49 billion.
Float is wonderful – if it doesn’t come at a high price. Its cost is determined by underwriting 
results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have
received. When an insurer earns an underwriting profit – as has been the case at Berkshire in about half of 
the 39 years we have been in the insurance business – float is better than free. In such years, we are
actually paid for holding other people’s money. For most insurers, however, life has been far more
difficult: In aggregate, the property-casualty industry almost invariably operates at an underwriting loss. 
When that loss is large, float becomes expensive, sometimes devastatingly so. 
6
In 2004 our float cost us less than nothing, and I told you that we had a chance – absent a mega￾catastrophe – of no-cost float in 2005. But we had the mega-cat, and as a specialist in that coverage, 
Berkshire suffered hurricane losses of $3.4 billion. Nevertheless, our float was costless in 2005 because of
the superb results we had in our other insurance activities, particularly at GEICO. 
* * * * * * * * * * * * 
Auto policies in force grew by 12.1% at GEICO, a gain increasing its market share of U.S. private 
passenger auto business from about 5.6% to about 6.1%. Auto insurance is a big business: Each share￾point equates to $1.6 billion in sales. 
While our brand strength is not quantifiable, I believe it also grew significantly. When Berkshire 
acquired control of GEICO in 1996, its annual advertising expenditures were $31 million. Last year we
were up to $502 million. And I can’t wait to spend more. 
Our advertising works because we have a great story to tell: More people can save money by 
insuring with us than is the case with any other national carrier offering policies to all comers. (Some
specialized auto insurers do particularly well for applicants fitting into their niches; also, because our
national competitors use rating systems that differ from ours, they will sometimes beat our price.) Last 
year, we achieved by far the highest conversion rate – the percentage of internet and phone quotes turned
into sales – in our history. This is powerful evidence that our prices are more attractive relative to the
competition than ever before. Test us by going to GEICO.com or by calling 800-847-7536. Be sure to 
indicate you are a shareholder because that fact will often qualify you for a discount. 
I told you last year about GEICO’s entry into New Jersey in August, 2004. Drivers in that state 
love us. Our retention rate there for new policyholders is running higher than in any other state, and by
sometime in 2007, GEICO is likely to become the third largest auto insurer in New Jersey. There, as 
elsewhere, our low costs allow low prices that lead to steady gains in profitable business. 
That simple formula immediately impressed me 55 years ago when I first discovered GEICO.
Indeed, at age 21, I wrote an article about the company – it’s reproduced on page 24 – when its market
value was $7 million. As you can see, I called GEICO “The Security I Like Best.” And that’s what I still 
call it. 
* * * * * * * * * * * * 
We have major reinsurance operations at General Re and National Indemnity. The former is run 
by Joe Brandon and Tad Montross, the latter by Ajit Jain. Both units performed well in 2005 considering 
the extraordinary hurricane losses that battered the industry. 
It’s an open question whether atmospheric, oceanic or other causal factors have dramatically
changed the frequency or intensity of hurricanes. Recent experience is worrisome. We know, for instance, 
that in the 100 years before 2004, about 59 hurricanes of Category 3 strength, or greater, hit the 
Southeastern and Gulf Coast states, and that only three of these were Category 5s. We further know that in 
2004 there were three Category 3 storms that hammered those areas and that these were followed by four 
more in 2005, one of them, Katrina, the most destructive hurricane in industry history. Moreover, there 
were three Category 5s near the coast last year that fortunately weakened before landfall. 
Was this onslaught of more frequent and more intense storms merely an anomaly? Or was it 
caused by changes in climate, water temperature or other variables we don’t fully understand? And could 
these factors be developing in a manner that will soon produce disasters dwarfing Katrina? 
Joe, Ajit and I don’t know the answer to these all-important questions. What we do know is that
our ignorance means we must follow the course prescribed by Pascal in his famous wager about the 
existence of God. As you may recall, he concluded that since he didn’t know the answer, his personal 
gain/loss ratio dictated an affirmative conclusion. 
7
So guided, we’ve concluded that we should now write mega-cat policies only at prices far higher 
than prevailed last year – and then only with an aggregate exposure that would not cause us distress if shifts
in some important variable produce far more costly storms in the near future. To a lesser degree, we felt 
this way after 2004 – and cut back our writings when prices didn’t move. Now our caution has intensified.
If prices seem appropriate, however, we continue to have both the ability and the appetite to be the largest
writer of mega-cat coverage in the world. 
* * * * * * * * * * * * 
Our smaller insurers, with MedPro added to the fold, delivered truly outstanding results last year. 
However, what you see in the table below does not do full justice to their performance. That’s because we 
increased the loss reserves of MedPro by about $125 million immediately after our purchase. 
No one knows with any precision what amount will be required to pay the claims we inherited.
Medical malpractice insurance is a “long-tail” line, meaning that claims often take many years to settle. In
addition, there are other losses that have occurred, but that we won’t even hear about for some time. One 
thing, though, we have learned – the hard way – after many years in the business: Surprises in insurance are 
far from symmetrical. You are lucky if you get one that is pleasant for every ten that go the other way. 
Too often, however, insurers react to looming loss problems with optimism. They behave like the fellow in 
a switchblade fight who, after his opponent has taken a mighty swipe at his throat, exclaimed, “You never
touched me.” His adversary’s reply: “Just wait until you try to shake your head.” 
Excluding the reserves we added for prior periods, MedPro wrote at an underwriting profit. And 
our other primary companies, in aggregate, had an underwriting profit of $324 million on $1,270 million of
volume. This is an extraordinary result, and our thanks go to Rod Eldred of Berkshire Hathaway
Homestate Companies, John Kizer of Central States Indemnity, Tom Nerney of U. S. Liability, Don Towle 
of Kansas Bankers Surety and Don Wurster of National Indemnity. 
Here’s the overall tally on our underwriting and float for each major sector of insurance:
(in $ millions)
Underwriting Profit (Loss) Yearend Float
Insurance Operations 2005 2004 2005 2004
General Re ....................... $( 334) $ 3 $22,920 $23,120 
B-H Reinsurance.............. (1,069) 417 16,233 15,278 
GEICO ............................. 1,221 970 6,692 5,960
Other Primary................... 235* 161 3,442 1,736
Total................................. $ 53 $1,551 $49,287 $46,094
*Includes MedPro from June 30, 2005. 
Regulated Utility Business 
We have an 80.5% (fully diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.7 million electric customers make it the third largest distributor of electricity in the U.K.; (2) 
MidAmerican Energy, which serves 706,000 electric customers, primarily in Iowa; and (3) Kern River and 
Northern Natural pipelines, which carry 7.8% of the natural gas consumed in the U.S. When our PacifiCorp
acquisition closes, we will add 1.6 million electric customers in six Western states, with Oregon and Utah
providing us the most business. This transaction will increase MidAmerican’s revenues by $3.3 billion and
its assets by $14.1 billion.
8
The Public Utility Holding Company Act (“PUHCA”) was repealed on August 8, 2005, a 
milestone that allowed Berkshire to convert its MidAmerican preferred stock into voting common shares on 
February 9, 2006. This conversion ended a convoluted corporate arrangement that PUHCA had forced
upon us. Now we have 83.4% of both the common stock and the votes at MidAmerican, which allows us 
to consolidate the company’s income for financial accounting and tax purposes. Our true economic
interest, however, is the aforementioned 80.5%, since there are options outstanding that are sure to be 
exercised within a few years and that upon exercise will dilute our ownership.
Though our voting power has increased dramatically, the dynamics of our four-party ownership 
have not changed at all. We view MidAmerican as a partnership among Berkshire, Walter Scott, and two 
terrific managers, Dave Sokol and Greg Abel. It’s unimportant how many votes each party has; we will 
make major moves only when we are unanimous in thinking them wise. Five years of working with Dave,
Greg and Walter have underscored my original belief: Berkshire couldn’t have better partners. 
You will notice that this year we have provided you with two balance sheets, one representing our 
actual figures per GAAP on December 31, 2005 (which does not consolidate MidAmerican) and one that 
reflects the subsequent conversion of our preferred. All future financial reports of Berkshire will include
MidAmerican’s figures. 
Somewhat incongruously, MidAmerican owns the second largest real estate brokerage firm in the 
U.S. And it’s a gem. The parent company’s name is HomeServices of America, but our 19,200 agents 
operate through 18 locally-branded firms. Aided by three small acquisitions, we participated in $64 billion 
of transactions last year, up 6.5% from 2004.
Currently, the white-hot market in residential real estate of recent years is cooling down, and that
should lead to additional acquisition possibilities for us. Both we and Ron Peltier, the company’s CEO,
expect HomeServices to be far larger a decade from now. 
Here are some key figures on MidAmerican’s operations: 
Earnings (in $ millions)
2005 2004
U.K. utilities....................................................................................................... $ 308 $ 326 
Iowa utility ......................................................................................................... 288 268
Pipelines............................................................................................................. 309 288
HomeServices..................................................................................................... 148 130
Other (net) .......................................................................................................... 107 172
Income (loss) from discontinued zinc project .................................................... 8 (579) 
Earnings before corporate interest and taxes...................................................... 1,168 605
Interest, other than to Berkshire ......................................................................... (200) (212)
Interest on Berkshire junior debt ........................................................................ (157) (170) 
Income tax .......................................................................................................... (248) (53) 
Net earnings........................................................................................................ $ 563 $ 170
Earnings applicable to Berkshire*...................................................................... $ 523 $ 237 
Debt owed to others............................................................................................ 10,296 10,528
Debt owed to Berkshire ...................................................................................... 1,289 1,478
*Includes interest earned by Berkshire (net of related income taxes) of $102 in 2005 and $110 in 2004.
9
Finance and Financial Products 
The star of our finance sector is Clayton Homes, masterfully run by Kevin Clayton. He does not
owe his brilliant record to a rising tide: The manufactured-housing business has been disappointing since 
Berkshire purchased Clayton in 2003. Industry sales have stagnated at 40-year lows, and the recent uptick
from Katrina-related demand will almost certainly be short-lived. In recent years, many industry
participants have suffered losses, and only Clayton has earned significant money.
In this brutal environment Clayton has bought a large amount of manufactured-housing loans from
major banks that found them unprofitable and difficult to service. Clayton’s operating expertise and 
Berkshire’s financial resources have made this an excellent business for us and one in which we are 
preeminent. We presently service $17 billion of loans, compared to $5.4 billon at the time of our purchase. 
Moreover, Clayton now owns $9.6 billion of its servicing portfolio, a position built up almost entirely since
Berkshire entered the picture. 
To finance this portfolio, Clayton borrows money from Berkshire, which in turn borrows the same
amount publicly. For the use of its credit, Berkshire charges Clayton a one percentage-point markup on its
borrowing cost. In 2005, the cost to Clayton for this arrangement was $83 million. That amount is
included in “Other” income in the table on the facing page, and Clayton’s earnings of $416 million are after
deducting this payment. 
On the manufacturing side, Clayton has also been active. To its original base of twenty plants, it 
first added twelve more in 2004 by way of the bankruptcy purchase of Oakwood, which just a few years 
earlier was one of the largest companies in the business. Then in 2005 Clayton purchased Karsten, a four￾plant operation that greatly strengthens Clayton’s position on the West Coast. 
* * * * * * * * * * * * 
Long ago, Mark Twain said: “A man who tries to carry a cat home by its tail will learn a lesson
that can be learned in no other way.” If Twain were around now, he might try winding up a derivatives 
business. After a few days, he would opt for cats. 
We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re’s derivative 
operation. Our aggregate losses since we began this endeavor total $404 million. 
Originally we had 23,218 contracts outstanding. By the start of 2005 we were down to 2,890. 
You might expect that our losses would have been stemmed by this point, but the blood has kept flowing. 
Reducing our inventory to 741 contracts last year cost us the $104 million mentioned above. 
Remember that the rationale for establishing this unit in 1990 was Gen Re’s wish to meet the 
needs of insurance clients. Yet one of the contracts we liquidated in 2005 had a term of 100 years! It’s
difficult to imagine what “need” such a contract could fulfill except, perhaps, the need of a compensation￾conscious trader to have a long-dated contract on his books. Long contracts, or alternatively those with 
multiple variables, are the most difficult to mark to market (the standard procedure used in accounting for 
derivatives) and provide the most opportunity for “imagination” when traders are estimating their value. 
Small wonder that traders promote them. 
A business in which huge amounts of compensation flow from assumed numbers is obviously
fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables 
and a far-off settlement date, their respective firms must subsequently value these contracts whenever they 
calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B.
You can bet that the valuation differences – and I’m personally familiar with several that were huge – tend
to be tilted in a direction favoring higher earnings at each firm. It’s a strange world in which two parties 
can carry out a paper transaction that each can promptly report as profitable. 
I dwell on our experience in derivatives each year for two reasons. One is personal and 
unpleasant. The hard fact is that I have cost you a lot of money by not moving immediately to close down
10
Gen Re’s trading operation. Both Charlie and I knew at the time of the Gen Re purchase that it was a 
problem and told its management that we wanted to exit the business. It was my responsibility to make
sure that happened. Rather than address the situation head on, however, I wasted several years while we 
attempted to sell the operation. That was a doomed endeavor because no realistic solution could have
extricated us from the maze of liabilities that was going to exist for decades. Our obligations were
particularly worrisome because their potential to explode could not be measured. Moreover, if severe
trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets. 
So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the 
books. Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in
personnel or in business operations, the time to act is now. 
The second reason I regularly describe our problems in this area lies in the hope that our 
experiences may prove instructive for managers, auditors and regulators. In a sense, we are a canary in this
business coal mine and should sing a song of warning as we expire. The number and value of derivative 
contracts outstanding in the world continues to mushroom and is now a multiple of what existed in 1998, 
the last time that financial chaos erupted. 
Our experience should be particularly sobering because we were a better-than-average candidate
to exit gracefully. Gen Re was a relatively minor operator in the derivatives field. It has had the good 
fortune to unwind its supposedly liquid positions in a benign market, all the while free of financial or other
pressures that might have forced it to conduct the liquidation in a less-than-efficient manner. Our
accounting in the past was conventional and actually thought to be conservative. Additionally, we know of
no bad behavior by anyone involved.
It could be a different story for others in the future. Imagine, if you will, one or more firms
(troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic 
markets and under extreme, and well-publicized, pressures. This is a scenario to which much attention
should be given now rather than after the fact. The time to have considered – and improved – the reliability 
of New Orleans’ levees was before Katrina. 
When we finally wind up Gen Re Securities, my feelings about its departure will be akin to those 
expressed in a country song, “My wife ran away with my best friend, and I sure miss him a lot.” 
* * * * * * * * * * * * 
Below are the results of our various finance and financial products activities: 
(in $ millions)
Pre-Tax Earnings Interest-Bearing Liabilities
2005 2004 2005 2004
Trading – ordinary income ............................ $ 200 $ 264 $1,061 $5,751 
Gen Re Securities (loss) ................................. (104) (44) 2,617* 5,437* 
Life and annuity operation ............................. 11 (57) 2,461 2,467
Value Capital (loss) ....................................... (33) 30 N/A N/A 
Leasing operations ......................................... 173 92 370 391
Manufactured-housing finance (Clayton)....... 416 192 9,299 3,636
Other............................................................... 159 107 N/A N/A
Income before capital gains............................ 822 584 
Trading – capital gains (losses) ..................... (234) 1,750
Total .............................................................. $ 588 $2,334
*Includes all liabilities 
11
Manufacturing, Service and Retailing Operations 
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary 
balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/05 (in $ millions)
Assets Liabilities and Equity
Cash and equivalents.............................. $ 1,004 Notes payable ............................ $ 1,469 
Accounts and notes receivable ............... 3,287 Other current liabilities.............. 5,371
Inventory ................................................ 4,143 Total current liabilities .............. 6,840 
Other current assets................................ 342
Total current assets................................. 8,776 
Goodwill and other intangibles............... 9,260 Deferred taxes............................ 338
Fixed assets............................................. 7,148 Term debt and other liabilities... 2,188 
Other assets............................................. 1,021 Equity ........................................ 16,839
$26,205 $26,205
Earnings Statement (in $ millions)
2005 2004 2003
Revenues .................................................................................... $46,896 $44,142 $32,106
Operating expenses (including depreciation of $699 in 2005,
$676 in 2004 and $605 in 2003).......................................... 44,190 41,604 29,885
Interest expense (net).................................................................. 83 57 64
Pre-tax earnings.......................................................................... 2,623 2,481 2,157 
Income taxes............................................................................... 977 941 813
Net income ................................................................................. $ 1,646 $ 1,540 $ 1,344
This eclectic collection, which sells products ranging from Dilly Bars to fractional interests in 
Boeing 737s, earned a very respectable 22.2% on average tangible net worth last year. It’s noteworthy also
that these operations used only minor financial leverage in achieving that return. Clearly, we own some
terrific businesses. We purchased many of them, however, at substantial premiums to net worth – a point
reflected in the goodwill item shown on the balance sheet – and that fact reduces the earnings on our 
average carrying value to 10.1%. 
Here are the pre-tax earnings for the larger categories or units. 
Pre-Tax Earnings
(in $ millions)
2005 2004
Building Products.................................................................................................... $ 751 $ 643
Shaw Industries ....................................................................................................... 485 466
Apparel & Footwear................................................................................................ 348 325
Retailing of Jewelry, Home Furnishings and Candy ............................................... 257 215 
Flight Services......................................................................................................... 120 191 
McLane.................................................................................................................... 217 228 
Other businesses...................................................................................................... 445 413
$2,623 $2,481
12
• In both our building-products companies and at Shaw, we continue to be hit by rising costs for raw
materials and energy. Most of these operations are significant users of oil (or more specifically,
petrochemicals) and natural gas. And prices for these commodities have soared.
 
We, likewise, have raised prices on many products, but there are often lags before increases be￾come effective. Nevertheless, both our building-products operations and Shaw delivered respect￾able results in 2005, a fact attributable to their strong business franchises and able managements. 
• In apparel, our largest unit, Fruit of the Loom, again increased earnings and market-share. You 
know, of course, of our leadership position in men’s and boys’ underwear, in which we account 
for about 48.7% of the sales recorded by mass-marketers (Wal-Mart, Target, etc.). That’s up from
44.2% in 2002, when we acquired the company. Operating from a smaller base, we have made 
still greater gains in intimate apparel for women and girls that is sold by the mass-marketers, 
climbing from 13.7% of their sales in 2002 to 24.7% in 2005. A gain like that in a major category
doesn’t come easy. Thank John Holland, Fruit’s extraordinary CEO, for making this happen.
• I told you last year that Ben Bridge (jewelry) and R. C. Willey (home furnishings) had same-store 
sales gains far above the average of their industries. You might think that blow-out figures in one 
year would make comparisons difficult in the following year. But Ed and Jon Bridge at their 
operation and Scott Hymas at R. C. Willey were more than up to this challenge. Ben Bridge had a 
6.6% same-store gain in 2005, and R. C. Willey came in at 9.9%.
Our never-on-Sunday approach at R. C. Willey continues to overwhelm seven-day competitors as 
we roll out stores in new markets. The Boise store, about which I was such a skeptic a few years 
back, had a 21% gain in 2005, coming off a 10% gain in 2004. Our new Reno store, opened in
November, broke out of the gate fast with sales that exceeded Boise’s early pace, and we will
begin business in Sacramento in June. If this store succeeds as I expect it to, Californians will see 
many more R. C. Willey stores in the years to come. 
• In flight services, earnings improved at FlightSafety as corporate aviation continued its rebound.
To support growth, we invest heavily in new simulators. Our most recent expansion, bringing us
to 42 training centers, is a major facility at Farnborough, England that opened in September. 
When it is fully built out in 2007, we will have invested more than $100 million in the building 
and its 15 simulators. Bruce Whitman, FlightSafety’s able CEO, makes sure that no competitor 
comes close to offering the breadth and depth of services that we do.
Operating results at NetJets were a different story. I said last year that this business would earn
money in 2005 – and I was dead wrong. 
Our European operation, it should be noted, showed both excellent growth and a reduced loss.
Customer contracts there increased by 37%. We are the only fractional-ownership operation of
any size in Europe, and our now-pervasive presence there is a key factor in making NetJets the
worldwide leader in this industry. 
Despite a large increase in customers, however, our U.S. operation dipped far into the red. Its
efficiency fell, and costs soared. We believe that our three largest competitors suffered similar
problems, but each is owned by aircraft manufacturers that may think differently than we do about 
the necessity of making adequate profits. The combined value of the fleets managed by these 
three competitors, in any case, continues to be less valuable than the fleet that we operate. 
Rich Santulli, one of the most dynamic managers I’ve ever met, will solve our revenue/expense 
problem. He won’t do it, however, in a manner that impairs the quality of the NetJets experience. 
Both he and I are committed to a level of service, security and safety that can’t be matched by
others. 
13
• Our retailing category includes See’s Candies, a company we bought early in 1972 (a date making
it our oldest non-insurance business). At that time, Charlie and I immediately decided to put
Chuck Huggins, then 46, in charge. Though we were new at the game of selecting managers, 
Charlie and I hit a home run with this appointment. Chuck’s love for the customer and the brand 
permeated the organization, which in his 34-year tenure produced a more-than-tenfold increase in
profits. This gain was achieved in an industry growing at best slowly and perhaps not at all. 
(Volume figures in this industry are hard to pin down.)
At yearend, Chuck turned the reins at See’s over to Brad Kinstler, who previously had served 
Berkshire well while running Cypress Insurance and Fechheimer’s. It’s unusual for us to move
managers around, but Brad’s record made him an obvious choice for the See’s job. I hope Chuck
and his wife, Donna, are at the annual meeting. If they are, shareholders can join Charlie and me
in giving America’s number one candy maker a richly-deserved round of applause. 
* * * * * * * * * * * * 
Every day, in countless ways, the competitive position of each of our businesses grows either 
weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our
products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our
businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, 
their consequences are enormous. 
When our long-term competitive position improves as a result of these almost unnoticeable
actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have
the kind of business we want a decade or two from now. We always, of course, hope to earn more money
in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If 
a management makes bad decisions in order to hit short-term earnings targets, and consequently gets
behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent
brilliance will overcome the damage that has been inflicted. Take a look at the dilemmas of managers in 
the auto and airline industries today as they struggle with the huge problems handed them by their 
predecessors. Charlie is fond of quoting Ben Franklin’s “An ounce of prevention is worth a pound of 
cure.” But sometimes no amount of cure will overcome the mistakes of the past. 
Our managers focus on moat-widening – and are brilliant at it. Quite simply, they are passionate
about their businesses. Usually, they were running those long before we came along; our only function
since has been to stay out of the way. If you see these heroes – and our four heroines as well – at the 
annual meeting, thank them for the job they do for you. 
* * * * * * * * * * * * 
The attitude of our managers vividly contrasts with that of the young man who married a tycoon’s 
only child, a decidedly homely and dull lass. Relieved, the father called in his new son-in-law after the
wedding and began to discuss the future:
“Son, you’re the boy I always wanted and never had. Here’s a stock certificate for 50% of the
company. You’re my equal partner from now on.” 
“Thanks, dad.”
“Now, what would you like to run? How about sales?” 
“I’m afraid I couldn’t sell water to a man crawling in the Sahara.” 
“Well then, how about heading human relations?”
“I really don’t care for people.” 
“No problem, we have lots of other spots in the business. What would you like to do?”
“Actually, nothing appeals to me. Why don’t you just buy me out?”
14
Investments 
We show below our common stock investments. Those that had a market value of more than $700
million at the end of 2005 are itemized. 
12/31/05
Percentage of
Shares Company Company Owned Cost* Market
(in $ millions)
151,610,700 American Express Company ................... 12.2 $1,287 $ 7,802
30,322,137 Ameriprise Financial, Inc..................... 12.1 183 1,243
43,854,200 Anheuser-Busch Cos., Inc.................... 5.6 2,133 1,884
200,000,000 The Coca-Cola Company ........................ 8.4 1,299 8,062 
6,708,760 M&T Bank Corporation .......................... 6.0 103 732
48,000,000 Moody’s Corporation .............................. 16.2 499 2,948
2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 488 1,915
100,000,000 The Procter & Gamble Company .......... 3.0 940 5,788
19,944,300 Wal-Mart Stores, Inc. ......................... 0.5 944 933
1,727,765 The Washington Post Company .............. 18.0 11 1,322 
95,092,200 Wells Fargo & Company......................... 5.7 2,754 5,975 
1,724,200 White Mountains Insurance..................... 16.0 369 963
Others...................................................... 4,937 7,154
Total Common Stocks............................. $15,947 $46,721
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required. 
A couple of last year’s changes in our portfolio occurred because of corporate events: Gillette was 
merged into Procter & Gamble, and American Express spun off Ameriprise. In addition, we substantially
increased our holdings in Wells Fargo, a company that Dick Kovacevich runs brilliantly, and established 
positions in Anheuser-Busch and Wal-Mart. 
Expect no miracles from our equity portfolio. Though we own major interests in a number of
strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they
may double in value in ten years. The likelihood is that their per-share earnings, in aggregate, will grow 6-
8% per year over the decade and that their stock prices will more or less match that growth. (Their
managers, of course, think my expectations are too modest – and I hope they’re right.) 
* * * * * * * * * * * * 
The P&G-Gillette merger, closing in the fourth quarter of 2005, required Berkshire to record a 
$5.0 billion pre-tax capital gain. This bookkeeping entry, dictated by GAAP, is meaningless from an
economic standpoint, and you should ignore it when you are evaluating Berkshire’s 2005 earnings. We
didn’t intend to sell our Gillette shares before the merger; we don’t intend to sell our P&G shares now; and
we incurred no tax when the merger took place. 
It’s hard to overemphasize the importance of who is CEO of a company. Before Jim Kilts arrived 
at Gillette in 2001, the company was struggling, having particularly suffered from capital-allocation
blunders. In the major example, Gillette’s acquisition of Duracell cost Gillette shareholders billions of
dollars, a loss never made visible by conventional accounting. Quite simply, what Gillette received in 
business value in this acquisition was not equivalent to what it gave up. (Amazingly, this most
fundamental of yardsticks is almost always ignored by both managements and their investment bankers
when acquisitions are under discussion.)
15
Upon taking office at Gillette, Jim quickly instilled fiscal discipline, tightened operations and 
energized marketing, moves that dramatically increased the intrinsic value of the company. Gillette’s 
merger with P&G then expanded the potential of both companies. For his accomplishments, Jim was paid 
very well – but he earned every penny. (This is no academic evaluation: As a 9.7% owner of Gillette, 
Berkshire in effect paid that proportion of his compensation.) Indeed, it’s difficult to overpay the truly 
extraordinary CEO of a giant enterprise. But this species is rare. 
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That 
won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay.
The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a 
consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs 
of money from an ill-designed compensation arrangement. 
Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of 
Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – 
his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to 
repurchase stock. 
Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years 
after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share 
on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to
repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 
158% by the end of the option period. That’s because repurchases would reduce the number of shares to 
38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding 
earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself 
improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings
had declined by 20% during the ten-year period. 
Fred can also get a splendid result for himself by paying no dividends and deploying the earnings
he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these 
initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio 
remaining unchanged at ten – Fred’s option will deliver him $63 million. Meanwhile, his shareholders will 
wonder what happened to the “alignment of interests” that was supposed to occur when Fred was issued
options. 
A “normal” dividend policy, of course – one-third of earnings paid out, for example – produces
less extreme results but still can provide lush rewards for managers who achieve nothing.
CEOs understand this math and know that every dime paid out in dividends reduces the value of 
all outstanding options. I’ve never, however, seen this manager-owner conflict referenced in proxy
materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally 
that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them
capital that is free. 
It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the
automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of
that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted 
for retained earnings seems foreign to compensation “experts,” who are nevertheless encyclopedic about
every management-friendly plan that exists. (“Whose bread I eat, his song I sing.”) 
Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more
in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning 
toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all￾too-prevalent rule is that nothing succeeds like failure. 
16
Huge severance payments, lavish perks and outsized payments for ho-hum performance often 
occur because comp committees have become slaves to comparative data. The drill is simple: Three or so
directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay
statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other 
managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of 
a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” 
When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline. 
Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood 
hero of mine. Hank’s son, Steve, at one time was a player’s agent. Representing an outfielder in
negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he 
should ask for. Hank, a true pay-for-performance guy, got straight to the point, “What did he hit last year?” 
When Steve answered “.246,” Hank’s comeback was immediate: “Ask for a uniform.” 
(Let me pause for a brief confession: In criticizing comp committee behavior, I don’t speak as a 
true insider. Though I have served as a director of twenty public companies, only one CEO has put me on
his comp committee. Hmmmm . . .)
* * * * * * * * * * * * 
My views on America’s long-term problem in respect to trade imbalances, which I have laid out in
previous reports, remain unchanged. My conviction, however, cost Berkshire $955 million pre-tax in 2005. 
That amount is included in our earnings statement, a fact that illustrates the differing ways in which GAAP
treats gains and losses. When we have a long-term position in stocks or bonds, year-to-year changes in
value are reflected in our balance sheet but, as long as the asset is not sold, are rarely reflected in earnings.
For example, our Coca-Cola holdings went from $1 billion in value early on to $13.4 billion at yearend 
1998 and have since declined to $8.1 billion – with none of these moves affecting our earnings statement. 
Long-term currency positions, however, are daily marked to market and therefore have an effect on
earnings in every reporting period. From the date we first entered into currency contracts, we are $2.0
billion in the black. 
We reduced our direct position in currencies somewhat during 2005. We partially offset this 
change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies 
and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring non￾dollar exposure. That’s largely because of changes in interest rates: As U.S. rates have risen relative to 
those of the rest of the world, holding most foreign currencies now involves a significant negative “carry.”
The carry aspect of our direct currency position indeed cost us money in 2005 and is likely to do so again in
2006. In contrast, the ownership of foreign equities is likely, over time, to create a positive carry – perhaps 
a substantial one. 
The underlying factors affecting the U.S. current account deficit continue to worsen, and no letup 
is in sight. Not only did our trade deficit – the largest and most familiar item in the current account – hit an 
all-time high in 2005, but we also can expect a second item – the balance of investment income – to soon
turn negative. As foreigners increase their ownership of U.S. assets (or of claims against us) relative to
U.S. investments abroad, these investors will begin earning more on their holdings than we do on ours. 
Finally, the third component of the current account, unilateral transfers, is always negative. 
The U.S., it should be emphasized, is extraordinarily rich and will get richer. As a result, the huge
imbalances in its current account may continue for a long time without their having noticeable deleterious
effects on the U.S. economy or on markets. I doubt, however, that the situation will forever remain benign. 
Either Americans address the problem soon in a way we select, or at some point the problem will likely
address us in an unpleasant way of its own.
17
How to Minimize Investment Returns 
It’s been an easy matter for Berkshire and other owners of American equities to prosper over the 
years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow 
rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising
answer is at the end of this section.) This huge rise came about for a simple reason: Over the century
American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses 
continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way
cutting the returns they will realize from their investments. 
The explanation of how this is happening begins with a fundamental truth: With unimportant
exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that
owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn.
True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the
expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by
having someone take his place. If one investor sells high, another must buy high. For owners as a whole, 
there is simply no magic – no shower of money from outer space – that will enable them to extract wealth 
from their companies beyond that created by the companies themselves. 
Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s
my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than 
they historically have. 
To understand how this toll has ballooned, imagine for a moment that all American corporations
are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on 
dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its
companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these
dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone
grows wealthier at the same pace, and all is harmonious. 
But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its 
members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. 
The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own 
all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth
diminishes, equaling the earnings of American business minus commissions paid. The more that family
members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact
is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on. 
After a while, most of the family members realize that they are not doing so well at this new “beat￾my-brother” game. Enter another set of Helpers. These newcomers explain to each member of the 
Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a
manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the 
broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers 
to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers. 
The family’s disappointment grows. Each of its members is now employing professionals. Yet
overall, the group’s finances have taken a turn for the worse. The solution? More help, of course. 
It arrives in the form of financial planners and institutional consultants, who weigh in to advise the 
Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its
members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask,
should they expect success in picking the right consultant? But this question does not occur to the 
Gotrocks, and the consultant-Helpers certainly don’t suggest it to them. 
18
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, 
and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers 
– appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring
because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are
simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of
zombies?” 
The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self￾confidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are
what each family member must fork over in order to really outmaneuver his relatives. 
The more observant members of the family see that some of the hyper-Helpers are really just 
manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE
EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, 
bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he
changed into his Superman costume. Calmed by this explanation, the family decides to pay up. 
And that’s where we are today: A record portion of the earnings that would go in their entirety to
owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. 
Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large
portions of the winnings when they are smart or lucky, and leave family members with all of the losses –
and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked). 
A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; 
tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the 
family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of
the earnings of American business. In other words, the burden of paying Helpers may cause American 
equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to
no one. 
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir 
Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can 
calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this
loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, 
returns decrease as motion increases. 
* * * * * * * * * * * * 
Here’s the answer to the question posed at the beginning of this section: To get very specific, the
Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3%
compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate
of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 
2,011,011.23. But I’m willing to settle for 2,000,000; six years into this century, the Dow has gained not at
all. 
Debt and Risk
As we consolidate MidAmerican, our new balance sheet may suggest that Berkshire has expanded
its tolerance for borrowing. But that’s not so. Except for token amounts, we shun debt, turning to it for
only three purposes:
1) We occasionally use repos as a part of certain short-term investing strategies that incorporate 
ownership of U.S. government (or agency) securities. Purchases of this kind are highly
opportunistic and involve only the most liquid of securities. A few years ago, we entered into
several interesting transactions that have since been unwound or are running off. The offsetting
debt has likewise been cut substantially and before long may be gone. 
19
2) We borrow money against portfolios of interest-bearing receivables whose risk characteristics we 
understand. We did this in 2001 when we guaranteed $5.6 billion of bank debt to take over, in
partnership with Leucadia, a bankrupt Finova (which held a broad range of receivables). All of 
that debt has been repaid. More recently, we have borrowed to finance a widely-diversified, 
predictably-performing portfolio of manufactured-home receivables managed by Clayton. 
Alternatively, we could “securitize” – that is, sell – these receivables, but retain the servicing of 
them. If we followed this procedure, which is common in the industry, we would not show the 
debt that we do on our balance sheet, and we would also accelerate the earnings we report. In the
end, however, we would earn less money. Were market variables to change so as to favor 
securitization (an unlikely event), we could sell part of our portfolio and eliminate the related debt. 
Until then, we prefer better profits to better cosmetics. 
3) At MidAmerican, we have substantial debt, but it is that company’s obligation only. Though it 
will appear on our consolidated balance sheet, Berkshire does not guarantee it.
Even so, this debt is unquestionably secure because it is serviced by MidAmerican’s diversified 
stream of highly-stable utility earnings. If there were to be some bolt from the blue that hurt one
of MidAmerican’s utility properties, earnings from the others would still be more than ample to
cover all debt requirements. Moreover, MidAmerican retains all of its earnings, an equity￾building practice that is rare in the utility field.
From a risk standpoint, it is far safer to have earnings from ten diverse and uncorrelated utility
operations that cover interest charges by, say, a 2:1 ratio than it is to have far greater coverage 
provided by a single utility. A catastrophic event can render a single utility insolvent – witness 
what Katrina did to the local electric utility in New Orleans – no matter how conservative its debt
policy. A geographical disaster – say, an earthquake in a Western state – can’t have the same
effect on MidAmerican. And even a worrier like Charlie can’t think of an event that would 
systemically decrease utility earnings in any major way. Because of MidAmerican’s ever￾widening diversity of regulated earnings, it will always utilize major amounts of debt. 
And that’s about it. We are not interested in incurring any significant debt at Berkshire for 
acquisitions or operating purposes. Conventional business wisdom, of course, would argue that we are 
being too conservative and that there are added profits that could be safely earned if we injected moderate
leverage into our balance sheet. 
Maybe so. But many of Berkshire’s hundreds of thousands of investors have a large portion of
their net worth in our stock (among them, it should be emphasized, a large number of our board and key
managers) and a disaster for the company would be a disaster for them. Moreover, there are people who 
have been permanently injured to whom we owe insurance payments that stretch out for fifty years or 
more. To these and other constituencies we have promised total security, whatever comes: financial panics,
stock-exchange closures (an extended one occurred in 1914) or even domestic nuclear, chemical or 
biological attacks. 
We are quite willing to accept huge risks. Indeed, more than any other insurer, we write high-limit
policies that are tied to single catastrophic events. We also own a large investment portfolio whose market 
value could fall dramatically and quickly under certain conditions (as happened on October 19, 1987). 
Whatever occurs, though, Berkshire will have the net worth, the earnings streams and the liquidity to
handle the problem with ease. 
Any other approach is dangerous. Over the years, a number of very smart people have learned the
hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is 
not an equation whose effects I would like to experience personally, and I would like even less to be
responsible for imposing its penalties upon others. 
20
Management Succession 
As owners, you are naturally concerned about whether I will insist on continuing as CEO after I
begin to fade and, if so, how the board will handle that problem. You also want to know what happens if I 
should die tonight. 
That second question is easy to answer. Most of our many businesses have strong market
positions, significant momentum, and terrific managers. The special Berkshire culture is deeply ingrained
throughout our subsidiaries, and these operations won’t miss a beat when I die. 
Moreover, we have three managers at Berkshire who are reasonably young and fully capable of
being CEO. Any of the three would be much better at certain management aspects of my job than I. On
the minus side, none has my crossover experience that allows me to be comfortable making decisions in
either the business arena or in investments. That problem will be solved by having another person in the
organization handle marketable securities. That’s an interesting job at Berkshire, and the new CEO will
have no problem in hiring a talented individual to do it. Indeed, that’s what we have done at GEICO for 26
years, and our results have been terrific. 
Berkshire’s board has fully discussed each of the three CEO candidates and has unanimously
agreed on the person who should succeed me if a replacement were needed today. The directors stay 
updated on this subject and could alter their view as circumstances change – new managerial stars may 
emerge and present ones will age. The important point is that the directors know now – and will always
know in the future – exactly what they will do when the need arises. 
The other question that must be addressed is whether the Board will be prepared to make a change
if that need should arise not from my death but rather from my decay, particularly if this decay is
accompanied by my delusionally thinking that I am reaching new peaks of managerial brilliance. That
problem would not be unique to me. Charlie and I have faced this situation from time to time at
Berkshire’s subsidiaries. Humans age at greatly varying rates – but sooner or later their talents and vigor
decline. Some managers remain effective well into their 80s – Charlie is a wonder at 82 – and others
noticeably fade in their 60s. When their abilities ebb, so usually do their powers of self-assessment.
Someone else often needs to blow the whistle. 
When that time comes for me, our board will have to step up to the job. From a financial 
standpoint, its members are unusually motivated to do so. I know of no other board in the country in which
the financial interests of directors are so completely aligned with those of shareholders. Few boards even
come close. On a personal level, however, it is extraordinarily difficult for most people to tell someone, 
particularly a friend, that he or she is no longer capable. 
If I become a candidate for that message, however, our board will be doing me a favor by
delivering it. Every share of Berkshire that I own is destined to go to philanthropies, and I want society to 
reap the maximum good from these gifts and bequests. It would be a tragedy if the philanthropic potential 
of my holdings was diminished because my associates shirked their responsibility to (tenderly, I hope) 
show me the door. But don’t worry about this. We have an outstanding group of directors, and they will 
always do what’s right for shareholders. 
And while we are on the subject, I feel terrific. 
The Annual Meeting
Our meeting this year will be on Saturday, May 6. As always, the doors will open at the Qwest 
Center at 7 a.m., and the latest Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the 
question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. Then, 
after a short recess, Charlie and I will convene the annual meeting at 3:15. This schedule worked well last
year, because it let those who wanted to attend the formal session to do so, while freeing others to shop. 
21
You certainly did your share in this respect last year. The 194,300 square foot hall adjoining the 
meeting area was filled with the products of Berkshire subsidiaries, and the 21,000 people who came to the
meeting allowed every location to rack up sales records. Kelly Broz (neé Muchemore), the Flo Ziegfeld of 
Berkshire, orchestrates both this magnificent shopping extravaganza and the meeting itself. The exhibitors 
love her, and so do I. Kelly got married in October, and I gave her away. She asked me how I wanted to
be listed in the wedding program. I replied “envious of the groom,” and that’s the way it went to press. 
This year we will showcase two Clayton homes (featuring Acme brick, Shaw carpet, Johns 
Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that these
homes, priced at $79,000 and $89,000, deliver excellent value. In fact, three shareholders came so firmly 
to that conclusion last year that they bought the $119,000 model we then showcased. Flanking the Clayton 
homes on the exhibition floor will be RVs from Forest River. 
GEICO will have a booth staffed by a number of its top counselors from around the country, all of 
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a 
special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in
which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as
that given certain groups.) Bring the details of your existing insurance and check out whether we can save 
you money. For at least 50% of you, I believe we can. And while you’re at it, sign up for the new GEICO 
credit card. It’s the one I now use.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets® 
available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. 
Come to Omaha by bus; leave in your new plane. 
The Bookworm boutique at the Qwest broke all records last year selling Berkshire-related books.
An amazing 3,500 of these were Poor Charlie’s Almanack, the collected wisdom of my partner. This
means that a copy was sold every 9 seconds. And for good reason: You will never find a book with more
useful ideas. Word-of-mouth recommendations have caused Charlie’s first printing of 20,500 copies to sell
out, and we will therefore have a revised and expanded edition on sale at our meeting. Among the other 22
titles and DVDs available last year at the Bookworm, 4,597 copies were sold for $84,746. Our 
shareholders are a bookseller’s dream. 
An attachment to the proxy material that is enclosed with this report explains how you can obtain
the credential you will need for admission to the meeting and other events. As for plane, hotel and car 
reservations, we have again signed up American Express (800-799-6634) to give you special help. Carol 
Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it. 
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, 
we will again be having “Berkshire Weekend” pricing. We initiated this special event at NFM nine years 
ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $27.4 million in 2005 (up 9% from
a year earlier). I get goose bumps just thinking about this volume. 
To obtain the discount, you must make your purchases between Thursday, May 4 and Monday, 
May 8 inclusive, and also present your meeting credential. The period’s special pricing will even apply to
the products of several prestigious manufacturers that normally have ironclad rules against discounting but
that, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their 
cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on
Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., we are having a special affair for shareholders 
only. I’ll be there, eating barbeque, drinking Coke, and counting sales. 
Borsheim’s again will have two shareholder-only events. The first will be a cocktail reception 
from 6 p.m. to 10 p.m. on Friday, May 5. The second, the main gala, will be from 9 a.m. to 4 p.m. on
Sunday, May 7. On Saturday, we will be open until 6 p.m.
22
We will have huge crowds at Borsheim’s throughout the weekend. For your convenience, 
therefore, shareholder prices will be available from Monday, May 1 through Saturday, May 13. During 
that period, just identify yourself as a shareholder through your meeting credentials or a brokerage 
statement. 
Borsheim’s operates on a gross margin that, even before the shareholders’ discount, is fully twenty 
percentage points below that of its major rivals. Last year, our shareholder-period business increased 9%
from 2004, which came on top of a 73% gain the year before. The store sold 5,000 Berkshire Monopoly
games – and then ran out. We’ve learned: Plenty will be in stock this year. 
In a tent outside of Borsheim’s, Patrick Wolff, twice U.S. chess champion, will take on all comers 
in groups of six – blindfolded. Additionally, we will have Bob Hamman and Sharon Osberg, two of the 
world’s top bridge experts, available to play with our shareholders on Sunday afternoon. They plan to keep 
their eyes open – but Bob never sorts his cards, even when playing for a national championship. 
Gorat’s – my favorite steakhouse – will again be open exclusively for Berkshire shareholders on
Sunday, May 7, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on
that day, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before). 
In this school year, about 35 university classes will come to Omaha for sessions with me. I take
almost all – in aggregate, perhaps 2,000 students – to lunch at Gorat’s. And they love it. To learn why, 
come join us on Sunday.
We will again have a special reception from 4:00 to 5:30 on Saturday afternoon for shareholders 
who have come from outside of North America. Every year our meeting draws many people from around
the globe, and Charlie and I want to be sure we personally greet those who have come so far. Last year we
enjoyed meeting more than 400 of you from many dozens of countries. Any shareholder who comes from
other than the U.S. or Canada will be given a special credential and instructions for attending this function. 
* * * * * * * * * * * * 
Charlie and I are extraordinarily lucky. We were born in America; had terrific parents who saw
that we got good educations; have enjoyed wonderful families and great health; and came equipped with a 
“business” gene that allows us to prosper in a manner hugely disproportionate to other people who
contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in
which we are helped every day in countless ways by talented and cheerful associates. No wonder we tap￾dance to work. But nothing is more fun for us than getting together with our shareholder-partners at 
Berkshire’s annual meeting. So join us on May 6th at the Qwest for our annual Woodstock for Capitalists.
We’ll see you there.
February 28, 2006 Warren E. Buffett 
 Chairman of the Board 
23
Note: The following table appears in the printed Annual Report on the facing page of the Chairman's Letter 
and is referred to in that letter.
2 
Berkshire’s Corporate Performance vs. the S&P 500 
 Annual Percentage Change 
in Per-Share in S&P 500 
Book Value of with Dividends Relative 
Berkshire Included Results 
Year (1) (2) (1)-(2) 
1965 .................................................. 23.8 10.0 13.8 
1966 .................................................. 20.3 (11.7) 32.0 
1967 .................................................. 11.0 30.9 (19.9) 
1968 .................................................. 19.0 11.0 8.0 
1969 .................................................. 16.2 (8.4) 24.6 
1970 .................................................. 12.0 3.9 8.1 
1971 .................................................. 16.4 14.6 1.8 
1972 .................................................. 21.7 18.9 2.8 
1973 .................................................. 4.7 (14.8) 19.5 
1974 .................................................. 5.5 (26.4) 31.9 
1975 .................................................. 21.9 37.2 (15.3) 
1976 .................................................. 59.3 23.6 35.7 
1977 .................................................. 31.9 (7.4) 39.3 
1978 .................................................. 24.0 6.4 17.6 
1979 .................................................. 35.7 18.2 17.5 
1980 .................................................. 19.3 32.3 (13.0) 
1981 .................................................. 31.4 (5.0) 36.4 
1982 .................................................. 40.0 21.4 18.6 
1983 .................................................. 32.3 22.4 9.9 
1984 .................................................. 13.6 6.1 7.5 
1985 .................................................. 48.2 31.6 16.6 
1986 .................................................. 26.1 18.6 7.5 
1987 .................................................. 19.5 5.1 14.4 
1988 .................................................. 20.1 16.6 3.5 
1989 .................................................. 44.4 31.7 12.7 
1990 .................................................. 7.4 (3.1) 10.5 
1991 .................................................. 39.6 30.5 9.1 
1992 .................................................. 20.3 7.6 12.7 
1993 .................................................. 14.3 10.1 4.2 
1994 .................................................. 13.9 1.3 12.6 
1995 .................................................. 43.1 37.6 5.5 
1996 .................................................. 31.8 23.0 8.8 
1997 .................................................. 34.1 33.4 .7 
1998 .................................................. 48.3 28.6 19.7 
1999 .................................................. .5 21.0 (20.5) 
2000 .................................................. 6.5 (9.1) 15.6 
2001 .................................................. (6.2) (11.9) 5.7 
2002 .................................................. 10.0 (22.1) 32.1 
2003 .................................................. 21.0 28.7 (7.7) 
2004 .................................................. 10.5 10.9 (.4) 
2005 .................................................. 6.4 4.9 1.5 
2006 .................................................. 18.4 15.8 2.6 
Compounded Annual Gain – 1965-2006 21.4% 10.4% 11.0 
Overall Gain – 1964-2006 361,156% 6,479% 
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 
 Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market 
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results 
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using 
the numbers originally reported. 
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire 
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index 
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC. 
To the Shareholders of Berkshire Hathaway Inc.: 
Our gain in net worth during 2006 was $16.9 billion, which increased the per-share book value of 
both our Class A and Class B stock by 18.4%. Over the last 42 years (that is, since present management 
took over) book value has grown from $19 to $70,281, a rate of 21.4% compounded annually.* 
We believe that $16.9 billion is a record for a one-year gain in net worth – more than has ever 
been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., 
AOL’s purchase of Time Warner). Of course, Exxon Mobil and other companies earn far more than 
Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth. 
All that said, a confession about our 2006 gain is in order. Our most important business, 
insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation. After 
hammering us with hurricanes in 2004 and 2005 – storms that caused us to lose a bundle on super-cat 
insurance – she just vanished. Last year, the red ink from this activity turned black – very black. 
In addition, the great majority of our 73 businesses did outstandingly well in 2006. Let me focus 
for a moment on one of our largest operations, GEICO. What management accomplished there was simply 
extraordinary. 
As I’ve told you before, Tony Nicely, GEICO’s CEO, went to work at the company 45 years ago, 
two months after turning 18. He became CEO in 1992, and from then on the company’s growth exploded. 
In addition, Tony has delivered staggering productivity gains in recent years. Between yearend 2003 and 
yearend 2006, the number of GEICO policies increased from 5.7 million to 8.1 million, a jump of 42%. 
Yet during that same period, the company’s employees (measured on a fulltime-equivalent basis) fell 3.5%. 
So productivity grew 47%. And GEICO didn’t start fat. 
That remarkable gain has allowed GEICO to maintain its all-important position as a low-cost 
producer, even though it has dramatically increased advertising expenditures. Last year GEICO spent $631 
million on ads, up from $238 million in 2003 (and up from $31 million in 1995, when Berkshire took 
control). Today, GEICO spends far more on ads than any of its competitors, even those much larger. We 
will continue to raise the bar. 
Last year I told you that if you had a new son or grandson to be sure to name him Tony. But Don 
Keough, a Berkshire director, recently had a better idea. After reviewing GEICO’s performance in 2006, 
he wrote me, “Forget births. Tell the shareholders to immediately change the names of their present
children to Tony or Antoinette.” Don signed his letter “Tony.” 
* * * * * * * * * * * * 
Charlie Munger – my partner and Berkshire’s vice chairman – and I run what has turned out to be 
a big business, one with 217,000 employees and annual revenues approaching $100 billion. We certainly 
didn’t plan it that way. Charlie began as a lawyer, and I thought of myself as a security analyst. Sitting in 
those seats, we both grew skeptical about the ability of big entities of any type to function well. Size seems 
to make many organizations slow-thinking, resistant to change and smug. In Churchill’s words: “We shape 
our buildings, and afterwards our buildings shape us.” Here’s a telling fact: Of the ten non-oil companies 
having the largest market capitalization in 1965 – titans such as General Motors, Sears, DuPont and 
Eastman Kodak – only one made the 2006 list. 
 *All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares 
are 1/30th of those shown for the A. 
3
In fairness, we’ve seen plenty of successes as well, some truly outstanding. There are many giant￾company managers whom I greatly admire; Ken Chenault of American Express, Jeff Immelt of G.E. and 
Dick Kovacevich of Wells Fargo come quickly to mind. But I don’t think I could do the management job 
they do. And I know I wouldn’t enjoy many of the duties that come with their positions – meetings, 
speeches, foreign travel, the charity circuit and governmental relations. For me, Ronald Reagan had it 
right: “It’s probably true that hard work never killed anyone – but why take the chance?” 
So I’ve taken the easy route, just sitting back and working through great managers who run their 
own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major 
capital-allocation decisions. Our managers have returned this trust by working hard and effectively. 
For their performance over the last 42 years – and particularly for 2006 – Charlie and I thank 
them. 
Yardsticks 
 Charlie and I measure Berkshire’s progress and evaluate its intrinsic value in a number of ways. 
No single criterion is effective in doing these jobs, and even an avalanche of statistics will not capture some 
factors that are important. For example, it’s essential that we have managers much younger than I available 
to succeed me. Berkshire has never been in better shape in this regard – but I can’t prove it to you with 
numbers. 
 There are two statistics, however, that are of real importance. The first is the amount of 
investments (including cash and cash-equivalents) that we own on a per-share basis. Arriving at this figure, 
we exclude investments held in our finance operation because these are largely offset by borrowings. 
Here’s the record since present management acquired control of Berkshire: 
Year Per-Share Investments* 
1965 ..................................................................... $ 4 
1975 ..................................................................... 159 
1985 ..................................................................... 2,407 
1995 ..................................................................... 21,817 
2006 ..................................................................... $80,636
Compound Growth Rate 1965-2006.................... 27.5% 
Compound Growth Rate 1995-2006.................... 12.6% 
 *Net of minority interests 
 In our early years we put most of our retained earnings and insurance float into investments in 
marketable securities. Because of this emphasis, and because the securities we purchased generally did 
well, our growth rate in investments was for a long time quite high. 
 Over the years, however, we have focused more and more on the acquisition of operating 
businesses. Using our funds for these purchases has both slowed our growth in investments and accelerated 
our gains in pre-tax earnings from non-insurance businesses, the second yardstick we use. Here’s how 
those earnings have looked: 
4
Year Pre-Tax Earnings Per Share* 
1965 ..................................................................... $ 4 
1975 ..................................................................... 4 
1985 ..................................................................... 52 
1995 ..................................................................... 175 
2006 ..................................................................... $3,625
Compound Growth Rate 1965-2006 .................... 17.9% 
Compound Growth Rate 1995-2006 .................... 31.7% 
 *Excluding purchase-accounting adjustments and net of minority interests 
 Last year we had a good increase in non-insurance earnings – 38%. Large gains from here on in, 
though, will come only if we are able to make major, and sensible, acquisitions. That will not be easy. We 
do, however, have one advantage: More and more, Berkshire has become “the buyer of choice” for 
business owners and managers. Initially, we were viewed that way only in the U.S. (and more often than 
not by private companies). We’ve long wanted, nonetheless, to extend Berkshire’s appeal beyond U.S. 
borders. And last year, our globe-trotting finally got underway. 
Acquisitions 
 We began 2006 by completing the three acquisitions pending at yearend 2005, spending about $6 
billion for PacifiCorp, Business Wire and Applied Underwriters. All are performing very well. 
 The highlight of the year, however, was our July 5th acquisition of most of ISCAR, an Israeli 
company, and our new association with its chairman, Eitan Wertheimer, and CEO, Jacob Harpaz. The 
story here began on October 25, 2005, when I received a 1¼-page letter from Eitan, of whom I then knew 
nothing. The letter began, “I am writing to introduce you to ISCAR,” and proceeded to describe a cutting￾tool business carried on in 61 countries. Then Eitan wrote, “We have for some time considered the issues 
of generational transfer and ownership that are typical for large family enterprises, and have given much 
thought to ISCAR’s future. Our conclusion is that Berkshire Hathaway would be the ideal home for 
ISCAR. We believe that ISCAR would continue to thrive as a part of your portfolio of businesses.” 
Overall, Eitan’s letter made the quality of the company and the character of its management leap 
off the page. It also made me want to learn more, and in November, Eitan, Jacob and ISCAR’s CFO, 
Danny Goldman, came to Omaha. A few hours with them convinced me that if we were to make a deal, we 
would be teaming up with extraordinarily talented managers who could be trusted to run the business after 
a sale with all of the energy and dedication that they had exhibited previously. However, having never 
bought a business based outside of the U.S. (though I had bought a number of foreign stocks), I needed to 
get educated on some tax and jurisdictional matters. With that task completed, Berkshire purchased 80% of 
ISCAR for $4 billion. The remaining 20% stays in the hands of the Wertheimer family, making it our 
valued partner. 
 ISCAR’s products are small, consumable cutting tools that are used in conjunction with large and 
expensive machine tools. It’s a business without magic except for that imparted by the people who run it. 
But Eitan, Jacob and their associates are true managerial magicians who constantly develop tools that make 
their customers’ machines more productive. The result: ISCAR makes money because it enables its 
customers to make more money. There is no better recipe for continued success. 
5
 In September, Charlie and I, along with five Berkshire associates, visited ISCAR in Israel. We – 
and I mean every one of us – have never been more impressed with any operation. At ISCAR, as 
throughout Israel, brains and energy are ubiquitous. Berkshire shareholders are lucky to have joined with 
Eitan, Jacob, Danny and their talented associates. 
* * * * * * * * * * * * 
 A few months later, Berkshire again became “the buyer of choice” in a deal brought to us by my 
friend, John Roach, of Fort Worth. John, many of you will remember, was Chairman of Justin Industries, 
which we bought in 2000. At that time John was helping John Justin, who was terminally ill, find a 
permanent home for his company. John Justin died soon after we bought Justin Industries, but it has since 
been run exactly as we promised him it would be. 
 Visiting me in November, John Roach brought along Paul Andrews, Jr., owner of about 80% of 
TTI, a Fort Worth distributor of electronic components. Over a 35-year period, Paul built TTI from 
$112,000 of sales to $1.3 billion. He is a remarkable entrepreneur and operator. 
 Paul, 64, loves running his business. But not long ago he happened to witness how disruptive the 
death of a founder can be both to a private company’s employees and the owner’s family. What starts out 
as disruptive, furthermore, often evolves into destructive. About a year ago, therefore, Paul began to think 
about selling TTI. His goal was to put his business in the hands of an owner he had carefully chosen, rather 
than allowing a trust officer or lawyer to conduct an auction after his death. 
 Paul rejected the idea of a “strategic” buyer, knowing that in the pursuit of “synergies,” an owner 
of that type would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of 
his associates (and perhaps wound TTI’s business in the process). He also ruled out a private equity firm, 
which would very likely load the company with debt and then flip it as soon as possible. 
 That left Berkshire. Paul and I met on the morning of November 15th and made a deal before 
lunch. Later he wrote me: “After our meeting, I am confident that Berkshire is the right owner for TTI . . . 
I am proud of our past and excited about our future.” And so are Charlie and I. 
* * * * * * * * * * * * 
 We also made some “tuck-in” acquisitions during 2006 at Fruit of the Loom (“Fruit”), MiTek, 
CTB, Shaw and Clayton. Fruit made the largest purchases. First, it bought Russell Corp., a leading 
producer of athletic apparel and uniforms for about $1.2 billion (including assumed debt) and in December 
it agreed to buy the intimate apparel business of VF Corp. Together, these acquisitions add about $2.2 
billion to Fruit’s sales and bring with them about 23,000 employees. 
 Charlie and I love it when we can acquire businesses that can be placed under managers, such as 
John Holland at Fruit, who have already shown their stuff at Berkshire. MiTek, for example, has made 14 
acquisitions since we purchased it in 2001, and Gene Toombs has delivered results from these deals far in 
excess of what he had predicted. In effect, we leverage the managerial talent already with us by these tuck￾in deals. We will make many more. 
* * * * * * * * * * * * 
 We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming 
cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much 
bigger game. 
Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow 
while both were shopping. The elderly man explained apologetically that he had lost track of his wife and 
was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also 
wandered off and suggested that it might be more efficient if they jointly looked for the two women. 
Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” 
the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and 
she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her, 
we’ll look for yours.” 
6
What we are looking for is described on page 25. If you have an acquisition candidate that fits, 
call me – day or night. And then watch me shatter a stained glass window. 
* * * * * * * * * * * * 
 Now, let’s examine the four major operating sectors of Berkshire. Lumping their financial figures 
together impedes analysis. So we’ll look at them as four separate businesses, starting with the all–
important insurance group. 
Insurance
 Next month marks the 40th anniversary of our entrance into the insurance business. It was on 
March 9, 1967, that Berkshire purchased National Indemnity and its companion company, National Fire & 
Marine, from Jack Ringwalt for $8.6 million. 
 Jack was a long-time friend of mine and an excellent, but somewhat eccentric, businessman. For 
about ten minutes every year he would get the urge to sell his company. But those moods – perhaps 
brought on by a tiff with regulators or an unfavorable jury verdict – quickly vanished. 
 In the mid-1960s, I asked investment banker Charlie Heider, a mutual friend of mine and Jack’s, 
to alert me the next time Jack was “in heat.” When Charlie’s call came, I sped to meet Jack. We made a 
deal in a few minutes, with me waiving an audit, “due diligence” or anything else that would give Jack an 
opportunity to reconsider. We just shook hands, and that was that. 
 When we were due to close the purchase at Charlie’s office, Jack was late. Finally arriving, he 
explained that he had been driving around looking for a parking meter with some unexpired time. That was 
a magic moment for me. I knew then that Jack was going to be my kind of manager. 
 When Berkshire purchased Jack’s two insurers, they had “float” of $17 million. We’ve regularly 
offered a long explanation of float in earlier reports, which you can read on our website. Simply put, float 
is money we hold that is not ours but which we get to invest. 
 At the end of 2006, our float had grown to $50.9 billion, and we have since written a huge 
retroactive reinsurance contract with Equitas – which I will describe in the next section – that boosts float 
by another $7 billion. Much of the gain we’ve made has come through our acquisition of other insurers, 
but we’ve also had outstanding internal growth, particularly at Ajit Jain’s amazing reinsurance operation. 
Naturally, I had no notion in 1967 that our float would develop as it has. There’s much to be said for just 
putting one foot in front of the other every day. 
 The float from retroactive reinsurance contracts, of which we have many, automatically drifts 
down over time. Therefore, it will be difficult for us to increase float in the future unless we make new 
acquisitions in the insurance field. Whatever its size, however, the all-important cost of Berkshire’s float 
over time is likely to be significantly below that of the industry, perhaps even falling to less than zero. 
Note the words “over time.” There will be bad years periodically. You can be sure of that. 
 In 2006, though, everything went right in insurance – really right. Our managers – Tony Nicely 
(GEICO), Ajit Jain (B-H Reinsurance), Joe Brandon and Tad Montross (General Re), Don Wurster 
(National Indemnity Primary), Tom Nerney (U.S. Liability), Tim Kenesey (Medical Protective), Rod 
Eldred (Homestate Companies and Cypress), Sid Ferenc and Steve Menzies (Applied Underwriters), John 
Kizer (Central States) and Don Towle (Kansas Bankers Surety) – simply shot the lights out. When I recite 
their names, I feel as if I’m at Cooperstown, reading from the Hall of Fame roster. Of course, the overall 
insurance industry also had a terrific year in 2006. But our managers delivered results generally superior to 
those of their competitors. 
7
 Below is the tally on our underwriting and float for each major sector of insurance. Enjoy the 
view, because you won’t soon see another like it. 
(in $ millions) 
Underwriting Profit (Loss) Yearend Float
Insurance Operations 2006 2005 2006 2005
General Re ....................... $ 526 $( 334) $22,827 $22,920 
B-H Reinsurance.............. 1,658 (1,069) 16,860 16,233 
GEICO ............................. 1,314 1,221 7,171 6,692 
Other Primary................... 340** 235* 4,029 3,442
Total................................. $3,838 $ 53 $50,887 $49,287
 * Includes MedPro from June 30, 2005. 
** Includes Applied Underwriters from May 19, 2006. 
* * * * * * * * * * * * 
 In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think 
they will remain satisfactory. The big unknown is super-cat insurance. Were the terrible hurricane seasons 
of 2004-05 aberrations? Or were they our planet’s first warning that the climate of the 21st Century will 
differ materially from what we’ve seen in the past? If the answer to the second question is yes, 2006 will 
soon be perceived as a misleading period of calm preceding a series of devastating storms. These could 
rock the insurance industry. It’s naïve to think of Katrina as anything close to a worst-case event. 
 Neither Ajit Jain, who manages our super-cat operation, nor I know what lies ahead. We do know 
that it would be a huge mistake to bet that evolving atmospheric changes are benign in their implications 
for insurers. 
 Don’t think, however, that we have lost our taste for risk. We remain prepared to lose $6 billion 
in a single event, if we have been paid appropriately for assuming that risk. We are not willing, though, to 
take on even very small exposures at prices that don’t reflect our evaluation of loss probabilities. 
Appropriate prices don’t guarantee profits in any given year, but inappropriate prices most certainly 
guarantee eventual losses. Rates have recently fallen because a flood of capital has entered the super-cat 
field. We have therefore sharply reduced our wind exposures. Our behavior here parallels that which we 
employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful. 
Lloyd’s, Equitas and Retroactive Reinsurance 
 Last year – we are getting now to Equitas – Berkshire agreed to enter into a huge retroactive 
reinsurance contract, a policy that protects an insurer against losses that have already happened, but whose 
cost is not yet known. I’ll give you details of the agreement shortly. But let’s first take a journey through 
insurance history, following the route that led to our deal. 
 Our tale begins around 1688, when Edward Lloyd opened a small coffee house in London. 
Though no Starbucks, his shop was destined to achieve worldwide fame because of the commercial 
activities of its clientele – shipowners, merchants and venturesome British capitalists. As these parties 
sipped Edward’s brew, they began to write contracts transferring the risk of a disaster at sea from the 
owners of ships and their cargo to the capitalists, who wagered that a given voyage would be completed 
without incident. These capitalists eventually became known as “underwriters at Lloyd’s.” 
 Though many people believe Lloyd’s to be an insurance company, that is not the case. It is 
instead a place where many member-insurers transact business, just as they did centuries ago. 
 Over time, the underwriters solicited passive investors to join in syndicates. Additionally, the 
business broadened beyond marine risks into every imaginable form of insurance, including exotic 
coverages that spread the fame of Lloyd’s far and wide. The underwriters left the coffee house, found 
grander quarters and formalized some rules of association. And those persons who passively backed the 
underwriters became known as “names.” 
8
 Eventually, the names came to include many thousands of people from around the world, who 
joined expecting to pick up some extra change without effort or serious risk. True, prospective names were 
always solemnly told that they would have unlimited and everlasting liability for the consequences of their 
syndicate’s underwriting – “down to the last cufflink,” as the quaint description went. But that warning 
came to be viewed as perfunctory. Three hundred years of retained cufflinks acted as a powerful sedative 
to the names poised to sign up. 
 Then came asbestos. When its prospective costs were added to the tidal wave of environmental 
and product claims that surfaced in the 1980s, Lloyd’s began to implode. Policies written decades earlier – 
and largely forgotten about – were developing huge losses. No one could intelligently estimate their total, 
but it was certain to be many tens of billions of dollars. The specter of unending and unlimited losses 
terrified existing names and scared away prospects. Many names opted for bankruptcy; some even chose 
suicide. 
 From these shambles, there came a desperate effort to resuscitate Lloyd’s. In 1996, the powers 
that be at the institution allotted £11.1 billion to a new company, Equitas, and made it responsible for 
paying all claims on policies written before 1993. In effect, this plan pooled the misery of the many 
syndicates in trouble. Of course, the money allotted could prove to be insufficient – and if that happened, 
the names remained liable for the shortfall. 
But the new plan, by concentrating all of the liabilities in one place, had the advantage of 
eliminating much of the costly intramural squabbling that went on among syndicates. Moreover, the 
pooling allowed claims evaluation, negotiation and litigation to be handled more intelligently than had been 
the case previously. Equitas embraced Ben Franklin’s thinking: “We must all hang together, or assuredly 
we shall hang separately.” 
 From the start, many people predicted Equitas would eventually fail. But as Ajit and I reviewed 
the facts in the spring of 2006 – 13 years after the last exposed policy had been written and after the 
payment of £11.3 billion in claims – we concluded that the patient was likely to survive. And so we 
decided to offer a huge reinsurance policy to Equitas. 
 Because plenty of imponderables continue to exist, Berkshire could not provide Equitas, and its 
27,972 names, unlimited protection. But we said – and I’m simplifying – that if Equitas would give us 
$7.12 billion in cash and securities (this is the float I spoke about), we would pay all of its future claims and 
expenses up to $13.9 billion. That amount was $5.7 billion above what Equitas had recently guessed its 
ultimate liabilities to be. Thus the names received a huge – and almost certainly sufficient – amount of 
future protection against unpleasant surprises. Indeed the protection is so large that Equitas plans a cash 
payment to its thousands of names, an event few of them had ever dreamed possible. 
 And how will Berkshire fare? That depends on how much “known” claims will end up costing us, 
how many yet-to-be-presented claims will surface and what they will cost, how soon claim payments will 
be made and how much we earn on the cash we receive before it must be paid out. Ajit and I think the odds 
are in our favor. And should we be wrong, Berkshire can handle it. 
 Scott Moser, the CEO of Equitas, summarized the transaction neatly: “Names wanted to sleep 
easy at night, and we think we’ve just bought them the world’s best mattress.” 
* * * * * * * * * * * 
Warning: It’s time to eat your broccoli – I am now going to talk about accounting matters. I owe 
this to those Berkshire shareholders who love reading about debits and credits. I hope both of you find this 
discussion helpful. All others can skip this section; there will be no quiz. 
 Berkshire has done many retroactive transactions – in both number and amount a multiple of such 
policies entered into by any other insurer. We are the reinsurer of choice for these coverages because the 
obligations that are transferred to us – for example, lifetime indemnity and medical payments to be made to 
injured workers – may not be fully satisfied for 50 years or more. No other company can offer the certainty 
9
that Berkshire can, in terms of guaranteeing the full and fair settlement of these obligations. This fact is 
important to the original insurer, policyholders and regulators. 
 The accounting procedure for retroactive transactions is neither well known nor intuitive. The 
best way for shareholders to understand it, therefore, is for us to simply lay out the debits and credits. 
Charlie and I would like to see this done more often. We sometimes encounter accounting footnotes about 
important transactions that leave us baffled, and we go away suspicious that the reporting company wished 
it that way. (For example, try comprehending transactions “described” in the old 10-Ks of Enron, even 
after you know how the movie ended.) 
So let us summarize our accounting for the Equitas transaction. The major debits will be to Cash 
and Investments, Reinsurance Recoverable, and Deferred Charges for Reinsurance Assumed (“DCRA”). 
The major credit will be to Reserve for Losses and Loss Adjustment Expense. No profit or loss will be 
recorded at the inception of the transaction, but underwriting losses will thereafter be incurred annually as 
the DCRA asset is amortized downward. The amount of the annual amortization charge will be primarily 
determined by how our end-of-the-year estimates as to the timing and amount of future loss payments 
compare to the estimates made at the beginning of the year. Eventually, when the last claim has been paid, 
the DCRA account will be reduced to zero. That day is 50 years or more away. 
 What’s important to remember is that retroactive insurance contracts always produce underwriting 
losses for us. Whether these losses are worth experiencing depends on whether the cash we have received 
produces investment income that exceeds the losses. Recently our DCRA charges have annually delivered 
$300 million or so of underwriting losses, which have been more than offset by the income we have 
realized through use of the cash we received as a premium. Absent new retroactive contracts, the amount 
of the annual charge would normally decline over time. After the Equitas transaction, however, the annual 
DCRA cost will initially increase to about $450 million a year. This means that our other insurance 
operations must generate at least that much underwriting gain for our overall float to be cost-free. That 
amount is quite a hurdle but one that I believe we will clear in many, if not most, years. 
 Aren’t you glad that I promised you there would be no quiz? 
Manufacturing, Service and Retailing Operations 
 Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary 
balance sheet and earnings statement for the entire group. 
Balance Sheet 12/31/06 (in millions)
Assets Liabilities and Equity
Cash and equivalents .............................. $ 1,543 Notes payable ............................ $ 1,468 
Accounts and notes receivable ............... 3,793 Other current liabilities.............. 6,635
Inventory ................................................ 5,257 Total current liabilities .............. 8,103 
Other current assets ................................ 363
Total current assets................................. 10,956 
Goodwill and other intangibles............... 13,314 Deferred taxes............................ 540 
Fixed assets............................................. 8,934 Term debt and other liabilities... 3,014 
Other assets............................................. 1,168 Equity ........................................ 22,715
$34,372 $34,372
10
Earnings Statement (in millions)
2006 2005 2004
Revenues ................................................................................. $52,660 $46,896 $44,142 
Operating expenses (including depreciation of $823 in 2006, 
 $699 in 2005 and $676 in 2004)....................................... 49,002 44,190 41,604 
Interest expense ....................................................................... 132 83 57
Pre-tax earnings....................................................................... 3,526* 2,623* 2,481* 
Income taxes and minority interests ........................................ 1,395 977 941
Net income .............................................................................. $ 2,131 $ 1,646 $ 1,540
*Does not include purchase-accounting adjustments. 
 This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing 
25% on average tangible net worth last year. It’s noteworthy also that these operations used only minor 
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many 
of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the 
balance sheet – and that fact reduces the earnings on our average carrying value to 10.8%. 
 Here are a few newsworthy items about companies in this sector: 
• Bob Shaw, a remarkable entrepreneur who from a standing start built Shaw Industries into the 
country’s largest carpet producer, elected last year, at age 75, to retire. To succeed him, Bob 
recommended Vance Bell, a 31-year veteran at Shaw, and Bob, as usual, made the right call. 
Weakness in housing has caused the carpet business to slow. Shaw, however, remains a 
powerhouse and a major contributor to Berkshire’s earnings.
• MiTek, a manufacturer of connectors for roof trusses at the time we purchased it in 2001, is 
developing into a mini-conglomerate. At the rate it is growing, in fact, “mini” may soon be 
inappropriate. In purchasing MiTek for $420 million, we lent the company $200 million at 9% 
and bought $198 million of stock, priced at $10,000 per share. Additionally, 55 employees bought 
2,200 shares for $22 million. Each employee paid exactly the same price that we did, in most 
cases borrowing money to do so. 
And are they ever glad they did! Five years later, MiTek’s sales have tripled and the stock is 
valued at $71,699 per share. Despite its making 14 acquisitions, at a cost of $291 million, MiTek 
has paid off its debt to Berkshire and holds $35 million of cash. We celebrated the fifth 
anniversary of our purchase with a party in July. I told the group that it would be embarrassing if 
MiTek’s stock price soared beyond that of Berkshire “A” shares. Don’t be surprised, however, if 
that happens (though Charlie and I will try to make our shares a moving target). 
• Not all of our businesses are destined to increase profits. When an industry’s underlying 
economics are crumbling, talented management may slow the rate of decline. Eventually, though, 
eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, 
“If you want to get a reputation as a good businessman, be sure to get into a good business.”) And 
fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits 
of our Buffalo News to decline. The skid will almost certainly continue. 
When Charlie and I were young, the newspaper business was as easy a way to make huge returns 
as existed in America. As one not-too-bright publisher famously said, “I owe my fortune to two 
great American institutions: monopoly and nepotism.” No paper in a one-paper city, however bad 
the product or however inept the management, could avoid gushing profits. 
The industry’s staggering returns could be simply explained. For most of the 20th Century, 
newspapers were the primary source of information for the American public. Whether the subject 
was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the 
easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets. 
11
The great majority of families therefore felt the need for a paper every day, but understandably 
most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and 
readers tended to want the paper with the most ads and news pages. This circularity led to a law 
of the newspaper jungle: Survival of the Fattest. 
Thus, when two or more papers existed in a major city (which was almost universally the case a 
century ago), the one that pulled ahead usually emerged as the stand-alone winner. After 
competition disappeared, the paper’s pricing power in both advertising and circulation was 
unleashed. Typically, rates for both advertisers and readers would be raised annually – and the 
profits rolled in. For owners this was economic heaven. (Interestingly, though papers regularly – 
and often in a disapproving way – reported on the profitability of, say, the auto or steel industries, 
they never enlightened readers about their own Midas-like situation. Hmmm . . .) 
As long ago as my 1991 letter to shareholders, I nonetheless asserted that this insulated world was 
changing, writing that “the media businesses . . . will prove considerably less marvelous than I, the 
industry, or lenders thought would be the case only a few years ago.” Some publishers took 
umbrage at both this remark and other warnings from me that followed. Newspaper properties, 
moreover, continued to sell as if they were indestructible slot machines. In fact, many intelligent 
newspaper executives who regularly chronicled and analyzed important worldwide events were 
either blind or indifferent to what was going on under their noses. 
Now, however, almost all newspaper owners realize that they are constantly losing ground in the 
battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had 
come along first, newspapers as we know them probably would never have existed. 
In Berkshire’s world, Stan Lipsey does a terrific job running the Buffalo News, and I am 
enormously proud of its editor, Margaret Sullivan. The News’ penetration of its market is the 
highest among that of this country’s large newspapers. We also do better financially than most 
metropolitan newspapers, even though Buffalo’s population and business trends are not good. 
Nevertheless, this operation faces unrelenting pressures that will cause profit margins to slide. 
True, we have the leading online news operation in Buffalo, and it will continue to attract more 
viewers and ads. However, the economic potential of a newspaper internet site – given the many 
alternative sources of information and entertainment that are free and only a click away – is at best 
a small fraction of that existing in the past for a print newspaper facing no competition. 
For a local resident, ownership of a city’s paper, like ownership of a sports team, still produces 
instant prominence. With it typically comes power and influence. These are ruboffs that appeal to 
many people with money. Beyond that, civic-minded, wealthy individuals may feel that local 
ownership will serve their community well. That’s why Peter Kiewit bought the Omaha paper 
more than 40 years ago. 
We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we 
have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, 
however: There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that 
losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when 
unit volume heads south. As the importance of newspapers diminishes, moreover, the “psychic” 
value of possessing one will wane, whereas owning a sports franchise will likely retain its cachet. 
Unless we face an irreversible cash drain, we will stick with the News, just as we’ve said that we 
would. (Read economic principle 11, on page 76.) Charlie and I love newspapers – we each read 
five a day – and believe that a free and energetic press is a key ingredient for maintaining a great 
democracy. We hope that some combination of print and online will ward off economic 
doomsday for newspapers, and we will work hard in Buffalo to develop a sustainable business 
model. I think we will be successful. But the days of lush profits from our newspaper are over. 
12
• A much improved situation is emerging at NetJets, which sells and manages fractionally-owned 
aircraft. This company has never had a problem growing: Revenues from flight operations have 
increased 596% since our purchase in 1998. But profits had been erratic. 
Our move to Europe, which began in 1996, was particularly expensive. After five years of 
operation there, we had acquired only 80 customers. And by mid-year 2006 our cumulative pre￾tax loss had risen to $212 million. But European demand has now exploded, with a net of 589 
customers having been added in 2005-2006. Under Mark Booth’s brilliant leadership, NetJets is 
now operating profitably in Europe, and we expect the positive trend to continue. 
Our U.S. operation also had a good year in 2006, which led to worldwide pre-tax earnings of $143 
million at NetJets last year. We made this profit even though we suffered a loss of $19 million in 
the first quarter. 
Credit Rich Santulli, along with Mark, for this turnaround. Rich, like many of our managers, has 
no financial need to work. But you’d never know it. He’s absolutely tireless – monitoring 
operations, making sales, and traveling the globe to constantly widen the already-enormous lead 
that NetJets enjoys over its competitors. Today, the value of the fleet we manage is far greater 
than that managed by our three largest competitors combined. 
There’s a reason NetJets is the runaway leader: It offers the ultimate in safety and service. At 
Berkshire, and at a number of our subsidiaries, NetJets aircraft are an indispensable business tool. 
I also have a contract for personal use with NetJets and so do members of my family and most 
Berkshire directors. (None of us, I should add, gets a discount.) Once you’ve flown NetJets, 
returning to commercial flights is like going back to holding hands. 
Regulated Utility Business 
 Berkshire has an 86.6% (fully diluted) interest in MidAmerican Energy Holdings, which owns a 
wide variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, 
whose 3.7 million electric customers make it the third largest distributor of electricity in the U.K.; (2) 
MidAmerican Energy, which serves 706,000 electric customers, primarily in Iowa; (3) Pacific Power and 
Rocky Mountain Power, serving about 1.7 million electric customers in six western states; and (4) Kern 
River and Northern Natural pipelines, which carry about 8% of the natural gas consumed in the U.S. 
Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave 
Sokol and Greg Abel. It’s unimportant how many votes each party has; we will make major moves only 
when we are unanimous in thinking them wise. Six years of working with Dave, Greg and Walter have 
underscored my original belief: Berkshire couldn’t have better partners. 
 Somewhat incongruously, MidAmerican owns the second largest real estate brokerage firm in the 
U.S., HomeServices of America. This company operates through 20 locally-branded firms with 20,300 
agents. Despite HomeServices’ purchase of two operations last year, the company’s overall volume fell 
9% to $58 billion, and profits fell 50%. 
 The slowdown in residential real estate activity stems in part from the weakened lending practices 
of recent years. The “optional” contracts and “teaser” rates that have been popular have allowed borrowers 
to make payments in the early years of their mortgages that fall far short of covering normal interest costs. 
Naturally, there are few defaults when virtually nothing is required of a borrower. As a cynic has said, “A 
rolling loan gathers no loss.” But payments not made add to principal, and borrowers who can’t afford 
normal monthly payments early on are hit later with above-normal monthly obligations. This is the Scarlett 
O’Hara scenario: “I’ll think about that tomorrow.” For many home owners, “tomorrow” has now arrived. 
Consequently there is a huge overhang of offerings in several of HomeServices’ markets. 
 Nevertheless, we will be seeking to purchase additional brokerage operations. A decade from 
now, HomeServices will almost certainly be much larger. 
13
 Here are some key figures on MidAmerican’s operations: 
Earnings (in $ millions)
2006 2005
U.K. utilities ....................................................................................................... $ 338 $ 308 
Iowa utility ......................................................................................................... 348 288 
Western utilities (acquired March 21, 2006) ..................................................... 356 N/A 
Pipelines ............................................................................................................. 376 309 
HomeServices..................................................................................................... 74 148 
Other (net) .......................................................................................................... 226 115
Earnings before corporate interest and taxes...................................................... 1,718 1,168 
Interest, other than to Berkshire ......................................................................... (261) (200) 
Interest on Berkshire junior debt ........................................................................ (134) (157) 
Income tax .......................................................................................................... (407) (248) 
Net earnings........................................................................................................ $ 916 $ 563
Earnings applicable to Berkshire*...................................................................... $ 885 $ 523 
Debt owed to others............................................................................................ 16,946 10,296 
Debt owed to Berkshire...................................................................................... 1,055 1,289 
*Includes interest earned by Berkshire (net of related income taxes) of $87 in 2006 and $102 in 2005. 
Finance and Financial Products 
 You will be happy to hear – and I’m even happier – that this will be my last discussion of the 
losses at Gen Re’s derivative operation. When we started to wind this business down early in 2002, we had 
23,218 contracts outstanding. Now we have 197. Our cumulative pre-tax loss from this operation totals 
$409 million, but only $5 million occurred in 2006. Charlie says that if we had properly classified the $409 
million on our 2001 balance sheet, it would have been labeled “Good Until Reached For.” In any event, a 
Shakespearean thought – slightly modified – seems appropriate for the tombstone of this derivative 
business: “All’s well that ends.” 
 We’ve also wound up our investment in Value Capital. So earnings or losses from these two lines 
of business are making their final appearance in the table that annually appears in this section. 
 Clayton Homes remains an anomaly in the manufactured-housing industry, which last year 
recorded its lowest unit sales since 1962. Indeed, the industry’s volume last year was only about one-third 
that of 1999. Outside of Clayton, I doubt if the industry, overall, made any money in 2006. 
Yet Clayton earned $513 million pre-tax and paid Berkshire an additional $86 million as a fee for 
our obtaining the funds to finance Clayton’s $10 billion portfolio of installment receivables. Berkshire’s 
financial strength has clearly been of huge help to Clayton. But the driving force behind the company’s 
success is Kevin Clayton. Kevin knows the business forward and backward, is a rational decision-maker 
and a joy to work with. Because of acquisitions, Clayton now employs 14,787 people, compared to 6,661 
at the time of our purchase. 
 We have two leasing operations: CORT (furniture), run by Paul Arnold, and XTRA (truck 
trailers), run by Bill Franz. CORT’s earnings improved significantly last year, and XTRA’s remained at 
the high level attained in 2005. We continue to look for tuck-in acquisitions to be run by Paul or Bill, and 
also are open to ideas for new leasing opportunities. 
14
 Here’s a breakdown of earnings in this sector: 
 (in millions) 
Pre-Tax Earnings Interest-Bearing Liabilities
2006 2005 2006 2005
Trading – ordinary income ............................ $ 274 $ 200 $ 600 $1,061 
Gen Re Securities (loss) ................................. (5) (104) 1,204* 2,617* 
Life and annuity operation ............................. 29 11 2,459 2,461 
Value Capital (loss) ....................................... 6 (33) N/A N/A 
Leasing operations ......................................... 182 173 261 370 
Manufactured-housing finance (Clayton)....... 513 416 10,498 9,299 
Other............................................................... 158 159 N/A N/A 
Income before capital gains............................ 1,157 822 
Trading – capital gains (losses) ..................... 938 (234) 
Total .............................................................. $ 2,095 $ 588
*Includes all liabilities 
Investments 
 We show below our common stock investments. With two exceptions, those that had a market 
value of more than $700 million at the end of 2006 are itemized. We don’t itemize the two securities 
referred to, which have a market value of $1.9 billion, because we continue to buy them. I could, of course, 
tell you their names. But then I would have to kill you. 
12/31/06
Percentage of
Shares Company Company Owned Cost* Market
(in millions)
151,610,700 American Express Company ................... 12.6 $ 1,287 $ 9,198 
36,417,400 Anheuser-Busch Cos., Inc. ...................... 4.7 1,761 1,792 
200,000,000 The Coca-Cola Company ........................ 8.6 1,299 9,650 
17,938,100 Conoco Phillips ....................................... 1.1 1,066 1,291 
21,334,900 Johnson & Johnson.................................. 0.7 1,250 1,409 
6,708,760 M&T Bank Corporation .......................... 6.1 103 820 
48,000,000 Moody’s Corporation .............................. 17.2 499 3,315 
2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 488 3,313 
3,486,006 POSCO .................................................... 4.0 572 1,158 
100,000,000 The Procter & Gamble Company ............ 3.2 940 6,427 
229,707,000 Tesco ....................................................... 2.9 1,340 1,820 
31,033,800 US Bancorp ............................................. 1.8 969 1,123 
17,072,192 USG Corp................................................ 19.0 536 936 
19,944,300 Wal-Mart Stores, Inc. .............................. 0.5 942 921 
1,727,765 The Washington Post Company .............. 18.0 11 1,288 
218,169,300 Wells Fargo & Company......................... 6.5 3,697 7,758 
1,724,200 White Mountains Insurance..................... 16.0 369 999 
Others ...................................................... 5,866 8,315
Total Common Stocks ............................. $22,995 $61,533
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases 
because of write-ups or write-downs that have been required. 
 We are delighted by the 2006 business performance of virtually all of our investees. Last year, we 
told you that our expectation was that these companies, in aggregate, would increase their earnings by 6% 
to 8% annually, a rate that would double their earnings every ten years or so. In 2006 American Express, 
15
Coca-Cola, Procter & Gamble and Wells Fargo, our largest holdings, increased per-share earnings by 18%, 
9%, 8% and 11%. These are stellar results, and we thank their CEOs. 
* * * * * * * * * * * * 
 We’ve come close to eliminating our direct foreign-exchange position, from which we realized 
about $186 million in pre-tax profits in 2006 (earnings that were included in the Finance and Financial 
Products table shown earlier). That brought our total gain since inception of this position in 2002 to $2.2 
billion. Here’s a breakdown by currency: 
Total Gain (Loss) in Millions
Australian dollar $247.1 Mexican peso $106.1 
British pound 287.2 New Zealand dollar 102.6 
Canadian dollar 398.3 Singapore dollar (2.6) 
Chinese yuan (12.7) South Korean won 261.3 
Euro 839.2 Swiss franc 9.6 
Hong Kong dollar (2.5) Taiwan dollar (45.3) 
Japanese yen 1.9 Miscellaneous options 22.9 
 We’ve made large indirect currency profits as well, though I’ve never tallied the precise amount. 
For example, in 2002-2003 we spent about $82 million buying – of all things – Enron bonds, some of 
which were denominated in Euros. Already we’ve received distributions of $179 million from these bonds, 
and our remaining stake is worth $173 million. That means our overall gain is $270 million, part of which 
came from the appreciation of the Euro that took place after our bond purchase. 
 When we first began making foreign exchange purchases, interest-rate differentials between the 
U.S. and most foreign countries favored a direct currency position. But that spread turned negative in 
2005. We therefore looked for other ways to gain foreign-currency exposure, such as the ownership of 
foreign equities or of U.S. stocks with major earnings abroad. The currency factor, we should emphasize, 
is not dominant in our selection of equities, but is merely one of many considerations. 
 As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues 
to be high. I fervently believe in real trade – the more the better for both us and the world. We had about 
$1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last 
year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators 
would describe the situation if our imports were $.76 trillion – a full 6% of GDP – and we had no exports.) 
Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its 
assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of 
what we owned in order to consume more than we produced. 
The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved 
responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and 
businesses. And we have a vast store of these to hand over. 
 These transfers will have consequences, however. Already the prediction I made last year about 
one fall-out from our spending binge has come true: The “investment income” account of our country – 
positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their 
U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and 
turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse 
compounding” as we pay ever-increasing amounts of interest on interest. 
 I want to emphasize that even though our course is unwise, Americans will live better ten or 
twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be 
forced every year to ship a significant portion of their current production abroad merely to service the cost 
of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption 
16
of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual 
“tribute” so onerous that there will be a severe political backlash. How that will play out in markets is 
impossible to predict – but to expect a “soft landing” seems like wishful thinking. 
* * * * * * * * * * * * 
 I should mention that all of the direct currency profits we have realized have come from forward 
contracts, which are derivatives, and that we have entered into other types of derivatives contracts as well. 
That may seem odd, since you know of our expensive experience in unwinding the derivatives book at Gen 
Re and also have heard me talk of the systemic problems that could result from the enormous growth in the 
use of derivatives. Why, you may wonder, are we fooling around with such potentially toxic material? 
 The answer is that derivatives, just like stocks and bonds, are sometimes wildly mispriced. For 
many years, accordingly, we have selectively written derivative contracts – few in number but sometimes 
for large dollar amounts. We currently have 62 contracts outstanding. I manage them personally, and they 
are free of counterparty credit risk. So far, these derivative contracts have worked out well for us, 
producing pre-tax profits in the hundreds of millions of dollars (above and beyond the gains I’ve itemized 
from forward foreign-exchange contracts). Though we will experience losses from time to time, we are 
likely to continue to earn – overall – significant profits from mispriced derivatives. 
* * * * * * * * * * * * 
 I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the 
Board knows exactly who should take over if I should die tonight. Each of the three is much younger than 
I. The directors believe it’s important that my successor have the prospect of a long tenure. 
 Frankly, we are not as well-prepared on the investment side of our business. There’s a history 
here: At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has 
filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO’s 
equity portfolio. But he is only six years younger than I. If I were to die soon, he would fill in 
magnificently for a short period. For the long-term, though, we need a different answer. 
 At our October board meeting, we discussed that subject fully. And we emerged with a plan, 
which I will carry out with the help of Charlie and Lou. 
 Under this plan, I intend to hire a younger man or woman with the potential to manage a very 
large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for 
someone to do that arises. As part of the selection process, we may in fact take on several candidates. 
 Picking the right person(s) will not be an easy task. It’s not hard, of course, to find smart people, 
among them individuals who have impressive investment records. But there is far more to successful long￾term investing than brains and performance that has recently been good. 
Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe 
out a long string of successes. We therefore need someone genetically programmed to recognize and avoid 
serious risks, including those never before encountered. Certain perils that lurk in investment strategies 
cannot be spotted by use of the models commonly employed today by financial institutions. 
Temperament is also important. Independent thinking, emotional stability, and a keen 
understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen 
a lot of very smart people who have lacked these virtues. 
 Finally, we have a special problem to consider: our ability to keep the person we hire. Being able 
to list Berkshire on a resume would materially enhance the marketability of an investment manager. We 
will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much 
more money elsewhere. 
17
There are surely people who fit what we need, but they may be hard to identify. In 1979, Jack 
Byrne and I felt we had found such a person in Lou Simpson. We then made an arrangement with him 
whereby he would be paid well for sustained overperformance. Under this deal, he has earned large 
amounts. Lou, however, could have left us long ago to manage far greater sums on more advantageous 
terms. If money alone had been the object, that’s exactly what he would have done. But Lou never 
considered such a move. We need to find a younger person or two made of the same stuff. 
* * * * * * * * * * * * 
The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent 
health. It’s amazing what Cherry Coke and hamburgers will do for a fellow. 
Some Changes on Berkshire’s Board 
 The composition of our board will change in two ways this spring. One change will involve the 
Chace family, which has been connected to Berkshire and its predecessor companies for more than a 
century. In 1929, the first Malcolm G. Chace played an important role in merging four New England 
textile operations into Berkshire Fine Spinning Associates. That company merged with Hathaway 
Manufacturing in 1955 to form Berkshire Hathaway, and Malcolm G. Chace, Jr. became its chairman. 
 Early in 1965, Malcolm arranged for Buffett Partnership Ltd. to buy a key block of Berkshire 
shares and welcomed us as the new controlling shareholder of the company. Malcolm continued as non￾executive chairman until 1969. He was both a wonderful gentleman and helpful partner. 
 That description also fits his son, Malcolm “Kim” Chace, who succeeded his father on Berkshire’s 
board in 1992. But last year Kim, now actively and successfully running a community bank that he 
founded in 1996, suggested that we find a younger person to replace him on our board. We have done so, 
and Kim will step down as a director at the annual meeting. I owe much to the Chaces and wish to thank 
Kim for his many years of service to Berkshire. 
 In selecting a new director, we were guided by our long-standing criteria, which are that board 
members be owner-oriented, business-savvy, interested and truly independent. I say “truly” because many 
directors who are now deemed independent by various authorities and observers are far from that, relying 
heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in 
many forms, often range between $150,000 and $250,000 annually, compensation that may approach or 
even exceed all other income of the “independent” director. And – surprise, surprise – director 
compensation has soared in recent years, pushed up by recommendations from corporate America’s 
favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is 
not.) 
Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, 
is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs 
seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from 
abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years 
I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like 
an intelligent owner?” 
 The questions I instead get would sound ridiculous to someone seeking candidates for, say, a 
football team, or an arbitration panel or a military command. In those cases, the selectors would look for 
people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we 
are in the specialized activity of running a business well, and therefore we seek business judgment. 
 That’s exactly what we’ve found in Susan Decker, CFO of Yahoo!, who will join our board at the 
annual meeting. We are lucky to have her: She scores very high on our four criteria and additionally, at 44, 
is young – an attribute, as you may have noticed, that your Chairman has long lacked. We will seek more 
young directors in the future, but never by slighting the four qualities that we insist upon. 
18
This and That 
 Berkshire will pay about $4.4 billion in federal income tax on its 2006 earnings. In its last fiscal 
year the U.S. Government spent $2.6 trillion, or about $7 billion per day. Thus, for more than half of one 
day, Berkshire picked up the tab for all federal expenditures, ranging from Social Security and Medicare 
payments to the cost of our armed services. Had there been only 600 taxpayers like Berkshire, no one else 
in America would have needed to pay any federal income or payroll taxes. 
* * * * * * * * * * * * 
 Our federal return last year, we should add, ran to 9,386 pages. To handle this filing, state and 
foreign tax returns, a myriad of SEC requirements, and all of the other matters involved in running 
Berkshire, we have gone all the way up to 19 employees at World Headquarters. 
 This crew occupies 9,708 square feet of space, and Charlie – at World Headquarters West in Los 
Angeles – uses another 655 square feet. Our home-office payroll, including benefits and counting both 
locations, totaled $3,531,978 last year. We’re careful when spending your money. 
 Corporate bigwigs often complain about government spending, criticizing bureaucrats who they 
say spend taxpayers’ money differently from how they would if it were their own. But sometimes the 
financial behavior of executives will also vary based on whose wallet is getting depleted. Here’s an 
illustrative tale from my days at Salomon. In the 1980s the company had a barber, Jimmy by name, who 
came in weekly to give free haircuts to the top brass. A manicurist was also on tap. Then, because of a 
cost-cutting drive, patrons were told to pay their own way. One top executive (not the CEO) who had 
previously visited Jimmy weekly went immediately to a once-every-three-weeks schedule. 
* * * * * * * * * * * * 
Every now and then Charlie and I catch on early to a tide-like trend, one brimming over with 
commercial promise. For example, though American Airlines (with its “miles”) and American Express 
(with credit card points) are credited as being trailblazers in granting customers “rewards,” Charlie and I 
were far ahead of them in spotting the appeal of this powerful idea. Excited by our insight, the two of us 
jumped into the reward business way back in 1970 by buying control of a trading stamp operation, Blue 
Chip Stamps. In that year, Blue Chip had sales of $126 million, and its stamps papered California. 
In 1970, indeed, about 60 billion of our stamps were licked by savers, pasted into books, and taken 
to Blue Chip redemption stores. Our catalog of rewards was 116 pages thick and chock full of tantalizing 
items. When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had 
finally found a sure thing. 
Well, not quite. From the day Charlie and I stepped into the Blue Chip picture, the business went 
straight downhill. By 1980, sales had fallen to $19.4 million. And, by 1990, sales were bumping along at 
$1.5 million. No quitter, I redoubled my managerial efforts. 
 Sales then fell another 98%. Last year, in Berkshire’s $98 billion of revenues, all of $25,920 (no
zeros omitted) came from Blue Chip. Ever hopeful, Charlie and I soldier on. 
* * * * * * * * * * * * 
 I mentioned last year that in my service on 19 corporate boards (not counting Berkshire or other 
controlled companies), I have been the Typhoid Mary of compensation committees. At only one company 
was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that 
we faced. My ostracism has been peculiar, considering that I certainly haven’t lacked experience in setting 
CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries 
and incentives for the CEOs of around 40 significant operating businesses. 
19
 How much time does this aspect of my job take? Virtually none. How many CEOs have 
voluntarily left us for other jobs in our 42-year history? Precisely none. 
 Berkshire employs many different incentive arrangements, with their terms depending on such 
elements as the economic potential or capital intensity of a CEO’s business. Whatever the compensation 
arrangement, though, I try to keep it both simple and fair. 
When we use incentives – and these can be large – they are always tied to the operating results for 
which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business 
performance. If a CEO bats .300, he gets paid for being a .300 hitter, even if circumstances outside of his 
control cause Berkshire to perform poorly. And if he bats .150, he doesn’t get a payoff just because the 
successes of others have enabled Berkshire to prosper mightily. An example: We now own $61 billion of 
equities at Berkshire, whose value can easily rise or fall by 10% in a given year. Why in the world should 
the pay of our operating executives be affected by such $6 billion swings, however important the gain or 
loss may be for shareholders? 
 You’ve read loads about CEOs who have received astronomical compensation for mediocre 
results. Much less well-advertised is the fact that America’s CEOs also generally live the good life. Many, 
it should be emphasized, are exceptionally able, and almost all work far more than 40 hours a week. But 
they are usually treated like royalty in the process. (And we’re certainly going to keep it that way at 
Berkshire. Though Charlie still favors sackcloth and ashes, I prefer to be spoiled rotten. Berkshire owns 
The Pampered Chef; our wonderful office group has made me The Pampered Chief.) 
 CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem 
a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this 
argument, phrased more elegantly of course, when they make recommendations to comp committees. 
 Irrational and excessive comp practices will not be materially changed by disclosure or by 
“independent” comp committee members. Indeed, I think it’s likely that the reason I was rejected for 
service on so many comp committees was that I was regarded as too independent. Compensation reform 
will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at 
the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their 
clients will only perpetuate present excesses. 
* * * * * * * * * * * * 
 Last year I arranged for the bulk of my Berkshire holdings to go to five charitable foundations, 
thus carrying out part of my lifelong plan to eventually use all of my shares for philanthropic purposes. 
Details of the commitments I made, as well as the rationale for them, are posted on our website, 
www.berkshirehathaway.com. Taxes, I should note, had nothing to do with my decision or its timing. My 
federal and state income taxes in 2006 were exactly what they would have been had I not made my first 
contributions last summer, and the same point will apply to my 2007 contributions. 
 In my will I’ve stipulated that the proceeds from all Berkshire shares I still own at death are to be 
used for philanthropic purposes within ten years after my estate is closed. Because my affairs are not 
complicated, it should take three years at most for this closing to occur. Adding this 13-year period to my 
expected lifespan of about 12 years (though, naturally, I’m aiming for more) means that proceeds from all 
of my Berkshire shares will likely be distributed for societal purposes over the next 25 years or so. 
I’ve set this schedule because I want the money to be spent relatively promptly by people I know
to be capable, vigorous and motivated. These managerial attributes sometimes wane as institutions – 
particularly those that are exempt from market forces – age. Today, there are terrific people in charge at 
the five foundations. So at my death, why should they not move with dispatch to judiciously spend the 
money that remains? 
20
Those people favoring perpetual foundations argue that in the future there will most certainly be 
large and important societal problems that philanthropy will need to address. I agree. But there will then 
also be many super-rich individuals and families whose wealth will exceed that of today’s Americans and 
to whom philanthropic organizations can make their case for funding. These funders can then judge 
firsthand which operations have both the vitality and the focus to best address the major societal problems 
that then exist. In this way, a market test of ideas and effectiveness can be applied. Some organizations 
will deserve major support while others will have outlived their usefulness. Even if the people above 
ground make their decisions imperfectly, they should be able to allocate funds more rationally than a 
decedent six feet under will have ordained decades earlier. Wills, of course, can always be rewritten, but 
it’s very unlikely that my thinking will change in a material way. 
 A few shareholders have expressed concern that sales of Berkshire by the foundations receiving 
shares will depress the stock. These fears are unwarranted. The annual trading volume of many stocks 
exceeds 100% of the outstanding shares, but nevertheless these stocks usually sell at prices approximating 
their intrinsic value. Berkshire also tends to sell at an appropriate price, but with annual volume that is only 
15% of shares outstanding. At most, sales by the foundations receiving my shares will add three 
percentage points to annual trading volume, which will still leave Berkshire with a turnover ratio that is the 
lowest around. 
Overall, Berkshire’s business performance will determine the price of our stock, and most of the 
time it will sell in a zone of reasonableness. It’s important that the foundations receive appropriate prices 
as they periodically sell Berkshire shares, but it’s also important that incoming shareholders don’t overpay. 
(See economic principle 14 on page 77.) By both our policies and shareholder communications, Charlie 
and I will do our best to ensure that Berkshire sells at neither a large discount nor large premium to intrinsic 
value. 
 The existence of foundation ownership will in no way influence our board’s decisions about 
dividends, repurchases, or the issuance of shares. We will follow exactly the same rule that has guided us 
in the past: What action will be likely to deliver the best result for shareholders over time? 
* * * * * * * * * * * * * 
 In last year’s report I allegorically described the Gotrocks family – a clan that owned all of 
America’s businesses and that counterproductively attempted to increase its investment returns by paying 
ever-greater commissions and fees to “helpers.” Sad to say, the “family” continued its self-destructive 
ways in 2006. 
 In part the family persists in this folly because it harbors unrealistic expectations about obtainable 
returns. Sometimes these delusions are self-serving. For example, private pension plans can temporarily 
overstate their earnings, and public pension plans can defer the need for increased taxes, by using 
investment assumptions that are likely to be out of reach. Actuaries and auditors go along with these 
tactics, and it can be decades before the chickens come home to roost (at which point the CEO or public 
official who misled the world is apt to be gone). 
 Meanwhile, Wall Street’s Pied Pipers of Performance will have encouraged the futile hopes of the 
family. The hapless Gotrocks will be assured that they all can achieve above-average investment 
performance – but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon. 
In 2006, promises and fees hit new highs. A flood of money went from institutional investors to 
the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 
2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, 
loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success 
is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will 
keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 
percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the 
manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 
15% to investors in the same period and charged them only a token fee. 
21
The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer 
over time than it would have been had it never heard of these “hyper-helpers.” Even so, the 2-and-20 
action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to 
someone with money, too often the fellow with money ends up with the experience, and the fellow with 
experience ends up with the money. 
* * * * * * * * * * * * 
 Let me end this section by telling you about one of the good guys of Wall Street, my long-time 
friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably 
successful investment partnership, from which he took not a dime unless his investors made money. My 
admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my 
sole recommendation to a St. Louis family who wanted an honest and able investment manager. 
 Walter did not go to business school, or for that matter, college. His office contained one file 
cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or 
bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. 
Walter and Edwin never came within a mile of inside information. Indeed, they used “outside” information 
only sparingly, generally selecting securities by certain simple statistical methods Walter learned while 
working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, 
“How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for 
Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms. 
 Following a strategy that involved no real risk – defined as permanent loss of capital – Walter 
produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s 
particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a 
lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of 
investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in 
comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the 
luckiest of them would not have come close to equaling his record. There is simply no possibility that what 
Walter achieved over 47 years was due to chance. 
 I first publicly discussed Walter’s remarkable record in 1984. At that time “efficient market 
theory” (EMT) was the centerpiece of investment instruction at most major business schools. This theory, 
as then most commonly taught, held that the price of any stock at any moment is not demonstrably 
mispriced, which means that no investor can be expected to overperform the stock market averages using 
only publicly-available information (though some will do so by luck). When I talked about Walter 23 years 
ago, his record forcefully contradicted this dogma. 
And what did members of the academic community do when they were exposed to this new and 
important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their 
minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to 
study Walter’s performance and what it meant for the school’s cherished theory. 
 Instead, the faculties of the schools went merrily on their way presenting EMT as having the 
certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as 
much chance of major promotion as Galileo had of being named Pope. 
 Tens of thousands of students were therefore sent out into life believing that on every day the price 
of every stock was “right” (or, more accurately, not demonstrably wrong) and that attempts to evaluate 
businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier 
by the misguided instructions that had been given to those young minds. After all, if you are in the 
shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat. 
 Maybe it was a good thing for his investors that Walter didn’t go to college. 
22
The Annual Meeting
 Our meeting this year will be held on Saturday, May 5th. As always, the doors will open at the 
Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to 
the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. 
Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave 
during the day’s question periods, please do so while Charlie is talking. 
 The best reason to exit, of course is to shop. We will help you do that by filling the 194,300 
square foot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 
24,000 people who came to the meeting did their part, and almost every location racked up record sales. 
But records are made to be broken, and I know you can do better. 
 This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, Johns 
Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that the home, 
priced at $139,900, delivers excellent value. Last year, a helper at the Qwest bought one of two homes on 
display well before we opened the doors to shareholders. Flanking the Clayton home on the exhibition 
floor this year will be an RV and pontoon boat from Forest River. 
 GEICO will have a booth staffed by a number of its top counselors from around the country, all of 
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a 
special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in 
which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as 
that given certain groups.) Bring the details of your existing insurance and check out whether we can save 
you money. For at least 50% of you, I believe we can. And while you’re at it, sign up for the new GEICO 
credit card. It’s the one I now use (sparingly, of course). 
 On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets available 
for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to 
Omaha by bus; leave in your new plane. And take all the hair gel that you wish on board with you. 
 In the Bookworm’s corner of our bazaar, there will be about 25 books and DVDs – all discounted 
– led again by Poor Charlie’s Almanack. (One hapless soul last year asked Charlie what he should do if he 
didn’t enjoy the book. Back came a Mungerism: “No problem – just give it to someone more intelligent.”) 
We’ve added a few titles this year. Among them are Seeking Wisdom: From Darwin to Munger by Peter 
Bevelin, a long-time Swedish shareholder of Berkshire, and Fred Schwed’s classic, Where are the 
Customers’ Yachts? This book was first published in 1940 and is now in its 4th edition. The funniest book 
ever written about investing, it lightly delivers many truly important messages on the subject. 
 An attachment to the proxy material that is enclosed with this report explains how you can obtain 
the credential you will need for admission to the meeting and other events. As for plane, hotel and car 
reservations, we have again signed up American Express (800-799-6634) to give you special help. Carol 
Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it. Hotel 
rooms can be hard to find, but work with Carol and you will get one. 
 At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, 
we will again be having “Berkshire Weekend” discount pricing. We initiated this special event at NFM ten 
years ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $30 million in 2006. I get 
goose bumps just thinking about this volume. 
 To obtain the Berkshire discount, you must make your purchases between Thursday, May 3rd and 
Monday, May 7th inclusive, and also present your meeting credential. The period’s special pricing will 
even apply to the products of several prestigious manufacturers that normally have ironclad rules against 
discounting but which, in the spirit of our shareholder weekend, have made an exception for you. We 
appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. 
23
to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a special shareholder 
picnic featuring chicken and beef tacos (and hamburgers for traditionalists like me). 
 At a remodeled and expanded Borsheim’s, we will again have two shareholder-only events. The 
first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May 4th. The second, the main gala, will 
be held on Sunday, May 6th, from 9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m. 
 We will have huge crowds at Borsheim’s throughout the weekend. For your convenience, 
therefore, shareholder prices will be available from Monday, April 30th through Saturday, May 12th. 
During that period, please identify yourself as a shareholder by presenting your meeting credentials or a 
brokerage statement that shows you are a Berkshire holder. 
 On Sunday, in a tent outside of Borsheim’s, a blindfolded Patrick Wolff, twice U.S. chess 
champion, will take on all comers – who will have their eyes wide open – in groups of six. Last year I 
carried on a conversation with Patrick while he played in this manner. Nearby, Norman Beck, a 
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and 
Sharon Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on 
Sunday afternoon. 
 To add to the Sunday fun at Borsheim’s, Ariel Hsing will play table tennis (ping-pong to the 
uninitiated) from 1 p.m. to 4 p.m. against anyone brave enough to take her on. Ariel, though only 11, is 
ranked number one among girls under 16 in the U.S. (and number 1 among both boys and girls under 12). 
The week I turned 75 I played Ariel, then 9 and barely tall enough to see across the table, thinking I would 
take it easy on her so as not to crush her young spirit. Instead she crushed me. I’ve since devised a plan 
that will give me a chance against her. At 1 p.m. on Sunday, I will initiate play with a 2-point game against 
Ariel. If I somehow win the first point, I will then feign injury and claim victory. After this strenuous 
encounter wears Ariel down, our shareholders can then try their luck against her. 
 Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 6th, and will be 
serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on that day, you must have a 
reservation. To make one, call 402-551-3733 on April 1st (but not before). 
 In the 2006-2007 school year, 35 university classes, including one from IBMEC in Brazil, will 
come to Omaha for sessions with me. I take almost all – in aggregate, more than 2,000 students – to lunch 
at Gorat’s. And they love it. To learn why, come join us on Sunday. 
 We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come 
from outside of North America. Every year our meeting draws many people from around the globe, and 
Charlie and I want to be sure we personally greet those who have come so far. Last year we enjoyed 
meeting more than 400 of you from many dozens of countries. Any shareholder who comes from other 
than the U.S. or Canada will be given a special credential and instructions for attending this function. 
* * * * * * * * * * * * 
 Charlie and I are extraordinarily lucky. We were born in America; had terrific parents who saw 
that we got good educations; have enjoyed wonderful families and great health; and came equipped with a 
“business” gene that allows us to prosper in a manner hugely disproportionate to other people who 
contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in 
which we are helped every day in countless ways by talented and cheerful associates. No wonder we tap￾dance to work. But nothing is more fun for us than getting together with our shareholder-partners at 
Berkshire’s annual meeting. So join us on May 5th at the Qwest for our annual Woodstock for Capitalists. 
We’ll see you there. 
February 28, 2007 Warren E. Buffett 
 Chairman of the Board 
24
Note: The following table appears in the printed Annual Report on the facing page of the Chairman's Letter 
and is referred to in that letter.
2 
Berkshire’s Corporate Performance vs. the S&P 500 
 Annual Percentage Change 
in Per-Share in S&P 500 
Book Value of with Dividends Relative 
Berkshire Included Results 
Year (1) (2) (1)-(2) 
1965 .................................................... 23.8 10.0 13.8 
1966 .................................................... 20.3 (11.7) 32.0 
1967 .................................................... 11.0 30.9 (19.9) 
1968 .................................................... 19.0 11.0 8.0 
1969 .................................................... 16.2 (8.4) 24.6 
1970 .................................................... 12.0 3.9 8.1 
1971 .................................................... 16.4 14.6 1.8 
1972 .................................................... 21.7 18.9 2.8 
1973 .................................................... 4.7 (14.8) 19.5 
1974 .................................................... 5.5 (26.4) 31.9 
1975 .................................................... 21.9 37.2 (15.3) 
1976 .................................................... 59.3 23.6 35.7 
1977 .................................................... 31.9 (7.4) 39.3 
1978 .................................................... 24.0 6.4 17.6 
1979 .................................................... 35.7 18.2 17.5 
1980 .................................................... 19.3 32.3 (13.0) 
1981 .................................................... 31.4 (5.0) 36.4 
1982 .................................................... 40.0 21.4 18.6 
1983 .................................................... 32.3 22.4 9.9 
1984 .................................................... 13.6 6.1 7.5 
1985 .................................................... 48.2 31.6 16.6 
1986 .................................................... 26.1 18.6 7.5 
1987 .................................................... 19.5 5.1 14.4 
1988 .................................................... 20.1 16.6 3.5 
1989 .................................................... 44.4 31.7 12.7 
1990 .................................................... 7.4 (3.1) 10.5 
1991 .................................................... 39.6 30.5 9.1 
1992 .................................................... 20.3 7.6 12.7 
1993 .................................................... 14.3 10.1 4.2 
1994 .................................................... 13.9 1.3 12.6 
1995 .................................................... 43.1 37.6 5.5 
1996 .................................................... 31.8 23.0 8.8 
1997 .................................................... 34.1 33.4 .7 
1998 .................................................... 48.3 28.6 19.7 
1999 .................................................... .5 21.0 (20.5) 
2000 .................................................... 6.5 (9.1) 15.6 
2001 .................................................... (6.2) (11.9) 5.7 
2002 .................................................... 10.0 (22.1) 32.1 
2003 .................................................... 21.0 28.7 (7.7) 
2004 .................................................... 10.5 10.9 (.4) 
2005 .................................................... 6.4 4.9 1.5 
2006 .................................................... 18.4 15.8 2.6 
2007 .................................................... 11.0 5.5 5.5 
Compounded Annual Gain – 1965-2007 21.1% 10.3% 10.8 
Overall Gain – 1964-2007 400,863% 6,840% 
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 
 Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market 
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results 
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using 
the numbers originally reported. 
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire 
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index 
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC. 
To the Shareholders of Berkshire Hathaway Inc.: 
Our gain in net worth during 2007 was $12.3 billion, which increased the per-share book value of 
both our Class A and Class B stock by 11%. Over the last 43 years (that is, since present management took 
over) book value has grown from $19 to $78,008, a rate of 21.1% compounded annually.* 
Overall, our 76 operating businesses did well last year. The few that had problems were primarily 
those linked to housing, among them our brick, carpet and real estate brokerage operations. Their setbacks 
are minor and temporary. Our competitive position in these businesses remains strong, and we have first￾class CEOs who run them right, in good times or bad. 
Some major financial institutions have, however, experienced staggering problems because they 
engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells 
Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented 
new ways to lose money when the old ways seemed to work just fine.” 
You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More 
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that 
house prices would forever rise. That conviction made a borrower’s income and cash equity seem 
unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would 
cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. 
As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been 
swimming naked when the tide goes out – and what we are witnessing at some of our largest financial 
institutions is an ugly sight. 
 Turning to happier thoughts, we can report that Berkshire’s newest acquisitions of size, TTI and 
Iscar, led by their CEOs, Paul Andrews and Jacob Harpaz respectively, performed magnificently in 2007. 
Iscar is as impressive a manufacturing operation as I’ve seen, a view I reported last year and that was 
confirmed by a visit I made in the fall to its extraordinary plant in Korea. 
 Finally, our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the 
reason is that we have the best collection of insurance managers in the business – more about them later. 
But we also were very lucky in 2007, the second year in a row free of major insured catastrophes. 
 That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall 
significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third 
consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points 
or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower 
insurance earnings during the next few years. 
Yardsticks 
 Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash 
equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations, 
which we assign to our second bucket of value). 
 *All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares 
are 1/30th of those shown for the A. 
3
 Insurance float – money we temporarily hold in our insurance operations that does not belong to 
us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks 
even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance 
underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however, 
we’ve been profitable, and I expect we will average breakeven results or better in the future. If we do that, 
our investments can be viewed as an unencumbered source of value for Berkshire shareholders. 
 Berkshire’s second component of value is earnings that come from sources other than investments 
and insurance. These earnings are delivered by our 66 non-insurance companies, itemized on page 76. In 
our early years, we focused on the investment side. During the past two decades, however, we have put 
ever more emphasis on the development of earnings from non-insurance businesses. 
 The following tables illustrate this shift. In the first we tabulate per-share investments at 14-year 
intervals. We exclude those applicable to minority interests. 
Year
Per-Share 
Investments Years
Compounded Annual 
Gain in Per-Share Investments
1965 $ 4 
1979 577 1965-1979 42.8% 
1993 13,961 1979-1993 25.6% 
2007 90,343 1993-2007 14.3% 
 For the entire 42 years, our compounded annual gain in per-share investments was 27.1%. But the 
trend has been downward as we increasingly used our available funds to buy operating businesses. 
 Here’s the record on how earnings of our non-insurance businesses have grown, again on a per￾share basis and after applicable minority interests. 
Year
Per Share 
Pre-Tax Earnings Years
Compounded Annual Gain in Per￾Share Pre-Tax Earnings
1965 $ 4 
1979 18 1965-1979 11.1% 
1993 212 1979-1993 19.1% 
2007 4,093 1993-2007 23.5% 
 For the entire period, the compounded annual gain was 17.8%, with gains accelerating as our 
focus shifted. 
 Though these tables may help you gain historical perspective and be useful in valuation, they are 
completely misleading in predicting future possibilities. Berkshire’s past record can’t be duplicated or 
even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the 
future.
 Charlie Munger, my partner at Berkshire, and I will continue to measure our progress by the two 
yardsticks I have just described and will regularly update you on the results. Though we can’t come close 
to duplicating the past, we will do our best to make sure the future is not disappointing. 
* * * * * * * * * * * * 
 In our efforts, we will be aided enormously by the managers who have joined Berkshire. This is 
an unusual group in several ways. First, most of them have no financial need to work. Many sold us their 
businesses for large sums and run them because they love doing so, not because they need the money. 
Naturally they wish to be paid fairly, but money alone is not the reason they work hard and productively. 
4
 A second, somewhat related, point about these managers is that they have exactly the job they 
want for the rest of their working years. At almost any other company, key managers below the top aspire 
to keep climbing the pyramid. For them, the subsidiary or division they manage today is a way station – or 
so they hope. Indeed, if they are in their present positions five years from now, they may well feel like 
failures. 
 Conversely, our CEOs’ scorecards for success are not whether they obtain my job but instead are 
the long-term performances of their businesses. Their decisions flow from a here-today, here-forever 
mindset. I think our rare and hard-to-replicate managerial structure gives Berkshire a real advantage. 
Acquisitions 
 Though our managers may be the best, we will need large and sensible acquisitions to get the 
growth in operating earnings we wish. Here, we made little progress in 2007 until very late in the year. 
Then, on Christmas day, Charlie and I finally earned our paychecks by contracting for the largest cash 
purchase in Berkshire’s history. 
 The seeds of this transaction were planted in 1954. That fall, only three months into a new job, I 
was sent by my employers, Ben Graham and Jerry Newman, to a shareholders’ meeting of Rockwood 
Chocolate in Brooklyn. A young fellow had recently taken control of this company, a manufacturer of 
assorted cocoa-based items. He had then initiated a one-of-a-kind tender, offering 80 pounds of cocoa 
beans for each share of Rockwood stock. I described this transaction in a section of the 1988 annual report 
that explained arbitrage. I also told you that Jay Pritzker – the young fellow mentioned above – was the 
business genius behind this tax-efficient idea, the possibilities for which had escaped all the other experts 
who had thought about buying Rockwood, including my bosses, Ben and Jerry. 
 At the meeting, Jay was friendly and gave me an education on the 1954 tax code. I came away 
very impressed. Thereafter, I avidly followed Jay’s business dealings, which were many and brilliant. His 
valued partner was his brother, Bob, who for nearly 50 years ran Marmon Group, the home for most of the 
Pritzker businesses. 
 Jay died in 1999, and Bob retired early in 2002. Around then, the Pritzker family decided to 
gradually sell or reorganize certain of its holdings, including Marmon, a company operating 125 
businesses, managed through nine sectors. Marmon’s largest operation is Union Tank Car, which together 
with a Canadian counterpart owns 94,000 rail cars that are leased to various shippers. The original cost of 
this fleet is $5.1 billion. All told, Marmon has $7 billion in sales and about 20,000 employees. 
 We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six 
years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula 
tied to earnings. Prior to our entry into the picture, the Pritzker family received substantial consideration 
from Marmon’s distribution of cash, investments and certain businesses. 
 This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s 
financial statements, employing no advisors and engaging in no nit-picking. I knew that the business 
would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however 
chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed 
entirely. With the Pritzkers, as with Berkshire, a deal is a deal. 
 Marmon’s CEO, Frank Ptak, works closely with a long-time associate, John Nichols. John was 
formerly the highly successful CEO of Illinois Tool Works (ITW), where he teamed with Frank to run a 
mix of industrial businesses. Take a look at their ITW record; you’ll be impressed. 
5
 Byron Trott of Goldman Sachs – whose praises I sang in the 2003 report – facilitated the Marmon 
transaction. Byron is the rare investment banker who puts himself in his client’s shoes. Charlie and I trust 
him completely. 
 You’ll like the code name that Goldman Sachs assigned the deal. Marmon entered the auto 
business in 1902 and exited it in 1933. Along the way it manufactured the Wasp, a car that won the first 
Indianapolis 500 race, held in 1911. So this deal was labeled “Indy 500.” 
* * * * * * * * * * * * 
 In May 2006, I spoke at a lunch at Ben Bridge, our Seattle-based jewelry chain. The audience was 
a number of its vendors, among them Dennis Ulrich, owner of a company that manufactured gold jewelry. 
 In January 2007, Dennis called me, suggesting that with Berkshire’s support he could build a large 
jewelry supplier. We soon made a deal for his business, simultaneously purchasing a supplier of about 
equal size. The new company, Richline Group, has since made two smaller acquisitions. Even with those, 
Richline is far below the earnings threshold we normally require for purchases. I’m willing to bet, 
however, that Dennis – with the help of his partner, Dave Meleski – will build a large operation, earning 
good returns on capital employed. 
Businesses – The Great, the Good and the Gruesome 
 Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss 
what we wish to avoid. 
 Charlie and I look for companies that have a) a business we understand; b) favorable long-term 
economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole 
business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t 
available, though, we are also happy to simply buy small portions of great businesses by way of stock￾market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone. 
 A truly great business must have an enduring “moat” that protects excellent returns on invested 
capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low￾cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American 
Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies 
whose moats proved illusory and were soon crossed. 
 Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and 
continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes 
investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all. 
 Additionally, this criterion eliminates the business whose success depends on having a great 
manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an 
abundance of these managers. Their abilities have created billions of dollars of value that would never 
have materialized if typical CEOs had been running their businesses. 
 But if a business requires a superstar to produce great results, the business itself cannot be deemed 
great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing 
earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You 
can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO. 
6
 Long-term competitive advantage in a stable industry is what we seek in a business. If that comes 
with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will 
simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no 
rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly 
great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large 
portion of their earnings internally at high rates of return. 
 Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates 
industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t 
grow. Many once-important brands have disappeared, and only three companies have earned more than 
token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues 
from only a few states, accounts for nearly half of the entire industry’s earnings. 
 At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the 
company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last 
year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive 
advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck 
Huggins and Brad Kinstler, has produced extraordinary results for Berkshire. 
 We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less 
than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt 
was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on 
invested capital. Two factors helped to minimize the funds required for operations. First, the product was 
sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was 
short, which minimized inventories. 
 Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now 
required to run the business is $40 million. This means we have had to reinvest only $32 million since 
1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. 
In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has 
been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we 
have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led 
to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command 
to “be fruitful and multiply” is one we take seriously at Berkshire.) 
 There aren’t many See’s in Corporate America. Typically, companies that increase their earnings 
from $5 million to $82 million require, say, $400 million or so of capital investment to finance their 
growth. That’s because growing businesses have both working capital needs that increase in proportion to 
sales growth and significant requirements for fixed asset investments. 
 A company that needs large increases in capital to engender its growth may well prove to be a 
satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 
million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different 
from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no 
major capital requirements. Ask Microsoft or Google. 
 One example of good, but far from sensational, business economics is our own FlightSafety. This 
company delivers benefits to its customers that are the equal of those delivered by any business that I know 
of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the 
best is like taking the low bid on a surgical procedure. 
7
 Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When 
we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment 
in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But 
capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane 
models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have 
273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating 
earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far 
from See’s-like, return on our incremental investment of $509 million. 
 Consequently, if measured only by economic returns, FlightSafety is an excellent but not 
extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For 
example, our large investment in regulated utilities falls squarely in this category. We will earn 
considerably more money in this business ten years from now, but we will invest many billions to make it. 
 Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires 
significant capital to engender the growth, and then earns little or no money. Think airlines. Here a 
durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a 
farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by 
shooting Orville down. 
 The airline industry’s demand for capital ever since that first flight has been insatiable. Investors 
have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. 
And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 
1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred 
dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always 
misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. 
In the decade following our sale, the company went bankrupt. Twice. 
 To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high 
interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be 
earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate 
and requires you to keep adding money at those disappointing returns. 
* * * * * * * * * * * * 
 And now it’s confession time. It should be noted that no consultant, board of directors or 
investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced 
errors. 
 To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was 
adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and 
that $1.35 billion would have gone to somebody else. 
 About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting, 
called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort 
Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it. 
I knew that TV stations were See’s-like businesses that required virtually no capital investment and had 
excellent prospects for growth. They were simple to run and showered cash on their owners. 
 Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager 
and outstanding human being. He knew the television business forward and backward and would not have 
called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But 
I didn’t listen. 
8
 In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the 
deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now 
has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had 
gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once 
described: “If his I.Q. was any lower, you would have to water him twice a day.”) 
 Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 
1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive 
advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I 
compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but 
rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion 
– to buy a worthless business. 
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you 
can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: 
“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.” 
* * * * * * * * * * * * 
 Now, let’s examine the four major operating sectors of Berkshire. Each sector has vastly different 
balance sheet and income account characteristics. Therefore, lumping them together impedes analysis. So 
we’ll present them as four separate businesses, which is how Charlie and I view them. 
Insurance 
 The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney, 
who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be 
president?” To which she replied, “Honey, you weren’t in my wildest dreams.” 
 When we first entered the property/casualty insurance business in 1967, my wildest dreams did 
not envision our current operation. Here’s how we did in the first five years after purchasing National 
Indemnity: 
Year Underwriting Profit (Loss) Float
 (in millions)
1967 $ 0.4 $18.5 
1968 0.6 21.3 
1969 0.1 25.4 
1970 (0.4) 39.4 
1971 1.4 65.6 
 To put it charitably, we were a slow starter. But things changed. Here’s the record of the last five 
years: 
Year Underwriting Profit (Loss) Float
 (in millions)
2003 $1,718 $44,220 
2004 1,551 46,094 
2005 53 49,287 
2006 3,838 50,887 
2007 3,374 58,698 
 This metamorphosis has been accomplished by some extraordinary managers. Let’s look at what 
each has achieved. 
9
• GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by 
Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto 
insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share 
was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million 
to $751 million during the same period. 
Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company – 
proud of how it could both save money for its customers and provide growth opportunities for its 
associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I. 
Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle 
market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in 
November we wrote our first commercial auto policy. GEICO and National Indemnity are 
working together in the commercial field, and early results are very encouraging. 
Even in aggregate, these lines will remain a small fraction of our personal auto volume. 
Nevertheless, they should deliver a growing stream of underwriting profits and float. 
• General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23 
billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however, 
had a shaky start. 
For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills 
and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I 
completely missed when I made the decision in 1998 to merge with General Re. The General Re 
of 1998 was not operated as the General Re of 1968 or 1978. 
Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the 
company has been restored. Joe and Tad have been running the business for six years and have 
been doing first-class business in a first-class way, to use the words of J. P. Morgan. They have 
restored discipline to underwriting, reserving and the selection of clients. 
Their job was made more difficult by costly and time-consuming legacy problems, both in the 
U.S. and abroad. Despite that diversion, Joe and Tad have delivered excellent underwriting results 
while skillfully repositioning the company for the future. 
• Since joining Berkshire in 1986, Ajit Jain has built a truly great specialty reinsurance operation 
from scratch. For one-of-a-kind mammoth transactions, the world now turns to him. 
Last year I told you in detail about the Equitas transfer of huge, but capped, liabilities to Berkshire 
for a single premium of $7.1 billion. At this very early date, our experience has been good. But 
this doesn’t tell us much because it’s just one straw in a fifty-year-or-more wind. What we know 
for sure, however, is that the London team who joined us, headed by Scott Moser, is first-rate and 
has become a valuable asset for our insurance business. 
• Finally, we have our smaller operations, which serve specialized segments of the insurance 
market. In aggregate, these companies have performed extraordinarily well, earning above￾average underwriting profits and delivering valuable float for investment. 
Last year BoatU.S., headed by Bill Oakerson, was added to the group. This company manages an 
association of about 650,000 boat owners, providing them services similar to those offered by 
AAA auto clubs to drivers. Among the association’s offerings is boat insurance. Learn more 
about this operation by visiting its display at the annual meeting. 
10
Below we show the record of our four categories of property/casualty insurance. 
Underwriting Profit Yearend Float
 (in millions) 
Insurance Operations 2007 2006 2007 2006
General Re ....................... $ 555 $ 526 $23,009 $22,827 
BH Reinsurance ............... 1,427 1,658 23,692 16,860 
GEICO ............................. 1,113 1,314 7,768 7,171 
Other Primary................... 279 340* 4,229 4,029* 
$3,374 $3,838 $58,698 $50,887
 * Includes Applied Underwriters from May 19, 2006. 
Regulated Utility Business 
 Berkshire has an 87.4% (diluted) interest in MidAmerican Energy Holdings, which owns a wide 
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 
3.8 million electric customers make it the third largest distributor of electricity in the U.K.; (2) 
MidAmerican Energy, which serves 720,000 electric customers, primarily in Iowa; (3) Pacific Power and 
Rocky Mountain Power, serving about 1.7 million electric customers in six western states; and (4) Kern 
River and Northern Natural pipelines, which carry about 8% of the natural gas consumed in the U.S. 
Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave 
Sokol and Greg Abel. It’s unimportant how many votes each party has; we make major moves only when 
we are unanimous in thinking them wise. Eight years of working with Dave, Greg and Walter have 
underscored my original belief: Berkshire couldn’t have better partners. 
 Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in 
the U.S., HomeServices of America. This company operates through 20 locally-branded firms with 18,800 
agents. Last year was a slow year for residential sales, and 2008 will probably be slower. We will 
continue, however, to acquire quality brokerage operations when they are available at sensible prices. 
 Here are some key figures on MidAmerican’s operation: 
Earnings (in millions)
2007 2006
U.K. utilities ....................................................................................................... $ 337 $ 338 
Iowa utility ......................................................................................................... 412 348 
Western utilities (acquired March 21, 2006) ..................................................... 692 356 
Pipelines ............................................................................................................. 473 376 
HomeServices..................................................................................................... 42 74 
Other (net) .......................................................................................................... 130 245
Earnings before corporate interest and taxes...................................................... 2,086 1,737 
Interest, other than to Berkshire ......................................................................... (312) (261) 
Interest on Berkshire junior debt ........................................................................ (108) (134) 
Income tax .......................................................................................................... (477) (426) 
Net earnings........................................................................................................ $ 1,189 $ 916
Earnings applicable to Berkshire*...................................................................... $ 1,114 $ 885 
Debt owed to others............................................................................................ 19,002 16,946 
Debt owed to Berkshire...................................................................................... 821 1,055 
*Includes interest earned by Berkshire (net of related income taxes) of $70 in 2007 and $87 in 2006. 
11
 We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in 
which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business 
was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several 
days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s 
offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to 
$35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the 
time, it hurt. 
 Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of 
one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793 
shares at $145 per share. 
 In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a 
reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So 
call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel. 
Manufacturing, Service and Retailing Operations 
 Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary 
balance sheet and earnings statement for the entire group. 
Balance Sheet 12/31/07 (in millions)
Assets Liabilities and Equity
Cash and equivalents .............................. $ 2,080 Notes payable ............................ $ 1,278 
Accounts and notes receivable ............... 4,488 Other current liabilities.............. 7,652
Inventory ................................................ 5,793 Total current liabilities .............. 8,930 
Other current assets ................................ 470
Total current assets................................. 12,831 
Goodwill and other intangibles............... 14,201 Deferred taxes............................ 828 
Fixed assets............................................. 9,605 Term debt and other liabilities... 3,079 
Other assets............................................. 1,685 Equity ........................................ 25,485
$38,322 $38,322
Earnings Statement (in millions)
2007 2006 2005
Revenues .................................................................................... $59,100 $52,660 $46,896 
Operating expenses (including depreciation of $955 in 2007, 
 $823 in 2006 and $699 in 2005).......................................... 55,026 49,002 44,190 
Interest expense .......................................................................... 127 132 83
Pre-tax earnings.......................................................................... 3,947* 3,526* 2,623* 
Income taxes and minority interests ........................................... 1,594 1,395 977
Net income ................................................................................. $ 2,353 $ 2,131 $ 1,646
*Does not include purchase-accounting adjustments. 
 This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing 
23% on average tangible net worth last year. It’s noteworthy also that these operations used only minor 
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many 
of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the 
balance sheet – and that fact reduces the earnings on our average carrying value to 9.8%. 
12
 Here are a few newsworthy items about companies in this sector: 
• Shaw, Acme Brick, Johns Manville and MiTek were all hurt in 2007 by the sharp housing 
downturn, with their pre-tax earnings declining 27%, 41%, 38%, and 9% respectively. Overall, 
these companies earned $941 million pre-tax compared to $1.296 billion in 2006.
Last year, Shaw, MiTek and Acme contracted for tuck-in acquisitions that will help future 
earnings. You can be sure they will be looking for more of these.
• In a tough year for retailing, our standouts were See’s, Borsheims and Nebraska Furniture Mart. 
Two years ago Brad Kinstler was made CEO of See’s. We very seldom move managers from one 
industry to another at Berkshire. But we made an exception with Brad, who had previously run 
our uniform company, Fechheimer, and Cypress Insurance. The move could not have worked out 
better. In his two years, profits at See’s have increased more than 50%. 
At Borsheims, sales increased 15.1%, helped by a 27% gain during Shareholder Weekend. Two 
years ago, Susan Jacques suggested that we remodel and expand the store. I was skeptical, but 
Susan was right. 
Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a 
managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the 
business, and she loves her associates. That beats having an MBA degree any time. 
(An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and 
integrity. Another of our great managers is Cathy Baron Tamraz, who has significantly increased 
Business Wire’s earnings since we purchased it early in 2006. She is an owner’s dream. It is 
positively dangerous to stand between Cathy and a business prospect. Cathy, it should be noted, 
began her career as a cab driver.) 
Finally, at Nebraska Furniture Mart, earnings hit a record as our Omaha and Kansas City stores 
each had sales of about $400 million. These, by some margin, are the two top home furnishings 
stores in the country. In a disastrous year for many furniture retailers, sales at Kansas City 
increased 8%, while in Omaha the gain was 6%. 
Credit the remarkable Blumkin brothers, Ron and Irv, for this performance. Both are close 
personal friends of mine and great businessmen. 
• Iscar continues its wondrous ways. Its products are small carbide cutting tools that make large and 
very expensive machine tools more productive. The raw material for carbide is tungsten, mined in 
China. For many decades, Iscar moved tungsten to Israel, where brains turned it into something 
far more valuable. Late in 2007, Iscar opened a large plant in Dalian, China. In effect, we’ve now 
moved the brains to the tungsten. Major opportunities for growth await Iscar. Its management 
team, led by Eitan Wertheimer, Jacob Harpaz, and Danny Goldman, is certain to make the most of 
them. 
• Flight services set a record in 2007 with pre-tax earnings increasing 49% to $547 million. 
Corporate aviation had an extraordinary year worldwide, and both of our companies – as runaway 
leaders in their fields – fully participated. 
FlightSafety, our pilot training business, gained 14% in revenues and 20% in pre-tax earnings. 
We estimate that we train about 58% of U.S. corporate pilots. Bruce Whitman, the company’s 
CEO, inherited this leadership position in 2003 from Al Ueltschi, the father of advanced flight 
training, and has proved to be a worthy successor. 
13
At NetJets, the inventor of fractional-ownership of jets, we also remain the unchallenged leader. 
We now operate 487 planes in the U.S. and 135 in Europe, a fleet more than twice the size of that 
operated by our three major competitors combined. Because our share of the large-cabin market is 
near 90%, our lead in value terms is far greater. 
The NetJets brand – with its promise of safety, service and security – grows stronger every year. 
Behind this is the passion of one man, Richard Santulli. If you were to pick someone to join you 
in a foxhole, you couldn’t do better than Rich. No matter what the obstacles, he just doesn’t stop. 
Europe is the best example of how Rich’s tenacity leads to success. For the first ten years we 
made little financial progress there, actually running up cumulative losses of $212 million. After 
Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we 
have real momentum, and last year earnings tripled. 
In November, our directors met at NetJets headquarters in Columbus and got a look at the 
sophisticated operation there. It is responsible for 1,000 or so flights a day in all kinds of weather, 
with customers expecting top-notch service. Our directors came away impressed by the facility 
and its capabilities – but even more impressed by Rich and his associates. 
Finance and Finance Products 
 Our major operation in this category is Clayton Homes, the largest U.S. manufacturer and 
marketer of manufactured homes. Clayton’s market share hit a record 31% last year. But industry volume 
continues to shrink: Last year, manufactured home sales were 96,000, down from 131,000 in 2003, the 
year we bought Clayton. (At the time, it should be remembered, some commentators criticized its directors 
for selling at a cyclical bottom.) 
 Though Clayton earns money from both manufacturing and retailing its homes, most of its 
earnings come from an $11 billion loan portfolio, covering 300,000 borrowers. That’s why we include 
Clayton’s operation in this finance section. Despite the many problems that surfaced during 2007 in real 
estate finance, the Clayton portfolio is performing well. Delinquencies, foreclosures and losses during the 
year were at rates similar to those we experienced in our previous years of ownership. 
 Clayton’s loan portfolio is financed by Berkshire. For this funding, we charge Clayton one 
percentage point over Berkshire’s borrowing cost – a fee that amounted to $85 million last year. Clayton’s 
2007 pre-tax earnings of $526 million are after its paying this fee. The flip side of this transaction is that 
Berkshire recorded $85 million as income, which is included in “other” in the following table. 
Pre-Tax Earnings
(in millions) 
2007 2006
Trading – ordinary income............................. $ 272 $ 274 
Life and annuity operation ............................ (60) 29 
Leasing operations ........................................ 111 182 
Manufactured-housing finance (Clayton)....... 526 513 
Other............................................................... 157 159
Income before capital gains............................ 1,006 1,157 
Trading – capital gains .................................. 105 938
$1,111 $2,095
 The leasing operations tabulated are XTRA, which rents trailers, and CORT, which rents furniture. 
Utilization of trailers was down considerably in 2007 and that led to a drop in earnings at XTRA. That 
company also borrowed $400 million last year and distributed the proceeds to Berkshire. The resulting 
higher interest it is now paying further reduced XTRA’s earnings. 
14
 Clayton, XTRA and CORT are all good businesses, very ably run by Kevin Clayton, Bill Franz 
and Paul Arnold. Each has made tuck-in acquisitions during Berkshire’s ownership. More will come. 
Investments
 We show below our common stock investments at yearend, itemizing those with a market value of 
at least $600 million. 
12/31/07
Percentage of
Shares Company Company Owned Cost* Market
(in millions)
151,610,700 American Express Company ................... 13.1 $ 1,287 $ 7,887 
35,563,200 Anheuser-Busch Companies, Inc............. 4.8 1,718 1,861 
60,828,818 Burlington Northern Santa Fe.................. 17.5 4,731 5,063 
200,000,000 The Coca-Cola Company ........................ 8.6 1,299 12,274 
17,508,700 Conoco Phillips ....................................... 1.1 1,039 1,546 
64,271,948 Johnson & Johnson.................................. 2.2 3,943 4,287 
124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059 
48,000,000 Moody’s Corporation .............................. 19.1 499 1,714 
3,486,006 POSCO .................................................... 4.5 572 2,136 
101,472,000 The Procter & Gamble Company ............ 3.3 1,030 7,450 
17,170,953 Sanofi-Aventis......................................... 1.3 1,466 1,575 
227,307,000 Tesco plc.................................................. 2.9 1,326 2,156 
75,176,026 U.S. Bancorp ........................................... 4.4 2,417 2,386 
17,072,192 USG Corp................................................ 17.2 536 611 
19,944,300 Wal-Mart Stores, Inc. .............................. 0.5 942 948 
1,727,765 The Washington Post Company .............. 18.2 11 1,367 
303,407,068 Wells Fargo & Company......................... 9.2 6,677 9,160 
1,724,200 White Mountains Insurance Group Ltd. .. 16.3 369 886 
Others ...................................................... 5,238 7,633
Total Common Stocks ............................. $39,252 $74,999
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases 
because of write-ups or write-downs that have been required. 
 Overall, we are delighted by the business performance of our investees. In 2007, American 
Express, Coca-Cola and Procter & Gamble, three of our four largest holdings, increased per-share earnings 
by 12%, 14% and 14%. The fourth, Wells Fargo, had a small decline in earnings because of the popping of 
the real estate bubble. Nevertheless, I believe its intrinsic value increased, even if only by a minor amount. 
 In the strange world department, note that American Express and Wells Fargo were both 
organized by Henry Wells and William Fargo, Amex in 1850 and Wells in 1852. P&G and Coke began 
business in 1837 and 1886 respectively. Start-ups are not our game. 
 I should emphasize that we do not measure the progress of our investments by what their market 
prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the 
businesses we own. The first test is improvement in earnings, with our making due allowance for industry 
conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities 
they possess that make life difficult for their competitors – have widened during the year. All of the “big 
four” scored positively on that test. 
15
 We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for 
$488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the 
company was worth about $100 billion. By 2007, two factors had materially increased its value: the price 
of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas 
reserves. In the second half of last year, the market value of the company rose to $275 billion, about what 
we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion. 
 A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of 
the U.S. government – defense, social security, you name it – for about four hours. 
* * * * * * * * * * * * 
 Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few 
left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories. 
 First, we have written 54 contracts that require us to make payments if certain bonds that are 
included in various high-yield indices default. These contracts expire at various times from 2009 to 2013. 
At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses; 
and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7 
billion. 
 We are certain to make many more payments. But I believe that on premium revenues alone, 
these contracts will prove profitable, leaving aside what we can earn on the large sums we hold. Our 
yearend liability for this exposure was recorded at $1.8 billion and is included in “Derivative Contract 
Liabilities” on our balance sheet. 
 The second category of contracts involves various put options we have sold on four stock indices 
(the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were 
struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of 
$4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between 
2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a 
level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate, 
will be profitable and that we will, in addition, receive substantial income from our investment of the 
premiums we hold during the 15- or 20-year period. 
 Two aspects of our derivative contracts are particularly important. First, in all cases we hold the 
money, which means that we have no counterparty risk. 
 Second, accounting rules for our derivative contracts differ from those applying to our investment 
portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance 
sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a 
derivative contract, however, must be applied each quarter to earnings. 
 Thus, our derivative positions will sometimes cause large swings in reported earnings, even 
though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will 
not be bothered by these swings – even though they could easily amount to $1 billion or more in a quarter – 
and we hope you won’t be either. You will recall that in our catastrophe insurance business, we are always 
ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the 
long run. That is our philosophy in derivatives as well. 
* * * * * * * * * * * * 
 The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: 
Americans like buying products made elsewhere more than the rest of the world likes buying products 
made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the 
rest of the world. And over time, that puts pressure on the dollar. 
16
 When the dollar falls, it both makes our products cheaper for foreigners to buy and their products 
more expensive for U.S. citizens. That’s why a falling currency is supposed to cure a trade deficit. Indeed, 
the U.S. deficit has undoubtedly been tempered by the large drop in the dollar. But ponder this: In 2002 
when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was 
$36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45 
billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with 
Canada rose as well, from $50 billion in 2002 to $64 billion in 2007. So far, at least, a plunging dollar has 
not done much to bring our trade activity into balance. 
 There’s been much talk recently of sovereign wealth funds and how they are buying large pieces 
of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade 
equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest 
of the world, they must invest in something here. Why should we complain when they choose stocks over 
bonds? 
 Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed 
countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible 
trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take 
actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both 
our country and the rest of the world. 
 Our legislators should recognize, however, that the current imbalances are unsustainable and 
should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2 
billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant 
sort. (For other comments about the unsustainability of our trade deficits, see Alan Greenspan’s comments 
on November 19, 2004, the Federal Open Market Committee’s minutes of June 29, 2004, and Ben 
Bernanke’s statement on September 11, 2007.) 
* * * * * * * * * * * * 
 At Berkshire we held only one direct currency position during 2007. That was in – hold your 
breath – the Brazilian real. Not long ago, swapping dollars for reals would have been unthinkable. After 
all, during the past century five versions of Brazilian currency have, in effect, turned into confetti. As has 
been true in many countries whose currencies have periodically withered and died, wealthy Brazilians 
sometimes stashed large sums in the U.S. to preserve their wealth. 
 But any Brazilian who followed this apparently prudent course would have lost half his net worth 
over the past five years. Here’s the year-by-year record (indexed) of the real versus the dollar from the end 
of 2002 to yearend 2007: 100; 122; 133; 152; 166; 199. Every year the real went up and the dollar fell. 
Moreover, during much of this period the Brazilian government was actually holding down the value of the 
real and supporting our currency by buying dollars in the market. 
 Our direct currency positions have yielded $2.3 billion of pre-tax profits over the past five years, 
and in addition we have profited by holding bonds of U.S. companies that are denominated in other 
currencies. For example, in 2001 and 2002 we purchased €310 million Amazon.com, Inc. 6 7/8 of 2010 at 
57% of par. At the time, Amazon bonds were priced as “junk” credits, though they were anything but. 
(Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find 
them anywhere except at the finance departments of some leading business schools.) 
 The Euro denomination of the Amazon bonds was a further, and important, attraction for us. The 
Euro was at 95¢ when we bought in 2002. Therefore, our cost in dollars came to only $169 million. Now 
the bonds sell at 102% of par and the Euro is worth $1.47. In 2005 and 2006 some of our bonds were 
called and we received $253 million for them. Our remaining bonds were valued at $162 million at 
yearend. Of our $246 million of realized and unrealized gain, about $118 million is attributable to the fall 
in the dollar. Currencies do matter. 
17
 At Berkshire, we will attempt to further increase our stream of direct and indirect foreign earnings. 
Even if we are successful, however, our assets and earnings will always be concentrated in the U.S. 
Despite our country’s many imperfections and unrelenting problems of one sort or another, America’s rule 
of law, market-responsive economic system, and belief in meritocracy are almost certain to produce ever￾growing prosperity for its citizens. 
* * * * * * * * * * * * 
 As I have told you before, we have for some time been well-prepared for CEO succession because 
we have three outstanding internal candidates. The board knows exactly whom it would pick if I were to 
become unavailable, either because of death or diminishing abilities. And that would still leave the board 
with two backups. 
 Last year I told you that we would also promptly complete a succession plan for the investment 
job at Berkshire, and we have indeed now identified four candidates who could succeed me in managing 
investments. All manage substantial sums currently, and all have indicated a strong interest in coming to 
Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the 
need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for 
Berkshire for reasons that go beyond compensation. 
 (I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – 
abandoning my hope to give new meaning to the term “thinking outside the box.”) 
Fanciful Figures – How Public Companies Juice Earnings 
 Former Senator Alan Simpson famously said: “Those who travel the high road in Washington 
need not fear heavy traffic.” If he had sought truly deserted streets, however, the Senator should have 
looked to Corporate America’s accounting. 
 An important referendum on which road businesses prefer occurred in 1994. America’s CEOs had 
just strong-armed the U.S. Senate into ordering the Financial Accounting Standards Board to shut up, by a 
vote that was 88-9. Before that rebuke the FASB had shown the audacity – by unanimous agreement, no 
less – to tell corporate chieftains that the stock options they were being awarded represented a form of 
compensation and that their value should be recorded as an expense. 
 After the senators voted, the FASB – now educated on accounting principles by the Senate’s 88 
closet CPAs – decreed that companies could choose between two methods of reporting on options. The 
preferred treatment would be to expense their value, but it would also be allowable for companies to ignore 
the expense as long as their options were issued at market value. 
 A moment of truth had now arrived for America’s CEOs, and their reaction was not a pretty sight. 
During the next six years, exactly two of the 500 companies in the S&P chose the preferred route. CEOs of 
the rest opted for the low road, thereby ignoring a large and obvious expense in order to report higher 
“earnings.” I’m sure some of them also felt that if they opted for expensing, their directors might in future 
years think twice before approving the mega-grants the managers longed for. 
 It turned out that for many CEOs even the low road wasn’t good enough. Under the weakened 
rule, there remained earnings consequences if options were issued with a strike price below market value. 
No problem. To avoid that bothersome rule, a number of companies surreptitiously backdated options to 
falsely indicate that they were granted at current market prices, when in fact they were dished out at prices 
well below market. 
 Decades of option-accounting nonsense have now been put to rest, but other accounting choices 
remain – important among these the investment-return assumption a company uses in calculating pension 
expense. It will come as no surprise that many companies continue to choose an assumption that allows 
them to report less-than-solid “earnings.” For the 363 companies in the S&P that have pension plans, this 
assumption in 2006 averaged 8%. Let’s look at the chances of that being achieved. 
18
 The average holdings of bonds and cash for all pension funds is about 28%, and on these assets 
returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with 
them a risk of commensurate (or greater) loss. 
 This means that the remaining 72% of assets – which are mostly in equities, either held directly or 
through vehicles such as hedge funds or private-equity investments – must earn 9.2% in order for the fund 
overall to achieve the postulated 8%. And that return must be delivered after all fees, which are now far 
higher than they have ever been. 
 How realistic is this expectation? Let’s revisit some data I mentioned two years ago: During the 
20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% 
when compounded annually. An investor who owned the Dow throughout the century would also have 
received generous dividends for much of the period, but only about 2% or so in the final years. It was a 
wonderful century. 
 Think now about this century. For investors to merely match that 5.3% market-value gain, the 
Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099. We are 
now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the 
market needed to travel in this hundred years to equal the 5.3% of the last. 
 It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an 
even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain 
for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything 
is possible, does anyone really believe this is the most likely outcome? 
 Dividends continue to run about 2%. Even if stocks were to average the 5.3% annual appreciation 
of the 1900s, the equity portion of plan assets – allowing for expenses of .5% – would produce no more 
than 7% or so. And .5% may well understate costs, given the presence of layers of consultants and high￾priced managers (“helpers”). 
 Naturally, everyone expects to be above average. And those helpers – bless their hearts – will 
certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below
average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs 
they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs 
that are very low; 3) With that group earning average returns, so must the remaining group – the active 
investors. But this group will incur high transaction, management, and advisory costs. Therefore, the 
active investors will have their returns diminished by a far greater percentage than will their inactive 
brethren. That means that the passive group – the “know-nothings” – must win. 
 I should mention that people who expect to earn 10% annually from equities during this century – 
envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly 
forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double￾digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently 
direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many 
as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while 
he fills his pockets with fees. 
 Some companies have pension plans in Europe as well as in the U.S. and, in their accounting, 
almost all assume that the U.S. plans will earn more than the non-U.S. plans. This discrepancy is puzzling: 
Why should these companies not put their U.S. managers in charge of the non-U.S. pension assets and let 
them work their magic on these assets as well? I’ve never seen this puzzle explained. But the auditors and 
actuaries who are charged with vetting the return assumptions seem to have no problem with it. 
19
 What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them 
report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost 
until long after they retire. 
 After decades of pushing the envelope – or worse – in its attempt to report the highest number 
possible for current earnings, Corporate America should ease up. It should listen to my partner, Charlie: “If 
you’ve hit three balls out of bounds to the left, aim a little to the right on the next swing.” 
* * * * * * * * * * * * 
 Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be 
surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in 
many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch 
from inflicting tax pain, given that problems will only become apparent long after these officials have 
departed. Promises involving very early retirement – sometimes to those in their low 40s – and generous 
cost-of-living adjustments are easy for these officials to make. In a world where people are living longer 
and inflation is certain, those promises will be anything but easy to keep. 
* * * * * * * * * * * * 
 Having laid out the failures of an “honor system” in American accounting, I need to point out that 
this is exactly the system existing at Berkshire for a truly huge balance-sheet item. In every report we 
make to you, we must guesstimate the loss reserves for our insurance units. If our estimate is wrong, it 
means that both our balance sheet and our earnings statement will be wrong. So naturally we do our best to 
make these guesses accurate. Nevertheless, in every report our estimate is sure to be wrong. 
 At yearend 2007, we show an insurance liability of $56 billion that represents our guess as to what 
we will eventually pay for all loss events that occurred before yearend (except for about $3 billion of the 
reserve that has been discounted to present value). We know of many thousands of events and have put a 
dollar value on each that reflects what we believe we will pay, including the associated costs (such as 
attorney’s fees) that we will incur in the payment process. In some cases, among them claims for certain 
serious injuries covered by worker’s compensation, payments will be made for 50 years or more. 
 We also include a large reserve for losses that occurred before yearend but that we have yet to hear 
about. Sometimes, the insured itself does not know that a loss has occurred. (Think of an embezzlement 
that remains undiscovered for years.) We sometimes hear about losses from policies that covered our 
insured many decades ago. 
 A story I told you some years back illustrates our problem in accurately estimating our loss 
liability: A fellow was on an important business trip in Europe when his sister called to tell him that their 
dad had died. Her brother explained that he couldn’t get back but said to spare nothing on the funeral, 
whose cost he would cover. When he returned, his sister told him that the service had been beautiful and 
presented him with bills totaling $8,000. He paid up but a month later received a bill from the mortuary for 
$10. He paid that, too – and still another $10 charge he received a month later. When a third $10 invoice 
was sent to him the following month, the perplexed man called his sister to ask what was going on. “Oh,” 
she replied, “I forgot to tell you. We buried Dad in a rented suit.” 
 At our insurance companies we have an unknown, but most certainly large, number of “rented 
suits” buried around the world. We try to estimate the bill for them accurately. In ten or twenty years, we 
will even be able to make a good guess as to how inaccurate our present guess is. But even that guess will 
be subject to surprises. I personally believe our stated reserves are adequate, but I’ve been wrong several 
times in the past. 
20
The Annual Meeting
 Our meeting this year will be held on Saturday, May 3rd. As always, the doors will open at the 
Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to 
the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. 
Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave 
during the day’s question periods, please do so while Charlie is talking. 
 The best reason to exit, of course is to shop. We will help you do that by filling the 194,300-
square-foot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 
27,000 people who came to the meeting did their part, and almost every location racked up record sales. 
But you can do better. (If necessary, I’ll lock the doors.) 
 This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, Johns 
Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that this 1,550-
square-foot home, priced at $69,500, delivers exceptional value. And after you purchase the house, 
consider also acquiring the Forest River RV and pontoon boat on display nearby. 
 GEICO will have a booth staffed by a number of its top counselors from around the country, all of 
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a 
special shareholder discount (usually 8%). This special offer is permitted by 45 of the 50 jurisdictions in 
which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as 
that given certain groups.) Bring the details of your existing insurance and check out whether we can save 
you money. For at least 50% of you, I believe we can. 
 On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets available 
for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to 
Omaha by bus; leave in your new plane. And take all the hair gel and scissors that you wish on board with 
you. 
 Next, if you have any money left, visit the Bookworm, where you will find about 25 books and 
DVDs – all discounted – led again by Poor Charlie’s Almanack. Without any advertising or bookstore 
placement, Charlie’s book has now remarkably sold nearly 50,000 copies. For those of you who can’t 
make the meeting, go to poorcharliesalmanack.com to order a copy. 
 An attachment to the proxy material that is enclosed with this report explains how you can obtain 
the credential you will need for admission to the meeting and other events. As for plane, hotel and car 
reservations, we have again signed up American Express (800-799-6634) to give you special help. Carol 
Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it. Hotel 
rooms can be hard to find, but work with Carol and you will get one. 
 At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, 
we will again be having “Berkshire Weekend” discount pricing. We initiated this special event at NFM 
eleven years ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $30.9 million in 2007. 
This is more volume than most furniture stores register in a year. 
 To obtain the Berkshire discount, you must make your purchases between Thursday, May 1st and 
Monday, May 5th inclusive, and also present your meeting credential. The period’s special pricing will 
even apply to the products of several prestigious manufacturers that normally have ironclad rules against 
discounting but which, in the spirit of our shareholder weekend, have made an exception for you. We 
appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. 
to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a Baja Beach Bash 
featuring beef and chicken tacos. 
21
 At Borsheims, we will again have two shareholder-only events. The first will be a cocktail 
reception from 6 p.m. to 10 p.m. on Friday, May 2nd. The second, the main gala, will be held on Sunday, 
May 4th, from 9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m. 
 We will have huge crowds at Borsheims throughout the weekend. For your convenience, 
therefore, shareholder prices will be available from Monday, April 28th through Saturday, May 10th. 
During that period, please identify yourself as a shareholder by presenting your meeting credentials or a 
brokerage statement that shows you are a Berkshire holder. 
 On Sunday, in a tent outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess 
champion, will take on all comers – who will have their eyes wide open – in groups of six. Nearby, 
Norman Beck, a remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have 
Bob Hamman and Sharon Osberg, two of the world’s top bridge experts, available to play bridge with our 
shareholders on Sunday afternoon. 
 Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 4th, and will be 
serving from 4 p.m. until 10 p.m. Last year Gorat’s, which seats 240, served 915 dinners on Shareholder 
Sunday. The three-day total was 2,487 including 656 T-bone steaks, the entrée preferred by the 
cognoscenti. Please remember that to come to Gorat’s on that day, you must have a reservation. To make 
one, call 402-551-3733 on April 1st (but not before). 
 We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come 
from outside of North America. Every year our meeting draws many people from around the globe, and 
Charlie and I want to be sure we personally greet those who have come so far. Last year we enjoyed 
meeting more than 400 of you from many dozens of countries. Any shareholder who comes from other 
than the U.S. or Canada will be given a special credential and instructions for attending this function. 
* * * * * * * * * * * * 
 At 84 and 77, Charlie and I remain lucky beyond our dreams. We were born in America; had 
terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; 
and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to 
that experienced by many people who contribute as much or more to our society’s well-being. Moreover, 
we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful 
associates. Every day is exciting to us; no wonder we tap-dance to work. But nothing is more fun for us 
than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 3rd at 
the Qwest for our annual Woodstock for Capitalists. We’ll see you there. 
February 2008 Warren E. Buffett 
 Chairman of the Board 
22
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ................................................... 23.8 10.0 13.8
1966 ................................................... 20.3 (11.7) 32.0
1967 ................................................... 11.0 30.9 (19.9)
1968 ................................................... 19.0 11.0 8.0
1969 ................................................... 16.2 (8.4) 24.6
1970 ................................................... 12.0 3.9 8.1
1971 ................................................... 16.4 14.6 1.8
1972 ................................................... 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ................................................... 21.9 37.2 (15.3)
1976 ................................................... 59.3 23.6 35.7
1977 ................................................... 31.9 (7.4) 39.3
1978 ................................................... 24.0 6.4 17.6
1979 ................................................... 35.7 18.2 17.5
1980 ................................................... 19.3 32.3 (13.0)
1981 ................................................... 31.4 (5.0) 36.4
1982 ................................................... 40.0 21.4 18.6
1983 ................................................... 32.3 22.4 9.9
1984 ................................................... 13.6 6.1 7.5
1985 ................................................... 48.2 31.6 16.6
1986 ................................................... 26.1 18.6 7.5
1987 ................................................... 19.5 5.1 14.4
1988 ................................................... 20.1 16.6 3.5
1989 ................................................... 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ................................................... 39.6 30.5 9.1
1992 ................................................... 20.3 7.6 12.7
1993 ................................................... 14.3 10.1 4.2
1994 ................................................... 13.9 1.3 12.6
1995 ................................................... 43.1 37.6 5.5
1996 ................................................... 31.8 23.0 8.8
1997 ................................................... 34.1 33.4 .7
1998 ................................................... 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 ................................................... (6.2) (11.9) 5.7
2002 ................................................... 10.0 (22.1) 32.1
2003 ................................................... 21.0 28.7 (7.7)
2004 ................................................... 10.5 10.9 (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ................................................... 18.4 15.8 2.6
2007 ................................................... 11.0 5.5 5.5
2008 ................................................... (9.6) (37.0) 27.4
Compounded Annual Gain – 1965-2008 ....................... 20.3% 8.9% 11.4
Overall Gain – 1964-2008 .................................. 362,319% 4,276%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of
both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over)
book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value
and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for
corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied
and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world’s great financial
institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned
non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was
young: “In God we trust; all others pay cash.”
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a
paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have
never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback
cycle. Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities
and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
challenge. They won’t leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if
the financial system was to avoid a total breakdown. Had one occurred, the consequences for every area of our
economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various
Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In
the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or
so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of
the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of
challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the
real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones
Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which
humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic
system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it
will continue to do so. America’s best days lie ahead.
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/30th of those shown for A.
3
Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a
gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie
Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will
be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell
us whether the stock market will rise or fall.
In good years and bad, Charlie and I simply focus on four goals:
(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of
excess liquidity, near-term obligations that are modest, and dozens of sources of earnings
and cash;
(2) widening the “moats” around our operating businesses that give them durable competitive
advantages;
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years,
have delivered Berkshire exceptional results.
Berkshire in 2008
Most of the Berkshire businesses whose results are significantly affected by the economy earned below
their potential last year, and that will be true in 2009 as well. Our retailers were hit particularly hard, as were our
operations tied to residential construction. In aggregate, however, our manufacturing, service and retail
businesses earned substantial sums and most of them – particularly the larger ones – continue to strengthen their
competitive positions. Moreover, we are fortunate that Berkshire’s two most important businesses – our
insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both
businesses delivered outstanding results in 2008 and have excellent prospects.
As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses
realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for
the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to
us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to
hold our float during 2008. Charlie and I find this enjoyable.
Over time, most insurers experience a substantial underwriting loss, which makes their economics far
different from ours. Of course, we too will experience underwriting losses in some years. But we have the best
group of managers in the insurance business, and in most cases they oversee entrenched and valuable franchises.
Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float
will therefore cost us nothing. Our insurance operation, the core business of Berkshire, is an economic
powerhouse.
Charlie and I are equally enthusiastic about our utility business, which had record earnings last year
and is poised for future gains. Dave Sokol and Greg Abel, the managers of this operation, have achieved results
unmatched elsewhere in the utility industry. I love it when they come up with new projects because in this
capital-intensive business these ventures are often large. Such projects offer Berkshire the opportunity to put out
substantial sums at decent returns.
4
Things also went well on the capital-allocation front last year. Berkshire is always a buyer of both
businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing,
pessimism is your friend, euphoria the enemy.
In our insurance portfolios, we made three large investments on terms that would be unavailable in
normal markets. These should add about $11⁄2 billion pre-tax to Berkshire’s annual earnings and offer
possibilities for capital gains as well. We also closed on our Marmon acquisition (we own 64% of the company
now and will purchase its remaining stock over the next six years). Additionally, certain of our subsidiaries made
“tuck-in” acquisitions that will strengthen their competitive positions and earnings.
That’s the good news. But there’s another less pleasant reality: During 2008 I did some dumb things in
investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts
came in that should have caused me to re-examine my thinking and promptly take action.
Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant
decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines
if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you
pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise
when it is marked down.
Yardsticks
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash
equivalents. At yearend those totaled $122 billion (not counting the investments held by our finance and utility
operations, which we assign to our second bucket of value). About $58.5 billion of that total is funded by our
insurance float.
Berkshire’s second component of value is earnings that come from sources other than investments and
insurance. These earnings are delivered by our 67 non-insurance companies, itemized on page 96. We exclude
our insurance earnings from this calculation because the value of our insurance operation comes from the
investable funds it generates, and we have already included this factor in our first bucket.
In 2008, our investments fell from $90,343 per share of Berkshire (after minority interest) to $77,793, a
decrease that was caused by a decline in market prices, not by net sales of stocks or bonds. Our second segment
of value fell from pre-tax earnings of $4,093 per Berkshire share to $3,921 (again after minority interest).
Both of these performances are unsatisfactory. Over time, we need to make decent gains in each area if
we are to increase Berkshire’s intrinsic value at an acceptable rate. Going forward, however, our focus will be on
the earnings segment, just as it has been for several decades. We like buying underpriced securities, but we like
buying fairly-priced operating businesses even more.
Now, let’s take a look at the four major operating sectors of Berkshire. Each of these has vastly
different balance sheet and income account characteristics. Therefore, lumping them together, as is done in
standard financial statements, impedes analysis. So we’ll present them as four separate businesses, which is how
Charlie and I view them.
5
Regulated Utility Business
Berkshire has an 87.4% (diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.8 million end users make it the U.K.’s third largest distributor of electricity; (2) MidAmerican Energy, which
serves 723,000 electric customers, primarily in Iowa; (3) Pacific Power and Rocky Mountain Power, serving
about 1.7 million electric customers in six western states; and (4) Kern River and Northern Natural pipelines,
which carry about 9% of the natural gas consumed in the U.S.
Our partners in ownership of MidAmerican are its two terrific managers, Dave Sokol and Greg Abel,
and my long-time friend, Walter Scott. It’s unimportant how many votes each party has; we make major moves
only when we are unanimous in thinking them wise. Nine years of working with Dave, Greg and Walter have
reinforced my original belief: Berkshire couldn’t have better partners.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in the
U.S., HomeServices of America. This company operates through 21 locally-branded firms that have 16,000
agents. Last year was a terrible year for home sales, and 2009 looks no better. We will continue, however, to
acquire quality brokerage operations when they are available at sensible prices.
Here are some key figures on MidAmerican’s operations:
Earnings (in millions)
2008 2007
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339 $ 337
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 412
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703 692
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 473
HomeServices ........................................................... (45) 42
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 130
Operating earnings before corporate interest and taxes ........................... 2,203 2,086
Constellation Energy* ..................................................... 1,092 –
Interest, other than to Berkshire ............................................. (332) (312)
Interest on Berkshire junior debt ............................................. (111) (108)
Income tax .............................................................. (1,002) (477)
Net earnings ............................................................. $ 1,850 $ 1,189
Earnings applicable to Berkshire** .......................................... $ 1,704 $ 1,114
Debt owed to others ....................................................... 19,145 19,002
Debt owed to Berkshire .................................................... 1,087 821
*Consists of a breakup fee of $175 million and a profit on our investment of $917 million.
**Includes interest earned by Berkshire (net of related income taxes) of $72 in 2008 and $70 in 2007.
MidAmerican’s record in operating its regulated electric utilities and natural gas pipelines is truly
outstanding. Here’s some backup for that claim.
Our two pipelines, Kern River and Northern Natural, were both acquired in 2002. A firm called Mastio
regularly ranks pipelines for customer satisfaction. Among the 44 rated, Kern River came in 9th when we
purchased it and Northern Natural ranked 39th. There was work to do.
In Mastio’s 2009 report, Kern River ranked 1st and Northern Natural 3rd. Charlie and I couldn’t be more
proud of this performance. It came about because hundreds of people at each operation committed themselves to
a new culture and then delivered on their commitment.
Achievements at our electric utilities have been equally impressive. In 1995, MidAmerican became the
major provider of electricity in Iowa. By judicious planning and a zeal for efficiency, the company has kept
electric prices unchanged since our purchase and has promised to hold them steady through 2013.
6
MidAmerican has maintained this extraordinary price stability while making Iowa number one among
all states in the percentage of its generation capacity that comes from wind. Since our purchase, MidAmerican’s
wind-based facilities have grown from zero to almost 20% of total capacity.
Similarly, when we purchased PacifiCorp in 2006, we moved aggressively to expand wind generation.
Wind capacity was then 33 megawatts. It’s now 794, with more coming. (Arriving at PacifiCorp, we found
“wind” of a different sort: The company had 98 committees that met frequently. Now there are 28. Meanwhile,
we generate and deliver considerably more electricity, doing so with 2% fewer employees.)
In 2008 alone, MidAmerican spent $1.8 billion on wind generation at our two operations, and today the
company is number one in the nation among regulated utilities in ownership of wind capacity. By the way,
compare that $1.8 billion to the $1.1 billion of pre-tax earnings of PacifiCorp (shown in the table as “Western”)
and Iowa. In our utility business, we spend all we earn, and then some, in order to fulfill the needs of our service
areas. Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Its
earnings have instead been reinvested to develop the utility systems our customers require and deserve. In
exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership
for all concerned.
************
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned
by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid
leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies
through thick and thin (though we prefer thick and thicker).
Our record matches our rhetoric. Most buyers competing against us, however, follow a different path.
For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators are
contemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly
care about the future of their businesses.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a
bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change,
though, were the essential ingredients of their previous operations, including their cherished fee structures and
love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a
business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s
capital structure compared to that previously existing. A number of these acquirees, purchased only two to three
years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of
the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private￾equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead,
they’re keeping their remaining funds very private.
In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be
the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of
purchasers when transactions are proposed.
There is no hiding your history when you stand before these regulators. They can – and do – call their
counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the
business, including a willingness to commit adequate equity capital.
7
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states we
would be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and
capabilities. We passed this examination, just as we expect to pass future ones.
There are two reasons for our confidence. First, Dave Sokol and Greg Abel are going to run any
businesses with which they are associated in a first-class manner. They don’t know of any other way to operate.
Beyond that is the fact that we hope to buy more regulated utilities in the future – and we know that our business
behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions
tomorrow.
Insurance
Our insurance group has propelled Berkshire’s growth since we first entered the business in 1967. This
happy result has not been due to general prosperity in the industry. During the 25 years ending in 2007, return on
net worth for insurers averaged 8.5% versus 14.0% for the Fortune 500. Clearly our insurance CEOs have not
had the wind at their back. Yet these managers have excelled to a degree Charlie and I never dreamed possible in
the early days. Why do I love them? Let me count the ways.
At GEICO, Tony Nicely – now in his 48th year at the company after joining it when he was 18 –
continues to gobble up market share while maintaining disciplined underwriting. When Tony became CEO in
1993, GEICO had 2.0% of the auto insurance market, a level at which the company had long been stuck. Now we
have a 7.7% share, up from 7.2% in 2007.
The combination of new business gains and an improvement in the renewal rate on existing business
has moved GEICO into the number three position among auto insurers. In 1995, when Berkshire purchased
control, GEICO was number seven. Now we trail only State Farm and Allstate.
GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually
everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service.
Efficiency is the key to low cost, and efficiency is Tony’s specialty. Five years ago the number of policies per
employee was 299. In 2008, the number was 439, a huge increase in productivity.
As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist
camp. Juicy targets are everywhere. First, and most important, our new business in auto insurance is now
exploding. Americans are focused on saving money as never before, and they are flocking to GEICO. In January
2009, we set a monthly record – by a wide margin – for growth in policyholders. That record will last exactly 28
days: As we go to press, it’s clear February’s gain will be even better.
Beyond this, we are gaining ground in allied lines. Last year, our motorcycle policies increased by
23.4%, which raised our market share from about 6% to more than 7%. Our RV and ATV businesses are also
growing rapidly, albeit from a small base. And, finally, we recently began insuring commercial autos, a big
market that offers real promise.
GEICO is now saving money for millions of Americans. Go to GEICO.com or call 1-800-847-7536
and see if we can save you money as well.
General Re, our large international reinsurer, also had an outstanding year in 2008. Some time back,
the company had serious problems (which I totally failed to detect when we purchased it in late 1998). By 2001,
when Joe Brandon took over as CEO, assisted by his partner, Tad Montross, General Re’s culture had further
deteriorated, exhibiting a loss of discipline in underwriting, reserving and expenses. After Joe and Tad took
charge, these problems were decisively and successfully addressed. Today General Re has regained its luster.
Last spring Joe stepped down, and Tad became CEO. Charlie and I are grateful to Joe for righting the ship and
are certain that, with Tad, General Re’s future is in the best of hands.
8
Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This
past year has retaught clients a crucial principle: A promise is no better than the person or institution making it.
That’s where General Re excels: It is the only reinsurer that is backed by an AAA corporation. Ben Franklin once
said, “It’s difficult for an empty sack to stand upright.” That’s no worry for General Re clients.
Our third major insurance operation is Ajit Jain’s reinsurance division, headquartered in Stamford and
staffed by only 31 employees. This may be one of the most remarkable businesses in the world, hard to
characterize but easy to admire.
From year to year, Ajit’s business is never the same. It features very large transactions, incredible
speed of execution and a willingness to quote on policies that leave others scratching their heads. When there is a
huge and unusual risk to be insured, Ajit is almost certain to be called.
Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent.
So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home.
Of course, I knew the answer before writing. There isn’t anyone like Ajit.
Our smaller insurers are just as outstanding in their own way as the “big three,” regularly delivering
valuable float to us at a negative cost. We aggregate their results below under “Other Primary.” For space
reasons, we don’t discuss these insurers individually. But be assured that Charlie and I appreciate the
contribution of each.
Here is the record for the four legs to our insurance stool. The underwriting profits signify that all four
provided funds to Berkshire last year without cost, just as they did in 2007. And in both years our underwriting
profitability was considerably better than that achieved by the industry. Of course, we ourselves will periodically
have a terrible year in insurance. But, overall, I expect us to average an underwriting profit. If so, we will be
using free funds of large size for the indefinite future.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2008 2007 2008 2007
General Re . . . . . . . . . . . . . . . . . . . . . . $ 342 $ 555 $21,074 $23,009
BH Reinsurance .................. 1,324 1,427 24,221 23,692
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 916 1,113 8,454 7,768
Other Primary . . . . . . . . . . . . . . . . . . . 210 279 4,739 4,229
$2,792 $3,374 $58,488 $58,698
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/08 (in millions)
Assets
Cash and equivalents ................. $ 2,497
Accounts and notes receivable .......... 5,047
Inventory .......................... 7,500
Other current assets . . . . . . . . . . . . . . . . . . 752
Total current assets ................... 15,796
Goodwill and other intangibles ......... 16,515
Fixed assets ........................ 16,338
Other assets ........................ 1,248
$49,897
Liabilities and Equity
Notes payable ....................... $ 2,212
Other current liabilities ............... 8,087
Total current liabilities ................ 10,299
Deferred taxes ...................... 2,786
Term debt and other liabilities .......... 6,033
Equity ............................. 30,779
$49,897
9
Earnings Statement (in millions)
2008 2007 2006
Revenues ......................................................... $66,099 $59,100 $52,660
Operating expenses (including depreciation of $1,280 in 2008, $955 in 2007 and
$823 in 2006) .................................................... 61,937 55,026 49,002
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 127 132
Pre-tax earnings .................................................... 4,023* 3,947* 3,526*
Income taxes and minority interests ..................................... 1,740 1,594 1,395
Net income ........................................................ $ 2,283 $ 2,353 $ 2,131
*Does not include purchase-accounting adjustments.
This motley group, which sells products ranging from lollipops to motor homes, earned an impressive
17.9% on average tangible net worth last year. It’s also noteworthy that these operations used only minor
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many of
them, however, at large premiums to net worth – a point reflected in the goodwill item shown on our balance
sheet – and that fact reduces the earnings on our average carrying value to 8.1%.
Though the full-year result was satisfactory, earnings of many of the businesses in this group hit the
skids in last year’s fourth quarter. Prospects for 2009 look worse. Nevertheless, the group retains strong earning
power even under today’s conditions and will continue to deliver significant cash to the parent company. Overall,
these companies improved their competitive positions last year, partly because our financial strength let us make
advantageous tuck-in acquisitions. In contrast, many competitors were treading water (or sinking).
The most noteworthy of these acquisitions was Iscar’s late-November purchase of Tungaloy, a leading
Japanese producer of small tools. Charlie and I continue to look with astonishment – and appreciation! – at the
accomplishments of Iscar’s management. To secure one manager like Eitan Wertheimer, Jacob Harpaz or Danny
Goldman when we acquire a company is a blessing. Getting three is like winning the Triple Crown. Iscar’s
growth since our purchase has exceeded our expectations – which were high – and the addition of Tungaloy will
move performance to the next level.
MiTek, Benjamin Moore, Acme Brick, Forest River, Marmon and CTB also made one or more
acquisitions during the year. CTB, which operates worldwide in the agriculture equipment field, has now picked
up six small firms since we purchased it in 2002. At that time, we paid $140 million for the company. Last year
its pre-tax earnings were $89 million. Vic Mancinelli, its CEO, followed Berkshire-like operating principles long
before our arrival. He focuses on blocking and tackling, day by day doing the little things right and never getting
off course. Ten years from now, Vic will be running a much larger operation and, more important, will be
earning excellent returns on invested capital.
Finance and Financial Products
I will write here at some length about the mortgage operation of Clayton Homes and skip any financial
commentary, which is summarized in the table at the end of this section. I do this because Clayton’s recent
experience may be useful in the public-policy debate about housing and mortgages. But first a little background.
Clayton is the largest company in the manufactured home industry, delivering 27,499 units last year.
This came to about 34% of the industry’s 81,889 total. Our share will likely grow in 2009, partly because much
of the rest of the industry is in acute distress. Industrywide, units sold have steadily declined since they hit a peak
of 372,843 in 1998.
10
At that time, much of the industry employed sales practices that were atrocious. Writing about the
period somewhat later, I described it as involving “borrowers who shouldn’t have borrowed being financed by
lenders who shouldn’t have lent.”
To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was
involved. (“That certainly looks like a $2,000 cat to me” says the salesman who will receive a $3,000
commission if the loan goes through.) Moreover, impossible-to-meet monthly payments were being agreed to by
borrowers who signed up because they had nothing to lose. The resulting mortgages were usually packaged
(“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and
it did.
Clayton, it should be emphasized, followed far more sensible practices in its own lending throughout
that time. Indeed, no purchaser of the mortgages it originated and then securitized has ever lost a dime of
principal or interest. But Clayton was the exception; industry losses were staggering. And the hangover continues
to this day.
This 1997-2000 fiasco should have served as a canary-in-the-coal-mine warning for the far-larger
conventional housing market. But investors, government and rating agencies learned exactly nothing from the
manufactured-home debacle. Instead, in an eerie rerun of that disaster, the same mistakes were repeated with
conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their
incomes, and borrowers just as happily signed up to meet those payments. Both parties counted on “house-price
appreciation” to make this otherwise impossible arrangement work. It was Scarlett O’Hara all over again: “I’ll
think about it tomorrow.” The consequences of this behavior are now reverberating through every corner of our
economy.
Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash,
handing us no unexpected losses. This is not because these borrowers are unusually creditworthy, a point proved
by FICO scores (a standard measure of credit risk). Their median FICO score is 644, compared to a national
median of 723, and about 35% are below 620, the segment usually designated “sub-prime.” Many disastrous
pools of mortgages on conventional homes are populated by borrowers with far better credit, as measured by
FICO scores.
Yet at yearend, our delinquency rate on loans we have originated was 3.6%, up only modestly from
2.9% in 2006 and 2.9% in 2004. (In addition to our originated loans, we’ve also bought bulk portfolios of various
types from other financial institutions.) Clayton’s foreclosures during 2008 were 3.0% of originated loans
compared to 3.8% in 2006 and 5.3% in 2004.
Why are our borrowers – characteristically people with modest incomes and far-from-great credit
scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply
looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then
decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention
of paying it off, whatever the course of home prices.
Just as important is what our borrowers did not do. They did not count on making their loan payments
by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their
income. And they did not assume that they could always sell their home at a profit if their mortgage payments
became onerous. Jimmy Stewart would have loved these folks.
Of course, a number of our borrowers will run into trouble. They generally have no more than minor
savings to tide them over if adversity hits. The major cause of delinquency or foreclosure is the loss of a job, but
death, divorce and medical expenses all cause problems. If unemployment rates rise – as they surely will in
2009 – more of Clayton’s borrowers will have troubles, and we will have larger, though still manageable, losses.
But our problems will not be driven to any extent by the trend of home prices.
11
Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do
not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures
take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have
made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away
from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they
can’t make the monthly payments.
Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years,
with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi
possibilities. And the home purchased ought to fit the income of the purchaser.
The present housing debacle should teach home buyers, lenders, brokers and government some simple
lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment
of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.
Keeping them in their homes should be the ambition.
************
Clayton’s lending operation, though not damaged by the performance of its borrowers, is nevertheless
threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee –
banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and
others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have
money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing
borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the
government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t
enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the
“haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course
feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our
cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the
moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Today’s extreme conditions may soon end. At worst, we believe we will find at least a partial solution
that will allow us to continue much of Clayton’s lending. Clayton’s earnings, however, will surely suffer if we
are forced to compete for long against government-favored lenders.
Pre-Tax Earnings
(in millions)
2008 2007
Net investment income ....................................... $330 $ 272
Life and annuity operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (60)
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 111
Manufactured-housing finance (Clayton) . . . . . . . . . . . . . . . . . . . . . . . . 206 526
Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 157
Income before investment and derivatives gains or losses ........... $787 $1,006
*Includes $92 million in 2008 and $85 million in 2007 of fees that Berkshire charges Clayton for the
use of Berkshire’s credit.
12
Tax-Exempt Bond Insurance
Early in 2008, we activated Berkshire Hathaway Assurance Company (“BHAC”) as an insurer of the
tax-exempt bonds issued by states, cities and other local entities. BHAC insures these securities for issuers both
at the time their bonds are sold to the public (primary transactions) and later, when the bonds are already owned
by investors (secondary transactions).
By yearend 2007, the half dozen or so companies that had been the major players in this business had
all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White,
but I drifted.”
The monolines (as the bond insurers are called) initially insured only tax-exempt bonds that were
low-risk. But over the years competition for this business intensified, and rates fell. Faced with the prospect of
stagnating or declining earnings, the monoline managers turned to ever-riskier propositions. Some of these
involved the insuring of residential mortgage obligations. When housing prices plummeted, the monoline
industry quickly became a basket case.
Early in the year, Berkshire offered to assume all of the insurance issued on tax-exempts that was on
the books of the three largest monolines. These companies were all in life-threatening trouble (though they said
otherwise.) We would have charged a 11⁄2% rate to take over the guarantees on about $822 billion of bonds. If
our offer had been accepted, we would have been required to pay any losses suffered by investors who owned
these bonds – a guarantee stretching for 40 years in some cases. Ours was not a frivolous proposal: For reasons
we will come to later, it involved substantial risk for Berkshire.
The monolines summarily rejected our offer, in some cases appending an insult or two. In the end,
though, the turndowns proved to be very good news for us, because it became apparent that I had severely
underpriced our offer.
Thereafter, we wrote about $15.6 billion of insurance in the secondary market. And here’s the punch
line: About 77% of this business was on bonds that were already insured, largely by the three aforementioned
monolines. In these agreements, we have to pay for defaults only if the original insurer is financially unable to do
so.
We wrote this “second-to-pay” insurance for rates averaging 3.3%. That’s right; we have been paid far
more for becoming the second to pay than the 1.5% we would have earlier charged to be the first to pay. In one
extreme case, we actually agreed to be fourth to pay, nonetheless receiving about three times the 1% premium
charged by the monoline that remains first to pay. In other words, three other monolines have to first go broke
before we need to write a check.
Two of the three monolines to which we made our initial bulk offer later raised substantial capital.
This, of course, directly helps us, since it makes it less likely that we will have to pay, at least in the near term,
any claims on our second-to-pay insurance because these two monolines fail. In addition to our book of
secondary business, we have also written $3.7 billion of primary business for a premium of $96 million. In
primary business, of course, we are first to pay if the issuer gets in trouble.
We have a great many more multiples of capital behind the insurance we write than does any other
monoline. Consequently, our guarantee is far more valuable than theirs. This explains why many sophisticated
investors have bought second-to-pay insurance from us even though they were already insured by another
monoline. BHAC has become not only the insurer of preference, but in many cases the sole insurer acceptable to
bondholders.
Nevertheless, we remain very cautious about the business we write and regard it as far from a sure
thing that this insurance will ultimately be profitable for us. The reason is simple, though I have never seen even
a passing reference to it by any financial analyst, rating agency or monoline CEO.
13
The rationale behind very low premium rates for insuring tax-exempts has been that defaults have
historically been few. But that record largely reflects the experience of entities that issued uninsured bonds.
Insurance of tax-exempt bonds didn’t exist before 1971, and even after that most bonds remained uninsured.
A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different
loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different.
To understand why, let’s go back to 1975 when New York City was on the edge of bankruptcy. At the time its
bonds – virtually all uninsured – were heavily held by the city’s wealthier residents as well as by New York
banks and other institutions. These local bondholders deeply desired to solve the city’s fiscal problems. So before
long, concessions and cooperation from a host of involved constituencies produced a solution. Without one, it
was apparent to all that New York’s citizens and businesses would have experienced widespread and severe
financial losses from their bond holdings.
Now, imagine that all of the city’s bonds had instead been insured by Berkshire. Would similar belt￾tightening, tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire
would have been asked to “share” in the required sacrifices. And, considering our deep pockets, the required
contribution would most certainly have been substantial.
Local governments are going to face far tougher fiscal problems in the future than they have to date.
The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities
and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between
assets and a realistic actuarial valuation of present liabilities is simply staggering.
When faced with large revenue shortfalls, communities that have all of their bonds insured will be
more prone to develop “solutions” less favorable to bondholders than those communities that have uninsured
bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be
highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that
others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local
citizens in the form of major tax increases over pain to a far-away bond insurer?
Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in
fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a
devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in
this business, eschewing many classes of bonds that other monolines regularly embrace.
************
The type of fallacy involved in projecting loss experience from a universe of non-insured bonds onto a
deceptively-similar universe in which many bonds are insured pops up in other areas of finance. “Back-tested”
models of many kinds are susceptible to this sort of error. Nevertheless, they are frequently touted in financial
markets as guides to future action. (If merely looking up past financial data would tell you what the future holds,
the Forbes 400 would consist of librarians.)
Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed,
history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience
over periods when home prices rose only moderately and speculation in houses was negligible. They then made
this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had
recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford.
In short, universe “past” and universe “current” had very different characteristics. But lenders, government and
media largely failed to recognize this all-important fact.
14
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood
using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often,
though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing
formulas.
************
A final post-script on BHAC: Who, you may wonder, runs this operation? While I help set policy, all
of the heavy lifting is done by Ajit and his crew. Sure, they were already generating $24 billion of float along
with hundreds of millions of underwriting profit annually. But how busy can that keep a 31-person group?
Charlie and I decided it was high time for them to start doing a full day’s work.
Investments
Because of accounting rules, we divide our large holdings of common stocks this year into two
categories. The table below, presenting the first category, itemizes investments that are carried on our balance
sheet at market value and that had a yearend value of more than $500 million.
12/31/08
Shares Company
Percentage of
Company
Owned Cost* Market
(in millions)
151,610,700 American Express Company .................... 13.1 $ 1,287 $ 2,812
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . 8.6 1,299 9,054
84,896,273 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 7,008 4,398
30,009,591 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1,847 1,795
130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 4,330 3,498
3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 768 1,191
91,941,010 The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1 643 5,684
22,111,966 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,827 1,404
11,262,000 Swiss Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 773 530
227,307,000 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 1,326 1,193
75,145,426 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 2,337 1,879
19,944,300 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 942 1,118
1,727,765 The Washington Post Company .................. 18.4 11 674
304,392,068 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . 7.2 6,702 8,973
Others ...................................... 6,035 4,870
Total Common Stocks Carried at Market .......... $37,135 $49,073
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
In addition, we have holdings in Moody’s and Burlington Northern Santa Fe that we now carry at
“equity value” – our cost plus retained earnings since our purchase, minus the tax that would be paid if those
earnings were paid to us as dividends. This accounting treatment is usually required when ownership of an
investee company reaches 20%.
We purchased 15% of Moody’s some years ago and have not since bought a share. Moody’s, though,
has repurchased its own shares and, by late 2008, those repurchases reduced its outstanding shares to the point
that our holdings rose above 20%. Burlington Northern has also repurchased shares, but our increase to 20%
primarily occurred because we continued to buy this stock.
15
Unless facts or rules change, you will see these holdings reflected in our balance sheet at “equity
accounting” values, whatever their market prices. You will also see our share of their earnings (less applicable
taxes) regularly included in our quarterly and annual earnings.
I told you in an earlier part of this report that last year I made a major mistake of commission (and
maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of
ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in
energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in
the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise,
moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.
I made some other already-recognizable errors as well. They were smaller, but unfortunately not that
small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we
wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined
even further. The tennis crowd would call my mistakes “unforced errors.”
On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued
by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high
current yields that, in themselves, make the investments more than satisfactory. But in each of these three
purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to
sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter &
Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and myself – to always run
Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet
tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra
profits.
The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that
yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free
governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the
financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the
housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost
equally extraordinary.
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a
terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable –
in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment
confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning
close to nothing and will surely find its purchasing power eroded over time.
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it
sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
Derivatives
Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial
system. They have made it almost impossible for investors to understand and analyze our largest commercial
banks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of
earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more
than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the
books.
16
Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial
institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include
Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get
our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had
never heard of). So we decided to close up shop. Though we were under no pressure and were operating in
benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the
task. Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I
got to know you so well.”
Improved “transparency” – a favorite remedy of politicians, commentators and financial regulators for
averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism
that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives.
Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in
10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is
going on in their portfolios (and then I reach for some aspirin).
For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example.
These giant institutions were created by Congress, which retained control over them, dictating what they could
and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two
behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated
companies of which I am aware, as measured by manpower assigned to the task.
On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to
Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes
and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of
Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had
resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even
while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in
2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on
every party but – you guessed it – Congress and OFHEO.
The Bear Stearns collapse highlights the counterparty problem embedded in derivatives transactions, a
time bomb I first discussed in Berkshire’s 2002 report. On April 3, 2008, Tim Geithner, then the able president of
the New York Fed, explained the need for a rescue: “The sudden discovery by Bear’s derivative counterparties
that important financial positions they had put in place to protect themselves from financial risk were no longer
operative would have triggered substantial further dislocation in markets. This would have precipitated a rush by
Bear’s counterparties to liquidate the collateral they held against those positions and to attempt to replicate those
positions in already very fragile markets.” This is Fedspeak for “We stepped in to avoid a financial chain reaction
of unpredictable magnitude.” In my opinion, the Fed was right to do so.
A normal stock or bond trade is completed in a few days with one party getting its cash, the other its
securities. Counterparty risk therefore quickly disappears, which means credit problems can’t accumulate. This
rapid settlement process is key to maintaining the integrity of markets. That, in fact, is a reason for NYSE and
NASDAQ shortening the settlement period from five days to three days in 1995.
Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties
building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become
important parts of financial statements though these items will not be validated for many years. Additionally, a
frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by
the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other
ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal
disease: It’s not just whom you sleep with, but also whom they are sleeping with.
17
Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because
it assures them government aid if trouble hits. In other words, only companies having problems that can infect
the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m
sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious
CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply
won’t do; it’s mindboggling screw-ups that are required.
Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives
contracts (other than those used for operational purposes at MidAmerican and the few left over at Gen Re). The
answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both
initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any
large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be
my fault.
Our derivatives dealings require our counterparties to make payments to us when contracts are
initiated. Berkshire therefore always holds the money, which leaves us assuming no meaningful counterparty
risk. As of yearend, the payments made to us less losses we have paid – our derivatives “float,” so to speak –
totaled $8.1 billion. This float is similar to insurance float: If we break even on an underlying transaction, we will
have enjoyed the use of free money for a long time. Our expectation, though it is far from a sure thing, is that we
will do better than break even and that the substantial investment income we earn on the funds will be frosting on
the cake.
Only a small percentage of our contracts call for any posting of collateral when the market moves
against us. Even under the chaotic conditions existing in last year’s fourth quarter, we had to post less than 1% of
our securities portfolio. (When we post collateral, we deposit it with third parties, meanwhile retaining the
investment earnings on the deposited securities.) In our 2002 annual report, we warned of the lethal threat that
posting requirements create, real-life illustrations of which we witnessed last year at a variety of financial
institutions (and, for that matter, at Constellation Energy, which was within hours of bankruptcy when
MidAmerican arrived to effect a rescue).
Our contracts fall into four major categories. With apologies to those who are not fascinated by
financial instruments, I will explain them in excruciating detail.
• We have added modestly to the “equity put” portfolio I described in last year’s report. Some of our
contracts come due in 15 years, others in 20. We must make a payment to our counterparty at
maturity if the reference index to which the put is tied is then below what it was at the inception of
the contract. Neither party can elect to settle early; it’s only the price on the final day that counts.
To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at,
say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million.
If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In
the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to
$150 million – that we would be free to invest as we wish.
Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major
indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the
Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24,
2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have
paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black￾Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change
on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9
billion in premiums we have received – means that we have so far reported a mark-to-market loss
of $5.1 billion from these contracts.
18
We endorse mark-to-market accounting. I will explain later, however, why I believe the Black￾Scholes formula, even though it is the standard for establishing the dollar liability for options,
produces strange results when the long-term variety are being valued.
One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion
we have at risk, all stocks in all four indices would have to go to zero on their various termination
dates. If, however – as an example – all indices fell 25% from their value at the inception of each
contract, and foreign-exchange rates remained as they are today, we would owe about $9 billion,
payable between 2019 and 2028. Between the inception of the contract and those dates, we would
have held the $4.9 billion premium and earned investment income on it.
• The second category we described in last year’s report concerns derivatives requiring us to pay
when credit losses occur at companies that are included in various high-yield indices. Our standard
contract covers a five-year period and involves 100 companies. We modestly expanded our position
last year in this category. But, of course, the contracts on the books at the end of 2007 moved one
year closer to their maturity. Overall, our contracts now have an average life of 21⁄3 years, with the
first expiration due to occur on September 20, 2009 and the last on December 20, 2013.
By yearend we had received premiums of $3.4 billion on these contracts and paid losses of $542
million. Using mark-to-market principles, we also set up a liability for future losses that at yearend
totaled $3.0 billion. Thus we had to that point recorded a loss of about $100 million, derived from
our $3.5 billion total in paid and estimated future losses minus the $3.4 billion of premiums we
received. In our quarterly reports, however, the amount of gain or loss has swung wildly from a
profit of $327 million in the second quarter of 2008 to a loss of $693 million in the fourth quarter of
2008.
Surprisingly, we made payments on these contracts of only $97 million last year, far below the
estimate I used when I decided to enter into them. This year, however, losses have accelerated
sharply with the mushrooming of large bankruptcies. In last year’s letter, I told you I expected these
contracts to show a profit at expiration. Now, with the recession deepening at a rapid rate, the
possibility of an eventual loss has increased. Whatever the result, I will keep you posted.
• In 2008 we began to write “credit default swaps” on individual companies. This is simply credit
insurance, similar to what we write in BHAC, except that here we bear the credit risk of
corporations rather than of tax-exempt issuers.
If, say, the XYZ company goes bankrupt, and we have written a $100 million contract, we are
obligated to pay an amount that reflects the shrinkage in value of a comparable amount of XYZ’s
debt. (If, for example, the company’s bonds are selling for 30 after default, we would owe $70
million.) For the typical contract, we receive quarterly payments for five years, after which our
insurance expires.
At yearend we had written $4 billion of contracts covering 42 corporations, for which we receive
annual premiums of $93 million. This is the only derivatives business we write that has any
counterparty risk; the party that buys the contract from us must be good for the quarterly premiums
it will owe us over the five years. We are unlikely to expand this business to any extent because
most buyers of this protection now insist that the seller post collateral, and we will not enter into
such an arrangement.
• At the request of our customers, we write a few tax-exempt bond insurance contracts that are
similar to those written at BHAC, but that are structured as derivatives. The only meaningful
difference between the two contracts is that mark-to-market accounting is required for derivatives
whereas standard accrual accounting is required at BHAC.
19
But this difference can produce some strange results. The bonds covered – in effect, insured – by
these derivatives are largely general obligations of states, and we feel good about them. At yearend,
however, mark-to-market accounting required us to record a loss of $631 million on these
derivatives contracts. Had we instead insured the same bonds at the same price in BHAC, and used
the accrual accounting required at insurance companies, we would have recorded a small profit for
the year. The two methods by which we insure the bonds will eventually produce the same
accounting result. In the short term, however, the variance in reported profits can be substantial.
We have told you before that our derivative contracts, subject as they are to mark-to-market
accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother
Charlie and me. Indeed, the “downs” can be helpful in that they give us an opportunity to expand a position on
favorable terms. I hope this explanation of our dealings will lead you to think similarly.
************
The Black-Scholes formula has approached the status of holy writ in finance, and we use it when
valuing our equity put options for financial statement purposes. Key inputs to the calculation include a contract’s
maturity and strike price, as well as the analyst’s expectations for volatility, interest rates and dividends.
If the formula is applied to extended time periods, however, it can produce absurd results. In fairness,
Black and Scholes almost certainly understood this point well. But their devoted followers may be ignoring
whatever caveats the two men attached when they first unveiled the formula.
It’s often useful in testing a theory to push it to extremes. So let’s postulate that we sell a 100- year $1
billion put option on the S&P 500 at a strike price of 903 (the index’s level on 12/31/08). Using the implied
volatility assumption for long-dated contracts that we do, and combining that with appropriate interest and
dividend assumptions, we would find the “proper” Black-Scholes premium for this contract to be $2.5 million.
To judge the rationality of that premium, we need to assess whether the S&P will be valued a century
from now at less than today. Certainly the dollar will then be worth a small fraction of its present value (at only
2% inflation it will be worth roughly 14¢). So that will be a factor pushing the stated value of the index higher.
Far more important, however, is that one hundred years of retained earnings will hugely increase the value of
most of the companies in the index. In the 20th Century, the Dow-Jones Industrial Average increased by about
175-fold, mainly because of this retained-earnings factor.
Considering everything, I believe the probability of a decline in the index over a one-hundred-year
period to be far less than 1%. But let’s use that figure and also assume that the most likely decline – should one
occur – is 50%. Under these assumptions, the mathematical expectation of loss on our contract would be $5
million ($1 billion X 1% X 50%).
But if we had received our theoretical premium of $2.5 million up front, we would have only had to
invest it at 0.7% compounded annually to cover this loss expectancy. Everything earned above that would have
been profit. Would you like to borrow money for 100 years at a 0.7% rate?
Let’s look at my example from a worst-case standpoint. Remember that 99% of the time we would pay
nothing if my assumptions are correct. But even in the worst case among the remaining 1% of possibilities – that
is, one assuming a total loss of $1 billion – our borrowing cost would come to only 6.2%. Clearly, either my
assumptions are crazy or the formula is inappropriate.
20
The ridiculous premium that Black-Scholes dictates in my extreme example is caused by the inclusion
of volatility in the formula and by the fact that volatility is determined by how much stocks have moved around
in some past period of days, months or years. This metric is simply irrelevant in estimating the probability￾weighted range of values of American business 100 years from now. (Imagine, if you will, getting a quote every
day on a farm from a manic-depressive neighbor and then using the volatility calculated from these changing
quotes as an important ingredient in an equation that predicts a probability-weighted range of values for the farm
a century from now.)
Though historical volatility is a useful – but far from foolproof – concept in valuing short-term options,
its utility diminishes rapidly as the duration of the option lengthens. In my opinion, the valuations that the Black￾Scholes formula now place on our long-term put options overstate our liability, though the overstatement will
diminish as the contracts approach maturity.
Even so, we will continue to use Black-Scholes when we are estimating our financial-statement
liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might
offer would engender extreme skepticism. That would be perfectly understandable: CEOs who have concocted
their own valuations for esoteric financial instruments have seldom erred on the side of conservatism. That club
of optimists is one that Charlie and I have no desire to join.
The Annual Meeting
Our meeting this year will be held on Saturday, May 2nd. As always, the doors will open at the Qwest
Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the
question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. Then, after
a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day’s
question periods, please do so while Charlie is talking.
The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-square￾foot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 31,000 people
who came to the meeting did their part, and almost every location racked up record sales. But you can do better.
(A friendly warning: If I find sales are lagging, I lock the exits.)
This year Clayton will showcase its new i-house that includes Shaw flooring, Johns Manville insulation
and MiTek fasteners. This innovative “green” home, featuring solar panels and numerous other energy-saving
products, is truly a home of the future. Estimated costs for electricity and heating total only about $1 per day
when the home is sited in an area like Omaha. After purchasing the i-house, you should next consider the Forest
River RV and pontoon boat on display nearby. Make your neighbors jealous.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 50 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least 50% of you, I believe we can.
On Saturday, at the Omaha airport, we will have the usual array of NetJets aircraft available for your
inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to Omaha by bus;
leave in your new plane. And take along – with no fear of a strip search – the Ginsu knives that you’ve purchased
at the exhibit of our Quikut subsidiary.
Next, if you have any money left, visit the Bookworm, which will be selling about 30 books and
DVDs. A shipping service will be available for those whose thirst for knowledge exceeds their carrying capacity.
21
Finally, we will have three fascinating cars on the exhibition floor, including one from the past and one
of the future. Paul Andrews, CEO of our subsidiary, TTI, will bring his 1935 Duesenberg, a car that once
belonged to Mrs. Forrest Mars, Sr., parent and grandparent of our new partners in the Wrigley purchase. The
future will be represented by a new plug-in electric car developed by BYD, an amazing Chinese company in
which we have a 10% interest.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations,
we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who
handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find,
but work with Carol and you will get one.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. We initiated this special event at NFM twelve years
ago, and sales during the “Weekend” grew from $5.3 million in 1997 to a record $33.3 million in 2008. On
Saturday of that weekend, we also set a single day record of $7.2 million. Ask any retailer what he thinks of such
volume.
To obtain the Berkshire discount, you must make your purchases between Thursday, April 30th and
Monday, May 4th inclusive, and also present your meeting credential. The period’s special pricing will even
apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting
but which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their
cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on Sunday.
On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a western cookout to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 10 p.m. on Friday, May 1st. The second, the main gala, will be held on Sunday, May 3rd, from 9
a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 27th through Saturday, May 9th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday
afternoon.
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 3rd, and will be
serving from 1 p.m. until 10 p.m. Last year Gorat’s, which seats 240, served 975 dinners on Shareholder Sunday.
The three-day total was 2,448 including 702 T-bone steaks, the entrée preferred by the cognoscenti. Please don’t
embarrass me by ordering foie gras. Remember: To come to Gorat’s on that day, you must have a reservation. To
make one, call 402-551-3733 on April 1st (but not before).
We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come from
outside North America. Every year our meeting draws many people from around the globe, and Charlie and I
want to be sure we personally greet those who have come so far. Last year we enjoyed meeting more than 700 of
you from many dozens of countries. Any shareholder who comes from outside the U.S. or Canada will be given a
special credential and instructions for attending this function.
************
22
This year we will be making important changes in how we handle the meeting’s question periods. In
recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last
year there were practically none. So we need to steer the discussion back to Berkshire’s businesses.
In a related problem, there has been a mad rush when the doors open at 7 a.m., led by people who wish
to be first in line at the 12 microphones available for questioners. This is not desirable from a safety standpoint,
nor do we believe that sprinting ability should be the determinant of who gets to pose questions. (At age 78, I’ve
concluded that speed afoot is a ridiculously overrated talent.) Again, a new procedure is desirable.
In our first change, several financial journalists from organizations representing newspapers,
magazines and television will participate in the question-and-answer period, asking Charlie and me questions that
shareholders have submitted by e-mail. The journalists and their e-mail addresses are: Carol Loomis, of Fortune,
who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com,
and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted,
each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your
e-mail, let the journalist know if you would like your name mentioned if your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists will pick some tough ones and that’s the way we like it.
In our second change, we will have a drawing at 8:15 at each microphone for those shareholders
hoping to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with
those from the winning shareholders. At least half the questions – those selected by the panel from your
submissions – are therefore certain to be Berkshire-related. We will meanwhile continue to get some good – and
perhaps entertaining – questions from the audience as well.
So join us at our Woodstock for Capitalists and let us know how you like the new format. Charlie and I
look forward to seeing you.
February 27, 2009 Warren E. Buffett
Chairman of the Board
23
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ................................................... 23.8 10.0 13.8
1966 ................................................... 20.3 (11.7) 32.0
1967 ................................................... 11.0 30.9 (19.9)
1968 ................................................... 19.0 11.0 8.0
1969 ................................................... 16.2 (8.4) 24.6
1970 ................................................... 12.0 3.9 8.1
1971 ................................................... 16.4 14.6 1.8
1972 ................................................... 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ................................................... 21.9 37.2 (15.3)
1976 ................................................... 59.3 23.6 35.7
1977 ................................................... 31.9 (7.4) 39.3
1978 ................................................... 24.0 6.4 17.6
1979 ................................................... 35.7 18.2 17.5
1980 ................................................... 19.3 32.3 (13.0)
1981 ................................................... 31.4 (5.0) 36.4
1982 ................................................... 40.0 21.4 18.6
1983 ................................................... 32.3 22.4 9.9
1984 ................................................... 13.6 6.1 7.5
1985 ................................................... 48.2 31.6 16.6
1986 ................................................... 26.1 18.6 7.5
1987 ................................................... 19.5 5.1 14.4
1988 ................................................... 20.1 16.6 3.5
1989 ................................................... 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ................................................... 39.6 30.5 9.1
1992 ................................................... 20.3 7.6 12.7
1993 ................................................... 14.3 10.1 4.2
1994 ................................................... 13.9 1.3 12.6
1995 ................................................... 43.1 37.6 5.5
1996 ................................................... 31.8 23.0 8.8
1997 ................................................... 34.1 33.4 .7
1998 ................................................... 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 ................................................... (6.2) (11.9) 5.7
2002 ................................................... 10.0 (22.1) 32.1
2003 ................................................... 21.0 28.7 (7.7)
2004 ................................................... 10.5 10.9 (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ................................................... 18.4 15.8 2.6
2007 ................................................... 11.0 5.5 5.5
2008 ................................................... (9.6) (37.0) 27.4
2009 ................................................... 19.8 26.5 (6.7)
Compounded Annual Gain – 1965-2009 ....................... 20.3% 9.3% 11.0
Overall Gain – 1964-2009 .................................. 434,057% 5,430%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both
our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over)
book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*
Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000
shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner,
and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual
report, consequently, we restate the economic principles that guide us. This year these principles appear on pages
89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these
principles for decades and will continue to do so long after I’m gone.
In this letter we will also review some of the basics of our business, hoping to provide both a freshman
orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.
How We Measure Ourselves
Our metrics for evaluating our managerial performance are displayed on the facing page. From the start,
Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have
not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then
painting the bull’s eye around it.
Selecting the S&P 500 as our bogey was an easy choice because our shareholders, at virtually no cost, can
match its performance by holding an index fund. Why should they pay us for merely duplicating that result?
A more difficult decision for us was how to measure the progress of Berkshire versus the S&P. There are
good arguments for simply using the change in our stock price. Over an extended period of time, in fact, that is
the best test. But year-to-year market prices can be extraordinarily erratic. Even evaluations covering as long as a
decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement
period. Steve Ballmer, of Microsoft, and Jeff Immelt, of GE, can tell you about that problem, suffering as they do
from the nosebleed prices at which their stocks traded when they were handed the managerial baton.
The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic
value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for
it: per-share book value. Relying on this yardstick has its shortcomings, which we discuss on pages 92 and 93.
Additionally, book value at most companies understates intrinsic value, and that is certainly the case at
Berkshire. In aggregate, our businesses are worth considerably more than the values at which they are carried on
our books. In our all-important insurance business, moreover, the difference is huge. Even so, Charlie and I
believe that our book value – understated though it is – supplies the most useful tracking device for changes in
intrinsic value. By this measurement, as the opening paragraph of this letter states, our book value since the start
of fiscal 1965 has grown at a rate of 20.3% compounded annually.
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
We should note that had we instead chosen market prices as our yardstick, Berkshire’s results would
look better, showing a gain since the start of fiscal 1965 of 22% compounded annually. Surprisingly, this modest
difference in annual compounding rate leads to an 801,516% market-value gain for the entire 45-year period
compared to the book-value gain of 434,057% (shown on page 2). Our market gain is better because in 1965
Berkshire shares sold at an appropriate discount to the book value of its underearning textile assets, whereas
today Berkshire shares regularly sell at a premium to the accounting values of its first-class businesses.
Summed up, the table on page 2 conveys three messages, two positive and one hugely negative. First,
we have never had any five-year period beginning with 1965-69 and ending with 2005-09 – and there have been
41 of these – during which our gain in book value did not exceed the S&P’s gain. Second, though we have lagged
the S&P in some years that were positive for the market, we have consistently done better than the S&P in the
eleven years during which it delivered negative results. In other words, our defense has been better than our
offense, and that’s likely to continue.
The big minus is that our performance advantage has shrunk dramatically as our size has grown, an
unpleasant trend that is certain to continue. To be sure, Berkshire has many outstanding businesses and a cadre of
truly great managers, operating within an unusual corporate culture that lets them maximize their talents. Charlie
and I believe these factors will continue to produce better-than-average results over time. But huge sums forge
their own anchor and our future advantage, if any, will be a small fraction of our historical edge.
What We Don’t Do
Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll
never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled
“Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach
works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and
wife.)
Here are a few examples of how we apply Charlie’s thinking at Berkshire:
• Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their
products may be. In the past, it required no brilliance for people to foresee the fabulous growth
that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But
the future then also included competitive dynamics that would decimate almost all of the
companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean
we can judge what its profit margins and returns on capital will be as a host of competitors battle
for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to
come seems reasonably predictable. Even then, we will make plenty of mistakes.
• We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback
position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash
we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be
constantly refreshed by a gusher of earnings from our many and diverse businesses.
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier
of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured
$15.5 billion into a business world that could otherwise look only to the federal government for
help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure
American businesses that needed – without delay – our tangible vote of confidence. The remaining
$6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was
completed without pause while, elsewhere, panic reigned.
4
We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash￾equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.
• We tend to let our many subsidiaries operate on their own, without our supervising and
monitoring them to any degree. That means we are sometimes late in spotting management
problems and that both operating and capital decisions are occasionally made with which Charlie
and I would have disagreed had we been consulted. Most of our managers, however, use the
independence we grant them magnificently, rewarding our confidence by maintaining an owner￾oriented attitude that is invaluable and too seldom found in huge organizations. We would rather
suffer the visible costs of a few bad decisions than incur the many invisible costs that come from
decisions made too slowly – or not at all – because of a stifling bureaucracy.
With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of
different operating units. We hope to have many more of each. But we will never allow Berkshire
to become some monolith that is overrun with committees, budget presentations and multiple
layers of management. Instead, we plan to operate as a collection of separately-managed medium￾sized and large businesses, most of whose decision-making occurs at the operating level. Charlie
and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and
setting their compensation.
• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst
commentary are not for us. Instead we want partners who join us at Berkshire because they wish
to make a long-term investment in a business they themselves understand and because it’s one that
follows policies with which they concur. If Charlie and I were to go into a small venture with a
few partners, we would seek individuals in sync with us, knowing that common goals and a shared
destiny make for a happy business “marriage” between owners and managers. Scaling up to giant
size doesn’t change that truth.
To build a compatible shareholder population, we try to communicate with our owners directly
and informatively. Our goal is to tell you what we would like to know if our positions were
reversed. Additionally, we try to post our quarterly and annual financial information on the
Internet early on weekends, thereby giving you and other investors plenty of time during a
non-trading period to digest just what has happened at our multi-faceted enterprise. (Occasionally,
SEC deadlines force a non-Friday disclosure.) These matters simply can’t be adequately
summarized in a few paragraphs, nor do they lend themselves to the kind of catchy headline that
journalists sometimes seek.
Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830
words in the annual letter was this sentence: “We are certain, for example, that the economy will
be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us
whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first
part of the sentence while making no mention whatsoever of its ending. I regard this as terrible
journalism: Misinformed readers or viewers may well have thought that Charlie and I were
forecasting bad things for the stock market, though we had not only in that sentence, but also
elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled
by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished
the year at 10,428.
Given a few experiences we’ve had like that, you can understand why I prefer that our
communications with you remain as direct and unabridged as possible.
************
Let’s move to the specifics of Berkshire’s operations. We have four major operating sectors, each
differing from the others in balance sheet and income account characteristics. Therefore, lumping them together,
as is standard in financial statements, impedes analysis. So we’ll present them as four separate businesses, which
is how Charlie and I view them.
5
Insurance
Our property-casualty (P/C) insurance business has been the engine behind Berkshire’s growth and will
continue to be. It has worked wonders for us. We carry our P/C companies on our books at $15.5 billion more
than their net tangible assets, an amount lodged in our “Goodwill” account. These companies, however, are
worth far more than their carrying value – and the following look at the economic model of the P/C industry will
tell you why.
Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from
certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model
leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to
invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float
we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does
our float.
If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that
adds to the investment income produced from the float. This combination allows us to enjoy the use of free
money – and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition,
so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss.
This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some
catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of
float.
In my perhaps biased view, Berkshire has the best large insurance operation in the world. And I will
absolutely state that we have the best managers. Our float has grown from $16 million in 1967, when we entered
the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for
seven consecutive years. I believe it likely that we will continue to underwrite profitably in most – though
certainly not all – future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion
with us that we could invest for our own benefit without the payment of interest.
Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a
whole: In most years, premiums have been inadequate to cover claims plus expenses. Consequently, the
industry’s overall return on tangible equity has for many decades fallen far short of that achieved by the S&P
500. Outstanding economics exist at Berkshire only because we have some outstanding managers running some
unusual businesses. Our insurance CEOs deserve your thanks, having added many billions of dollars to
Berkshire’s value. It’s a pleasure for me to tell you about these all-stars.
************
Let’s start at GEICO, which is known to all of you because of its $800 million annual advertising
budget (close to twice that of the runner-up advertiser in the auto insurance field). GEICO is managed by Tony
Nicely, who joined the company at 18. Now 66, Tony still tap-dances to the office every day, just as I do at 79.
We both feel lucky to work at a business we love.
GEICO’s customers have warm feelings toward the company as well. Here’s proof: Since Berkshire
acquired control of GEICO in 1996, its market share has increased from 2.5% to 8.1%, a gain reflecting the net
addition of seven million policyholders. Perhaps they contacted us because they thought our gecko was cute, but
they bought from us to save important money. (Maybe you can as well; call 1-800-847-7536 or go to
www.GEICO.com.) And they’ve stayed with us because they like our service as well as our price.
Berkshire acquired GEICO in two stages. In 1976-80 we bought about one-third of the company’s
stock for $47 million. Over the years, large repurchases by the company of its own shares caused our position to
grow to about 50% without our having bought any more shares. Then, on January 2, 1996, we acquired the
remaining 50% of GEICO for $2.3 billion in cash, about 50 times the cost of our original purchase.
6
An old Wall Street joke gets close to our experience:
Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18.
Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now,
that it’s an even better buy at 18 than it was when you made your purchase.
Customer: Damn, I knew I should have waited.
GEICO’s growth may slow in 2010. U.S. vehicle registrations are actually down because of slumping
auto sales. Moreover, high unemployment is causing a growing number of drivers to go uninsured. (That’s illegal
almost everywhere, but if you’ve lost your job and still want to drive . . .) Our “low-cost producer” status,
however, is sure to give us significant gains in the future. In 1995, GEICO was the country’s sixth largest auto
insurer; now we are number three. The company’s float has grown from $2.7 billion to $9.6 billion. Equally
important, GEICO has operated at an underwriting profit in 13 of the 14 years Berkshire has owned it.
I became excited about GEICO in January 1951, when I first visited the company as a 20-year-old
student. Thanks to Tony, I’m even more excited today.
************
A hugely important event in Berkshire’s history occurred on a Saturday in 1985. Ajit Jain came into
our office in Omaha – and I immediately knew we had found a superstar. (He had been discovered by Mike
Goldberg, now elevated to St. Mike.)
We immediately put Ajit in charge of National Indemnity’s small and struggling reinsurance operation.
Over the years, he has built this business into a one-of-a-kind giant in the insurance world.
Staffed today by only 30 people, Ajit’s operation has set records for transaction size in several areas of
insurance. Ajit writes billion-dollar limits – and then keeps every dime of the risk instead of laying it off with
other insurers. Three years ago, he took over huge liabilities from Lloyds, allowing it to clean up its relationship
with 27,972 participants (“names”) who had written problem-ridden policies that at one point threatened the
survival of this 322-year-old institution. The premium for that single contract was $7.1 billion. During 2009, he
negotiated a life reinsurance contract that could produce $50 billion of premium for us over the next 50 or so
years.
Ajit’s business is just the opposite of GEICO’s. At that company, we have millions of small policies
that largely renew year after year. Ajit writes relatively few policies, and the mix changes significantly from year
to year. Throughout the world, he is known as the man to call when something both very large and unusual needs
to be insured.
If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.
************
Our third insurance powerhouse is General Re. Some years back this operation was troubled; now it is
a gleaming jewel in our insurance crown.
Under the leadership of Tad Montross, General Re had an outstanding underwriting year in 2009, while
also delivering us unusually large amounts of float per dollar of premium volume. Alongside General Re’s P/C
business, Tad and his associates have developed a major life reinsurance operation that has grown increasingly
valuable.
Last year General Re finally attained 100% ownership of Cologne Re, which since 1995 has been a
key – though only partially-owned – part of our presence around the world. Tad and I will be visiting Cologne in
September to thank its managers for their important contribution to Berkshire.
7
Finally, we own a group of smaller companies, most of them specializing in odd corners of the
insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the
float they provide us is substantial. Charlie and I treasure these companies and their managers.
Here is the record of all four segments of our property-casualty and life insurance businesses:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2009 2008 2009 2008
General Re . . . . . . . . . . . . . . . . . . . . . . $ 477 $ 342 $21,014 $21,074
BH Reinsurance . . . . . . . . . . . . . . . . . . 349 1,324 26,223 24,221
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 649 916 9,613 8,454
Other Primary . . . . . . . . . . . . . . . . . . . 84 210 5,061 4,739
$1,559 $2,792 $61,911 $58,488
************
And now a painful confession: Last year your chairman closed the book on a very expensive business
fiasco entirely of his own making.
For many years I had struggled to think of side products that we could offer our millions of loyal
GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market
our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we
offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong
type.
Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We
then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million.
GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me
that instead of getting the cream of GEICO’s customers we would get the ––––– well, let’s call it the
non-cream. I subtly indicated that I was older and wiser.
I was just older.
Regulated Utility Business
Berkshire has an 89.5% interest in MidAmerican Energy Holdings, which owns a wide variety of
utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 3.8 million end
users make it the U.K.’s third largest distributor of electricity; (2) MidAmerican Energy, which serves 725,000
electric customers, primarily in Iowa; (3) Pacific Power and Rocky Mountain Power, serving about 1.7 million
electric customers in six western states; and (4) Kern River and Northern Natural pipelines, which carry about
8% of the natural gas consumed in the U.S.
MidAmerican has two terrific managers, Dave Sokol and Greg Abel. In addition, my long-time friend,
Walter Scott, along with his family, has a major ownership position in the company. Walter brings extraordinary
business savvy to any operation. Ten years of working with Dave, Greg and Walter have reinforced my original
belief: Berkshire couldn’t have better partners. They are truly a dream team.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in the
U.S., HomeServices of America. This company operates through 21 locally-branded firms that have 16,000
agents. Though last year was again a terrible year for home sales, HomeServices earned a modest sum. It also
acquired a firm in Chicago and will add other quality brokerage operations when they are available at sensible
prices. A decade from now, HomeServices is likely to be much larger.
8
Here are some key figures on MidAmerican’s operations:
Earnings (in millions)
2009 2008
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 248 $ 339
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 425
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788 703
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 595
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (45)
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 186
Operating earnings before corporate interest and taxes ........................... 1,846 2,203
Constellation Energy * .................................................... — 1,092
Interest, other than to Berkshire ............................................. (318) (332)
Interest on Berkshire junior debt ............................................. (58) (111)
Income tax .............................................................. (313) (1,002)
Net earnings ............................................................. $ 1,157 $ 1,850
Earnings applicable to Berkshire ** .......................................... $ 1,071 $ 1,704
Debt owed to others ....................................................... 19,579 19,145
Debt owed to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 1,087
*Consists of a breakup fee of $175 million and a profit on our investment of $917 million.
**Includes interest earned by Berkshire (net of related income taxes) of $38 in 2009 and $72 in 2008.
Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner
with the customers in their service areas, with those users depending on us to provide first-class service and
invest for their future needs. Permitting and construction periods for generation and major transmission facilities
stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on
behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet
future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.
Dave and Greg make sure we do just that. National research companies consistently rank our Iowa and
Western utilities at or near the top of their industry. Similarly, among the 43 U.S. pipelines ranked by a firm
named Mastio, our Kern River and Northern Natural properties tied for second place.
Moreover, we continue to pour huge sums of money into our operations so as to not only prepare for
the future but also make these operations more environmentally friendly. Since we purchased MidAmerican ten
years ago, it has never paid a dividend. We have instead used earnings to improve and expand our properties in
each of the territories we serve. As one dramatic example, in the last three years our Iowa and Western utilities
have earned $2.5 billion, while in this same period spending $3 billion on wind generation facilities.
MidAmerican has consistently kept its end of the bargain with society and, to society’s credit, it has
reciprocated: With few exceptions, our regulators have promptly allowed us to earn a fair return on the ever￾increasing sums of capital we must invest. Going forward, we will do whatever it takes to serve our territories in
the manner they expect. We believe that, in turn, we will be allowed the return we deserve on the funds we
invest.
In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the
best businesses by far for owners continue to be those that have high returns on capital and that require little
incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy
more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite
willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses
have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations
are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses
should produce above-average, though certainly not spectacular, returns in the decades ahead.
9
Our BNSF operation, it should be noted, has certain important economic characteristics that resemble
those of our electric utilities. In both cases we provide fundamental services that are, and will remain, essential to
the economic well-being of our customers, the communities we serve, and indeed the nation. Both will require
heavy investment that greatly exceeds depreciation allowances for decades to come. Both must also plan far
ahead to satisfy demand that is expected to outstrip the needs of the past. Finally, both require wise regulators
who will provide certainty about allowable returns so that we can confidently make the huge investments
required to maintain, replace and expand the plant.
We see a “social compact” existing between the public and our railroad business, just as is the case
with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to
the compact should – and we believe will – understand the benefit of behaving in a way that encourages good
behavior by the other. It is inconceivable that our country will realize anything close to its full economic
potential without its possessing first-class electricity and railroad systems. We will do our part to see that they
exist.
In the future, BNSF results will be included in this “regulated utility” section. Aside from the two
businesses having similar underlying economic characteristics, both are logical users of substantial amounts of
debt that is not guaranteed by Berkshire. Both will retain most of their earnings. Both will earn and invest large
sums in good times or bad, though the railroad will display the greater cyclicality. Overall, we expect this
regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens
– yes, tens – of billions of dollars of incremental equity capital.
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance
sheet and earnings statement for the entire group.
Balance Sheet 12/31/09 (in millions)
Assets
Cash and equivalents ................. $ 3,018
Accounts and notes receivable .......... 5,066
Inventory .......................... 6,147
Other current assets . . . . . . . . . . . . . . . . . . 625
Total current assets ................... 14,856
Goodwill and other intangibles ......... 16,499
Fixed assets ........................ 15,374
Other assets ........................ 2,070
$48,799
Liabilities and Equity
Notes payable ....................... $ 1,842
Other current liabilities ............... 7,414
Total current liabilities ................ 9,256
Deferred taxes ...................... 2,834
Term debt and other liabilities .......... 6,240
Equity ............................. 30,469
$48,799
Earnings Statement (in millions)
2009 2008 2007
Revenues ......................................................... $61,665 $66,099 $59,100
Operating expenses (including depreciation of $1,422 in 2009, $1,280 in 2008
and $955 in 2007) ................................................. 59,509 61,937 55,026
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 139 127
Pre-tax earnings .................................................... 2,058* 4,023* 3,947*
Income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 1,740 1,594
Net income ........................................................ $ 1,113 $ 2,283 $ 2,353
*Does not include purchase-accounting adjustments.
10
Almost all of the many and widely-diverse operations in this sector suffered to one degree or another
from 2009’s severe recession. The major exception was McLane, our distributor of groceries, confections and
non-food items to thousands of retail outlets, the largest by far Wal-Mart.
Grady Rosier led McLane to record pre-tax earnings of $344 million, which even so amounted to only
slightly more than one cent per dollar on its huge sales of $31.2 billion. McLane employs a vast array of physical
assets – practically all of which it owns – including 3,242 trailers, 2,309 tractors and 55 distribution centers with
15.2 million square feet of space. McLane’s prime asset, however, is Grady.
We had a number of companies at which profits improved even as sales contracted, always an
exceptional managerial achievement. Here are the CEOs who made it happen:
COMPANY CEO
Benjamin Moore (paint) Denis Abrams
Borsheims (jewelry retailing) Susan Jacques
H. H. Brown (manufacturing and retailing of shoes) Jim Issler
CTB (agricultural equipment) Vic Mancinelli
Dairy Queen John Gainor
Nebraska Furniture Mart (furniture retailing) Ron and Irv Blumkin
Pampered Chef (direct sales of kitchen tools) Marla Gottschalk
See’s (manufacturing and retailing of candy) Brad Kinstler
Star Furniture (furniture retailing) Bill Kimbrell
Among the businesses we own that have major exposure to the depressed industrial sector, both
Marmon and Iscar turned in relatively strong performances. Frank Ptak’s Marmon delivered a 13.5% pre-tax
profit margin, a record high. Though the company’s sales were down 27%, Frank’s cost-conscious management
mitigated the decline in earnings.
Nothing stops Israel-based Iscar – not wars, recessions or competitors. The world’s two other leading
suppliers of small cutting tools both had very difficult years, each operating at a loss throughout much of the
year. Though Iscar’s results were down significantly from 2008, the company regularly reported profits, even
while it was integrating and rationalizing Tungaloy, the large Japanese acquisition that we told you about last
year. When manufacturing rebounds, Iscar will set new records. Its incredible managerial team of Eitan
Wertheimer, Jacob Harpaz and Danny Goldman will see to that.
Every business we own that is connected to residential and commercial construction suffered severely
in 2009. Combined pre-tax earnings of Shaw, Johns Manville, Acme Brick, and MiTek were $227 million, an
82.5% decline from $1.295 billion in 2006, when construction activity was booming. These businesses continue
to bump along the bottom, though their competitive positions remain undented.
The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional
ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company
in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our
dominance in the field remains unchallenged.
NetJets’ business operation, however, has been another story. In the eleven years that we have owned
the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared
from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of
this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this
condition. But, luckily, I have been bailed out.
11
Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of
NetJets in August. His leadership has been transforming: Debt has already been reduced to $1.4 billion, and, after
suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.
Most important, none of the changes wrought by Dave have in any way undercut the top-of-the-line
standards for safety and service that Rich Santulli, NetJets’ previous CEO and the father of the fractional￾ownership industry, insisted upon. Dave and I have the strongest possible personal interest in maintaining these
standards because we and our families use NetJets for almost all of our flying, as do many of our directors and
managers. None of us are assigned special planes nor crews. We receive exactly the same treatment as any other
owner, meaning we pay the same prices as everyone else does when we are using our personal contracts. In short,
we eat our own cooking. In the aviation business, no other testimonial means more.
Finance and Financial Products
Our largest operation in this sector is Clayton Homes, the country’s leading producer of modular and
manufactured homes. Clayton was not always number one: A decade ago the three leading manufacturers were
Fleetwood, Champion and Oakwood, which together accounted for 44% of the output of the industry. All have
since gone bankrupt. Total industry output, meanwhile, has fallen from 382,000 units in 1999 to 60,000 units in
2009.
The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy
is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000,
by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.
People thought it was good news a few years back when housing starts – the supply side of the picture
– were running about two million annually. But household formations – the demand side – only amounted to
about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many
houses.
There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the
destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by,
say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce
new housing starts to a number far below the rate of household formations.
Our country has wisely selected the third option, which means that within a year or so residential
housing problems should largely be behind us, the exceptions being only high-value houses and those in certain
localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course,
but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t
afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.
The second reason that manufactured housing is troubled is specific to the industry: the punitive
differential in mortgage rates between factory-built homes and site-built homes. Before you read further, let me
underscore the obvious: Berkshire has a dog in this fight, and you should therefore assess the commentary that
follows with special care. That warning made, however, let me explain why the rate differential causes problems
for both large numbers of lower-income Americans and Clayton.
The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie
Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically
be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of
conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 51⁄4%. In
addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an
action that also helped to keep rates at bargain-basement levels.
In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a
meritorious buyer of a factory-built home must pay about 9% on his loan. For the all-cash buyer, Clayton’s
homes offer terrific value. If the buyer needs mortgage financing, however – and, of course, most buyers do – the
difference in financing costs too often negates the attractive price of a factory-built home.
12
Last year I told you why our buyers – generally people with low incomes – performed so well as credit
risks. Their attitude was all-important: They signed up to live in the home, not resell or refinance it.
Consequently, our buyers usually took out loans with payments geared to their verified incomes (we weren’t
making “liar’s loans”) and looked forward to the day they could burn their mortgage. If they lost their jobs, had
health problems or got divorced, we could of course expect defaults. But they seldom walked away simply
because house values had fallen. Even today, though job-loss troubles have grown, Clayton’s delinquencies and
defaults remain reasonable and will not cause us significant problems.
We have tried to qualify more of our customers’ loans for treatment similar to those available on the
site-built product. So far we have had only token success. Many families with modest incomes but responsible
habits have therefore had to forego home ownership simply because the financing differential attached to the
factory-built product makes monthly payments too expensive. If qualifications aren’t broadened, so as to open
low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems
destined to struggle and dwindle.
Even under these conditions, I believe Clayton will operate profitably in coming years, though well
below its potential. We couldn’t have a better manager than CEO Kevin Clayton, who treats Berkshire’s interests
as if they were his own. Our product is first-class, inexpensive and constantly being improved. Moreover, we will
continue to use Berkshire’s credit to support Clayton’s mortgage program, convinced as we are of its soundness.
Even so, Berkshire can’t borrow at a rate approaching that available to government agencies. This handicap will
limit sales, hurting both Clayton and a multitude of worthy families who long for a low-cost home.
In the following table, Clayton’s earnings are net of the company’s payment to Berkshire for the use of
its credit. Offsetting this cost to Clayton is an identical amount of income credited to Berkshire’s finance
operation and included in “Other Income.” The cost and income amount was $116 million in 2009 and $92
million in 2008.
The table also illustrates how severely our furniture (CORT) and trailer (XTRA) leasing operations
have been hit by the recession. Though their competitive positions remain as strong as ever, we have yet to see
any bounce in these businesses.
Pre-Tax Earnings
(in millions)
2009 2008
Net investment income ....................................... $278 $330
Life and annuity operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 23
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 87
Manufactured-housing finance (Clayton) . . . . . . . . . . . . . . . . . . . . . . . . 187 206
Other income * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 141
Income before investment and derivatives gains or losses ........... $781 $787
*Includes $116 million in 2009 and $92 million in 2008 of fees that Berkshire charges Clayton for the
use of Berkshire’s credit.
************
At the end of 2009, we became a 50% owner of Berkadia Commercial Mortgage (formerly known as
Capmark), the country’s third-largest servicer of commercial mortgages. In addition to servicing a $235 billion
portfolio, the company is an important originator of mortgages, having 25 offices spread around the country.
Though commercial real estate will face major problems in the next few years, long-term opportunities for
Berkadia are significant.
13
Our partner in this operation is Leucadia, run by Joe Steinberg and Ian Cumming, with whom we had a
terrific experience some years back when Berkshire joined with them to purchase Finova, a troubled finance
business. In resolving that situation, Joe and Ian did far more than their share of the work, an arrangement I
always encourage. Naturally, I was delighted when they called me to partner again in the Capmark purchase.
Our first venture was also christened Berkadia. So let’s call this one Son of Berkadia. Someday I’ll be
writing you about Grandson of Berkadia.
Investments
Below we show our common stock investments that at yearend had a market value of more than $1 billion.
12/31/09
Shares Company
Percentage of
Company
Owned Cost * Market
(in millions)
151,610,700 American Express Company ........................ 12.7 $ 1,287 $ 6,143
225,000,000 BYD Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 232 1,986
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 1,299 11,400
37,711,330 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2,741 1,926
28,530,467 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1,724 1,838
130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 4,330 3,541
3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 768 2,092
83,128,411 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.9 533 5,040
25,108,967 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2,027 1,979
234,247,373 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 1,367 1,620
76,633,426 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 2,371 1,725
39,037,142 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1,893 2,087
334,235,585 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 7,394 9,021
Others ......................................... 6,680 8,636
Total Common Stocks Carried at Market .............. $34,646 $59,034
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
In addition, we own positions in non-traded securities of Dow Chemical, General Electric, Goldman
Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion. We
purchased these five positions in the last 18 months. Setting aside the significant equity potential they provide us,
these holdings deliver us an aggregate of $2.1 billion annually in dividends and interest. Finally, we owned
76,777,029 shares (22.5%) of BNSF at yearend, which we then carried at $85.78 per share, but which have
subsequently been melded into our purchase of the entire company.
In 2009, our largest sales were in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson
(sales of the latter occurring after we had built our position earlier in the year). Charlie and I believe that all of
these stocks will likely trade higher in the future. We made some sales early in 2009 to raise cash for our Dow
and Swiss Re purchases and late in the year made other sales in anticipation of our BNSF purchase.
14
We told you last year that very unusual conditions then existed in the corporate and municipal bond
markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with
some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold,
reach for a bucket, not a thimble.
We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings
of $17 billion. Nevertheless, at yearend 2009, our cash was down to $30.6 billion (with $8 billion earmarked for
the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an
ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are
upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you
pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns
in the succeeding decade or two.
************
Last year I wrote extensively about our derivatives contracts, which were then the subject of both
controversy and misunderstanding. For that discussion, please go to www.berkshirehathaway.com.
We have since changed only a few of our positions. Some credit contracts have run off. The terms of
about 10% of our equity put contracts have also changed: Maturities have been shortened and strike prices
materially reduced. In these modifications, no money changed hands.
A few points from last year’s discussion are worth repeating:
(1) Though it’s no sure thing, I expect our contracts in aggregate to deliver us a profit over their lifetime,
even when investment income on the huge amount of float they provide us is excluded in the
calculation. Our derivatives float – which is not included in the $62 billion of insurance float I
described earlier – was about $6.3 billion at yearend.
(2) Only a handful of our contracts require us to post collateral under any circumstances. At last year’s low
point in the stock and credit markets, our posting requirement was $1.7 billion, a small fraction of the
derivatives-related float we held. When we do post collateral, let me add, the securities we put up
continue to earn money for our account.
(3) Finally, you should expect large swings in the carrying value of these contracts, items that can affect
our reported quarterly earnings in a huge way but that do not affect our cash or investment holdings.
That thought certainly fit 2009’s circumstances. Here are the pre-tax quarterly gains and losses from
derivatives valuations that were part of our reported earnings last year:
Quarter $ Gain (Loss) in Billions
1 (1.517)
2 2.357
3 1.732
4 1.052
As we’ve explained, these wild swings neither cheer nor bother Charlie and me. When we report to
you, we will continue to separate out these figures (as we do realized investment gains and losses) so that you can
more clearly view the earnings of our operating businesses. We are delighted that we hold the derivatives
contracts that we do. To date we have significantly profited from the float they provide. We expect also to earn
further investment income over the life of our contracts.
15
We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to
invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998.
The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and
that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At
Berkshire nothing like that has occurred – nor will it.
It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not
delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives
contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as
MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault.
It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.
************
In my view a board of directors of a huge financial institution is derelict if it does not insist that its
CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other
employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –
the financial consequences for him and his board should be severe.
It has not been shareholders who have botched the operations of some of our country’s largest financial
institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most
cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the
last two years. To say these owners have been “bailed-out” is to make a mockery of the term.
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may
have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these
CEOs and directors that needs to be changed: If their institutions and the country are harmed by their
recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by
insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some
meaningful sticks now need to be part of their employment picture as well.
An Inconvenient Truth (Boardroom Overheating)
Our subsidiaries made a few small “bolt-on” acquisitions last year for cash, but our blockbuster deal
with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously
outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.
The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the
current market price, why in the world should we “sell” a significant part of the company at that same inadequate
price by issuing our stock in a merger?
In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on
the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver
them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are
selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You
simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.
Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically
worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence
and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100
per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic
value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders
of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone
at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large
as his original domain, in a world where size tends to correlate with both prestige and compensation.
16
If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s
advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of
stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in
effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s
having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this
way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is
plenty of private snickering.)
In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share.
The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie
and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of
BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was
paid with Berkshire shares.
In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was
offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and
liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We
also like the prospect of investing additional billions over the years at reasonable rates of return. But the final
decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made
no sense. We would have then been giving up more than we were getting.
************
I have been in dozens of board meetings in which acquisitions have been deliberated, often with the
directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers
give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is
worth far more than its market price. In more than fifty years of board memberships, however, never have I heard
the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the
issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though
they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its
real value – had a takeover bid for the acquirer instead been the subject up for discussion.
When stock is the currency being contemplated in an acquisition and when directors are hearing from
an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should
hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not
going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t
ask the barber whether you need a haircut.”
************
I can’t resist telling you a true story from long ago. We owned stock in a large well-run bank that for
decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank
immediately began looking for possible purchases. Its managers – fine people and able bankers – not
unexpectedly began to behave like teenage boys who had just discovered girls.
They soon focused on a much smaller bank, also well-run and having similar financial characteristics
in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why
we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside,
though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price
close to three times book value. Moreover, he wanted stock, not cash.
Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are
in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a
legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog
that fouls our lawn is a Chihuahua rather than a Saint Bernard?”
17
The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After
the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going
to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise
me, therefore, that you’ll never again do a deal this dumb.”
Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the
managers of the big bank – newly bigger – lived happily ever after.
The Annual Meeting
Our best guess is that 35,000 people attended the annual meeting last year (up from 12 – no zeros
omitted – in 1981). With our shareholder population much expanded, we expect even more this year. Therefore,
we will have to make a few changes in the usual routine. There will be no change, however, in our enthusiasm
for having you attend. Charlie and I like to meet you, answer your questions and – best of all – have you buy lots
of goods from our businesses.
The meeting this year will be held on Saturday, May 1st. As always, the doors will open at the Qwest
Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the
question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:30. After a
short recess, Charlie and I will convene the annual meeting at 3:45. If you decide to leave during the day’s
question periods, please do so while Charlie is talking. (Act fast; he can be terse.)
The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-square￾foot hall that adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did
your part, and most locations racked up record sales. But you can do better. (A friendly warning: If I find sales
are lagging, I get testy and lock the exits.)
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least 50% of you, I believe we can.
Be sure to visit the Bookworm. Among the more than 30 books and DVDs it will offer are two new
books by my sons: Howard’s Fragile, a volume filled with photos and commentary about lives of struggle
around the globe and Peter’s Life Is What You Make It. Completing the family trilogy will be the debut of my
sister Doris’s biography, a story focusing on her remarkable philanthropic activities. Also available will be Poor
Charlie’s Almanack, the story of my partner. This book is something of a publishing miracle – never advertised,
yet year after year selling many thousands of copies from its Internet site. (Should you need to ship your book
purchases, a nearby shipping service will be available.)
If you are a big spender – or, for that matter, merely a gawker – visit Elliott Aviation on the east side of
the Omaha airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that
will get your pulse racing.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations,
we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who
handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find,
but work with Carol and you will get one.
18
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. To obtain the Berkshire discount, you must make
your purchases between Thursday, April 29th and Monday, May 3rd inclusive, and also present your meeting
credential. The period’s special pricing will even apply to the products of several prestigious manufacturers that
normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made
an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through
Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a
Berkyville BBQ to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 10 p.m. on Friday, April 30th. The second, the main gala, will be held on Sunday, May 2nd, from 9
a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 26th through Saturday, May 8th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder. Enter with rhinestones; leave with diamonds. My daughter tells me that the
more you buy, the more you save (kids say the darnedest things).
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers.
Our special treat for shareholders this year will be the return of my friend, Ariel Hsing, the country’s
top-ranked junior table tennis player (and a good bet to win at the Olympics some day). Now 14, Ariel came to
the annual meeting four years ago and demolished all comers, including me. (You can witness my humiliating
defeat on YouTube; just type in Ariel Hsing Berkshire.)
Naturally, I’ve been plotting a comeback and will take her on outside of Borsheims at 1:00 p.m. on
Sunday. It will be a three-point match, and after I soften her up, all shareholders are invited to try their luck at
similar three-point contests. Winners will be given a box of See’s candy. We will have equipment available, but
bring your own paddle if you think it will help. (It won’t.)
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 2nd, and will be
serving from 1 p.m. until 10 p.m. Last year, though, it was overwhelmed by demand. With many more diners
expected this year, I’ve asked my friend, Donna Sheehan, at Piccolo’s – another favorite restaurant of mine – to
serve shareholders on Sunday as well. (Piccolo’s giant root beer float is mandatory for any fan of fine dining.) I
plan to eat at both restaurants: All of the weekend action makes me really hungry, and I have favorite dishes at
each spot. Remember: To make a reservation at Gorat’s, call 402-551-3733 on April 1st (but not before) and at
Piccolo’s call 402-342-9038.
Regrettably, we will not be able to have a reception for international visitors this year. Our count grew
to about 800 last year, and my simply signing one item per person took about 21⁄2 hours. Since we expect even
more international visitors this year, Charlie and I decided we must drop this function. But be assured, we
welcome every international visitor who comes.
Last year we changed our method of determining what questions would be asked at the meeting and
received many dozens of letters applauding the new arrangement. We will therefore again have the same three
financial journalists lead the question-and-answer period, asking Charlie and me questions that shareholders have
submitted to them by e-mail.
19
The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be e-mailed at
cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross
Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will
choose the dozen or so he or she decides are the most interesting and important. The journalists have told me
your question has the best chance of being selected if you keep it concise and include no more than two questions
in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if
your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists will pick some tough ones and that’s the way we like it.
We will again have a drawing at 8:15 on Saturday at each of 13 microphones for those shareholders
wishing to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with
those from the winning shareholders. We’ve added 30 minutes to the question time and will probably have time
for about 30 questions from each group.
***********
At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific
parents who saw that we got good educations; have enjoyed wonderful families and great health; and came
equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that
experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have
long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed,
over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we
would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).
Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s
annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you
there.
February 26, 2010 Warren E. Buffett
Chairman of the Board
P.S. Come by rail.
20
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ................................................... 23.8 10.0 13.8
1966 ................................................... 20.3 (11.7) 32.0
1967 ................................................... 11.0 30.9 (19.9)
1968 ................................................... 19.0 11.0 8.0
1969 ................................................... 16.2 (8.4) 24.6
1970 ................................................... 12.0 3.9 8.1
1971 ................................................... 16.4 14.6 1.8
1972 ................................................... 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ................................................... 21.9 37.2 (15.3)
1976 ................................................... 59.3 23.6 35.7
1977 ................................................... 31.9 (7.4) 39.3
1978 ................................................... 24.0 6.4 17.6
1979 ................................................... 35.7 18.2 17.5
1980 ................................................... 19.3 32.3 (13.0)
1981 ................................................... 31.4 (5.0) 36.4
1982 ................................................... 40.0 21.4 18.6
1983 ................................................... 32.3 22.4 9.9
1984 ................................................... 13.6 6.1 7.5
1985 ................................................... 48.2 31.6 16.6
1986 ................................................... 26.1 18.6 7.5
1987 ................................................... 19.5 5.1 14.4
1988 ................................................... 20.1 16.6 3.5
1989 ................................................... 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ................................................... 39.6 30.5 9.1
1992 ................................................... 20.3 7.6 12.7
1993 ................................................... 14.3 10.1 4.2
1994 ................................................... 13.9 1.3 12.6
1995 ................................................... 43.1 37.6 5.5
1996 ................................................... 31.8 23.0 8.8
1997 ................................................... 34.1 33.4 .7
1998 ................................................... 48.3 28.6 19.7
1999 ................................................... .5 21.0 (20.5)
2000 ................................................... 6.5 (9.1) 15.6
2001 ................................................... (6.2) (11.9) 5.7
2002 ................................................... 10.0 (22.1) 32.1
2003 ................................................... 21.0 28.7 (7.7)
2004 ................................................... 10.5 10.9 (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ................................................... 18.4 15.8 2.6
2007 ................................................... 11.0 5.5 5.5
2008 ................................................... (9.6) (37.0) 27.4
2009 ................................................... 19.8 26.5 (6.7)
2010 ................................................... 13.0 15.1 (2.1)
Compounded Annual Gain – 1965-2010 ....................... 20.2% 9.4% 10.8
Overall Gain – 1964-2010 .................................. 490,409% 6,262%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index
showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
The per-share book value of both our Class A and Class B stock increased by 13% in 2010. Over the
last 46 years (that is, since present management took over), book value has grown from $19 to $95,453, a rate of
20.2% compounded annually.*
The highlight of 2010 was our acquisition of Burlington Northern Santa Fe, a purchase that’s working
out even better than I expected. It now appears that owning this railroad will increase Berkshire’s “normal”
earning power by nearly 40% pre-tax and by well over 30% after-tax. Making this purchase increased our share
count by 6% and used $22 billion of cash. Since we’ve quickly replenished the cash, the economics of this
transaction have turned out very well.
A “normal year,” of course, is not something that either Charlie Munger, Vice Chairman of Berkshire
and my partner, or I can define with anything like precision. But for the purpose of estimating our current earning
power, we are envisioning a year free of a mega-catastrophe in insurance and possessing a general business
climate somewhat better than that of 2010 but weaker than that of 2005 or 2006. Using these assumptions, and
several others that I will explain in the “Investment” section, I can estimate that the normal earning power of the
assets we currently own is about $17 billion pre-tax and $12 billion after-tax, excluding any capital gains or
losses. Every day Charlie and I think about how we can build on this base.
Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental
advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record
500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means
our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced
greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.
Over time, the movement of goods in the United States will increase, and BNSF should get its full
share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better
situated than Berkshire to supply the funds required. However slow the economy, or chaotic the markets, our
checks will clear.
Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm
for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount,
$5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in
the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new
record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.
Money will always flow toward opportunity, and there is an abundance of that in America.
Commentators today often talk of “great uncertainty.” But think back, for example, to December 6,
1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always
uncertain.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly
moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than
when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential
is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders
for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and
effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But
look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and
1941, America’s best days lie ahead.
Performance
Charlie and I believe that those entrusted with handling the funds of others should establish
performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot
the arrow of performance and then paint the bull’s-eye around wherever it lands.
In Berkshire’s case, we long ago told you that our job is to increase per-share intrinsic value at a rate
greater than the increase (including dividends) of the S&P 500. In some years we succeed; in others we fail. But,
if we are unable over time to reach that goal, we have done nothing for our investors, who by themselves could
have realized an equal or better result by owning an index fund.
The challenge, of course, is the calculation of intrinsic value. Present that task to Charlie and me
separately, and you will get two different answers. Precision just isn’t possible.
To eliminate subjectivity, we therefore use an understated proxy for intrinsic-value – book value –
when measuring our performance. To be sure, some of our businesses are worth far more than their carrying
value on our books. (Later in this report, we’ll present a case study.) But since that premium seldom swings
wildly from year to year, book value can serve as a reasonable device for tracking how we are doing.
The table on page 2 shows our 46-year record against the S&P, a performance quite good in the earlier
years and now only satisfactory. The bountiful years, we want to emphasize, will never return. The huge sums of
capital we currently manage eliminate any chance of exceptional performance. We will strive, however, for
better-than-average results and feel it fair for you to hold us to that standard.
Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of
the earth’s movement around the sun is not synchronized with the time required for either investment ideas or
operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on
advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount
productively, we would happily do so though short-term results would be further penalized. Many large
investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
To provide you a longer-term perspective on performance, we present on the facing page the yearly
figures from page 2 recast into a series of five-year periods. Overall, there are 42 of these periods, and they tell
an interesting story. On a comparative basis, our best years ended in the early 1980s. The market’s golden period,
however, came in the 17 following years, with Berkshire achieving stellar absolute returns even as our relative
advantage narrowed.
After 1999, the market stalled (or have you already noticed that?). Consequently, the satisfactory
performance relative to the S&P that Berkshire has achieved since then has delivered only moderate absolute
results.
Looking forward, we hope to average several points better than the S&P – though that result is, of
course, far from a sure thing. If we succeed in that aim, we will almost certainly produce better relative results in
bad years for the stock market and suffer poorer results in strong markets.
4
Berkshire’s Corporate Performance vs. the S&P 500 by Five-Year Periods
Annual Percentage Change
Five-Year Period
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965-1969 ............................................... 17.2 5.0 12.2
1966-1970 ............................................... 14.7 3.9 10.8
1967-1971 ............................................... 13.9 9.2 4.7
1968-1972 ............................................... 16.8 7.5 9.3
1969-1973 ............................................... 17.7 2.0 15.7
1970-1974 ............................................... 15.0 (2.4) 17.4
1971-1975 ............................................... 13.9 3.2 10.7
1972-1976 ............................................... 20.8 4.9 15.9
1973-1977 ............................................... 23.4 (0.2) 23.6
1974-1978 ............................................... 24.4 4.3 20.1
1975-1979 ............................................... 30.1 14.7 15.4
1976-1980 ............................................... 33.4 13.9 19.5
1977-1981 ............................................... 29.0 8.1 20.9
1978-1982 ............................................... 29.9 14.1 15.8
1979-1983 ............................................... 31.6 17.3 14.3
1980-1984 ............................................... 27.0 14.8 12.2
1981-1985 ............................................... 32.6 14.6 18.0
1982-1986 ............................................... 31.5 19.8 11.7
1983-1987 ............................................... 27.4 16.4 11.0
1984-1988 ............................................... 25.0 15.2 9.8
1985-1989 ............................................... 31.1 20.3 10.8
1986-1990 ............................................... 22.9 13.1 9.8
1987-1991 ............................................... 25.4 15.3 10.1
1988-1992 ............................................... 25.6 15.8 9.8
1989-1993 ............................................... 24.4 14.5 9.9
1990-1994 ............................................... 18.6 8.7 9.9
1991-1995 ............................................... 25.6 16.5 9.1
1992-1996 ............................................... 24.2 15.2 9.0
1993-1997 ............................................... 26.9 20.2 6.7
1994-1998 ............................................... 33.7 24.0 9.7
1995-1999 ............................................... 30.4 28.5 1.9
1996-2000 ............................................... 22.9 18.3 4.6
1997-2001 ............................................... 14.8 10.7 4.1
1998-2002 ............................................... 10.4 (0.6) 11.0
1999-2003 ............................................... 6.0 (0.6) 6.6
2000-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 (2.3) 10.3
2001-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 0.6 7.4
2002-2006 ............................................... 13.1 6.2 6.9
2003-2007 ............................................... 13.3 12.8 0.5
2004-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 (2.2) 9.1
2005-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 0.4 8.2
2006-2010 ............................................... 10.0 2.3 7.7
Notes: The first two periods cover the five years beginning September 30 of the previous year. The third period covers
63 months beginning September 30, 1966 to December 31, 1971. All other periods involve calendar years.
The other notes on page 2 also apply to this table.
5
Intrinsic Value – Today and Tomorrow
Though Berkshire’s intrinsic value cannot be precisely calculated, two of its three key pillars can be
measured. Charlie and I rely heavily on these measurements when we make our own estimates of Berkshire’s
value.
The first component of value is our investments: stocks, bonds and cash equivalents. At yearend these
totaled $158 billion at market value.
Insurance float – money we temporarily hold in our insurance operations that does not belong to us –
funds $66 billion of our investments. This float is “free” as long as insurance underwriting breaks even, meaning
that the premiums we receive equal the losses and expenses we incur. Of course, underwriting results are volatile,
swinging erratically between profits and losses. Over our entire history, though, we’ve been significantly
profitable, and I also expect us to average breakeven results or better in the future. If we do that, all of our
investments – those funded both by float and by retained earnings – can be viewed as an element of value for
Berkshire shareholders.
Berkshire’s second component of value is earnings that come from sources other than investments and
insurance underwriting. These earnings are delivered by our 68 non-insurance companies, itemized on page 106.
In Berkshire’s early years, we focused on the investment side. During the past two decades, however, we’ve
increasingly emphasized the development of earnings from non-insurance businesses, a practice that will
continue.
The following tables illustrate this shift. In the first table, we present per-share investments at decade
intervals beginning in 1970, three years after we entered the insurance business. We exclude those investments
applicable to minority interests.
Yearend
Per-Share
Investments Period
Compounded Annual Increase
in Per-Share Investments
1970 . . . . . . . . . . . . . . . . . . . $ 66
1980 . . . . . . . . . . . . . . . . . . . 754 1970-1980 27.5%
1990 ................... 7,798 1980-1990 26.3%
2000 ................... 50,229 1990-2000 20.5%
2010 ................... 94,730 2000-2010 6.6%
Though our compounded annual increase in per-share investments was a healthy 19.9% over the
40-year period, our rate of increase has slowed sharply as we have focused on using funds to buy operating
businesses.
The payoff from this shift is shown in the following table, which illustrates how earnings of our
non-insurance businesses have increased, again on a per-share basis and after applicable minority interests.
Year
Per-Share
Pre-Tax Earnings Period
Compounded Annual Increase in
Per-Share Pre-Tax Earnings
1970 ............ $ 2.87
1980 ............ 19.01 1970-1980 20.8%
1990 ............ 102.58 1980-1990 18.4%
2000 ............ 918.66 1990-2000 24.5%
2010 ............ 5,926.04 2000-2010 20.5%
6
For the forty years, our compounded annual gain in pre-tax, non-insurance earnings per share is 21.0%.
During the same period, Berkshire’s stock price increased at a rate of 22.1% annually. Over time, you can expect
our stock price to move in rough tandem with Berkshire’s investments and earnings. Market price and intrinsic
value often follow very different paths – sometimes for extended periods – but eventually they meet.
There is a third, more subjective, element to an intrinsic value calculation that can be either positive or
negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other
businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently
employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.
This “what-will-they-do-with-the-money” factor must always be evaluated along with the
“what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s
intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the
company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the
company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The
difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery
Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.
************
Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a
decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our
current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my
trigger finger is itchy.
Partially offsetting our anchor of size are several important advantages we have. First, we possess a
cadre of truly skilled managers who have an unusual commitment to their own operations and to Berkshire.
Many of our CEOs are independently wealthy and work only because they love what they do. They are
volunteers, not mercenaries. Because no one can offer them a job they would enjoy more, they can’t be lured
away.
At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at
headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years
(it’s reproduced on pages 104-105) and call me when they wish. And their wishes do differ: There are managers
to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people
rather than process. A “hire well, manage little” code suits both them and me.
Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college. Some use
budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad
composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.
Our second advantage relates to the allocation of the money our businesses earn. After meeting the
needs of those businesses, we have very substantial sums left over. Most companies limit themselves to
reinvesting funds within the industry in which they have been operating. That often restricts them, however, to a
“universe” for capital allocation that is both tiny and quite inferior to what is available in the wider world.
Competition for the few opportunities that are available tends to become fierce. The seller has the upper hand, as
a girl might if she were the only female at a party attended by many boys. That lopsided situation would be great
for the girl, but terrible for the boys.
At Berkshire we face no institutional restraints when we deploy capital. Charlie and I are limited only
by our ability to understand the likely future of a possible acquisition. If we clear that hurdle – and frequently we
can’t – we are then able to compare any one opportunity against a host of others.
7
When I took control of Berkshire in 1965, I didn’t exploit this advantage. Berkshire was then only in
textiles, where it had in the previous decade lost significant money. The dumbest thing I could have done was to
pursue “opportunities” to improve and expand the existing textile operation – so for years that’s exactly what I
did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh!
Eventually I came to my senses, heading first into insurance and then into other industries.
There is even a supplement to this world-is-our-oyster advantage: In addition to evaluating the
attractions of one business against a host of others, we also measure businesses against opportunities available in
marketable securities, a comparison most managements don’t make. Often, businesses are priced ridiculously
high against what can likely be earned from investments in stocks or bonds. At such moments, we buy securities
and bide our time.
Our flexibility in respect to capital allocation has accounted for much of our progress to date. We have
been able to take money we earn from, say, See’s Candies or Business Wire (two of our best-run businesses, but
also two offering limited reinvestment opportunities) and use it as part of the stake we needed to buy BNSF.
Our final advantage is the hard-to-duplicate culture that permeates Berkshire. And in businesses,
culture counts.
To start with, the directors who represent you think and act like owners. They receive token
compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them
directors and officers liability insurance, a given at almost every other large public company. If they mess up
with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own
Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results
with keen interest and an owner’s eye. You and I are lucky to have them as stewards.
This same owner-orientation prevails among our managers. In many cases, these are people who have
sought out Berkshire as an acquirer for a business that they and their families have long owned. They came to us
with an owner’s mindset, and we provide an environment that encourages them to retain it. Having managers
who love their businesses is no small advantage.
Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape
you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial
corporate palaces induce imperious behavior. (As one wag put it, “You know you’re no longer CEO when you
get in the back seat of your car and it doesn’t move.”) At Berkshire’s “World Headquarters” our annual rent is
$270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech
equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own,
Berkshire’s managers are likely to be careful with it as well.
Our compensation programs, our annual meeting and even our annual reports are all designed with an
eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent.
This culture grows stronger every year, and it will remain intact long after Charlie and I have left the scene.
We will need all of the strengths I’ve just described to do reasonably well. Our managers will deliver;
you can count on that. But whether Charlie and I can hold up our end in capital allocation depends in part on the
competitive environment for acquisitions. You will get our best efforts.
GEICO
Now let me tell you a story that will help you understand how the intrinsic value of a business can far
exceed its book value. Relating this tale also gives me a chance to relive some great memories.
Sixty years ago last month, GEICO entered my life, destined to shape it in a huge way. I was then a
20-year-old graduate student at Columbia, having elected to go there because my hero, Ben Graham, taught a
once-a-week class at the school.
8
One day at the library, I checked out Ben’s entry in Who’s Who in America and found he was
chairman of Government Employees Insurance Co. (now called GEICO). I knew nothing of insurance and had
never heard of the company. The librarian, however, steered me to a large compendium of insurers and, after
reading the page on GEICO, I decided to visit the company. The following Saturday, I boarded an early train for
Washington.
Alas, when I arrived at the company’s headquarters, the building was closed. I then rather frantically
started pounding on a door, until finally a janitor appeared. I asked him if there was anyone in the office I could
talk to, and he steered me to the only person around, Lorimer Davidson.
That was my lucky moment. During the next four hours, “Davy” gave me an education about both
insurance and GEICO. It was the beginning of a wonderful friendship. Soon thereafter, I graduated from
Columbia and became a stock salesman in Omaha. GEICO, of course, was my prime recommendation, which got
me off to a great start with dozens of customers. GEICO also jump-started my net worth because, soon after
meeting Davy, I made the stock 75% of my $9,800 investment portfolio. (Even so, I felt over-diversified.)
Subsequently, Davy became CEO of GEICO, taking the company to undreamed-of heights before it got
into trouble in the mid-1970s, a few years after his retirement. When that happened – with the stock falling by
more than 95% – Berkshire bought about one-third of the company in the market, a position that over the years
increased to 50% because of GEICO’s repurchases of its own shares. Berkshire’s cost for this half of the business
was $46 million. (Despite the size of our position, we exercised no control over operations.)
We then purchased the remaining 50% of GEICO at the beginning of 1996, which spurred Davy, at 95,
to make a video tape saying how happy he was that his beloved GEICO would permanently reside with
Berkshire. (He also playfully concluded with, “Next time, Warren, please make an appointment.”)
A lot has happened at GEICO during the last 60 years, but its core goal – saving Americans substantial
money on their purchase of auto insurance – remains unchanged. (Try us at 1-800-847-7536 or
www.GEICO.com.) In other words, get the policyholder’s business by deserving his business. Focusing on this
objective, the company has grown to be America’s third-largest auto insurer, with a market share of 8.8%.
When Tony Nicely, GEICO’s CEO, took over in 1993, that share was 2.0%, a level at which it had
been stuck for more than a decade. GEICO became a different company under Tony, finding a path to consistent
growth while simultaneously maintaining underwriting discipline and keeping its costs low.
Let me quantify Tony’s achievement. When, in 1996, we bought the 50% of GEICO we didn’t already
own, it cost us about $2.3 billion. That price implied a value of $4.6 billion for 100%. GEICO then had tangible
net worth of $1.9 billion.
The excess over tangible net worth of the implied value – $2.7 billion – was what we estimated
GEICO’s “goodwill” to be worth at that time. That goodwill represented the economic value of the policyholders
who were then doing business with GEICO. In 1995, those customers had paid the company $2.8 billion in
premiums. Consequently, we were valuing GEICO’s customers at about 97% (2.7/2.8) of what they were
annually paying the company. By industry standards, that was a very high price. But GEICO was no ordinary
insurer: Because of the company’s low costs, its policyholders were consistently profitable and unusually loyal.
Today, premium volume is $14.3 billion and growing. Yet we carry the goodwill of GEICO on our
books at only $1.4 billion, an amount that will remain unchanged no matter how much the value of GEICO
increases. (Under accounting rules, you write down the carrying value of goodwill if its economic value
decreases, but leave it unchanged if economic value increases.) Using the 97%-of-premium-volume yardstick we
applied to our 1996 purchase, the real value today of GEICO’s economic goodwill is about $14 billion. And this
value is likely to be much higher ten and twenty years from now. GEICO – off to a strong start in 2011 – is the
gift that keeps giving.
9
One not-so-small footnote: Under Tony, GEICO has developed one of the country’s largest personal￾lines insurance agencies, which primarily sells homeowners policies to our GEICO auto insurance customers. In
this business, we represent a number of insurers that are not affiliated with us. They take the risk; we simply sign
up the customers. Last year we sold 769,898 new policies at this agency operation, up 34% from the year before.
The obvious way this activity aids us is that it produces commission revenue; equally important is the fact that it
further strengthens our relationship with our policyholders, helping us retain them.
I owe an enormous debt to Tony and Davy (and, come to think of it, to that janitor as well).
************
Now, let’s examine the four major sectors of Berkshire. Each has vastly different balance sheet and
income characteristics from the others. Lumping them together therefore impedes analysis. So we’ll present them
as four separate businesses, which is how Charlie and I view them.
We will look first at insurance, Berkshire’s core operation and the engine that has propelled our
expansion over the years.
Insurance
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases,
such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This
collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to
others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims
come and go, the amount of float we hold remains remarkably stable in relation to premium volume.
Consequently, as our business grows, so does our float. And how we have grown: Just take a look at the
following table:
Yearend
Float
(in $ millions)
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39
1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
1990 ........................................ 1,632
2000 ........................................ 27,871
2010 ........................................ 65,832
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income that our float produces. When such a profit occurs, we enjoy the use of free
money – and, better yet, get paid for holding it. Alas, the wish of all insurers to achieve this happy result creates
intense competition, so vigorous in most years that it causes the P/C industry as a whole to operate at a
significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. For example, State
Farm, by far the country’s largest insurer and a well-managed company, has incurred an underwriting loss in
seven of the last ten years. During that period, its aggregate underwriting loss was more than $20 billion.
At Berkshire, we have now operated at an underwriting profit for eight consecutive years, our total
underwriting gain for the period having been $17 billion. I believe it likely that we will continue to underwrite
profitably in most – though certainly not all – future years. If we accomplish that, our float will be better than
cost-free. We will benefit just as we would if some party deposited $66 billion with us, paid us a fee for holding
its money and then let us invest its funds for our own benefit.
10
Let me emphasize again that cost-free float is not an outcome to be expected for the P/C industry as a
whole: In most years, industry premiums have been inadequate to cover claims plus expenses. Consequently, the
industry’s overall return on tangible equity has for many decades fallen far short of the average return realized by
American industry, a sorry performance almost certain to continue. Berkshire’s outstanding economics exist only
because we have some terrific managers running some unusual businesses. We’ve already told you about GEICO,
but we have two other very large operations, and a bevy of smaller ones as well, each a star in its own way.
************
First off is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no one
else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most
importantly, brains in a manner that is unique in the insurance business. Yet he never exposes Berkshire to risks
that are inappropriate in relation to our resources. Indeed, we are far more conservative than most large insurers
in that respect. In the past year, Ajit has significantly increased his life reinsurance operation, developing annual
premium volume of about $2 billion that will repeat for decades.
From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and
significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his
accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite
bounces off Ajit.
************
We have another insurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation requires four disciplines: (1) An understanding of all exposures
that might cause a policy to incur losses; (2) A conservative evaluation of the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) The setting of a premium that will deliver a profit, on average,
after both prospective loss costs and operating expenses are covered; and (4) The willingness to walk away if the
appropriate premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from
the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has
led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells
trouble in any business, but none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be.
************
Finally, we own a group of smaller companies, most of them specializing in odd corners of the
insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the
float they provide us is substantial. Charlie and I treasure these companies and their managers.
Here is the record of all four segments of our property-casualty and life insurance businesses:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2010 2009 2010 2009
General Re . . . . . . . . . . . . . . . . . . . . . . $ 452 $ 477 $20,049 $21,014
BH Reinsurance . . . . . . . . . . . . . . . . . . 176 250 30,370 27,753
GEICO ......................... 1,117 649 10,272 9,613
Other Primary . . . . . . . . . . . . . . . . . . . 268 84 5,141 5,061
$2,013 $1,460 $65,832 $63,441
Among large insurance operations, Berkshire’s impresses me as the best in the world.
11
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance
sheet and earnings statement for the entire group.
Balance Sheet 12/31/10 (in millions)
Assets
Cash and equivalents ................. $ 2,673
Accounts and notes receivable .......... 5,396
Inventory .......................... 7,101
Other current assets . . . . . . . . . . . . . . . . . . 550
Total current assets ................... 15,720
Goodwill and other intangibles ......... 16,976
Fixed assets ........................ 15,421
Other assets ........................ 3,029
$51,146
Liabilities and Equity
Notes payable ....................... $ 1,805
Other current liabilities ............... 8,169
Total current liabilities ................ 9,974
Deferred taxes ...................... 3,001
Term debt and other liabilities .......... 6,621
Equity ............................. 31,550
$51,146
Earnings Statement (in millions)
2010 2009 2008
Revenues ......................................................... $66,610 $61,665 $66,099
Operating expenses (including depreciation of $1,362 in 2010, $1,422 in 2009
and $1,280 in 2008) ............................................... 62,225 59,509 61,937
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 98 139
Pre-tax earnings .................................................... 4,274* 2,058* 4,023*
Income taxes and non-controlling interests ............................... 1,812 945 1,740
Net earnings ....................................................... $ 2,462 $ 1,113 $ 2,283
*Does not include purchase-accounting adjustments.
This group of companies sells products ranging from lollipops to jet airplanes. Some of the businesses
enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to
more than 100%. Others produce good returns in the area of 12-20%. Unfortunately, a few have very poor
returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about
because I misjudged either the competitive strength of the business I was purchasing or the future economics of
the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes
my eyesight has been poor.
Most of the companies in this section improved their earnings last year and four set records. Let’s look
first at the record-breakers.
• TTI, our electronic components distributor, had sales 21% above its previous high (recorded in 2008)
and pre-tax earnings that topped its earlier record by 58%. Its sales gains spanned three continents, with
North America at 16%, Europe at 26%, and Asia at 50%. The thousands of items TTI distributes are
pedestrian, many selling for less than a dollar. The magic of TTI’s exceptional performance is created
by Paul Andrews, its CEO, and his associates.
12
• Forest River, our RV and boat manufacturer, had record sales of nearly $2 billion and record earnings
as well. Forest River has 82 plants, and I have yet to visit one (or the home office, for that matter).
There’s no need; Pete Liegl, the company’s CEO, runs a terrific operation. Come view his products at
the annual meeting. Better yet, buy one.
• CTB, our farm-equipment company, again set an earnings record. I told you in the 2008 Annual Report
about Vic Mancinelli, the company’s CEO. He just keeps getting better. Berkshire paid $140 million
for CTB in 2002. It has since paid us dividends of $160 million and eliminated $40 million of debt.
Last year it earned $106 million pre-tax. Productivity gains have produced much of this increase. When
we bought CTB, sales per employee were $189,365; now they are $405,878.
• Would you believe shoes? H. H. Brown, run by Jim Issler and best known for its Born brand, set a new
record for sales and earnings (helped by its selling 1,110 pairs of shoes at our annual meeting). Jim has
brilliantly adapted to major industry changes. His work, I should mention, is overseen by Frank
Rooney, 89, a superb businessman and still a dangerous fellow with whom to have a bet on the golf
course.
A huge story in this sector’s year-to-year improvement occurred at NetJets. I can’t overstate the
breadth and importance of Dave Sokol’s achievements at this company, the leading provider of fractional
ownership of jet airplanes. NetJets has long been an operational success, owning a 2010 market share five times
that of its nearest competitor. Our overwhelming leadership stems from a wonderful team of pilots, mechanics
and service personnel. This crew again did its job in 2010, with customer satisfaction, as delineated in our regular
surveys, hitting new highs.
Even though NetJets was consistently a runaway winner with customers, our financial results, since its
acquisition in 1998, were a failure. In the 11 years through 2009, the company reported an aggregate pre-tax loss
of $157 million, a figure that was far understated since borrowing costs at NetJets were heavily subsidized by its
free use of Berkshire’s credit. Had NetJets been operating on a stand-alone basis, its loss over the years would
have been several hundreds of millions greater.
We are now charging NetJets an appropriate fee for Berkshire’s guarantee. Despite this fee (which
came to $38 million in 2010), NetJets earned $207 million pre-tax in 2010, a swing of $918 million from 2009.
Dave’s quick restructuring of management and the company’s rationalization of its purchasing and spending
policies has ended the hemorrhaging of cash and turned what was Berkshire’s only major business problem into a
solidly profitable operation.
Dave has meanwhile maintained NetJets’ industry-leading reputation for safety and service. In many
important ways, our training and operational standards are considerably stronger than those required by the FAA.
Maintaining top-of-the-line standards is the right thing to do, but I also have a selfish reason for championing this
policy. My family and I have flown more than 5,000 hours on NetJets (that’s equal to being airborne 24 hours a
day for seven months) and will fly thousands of hours more in the future. We receive no special treatment and
have used a random mix of at least 100 planes and 300 crews. Whichever the plane or crew, we always know we
are flying with the best-trained pilots in private aviation.
The largest earner in our manufacturing, service and retailing sector is Marmon, a collection of 130
businesses. We will soon increase our ownership in this company to 80% by carrying out our scheduled purchase
of 17% of its stock from the Pritzker family. The cost will be about $1.5 billion. We will then purchase the
remaining Pritzker holdings in 2013 or 2014, whichever date is selected by the family. Frank Ptak runs Marmon
wonderfully, and we look forward to 100% ownership.
13
Next to Marmon, the two largest earners in this sector are Iscar and McLane. Both had excellent years.
In 2010, Grady Rosier’s McLane entered the wine and spirits distribution business to supplement its $32 billion
operation as a distributor of food products, cigarettes, candy and sundries. In purchasing Empire Distributors, an
operator in Georgia and North Carolina, we teamed up with David Kahn, the company’s dynamic CEO. David is
leading our efforts to expand geographically. By yearend he had already made his first acquisition, Horizon Wine
and Spirits in Tennessee.
At Iscar, profits were up 159% in 2010, and we may well surpass pre-recession levels in 2011. Sales
are improving throughout the world, particularly in Asia. Credit Eitan Wertheimer, Jacob Harpaz and Danny
Goldman for an exceptional performance, one far superior to that of Iscar’s main competitors.
All that is good news. Our businesses related to home construction, however, continue to struggle.
Johns Manville, MiTek, Shaw and Acme Brick have maintained their competitive positions, but their profits are
far below the levels of a few years ago. Combined, these operations earned $362 million pre-tax in 2010
compared to $1.3 billion in 2006, and their employment has fallen by about 9,400.
A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some
point. Consequently: (1) At MiTek, we have made, or committed to, five bolt-on acquisitions during the past
eleven months; (2) At Acme, we just recently acquired the leading manufacturer of brick in Alabama for
$50 million; (3) Johns Manville is building a $55 million roofing membrane plant in Ohio, to be completed next
year; and (4) Shaw will spend $200 million in 2011 on plant and equipment, all of it situated in America. These
businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever.
Regulated, Capital-Intensive Businesses
We have two very large businesses, BNSF and MidAmerican Energy, with important common
characteristics that distinguish them from our many others. Consequently, we give them their own sector in this
letter and split out their financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is the huge investment they have in very long-lived, regulated
assets, with these funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is
not needed: Both businesses have earning power that, even under very adverse business conditions, amply covers
their interest requirements. For example, in recessionary 2010 with BNSF’s car loadings far off peak levels, the
company’s interest coverage was 6:1.
Both companies are heavily regulated, and both will have a never-ending need to make major
investments in plant and equipment. Both also need to provide efficient, customer-satisfying service to earn the
respect of their communities and regulators. In return, both need to be assured that they will be allowed to earn
reasonable earnings on future capital investments.
Earlier I explained just how important railroads are to our country’s future. Rail moves 42% of
America’s inter-city freight, measured by ton-miles, and BNSF moves more than any other railroad – about 28%
of the industry total. A little math will tell you that more than 11% of all inter-city ton-miles of freight in the U.S.
is transported by BNSF. Given the shift of population to the West, our share may well inch higher.
All of this adds up to a huge responsibility. We are a major and essential part of the American
economy’s circulatory system, obliged to constantly maintain and improve our 23,000 miles of track along with
its ancillary bridges, tunnels, engines and cars. In carrying out this job, we must anticipate society’s needs, not
merely react to them. Fulfilling our societal obligation, we will regularly spend far more than our depreciation,
with this excess amounting to $2 billion in 2011. I’m confident we will earn appropriate returns on our huge
incremental investments. Wise regulation and wise investment are two sides of the same coin.
At MidAmerican, we participate in a similar “social compact.” We are expected to put up ever￾increasing sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently, we
know that we will obtain a fair return on these investments.
14
MidAmerican supplies 2.4 million customers in the U.S. with electricity, operating as the largest
supplier in Iowa, Wyoming and Utah and as an important provider in other states as well. Our pipelines transport
8% of the country’s natural gas. Obviously, many millions of Americans depend on us every day.
MidAmerican has delivered outstanding results for both its owners (Berkshire’s interest is 89.8%) and its
customers. Shortly after MidAmerican purchased Northern Natural Gas pipeline in 2002, that company’s
performance as a pipeline was rated dead last, 43 out of 43, by the leading authority in the field. In the most recent
report published, Northern Natural was ranked second. The top spot was held by our other pipeline, Kern River.
In its electric business, MidAmerican has a comparable record. Iowa rates have not increased since we
purchased our operation there in 1999. During the same period, the other major electric utility in the state has
raised prices more than 70% and now has rates far above ours. In certain metropolitan areas in which the two
utilities operate side by side, electric bills of our customers run far below those of their neighbors. I am told that
comparable houses sell at higher prices in these cities if they are located in our service area.
MidAmerican will have 2,909 megawatts of wind generation in operation by the end of 2011, more
than any other regulated electric utility in the country. The total amount that MidAmerican has invested or
committed to wind is a staggering $5.4 billion. We can make this sort of investment because MidAmerican
retains all of its earnings, unlike other utilities that generally pay out most of what they earn.
As you can tell by now, I am proud of what has been accomplished for our society by Matt Rose at
BNSF and by David Sokol and Greg Abel at MidAmerican. I am also both proud and grateful for what they have
accomplished for Berkshire shareholders. Below are the relevant figures:
MidAmerican Earnings (in millions)
2010 2009
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 333 $ 248
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 285
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783 788
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378 457
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 43
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 25
Operating earnings before corporate interest and taxes ........................... 1,862 1,846
Interest, other than to Berkshire ............................................. (323) (318)
Interest on Berkshire junior debt ............................................. (30) (58)
Income tax .............................................................. (271) (313)
Net earnings ............................................................. $1,238 $1,157
Earnings applicable to Berkshire* ........................................... $1,131 $1,071
*Includes interest earned by Berkshire (net of related income taxes) of $19 in 2010 and $38 in 2009.
BNSF
(Historical accounting through 2/12/10; purchase accounting subsequently) (in millions)
2010 2009
Revenues ............................................................... $16,850 $14,016
Operating earnings ....................................................... 4,495 3,254
Interest (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507 613
Pre-Tax earnings ......................................................... 3,988 2,641
Net earnings ............................................................. 2,459 1,721
15
Finance and Financial Products
This, our smallest sector, includes two rental companies, XTRA (trailers) and CORT (furniture), and
Clayton Homes, the country’s leading producer and financer of manufactured homes.
Both of our leasing businesses improved their performances last year, albeit from a very low base.
XTRA increased the utilization of its equipment from 63% in 2009 to 75% in 2010, thereby raising pre-tax
earnings to $35 million from $17 million in 2009. CORT experienced a pickup in business as the year progressed
and also significantly tightened its operations. The combination increased its pre-tax results from a loss of
$3 million in 2009 to $18 million of profit in 2010.
At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak
year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.) Sales would have
been terrible last year under any circumstances, but the financing problems I commented upon in the 2009 report
continue to exacerbate the distress. To explain: Home-financing policies of our government, expressed through
the loans found acceptable by FHA, Freddie Mac and Fannie Mae, favor site-built homes and work to negate the
price advantage that manufactured homes offer.
We finance more manufactured-home buyers than any other company. Our experience, therefore,
should be instructive to those parties preparing to overhaul our country’s home-loan practices. Let’s take a look.
Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it
purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47%
were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable
credits.
Nevertheless, our portfolio has performed well during conditions of stress. Here’s our loss experience
during the last five years for originated loans:
Year
Net Losses as a Percentage
of Average Loans
2006 .............................. 1.53%
2007 .............................. 1.27%
2008 .............................. 1.17%
2009 .............................. 1.86%
2010 .............................. 1.72%
Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The
recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts
in relation to their income. In addition, we were keeping the originated mortgages for our own account, which
means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to
pay the price. That concentrates the mind.
If home buyers throughout the country had behaved like our buyers, America would not have had the
crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments
to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.
Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain
interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I
would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best
investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of
terrific memories with more to come.
16
But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often
protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put
families into the house of their dreams, but rather to put them into a house they can afford.
Investments
Below we show our common stock investments that at yearend had a market value of more than
$1 billion.
12/31/10
Shares Company
Percentage of
Company
Owned Cost * Market
(in millions)
151,610,700 American Express Company ........................ 12.6 $ 1,287 $ 6,507
225,000,000 BYD Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 232 1,182
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 1,299 13,154
29,109,637 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2,028 1,982
45,022,563 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 2,749 2,785
97,214,584 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 3,207 3,063
19,259,600 Munich Re ...................................... 10.5 2,896 2,924
3,947,555 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 768 1,706
72,391,036 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.6 464 4,657
25,848,838 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2,060 1,656
242,163,773 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 1,414 1,608
78,060,769 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 2,401 2,105
39,037,142 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1,893 2,105
358,936,125 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 8,015 11,123
Others ......................................... 3,020 4,956
Total Common Stocks Carried at Market .............. $33,733 $61,513
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
In our reported earnings we reflect only the dividends our portfolio companies pay us. Our share of the
undistributed earnings of these investees, however, was more than $2 billion last year. These retained earnings
are important. In our experience – and, for that matter, in the experience of investors over the past century –
undistributed earnings have been either matched or exceeded by market gains, albeit in a highly irregular manner.
(Indeed, sometimes the correlation goes in reverse. As one investor said in 2009: “This is worse than divorce.
I’ve lost half my net worth – and I still have my wife.”) In the future, we expect our market gains to eventually at
least equal the earnings our investees retain.
************
In our earlier estimate of Berkshire’s normal earning power, we made three adjustments that relate to
future investment income (but did not include anything for the undistributed earnings factor I have just
described).
The first adjustment was decidedly negative. Last year, we discussed five large fixed-income
investments that have been contributing substantial sums to our reported earnings. One of these – our Swiss Re
note – was redeemed in the early days of 2011, and two others – our Goldman Sachs and General Electric
preferred stocks – are likely to be gone by yearend. General Electric is entitled to call our preferred in October
and has stated its intention to do so. Goldman Sachs has the right to call our preferred on 30 days notice, but has
been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light
before long.
17
All three of the companies redeeming must pay us a premium to do so – in aggregate about $1.4 billion –
but all of the redemptions are nevertheless unwelcome. After they occur, our earning power will be significantly
reduced. That’s the bad news.
There are two probable offsets. At yearend we held $38 billion of cash equivalents that have been
earning a pittance throughout 2010. At some point, however, better rates will return. They will add at least
$500 million – and perhaps much more – to our investment income. That sort of increase in money-market yields
is unlikely to come soon. It is appropriate, nevertheless, for us to include improved rates in an estimate of
“normal” earning power. Even before higher rates come about, furthermore, we could get lucky and find an
opportunity to use some of our cash hoard at decent returns. That day can’t come too soon for me: To update
Aesop, a girl in a convertible is worth five in the phone book.
In addition, dividends on our current common stock holdings will almost certainly increase. The largest
gain is likely to come at Wells Fargo. The Federal Reserve, our friend in respect to Goldman Sachs, has frozen
dividend levels at major banks, whether strong or weak, during the last two years. Wells Fargo, though
consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength
and earning power, has therefore been forced to maintain an artificially low payout. (We don’t fault the Fed: For
various reasons, an across-the-board freeze made sense during the crisis and its immediate aftermath.)
At some point, probably soon, the Fed’s restrictions will cease. Wells Fargo can then reinstate the
rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just
this one security to increase by several hundreds of millions of dollars annually.
Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million
in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In
2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I
would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of
Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful
business.
Overall, I believe our “normal” investment income will at least equal what we realized in 2010, though
the redemptions I described will cut our take in 2011 and perhaps 2012 as well.
************
Last summer, Lou Simpson told me he wished to retire. Since Lou was a mere 74 – an age Charlie and
I regard as appropriate only for trainees at Berkshire – his call was a surprise.
Lou joined GEICO as its investment manager in 1979, and his service to that company has been
invaluable. In the 2004 Annual Report, I detailed his record with equities, and I have omitted updates only
because his performance made mine look bad. Who needs that?
Lou has never been one to advertise his talents. But I will: Simply put, Lou is one of the investment
greats. We will miss him.
************
Four years ago, I told you that we needed to add one or more younger investment managers to carry on
when Charlie, Lou and I weren’t around. At that time we had multiple outstanding candidates immediately
available for my CEO job (as we do now), but we did not have backup in the investment area.
It’s easy to identify many investment managers with great recent records. But past results, though
important, do not suffice when prospective performance is being judged. How the record has been achieved is
crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by
beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a
hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally,
we wanted someone who would regard working for Berkshire as far more than a job.
18
When Charlie and I met Todd Combs, we knew he fit our requirements. Todd, as was the case with
Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have
arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by
undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have
received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their
limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started
another fund so that they could immediately participate in future profits without having to overcome their past
losses. Investors who put money with such managers should be labeled patsies, not partners.
As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds
and equities. Todd initially will manage funds in the range of one to three billion dollars, an amount he can reset
annually. His focus will be equities but he is not restricted to that form of investment. (Fund consultants like to
require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is
“smart.”)
Over time, we may add one or two investment managers if we find the right individuals. Should we do
that, we will probably have 80% of each manager’s performance compensation be dependent on his or her own
portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for
individual success but that also fosters cooperation, not competition.
When Charlie and I are no longer around, our investment manager(s) will have responsibility for the
entire portfolio in a manner then set by the CEO and Board of Directors. Because good investors bring a useful
perspective to the purchase of businesses, we would expect them to be consulted – but not to have a vote – on the
wisdom of possible acquisitions. In the end, of course, the Board will make the call on any major acquisition.
One footnote: When we issued a press release about Todd’s joining us, a number of commentators
pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder
how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal
was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest
metaphor for an 80-year-old CEO to use.)
Derivatives
Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives
contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at
Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the
unwinding or expiration of some contracts.
Our continuing positions, all of which I am personally responsible for, fall largely into two categories.
We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming
risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are
identical to those we use in our insurance business. You should also understand that we get paid up-front when
we enter into the contracts and therefore run no counterparty risk. That’s important.
Our first category of derivatives consists of a number of contracts, written in 2004-2008, that required
payments by us if there were bond defaults by companies included in certain high-yield indices. With minor
exceptions, we were exposed to these risks for five years, with each contract covering 100 companies.
In aggregate, we received premiums of $3.4 billion for these contracts. When I originally told you in
our 2007 Annual Report about them, I said that I expected the contracts would deliver us an “underwriting
profit,” meaning that our losses would be less than the premiums we received. In addition, I said we would
benefit from the use of float.
19
Subsequently, as you know too well, we encountered both a financial panic and a severe recession. A
number of the companies in the high-yield indices failed, which required us to pay losses of $2.5 billion. Today,
however, our exposure is largely behind us because most of our higher-risk contracts have expired. Consequently, it
appears almost certain that we will earn an underwriting profit as we originally anticipated. In addition, we have had
the use of interest-free float that averaged about $2 billion over the life of the contracts. In short, we charged the
right premium, and that protected us when business conditions turned terrible three years ago.
Our other large derivatives position – whose contracts go by the name of “equity puts” – involves
insurance we wrote for parties wishing to protect themselves against a possible decline in equity prices in the
U.S., U.K., Europe and Japan. These contracts are tied to various equity indices, such as the S&P 500 in the U.S.
and the FTSE 100 in the U.K. In the 2004-2008 period, we received $4.8 billion of premiums for 47 of these
contracts, most of which ran for 15 years. On these contracts, only the price of the indices on the termination date
counts: No payments can be required before then.
As a first step in updating you about these contracts, I can report that late in 2010, at the instigation of
our counterparty, we unwound eight contracts, all of them due between 2021 and 2028. We had originally
received $647 million in premiums for these contracts, and the unwinding required us to pay $425 million.
Consequently, we realized a gain of $222 million and also had the interest-free and unrestricted use of that
$647 million for about three years.
Those 2010 transactions left us with 39 equity put contracts remaining on our books at yearend. On
these, at their initiation, we received premiums of $4.2 billion.
The future of these contracts is, of course, uncertain. But here is one perspective on them. If the prices
of the relevant indices are the same at the contract expiration dates as these prices were on December 31, 2010 –
and foreign exchange rates are unchanged – we would owe $3.8 billion on expirations occurring from 2018 to
2026. You can call this amount “settlement value.”
On our yearend balance sheet, however, we carry the liability for those remaining equity puts at
$6.7 billion. In other words, if the prices of the relevant indices remain unchanged from that date, we will record
a $2.9 billion gain in the years to come, that being the difference between the liability figure of $6.7 billion and
the settlement value of $3.8 billion. I believe that equity prices will very likely increase and that our liability will
fall significantly between now and settlement date. If so, our gain from this point will be even greater. But that,
of course, is far from a sure thing.
What is sure is that we will have the use of our remaining “float” of $4.2 billion for an average of about
10 more years. (Neither this float nor that arising from the high-yield contracts is included in the insurance float
figure of $66 billion.) Since money is fungible, think of a portion of these funds as contributing to the purchase
of BNSF.
As I have told you before, almost all of our derivatives contracts are free of any obligation to post
collateral – a fact that cut the premiums we could otherwise have charged. But that fact also left us feeling
comfortable during the financial crisis, allowing us in those days to commit to some advantageous purchases.
Foregoing some additional derivatives premiums proved to be well worth it.
On Reporting and Misreporting: The Numbers That Count and Those That Don’t
Earlier in this letter, I pointed out some numbers that Charlie and I find useful in valuing Berkshire and
measuring its progress.
Let’s focus here on a number we omitted, but which many in the media feature above all others: net
income. Important though that number may be at most companies, it is almost always meaningless at Berkshire.
Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any
given period to be almost any number we would like.
20
We have that flexibility because realized gains or losses on investments go into the net income figure,
whereas unrealized gains (and, in most cases, losses) are excluded. For example, imagine that Berkshire had a
$10 billion increase in unrealized gains in a given year and concurrently had $1 billion of realized losses. Our net
income – which would count only the loss – would be reported as less than our operating income. If we had
meanwhile realized gains in the previous year, headlines might proclaim that our earnings were down X% when
in reality our business might be much improved.
If we really thought net income important, we could regularly feed realized gains into it simply because
we have a huge amount of unrealized gains upon which to draw. Rest assured, though, that Charlie and I have
never sold a security because of the effect a sale would have on the net income we were soon to report. We both
have a deep disgust for “game playing” with numbers, a practice that was rampant throughout corporate America
in the 1990s and still persists, though it occurs less frequently and less blatantly than it used to.
Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our
businesses are doing. Ignore our net income figure, however. Regulations require that we report it to you. But if
you find reporters focusing on it, that will speak more to their performance than ours.
Both realized and unrealized gains and losses are fully reflected in the calculation of our book value.
Pay attention to the changes in that metric and to the course of our operating earnings, and you will be on the
right track.
************
As a p.s., I can’t resist pointing out just how capricious reported net income can be. Had our equity puts
had a termination date of June 30, 2010, we would have been required to pay $6.4 billion to our counterparties at
that date. Security prices then generally rose in the next quarter, a move that brought the corresponding figure
down to $5.8 billion on September 30th. Yet the Black-Scholes formula that we use in valuing these contracts
required us to increase our balance-sheet liability during this period from $8.9 billion to $9.6 billion, a change
that, after the effect of tax accruals, reduced our net income for the quarter by $455 million.
Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to
long-dated options. We set out one absurd example in these pages two years ago. More tangibly, we put our
money where our mouth was by entering into our equity put contracts. By doing so, we implicitly asserted that
the Black-Scholes calculations used by our counterparties or their customers were faulty.
We continue, nevertheless, to use that formula in presenting our financial statements. Black-Scholes is
the accepted standard for option valuation – almost all leading business schools teach it – and we would be
accused of shoddy accounting if we deviated from it. Moreover, we would present our auditors with an
insurmountable problem were we to do that: They have clients who are our counterparties and who use Black￾Scholes values for the same contracts we hold. It would be impossible for our auditors to attest to the accuracy of
both their values and ours were the two far apart.
Part of the appeal of Black-Scholes to auditors and regulators is that it produces a precise number.
Charlie and I can’t supply one of those. We believe the true liability of our contracts to be far lower than that
calculated by Black-Scholes, but we can’t come up with an exact figure – anymore than we can come up with a
precise value for GEICO, BNSF, or for Berkshire Hathaway itself. Our inability to pinpoint a number doesn’t
bother us: We would rather be approximately right than precisely wrong.
John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They
made the ones learned in graduate school last a lifetime. University finance departments often behave similarly.
Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and
1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind:
The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential,
anomaly.)
21
Academics’ current practice of teaching Black-Scholes as revealed truth needs re-examination. For that
matter, so does the academic’s inclination to dwell on the valuation of options. You can be highly successful as
an investor without having the slightest ability to value an option. What students should be learning is how to
value a business. That’s what investing is all about.
Life and Debt
The fundamental principle of auto racing is that to finish first, you must first finish. That dictum is
equally applicable to business and guides our every action at Berkshire.
Unquestionably, some people have become very rich through the use of borrowed money. However,
that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re
clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very
few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in
2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a
single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart
people.
Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that
these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either
because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by
payment. For that, only cash will do the job.
Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed.
When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.
In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close
to bringing our entire country to its knees.
Charlie and I have no interest in any activity that could pose the slightest threat to Berkshire’s well￾being. (With our having a combined age of 167, starting over is not on our bucket list.) We are forever conscious
of the fact that you, our partners, have entrusted us with what in many cases is a major portion of your savings. In
addition, important philanthropy is dependent on our prudence. Finally, many disabled victims of accidents
caused by our insureds are counting on us to deliver sums payable decades from now. It would be irresponsible
for us to risk what all these constituencies need just to pursue a few points of extra return.
A little personal history may partially explain our extreme aversion to financial adventurism. I didn’t
meet Charlie until he was 35, though he grew up within 100 yards of where I have lived for 52 years and also
attended the same inner-city public high school in Omaha from which my father, wife, children and two
grandchildren graduated. Charlie and I did, however, both work as young boys at my grandfather’s grocery store,
though our periods of employment were separated by about five years. My grandfather’s name was Ernest, and
perhaps no man was more aptly named. No one worked for Ernest, even as a stock boy, without being shaped by
the experience.
On the facing page you can read a letter sent in 1939 by Ernest to his youngest son, my Uncle Fred.
Similar letters went to his other four children. I still have the letter sent to my Aunt Alice, which I found – along
with $1,000 of cash – when, as executor of her estate, I opened her safe deposit box in 1970.
Ernest never went to business school – he never in fact finished high school – but he understood the
importance of liquidity as a condition for assured survival. At Berkshire, we have taken his $1,000 solution a bit
further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility
and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we
can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina,
the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities,
even during times of financial turmoil.
22
23
We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few
more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds
became apparent in September 2008. We agree with investment writer Ray DeVoe’s observation, “More money
has been lost reaching for yield than at the point of a gun.” At Berkshire, we don’t rely on bank lines, and we
don’t enter into contracts that could require postings of collateral except for amounts that are tiny in relation to
our liquid assets.
Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during the past
40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running
about $1 billion per month. Our net worth has thus increased from $48 million to $157 billion during those four
decades and our intrinsic value has grown far more. No other American corporation has come close to building
up its financial strength in this unrelenting way.
By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of
liquidity, though, lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our
economy, we will be equipped both financially and emotionally to play offense while others scramble for survival.
That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.
The Annual Meeting
The annual meeting will be held on Saturday, April 30th. Carrie Kizer from our home office will be the
ringmaster, and her theme this year is Planes, Trains and Automobiles. This gives NetJets, BNSF and BYD a
chance to show off.
As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at
8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest’s
stands) will last until 3:30. After a short recess, Charlie and I will convene the annual meeting at 3:45. If you decide
to leave during the day’s question periods, please do so while Charlie is talking. (Act fast; he can be terse.)
The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-square￾foot hall that adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did
your part, and most locations racked up record sales. In a nine-hour period, we sold 1,053 pairs of Justin boots,
12,416 pounds of See’s candy, 8,000 Dairy Queen Blizzards® and 8,800 Quikut knives (that’s 16 knives per
minute). But you can do better. Remember: Anyone who says money can’t buy happiness simply hasn’t learned
where to shop.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least half of you, I believe we can.
Be sure to visit the Bookworm. It will carry more than 60 books and DVDs, including the Chinese
language edition of Poor Charlie’s Almanack, the ever-popular book about my partner. So what if you can’t read
Chinese? Just buy a copy and carry it around; it will make you look urbane and erudite. Should you need to ship
your book purchases, a shipping service will be available nearby.
If you are a big spender – or merely a gawker – visit Elliott Aviation on the east side of the Omaha
airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that will get your
pulse racing. Come by bus; leave by private jet.
24
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations,
we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who
handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find,
but work with Carol and you will get one.
Airlines have often jacked up prices – sometimes dramatically so – for the Berkshire weekend. If you
are coming from far away, compare the cost of flying to Kansas City versus Omaha. The drive is about 21⁄2 hours
and it may be that you can save significant money, particularly if you had planned to rent a car in Omaha.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. Last year the store did $33.3 million of business
during its annual meeting sale, a volume that – as far as I know – exceeds the one-week total of any retail store
anyplace. To obtain the Berkshire discount, you must make your purchases between Tuesday, April 26th and
Monday, May 2nd inclusive, and also present your meeting credential. The period’s special pricing will even
apply to the products of several prestigious manufacturers that normally have ironclad rules against
discounting but which, in the spirit of our shareholder weekend, have made an exception for you.
We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m.
to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a picnic to which you are
all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 9 p.m. on Friday, April 29th. The second, the main gala, will be held on Sunday, May 1st , from
9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m. On Sunday, around 1 p.m., I will be at Borsheims
with a smile and a shoeshine, selling jewelry just as I sold men’s shirts at J.C. Penney’s 63 years ago.
I’ve told Susan Jacques, Borsheims’ CEO, that I’m still a hotshot salesman. But I see doubt in her eyes.
So cut loose and buy something from me for your wife or sweetheart (presumably the same person). Make me
look good.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 25th through Saturday, May 7th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire shareholder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday
afternoon.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 1st.
Both will be serving until 10 p.m., with Gorat’s opening at 1 p.m. and Piccolo’s opening at 4 p.m. These
restaurants are my favorites and – still being a growing boy – I will eat at both of them on Sunday evening.
Remember: To make a reservation at Gorat’s, call 402-551-3733 on April 1st (but not before) and at Piccolo’s
call 402-342-9038.
We will again have the same three financial journalists lead the question-and-answer period, asking
Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their e-mail
addresses are: Carol Loomis, of Fortune, who may be emailed at cloomis@fortunemail.com; Becky Quick, of
CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at
arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the dozen or so he or she decides are the
most interesting and important. The journalists have told me your question has the best chance of being selected
if you keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than
two questions in any email you send them. (In your email, let the journalist know if you would like your name
mentioned if your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists will pick some tough ones, and that’s the way we like it.
25
We will again have a drawing at 8:15 a.m. on Saturday at each of 13 microphones for those
shareholders wishing to ask questions themselves. At the meeting, I will alternate the questions asked by the
journalists with those from the winning shareholders. We hope to answer at least 60 questions. From our
standpoint, the more the better. Our goal, which we pursue both through these annual letters and by our meeting
discussions, is to give you a better understanding of the business that you own.
************
For good reason, I regularly extol the accomplishments of our operating managers. Equally important,
however, are the 20 men and women who work with me at our corporate office (all on one floor, which is the
way we intend to keep it!).
This group efficiently deals with a multitude of SEC and other regulatory requirements, files a 14,097-
page Federal income tax return along with state and foreign returns, responds to countless shareholder and media
inquiries, gets out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s
activities – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life
easy and joyful. Their efforts go beyond activities strictly related to Berkshire: They deal with 48 universities
(selected from 200 applicants) who will send students to Omaha this school year for a day with me and also
handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers for lunch. No CEO has
it better.
This home office crew has my deepest thanks and deserves yours as well. Come to our Woodstock for
Capitalism on April 30th and tell them so.
February 26, 2011 Warren E. Buffett
Chairman of the Board
26
Memo
To: Berkshire Hathaway Managers (“The All-Stars”)
cc: Berkshire Directors
From: Warren E. Buffett
Date: July 26, 2010
This is my biennial letter to reemphasize Berkshire’s top priority and to get your help on
succession planning (yours, not mine!).
The priority is that all of us continue to zealously guard Berkshire’s reputation. We can’t be
perfect but we can try to be. As I’ve said in these memos for more than 25 years: “We can afford to lose
money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We
must continue to measure every act against not only what is legal but also what we would be happy to have
written about on the front page of a national newspaper in an article written by an unfriendly but intelligent
reporter.
Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always
a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a
moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they
can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter
or a judge and see how far it gets them.
If you see anything whose propriety or legality causes you to hesitate, be sure to give me a call.
However, it’s very likely that if a given course of action evokes such hesitation, it’s too close to the line
and should be abandoned. There’s plenty of money to be made in the center of the court. If it’s
questionable whether some action is close to the line, just assume it is outside and forget it.
As a corollary, let me know promptly if there’s any significant bad news. I can handle bad news
but I don’t like to deal with it after it has festered for awhile. A reluctance to face up immediately to bad
news is what turned a problem at Salomon from one that could have easily been disposed of into one that
almost caused the demise of a firm with 8,000 employees.
104
Somebody is doing something today at Berkshire that you and I would be unhappy about if we
knew of it. That’s inevitable: We now employ more than 250,000 people and the chances of that number
getting through the day without any bad behavior occurring is nil. But we can have a huge effect in
minimizing such activities by jumping on anything immediately when there is the slightest odor of
impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most
important factor in how the culture of your business develops. Culture, more than rule books, determines
how an organization behaves.
In other respects, talk to me about what is going on as little or as much as you wish. Each of you
does a first-class job of running your operation with your own individual style and you don’t need me to
help. The only items you need to clear with me are any changes in post-retirement benefits and any
unusually large capital expenditures or acquisitions.
************
I need your help in respect to the question of succession. I’m not looking for any of you to retire
and I hope you all live to 100. (In Charlie’s case, 110.) But just in case you don’t, please send me a letter
(at home if you wish) giving your recommendation as who should take over tomorrow if you should
become incapacitated overnight. These letters will be seen by no one but me unless I’m no longer CEO, in
which case my successor will need the information. Please summarize the strengths and weaknesses of
your primary candidate as well as any possible alternates you may wish to include. Most of you have
participated in this exercise in the past and others have offered your ideas verbally. However, it’s
important to me to get a periodic update, and now that we have added so many businesses, I need to have
your thoughts in writing rather than trying to carry them around in my memory. Of course, there are a few
operations that are run by two or more of you – such as the Blumkins, the Merschmans, the pair at Applied
Underwriters, etc. – and in these cases, just forget about this item. Your note can be short, informal,
handwritten, etc. Just mark it “Personal for Warren.”
Thanks for your help on all of this. And thanks for the way you run your businesses. You make
my job easy.
WEB/db
P.S. Another minor request: Please turn down all proposals for me to speak, make contributions, intercede
with the Gates Foundation, etc. Sometimes these requests for you to act as intermediary will be
accompanied by “It can’t hurt to ask.” It will be easier for both of us if you just say “no.” As an added
favor, don’t suggest that they instead write or call me. Multiply 76 businesses by the periodic “I think he’ll
be interested in this one” and you can understand why it is better to say no firmly and immediately.
105
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ..................................................... 23.8 10.0 13.8
1966 ..................................................... 20.3 (11.7) 32.0
1967 ..................................................... 11.0 30.9 (19.9)
1968 ..................................................... 19.0 11.0 8.0
1969 ..................................................... 16.2 (8.4) 24.6
1970 ..................................................... 12.0 3.9 8.1
1971 ..................................................... 16.4 14.6 1.8
1972 ..................................................... 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ..................................................... 21.9 37.2 (15.3)
1976 ..................................................... 59.3 23.6 35.7
1977 ..................................................... 31.9 (7.4) 39.3
1978 ..................................................... 24.0 6.4 17.6
1979 ..................................................... 35.7 18.2 17.5
1980 ..................................................... 19.3 32.3 (13.0)
1981 ..................................................... 31.4 (5.0) 36.4
1982 ..................................................... 40.0 21.4 18.6
1983 ..................................................... 32.3 22.4 9.9
1984 ..................................................... 13.6 6.1 7.5
1985 ..................................................... 48.2 31.6 16.6
1986 ..................................................... 26.1 18.6 7.5
1987 ..................................................... 19.5 5.1 14.4
1988 ..................................................... 20.1 16.6 3.5
1989 ..................................................... 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ..................................................... 39.6 30.5 9.1
1992 ..................................................... 20.3 7.6 12.7
1993 ..................................................... 14.3 10.1 4.2
1994 ..................................................... 13.9 1.3 12.6
1995 ..................................................... 43.1 37.6 5.5
1996 ..................................................... 31.8 23.0 8.8
1997 ..................................................... 34.1 33.4 .7
1998 ..................................................... 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 ..................................................... (6.2) (11.9) 5.7
2002 ..................................................... 10.0 (22.1) 32.1
2003 ..................................................... 21.0 28.7 (7.7)
2004 ..................................................... 10.5 10.9 (.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ..................................................... 18.4 15.8 2.6
2007 ..................................................... 11.0 5.5 5.5
2008 ..................................................... (9.6) (37.0) 27.4
2009 ..................................................... 19.8 26.5 (6.7)
2010 ..................................................... 13.0 15.1 (2.1)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 2.1 2.5
Compounded Annual Gain – 1965-2011 ......................... 19.8% 9.2% 10.6
Overall Gain – 1964-2011 .................................... 513,055% 6,397%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at
market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s
results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated
using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after￾tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its
results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the
S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the
aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the
last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of
19.8% compounded annually.*
Charlie Munger, Berkshire’s Vice Chairman and my partner, and I feel good about the company’s
progress during 2011. Here are the highlights:
• The primary job of a Board of Directors is to see that the right people are running the business and to
be sure that the next generation of leaders is identified and ready to take over tomorrow. I have been on
19 corporate boards, and Berkshire’s directors are at the top of the list in the time and diligence they
have devoted to succession planning. What’s more, their efforts have paid off.
As 2011 started, Todd Combs joined us as an investment manager, and shortly after yearend Ted
Weschler came aboard. Both of these men have outstanding investment skills and a deep commitment
to Berkshire. Each will be handling a few billion dollars in 2012, but they have the brains, judgment
and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.
Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a
great deal of exposure and whose managerial and human qualities they admire. (We have two superb
back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and
Berkshire’s prospects will remain bright. More than 98% of my net worth is in Berkshire stock, all of
which will go to various philanthropies. Being so heavily concentrated in one stock defies conventional
wisdom. But I’m fine with this arrangement, knowing both the quality and diversity of the businesses
we own and the caliber of the people who manage them. With these assets, my successor will enjoy a
running start. Do not, however, infer from this discussion that Charlie and I are going anywhere; we
continue to be in excellent health, and we love what we do.
• On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty
chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004,
with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many
opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to
three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager
to expand his managerial domain.
• Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF,
Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In
aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago,
when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the
economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings
comfortably topping $10 billion.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
• In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in
2011, smashing our previous record by more than $2 billion. About 95% of these outlays were made in
the U.S., a fact that may surprise those who believe our country lacks investment opportunities. We
welcome projects abroad, but expect the overwhelming majority of Berkshire’s future capital
commitments to be in America. In 2012, these expenditures will again set a record.
• Our insurance operations continued their delivery of costless capital that funds a myriad of other
opportunities. This business produces “float” – money that doesn’t belong to us, but that we get to
invest for Berkshire’s benefit. And if we pay out less in losses and expenses than we receive in
premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing.
Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive
years of underwriting profits, totaling about $17 billion. Over the same nine years our float increased
from $41 billion to its current record of $70 billion. Insurance has been good to us.
• Finally, we made two major investments in marketable securities: (1) a $5 billion 6% preferred stock of
Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per
share any time before September 2, 2021; and (2) 63.9 million shares of IBM that cost us $10.9 billion.
Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of
American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course,
have many smaller, but important, positions.)
We view these holdings as partnership interests in wonderful businesses, not as marketable securities to
be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from
fully reflected in our earnings; only the dividends we receive from these businesses show up in our
financial reports. Over time, though, the undistributed earnings of these companies that are attributable
to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to
increase future earnings and dividends of the investee. They may also be devoted to stock repurchases,
which will increase our share of the company’s future earnings.
Had we owned our present positions throughout last year, our dividends from the “Big Four” would
have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our
share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I
believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for
Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and
their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to
come. A decade from now, our current holdings of the four companies might well account for earnings
of $7 billion, of which $2 billion in dividends would come to us.
I’ve run out of good news. Here are some developments that hurt us during 2011:
• A few years back, I spent about $2 billion buying several bond issues of Energy Future Holdings, an
electric utility operation serving portions of Texas. That was a mistake – a big mistake. In large measure,
the company’s prospects were tied to the price of natural gas, which tanked shortly after our purchase and
remains depressed. Though we have annually received interest payments of about $102 million since our
purchase, the company’s ability to pay will soon be exhausted unless gas prices rise substantially. We
wrote down our investment by $1 billion in 2010 and by an additional $390 million last year.
At yearend, we carried the bonds at their market value of $878 million. If gas prices remain at present
levels, we will likely face a further loss, perhaps in an amount that will virtually wipe out our current
carrying value. Conversely, a substantial increase in gas prices might allow us to recoup some, or even
all, of our write-down. However things turn out, I totally miscalculated the gain/loss probabilities when
I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman.
4
• Three large and very attractive fixed-income investments were called away from us by their issuers in
2011. Swiss Re, Goldman Sachs and General Electric paid us an aggregate of $12.8 billion to redeem
securities that were producing about $1.2 billion of pre-tax earnings for Berkshire. That’s a lot of
income to replace, though our Lubrizol purchase did offset most of it.
• Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead
wrong. We have five businesses whose results are significantly influenced by housing activity. The
connection is direct at Clayton Homes, which is the largest producer of homes in the country,
accounting for about 7% of those constructed during 2011.
Additionally, Acme Brick, Shaw (carpet), Johns Manville (insulation) and MiTek (building products,
primarily connector plates used in roofing) are all materially affected by construction activity. In
aggregate, our five housing-related companies had pre-tax profits of $513 million in 2011. That’s
similar to 2010 but down from $1.8 billion in 2006.
Housing will come back – you can be sure of that. Over time, the number of housing units necessarily
matches the number of households (after allowing for a normal level of vacancies). For a period of
years prior to 2008, however, America added more housing units than households. Inevitably, we
ended up with far too many units and the bubble popped with a violence that shook the entire economy.
That created still another problem for housing: Early in a recession, household formations slow, and in
2009 the decrease was dramatic.
That devastating supply/demand equation is now reversed: Every day we are creating more households
than housing units. People may postpone hitching up during uncertain times, but eventually hormones
take over. And while “doubling-up” may be the initial reaction of some during a recession, living with
in-laws can quickly lose its allure.
At our current annual pace of 600,000 housing starts – considerably less than the number of new
households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This
process will run its course at different rates around the country; the supply-demand situation varies
widely by locale.) While this healing takes place, however, our housing-related companies sputter,
employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the
economy, which includes not only construction but everything that feeds off of it, remains in a
depression of its own. I believe this is the major reason a recovery in employment has so severely
lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.
Wise monetary and fiscal policies play an important role in tempering recessions, but these tools don’t
create households nor eliminate excess housing units. Fortunately, demographics and our market
system will restore the needed balance – probably before long. When that day comes, we will again
build one million or more residential units annually. I believe pundits will be surprised at how far
unemployment drops once that happens. They will then reawake to what has been true since 1776:
America’s best days lie ahead.
Intrinsic Business Value
Charlie and I measure our performance by the rate of gain in Berkshire’s per-share intrinsic business
value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it
doesn’t, we are overpaid at any price.
We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated,
proxy for it: per-share book value. This yardstick is meaningless at most companies. At Berkshire, however,
book value very roughly tracks business values. That’s because the amount by which Berkshire’s intrinsic value
exceeds book value does not swing wildly from year to year, though it increases in most years. Over time, the
divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on
a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.
5
We’ve regularly emphasized that our book-value performance is almost certain to outpace the S&P 500
in a bad year for the stock market and just as certainly will fall short in a strong up-year. The test is how we do
over time. Last year’s annual report included a table laying out results for the 42 five-year periods since we took
over at Berkshire in 1965 (i.e., 1965-69, 1966-70, etc.). All showed our book value beating the S&P, and our
string held for 2007-11. It will almost certainly snap, though, if the S&P 500 should put together a five-year
winning streak (which it may well be on its way to doing as I write this).
************
I also included two tables last year that set forth the key quantitative ingredients that will help you
estimate our per-share intrinsic value. I won’t repeat the full discussion here; you can find it reproduced on
pages 99-100. To update the tables shown there, our per-share investments in 2011 increased 4% to $98,366, and
our pre-tax earnings from businesses other than insurance and investments increased 18% to $6,990 per share.
Charlie and I like to see gains in both areas, but our primary focus is on building operating earnings. Over
time, the businesses we currently own should increase their aggregate earnings, and we hope also to purchase some
large operations that will give us a further boost. We now have eight subsidiaries that would each be included in the
Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.
Share Repurchases
Last September, we announced that Berkshire would repurchase its shares at a price of up to 110% of book
value. We were in the market for only a few days – buying $67 million of stock – before the price advanced beyond
our limit. Nonetheless, the general importance of share repurchases suggests I should focus for a bit on the subject.
Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take
care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the
company’s intrinsic business value, conservatively calculated.
We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course,
infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other
instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to
offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders
are hurt unless shares are purchased below intrinsic value. The first law of capital allocation – whether the
money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another. (One
CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I
recommend that you read his annual letter.)
Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like
making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our
own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our
directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)
Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling
shareholders a slightly higher price than they would receive if our bid was absent. When we are buying,
therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.
At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic
value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given
the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know,
however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets.
Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength
that is unquestionable takes precedence over all else.
************
This discussion of repurchases offers me the chance to address the irrational reaction of many investors
to changes in stock prices. When Berkshire buys stock in a company that is repurchasing shares, we hope for two
events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to
come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to
this second point: “Talking our book” about a stock we own – were that to be effective – would actually be
harmful to Berkshire, not helpful as commentators customarily assume.
6
Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano
did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their
operational accomplishments were truly extraordinary.
But their financial management was equally brilliant, particularly in recent years as the company’s
financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a
skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made
value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.
Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.
Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.
Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the
day: What should a long-term shareholder, such as Berkshire, cheer for during that period?
I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.
Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire
250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we
would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year
period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after
five years, of which we would own 6.5%.
If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100
million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher
price. At some later point our shares would be worth perhaps $11⁄2 billion more than if the “high-price”
repurchase scenario had taken place.
The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own
money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks
rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including
those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble
a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.
Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough
human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here
a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben
Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock
prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one
of the luckiest moments in my life.
In the end, the success of our IBM investment will be determined primarily by its future earnings. But
an important secondary factor will be how many shares the company purchases with the substantial sums it is
likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will
abandon my famed frugality and give Berkshire employees a paid holiday.
************
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet
and income characteristics from the others. Lumping them together therefore impedes analysis. So we’ll present
them as four separate businesses, which is how Charlie and I view them. Because we may be repurchasing
Berkshire shares from some of you, we will offer our thoughts in each section as to how intrinsic value compares
to carrying value.
7
Insurance
Let’s look first at insurance, Berkshire’s core operation and the engine that has propelled our expansion
over the years.
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases,
such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This
collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to
others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims
come and go, the amount of float we hold remains remarkably stable in relation to premium volume.
Consequently, as our business grows, so does our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2011 70,571
It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we
already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add,
it would almost certainly be very gradual and therefore impose no unusual demand for funds on us.
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit occurs, we enjoy the use of free
money – and, better yet, get paid for holding it. Unfortunately, the wish of all insurers to achieve this happy
result creates intense competition, so vigorous in most years that it causes the P/C industry as a whole to
operate at a significant underwriting loss. For example, State Farm, by farthe country’slargestinsurer and a well-managed
company besides, has incurred an underwriting loss in eight of the last eleven years. There are
a lot of ways to lose money in insurance, and the industry is resourceful in creating new ones.
As noted in the first section of this report, we have now operated at an underwriting profit for nine
consecutive years, our gain for the period having totaled $17 billion. I believe it likely that we will continue to
underwrite profitably in most – though certainly not all – future years. If we accomplish that, our float will be
better than cost-free. We will profit just as we would if some party deposited $70.6 billion with us, paid us a fee
for holding its money and then let us invest its funds for our own benefit.
So how does this attractive float affect intrinsic value calculations? Our float is deducted in full as a
liability in calculating Berkshire’s book value, just as if we had to pay it out tomorrow and were unable to
replenish it. But that’s an incorrect way to view float, which should instead be viewed as a revolving fund. If
float is both costless and long-enduring, the true value of this liability is far lower than the accounting liability.
Partially offsetting this overstated liability is $15.5 billion of “goodwill” attributable to our insurance
companies that is included in book value as an asset. In effect, this goodwill represents the price we paid for the
float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its
true value. If an insurance business produces large and sustained underwriting losses, any goodwill asset
attributable to it should be deemed valueless, whatever its original cost.
Fortunately, that’s not the case at Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would pay to purchase float of similar quality – to be far in excess of its historic
carrying value. The value of our float is one reason – a huge reason – why we believe Berkshire’s intrinsic
business value substantially exceeds book value.
Let me emphasize once again that cost-free float is not an outcome to be expected for the P/C industry
as a whole: We don’t think there is much “Berkshire-quality” float existing in the insurance world. In most years,
including 2011, the industry’s premiums have been inadequate to cover claims plus expenses. Consequently, the
8
industry’s overall return on tangible equity has for many decades fallen far short of the average return realized by
American industry, a sorry performance almost certain to continue. Berkshire’s outstanding economics exist only
because we have some terrific managers running some extraordinary insurance operations. Let me tell you about
the major units.
************
First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks
that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and,
most importantly, brains in a manner that is unique in the insurance business. Yet he never exposes Berkshire to
risks that are inappropriate in relation to our resources. Indeed, we are far more conservative in that respect than
most large insurers. For example, if the insurance industry should experience a $250 billion loss from some
mega-catastrophe – a loss about triple anything it has ever faced – Berkshire as a whole would likely record a
moderate profit for the year because of its many streams of earnings. Concurrently, all other major insurers and
reinsurers would be far in the red, and some would face insolvency.
From a standing start in 1985, Ajit has created an insurance business with float of $34 billion and
significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By these
accomplishments, he has added a great many billions of dollars to the value of Berkshire. Charlie would gladly
trade me for a second Ajit. Alas, there is none.
************
We have another insurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively evaluate the likelihood of any exposure
actually causing a loss and the probable cost if it does; (3) set a premium that will deliver a profit, on average,
after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the
appropriate premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells
trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent
mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,”
she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they
don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.”
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s
huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to
be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure.
************
Finally, there is GEICO, the insurer on which I cut my teeth 61 years ago. GEICO is run by Tony
Nicely, who joined the company at 18 and completed 50 years of service in 2011.
GEICO’s much-envied record comes from Tony’s brilliant execution of a superb and almost￾impossible-to-replicate business model. During Tony’s 18-year tenure as CEO, our market share has grown from 2.0%
to 9.3%. If it had instead remained static – as it had for more than a decade before he took over – our premium volume
would now be $3.3 billion rather than the $15.4 billion we attained in 2011. The extra value created by Tony and his
associates is a major element in Berkshire’s excess of intrinsic value over book value.
There is still more than 90% of the auto-insurance market left for GEICO to rake in. Don’t bet against
Tony acquiring chunks of it year after year in the future. Our low costs permit low prices, and every day more
Americans discover that the Gecko is doing them a favor when he urges them to visit GEICO.com for a quote.
(Our lizard has another endearing quality: Unlike human spokesmen or spokeswomen who expensively represent
other insurance companies, our little fellow has no agent.)
************
In addition to our three major insurance operations, we own a group of smaller companies, most of
them plying their trade in odd corners of the insurance world. In aggregate, their results have consistently been
profitable and the float they provide us is substantial. Charlie and I treasure these companies and their managers.
9
At yearend, we acquired Princeton Insurance, a New Jersey writer of medical malpractice policies. This
bolt-on transaction expands the managerial domain of Tim Kenesey, the star CEO of Medical Protective, our
Indiana-based med-mal insurer. Princeton brings with it more than $600 million of float, an amount that is
included in the following table.
Here is the record of all four segments of our property-casualty and life insurance businesses:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2011 2010 2011 2010
BH Reinsurance ................ $(714) $ 176 $33,728 $30,370
General Re . . . . . . . . . . . . . . . . . . . . 144 452 19,714 20,049
GEICO . . . . . . . . . . . . . . . . . . . . . . . 576 1,117 11,169 10,272
Other Primary . . . . . . . . . . . . . . . . . . 242 268 5,960 5,141
$ 248 $2,013 $70,571 $65,832
Among large insurance operations, Berkshire’s impresses me as the best in the world.
Regulated, Capital-Intensive Businesses
We have two very large businesses, BNSF and MidAmerican Energy, that have important common
characteristics distinguishing them from our many other businesses. Consequently, we assign them their own sector
in this letter and also split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is the huge investment they have in very long-lived, regulated
assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our
credit is not needed: Both businesses have earning power that even under terrible business conditions amply
covers their interest requirements. In a less than robust economy during 2011, for example, BNSF’s interest
coverage was 9.5x. At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all
circumstances: The stability of earnings that is inherent in our exclusively offering an essential service and a
diversity of earnings streams, which shield it from the actions of any single regulatory body.
Measured by ton-miles, rail moves 42% of America’s inter-city freight, and BNSF moves more than
any other railroad – about 37% of the industry total. A little math will tell you that about 15% of all inter-city
ton-miles of freight in the U.S. is transported by BNSF. It is no exaggeration to characterize railroads as the
circulatory system of our economy. Your railroad is the largest artery.
All of this places a huge responsibility on us. We must, without fail, maintain and improve our 23,000
miles of track along with 13,000 bridges, 80 tunnels, 6,900 locomotives and 78,600 freight cars. This job requires
us to have ample financial resources under all economic scenarios and to have the human talent that can instantly
and effectively deal with the vicissitudes of nature, such as the widespread flooding BNSF labored under last
summer.
To fulfill its societal obligation, BNSF regularly invests far more than its depreciation charge, with the
excess amounting to $1.8 billion in 2011. The three other major U.S. railroads are making similar outlays.
Though many people decry our country’s inadequate infrastructure spending, that criticism cannot be levied
against the railroad industry. It is pouring money – funds from the private sector – into the investment projects
needed to provide better and more extensive service in the future. If railroads were not making these huge
expenditures, our country’s publicly-financed highway system would face even greater congestion and
maintenance problems than exist today.
Massive investments of the sort that BNSF is making would be foolish if it could not earn appropriate
returns on the incremental sums it commits. But I am confident it will do so because of the value it delivers.
Many years ago Ben Franklin counseled, “Keep thy shop, and thy shop will keep thee.” Translating this to our
regulated businesses, he might today say, “Take care of your customer, and the regulator – your customer’s
representative – will take care of you.” Good behavior by each party begets good behavior in return.
10
At MidAmerican, we participate in a similar “social compact.” We are expected to put up ever-increasing
sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently,
we know that we will obtain a fair return on these investments.
MidAmerican, 89.8% owned by Berkshire, supplies 2.5 million customers in the U.S. with electricity,
operating as the largest supplier in Iowa, Utah and Wyoming and as an important provider in six other states as
well. Our pipelines transport 8% of the country’s natural gas. Obviously, many millions of Americans depend on
us every day. They haven’t been disappointed.
When MidAmerican purchased Northern Natural Gas pipeline in 2002, that company’s performance as
a pipeline was rated dead last, 43 out of 43, by the leading authority in the field. In the most recent report,
Northern Natural was ranked second. The top spot was held by our other pipeline, Kern River.
In its electric business, MidAmerican has a comparable record. In the most recent survey of customer
satisfaction, MidAmerican’s U.S. utilities ranked second among 60 utility groups surveyed. The story was far
different not many years back when MidAmerican acquired these properties.
MidAmerican will have 3,316 megawatts of wind generation in operation by the end of 2012, far more
than any other regulated electric utility in the country. The total amount that we have invested or committed to
wind is a staggering $6 billion. We can make this sort of investment because MidAmerican retains all of its
earnings, unlike other utilities that generally pay out most of what they earn. In addition, late last year we took on
two solar projects – one 100%-owned in California and the other 49%-owned in Arizona – that will cost about $3
billion to construct. Many more wind and solar projects will almost certainly follow.
As you can tell by now, I am proud of what has been accomplished for our society by Matt Rose at
BNSF and by Greg Abel at MidAmerican. I am also both proud and grateful for what they have accomplished for
Berkshire shareholders. Below are the relevant figures:
MidAmerican Earnings (in millions)
2011 2010
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469 $ 333
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 279
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771 783
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 378
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 42
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 47
Operating earnings before corporate interest and taxes ............................ 1,982 1,862
Interest, other than to Berkshire .............................................. (323) (323)
Interest on Berkshire junior debt .............................................. (13) (30)
Income tax ............................................................... (315) (271)
Net earnings ............................................................. $1,331 $1,238
Earnings applicable to Berkshire* ............................................ $1,204 $1,131
*Includes interest earned by Berkshire (net of related income taxes) of $8 in 2011 and $19 in 2010.
BNSF
(Historical accounting through 2/12/10; purchase accounting subsequently) (in millions)
2011 2010
Revenues ................................................................ $19,548 $16,850
Operating earnings ........................................................ 5,310 4,495
Interest (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560 507
Pre-Tax earnings .......................................................... 4,741 3,988
Net earnings .............................................................. 2,972 2,459
In the book value recorded on our balance sheet, BNSF and MidAmerican carry substantial goodwill
components totaling $20 billion. In each instance, however, Charlie and I believe current intrinsic value is far
greater than book value.
11
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance
sheet and earnings statement for the entire group.
Balance Sheet 12/31/11 (in millions)
Assets Liabilities and Equity
Cash and equivalents ................... $ 4,241 Notes payable .................... $ 1,611
Accounts and notes receivable ........... 6,584 Other current liabilities ............. 15,124
Inventory ............................ 8,975 Total current liabilities ............. 16,735
Other current assets . . . . . . . . . . . . . . . . . . . . 631
Total current assets .................... 20,431
Deferred taxes .................... 4,661
Goodwill and other intangibles ........... 24,755 Term debt and other liabilities ....... 6,214
Fixed assets .......................... 17,866 Non-controlling interests ............ 2,410
Other assets .......................... 3,661 Berkshire equity .................. 36,693
$66,713 $66,713
Earnings Statement (in millions)
2011** 2010 2009
Revenues ................................................... $72,406 $66,610 $61,665
Operating expenses (including depreciation of $1,431 in 2011,
$1,362 in 2010 and $1,422 in 2009) ............................ 67,239 62,225 59,509
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 111 98
Pre-tax earnings .............................................. 5,037* 4,274* 2,058*
Income taxes and non-controlling interests ........................ 1,998 1,812 945
Net earnings ................................................ $ 3,039 $ 2,462 $ 1,113
*Does not include purchase-accounting adjustments.
**Includes earnings of Lubrizol from September 16.
This group of companies sells products ranging from lollipops to jet airplanes. Some of the businesses
enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to
more than 100%. Others produce good returns in the area of 12-20%. A few, however, have very poor returns, a
result of some serious mistakes I made in my job of capital allocation. These errors came about because I misjudged
either the competitive strength of the business being purchased or the future economics of the industry in which it
operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been
poor. Charlie’s has been better; he voted no more than “present” on several of my errant purchases.
Berkshire’s newer shareholders may be puzzled over our decision to hold on to my mistakes. After all,
their earnings can never be consequential to Berkshire’s valuation, and problem companies require more
managerial time than winners. Any management consultant or Wall Street advisor would look at our laggards and
say “dump them.”
That won’t happen. For 29 years, we have regularly laid out Berkshire’s economic principles in these
reports (pages 93-98) and Number 11 describes our general reluctance to sell poor performers (which, in most
cases, lag because of industry factors rather than managerial shortcomings). Our approach is far from Darwinian,
and many of you may disapprove of it. I can understand your position. However, we have made – and continue to
make – a commitment to the sellers of businesses we buy that we will retain those businesses through thick and
thin. So far, the dollar cost of that commitment has not been substantial and may well be offset by the goodwill it
builds among prospective sellers looking for the right permanent home for their treasured business and loyal
associates. These owners know that what they get with us can’t be delivered by others and that our commitments
will be good for many decades to come.
12
Please understand, however, that Charlie and I are neither masochists nor Pollyannas. If either of the
failings we set forth in Rule 11 is present – if the business will likely be a cash drain over the longer term, or if labor
strife is endemic – we will take prompt and decisive action. Such a situation has happened only a couple of times in
our 47-year history, and none of the businesses we now own is in straits requiring us to consider disposing of it.
************
The steady and substantial comeback in the U.S. economy since mid-2009 is clear from the earnings
shown at the front of this section. This compilation includes 54 of our companies. But one of these, Marmon, is
itself the owner of 140 operations in eleven distinct business sectors. In short, when you look at Berkshire, you
are looking across corporate America. So let’s dig a little deeper to gain a greater insight into what has happened
in the last few years.
The four housing-related companies in this section (a group that excludes Clayton, which is carried
under Finance and Financial Products) had aggregate pre-tax earnings of $227 million in 2009, $362 million in
2010 and $359 million in 2011. If you subtract these earnings from those in the combined statement, you will see
that our multiple and diverse non-housing operations earned $1,831 million in 2009, $3,912 million in 2010 and
$4,678 million in 2011. About $291 million of the 2011 earnings came from the Lubrizol acquisition. The profile
of the remaining 2011 earnings – $4,387 million – illustrates the comeback of much of America from the
devastation wrought by the 2008 financial panic. Though housing-related businesses remain in the emergency
room, most other businesses have left the hospital with their health fully restored.
************
Almost all of our managers delivered outstanding performances last year, among them those managers
who run housing-related businesses and were therefore fighting hurricane-force headwinds. Here are a few examples:
• Vic Mancinelli again set a record at CTB, our agricultural equipment operation. We purchased CTB in
2002 for $139 million. It has subsequently distributed $180 million to Berkshire, last year earned $124
million pre-tax and has $109 million in cash. Vic has made a number of bolt-on acquisitions over the
years, including a meaningful one he signed up after yearend.
• TTI, our electric components distributor, increased its sales to a record $2.1 billion, up 12.4% from
2010. Earnings also hit a record, up 127% from 2007, the year in which we purchased the business. In
2011, TTI performed far better than the large publicly-traded companies in its field. That’s no surprise:
Paul Andrews and his associates have been besting them for years. Charlie and I are delighted that Paul
negotiated a large bolt-on acquisition early in 2012. We hope more follow.
• Iscar, our 80%-owned cutting-tools operation, continues to amaze us. Its sales growth and overall
performance are unique in its industry. Iscar’s managers – Eitan Wertheimer, Jacob Harpaz and Danny
Goldman – are brilliant strategists and operators. When the economic world was cratering in November
2008, they stepped up to buy Tungaloy, a leading Japanese cutting-tool manufacturer. Tungaloy
suffered significant damage when the tsunami hit north of Tokyo last spring. But you wouldn’t know
that now: Tungaloy went on to set a sales record in 2011. I visited the Iwaki plant in November and
was inspired by the dedication and enthusiasm of Tungaloy’s management, as well as its staff. They are
a wonderful group and deserve your admiration and thanks.
• McLane, our huge distribution company that is run by Grady Rosier, added important new customers in
2011 and set a pre-tax earnings record of $370 million. Since its purchase in 2003 for $1.5 billion, the
company has had pre-tax earnings of $2.4 billion and also increased its LIFO reserve by $230 million
because the prices of the retail products it distributes (candy, gum, cigarettes, etc.) have risen. Grady
runs a logistical machine second to none. You can look for bolt-ons at McLane, particularly in our new
wine-and-spirits distribution business.
13
• Jordan Hansell took over at NetJets in April and delivered 2011 pre-tax earnings of $227 million. That
is a particularly impressive performance because the sale of new planes was slow during most of the
year. In December, however, there was an uptick that was more than seasonally normal. How
permanent it will be is uncertain.
A few years ago NetJets was my number one worry: Its costs were far out of line with revenues, and
cash was hemorrhaging. Without Berkshire’s support, NetJets would have gone broke. These problems
are behind us, and Jordan is now delivering steady profits from a well-controlled and smoothly-running
operation. NetJets is proceeding on a plan to enter China with some first-class partners, a move that
will widen our business “moat.” No other fractional-ownership operator has remotely the size and
breadth of the NetJets operation, and none ever will. NetJets’ unrelenting focus on safety and service
has paid off in the marketplace.
• It’s a joy to watch Marmon’s progress under Frank Ptak’s leadership. In addition to achieving internal
growth, Frank regularly makes bolt-on acquisitions that, in aggregate, will materially increase Marmon’s
earning power. (He did three, costing about $270 million, in the last few months.) Joint ventures around
the world are another opportunity for Marmon. At midyear Marmon partnered with the Kundalia family
in an Indian crane operation that is already delivering substantial profits. This is Marmon’s second
venture with the family, following a successful wire and cable partnership instituted a few years ago.
Of the eleven major sectors in which Marmon operates, ten delivered gains in earnings last year. You
can be confident of higher earnings from Marmon in the years ahead.
• “Buy commodities, sell brands” has long been a formula for business success. It has produced
enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. On a smaller scale,
we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago.
Last year See’s had record pre-tax earnings of $83 million, bringing its total since we bought it to $1.65
billion. Contrast that figure with our purchase price of $25 million and our yearend carrying-value (net
of cash) of less than zero. (Yes, you read that right; capital employed at See’s fluctuates seasonally,
hitting a low after Christmas.) Credit Brad Kinstler for taking the company to new heights since he
became CEO in 2006.
• Nebraska Furniture Mart (80% owned) set an earnings record in 2011, netting more than ten times what
it did in 1983, when we acquired our stake.
But that’s not the big news. More important was NFM’s acquisition of a 433-acre tract north of Dallas
on which we will build what is almost certain to be the highest-volume home-furnishings store in the
country. Currently, that title is shared by our two stores in Omaha and Kansas City, each of which had
record-setting sales of more than $400 million in 2011. It will be several years before the Texas store is
completed, but I look forward to cutting the ribbon at the opening. (At Berkshire, the managers do the
work; I take the bows.)
Our new store, which will offer an unequalled variety of merchandise sold at prices that can’t be
matched, will bring huge crowds from near and far. This drawing power and our extensive holdings of
land at the site should enable us to attract a number of other major stores. (If any high-volume retailers
are reading this, contact me.)
Our experience with NFM and the Blumkin family that runs it has been a real joy. The business was
built by Rose Blumkin (known to all as “Mrs. B”), who started the company in 1937 with $500 and a
dream. She sold me our interest when she was 89 and worked until she was 103. (After retiring, she
died the next year, a sequence I point out to any other Berkshire manager who even thinks of retiring.)
Mrs. B’s son, Louie, now 92, helped his mother build the business after he returned from World War II
and, along with his wife, Fran, has been my friend for 55 years. In turn, Louie’s sons, Ron and Irv, have
taken the company to new heights, first opening the Kansas City store and now gearing up for Texas.
14
The “boys” and I have had many great times together, and I count them among my best friends. The
Blumkins are a remarkable family. Never inclined to let an extraordinary gene pool go to waste, I am
rejoicing these days because several members of the fourth Blumkin generation have joined NFM.
Overall, the intrinsic value of the businesses in this Berkshire sector significantly exceeds their book
value. For many of the smaller companies, however, this is not true. I have made more than my share of mistakes
buying small companies. Charlie long ago told me, “If something’s not worth doing at all, it’s not worth
doing well,” and I should have listened harder. In any event, our large purchases have generally worked
well – extraordinarily well in a few cases – and overall this sector is a winner for us.
************
Certain shareholders have told me they hunger for more discussions of accounting arcana. So here’s a
bit of GAAP-mandated nonsense I hope both of them enjoy.
Common sense would tell you that our varied subsidiaries should be carried on our books at their cost
plus the earnings they have retained since our purchase (unless their economic value has materially decreased, in
which case an appropriate write-down must be taken). And that’s essentially the reality at Berkshire – except for
the weird situation at Marmon.
We purchased 64% of the company in 2008 and put this interest on our books at our cost, $4.8 billion.
So far, so good. Then, in early 2011, pursuant to our original contract with the Pritzker family, we purchased an
additional 16%, paying $1.5 billion as called for by a formula that reflected Marmon’s increased value. In this
instance, however, we were required to immediately write off $614 million of the purchase price retroactive to
the end of 2010. (Don’t ask!) Obviously, this write-off had no connection to economic reality. The excess of
Marmon’s intrinsic value over its carrying value is widened by this meaningless write-down.
Finance and Financial Products
This sector, our smallest, includes two rental companies, XTRA (trailers) and CORT (furniture), and
Clayton Homes, the country’s leading producer and financer of manufactured homes. Aside from these 100%-owned
subsidiaries, we also include in this category a collection of financial assets and our 50% interest in Berkadia
Commercial Mortgage.
It’s instructive to look at what transpired at our three operating businesses after the economy fell off a
cliff in late 2008, because their experiences illuminate the fractured recovery that later came along.
Results at our two leasing companies mirrored the “non-housing” economy. Their combined pre-tax
earnings were $13 million in 2009, $53 million in 2010 and $155 million in 2011, an improvement reflecting the
steady recovery we have seen in almost all of our non-housing businesses. In contrast, Clayton’s world of
manufactured housing (just like site-built housing) has endured a veritable depression, experiencing no recovery
to date. Manufactured housing sales in the nation were 49,789 homes in 2009, 50,046 in 2010 and 51,606 in
2011. (When housing was booming in 2005, they were 146,744.)
Despite these difficult times, Clayton has continued to operate profitably, largely because its mortgage
portfolio has performed well under trying circumstances. Because we are the largest lender in the manufactured
homes sector and are also normally lending to lower-and-middle-income families, you might expect us to suffer
heavy losses during a housing meltdown. But by sticking to old-fashioned loan policies – meaningful down
payments and monthly payments with a sensible relationship to regular income – Clayton has kept losses to
acceptable levels. It has done so even though many of our borrowers have had negative equity for some time.
As is well-known, the U.S. went off the rails in its home-ownership and mortgage-lending policies,
and for these mistakes our economy is now paying a huge price. All of us participated in the destructive
behavior – government, lenders, borrowers, the media, rating agencies, you name it. At the core of the folly was
the almost universal belief that the value of houses was certain to increase over time and that any dips
would be inconsequential. The acceptance of this premise justified almost any price and practice in housing
transactions. Homeowners everywhere felt richer and rushed to “monetize” the increased value of their homes by
refinancings. These massive cash infusions fueled a consumption binge throughout our economy. It all seemed
great fun while it lasted. (A largely unnoted fact: Large numbers of people who have “lost” their house through
foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in
excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.)
15
In 2007, the bubble burst, just as all bubbles must. We are now in the fourth year of a cure that, though
long and painful, is sure to succeed. Today, household formations are consistently exceeding housing starts.
Clayton’s earnings should improve materially when the nation’s excess housing inventory is worked
off. As I see things today, however, I believe the intrinsic value of the three businesses in this sector does not
differ materially from their book value.
Investments
Below we show our common stock investments that at yearend had a market value of more than $1 billion.
12/31/11
Shares Company
Percentage of
Company
Owned
Cost* Market
(in millions)
151,610,700 American Express Company ............. 13.0 $ 1,287 $ 7,151
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . 8.8 1,299 13,994
29,100,937 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2,027 2,121
63,905,931 International Business Machines Corp. . . . . . 5.5 10,856 11,751
31,416,127 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . 1.2 1,880 2,060
79,034,713 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . 4.5 2,589 2,953
20,060,390 Munich Re ........................... 11.3 2,990 2,464
3,947,555 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 768 1,301
72,391,036 The Procter & Gamble Company . . . . . . . . . . 2.6 464 4,829
25,848,838 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2,055 1,900
291,577,428 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 1,719 1,827
78,060,769 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 2,401 2,112
39,037,142 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . 1.1 1,893 2,333
400,015,828 Wells Fargo & Company . . . . . . . . . . . . . . . . 7.6 9,086 11,024
Others ............................... 6,895 9,171
Total Common Stocks Carried at Market .... $48,209 $76,991
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
We made few changes in our investment holdings during 2011. But three moves were important: our
purchases of IBM and Bank of America and the $1 billion addition we made to our Wells Fargo position.
The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its
assets solid and its capital at record levels. At Bank of America, some huge mistakes were made by prior
management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that
process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that
will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares
will likely be of great value before they expire.
As was the case with Coca-Cola in 1988 and the railroads in 2006, I was late to the IBM party. I have
been reading the company’s annual report for more than 50 years, but it wasn’t until a Saturday in March last
year that my thinking crystallized. As Thoreau said, “It’s not what you look at that matters, it’s what you see.”
Todd Combs built a $1.75 billion portfolio (at cost) last year, and Ted Weschler will soon create one of
similar size. Each of them receives 80% of his performance compensation from his own results and 20% from his
partner’s. When our quarterly filings report relatively small holdings, these are not likely to be buys I made
(though the media often overlook that point) but rather holdings denoting purchases by Todd or Ted.
16
One additional point about these two new arrivals. Both Ted and Todd will be helpful to the next CEO
of Berkshire in making acquisitions. They have excellent “business minds” that grasp the economic forces likely
to determine the future of a wide variety of businesses. They are aided in their thinking by an understanding of
what is predictable and what is unknowable.
************
There is little new to report on our derivatives positions, which we have described in detail in past reports.
(Annual reports since 1977 are available at www.berkshirehathaway.com.) One important industry change,
however, must be noted: Though our existing contracts have very minor collateral requirements, the rules have
changed for new positions. Consequently, we will not be initiating any major derivatives positions. We shun
contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge
posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist
attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength.
Our insurance-like derivatives contracts, whereby we pay if various issues included in high-yield bond
indices default, are coming to a close. The contracts that most exposed us to losses have already expired, and the
remainder will terminate soon. In 2011, we paid out $86 million on two losses, bringing our total payments to
$2.6 billion. We are almost certain to realize a final “underwriting profit” on this portfolio because the premiums
we received were $3.4 billion, and our future losses are apt to be minor. In addition, we will have averaged about
$2 billion of float over the five-year life of these contracts. This successful result during a time of great credit
stress underscores the importance of obtaining a premium that is commensurate with the risk.
Charlie and I continue to believe that our equity-put positions will produce a significant profit, considering
both the $4.2 billion of float we will have held for more than fifteen years and the $222 million profit we’ve already
realized on contracts that we repurchased. At yearend, Berkshire’s book value reflected a liability of $8.5 billion for
the remaining contracts; if they had all come due at that time our payment would have been $6.2 billion.
The Basic Choices for Investors and the One We Strongly Prefer
Investing is often described as the process of laying out money now in the expectation of receiving
more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to
others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes
have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in
order to have the ability to consume more at a later date.
From our definition there flows an important corollary: The riskiness of an investment is not measured
by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the
probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his
contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably
certain to deliver increased purchasing power over their holding period. And as we will see, a non-fluctuating
asset can be laden with risk.
Investment possibilities are both many and varied. There are three major categories, however, and it’s
important to understand the characteristics of each. So let’s survey the field.
• Investments that are denominated in a given currency include money-market funds, bonds, mortgages,
bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.”
In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.
Over the past century these instruments have destroyed the purchasing power of investors in many
countries, even as the holders continued to receive timely payments of interest and principal. This ugly
result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic
forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such
policies spin out of control.
Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86%
in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy
what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually
from bond investments over that period to simply maintain its purchasing power. Its managers would
have been kidding themselves if they thought of any portion of that interest as “income.”
17
For tax-paying investors like you and me, the picture has been far worse. During the same 47-year
period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But
if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would
have yielded nothing in the way of real income. This investor’s visible income tax would have stripped
him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining
4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax
that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our
currency, but the hand that activates our government’s printing press has been all too human.
High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based
investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come
close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a
warning label.
Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds
significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample
liquidity occupies center stage and will never be slighted, however inadequate rates may be.
Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be
counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity
is $20 billion; $10 billion is our absolute minimum.
Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related
securities only if they offer the possibility of unusual gain – either because a particular credit is
mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the
possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we’ve
exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from
such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems
apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”
• The second major category of investments involves assets that will never produce anything, but that are
purchased in the buyer’s hope that someone else – who also knows that the assets will be forever
unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of
such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they
believe the buying pool will expand still further. Owners are not inspired by what the asset itself can
produce – it will remain lifeless forever – but rather by the belief that others will desire it even more
avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other
assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however,
has two significant shortcomings, being neither of much use nor procreative. True, gold has some
industrial and decorative utility, but the demand for these purposes is both limited and incapable of
soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still
own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the
past decade that belief has proved correct. Beyond that, the rising price has on its own generated
additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.
As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses
that can be created by combining an initially sensible thesis with well-publicized rising prices. In these
bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market,
and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles
blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise
man does in the beginning, the fool does in the end.”
18
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it
would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At
$1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400
million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most
profitable company, one earning more than $40 billion annually). After these purchases, we would
have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying
binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual
production of gold command about $160 billion. Buyers – whether jewelry and industrial users,
frightened individuals, or speculators – must continually absorb this additional supply to merely
maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn,
wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the
currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its
owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The
170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can
fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m
confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at
a rate far inferior to that achieved by pile B.
• Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse
drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency
collapse fosters movement to sterile assets such as gold. We heard “cash is king” in late 2008, just
when cash should have been deployed rather than held. Similarly, we heard “cash is trash” in the early
1980s just when fixed-dollar investments were at their most attractive level in memory. On those
occasions, investors who required a supportive crowd paid dearly for that comfort.
My own preference – and you knew this was coming – is our third category: investment in productive
assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in
inflationary times to deliver output that will retain its purchasing-power value while requiring a
minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM
and our own See’s Candy meet that double-barreled test. Certain other companies – think of our
regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To
earn more, their owners must invest more. Even so, these investments will remain superior to
nonproductive or currency-based assets.
Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper
(as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola
or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more
food, and require more living space than it does now. People will forever exchange what they produce
for what others produce.
Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens.
Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk”
to boot. Their value will be determined not by the medium of exchange but rather by their capacity to
deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they
did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as
well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be
to own them in their entirety – but we will also be owners by way of holding sizable amounts of
marketable stocks. I believe that over any extended period of time this category of investing will prove to
be the runaway winner among the three we’ve examined. More important, it will be by far the safest.
19
The Annual Meeting
The annual meeting will be held on Saturday, May 5th at the CenturyLink Center (renamed from
“Qwest”). Last year, Carrie Kizer debuted as the ringmaster and earned a lifetime assignment. Everyone loved
the job she did – especially me.
Soon after the 7 a.m. opening of the doors, we will have a new activity: The Newspaper Tossing Challenge.
Late last year, Berkshire purchased the Omaha World-Herald and, in my meeting with its shareholder-employees,
I told of the folding and throwing skills I developed while delivering 500,000 papers as a teenager.
I immediately saw skepticism in the eyes of the audience. That was no surprise to me. After all, the
reporters’ mantra is: “If your mother says she loves you, check it out.” So now I have to back up my claim. At
the meeting, I will take on all comers in making 35-foot tosses of the World-Herald to a Clayton porch. Any
challenger whose paper lands closer to the doorstep than mine will receive a dilly bar. I’ve asked Dairy Queen to
supply several for the contest, though I doubt that any will be needed. We will have a large stack of papers. Grab
one. Fold it (no rubber bands). Take your best shot. Make my day.
At 8:30, a new Berkshire movie will be shown. An hour later, we will start the question-and-answer
period, which (with a break for lunch at the CenturyLink’s stands) will last until 3:30. After a short recess,
Charlie and I will convene the annual meeting at 3:45. If you decide to leave during the day’s question periods,
please do so while Charlie is talking.
The best reason to exit, of course, is to shop. We will help you do so by filling the 194,300-square-foot
hall that adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did your
part, and most locations racked up record sales. In a nine-hour period, we sold 1,249 pairs of Justin boots, 11,254
pounds of See’s candy, 8,000 Quikut knives (that’s 15 knives per minute) and 6,126 pairs of Wells Lamont
gloves, a Marmon product whose very existence was news to me. (The product I focus on is money.) But you can
do better. Remember: Anyone who says money can’t buy happiness simply hasn’t shopped at our meeting.
Among the new exhibitors this year will be Brooks, our running-shoe company. Brooks has been
gobbling up market share and in 2011 had a sales gain of 34%, its tenth consecutive year of record volume. Drop
by and congratulate Jim Weber, the company’s CEO. And be sure to buy a couple of pairs of limited edition
“Berkshire Hathaway Running Shoes.”
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least half of you, I believe we can.
Be sure to visit the Bookworm. It will carry more than 35 books and DVDs, including a couple of new
ones. I recommend MiTek, an informative history of one of our very successful subsidiaries. You’ll learn how my
interest in the company was originally piqued by my receiving in the mail a hunk of ugly metal whose purpose I
couldn’t fathom. Since we bought MiTek in 2001, it has made 33 “tuck-in” acquisitions, almost all successful. I
think you’ll also like a short book that Peter Bevelin has put together explaining Berkshire’s investment and
operating principles. It sums up what Charlie and I have been saying over the years in annual reports and at
annual meetings. Should you need to ship your book purchases, a shipping service will be available nearby.
If you are a big spender – or aspire to become one – visit Elliott Aviation on the east side of the Omaha
airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that will get your
pulse racing. Come by bus; leave by private jet. I’ll OK your credit.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. Airlines have sometimes jacked up prices
for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City versus
Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that you can save significant money,
particularly if you had planned to rent a car in Omaha. Spend the savings with us.
20
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. Last year the store did $32.7 million of business
during its annual meeting sale, a volume that exceeds the yearly sales of most furniture stores. To obtain the
Berkshire discount, you must make your purchases between Tuesday, May 1st and Monday, May 7th inclusive,
and also present your meeting credential. The period’s special pricing will even apply to the products of several
prestigious manufacturers that normally have ironclad rules against discounting but which, in the spirit of
our shareholder weekend, have made an exception for you. We appreciate their cooperation. NFM is open
from 10 a.m.to 9 p.m.Mondaythrough Saturday, and 10 a.m.to 6 p.m. on Sunday.On Saturdaythis year, from 5:30 p.m.
to 8 p.m., NFM is having a picnic to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 9 p.m. on Friday, May 4th. The second, the main gala, will be held on Sunday, May 6th, from
9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m. On Sunday, around 2 p.m., I will be clerking at
Borsheims, desperate to beat my sales figure from last year. So come take advantage of me. Ask me for my
“Crazy Warren” price.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 30th through Saturday, May 12th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday
afternoon. Two non-experts – Charlie and I – will also be at the tables.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 6th.
Both will be serving until 10 p.m., with Gorat’s opening at 1 p.m. and Piccolo’s opening at 4 p.m. These
restaurants are my favorites, and I will eat at both of them on Sunday evening. (Actuarial tables tell me that I can
consume another 12 million calories before my death. I’m terrified at the thought of leaving any of these behind,
so will be frontloading on Sunday.) Remember: To make a reservation at Gorat’s, call 402-551-3733 on April 1st
(but not before) and at Piccolo’s, call 402-342-9038. At Piccolo’s, show some class and order a giant root beer
float for dessert. Only sissies get the small one.
We will again have the same three financial journalists lead the question-and-answer period at the
meeting, asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists
and their e-mail addresses are: Carol Loomis, of Fortune, who may be e-mailed at cloomis@fortunemail.com;
Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times,
at arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the dozen or so he or she decides are the
most interesting and important. The journalists have told me your question has the best chance of being selected
if you keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than
two questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name
mentioned if your question is selected.)
This year we are adding a second panel of three financial analysts who follow Berkshire. They are Cliff
Gallant of KBW, Jay Gelb of Barclays Capital and Gary Ransom of Dowling and Partners. These analysts will
bring their own Berkshire-specific questions and alternate with the journalists and the audience.
Charlie and I believe that all shareholders should have access to new Berkshire information simultaneously
and should also have adequate time to analyze it, which is why we try to issue financial information after the market
close on a Friday. We do not talk one-on-one to large institutional investors or analysts. Our new panel will let
analysts ask questions – perhaps even a few technical ones – in a manner that may be helpful to many shareholders.
21
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists and analysts will come up with some tough ones, and that’s the way we like it. All told, we expect at
least 54 questions, which will allow for six from each analyst and journalist and 18 from the audience. If there is
some extra time, we will take more from the audience. Audience questioners will be determined by drawings that
will take place at 8:15 a.m. at each of the 13 microphones located in the arena and main overflow room.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly
All-Stars, who run their businesses as if they were the only asset owned by their families. I believe their mindset
to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most have no
financial need to work; the joy of hitting business “home runs” means as much to them as their paycheck.
Equally important, however, are the 23 men and women who work with me at our corporate office (all
on one floor, which is the way we intend to keep it!).
This group efficiently deals with a multitude of SEC and other regulatory requirements and files a
17,839-page Federal income tax return – hello, Guinness! – as well as state and foreign returns. Additionally,
they respond to countless shareholder and media inquiries, get out the annual report, prepare for the country’s
largest annual meeting, coordinate the Board’s activities – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: They deal with 48 universities (selected
from 200 applicants) who will send students to Omaha this school year for a day with me and also handle all kinds
of requests that I receive, arrange my travel, and even get me hamburgers for lunch. No CEO has it better.
This home office crew, along with our operating managers, has my deepest thanks and deserves yours
as well. Come to Omaha – the cradle of capitalism – on May 5th and tell them so.
February 25, 2012 Warren E. Buffett
Chairman of the Board
22
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ........................................................ 23.8 10.0 13.8
1966 ........................................................ 20.3 (11.7) 32.0
1967 ........................................................ 11.0 30.9 (19.9)
1968 ........................................................ 19.0 11.0 8.0
1969 ........................................................ 16.2 (8.4) 24.6
1970 ........................................................ 12.0 3.9 8.1
1971 ........................................................ 16.4 14.6 1.8
1972 ........................................................ 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ........................................................ 21.9 37.2 (15.3)
1976 ........................................................ 59.3 23.6 35.7
1977 ........................................................ 31.9 (7.4) 39.3
1978 ........................................................ 24.0 6.4 17.6
1979 ........................................................ 35.7 18.2 17.5
1980 ........................................................ 19.3 32.3 (13.0)
1981 ........................................................ 31.4 (5.0) 36.4
1982 ........................................................ 40.0 21.4 18.6
1983 ........................................................ 32.3 22.4 9.9
1984 ........................................................ 13.6 6.1 7.5
1985 ........................................................ 48.2 31.6 16.6
1986 ........................................................ 26.1 18.6 7.5
1987 ........................................................ 19.5 5.1 14.4
1988 ........................................................ 20.1 16.6 3.5
1989 ........................................................ 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ........................................................ 39.6 30.5 9.1
1992 ........................................................ 20.3 7.6 12.7
1993 ........................................................ 14.3 10.1 4.2
1994 ........................................................ 13.9 1.3 12.6
1995 ........................................................ 43.1 37.6 5.5
1996 ........................................................ 31.8 23.0 8.8
1997 ........................................................ 34.1 33.4 0.7
1998 ........................................................ 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 ........................................................ (6.2) (11.9) 5.7
2002 ........................................................ 10.0 (22.1) 32.1
2003 ........................................................ 21.0 28.7 (7.7)
2004 ........................................................ 10.5 10.9 (0.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ........................................................ 18.4 15.8 2.6
2007 ........................................................ 11.0 5.5 5.5
2008 ........................................................ (9.6) (37.0) 27.4
2009 ........................................................ 19.8 26.5 (6.7)
2010 ........................................................ 13.0 15.1 (2.1)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 2.1 2.5
2012 ........................................................ 14.4 16.0 (1.6)
Compounded Annual Gain – 1965-2012 ........................... 19.7% 9.4% 10.3
Overall Gain – 1964-2012 ....................................... 586,817% 7,433%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at
market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s
results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated
using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after￾tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its
results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the
S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the
aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
In 2012, Berkshire achieved a total gain for its shareholders of $24.1 billion. We used $1.3 billion of that
to repurchase our stock, which left us with an increase in net worth of $22.8 billion for the year. The per-share book
value of both our Class A and Class B stock increased by 14.4%. Over the last 48 years (that is, since present
management took over), book value has grown from $19 to $114,214, a rate of 19.7% compounded annually.*
A number of good things happened at Berkshire last year, but let’s first get the bad news out of the way.
Š When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in
which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing
page.
But subpar it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less
than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In
eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the
wind is in our face.
To date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the
S&P over such a stretch. (The record is on page 103.) But the S&P has now had gains in each of the last
four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five￾year wins will end.
One thing of which you can be certain: Whatever Berkshire’s results, my partner Charlie Munger, the
company’s Vice Chairman, and I will not change yardsticks. It’s our job to increase intrinsic business
value – for which we use book value as a significantly understated proxy – at a faster rate than the market
gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself
outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who
themselves can earn S&P returns by buying a low-cost index fund.
Charlie and I believe the gain in Berkshire’s intrinsic value will over time likely surpass the S&P returns by
a small margin. We’re confident of that because we have some outstanding businesses, a cadre of terrific
operating managers and a shareholder-oriented culture. Our relative performance, however, is almost
certain to be better when the market is down or flat. In years when the market is particularly strong, expect
us to fall short.
Š The second disappointment in 2012 was my inability to make a major acquisition. I pursued a couple of
elephants, but came up empty-handed.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
Our luck, however, changed early this year. In February, we agreed to buy 50% of a holding company that
will own all of H. J. Heinz. The other half will be owned by a small group of investors led by Jorge Paulo
Lemann, a renowned Brazilian businessman and philanthropist.
We couldn’t be in better company. Jorge Paulo is a long-time friend of mine and an extraordinary
manager. His group and Berkshire will each contribute about $4 billion for common equity in the holding
company. Berkshire will also invest $8 billion in preferred shares that pay a 9% dividend. The preferred
has two other features that materially increase its value: at some point it will be redeemed at a significant
premium price and the preferred also comes with warrants permitting us to buy 5% of the holding
company’s common stock for a nominal sum.
Our total investment of about $12 billion soaks up much of what Berkshire earned last year. But we still
have plenty of cash and are generating more at a good clip. So it’s back to work; Charlie and I have again
donned our safari outfits and resumed our search for elephants.
Now to some good news from 2012:
Š Last year I told you that BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – our five most
profitable non-insurance companies – were likely to earn more than $10 billion pre-tax in 2012. They
delivered. Despite tepid U.S. growth and weakening economies throughout much of the world, our
“powerhouse five” had aggregate earnings of $10.1 billion, about $600 million more than in 2011.
Of this group, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire eight years
ago. Subsequently, we purchased another three of the five on an all-cash basis. In acquiring the fifth,
BNSF, we paid about 70% of the cost in cash, and for the remainder, issued shares that increased the
amount outstanding by 6.1%. Consequently, the $9.7 billion gain in annual earnings delivered Berkshire
by the five companies has been accompanied by only minor dilution. That satisfies our goal of not simply
growing, but rather increasing per-share results.
Unless the U.S. economy tanks – which we don’t expect – our powerhouse five should again deliver higher
earnings in 2013. The five outstanding CEOs who run them will see to that.
Š Though I failed to land a major acquisition in 2012, the managers of our subsidiaries did far better. We had
a record year for “bolt-on” purchases, spending about $2.3 billion for 26 companies that were melded into
our existing businesses. These transactions were completed without Berkshire issuing any shares.
Charlie and I love these acquisitions: Usually they are low-risk, burden headquarters not at all, and expand
the scope of our proven managers.
Š Our insurance operations shot the lights out last year. While giving Berkshire $73 billion of free money to
invest, they also delivered a $1.6 billion underwriting gain, the tenth consecutive year of profitable
underwriting. This is truly having your cake and eating it too.
GEICO led the way, continuing to gobble up market share without sacrificing underwriting discipline.
Since 1995, when we obtained control, GEICO’s share of the personal-auto market has grown from 2.5% to
9.7%. Premium volume meanwhile increased from $2.8 billion to $16.7 billion. Much more growth lies
ahead.
The credit for GEICO’s extraordinary performance goes to Tony Nicely and his 27,000 associates. And to
that cast, we should add our Gecko. Neither rain nor storm nor gloom of night can stop him; the little lizard
just soldiers on, telling Americans how they can save big money by going to GEICO.com.
When I count my blessings, I count GEICO twice.
4
Š Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of
integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We
hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in
the dust as well.
Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating
from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage
Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they
take over.
Š Berkshire’s yearend employment totaled a record 288,462 (see page 106 for details), up 17,604 from last
year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.
Š Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo – all had good
years. Our ownership interest in each of these companies increased during the year. We purchased
additional shares of Wells Fargo (our ownership now is 8.7% versus 7.6% at yearend 2011) and IBM (6.0%
versus 5.5%). Meanwhile, stock repurchases at Coca-Cola and American Express raised our percentage
ownership. Our equity in Coca-Cola grew from 8.8% to 8.9% and our interest at American Express from
13.0% to 13.7%.
Berkshire’s ownership interest in all four companies is likely to increase in the future. Mae West had it
right: “Too much of a good thing can be wonderful.”
The four companies possess marvelous businesses and are run by managers who are both talented and
shareholder-oriented. At Berkshire we much prefer owning a non-controlling but substantial portion of a
wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a
significant advantage over companies that limit themselves only to acquisitions they can operate.
Going by our yearend share count, our portion of the “Big Four’s” 2012 earnings amounted to $3.9 billion.
In the earnings we report to you, however, we include only the dividends we receive – about $1.1 billion.
But make no mistake: The $2.8 billion of earnings we do not report is every bit as valuable to us as what
we record.
The earnings that the four companies retain are often used for repurchases – which enhance our share of
future earnings – and also for funding business opportunities that are usually advantageous. Over time we
expect substantially greater earnings from these four investees. If we are correct, dividends to Berkshire
will increase and, even more important, so will our unrealized capital gains (which, for the four, totaled
$26.7 billion at yearend).
Š There was a lot of hand-wringing last year among CEOs who cried “uncertainty” when faced with capital￾allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and
cash). At Berkshire, we didn’t share their fears, instead spending a record $9.8 billion on plant and
equipment in 2012, about 88% of it in the United States. That’s 19% more than we spent in 2011, our
previous high. Charlie and I love investing large sums in worthwhile projects, whatever the pundits are
saying. We instead heed the words from Gary Allan’s new country song, “Every Storm Runs Out of Rain.”
We will keep our foot to the floor and will almost certainly set still another record for capital expenditures
in 2013. Opportunities abound in America.
************
A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the
unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist
while at other times they ignore them (usually because the recent past has been uneventful).
5
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied
to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that
is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th
Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and
many recessions. And don’t forget that shareholders received substantial dividends throughout the century
as well.)
Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out
of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business
activity. The risks of being out of the game are huge compared to the risks of being in it.
My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when
the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more
setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.
The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per
capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been
uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.
If you are a CEO who has some large, profitable project you are shelving because of short-term worries,
call Berkshire. Let us unburden you.
************
In summary, Charlie and I hope to build per-share intrinsic value by (1) improving the earning power of our
many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) participating in the growth
of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic
value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if
ever, issuing Berkshire shares.
Those building blocks rest on a rock-solid foundation. A century hence, BNSF and MidAmerican Energy
will continue to play major roles in the American economy. Insurance, moreover, will always be essential for both
businesses and individuals – and no company brings greater resources to that arena than Berkshire. As we view
these and other strengths, Charlie and I like your company’s prospects.
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number
is for Berkshire shares (or, for that matter, any other stock). In our 2010 annual report, however, we laid out the
three elements – one of which was qualitative – that we believe are the keys to a sensible estimate of Berkshire’s
intrinsic value. That discussion is reproduced in full on pages 104-105.
Here is an update of the two quantitative factors: In 2012 our per-share investments increased 15.7% to
$113,786, and our per-share pre-tax earnings from businesses other than insurance and investments also increased
15.7% to $8,085.
Since 1970, our per-share investments have increased at a rate of 19.4% compounded annually, and our
per-share earnings figure has grown at a 20.8% clip. It is no coincidence that the price of Berkshire stock over the
42-year period has increased at a rate very similar to that of our two measures of value. Charlie and I like to see
gains in both areas, but our strong emphasis will always be on building operating earnings.
************
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. Lumping them together therefore impedes analysis. So we’ll present them
as four separate businesses, which is how Charlie and I view them.
6
Insurance
Let’s look first at insurance, Berkshire’s core operation and the engine that has propelled our expansion
over the years.
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such
as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect￾now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others.
Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go,
the amount of float we hold remains quite stable in relation to premium volume. Consequently, as our business
grows, so does our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2012 73,125
Last year I told you that our float was likely to level off or even decline a bit in the future. Our insurance
CEOs set out to prove me wrong and did, increasing float last year by $2.5 billion. I now expect a further increase
in 2013. But further gains will be tough to achieve. On the plus side, GEICO’s float will almost certainly grow. In
National Indemnity’s reinsurance division, however, we have a number of run-off contracts whose float drifts
downward. If we do experience a decline in float at some future time, it will be very gradual – at the outside no
more than 2% in any year.
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it. That’s like your taking out a loan and having the bank pay you interest.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous
in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in
effect, is what the industry pays to hold its float. For example, State Farm, by far the country’s largest insurer and a
well-managed company besides, incurred an underwriting loss in eight of the eleven years ending in 2011. (Their
financials for 2012 are not yet available.) There are a lot of ways to lose money in insurance, and the industry never
ceases searching for new ones.
As noted in the first section of this report, we have now operated at an underwriting profit for ten
consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will
continue to underwrite profitably in most years. If we do, our float will be better than free money.
So how does our attractive float affect the calculations of intrinsic value? When Berkshire’s book value is
calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were
unable to replenish it. But that’s an incorrect way to look at float, which should instead be viewed as a revolving
fund. If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is
dramatically less than the accounting liability.
A partial offset to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance
companies and included in book value as an asset. In effect, this goodwill represents the price we paid for the float￾generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true
value. For example, if an insurance business sustains large and prolonged underwriting losses, any goodwill asset
carried on the books should be deemed valueless, whatever its original cost.
7
Fortunately, that’s not the case at Berkshire. Charlie and I believe the true economic value of our insurance
goodwill – what we would happily pay to purchase an insurance operation producing float of similar quality – to be
far in excess of its historic carrying value. The value of our float is one reason – a huge reason – why we believe
Berkshire’s intrinsic business value substantially exceeds its book value.
Let me emphasize once again that cost-free float is not an outcome to be expected for the P/C industry as a
whole: There is very little “Berkshire-quality” float existing in the insurance world. In 37 of the 45 years ending in
2011, the industry’s premiums have been inadequate to cover claims plus expenses. Consequently, the industry’s
overall return on tangible equity has for many decades fallen far short of the average return realized by American
industry, a sorry performance almost certain to continue.
A further unpleasant reality adds to the industry’s dim prospects: Insurance earnings are now benefitting
from “legacy” bond portfolios that deliver much higher yields than will be available when funds are reinvested
during the next few years – and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting
assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.
************
Berkshire’s outstanding economics exist only because we have some terrific managers running some
extraordinary insurance operations. Let me tell you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no
one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most
important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that are
inappropriate in relation to our resources. Indeed, we are far more conservative in avoiding risk than most large
insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe
– a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit
for the year because it has so many streams of earnings. All other major insurers and reinsurers would meanwhile
be far in the red, with some facing insolvency.
From a standing start in 1985, Ajit has created an insurance business with float of $35 billion and a
significant cumulative underwriting profit, a feat that no other insurance CEO has come close to matching. He has
thus added a great many billions of dollars to the value of Berkshire. If you meet Ajit at the annual meeting, bow
deeply.
************
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both
prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate
premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,”
spells trouble in any business, but none more so than insurance.
8
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. We
are particularly enthusiastic about General Re’s international life reinsurance business, which has achieved
consistent and profitable growth since we acquired the company in 1998.
************
Finally, there is GEICO, the insurer on which I cut my teeth 62 years ago. GEICO is run by Tony Nicely,
who joined the company at 18 and completed 51 years of service in 2012.
I rub my eyes when I look at what Tony has accomplished. Last year, it should be noted, his record was
considerably better than is indicated by GEICO’s GAAP underwriting profit of $680 million. Because of a change
in accounting rules at the beginning of the year, we recorded a charge to GEICO’s underwriting earnings of
$410 million. This item had nothing to do with 2012’s operating results, changing neither cash, revenues, expenses
nor taxes. In effect, the writedown simply widened the already huge difference between GEICO’s intrinsic value
and the value at which we carry it on our books.
GEICO earned its underwriting profit, moreover, despite the company suffering its largest single loss in
history. The cause was Hurricane Sandy, which cost GEICO more than three times the loss it sustained from
Katrina, the previous record-holder. We insured 46,906 vehicles that were destroyed or damaged in the storm, a
staggering number reflecting GEICO’s leading market share in the New York metropolitan area.
Last year GEICO enjoyed a meaningful increase in both the renewal rate for existing policyholders
(“persistency”) and in the percentage of rate quotations that resulted in sales (“closures”). Big dollars ride on those
two factors: A sustained gain in persistency of a bare one percentage point increases intrinsic value by more than
$1 billion. GEICO’s gains in 2012 offer dramatic proof that when people check the company’s prices, they usually
find they can save important sums. (Give us a try at 1-800-847-7536 or GEICO.com. Be sure to mention that you are a
shareholder; that fact will usually result in a discount.)
************
In addition to our three major insurance operations, we own a group of smaller companies, most of them
plying their trade in odd corners of the insurance world. In aggregate, these companies have consistently delivered
an underwriting profit. Moreover, as the table below shows, they also provide us with substantial float. Charlie and
I treasure these companies and their managers.
Late in 2012, we enlarged this group by acquiring Guard Insurance, a Wilkes-Barre company that writes
workers compensation insurance, primarily for smaller businesses. Guard’s annual premiums total about $300
million. The company has excellent prospects for growth in both its traditional business and new lines it has begun
to offer.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2012 2011 2012 2011
BH Reinsurance . . . . . . . . . $ 304 $(714) $34,821 $33,728
General Re . . . . . . . . . . . . . 355 144 20,128 19,714
GEICO ................ 680* 576 11,578 11,169
Other Primary . . . . . . . . . . 286 242 6,598 5,960
$1,625 $ 248 $73,125 $70,571
*After a $410 million charge against earnings arising from an industry-wide accounting change.
Among large insurance operations, Berkshire’s impresses me as the best in the world. It was our lucky day
when, in March 1967, Jack Ringwalt sold us his two property-casualty insurers for $8.6 million.
9
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and MidAmerican Energy, that have important common
characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in
this letter and split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with
these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact
not needed because each business has earning power that even under terrible conditions amply covers its interest
requirements. In last year’s tepid economy, for example, BNSF’s interest coverage was 9.6x. (Our definition of
coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed.)
At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all circumstances: the
company’s recession-resistant earnings, which result from our exclusively offering an essential service, and its great
diversity of earnings streams, which shield it from being seriously harmed by any single regulatory body.
Every day, our two subsidiaries power the American economy in major ways:
Š BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by
truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact
making BNSF the most important artery in our economy’s circulatory system.
BNSF also moves its cargo in an extraordinarily fuel-efficient and environmentally friendly way, carrying a
ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on the same job guzzle about
four times as much fuel.
Š MidAmerican’s electric utilities serve regulated retail customers in ten states. Only one utility holding
company serves more states. In addition, we are the leader in renewables: first, from a standing start nine
years ago, we now account for 6% of the country’s wind generation capacity. Second, when we complete
three projects now under construction, we will own about 14% of U.S. solar-generation capacity.
Projects like these require huge capital investments. Upon completion, indeed, our renewables portfolio
will have cost $13 billion. We relish making such commitments if they promise reasonable returns – and on that
front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever need
massive investment in both transportation and energy. It is in the self-interest of governments to treat capital
providers in a manner that will ensure the continued flow of funds to essential projects. And it is in our self-interest
to conduct our operations in a manner that earns the approval of our regulators and the people they represent.
Our managers must think today of what the country will need far down the road. Energy and transportation
projects can take many years to come to fruition; a growing country simply can’t afford to get behind the curve.
We have been doing our part to make sure that doesn’t happen. Whatever you may have heard about our
country’s crumbling infrastructure in no way applies to BNSF or railroads generally. America’s rail system has
never been in better shape, a consequence of huge investments by the industry. We are not, however, resting on our
laurels: BNSF will spend about $4 billion on the railroad in 2013, roughly double its depreciation charge and more
than any railroad has spent in a single year.
10
In Matt Rose, at BNSF, and Greg Abel, at MidAmerican, we have two outstanding CEOs. They are
extraordinary managers who have developed businesses that serve both their customers and owners well. Each has
my gratitude and each deserves yours. Here are the key figures for their businesses:
MidAmerican (89.8% owned) Earnings (in millions)
2012 2011
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 429 $ 469
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 279
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737 771
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 388
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 39
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 36
Operating earnings before corporate interest and taxes ................... 1,958 1,982
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 336
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 315
Net earnings .................................................... $ 1,472 $ 1,331
Earnings applicable to Berkshire .................................... $ 1,323 $ 1,204
BNSF Earnings (in millions)
2012 2011
Revenues ....................................................... $20,835 $19,548
Operating expenses ............................................... 14,835 14,247
Operating earnings before interest and taxes ........................... 6,000 5,301
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 560
Income taxes .................................................... 2,005 1,769
Net earnings .................................................... $ 3,372 $ 2,972
Sharp-eyed readers will notice an incongruity in the MidAmerican earnings tabulation. What in the world
is HomeServices, a real estate brokerage operation, doing in a section entitled “Regulated, Capital-Intensive
Businesses?”
Well, its ownership came with MidAmerican when we bought control of that company in 2000. At that
time, I focused on MidAmerican’s utility operations and barely noticed HomeServices, which then owned only a
few real estate brokerage companies.
Since then, however, the company has regularly added residential brokers – three in 2012 – and now has
about 16,000 agents in a string of major U.S. cities. (Our real estate brokerage companies are listed on page 107.)
In 2012, our agents participated in $42 billion of home sales, up 33% from 2011.
Additionally, HomeServices last year purchased 67% of the Prudential and Real Living franchise
operations, which together license 544 brokerage companies throughout the country and receive a small royalty on
their sales. We have an arrangement to purchase the balance of those operations within five years. In the coming
years, we will gradually rebrand both our franchisees and the franchise firms we own as Berkshire Hathaway
HomeServices.
Ron Peltier has done an outstanding job in managing HomeServices during a depressed period. Now, as
the housing market continues to strengthen, we expect earnings to rise significantly.
11
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/12 (in millions)
Assets Liabilities and Equity
Cash and equivalents .............. $ 5,338 Notes payable ............... $ 1,454
Accounts and notes receivable ....... 7,382 Other current liabilities ........ 8,527
Inventory ....................... 9,675 Total current liabilities ........ 9,981
Other current assets . . . . . . . . . . . . . . . 734
Total current assets ................ 23,129
Deferred taxes ............... 4,907
Goodwill and other intangibles ...... 26,017 Term debt and other liabilities . . 5,826
Fixed assets ..................... 18,871 Non-controlling interests ...... 2,062
Other assets ..................... 3,416 Berkshire equity ............. 48,657
$71,433 $71,433
Earnings Statement (in millions)
2012 2011* 2010
Revenues ............................................ $83,255 $72,406 $66,610
Operating expenses .................................... 76,978 67,239 62,225
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 130 111
Pre-tax earnings ....................................... 6,131 5,037 4,274
Income taxes and non-controlling interests .................. 2,432 1,998 1,812
Net earnings .......................................... $ 3,699 $ 3,039 $ 2,462
*Includes earnings of Lubrizol from September 16.
Our income and expense data conforming to Generally Accepted Accounting Principles (“GAAP”) is on
page 29. In contrast, the operating expense figures above are non-GAAP. In particular, they exclude some
purchase-accounting items, primarily the amortization of certain intangible assets. We present the data in this
manner because Charlie and I believe the adjusted numbers more accurately reflect the real expenses and profits of
the businesses aggregated in the table.
I won’t explain all of the adjustments – some are small and arcane – but serious investors should
understand the disparate nature of intangible assets: Some truly deplete over time while others never lose value.
With software, for example, amortization charges are very real expenses. Charges against other intangibles such as
the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real
expenses. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as
expenses when calculating earnings – even though from an investor’s viewpoint they could not be more different.
In the GAAP-compliant figures we show on page 29, amortization charges of $600 million for the
companies included in this section are deducted as expenses. We would call about 20% of these “real” – and indeed
that is the portion we have included in the table above – and the rest not. This difference has become significant
because of the many acquisitions we have made.
“Non-real” amortization expense also looms large at some of our major investees. IBM has made many
small acquisitions in recent years and now regularly reports “adjusted operating earnings,” a non-GAAP figure that
excludes certain purchase-accounting adjustments. Analysts focus on this number, as they should.
12
A “non-real” amortization charge at Wells Fargo, however, is not highlighted by the company and never, to
my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an
“amortization of core deposits” charge, the implication being that these deposits are disappearing at a fairly rapid
clip. Yet core deposits regularly increase. The charge last year was about $1.5 billion. In no sense, except GAAP
accounting, is this whopping charge an expense.
And that ends today’s accounting lecture. Why is no one shouting “More, more?”
************
The crowd of companies in this section sell products ranging from lollipops to jet airplanes. Some of the
businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25%
after-tax to more than 100%. Others produce good returns in the area of 12-20%. A few, however, have very poor
returns, a result of some serious mistakes I made in my job of capital allocation.
More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price
than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes
reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes
have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and,
in a few cases, more than well.
Viewed as a single entity, therefore, the companies in this group are an excellent business. They employ
$22.6 billion of net tangible assets and, on that base, earned 16.3% after-tax.
Of course, a business with terrific economics can be a bad investment if the price paid is excessive. We
have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large
figure we show for intangible assets. Overall, however, we are getting a decent return on the capital we have
deployed in this sector. Furthermore, the intrinsic value of the businesses, in aggregate, exceeds their carrying value
by a good margin. Even so, the difference between intrinsic value and carrying value in the insurance and regulated￾industry segments is far greater. It is there that the huge winners reside.
************
Marmon provides an example of a clear and substantial gap existing between book value and intrinsic
value. Let me explain the odd origin of this differential.
Last year I told you that we had purchased additional shares in Marmon, raising our ownership to 80% (up
from the 64% we acquired in 2008). I also told you that GAAP accounting required us to immediately record the
2011 purchase on our books at far less than what we paid. I’ve now had a year to think about this weird accounting
rule, but I’ve yet to find an explanation that makes any sense – nor can Charlie or Marc Hamburg, our CFO, come
up with one. My confusion increases when I am told that if we hadn’t already owned 64%, the 16% we purchased
in 2011 would have been entered on our books at our cost.
In 2012 (and in early 2013, retroactive to yearend 2012) we acquired an additional 10% of Marmon and the
same bizarre accounting treatment was required. The $700 million write-off we immediately incurred had no effect
on earnings but did reduce book value and, therefore, 2012’s gain in net worth.
The cost of our recent 10% purchase implies a $12.6 billion value for the 90% of Marmon we now own.
Our balance-sheet carrying value for the 90%, however, is $8 billion. Charlie and I believe our current purchase
represents excellent value. If we are correct, our Marmon holding is worth at least $4.6 billion more than its
carrying value.
Marmon is a diverse enterprise, comprised of about 150 companies operating in a wide variety of
industries. Its largest business involves the ownership of tank cars that are leased to a variety of shippers, such as oil
and chemical companies. Marmon conducts this business through two subsidiaries, Union Tank Car in the U.S. and
Procor in Canada.
13
Union Tank Car has been around a long time, having been owned by the Standard Oil Trust until that
empire was broken up in 1911. Look for its UTLX logo on tank cars when you watch trains roll by. As a Berkshire
shareholder, you own the cars with that insignia. When you spot a UTLX car, puff out your chest a bit and enjoy the
same satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a century ago.
Tank cars are owned by either shippers or lessors, not by railroads. At yearend Union Tank Car and Procor
together owned 97,000 cars having a net book value of $4 billion. A new car, it should be noted, costs upwards of
$100,000. Union Tank Car is also a major manufacturer of tank cars – some of them to be sold but most to be
owned by it and leased out. Today, its order book extends well into 2014.
At both BNSF and Marmon, we are benefitting from the resurgence of U.S. oil production. In fact, our
railroad is now transporting about 500,000 barrels of oil daily, roughly 10% of the total produced in the “lower 48”
(i.e. not counting Alaska and offshore). All indications are that BNSF’s oil shipments will grow substantially in
coming years.
************
Space precludes us from going into detail about the many other businesses in this segment. Company￾specific information about the 2012 operations of some of the larger units appears on pages 76 to 79.
Finance and Financial Products
This sector, our smallest, includes two rental companies, XTRA (trailers) and CORT (furniture), as well as
Clayton Homes, the country’s leading producer and financer of manufactured homes. Aside from these 100%-
owned subsidiaries, we also include in this category a collection of financial assets and our 50% interest in Berkadia
Commercial Mortgage.
We include Clayton in this sector because it owns and services 332,000 mortgages, totaling $13.7 billion.
In large part, these loans have been made to lower and middle-income families. Nevertheless, the loans have
performed well throughout the housing collapse, thereby validating our conviction that a reasonable down payment
and a sensible payments-to-income ratio will ward off outsized foreclosure losses, even during stressful times.
Clayton also produced 25,872 manufactured homes last year, up 13.5% from 2011. That output accounted
for about 4.8% of all single-family residences built in the country, a share that makes Clayton America’s number
one homebuilder.
CORT and XTRA are leaders in their industries as well. Our expenditures for new rental equipment at
XTRA totaled $256 million in 2012, more than double its depreciation expense. While competitors fret about
today’s uncertainties, XTRA is preparing for tomorrow.
Berkadia continues to do well. Our partners at Leucadia do most of the work in this venture, an
arrangement that Charlie and I happily embrace.
Here’s the pre-tax earnings recap for this sector:
2012 2011
(in millions)
Berkadia . . . . . . . . . . . . . . . . . . . . . . . . $ 35 $ 25
Clayton . . . . . . . . . . . . . . . . . . . . . . . . . 255 154
CORT . . . . . . . . . . . . . . . . . . . . . . . . . . 42 29
XTRA . . . . . . . . . . . . . . . . . . . . . . . . . . 106 126
Net financial income* . . . . . . . . . . . . . 410 440
$848 $774
*Excludes capital gains or losses
14
Investments
Below we show our common stock investments that at yearend had a market value of more than $1 billion.
12/31/12
Shares Company
Percentage of
Company
Owned
Cost* Market
(in millions)
151,610,700 American Express Company .............. 13.7 $ 1,287 $ 8,715
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . 8.9 1,299 14,500
24,123,911 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1,219 1,399
22,999,600 DIRECTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 1,057 1,154
68,115,484 International Business Machines Corp. . . . . . . 6.0 11,680 13,048
28,415,250 Moody’s Corporation .................... 12.7 287 1,430
20,060,390 Munich Re ............................ 11.3 2,990 3,599
20,668,118 Phillips 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 660 1,097
3,947,555 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 768 1,295
52,477,678 The Procter & Gamble Company . . . . . . . . . . . 1.9 336 3,563
25,848,838 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2,073 2,438
415,510,889 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 2,350 2,268
78,060,769 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 2,401 2,493
54,823,433 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . 1.6 2,837 3,741
456,170,061 Wells Fargo & Company . . . . . . . . . . . . . . . . . 8.7 10,906 15,592
Others ................................ 7,646 11,330
Total Common Stocks Carried at Market .... $49,796 $87,662
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
One point about the composition of this list deserves mention. In Berkshire’s past annual reports, every
stock itemized in this space has been bought by me, in the sense that I made the decision to buy it for Berkshire. But
starting with this list, any investment made by Todd Combs or Ted Weschler – or a combined purchase by them –
that meets the dollar threshold for the list ($1 billion this year) will be included. Above is the first such stock,
DIRECTV, which both Todd and Ted hold in their portfolios and whose combined holdings at the end of 2012 were
valued at the $1.15 billion shown.
Todd and Ted also manage the pension funds of certain Berkshire subsidiaries, while others, for regulatory
reasons, are managed by outside advisers. We do not include holdings of the pension funds in our annual report
tabulations, though their portfolios often overlap Berkshire’s.
************
We continue to wind down the part of our derivatives portfolio that involved the assumption by Berkshire
of insurance-like risks. (Our electric and gas utility businesses, however, will continue to use derivatives for
operational purposes.) New commitments would require us to post collateral and, with minor exceptions, we are
unwilling to do that. Markets can behave in extraordinary ways, and we have no interest in exposing Berkshire to
some out-of-the-blue event in the financial world that might require our posting mountains of cash on a moment’s
notice.
Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of
obligation that could drain our cash in a material way. That reduces our returns in 99 years out of 100. But we will
survive in the 100th while many others fail. And we will sleep well in all 100.
15
The derivatives we have sold that provide credit protection for corporate bonds will all expire in the next
year. It’s now almost certain that our profit from these contracts will approximate $1 billion pre-tax. We also
received very substantial sums upfront on these derivatives, and the “float” attributable to them has averaged about
$2 billion over their five-year lives. All told, these derivatives have provided a more-than-satisfactory result,
especially considering the fact that we were guaranteeing corporate credits – mostly of the high-yield variety –
throughout the financial panic and subsequent recession.
In our other major derivatives commitment, we sold long-term puts on four leading stock indices in the
U.S., U.K., Europe and Japan. These contracts were initiated between 2004 and 2008 and even under the worst of
circumstances have only minor collateral requirements. In 2010 we unwound about 10% of our exposure at a profit
of $222 million. The remaining contracts expire between 2018 and 2026. Only the index value at expiration date
counts; our counterparties have no right to early termination.
Berkshire received premiums of $4.2 billion when we wrote the contracts that remain outstanding. If all of
these contracts had come due at yearend 2011, we would have had to pay $6.2 billion; the corresponding figure at
yearend 2012 was $3.9 billion. With this large drop in immediate settlement liability, we reduced our GAAP
liability at yearend 2012 to $7.5 billion from $8.5 billion at the end of 2011. Though it’s no sure thing, Charlie and I
believe it likely that the final liability will be considerably less than the amount we currently carry on our books. In
the meantime, we can invest the $4.2 billion of float derived from these contracts as we see fit.
We Buy Some Newspapers . . . Newspapers?
During the past fifteen months, we acquired 28 daily newspapers at a cost of $344 million. This may
puzzle you for two reasons. First, I have long told you in these letters and at our annual meetings that the
circulation, advertising and profits of the newspaper industry overall are certain to decline. That prediction still
holds. Second, the properties we purchased fell far short of meeting our oft-stated size requirements for
acquisitions.
We can address the second point easily. Charlie and I love newspapers and, if their economics make sense,
will buy them even when they fall far short of the size threshold we would require for the purchase of, say, a widget
company. Addressing the first point requires me to provide a more elaborate explanation, including some history.
News, to put it simply, is what people don’t know that they want to know. And people will seek their news
– what’s important to them – from whatever sources provide the best combination of immediacy, ease of access,
reliability, comprehensiveness and low cost. The relative importance of these factors varies with the nature of the
news and the person wanting it.
Before television and the Internet, newspapers were the primary source for an incredible variety of news, a
fact that made them indispensable to a very high percentage of the population. Whether your interests were
international, national, local, sports or financial quotations, your newspaper usually was first to tell you the latest
information. Indeed, your paper contained so much you wanted to learn that you received your money’s worth, even
if only a small number of its pages spoke to your specific interests. Better yet, advertisers typically paid almost all
of the product’s cost, and readers rode their coattails.
Additionally, the ads themselves delivered information of vital interest to hordes of readers, in effect
providing even more “news.” Editors would cringe at the thought, but for many readers learning what jobs or
apartments were available, what supermarkets were carrying which weekend specials, or what movies were showing
where and when was far more important than the views expressed on the editorial page.
16
In turn, the local paper was indispensable to advertisers. If Sears or Safeway built stores in Omaha, they
required a “megaphone” to tell the city’s residents why their stores should be visited today. Indeed, big department
stores and grocers vied to outshout their competition with multi-page spreads, knowing that the goods they
advertised would fly off the shelves. With no other megaphone remotely comparable to that of the newspaper, ads
sold themselves.
As long as a newspaper was the only one in its community, its profits were certain to be extraordinary;
whether it was managed well or poorly made little difference. (As one Southern publisher famously confessed, “I
owe my exalted position in life to two great American institutions – nepotism and monopoly.”)
Over the years, almost all cities became one-newspaper towns (or harbored two competing papers that
joined forces to operate as a single economic unit). This contraction was inevitable because most people wished to
read and pay for only one paper. When competition existed, the paper that gained a significant lead in circulation
almost automatically received the most ads. That left ads drawing readers and readers drawing ads. This symbiotic
process spelled doom for the weaker paper and became known as “survival of the fattest.”
Now the world has changed. Stock market quotes and the details of national sports events are old news
long before the presses begin to roll. The Internet offers extensive information about both available jobs and homes.
Television bombards viewers with political, national and international news. In one area of interest after another,
newspapers have therefore lost their “primacy.” And, as their audiences have fallen, so has advertising. (Revenues
from “help wanted” classified ads – long a huge source of income for newspapers – have plunged more than 90% in
the past 12 years.)
Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s
going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute
for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs
about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will
be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational
needs of that community will remain indispensable to a significant portion of its residents.
Even a valuable product, however, can self-destruct from a faulty business strategy. And that process has
been underway during the past decade at almost all papers of size. Publishers – including Berkshire in Buffalo –
have offered their paper free on the Internet while charging meaningful sums for the physical specimen. How could
this lead to anything other than a sharp and steady drop in sales of the printed product? Falling circulation,
moreover, makes a paper less essential to advertisers. Under these conditions, the “virtuous circle” of the past
reverses.
The Wall Street Journal went to a pay model early. But the main exemplar for local newspapers is the
Arkansas Democrat-Gazette, published by Walter Hussman, Jr. Walter also adopted a pay format early, and over
the past decade his paper has retained its circulation far better than any other large paper in the country. Despite
Walter’s powerful example, it’s only been in the last year or so that other papers, including Berkshire’s, have
explored pay arrangements. Whatever works best – and the answer is not yet clear – will be copied widely.
************
Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound
communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that
success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage
will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some
large towns or cities – while it may improve profits in the short term – seems certain to diminish the papers’
relevance over time. Our goal is to keep our papers loaded with content of interest to our readers and to be paid
appropriately by those who find us useful, whether the product they view is in their hands or on the Internet.
17
Our confidence is buttressed by the availability of Terry Kroeger’s outstanding management group at the
Omaha World-Herald, a team that has the ability to oversee a large group of papers. The individual papers,
however, will be independent in their news coverage and editorial opinions. (I voted for Obama; of our 12 dailies
that endorsed a presidential candidate, 10 opted for Romney.)
Our newspapers are certainly not insulated from the forces that have been driving revenues downward.
Still, the six small dailies we owned throughout 2012 had unchanged revenues for the year, a result far superior to
that experienced by big-city dailies. Moreover, the two large papers we operated throughout the year – The Buffalo
News and the Omaha World-Herald – held their revenue loss to 3%, which was also an above-average outcome.
Among newspapers in America’s 50 largest metropolitan areas, our Buffalo and Omaha papers rank near the top in
circulation penetration of their home territories.
This popularity is no accident: Credit the editors of those papers – Margaret Sullivan at the News and Mike
Reilly at the World-Herald — for delivering information that has made their publications indispensable to
community-interested readers. (Margaret, I regret to say, recently left us to join The New York Times, whose job
offers are tough to turn down. That paper made a great hire, and we wish her the best.)
Berkshire’s cash earnings from its papers will almost certainly trend downward over time. Even a sensible
Internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet
or exceed our economic test for acquisitions. Results to date support that belief.
Charlie and I, however, still operate under economic principle 11 (detailed on page 99) and will not
continue the operation of any business doomed to unending losses. One daily paper that we acquired in a bulk
purchase from Media General was significantly unprofitable under that company’s ownership. After analyzing the
paper’s results, we saw no remedy for the losses and reluctantly shut it down. All of our remaining dailies, however,
should be profitable for a long time to come. (They are listed on page 108.) At appropriate prices – and that
means at a very low multiple of current earnings – we will purchase more papers of the type we like.
************
A milestone in Berkshire’s newspaper operations occurred at yearend when Stan Lipsey retired as publisher
of The Buffalo News. It’s no exaggeration for me to say that the News might now be extinct were it not for Stan.
Charlie and I acquired the News in April 1977. It was an evening paper, dominant on weekdays but lacking
a Sunday edition. Throughout the country, the circulation trend was toward morning papers. Moreover, Sunday
was becoming ever more critical to the profitability of metropolitan dailies. Without a Sunday paper, the News was
destined to lose out to its morning competitor, which had a fat and entrenched Sunday product.
We therefore began to print a Sunday edition late in 1977. And then all hell broke loose. Our competitor
sued us, and District Judge Charles Brieant, Jr. authored a harsh ruling that crippled the introduction of our paper.
His ruling was later reversed – after 17 long months – in a 3-0 sharp rebuke by the Second Circuit Court of Appeals.
While the appeal was pending, we lost circulation, hemorrhaged money and stood in constant danger of going out of
business.
Enter Stan Lipsey, a friend of mine from the 1960s, who, with his wife, had sold Berkshire a small Omaha
weekly. I found Stan to be an extraordinary newspaperman, knowledgeable about every aspect of circulation,
production, sales and editorial. (He was a key person in gaining that small weekly a Pulitzer Prize in 1973.) So
when I was in big trouble at the News, I asked Stan to leave his comfortable way of life in Omaha to take over in
Buffalo.
He never hesitated. Along with Murray Light, our editor, Stan persevered through four years of very dark
days until the News won the competitive struggle in 1982. Ever since, despite a difficult Buffalo economy, the
performance of the News has been exceptional. As both a friend and as a manager, Stan is simply the best.
18
Dividends
A number of Berkshire shareholders – including some of my good friends – would like Berkshire to pay a
cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns,
but pay out nothing ourselves. So let’s examine when dividends do and don’t make sense for shareholders.
A profitable company can allocate its earnings in various ways (which are not mutually exclusive). A
company’s management should first examine reinvestment possibilities offered by its current business – projects to
become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic
moat separating the company from its competitors.
I ask the managers of our subsidiaries to unendingly focus on moat-widening opportunities, and they find
many that make economic sense. But sometimes our managers misfire. The usual cause of failure is that they start
with the answer they want and then work backwards to find a supporting rationale. Of course, the process is
subconscious; that’s what makes it so dangerous.
Your chairman has not been free of this sin. In Berkshire’s 1986 annual report, I described how twenty
years of management effort and capital improvements in our original textile business were an exercise in futility. I
wanted the business to succeed and wished my way into a series of bad decisions. (I even bought another New
England textile company.) But wishing makes dreams come true only in Disney movies; it’s poison in business.
Despite such past miscues, our first priority with available funds will always be to examine whether they
can be intelligently deployed in our various businesses. Our record $12.1 billion of fixed-asset investments and bolt￾on acquisitions in 2012 demonstrate that this is a fertile field for capital allocation at Berkshire. And here we have
an advantage: Because we operate in so many areas of the economy, we enjoy a range of choices far wider than that
open to most corporations. In deciding what to do, we can water the flowers and skip over the weeds.
Even after we deploy hefty amounts of capital in our current operations, Berkshire will regularly generate a
lot of additional cash. Our next step, therefore, is to search for acquisitions unrelated to our current businesses.
Here our test is simple: Do Charlie and I think we can effect a transaction that is likely to leave our shareholders
wealthier on a per-share basis than they were prior to the acquisition?
I have made plenty of mistakes in acquisitions and will make more. Overall, however, our record is
satisfactory, which means that our shareholders are far wealthier today than they would be if the funds we used for
acquisitions had instead been devoted to share repurchases or dividends.
But, to use the standard disclaimer, past performance is no guarantee of future results. That’s particularly
true at Berkshire: Because of our present size, making acquisitions that are both meaningful and sensible is now
more difficult than it has been during most of our years.
Nevertheless, a large deal still offers us possibilities to add materially to per-share intrinsic value. BNSF is
a case in point: It is now worth considerably more than our carrying value. Had we instead allocated the funds
required for this purchase to dividends or repurchases, you and I would have been worse off. Though large
transactions of the BNSF kind will be rare, there are still some whales in the ocean.
The third use of funds – repurchases – is sensible for a company when its shares sell at a meaningful
discount to conservatively calculated intrinsic value. Indeed, disciplined repurchases are the surest way to use funds
intelligently: It’s hard to go wrong when you’re buying dollar bills for 80¢ or less. We explained our criteria for
repurchases in last year’s report and, if the opportunity presents itself, we will buy large quantities of our stock. We
originally said we would not pay more than 110% of book value, but that proved unrealistic. Therefore, we
increased the limit to 120% in December when a large block became available at about 116% of book value.
19
But never forget: In repurchase decisions, price is all-important. Value is destroyed when purchases are
made above intrinsic value. The directors and I believe that continuing shareholders are benefitted in a meaningful
way by purchases up to our 120% limit.
And that brings us to dividends. Here we have to make a few assumptions and use some math. The
numbers will require careful reading, but they are essential to understanding the case for and against dividends. So
bear with me.
We’ll start by assuming that you and I are the equal owners of a business with $2 million of net worth. The
business earns 12% on tangible net worth – $240,000 – and can reasonably expect to earn the same 12% on
reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 125% of net
worth. Therefore, the value of what we each own is now $1.25 million.
You would like to have the two of us shareholders receive one-third of our company’s annual earnings and
have two-thirds be reinvested. That plan, you feel, will nicely balance your needs for both current income and
capital growth. So you suggest that we pay out $80,000 of current earnings and retain $160,000 to increase the
future earnings of the business. In the first year, your dividend would be $40,000, and as earnings grew and the one￾third payout was maintained, so too would your dividend. In total, dividends and stock value would increase 8%
each year (12% earned on net worth less 4% of net worth paid out).
After ten years our company would have a net worth of $4,317,850 (the original $2 million compounded at
8%) and your dividend in the upcoming year would be $86,357. Each of us would have shares worth $2,698,656
(125% of our half of the company’s net worth). And we would live happily ever after – with dividends and the
value of our stock continuing to grow at 8% annually.
There is an alternative approach, however, that would leave us even happier. Under this scenario, we
would leave all earnings in the company and each sell 3.2% of our shares annually. Since the shares would be sold
at 125% of book value, this approach would produce the same $40,000 of cash initially, a sum that would grow
annually. Call this option the “sell-off” approach.
Under this “sell-off” scenario, the net worth of our company increases to $6,211,696 after ten years
($2 million compounded at 12%). Because we would be selling shares each year, our percentage ownership would
have declined, and, after ten years, we would each own 36.12% of the business. Even so, your share of the net
worth of the company at that time would be $2,243,540. And, remember, every dollar of net worth attributable to
each of us can be sold for $1.25. Therefore, the market value of your remaining shares would be $2,804,425, about
4% greater than the value of your shares if we had followed the dividend approach.
Moreover, your annual cash receipts from the sell-off policy would now be running 4% more than you
would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and
more capital value.
This calculation, of course, assumes that our hypothetical company can earn an average of 12% annually on
net worth and that its shareholders can sell their shares for an average of 125% of book value. To that point, the
S&P 500 earns considerably more than 12% on net worth and sells at a price far above 125% of that net worth.
Both assumptions also seem reasonable for Berkshire, though certainly not assured.
Moreover, on the plus side, there also is a possibility that the assumptions will be exceeded. If they are, the
argument for the sell-off policy becomes even stronger. Over Berkshire’s history – admittedly one that won’t come
close to being repeated – the sell-off policy would have produced results for shareholders dramatically superior to
the dividend policy.
Aside from the favorable math, there are two further – and important – arguments for a sell-off policy.
First, dividends impose a specific cash-out policy upon all shareholders. If, say, 40% of earnings is the policy, those
who wish 30% or 50% will be thwarted. Our 600,000 shareholders cover the waterfront in their desires for cash. It
is safe to say, however, that a great many of them – perhaps even most of them – are in a net-savings mode and
logically should prefer no payment at all.
20
The sell-off alternative, on the other hand, lets each shareholder make his own choice between cash receipts
and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders
elect 20% or nothing at all. Of course, a shareholder in our dividend-paying scenario could turn around and use his
dividends to purchase more shares. But he would take a beating in doing so: He would both incur taxes and also pay
a 25% premium to get his dividend reinvested. (Keep remembering, open-market purchases of the stock take place
at 125% of book value.)
The second disadvantage of the dividend approach is of equal importance: The tax consequences for all
taxpaying shareholders are inferior – usually far inferior – to those under the sell-off program. Under the dividend
program, all of the cash received by shareholders each year is taxed whereas the sell-off program results in tax on
only the gain portion of the cash receipts.
Let me end this math exercise – and I can hear you cheering as I put away the dentist drill – by using my
own case to illustrate how a shareholder’s regular disposals of shares can be accompanied by an increased
investment in his or her business. For the last seven years, I have annually given away about 41⁄4% of my Berkshire
shares. Through this process, my original position of 712,497,000 B-equivalent shares (split-adjusted) has
decreased to 528,525,623 shares. Clearly my ownership percentage of the company has significantly decreased.
Yet my investment in the business has actually increased: The book value of my current interest in
Berkshire considerably exceeds the book value attributable to my holdings of seven years ago. (The actual figures
are $28.2 billion for 2005 and $40.2 billion for 2012.) In other words, I now have far more money working for me
at Berkshire even though my ownership of the company has materially decreased. It’s also true that my share of
both Berkshire’s intrinsic business value and the company’s normal earning power is far greater than it was in 2005.
Over time, I expect this accretion of value to continue – albeit in a decidedly irregular fashion – even as I now
annually give away more than 41⁄2% of my shares (the increase having occurred because I’ve recently doubled my
lifetime pledges to certain foundations).
************
Above all, dividend policy should always be clear, consistent and rational. A capricious policy will
confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his
Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition
of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a
restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch
capriciously between the two and retain the fans of either.
Most companies pay consistent dividends, generally trying to increase them annually and cutting them very
reluctantly. Our “Big Four” portfolio companies follow this sensible and understandable approach and, in certain
cases, also repurchase shares quite aggressively.
We applaud their actions and hope they continue on their present paths. We like increased dividends, and
we love repurchases at appropriate prices.
At Berkshire, however, we have consistently followed a different approach that we know has been sensible
and that we hope has been made understandable by the paragraphs you have just read. We will stick with this policy
as long as we believe our assumptions about the book-value buildup and the market-price premium seem reasonable.
If the prospects for either factor change materially for the worse, we will reexamine our actions.
The Annual Meeting
The annual meeting will be held on Saturday, May 4th at the CenturyLink Center. Carrie Sova will be in
charge. (Though that’s a new name, it’s the same wonderful Carrie as last year; she got married in June to a very
lucky guy.) All of our headquarters group pitches in to help her; the whole affair is a homemade production, and I
couldn’t be more proud of those who put it together.
21
The doors will open at 7 a.m., and at 7:30 we will have our second International Newspaper Tossing
Challenge. The target will be the porch of a Clayton Home, precisely 35 feet from the throwing line. Last year I
successfully fought off all challengers. But now Berkshire has acquired a large number of newspapers and with
them came much tossing talent (or so the throwers claim). Come see whether their talent matches their talk. Better
yet, join in. The papers will be 36 to 42 pages and you must fold them yourself (no rubber bands).
At 8:30, a new Berkshire movie will be shown. An hour later, we will start the question-and-answer
period, which (with a break for lunch at the CenturyLink’s stands) will last until 3:30. After a short recess, Charlie
and I will convene the annual meeting at 3:45. If you decide to leave during the day’s question periods, please do so
while Charlie is talking.
The best reason to exit, of course, is to shop. We will help you do so by filling the 194,300-square-foot hall
that adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did your part, and
most locations racked up record sales. In a nine-hour period, we sold 1,090 pairs of Justin boots, (that’s a pair every
30 seconds), 10,010 pounds of See’s candy, 12,879 Quikut knives (24 knives per minute) and 5,784 pairs of Wells
Lamont gloves, always a hot item. But you can do better. Remember: Anyone who says money can’t buy happiness
simply hasn’t shopped at our meeting.
Last year, Brooks, our running shoe company, exhibited for the first time and ran up sales of $150,000.
Brooks is on fire: Its volume in 2012 grew 34%, and that was on top of a similar 34% gain in 2011. The company’s
management expects another jump of 23% in 2013. We will again have a special commemorative shoe to offer at
the meeting.
On Sunday at 8 a.m., we will initiate the “Berkshire 5K,” a race starting at the CenturyLink. Full details for
participating will be included in the Visitor’s Guide that you will receive with your credentials for the meeting. We
will have plenty of categories for competition, including one for the media. (It will be fun to report on their
performance.) Regretfully, I will forego running; someone has to man the starting gun.
I should warn you that we have a lot of home-grown talent. Ted Weschler has run the marathon in 3:01.
Jim Weber, Brooks’ dynamic CEO, is another speedster with a 3:31 best. Todd Combs specializes in the triathlon,
but has been clocked at 22 minutes in the 5K.
That, however, is just the beginning: Our directors are also fleet of foot (that is, some of our directors are).
Steve Burke has run an amazing 2:39 Boston marathon. (It’s a family thing; his wife, Gretchen, finished the New
York marathon in 3:25.) Charlotte Guyman’s best is 3:37, and Sue Decker crossed the tape in New York in 3:36.
Charlie did not return his questionnaire.
GEICO will have a booth in the shopping area, staffed by a number of its top counselors from around the
country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%).
This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The
discount is not additive if you qualify for another, such as that given certain groups.) Bring the details of your
existing insurance and check out whether we can save you money. For at least half of you, I believe we can.
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, including a couple of new ones.
Carol Loomis, who has been invaluable to me in editing this letter since 1977, has recently authored Tap Dancing to
Work: Warren Buffett on Practically Everything. She and I have cosigned 500 copies, available exclusively at the
meeting.
The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs who excelled at capital
allocation. It has an insightful chapter on our director, Tom Murphy, overall the best business manager I’ve ever
met. I also recommend The Clash of the Cultures by Jack Bogle and Laura Rittenhouse’s Investing Between the
Lines. Should you need to ship your book purchases, a shipping service will be available nearby.
The Omaha World-Herald will again have a booth, offering a few books it has recently published. Red￾blooded Husker fans – is there any Nebraskan who isn’t one? – will surely want to purchase Unbeatable. It tells the
story of Nebraska football during 1993-97, a golden era in which Tom Osborne’s teams went 60-3.
22
If you are a big spender – or aspire to become one – visit Signature Aviation on the east side of the Omaha
airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that will get your
pulse racing. Come by bus; leave by private jet. Live a little.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. Airlines have sometimes jacked up prices
for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City versus
Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that you can save significant money,
particularly if you had planned to rent a car in Omaha. Spend the savings with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. Last year the store did $35.9 million of business during its
annual meeting sale, an all-time record that makes other retailers turn green. To obtain the Berkshire discount, you
must make your purchases between Tuesday, April 30th and Monday, May 6th inclusive, and also present your
meeting credential. The period’s special pricing will even apply to the products of several prestigious manufacturers
that normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made
an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through
Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a picnic
to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from
6 p.m. to 9 p.m. on Friday, May 3rd. The second, the main gala, will be held on Sunday, May 5th, from 9 a.m. to 4 p.m.
On Saturday, we will be open until 6 p.m. In recent years, our three-day volume has far exceeded sales in all of
December, normally a jeweler’s best month.
Around 1 p.m. on Sunday, I will begin clerking at Borsheims. Last year my sales totaled $1.5 million.
This year I won’t quit until I hit $2 million. Because I need to leave well before sundown, I will be desperate to do
business. Come take advantage of me. Ask for my “Crazy Warren” price.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 29th through Saturday, May 11th. During that period, please
identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that shows you
are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion, will
take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a remarkable
magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon Osberg, two
of the world’s top bridge experts, available to play bridge with our shareholders on Sunday afternoon. Don’t play
them for money.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 5th. Both
will be serving until 10 p.m., with Gorat’s opening at 1 p.m. and Piccolo’s opening at 4 p.m. These restaurants are
my favorites, and I will eat at both of them on Sunday evening. Remember: To make a reservation at Gorat’s, call
402-551-3733 on April 1st (but not before) and at Piccolo’s call 402-342-9038. At Piccolo’s, order a giant root beer
float for dessert. Only sissies get the small one. (I once saw Bill Gates polish off two of the giant variety after a
full-course dinner; that’s when I knew he would make a great director.)
We will again have the same three financial journalists lead the question-and-answer period at the meeting,
asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their e-mail
addresses are: Carol Loomis, of Fortune, who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC,
at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com.
23
From the questions submitted, each journalist will choose the six he or she decides are the most interesting
and important. The journalists have told me your question has the best chance of being selected if you keep it
concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two questions in
any email you send them. (In your email, let the journalist know if you would like your name mentioned if your
question is selected.)
Last year we had a second panel of three analysts who follow Berkshire. All were insurance specialists,
and shareholders subsequently indicated they wanted a little more variety. Therefore, this year we will have one
insurance analyst, Cliff Gallant of Nomura Securities. Jonathan Brandt of Ruane, Cunniff & Goldfarb will join the
analyst panel to ask questions that deal with our non-insurance operations.
Finally – to spice things up – we would like to add to the panel a credentialed bear on Berkshire, preferably
one who is short the stock. Not yet having a bear identified, we would like to hear from applicants. The only
requirement is that you be an investment professional and negative on Berkshire. The three analysts will bring their
own Berkshire-specific questions and alternate with the journalists and the audience in asking them.
Charlie and I believe that all shareholders should have access to new Berkshire information simultaneously
and should also have adequate time to analyze it, which is why we try to issue financial information after the market
close on a Friday and why our annual meeting is held on Saturdays. We do not talk one-on-one to large institutional
investors or analysts. Our hope is that the journalists and analysts will ask questions that will further educate
shareholders about their investment.
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the journalists
and analysts will come up with some tough ones, and that’s the way we like it. All told, we expect at least 54
questions, which will allow for six from each analyst and journalist and 18 from the audience. If there is some extra
time, we will take more from the audience. Audience questioners will be determined by drawings that will take
place at 8:15 a.m. at each of the 11 microphones located in the arena and main overflow room.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All￾Stars, who run their businesses as if they were the only asset owned by their families. I believe their mindset to be
as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most have no financial
need to work; the joy of hitting business “home runs” means as much to them as their paycheck.
Equally important, however, are the 23 men and women who work with me at our corporate office (all on
one floor, which is the way we intend to keep it!).
This group efficiently deals with a multitude of SEC and other regulatory requirements, files a 21,500-page
Federal income tax return as well as state and foreign returns, responds to countless shareholder and media inquiries,
gets out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s activities – and
the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year they dealt with 48 universities
(selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also handle all kinds of
requests that I receive, arrange my travel, and even get me hamburgers for lunch. No CEO has it better; I truly do
feel like tap dancing to work every day.
This home office crew, along with our operating managers, has my deepest thanks and deserves yours as
well. Come to Omaha – the cradle of capitalism – on May 4th and chime in.
March 1, 2013 Warren E. Buffett
Chairman of the Board
24
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 ........................................................ 23.8 10.0 13.8
1966 ........................................................ 20.3 (11.7) 32.0
1967 ........................................................ 11.0 30.9 (19.9)
1968 ........................................................ 19.0 11.0 8.0
1969 ........................................................ 16.2 (8.4) 24.6
1970 ........................................................ 12.0 3.9 8.1
1971 ........................................................ 16.4 14.6 1.8
1972 ........................................................ 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 ........................................................ 21.9 37.2 (15.3)
1976 ........................................................ 59.3 23.6 35.7
1977 ........................................................ 31.9 (7.4) 39.3
1978 ........................................................ 24.0 6.4 17.6
1979 ........................................................ 35.7 18.2 17.5
1980 ........................................................ 19.3 32.3 (13.0)
1981 ........................................................ 31.4 (5.0) 36.4
1982 ........................................................ 40.0 21.4 18.6
1983 ........................................................ 32.3 22.4 9.9
1984 ........................................................ 13.6 6.1 7.5
1985 ........................................................ 48.2 31.6 16.6
1986 ........................................................ 26.1 18.6 7.5
1987 ........................................................ 19.5 5.1 14.4
1988 ........................................................ 20.1 16.6 3.5
1989 ........................................................ 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 ........................................................ 39.6 30.5 9.1
1992 ........................................................ 20.3 7.6 12.7
1993 ........................................................ 14.3 10.1 4.2
1994 ........................................................ 13.9 1.3 12.6
1995 ........................................................ 43.1 37.6 5.5
1996 ........................................................ 31.8 23.0 8.8
1997 ........................................................ 34.1 33.4 0.7
1998 ........................................................ 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 ........................................................ (6.2) (11.9) 5.7
2002 ........................................................ 10.0 (22.1) 32.1
2003 ........................................................ 21.0 28.7 (7.7)
2004 ........................................................ 10.5 10.9 (0.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 ........................................................ 18.4 15.8 2.6
2007 ........................................................ 11.0 5.5 5.5
2008 ........................................................ (9.6) (37.0) 27.4
2009 ........................................................ 19.8 26.5 (6.7)
2010 ........................................................ 13.0 15.1 (2.1)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 2.1 2.5
2012 ........................................................ 14.4 16.0 (1.6)
2013 ........................................................ 18.2 32.4 (14.2)
Compounded Annual Gain – 1965-2013 ........................... 19.7% 9.8% 9.9
Overall Gain – 1964-2013 ....................................... 693,518% 9,841%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at
market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s
results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated
using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after￾tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its
results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the
S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the
aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2013 was $34.2 billion. That gain was after our deducting $1.8 billion
of charges – meaningless economically, as I will explain later – that arose from our purchase of the minority
interests in Marmon and Iscar. After those charges, the per-share book value of both our Class A and Class B stock
increased by 18.2%. Over the last 49 years (that is, since present management took over), book value has grown
from $19 to $134,973, a rate of 19.7% compounded annually.*
On the facing page, we show our long-standing performance measurement: The yearly change in
Berkshire’s per-share book value versus the market performance of the S&P 500. What counts, of course, is per￾share intrinsic value. But that’s a subjective figure, and book value is useful as a rough tracking indicator. (An
extended discussion of intrinsic value is included in our Owner-Related Business Principles on pages 103 - 108.
Those principles have been included in our reports for 30 years, and we urge new and prospective shareholders to
read them.)
As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has
widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120%
of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value
exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however,
because the stock price did not descend to the 120% level. If it does, we will be aggressive.
Charlie Munger, Berkshire’s vice chairman and my partner, and I believe both Berkshire’s book value and
intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall
short, though, in years when the market is strong – as we did in 2013. We have underperformed in ten of our 49
years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%.
Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full
cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you
could always own an index fund and be assured of S&P results.
The Year at Berkshire
On the operating front, just about everything turned out well for us last year – in certain cases very well.
Let me count the ways:
Š We completed two large acquisitions, spending almost $18 billion to purchase all of NV Energy and a
major interest in H. J. Heinz. Both companies fit us well and will be prospering a century from now.
With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in
future acquisitions of size. Here, we teamed up with investors at 3G Capital, a firm led by my friend, Jorge
Paulo Lemann. His talented associates – Bernardo Hees, Heinz’s new CEO, and Alex Behring, its
Chairman – are responsible for operations.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
Berkshire is the financing partner. In that role, we purchased $8 billion of Heinz preferred stock that
carries a 9% coupon but also possesses other features that should increase the preferred’s annual return to
12% or so. Berkshire and 3G each purchased half of the Heinz common stock for $4.25 billion.
Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial
difference: Berkshire never intends to sell a share of the company. What we would like, rather, is to buy
more, and that could happen: Certain 3G investors may sell some or all of their shares in the future, and
we might increase our ownership at such times. Berkshire and 3G could also decide at some point that it
would be mutually beneficial if we were to exchange some of our preferred for common shares (at an
equity valuation appropriate to the time).
Our partnership took control of Heinz in June, and operating results so far are encouraging. Only minor
earnings from Heinz, however, are reflected in those we report for Berkshire this year: One-time charges
incurred in the purchase and subsequent restructuring of operations totaled $1.3 billion. Earnings in 2014
will be substantial.
With Heinz, Berkshire now owns 81⁄2 companies that, were they stand-alone businesses, would be in the
Fortune 500. Only 4911⁄2 to go.
NV Energy, purchased for $5.6 billion by MidAmerican Energy, our utility subsidiary, supplies electricity
to about 88% of Nevada’s population. This acquisition fits nicely into our existing electric-utility
operation and offers many possibilities for large investments in renewable energy. NV Energy will not be
MidAmerican’s last major acquisition.
Š MidAmerican is one of our “Powerhouse Five” – a collection of large non-insurance businesses that, in
aggregate, had a record $10.8 billion of pre-tax earnings in 2013, up $758 million from 2012. The other
companies in this sainted group are BNSF, Iscar, Lubrizol and Marmon.
Of the five, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire nine years
ago. Subsequently, we purchased another three of the five on an all-cash basis. In acquiring the fifth,
BNSF, we paid about 70% of the cost in cash, and, for the remainder, issued shares that increased the
number outstanding by 6.1%. In other words, the $10.4 billion gain in annual earnings delivered Berkshire
by the five companies over the nine-year span has been accompanied by only minor dilution. That satisfies
our goal of not simply growing, but rather increasing per-share results.
If the U.S. economy continues to improve in 2014, we can expect earnings of our Powerhouse Five to
improve also – perhaps by $1 billion or so pre-tax.
Š Our many dozens of smaller non-insurance businesses earned $4.7 billion pre-tax last year, up from $3.9
billion in 2012. Here, too, we expect further gains in 2014.
Š Berkshire’s extensive insurance operation again operated at an underwriting profit in 2013 – that makes 11
years in a row – and increased its float. During that 11-year stretch, our float – money that doesn’t belong
to us but that we can invest for Berkshire’s benefit – has grown from $41 billion to $77 billion.
Concurrently, our underwriting profit has aggregated $22 billion pre-tax, including $3 billion realized in
2013. And all of this all began with our 1967 purchase of National Indemnity for $8.6 million.
We now own a wide variety of exceptional insurance operations. Best known is GEICO, the car insurer
Berkshire acquired in full at yearend 1995 (having for many years prior owned a partial interest). GEICO
in 1996 ranked number seven among U.S. auto insurers. Now, GEICO is number two, having recently
passed Allstate. The reasons for this amazing growth are simple: low prices and reliable service. You can
do yourself a favor by calling 1-800-847-7536 or checking Geico.com to see if you, too, can cut your
insurance costs. Buy some of Berkshire’s other products with the savings.
4
Š While Charlie and I search for elephants, our many subsidiaries are regularly making bolt-on acquisitions.
Last year, we contracted for 25 of these, scheduled to cost $3.1 billion in aggregate. These transactions
ranged from $1.9 million to $1.1 billion in size.
Charlie and I encourage these deals. They deploy capital in activities that fit with our existing businesses
and that will be managed by our corps of expert managers. The result is no more work for us and more
earnings for you. Many more of these bolt-on deals will be made in future years. In aggregate, they will be
meaningful.
Š Last year we invested $3.5 billion in the surest sort of bolt-on: the purchase of additional shares in two
wonderful businesses that we already controlled. In one case – Marmon – our purchases brought us to the
100% ownership we had signed up for in 2008. In the other instance – Iscar – the Wertheimer family
elected to exercise a put option it held, selling us the 20% of the business it retained when we bought
control in 2006.
These purchases added about $300 million pre-tax to our current earning power and also delivered us $800
million of cash. Meanwhile, the same nonsensical accounting rule that I described in last year’s letter
required that we enter these purchases on our books at $1.8 billion less than we paid, a process that
reduced Berkshire’s book value. (The charge was made to “capital in excess of par value”; figure that one
out.) This weird accounting, you should understand, instantly increased Berkshire’s excess of intrinsic
value over book value by the same $1.8 billion.
Š Our subsidiaries spent a record $11 billion on plant and equipment during 2013, roughly twice our
depreciation charge. About 89% of that money was spent in the United States. Though we invest abroad as
well, the mother lode of opportunity resides in America.
Š In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd
Combs and Ted Weschler handily did so. Each now runs a portfolio exceeding $7 billion. They’ve earned
it.
I must again confess that their investments outperformed mine. (Charlie says I should add “by a lot.”) If
such humiliating comparisons continue, I’ll have no choice but to cease talking about them.
Todd and Ted have also created significant value for you in several matters unrelated to their portfolio
activities. Their contributions are just beginning: Both men have Berkshire blood in their veins.
Š Berkshire’s yearend employment – counting Heinz – totaled a record 330,745, up 42,283 from last year.
The increase, I must admit, included one person at our Omaha home office. (Don’t panic: The
headquarters gang still fits comfortably on one floor.)
Š Berkshire increased its ownership interest last year in each of its “Big Four” investments – American
Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of Wells Fargo (increasing
our ownership to 9.2% versus 8.7% at yearend 2012) and IBM (6.3% versus 6.0%). Meanwhile, stock
repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca￾Cola grew from 8.9% to 9.1% and our interest in American Express from 13.7% to 14.2%. And, if you
think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each
increase of one-tenth of a percent in our share of their equity raises Berkshire’s share of their annual
earnings by $50 million.
5
The four companies possess excellent businesses and are run by managers who are both talented and
shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a
wonderful company to owning 100% of a so-so business; it’s better to have a partial interest in the Hope
diamond than to own all of a rhinestone.
Going by our yearend holdings, our portion of the “Big Four’s” 2013 earnings amounted to $4.4 billion. In
the earnings we report to you, however, we include only the dividends we receive – about $1.4 billion last
year. But make no mistake: The $3 billion of their earnings we don’t report is every bit as valuable to us as
the portion Berkshire records.
The earnings that these four companies retain are often used for repurchases of their own stock – a move
that enhances our share of future earnings – as well as for funding business opportunities that usually turn
out to be advantageous. All that leads us to expect that the per-share earnings of these four investees will
grow substantially over time. If they do, dividends to Berkshire will increase and, even more important,
our unrealized capital gains will, too. (For the four, unrealized gains already totaled $39 billion at
yearend.)
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled
businesses – gives us a significant advantage over companies that limit themselves to acquisitions they can
operate. Woody Allen stated the general idea when he said: “The advantage of being bi-sexual is that it
doubles your chances for a date on Saturday night.” Similarly, our appetite for either operating businesses
or passive investments doubles our chances of finding sensible uses for our endless gusher of cash.
************
Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in
Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United
States.”
That kind of commitment was nothing new for us: We’ve been making similar wagers ever since Buffett
Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too. Charlie and I have always considered
a “bet” on ever-rising U.S. prosperity to be very close to a sure thing.
Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our
country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism
embedded in our market economy will continue to work its magic. America’s best days lie ahead.
With this tailwind working for us, Charlie and I hope to build Berkshire’s per-share intrinsic value by
(1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings
through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares
when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large
acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.
Those building blocks rest on a rock-solid foundation. A century hence, BNSF and MidAmerican Energy
will still be playing major roles in our economy. Insurance will concomitantly be essential for both businesses and
individuals – and no company brings greater human and financial resources to that business than Berkshire.
Moreover, we will always maintain supreme financial strength, operating with at least $20 billion of cash
equivalents and never incurring material amounts of short-term obligations. As we view these and other strengths,
Charlie and I like your company’s prospects. We feel fortunate to be entrusted with its management.
6
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that
number is for Berkshire shares (nor, in fact, for any other stock). In our 2010 annual report, however, we laid out
the three elements – one of them qualitative – that we believe are the keys to a sensible estimate of Berkshire’s
intrinsic value. That discussion is reproduced in full on pages 109 - 110.
Here is an update of the two quantitative factors: In 2013 our per-share investments increased 13.6% to
$129,253 and our pre-tax earnings from businesses other than insurance and investments increased 12.8% to $9,116
per share.
Since 1970, our per-share investments have increased at a rate of 19.3% compounded annually, and our
earnings figure has grown at a 20.6% clip. It is no coincidence that the price of Berkshire stock over the 43-year
period has increased at a rate very similar to that of our two measures of value. Charlie and I like to see gains in
both sectors, but we will most strongly focus on building operating earnings.
************
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. So we’ll present them as four separate businesses, which is how Charlie and
I view them (though there are important and enduring advantages to having them all under one roof). Our goal is to
provide you with the information we would wish to have if our positions were reversed, with you being the
reporting manager and we the absentee shareholders. (But don’t get any ideas!)
Insurance
“Our investment in the insurance companies reflects a first major step in our efforts to achieve a more
diversified base of earning power.”
— 1967 Annual Report
Let’s look first at insurance, Berkshire’s core operation and the engine that has consistently propelled our
expansion since that 1967 report was published.
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such
as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect￾now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to
others. Meanwhile, insurers get to invest this float for their benefit. Though individual policies and claims come
and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume.
Consequently, as our business grows, so does our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2013 77,240
Further gains in float will be tough to achieve. On the plus side, GEICO’s float will almost certainly grow.
In National Indemnity’s reinsurance division, however, we have a number of run-off contracts whose float drifts
downward. If we do experience a decline in float at some future time, it will be very gradual – at the outside no
more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate
demands for sums that are large compared to our cash resources. (In this respect, property-casualty insurance
differs in an important way from certain forms of life insurance.)
7
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free
money – and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous
in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in
effect, is what the industry pays to hold its float. For example, State Farm, by far the country’s largest insurer and a
well-managed company besides, incurred an underwriting loss in nine of the twelve years ending in 2012 (the latest
year for which their financials are available, as I write this). Competitive dynamics almost guarantee that the
insurance industry – despite the float income all companies enjoy – will continue its dismal record of earning
subnormal returns as compared to other businesses.
As noted in the first section of this report, we have now operated at an underwriting profit for eleven
consecutive years, our pre-tax gain for the period having totaled $22 billion. Looking ahead, I believe we will
continue to underwrite profitably in most years. Doing so is the daily focus of all of our insurance managers who
know that while float is valuable, it can be drowned by poor underwriting results.
So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of
our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of
float as strictly a liability is incorrect; it should instead be viewed as a revolving fund. Daily, we pay old claims –
some $17 billion to more than five million claimants in 2013 – and that reduces float. Just as surely, we each day
write new business and thereby generate new claims that add to float. If our revolving float is both costless and
long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting
liability.
A counterpart to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance
companies and included in book value as an asset. In very large part, this goodwill represents the price we paid for
the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on
its true value. For example, if an insurance business sustains large and prolonged underwriting losses, any goodwill
asset carried on the books should be deemed valueless, whatever its original cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay to purchase an insurance operation possessing float of similar
quality to that we have – to be far in excess of its historic carrying value. The value of our float is one reason – a
huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.
************
Berkshire’s attractive insurance economics exist only because we have some terrific managers running
disciplined operations that possess strong, hard-to-replicate business models. Let me tell you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks
that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and,
most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that
are inappropriate in relation to our resources. Indeed, we are far more conservative in avoiding risk than most large
insurers. For example, if the insurance industry should experience a $250 billion loss from some mega￾catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a
significant profit for the year because of its many streams of earnings. And we would remain awash in cash,
looking for large opportunities if the catastrophe caused markets to go into shock. All other major insurers and
reinsurers would meanwhile be far in the red, with some facing insolvency.
From a standing start in 1985, Ajit has created an insurance business with float of $37 billion and a large
cumulative underwriting profit, a feat no other insurance CEO has come close to matching. Ajit’s mind is an idea
factory that is always looking for more lines of business he can add to his current assortment.
8
One venture materialized last June when he formed Berkshire Hathaway Specialty Insurance (“BHSI”).
This initiative took us into commercial insurance, where we were instantly accepted by both major insurance
brokers and corporate risk managers throughout America. These professionals recognize that no other insurer can
match the financial strength of Berkshire, which guarantees that legitimate claims arising many years in the future
will be paid promptly and fully.
BHSI is led by Peter Eastwood, an experienced underwriter who is widely respected in the insurance
world. Peter has assembled a spectacular team that is already writing a substantial amount of business with many
Fortune 500 companies and with smaller operations as well. BHSI will be a major asset for Berkshire, one that will
generate volume in the billions within a few years. Give Peter a Berkshire greeting when you see him at the annual
meeting.
************
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure
actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after
both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate
premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,”
spells trouble in any business, but in none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been better than cost-free under his leadership, and we expect that, on average, to continue. We are
particularly enthusiastic about General Re’s international life reinsurance business, which has grown consistently
and profitably since we acquired the company in 1998.
It can be remembered that soon after we purchased General Re, the company was beset by problems that
caused commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone.
General Re is now a gem.
************
Finally, there is GEICO, the insurer on which I cut my teeth 63 years ago. GEICO is managed by Tony
Nicely, who joined the company at 18 and completed 52 years of service in 2013. Tony became CEO in 1993, and
since then the company has been flying.
When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the
company enjoyed compared to the expenses borne by the giants of the industry. That operational efficiency continues
today and is an all-important asset. No one likes to buy auto insurance. But almost everyone likes to drive. The
insurance needed is a major expenditure for most families. Savings matter to them – and only a low-cost operation can
deliver these.
GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after
year. Its low costs create a moat – an enduring one – that competitors are unable to cross. Meanwhile, our little
gecko continues to tell Americans how GEICO can save them important money. With our latest reduction in
operating costs, his story has become even more compelling.
9
In 1995, we purchased the half of GEICO that we didn’t already own, paying $1.4 billion more than the net
tangible assets we acquired. That’s “goodwill,” and it will forever remain unchanged on our books. As GEICO’s
business grows, however, so does its true economic goodwill. I believe that figure to be approaching $20 billion.
************
In addition to our three major insurance operations, we own a group of smaller companies, most of them
plying their trade in odd corners of the insurance world. In aggregate, these companies are a growing operation that
consistently delivers an underwriting profit. Moreover, as the table below shows, they also provide us with
substantial float. Charlie and I treasure these companies and their managers.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2013 2012 2013 2012
BH Reinsurance .............. $1,294 $ 304 $37,231 $34,821
General Re . . . . . . . . . . . . . . . . . . 283 355 20,013 20,128
GEICO ..................... 1,127 680 12,566 11,578
Other Primary . . . . . . . . . . . . . . . . 385 286 7,430 6,598
$3,089 $1,625 $77,240 $73,125
************
Simply put, insurance is the sale of promises. The “customer” pays money now; the insurer promises to
pay money in the future if certain events occur.
Sometimes, the promise will not be tested for decades. (Think of life insurance bought by those in their
20s.) Therefore, both the ability and willingness of the insurer to pay – even if economic chaos prevails when
payment time arrives – is all-important.
Berkshire’s promises have no equal, a fact affirmed in recent years by the actions of the world’s largest
and most sophisticated insurers, some of which have wanted to shed themselves of huge and exceptionally long￾lived liabilities, particularly those involving asbestos claims. That is, these insurers wished to “cede” their liabilities
to a reinsurer. Choosing the wrong reinsurer, however – one that down the road proved to be financially strapped or
a bad actor – would put the original insurer in danger of getting the liabilities right back in its lap.
Almost without exception, the largest insurers seeking aid came to Berkshire. Indeed, in the largest such
transaction ever recorded, Lloyd’s in 2007 turned over to us both many thousands of known claims arising from
policies written before 1993 and an unknown but huge number of claims from that same period sure to materialize
in the future. (Yes, we will be receiving claims decades from now that apply to events taking place prior to 1993.)
Berkshire’s ultimate payments arising from the Lloyd’s transaction are today unknowable. What is certain,
however, is that Berkshire will pay all valid claims up to the $15 billion limit of our policy. No other insurer’s
promise would have given Lloyd’s the comfort provided by its agreement with Berkshire. The CEO of the entity
then handling Lloyd’s claims said it best: “Names [the original insurers at Lloyd’s] wanted to sleep easy at night,
and we think we’ve just bought them the world’s best mattress.”
************
Berkshire’s great managers, premier financial strength and a variety of business models possessing wide
moats form something unique in the insurance world. The combination is a huge asset for Berkshire shareholders
that will only get more valuable with time.
10
Regulated, Capital-Intensive Businesses
“Though there are many regulatory restraints in the utility industry, it’s possible that we will make
additional commitments in the field. If we do, the amounts involved could be large.”
— 1999 Annual Report
We have two major operations, BNSF and MidAmerican Energy, that share important characteristics
distinguishing them from our other businesses. Consequently, we assign them their own section in this letter and
split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with
these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact
not needed because each company has earning power that even under terrible economic conditions will far exceed
its interest requirements. Last year, for example, BNSF’s interest coverage was 9:1. (Our definition of coverage is
pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as seriously flawed.)
At MidAmerican, meanwhile, two factors ensure the company’s ability to service its debt under all
circumstances. The first is common to all utilities: recession-resistant earnings, which result from these companies
exclusively offering an essential service. The second is enjoyed by few other utilities: a great diversity of earnings
streams, which shield us from being seriously harmed by any single regulatory body. Now, with the acquisition of
NV Energy, MidAmerican’s earnings base has further broadened. This particular strength, supplemented by
Berkshire’s ownership, has enabled MidAmerican and its utility subsidiaries to significantly lower their cost of
debt. This advantage benefits both us and our customers.
Every day, our two subsidiaries power the American economy in major ways:
Š BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by
truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact
establishing BNSF as the most important artery in our economy’s circulatory system. Its hold on the
number-one position strengthened in 2013.
BNSF, like all railroads, also moves its cargo in an extraordinarily fuel-efficient and environmentally
friendly way, carrying a ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on
the same job guzzle about four times as much fuel.
Š MidAmerican’s utilities serve regulated retail customers in eleven states. No utility company stretches
further. In addition, we are the leader in renewables: From a standing start nine years ago, MidAmerican
now accounts for 7% of the country’s wind generation capacity, with more on the way. Our share in
solar – most of which is still in construction – is even larger.
MidAmerican can make these investments because it retains all of its earnings. Here’s a little known fact:
Last year MidAmerican retained more dollars of earnings – by far – than any other American electric
utility. We and our regulators see this as an important advantage – one almost certain to exist five, ten and
twenty years from now.
When our current projects are completed, MidAmerican’s renewables portfolio will have cost $15 billion.
We relish making such commitments as long as they promise reasonable returns. And, on that front, we put a large
amount of trust in future regulation.
11
Our confidence is justified both by our past experience and by the knowledge that society will forever
need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital
providers in a manner that will ensure the continued flow of funds to essential projects. It is meanwhile in our self￾interest to conduct our operations in a way that earns the approval of our regulators and the people they represent.
Tangible proof of our dedication to that duty was delivered last year in a poll of customer satisfaction
covering 52 holding companies and their 101 operating electric utilities. Our MidAmerican group ranked number
one, with 95.3% of respondents giving us a “very satisfied” vote and not a single customer rating us “dissatisfied.”
The bottom score in the survey, incidentally, was a dismal 34.5%.
All three of our companies were ranked far lower by this measure before they were acquired by
MidAmerican. The extraordinary customer satisfaction we have achieved is of great importance as we expand:
Regulators in states we hope to enter are glad to see us, knowing we will be responsible operators.
Our railroad has been diligent as well in anticipating the needs of its customers. Whatever you may have
heard about our country’s crumbling infrastructure in no way applies to BNSF or railroads generally. America’s rail
system has never been in better shape, a consequence of huge investments by the industry. We are not, however,
resting: BNSF spent $4 billion on the railroad in 2013, double its depreciation charge and a single-year record for
any railroad. And, we will spend considerably more in 2014. Like Noah, who foresaw early on the need for
dependable transportation, we know it’s our job to plan ahead.
Leading our two capital-intensive companies are Greg Abel, at MidAmerican, and the team of Matt Rose
and Carl Ice at BNSF. The three are extraordinary managers who have my gratitude and deserve yours as well.
Here are the key figures for their businesses:
MidAmerican (89.8% owned) Earnings (in millions)
2013 2012 2011
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 362 $ 429 $ 469
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 236 279
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982 737 771
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 383 388
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 82 39
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 91 36
Operating earnings before corporate interest and taxes ....................... 2,102 1,958 1,982
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 314 336
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 172 315
Net earnings ........................................................ $ 1,636 $ 1,472 $ 1,331
Earnings applicable to Berkshire ........................................ $ 1,470 $ 1,323 $ 1,204
BNSF Earnings (in millions)
2013 2012 2011
Revenues .......................................................... $22,014 $20,835 $19,548
Operating expenses .................................................. 15,357 14,835 14,247
Operating earnings before interest and taxes ............................... 6,657 6,000 5,301
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 623 560
Income taxes ........................................................ 2,135 2,005 1,769
Net earnings ........................................................ $ 3,793 $ 3,372 $ 2,972
12
Ron Peltier continues to build HomeServices, MidAmerican’s real estate brokerage subsidiary. Last year
his operation made four acquisitions, the most significant being Fox & Roach, a Philadelphia-based company that
is the largest single-market realtor in the country.
HomeServices now has 22,114 agents (listed by geography on page 112), up 38% from 2012.
HomeServices also owns 67% of the Prudential and Real Living franchise operations, which are in the process of
rebranding their franchisees as Berkshire Hathaway HomeServices. If you haven’t yet, many of you will soon be
seeing our name on “for sale” signs.
Manufacturing, Service and Retailing Operations
“See that store,” Warren says, pointing at Nebraska Furniture Mart. “That’s a really good business.”
“Why don’t you buy it?” I said.
“It’s privately held,” Warren said.
“Oh,” I said.
“I might buy it anyway,” Warren said. “Someday.”
— Supermoney by Adam Smith (1972)
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance
sheet and earnings statement for the entire group.
Balance Sheet 12/31/13 (in millions)
Assets Liabilities and Equity
Cash and equivalents ................... $ 6,625 Notes payable .................... $ 1,615
Accounts and notes receivable ............ 7,749 Other current liabilities ............. 8,965
Inventory ............................. 9,945 Total current liabilities ............. 10,580
Other current assets . . . . . . . . . . . . . . . . . . . . . 716
Total current assets ..................... 25,035
Deferred taxes .................... 5,184
Goodwill and other intangibles ............ 25,617 Term debt and other liabilities ....... 4,405
Fixed assets ........................... 19,389 Non-controlling interests . . . . . . . . . . . . 456
Other assets ........................... 4,274 Berkshire equity .................. 53,690
$74,315 $74,315
Earnings Statement (in millions)
2013 2012 2011
Revenues ........................................................ $95,291 $83,255 $72,406
Operating expenses ................................................ 88,414 76,978 67,239
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 146 130
Pre-tax earnings ................................................... 6,742 6,131 5,037
Income taxes and non-controlling interests .............................. 2,512 2,432 1,998
Net earnings ...................................................... $ 4,230 $ 3,699 $ 3,039
Our income and expense data conforming to Generally Accepted Accounting Principles (“GAAP”) is on
page 29. In contrast, the operating expense figures above are non-GAAP and exclude some purchase-accounting
items (primarily the amortization of certain intangible assets). We present the data in this manner because Charlie
and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses
aggregated in the table than do GAAP figures.
13
I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand
the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With
software, for example, amortization charges are very real expenses. Charges against other intangibles such as the
amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real
costs. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses
when earnings are calculated – even though from an investor’s viewpoint they could not be more different.
In the GAAP-compliant figures we show on page 29, amortization charges of $648 million for the
companies included in this section are deducted as expenses. We would call about 20% of these “real,” the rest not.
This difference has become significant because of the many acquisitions we have made. It will almost certainly rise
further as we acquire more companies.
Eventually, of course, the non-real charges disappear when the assets to which they’re related become
fully amortized. But this usually takes 15 years and – alas – it will be my successor whose reported earnings get the
benefit of their expiration.
Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other
companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.
Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality,
however, remember to add back most of the amortization charges we report.
************
The crowd of companies in this section sells products ranging from lollipops to jet airplanes. Some of
these businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing
profits that run from 25% after-tax to far more than 100%. Others generate good returns in the area of 12% to 20%.
A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. I
was not misled: I simply was wrong in my evaluation of the economic dynamics of the company or the industry in
which it operated.
Fortunately, my blunders usually involved relatively small acquisitions. Our large buys have generally
worked out well and, in a few cases, more than well. I have not, however, made my last mistake in purchasing
either businesses or stocks. Not everything works out as planned.
Viewed as a single entity, the companies in this group are an excellent business. They employed an
average of $25 billion of net tangible assets during 2013 and, with large quantities of excess cash and little
leverage, earned 16.7% after-tax on that capital.
Of course, a business with terrific economics can be a bad investment if the purchase price is excessive.
We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the
large figure we show for goodwill. Overall, however, we are getting a decent return on the capital we have
deployed in this sector. Furthermore, the intrinsic value of these businesses, in aggregate, exceeds their carrying
value by a good margin. Even so, the difference between intrinsic value and carrying value in the insurance and
regulated-industry segments is far greater. It is there that the truly big winners reside.
************
We have far too many companies in this group to comment on them individually. Moreover, both current
and potential competitors read this report. In a few of our businesses we might be disadvantaged if they knew our
numbers. So, in some of our operations that are not of a size material to an evaluation of Berkshire, we only
disclose what is required. You can find a good bit of detail about many of our operations, however, on pages 80-84.
14
I can’t resist, however, giving you an update on Nebraska Furniture Mart’s expansion into Texas. I’m not
covering this event because of its economic importance to Berkshire – it takes more than a new store to move the
needle on Berkshire’s $225 billion equity base. But I’ve now worked 30 years with the marvelous Blumkin family,
and I’m excited about the remarkable store – truly Texas-sized – it is building at The Colony, in the northern part of
the Dallas metropolitan area.
When the store is completed next year, NFM will have – under one roof, and on a 433-acre site – 1.8 million
square feet of retail and supporting warehouse space. View the project’s progress at www.nfm.com/texas. NFM
already owns the two highest-volume home furnishings stores in the country (in Omaha and Kansas City, Kansas),
each doing about $450 million annually. I predict the Texas store will blow these records away. If you live anywhere
near Dallas, come check us out.
I think back to August 30, 1983 – my birthday – when I went to see Mrs. B (Rose Blumkin), carrying a
11⁄4-page purchase proposal for NFM that I had drafted. (It’s reproduced on pages 114 - 115.) Mrs. B accepted my
offer without changing a word, and we completed the deal without the involvement of investment bankers or
lawyers (an experience that can only be described as heavenly). Though the company’s financial statements were
unaudited, I had no worries. Mrs. B simply told me what was what, and her word was good enough for me.
Mrs. B was 89 at the time and worked until 103 – definitely my kind of woman. Take a look at NFM’s
financial statements from 1946 on pages 116 - 117. Everything NFM now owns comes from (a) that $72,264 of net
worth and $50 – no zeros omitted – of cash the company then possessed, and (b) the incredible talents of Mrs. B,
her son, Louie, and his sons Ron and Irv.
The punch line to this story is that Mrs. B never spent a day in school. Moreover, she emigrated from
Russia to America knowing not a word of English. But she loved her adopted country: At Mrs. B’s request, the
family always sang God Bless America at its gatherings.
Aspiring business managers should look hard at the plain, but rare, attributes that produced Mrs. B’s
incredible success. Students from 40 universities visit me every year, and I have them start the day with a visit to
NFM. If they absorb Mrs. B’s lessons, they need none from me.
Finance and Financial Products
“Clayton’s loan portfolio will likely grow to at least $5 billion in not too many years and, with sensible
credit standards in place, should deliver significant earnings.”
— 2003 Annual Report
This sector, our smallest, includes two rental companies, XTRA (trailers) and CORT (furniture), as well as
Clayton Homes, the country’s leading producer and financer of manufactured homes. Aside from these 100%-
owned subsidiaries, we also include in this category a collection of financial assets and our 50% interest in
Berkadia Commercial Mortgage.
Clayton is placed in this section because it owns and services 326,569 mortgages, totaling $13.6 billion. In
recent years, as manufactured home sales plummeted, a high percentage of Clayton’s earnings came from this
mortgage business.
In 2013, however, the sale of new homes began to pick up and earnings from both manufacturing and
retailing are again becoming significant. Clayton remains America’s number one homebuilder: Its 2013 output of
29,547 homes accounted for about 4.7% of all single-family residences built in the country. Kevin Clayton,
Clayton’s CEO, has done a magnificent job of guiding the company through the severe housing depression. Now,
his job – definitely more fun these days – includes the prospect of another earnings gain in 2014.
15
CORT and XTRA are leaders in their industries as well. And Jeff Pederson and Bill Franz will keep them
on top. We are backing their plans through purchases of equipment that enlarge their rental potential.
Here’s the pre-tax earnings recap for this sector:
2013 2012 2011
(in millions)
Berkadia . . . . . . . . . . . . . . . . . . . . . $ 80 $ 35 $ 25
Clayton . . . . . . . . . . . . . . . . . . . . . . 416 255 154
CORT . . . . . . . . . . . . . . . . . . . . . . . 40 42 29
XTRA . . . . . . . . . . . . . . . . . . . . . . . 125 106 126
Net financial income* . . . . . . . . . . . 324 410 440
$985 $848 $ 774
* Excludes capital gains or losses
Investments
“Our stock portfolio . . . was worth approximately $17 million less than its carrying value [cost] . . .
it is our belief that, over a period of years, the overall portfolio will prove to be worth more than its
cost.”
— 1974 Annual Report
Below we list our fifteen common stock investments that at yearend had the largest market value.
12/31/13
Shares** Company
Percentage of
Company
Owned
Cost* Market
(in millions)
151,610,700 American Express Company ............. 14.2 $ 1,287 $ 13,756
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . 9.1 1,299 16,524
22,238,900 DIRECTV . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 1,017 1,536
41,129,643 Exxon Mobil Corp. . . . . . . . . . . . . . . . . . . . . 0.9 3,737 4,162
13,062,594 The Goldman Sachs Group, Inc. . . . . . . . . . . 2.8 750 2,315
68,121,984 International Business Machines Corp. . . . . . 6.3 11,681 12,778
24,669,778 Moody’s Corporation .................. 11.5 248 1,936
20,060,390 Munich Re ........................... 11.2 2,990 4,415
20,668,118 Phillips 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 660 1,594
52,477,678 The Procter & Gamble Company . . . . . . . . . 1.9 336 4,272
22,169,930 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,747 2,354
301,046,076 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 1,699 1,666
96,117,069 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 3,002 3,883
56,805,984 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . 1.8 2,976 4,470
483,470,853 Wells Fargo & Company . . . . . . . . . . . . . . . . 9.2 11,871 21,950
Others .............................. 11,281 19,894
Total Common Stocks Carried at Market . . . $56,581 $117,505
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required under its rules.
**Excludes shares held by Berkshire subsidiary pension funds.
16
Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of
Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $10.9
billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for
you to realize that Bank of America is, in effect, our fifth largest equity investment and one we value highly.
In addition to our equity holdings, we also invest substantial sums in bonds. Usually, we’ve done well in
these. But not always.
Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I
hadn’t. The company was formed in 2007 to effect a giant leveraged buyout of electric utility assets in Texas. The
equity owners put up $8 billion and borrowed a massive amount in addition. About $2 billion of the debt was
purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake.
Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold
our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall,
therefore, we suffered a pre-tax loss of $873 million. Next time I’ll call Charlie.
A few of our subsidiaries – primarily electric and gas utilities – use derivatives in their operations.
Otherwise, we have not entered into any derivative contracts for some years, and our existing positions continue to
run off. The contracts that have expired have delivered large profits as well as several billion dollars of medium￾term float. Though there are no guarantees, we expect a similar result from those remaining on our books.
Some Thoughts About Investing
Investment is most intelligent when it is most businesslike.
— The Intelligent Investor by Benjamin Graham
It is fitting to have a Ben Graham quote open this discussion because I owe so much of what I know about
investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me
first tell you about two small non-stock investments that I made long ago. Though neither changed my net worth by
much, they are instructive.
This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices,
caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural
banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and
their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath than in our recent
Great Recession.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me
$280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing
about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn
and soybeans the farm would produce and what the operating expenses would be. From these estimates, I
calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity
would improve over time and that crop prices would move higher as well. Both expectations proved out.
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and
potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes
disappoint. But so what? There would be some unusually good years as well, and I would never be under any
pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more
what I paid. I still know nothing about farming and recently made just my second visit to the farm.
17
In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the
company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was
selling. Again, a bubble had popped – this one involving commercial real estate – and the RTC had been created to
dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.
Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from
the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase
when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the
project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this
bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also
superb: NYU wasn’t going anywhere.
I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an
experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they
did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity
investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several
special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.
Income from both the farm and the NYU real estate will probably increase in the decades to come. Though
the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and,
subsequently, for my children and grandchildren.
I tell these tales to illustrate certain fundamentals of investing:
Š You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you
must recognize your limitations and follow a course certain to work reasonably well. Keep things simple
and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
Š Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough
estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every
investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
Š If you instead focus on the prospective price change of a contemplated purchase, you are speculating.
There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I
am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first
toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that
a given asset has appreciated in the recent past is never a reason to buy it.
Š With my two small investments, I thought only of what the properties would produce and cared not at all
about their daily valuations. Games are won by players who focus on the playing field – not by those
whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock
prices, give it a try on weekdays.
Š Forming macro opinions or listening to the macro or market predictions of others is a waste of time.
Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear
TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s
scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
18
Š My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market
might do in the years immediately following – 1987 and 1994 – was of no importance to me in making
those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the
chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks
provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm
or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations
placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my
property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices
varied widely over short periods of time depending on his mental state – how in the world could I be other than
benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would
buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners
cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest
rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet,
important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become
frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an
implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the
unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic
and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if
he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a
euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my
farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a
solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So
why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them
might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was
going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
************
When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very
similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate
an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a
reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate
future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked
together, we have never foregone an attractive purchase because of the macro or political environment, or the views
of other people. In fact, these subjects never come up when we make decisions.
It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of
it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that
occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a
desire to be where the action is.
19
Most investors, of course, have not made the study of business prospects a priority in their lives. If wise,
they will conclude that they do not know enough about specific businesses to predict their future earning power.
I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate,
American business has done wonderfully over time and will continue to do so (though, most assuredly, in
unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497,
paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be
substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do
that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost
S&P 500 index fund will achieve this goal.
That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is
that the timid or beginning investor will enter the market at a time of extreme exuberance and then become
disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It
feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a
long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the
“know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory
results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long￾term results than the knowledgeable professional who is blind to even a single weakness.
If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their
crops would be increased. The only consequence of such behavior would be decreases in the overall earnings
realized by the farm-owning population because of the substantial costs it would incur as it sought advice and
switched properties.
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit
from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in
aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a
farm.
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain
instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s
benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to
certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee
could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P
500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to
those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee
managers.
************
And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s
book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.
Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written
on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict
stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this
was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.
In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek
letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and
20. (The original 1949 edition numbered its chapters differently.) These points guide my investing decisions today.
20
A couple of interesting sidelights about the book: Later editions included a postscript describing an
unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first
edition and – brace yourself – the mystery company was GEICO. If Ben had not recognized the special qualities of
GEICO when it was still in its infancy, my future and Berkshire’s would have been far different.
The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning
about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving
himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that
required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.
The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington
and Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully
owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its
successor (having added a great many properties, to be sure) earns that amount every four days.
I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would
underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever
made, buying Ben’s book was the best (except for my purchase of two marriage licenses).
************
Local and state financial problems are accelerating, in large part because public entities promised pensions
they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that
was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension
mathematics today remain a mystery to most Americans.
Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to
Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the
importance of investment policy. That memo is reproduced on pages 118 - 136.
During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my
memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.
The Annual Meeting
The annual meeting will be held on Saturday, May 3rd at the CenturyLink Center. Carrie Sova, our talented
ringmaster, will be in charge, and all of our headquarters group will pitch in to help her. Our gang both does a
better job than professional event planners would and – yes – saves us money.
CenturyLink’s doors will open at 7 a.m., and at 7:30 we will have our third International Newspaper
Tossing Challenge. Our target will be a Clayton Home porch, precisely 35 feet from the throwing line. I tossed
about 500,000 papers when I was a teenager, so I think I’m pretty good. Challenge me: I’ll buy a Dilly Bar for
anyone who lands his or her throw closer to the doorstep than I do. The papers will be 36 to 42 pages, and you must
fold them yourself (no rubber bands allowed).
At 8:30, a new Berkshire movie will be shown. An hour later, we will start the question-and-answer
period, which (with a break for lunch at CenturyLink’s stands) will last until 3:30. After a short recess, Charlie and
I will convene the annual meeting at 3:45. If you decide to leave during the day’s question periods, please do so
while Charlie is talking.
21
The best reason to exit, of course, is to shop. We’ll assist you by filling the 194,300-square-foot hall that
adjoins the meeting area with products from dozens of Berkshire subsidiaries. Last year, you did your part, and
most locations racked up record sales. In a nine-hour period, we sold 1,062 pairs of Justin boots (that’s a pair every
32 seconds), 12,792 pounds of See’s candy, 11,162 Quikut knives (21 knives per minute) and 6,344 pairs of Wells
Lamont gloves, always a hot item. This year, Charlie and I will have competing ketchup bottles for sale. Naturally,
the one with Charlie’s picture will be heavily discounted. But, if you help, my bottle will outsell his. This is
important, so don’t let me down.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the meeting.
After you purchase a pair, wear them the next day at our second annual “Berkshire 5K,” an 8 a.m. race starting at
the CenturyLink. Full details for participating will be included in the Visitor’s Guide that you will receive with
your tickets for the meeting. Entrants will find themselves running alongside many of Berkshire’s managers,
directors and associates.
GEICO will have a booth in the shopping area, staffed by a number of its top counselors from around the
country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%).
This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The
discount is not additive if you qualify for another, such as that given certain groups.) Bring the details of your
existing insurance and check out whether we can save you money. For at least half of you, I believe we can.
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, among them a couple of new
titles. One is Max Olson’s compilation of Berkshire letters going back to 1965. The book includes an index that I
find particularly useful, specifying page numbers for individuals, companies and subject matter. I also recommend
Forty Chances by my son, Howard. You’ll enjoy it.
If you are a big spender – or aspire to become one – visit Signature Flight Support on the east side of the
Omaha airport between noon and 5 p.m. on Saturday. There, we will have a fleet of NetJets aircraft sure to set your
pulse racing. Come by bus; leave by private jet. Live a little.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. Airlines have sometimes jacked up prices
for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City versus
Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can save you
significant money, particularly if you had planned to rent a car in Omaha. Spend the savings with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. Last year in the week surrounding the meeting, the store
did $40.2 million of business, breaking its previous record by 12%. It also set a single day record of $8.2 million on
Saturday, selling nearly $1 million of mattresses alone.
To obtain the Berkshire discount at NFM, you must make your purchases between Tuesday, April 29th and
Monday, May 5th inclusive, and also present your meeting credential. The period’s special pricing will even apply
to the products of several prestigious manufacturers that normally have ironclad rules against discounting but
which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation.
NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this
year, from 5:30 p.m. to 8 p.m., NFM is having a picnic to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from
6 p.m. to 9 p.m. on Friday, May 2nd. The second, the main gala, will be held on Sunday, May 4th, from 9 a.m. to 4
p.m. On Saturday, we will be open until 6 p.m. In recent years, our three-day volume has far exceeded sales in all
of December, normally a jeweler’s best month.
22
About 1:15 p.m. on Sunday, I will begin clerking at Borsheims. Ask for my “Crazy Warren” quote on the
item of your choice. As I get older, my pricing gets ever more ridiculous. Come take advantage of me.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 28th through Saturday, May 10th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday afternoon.
Don’t play them for money.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. Last
year, she made Americans – and especially me – proud with her performance at the Olympics.
I met Ariel when she was nine and even then I was unable to score a point against her. Now, she’s a
freshman at Princeton and the U.S. Women’s Champion. If you don’t mind embarrassing yourself, test your skills
against her, beginning at 1 p.m. Bill Gates and I will lead off and try to soften her up.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 4th. Both
will be serving until 10 p.m., with Gorat’s opening at 1 p.m. and Piccolo’s opening at 4 p.m. These restaurants are
my favorites, and I will eat at both of them on Sunday evening. Remember: To make a reservation at Gorat’s, call
402-551-3733 on April 1st (but not before) and for Piccolo’s call 402-342-9038. At Piccolo’s order a giant root beer
float for dessert. Only sissies get the small one.
We will again have the same three financial journalists lead the question-and-answer period at the
meeting, asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and
their e-mail addresses are: Carol Loomis, of Fortune, who may be e-mailed at cloomis@fortunemail.com; Becky
Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of The New York Times, at
arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the six he or she decides are the most interesting
and important. The journalists have told me your question has the best chance of being selected if you keep it
concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two questions in
any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if your
question is selected.)
We will also have a panel of three analysts who follow Berkshire. This year the insurance specialist will
be Jay Gelb of Barclays. Questions that deal with our non-insurance operations will come from Jonathan Brandt of
Ruane, Cunniff & Goldfarb.
And we will again have a credentialed bear on Berkshire. We would like to hear from applicants who are
short Berkshire (please include evidence of your position). The three analysts will bring their own Berkshire￾specific questions and alternate with the journalists and the audience in asking them.
Charlie and I believe that all shareholders should have access to new Berkshire information
simultaneously and should also have adequate time to analyze it. That’s why we try to issue financial information
late on Fridays or early on Saturdays and why our annual meeting is held on Saturdays. We do not talk one-on-one
to large institutional investors or analysts, but rather treat all shareholders the same. Our hope is that the journalists
and analysts will ask questions that further educate our owners about their investment.
23
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the journalists
and analysts will come up with some tough ones, and that’s the way we like it. All told, we expect at least
54 questions, which will allow for six from each analyst and journalist and 18 from the audience. If there is some
extra time, we will take more from the audience. Audience questioners will be determined by drawings that will
take place at 8:15 a.m. at each of the 15 microphones located in the arena and main overflow room.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All￾Stars, who run their businesses as if they were the only asset owned by their families. I believe the mindset of our
managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most
have no financial need to work; the joy of hitting business “home runs” means as much to them as their paycheck.
Equally important, however, are the 24 men and women who work with me at our corporate office. This
group efficiently deals with a multitude of SEC and other regulatory requirements, files a 23,000-page Federal
income tax return as well as state and foreign returns, responds to countless shareholder and media inquiries, gets
out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s activities – and the
list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year they dealt with the 40
universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also handle
all kinds of requests that I receive, arrange my travel, and even get me hamburgers and French fries (smothered in
ketchup, of course) for lunch. No CEO has it better; I truly do feel like tap dancing to work every day.
In closing, I think it’s become appropriate to ignore our “no pictures” policy and let you view our
remarkable home-office crew. Below is a photo from our Christmas lunch. Two people couldn’t make it; otherwise
you are looking at all of those who staff Berkshire’s headquarters. They are truly miracle-workers.
Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50. In the
meantime, come to Omaha on May 3rd and enjoy our Woodstock for Capitalists.
February 28, 2014
Warren E. Buffett
Chairman of the Board
A power lunch, Berkshire-style
24
Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 ...................................................................... 23.8 49.5 10.0
1966 ...................................................................... 20.3 (3.4) (11.7)
1967 ...................................................................... 11.0 13.3 30.9
1968 ...................................................................... 19.0 77.8 11.0
1969 ...................................................................... 16.2 19.4 (8.4)
1970 ...................................................................... 12.0 (4.6) 3.9
1971 ...................................................................... 16.4 80.5 14.6
1972 ...................................................................... 21.7 8.1 18.9
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (2.5) (14.8)
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (48.7) (26.4)
1975 ...................................................................... 21.9 2.5 37.2
1976 ...................................................................... 59.3 129.3 23.6
1977 ...................................................................... 31.9 46.8 (7.4)
1978 ...................................................................... 24.0 14.5 6.4
1979 ...................................................................... 35.7 102.5 18.2
1980 ...................................................................... 19.3 32.8 32.3
1981 ...................................................................... 31.4 31.8 (5.0)
1982 ...................................................................... 40.0 38.4 21.4
1983 ...................................................................... 32.3 69.0 22.4
1984 ...................................................................... 13.6 (2.7) 6.1
1985 ...................................................................... 48.2 93.7 31.6
1986 ...................................................................... 26.1 14.2 18.6
1987 ...................................................................... 19.5 4.6 5.1
1988 ...................................................................... 20.1 59.3 16.6
1989 ...................................................................... 44.4 84.6 31.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (23.1) (3.1)
1991 ...................................................................... 39.6 35.6 30.5
1992 ...................................................................... 20.3 29.8 7.6
1993 ...................................................................... 14.3 38.9 10.1
1994 ...................................................................... 13.9 25.0 1.3
1995 ...................................................................... 43.1 57.4 37.6
1996 ...................................................................... 31.8 6.2 23.0
1997 ...................................................................... 34.1 34.9 33.4
1998 ...................................................................... 48.3 52.2 28.6
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 (19.9) 21.0
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 26.6 (9.1)
2001 ...................................................................... (6.2) 6.5 (11.9)
2002 ...................................................................... 10.0 (3.8) (22.1)
2003 ...................................................................... 21.0 15.8 28.7
2004 ...................................................................... 10.5 4.3 10.9
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 0.8 4.9
2006 ...................................................................... 18.4 24.1 15.8
2007 ...................................................................... 11.0 28.7 5.5
2008 ...................................................................... (9.6) (31.8) (37.0)
2009 ...................................................................... 19.8 2.7 26.5
2010 ...................................................................... 13.0 21.4 15.1
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 (4.7) 2.1
2012 ...................................................................... 14.4 16.8 16.0
2013 ...................................................................... 18.2 32.7 32.4
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 27.0 13.7
Compounded Annual Gain – 1965-2014 ................................... 19.4% 21.6% 9.9%
Overall Gain – 1964-2014 ................................................. 751,113% 1,826,163% 11,196%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,
accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was
previously the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects,
the results are calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a
corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the
years, the tax costs would have caused the aggregate lag to be substantial.
2
A note to readers: Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary,
Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50
years and what each expects during the next 50. Neither changed a word of his commentary after reading what the
other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new
ones, may find it useful to read those letters before reading the report on 2014, which begins below.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2014 was $18.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 8.3%. Over the last 50 years (that is, since present management took over),
per-share book value has grown from $19 to $146,186, a rate of 19.4% compounded annually.*
During our tenure, we have consistently compared the yearly performance of the S&P 500 to the change in
Berkshire’s per-share book value. We’ve done that because book value has been a crude, but useful, tracking device
for the number that really counts: intrinsic business value.
In our early decades, the relationship between book value and intrinsic value was much closer than it is
now. That was true because Berkshire’s assets were then largely securities whose values were continuously restated
to reflect their current market prices. In Wall Street parlance, most of the assets involved in the calculation of book
value were “marked to market.”
Today, our emphasis has shifted in a major way to owning and operating large businesses. Many of these
are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how
much the value of these companies has increased. Consequently, the gap between Berkshire’s intrinsic value and its
book value has materially widened.
With that in mind, we have added a new set of data – the historical record of Berkshire’s stock price – to
the performance table on the facing page. Market prices, let me stress, have their limitations in the short term.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time,
however, stock prices and intrinsic value almost invariably converge. Charlie Munger, Berkshire Vice Chairman
and my partner, and I believe that has been true at Berkshire: In our view, the increase in Berkshire’s per-share
intrinsic value over the past 50 years is roughly equal to the 1,826,163% gain in market price of the company’s
shares.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of
those shown for A.
3
The Year at Berkshire
It was a good year for Berkshire on all major fronts, except one. Here are the important developments:
‹ Our “Powerhouse Five” – a collection of Berkshire’s largest non-insurance businesses – had a record $12.4
billion of pre-tax earnings in 2014, up $1.6 billion from 2013.* The companies in this sainted group are
Berkshire Hathaway Energy (formerly MidAmerican Energy), BNSF, IMC (I’ve called it Iscar in the past),
Lubrizol and Marmon.
Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us a decade ago.
Subsequently we purchased another three of the five on an all-cash basis. In acquiring the fifth, BNSF, we
paid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased the
number outstanding by 6.1%. In other words, the $12 billion gain in annual earnings delivered Berkshire by
the five companies over the ten-year span has been accompanied by only minor dilution. That satisfies our
goal of not simply increasing earnings, but making sure we also increase per-share results.
If the U.S. economy continues to improve in 2015, we expect earnings of our Powerhouse Five to improve
as well. The gain could reach $1 billion, in part because of bolt-on acquisitions by the group that have
already closed or are under contract.
‹ Our bad news from 2014 comes from our group of five as well and is unrelated to earnings. During the
year, BNSF disappointed many of its customers. These shippers depend on us, and service failures can
badly hurt their businesses.
BNSF is, by far, Berkshire’s most important non-insurance subsidiary and, to improve its performance, we
will spend $6 billion on plant and equipment in 2015. That sum is nearly 50% more than any other railroad
has spent in a single year and is a truly extraordinary amount, whether compared to revenues, earnings or
depreciation charges.
Though weather, which was particularly severe last year, will always cause railroads a variety of operating
problems, our responsibility is to do whatever it takes to restore our service to industry-leading levels. That
can’t be done overnight: The extensive work required to increase system capacity sometimes disrupts
operations while it is underway. Recently, however, our outsized expenditures are beginning to show
results. During the last three months, BNSF’s performance metrics have materially improved from last
year’s figures.
‹ Our many dozens of smaller non-insurance businesses earned $5.1 billion last year, up from $4.7 billion in
2013. Here, as with our Powerhouse Five, we expect further gains in 2015. Within this group, we have two
companies that last year earned between $400 million and $600 million, six that earned between $250
million and $400 million, and seven that earned between $100 million and $250 million. This collection of
businesses will increase in both number and earnings. Our ambitions have no finish line.
‹ Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2014 – that
makes 12 years in a row – and increased its float. During that 12-year stretch, our float – money that
doesn’t belong to us but that we can invest for Berkshire’s benefit – has grown from $41 billion to $84
billion. Though neither that gain nor the size of our float is reflected in Berkshire’s earnings, float
generates significant investment income because of the assets it allows us to hold.
* Throughout this letter, as well as in the “Golden Anniversary” letters included later in this report, all earnings are
stated on a pre-tax basis unless otherwise designated.
4
Meanwhile, our underwriting profit totaled $24 billion during the twelve-year period, including $2.7 billion
earned in 2014. And all of this began with our 1967 purchase of National Indemnity for $8.6 million.
‹ While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on
acquisitions. Last year was particularly fruitful: We contracted for 31 bolt-ons, scheduled to cost $7.8
billion in aggregate. The size of these transactions ranged from $400,000 to $2.9 billion. However, the
largest acquisition, Duracell, will not close until the second half of this year. It will then be placed under
Marmon’s jurisdiction.
Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us aren’t.) They deploy
capital in activities that fit with our existing businesses and that will be managed by our corps of expert
managers. This means no more work for us, yet more earnings, a combination we find particularly
appealing. We will make many more of these bolt-on deals in future years.
‹ Two years ago my friend, Jorge Paulo Lemann, asked Berkshire to join his 3G Capital group in the
acquisition of Heinz. My affirmative response was a no-brainer: I knew immediately that this partnership
would work well from both a personal and financial standpoint. And it most definitely has.
I’m not embarrassed to admit that Heinz is run far better under Alex Behring, Chairman, and Bernardo
Hees, CEO, than would be the case if I were in charge. They hold themselves to extraordinarily high
performance standards and are never satisfied, even when their results far exceed those of competitors.
We expect to partner with 3G in more activities. Sometimes our participation will only involve a financing
role, as was the case in the recent acquisition of Tim Hortons by Burger King. Our favored arrangement,
however, will usually be to link up as a permanent equity partner (who, in some cases, contributes to the
financing of the deal as well). Whatever the structure, we feel good when working with Jorge Paulo.
Berkshire also has fine partnerships with Mars and Leucadia, and we may form new ones with them or with
other partners. Our participation in any joint activities, whether as a financing or equity partner, will be
limited to friendly transactions.
‹ In October, we contracted to buy Van Tuyl Automotive, a group of 78 automobile dealerships that is
exceptionally well-run. Larry Van Tuyl, the company’s owner, and I met some years ago. He then decided
that if he were ever to sell his company, its home should be Berkshire. Our purchase was recently
completed, and we are now “car guys.”
Larry and his dad, Cecil, spent 62 years building the group, following a strategy that made owner-partners
of all local managers. Creating this mutuality of interests proved over and over to be a winner. Van Tuyl is
now the fifth-largest automotive group in the country, with per-dealership sales figures that are
outstanding.
In recent years, Jeff Rachor has worked alongside Larry, a successful arrangement that will continue. There
are about 17,000 dealerships in the country, and ownership transfers always require approval by the
relevant auto manufacturer. Berkshire’s job is to perform in a manner that will cause manufacturers to
welcome further purchases by us. If we do this – and if we can buy dealerships at sensible prices – we will
build a business that before long will be multiples the size of Van Tuyl’s $9 billion of sales.
With the acquisition of Van Tuyl, Berkshire now owns 91⁄2 companies that would be listed on the Fortune
500 were they independent (Heinz is the 1⁄2). That leaves 4901⁄2 fish in the sea. Our lines are out.
5
‹ Our subsidiaries spent a record $15 billion on plant and equipment during 2014, well over twice their
depreciation charges. About 90% of that money was spent in the United States. Though we will always
invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been
uncovered up to now are dwarfed by those still untapped. Through dumb luck, Charlie and I were born in
the United States, and we are forever grateful for the staggering advantages this accident of birth has given
us.
‹ Berkshire’s yearend employees – including those at Heinz – totaled a record 340,499, up 9,754 from last
year. The increase, I am proud to say, included no gain at headquarters (where 25 people work). No sense
going crazy.
‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American
Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our
ownership to 7.8% versus 6.3% at yearend 2013). Meanwhile, stock repurchases at Coca-Cola, American
Express and Wells Fargo raised our percentage ownership of each. Our equity in Coca-Cola grew from
9.1% to 9.2%, our interest in American Express increased from 14.2% to 14.8% and our ownership of
Wells Fargo grew from 9.2% to 9.4%. And, if you think tenths of a percent aren’t important, ponder this
math: For the four companies in aggregate, each increase of one-tenth of a percent in our ownership raises
Berkshire’s portion of their annual earnings by $50 million.
These four investees possess excellent businesses and are run by managers who are both talented and
shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a
wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope
Diamond than to own all of a rhinestone.
If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2014 earnings
before discontinued operations amounted to $4.7 billion (compared to $3.3 billion only three years ago). In
the earnings we report to you, however, we include only the dividends we receive – about $1.6 billion last
year. (Again, three years ago the dividends were $862 million.) But make no mistake: The $3.1 billion of
these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.
The earnings these investees retain are often used for repurchases of their own stock – a move that
enhances Berkshire’s share of future earnings without requiring us to lay out a dime. Their retained
earnings also fund business opportunities that usually turn out to be advantageous. All that leads us to
expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time
(though 2015 will be a tough year for the group, in part because of the strong dollar). If the expected gains
materialize, dividends to Berkshire will increase and, even more important, so will our unrealized capital
gains. (For the package of four, our unrealized gains already totaled $42 billion at yearend.)
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled
businesses – gives us a significant advantage over companies that limit themselves to acquisitions they can
operate. Our appetite for either operating businesses or passive investments doubles our chances of finding
sensible uses for Berkshire’s endless gusher of cash.
‹ I’ve mentioned in the past that my experience in business helps me as an investor and that my investment
experience has made me a better businessman. Each pursuit teaches lessons that are applicable to the other.
And some truths can only be fully learned through experience. (In Fred Schwed’s wonderful book, Where
Are the Customers’ Yachts?, a Peter Arno cartoon depicts a puzzled Adam looking at an eager Eve, while a
caption says, “There are certain things that cannot be adequately explained to a virgin either by words or
pictures.” If you haven’t read Schwed’s book, buy a copy at our annual meeting. Its wisdom and humor are
truly priceless.)
6
Among Arno’s “certain things,” I would include two separate skills, the evaluation of investments and the
management of businesses. I therefore think it’s worthwhile for Todd Combs and Ted Weschler, our two
investment managers, to each have oversight of at least one of our businesses. A sensible opportunity for
them to do so opened up a few months ago when we agreed to purchase two companies that, though
smaller than we would normally acquire, have excellent economic characteristics. Combined, the two earn
$100 million annually on about $125 million of net tangible assets.
I’ve asked Todd and Ted to each take on one as Chairman, in which role they will function in the very
limited way that I do with our larger subsidiaries. This arrangement will save me a minor amount of work
and, more important, make the two of them even better investors than they already are (which is to say
among the best).
************
Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in
Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United
States.”
That kind of commitment was nothing new for us. We’ve been making similar wagers ever since Buffett
Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too: Charlie and I have always considered a
“bet” on ever-rising U.S. prosperity to be very close to a sure thing.
Indeed, who has ever benefited during the past 238 years by betting against America? If you compare our
country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real
per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see.
Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to
emigrate (though I can think of a few for whom I would happily buy a one-way ticket).
The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a
smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most
assuredly, America’s best days lie ahead.
With this tailwind working for us, Charlie and I hope to build Berkshire’s per-share intrinsic value by
(1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings
through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares
when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large
acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.
Those building blocks rest on a rock-solid foundation. A century hence, BNSF and Berkshire Hathaway
Energy will still be playing vital roles in our economy. Homes and autos will remain central to the lives of most
families. Insurance will continue to be essential for both businesses and individuals. Looking ahead, Charlie and I
see a world made to order for Berkshire. We feel fortunate to be entrusted with its management.
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that
number is for Berkshire shares (nor, in fact, for any other stock). In our 2010 annual report, however, we laid out the
three elements – one of them qualitative – that we believe are the keys to a sensible estimate of Berkshire’s intrinsic
value. That discussion is reproduced in full on pages 123-124.
Here is an update of the two quantitative factors: In 2014 our per-share investments increased 8.4% to
$140,123, and our earnings from businesses other than insurance and investments increased 19% to $10,847 per
share.
7
Since 1970, our per-share investments have increased at a rate of 19% compounded annually, and our
earnings figure has grown at a 20.6% clip. It is no coincidence that the price of Berkshire stock over the ensuing 44
years has increased at a rate very similar to that of our two measures of value. Charlie and I like to see gains in both
sectors, but our main focus is to build operating earnings. That’s why we were pleased to exchange our Phillips 66
and Graham Holdings stock for operating businesses last year and to contract with Procter and Gamble to acquire
Duracell by means of a similar exchange set to close in 2015.
************
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. So we’ll present them as four separate businesses, which is how Charlie and
I view them (though there are important and enduring advantages to having them all under one roof). Our goal is to
provide you with the information we would wish to have if our positions were reversed, with you being the
reporting manager and we the absentee shareholders. (But don’t get any ideas!)
Insurance
Let’s look first at insurance, Berkshire’s core operation. That industry has been the engine that has
propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National Fire &
Marine, for $8.6 million. Though that purchase had monumental consequences for Berkshire, its execution was
simplicity itself.
Jack Ringwalt, a friend of mine who was the controlling shareholder of the two companies, came to my
office saying he would like to sell. Fifteen minutes later, we had a deal. Neither of Jack’s companies had ever had an
audit by a public accounting firm, and I didn’t ask for one. My reasoning: (1) Jack was honest and (2) He was also a
bit quirky and likely to walk away if the deal became at all complicated.
On pages 128-129, we reproduce the 11⁄2-page purchase agreement we used to finalize the transaction.
That contract was homemade: Neither side used a lawyer. Per page, this has to be Berkshire’s best deal: National
Indemnity today has GAAP (generally accepted accounting principles) net worth of $111 billion, which exceeds that
of any other insurer in the world.
One reason we were attracted to the property-casualty business was its financial characteristics: P/C
insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain
workers’ compensation accidents, payments can stretch over many decades. This collect-now, pay-later model
leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile,
insurers get to invest this float for their benefit. Though individual policies and claims come and go, the amount of
float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business
grows, so does our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2014 83,921
Further gains in float will be tough to achieve. On the plus side, GEICO and our new commercial
insurance operation are almost certain to grow at a good clip. National Indemnity’s reinsurance division, however, is
party to a number of run-off contracts whose float drifts downward. If we do in time experience a decline in float, it
will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that
we can never be subject to immediate demands for sums that are large compared to our cash resources. This strength
is a key pillar in Berkshire’s economic fortress.
8
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so
vigorous indeed that it frequently causes the P/C industry as a whole to operate at a significant underwriting loss.
This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the
insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning
subnormal returns on tangible net worth as compared to other American businesses. The prolonged period of low
interest rates our country is now dealing with causes earnings on float to decrease, thereby exacerbating the profit
problems of the industry.
As noted in the first section of this report, Berkshire has now operated at an underwriting profit for
twelve consecutive years, our pre-tax gain for the period having totaled $24 billion. Looking ahead, I believe we
will continue to underwrite profitably in most years. Doing so is the daily focus of all of our insurance managers,
who know that while float is valuable, its benefits can be drowned by poor underwriting results. That message is
given at least lip service by all insurers; at Berkshire it is a religion.
So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount
of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think
of float as strictly a liability is incorrect; it should instead be viewed as a revolving fund. Daily, we pay old claims
and related expenses – a huge $22.7 billion to more than six million claimants in 2014 – and that reduces float. Just
as surely, we each day write new business and thereby generate new claims that add to float.
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the
door tomorrow and not be replaced. The two types of liabilities are treated as equals, however, under GAAP.
A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying
our insurance companies and that increases book value. In very large part, this goodwill represents the price we paid
for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing
on its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any
goodwill asset carried on the books should be deemed valueless, whatever its original cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance
operation possessing it – to be far in excess of its historic carrying value. Under present accounting rules (with
which we agree) this excess value will never be entered on our books. But I can assure you that it’s real. That’s one
reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.
************
Berkshire’s attractive insurance economics exist only because we have some terrific managers running
disciplined operations that possess hard-to-replicate business models. Let me tell you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks
that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and,
most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that
are inappropriate in relation to our resources.
9
Indeed, we are far more conservative in avoiding risk than most large insurers. For example, if the
insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything
it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its
many streams of earnings. We would also remain awash in cash and be looking for large opportunities in a market
that might well have gone into shock. Meanwhile, other major insurers and reinsurers would be far in the red, if not
facing insolvency.
Ajit’s underwriting skills are unmatched. His mind, moreover, is an idea factory that is always looking
for more lines of business he can add to his current assortment. Last year I told you about his formation of Berkshire
Hathaway Specialty Insurance (“BHSI”). This initiative took us into commercial insurance, where we were instantly
welcomed by both major insurance brokers and corporate risk managers throughout America. Previously, we had
written only a few specialized lines of commercial insurance.
BHSI is led by Peter Eastwood, an experienced underwriter who is widely respected in the insurance
world. During 2014, Peter expanded his talented group, moving into both international business and new lines of
insurance. We repeat last year’s prediction that BHSI will be a major asset for Berkshire, one that will generate
volume in the billions within a few years.
************
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both
prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate
premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,”
spells trouble in any business, but in none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue.
We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown
consistently and profitably since we acquired the company in 1998.
It can be remembered that soon after we purchased General Re, it was beset by problems that caused
commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re
is now a gem.
************
Finally, there is GEICO, the insurer on which I cut my teeth 64 years ago. GEICO is managed by Tony
Nicely, who joined the company at 18 and completed 53 years of service in 2014. Tony became CEO in 1993, and
since then the company has been flying. There is no better manager than Tony.
When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the
company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO
would succeed because it deserved to succeed. No one likes to buy auto insurance. Almost everyone, though, likes
to drive. The insurance consequently needed is a major expenditure for most families. Savings matter to them – and
only a low-cost operation can deliver these. Indeed, at least 40% of the people reading this letter can save money by
insuring with GEICO. So stop reading and go to geico.com or call 800-368-2734.
10
GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after
year. (We ended 2014 at 10.8% compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The
company’s low costs create a moat – an enduring one – that competitors are unable to cross. Our gecko never tires
of telling Americans how GEICO can save them important money. The gecko, I should add, has one particularly
endearing quality – he works without pay. Unlike a human spokesperson, he never gets a swelled head from his
fame nor does he have an agent to constantly remind us how valuable he is. I love the little guy.
************
In addition to our three major insurance operations, we own a group of smaller companies, most of them
plying their trade in odd corners of the insurance world. In aggregate, these companies are a growing operation that
consistently delivers an underwriting profit. Indeed, over the past decade, they have earned $2.95 billion from
underwriting while growing their float from $1.7 billion to $8.6 billion. Charlie and I treasure these companies and
their managers.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2014 2013 2014 2013
BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 606 $1,294 $42,454 $37,231
General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 283 19,280 20,013
GEICO ............................................ 1,159 1,127 13,569 12,566
Other Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626 385 8,618 7,430
$2,668 $3,089 $83,921 $77,240
************
Simply put, insurance is the sale of promises. The “customer” pays money now; the insurer promises to
pay money in the future should certain unwanted events occur.
Sometimes, the promise will not be tested for decades. (Think of life insurance bought by people in their
20s.) Therefore, both the ability and willingness of the insurer to pay, even if economic chaos prevails when
payment time arrives, is all-important.
Berkshire’s promises have no equal, a fact affirmed in recent years by certain of the world’s largest and
most sophisticated P/C insurers, who wished to shed themselves of huge and exceptionally long-lived liabilities.
That is, these insurers wished to “cede” these liabilities – most of them potential losses from asbestos claims – to a
reinsurer. They needed the right one, though: If a reinsurer fails to pay a loss, the original insurer is still on the hook
for it. Choosing a reinsurer, therefore, that down the road proves to be financially strapped or a bad actor threatens
the original insurer with getting huge liabilities right back in its lap.
Last year, our premier position in reinsurance was reaffirmed by our writing a policy carrying a $3 billion
single premium. I believe that the policy’s size has only been exceeded by our 2007 transaction with Lloyd’s, in
which the premium was $7.1 billion.
In fact, I know of only eight P/C policies in history that had a single premium exceeding $1 billion. And,
yes, all eight were written by Berkshire. Certain of these contracts will require us to make substantial payments 50
years or more from now. When major insurers have needed an unquestionable promise that payments of this type
will be made, Berkshire has been the party – the only party – to call.
************
Berkshire’s great managers, premier financial strength and a variety of business models protected by
wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for
Berkshire shareholders that will only get more valuable with time.
11
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and Berkshire Hathaway Energy (“BHE”), that share important
characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in
this letter and split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with
these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact
not needed because each company has earning power that even under terrible economic conditions will far exceed
its interest requirements. Last year, for example, BNSF’s interest coverage was more than 8:1. (Our definition of
coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly used measure we view as seriously flawed.)
At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances.
The first is common to all utilities: recession-resistant earnings, which result from these companies offering an
essential service on an exclusive basis. The second is enjoyed by few other utilities: a great diversity of earnings
streams, which shield us from being seriously harmed by any single regulatory body. Recently, we have further
broadened that base through our $3 billion (Canadian) acquisition of AltaLink, an electric transmission system
serving 85% of Alberta’s population. This multitude of profit streams, supplemented by the inherent advantage of
being owned by a strong parent, has enabled BHE and its utility subsidiaries to significantly lower their cost of debt.
This economic fact benefits both us and our customers.
Every day, our two subsidiaries power the American economy in major ways:
• BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by
truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact
establishing BNSF as the most important artery in our economy’s circulatory system.
BNSF, like all railroads, also moves its cargo in an extraordinarily fuel-efficient and environmentally
friendly way, carrying a ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on
the same job guzzle about four times as much fuel.
• BHE’s utilities serve regulated retail customers in eleven states. No utility company stretches further. In
addition, we are a leader in renewables: From a standing start ten years ago, BHE now accounts for 6% of
the country’s wind generation capacity and 7% of its solar generation capacity. Beyond these businesses,
BHE owns two large pipelines that deliver 8% of our country’s natural gas consumption; the recently￾purchased electric transmission operation in Canada; and major electric businesses in the U.K. and
Philippines. And the beat goes on: We will continue to buy and build utility operations throughout the
world for decades to come.
BHE can make these investments because it retains all of its earnings. In fact, last year the company
retained more dollars of earnings – by far – than any other American electric utility. We and our
regulators see this 100% retention policy as an important advantage – one almost certain to distinguish
BHE from other utilities for many years to come.
When BHE completes certain renewables projects that are underway, the company’s renewables portfolio
will have cost $15 billion. In addition, we have conventional projects in the works that will also cost many billions.
We relish making such commitments as long as they promise reasonable returns – and, on that front, we put a large
amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever
need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital
providers in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our
self-interest to conduct our operations in a way that earns the approval of our regulators and the people they
represent.
12
Last year we fully met this objective at BHE, just as we have in every year of our ownership. Our rates
remain low, our customer satisfaction is high and our record for employee safety is among the best in the industry.
The story at BNSF, however – as I noted earlier – was not good in 2014, a year in which the railroad
disappointed many of its customers. This problem occurred despite the record capital expenditures that BNSF has
made in recent years, with those having far exceeded the outlays made by Union Pacific, our principal competitor.
The two railroads are of roughly equal size measured by revenues, though we carry considerably more
freight (measured either by carloads or ton-miles). But our service problems exceeded Union Pacific’s last year, and
we lost market share as a result. Moreover, U.P.’s earnings beat ours by a record amount. Clearly, we have a lot of
work to do.
We are wasting no time: As I also mentioned earlier, we will spend $6 billion in 2015 on improving our
railroad’s operation. That will amount to about 26% of estimated revenues (a calculation that serves as the
industry’s yardstick). Outlays of this magnitude are largely unheard of among railroads. For us, this percentage
compares to our average of 18% in 2009-2013 and to U.P.’s projection for the near future of 16-17%. Our huge
investments will soon lead to a system with greater capacity and much better service. Improved profits should
follow.
Here are the key figures for Berkshire Hathaway Energy and BNSF:
Berkshire Hathaway Energy (89.9% owned) Earnings (in millions)
2014 2013 2012
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527 $ 362 $ 429
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 230 236
Nevada utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549 — —
PacifiCorp (primarily Oregon and Utah) ..................................... 1,010 982 737
Gas Pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 385 383
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 139 82
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 4 91
Operating earnings before corporate interest and taxes ....................... 3,138 2,102 1,958
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 296 314
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616 170 172
Net earnings ................................................................ $ 2,095 $ 1,636 $ 1,472
Earnings applicable to Berkshire ............................................ $ 1,882 $ 1,470 $ 1,323
BNSF Earnings (in millions)
2014 2013 2012
Revenues ................................................................... $23,239 $22,014 $20,835
Operating expenses ......................................................... 16,237 15,357 14,835
Operating earnings before interest and taxes ................................. 7,002 6,657 6,000
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833 729 623
Income taxes................................................................ 2,300 2,135 2,005
Net earnings ................................................................ $ 3,869 $ 3,793 $ 3,372
13
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/14 (in millions)
Assets Liabilities and Equity
Cash and equivalents ...................... $ 5,765 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965
Accounts and notes receivable ............. 8,264 Other current liabilities ................. 9,734
Inventory .................................. 10,236 Total current liabilities .................. 10,699
Other current assets ....................... 1,117
Total current assets ........................ 25,382
Deferred taxes .......................... 3,801
Goodwill and other intangibles ............ 28,107 Term debt and other liabilities........... 4,269
Fixed assets ............................... 13,806 Non-controlling interests . . . . . . . . . . . . . . . . 492
Other assets ............................... 3,793 Berkshire equity ........................ 51,827
$71,088 $71,088
Earnings Statement (in millions)
2014 2013* 2012*
Revenues .................................................................. $97,689 $93,472 $81,432
Operating expenses ........................................................ 90,788 87,208 75,734
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 104 112
Pre-tax earnings............................................................ 6,792 6,160 5,586
Income taxes and non-controlling interests ................................. 2,324 2,283 2,229
Net earnings ............................................................... $ 4,468 $ 3,877 $ 3,357
*Earnings for 2012 and 2013 have been restated to exclude Marmon’s leasing operations, which are now included in
the Finance and Financial Products section.
Our income and expense data conforming to GAAP is on page 49. In contrast, the operating expense
figures above are non-GAAP and exclude some purchase-accounting items (primarily the amortization of certain
intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers more
accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP
figures.
I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand
the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For
software, as a big example, amortization charges are very real expenses. The concept of making charges against
other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting
rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.
Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint
they could not be more different.
14
In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been
deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non￾existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real
amortization charges will almost certainly rise further as we acquire more companies.
The GAAP-compliant table on page 67 gives you the current status of our intangible assets. We now have
$7.4 billion left to amortize, of which $4.1 billion will be charged over the next five years. Eventually, of course,
every dollar of non-real costs becomes entirely charged off. When that happens, reported earnings increase even if
true earnings are flat.
Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report
is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire
them up for a polygraph test.
Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,
you should remember to add back most of the amortization charges we report.
************
To get back to our many manufacturing, service and retailing operations, they sell products ranging from
lollipops to jet airplanes. Some of this sector’s businesses, measured by earnings on unleveraged net tangible assets,
enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others generate good
returns in the area of 12% to 20%. A few, however, have very poor returns, the result of some serious mistakes I
made in my job of capital allocation. I was not misled: I simply was wrong in my evaluation of the economic
dynamics of the company or the industry in which it operates.
Fortunately, my blunders normally involved relatively small acquisitions. Our large buys have generally
worked out well and, in a few cases, more than well. I have not, nonetheless, made my last mistake in purchasing
either businesses or stocks. Not everything works out as planned.
Viewed as a single entity, the companies in this group are an excellent business. They employed an average
of $24 billion of net tangible assets during 2014 and, despite their holding large quantities of excess cash and using
little leverage, earned 18.7% after-tax on that capital.
Of course, a business with terrific economics can be a bad investment if it is bought for too high a price. We
have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large
figure we show for goodwill. Overall, however, we are getting a decent return on the capital we have deployed in
this sector. Furthermore, the intrinsic value of these businesses, in aggregate, exceeds their carrying value by a good
margin, and that premium is likely to widen. Even so, the difference between intrinsic value and carrying value in
both the insurance and regulated-industry segments is far greater. It is there that the truly big winners reside.
************
We have far too many companies in this group to comment on them individually. Moreover, their
competitors – both current and potential – read this report. In a few of our businesses we might be disadvantaged if
others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire,
therefore, we only disclose what is required. You can find a good bit of detail about many of our operations,
however, on pages 97-100.
15
Finance and Financial Products
This year we include in this section Marmon’s very sizable leasing operations, whose wares are railcars,
containers and cranes. We have also restated the previous two years to reflect that change. Why have we made it? At
one time there was a large minority ownership at Marmon, and I felt it was more understandable to include all of the
company’s operations in one place. Today we own virtually 100% of Marmon, which makes me think you will gain
more insight into our various businesses if we include Marmon’s leasing operations under this heading. (The figures
for the many dozens of Marmon’s other businesses remain in the previous section.)
Our other leasing and rental operations are conducted by CORT (furniture) and XTRA (semi-trailers).
These companies are industry leaders and have substantially increased their earnings as the American economy has
gained strength. Both companies have invested more money in new equipment than have many of their competitors,
and that’s paying off.
Kevin Clayton has again delivered an industry-leading performance at Clayton Homes, the largest home
builder in America. Last year, Clayton sold 30,871 homes, about 45% of the manufactured homes bought by
Americans. When we purchased Clayton in 2003 for $1.7 billion, its share was 14%.
Key to Clayton’s earnings is the company’s $13 billion mortgage portfolio. During the financial panic of
2008 and 2009, when funding for the industry dried up, Clayton was able to keep lending because of Berkshire’s
backing. In fact, we continued during that period to finance our competitors’ retail sales as well as our own.
Many of Clayton’s borrowers have low incomes and mediocre FICO scores. But thanks to the company’s
sensible lending practices, its portfolio performed well during the recession, meaning a very high percentage of our
borrowers kept their homes. Our blue-collar borrowers, in many cases, proved much better credit risks than their
higher-income brethren.
At Marmon’s railroad-car operation, lease rates have improved substantially over the past few years. The
nature of this business, however, is that only 20% or so of our leases expire annually. Consequently, improved
pricing only gradually works its way into our revenue stream. The trend, though, is strong. Our 105,000-car fleet
consists largely of tank cars, but only 8% of those transport crude oil.
One further fact about our rail operation is important for you to know: Unlike many other lessors, we
manufacture our own tank cars, about 6,000 of them in a good year. We do not book any profit when we transfer
cars from our manufacturing division to our leasing division. Our fleet is consequently placed on our books at a
“bargain” price. The difference between that figure and a “retail” price is only slowly reflected in our earnings
through smaller annual depreciation charges that we enjoy over the 30-year life of the car. Because of that fact as
well as others, Marmon’s rail fleet is worth considerably more than the $5 billion figure at which it is carried on our
books.
Here’s the earnings recap for this sector:
2014 2013 2012
(in millions)
Berkadia (our 50% share) . . . . . . . . . . . . . $ 122 $ 80 $ 35
Clayton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 416 255
CORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 40 42
Marmon – Containers and Cranes . . . . . 238 226 246
Marmon – Railcars . . . . . . . . . . . . . . . . . . . . 442 353 299
XTRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 125 106
Net financial income* . . . . . . . . . . . . . . . . . 296 324 410
$ 1,839 $ 1,564 $ 1,393
* Excludes capital gains or losses
16
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value.
12/31/14
Shares** Company
Percentage of
Company
Owned
Cost* Market
(in millions)
151,610,700 American Express Company ................. 14.8 $ 1,287 $ 14,106
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . 9.2 1,299 16,888
18,513,482 DaVita HealthCare Partners Inc. . . . . . . . . . . . . . 8.6 843 1,402
15,430,586 Deere & Company . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 1,253 1,365
24,617,939 DIRECTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 1,454 2,134
13,062,594 The Goldman Sachs Group, Inc. . . . . . . . . . . . . . 3.0 750 2,532
76,971,817 International Business Machines Corp. . . . . . . 7.8 13,157 12,349
24,669,778 Moody’s Corporation ........................ 12.1 248 2,364
20,060,390 Munich Re .................................. 11.8 2,990 4,023
52,477,678 The Procter & Gamble Company . . . . . . . . . . . . 1.9 336 4,683 ***
22,169,930 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,721 2,032
96,890,665 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 3,033 4,355
43,387,980 USG Corporation ............................ 30.0 836 1,214
67,707,544 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2.1 3,798 5,815
483,470,853 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . 9.4 11,871 26,504
Others....................................... 10,180 15,704
Total Common Stocks Carried at Market .... $55,056 $ 117,470
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or
write-downs that have been required under GAAP rules.
**Excludes shares held by pension funds of Berkshire subsidiaries.
***Held under contract of sale for this amount.
Berkshire has one major equity position that is not included in the table: We can buy 700 million shares
of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $12.5
billion. We are likely to purchase the shares just before expiration of our option. In the meantime, it is important for
you to realize that Bank of America is, in effect, our fourth largest equity investment – and one we value highly.
************
Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock
investments, is now absent. An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I
made a big mistake with this investment by dawdling.
At the end of 2012 we owned 415 million shares of Tesco, then and now the leading food retailer in the
U.K. and an important grocer in other countries as well. Our cost for this investment was $2.3 billion, and the
market value was a similar amount.
17
In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a
profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior
“thumb-sucking.” (Considering what my delay cost us, he is being kind.)
During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins
contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a
cockroach in your kitchen; as the days go by, you meet his relatives.
We sold Tesco shares throughout the year and are now out of the position. (The company, we should
mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444
million, about 1/5 of 1% of Berkshire’s net worth. In the past 50 years, we have only once realized an investment
loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses
occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to
be even cheaper.
************
Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500
rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2.
Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes
$1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).
There is an important message for investors in that disparate performance between stocks and dollars.
Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power
now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal
gains – in the future.”
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far
safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for
example – whose values have been tied to American currency. That was also true in the preceding half-century, a
period including the Great Depression and two world wars. Investors should heed this history. To one degree or
another it is almost certain to be repeated during the next century.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however,
currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock
portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That
lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for
risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from
synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and
purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say,
investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell
securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds
should keep appropriate sums in Treasuries or insured bank deposits.
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon,
quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing
power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less
risky than dollar-based securities.
18
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may,
ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling
stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this
sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The
S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these
investors could have assured themselves of a good income for life by simply buying a very low-cost index fund
whose dividends would trend upward over the years and whose principal would grow as well (with many ups and
downs, to be sure).
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active
trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees
to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of
equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can
happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can
tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional
investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits
tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn,
recommend high-fee managers. And that is a fool’s game.
There are a few investment managers, of course, who are very good – though in the short run, it’s difficult
to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high
fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to
their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense
Investing.
Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare:
“The fault, dear Brutus, is not in our stars, but in ourselves.”
The Annual Meeting
The annual meeting will be held on Saturday, May 2nd at the CenturyLink Center. Last year’s attendance
of 39,000 set a record, and we expect a further increase this year as we celebrate our Golden Anniversary. Be there
when the doors open at 7 a.m.
Berkshire’s talented Carrie Sova will again be in charge. Carrie joined us six years ago at the age of 24 as
a secretary. Then, four years ago, I asked her to take charge of the meeting – a huge undertaking, requiring a
multitude of skills – and she jumped at the chance. Carrie is unflappable, ingenious and expert at bringing out the
best in the hundreds who work with her. She is aided by our entire home office crew who enjoy pitching in to make
the weekend fun and informative for our owners.
And, yes, we also try to sell our visiting shareholders our products while they’re here. In fact, this year
we will substantially increase the hours available for purchases, opening for business at the CenturyLink on Friday,
May 1st, from noon to 5 p.m. as well as the usual 7 a.m. to 4 p.m. on meeting day. So bring a smile to Charlie’s face
and do some serious shopping.
Get up early on Saturday morning. At 6:20 a.m., Norman and Jake, two Texas longhorns each weighing
about a ton, will proceed down 10th Street to the CenturyLink. Aboard them will be a couple of our Justin Boot
executives, who do double duty as cowboys. Following the steers will be four horses pulling a Wells Fargo
stagecoach. Berkshire already markets planes, trains and automobiles. Adding steers and stagecoaches to our
portfolio should seal our reputation as America’s all-purpose transportation company.
19
At about 7:30 a.m. on Saturday, we will have our fourth International Newspaper Tossing Challenge. Our
target again will be a Clayton Home porch, located precisely 35 feet from the throwing line. When I was a teenager
– in my one brief flirtation with honest labor – I tossed about 500,000 papers. So I think I’m pretty good. Challenge
me! Humiliate me! Knock me down a peg! I’ll buy a Dilly Bar for anyone who lands his or her throw closer to the
doorstep than I do. The papers will run 36 to 42 pages, and you must fold them yourself (no rubber bands allowed).
I’ll present a special prize to the 12-or-under contestant who makes the best toss. Deb Bosanek will be the judge.
At 8:30 a.m., a new Berkshire movie will be shown. An hour later, we will start the question-and-answer
period, which (with a break for lunch at CenturyLink’s stands) will last until 3:30 p.m. After a short recess, Charlie
and I will convene the annual meeting at 3:45 p.m. This business session typically lasts only a half hour or so.
Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which
products from dozens of Berkshire subsidiaries will be for sale. If you don’t get your shopping done on Friday, slip
out while Charlie’s talking on Saturday and binge on our bargains. Check the terrific BNSF railroad layout also.
Even though I’m 84, it still excites me.
Last year you did your part as a shopper, and most of our businesses racked up record sales. In a nine-hour
period on Saturday, we sold 1,385 pairs of Justin boots (that’s a pair every 23 seconds), 13,440 pounds of See’s
candy, 7,276 pairs of Wells Lamont work gloves and 10,000 bottles of Heinz ketchup. Heinz has a new mustard
product, so both mustard and ketchup will be available this year. (Buy both!) Now that we are open for business on
Friday as well, we expect new records in every precinct.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the
meeting. After you purchase a pair, wear them the next day at our third annual “Berkshire 5K,” an 8 a.m. race
starting at the CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent to
you with your credentials for the meeting. Entrants in the race will find themselves running alongside many of
Berkshire’s managers, directors and associates. (Charlie and I, however, will sleep in.)
A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from
around the country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount
(usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental
point: The discount is not additive if you qualify for another discount, such as that available to certain groups.)
Bring the details of your existing insurance and check out our price. We can save many of you real money.
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, among them a couple of new
titles. Last year, many shareholders purchased Max Olson’s compilation of Berkshire letters going back to 1965,
and he has produced an updated edition for the meeting. We also expect to be selling an inexpensive book
commemorating our fifty years. It’s currently a work in process, but I expect it to contain a wide variety of historical
material, including documents from the 19th Century.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to both the meeting and other events. Airlines have sometimes jacked up
prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City vs.
Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can save you
significant money, particularly if you had planned to rent a car in Omaha. The savings for a couple could run to
$1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. Last year in the week surrounding the meeting, the store did
a record $40,481,817 of business. (An average week for NFM’s Omaha store is about $9 million.)
20
To obtain the Berkshire discount at NFM, you must make your purchases between Tuesday, April 28th
and Monday, May 4th inclusive, and also present your meeting credential. The period’s special pricing will even
apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but
which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation.
NFM is open from 10 a.m. to 9 p.m. Monday through Friday, 10 a.m. to 9:30 p.m. on Saturday and 10 a.m. to 8 p.m.
on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is having a picnic to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from
6 p.m. to 9 p.m. on Friday, May 1st. The second, the main gala, will be held on Sunday, May 3rd, from 9 a.m. to 4
p.m. On Saturday, we will remain open until 6 p.m. In recent years, our three-day volume has far exceeded our sales
in all of December, normally a jeweler’s best month.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 27th through Saturday, May 9th. During that period, please
identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that shows you
are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, Norman Beck, a remarkable magician from Dallas, will
bewilder onlookers. Additionally, we will have Bob Hamman and Sharon Osberg, two of the world’s top bridge
experts, available to play bridge with our shareholders on Sunday afternoon. Don’t play them for money.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met
Ariel when she was nine and even then I was unable to score a point against her. Now, she’s a sophomore at
Princeton, having already represented the United States in the 2012 Olympics. If you don’t mind embarrassing
yourself, test your skills against her, beginning at 1 p.m. Bill Gates and I will lead off and try to soften her up.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 3rd.
Both will be serving until 10 p.m., with Gorat’s opening at 1 p.m. and Piccolo’s opening at 4 p.m. These restaurants
are my favorites, and I will eat at both of them on Sunday evening. Remember: To make a reservation at Gorat’s,
call 402-551-3733 on April 1st (but not before); for Piccolo’s, call 402-346-2865. At Piccolo’s, order a giant root
beer float for dessert. Only sissies get the small one.
We will again have the same three financial journalists lead the question-and-answer period at the
meeting, asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and
their e-mail addresses are: Carol Loomis, who retired last year after sixty years at Fortune, but remains the expert on
business and financial matters, and who may be e-mailed at loomisbrk@gmail.com; Becky Quick, of CNBC, at
BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the six he or she decides are the most
interesting and important. The journalists have told me your question has the best chance of being selected if you
keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two
questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name
mentioned if your question is asked.)
We will also have a panel of three analysts who follow Berkshire. This year the insurance specialist will
be Gary Ransom of Dowling & Partners. Questions that deal with our non-insurance operations will come from
Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Our hope is that the analysts and
journalists will ask questions that add to our owners’ understanding and knowledge of their investment.
21
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough,
for sure, and that’s the way we like it. All told we expect at least 54 questions, which will allow for six from each
analyst and journalist and for 18 from the audience. (Last year we had 62 in total.) The questioners from the
audience will be chosen by means of 11 drawings that will take place at 8:15 a.m. on the morning of the annual
meeting. Each of the 11 microphones installed in the arena and main overflow room will host, so to speak, a
drawing.
While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe
all shareholders should simultaneously have access to new information that Berkshire releases and should also have
adequate time to analyze it. That’s why we try to issue financial data late on Fridays or early on Saturdays and why
our annual meeting is always held on a Saturday. We do not talk one-on-one to large institutional investors or
analysts, treating them instead as we do all other shareholders.
************
We get terrific help at meeting time from literally thousands of Omaha residents and businesses who
want you to enjoy yourselves. This year, because we expect record attendance, we have worried about a shortage of
hotel rooms. To deal with that possible problem, Airbnb is making a special effort to obtain listings for the period
around meeting time and is likely to have a wide array of accommodations to offer. Airbnb’s services may be
especially helpful to shareholders who expect to spend only a single night in Omaha and are aware that last year a
few hotels required guests to pay for a minimum of three nights. That gets expensive. Those people on a tight
budget should check the Airbnb website.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All￾Stars who run their businesses as if they were the only asset owned by their families. I believe the mindset of our
managers also to be as shareholder-oriented as can be found in the universe of large publicly-owned companies.
Most of our managers have no financial need to work. The joy of hitting business “home runs” means as much to
them as their paycheck.
Equally important, however, are the 24 men and women who work with me at our corporate office. This
group efficiently deals with a multitude of SEC and other regulatory requirements, files a 24,100-page Federal
income tax return and oversees the filing of 3,400 state tax returns, responds to countless shareholder and media
inquiries, gets out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s
activities – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year they dealt with the 40
universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also handle
all kinds of requests that I receive, arrange my travel, and even get me hamburgers and french fries (smothered in
Heinz ketchup, of course) for lunch. No CEO has it better; I truly do feel like tap dancing to work every day.
Last year, for the annual report, we dropped our 48-year-old “no pictures” policy – who says I’m not
flexible? – and ran a photo of our remarkable home-office crew that was taken at our Christmas lunch. I didn’t warn
the gang of the public exposure they were to receive, so they didn’t have on their Sunday best. This year was a
different story: On the facing page you will see what our group looks like when they think someone will be noticing.
However they dress, their performance is mind-boggling.
Come meet them on May 2nd and enjoy our Woodstock for Capitalists.
February 27, 2015
Warren E. Buffett
Chairman of the Board
22
BERKSHIRE HATHAWAY INC.
ACQUISITION CRITERIA
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction
when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range. We
are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer – customarily
within five minutes – as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as
much in intrinsic business value as we give. We don’t participate in auctions.
Charlie and I frequently get approached about acquisitions that don’t come close to meeting our tests: We’ve found that if you
advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song
expresses our feeling about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me.”
23
Berkshire – Past, Present and Future
In the Beginning
On May 6, 1964, Berkshire Hathaway, then run by a man named Seabury Stanton, sent a letter to its
shareholders offering to buy 225,000 shares of its stock for $11.375 per share. I had expected the letter; I was
surprised by the price.
Berkshire then had 1,583,680 shares outstanding. About 7% of these were owned by Buffett Partnership
Ltd. (“BPL”), an investing entity that I managed and in which I had virtually all of my net worth. Shortly before the
tender offer was mailed, Stanton had asked me at what price BPL would sell its holdings. I answered $11.50, and he
said, “Fine, we have a deal.” Then came Berkshire’s letter, offering an eighth of a point less. I bristled at Stanton’s
behavior and didn’t tender.
That was a monumentally stupid decision.
Berkshire was then a northern textile manufacturer mired in a terrible business. The industry in which it
operated was heading south, both metaphorically and physically. And Berkshire, for a variety of reasons, was unable
to change course.
That was true even though the industry’s problems had long been widely understood. Berkshire’s own
Board minutes of July 29, 1954, laid out the grim facts: “The textile industry in New England started going out of
business forty years ago. During the war years this trend was stopped. The trend must continue until supply and
demand have been balanced.”
About a year after that board meeting, Berkshire Fine Spinning Associates and Hathaway Manufacturing –
both with roots in the 19th Century – joined forces, taking the name we bear today. With its fourteen plants and
10,000 employees, the merged company became the giant of New England textiles. What the two managements
viewed as a merger agreement, however, soon morphed into a suicide pact. During the seven years following the
consolidation, Berkshire operated at an overall loss, and its net worth shrunk by 37%.
Meanwhile, the company closed nine plants, sometimes using the liquidation proceeds to repurchase
shares. And that pattern caught my attention.
I purchased BPL’s first shares of Berkshire in December 1962, anticipating more closings and more
repurchases. The stock was then selling for $7.50, a wide discount from per-share working capital of $10.25 and
book value of $20.20. Buying the stock at that price was like picking up a discarded cigar butt that had one puff
remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure
was enjoyed, however, no more could be expected.
Berkshire thereafter stuck to the script: It soon closed another two plants, and in that May 1964 move, set
out to repurchase shares with the shutdown proceeds. The price that Stanton offered was 50% above the cost of our
original purchases. There it was – my free puff, just waiting for me, after which I could look elsewhere for other
discarded butts.
Instead, irritated by Stanton’s chiseling, I ignored his offer and began to aggressively buy more Berkshire
shares.
24
By April 1965, BPL owned 392,633 shares (out of 1,017,547 then outstanding) and at an early-May board
meeting we formally took control of the company. Through Seabury’s and my childish behavior – after all, what
was an eighth of a point to either of us? – he lost his job, and I found myself with more than 25% of BPL’s capital
invested in a terrible business about which I knew very little. I became the dog who caught the car.
Because of Berkshire’s operating losses and share repurchases, its net worth at the end of fiscal 1964 had
fallen to $22 million from $55 million at the time of the 1955 merger. The full $22 million was required by the
textile operation: The company had no excess cash and owed its bank $2.5 million. (Berkshire’s 1964 annual report
is reproduced on pages 130-142.)
For a time I got lucky: Berkshire immediately enjoyed two years of good operating conditions. Better yet,
its earnings in those years were free of income tax because it possessed a large loss carry-forward that had arisen
from the disastrous results in earlier years.
Then the honeymoon ended. During the 18 years following 1966, we struggled unremittingly with the
textile business, all to no avail. But stubbornness – stupidity? – has its limits. In 1985, I finally threw in the towel
and closed the operation.
************
Undeterred by my first mistake of committing much of BPL’s resources to a dying business, I quickly
compounded the error. Indeed, my second blunder was far more serious than the first, eventually becoming the most
costly in my career.
Early in 1967, I had Berkshire pay $8.6 million to buy National Indemnity Company (“NICO”), a small but
promising Omaha-based insurer. (A tiny sister company was also included in the deal.) Insurance was in my sweet
spot: I understood and liked the industry.
Jack Ringwalt, the owner of NICO, was a long-time friend who wanted to sell to me – me, personally. In
no way was his offer intended for Berkshire. So why did I purchase NICO for Berkshire rather than for BPL? I’ve
had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal
mistake.
If BPL had been the purchaser, my partners and I would have owned 100% of a fine business, destined to
form the base for building the company Berkshire has become. Moreover, our growth would not have been impeded
for nearly two decades by the unproductive funds imprisoned in the textile operation. Finally, our subsequent
acquisitions would have been owned in their entirety by my partners and me rather than being 39%-owned by the
legacy shareholders of Berkshire, to whom we had no obligation. Despite these facts staring me in the face, I opted
to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision
that eventually diverted $100 billion or so from BPL partners to a collection of strangers.
************
One more confession and then I’ll go on to more pleasant topics: Can you believe that in 1975 I bought
Waumbec Mills, another New England textile company? Of course, the purchase price was a “bargain” based on the
assets we received and the projected synergies with Berkshire’s existing textile business. Nevertheless – surprise,
surprise – Waumbec was a disaster, with the mill having to be closed down not many years later.
And now some good news: The northern textile industry is finally extinct. You need no longer panic if you
hear that I’ve been spotted wandering around New England.
25
Charlie Straightens Me Out
My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of
free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute
investment performance.
Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a
1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned
that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains
in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben
Graham had taught me that technique, and it worked.
But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only
to a point. With large sums, it would never work well.
In addition, though marginal businesses purchased at cheap prices may be attractive as short-term
investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage
partner clearly requires more demanding criteria than does dating. (Berkshire, it should be noted, would have been a
highly satisfactory “date”: If we had taken Seabury Stanton’s $11.375 offer for our shares, BPL’s weighted annual
return on its Berkshire investment would have been about 40%.)
************
It took Charlie Munger to break my cigar-butt habits and set the course for building a business that could
combine huge size with satisfactory profits. Charlie had grown up a few hundred feet from where I now live and as
a youth had worked, as did I, in my grandfather’s grocery store. Nevertheless, it was 1959 before I met Charlie, long
after he had left Omaha to make Los Angeles his home. I was then 28 and he was 35. The Omaha doctor who
introduced us predicted that we would hit it off – and we did.
If you’ve attended our annual meetings, you know Charlie has a wide-ranging brilliance, a prodigious
memory, and some firm opinions. I’m not exactly wishy-washy myself, and we sometimes don’t agree. In 56 years,
however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: “Warren,
think it over and you’ll agree with me because you’re smart and I’m right.”
What most of you do not know about Charlie is that architecture is among his passions. Though he began
his career as a practicing lawyer (with his time billed at $15 per hour), Charlie made his first real money in his 30s
by designing and building five apartment projects near Los Angeles. Concurrently, he designed the house that he
lives in today – some 55 years later. (Like me, Charlie can’t be budged if he is happy in his surroundings.) In recent
years, Charlie has designed large dorm complexes at Stanford and the University of Michigan and today, at age 91,
is working on another major project.
From my perspective, though, Charlie’s most important architectural feat was the design of today’s
Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful
prices; instead, buy wonderful businesses at fair prices.
26
Altering my behavior is not an easy task (ask my family). I had enjoyed reasonable success without
Charlie’s input, so why should I listen to a lawyer who had never spent a day in business school (when – ahem – I
had attended three). But Charlie never tired of repeating his maxims about business and investing to me, and his
logic was irrefutable. Consequently, Berkshire has been built to Charlie’s blueprint. My role has been that of general
contractor, with the CEOs of Berkshire’s subsidiaries doing the real work as sub-contractors.
The year 1972 was a turning point for Berkshire (though not without occasional backsliding on my part –
remember my 1975 purchase of Waumbec). We had the opportunity then to buy See’s Candy for Blue Chip Stamps,
a company in which Charlie, I and Berkshire had major stakes, and which was later merged into Berkshire.
See’s was a legendary West Coast manufacturer and retailer of boxed chocolates, then annually earning
about $4 million pre-tax while utilizing only $8 million of net tangible assets. Moreover, the company had a huge
asset that did not appear on its balance sheet: a broad and durable competitive advantage that gave it significant
pricing power. That strength was virtually certain to give See’s major gains in earnings over time. Better yet, these
would materialize with only minor amounts of incremental investment. In other words, See’s could be expected to
gush cash for decades to come.
The family controlling See’s wanted $30 million for the business, and Charlie rightly said it was worth that
much. But I didn’t want to pay more than $25 million and wasn’t all that enthusiastic even at that figure. (A price
that was three times net tangible assets made me gulp.) My misguided caution could have scuttled a terrific
purchase. But, luckily, the sellers decided to take our $25 million bid.
To date, See’s has earned $1.9 billion pre-tax, with its growth having required added investment of only
$40 million. See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that,
in turn, have themselves produced large distributable profits. (Envision rabbits breeding.) Additionally, through
watching See’s in action, I gained a business education about the value of powerful brands that opened my eyes to
many other profitable investments.
************
Even with Charlie’s blueprint, I have made plenty of mistakes since Waumbec. The most gruesome was
Dexter Shoe. When we purchased the company in 1993, it had a terrific record and in no way looked to me like a
cigar butt. Its competitive strengths, however, were soon to evaporate because of foreign competition. And I simply
didn’t see that coming.
Consequently, Berkshire paid $433 million for Dexter and, rather promptly, its value went to zero. GAAP
accounting, however, doesn’t come close to recording the magnitude of my error. The fact is that I gave Berkshire
stock to the sellers of Dexter rather than cash, and the shares I used for the purchase are now worth about $5.7
billion. As a financial disaster, this one deserves a spot in the Guinness Book of World Records.
Several of my subsequent errors also involved the use of Berkshire shares to purchase businesses whose
earnings were destined to simply limp along. Mistakes of that kind are deadly. Trading shares of a wonderful
business – which Berkshire most certainly is – for ownership of a so-so business irreparably destroys value.
We’ve also suffered financially when this mistake has been committed by companies whose shares
Berkshire has owned (with the errors sometimes occurring while I was serving as a director). Too often CEOs seem
blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than
the intrinsic value of the business you receive.
27
I’ve yet to see an investment banker quantify this all-important math when he is presenting a stock-for￾stock deal to the board of a potential acquirer. Instead, the banker’s focus will be on describing “customary”
premiums-to-market-price that are currently being paid for acquisitions – an absolutely asinine way to evaluate the
attractiveness of an acquisition – or whether the deal will increase the acquirer’s earnings-per-share (which in itself
should be far from determinative). In striving to achieve the desired per-share number, a panting CEO and his
“helpers” will often conjure up fanciful “synergies.” (As a director of 19 companies over the years, I’ve never heard
“dis-synergies” mentioned, though I’ve witnessed plenty of these once deals have closed.) Post mortems of
acquisitions, in which reality is honestly compared to the original projections, are rare in American boardrooms.
They should instead be standard practice.
I can promise you that long after I’m gone, Berkshire’s CEO and Board will carefully make intrinsic value
calculations before issuing shares in any acquisitions. You can’t get rich trading a hundred-dollar bill for eight tens
(even if your advisor has handed you an expensive “fairness” opinion endorsing that swap).
************
Overall, Berkshire’s acquisitions have worked out well – and very well in the case of a few large ones. So,
too, have our investments in marketable securities. The latter are always valued on our balance sheet at their market
prices so any gains – including those unrealized – are immediately reflected in our net worth. But the businesses we
buy outright are never revalued upward on our balance sheet, even when we could sell them for many billions of
dollars more than their carrying value. The unrecorded gains in the value of Berkshire’s subsidiaries have become
huge, with these growing at a particularly fast pace in the last decade.
Listening to Charlie has paid off.
28
Berkshire Today
Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.
Conglomerates, it should be acknowledged, have a terrible reputation with investors. And they richly
deserve it. Let me first explain why they are in the doghouse, and then I will go on to describe why the
conglomerate form brings huge and enduring advantages to Berkshire.
Since I entered the business world, conglomerates have enjoyed several periods of extreme popularity, the
silliest of which occurred in the late 1960s. The drill for conglomerate CEOs then was simple: By personality,
promotion or dubious accounting – and often by all three – these managers drove a fledgling conglomerate’s stock
to, say, 20 times earnings and then issued shares as fast as possible to acquire another business selling at ten-or-so
times earnings. They immediately applied “pooling” accounting to the acquisition, which – with not a dime’s worth
of change in the underlying businesses – automatically increased per-share earnings, and used the rise as proof of
managerial genius. They next explained to investors that this sort of talent justified the maintenance, or even the
enhancement, of the acquirer’s p/e multiple. And, finally, they promised to endlessly repeat this procedure and
thereby create ever-increasing per-share earnings.
Wall Street’s love affair with this hocus-pocus intensified as the 1960s rolled by. The Street’s denizens are
always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per-share earnings,
particularly if these acrobatics produce mergers that generate huge fees for investment bankers. Auditors willingly
sprinkled their holy water on the conglomerates’ accounting and sometimes even made suggestions as to how to
further juice the numbers. For many, gushers of easy money washed away ethical sensitivities.
Since the per-share earnings gains of an expanding conglomerate came from exploiting p/e differences, its
CEO had to search for businesses selling at low multiples of earnings. These, of course, were characteristically
mediocre businesses with poor long-term prospects. This incentive to bottom-fish usually led to a conglomerate’s
collection of underlying businesses becoming more and more junky. That mattered little to investors: It was deal
velocity and pooling accounting they looked to for increased earnings.
The resulting firestorm of merger activity was fanned by an adoring press. Companies such as ITT, Litton
Industries, Gulf & Western, and LTV were lionized, and their CEOs became celebrities. (These once-famous
conglomerates are now long gone. As Yogi Berra said, “Every Napoleon meets his Watergate.”)
Back then, accounting shenanigans of all sorts – many of them ridiculously transparent – were excused or
overlooked. Indeed, having an accounting wizard at the helm of an expanding conglomerate was viewed as a huge
plus: Shareholders in those instances could be sure that reported earnings would never disappoint, no matter how
bad the operating realities of the business might become.
In the late 1960s, I attended a meeting at which an acquisitive CEO bragged of his “bold, imaginative
accounting.” Most of the analysts listening responded with approving nods, seeing themselves as having found a
manager whose forecasts were certain to be met, whatever the business results might be.
29
Eventually, however, the clock struck twelve, and everything turned to pumpkins and mice. Once again, it
became evident that business models based on the serial issuances of overpriced shares – just like chain-letter
models – most assuredly redistribute wealth, but in no way create it. Both phenomena, nevertheless, periodically
blossom in our country – they are every promoter’s dream – though often they appear in a carefully-crafted disguise.
The ending is always the same: Money flows from the gullible to the fraudster. And with stocks, unlike chain letters,
the sums hijacked can be staggering.
At both BPL and Berkshire, we have never invested in companies that are hell-bent on issuing shares. That
behavior is one of the surest indicators of a promotion-minded management, weak accounting, a stock that is
overpriced and – all too often – outright dishonesty.
************
So what do Charlie and I find so attractive about Berkshire’s conglomerate structure? To put the case
simply: If the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital
growth.
One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets
will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its
excesses, market-driven allocation of capital is usually far superior to any alternative.
Nevertheless, there are often obstacles to the rational movement of capital. As those 1954 Berkshire
minutes made clear, capital withdrawals within the textile industry that should have been obvious were delayed for
decades because of the vain hopes and self-interest of managements. Indeed, I myself delayed abandoning our
obsolete textile mills for far too long.
A CEO with capital employed in a declining operation seldom elects to massively redeploy that capital into
unrelated activities. A move of that kind would usually require that long-time associates be fired and mistakes be
admitted. Moreover, it’s unlikely that CEO would be the manager you would wish to handle the redeployment job
even if he or she was inclined to undertake it.
At the shareholder level, taxes and frictional costs weigh heavily on individual investors when they attempt
to reallocate capital among businesses and industries. Even tax-free institutional investors face major costs as they
move capital because they usually need intermediaries to do this job. A lot of mouths with expensive tastes then
clamor to be fed – among them investment bankers, accountants, consultants, lawyers and such capital-reallocators
as leveraged buyout operators. Money-shufflers don’t come cheap.
In contrast, a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at
minimal cost. Of course, form itself is no guarantee of success: We have made plenty of mistakes, and we will make
more. Our structural advantages, however, are formidable.
At Berkshire, we can – without incurring taxes or much in the way of other costs – move huge sums from
businesses that have limited opportunities for incremental investment to other sectors with greater promise.
Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to
pressures from colleagues having a vested interest in maintaining the status quo. That’s important: If horses had
controlled investment decisions, there would have been no auto industry.
30
Another major advantage we possess is the ability to buy pieces of wonderful businesses – a.k.a. common
stocks. That’s not a course of action open to most managements. Over our history, this strategic alternative has
proved to be very helpful; a broad range of options always sharpens decision-making. The businesses we are offered
by the stock market every day – in small pieces, to be sure – are often far more attractive than the businesses we are
concurrently being offered in their entirety. Additionally, the gains we’ve realized from marketable securities have
helped us make certain large acquisitions that would otherwise have been beyond our financial capabilities.
In effect, the world is Berkshire’s oyster – a world offering us a range of opportunities far beyond those
realistically open to most companies. We are limited, of course, to businesses whose economic prospects we can
evaluate. And that’s a serious limitation: Charlie and I have no idea what a great many companies will look like ten
years from now. But that limitation is much smaller than that borne by an executive whose experience has been
confined to a single industry. On top of that, we can profitably scale to a far larger size than the many businesses
that are constrained by the limited potential of the single industry in which they operate.
I mentioned earlier that See’s Candy had produced huge earnings compared to its modest capital
requirements. We would have loved, of course, to intelligently use those funds to expand our candy operation. But
our many attempts to do so were largely futile. So, without incurring tax inefficiencies or frictional costs, we have
used the excess funds generated by See’s to help purchase other businesses. If See’s had remained a stand-alone
company, its earnings would have had to be distributed to investors to redeploy, sometimes after being heavily
depleted by large taxes and, almost always, by significant frictional and agency costs.
************
Berkshire has one further advantage that has become increasingly important over the years: We are now the
home of choice for the owners and managers of many outstanding businesses.
Families that own successful businesses have multiple options when they contemplate sale. Frequently, the
best decision is to do nothing. There are worse things in life than having a prosperous business that one understands
well. But sitting tight is seldom recommended by Wall Street. (Don’t ask the barber whether you need a haircut.)
When one part of a family wishes to sell while others wish to continue, a public offering often makes
sense. But, when owners wish to cash out entirely, they usually consider one of two paths.
The first is sale to a competitor who is salivating at the possibility of wringing “synergies” from the
combining of the two companies. This buyer invariably contemplates getting rid of large numbers of the seller’s
associates, the very people who have helped the owner build his business. A caring owner, however – and there are
plenty of them – usually does not want to leave his long-time associates sadly singing the old country song: “She got
the goldmine, I got the shaft.”
The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called
themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s – remember RJR and
Barbarians at the Gate? – these buyers hastily relabeled themselves “private-equity.”
The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in
virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part
determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.
31
Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage
with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply
downward, sometimes even to a negative figure.
In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, because debt
is currently so inexpensive, these buyers can frequently pay top dollar. Later, the business will be resold, often to
another leveraged buyer. In effect, the business becomes a piece of merchandise.
Berkshire offers a third choice to the business owner who wishes to sell: a permanent home, in which the
company’s people and culture will be retained (though, occasionally, management changes will be needed). Beyond
that, any business we acquire dramatically increases its financial strength and ability to grow. Its days of dealing
with banks and Wall Street analysts are also forever ended.
Some sellers don’t care about these matters. But, when sellers do, Berkshire does not have a lot of
competition.
************
Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no
sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to
move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate
themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal
costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors
would soar. So, too, would regulatory and administration expenditures.
Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For
example, certain tax credits that are available to our utilities are currently realizable only because we generate huge
amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage
over most public-utility companies in developing wind and solar projects.
Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50%
premiums over market price for publicly-held businesses. The bankers tell the buyer that the premium is justified for
“control value” and for the wonderful things that are going to happen once the acquirer’s CEO takes charge. (What
acquisition-hungry manager will challenge that assertion?)
A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the
earlier acquisition in order to “unlock shareholder value.” Spin-offs, of course, strip the owning company of its
purported “control value” without any compensating payment. The bankers explain that the spun-off company will
flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy
of the parent company. (So much for that talented CEO we met earlier.)
If the divesting company later wishes to reacquire the spun-off operation, it presumably would again be
urged by its bankers to pay a hefty “control” premium for the privilege. (Mental “flexibility” of this sort by the
banking fraternity has prompted the saying that fees too often lead to transactions rather than transactions leading to
fees.)
It’s possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators.
Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest
a bank we owned in Rockford, Illinois.
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Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation
flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would
have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages
derived from Berkshire’s ownership. Moreover, the parent and the spun-off operations, once separated, would likely
incur moderately greater costs than existed when they were combined.
************
Before I depart the subject of spin-offs, let’s look at a lesson to be learned from a conglomerate mentioned
earlier: LTV. I’ll summarize here, but those who enjoy a good financial story should read the piece about Jimmy
Ling that ran in the October 1982 issue of D Magazine. Look it up on the Internet.
Through a lot of corporate razzle-dazzle, Ling had taken LTV from sales of only $36 million in 1965 to
number 14 on the Fortune 500 list just two years later. Ling, it should be noted, had never displayed any managerial
skills. But Charlie told me long ago to never underestimate the man who overestimates himself. And Ling had no
peer in that respect.
Ling’s strategy, which he labeled “project redeployment,” was to buy a large company and then partially
spin off its various divisions. In LTV’s 1966 annual report, he explained the magic that would follow: “Most
importantly, acquisitions must meet the test of the 2 plus 2 equals 5 (or 6) formula.” The press, the public and Wall
Street loved this sort of talk.
In 1967 Ling bought Wilson & Co., a huge meatpacker that also had interests in golf equipment and
pharmaceuticals. Soon after, he split the parent into three businesses, Wilson & Co. (meatpacking), Wilson Sporting
Goods and Wilson Pharmaceuticals, each of which was to be partially spun off. These companies quickly became
known on Wall Street as Meatball, Golf Ball and Goof Ball.
Soon thereafter, it became clear that, like Icarus, Ling had flown too close to the sun. By the early 1970s,
Ling’s empire was melting, and he himself had been spun off from LTV . . . that is, fired.
Periodically, financial markets will become divorced from reality – you can count on that. More Jimmy
Lings will appear. They will look and sound authoritative. The press will hang on their every word. Bankers will
fight for their business. What they are saying will recently have “worked.” Their early followers will be feeling very
clever. Our suggestion: Whatever their line, never forget that 2+2 will always equal 4. And when someone tells you
how old-fashioned that math is --- zip up your wallet, take a vacation and come back in a few years to buy stocks at
cheap prices.
************
Today Berkshire possesses (1) an unmatched collection of businesses, most of them now enjoying
favorable economic prospects; (2) a cadre of outstanding managers who, with few exceptions, are unusually devoted
to both the subsidiary they operate and to Berkshire; (3) an extraordinary diversity of earnings, premier financial
strength and oceans of liquidity that we will maintain under all circumstances; (4) a first-choice ranking among
many owners and managers who are contemplating sale of their businesses and (5) in a point related to the
preceding item, a culture, distinctive in many ways from that of most large companies, that we have worked 50
years to develop and that is now rock-solid.
These strengths provide us a wonderful foundation on which to build.
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The Next 50 Years at Berkshire
Now let’s take a look at the road ahead. Bear in mind that if I had attempted 50 years ago to gauge what
was coming, certain of my predictions would have been far off the mark. With that warning, I will tell you what I
would say to my family today if they asked me about Berkshire’s future.
‹ First and definitely foremost, I believe that the chance of permanent capital loss for patient Berkshire
shareholders is as low as can be found among single-company investments. That’s because our per-share
intrinsic business value is almost certain to advance over time.
This cheery prediction comes, however, with an important caution: If an investor’s entry point into
Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares
have occasionally reached – it may well be many years before the investor can realize a profit. In other
words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire
is not exempt from this truth.
Purchases of Berkshire that investors make at a price modestly above the level at which the company
would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s
directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our
view, that is an essential criterion for repurchases that is often ignored by other managements.)
For those investors who plan to sell within a year or two after their purchase, I can offer no assurances,
whatever the entry price. Movements of the general stock market during such abbreviated periods will
likely be far more important in determining your results than the concomitant change in the intrinsic value
of your Berkshire shares. As Ben Graham said many decades ago: “In the short-term the market is a voting
machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors –
amateurs and professionals alike – border on lunacy.
Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire
shares only if you expect to hold them for at least five years. Those who seek short-term profits should look
elsewhere.
Another warning: Berkshire shares should not be purchased with borrowed money. There have been three
times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to
this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a
satisfactory holding for investors. But it could well be a disastrous choice for speculators employing
leverage.
‹ I believe the chance of any event causing Berkshire to experience financial problems is essentially zero.
We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets
to the unprepared. Berkshire played an important role as a “first responder” during the 2008-2009
meltdown, and we have since more than doubled the strength of our balance sheet and our earnings
potential. Your company is the Gibraltar of American business and will remain so.
Financial staying power requires a company to maintain three strengths under all circumstances: (1) a large
and reliable stream of earnings; (2) massive liquid assets and (3) no significant near-term cash
requirements. Ignoring that last necessity is what usually leads companies to experience unexpected
problems: Too often, CEOs of profitable companies feel they will always be able to refund maturing
obligations, however large these are. In 2008-2009, many managements learned how perilous that mindset
can be.
Here’s how we will always stand on the three essentials. First, our earnings stream is huge and comes from
a vast array of businesses. Our shareholders now own many large companies that have durable competitive
advantages, and we will acquire more of those in the future. Our diversification assures Berkshire’s
continued profitability, even if a catastrophe causes insurance losses that far exceed any previously
experienced.
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Next up is cash. At a healthy business, cash is sometimes thought of as something to be minimized – as an
unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as
oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
American business provided a case study of that in 2008. In September of that year, many long-prosperous
companies suddenly wondered whether their checks would bounce in the days ahead. Overnight, their
financial oxygen disappeared.
At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September
and early October, we supplied $15.6 billion of fresh money to American businesses.
We could do that because we always maintain at least $20 billion – and usually far more – in cash
equivalents. And by that we mean U.S. Treasury bills, not other substitutes for cash that are claimed to
deliver liquidity and actually do so, except when it is truly needed. When bills come due, only cash is legal
tender. Don’t leave home without it.
Finally – getting to our third point – we will never engage in operating or investment practices that can
result in sudden demands for large sums. That means we will not expose Berkshire to short-term debt
maturities of size nor enter into derivative contracts or other business arrangements that could require large
collateral calls.
Some years ago, we became a party to certain derivative contracts that we believed were significantly
mispriced and that had only minor collateral requirements. These have proved to be quite profitable.
Recently, however, newly-written derivative contracts have required full collateralization. And that ended
our interest in derivatives, regardless of what profit potential they might offer. We have not, for some
years, written these contracts, except for a few needed for operational purposes at our utility businesses.
Moreover, we will not write insurance contracts that give policyholders the right to cash out at their option.
Many life insurance products contain redemption features that make them susceptible to a “run” in times of
extreme panic. Contracts of that sort, however, do not exist in the property-casualty world that we inhabit. If
our premium volume should shrink, our float would decline – but only at a very slow pace.
The reason for our conservatism, which may impress some people as extreme, is that it is entirely
predictable that people will occasionally panic, but not at all predictable when this will happen. Though
practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension
on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you
must be prepared for whatever it does.
A CEO who is 64 and plans to retire at 65 may have his own special calculus in evaluating risks that have
only a tiny chance of happening in a given year. He may, in fact, be “right” 99% of the time. Those odds,
however, hold no appeal for us. We will never play financial Russian roulette with the funds you’ve
entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is
madness to risk losing what you need in pursuing what you simply desire.
‹ Despite our conservatism, I think we will be able every year to build the underlying per-share earning
power of Berkshire. That does not mean operating earnings will increase each year – far from it. The U.S.
economy will ebb and flow – though mostly flow – and, when it weakens, so will our current earnings. But
we will continue to achieve organic gains, make bolt-on acquisitions and enter new fields. I believe,
therefore, that Berkshire will annually add to its underlying earning power.
In some years the gains will be substantial, and at other times they will be minor. Markets, competition,
and chance will determine when opportunities come our way. Through it all, Berkshire will keep moving
forward, powered by the array of solid businesses we now possess and the new companies we will
purchase. In most years, moreover, our country’s economy will provide a strong tailwind for business. We
are blessed to have the United States as our home field.
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‹ The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be
dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big.
I think Berkshire will outperform the average American company, but our advantage, if any, won’t be
great.
Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources
will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At
that time our directors will need to determine whether the best method to distribute the excess earnings is
through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value,
massive repurchases will almost certainly be the best choice. You can be comfortable that your directors
will make the right decision.
‹ No company will be more shareholder-minded than Berkshire. For more than 30 years, we have annually
reaffirmed our Shareholder Principles (see page 117), always leading off with: “Although our form is
corporate, our attitude is partnership.” This covenant with you is etched in stone.
We have an extraordinarily knowledgeable and business-oriented board of directors ready to carry out that
promise of partnership. None took the job for the money: In an arrangement almost non-existent elsewhere,
our directors are paid only token fees. They receive their rewards instead through ownership of Berkshire
shares and the satisfaction that comes from being good stewards of an important enterprise.
The shares that they and their families own – which, in many cases, are worth very substantial sums – were
purchased in the market (rather than their materializing through options or grants). In addition, unlike
almost all other sizable public companies, we carry no directors and officers liability insurance. At
Berkshire, directors walk in your shoes.
To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a non￾executive Chairman. My only reason for this wish is to make change easier if the wrong CEO should ever
be employed and there occurs a need for the Chairman to move forcefully. I can assure you that this
problem has a very low probability of arising at Berkshire – likely as low as at any public company. In my
service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre
CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)
If elected, Howard will receive no pay and will spend no time at the job other than that required of all
directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the
CEO and wishes to learn if other directors are expressing doubts as well. Should multiple directors be
apprehensive, Howard’s chairmanship will allow the matter to be promptly and properly addressed.
‹ Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board
meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and
retention of outstanding managers to captain our operating subsidiaries. Obviously, the job also requires the
replacement of a subsidiary’s CEO when that is called for. These duties require Berkshire’s CEO to be a
rational, calm and decisive individual who has a broad understanding of business and good insights into
human behavior. It’s important as well that he knows his limits. (As Tom Watson, Sr. of IBM said, “I’m no
genius, but I’m smart in spots and I stay around those spots.”)
Character is crucial: A Berkshire CEO must be “all in” for the company, not for himself. (I’m using male
pronouns to avoid awkward wording, but gender should never decide who becomes CEO.) He can’t help
but earn money far in excess of any possible need for it. But it’s important that neither ego nor avarice
motivate him to reach for pay matching his most lavishly-compensated peers, even if his achievements far
exceed theirs. A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that
shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of
thinking.
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My successor will need one other particular strength: the ability to fight off the ABCs of business decay,
which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the
strongest of companies can falter. The examples available to prove the point are legion, but to maintain
friendships I will exhume only cases from the distant past.
In their glory days, General Motors, IBM, Sears Roebuck and U.S. Steel sat atop huge industries. Their
strengths seemed unassailable. But the destructive behavior I deplored above eventually led each of them to
fall to depths that their CEOs and directors had not long before thought impossible. Their one-time
financial strength and their historical earning power proved no defense.
Only a vigilant and determined CEO can ward off such debilitating forces as Berkshire grows ever larger.
He must never forget Charlie’s plea: “Tell me where I’m going to die, so I’ll never go there.” If our non￾economic values were to be lost, much of Berkshire’s economic value would collapse as well. “Tone at the
top” will be key to maintaining Berkshire’s special culture.
Fortunately, the structure our future CEOs will need to be successful is firmly in place. The extraordinary
delegation of authority now existing at Berkshire is the ideal antidote to bureaucracy. In an operating sense,
Berkshire is not a giant company but rather a collection of large companies. At headquarters, we have
never had a committee nor have we ever required our subsidiaries to submit budgets (though many use
them as an important internal tool). We don’t have a legal office nor departments that other companies take
for granted: human relations, public relations, investor relations, strategy, acquisitions, you name it.
We do, of course, have an active audit function; no sense being a damned fool. To an unusual degree,
however, we trust our managers to run their operations with a keen sense of stewardship. After all, they
were doing exactly that before we acquired their businesses. With only occasional exceptions, furthermore,
our trust produces better results than would be achieved by streams of directives, endless reviews and
layers of bureaucracy. Charlie and I try to interact with our managers in a manner consistent with what we
would wish for, if the positions were reversed.
‹ Our directors believe that our future CEOs should come from internal candidates whom the Berkshire
board has grown to know well. Our directors also believe that an incoming CEO should be relatively
young, so that he or she can have a long run in the job. Berkshire will operate best if its CEOs average well
over ten years at the helm. (It’s hard to teach a new dog old tricks.) And they are not likely to retire at 65
either (or have you noticed?).
In both Berkshire’s business acquisitions and large, tailored investment moves, it is important that our
counterparties be both familiar with and feel comfortable with Berkshire’s CEO. Developing confidence of
that sort and cementing relationships takes time. The payoff, though, can be huge.
Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to
assume the job the day after I die or step down. In certain important respects, this person will do a better
job than I am doing.
‹ Investments will always be of great importance to Berkshire and will be handled by several specialists.
They will report to the CEO because their investment decisions, in a broad way, will need to be
coordinated with Berkshire’s operating and acquisition programs. Overall, though, our investment
managers will enjoy great autonomy. In this area, too, we are in fine shape for decades to come. Todd
Combs and Ted Weschler, each of whom has spent several years on Berkshire’s investment team, are first￾rate in all respects and can be of particular help to the CEO in evaluating acquisitions.
All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right
people in place – the right directors, managers and prospective successors to those managers. Our culture,
furthermore, is embedded throughout their ranks. Our system is also regenerative. To a large degree, both
good and bad cultures self-select to perpetuate themselves. For very good reasons, business owners and
operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind
and permanent home.
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‹ I would be remiss if I didn’t salute another key constituency that makes Berkshire special: our shareholders.
Berkshire truly has an owner base unlike that of any other giant corporation. That fact was demonstrated in
spades at last year’s annual meeting, where the shareholders were offered a proxy resolution:
RESOLVED: Whereas the corporation has more money than it needs and since the owners unlike
Warren are not multi billionaires, the board shall consider paying a meaningful annual dividend on
the shares.
The sponsoring shareholder of that resolution never showed up at the meeting, so his motion was not
officially proposed. Nevertheless, the proxy votes had been tallied, and they were enlightening.
Not surprisingly, the A shares – owned by relatively few shareholders, each with a large economic interest
– voted “no” on the dividend question by a margin of 89 to 1.
The remarkable vote was that of our B shareholders. They number in the hundreds of thousands – perhaps
even totaling one million – and they voted 660,759,855 “no” and 13,927,026 “yes,” a ratio of about 47 to 1.
Our directors recommended a “no” vote but the company did not otherwise attempt to influence
shareholders. Nevertheless, 98% of the shares voting said, in effect, “Don’t send us a dividend but instead
reinvest all of the earnings.” To have our fellow owners – large and small – be so in sync with our
managerial philosophy is both remarkable and rewarding.
I am a lucky fellow to have you as partners.
Warren E. Buffett
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Vice Chairman’s Thoughts – Past and Future
To the shareholders of Berkshire Hathaway Inc.:
I closely watched the 50-year history of Berkshire’s uncommon success under Warren Buffett. And it now seems
appropriate that I independently supplement whatever celebratory comment comes from him. I will try to do five
things.
(1) Describe the management system and policies that caused a small and unfixably-doomed commodity
textile business to morph into the mighty Berkshire that now exists,
(2) Explain how the management system and policies came into being,
(3) Explain, to some extent, why Berkshire did so well,
(4) Predict whether abnormally good results would continue if Buffett were soon to depart, and
(5) Consider whether Berkshire’s great results over the last 50 years have implications that may prove useful
elsewhere.
The management system and policies of Berkshire under Buffett (herein together called “the Berkshire system”)
were fixed early and are described below:
(1) Berkshire would be a diffuse conglomerate, averse only to activities about which it could not make useful
predictions.
(2) Its top company would do almost all business through separately incorporated subsidiaries whose CEOs
would operate with very extreme autonomy.
(3) There would be almost nothing at conglomerate headquarters except a tiny office suite containing a
Chairman, a CFO, and a few assistants who mostly helped the CFO with auditing, internal control, etc.
(4) Berkshire subsidiaries would always prominently include casualty insurers. Those insurers as a group
would be expected to produce, in due course, dependable underwriting gains while also producing
substantial “float” (from unpaid insurance liabilities) for investment.
(5) There would be no significant system-wide personnel system, stock option system, other incentive system,
retirement system, or the like, because the subsidiaries would have their own systems, often different.
(6) Berkshire’s Chairman would reserve only a few activities for himself.
(i) He would manage almost all security investments, with these normally residing in Berkshire’s
casualty insurers.
(ii) He would choose all CEOs of important subsidiaries, and he would fix their compensation and
obtain from each a private recommendation for a successor in case one was suddenly needed.
(iii) He would deploy most cash not needed in subsidiaries after they had increased their competitive
advantage, with the ideal deployment being the use of that cash to acquire new subsidiaries.
(iv) He would make himself promptly available for almost any contact wanted by any subsidiary’s
CEO, and he would require almost no additional contact.
(v) He would write a long, logical, and useful letter for inclusion in his annual report, designed as he
would wish it to be if he were only a passive shareholder, and he would be available for hours of
answering questions at annual shareholders’ meetings.
(vi) He would try to be an exemplar in a culture that would work well for customers, shareholders,
and other incumbents for a long time, both before and after his departure.
(vii) His first priority would be reservation of much time for quiet reading and thinking, particularly
that which might advance his determined learning, no matter how old he became; and
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(viii) He would also spend much time in enthusiastically admiring what others were accomplishing.
(7) New subsidiaries would usually be bought with cash, not newly issued stock.
(8) Berkshire would not pay dividends so long as more than one dollar of market value for shareholders was
being created by each dollar of retained earnings.
(9) In buying a new subsidiary, Berkshire would seek to pay a fair price for a good business that the Chairman
could pretty well understand. Berkshire would also want a good CEO in place, one expected to remain for a
long time and to manage well without need for help from headquarters.
(10) In choosing CEOs of subsidiaries, Berkshire would try to secure trustworthiness, skill, energy, and love for
the business and circumstances the CEO was in.
(11) As an important matter of preferred conduct, Berkshire would almost never sell a subsidiary.
(12) Berkshire would almost never transfer a subsidiary’s CEO to another unrelated subsidiary.
(13) Berkshire would never force the CEO of a subsidiary to retire on account of mere age.
(14) Berkshire would have little debt outstanding as it tried to maintain (i) virtually perfect creditworthiness
under all conditions and (ii) easy availability of cash and credit for deployment in times presenting unusual
opportunities.
(15) Berkshire would always be user-friendly to a prospective seller of a large business. An offer of such a
business would get prompt attention. No one but the Chairman and one or two others at Berkshire would
ever know about the offer if it did not lead to a transaction. And they would never tell outsiders about it.
Both the elements of the Berkshire system and their collected size are quite unusual. No other large corporation I
know of has half of such elements in place.
How did Berkshire happen to get a corporate personality so different from the norm?
Well, Buffett, even when only 34 years old, controlled about 45% of Berkshire’s shares and was completely trusted
by all the other big shareholders. He could install whatever system he wanted. And he did so, creating the Berkshire
system.
Almost every element was chosen because Buffett believed that, under him, it would help maximize Berkshire’s
achievement. He was not trying to create a one-type-fits-all system for other corporations. Indeed, Berkshire’s
subsidiaries were not required to use the Berkshire system in their own operations. And some flourished while using
different systems.
What was Buffett aiming at as he designed the Berkshire system?
Well, over the years I diagnosed several important themes:
(1) He particularly wanted continuous maximization of the rationality, skills, and devotion of the most
important people in the system, starting with himself.
(2) He wanted win/win results everywhere--in gaining loyalty by giving it, for instance.
(3) He wanted decisions that maximized long-term results, seeking these from decision makers who usually
stayed long enough in place to bear the consequences of decisions.
(4) He wanted to minimize the bad effects that would almost inevitably come from a large bureaucracy at
headquarters.
(5) He wanted to personally contribute, like Professor Ben Graham, to the spread of wisdom attained.
When Buffett developed the Berkshire system, did he foresee all the benefits that followed? No. Buffett stumbled into
some benefits through practice evolution. But, when he saw useful consequences, he strengthened their causes.
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Why did Berkshire under Buffett do so well?
Only four large factors occur to me:
(1) The constructive peculiarities of Buffett,
(2) The constructive peculiarities of the Berkshire system,
(3) Good luck, and
(4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the
press.
I believe all four factors were present and helpful. But the heavy freight was carried by the constructive
peculiarities, the weird devotion, and their interactions.
In particular, Buffett’s decision to limit his activities to a few kinds and to maximize his attention to them, and to
keep doing so for 50 years, was a lollapalooza. Buffett succeeded for the same reason Roger Federer became good
at tennis.
Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most
regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents
always faced his best players, instead of his second best. And, with the extra playing time, the best players improved
more than was normal.
And Buffett much out-Woodened Wooden, because in his case the exercise of skill was concentrated in one person,
not seven, and his skill improved and improved as he got older and older during 50 years, instead of deteriorating
like the skill of a basketball player does.
Moreover, by concentrating so much power and authority in the often-long-serving CEOs of important subsidiaries,
Buffett was also creating strong Wooden-type effects there. And such effects enhanced the skills of the CEOs and
the achievements of the subsidiaries.
Then, as the Berkshire system bestowed much-desired autonomy on many subsidiaries and their CEOs, and
Berkshire became successful and well known, these outcomes attracted both more and better subsidiaries into
Berkshire, and better CEOs as well.
And the better subsidiaries and CEOs then required less attention from headquarters, creating what is often called a
“virtuous circle.”
How well did it work out for Berkshire to always include casualty insurers as important subsidiaries?
Marvelously well. Berkshire’s ambitions were unreasonably extreme and, even so, it got what it wanted.
Casualty insurers often invest in common stocks with a value amounting roughly to their shareholders’ equity, as
did Berkshire’s insurance subsidiaries. And the S&P 500 Index produced about 10% per annum, pre-tax, during the
last 50 years, creating a significant tailwind.
And, in the early decades of the Buffett era, common stocks within Berkshire’s insurance subsidiaries greatly
outperformed the index, exactly as Buffett expected. And, later, when both the large size of Berkshire’s
stockholdings and income tax considerations caused the index-beating part of returns to fade to insignificance
(perhaps not forever), other and better advantage came. Ajit Jain created out of nothing an immense reinsurance
business that produced both a huge “float” and a large underwriting gain. And all of GEICO came into Berkshire,
followed by a quadrupling of GEICO’s market share. And the rest of Berkshire’s insurance operations hugely
improved, largely by dint of reputational advantage, underwriting discipline, finding and staying within good niches,
and recruiting and holding outstanding people.
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Then, later, as Berkshire’s nearly unique and quite dependable corporate personality and large size became well
known, its insurance subsidiaries got and seized many attractive opportunities, not available to others, to buy
privately issued securities. Most of these securities had fixed maturities and produced outstanding results.
Berkshire’s marvelous outcome in insurance was not a natural result. Ordinarily, a casualty insurance business is a
producer of mediocre results, even when very well managed. And such results are of little use. Berkshire’s better
outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small
base while retaining his smarts and regaining his youth.
Did Berkshire suffer from being a diffuse conglomerate? No, its opportunities were usefully enlarged by a widened
area for operation. And bad effects, common elsewhere, were prevented by Buffett’s skills.
Why did Berkshire prefer to buy companies with cash, instead of its own stock? Well, it was hard to get anything in
exchange for Berkshire stock that was as valuable as what was given up.
Why did Berkshire’s acquisition of companies outside the insurance business work out so well for Berkshire
shareholders when the normal result in such acquisitions is bad for shareholders of the acquirer?
Well, Berkshire, by design, had methodological advantages to supplement its better opportunities. It never had the
equivalent of a “department of acquisitions” under pressure to buy. And it never relied on advice from “helpers”
sure to be prejudiced in favor of transactions. And Buffett held self-delusion at bay as he underclaimed expertise
while he knew better than most corporate executives what worked and what didn’t in business, aided by his long
experience as a passive investor. And, finally, even when Berkshire was getting much better opportunities than most
others, Buffett often displayed almost inhuman patience and seldom bought. For instance, during his first ten years
in control of Berkshire, Buffett saw one business (textiles) move close to death and two new businesses come in, for
a net gain of one.
What were the big mistakes made by Berkshire under Buffett? Well, while mistakes of commission were common,
almost all huge errors were in not making a purchase, including not purchasing Walmart stock when that was sure to
work out enormously well. The errors of omission were of much importance. Berkshire’s net worth would now be at
least $50 billion higher if it had seized several opportunities it was not quite smart enough to recognize as virtually
sure things.
The next to last task on my list was: Predict whether abnormally good results would continue at Berkshire if Buffett
were soon to depart.
The answer is yes. Berkshire has in place in its subsidiaries much business momentum grounded in much durable
competitive advantage.
Moreover, its railroad and utility subsidiaries now provide much desirable opportunity to invest large sums in new
fixed assets. And many subsidiaries are now engaged in making wise “bolt-on” acquisitions.
Provided that most of the Berkshire system remains in place, the combined momentum and opportunity now present
is so great that Berkshire would almost surely remain a better-than-normal company for a very long time even if
(1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again
purchased a large business.
But, under this Buffett-soon-leaves assumption, his successors would not be “of only moderate ability.” For
instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.”
“World-leading” would be the description I would choose. In some important ways, each is a better business
executive than Buffett.
And I believe neither Jain nor Abel would (1) leave Berkshire, no matter what someone else offered or (2) desire
much change in the Berkshire system.
42
Nor do I think that desirable purchases of new businesses would end with Buffett’s departure. With Berkshire now
so large and the age of activism upon us, I think some desirable acquisition opportunities will come and that
Berkshire’s $60 billion in cash will constructively decrease.
My final task was to consider whether Berkshire’s great results over the last 50 years have implications that may
prove useful elsewhere.
The answer is plainly yes. In its early Buffett years, Berkshire had a big task ahead: turning a tiny stash into a large
and useful company. And it solved that problem by avoiding bureaucracy and relying much on one thoughtful leader
for a long, long time as he kept improving and brought in more people like himself.
Compare this to a typical big-corporation system with much bureaucracy at headquarters and a long succession of
CEOs who come in at about age 59, pause little thereafter for quiet thought, and are soon forced out by a fixed
retirement age.
I believe that versions of the Berkshire system should be tried more often elsewhere and that the worst attributes of
bureaucracy should much more often be treated like the cancers they so much resemble. A good example of
bureaucracy fixing was created by George Marshall when he helped win World War II by getting from Congress the
right to ignore seniority in choosing generals.
Sincerely,
Charles T. Munger
43
Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 .................................................. 23.8 49.5 10.0
1966 .................................................. 20.3 (3.4) (11.7)
1967 .................................................. 11.0 13.3 30.9
1968 .................................................. 19.0 77.8 11.0
1969 .................................................. 16.2 19.4 (8.4)
1970 .................................................. 12.0 (4.6) 3.9
1971 .................................................. 16.4 80.5 14.6
1972 .................................................. 21.7 8.1 18.9
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (2.5) (14.8)
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (48.7) (26.4)
1975 .................................................. 21.9 2.5 37.2
1976 .................................................. 59.3 129.3 23.6
1977 .................................................. 31.9 46.8 (7.4)
1978 .................................................. 24.0 14.5 6.4
1979 .................................................. 35.7 102.5 18.2
1980 .................................................. 19.3 32.8 32.3
1981 .................................................. 31.4 31.8 (5.0)
1982 .................................................. 40.0 38.4 21.4
1983 .................................................. 32.3 69.0 22.4
1984 .................................................. 13.6 (2.7) 6.1
1985 .................................................. 48.2 93.7 31.6
1986 .................................................. 26.1 14.2 18.6
1987 .................................................. 19.5 4.6 5.1
1988 .................................................. 20.1 59.3 16.6
1989 .................................................. 44.4 84.6 31.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (23.1) (3.1)
1991 .................................................. 39.6 35.6 30.5
1992 .................................................. 20.3 29.8 7.6
1993 .................................................. 14.3 38.9 10.1
1994 .................................................. 13.9 25.0 1.3
1995 .................................................. 43.1 57.4 37.6
1996 .................................................. 31.8 6.2 23.0
1997 .................................................. 34.1 34.9 33.4
1998 .................................................. 48.3 52.2 28.6
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 (19.9) 21.0
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 26.6 (9.1)
2001 .................................................. (6.2) 6.5 (11.9)
2002 .................................................. 10.0 (3.8) (22.1)
2003 .................................................. 21.0 15.8 28.7
2004 .................................................. 10.5 4.3 10.9
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 0.8 4.9
2006 .................................................. 18.4 24.1 15.8
2007 .................................................. 11.0 28.7 5.5
2008 .................................................. (9.6) (31.8) (37.0)
2009 .................................................. 19.8 2.7 26.5
2010 .................................................. 13.0 21.4 15.1
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 (4.7) 2.1
2012 .................................................. 14.4 16.8 16.0
2013 .................................................. 18.2 32.7 32.4
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 27.0 13.7
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (12.5) 1.4
Compounded Annual Gain – 1965-2015 ...................... 19.2% 20.8% 9.7%
Overall Gain – 1964-2015 ................................. 798,981% 1,598,284% 11,355%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,
accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was
previously the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects,
the results are calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a
corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the
years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of
both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over),
per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.*
During the first half of those years, Berkshire’s net worth was roughly equal to the number that really
counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our
resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax that
would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part
“marked to market.”
By the early 1990s, however, our focus had changed to the outright ownership of businesses, a shift that
diminished the relevance of balance-sheet figures. That disconnect occurred because the accounting rules that apply
to controlled companies are materially different from those used in valuing marketable securities. The carrying
value of the “losers” we own is written down, but “winners” are never revalued upwards.
We’ve had experience with both outcomes: I’ve made some dumb purchases, and the amount I paid for the
economic goodwill of those companies was later written off, a move that reduced Berkshire’s book value. We’ve
also had some winners – a few of them very big – but have not written those up by a penny.
Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap
between intrinsic value and book value. Today, the large – and growing – unrecorded gains at our “winners” make it
clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase
our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully
increase per-share intrinsic value for Berkshire’s continuing shareholders.
The unrecorded increase in the value of our owned businesses explains why Berkshire’s aggregate market￾value gain – tabulated on the facing page – materially exceeds our book-value gain. The two indicators vary
erratically over short periods. Last year, for example, book-value performance was superior. Over time, however,
market-value gains should continue their historical tendency to exceed gains in book value.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of
those shown for A.
3
The Year at Berkshire
Charlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire’s normalized earning
power to increase every year. (Actual year-to-year earnings, of course, will sometimes decline because of weakness
in the U.S. economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains will
be small; at other times they will be material. Last year was a good one. Here are the highlights:
‹ The most important development at Berkshire during 2015 was not financial, though it led to better
earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to
customers last year. To attain that result, we invested about $5.8 billion during the year in capital
expenditures, a sum far and away the record for any American railroad and nearly three times our annual
depreciation charge. It was money well spent.
BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether
transported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among the
seven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freight
than our closest competitor. Consequently, our maintaining first-class service is not only vital to our
shippers’ welfare but also important to the smooth functioning of the U.S. economy.
For most American railroads, 2015 was a disappointing year. Aggregate ton-miles fell, and earnings
weakened as well. BNSF, however, maintained volume, and pre-tax income rose to a record $6.8 billion*
(a gain of $606 million from 2014). Matt Rose and Carl Ice, the managers of BNSF, have my thanks and
deserve yours.
‹ BNSF is the largest of our “Powerhouse Five,” a group that also includes Berkshire Hathaway Energy,
Marmon, Lubrizol and IMC. Combined, these companies – our five most profitable non-insurance
businesses – earned $13.1 billion in 2015, an increase of $650 million over 2014.
Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us in 2003.
Subsequently, we purchased three of the other four on an all-cash basis. In acquiring BNSF, however, we
paid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased the
number outstanding by 6.1%. In other words, the $12.7 billion gain in annual earnings delivered Berkshire
by the five companies over the twelve-year span has been accompanied by only minor dilution. That
satisfies our goal of not simply increasing earnings, but making sure we also increase per-share results.
‹ Next year, I will be discussing the “Powerhouse Six.” The newcomer will be Precision Castparts Corp.
(“PCC”), a business that we purchased a month ago for more than $32 billion of cash. PCC fits perfectly
into the Berkshire model and will substantially increase our normalized per-share earning power.
Under CEO Mark Donegan, PCC has become the world’s premier supplier of aerospace components (most
of them destined to be original equipment, though spares are important to the company as well). Mark’s
accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable
Israeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinary
products that are used by major manufacturers worldwide. Each is the da Vinci of his craft.
PCC’s products, often delivered under multi-year contracts, are key components in most large aircraft.
Other industries are served as well by the company’s 30,466 employees, who work out of 162 plants in 13
countries. In building his business, Mark has made many acquisitions and will make more. We look
forward to having him deploy Berkshire’s capital.
* Throughout this letter, all earnings are stated on a pre-tax basis unless otherwise designated.
4
A personal thank-you: The PCC acquisition would not have happened without the input and assistance of
our own Todd Combs, who brought the company to my attention a few years ago and went on to educate
me about both the business and Mark. Though Todd and Ted Weschler are primarily investment managers
– they each handle about $9 billion for us – both of them cheerfully and ably add major value to Berkshire
in other ways as well. Hiring these two was one of my best moves.
‹ With the PCC acquisition, Berkshire will own 101⁄4 companies that would populate the Fortune 500 if they
were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1⁄4.) That leaves just under 98% of
America’s business giants that have yet to call us. Operators are standing by.
‹ Our many dozens of smaller non-insurance businesses earned $5.7 billion last year, up from $5.1 billion in
2014. Within this group, we have one company that last year earned more than $700 million, two that
earned between $400 million and $700 million, seven that earned between $250 million and $400 million,
six that earned between $100 million and $250 million, and eleven that earned between $50 million and
$100 million. We love them all: This collection of businesses will expand both in number and earnings as
the years go by.
‹ When you hear talk about America’s crumbling infrastructure, rest assured that they’re not talking about
Berkshire. We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in
the United States.
I told you earlier about BNSF’s record capital expenditures in 2015. At the end of every year, our railroad’s
physical facilities will be improved from those existing twelve months earlier.
Berkshire Hathaway Energy (“BHE”) is a similar story. That company has invested $16 billion in
renewables and now owns 7% of the country’s wind generation and 6% of its solar generation. Indeed, the
4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the
generation of the runner-up utility.
We’re not done. Last year, BHE made major commitments to the future development of renewables in
support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both
for the environment and for Berkshire’s economics.
‹ Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015 – that
makes 13 years in a row – and increased its float. During those years, our float – money that doesn’t belong
to us but that we can invest for Berkshire’s benefit – grew from $41 billion to $88 billion. Though neither
that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment
income because of the assets it allows us to hold.
Meanwhile, our underwriting profit totaled $26 billion during the 13-year period, including $1.8 billion
earned in 2015. Without a doubt, Berkshire’s largest unrecorded wealth lies in its insurance business.
We’ve spent 48 years building this multi-faceted operation, and it can’t be replicated.
‹ While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on
acquisitions. Last year we contracted for 29 bolt-ons, scheduled to cost $634 million in aggregate. The cost
of these purchases ranged from $300,000 to $143 million.
Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us most definitely aren’t.)
These purchases deploy capital in operations that fit with our existing businesses and that will be managed
by our corps of expert managers. That means no additional work for us, yet more earnings for Berkshire, a
combination we find highly appealing. We will make many dozens of bolt-on deals in future years.
5
‹ Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its
size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of
$4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The
new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your
Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite
meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.)
Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us
to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our
Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions
below its market value, an outcome only an accountant could love.
Berkshire also owns Kraft Heinz preferred shares that pay us $720 million annually and are carried at $7.7
billion on our balance sheet. That holding will almost certainly be redeemed for $8.32 billion in June (the
earliest date allowed under the preferred’s terms). That will be good news for Kraft Heinz and bad news for
Berkshire.
Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and
hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing
this goal.
Their method, at which they have been extraordinarily successful, is to buy companies that offer an
opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will
get the job done. Their actions significantly boost productivity, the all-important factor in America’s
economic growth over the past 240 years. Without more output of desired goods and services per working
hour – that’s the measure of productivity gains – an economy inevitably stagnates. At much of corporate
America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his
associates.
At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow
an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by
cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in
which these CEOs – and their eventual successors, who typically are like-minded – can maximize both
their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am
heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to
marry someone with the intent of changing their behavior.”)
We will continue to operate with extreme – indeed, almost unheard of – decentralization at Berkshire. But
we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the
case when his group purchased Tim Horton’s, or as a combined equity-and-financing partner, as at Heinz.
We also may occasionally partner with others, as we have successfully done at Berkadia.
Berkshire, however, will join only with partners making friendly acquisitions. To be sure, certain hostile
offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other
managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to
make the change required. That’s when new faces are needed. We, though, will leave these “opportunities”
for others. At Berkshire, we go only where we are welcome.
6
‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American
Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our
ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other
two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our
equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8%
to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the
four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s
portion of their annual earnings by about $500 million.
These four investees possess excellent businesses and are run by managers who are both talented and
shareholder-oriented. Their returns on tangible equity range from excellent to staggering. At Berkshire, we
much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of
a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.
If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2015 earnings
amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they
pay us – about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies’
earnings we don’t report are every bit as valuable to us as the portion Berkshire records.
The earnings our investees retain are often used for repurchases of their own stock – a move that increases
Berkshire’s share of future earnings without requiring us to lay out a dime. The retained earnings of these
companies also fund business opportunities that usually turn out to be advantageous. All that leads us to
expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If
gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital
gains.
Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled
businesses – gives us a significant edge over companies that limit themselves to acquisitions they will
operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance
of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either
operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s
endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile
of funds that can be tapped when an elephant-sized acquisition is offered to us.
************
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course,
only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not
live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a
staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or
their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did
Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is
certain to continue: America’s economic magic remains alive and well.
Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to
see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers
astounding gains.
7
America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net
migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive.
But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita.
(Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.)
In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation.
Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians
need not shed tears for tomorrow’s children.
Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood
regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His
unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few –
transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he
could not, however, live as well as my neighbors now do.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided
will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods
and services between those people in their productive years and retirees, between the healthy and the infirm,
between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with
talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills
the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the
battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.
The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they
should – far more goods and services in the future than they have in the past. The quality of their increased bounty
will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more
so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television
set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do,
quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter,
“search” is invaluable to me. (I’m not ready for Tinder, however.)
For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s
golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security
promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their
parents did.
************
Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost
certainly prosper. The managers who succeed Charlie and me will build Berkshire’s per-share intrinsic value by
following our simple blueprint of: (1) constantly improving the basic earning power of our many subsidiaries;
(2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees;
(4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and
(5) making an occasional large acquisition. Management will also try to maximize results for you by rarely, if ever,
issuing Berkshire shares.
8
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number
is for Berkshire shares (nor, in fact, for any other stock). It is possible, however, to make a sensible estimate. In our
2010 annual report we laid out the three elements – one of them qualitative – that we believe are the keys to an
estimation of Berkshire’s intrinsic value. That discussion is reproduced in full on pages 113-114.
Here is an update of the two quantitative factors: In 2015 our per-share cash and investments increased
8.3% to $159,794 (with our Kraft Heinz shares stated at market value), and earnings from our many businesses –
including insurance underwriting income – increased 2.1% to $12,304 per share. We exclude in the second factor
the dividends and interest from the investments we hold because including them would produce a double-counting
of value. In arriving at our earnings figure, we deduct all corporate overhead, interest, depreciation, amortization
and minority interests. Income taxes, though, are not deducted. That is, the earnings are pre-tax.
I used the italics in the paragraph above because we are for the first time including insurance underwriting
income in business earnings. We did not do that when we initially introduced Berkshire’s two quantitative pillars of
valuation because our insurance results were then heavily influenced by catastrophe coverages. If the wind didn’t
blow and the earth didn’t shake, we made large profits. But a mega-catastrophe would produce red ink. In order to
be conservative then in stating our business earnings, we consistently assumed that underwriting would break even
over time and ignored any of its gains or losses in our annual calculation of the second factor of value.
Today, our insurance results are likely to be more stable than was the case a decade or two ago because we
have deemphasized catastrophe coverages and greatly expanded our bread-and-butter lines of business. Last year,
our underwriting income contributed $1,118 per share to the $12,304 per share of earnings referenced in the second
paragraph of this section. Over the past decade, annual underwriting income has averaged $1,434 per share, and we
anticipate being profitable in most years. You should recognize, however, that underwriting in any given year could
well be unprofitable, perhaps substantially so.
Since 1970, our per-share investments have increased at a rate of 18.9% compounded annually, and our
earnings (including the underwriting results in both the initial and terminal year) have grown at a 23.7% clip. It is no
coincidence that the price of Berkshire stock over the ensuing 45 years has increased at a rate very similar to that of
our two measures of value. Charlie and I like to see gains in both sectors, but our main goal is to build operating
earnings.
************
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. So we’ll present them as four separate businesses, which is how Charlie and
I view them (though there are important and enduring economic advantages to having them all under one roof). Our
intent is to provide you with the information we would wish to have if our positions were reversed, with you being
the reporting manager and we the absentee shareholders. (Don’t get excited; this is not a switch we are considering.)
Insurance
Let’s look first at insurance. The property-casualty (“P/C”) branch of that industry has been the engine that
has propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National
Fire & Marine, for $8.6 million. Today, National Indemnity is the largest property-casualty company in the world,
as measured by net worth. Moreover, its intrinsic value is far in excess of the value at which it is carried on our
books.
9
One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive
premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation
accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies
holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this
float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds
usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float.
And how we have grown, as the following table shows:
Year Float (in millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2015 87,722
Further gains in float will be tough to achieve. On the plus side, GEICO and several of our specialized
operations are almost certain to grow at a good clip. National Indemnity’s reinsurance division, however, is party to
a number of run-off contracts whose float drifts downward. If we do in time experience a decline in float, it will be
very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can
never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This
structure is by design and is a key component in the strength of Berkshire’s economic fortress. It will never be
compromised.
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous
indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss,
in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance
industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal
returns on tangible net worth as compared to other American businesses. The prolonged period of low interest rates
the world is now dealing with also virtually guarantees that earnings on float will steadily decrease for many years
to come, thereby exacerbating the profit problems of insurers. It’s a good bet that industry results over the next ten
years will fall short of those recorded in the past decade, particularly for those companies that specialize in
reinsurance.
As noted early in this report, Berkshire has now operated at an underwriting profit for 13 consecutive
years, our pre-tax gain for the period having totaled $26.2 billion. That’s no accident: Disciplined risk evaluation is
the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned
by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament
style.
So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of
our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of
float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and
related expenses – a huge $24.5 billion to more than six million claimants in 2015 – and that reduces float. Just as
surely, we each day write new business that will soon generate its own claims, adding to float.
10
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the
door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP.
A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying our
insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for
the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on
its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any goodwill
asset carried on the books should be deemed valueless, whatever its original cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance
operation possessing it – to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion we
carry for goodwill in our insurance business was already on our books in 2000. Yet we subsequently tripled our
float. Its value today is one reason – a huge reason – why we believe Berkshire’s intrinsic business value
substantially exceeds its book value.
************
Berkshire’s attractive insurance economics exist only because we have some terrific managers running
disciplined operations that possess hard-to-replicate business models. Let me tell you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks
that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and,
most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that
are inappropriate in relation to our resources.
Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the
insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything
it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its
many streams of earnings. We would also remain awash in cash and be looking for large opportunities to write
business in an insurance market that might well be in disarray. Meanwhile, other major insurers and reinsurers
would be swimming in red ink, if not facing insolvency.
When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the
insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our
reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of
value for Berkshire shareholders.
************
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both
prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate
premium can’t be obtained.
11
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business
that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,”
spells trouble in any business, but in none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue.
We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown
consistently and profitably since we acquired the company in 1998.
It can be remembered that soon after we purchased General Re, it was beset by problems that caused
commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re
is now a gem.
************
Finally, there is GEICO, the insurer on which I cut my teeth 65 years ago. GEICO is managed by Tony
Nicely, who joined the company at 18 and completed 54 years of service in 2015. Tony became CEO in 1993, and
since then the company has been flying. There is no better manager than Tony. In the 40 years that I’ve known him,
his every action has made great sense.
When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the
company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO
would succeed because it deserved to succeed.
No one likes to buy auto insurance. Almost everyone, though, likes to drive. The insurance consequently
needed is a major expenditure for most families. Savings matter to them – and only a low-cost operation can deliver
these. Indeed, at least 40% of the people reading this letter can save money by insuring with GEICO. So stop
reading – right now! – and go to geico.com or call 800-368-2734.
GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after
year. (We ended 2015 with 11.4% of the market compared to 2.5% in 1995, when Berkshire acquired control of
GEICO.) The company’s low costs create a moat – an enduring one – that competitors are unable to cross.
All the while, our gecko never tires of telling Americans how GEICO can save them important money. I
love hearing the little guy deliver his message: “15 minutes could save you 15% or more on car insurance.” (Of
course, there’s always a grouch in the crowd. One of my friends says he is glad that only a few animals can talk,
since the ones that do speak seem unable to discuss any subject but insurance.)
************
In addition to our three major insurance operations, we own a group of smaller companies that primarily
write commercial coverages. In aggregate, these companies are a large, growing and valuable operation that
consistently delivers an underwriting profit, usually much better than that reported by their competitors. Indeed,
over the past 13 years, this group has earned $4 billion from underwriting – about 13% of its premium volume –
while increasing its float from $943 million to $9.9 billion.
Less than three years ago, we formed Berkshire Hathaway Specialty Insurance (“BHSI”), which we include
in this group. Our first decision was to put Peter Eastwood in charge. That move was a home run: BHSI has already
developed $1 billion of annual premium volume and, under Peter’s direction, is destined to become one of the
world’s leading P/C insurers.
12
Here’s a recap of underwriting earnings and float by division:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2015 2014 2015 2014
BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 421 $ 606 $ 44,108 $ 42,454
General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 277 18,560 19,280
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 1,159 15,148 13,569
Other Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 824 626 9,906 8,618
$ 1,837 $ 2,668 $ 87,722 $ 83,921
Berkshire’s great managers, premier financial strength and a variety of business models protected by wide
moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for
Berkshire shareholders that will only get more valuable with time.
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and BHE, that share important characteristics distinguishing them
from our other businesses. Consequently, we assign them their own section in this letter and split out their combined
financial statistics in our GAAP balance sheet and income statement. Together, they last year accounted for 37% of
Berkshire’s after-tax operating earnings.
A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with
these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact
not needed because each company has earning power that even under terrible economic conditions would far exceed
its interest requirements. Last year, for example, in a disappointing year for railroads, BNSF’s interest coverage was
more than 8:1. (Our definition of coverage is the ratio of earnings before interest and taxes to interest, not EBITDA/
interest, a commonly used measure we view as seriously flawed.)
At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances.
The first is common to all utilities: recession-resistant earnings, which result from these companies offering an
essential service on an exclusive basis. The second is enjoyed by few other utilities: a great and ever-widening
diversity of earnings streams, which shield BHE from being seriously harmed by any single regulatory body. These
many sources of profit, supplemented by the inherent advantage of being owned by a strong parent, have allowed
BHE and its utility subsidiaries to significantly lower their cost of debt. This economic fact benefits both us and our
customers.
All told, BHE and BNSF invested $11.6 billion in plant and equipment last year, a massive commitment to
key components of America’s infrastructure. We relish making such investments as long as they promise reasonable
returns – and, on that front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever need
huge investments in both transportation and energy. It is in the self-interest of governments to treat capital providers
in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our self-interest
to conduct our operations in a way that earns the approval of our regulators and the people they represent.
Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE’s average retail rate is
6.8¢ per KWH. Alliant, the other major electric utility in the state, averages 9.5¢. Here are the comparable industry
figures for adjacent states: Nebraska 9.0¢, Missouri 9.3¢, Illinois 9.3¢, Minnesota 9.7¢. The national average is
10.4¢. Our rock-bottom prices add up to real money for paycheck-strapped customers.
13
At BNSF, price comparisons between major railroads are far more difficult to make because of significant
differences in both their mix of cargo and the average distance it is carried. To supply a very crude measure,
however, our revenue per ton-mile was just under 3¢ last year, while shipping costs for customers of the other four
major U.S.-based railroads were at least 40% higher, ranging from 4.2¢ to 5.3¢.
Both BHE and BNSF have been leaders in pursuing planet-friendly technology. In wind generation, no
state comes close to Iowa, where last year megawatt-hours we generated from wind equaled 47% of all
megawatt-hours sold to our retail customers. (Additional wind projects to which we are committed will take that
figure to 58% in 2017.)
BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost
500 miles. That makes the railroads four times as fuel-efficient as trucks! Furthermore, railroads alleviate highway
congestion – and the taxpayer-funded maintenance expenditures that come with heavier traffic – in a major way.
Here are the key figures for BHE and BNSF:
Berkshire Hathaway Energy (89.9% owned) Earnings (in millions)
2015 2014 2013
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 460 $ 527 $ 362
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 298 230
Nevada utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586 549 (58)
PacifiCorp (primarily Oregon and Utah) ............................... 1,026 1,010 982
Gas pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . . 401 379 385
Canadian transmission utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 16 —
Renewable projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 194 50
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 139 139
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 26 12
Operating earnings before corporate interest and taxes .................... 3,350 3,138 2,102
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499 427 296
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 616 170
Net earnings ..................................................... $ 2,370 $ 2,095 $ 1,636
Earnings applicable to Berkshire ..................................... $ 2,132 $ 1,882 $ 1,470
BNSF Earnings (in millions)
2015 2014 2013
Revenues ....................................................... $ 21,967 $ 23,239 $ 22,014
Operating expenses ............................................... 14,264 16,237 15,357
Operating earnings before interest and taxes ............................ 7,703 7,002 6,657
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 928 833 729
Income taxes .................................................... 2,527 2,300 2,135
Net earnings ..................................................... $ 4,248 $ 3,869 $ 3,793
I currently expect increased after-tax earnings at BHE in 2016, but lower earnings at BNSF.
14
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/15 (in millions)
Assets Liabilities and Equity
Cash and equivalents .................. $ 6,807 Notes payable ...................... $ 2,135
Accounts and notes receivable ........... 8,886 Other current liabilities ............... 10,565
Inventory ............................ 11,916 Total current liabilities ............... 12,700
Other current assets . . . . . . . . . . . . . . . . . . . 970
Total current assets .................... 28,579
Deferred taxes ...................... 3,649
Goodwill and other intangibles .......... 30,289 Term debt and other liabilities ......... 4,767
Fixed assets .......................... 15,161 Non-controlling interests . . . . . . . . . . . . . 521
Other assets .......................... 4,445 Berkshire equity .................... 56,837
$ 78,474 $ 78,474
Earnings Statement (in millions)
2015 2014 2013*
Revenues ............................................... $107,825 $ 97,689 $ 93,472
Operating expenses ....................................... 100,607 90,788 87,208
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 109 104
Pre-tax earnings ......................................... 7,115 6,792 6,160
Income taxes and non-controlling interests .................... 2,432 2,324 2,283
Net earnings ............................................ $ 4,683 $ 4,468 $ 3,877
* Earnings for 2013 have been restated to exclude Marmon’s leasing operations, which are now included in the
Finance and Financial Products results.
Our income and expense data conforming to GAAP is on page 38. In contrast, the operating expense
figures above are non-GAAP because they exclude some purchase-accounting items (primarily the amortization of
certain intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers
more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do
GAAP figures.
I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand
the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value.
For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording
charges against other intangibles, such as customer relationships, arises from purchase-accounting rules and clearly
does not reflect economic reality. GAAP accounting draws no distinction between the two types of charges. Both,
that is, are recorded as expenses when earnings are calculated – even though, from an investor’s viewpoint, they
could not differ more.
15
In the GAAP-compliant figures we show on page 38, amortization charges of $1.1 billion have been
deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once non￾existent at Berkshire, have become significant because of the many acquisitions we have made. Non-real
amortization charges are likely to climb further as we acquire more companies.
The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now
have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years.
Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings
increase even if true earnings are flat. (My gift to my successor.)
I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do
that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are
all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.”
If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of
earnings, where in the world do they belong?
Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring
“earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they
fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is
playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of
propagating misleading numbers that can deceive investors.
Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at
Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in
51 years I’ve yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls
far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP
earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When
CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses
lengthen while they speak.
Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,
you should remember to add back most of the amortization charges we report. You should also subtract something
to reflect BNSF’s inadequate depreciation charge.
************
Let’s get back to our many manufacturing, service and retailing operations, which sell products ranging
from lollipops to jet airplanes. Some of this sector’s businesses, measured by earnings on unleveraged net tangible
assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others
generate good returns in the area of 12% to 20%.
A few, however – these are serious mistakes I made in my job of capital allocation – have very poor
returns. In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the
industry in which it operates, and we are now paying the price for my misjudgments. At other times, I stumbled in
evaluating either the fidelity or the ability of incumbent managers or ones I later appointed. I will commit more
errors; you can count on that. If we luck out, they will occur at our smaller operations.
Viewed as a single entity, the companies in this group are an excellent business. They employed an average
of $25.6 billion of net tangible assets during 2015 and, despite their holding large quantities of excess cash and
using only token amounts of leverage, earned 18.4% after-tax on that capital.
16
Of course, a business with terrific economics can be a bad investment if it is bought at too high a price. We
have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large
figure we show for goodwill and other intangibles. Overall, however, we are getting a decent return on the capital
we have deployed in this sector. Earnings from the group should grow substantially in 2016 as Duracell and
Precision Castparts enter the fold.
************
We have far too many companies in this group to comment on them individually. Moreover, their
competitors – both current and potential – read this report. In a few of our businesses we might be disadvantaged if
others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire,
therefore, we only disclose what is required. You can nevertheless find a good bit of detail about many of our
operations on pages 88-91.
Finance and Financial Products
Our three leasing and rental operations are conducted by CORT (furniture), XTRA (semi-trailers), and
Marmon (primarily tank cars but also freight cars, intermodal tank containers and cranes). These companies are
industry leaders and have substantially increased their earnings as the American economy has gained strength. At
each of the three, we have invested more money in new equipment than have many of our competitors, and that’s
paid off. Dealing from strength is one of Berkshire’s enduring advantages.
Kevin Clayton has again delivered an industry-leading performance at Clayton Homes, the second-largest
home builder in America. Last year, the company sold 34,397 homes, about 45% of the manufactured homes bought
by Americans. In contrast, the company was number three in the field, with a 14% share, when Berkshire purchased
it in 2003.
Manufactured homes allow the American dream of home ownership to be achieved by lower-income
citizens: Around 70% of new homes costing $150,000 or less come from our industry. About 46% of Clayton’s
homes are sold through the 331 stores we ourselves own and operate. Most of Clayton’s remaining sales are made to
1,395 independent retailers.
Key to Clayton’s operation is its $12.8 billion mortgage portfolio. We originate about 35% of all
mortgages on manufactured homes. About 37% of our mortgage portfolio emanates from our retail operation, with
the balance primarily originated by independent retailers, some of which sell our homes while others market only
the homes of our competitors.
Lenders other than Clayton have come and gone. With Berkshire’s backing, however, Clayton steadfastly
financed home buyers throughout the panic days of 2008-2009. Indeed, during that period, Clayton used precious
capital to finance dealers who did not sell our homes. The funds we supplied to Goldman Sachs and General Electric
at that time produced headlines; the funds Berkshire quietly delivered to Clayton both made home ownership
possible for thousands of families and kept many non-Clayton dealers alive.
Our retail outlets, employing simple language and large type, consistently inform home buyers of
alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from
customers that this information has been received and read. (The form we use is reproduced in its actual size on
page 119.)
17
Mortgage-origination practices are of great importance to both the borrower and to society. There is no
question that reckless practices in home lending played a major role in bringing on the financial panic of 2008,
which in turn led to the Great Recession. In the years preceding the meltdown, a destructive and often corrupt
pattern of mortgage creation flourished whereby (1) an originator in, say, California would make loans and
(2) promptly sell them to an investment or commercial bank in, say, New York, which would package many
mortgages to serve as collateral for a dizzyingly complicated array of mortgage-backed securities to be (3) sold to
unwitting institutions around the world.
As if these sins weren’t sufficient to create an unholy mess, imaginative investment bankers sometimes
concocted a second layer of sliced-up financing whose value depended on the junkier portions of primary offerings.
(When Wall Street gets “innovative,” watch out!) While that was going on, I described this “doubling-up” practice
as requiring an investor to read tens of thousands of pages of mind-numbing prose to evaluate a single security
being offered.
Both the originator and the packager of these financings had no skin in the game and were driven by
volume and mark-ups. Many housing borrowers joined the party as well, blatantly lying on their loan applications
while mortgage originators looked the other way. Naturally, the gamiest credits generated the most profits. Smooth
Wall Street salesmen garnered millions annually by manufacturing products that their customers were unable to
understand. (It’s also questionable as to whether the major rating agencies were capable of evaluating the more
complex structures. But rate them they did.)
Barney Frank, perhaps the most financially-savvy member of Congress during the panic, recently assessed
the 2010 Dodd-Frank Act, saying, “The one major weakness that I’ve seen in the implementation was this decision
by the regulators not to impose risk retention on all residential mortgages.” Today, some legislators and
commentators continue to advocate a 1%-to-5% retention by the originator as a way to align its interests with that of
the ultimate lender or mortgage guarantor.
At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside
the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a
price – a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to
foreclose on 8,444 manufactured-housing mortgages at a cost to us of $157 million.
The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a
daunting commitment for our many lower-income borrowers. Our buyer acquires a decent home – take a look at the
home we will have on display at our annual meeting – requiring monthly principal-and-interest payments that
average $522.
Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get over￾extended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his
down payment (though his mortgage payments during his time of occupancy may have been well under rental rates
for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment
behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people
earning multiples of our typical borrower’s income.
The strong desire of our borrowers to have a home of their own is one reason we’ve done well with our
mortgage portfolio. Equally important, we have financed much of the portfolio with floating-rate debt or with short￾term fixed-rate debt. Consequently, the incredibly low short-term rates of recent years have provided us a
constantly-widening spread between our interest costs and the income we derive from our mortgage portfolio, which
bears fixed rates. (Incidentally, we would have enjoyed similar margins had we simply bought long-term bonds and
financed the position in some short-term manner.)
18
Normally, it is risky business to lend long at fixed rates and borrow short as we have been doing at
Clayton. Over the years, some important financial institutions have gone broke doing that. At Berkshire, however,
we possess a natural offset in that our businesses always maintain at least $20 billion in cash-equivalents that earn
short-term rates. More often, our short-term investments are in the $40 billion to $60 billion range. If we have, say,
$60 billion invested at 1⁄4% or less, a sharp move to higher short-term rates would bring benefits to us far exceeding
the higher financing costs we would incur in funding Clayton’s $13 billion mortgage portfolio. In banking terms,
Berkshire is – and always will be – heavily asset-sensitive and will consequently benefit from rising interest rates.
Let me talk about one subject of which I am particularly proud, that having to do with regulation. The
Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be
assessed many billions of dollars in fines and penalties.
The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously
reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and
internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and
Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the
past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its
mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to customers
$704,678. Furthermore, though we had to foreclose on 2.64% of our manufactured-home mortgages last year,
95.4% of our borrowers were current on their payments at yearend, as they moved toward owning a debt-free home.
************
Marmon’s rail fleet expanded to 133,220 units by yearend, a number significantly increased by the
company’s purchase of 25,085 cars from General Electric on September 30. If our fleet was connected to form a
single train, the engine would be in Omaha and the caboose in Portland, Maine.
At yearend, 97% of our railcars were leased, with about 15-17% of the fleet coming up for renewal each
year. Though “tank cars” sound like vessels carrying crude oil, only about 7% of our fleet carries that product;
chemicals and refined petroleum products are the lead items we transport. When trains roll by, look for the UTLX or
Procor markings that identify our tank cars. When you spot the brand, puff out your chest; you own a portion of that
car.
Here’s the earnings recap for this sector:
2015 2014 2013
(in millions)
Berkadia (our 50% share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74 $ 122 $ 80
Clayton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706 558 416
CORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 49 42
Marmon – Containers and Cranes . . . . . . . . . . . . . . . . . . . . . . . 192 238 226
Marmon – Railcars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546 442 353
XTRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 147 125
Net financial income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 283 322
$ 2,086 $ 1,839 $ 1,564
* Excludes capital gains or losses
19
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value. We
exclude our Kraft Heinz holding because we are part of a control group and account for it on the “equity” method.
12/31/15
Shares** Company
Percentage of
Company
Owned Cost* Market
(in millions)
151,610,700 American Express Company ................. 15.6 $ 1,287 $ 10,545
46,577,138 AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 1,283 1,603
7,463,157 Charter Communications, Inc. . . . . . . . . . . . . . . . . 6.6 1,202 1,367
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . 9.3 1,299 17,184
18,513,482 DaVita HealthCare Partners Inc. . . . . . . . . . . . . . . 8.8 843 1,291
22,164,450 Deere & Company . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 1,773 1,690
11,390,582 The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . 2.7 654 2,053
81,033,450 International Business Machines Corp. . . . . . . . . . 8.4 13,791 11,152
24,669,778 Moody’s Corporation ....................... 12.6 248 2,475
55,384,926 Phillips 66 ................................ 10.5 4,357 4,530
52,477,678 The Procter & Gamble Company . . . . . . . . . . . . . . 1.9 336 4,683 ***
22,169,930 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,701 1,896
101,859,335 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 3,239 4,346
63,507,544 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2.0 3,593 3,893
500,000,000 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . 9.8 12,730 27,180
Others ................................... 10,276 16,450
Total Common Stocks Carried at Market ........ $ 58,612 $ 112,338
* This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write￾ups or write-downs that have been required under GAAP rules.
** Excludes shares held by pension funds of Berkshire subsidiaries.
*** Held under contract of sale for this amount.
Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of
Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8
billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5
billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that
Bank of America is, in effect, our fourth largest equity investment – and one we value highly.
20
Productivity and Prosperity
Earlier, I told you how our partners at Kraft Heinz root out inefficiencies, thereby increasing output per
hour of employment. That kind of improvement has been the secret sauce of America’s remarkable gains in living
standards since the nation’s founding in 1776. Unfortunately, the label of “secret” is appropriate: Too few
Americans fully grasp the linkage between productivity and prosperity. To see that connection, let’s look first at the
country’s most dramatic example – farming – and later examine three Berkshire-specific areas.
In 1900, America’s civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the
total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its
production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually.
Then came the tractor and one innovation after another that revolutionized such keys to farm productivity
as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn.
Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13-14 billion
bushels. Farmers have made similar gains with other products.
Increased yields, though, are only half the story: The huge increases in physical output have been
accompanied by a dramatic reduction in the number of farm laborers (“human input”). Today about three million
people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have
allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of
human resources that enables Americans of today to enjoy huge quantities of non-farm goods and services they
would otherwise lack.
It’s easy to look back over the 115-year span and realize how extraordinarily beneficial agricultural
innovations have been – not just for farmers but, more broadly, for our entire society. We would not have anything
close to the America we now know had we stifled those improvements in productivity. (It was fortunate that horses
couldn’t vote.) On a day-to-day basis, however, talk of the “greater good” must have rung hollow to farm hands who
lost their jobs to machines that performed routine tasks far more efficiently than humans ever could. We will
examine this flip-side to productivity gains later in this section.
For the moment, however, let’s move on to three stories of efficiencies that have had major consequences
for Berkshire subsidiaries. Similar transformations have been commonplace throughout American business.
‹ In 1947, shortly after the end of World War II, the American workforce totaled 44 million. About
1.35 million workers were employed in the railroad industry. The revenue ton-miles of freight moved by
Class I railroads that year totaled 655 billion.
By 2014, Class I railroads carried 1.85 trillion ton-miles, an increase of 182%, while employing only
187,000 workers, a reduction of 86% since 1947. (Some of this change involved passenger-related
employees, but most of the workforce reduction came on the freight side.) As a result of this staggering
improvement in productivity, the inflation-adjusted price for moving a ton-mile of freight has fallen by
55% since 1947, a drop saving shippers about $90 billion annually in current dollars.
Another startling statistic: If it took as many people now to move freight as it did in 1947, we would need
well over three million railroad workers to handle present volumes. (Of course, that level of employment
would raise freight charges by a lot; consequently, nothing close to today’s volume would actually move.)
21
Our own BNSF was formed in 1995 by a merger between Burlington Northern and Santa Fe. In 1996, the
merged company’s first full year of operation, 411 million ton-miles of freight were transported by 45,000
employees. Last year the comparable figures were 702 million ton-miles (plus 71%) and 47,000 employees
(plus only 4%). That dramatic gain in productivity benefits both owners and shippers. Safety at BNSF has
improved as well: Reportable injuries were 2.04 per 200,000 man-hours in 1996 and have since fallen more
than 50% to 0.95.
‹ A bit more than a century ago, the auto was invented, and around it formed an industry that insures cars
and their drivers. Initially, this business was written through traditional insurance agencies – the kind
dealing in fire insurance. This agency-centric approach included high commissions and other underwriting
expenses that consumed about 40¢ of the premium dollar. Strong local agencies were then in the driver’s
seat because they represented multiple insurers and could play one company off against another when
commissions were being negotiated. Cartel-like pricing prevailed, and all involved were doing fine –
except for the consumer.
And then some American ingenuity came into play: G. J. Mecherle, a farmer from Merna, Illinois, came up
with the idea of a captive sales force that would sell the insurance products of only a single company. His
baby was christened State Farm Mutual. The company cut commissions and expenses – moves that
permitted lower prices – and soon became a powerhouse. For many decades, State Farm has been the
runaway volume leader in both auto and homeowner’s insurance. Allstate, which also operated with a
direct distribution model, was long the runner-up. Both State Farm and Allstate have had underwriting
expenses of about 25%.
In the early 1930s, another contender, United Services Auto Association (“USAA”), a mutual-like
company, was writing auto insurance for military officers on a direct-to-the-customer basis. This marketing
innovation rose from a need that military personnel had to buy insurance that would stay with them as they
moved from base to base. That was business of little interest to local insurance agencies, which wanted the
steady renewals that came from permanent residents.
The direct distribution method of USAA, as it happened, incurred lower costs than those enjoyed by State
Farm and Allstate and therefore delivered an even greater bargain to customers. That made Leo and Lillian
Goodwin, employees of USAA, dream of broadening the target market for its direct distribution model
beyond military officers. In 1936, starting with $100,000 of capital, they incorporated Government
Employees Insurance Co. (later compressing this mouthful to GEICO).
Their fledgling did $238,000 of auto insurance business in 1937, its first full year. Last year GEICO did
$22.6 billion, more than double the volume of USAA. (Though the early bird gets the worm, the second
mouse gets the cheese.) GEICO’s underwriting expenses in 2015 were 14.7% of premiums, with USAA
being the only large company to achieve a lower percentage. (GEICO is fully as efficient as USAA but
spends considerably more on advertising aimed at promoting growth.)
With the price advantage GEICO’s low costs allow, it’s not surprising that several years ago the company
seized the number two spot in auto insurance from Allstate. GEICO is also gaining ground on State Farm,
though it is still far ahead of us in volume. On August 30, 2030 – my 100th birthday – I plan to announce
that GEICO has taken over the top spot. Mark your calendar.
GEICO employs about 34,000 people to serve its 14 million policyholders. I can only guess at the
workforce it would require to serve a similar number of policyholders under the agency system. I believe,
however, that the number would be at least 60,000, a combination of what the insurer would need in direct
employment and the personnel required at supporting agencies.
22
‹ In its electric utility business, our Berkshire Hathaway Energy (“BHE”) operates within a changing
economic model. Historically, the survival of a local electric company did not depend on its efficiency. In
fact, a “sloppy” operation could do just fine financially.
That’s because utilities were usually the sole supplier of a needed product and were allowed to price at a
level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a
utility was the only business that would automatically earn more money by redecorating the boss’s office.
And some CEOs ran things accordingly.
That’s all changing. Today, society has decided that federally-subsidized wind and solar generation is in
our country’s long-term interest. Federal tax credits are used to implement this policy, support that makes
renewables price-competitive in certain geographies. Those tax credits, or other government-mandated help
for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost
operator. BHE’s long-established emphasis on efficiency – even when the company didn’t need it to attain
authorized earnings – leaves us particularly competitive in today’s market (and, more important, in
tomorrow’s as well).
BHE acquired its Iowa utility in 1999. In the year before, that utility employed 3,700 people and produced
19 million megawatt-hours of electricity. Now we employ 3,500 people and produce 29 million megawatt￾hours. That major increase in efficiency allowed us to operate without a rate increase for 16 years, a period
during which industry rates increased 44%.
The safety record of our Iowa utility is also outstanding. It had .79 injuries per 100 employees in 2015
compared to the rate of 7.0 experienced by the previous owner in the year before we bought the operation.
In 2006 BHE purchased PacifiCorp, which operated primarily in Oregon and Utah. The year before our
purchase PacifiCorp employed 6,750 people and produced 52.6 million megawatt-hours. Last year the
numbers were 5,700 employees and 56.3 million megawatt-hours. Here, too, safety improved dramatically,
with the accident-rate-per-100-employees falling from 3.4 in 2005 to .85 in 2015. In safety, BHE now
ranks in the industry’s top decile.
Those outstanding performances explain why BHE is welcomed by regulators when it proposes to buy a
utility in their jurisdiction. The regulators know the company will run an efficient, safe and reliable
operation and also arrive with unlimited capital to fund whatever projects make sense. (BHE has never paid
a dividend to Berkshire since we assumed ownership. No investor-owned utility in America comes close to
matching BHE’s enthusiasm for reinvestment.)
************
The productivity gains that I’ve just spelled out – and countless others that have been achieved in America
– have delivered awesome benefits to society. That’s the reason our citizens, as a whole, have enjoyed – and will
continue to enjoy – major gains in the goods and services they receive.
To this thought there are offsets. First, the productivity gains achieved in recent years have largely
benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a
terrible price when innovation or new efficiencies upend their worlds.
We need shed no tears for the capitalists (whether they be private owners or an army of public
shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good
decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who
diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning
investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones
Industrial Average – an index fund of sorts – soared from 66 to 11,497, with its component companies all the while
paying ever-increasing dividends.)
23
A long-employed worker faces a different equation. When innovation and the market system interact to
produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent
employment elsewhere; for others, that is not an option.
When low-cost competition drove shoe production to Asia, our once-prosperous Dexter operation folded,
putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could
learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they
could not replace. The same scenario unfolded in slow-motion at our original New England textile operation, which
struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke
Portuguese and knew little, if any, English. They had no Plan B.
The answer in such disruptions is not the restraining or outlawing of actions that increase productivity.
Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be
employed in farming.
The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to
work but find their specific talents judged of small value because of market forces. (I personally favor a reformed
and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The
price of achieving ever-increasing prosperity for the great majority of Americans should not be penury for the
unfortunate.
Important Risks
We, like all public companies, are required by the SEC to annually catalog “risk factors” in our 10-K. I
can’t remember, however, an instance when reading a 10-K’s “risk” section has helped me in evaluating a business.
That’s not because the identified risks aren’t real. The truly important risks, however, are usually well known.
Beyond that, a 10-K’s catalog of risks is seldom of aid in assessing: (1) the probability of the threatening event
actually occurring; (2) the range of costs if it does occur; and (3) the timing of the possible loss. A threat that will
only surface 50 years from now may be a problem for society, but it is not a financial problem for today’s investor.
Berkshire operates in more industries than any company I know of. Each of our pursuits has its own array
of possible problems and opportunities. Those are easy to list but hard to evaluate: Charlie, I and our various CEOs
often differ in a very major way in our calculation of the likelihood, the timing and the cost (or benefit) that may
result from these possibilities.
Let me mention just a few examples. To begin with an obvious threat, BNSF, along with other railroads, is
certain to lose significant coal volume over the next decade. At some point in the future – though not, in my view,
for a long time – GEICO’s premium volume may shrink because of driverless cars. This development could hurt our
auto dealerships as well. Circulation of our print newspapers will continue to fall, a certainty we allowed for when
purchasing them. To date, renewables have helped our utility operation but that could change, particularly if storage
capabilities for electricity materially improve. Online retailing threatens the business model of our retailers and
certain of our consumer brands. These potentialities are just a few of the negative possibilities facing us – but even
the most casual follower of business news has long been aware of them.
None of these problems, however, is crucial to Berkshire’s long-term well-being. When we took over the
company in 1965, its risks could have been encapsulated in a single sentence: “The northern textile business in
which all of our capital resides is destined for recurring losses and will eventually disappear.” That development,
however, was no death knell. We simply adapted. And we will continue to do so.
24
Every day Berkshire managers are thinking about how they can better compete in an always-changing
world. Just as vigorously, Charlie and I focus on where a steady stream of funds should be deployed. In that respect,
we possess a major advantage over one-industry companies, whose options are far more limited. I firmly believe
that Berkshire has the money, talent and culture to plow through the sort of adversities I’ve itemized above – and
many more – and to emerge with ever-greater earning power.
There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are
powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the
aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all
of American business.
The probability of such mass destruction in any given year is likely very small. It’s been more than 70
years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first
atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our
government – and luck! – for this result.
Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is
only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a
century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even
nations that would like to inflict maximum damage on our country. Their means of doing so have increased
exponentially during my lifetime. “Innovation” has its dark side.
There is no way for American corporations or their investors to shed this risk. If an event occurs in the U.S.
that leads to mass devastation, the value of all equity investments will almost certainly be decimated.
No one knows what “the day after” will look like. I think, however, that Einstein’s 1949 appraisal remains
apt: “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and
stones.”
************
I am writing this section because we have a proxy proposal regarding climate change to consider at this
year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present
to our insurance operation and explain how we are responding to these threats.
It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely”
rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts”
about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to
the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the
danger.
This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued
that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the
rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the
planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is
foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how
cloudless the skies appear.
It’s understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by
climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property
losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or
twenty-year policies at fixed prices. But insurance policies are customarily written for one year and repriced
annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.
25
Think back to 1951 when I first became enthused about GEICO. The company’s average loss-per-policy
was then about $30 annually. Imagine your reaction if I had predicted then that in 2015 the loss costs would increase
to about $1,000 per policy. Wouldn’t such skyrocketing losses prove disastrous, you might ask? Well, no.
Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans
involved in accidents. But these increased costs have been promptly matched by increased premiums. So,
paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had
remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than
one doing $23 billion.
Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather￾related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years,
which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely –
though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable.
As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a
low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major
insurer, climate change should not be on your list of worries.
The Annual Meeting
Charlie and I have finally decided to enter the 21st Century. Our annual meeting this year will be webcast
worldwide in its entirety. To view the meeting, simply go to https://finance.yahoo.com/brklivestream at 9 a.m.
Central Daylight Time on Saturday, April 30th. The Yahoo! webcast will begin with a half hour of interviews with
managers, directors and shareholders. Then, at 9:30, Charlie and I will commence answering questions.
This new arrangement will serve two purposes. First, it may level off or modestly decrease attendance at
the meeting. Last year’s record of more than 40,000 attendees strained our capacity. In addition to quickly filling the
CenturyLink Center’s main arena, we packed its overflow rooms and then spilled into two large meeting rooms at
the adjoining Omaha Hilton. All major hotels were sold out notwithstanding Airbnb’s stepped-up presence. Airbnb
was especially helpful for those visitors on limited budgets.
Our second reason for initiating a webcast is more important. Charlie is 92, and I am 85. If we were
partners with you in a small business, and were charged with running the place, you would want to look in
occasionally to make sure we hadn’t drifted off into la-la land. Shareholders, in contrast, should not need to come to
Omaha to monitor how we look and sound. (In making your evaluation, be kind: Allow for the fact that we didn’t
look that impressive when we were at our best.)
Viewers can also observe our life-prolonging diet. During the meeting, Charlie and I will each consume
enough Coke, See’s fudge and See’s peanut brittle to satisfy the weekly caloric needs of an NFL lineman. Long ago
we discovered a fundamental truth: There’s nothing like eating carrots and broccoli when you’re really hungry –
and want to stay that way.
Shareholders planning to attend the meeting should come at 7 a.m. when the doors open at CenturyLink
Center and start shopping. Carrie Sova will again be in charge of the festivities. She had her second child late last
month, but that did not slow her down. Carrie is unflappable, ingenious and expert at bringing out the best in those
who work with her. She is aided by hundreds of Berkshire employees from around the country and by our entire
home office crew as well, all of them pitching in to make the weekend fun and informative for our owners.
26
Last year we increased the number of hours available for shopping at the CenturyLink. Sales skyrocketed –
so, naturally, we will stay with the new schedule. On Friday, April 29th you can shop between noon and 5 p.m., and
on Saturday exhibits and stores will be open from 7 a.m. until 4:30 p.m.
On Saturday morning, we will have our fifth International Newspaper Tossing Challenge. Our target will
again be a Clayton Home porch, located precisely 35 feet from the throwing line. When I was a teenager – in my
one brief flirtation with honest labor – I delivered about 500,000 papers. So I think I’m pretty good at this game.
Challenge me! Humiliate me! Knock me down a peg! The papers will run 36 to 42 pages, and you must fold them
yourself (no rubber bands allowed).
The competition begins at 7:15, when contestants will make preliminary tosses. The eight throws judged
most accurate – four made by contestants 12 or under, and four made by the older set – will compete against me at
7:45. The young challengers will each receive a prize. But the older ones will have to beat me to take anything
home.
And be sure to check out the Clayton home itself. It can be purchased for $78,900, fully installed on land
you provide. In past years, we’ve made many sales on the meeting day. Kevin Clayton will be on hand with his
order book.
At 8:30 a.m., a new Berkshire movie will be shown. An hour later, we will start the question-and-answer
period, which (including a break for lunch at CenturyLink’s stands) will last until 3:30 p.m. After a short recess,
Charlie and I will convene the annual meeting at 3:45 p.m. This business session typically lasts only a half hour or
so and can safely be skipped by those craving a little last-minute shopping.
Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which
products from dozens of Berkshire subsidiaries will be for sale. Say hello to the many Berkshire managers who will
be captaining their exhibits. And be sure to view the terrific BNSF railroad layout that salutes all of our subsidiaries.
Your children (and you!) will be enchanted with it.
We will have a new and very special exhibit in the hall this year: a full-size model of the world’s largest
aircraft engine, for which Precision Castparts makes many key components. The real engines weigh about 20,000
pounds and are ten feet in diameter and 22 feet in length. The bisected model at the meeting will give you a good
look at many PCC components that help power your flights.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the meeting.
After you purchase a pair, wear them on Sunday at our fourth annual “Berkshire 5K,” an 8 a.m. race starting at the
CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent to you with your
meeting credentials. Entrants in the race will find themselves running alongside many of Berkshire’s managers,
directors and associates. (Charlie and I, however, will sleep in; the fudge and peanut brittle take their toll.)
Participation in the 5K grows every year. Help us set another record.
A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from
around the country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount
(usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental
point: The discount is not additive if you qualify for another discount, such as that available to certain groups.)
Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend
the savings on our other products.
27
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, among them a couple of new titles.
Andy Kilpatrick will introduce (and be glad to sign) the latest edition of his all-encompassing coverage of
Berkshire. It’s 1,304 pages and weighs 9.8 pounds. (My blurb for the book: “Ridiculously skimpy.”) Check out
Peter Bevelin’s new book as well. Peter has long been a keen observer of Berkshire.
We will also have a new, 20-page-longer edition of Berkshire’s 50-year commemorative book that at last
year’s meeting sold 12,000 copies. Since then, Carrie and I have uncovered additional material that we find
fascinating, such as some very personal letters sent by Grover Cleveland to Edward Butler, his friend and the then￾publisher of The Buffalo News. Nothing from the original edition has been changed or eliminated, and the price
remains $20. Charlie and I will jointly sign 100 copies that will be randomly placed among the 5,000 available for
sale at the meeting.
My friend, Phil Beuth, has written Limping on Water, an autobiography that chronicles his life at Capital
Cities Communications and tells you a lot about its leaders, Tom Murphy and Dan Burke. These two were the best
managerial duo – both in what they accomplished and how they did it – that Charlie and I ever witnessed. Much of
what you become in life depends on whom you choose to admire and copy. Start with Tom Murphy, and you’ll
never need a second exemplar.
Finally, Jeremy Miller has written Warren Buffett’s Ground Rules, a book that will debut at the annual
meeting. Mr. Miller has done a superb job of researching and dissecting the operation of Buffett Partnership Ltd.
and of explaining how Berkshire’s culture has evolved from its BPL origin. If you are fascinated by investment
theory and practice, you will enjoy this book.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to both the meeting and other events. Airlines have sometimes jacked up
prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City vs.
Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can save you
significant money, particularly if you had planned to rent a car in Omaha. The savings for a couple could run to
$1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. Last year in the week encompassing the meeting, the store
did a record $44,239,493 of business. If you repeat that figure to a retailer, he is not going to believe you. (An
average week for NFM’s Omaha store – the highest-volume home furnishings store in the United States except for
our new Dallas store – is about $9 million.)
To obtain the Berkshire discount at NFM, you must make your purchases between Tuesday, April 26th and
Monday, May 2nd inclusive, and also present your meeting credential. The period’s special pricing will even apply to
the products of several prestigious manufacturers that normally have ironclad rules against discounting but which, in
the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. During
“Berkshire Weekend” NFM will be open from 10 a.m. to 9 p.m. Monday through Friday, 10 a.m. to 9:30 p.m. on
Saturday and 10 a.m. to 8 p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is hosting a picnic to which
you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from 6
p.m. to 9 p.m. on Friday, April 29th. The second, the main gala, will be held on Sunday, May 1st, from 9 a.m. to 4
p.m. On Saturday, we will remain open until 6 p.m. During last year’s Friday-Sunday stretch, the store wrote a sales
ticket every 15 seconds that it was open.
28
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 25th through Saturday, May 7th. During that period, please
identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement showing
you own our stock.
On Sunday, in the mall outside of Borsheims, Norman Beck, a remarkable magician from Dallas, will
bewilder onlookers. On the upper level, we will have Bob Hamman and Sharon Osberg, two of the world’s top
bridge experts, available to play bridge with our shareholders on Sunday afternoon. I will join them and hope to
have Ajit and Charlie there also.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met
Ariel when she was nine and even then I was unable to score a point against her. Now, she’s a junior at Princeton,
having already represented the United States in the 2012 Olympics. If you don’t mind embarrassing yourself, test
your skills against her, beginning at 1 p.m. Bill Gates and I will lead off and try to soften her up.
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 1st, serving from 1 p.m.
until 10 p.m. To make a reservation at Gorat’s, call 402-551-3733 on April 1st (but not before). As for my other
favorite restaurant, Piccolo’s, I’m sad to report it closed.
We will again have the same three financial journalists lead the question-and-answer period at the meeting,
asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their e￾mail addresses are: Carol Loomis, the preeminent business journalist of her time, who may be e-mailed at
loomisbrk@gmail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of
The New York Times, at arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the six he or she decides are the most interesting
and important. The journalists have told me your question has the best chance of being selected if you keep it
concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two questions in
any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if your
question is asked.)
An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the
insurance specialist will be Cliff Gallant of Nomura Securities. Questions that deal with our non-insurance
operations will come from Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Our
hope is that the analysts and journalists will ask questions that add to our owners’ understanding and knowledge of
their investment.
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough,
for sure, and that’s the way we like it. Multi-part questions aren’t allowed; we want to give as many questioners as
possible a shot at us.
All told we expect at least 54 questions, which will allow for six from each analyst and journalist and for
18 from the audience. (Last year we had 64 in total.) The questioners from the audience will be chosen by means of
11 drawings that will take place at 8:15 a.m. on the morning of the annual meeting. Each of the 11 microphones
installed in the arena and main overflow room will host, so to speak, a drawing.
29
While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe
all shareholders should simultaneously have access to new information that Berkshire releases and, if possible,
should also have adequate time to digest and analyze it before any trading takes place. That’s why we try to issue
financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday. We
do not follow the common practice of talking one-on-one with large institutional investors or analysts, treating them
instead as we do all other shareholders. There is no one more important to us than the shareholder of limited means
who trusts us with a substantial portion of his savings.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars
who run their businesses as if they were the only asset owned by their families. I also believe the mindset of our
managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most of
our managers have no financial need to work. The joy of hitting business “home runs” means as much to them as
their paycheck.
Equally important, however, are the 24 men and women who work with me at our corporate office. This
group efficiently deals with a multitude of SEC and other regulatory requirements, files a 30,400-page Federal
income tax return – that’s up 6,000 pages from the prior year! – oversees the filing of 3,530 state tax returns,
responds to countless shareholder and media inquiries, gets out the annual report, prepares for the country’s largest
annual meeting, coordinates the Board’s activities, fact-checks this letter – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt with
the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also
handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and french fries
(smothered in Heinz ketchup, of course) for lunch. No CEO has it better; I truly do feel like tap dancing to work
every day. In fact, my job becomes more fun every year.
In 2015, Berkshire’s revenues increased by $16 billion. Look carefully, however, at the two pictures on the
facing page. The top one is from last year’s report and shows the entire Berkshire home-office crew at our
Christmas lunch. Below that photo is this year’s Christmas photo portraying the same 25 people identically
positioned. In 2015, no one joined us, no one left. And the odds are good that you will see a photo of the same 25
next year.
Can you imagine another very large company – we employ 361,270 people worldwide – enjoying that kind
of employment stability at headquarters? At Berkshire we have hired some wonderful people – and they have stayed
with us. Moreover, no one is hired unless he or she is truly needed. That’s why you’ve never read about
“restructuring” charges at Berkshire.
On April 30th, come to Omaha – the cradle of capitalism – and meet my gang. They are the best.
February 27, 2016 Warren E. Buffett
Chairman of the Board
30
Front Row – Becki Amick, Sharon Heck, Melissa Hawk, Jalayna Busse, Warren Buffett, Angie Wells, Alisa Krueger,
Deb Ray, Carrie Sova, Ellen Schmidt Back Row – Tracy Britt Cool, Jennifer Tselentis, Ted Weschler, Joanne Manhart,
Bob Reeson, Todd Combs, Dan Jaksich, Debbie Bosanek, Mark Sisley, Marc Hamburg, Kerby Ham, Mark Millard,
Allyson Ballard, Stacy Gottschalk, Tiffany Vokt
31
Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 ........................................................................... 23.8 49.5 10.0
1966 ........................................................................... 20.3 (3.4) (11.7)
1967 ........................................................................... 11.0 13.3 30.9
1968 ........................................................................... 19.0 77.8 11.0
1969 ........................................................................... 16.2 19.4 (8.4)
1970 ........................................................................... 12.0 (4.6) 3.9
1971 ........................................................................... 16.4 80.5 14.6
1972 ........................................................................... 21.7 8.1 18.9
1973 ........................................................................... 4.7 (2.5) (14.8)
1974 ........................................................................... 5.5 (48.7) (26.4)
1975 ........................................................................... 21.9 2.5 37.2
1976 ........................................................................... 59.3 129.3 23.6
1977 ........................................................................... 31.9 46.8 (7.4)
1978 ........................................................................... 24.0 14.5 6.4
1979 ........................................................................... 35.7 102.5 18.2
1980 ........................................................................... 19.3 32.8 32.3
1981 ........................................................................... 31.4 31.8 (5.0)
1982 ........................................................................... 40.0 38.4 21.4
1983 ........................................................................... 32.3 69.0 22.4
1984 ........................................................................... 13.6 (2.7) 6.1
1985 ........................................................................... 48.2 93.7 31.6
1986 ........................................................................... 26.1 14.2 18.6
1987 ........................................................................... 19.5 4.6 5.1
1988 ........................................................................... 20.1 59.3 16.6
1989 ........................................................................... 44.4 84.6 31.7
1990 ........................................................................... 7.4 (23.1) (3.1)
1991 ........................................................................... 39.6 35.6 30.5
1992 ........................................................................... 20.3 29.8 7.6
1993 ........................................................................... 14.3 38.9 10.1
1994 ........................................................................... 13.9 25.0 1.3
1995 ........................................................................... 43.1 57.4 37.6
1996 ........................................................................... 31.8 6.2 23.0
1997 ........................................................................... 34.1 34.9 33.4
1998 ........................................................................... 48.3 52.2 28.6
1999 ........................................................................... 0.5 (19.9) 21.0
2000 ........................................................................... 6.5 26.6 (9.1)
2001 ........................................................................... (6.2) 6.5 (11.9)
2002 ........................................................................... 10.0 (3.8) (22.1)
2003 ........................................................................... 21.0 15.8 28.7
2004 ........................................................................... 10.5 4.3 10.9
2005 ........................................................................... 6.4 0.8 4.9
2006 ........................................................................... 18.4 24.1 15.8
2007 ........................................................................... 11.0 28.7 5.5
2008 ........................................................................... (9.6) (31.8) (37.0)
2009 ........................................................................... 19.8 2.7 26.5
2010 ........................................................................... 13.0 21.4 15.1
2011 ........................................................................... 4.6 (4.7) 2.1
2012 ........................................................................... 14.4 16.8 16.0
2013 ........................................................................... 18.2 32.7 32.4
2014 ........................................................................... 8.3 27.0 13.7
2015 ........................................................................... 6.4 (12.5) 1.4
2016 ........................................................................... 10.7 23.4 12.0
Compounded Annual Gain – 1965-2016 ............................ 19.0% 20.8% 9.7%
Overall Gain – 1964-2016 ............................................... 884,319% 1,972,595% 12,717%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,
accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which
was previously the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other
respects, the results are calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are
after-tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have
lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2016 was $27.5 billion, which increased the per-share book value
of both our Class A and Class B stock by 10.7%. Over the last 52 years (that is, since present management took
over), per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually.*
During the first half of those years, Berkshire’s net worth was roughly equal to the number that really
counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our
resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax
that would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large
part “marked to market.”
By the early 1990s, however, our focus was changing to the outright ownership of businesses, a shift
that materially diminished the relevance of balance sheet figures. That disconnect occurred because the
accounting rules (commonly referred to as “GAAP”) that apply to companies we control differ in important ways
from those used to value marketable securities. Specifically, the accounting for businesses we own requires that
the carrying value of “losers” be written down when their failures become apparent. “Winners,” conversely, are
never revalued upwards.
We’ve experienced both outcomes: As is the case in marriage, business acquisitions often deliver
surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of
companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book
value. We’ve also had some winners among the businesses we’ve purchased – a few of the winners very big –
but have not written those up by a penny.
We have no quarrel with the asymmetrical accounting that applies here. But, over time, it necessarily
widens the gap between Berkshire’s intrinsic value and its book value. Today, the large – and growing –
unrecorded gains at our winners produce an intrinsic value for Berkshire’s shares that far exceeds their book
value. The overage is truly huge in our property/casualty insurance business and significant also in many other
operations.
Over time, stock prices gravitate toward intrinsic value. That’s what has happened at Berkshire, a fact
explaining why the company’s 52-year market-price gain – shown on the facing page – materially exceeds its
book-value gain.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of
those shown for A.
3
What We Hope to Accomplish
Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s normalized
earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of
periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific
events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well.
It’s our job, though, to over time deliver significant growth, bumpy or not. After all, as stewards of your
capital, Berkshire directors have opted to retain all earnings. Indeed, in both 2015 and 2016 Berkshire ranked
first among American businesses in the dollar volume of earnings retained, in each year reinvesting many
billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep.
Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the
cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be
prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark
clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s
imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
I earlier described our gradual shift from a company obtaining most of its gains from investment
activities to one that grows in value by owning businesses. Launching that transition, we took baby steps –
making small acquisitions whose impact on Berkshire’s profits was dwarfed by our gains from marketable
securities. Despite that cautious approach, I made one particularly egregious error, acquiring Dexter Shoe for
$434 million in 1993. Dexter’s value promptly went to zero. The story gets worse: I used stock for the purchase,
giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6 billion.
That wreck was followed by three key happenings – two positive, one negative – that set us firmly on
our present course. At the beginning of 1996, we acquired the half of GEICO we didn’t already own, a cash
transaction that changed our holding from a portfolio investment into a wholly-owned operating business.
GEICO, with its almost unlimited potential, quickly became the centerpiece around which we built what I believe
is now the world’s premier property/casualty business.
Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock – a boatload of
stock – to buy General Reinsurance in late 1998. After some early problems, General Re has become a fine
insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of
Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error
caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical
endorsement – is far from blessed when you are buying businesses).
Early in 2000, I atoned for that folly by buying 76% (since grown to 90%) of MidAmerican Energy, a
brilliantly-managed utility business that has delivered us many large opportunities to make profitable and
socially-useful investments. The MidAmerican cash purchase – I was learning – firmly launched us on our
present course of (1) continuing to build our insurance operation; (2) energetically acquiring large and diversified
non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather
prep for a colonoscopy than issue Berkshire shares.)
Our portfolio of bonds and stocks, de-emphasized though it is, has continued in the post-1998 period to
grow and to deliver us hefty capital gains, interest, and dividends. Those portfolio earnings have provided us
major help in financing the purchase of businesses. Though unconventional, Berkshire’s two-pronged approach
to capital allocation gives us a real edge.
4
Here’s our financial record since 1999, when the redirection of our business began in earnest. During
the 18-year period covered, Berkshire’s outstanding shares grew by only 8.3%, with most of the increase
occurring when we purchased BNSF. That, I’m happy to say, was one issuance of stock that made good sense.
After-Tax Earnings
(in billions of dollars)
Year Operations (1)
Capital
Gains (2) Year Operations (1)
Capital
Gains (2)
1999 0.67 0.89 2008 9.64 (4.65)
2000 0.94 2.39 2009 7.57 0.49
2001 (0.13) 0.92 2010 11.09 1.87
2002 3.72 0.57 2011 10.78 (0.52)
2003 5.42 2.73 2012 12.60 2.23
2004 5.05 2.26 2013 15.14 4.34
2005 5.00 3.53 2014 16.55 3.32
2006 9.31 1.71 2015 17.36 6.73
2007 9.63 3.58 2016 17.57 6.50
(1) Including interest and dividends from investments, but excluding capital gains or losses.
(2) In very large part, this tabulation includes only realized capital gains or losses. Unrealized gains and
losses are also included, however, when GAAP requires that treatment.
Our expectation is that investment gains will continue to be substantial – though totally random as to
timing – and that these will supply significant funds for business purchases. Concurrently, Berkshire’s superb
corps of operating CEOs will focus on increasing earnings at the individual businesses they manage, sometimes
helping them to grow by making bolt-on acquisitions. By our avoiding the issuance of Berkshire stock, any
improvement in earnings will translate into equivalent per-share gains.
************
Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been
throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s
achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on
earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious
immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.
You need not be an economist to understand how well our system has worked. Just look around you.
See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive
factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for
Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America
has amassed wealth totaling $90 trillion.
5
It’s true, of course, that American owners of homes, autos and other assets have often borrowed heavily
to finance their purchases. If an owner defaults, however, his or her asset does not disappear or lose its
usefulness. Rather, ownership customarily passes to an American lending institution that then disposes of it to an
American buyer. Our nation’s wealth remains intact. As Gertrude Stein put it, “Money is always there, but the
pockets change.”
Above all, it’s our market system – an economic traffic cop ably directing capital, brains and labor –
that has created America’s abundance. This system has also been the primary factor in allocating rewards.
Governmental redirection, through federal, state and local taxation, has in addition determined the distribution of
a significant portion of the bounty.
America has, for example, decided that those citizens in their productive years should help both the old
and the young. Such forms of aid – sometimes enshrined as “entitlements” – are generally thought of as applying
to the aged. But don’t forget that four million American babies are born each year with an entitlement to a public
education. That societal commitment, largely financed at the local level, costs about $150,000 per baby. The
annual cost totals more than $600 billion, which is about 31⁄2% of GDP.
However our wealth may be divided, the mind-boggling amounts you see around you belong almost
exclusively to Americans. Foreigners, of course, own or have claims on a modest portion of our wealth. Those
holdings, however, are of little importance to our national balance sheet: Our citizens own assets abroad that are
roughly comparable in value.
Early Americans, we should emphasize, were neither smarter nor more hard working than those people
who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed
human potential, and their successors built upon it.
This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the
build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll
repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the
luckiest crop in history.
************
America’s economic achievements have led to staggering profits for stockholders. During the 20th
century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially
boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a
further 72%, to 19,763.
American business – and consequently a basket of stocks – is virtually certain to be worth far more in
the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.
Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the
nonsense they peddle.
Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of
market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics –
that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not
economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We
spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”
During such scary periods, you should never forget two things: First, widespread fear is your friend as
an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be
unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a
collection of large, conservatively-financed American businesses will almost certainly do well.
As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase.
Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength
and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.
6
Share Repurchases
In the investment world, discussions about share repurchases often become heated. But I’d suggest that
participants in this debate take a deep breath: Assessing the desirability of repurchases isn’t that complicated.
From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of
these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market.
For continuing shareholders, however, repurchases only make sense if the shares are bought at a price
below intrinsic value. When that rule is followed, the remaining shares experience an immediate gain in intrinsic
value. Consider a simple analogy: If there are three equal partners in a business worth $3,000 and one is bought
out by the partnership for $900, each of the remaining partners realizes an immediate gain of $50. If the exiting
partner is paid $1,100, however, the continuing partners each suffer a loss of $50. The same math applies with
corporations and their shareholders. Ergo, the question of whether a repurchase action is value-enhancing or
value-destroying for continuing shareholders is entirely purchase-price dependent.
It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above
which repurchases will be eschewed. That certainly wouldn’t be the case if a management was buying an outside
business. There, price would always factor into a buy-or-pass decision.
When CEOs or boards are buying a small part of their own company, though, they all too often seem
oblivious to price. Would they behave similarly if they were managing a private company with just a few owners
and were evaluating the wisdom of buying out one of them? Of course not.
It is important to remember that there are two occasions in which repurchases should not take place,
even if the company’s shares are underpriced. One is when a business both needs all its available money to
protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for
funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it
after the needed expenditures are made.
The second exception, less common, materializes when a business acquisition (or some other investment
opportunity) offers far greater value than do the undervalued shares of the potential repurchaser. Long ago,
Berkshire itself often had to choose between these alternatives. At our present size, the issue is far less likely to
arise.
My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join
hands and in unison declare, “What is smart at one price is stupid at another.”
************
To recap Berkshire’s own repurchase policy: I am authorized to buy large amounts of Berkshire shares at
120% or less of book value because our Board has concluded that purchases at that level clearly bring an instant and
material benefit to continuing shareholders. By our estimate, a 120%-of-book price is a significant discount to
Berkshire’s intrinsic value, a spread that is appropriate because calculations of intrinsic value can’t be precise.
The authorization given me does not mean that we will “prop” our stock’s price at the 120% ratio. If
that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating
price with a related goal of not over-influencing the market.
To date, repurchasing our shares has proved hard to do. That may well be because we have been clear in
describing our repurchase policy and thereby have signaled our view that Berkshire’s intrinsic value is
significantly higher than 120% of book value. If so, that’s fine. Charlie and I prefer to see Berkshire shares sell in
a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no
fun having owners who are disappointed with their purchases – nor one too low. Furthermore, our buying out
“partners” at a discount is not a particularly gratifying way of making money. Still, market circumstances could
create a situation in which repurchases would benefit both continuing and exiting shareholders. If so, we will be
ready to act.
7
One final observation for this section: As the subject of repurchases has come to a boil, some people
have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds
needed for productive endeavors. That simply isn’t the case: Both American corporations and private investors
are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent
years has died for lack of capital. (Call us if you have a candidate.)
Insurance
Let’s now look at Berkshire’s various businesses, starting with our most important sector, insurance.
The property/casualty (“P/C”) branch of that industry has been the engine that has propelled our growth since
1967, the year we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million.
Today, National Indemnity is the largest property/casualty company in the world as measured by net worth.
One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive
premiums upfront and pay claims later. In extreme cases, such as claims arising from exposure to asbestos,
payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large
sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for
their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds
usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our
float. And how it has grown, as the following table shows:
Year Float (in millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2016 91,577
We recently wrote a huge policy that increased float to more than $100 billion. Beyond that one-time
boost, float at GEICO and several of our specialized operations is almost certain to grow at a good clip. National
Indemnity’s reinsurance division, however, is party to a number of large run-off contracts whose float is certain
to drift downward.
We may in time experience a decline in float. If so, the decline will be very gradual – at the outside no
more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to
immediate or near-term demands for sums that are of significance to our cash resources. This structure is by
design and is a key component in the unequaled financial strength of our insurance companies. It will never be
compromised.
If our premiums exceed the total of our expenses and eventual losses, our insurance operation registers
an underwriting profit that adds to the investment income the float produces. When such a profit is earned, we
enjoy the use of free money – and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so
vigorous indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss.
This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the
insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning
subnormal returns on tangible net worth as compared to other American businesses.
8
This outcome is made more certain by the dramatically lower interest rates that now exist throughout the
world. The investment portfolios of almost all P/C companies – though not those of Berkshire – are heavily
concentrated in bonds. As these high-yielding legacy investments mature and are replaced by bonds yielding a
pittance, earnings from float will steadily fall. For that reason, and others as well, it’s a good bet that industry
results over the next ten years will fall short of those recorded in the past decade, particularly in the case of
companies that specialize in reinsurance.
Nevertheless, I very much like our own prospects. Berkshire’s unrivaled financial strength allows us far
more flexibility in investing than that generally available to P/C companies. The many alternatives available to us
are always an advantage; occasionally, they offer us major opportunities. When others are constrained, our
choices expand.
Moreover, our P/C companies have an excellent underwriting record. Berkshire has now operated at an
underwriting profit for 14 consecutive years, our pre-tax gain for the period having totaled $28 billion. That
record is no accident: Disciplined risk evaluation is the daily focus of all of our insurance managers, who know
that while float is valuable, its benefits can be drowned by poor underwriting results. All insurers give that
message lip service. At Berkshire it is a religion, Old Testament style.
So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount
of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to
think of float as a typical liability is a major mistake. It should instead be viewed as a revolving fund. Daily, we
pay old claims and related expenses – a huge $27 billion to more than six million claimants in 2016 – and that
reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to
float.
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out
the door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP.
A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying
our insurance companies and that is included in our book-value figure. In very large part, this goodwill represents
the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill,
however, has no bearing on its true value. For example, if an insurance company sustains large and prolonged
underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original
cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance
operation possessing it – to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion
we carry for goodwill in our insurance business was already on our books in 2000 when float was $28 billion.
Yet we have subsequently increased our float by $64 billion, a gain that in no way is reflected in our book value.
This unrecorded asset is one reason – a huge reason – why we believe Berkshire’s intrinsic business value far
exceeds its book value.
************
Berkshire’s attractive insurance economics exist only because we have some terrific managers running
disciplined operations that in most cases possess hard-to-replicate business models. Let me tell you about the
major units.
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures
risks that no one else has the desire or the capital to take on. His operation combines capacity, speed,
decisiveness and, most important, brains in a manner unique in the insurance business. Yet he never exposes
Berkshire to risks that are inappropriate in relation to our resources.
9
Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the
insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple
anything it has ever experienced – Berkshire as a whole would likely record a large profit for the year. Our many
streams of non-insurance earnings would see to that. Additionally, we would remain awash in cash and be eager
to write business in an insurance market that might well be in disarray. Meanwhile, other major insurers and
reinsurers would be swimming in red ink, if not facing insolvency.
When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the
insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our
small and struggling reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created
tens of billions of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me
for him, don’t hesitate. Make the trade!
************
We have another reinsurance powerhouse in General Re, managed until recently by Tad Montross. After
39 years at General Re, Tad retired in 2016. Tad was a class act in every way and we owe him a ton of thanks.
Kara Raiguel, who has worked with Ajit for 16 years, is now CEO of General Re.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all
exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure
actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit
after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the
appropriate premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on
business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must
as well,” spells trouble in any business, but in none more so than insurance. Tad never listened to that
nonsensical excuse for sloppy underwriting, and neither will Kara.
************
Finally, there is GEICO, the company that set my heart afire 66 years ago (and for which the flame still
burns). GEICO is managed by Tony Nicely, who joined the company at 18 and completed 55 years of service in
2016.
Tony became CEO of GEICO in 1993, and since then the company has been flying. There is no better
manager than Tony, who brings his combination of brilliance, dedication and soundness to the job. (The latter
quality is essential to sustained success. As Charlie says, it’s great to have a manager with a 160 IQ – unless he
thinks it’s 180.) Like Ajit, Tony has created tens of billions of value for Berkshire.
On my initial visit to GEICO in 1951, I was blown away by the huge cost advantage the company
enjoyed over the giants of the industry. It was clear to me that GEICO would succeed because it deserved to
succeed. The company’s annual sales were then $8 million; In 2016, GEICO did that much business every three
hours of the year.
Auto insurance is a major expenditure for most families. Savings matter to them – and only a low-cost
operation can deliver those. In fact, at least 40% of the people reading this letter can save money by insuring with
GEICO. So stop reading – right now! – and go to geico.com or call 800-847-7536.
GEICO’s low costs create a moat – an enduring one – that competitors are unable to cross. As a result,
the company gobbles up market share year after year, ending 2016 with about 12% of industry volume. That’s up
from 2.5% in 1995, the year Berkshire acquired control of GEICO. Employment, meanwhile, grew from 8,575 to
36,085.
10
GEICO’s growth accelerated dramatically during the second half of 2016. Loss costs throughout the
auto-insurance industry had been increasing at an unexpected pace and some competitors lost their enthusiasm
for taking on new customers. GEICO’s reaction to the profit squeeze, however, was to accelerate its
new-business efforts. We like to make hay while the sun sets, knowing that it will surely rise again.
GEICO continues on a roll as I send you this letter. When insurance prices increase, people shop more.
And when they shop, GEICO wins.
Have you called yet? (800-847-7536 or go to geico.com)
************
In addition to our three major insurance operations, we own a collection of smaller companies that
primarily write commercial coverages. In aggregate, these companies are a large, growing and valuable operation
that consistently delivers an underwriting profit, usually one much superior to that reported by their competitors.
Over the past 14 years, this group has earned $4.7 billion from underwriting – about 13% of its premium
volume – while increasing its float from $943 million to $11.6 billion.
Less than three years ago, we formed Berkshire Hathaway Specialty Insurance (“BHSI”), which is
included in this grouping. Our first decision was to put Peter Eastwood in charge, a move that proved to be a
home run: We expected significant losses in the early years while Peter built the personnel and infrastructure
needed for a world-wide operation. Instead, he and his crew delivered significant underwriting profits throughout
the start-up period. BHSI’s volume increased 40% in 2016, reaching $1.3 billion. It’s clear to me that the
company is destined to become one of the world’s leading P/C insurers.
Here’s a recap of pre-tax underwriting earnings and float by division:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2016 2015 2016 2015
BH Reinsurance .................................... $ 822 $ 421 $ 45,081 $ 44,108
General Re ........................................... 190 132 17,699 18,560
GEICO ................................................ 462 460 17,148 15,148
Other Primary ....................................... 657 824 11,649 9,906
$2,131 $1,837 $ 91,577 $ 87,722
Berkshire’s great managers, premier financial strength and a range of business models protected by wide
moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for
Berkshire shareholders that time will only make more valuable.
Regulated, Capital-Intensive Businesses
Our BNSF railroad and Berkshire Hathaway Energy (“BHE”), our 90%-owned utility business, share
important characteristics that distinguish them from Berkshire’s other activities. Consequently, we assign them
their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and
income statement. These two very major companies accounted for 33% of Berkshire’s after-tax operating
earnings last year.
11
A key characteristic of both companies is their huge investment in very long-lived, regulated assets,
with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is
in fact not needed because each company has earning power that even under terrible economic conditions would
far exceed its interest requirements. Last year, for example, in a disappointing year for railroads, BNSF’s interest
coverage was more than 6:1. (Our definition of coverage is the ratio of earnings before interest and taxes to
interest, not EBITDA/interest, a commonly-used measure we view as seriously flawed.)
At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all
circumstances. The first is common to all utilities: recession-resistant earnings, which result from these
companies offering an essential service for which demand is remarkably steady. The second is enjoyed by few
other utilities: an ever-widening diversity of earnings streams, which shield BHE from being seriously harmed by
any single regulatory body. These many sources of profit, supplemented by the inherent advantage of the
company being owned by a strong parent, have allowed BHE and its utility subsidiaries to significantly lower
their cost of debt. That economic fact benefits both us and our customers.
All told, BHE and BNSF invested $8.9 billion in plant and equipment last year, a massive commitment
to their segments of America’s infrastructure. We relish making such investments as long as they promise
reasonable returns – and, on that front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever
need huge investments in both transportation and energy. It is in the self-interest of governments to treat capital
providers in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our
self-interest to conduct our operations in a way that earns the approval of our regulators and the people they
represent.
Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE’s average retail rate is
7.1¢ per KWH. Alliant, the other major electric utility in the state, averages 9.9¢. Here are the comparable
industry figures for adjacent states: Nebraska 9.0¢, Missouri 9.5¢, Illinois 9.2¢, Minnesota 10.0¢. The national
average is 10.3¢. We have promised Iowans that our base rates will not increase until 2029 at the earliest. Our
rock-bottom prices add up to real money for paycheck-strapped customers.
At BNSF, price comparisons between major railroads are far more difficult to make because of
significant differences in both their mix of cargo and the average distance the load is carried. To supply a very
crude measure, however, our revenue per ton-mile was 3¢ last year, while shipping costs for customers of the
other four major U.S.-based railroads ranged from 4¢ to 5¢.
Both BHE and BNSF have been leaders in pursuing planet-friendly technology. In wind generation, no
state comes close to rivaling Iowa, where last year the megawatt-hours we generated from wind equaled 55% of
all megawatt-hours sold to our Iowa retail customers. New wind projects that are underway will take that figure
to 89% by 2020.
Bargain-basement electric rates carry second-order benefits with them. Iowa has attracted large high￾tech installations, both because of its low prices for electricity (which data centers use in huge quantities) and
because most tech CEOs are enthusiastic about using renewable energy. When it comes to wind energy, Iowa is
the Saudi Arabia of America.
BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight
almost 500 miles. Those economics make railroads four times as fuel-efficient as trucks! Furthermore, railroads
alleviate highway congestion – and the taxpayer-funded maintenance expenditures that come with heavier
traffic – in a major way.
12
All told, BHE and BNSF own assets that are of major importance to our country as well as to
shareholders of Berkshire. Here are the key financial figures for both:
BNSF Earnings (in millions)
2016 2015 2014
Revenues.................................................................................. $ 19,829 $ 21,967 $ 23,239
Operating expenses .................................................................... 13,144 14,264 16,237
Operating earnings before interest and taxes.................................... 6,685 7,703 7,002
Interest (net) ............................................................................. 992 928 833
Income taxes............................................................................. 2,124 2,527 2,300
Net earnings.............................................................................. $ 3,569 $ 4,248 $ 3,869
Berkshire Hathaway Energy (90% owned) Earnings (in millions)
2016 2015 2014
U.K. utilities ............................................................................. $ 367 $ 460 $ 527
Iowa utility ............................................................................... 392 292 270
Nevada utilities ......................................................................... 559 586 549
PacifiCorp (primarily Oregon and Utah)......................................... 1,105 1,026 1,010
Gas pipelines (Northern Natural and Kern River) ............................. 413 401 379
Canadian transmission utility ....................................................... 147 170 16
Renewable projects .................................................................... 157 175 194
HomeServices ........................................................................... 225 191 139
Other (net)................................................................................ 73 49 54
Operating earnings before corporate interest and taxes ...................... 3,438 3,350 3,138
Interest .................................................................................... 465 499 427
Income taxes............................................................................. 431 481 616
Net earnings.............................................................................. $ 2,542 $ 2,370 $ 2,095
Earnings applicable to Berkshire ................................................... $ 2,287 $ 2,132 $ 1,882
HomeServices may appear out of place in the above table. But it came with our purchase of
MidAmerican (now BHE) in 1999 – and we are lucky that it did.
HomeServices owns 38 realty companies with more than 29,000 agents who operate in 28 states. Last
year it purchased four realtors, including Houlihan Lawrence, the leader in New York’s Westchester County (in a
transaction that closed shortly after yearend).
In real estate parlance, representing either a buyer or a seller is called a “side,” with the representation of
both counting as two sides. Last year, our owned realtors participated in 244,000 sides, totaling $86 billion in
volume.
HomeServices also franchises many operations throughout the country that use our name. We like both
aspects of the real estate business and expect to acquire many realtors and franchisees during the next decade.
13
Manufacturing, Service and Retailing Operations
Our manufacturing, service and retailing operations sell products ranging from lollipops to jet airplanes.
Let’s look, though, at a summary balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/16 (in millions)
Assets Liabilities and Equity
Cash and equivalents........................... $ 8,073 Notes payable ................................ $ 2,054
Accounts and notes receivable .............. 11,183 Other current liabilities .................... 12,464
Inventory .......................................... 15,727 Total current liabilities..................... 14,518
Other current assets............................. 1,039
Total current assets ............................. 36,022
Deferred taxes................................ 12,044
Goodwill and other intangibles.............. 71,473 Term debt and other liabilities........... 10,943
Fixed assets....................................... 18,915 Non-controlling interests.................. 579
Other assets....................................... 3,183 Berkshire equity ............................. 91,509
$129,593 $129,593
Earnings Statement (in millions)
2016 2015 2014
Revenues ................................................................ $120,059 $107,825 $97,689
Operating expenses................................................... 111,383 100,607 90,788
Interest expense........................................................ 214 103 109
Pre-tax earnings ....................................................... 8,462 7,115 6,792
Income taxes and non-controlling interests .................... 2,831 2,432 2,324
Net earnings ............................................................ $ 5,631 $ 4,683 $ 4,468
Included in this financial summary are 44 businesses that report directly to headquarters. But some of
these companies, in turn, have many individual operations under their umbrella. For example, Marmon has 175
separate business units, serving widely disparate markets, and Berkshire Hathaway Automotive owns 83
dealerships, operating in nine states.
This collection of businesses is truly a motley crew. Some operations, measured by earnings on
unleveraged net tangible assets, enjoy terrific returns that, in a couple of instances, exceed 100%. Most are solid
businesses generating good returns in the area of 12% to 20%.
14
A few, however – these are serious blunders I made in my job of capital allocation – produce very poor
returns. In most cases, I was wrong when I originally sized up the economic characteristics of these companies or
the industries in which they operate, and we are now paying the price for my misjudgments. In a couple of
instances, I stumbled in assessing either the fidelity or ability of incumbent managers or ones I later put in place.
I will commit more errors; you can count on that. Fortunately, Charlie – never bashful – is around to say “no” to
my worst ideas.
Viewed as a single entity, the companies in the manufacturing, service and retailing group are an
excellent business. They employed an average of $24 billion of net tangible assets during 2016 and, despite their
holding large quantities of excess cash and carrying very little debt, earned 24% after-tax on that capital.
Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.
We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the
large figure we show on our balance sheet for goodwill and other intangibles. Overall, however, we are getting a
decent return on the capital we have deployed in this sector. Absent a recession, earnings from the group will
likely grow in 2017, in part because Duracell and Precision Castparts (both bought in 2016) will for the first time
contribute a full year’s earnings to this group. Additionally, Duracell incurred significant transitional costs in
2016 that will not recur.
We have far too many companies in this group to comment on them individually. Moreover, their
competitors – both current and potential – read this report. In a few of our businesses, we might be disadvantaged
if outsiders knew our numbers. Therefore, in certain of our operations that are not of a size material to an
evaluation of Berkshire, we only disclose what is required. You can nevertheless find a good bit of detail about
many of our operations on pages 90 - 94. Be aware, though, that it’s the growth of the Berkshire forest that
counts. It would be foolish to focus over-intently on any single tree.
************
For several years I have told you that the income and expense data shown in this section does not
conform to GAAP. I have explained that this divergence occurs primarily because of GAAP-ordered rules
regarding purchase-accounting adjustments that require the full amortization of certain intangibles over periods
averaging about 19 years. In our opinion, most of those amortization “expenses” are not truly an economic cost.
Our goal in diverging from GAAP in this section is to present the figures to you in a manner reflecting the way in
which Charlie and I view and analyze them.
On page 54 we itemize $15.4 billion of intangibles that are yet to be amortized by annual charges to
earnings. (More intangibles to be amortized will be created as we make new acquisitions.) On that page, we show
that the 2016 amortization charge to GAAP earnings was $1.5 billion, up $384 million from 2015. My judgment
is that about 20% of the 2016 charge is a “real” cost.
Eventually amortization charges fully write off the related asset. When that happens – most often at the
15-year mark – the GAAP earnings we report will increase without any true improvement in the underlying
economics of Berkshire’s business. (My gift to my successor.)
Now that I’ve described a GAAP expense that I believe to be overstated, let me move on to a less
pleasant distortion produced by accounting rules. The subject this time is GAAP-prescribed depreciation charges,
which are necessarily based on historical cost. Yet in certain cases, those charges materially understate true
economic costs. Countless words were written about this phenomenon in the 1970s and early 1980s, when
inflation was rampant. As inflation subsided – thanks to heroic actions by Paul Volcker – the inadequacy of
depreciation charges became less of an issue. But the problem still prevails, big time, in the railroad industry,
where current costs for many depreciable items far outstrip historical costs. The inevitable result is that reported
earnings throughout the railroad industry are considerably higher than true economic earnings.
15
At BNSF, to get down to particulars, our GAAP depreciation charge last year was $2.1 billion. But were
we to spend that sum and no more annually, our railroad would soon deteriorate and become less competitive.
The reality is that – simply to hold our own – we need to spend far more than the cost we show for depreciation.
Moreover, a wide disparity will prevail for decades.
All that said, Charlie and I love our railroad, which was one of our better purchases.
************
Too many managements – and the number seems to grow every year – are looking for any means to
report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earnings. There are
many ways for practitioners to perform this legerdemain. Two of their favorites are the omission of
“restructuring costs” and “stock-based compensation” as expenses.
Charlie and I want managements, in their commentary, to describe unusual items – good or bad – that
affect the GAAP numbers. After all, the reason we look at these numbers of the past is to make estimates of the
future. But a management that regularly attempts to wave away very real costs by highlighting “adjusted
per-share earnings” makes us nervous. That’s because bad behavior is contagious: CEOs who overtly look for
ways to report high numbers tend to foster a culture in which subordinates strive to be “helpful” as well. Goals
like that can lead, for example, to insurers underestimating their loss reserves, a practice that has destroyed many
industry participants.
Charlie and I cringe when we hear analysts talk admiringly about managements who always “make the
numbers.” In truth, business is too unpredictable for the numbers always to be met. Inevitably, surprises occur.
When they do, a CEO whose focus is centered on Wall Street will be tempted to make up the numbers.
Let’s get back to the two favorites of “don’t-count-this” managers, starting with “restructuring.”
Berkshire, I would say, has been restructuring from the first day we took over in 1965. Owning only a northern
textile business then gave us no other choice. And today a fair amount of restructuring occurs every year at
Berkshire. That’s because there are always things that need to change in our hundreds of businesses. Last year, as
I mentioned earlier, we spent significant sums getting Duracell in shape for the decades ahead.
We have never, however, singled out restructuring charges and told you to ignore them in estimating our
normal earning power. If there were to be some truly major expenses in a single year, I would, of course, mention
it in my commentary. Indeed, when there is a total rebasing of a business, such as occurred when Kraft and Heinz
merged, it is imperative that for several years the huge one-time costs of rationalizing the combined operations be
explained clearly to owners. That’s precisely what the CEO of Kraft Heinz has done, in a manner approved by
the company’s directors (who include me). But, to tell owners year after year, “Don’t count this,” when
management is simply making business adjustments that are necessary, is misleading. And too many analysts and
journalists fall for this baloney.
To say “stock-based compensation” is not an expense is even more cavalier. CEOs who go down that
road are, in effect, saying to shareholders, “If you pay me a bundle in options or restricted stock, don’t worry
about its effect on earnings. I’ll ‘adjust’ it away.”
To explore this maneuver further, join me for a moment in a visit to a make-believe accounting
laboratory whose sole mission is to juice Berkshire’s reported earnings. Imaginative technicians await us, eager
to show their stuff.
16
Listen carefully while I tell these enablers that stock-based compensation usually comprises at least 20%
of total compensation for the top three or four executives at most large companies. Pay attention, too, as I explain
that Berkshire has several hundred such executives at its subsidiaries and pays them similar amounts, but uses
only cash to do so. I further confess that, lacking imagination, I have counted all of these payments to
Berkshire’s executives as an expense.
My accounting minions suppress a giggle and immediately point out that 20% of what is paid these
Berkshire managers is tantamount to “cash paid in lieu of stock-based compensation” and is therefore not a
“true” expense. So – presto! – Berkshire, too, can have “adjusted” earnings.
Back to reality: If CEOs want to leave out stock-based compensation in reporting earnings, they should
be required to affirm to their owners one of two propositions: why items of value used to pay employees are not a
cost or why a payroll cost should be excluded when calculating earnings.
During the accounting nonsense that flourished during the 1960s, the story was told of a CEO who, as
his company revved up to go public, asked prospective auditors, “What is two plus two?” The answer that won
the assignment, of course, was, “What number do you have in mind?”
Finance and Financial Products
Our three leasing and rental operations are conducted by CORT (furniture), XTRA (semi-trailers), and
Marmon (primarily tank cars but also freight cars, intermodal tank containers and cranes). Each is the leader in
its field.
We also include Clayton Homes in this section. This company receives most of its revenue from the sale
of manufactured homes, but derives the bulk of its earnings from its large mortgage portfolio. Last year, Clayton
became America’s largest home builder, delivering 42,075 units that accounted for 5% of all new American
homes. (In fairness, other large builders do far more dollar volume than Clayton because they sell site-built
homes that command much higher prices.)
In 2015, Clayton branched out, purchasing its first site-builder. Two similar acquisitions followed in
2016, and more will come. Site-built houses are expected to amount to 3% or so of Clayton’s unit sales in 2017
and will likely deliver about 14% of its dollar volume.
Even so, Clayton’s focus will always be manufactured homes, which account for about 70% of new
American homes costing less than $150,000. Clayton manufactures close to one-half of the total. That is a far cry
from Clayton’s position in 2003 when Berkshire purchased the company. It then ranked third in the industry in
units sold and employed 6,731 people. Now, when its new acquisitions are included, the employee count is
14,677. And that number will increase in the future.
Clayton’s earnings in recent years have materially benefited from extraordinarily low interest rates. The
company’s mortgage loans to home-buyers are at fixed-rates and for long terms (averaging 25 years at
inception). But Clayton’s own borrowings are short-term credits that re-price frequently. When rates plunge,
Clayton’s earnings from its portfolio greatly increase. We normally would shun that kind of lend-long, borrow￾short approach, which can cause major problems for financial institutions. As a whole, however, Berkshire is
always asset-sensitive, meaning that higher short-term rates will benefit our consolidated earnings, even as they
hurt at Clayton.
17
Last year Clayton had to foreclose on 8,304 manufactured-housing mortgages, about 2.5% of its total
portfolio. Customer demographics help explain that percentage. Clayton’s customers are usually lower-income
families with mediocre credit scores; many are supported by jobs that will be at risk in any recession; many,
similarly, have financial profiles that will be damaged by divorce or death to an extent that would not be typical
for a high-income family. Those risks that our customers face are partly mitigated because almost all have a
strong desire to own a home and because they enjoy reasonable monthly payments that average only $587,
including the cost of insurance and property taxes.
Clayton also has long had programs that help borrowers through difficulties. The two most popular are
loan extensions and payment forgiveness. Last year about 11,000 borrowers received extensions, and 3,800 had
$3.4 million of scheduled payments permanently canceled by Clayton. The company does not earn interest or
fees when these loss-mitigation moves are made. Our experience is that 93% of borrowers helped through these
programs in the last two years now remain in their homes. Since we lose significant sums on
foreclosures – losses last year totaled $150 million – our assistance programs end up helping Clayton as well as
its borrowers.
Clayton and Berkshire have been a wonderful partnership. Kevin Clayton came to us with a best-in-class
management group and culture. Berkshire, in turn, provided unmatched staying power when the manufactured￾home industry fell apart during the Great Recession. (As other lenders to the industry vanished, Clayton supplied
credit not only to its own dealers but also to dealers who sold the products of its competitors.) At Berkshire, we
never count on synergies when we acquire companies. Truly important ones, however, surfaced after our
purchase of Clayton.
Marmon’s railcar business experienced a major slowdown in demand last year, which will cause
earnings to decline in 2017. Fleet utilization was 91% in December, down from 97% a year earlier, with the drop
particularly severe at the large fleet we purchased from General Electric in 2015. Marmon’s crane and container
rentals have weakened as well.
Big swings in railcar demand have occurred in the past and they will continue. Nevertheless, we very
much like this business and expect decent returns on equity capital over the years. Tank cars are Marmon’s
specialty. People often associate tank cars with the transportation of crude oil; in fact, they are essential to a great
variety of shippers.
Over time, we expect to expand our railcar operation. Meanwhile, Marmon is making a number of
bolt-on acquisitions whose results are included in the Manufacturing, Service and Retailing section.
Here’s the pre-tax earnings recap for our finance-related companies:
2016 2015 2014
(in millions)
Berkadia (our 50% share) ............................................ $ 91 $ 74 $ 122
Clayton .................................................................... 744 706 558
CORT...................................................................... 60 55 49
Marmon – Containers and Cranes ................................. 126 192 238
Marmon – Railcars..................................................... 654 546 442
XTRA ..................................................................... 179 172 147
Net financial income* ................................................. 276 341 283
$ 2,130 $ 2,086 $ 1,839
* Excludes capital gains or losses
18
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value. We
exclude our Kraft Heinz holding because Berkshire is part of a control group and therefore must account for this
investment on the “equity” method. The 325,442,152 shares Berkshire owns of Kraft Heinz are carried on our
balance sheet at a GAAP figure of $15.3 billion and had a yearend market value of $28.4 billion. Our cost basis
for the shares is $9.8 billion.
12/31/16
Shares* Company
Percentage of
Company
Owned Cost** Market
(in millions)
151,610,700 American Express Company..................... 16.8 $ 1,287 $ 11,231
61,242,652 Apple Inc. ............................................. 1.1 6,747 7,093
6,789,054 Charter Communications, Inc.................... 2.5 1,210 1,955
400,000,000 The Coca-Cola Company ......................... 9.3 1,299 16,584
54,934,718 Delta Airlines Inc. .................................. 7.5 2,299 2,702
11,390,582 The Goldman Sachs Group, Inc. ................ 2.9 654 2,727
81,232,303 International Business Machines Corp. ....... 8.5 13,815 13,484
24,669,778 Moody’s Corporation .............................. 12.9 248 2,326
74,587,892 Phillips 66............................................. 14.4 5,841 6,445
22,169,930 Sanofi .................................................. 1.7 1,692 1,791
43,203,775 Southwest Airlines Co. ............................ 7.0 1,757 2,153
101,859,335 U.S. Bancorp ......................................... 6.0 3,239 5,233
26,620,184 United Continental Holdings Inc................ 8.4 1,477 1,940
43,387,980 USG Corp. ............................................ 29.7 836 1,253
500,000,000 Wells Fargo & Company ......................... 10.0 12,730 27,555
Others .................................................. 10,697 17,560
Total Common Stocks Carried at Market .... $ 65,828 $ 122,032
* Excludes shares held by pension funds of Berkshire subsidiaries.
** This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-downs that have been required under GAAP rules.
Some of the stocks in the table are the responsibility of either Todd Combs or Ted Weschler, who work
with me in managing Berkshire’s investments. Each, independently, manages more than $10 billion; I usually
learn about decisions they have made by looking at monthly trade sheets. Included in the $21 billion that the two
manage is about $7.6 billion of pension trust assets of certain Berkshire subsidiaries. As noted, pension
investments are not included in the preceding tabulation of Berkshire holdings.
************
Excluded from the table – but important – is our ownership of $5 billion of preferred stock issued by
Bank of America. This stock, which pays us $300 million per year, also carries with it a valuable warrant
allowing Berkshire to purchase 700 million common shares of Bank of America for $5 billion at any time before
September 2, 2021. At yearend, that privilege would have delivered us a profit of $10.5 billion. If it wishes,
Berkshire can use its preferred shares to satisfy the $5 billion cost of exercising the warrant.
19
If the dividend rate on Bank of America common stock – now 30 cents annually – should rise above
44 cents before 2021, we would anticipate making a cashless exchange of our preferred into common. If the
common dividend remains below 44 cents, it is highly probable that we will exercise the warrant immediately
before it expires.
Many of our investees, including Bank of America, have been repurchasing shares, some quite
aggressively. We very much like this behavior because we believe the repurchased shares have in most cases
been underpriced. (Undervaluation, after all, is why we own these positions.) When a company grows and
outstanding shares shrink, good things happen for shareholders.
************
It’s important for you to understand that 95% of the $86 billion of “cash and equivalents” (which in my
mind includes U.S. Treasury Bills) shown on our balance sheet are held by entities in the United States and,
consequently, is not subject to any repatriation tax. Moreover, repatriation of the remaining funds would trigger
only minor taxes because much of that money has been earned in countries that themselves impose meaningful
corporate taxes. Those payments become an offset to U.S. tax when money is brought home.
These explanations are important because many cash-rich American companies hold a large portion of
their funds in jurisdictions imposing very low taxes. Such companies hope – and may well be proved right – that
the tax levied for bringing these funds to America will soon be materially reduced. In the meantime, these
companies are limited as to how they can use that cash. In other words, off-shore cash is simply not worth as
much as cash held at home.
Berkshire has a partial offset to the favorable geographical location of its cash, which is that much of it
is held in our insurance subsidiaries. Though we have many alternatives for investing this cash, we do not have
the unlimited choices that we would enjoy if the cash were held by the parent company, Berkshire. We do have
an ability annually to distribute large amounts of cash from our insurers to the parent – though here, too, there are
limits. Overall, cash held at our insurers is a very valuable asset, but one slightly less valuable to us than is cash
held at the parent level.
************
Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is
true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking
20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.
Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on
pages 110 - 111, which has been included in our annual reports since 1983. That principle covers controlled
businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners
understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.
************
Before we leave this investment section, a few educational words about dividends and taxes: Berkshire,
like most corporations, nets considerably more from a dollar of dividends than it reaps from a dollar of capital
gains. That will probably surprise those of our shareholders who are accustomed to thinking of capital gains as
the route to tax-favored returns.
But here’s the corporate math. Every $1 of capital gains that a corporation realizes carries with it
35 cents of federal income tax (and often state income tax as well). The tax on dividends received from domestic
corporations, however, is consistently lower, though rates vary depending on the status of the recipient.
20
For a non-insurance company – which describes Berkshire Hathaway, the parent – the federal tax rate is
effectively 101⁄2 cents per $1 of dividends received. Furthermore, a non-insurance company that owns more than
20% of an investee owes taxes of only 7 cents per $1 of dividends. That rate applies, for example, to the
substantial dividends we receive from our 27% ownership of Kraft Heinz, all of it held by the parent company.
(The rationale for the low corporate taxes on dividends is that the dividend-paying investee has already paid its
own corporate tax on the earnings being distributed.)
Berkshire’s insurance subsidiaries pay a tax rate on dividends that is somewhat higher than that applying
to non-insurance companies, though the rate is still well below the 35% hitting capital gains. Property/casualty
companies owe about 14% in taxes on most dividends they receive. Their tax rate falls, though, to about 11% if
they own more than 20% of a U.S.-based investee.
And that’s our tax lesson for today.
“The Bet” (or how your money finds its way to Wall Street)
In this section, you will encounter, early on, the story of an investment bet I made nine years ago and,
next, some strong opinions I have about investing. As a starter, though, I want to briefly describe Long Bets, a
unique establishment that played a role in the bet.
Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that
administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org
that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other
side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side
wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website.
When the bet is concluded, Long Bets pays off the winning charity.
Here are examples of what you will find on Long Bets’ very interesting site:
In 2002, entrepreneur Mitch Kapor asserted that “By 2029 no computer – or ‘machine intelligence’ – will
have passed the Turing Test,” which deals with whether a computer can successfully impersonate a human being.
Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I don’t know who will
win this bet, but I will confidently wager that no computer will ever replicate Charlie.
That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers
by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn
Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He
promptly laid off $500 with me. (I like his assumption that I’ll be around in 2030 to contribute my payment,
should we lose.)
Now, to my bet and its history. In Berkshire’s 2005 annual report, I argued that active investment
management by professionals – in aggregate – would over a period of years underperform the returns achieved by
rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave
their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index
fund. (See pages 114 - 115 for a reprint of the argument as I originally stated it in the 2005 report.)
21
Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least
five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match
the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and
named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of
fund managers – who could include their own fund as one of the five – to come forth and defend their
occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting
a little of their own money on the line?
What followed was the sound of silence. Though there are thousands of professional investment managers
who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides –
stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money
from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.
I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where
his mouth was. He has been both straight-forward with me and meticulous in supplying all the data that both he
and I have needed to monitor the bet.
For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be
averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in
more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be
distorted by the good or poor results of a single manager.
Each fund-of-funds, of course, operated with a layer of fees that sat above the fees charged by the hedge
funds in which it had invested. In this doubling-up arrangement, the larger fees were levied by the underlying
hedge funds; each of the fund-of-funds imposed an additional fee for its presumed skills in selecting hedge-fund
managers.
Here are the results for the first nine years of the bet – figures leaving no doubt that Girls Inc. of Omaha,
the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening
the mail next January.
Year
Fund of
Funds A
Fund of
Funds B
Fund of
Funds C
Fund of
Funds D
Fund of
Funds E
S&P
Index Fund
2008 -16.5% -22.3% -21.3% -29.3% -30.1% -37.0%
2009 11.3% 14.5% 21.4% 16.5% 16.8% 26.6%
2010 5.9% 6.8% 13.3% 4.9% 11.9% 15.1%
2011 -6.3% -1.3% 5.9% -6.3% -2.8% 2.1%
2012 3.4% 9.6% 5.7% 6.2% 9.1% 16.0%
2013 10.5% 15.2% 8.8% 14.2% 14.4% 32.3%
2014 4.7% 4.0% 18.9% 0.7% -2.1% 13.6%
2015 1.6% 2.5% 5.4% 1.4% -5.0% 1.4%
2016 -2.9% 1.7% -1.4% 2.5% 4.4% 11.9%
Gain to
Date 8.7% 28.3% 62.8% 2.9% 7.5% 85.4%
Footnote: Under my agreement with Protégé Partners, the names of these funds-of-funds have never
been publicly disclosed. I, however, see their annual audits.
The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily
prove typical for the stock market over time. That’s an important fact: A particularly weak nine years for the
market over the lifetime of this bet would have probably helped the relative performance of the hedge funds,
because many hold large “short” positions. Conversely, nine years of exceptionally high returns from stocks
would have provided a tailwind for index funds.
Instead we operated in what I would call a “neutral” environment. In it, the five funds-of-funds
delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in
those funds would have gained $220,000. The index fund would meanwhile have gained $854,000.
22
Bear in mind that every one of the 100-plus managers of the underlying hedge funds had a huge
financial incentive to do his or her best. Moreover, the five funds-of-funds managers that Ted selected were
similarly incentivized to select the best hedge-fund managers possible because the five were entitled to
performance fees based on the results of the underlying funds.
I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But
the results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the
funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their
managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have
put it: “Fees never sleep.”
The underlying hedge-fund managers in our bet received payments from their limited partners that
likely averaged a bit under the prevailing hedge-fund standard of “2 and 20,” meaning a 2% annual fixed fee,
payable even when losses are huge, and 20% of profits with no clawback (if good years were followed by bad
ones). Under this lopsided arrangement, a hedge fund operator’s ability to simply pile up assets under
management has made many of these managers extraordinarily rich, even as their investments have performed
poorly.
Still, we’re not through with fees. Remember, there were the fund-of-funds managers to be fed as well.
These managers received an additional fixed amount that was usually set at 1% of assets. Then, despite the
terrible overall record of the five funds-of-funds, some experienced a few good years and collected
“performance” fees. Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains
achieved by the five funds-of-funds were diverted to the two levels of managers. That was their misbegotten
reward for accomplishing something far short of what their many hundreds of limited partners could have
effortlessly – and with virtually no cost – achieved on their own.
In my opinion, the disappointing results for hedge-fund investors that this bet exposed are almost certain
to recur in the future. I laid out my reasons for that belief in a statement that was posted on the Long Bets website
when the bet commenced (and that is still posted there). Here is what I asserted:
Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017,
the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is
measured on a basis net of fees, costs and expenses.
A lot of very smart people set out to do better than average in securities markets. Call them
active investors.
Their opposites, passive investors, will by definition do about average. In aggregate their
positions will more or less approximate those of an index fund. Therefore, the balance of
the universe—the active investors—must do about average as well. However, these
investors will incur far greater costs. So, on balance, their aggregate results after these costs
will be worse than those of the passive investors.
Costs skyrocket when large annual fees, large performance fees, and active trading costs are
all added to the active investor’s equation. Funds of hedge funds accentuate this cost
problem because their fees are superimposed on the large fees charged by the hedge funds
in which the funds of funds are invested.
A number of smart people are involved in running hedge funds. But to a great extent their
efforts are self-neutralizing, and their IQ will not overcome the costs they impose on
investors. Investors, on average and over time, will do better with a low-cost index fund
than with a group of funds of funds.
23
So that was my argument – and now let me put it into a simple equation. If Group A (active investors)
and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average
results before costs, so, too, must A. Whichever group has the lower costs will win. (The academic in me requires
me to mention that there is a very minor point – not worth detailing – that slightly modifies this formulation.)
And if Group A has exorbitant costs, its shortfall will be substantial.
There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long
stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would
accomplish this feat.
There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose
abilities would equal those of the people I’ve identified. The job, after all, is not impossible. The problem simply
is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that
the person soliciting your funds will not be the exception who does well. Bill Ruane – a truly wonderful human
being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the
long haul – said it well: “In investment management, the progression is from the innovators to the imitators to the
swarming incompetents.”
Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that
some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make
a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine
consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet.
But there would remain a difference: The lucky monkey would not find people standing in line to invest with
him.
Finally, there are three connected realities that cause investing success to breed failure. First, a good
record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment
performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless
seek new money because of their personal equation – namely, the more funds they have under management, the
more their fees.
These three points are hardly new ground for me: In January 1966, when I was managing $44 million, I
wrote my limited partners: “I feel substantially greater size is more likely to harm future results than to help
them. This might not be true for my own personal results, but it is likely to be true for your results. Therefore, . . .
I intend to admit no additional partners to BPL. I have notified Susie that if we have any more children, it is up to
her to find some other partnership for them.”
The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will
usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick
with low-cost index funds.
************
If a statue is ever erected to honor the person who has done the most for American investors, the hands￾down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds.
In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have
promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of
added value.
In his early years, Jack was frequently mocked by the investment-management industry. Today,
however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their
savings than they otherwise would have earned. He is a hero to them and to me.
************
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve
learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index
fund. To their credit, my friends who possess only modest means have usually followed my suggestion.
24
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed
that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and
depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another
breed of hyper-helper called a consultant.
That professional, however, faces a problem. Can you imagine an investment consultant telling clients,
year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large
fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That
advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current
economic trends make the shift appropriate.
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling,
entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them
something superior compared to what the masses receive.
In many aspects of life, indeed, wealth does command top-grade products or services. For that reason,
the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble
meekly signing up for a financial product or service that is available as well to people investing only a few
thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an
expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite
for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.
Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in
hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is
conservative.
Much of the financial damage befell pension funds for public employees. Many of these funds are
woefully underfunded, in part because they have suffered a double whammy: poor investment performance
accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local
taxpayers.
Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will
continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this
expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The
likely result from this parade of promises is predicted in an adage: “When a person with money meets a person
with experience, the one with experience ends up with the money and the one with money leaves with
experience.”
Long ago, a brother-in-law of mine, Homer Rogers, was a commission agent working in the Omaha
stockyards. I asked him how he induced a farmer or rancher to hire him to handle the sale of their hogs or cattle
to the buyers from the big four packers (Swift, Cudahy, Wilson and Armour). After all, hogs were hogs and the
buyers were experts who knew to the penny how much any animal was worth. How then, I asked Homer, could
any sales agent get a better result than any other?
Homer gave me a pitying look and said: “Warren, it’s not how you sell ‘em, it’s how you tell ‘em.”
What worked in the stockyards continues to work in Wall Street.
************
And, finally, let me offer an olive branch to Wall Streeters, many of them good friends of mine.
Berkshire loves to pay fees – even outrageous fees – to investment bankers who bring us acquisitions. Moreover,
we have paid substantial sums for over-performance to our two in-house investment managers – and we hope to
make even larger payments to them in the future.
To get biblical (Ephesians 3:18), I know the height and the depth and the length and the breadth of the
energy flowing from that simple four-letter word – fees – when it is spoken to Wall Street. And when that energy
delivers value to Berkshire, I will cheerfully write a big check.
25
The Annual Meeting
Last year we partnered with Yahoo to air the first-ever webcast of our annual meeting. Thanks to Andy
Serwer and his Yahoo crew, the production was a success in all respects, registering 1.1 million unique visits in
real-time viewing and 11.5 million more in replays (many of those, to be sure, called up by viewers interested in
only certain segments of the webcast).
Berkshire’s thank-you mail for initiating the webcast included many notes from three constituencies: the
elderly who find travel difficult; the thrifty who find it expensive to travel to Omaha; and those who cannot
attend a Saturday meeting for religious reasons.
The webcast cut attendance at last year’s meeting to about 37,000 people (we can’t get a precise count),
which was down about 10%. Nevertheless, both Berkshire’s subsidiaries and Omaha hotels and restaurants
racked up huge sales. Nebraska Furniture Mart’s sales broke their 2015 record volume by 3%, with the Omaha
store recording one-week volume of $45.5 million.
Our Berkshire exhibitors at CenturyLink were open from noon until 5 p.m. on Friday and drew a crowd
of 12,000 bargain-hunting shareholders. We will repeat those Friday shopping hours this year on May 5th. Bring
money.
The annual meeting falls on May 6th and will again be webcast by Yahoo, whose web address is
https://finance.yahoo.com/brklivestream. The webcast will go live at 9 a.m. Central Daylight Time. Yahoo will
interview directors, managers, stockholders and celebrities before the meeting and during the lunch break. Both
those interviews and meeting will be translated simultaneously into Mandarin.
For those attending the meeting in person, the doors at the CenturyLink will open at 7:00 a.m. on
Saturday to facilitate shopping prior to our shareholder movie, which begins at 8:30. The question-and-answer
period will start at 9:30 and run until 3:30, with a one-hour lunch break at noon. Finally, at 3:45 we will begin the
formal shareholder meeting. It will run an hour or so. That is somewhat longer than usual because three proxy
items are to be presented by their proponents, who will be given a reasonable amount of time to state their case.
On Saturday morning, we will have our sixth International Newspaper Tossing Challenge. Our target
will again be the porch of a Clayton Home, located precisely 35 feet from the throwing line. When I was a
teenager – in my one brief flirtation with honest labor – I delivered about 500,000 papers. So I think I’m pretty
good at this game. Challenge me! Humiliate me! Knock me down a peg! The papers will run 36 to 42 pages, and
you must fold them yourself (no rubber bands allowed). The competition will begin about 7:45, and I’ll take on
ten or so competitors selected a few minutes earlier by my assistant, Deb Bosanek.
Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which
products from dozens of our subsidiaries will be for sale. Say hello to the many Berkshire managers who will be
captaining their exhibits. And be sure to view the terrific BNSF railroad layout that salutes all of our companies.
Your children (and you!) will be enchanted with it.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the
meeting. After you purchase a pair, wear them on Sunday at our fourth annual “Berkshire 5K,” an 8 a.m. race
starting at the CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent
to you with your meeting credentials. Entrants in the race will find themselves running alongside many of
Berkshire’s managers, directors and associates. (Charlie and I, however, will sleep in; the fudge and peanut
brittle we eat throughout the Saturday meeting takes its toll.) Participation in the 5K grows every year. Help us
set another record.
26
A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from
around the country. At last year’s meeting, we set a record for policy sales, up 21% from 2015. I predict we will
be up again this year.
So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually
8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point:
The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring
the details of your existing insurance and check out our price. We can save many of you real money. Spend the
savings on other Berkshire products.
Be sure to visit the Bookworm. This Omaha-based retailer will carry about 35 books and DVDs, among
them a couple of new titles. The best book I read last year was Shoe Dog, by Nike’s Phil Knight. Phil is a very
wise, intelligent and competitive fellow who is also a gifted storyteller. The Bookworm will have piles of Shoe
Dog as well as several investment classics by Jack Bogle.
The Bookworm will once again offer our history of the highlights (and lowlights) of Berkshire’s first 50
years. Non-attendees of the meeting can find the book on eBay. Just type in: Berkshire Hathaway Inc.
Celebrating 50 years of a Profitable Partnership (2nd Edition).
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to both the meeting and other events. Keep in mind that airlines have
sometimes jacked up prices for the Berkshire weekend – though I must admit I have developed some tolerance,
bordering on enthusiasm, for that practice now that Berkshire has made large investments in America’s four
major carriers. Nevertheless, if you are coming from far away, compare the cost of flying to Kansas City vs.
Omaha. The drive between the two cities is about 21/2 hours, and it may be that Kansas City can save you
significant money. The savings for a couple could run to $1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. To obtain the Berkshire discount at NFM, you must
make your purchases between Tuesday, May 2nd and Monday, May 8th inclusive, and must also present your
meeting credential. The period’s special pricing will even apply to the products of several prestigious
manufacturers that normally have ironclad rules against discounting but which, in the spirit of our shareholder
weekend, have made an exception for you. We appreciate their cooperation. During “Berkshire Weekend,” NFM
will be open from 10 a.m. to 9 p.m. Monday through Friday, 10 a.m. to 9:30 p.m. on Saturday and 10 a.m. to 8
p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is hosting a picnic to which you are all invited.
This year we have good news for shareholders in the Kansas City and Dallas metro markets who can’t
attend the meeting or perhaps prefer the webcast. From May 2nd through May 8th, shareholders who present
meeting credentials or other evidence of their Berkshire ownership (such as brokerage statements) to their local
NFM store will receive the same discounts enjoyed by those visiting the Omaha store.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 9 p.m. on Friday, May 5th. The second, the main gala, will be held on Sunday, May 7th, from 9
a.m. to 4 p.m. On Saturday, we will remain open until 6 p.m. Remember, the more you buy, the more you save
(or so my daughter tells me when we visit the store).
27
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, May 1st through Saturday, May 13th. During that period,
please identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement
showing you own our stock.
On Sunday, in the mall outside of Borsheims, Norman Beck, a remarkable magician and motivational
speaker from Dallas, will bewilder onlookers. On the upper level, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play with our shareholders on Sunday afternoon. If
they suggest wagering on the game, change the subject. I will join them at some point and hope Ajit, Charlie and
Bill Gates will do so also.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I
met Ariel when she was nine, and even then I was unable to score a point against her. Ariel represented the
United States in the 2012 Olympics. Now, she’s a senior at Princeton (after interning last summer at JPMorgan
Chase). If you don’t mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill Gates did
pretty well playing Ariel last year, so he may be ready to again challenge her. (My advice: Bet on Ariel.)
Gorat’s will be open exclusively for Berkshire shareholders on Sunday, May 7th, serving from 1 p.m.
until 10 p.m. To make a reservation at Gorat’s, call 402-551-3733 on April 3rd (but not before). Show you are a
sophisticated diner by ordering the T-bone with hash browns.
We will have the same three financial journalists lead the question-and-answer period at the meeting,
asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their
e-mail addresses are: Carol Loomis, the preeminent business journalist of her time, who may be e-mailed at
loomisbrk@gmail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of
the New York Times, at arsorkin@nytimes.com.
From the questions submitted, each journalist will choose the six he or she decides are the most
interesting and important to shareholders. The journalists have told me your question has the best chance of being
selected if you keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no
more than two questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like
your name mentioned if your question is asked.)
An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the
insurance specialist will be Jay Gelb of Barclays. Questions that deal with our non-insurance operations will
come from Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Since what we
will be conducting is a shareholders’ meeting, our hope is that the analysts and journalists will ask questions that
add to our owners’ understanding and knowledge of their investment.
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be
tough, for sure, and that’s the way we like it. Multi-part questions aren’t allowed; we want to give as many
questioners as possible a shot at us. Our goal is for you to leave the meeting knowing more about Berkshire than
when you came and for you to have a good time while in Omaha.
All told, we expect at least 54 questions, which will allow for six from each analyst and journalist and
for 18 from the audience. The questioners from the audience will be chosen by means of 11 drawings that will
take place at 8:15 a.m. on the morning of the annual meeting. Each of the 11 microphones installed in the arena
and main overflow room will host, so to speak, a drawing.
28
While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I
believe all shareholders should simultaneously have access to new information that Berkshire releases and, if
possible, should also have adequate time to digest and analyze it before any trading takes place. That’s why we
try to issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a
Saturday (a day that also eases traffic and parking problems).
We do not follow the common practice of talking one-on-one with large institutional investors or
analysts, treating them instead as we do all other shareholders. There is no one more important to us than the
shareholder of limited means who trusts us with a substantial portion of his or her savings. As I run the company
day-to-day – and as I write this letter – that is the shareholder whose image is in my mind.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly
All-Stars who run their businesses as if they were the only asset owned by their families. I also believe the
mindset of our managers to be as shareholder-oriented as can be found in the universe of large publicly-owned
companies. Most of our managers have no financial need to work. The joy of hitting business “home runs” means
as much to them as their paycheck.
Equally important, however, are the men and women who work with me at our corporate office. This
team efficiently deals with a multitude of SEC and other regulatory requirements, files a 30,450-page Federal
income tax return, oversees the filing of 3,580 state tax returns, responds to countless shareholder and media
inquiries, gets out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s
activities, fact-checks this letter – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt
with the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me.
They also handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and French
fries (smothered in Heinz ketchup, of course) for lunch. In addition, they cheerfully pitch in to help Carrie Sova –
our talented ringmaster at the annual meeting – deliver an interesting and entertaining weekend for our
shareholders. They are proud to work for Berkshire, and I am proud of them.
I’m a lucky guy, very fortunate in being surrounded by this excellent staff, a team of highly-talented
operating managers and a boardroom of very wise and experienced directors. Come to Omaha – the cradle of
capitalism – on May 6th and meet the Berkshire Bunch. All of us look forward to seeing you.
February 25, 2017 Warren E. Buffett
Chairman of the Board
29
Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 ....................................................... 23.8 49.5 10.0
1966 ....................................................... 20.3 (3.4) (11.7)
1967 ....................................................... 11.0 13.3 30.9
1968 ....................................................... 19.0 77.8 11.0
1969 ....................................................... 16.2 19.4 (8.4)
1970 ....................................................... 12.0 (4.6) 3.9
1971 ....................................................... 16.4 80.5 14.6
1972 ....................................................... 21.7 8.1 18.9
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (2.5) (14.8)
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (48.7) (26.4)
1975 ....................................................... 21.9 2.5 37.2
1976 ....................................................... 59.3 129.3 23.6
1977 ....................................................... 31.9 46.8 (7.4)
1978 ....................................................... 24.0 14.5 6.4
1979 ....................................................... 35.7 102.5 18.2
1980 ....................................................... 19.3 32.8 32.3
1981 ....................................................... 31.4 31.8 (5.0)
1982 ....................................................... 40.0 38.4 21.4
1983 ....................................................... 32.3 69.0 22.4
1984 ....................................................... 13.6 (2.7) 6.1
1985 ....................................................... 48.2 93.7 31.6
1986 ....................................................... 26.1 14.2 18.6
1987 ....................................................... 19.5 4.6 5.1
1988 ....................................................... 20.1 59.3 16.6
1989 ....................................................... 44.4 84.6 31.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (23.1) (3.1)
1991 ....................................................... 39.6 35.6 30.5
1992 ....................................................... 20.3 29.8 7.6
1993 ....................................................... 14.3 38.9 10.1
1994 ....................................................... 13.9 25.0 1.3
1995 ....................................................... 43.1 57.4 37.6
1996 ....................................................... 31.8 6.2 23.0
1997 ....................................................... 34.1 34.9 33.4
1998 ....................................................... 48.3 52.2 28.6
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 (19.9) 21.0
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 26.6 (9.1)
2001 ....................................................... (6.2) 6.5 (11.9)
2002 ....................................................... 10.0 (3.8) (22.1)
2003 ....................................................... 21.0 15.8 28.7
2004 ....................................................... 10.5 4.3 10.9
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 0.8 4.9
2006 ....................................................... 18.4 24.1 15.8
2007 ....................................................... 11.0 28.7 5.5
2008 ....................................................... (9.6) (31.8) (37.0)
2009 ....................................................... 19.8 2.7 26.5
2010 ....................................................... 13.0 21.4 15.1
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 (4.7) 2.1
2012 ....................................................... 14.4 16.8 16.0
2013 ....................................................... 18.2 32.7 32.4
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 27.0 13.7
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (12.5) 1.4
2016 ....................................................... 10.7 23.4 12.0
2017 ....................................................... 23.0 21.9 21.8
Compounded Annual Gain – 1965-2017 ........................... 19.1% 20.9% 9.9%
Overall Gain – 1964-2017 ...................................... 1,088,029% 2,404,748% 15,508%
Note: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979, accounting
rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously
the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects, the results are
calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation
such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years
when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the years,
the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 23%. Over the last 53 years (that is, since present management took over), per￾share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.*
The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A
large portion of our gain did not come from anything we accomplished at Berkshire.
The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s
operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.
(Details of Berkshire’s tax-related gain appear on page K-32 and pages K-89 – K-90.)
After stating those fiscal facts, I would prefer to turn immediately to discussing Berkshire’s operations. But,
in still another interruption, I must first tell you about a new accounting rule – a generally accepted accounting
principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire’s net income figures and
very often mislead commentators and investors.
The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be
included in all net income figures we report to you. That requirement will produce some truly wild and capricious
swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft
Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.
Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our
operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.
The new rule compounds the communication problems we have long had in dealing with the realized gains
(or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases,
we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains
– fluctuate randomly.
That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying
to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when
our portfolio, overall, performed poorly (or the converse).
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those
shown for the A shares.
3
With the new rule about unrealized gains exacerbating the distortion caused by the existing rules applying to
realized gains, we will take pains every quarter to explain the adjustments you need in order to make sense of our
numbers. But televised commentary on earnings releases is often instantaneous with their receipt, and newspaper
headlines almost always focus on the year-over-year change in GAAP net income. Consequently, media reports
sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.
We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on
Friday, well after the markets close, or early on Saturday morning. That will allow you maximum time for analysis
and give investment professionals the opportunity to deliver informed commentary before markets open on Monday.
Nevertheless, I expect considerable confusion among shareholders for whom accounting is a foreign language.
At Berkshire what counts most are increases in our normalized per-share earning power. That metric is what
Charlie Munger, my long-time partner, and I focus on – and we hope that you do, too. Our scorecard for 2017 follows.
Acquisitions
There are four building blocks that add value to Berkshire: (1) sizable stand-alone acquisitions; (2) bolt-on
acquisitions that fit with businesses we already own; (3) internal sales growth and margin improvement at our many
and varied businesses; and (4) investment earnings from our huge portfolio of stocks and bonds. In this section, we
will review 2017 acquisition activity.
In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths;
able and high-grade management; good returns on the net tangible assets required to operate the business;
opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far
from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic
purchasers.
Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates
will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate
size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a
haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be
forecast. Spreadsheets never disappoint.
The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even
a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate
acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion
of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt
dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never
factor in, nor do we often find, synergies.
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us
believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years
ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold
it today after a million or so “partners” have joined us at Berkshire.
4
Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have
opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the
prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
************
We were able to make one sensible stand-alone purchase last year, a 38.6% partnership interest in Pilot Flying
J (“PFJ”). With about $20 billion in annual volume, the company is far and away the nation’s leading travel-center
operator.
PFJ has been run from the get-go by the remarkable Haslam family. “Big Jim” Haslam began with a dream
and a gas station 60 years ago. Now his son, Jimmy, manages 27,000 associates at about 750 locations throughout
North America. Berkshire has a contractual agreement to increase its partnership interest in PFJ to 80% in 2023;
Haslam family members will then own the remaining 20%. Berkshire is delighted to be their partner.
When driving on the Interstate, drop in. PFJ sells gasoline as well as diesel fuel, and the food is good. If it’s
been a long day, remember, too, that our properties have 5,200 showers.
************
Let’s move now to bolt-on acquisitions. Some of these were small transactions that I will not detail. Here is
an account, however, of a few larger purchases whose closings stretched between late 2016 and early 2018.
Š Clayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled
our presence in a field we entered only three years ago. With these additions – Oakwood Homes in Colorado and
Harris Doyle in Birmingham – I expect our 2018 site built volume will exceed $1 billion.
Clayton’s emphasis, nonetheless, remains manufactured homes, both their construction and their financing.
In 2017 Clayton sold 19,168 units through its own retail operation and wholesaled another 26,706 units to independent
retailers. All told, Clayton accounted for 49% of the manufactured-home market last year. That industry-leading share
– about three times what our nearest competitor did – is a far cry from the 13% Clayton achieved in 2003, the year it
joined Berkshire.
Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been
friends. Kevin Clayton’s comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring
comments about the Haslam family to me, helped cement the PFJ deal.
Š Near the end of 2016, Shaw Industries, our floor coverings business, acquired U.S. Floors (“USF”), a rapidly
growing distributor of luxury vinyl tile. USF’s managers, Piet Dossche and Philippe Erramuzpe, came out of the gate
fast, delivering a 40% increase in sales in 2017, during which their operation was integrated with Shaw’s. It’s clear
that we acquired both great human assets and business assets in making the USF purchase.
Vance Bell, Shaw’s CEO, originated, negotiated and completed this acquisition, which increased Shaw’s
sales to $5.7 billion in 2017 and its employment to 22,000. With the purchase of USF, Shaw has substantially
strengthened its position as an important and durable source of earnings for Berkshire.
Š I have told you several times about HomeServices, our growing real estate brokerage operation. Berkshire
backed into this business in 2000 when we acquired a majority interest in MidAmerican Energy (now named Berkshire
Hathaway Energy). MidAmerican’s activities were then largely in the electric utility field, and I originally paid little
attention to HomeServices.
5
But, year-by-year, the company added brokers and, by the end of 2016, HomeServices was the second-largest
brokerage operation in the country – still ranking, though, far behind the leader, Realogy. In 2017, however,
HomeServices’ growth exploded. We acquired the industry’s third-largest operator, Long and Foster; number 12,
Houlihan Lawrence; and Gloria Nilson.
With those purchases we added 12,300 agents, raising our total to 40,950. HomeServices is now close to
leading the country in home sales, having participated (including our three acquisitions pro-forma) in $127 billion of
“sides” during 2017. To explain that term, there are two “sides” to every transaction; if we represent both buyer and
seller, the dollar value of the transaction is counted twice.
Despite its recent acquisitions, HomeServices is on track to do only about 3% of the country’s home￾brokerage business in 2018. That leaves 97% to go. Given sensible prices, we will keep adding brokers in this most
fundamental of businesses.
Š Finally, Precision Castparts, a company built through acquisitions, bought Wilhelm Schulz GmbH, a
German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further
explanation. I don’t understand manufacturing operations as well as I do the activities of real estate brokers, home
builders or truck stops.
Fortunately, I don’t need in this instance to bring knowledge to the table: Mark Donegan, CEO of Precision,
is an extraordinary manufacturing executive, and any business in his domain is slated to do well. Betting on people
can sometimes be more certain than betting on physical assets.
Let’s now move on to operations, beginning with property-casualty (“p/c”) insurance, a business I do
understand and the engine that for 51 years has powered Berkshire’s growth.
Insurance
Before I discuss our 2017 insurance results, let me remind you of how and why we entered the field. We
began by purchasing National Indemnity and a smaller sister company for $8.6 million in early 1967. With our
purchase we received $6.7 million of tangible net worth that, by the nature of the insurance business, we were able to
deploy in marketable securities. It was easy to rearrange the portfolio into securities we would otherwise have owned at
Berkshire itself. In effect, we were “trading dollars” for the net worth portion of the cost.
The $1.9 million premium over net worth that Berkshire paid brought us an insurance business that usually
delivered an underwriting profit. Even more important, the insurance operation carried with it $19.4 million of “float”
– money that belonged to others but was held by our two insurers.
Ever since, float has been of great importance to Berkshire. When we invest these funds, all dividends,
interest and gains from their deployment belong to Berkshire. (If we experience investment losses, those, of course,
are on our tab as well.)
Float materializes at p/c insurers in several ways: (1) Premiums are generally paid to the company upfront
whereas losses occur over the life of the policy, usually a six-month or one-year period; (2) Though some losses, such
as car repairs, are quickly paid, others – such as the harm caused by exposure to asbestos – may take many years to
surface and even longer to evaluate and settle; (3) Loss payments are sometimes spread over decades in cases, say, of
a person employed by one of our workers’ compensation policyholders being permanently injured and thereafter
requiring expensive lifetime care.
6
Float generally grows as premium volume increases. Additionally, certain p/c insurers specialize in lines of
business such as medical malpractice or product liability – business labeled “long-tail” in industry jargon – that
generate far more float than, say, auto collision and homeowner policies, which require insurers to almost immediately
make payments to claimants for needed repairs.
Berkshire has been a leader in long-tail business for many years. In particular, we have specialized in jumbo
reinsurance policies that leave us assuming long-tail losses already incurred by other p/c insurers. As a result of our
emphasizing that sort of business, Berkshire’s growth in float has been extraordinary. We are now the country’s second
largest p/c company measured by premium volume and its leader, by far, in float.
Here’s the record:
(in $ millions)
Year Premium Volume Float
1970 $ 39 $ 39
1980 185 237
1990 582 1,632
2000 19,343 27,871
2010 30,749 65,832
2017 60,597 114,500
Our 2017 volume was boosted by a huge deal in which we reinsured up to $20 billion of long-tail losses that
AIG had incurred. Our premium for this policy was $10.2 billion, a world’s record and one we won’t come close to
repeating. Premium volume will therefore fall somewhat in 2018.
Float will probably increase slowly for at least a few years. When we eventually experience a decline, it will
be modest – at most 3% or so in any single year. Unlike bank deposits or life insurance policies containing surrender
options, p/c float can’t be withdrawn. This means that p/c companies can’t experience massive “runs” in times of
widespread financial stress, a characteristic of prime importance to Berkshire that we factor into our investment
decisions.
Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers – or even
that of friends who may be facing liquidity problems of their own. During the 2008-2009 crisis, we liked having
Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines
or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably
withstand economic discontinuities, including such extremes as extended market closures.
************
The downside of float is that it comes with risk, sometimes oceans of risk. What looks predictable in insurance
can be anything but. Take the famous Lloyds insurance market, which produced decent results for three centuries. In
the 1980’s, though, huge latent problems from a few long-tail lines of insurance surfaced at Lloyds and, for a time,
threatened to destroy its storied operation. (It has, I should add, fully recovered.)
Berkshire’s insurance managers are conservative and careful underwriters, who operate in a culture that has
long prioritized those qualities. That disciplined behavior has produced underwriting profits in most years, and in such
instances, our cost of float was less than zero. In effect, we got paid then for holding the huge sums tallied in the
earlier table.
I have warned you, however, that we have been fortunate in recent years and that the catastrophe-light period
the industry was experiencing was not a new norm. Last September drove home that point, as three significant
hurricanes hit Texas, Florida and Puerto Rico.
7
My guess at this time is that the insured losses arising from the hurricanes are $100 billion or so. That figure,
however, could be far off the mark. The pattern with most mega-catastrophes has been that initial loss estimates ran
low. As well-known analyst V.J. Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded
exam. Ignorance, wishful thinking or, occasionally, downright fraud can deliver inaccurate figures about an insurer’s
financial condition for a very long time.
We currently estimate Berkshire’s losses from the three hurricanes to be $3 billion (or about $2 billion after
tax). If both that estimate and my industry estimate of $100 billion are close to accurate, our share of the industry loss
was about 3%. I believe that percentage is also what we may reasonably expect to be our share of losses in future
American mega-cats.
It’s worth noting that the $2 billion net cost from the three hurricanes reduced Berkshire’s GAAP net worth
by less than 1%. Elsewhere in the reinsurance industry there were many companies that suffered losses in net worth
ranging from 7% to more than 15%. The damage to them could have been far worse: Had Hurricane Irma followed a
path through Florida only a bit to the east, insured losses might well have been an additional $100 billion.
We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured
losses is about 2%. No one, of course, knows the correct probability. We do know, however, that the risk increases
over time because of growth in both the number and value of structures located in catastrophe-vulnerable areas.
No company comes close to Berkshire in being financially prepared for a $400 billion mega-cat. Our share
of such a loss might be $12 billion or so, an amount far below the annual earnings we expect from our non-insurance
activities. Concurrently, much – indeed, perhaps most – of the p/c world would be out of business. Our unparalleled
financial strength explains why other p/c insurers come to Berkshire – and only Berkshire – when they, themselves,
need to purchase huge reinsurance coverages for large payments they may have to make in the far future.
Prior to 2017, Berkshire had recorded 14 consecutive years of underwriting profits, which totaled $28.3
billion pre-tax. I have regularly told you that I expect Berkshire to attain an underwriting profit in a majority of years,
but also to experience losses from time to time. My warning became fact in 2017, as we lost $3.2 billion pre-tax from
underwriting.
A large amount of additional information about our various insurance operations is included in the 10-K at
the back of this report. The only point I will add here is that you have some extraordinary managers working for you
at our various p/c operations. This is a business in which there are no trade secrets, patents, or locational advantages.
What counts are brains and capital. The managers of our various insurance companies supply the brains and Berkshire
provides the capital.
************
For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion
has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the
letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional
details can be found on pages K-5 – K-22 and pages K-40 – K-50.
Viewed as a group – and excluding investment income – our operations other than insurance delivered pre￾tax income of $20 billion in 2017, an increase of $950 million over 2016. About 44% of the 2017 profit came from two
subsidiaries. BNSF, our railroad, and Berkshire Hathaway Energy (of which we own 90.2%). You can read more
about these businesses on pages K-5 – K-10 and pages K-40 – K-44.
Proceeding down Berkshire’s long list of subsidiaries, our next five non-insurance businesses, as ranked by
earnings (but presented here alphabetically) Clayton Homes, International Metalworking Companies, Lubrizol,
Marmon and Precision Castparts had aggregate pre-tax income in 2017 of $5.5 billion, little changed from the $5.4
billion these companies earned in 2016.
The next five, similarly ranked and listed (Forest River, Johns Manville, MiTek, Shaw and TTI) earned $2.1
billion last year, up from $1.7 billion in 2016.
8
The remaining businesses that Berkshire owns – and there are many – recorded little change in pre-tax
income, which was $3.7 billion in 2017 versus $3.5 billion in 2016.
Depreciation charges for all of these non-insurance operations totaled $7.6 billion; capital expenditures were
$11.5 billion. Berkshire is always looking for ways to expand its businesses and regularly incurs capital expenditures
that far exceed its depreciation charge. Almost 90% of our investments are made in the United States. America’s
economic soil remains fertile.
Amortization charges were an additional $1.3 billion. I believe that in large part this item is not a true
economic cost. Partially offsetting this good news is the fact that BNSF (like all other railroads) records depreciation
charges that fall well short of the sums regularly needed to keep the railroad in first-class shape.
Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we
will need to make one or more huge acquisitions. We certainly have the resources to do so. At yearend Berkshire held
$116.0 billion in cash and U.S. Treasury Bills (whose average maturity was 88 days), up from $86.4 billion at yearend
2016. This extraordinary liquidity earns only a pittance and is far beyond the level Charlie and I wish Berkshire to
have. Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value. We exclude
our Kraft Heinz holding – 325,442,152 shares – because Berkshire is part of a control group and therefore must
account for this investment on the “equity” method. On its balance sheet, Berkshire carries its Kraft Heinz holding at
a GAAP figure of $17.6 billion. The shares had a yearend market value of $25.3 billion, and a cost basis of $9.8 billion.
12/31/17
Shares* Company
Percentage of
Company
Owned Cost** Market
(in millions)
151,610,700 American Express Company .................. 17.6 $ 1,287 $ 15,056
166,713,209 Apple Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 20,961 28,213
700,000,000 Bank of America Corporation . . . . . . . . . . . . . . . . . 6.8 5,007 20,664
53,307,534 The Bank of New York Mellon Corporation . . . . . . 5.3 2,230 2,871
225,000,000 BYD Company Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 232 1,961
6,789,054 Charter Communications, Inc. . . . . . . . . . . . . . . . . . 2.8 1,210 2,281
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . 9.4 1,299 18,352
53,110,395 Delta Airlines Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 2,219 2,974
44,527,147 General Motors Company . . . . . . . . . . . . . . . . . . . . 3.2 1,343 1,825
11,390,582 The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . 3.0 654 2,902
24,669,778 Moody’s Corporation ........................ 12.9 248 3,642
74,587,892 Phillips 66 ................................. 14.9 5,841 7,545
47,659,456 Southwest Airlines Co. . . . . . . . . . . . . . . . . . . . . . . . 8.1 1,997 3,119
103,855,045 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 3,343 5,565
482,544,468 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . 9.9 11,837 29,276
Others .................................... 14,968 24,294
Total Common Stocks Carried at Market ......... $ 74,676 $ 170,540
* Excludes shares held by pension funds of Berkshire subsidiaries.
** This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-downs that have been required under GAAP rules.
9
Some of the stocks in the table are the responsibility of either Todd Combs or Ted Weschler, who work with
me in managing Berkshire’s investments. Each, independently of me, manages more than $12 billion; I usually learn
about decisions they have made by looking at monthly portfolio summaries. Included in the $25 billion that the two
manage is more than $8 billion of pension trust assets of certain Berkshire subsidiaries. As noted, pension investments
are not included in the preceding tabulation of Berkshire holdings.
************
Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker
symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media
pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be)
our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register
will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent
results. In America, equity investors have the wind at their back.
From our stock portfolio – call our holdings “minority interests” in a diversified group of publicly-owned
businesses – Berkshire received $3.7 billion of dividends in 2017. That’s the number included in our GAAP figures,
as well as in the “operating earnings” we reference in our quarterly and annual reports.
That dividend figure, however, far understates the “true” earnings emanating from our stock holdings. For
decades, we have stated in Principle 6 of our “Owner-Related Business Principles” (page 19) that we expect
undistributed earnings of our investees to deliver us at least equivalent earnings by way of subsequent capital gains.
Our recognition of capital gains (and losses) will be lumpy, particularly as we conform with the new GAAP
rule requiring us to constantly record unrealized gains or losses in our earnings. I feel confident, however, that the
earnings retained by our investees will over time, and with our investees viewed as a group, translate into
commensurate capital gains for Berkshire.
The connection of value-building to retained earnings that I’ve just described will be impossible to detect in
the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value.
Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine;
in the long run, however, it becomes a weighing machine.”
************
Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long￾term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting
compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four
truly major dips. Here are the gory details:
Period High Low Percentage Decrease
March 1973-January 1975 93 38 (59.1%)
10/2/87-10/27/87 4,250 2,675 (37.1%)
6/19/98-3/10/2000 80,900 41,300 (48.9%)
9/19/08-3/5/09 147,000 72,400 (50.7%)
This table offers the strongest argument I can muster against ever using borrowed money to own stocks.
There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your
positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines
and breathless commentary. And an unsettled mind will not make good decisions.
10
In the next 53 years our shares (and others) will experience declines resembling those in the table. No one
can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.
When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped
by debt. That’s the time to heed these lines from Kipling’s If:
“If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you...
Yours is the Earth and everything that’s in it.”
“The Bet” is Over and Has Delivered an Unforeseen Investment Lesson
Last year, at the 90% mark, I gave you a detailed report on a ten-year bet I had made on December 19, 2007.
(The full discussion from last year’s annual report is reprinted on pages 24 – 26.) Now I have the final tally – and, in
several respects, it’s an eye-opener.
I made the bet for two reasons: (1) to leverage my outlay of $318,250 into a disproportionately larger sum
that – if things turned out as I expected – would be distributed in early 2018 to Girls Inc. of Omaha; and (2) to
publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would,
over time, deliver better results than those achieved by most investment professionals, however well-regarded and
incentivized those “helpers” may be.
Addressing this question is of enormous importance. American investors pay staggering sums annually to
advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s
worth? Indeed, again in the aggregate, do investors get anything for their outlays?
Protégé Partners, my counterparty to the bet, picked five “funds-of-funds” that it expected to overperform
the S&P 500. That was not a small sample. Those five funds-of-funds in turn owned interests in more than 200 hedge
funds.
Essentially, Protégé, an advisory firm that knew its way around Wall Street, selected five investment experts
who, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This
assemblage was an elite crew, loaded with brains, adrenaline and confidence.
The managers of the five funds-of-funds possessed a further advantage: They could – and did – rearrange
their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge
funds whose managers had lost their touch.
Every actor on Protégé’s side was highly incentivized: Both the fund-of-funds managers and the hedge-fund
managers they selected significantly shared in gains, even those achieved simply because the market generally moves
upwards. (In 100% of the 43 ten-year periods since we took control of Berkshire, years with gains by the S&P 500
exceeded loss years.)
Those performance incentives, it should be emphasized, were frosting on a huge and tasty cake: Even if the
funds lost money for their investors during the decade, their managers could grow very rich. That would occur because
fixed fees averaging a staggering 21⁄2% of assets or so were paid every year by the fund-of-funds’ investors, with part
of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the
underlying hedge funds.
11
Here’s the final scorecard for the bet:
Year
Fund-of￾Funds A
Fund-of￾Funds B
Fund-of￾Funds C
Fund-of￾Funds D
Fund-of￾Funds E
S&P
Index Fund
2008 -16.5% -22.3% -21.3% -29.3% -30.1% -37.0%
2009 11.3% 14.5% 21.4% 16.5% 16.8% 26.6%
2010 5.9% 6.8% 13.3% 4.9% 11.9% 15.1%
2011 -6.3% -1.3% 5.9% -6.3% -2.8% 2.1%
2012 3.4% 9.6% 5.7% 6.2% 9.1% 16.0%
2013 10.5% 15.2% 8.8% 14.2% 14.4% 32.3%
2014 4.7% 4.0% 18.9% 0.7% -2.1% 13.6%
2015 1.6% 2.5% 5.4% 1.4% -5.0% 1.4%
2016 -3.2% 1.9% -1.7% 2.5% 4.4% 11.9%
2017 12.2% 10.6% 15.6% N/A 18.0% 21.8%
Final Gain 21.7% 42.3% 87.7% 2.8% 27.0% 125.8%
Average
Annual Gain 2.0% 3.6% 6.5% 0.3% 2.4% 8.5%
Footnote: Under my agreement with Protégé Partners, the names of these funds-of-funds have never been publicly
disclosed. I, however, have received their annual audits from Protégé. The 2016 figures for funds A, B
and C were revised slightly from those originally reported last year. Fund D was liquidated in 2017; its
average annual gain is calculated for the nine years of its operation.
The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In
every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.
Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch.
If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their
guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that
environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group
prospered, however, many of their investors experienced a lost decade.
Performance comes, performance goes. Fees never falter.
************
The bet illuminated another important investment lesson: Though markets are generally rational, they
occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in
economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an
ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look
unimaginative for a sustained period – or even to look foolish – is also essential.
Originally, Protégé and I each funded our portion of the ultimate $1 million prize by purchasing $500,000
face amount of zero-coupon U.S. Treasury bonds (sometimes called “strips”). These bonds cost each of us $318,250 –
a bit less than 64¢ on the dollar – with the $500,000 payable in ten years.
As the name implies, the bonds we acquired paid no interest, but (because of the discount at which they were
purchased) delivered a 4.56% annual return if held to maturity. Protégé and I originally intended to do no more than
tally the annual returns and distribute $1 million to the winning charity when the bonds matured late in 2017.
12
After our purchase, however, some very strange things took place in the bond market. By November 2012,
our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that
price, their annual yield to maturity was less than 1%. Or, to be precise, .88%.
Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to
American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately
weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).
In November 2012, as we were considering all this, the cash return from dividends on the S&P 500 was 21⁄2%
annually, about triple the yield on our U.S. Treasury bond. These dividend payments were almost certain to grow.
Beyond that, huge sums were being retained by the companies comprising the 500. These businesses would use their
retained earnings to expand their operations and, frequently, to repurchase their shares as well. Either course would,
over time, substantially increase earnings-per-share. And – as has been the case since 1776 – whatever its problems of
the minute, the American economy was going to move forward.
Presented late in 2012 with the extraordinary valuation mismatch between bonds and equities, Protégé and
I agreed to sell the bonds we had bought five years earlier and use the proceeds to buy 11,200 Berkshire “B” shares.
The result: Girls Inc. of Omaha found itself receiving $2,222,279 last month rather than the $1 million it had originally
hoped for.
Berkshire, it should be emphasized, has not performed brilliantly since the 2012 substitution. But brilliance
wasn’t needed: After all, Berkshire’s gain only had to beat that annual .88% bond bogey – hardly a Herculean
achievement.
The only risk in the bonds-to-Berkshire switch was that yearend 2017 would coincide with an exceptionally
weak stock market. Protégé and I felt this possibility (which always exists) was very low. Two factors dictated this
conclusion: The reasonable price of Berkshire in late 2012, and the large asset build-up that was almost certain to occur
at Berkshire during the five years that remained before the bet would be settled. Even so, to eliminate all risk to the
charities from the switch, I agreed to make up any shortfall if sales of the 11,200 Berkshire shares at yearend 2017
didn’t produce at least $1 million.
************
Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption
at a later date. “Risk” is the possibility that this objective won’t be attained.
By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long￾term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would
have decreased the purchasing-power of the government bond that Protégé and I sold.
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far
riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio
of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible
multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds
to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
************
A final lesson from our bet: Stick with big, “easy” decisions and eschew activity. During the ten-year bet,
the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell
decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would
prove advantageous. In the process of investing, they studied 10-Ks, interviewed managements, read trade journals
and conferred with Wall Street analysts.
13
Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment
decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings
(95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.
We made the sale in order to move our money into a single security – Berkshire – that, in turn, owned a
diversified group of solid businesses. Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less
than 8% annually, even if we were to experience a so-so economy.
After that kindergarten-like analysis, Protégé and I made the switch and relaxed, confident that, over time, 8%
was certain to beat .88%. By a lot.
The Annual Meeting
The annual meeting falls on May 5th and will again be webcast by Yahoo!, whose web address is
https://finance.yahoo.com/brklivestream. The webcast will go live at 8:45 a.m. Central Daylight Time. Yahoo! will
interview directors, managers, stockholders and celebrities before the meeting and during the lunch break. Both the
interviews and meeting will be translated simultaneously into Mandarin.
Our partnership with Yahoo! began in 2016 and shareholders have responded enthusiastically. Last year,
real-time viewership increased 72% to about 3.1 million and replays of short segments totaled 17.1 million.
For those attending the meeting in person, the doors at the CenturyLink will open at 7:00 a.m. on Saturday
to facilitate shopping prior to our shareholder movie, which begins at 8:30. The question-and-answer period will start
at 9:15 and run until 3:30, with a one-hour lunch break at noon. Finally, at 3:45 we will begin the formal shareholder
meeting, which usually runs from 15 to 45 minutes. Shopping will end at 4:30.
On Friday, May 4th, our Berkshire exhibitors at CenturyLink will be open from noon until 5 p.m. We added
that extra shopping time in 2015, and serious shoppers love it. Last year about 12,000 people came through the doors
in the five hours we were open on Friday.
Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which
products from dozens of our subsidiaries will be for sale. (Your Chairman discourages freebies.) Say hello to the many
Berkshire managers who will be captaining their exhibits. And be sure to view the terrific BNSF railroad layout that
salutes all of our companies.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the meeting.
After you purchase a pair, wear them on Sunday at our sixth annual “Berkshire 5K,” an 8 a.m. race starting at the
CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent to you with your
meeting credentials. Entrants in the race will find themselves running alongside many of Berkshire’s managers,
directors and associates. (Charlie and I, however, will sleep in; even with Brooks running shoes, our times would be
embarrassing.) Participation in the 5K grows every year. Help us set another record.
A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from
around the country. At last year’s meeting, we set a record for policy sales, up 43% from 2016.
So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%).
This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount
is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your
existing insurance and check out our price. We can save many of you real money. Spend the savings on other Berkshire
products.
Be sure to visit the Bookworm. This Omaha-based retailer will carry more than 40 books and DVDs, among
them a couple of new titles. Berkshire shareholders are a bookseller’s dream: When Poor Charlie’s Almanack (yes,
our Charlie) made its debut some years ago, we sold 3,500 copies at the meeting. The book weighed 4.85 pounds. Do
the math: Our shareholders left the building that day carrying about 81⁄2 tons of Charlie’s wisdom.
14
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to both the meeting and other events. Keep in mind that most airlines
substantially increase prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying
to Kansas City vs. Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can
save you significant money. The savings for a couple could run to $1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. To obtain the Berkshire discount at NFM, you must make
your purchases between Tuesday, May 1st and Monday, May 7th inclusive, and must also present your meeting
credential. Last year, the one-week volume for the store was a staggering $44.6 million. Bricks and mortar are alive
and well at NFM.
The period’s special pricing will even apply to the products of several prestigious manufacturers that
normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made an
exception for you. We appreciate their cooperation. During “Berkshire Weekend,” NFM will be open from 10 a.m. to
9 p.m. Monday through Saturday and 11 a.m. to 8 p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is
hosting a picnic to which you are all invited.
NFM will again extend its shareholder’s discount offerings to our Kansas City and Dallas stores. From May
1st through May 7th, shareholders who present meeting credentials or other evidence of their Berkshire ownership (such
as brokerage statements) to those NFM stores will receive the same discounts enjoyed by those visiting the Omaha
store.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from
6 p.m. to 9 p.m. on Friday, May 4th. The second, the main gala, will be held on Sunday, May 6th, from 9 a.m. to 4 p.m.
On Saturday, we will remain open until 6 p.m. Remember, the more you buy, the more you save (or so my daughter
tells me when we visit the store).
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 30th through Saturday, May 12th. During that period, please
identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement showing you
own our stock.
On Sunday afternoon, on the upper level above Borsheims, we will have Bob Hamman and Sharon Osberg,
two of the world’s top bridge experts, available to play with our shareholders. If they suggest wagering on the game,
change the subject. Ajit, Charlie, Bill Gates and I will likely drop by as well.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met
Ariel when she was nine, and even then I was unable to score a point against her. Ariel represented the United States
in the 2012 Olympics. If you don’t mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill
Gates did pretty well playing Ariel last year, so he may be ready to again challenge her. (My advice: Bet on Ariel.) I
will participate on an advisory basis only.
Gorat’s will be open exclusively for Berkshire shareholders on Sunday, May 6th, serving from 12 p.m. until
10 p.m. To make a reservation at Gorat’s, call 402-551-3733 on April 2nd (but not before). Show you are a sophisticated
diner by ordering the T-bone with hash browns.
We will have the same three financial journalists lead the question-and-answer period at the meeting, asking
Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their e-mail
addresses are: Carol Loomis, the preeminent business journalist of her time, who may be e-mailed at
loomisbrk@gmail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of the
New York Times, at arsorkin@nytimes.com.
15
From the questions submitted, each journalist will choose the six he or she decides are the most interesting
and important to shareholders. The journalists have told me your question has the best chance of being selected if you
keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two
questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned
if your question is asked.)
An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the
insurance specialist will be Gary Ransom of Dowling & Partners. Questions that deal with our non-insurance
operations will come from Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Since
what we will be conducting is a shareholders’ meeting, our hope is that the analysts and journalists will ask questions
that add to our owners’ understanding and knowledge of their investment.
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough,
for sure, and that’s the way we like it. Multi-part questions aren’t allowed; we want to give as many questioners as
possible a shot at us. Our goal is for you to leave the meeting knowing more about Berkshire than when you came and
for you to have a good time while in Omaha.
All told, we expect at least 54 questions, which will allow for six from each analyst and journalist and for
18 from the audience. After the 54th, all questions come from the audience. Charlie and I have often tackled more than
60 by 3:30.
The questioners from the audience will be chosen by means of 11 drawings that will take place at 8:15 a.m.
on the morning of the annual meeting. Each of the 11 microphones installed in the arena and main overflow room will
host, so to speak, a drawing.
While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe
all shareholders should simultaneously have access to new information that Berkshire releases and, if possible, should
also have adequate time to digest and analyze that information before any trading takes place. That’s why we try to
issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday (a
day that also eases traffic and parking problems).
We do not follow the common practice of talking one-on-one with large institutional investors or analysts,
treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of
limited means who trusts us with a substantial portion of his or her savings. As I run the company day-to-day – and
as I write this letter – that is the shareholder whose image is in my mind.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars
who run their businesses as if they were the only asset owned by their families. I also believe the mindset of our
managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most of
our managers have no financial need to work. The joy of hitting business “home runs” means as much to them as their
paycheck.
If managers (or directors) own Berkshire shares – and many do – it’s from open-market purchases they
have made or because they received shares when they sold their businesses to us. None, however, gets the upside of
ownership without risking the downside. Our directors and managers stand in your shoes.
We continue to have a wonderful group at headquarters. This team efficiently deals with a multitude of
SEC and other regulatory requirements, files a 32,700-page Federal income tax return, oversees the filing of 3,935
state tax returns, responds to countless shareholder and media inquiries, gets out the annual report, prepares for the
country’s largest annual meeting, coordinates the Board’s activities, fact-checks this letter – and the list goes on and
on.
16
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt with
the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also
handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and French fries (smothered
in Heinz ketchup, of course) for lunch. In addition, they cheerfully pitch in to help at the annual meeting in whatever
way they are needed. They are proud to work for Berkshire, and I am proud of them.
************
I’ve saved the best for last. Early in 2018, Berkshire’s board elected Ajit Jain and Greg Abel as directors
of Berkshire and also designated each as Vice Chairman. Ajit is now responsible for insurance operations, and Greg
oversees the rest of our businesses. Charlie and I will focus on investments and capital allocation.
You and I are lucky to have Ajit and Greg working for us. Each has been with Berkshire for decades, and
Berkshire’s blood flows through their veins. The character of each man matches his talents. And that says it all.
Come to Omaha – the cradle of capitalism – on May 5th and meet the Berkshire Bunch. All of us look
forward to your visit.
February 24, 2018 Warren E. Buffett
Chairman of the Board
17
Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 ....................................................... 23.8 49.5 10.0
1966 ....................................................... 20.3 (3.4) (11.7)
1967 ....................................................... 11.0 13.3 30.9
1968 ....................................................... 19.0 77.8 11.0
1969 ....................................................... 16.2 19.4 (8.4)
1970 ....................................................... 12.0 (4.6) 3.9
1971 ....................................................... 16.4 80.5 14.6
1972 ....................................................... 21.7 8.1 18.9
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (2.5) (14.8)
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (48.7) (26.4)
1975 ....................................................... 21.9 2.5 37.2
1976 ....................................................... 59.3 129.3 23.6
1977 ....................................................... 31.9 46.8 (7.4)
1978 ....................................................... 24.0 14.5 6.4
1979 ....................................................... 35.7 102.5 18.2
1980 ....................................................... 19.3 32.8 32.3
1981 ....................................................... 31.4 31.8 (5.0)
1982 ....................................................... 40.0 38.4 21.4
1983 ....................................................... 32.3 69.0 22.4
1984 ....................................................... 13.6 (2.7) 6.1
1985 ....................................................... 48.2 93.7 31.6
1986 ....................................................... 26.1 14.2 18.6
1987 ....................................................... 19.5 4.6 5.1
1988 ....................................................... 20.1 59.3 16.6
1989 ....................................................... 44.4 84.6 31.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (23.1) (3.1)
1991 ....................................................... 39.6 35.6 30.5
1992 ....................................................... 20.3 29.8 7.6
1993 ....................................................... 14.3 38.9 10.1
1994 ....................................................... 13.9 25.0 1.3
1995 ....................................................... 43.1 57.4 37.6
1996 ....................................................... 31.8 6.2 23.0
1997 ....................................................... 34.1 34.9 33.4
1998 ....................................................... 48.3 52.2 28.6
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 (19.9) 21.0
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 26.6 (9.1)
2001 ....................................................... (6.2) 6.5 (11.9)
2002 ....................................................... 10.0 (3.8) (22.1)
2003 ....................................................... 21.0 15.8 28.7
2004 ....................................................... 10.5 4.3 10.9
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 0.8 4.9
2006 ....................................................... 18.4 24.1 15.8
2007 ....................................................... 11.0 28.7 5.5
2008 ....................................................... (9.6) (31.8) (37.0)
2009 ....................................................... 19.8 2.7 26.5
2010 ....................................................... 13.0 21.4 15.1
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 (4.7) 2.1
2012 ....................................................... 14.4 16.8 16.0
2013 ....................................................... 18.2 32.7 32.4
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 27.0 13.7
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 (12.5) 1.4
2016 ....................................................... 10.7 23.4 12.0
2017 ....................................................... 23.0 21.9 21.8
Compounded Annual Gain – 1965-2017 ........................... 19.1% 20.9% 9.9%
Overall Gain – 1964-2017 ...................................... 1,088,029% 2,404,748% 15,508%
Note: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979, accounting
rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously
the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects, the results are
calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation
such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years
when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the years,
the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 23%. Over the last 53 years (that is, since present management took over), per￾share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.*
The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A
large portion of our gain did not come from anything we accomplished at Berkshire.
The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s
operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.
(Details of Berkshire’s tax-related gain appear on page K-32 and pages K-89 – K-90.)
After stating those fiscal facts, I would prefer to turn immediately to discussing Berkshire’s operations. But,
in still another interruption, I must first tell you about a new accounting rule – a generally accepted accounting
principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire’s net income figures and
very often mislead commentators and investors.
The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be
included in all net income figures we report to you. That requirement will produce some truly wild and capricious
swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft
Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.
Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our
operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.
The new rule compounds the communication problems we have long had in dealing with the realized gains
(or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases,
we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains
– fluctuate randomly.
That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying
to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when
our portfolio, overall, performed poorly (or the converse).
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those
shown for the A shares.
3
With the new rule about unrealized gains exacerbating the distortion caused by the existing rules applying to
realized gains, we will take pains every quarter to explain the adjustments you need in order to make sense of our
numbers. But televised commentary on earnings releases is often instantaneous with their receipt, and newspaper
headlines almost always focus on the year-over-year change in GAAP net income. Consequently, media reports
sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.
We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on
Friday, well after the markets close, or early on Saturday morning. That will allow you maximum time for analysis
and give investment professionals the opportunity to deliver informed commentary before markets open on Monday.
Nevertheless, I expect considerable confusion among shareholders for whom accounting is a foreign language.
At Berkshire what counts most are increases in our normalized per-share earning power. That metric is what
Charlie Munger, my long-time partner, and I focus on – and we hope that you do, too. Our scorecard for 2017 follows.
Acquisitions
There are four building blocks that add value to Berkshire: (1) sizable stand-alone acquisitions; (2) bolt-on
acquisitions that fit with businesses we already own; (3) internal sales growth and margin improvement at our many
and varied businesses; and (4) investment earnings from our huge portfolio of stocks and bonds. In this section, we
will review 2017 acquisition activity.
In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths;
able and high-grade management; good returns on the net tangible assets required to operate the business;
opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far
from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic
purchasers.
Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates
will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate
size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a
haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be
forecast. Spreadsheets never disappoint.
The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even
a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate
acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion
of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt
dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never
factor in, nor do we often find, synergies.
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us
believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years
ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold
it today after a million or so “partners” have joined us at Berkshire.
4
Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have
opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the
prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
************
We were able to make one sensible stand-alone purchase last year, a 38.6% partnership interest in Pilot Flying
J (“PFJ”). With about $20 billion in annual volume, the company is far and away the nation’s leading travel-center
operator.
PFJ has been run from the get-go by the remarkable Haslam family. “Big Jim” Haslam began with a dream
and a gas station 60 years ago. Now his son, Jimmy, manages 27,000 associates at about 750 locations throughout
North America. Berkshire has a contractual agreement to increase its partnership interest in PFJ to 80% in 2023;
Haslam family members will then own the remaining 20%. Berkshire is delighted to be their partner.
When driving on the Interstate, drop in. PFJ sells gasoline as well as diesel fuel, and the food is good. If it’s
been a long day, remember, too, that our properties have 5,200 showers.
************
Let’s move now to bolt-on acquisitions. Some of these were small transactions that I will not detail. Here is
an account, however, of a few larger purchases whose closings stretched between late 2016 and early 2018.
Š Clayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled
our presence in a field we entered only three years ago. With these additions – Oakwood Homes in Colorado and
Harris Doyle in Birmingham – I expect our 2018 site built volume will exceed $1 billion.
Clayton’s emphasis, nonetheless, remains manufactured homes, both their construction and their financing.
In 2017 Clayton sold 19,168 units through its own retail operation and wholesaled another 26,706 units to independent
retailers. All told, Clayton accounted for 49% of the manufactured-home market last year. That industry-leading share
– about three times what our nearest competitor did – is a far cry from the 13% Clayton achieved in 2003, the year it
joined Berkshire.
Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been
friends. Kevin Clayton’s comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring
comments about the Haslam family to me, helped cement the PFJ deal.
Š Near the end of 2016, Shaw Industries, our floor coverings business, acquired U.S. Floors (“USF”), a rapidly
growing distributor of luxury vinyl tile. USF’s managers, Piet Dossche and Philippe Erramuzpe, came out of the gate
fast, delivering a 40% increase in sales in 2017, during which their operation was integrated with Shaw’s. It’s clear
that we acquired both great human assets and business assets in making the USF purchase.
Vance Bell, Shaw’s CEO, originated, negotiated and completed this acquisition, which increased Shaw’s
sales to $5.7 billion in 2017 and its employment to 22,000. With the purchase of USF, Shaw has substantially
strengthened its position as an important and durable source of earnings for Berkshire.
Š I have told you several times about HomeServices, our growing real estate brokerage operation. Berkshire
backed into this business in 2000 when we acquired a majority interest in MidAmerican Energy (now named Berkshire
Hathaway Energy). MidAmerican’s activities were then largely in the electric utility field, and I originally paid little
attention to HomeServices.
5
But, year-by-year, the company added brokers and, by the end of 2016, HomeServices was the second-largest
brokerage operation in the country – still ranking, though, far behind the leader, Realogy. In 2017, however,
HomeServices’ growth exploded. We acquired the industry’s third-largest operator, Long and Foster; number 12,
Houlihan Lawrence; and Gloria Nilson.
With those purchases we added 12,300 agents, raising our total to 40,950. HomeServices is now close to
leading the country in home sales, having participated (including our three acquisitions pro-forma) in $127 billion of
“sides” during 2017. To explain that term, there are two “sides” to every transaction; if we represent both buyer and
seller, the dollar value of the transaction is counted twice.
Despite its recent acquisitions, HomeServices is on track to do only about 3% of the country’s home￾brokerage business in 2018. That leaves 97% to go. Given sensible prices, we will keep adding brokers in this most
fundamental of businesses.
Š Finally, Precision Castparts, a company built through acquisitions, bought Wilhelm Schulz GmbH, a
German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further
explanation. I don’t understand manufacturing operations as well as I do the activities of real estate brokers, home
builders or truck stops.
Fortunately, I don’t need in this instance to bring knowledge to the table: Mark Donegan, CEO of Precision,
is an extraordinary manufacturing executive, and any business in his domain is slated to do well. Betting on people
can sometimes be more certain than betting on physical assets.
Let’s now move on to operations, beginning with property-casualty (“p/c”) insurance, a business I do
understand and the engine that for 51 years has powered Berkshire’s growth.
Insurance
Before I discuss our 2017 insurance results, let me remind you of how and why we entered the field. We
began by purchasing National Indemnity and a smaller sister company for $8.6 million in early 1967. With our
purchase we received $6.7 million of tangible net worth that, by the nature of the insurance business, we were able to
deploy in marketable securities. It was easy to rearrange the portfolio into securities we would otherwise have owned at
Berkshire itself. In effect, we were “trading dollars” for the net worth portion of the cost.
The $1.9 million premium over net worth that Berkshire paid brought us an insurance business that usually
delivered an underwriting profit. Even more important, the insurance operation carried with it $19.4 million of “float”
– money that belonged to others but was held by our two insurers.
Ever since, float has been of great importance to Berkshire. When we invest these funds, all dividends,
interest and gains from their deployment belong to Berkshire. (If we experience investment losses, those, of course,
are on our tab as well.)
Float materializes at p/c insurers in several ways: (1) Premiums are generally paid to the company upfront
whereas losses occur over the life of the policy, usually a six-month or one-year period; (2) Though some losses, such
as car repairs, are quickly paid, others – such as the harm caused by exposure to asbestos – may take many years to
surface and even longer to evaluate and settle; (3) Loss payments are sometimes spread over decades in cases, say, of
a person employed by one of our workers’ compensation policyholders being permanently injured and thereafter
requiring expensive lifetime care.
6
Float generally grows as premium volume increases. Additionally, certain p/c insurers specialize in lines of
business such as medical malpractice or product liability – business labeled “long-tail” in industry jargon – that
generate far more float than, say, auto collision and homeowner policies, which require insurers to almost immediately
make payments to claimants for needed repairs.
Berkshire has been a leader in long-tail business for many years. In particular, we have specialized in jumbo
reinsurance policies that leave us assuming long-tail losses already incurred by other p/c insurers. As a result of our
emphasizing that sort of business, Berkshire’s growth in float has been extraordinary. We are now the country’s second
largest p/c company measured by premium volume and its leader, by far, in float.
Here’s the record:
(in $ millions)
Year Premium Volume Float
1970 $ 39 $ 39
1980 185 237
1990 582 1,632
2000 19,343 27,871
2010 30,749 65,832
2017 60,597 114,500
Our 2017 volume was boosted by a huge deal in which we reinsured up to $20 billion of long-tail losses that
AIG had incurred. Our premium for this policy was $10.2 billion, a world’s record and one we won’t come close to
repeating. Premium volume will therefore fall somewhat in 2018.
Float will probably increase slowly for at least a few years. When we eventually experience a decline, it will
be modest – at most 3% or so in any single year. Unlike bank deposits or life insurance policies containing surrender
options, p/c float can’t be withdrawn. This means that p/c companies can’t experience massive “runs” in times of
widespread financial stress, a characteristic of prime importance to Berkshire that we factor into our investment
decisions.
Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers – or even
that of friends who may be facing liquidity problems of their own. During the 2008-2009 crisis, we liked having
Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines
or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably
withstand economic discontinuities, including such extremes as extended market closures.
************
The downside of float is that it comes with risk, sometimes oceans of risk. What looks predictable in insurance
can be anything but. Take the famous Lloyds insurance market, which produced decent results for three centuries. In
the 1980’s, though, huge latent problems from a few long-tail lines of insurance surfaced at Lloyds and, for a time,
threatened to destroy its storied operation. (It has, I should add, fully recovered.)
Berkshire’s insurance managers are conservative and careful underwriters, who operate in a culture that has
long prioritized those qualities. That disciplined behavior has produced underwriting profits in most years, and in such
instances, our cost of float was less than zero. In effect, we got paid then for holding the huge sums tallied in the
earlier table.
I have warned you, however, that we have been fortunate in recent years and that the catastrophe-light period
the industry was experiencing was not a new norm. Last September drove home that point, as three significant
hurricanes hit Texas, Florida and Puerto Rico.
7
My guess at this time is that the insured losses arising from the hurricanes are $100 billion or so. That figure,
however, could be far off the mark. The pattern with most mega-catastrophes has been that initial loss estimates ran
low. As well-known analyst V.J. Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded
exam. Ignorance, wishful thinking or, occasionally, downright fraud can deliver inaccurate figures about an insurer’s
financial condition for a very long time.
We currently estimate Berkshire’s losses from the three hurricanes to be $3 billion (or about $2 billion after
tax). If both that estimate and my industry estimate of $100 billion are close to accurate, our share of the industry loss
was about 3%. I believe that percentage is also what we may reasonably expect to be our share of losses in future
American mega-cats.
It’s worth noting that the $2 billion net cost from the three hurricanes reduced Berkshire’s GAAP net worth
by less than 1%. Elsewhere in the reinsurance industry there were many companies that suffered losses in net worth
ranging from 7% to more than 15%. The damage to them could have been far worse: Had Hurricane Irma followed a
path through Florida only a bit to the east, insured losses might well have been an additional $100 billion.
We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured
losses is about 2%. No one, of course, knows the correct probability. We do know, however, that the risk increases
over time because of growth in both the number and value of structures located in catastrophe-vulnerable areas.
No company comes close to Berkshire in being financially prepared for a $400 billion mega-cat. Our share
of such a loss might be $12 billion or so, an amount far below the annual earnings we expect from our non-insurance
activities. Concurrently, much – indeed, perhaps most – of the p/c world would be out of business. Our unparalleled
financial strength explains why other p/c insurers come to Berkshire – and only Berkshire – when they, themselves,
need to purchase huge reinsurance coverages for large payments they may have to make in the far future.
Prior to 2017, Berkshire had recorded 14 consecutive years of underwriting profits, which totaled $28.3
billion pre-tax. I have regularly told you that I expect Berkshire to attain an underwriting profit in a majority of years,
but also to experience losses from time to time. My warning became fact in 2017, as we lost $3.2 billion pre-tax from
underwriting.
A large amount of additional information about our various insurance operations is included in the 10-K at
the back of this report. The only point I will add here is that you have some extraordinary managers working for you
at our various p/c operations. This is a business in which there are no trade secrets, patents, or locational advantages.
What counts are brains and capital. The managers of our various insurance companies supply the brains and Berkshire
provides the capital.
************
For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion
has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the
letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional
details can be found on pages K-5 – K-22 and pages K-40 – K-50.
Viewed as a group – and excluding investment income – our operations other than insurance delivered pre￾tax income of $20 billion in 2017, an increase of $950 million over 2016. About 44% of the 2017 profit came from two
subsidiaries. BNSF, our railroad, and Berkshire Hathaway Energy (of which we own 90.2%). You can read more
about these businesses on pages K-5 – K-10 and pages K-40 – K-44.
Proceeding down Berkshire’s long list of subsidiaries, our next five non-insurance businesses, as ranked by
earnings (but presented here alphabetically) Clayton Homes, International Metalworking Companies, Lubrizol,
Marmon and Precision Castparts had aggregate pre-tax income in 2017 of $5.5 billion, little changed from the $5.4
billion these companies earned in 2016.
The next five, similarly ranked and listed (Forest River, Johns Manville, MiTek, Shaw and TTI) earned $2.1
billion last year, up from $1.7 billion in 2016.
8
The remaining businesses that Berkshire owns – and there are many – recorded little change in pre-tax
income, which was $3.7 billion in 2017 versus $3.5 billion in 2016.
Depreciation charges for all of these non-insurance operations totaled $7.6 billion; capital expenditures were
$11.5 billion. Berkshire is always looking for ways to expand its businesses and regularly incurs capital expenditures
that far exceed its depreciation charge. Almost 90% of our investments are made in the United States. America’s
economic soil remains fertile.
Amortization charges were an additional $1.3 billion. I believe that in large part this item is not a true
economic cost. Partially offsetting this good news is the fact that BNSF (like all other railroads) records depreciation
charges that fall well short of the sums regularly needed to keep the railroad in first-class shape.
Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we
will need to make one or more huge acquisitions. We certainly have the resources to do so. At yearend Berkshire held
$116.0 billion in cash and U.S. Treasury Bills (whose average maturity was 88 days), up from $86.4 billion at yearend
2016. This extraordinary liquidity earns only a pittance and is far beyond the level Charlie and I wish Berkshire to
have. Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value. We exclude
our Kraft Heinz holding – 325,442,152 shares – because Berkshire is part of a control group and therefore must
account for this investment on the “equity” method. On its balance sheet, Berkshire carries its Kraft Heinz holding at
a GAAP figure of $17.6 billion. The shares had a yearend market value of $25.3 billion, and a cost basis of $9.8 billion.
12/31/17
Shares* Company
Percentage of
Company
Owned Cost** Market
(in millions)
151,610,700 American Express Company .................. 17.6 $ 1,287 $ 15,056
166,713,209 Apple Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 20,961 28,213
700,000,000 Bank of America Corporation . . . . . . . . . . . . . . . . . 6.8 5,007 20,664
53,307,534 The Bank of New York Mellon Corporation . . . . . . 5.3 2,230 2,871
225,000,000 BYD Company Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 232 1,961
6,789,054 Charter Communications, Inc. . . . . . . . . . . . . . . . . . 2.8 1,210 2,281
400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . 9.4 1,299 18,352
53,110,395 Delta Airlines Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 2,219 2,974
44,527,147 General Motors Company . . . . . . . . . . . . . . . . . . . . 3.2 1,343 1,825
11,390,582 The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . 3.0 654 2,902
24,669,778 Moody’s Corporation ........................ 12.9 248 3,642
74,587,892 Phillips 66 ................................. 14.9 5,841 7,545
47,659,456 Southwest Airlines Co. . . . . . . . . . . . . . . . . . . . . . . . 8.1 1,997 3,119
103,855,045 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 3,343 5,565
482,544,468 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . 9.9 11,837 29,276
Others .................................... 14,968 24,294
Total Common Stocks Carried at Market ......... $ 74,676 $ 170,540
* Excludes shares held by pension funds of Berkshire subsidiaries.
** This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-downs that have been required under GAAP rules.
9
Some of the stocks in the table are the responsibility of either Todd Combs or Ted Weschler, who work with
me in managing Berkshire’s investments. Each, independently of me, manages more than $12 billion; I usually learn
about decisions they have made by looking at monthly portfolio summaries. Included in the $25 billion that the two
manage is more than $8 billion of pension trust assets of certain Berkshire subsidiaries. As noted, pension investments
are not included in the preceding tabulation of Berkshire holdings.
************
Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker
symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media
pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be)
our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register
will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent
results. In America, equity investors have the wind at their back.
From our stock portfolio – call our holdings “minority interests” in a diversified group of publicly-owned
businesses – Berkshire received $3.7 billion of dividends in 2017. That’s the number included in our GAAP figures,
as well as in the “operating earnings” we reference in our quarterly and annual reports.
That dividend figure, however, far understates the “true” earnings emanating from our stock holdings. For
decades, we have stated in Principle 6 of our “Owner-Related Business Principles” (page 19) that we expect
undistributed earnings of our investees to deliver us at least equivalent earnings by way of subsequent capital gains.
Our recognition of capital gains (and losses) will be lumpy, particularly as we conform with the new GAAP
rule requiring us to constantly record unrealized gains or losses in our earnings. I feel confident, however, that the
earnings retained by our investees will over time, and with our investees viewed as a group, translate into
commensurate capital gains for Berkshire.
The connection of value-building to retained earnings that I’ve just described will be impossible to detect in
the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value.
Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine;
in the long run, however, it becomes a weighing machine.”
************
Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure long￾term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting
compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four
truly major dips. Here are the gory details:
Period High Low Percentage Decrease
March 1973-January 1975 93 38 (59.1%)
10/2/87-10/27/87 4,250 2,675 (37.1%)
6/19/98-3/10/2000 80,900 41,300 (48.9%)
9/19/08-3/5/09 147,000 72,400 (50.7%)
This table offers the strongest argument I can muster against ever using borrowed money to own stocks.
There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your
positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines
and breathless commentary. And an unsettled mind will not make good decisions.
10
In the next 53 years our shares (and others) will experience declines resembling those in the table. No one
can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.
When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped
by debt. That’s the time to heed these lines from Kipling’s If:
“If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you...
Yours is the Earth and everything that’s in it.”
“The Bet” is Over and Has Delivered an Unforeseen Investment Lesson
Last year, at the 90% mark, I gave you a detailed report on a ten-year bet I had made on December 19, 2007.
(The full discussion from last year’s annual report is reprinted on pages 24 – 26.) Now I have the final tally – and, in
several respects, it’s an eye-opener.
I made the bet for two reasons: (1) to leverage my outlay of $318,250 into a disproportionately larger sum
that – if things turned out as I expected – would be distributed in early 2018 to Girls Inc. of Omaha; and (2) to
publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would,
over time, deliver better results than those achieved by most investment professionals, however well-regarded and
incentivized those “helpers” may be.
Addressing this question is of enormous importance. American investors pay staggering sums annually to
advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s
worth? Indeed, again in the aggregate, do investors get anything for their outlays?
Protégé Partners, my counterparty to the bet, picked five “funds-of-funds” that it expected to overperform
the S&P 500. That was not a small sample. Those five funds-of-funds in turn owned interests in more than 200 hedge
funds.
Essentially, Protégé, an advisory firm that knew its way around Wall Street, selected five investment experts
who, in turn, employed several hundred other investment experts, each managing his or her own hedge fund. This
assemblage was an elite crew, loaded with brains, adrenaline and confidence.
The managers of the five funds-of-funds possessed a further advantage: They could – and did – rearrange
their portfolios of hedge funds during the ten years, investing with new “stars” while exiting their positions in hedge
funds whose managers had lost their touch.
Every actor on Protégé’s side was highly incentivized: Both the fund-of-funds managers and the hedge-fund
managers they selected significantly shared in gains, even those achieved simply because the market generally moves
upwards. (In 100% of the 43 ten-year periods since we took control of Berkshire, years with gains by the S&P 500
exceeded loss years.)
Those performance incentives, it should be emphasized, were frosting on a huge and tasty cake: Even if the
funds lost money for their investors during the decade, their managers could grow very rich. That would occur because
fixed fees averaging a staggering 21⁄2% of assets or so were paid every year by the fund-of-funds’ investors, with part
of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the
underlying hedge funds.
11
Here’s the final scorecard for the bet:
Year
Fund-of￾Funds A
Fund-of￾Funds B
Fund-of￾Funds C
Fund-of￾Funds D
Fund-of￾Funds E
S&P
Index Fund
2008 -16.5% -22.3% -21.3% -29.3% -30.1% -37.0%
2009 11.3% 14.5% 21.4% 16.5% 16.8% 26.6%
2010 5.9% 6.8% 13.3% 4.9% 11.9% 15.1%
2011 -6.3% -1.3% 5.9% -6.3% -2.8% 2.1%
2012 3.4% 9.6% 5.7% 6.2% 9.1% 16.0%
2013 10.5% 15.2% 8.8% 14.2% 14.4% 32.3%
2014 4.7% 4.0% 18.9% 0.7% -2.1% 13.6%
2015 1.6% 2.5% 5.4% 1.4% -5.0% 1.4%
2016 -3.2% 1.9% -1.7% 2.5% 4.4% 11.9%
2017 12.2% 10.6% 15.6% N/A 18.0% 21.8%
Final Gain 21.7% 42.3% 87.7% 2.8% 27.0% 125.8%
Average
Annual Gain 2.0% 3.6% 6.5% 0.3% 2.4% 8.5%
Footnote: Under my agreement with Protégé Partners, the names of these funds-of-funds have never been publicly
disclosed. I, however, have received their annual audits from Protégé. The 2016 figures for funds A, B
and C were revised slightly from those originally reported last year. Fund D was liquidated in 2017; its
average annual gain is calculated for the nine years of its operation.
The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In
every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.
Let me emphasize that there was nothing aberrational about stock-market behavior over the ten-year stretch.
If a poll of investment “experts” had been asked late in 2007 for a forecast of long-term common-stock returns, their
guesses would have likely averaged close to the 8.5% actually delivered by the S&P 500. Making money in that
environment should have been easy. Indeed, Wall Street “helpers” earned staggering sums. While this group
prospered, however, many of their investors experienced a lost decade.
Performance comes, performance goes. Fees never falter.
************
The bet illuminated another important investment lesson: Though markets are generally rational, they
occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in
economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an
ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look
unimaginative for a sustained period – or even to look foolish – is also essential.
Originally, Protégé and I each funded our portion of the ultimate $1 million prize by purchasing $500,000
face amount of zero-coupon U.S. Treasury bonds (sometimes called “strips”). These bonds cost each of us $318,250 –
a bit less than 64¢ on the dollar – with the $500,000 payable in ten years.
As the name implies, the bonds we acquired paid no interest, but (because of the discount at which they were
purchased) delivered a 4.56% annual return if held to maturity. Protégé and I originally intended to do no more than
tally the annual returns and distribute $1 million to the winning charity when the bonds matured late in 2017.
12
After our purchase, however, some very strange things took place in the bond market. By November 2012,
our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that
price, their annual yield to maturity was less than 1%. Or, to be precise, .88%.
Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to
American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately
weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).
In November 2012, as we were considering all this, the cash return from dividends on the S&P 500 was 21⁄2%
annually, about triple the yield on our U.S. Treasury bond. These dividend payments were almost certain to grow.
Beyond that, huge sums were being retained by the companies comprising the 500. These businesses would use their
retained earnings to expand their operations and, frequently, to repurchase their shares as well. Either course would,
over time, substantially increase earnings-per-share. And – as has been the case since 1776 – whatever its problems of
the minute, the American economy was going to move forward.
Presented late in 2012 with the extraordinary valuation mismatch between bonds and equities, Protégé and
I agreed to sell the bonds we had bought five years earlier and use the proceeds to buy 11,200 Berkshire “B” shares.
The result: Girls Inc. of Omaha found itself receiving $2,222,279 last month rather than the $1 million it had originally
hoped for.
Berkshire, it should be emphasized, has not performed brilliantly since the 2012 substitution. But brilliance
wasn’t needed: After all, Berkshire’s gain only had to beat that annual .88% bond bogey – hardly a Herculean
achievement.
The only risk in the bonds-to-Berkshire switch was that yearend 2017 would coincide with an exceptionally
weak stock market. Protégé and I felt this possibility (which always exists) was very low. Two factors dictated this
conclusion: The reasonable price of Berkshire in late 2012, and the large asset build-up that was almost certain to occur
at Berkshire during the five years that remained before the bet would be settled. Even so, to eliminate all risk to the
charities from the switch, I agreed to make up any shortfall if sales of the 11,200 Berkshire shares at yearend 2017
didn’t produce at least $1 million.
************
Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption
at a later date. “Risk” is the possibility that this objective won’t be attained.
By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long￾term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would
have decreased the purchasing-power of the government bond that Protégé and I sold.
I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far
riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio
of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible
multiple of earnings relative to then-prevailing interest rates.
It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds
to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
************
A final lesson from our bet: Stick with big, “easy” decisions and eschew activity. During the ten-year bet,
the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell
decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would
prove advantageous. In the process of investing, they studied 10-Ks, interviewed managements, read trade journals
and conferred with Wall Street analysts.
13
Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment
decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings
(95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.
We made the sale in order to move our money into a single security – Berkshire – that, in turn, owned a
diversified group of solid businesses. Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less
than 8% annually, even if we were to experience a so-so economy.
After that kindergarten-like analysis, Protégé and I made the switch and relaxed, confident that, over time, 8%
was certain to beat .88%. By a lot.
The Annual Meeting
The annual meeting falls on May 5th and will again be webcast by Yahoo!, whose web address is
https://finance.yahoo.com/brklivestream. The webcast will go live at 8:45 a.m. Central Daylight Time. Yahoo! will
interview directors, managers, stockholders and celebrities before the meeting and during the lunch break. Both the
interviews and meeting will be translated simultaneously into Mandarin.
Our partnership with Yahoo! began in 2016 and shareholders have responded enthusiastically. Last year,
real-time viewership increased 72% to about 3.1 million and replays of short segments totaled 17.1 million.
For those attending the meeting in person, the doors at the CenturyLink will open at 7:00 a.m. on Saturday
to facilitate shopping prior to our shareholder movie, which begins at 8:30. The question-and-answer period will start
at 9:15 and run until 3:30, with a one-hour lunch break at noon. Finally, at 3:45 we will begin the formal shareholder
meeting, which usually runs from 15 to 45 minutes. Shopping will end at 4:30.
On Friday, May 4th, our Berkshire exhibitors at CenturyLink will be open from noon until 5 p.m. We added
that extra shopping time in 2015, and serious shoppers love it. Last year about 12,000 people came through the doors
in the five hours we were open on Friday.
Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which
products from dozens of our subsidiaries will be for sale. (Your Chairman discourages freebies.) Say hello to the many
Berkshire managers who will be captaining their exhibits. And be sure to view the terrific BNSF railroad layout that
salutes all of our companies.
Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the meeting.
After you purchase a pair, wear them on Sunday at our sixth annual “Berkshire 5K,” an 8 a.m. race starting at the
CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent to you with your
meeting credentials. Entrants in the race will find themselves running alongside many of Berkshire’s managers,
directors and associates. (Charlie and I, however, will sleep in; even with Brooks running shoes, our times would be
embarrassing.) Participation in the 5K grows every year. Help us set another record.
A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from
around the country. At last year’s meeting, we set a record for policy sales, up 43% from 2016.
So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%).
This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount
is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your
existing insurance and check out our price. We can save many of you real money. Spend the savings on other Berkshire
products.
Be sure to visit the Bookworm. This Omaha-based retailer will carry more than 40 books and DVDs, among
them a couple of new titles. Berkshire shareholders are a bookseller’s dream: When Poor Charlie’s Almanack (yes,
our Charlie) made its debut some years ago, we sold 3,500 copies at the meeting. The book weighed 4.85 pounds. Do
the math: Our shareholders left the building that day carrying about 81⁄2 tons of Charlie’s wisdom.
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An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to both the meeting and other events. Keep in mind that most airlines
substantially increase prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying
to Kansas City vs. Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can
save you significant money. The savings for a couple could run to $1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” discount pricing. To obtain the Berkshire discount at NFM, you must make
your purchases between Tuesday, May 1st and Monday, May 7th inclusive, and must also present your meeting
credential. Last year, the one-week volume for the store was a staggering $44.6 million. Bricks and mortar are alive
and well at NFM.
The period’s special pricing will even apply to the products of several prestigious manufacturers that
normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made an
exception for you. We appreciate their cooperation. During “Berkshire Weekend,” NFM will be open from 10 a.m. to
9 p.m. Monday through Saturday and 11 a.m. to 8 p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is
hosting a picnic to which you are all invited.
NFM will again extend its shareholder’s discount offerings to our Kansas City and Dallas stores. From May
1st through May 7th, shareholders who present meeting credentials or other evidence of their Berkshire ownership (such
as brokerage statements) to those NFM stores will receive the same discounts enjoyed by those visiting the Omaha
store.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from
6 p.m. to 9 p.m. on Friday, May 4th. The second, the main gala, will be held on Sunday, May 6th, from 9 a.m. to 4 p.m.
On Saturday, we will remain open until 6 p.m. Remember, the more you buy, the more you save (or so my daughter
tells me when we visit the store).
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 30th through Saturday, May 12th. During that period, please
identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement showing you
own our stock.
On Sunday afternoon, on the upper level above Borsheims, we will have Bob Hamman and Sharon Osberg,
two of the world’s top bridge experts, available to play with our shareholders. If they suggest wagering on the game,
change the subject. Ajit, Charlie, Bill Gates and I will likely drop by as well.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met
Ariel when she was nine, and even then I was unable to score a point against her. Ariel represented the United States
in the 2012 Olympics. If you don’t mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill
Gates did pretty well playing Ariel last year, so he may be ready to again challenge her. (My advice: Bet on Ariel.) I
will participate on an advisory basis only.
Gorat’s will be open exclusively for Berkshire shareholders on Sunday, May 6th, serving from 12 p.m. until
10 p.m. To make a reservation at Gorat’s, call 402-551-3733 on April 2nd (but not before). Show you are a sophisticated
diner by ordering the T-bone with hash browns.
We will have the same three financial journalists lead the question-and-answer period at the meeting, asking
Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their e-mail
addresses are: Carol Loomis, the preeminent business journalist of her time, who may be e-mailed at
loomisbrk@gmail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of the
New York Times, at arsorkin@nytimes.com.
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From the questions submitted, each journalist will choose the six he or she decides are the most interesting
and important to shareholders. The journalists have told me your question has the best chance of being selected if you
keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two
questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned
if your question is asked.)
An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the
insurance specialist will be Gary Ransom of Dowling & Partners. Questions that deal with our non-insurance
operations will come from Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Since
what we will be conducting is a shareholders’ meeting, our hope is that the analysts and journalists will ask questions
that add to our owners’ understanding and knowledge of their investment.
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough,
for sure, and that’s the way we like it. Multi-part questions aren’t allowed; we want to give as many questioners as
possible a shot at us. Our goal is for you to leave the meeting knowing more about Berkshire than when you came and
for you to have a good time while in Omaha.
All told, we expect at least 54 questions, which will allow for six from each analyst and journalist and for
18 from the audience. After the 54th, all questions come from the audience. Charlie and I have often tackled more than
60 by 3:30.
The questioners from the audience will be chosen by means of 11 drawings that will take place at 8:15 a.m.
on the morning of the annual meeting. Each of the 11 microphones installed in the arena and main overflow room will
host, so to speak, a drawing.
While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe
all shareholders should simultaneously have access to new information that Berkshire releases and, if possible, should
also have adequate time to digest and analyze that information before any trading takes place. That’s why we try to
issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday (a
day that also eases traffic and parking problems).
We do not follow the common practice of talking one-on-one with large institutional investors or analysts,
treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of
limited means who trusts us with a substantial portion of his or her savings. As I run the company day-to-day – and
as I write this letter – that is the shareholder whose image is in my mind.
************
For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars
who run their businesses as if they were the only asset owned by their families. I also believe the mindset of our
managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most of
our managers have no financial need to work. The joy of hitting business “home runs” means as much to them as their
paycheck.
If managers (or directors) own Berkshire shares – and many do – it’s from open-market purchases they
have made or because they received shares when they sold their businesses to us. None, however, gets the upside of
ownership without risking the downside. Our directors and managers stand in your shoes.
We continue to have a wonderful group at headquarters. This team efficiently deals with a multitude of
SEC and other regulatory requirements, files a 32,700-page Federal income tax return, oversees the filing of 3,935
state tax returns, responds to countless shareholder and media inquiries, gets out the annual report, prepares for the
country’s largest annual meeting, coordinates the Board’s activities, fact-checks this letter – and the list goes on and
on.
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They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy
and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt with
the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also
handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and French fries (smothered
in Heinz ketchup, of course) for lunch. In addition, they cheerfully pitch in to help at the annual meeting in whatever
way they are needed. They are proud to work for Berkshire, and I am proud of them.
************
I’ve saved the best for last. Early in 2018, Berkshire’s board elected Ajit Jain and Greg Abel as directors
of Berkshire and also designated each as Vice Chairman. Ajit is now responsible for insurance operations, and Greg
oversees the rest of our businesses. Charlie and I will focus on investments and capital allocation.
You and I are lucky to have Ajit and Greg working for us. Each has been with Berkshire for decades, and
Berkshire’s blood flows through their veins. The character of each man matches his talents. And that says it all.
Come to Omaha – the cradle of capitalism – on May 5th and meet the Berkshire Bunch. All of us look
forward to your visit.
February 24, 2018 Warren E. Buffett
Chairman of the Board
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