加载中…巴菲特2011年致股东的信发布了！http://www.berkshirehathaway.com/letters/2010ltr.pdf
(2011-02-26 20:59:20)
标签：
股票 |
分类： 转载关于巴菲特的文章 |
巴菲特刚刚发布2010年度致股东的信和伯克希尔2010年度报告！
巴菲特致股东的信2010年度
伯克希尔2010年度报告
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 personallines
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 everincreasing
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 wellbeing.
(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-squarefoot
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
喜欢
0
赠金笔
后一篇：伯克希尔大丰收 巴菲特欲增加收购