每日说敖东--个人投资日记

长白游人

上面的数据源自2009年度巴菲特给股东的信，http://www.berkshirehathaway.com/letters/2009ltr.pdf

[ 本帖最后由 长白游人 于 2010-6-3 22:31 编辑 ]

长白游人

巴菲特在信中对09年的总结：
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both
our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over)
book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*
Berkshire’s recent acquisition of Burlington Northern Santa Fe (BNSF) has added at least 65,000
shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner,
and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual
report, consequently, we restate the economic principles that guide us. This year these principles appear on pages
89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these
principles for decades and will continue to do so long after I’m gone.
In this letter we will also review some of the basics of our business, hoping to provide both a freshman
orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.
How We Measure Ourselves
Our metrics for evaluating our managerial performance are displayed on the facing page. From the start,
Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have
not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then
painting the bull’s eye around it.
Selecting the S&P 500 as our bogey was an easy choice because our shareholders, at virtually no cost, can
match its performance by holding an index fund. Why should they pay us for merely duplicating that result?
A more difficult decision for us was how to measure the progress of Berkshire versus the S&P. There are
good arguments for simply using the change in our stock price. Over an extended period of time, in fact, that is
the best test. But year-to-year market prices can be extraordinarily erratic. Even evaluations covering as long as a
decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement
period. Steve Ballmer, of Microsoft, and Jeff Immelt, of GE, can tell you about that problem, suffering as they do
from the nosebleed prices at which their stocks traded when they were handed the managerial baton.
The ideal standard for measuring our yearly progress would be the change in Berkshire’s per-share intrinsic
value. Alas, that value cannot be calculated with anything close to precision, so we instead use a crude proxy for
it: per-share book value. Relying on this yardstick has its shortcomings, which we discuss on pages 92 and 93.
Additionally, book value at most companies understates intrinsic value, and that is certainly the case at
Berkshire. In aggregate, our businesses are worth considerably more than the values at which they are carried on
our books. In our all-important insurance business, moreover, the difference is huge. Even so, Charlie and I
believe that our book value – understated though it is – supplies the most useful tracking device for changes in
intrinsic value. By this measurement, as the opening paragraph of this letter states, our book value since the start
of fiscal 1965 has grown at a rate of 20.3% compounded annually.
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
We should note that had we instead chosen market prices as our yardstick, Berkshire’s results would
look better, showing a gain since the start of fiscal 1965 of 22% compounded annually. Surprisingly, this modest
difference in annual compounding rate leads to an 801,516% market-value gain for the entire 45-year period
compared to the book-value gain of 434,057% (shown on page 2). Our market gain is better because in 1965
Berkshire shares sold at an appropriate discount to the book value of its underearning textile assets, whereas
today Berkshire shares regularly sell at a premium to the accounting values of its first-class businesses.
Summed up, the table on page 2 conveys three messages, two positive and one hugely negative. First,
we have never had any five-year period beginning with 1965-69 and ending with 2005-09 – and there have been
41 of these – during which our gain in book value did not exceed the S&P’s gain. Second, though we have lagged
the S&P in some years that were positive for the market, we have consistently done better than the S&P in the
eleven years during which it delivered negative results. In other words, our defense has been better than our
offense, and that’s likely to continue.
The big minus is that our performance advantage has shrunk dramatically as our size has grown, an
unpleasant trend that is certain to continue. To be sure, Berkshire has many outstanding businesses and a cadre of
truly great managers, operating within an unusual corporate culture that lets them maximize their talents. Charlie
and I believe these factors will continue to produce better-than-average results over time. But huge sums forge
their own anchor and our future advantage, if any, will be a small fraction of our historical edge.
What We Don’t Do
Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll
never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled
“Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach
works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and
wife.)
Here are a few examples of how we apply Charlie’s thinking at Berkshire:
• Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their
products may be. In the past, it required no brilliance for people to foresee the fabulous growth
that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But
the future then also included competitive dynamics that would decimate almost all of the
companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean
we can judge what its profit margins and returns on capital will be as a host of competitors battle
for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to
come seems reasonably predictable. Even then, we will make plenty of mistakes.
• We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback
position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash
we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be
constantly refreshed by a gusher of earnings from our many and diverse businesses.
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier
of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured
$15.5 billion into a business world that could otherwise look only to the federal government for
help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure
American businesses that needed – without delay – our tangible vote of confidence. The remaining
$6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was
completed without pause while, elsewhere, panic reigned.
4
We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cashequivalent
assets that we customarily hold is earning a pittance at present. But we sleep well.
• We tend to let our many subsidiaries operate on their own, without our supervising and
monitoring them to any degree. That means we are sometimes late in spotting management
problems and that both operating and capital decisions are occasionally made with which Charlie
and I would have disagreed had we been consulted. Most of our managers, however, use the
independence we grant them magnificently, rewarding our confidence by maintaining an owneroriented
attitude that is invaluable and too seldom found in huge organizations. We would rather
suffer the visible costs of a few bad decisions than incur the many invisible costs that come from
decisions made too slowly – or not at all – because of a stifling bureaucracy.
With our acquisition of BNSF, we now have about 257,000 employees and literally hundreds of
different operating units. We hope to have many more of each. But we will never allow Berkshire
to become some monolith that is overrun with committees, budget presentations and multiple
layers of management. Instead, we plan to operate as a collection of separately-managed mediumsized
and large businesses, most of whose decision-making occurs at the operating level. Charlie
and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and
setting their compensation.
• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst
commentary are not for us. Instead we want partners who join us at Berkshire because they wish
to make a long-term investment in a business they themselves understand and because it’s one that
follows policies with which they concur. If Charlie and I were to go into a small venture with a
few partners, we would seek individuals in sync with us, knowing that common goals and a shared
destiny make for a happy business “marriage” between owners and managers. Scaling up to giant
size doesn’t change that truth.
To build a compatible shareholder population, we try to communicate with our owners directly
and informatively. Our goal is to tell you what we would like to know if our positions were
reversed. Additionally, we try to post our quarterly and annual financial information on the
Internet early on weekends, thereby giving you and other investors plenty of time during a
non-trading period to digest just what has happened at our multi-faceted enterprise. (Occasionally,
SEC deadlines force a non-Friday disclosure.) These matters simply can’t be adequately
summarized in a few paragraphs, nor do they lend themselves to the kind of catchy headline that
journalists sometimes seek.
Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830
words in the annual letter was this sentence: “We are certain, for example, that the economy will
be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us
whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first
part of the sentence while making no mention whatsoever of its ending. I regard this as terrible
journalism: Misinformed readers or viewers may well have thought that Charlie and I were
forecasting bad things for the stock market, though we had not only in that sentence, but also
elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled
by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished
the year at 10,428.
Given a few experiences we’ve had like that, you can understand why I prefer that our
communications with you remain as direct and unabridged as possible.
* * * * * * * * * * * *

[ 本帖最后由 长白游人 于 2010-6-3 22:49 编辑 ]

长白游人

分述4个业务
Let’s move to the specifics of Berkshire’s operations. We have four major operating sectors, each
differing from the others in balance sheet and income account characteristics. Therefore, lumping them together,
as is standard in financial statements, impedes analysis. So we’ll present them as four separate businesses, which
is how Charlie and I view them.
5
Insurance
Our property-casualty (P/C) insurance business has been the engine behind Berkshire’s growth and will
continue to be. It has worked wonders for us. We carry our P/C companies on our books at $15.5 billion more
than their net tangible assets, an amount lodged in our “Goodwill” account. These companies, however, are
worth far more than their carrying value – and the following look at the economic model of the P/C industry will
tell you why.
Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from
certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model
leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to
invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float
we hold remains remarkably stable in relation to premium volume. Consequently, as our business grows, so does
our float.
If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that
adds to the investment income produced from the float. This combination allows us to enjoy the use of free
money – and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition,
so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss.
This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some
catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of
float.
In my perhaps biased view, Berkshire has the best large insurance operation in the world. And I will
absolutely state that we have the best managers. Our float has grown from $16 million in 1967, when we entered
the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for
seven consecutive years. I believe it likely that we will continue to underwrite profitably in most – though
certainly not all – future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion
with us that we could invest for our own benefit without the payment of interest.
Let me emphasize again that cost-free float is not a result to be expected for the P/C industry as a
whole: In most years, premiums have been inadequate to cover claims plus expenses. Consequently, the
industry’s overall return on tangible equity has for many decades fallen far short of that achieved by the S&P
500. Outstanding economics exist at Berkshire only because we have some outstanding managers running some
unusual businesses. Our insurance CEOs deserve your thanks, having added many billions of dollars to
Berkshire’s value. It’s a pleasure for me to tell you about these all-stars.
* * * * * * * * * * * *
Let’s start at GEICO, which is known to all of you because of its $800 million annual advertising
budget (close to twice that of the runner-up advertiser in the auto insurance field). GEICO is managed by Tony
Nicely, who joined the company at 18. Now 66, Tony still tap-dances to the office every day, just as I do at 79.
We both feel lucky to work at a business we love.
GEICO’s customers have warm feelings toward the company as well. Here’s proof: Since Berkshire
acquired control of GEICO in 1996, its market share has increased from 2.5% to 8.1%, a gain reflecting the net
addition of seven million policyholders. Perhaps they contacted us because they thought our gecko was cute, but
they bought from us to save important money. (Maybe you can as well; call 1-800-847-7536 or go to
www.GEICO.com.) And they’ve stayed with us because they like our service as well as our price.
Berkshire acquired GEICO in two stages. In 1976-80 we bought about one-third of the company’s
stock for $47 million. Over the years, large repurchases by the company of its own shares caused our position to
grow to about 50% without our having bought any more shares. Then, on January 2, 1996, we acquired the
remaining 50% of GEICO for $2.3 billion in cash, about 50 times the cost of our original purchase.
6
An old Wall Street joke gets close to our experience:
Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18.
Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now,
that it’s an even better buy at 18 than it was when you made your purchase.
Customer: Damn, I knew I should have waited.
GEICO’s growth may slow in 2010. U.S. vehicle registrations are actually down because of slumping
auto sales. Moreover, high unemployment is causing a growing number of drivers to go uninsured. (That’s illegal
almost everywhere, but if you’ve lost your job and still want to drive . . .) Our “low-cost producer” status,
however, is sure to give us significant gains in the future. In 1995, GEICO was the country’s sixth largest auto
insurer; now we are number three. The company’s float has grown from $2.7 billion to $9.6 billion. Equally
important, GEICO has operated at an underwriting profit in 13 of the 14 years Berkshire has owned it.
I became excited about GEICO in January 1951, when I first visited the company as a 20-year-old
student. Thanks to Tony, I’m even more excited today.
* * * * * * * * * * * *
A hugely important event in Berkshire’s history occurred on a Saturday in 1985. Ajit Jain came into
our office in Omaha – and I immediately knew we had found a superstar. (He had been discovered by Mike
Goldberg, now elevated to St. Mike.)
We immediately put Ajit in charge of National Indemnity’s small and struggling reinsurance operation.
Over the years, he has built this business into a one-of-a-kind giant in the insurance world.
Staffed today by only 30 people, Ajit’s operation has set records for transaction size in several areas of
insurance. Ajit writes billion-dollar limits – and then keeps every dime of the risk instead of laying it off with
other insurers. Three years ago, he took over huge liabilities from Lloyds, allowing it to clean up its relationship
with 27,972 participants (“names”) who had written problem-ridden policies that at one point threatened the
survival of this 322-year-old institution. The premium for that single contract was $7.1 billion. During 2009, he
negotiated a life reinsurance contract that could produce $50 billion of premium for us over the next 50 or so
years.
Ajit’s business is just the opposite of GEICO’s. At that company, we have millions of small policies
that largely renew year after year. Ajit writes relatively few policies, and the mix changes significantly from year
to year. Throughout the world, he is known as the man to call when something both very large and unusual needs
to be insured.
If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.
* * * * * * * * * * * *
Our third insurance powerhouse is General Re. Some years back this operation was troubled; now it is
a gleaming jewel in our insurance crown.
Under the leadership of Tad Montross, General Re had an outstanding underwriting year in 2009, while
also delivering us unusually large amounts of float per dollar of premium volume. Alongside General Re’s P/C
business, Tad and his associates have developed a major life reinsurance operation that has grown increasingly
valuable.
Last year General Re finally attained 100% ownership of Cologne Re, which since 1995 has been a
key – though only partially-owned – part of our presence around the world. Tad and I will be visiting Cologne in
September to thank its managers for their important contribution to Berkshire.
7
Finally, we own a group of smaller companies, most of them specializing in odd corners of the
insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the
float they provide us is substantial. Charlie and I treasure these companies and their managers.
Here is the record of all four segments of our property-casualty and life insurance businesses:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2009 2008 2009 2008
General Re . . . . . . . . . . . . . . . . . . . . . . $ 477 $ 342 $21,014 $21,074
BH Reinsurance . . . . . . . . . . . . . . . . . . 349 1,324 26,223 24,221
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 649 916 9,613 8,454
Other Primary . . . . . . . . . . . . . . . . . . . 84 210 5,061 4,739
$1,559 $2,792 $61,911 $58,488
* * * * * * * * * * * *
And now a painful confession: Last year your chairman closed the book on a very expensive business
fiasco entirely of his own making.
For many years I had struggled to think of side products that we could offer our millions of loyal
GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market
our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we
offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong
type.
Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We
then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million.
GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me
that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the
non-cream. I subtly indicated that I was older and wiser.
I was just older.
Regulated Utility Business
Berkshire has an 89.5% interest in MidAmerican Energy Holdings, which owns a wide variety of
utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 3.8 million end
users make it the U.K.’s third largest distributor of electricity; (2) MidAmerican Energy, which serves 725,000
electric customers, primarily in Iowa; (3) Pacific Power and Rocky Mountain Power, serving about 1.7 million
electric customers in six western states; and (4) Kern River and Northern Natural pipelines, which carry about
8% of the natural gas consumed in the U.S.
MidAmerican has two terrific managers, Dave Sokol and Greg Abel. In addition, my long-time friend,
Walter Scott, along with his family, has a major ownership position in the company. Walter brings extraordinary
business savvy to any operation. Ten years of working with Dave, Greg and Walter have reinforced my original
belief: Berkshire couldn’t have better partners. They are truly a dream team.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in the
U.S., HomeServices of America. This company operates through 21 locally-branded firms that have 16,000
agents. Though last year was again a terrible year for home sales, HomeServices earned a modest sum. It also
acquired a firm in Chicago and will add other quality brokerage operations when they are available at sensible
prices. A decade from now, HomeServices is likely to be much larger.
8
Here are some key figures on MidAmerican’s operations:
Earnings (in millions)
2009 2008
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 248 $ 339
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 425
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788 703
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457 595
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (45)
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 186
Operating earnings before corporate interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,846 2,203
Constellation Energy * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,092
Interest, other than to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (318) (332)
Interest on Berkshire junior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (111)
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (313) (1,002)
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,157 $ 1,850
Earnings applicable to Berkshire ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,071 $ 1,704
Debt owed to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,579 19,145
Debt owed to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 1,087
*Consists of a breakup fee of $175 million and a profit on our investment of $917 million.
**Includes interest earned by Berkshire (net of related income taxes) of $38 in 2009 and $72 in 2008.
Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner
with the customers in their service areas, with those users depending on us to provide first-class service and
invest for their future needs. Permitting and construction periods for generation and major transmission facilities
stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on
behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet
future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.
Dave and Greg make sure we do just that. National research companies consistently rank our Iowa and
Western utilities at or near the top of their industry. Similarly, among the 43 U.S. pipelines ranked by a firm
named Mastio, our Kern River and Northern Natural properties tied for second place.
Moreover, we continue to pour huge sums of money into our operations so as to not only prepare for
the future but also make these operations more environmentally friendly. Since we purchased MidAmerican ten
years ago, it has never paid a dividend. We have instead used earnings to improve and expand our properties in
each of the territories we serve. As one dramatic example, in the last three years our Iowa and Western utilities
have earned $2.5 billion, while in this same period spending $3 billion on wind generation facilities.
MidAmerican has consistently kept its end of the bargain with society and, to society’s credit, it has
reciprocated: With few exceptions, our regulators have promptly allowed us to earn a fair return on the everincreasing
sums of capital we must invest. Going forward, we will do whatever it takes to serve our territories in
the manner they expect. We believe that, in turn, we will be allowed the return we deserve on the funds we
invest.
In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the
best businesses by far for owners continue to be those that have high returns on capital and that require little
incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy
more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite
willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses
have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations
are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses
should produce above-average, though certainly not spectacular, returns in the decades ahead.
9
Our BNSF operation, it should be noted, has certain important economic characteristics that resemble
those of our electric utilities. In both cases we provide fundamental services that are, and will remain, essential to
the economic well-being of our customers, the communities we serve, and indeed the nation. Both will require
heavy investment that greatly exceeds depreciation allowances for decades to come. Both must also plan far
ahead to satisfy demand that is expected to outstrip the needs of the past. Finally, both require wise regulators
who will provide certainty about allowable returns so that we can confidently make the huge investments
required to maintain, replace and expand the plant.
We see a “social compact” existing between the public and our railroad business, just as is the case
with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to
the compact should – and we believe will – understand the benefit of behaving in a way that encourages good
behavior by the other. It is inconceivable that our country will realize anything close to its full economic
potential without its possessing first-class electricity and railroad systems. We will do our part to see that they
exist.
In the future, BNSF results will be included in this “regulated utility” section. Aside from the two
businesses having similar underlying economic characteristics, both are logical users of substantial amounts of
debt that is not guaranteed by Berkshire. Both will retain most of their earnings. Both will earn and invest large
sums in good times or bad, though the railroad will display the greater cyclicality. Overall, we expect this
regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens
– yes, tens – of billions of dollars of incremental equity capital.
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance
sheet and earnings statement for the entire group.
Balance Sheet 12/31/09 (in millions)
Assets
Cash and equivalents . . . . . . . . . . . . . . . . . $ 3,018
Accounts and notes receivable . . . . . . . . . . 5,066
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 6,147
Other current assets . . . . . . . . . . . . . . . . . . 625
Total current assets . . . . . . . . . . . . . . . . . . . 14,856
Goodwill and other intangibles . . . . . . . . . 16,499
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . 15,374
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 2,070
$48,799
Liabilities and Equity
Notes payable . . . . . . . . . . . . . . . . . . . . . . . $ 1,842
Other current liabilities . . . . . . . . . . . . . . . 7,414
Total current liabilities . . . . . . . . . . . . . . . . 9,256
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . 2,834
Term debt and other liabilities . . . . . . . . . . 6,240
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,469
$48,799
Earnings Statement (in millions)
2009 2008 2007
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,665 $66,099 $59,100
Operating expenses (including depreciation of $1,422 in 2009, $1,280 in 2008
and $955 in 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,509 61,937 55,026
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 139 127
Pre-tax earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,058* 4,023* 3,947*
Income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 1,740 1,594
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,113 $ 2,283 $ 2,353
*Does not include purchase-accounting adjustments.
10
Almost all of the many and widely-diverse operations in this sector suffered to one degree or another
from 2009’s severe recession. The major exception was McLane, our distributor of groceries, confections and
non-food items to thousands of retail outlets, the largest by far Wal-Mart.
Grady Rosier led McLane to record pre-tax earnings of $344 million, which even so amounted to only
slightly more than one cent per dollar on its huge sales of $31.2 billion. McLane employs a vast array of physical
assets – practically all of which it owns – including 3,242 trailers, 2,309 tractors and 55 distribution centers with
15.2 million square feet of space. McLane’s prime asset, however, is Grady.
We had a number of companies at which profits improved even as sales contracted, always an
exceptional managerial achievement. Here are the CEOs who made it happen:
COMPANY CEO
Benjamin Moore (paint) Denis Abrams
Borsheims (jewelry retailing) Susan Jacques
H. H. Brown (manufacturing and retailing of shoes) Jim Issler
CTB (agricultural equipment) Vic Mancinelli
Dairy Queen John Gainor
Nebraska Furniture Mart (furniture retailing) Ron and Irv Blumkin
Pampered Chef (direct sales of kitchen tools) Marla Gottschalk
See’s (manufacturing and retailing of candy) Brad Kinstler
Star Furniture (furniture retailing) Bill Kimbrell
Among the businesses we own that have major exposure to the depressed industrial sector, both
Marmon and Iscar turned in relatively strong performances. Frank Ptak’s Marmon delivered a 13.5% pre-tax
profit margin, a record high. Though the company’s sales were down 27%, Frank’s cost-conscious management
mitigated the decline in earnings.
Nothing stops Israel-based Iscar – not wars, recessions or competitors. The world’s two other leading
suppliers of small cutting tools both had very difficult years, each operating at a loss throughout much of the
year. Though Iscar’s results were down significantly from 2008, the company regularly reported profits, even
while it was integrating and rationalizing Tungaloy, the large Japanese acquisition that we told you about last
year. When manufacturing rebounds, Iscar will set new records. Its incredible managerial team of Eitan
Wertheimer, Jacob Harpaz and Danny Goldman will see to that.
Every business we own that is connected to residential and commercial construction suffered severely
in 2009. Combined pre-tax earnings of Shaw, Johns Manville, Acme Brick, and MiTek were $227 million, an
82.5% decline from $1.295 billion in 2006, when construction activity was booming. These businesses continue
to bump along the bottom, though their competitive positions remain undented.
The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional
ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company
in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our
dominance in the field remains unchallenged.
NetJets’ business operation, however, has been another story. In the eleven years that we have owned
the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared
from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of
this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this
condition. But, luckily, I have been bailed out.
11
Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of
NetJets in August. His leadership has been transforming: Debt has already been reduced to $1.4 billion, and, after
suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.
Most important, none of the changes wrought by Dave have in any way undercut the top-of-the-line
standards for safety and service that Rich Santulli, NetJets’ previous CEO and the father of the fractionalownership
industry, insisted upon. Dave and I have the strongest possible personal interest in maintaining these
standards because we and our families use NetJets for almost all of our flying, as do many of our directors and
managers. None of us are assigned special planes nor crews. We receive exactly the same treatment as any other
owner, meaning we pay the same prices as everyone else does when we are using our personal contracts. In short,
we eat our own cooking. In the aviation business, no other testimonial means more.
Finance and Financial Products
Our largest operation in this sector is Clayton Homes, the country’s leading producer of modular and
manufactured homes. Clayton was not always number one: A decade ago the three leading manufacturers were
Fleetwood, Champion and Oakwood, which together accounted for 44% of the output of the industry. All have
since gone bankrupt. Total industry output, meanwhile, has fallen from 382,000 units in 1999 to 60,000 units in
2009.
The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy
is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000,
by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.
People thought it was good news a few years back when housing starts – the supply side of the picture
– were running about two million annually. But household formations – the demand side – only amounted to
about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many
houses.
There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the
destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by,
say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce
new housing starts to a number far below the rate of household formations.
Our country has wisely selected the third option, which means that within a year or so residential
housing problems should largely be behind us, the exceptions being only high-value houses and those in certain
localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course,
but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t
afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.
The second reason that manufactured housing is troubled is specific to the industry: the punitive
differential in mortgage rates between factory-built homes and site-built homes. Before you read further, let me
underscore the obvious: Berkshire has a dog in this fight, and you should therefore assess the commentary that
follows with special care. That warning made, however, let me explain why the rate differential causes problems
for both large numbers of lower-income Americans and Clayton.
The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie
Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically
be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of
conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 51⁄4%. In
addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an
action that also helped to keep rates at bargain-basement levels.
In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a
meritorious buyer of a factory-built home must pay about 9% on his loan. For the all-cash buyer, Clayton’s
homes offer terrific value. If the buyer needs mortgage financing, however – and, of course, most buyers do – the
difference in financing costs too often negates the attractive price of a factory-built home.
12
Last year I told you why our buyers – generally people with low incomes – performed so well as credit
risks. Their attitude was all-important: They signed up to live in the home, not resell or refinance it.
Consequently, our buyers usually took out loans with payments geared to their verified incomes (we weren’t
making “liar’s loans”) and looked forward to the day they could burn their mortgage. If they lost their jobs, had
health problems or got divorced, we could of course expect defaults. But they seldom walked away simply
because house values had fallen. Even today, though job-loss troubles have grown, Clayton’s delinquencies and
defaults remain reasonable and will not cause us significant problems.
We have tried to qualify more of our customers’ loans for treatment similar to those available on the
site-built product. So far we have had only token success. Many families with modest incomes but responsible
habits have therefore had to forego home ownership simply because the financing differential attached to the
factory-built product makes monthly payments too expensive. If qualifications aren’t broadened, so as to open
low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems
destined to struggle and dwindle.
Even under these conditions, I believe Clayton will operate profitably in coming years, though well
below its potential. We couldn’t have a better manager than CEO Kevin Clayton, who treats Berkshire’s interests
as if they were his own. Our product is first-class, inexpensive and constantly being improved. Moreover, we will
continue to use Berkshire’s credit to support Clayton’s mortgage program, convinced as we are of its soundness.
Even so, Berkshire can’t borrow at a rate approaching that available to government agencies. This handicap will
limit sales, hurting both Clayton and a multitude of worthy families who long for a low-cost home.
In the following table, Clayton’s earnings are net of the company’s payment to Berkshire for the use of
its credit. Offsetting this cost to Clayton is an identical amount of income credited to Berkshire’s finance
operation and included in “Other Income.” The cost and income amount was $116 million in 2009 and $92
million in 2008.
The table also illustrates how severely our furniture (CORT) and trailer (XTRA) leasing operations
have been hit by the recession. Though their competitive positions remain as strong as ever, we have yet to see
any bounce in these businesses.
Pre-Tax Earnings
(in millions)
2009 2008
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $278 $330
Life and annuity operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 23
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 87
Manufactured-housing finance (Clayton) . . . . . . . . . . . . . . . . . . . . . . . . 187 206
Other income * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 141
Income before investment and derivatives gains or losses . . . . . . . . . . . $781 $787
*Includes $116 million in 2009 and $92 million in 2008 of fees that Berkshire charges Clayton for the
use of Berkshire’s credit.
* * * * * * * * * * * *
At the end of 2009, we became a 50% owner of Berkadia Commercial Mortgage (formerly known as
Capmark), the country’s third-largest servicer of commercial mortgages. In addition to servicing a $235 billion
portfolio, the company is an important originator of mortgages, having 25 offices spread around the country.
Though commercial real estate will face major problems in the next few years, long-term opportunities for
Berkadia are significant.
13
Our partner in this operation is Leucadia, run by Joe Steinberg and Ian Cumming, with whom we had a
terrific experience some years back when Berkshire joined with them to purchase Finova, a troubled finance
business. In resolving that situation, Joe and Ian did far more than their share of the work, an arrangement I
always encourage. Naturally, I was delighted when they called me to partner again in the Capmark purchase.
Our first venture was also christened Berkadia. So let’s call this one Son of Berkadia. Someday I’ll be
writing you about Grandson of Berkadia.
Investments
Below we show our common stock investments that at yearend had a market value of more than $1 billion.
12/31/09
Shares Company
Percentage of
Company
Owned Cost * Market
(in millions)
151,610,700 American Express Company . . . . . . . . . . . . . . . . . . . . . . . . 12.7 $ 1,287 $ 6,143
225,000,000 BYD Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 232 1,986
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 1,299 11,400
37,711,330 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2,741 1,926
28,530,467 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1,724 1,838
130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 4,330 3,541
3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 768 2,092
83,128,411 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.9 533 5,040
25,108,967 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2,027 1,979
234,247,373 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 1,367 1,620
76,633,426 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 2,371 1,725
39,037,142 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1,893 2,087
334,235,585 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 7,394 9,021
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,680 8,636
Total Common Stocks Carried at Market . . . . . . . . . . . . . . $34,646 $59,034
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
In addition, we own positions in non-traded securities of Dow Chemical, General Electric, Goldman
Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion. We
purchased these five positions in the last 18 months. Setting aside the significant equity potential they provide us,
these holdings deliver us an aggregate of $2.1 billion annually in dividends and interest. Finally, we owned
76,777,029 shares (22.5%) of BNSF at yearend, which we then carried at $85.78 per share, but which have
subsequently been melded into our purchase of the entire company.
In 2009, our largest sales were in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson
(sales of the latter occurring after we had built our position earlier in the year). Charlie and I believe that all of
these stocks will likely trade higher in the future. We made some sales early in 2009 to raise cash for our Dow
and Swiss Re purchases and late in the year made other sales in anticipation of our BNSF purchase.
14
We told you last year that very unusual conditions then existed in the corporate and municipal bond
markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with
some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold,
reach for a bucket, not a thimble.
We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings
of $17 billion. Nevertheless, at yearend 2009, our cash was down to $30.6 billion (with $8 billion earmarked for
the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an
ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are
upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you
pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns
in the succeeding decade or two.
* * * * * * * * * * * *
Last year I wrote extensively about our derivatives contracts, which were then the subject of both
controversy and misunderstanding. For that discussion, please go to www.berkshirehathaway.com.
We have since changed only a few of our positions. Some credit contracts have run off. The terms of
about 10% of our equity put contracts have also changed: Maturities have been shortened and strike prices
materially reduced. In these modifications, no money changed hands.
A few points from last year’s discussion are worth repeating:
(1) Though it’s no sure thing, I expect our contracts in aggregate to deliver us a profit over their lifetime,
even when investment income on the huge amount of float they provide us is excluded in the
calculation. Our derivatives float – which is not included in the $62 billion of insurance float I
described earlier – was about $6.3 billion at yearend.
(2) Only a handful of our contracts require us to post collateral under any circumstances. At last year’s low
point in the stock and credit markets, our posting requirement was $1.7 billion, a small fraction of the
derivatives-related float we held. When we do post collateral, let me add, the securities we put up
continue to earn money for our account.
(3) Finally, you should expect large swings in the carrying value of these contracts, items that can affect
our reported quarterly earnings in a huge way but that do not affect our cash or investment holdings.
That thought certainly fit 2009’s circumstances. Here are the pre-tax quarterly gains and losses from
derivatives valuations that were part of our reported earnings last year:
Quarter $ Gain (Loss) in Billions
1 (1.517)
2 2.357
3 1.732
4 1.052
As we’ve explained, these wild swings neither cheer nor bother Charlie and me. When we report to
you, we will continue to separate out these figures (as we do realized investment gains and losses) so that you can
more clearly view the earnings of our operating businesses. We are delighted that we hold the derivatives
contracts that we do. To date we have significantly profited from the float they provide. We expect also to earn
further investment income over the life of our contracts.
15
We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to
invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998.
The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and
that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At
Berkshire nothing like that has occurred – nor will it.
It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not
delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives
contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as
MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault.
It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.
* * * * * * * * * * * *
In my view a board of directors of a huge financial institution is derelict if it does not insist that its
CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other
employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –
the financial consequences for him and his board should be severe.
It has not been shareholders who have botched the operations of some of our country’s largest financial
institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most
cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the
last two years. To say these owners have been “bailed-out” is to make a mockery of the term.
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may
have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these
CEOs and directors that needs to be changed: If their institutions and the country are harmed by their
recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by
insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some
meaningful sticks now need to be part of their employment picture as well.
An Inconvenient Truth (Boardroom Overheating)
Our subsidiaries made a few small “bolt-on” acquisitions last year for cash, but our blockbuster deal
with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously
outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.
The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the
current market price, why in the world should we “sell” a significant part of the company at that same inadequate
price by issuing our stock in a merger?
In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on
the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver
them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are
selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You
simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.
Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically
worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence
and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100
per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic
value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders
of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone
at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large
as his original domain, in a world where size tends to correlate with both prestige and compensation.
16
If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s
advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of
stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in
effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s
having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this
way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is
plenty of private snickering.)
In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share.
The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie
and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of
BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was
paid with Berkshire shares.
In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was
offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and
liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We
also like the prospect of investing additional billions over the years at reasonable rates of return. But the final
decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made
no sense. We would have then been giving up more than we were getting.
* * * * * * * * * * * *
I have been in dozens of board meetings in which acquisitions have been deliberated, often with the
directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers
give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is
worth far more than its market price. In more than fifty years of board memberships, however, never have I heard
the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the
issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though
they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its
real value – had a takeover bid for the acquirer instead been the subject up for discussion.
When stock is the currency being contemplated in an acquisition and when directors are hearing from
an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should
hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not
going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t
ask the barber whether you need a haircut.”
* * * * * * * * * * * *
I can’t resist telling you a true story from long ago. We owned stock in a large well-run bank that for
decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank
immediately began looking for possible purchases. Its managers – fine people and able bankers – not
unexpectedly began to behave like teenage boys who had just discovered girls.
They soon focused on a much smaller bank, also well-run and having similar financial characteristics
in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why
we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside,
though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price
close to three times book value. Moreover, he wanted stock, not cash.
Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are
in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a
legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog
that fouls our lawn is a Chihuahua rather than a Saint Bernard?”
17
The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After
the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going
to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise
me, therefore, that you’ll never again do a deal this dumb.”
Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the
managers of the big bank – newly bigger – lived happily ever after.
The Annual Meeting
Our best guess is that 35,000 people attended the annual meeting last year (up from 12 – no zeros
omitted – in 1981). With our shareholder population much expanded, we expect even more this year. Therefore,
we will have to make a few changes in the usual routine. There will be no change, however, in our enthusiasm
for having you attend. Charlie and I like to meet you, answer your questions and – best of all – have you buy lots
of goods from our businesses.
The meeting this year will be held on Saturday, May 1st. As always, the doors will open at the Qwest
Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the
question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:30. After a
short recess, Charlie and I will convene the annual meeting at 3:45. If you decide to leave during the day’s
question periods, please do so while Charlie is talking. (Act fast; he can be terse.)
The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-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. But you can do better. (A friendly warning: If I find sales
are lagging, I get testy and lock the exits.)
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least 50% of you, I believe we can.
Be sure to visit the Bookworm. Among the more than 30 books and DVDs it will offer are two new
books by my sons: Howard’s Fragile, a volume filled with photos and commentary about lives of struggle
around the globe and Peter’s Life Is What You Make It. Completing the family trilogy will be the debut of my
sister Doris’s biography, a story focusing on her remarkable philanthropic activities. Also available will be Poor
Charlie’s Almanack, the story of my partner. This book is something of a publishing miracle – never advertised,
yet year after year selling many thousands of copies from its Internet site. (Should you need to ship your book
purchases, a nearby shipping service will be available.)
If you are a big spender – or, for that matter, merely a gawker – visit Elliott Aviation on the east side of
the Omaha airport between noon and 5:00 p.m. on Saturday. There we will have a fleet of NetJets aircraft that
will get your pulse racing.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations,
we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who
handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find,
but work with Carol and you will get one.
18
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. To obtain the Berkshire discount, you must make
your purchases between Thursday, April 29th and Monday, May 3rd inclusive, and also present your meeting
credential. The period’s special pricing will even apply to the products of several prestigious manufacturers that
normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made
an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through
Saturday, and 10 a.m. to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a
Berkyville BBQ to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 10 p.m. on Friday, April 30th. The second, the main gala, will be held on Sunday, May 2nd, from 9
a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 26th through Saturday, May 8th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder. Enter with rhinestones; leave with diamonds. My daughter tells me that the
more you buy, the more you save (kids say the darnedest things).
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers.
Our special treat for shareholders this year will be the return of my friend, Ariel Hsing, the country’s
top-ranked junior table tennis player (and a good bet to win at the Olympics some day). Now 14, Ariel came to
the annual meeting four years ago and demolished all comers, including me. (You can witness my humiliating
defeat on YouTube; just type in Ariel Hsing Berkshire.)
Naturally, I’ve been plotting a comeback and will take her on outside of Borsheims at 1:00 p.m. on
Sunday. It will be a three-point match, and after I soften her up, all shareholders are invited to try their luck at
similar three-point contests. Winners will be given a box of See’s candy. We will have equipment available, but
bring your own paddle if you think it will help. (It won’t.)
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 2nd, and will be
serving from 1 p.m. until 10 p.m. Last year, though, it was overwhelmed by demand. With many more diners
expected this year, I’ve asked my friend, Donna Sheehan, at Piccolo’s – another favorite restaurant of mine – to
serve shareholders on Sunday as well. (Piccolo’s giant root beer float is mandatory for any fan of fine dining.) I
plan to eat at both restaurants: All of the weekend action makes me really hungry, and I have favorite dishes at
each spot. Remember: To make a reservation at Gorat’s, call 402-551-3733 on April 1st (but not before) and at
Piccolo’s call 402-342-9038.
Regrettably, we will not be able to have a reception for international visitors this year. Our count grew
to about 800 last year, and my simply signing one item per person took about 21⁄2 hours. Since we expect even
more international visitors this year, Charlie and I decided we must drop this function. But be assured, we
welcome every international visitor who comes.
Last year we changed our method of determining what questions would be asked at the meeting and
received many dozens of letters applauding the new arrangement. We will therefore again have the same three
financial journalists lead the question-and-answer period, asking Charlie and me questions that shareholders have
submitted to them by e-mail.
19
The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be e-mailed at
cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross
Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will
choose the dozen or so he or she decides are the most interesting and important. The journalists have told me
your question has the best chance of being selected if you keep it concise and include no more than two questions
in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if
your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists will pick some tough ones and that’s the way we like it.
We will again have a drawing at 8:15 on Saturday at each of 13 microphones for those shareholders
wishing to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with
those from the winning shareholders. We’ve added 30 minutes to the question time and will probably have time
for about 30 questions from each group.
* * * * * * * * * * *
At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific
parents who saw that we got good educations; have enjoyed wonderful families and great health; and came
equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that
experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have
long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed,
over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we
would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).
Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s
annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you
there.
February 26, 2010 Warren E. Buffett
Chairman of the Board
P.S. Come by rail.

[ 本帖最后由 长白游人 于 2010-6-3 22:47 编辑 ]

长白游人

http://www.cnbc.com/id/37470793

Warren Buffett to Panel: Moody's Doesn't Deserve All the Blame for Bubble
Published: Wednesday, 2 Jun 2010 | 12:54 PM ET Text Size By: Alex Crippen
Executive Producer
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CNBC TV
Warren Buffett is sworn in before testifying to the Financial Crisis Inquiry Commission in New York City on June 2, 2010
--------------------------------------------------------------------------------

In his appearance before a panel looking into the causes of the financial crisis, Warren Buffett says Moody's should not be singled out for blame.

Buffett concedes that "looking back," Moody's should have recognized there was a housing bubble and not given such good ratings to what turned out to be disasterous investment vehicles.

But, he says, almost everyone in the country got caught up in "the greatest bubble I ever saw."  He includes himself in what he calls a mass delusion.  "I was wrong on it, too."

He compared rising housing prices during the bubble as a "narcotic" that affected everyone's reasoning power "up and down the line."

As a result, he rejects suggestions that Moody's needs new management.

Warren Buffett to CNBC: Market Demands 'Brand Name' Credit Rating Agencies
Read the CNBC interview transcript
In contrast, Buffett says there should be a "huge downside" for the CEOs and directors of companies that need a government bailout to avoid collapse.


The chairman of the Financial Crisis Inquiry Commission, Phil Angelides, pointed out to Buffett that there were warnings from some observers and investors at the time, and he accused Moody's of not doing enough to understand the complexities of the structured products it was rating.

Buffett replied that while "the Casandras were there" during the housing bubble, most people didn't take them seriously.

Buffett's Berkshire Hathaway is Moody's largest shareholder, but Buffett says he has had virtually no contact with the company's management.

长白游人

FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document, as well as some statements in periodic press
releases and some oral statements of our officials during presentations about us, are “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements
that are predictive in nature, that depend upon or refer to future events or conditions, that include words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “estimates,” or similar expressions. In addition, any statements concerning future
financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and
possible future Berkshire actions, which may be provided by management are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about us, economic and market factors and the industries in which we do business, among other
things. These statements are not guaranties of future performance and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a
number of factors. The principal important risk factors that could cause our actual performance and future events and actions to
differ materially from such forward-looking statements, include, but are not limited to, changes in market prices of our
investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more
catastrophic events, such as an earthquake, hurricane or an act of terrorism that causes losses insured by our insurance
subsidiaries, changes in insurance laws or regulations, changes in federal income tax laws, and changes in general economic and
market factors that affect the prices of securities or the industries in which we do business.
88
In June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual*” to Berkshire’s
Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of
operation. An updated version is reproduced on this and the following pages.
OWNER-RELATED BUSINESS PRINCIPLES
At the time of the Blue Chip merger in 1983, I set down 13 owner-related business principles that I thought would help
new shareholders understand our managerial approach. As is appropriate for “principles,” all 13 remain alive and well today,
and they are stated here in italics.
1. Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as ownerpartners,
and of ourselves as managing partners. (Because of the size of our shareholdings we are also, for better or
worse, controlling partners.) We do not view the company itself as the ultimate owner of our business assets but instead
view the company as a conduit through which our shareholders own the assets.
Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily
and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize
yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or
apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as
faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may
well turn out to be the remainder of their lives.
The evidence suggests that most Berkshire shareholders have indeed embraced this long-term partnership concept. The
annual percentage turnover in Berkshire’s shares is a fraction of that occurring in the stocks of other major American
corporations, even when the shares I own are excluded from the calculation.
In effect, our shareholders behave in respect to their Berkshire stock much as Berkshire itself behaves in respect to
companies in which it has an investment. As owners of, say, Coca-Cola or American Express shares, we think of Berkshire
as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term
progress of the companies rather than by the month-to-month movements of their stocks. In fact, we would not care in the
least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we
have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an
opportunity to increase our ownership at an attractive price.
2. In line with Berkshire’s owner-orientation, most of our directors have a major portion of their net worth invested in the
company. We eat our own cooking.
Charlie’s family has 80% or more of its net worth in Berkshire shares; I have more than 98%. In addition, many of my
relatives – my sisters and cousins, for example – keep a huge portion of their net worth in Berkshire stock.
Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of
truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the
businesses in which it owns either a controlling interest or a minority interest of significance.
Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in lockstep with ours
for whatever period of time you elect to be our partner. We have no interest in large salaries or options or other means of
gaining an “edge” over you. We want to make money only when our partners do and in exactly the same proportion.
Moreover, when I do something dumb, I want you to be able to derive some solace from the fact that my financial suffering
is proportional to yours.
3. Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire’s average annual
rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance
of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish
in the future – a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that
of the average large American corporation.
4. Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and
consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained
primarily through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of
businesses and the need for insurance capital determine any given year’s capital allocation.
* Copyright © 1996 By Warren E. Buffett
All Rights Reserved
89
In recent years we have made a number of acquisitions. Though there will be dry years, we expect to make many more in
the decades to come, and our hope is that they will be large. If these purchases approach the quality of those we have made
in the past, Berkshire will be well served.
The challenge for us is to generate ideas as rapidly as we generate cash. In this respect, a depressed stock market is likely
to present us with significant advantages. For one thing, it tends to reduce the prices at which entire companies become
available for purchase. Second, a depressed market makes it easier for our insurance companies to buy small pieces of
wonderful businesses – including additional pieces of businesses we already own – at attractive prices. And third, some of
those same wonderful businesses, such as Coca-Cola, are consistent buyers of their own shares, which means that they, and
we, gain from the cheaper prices at which they can buy.
Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food
benefits from declining food prices. So when the market plummets – as it will from time to time – neither panic nor mourn.
It’s good news for Berkshire.
5. Because of our two-pronged approach to business ownership and because of the limitations of conventional accounting,
consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as
owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of
each major business we control, numbers we consider of great importance. These figures, along with other information we
will supply about the individual businesses, should generally aid you in making judgments about them.
To state things simply, we try to give you in the annual report the numbers and other information that really matter. Charlie
and I pay a great deal of attention to how well our businesses are doing, and we also work to understand the environment in
which each business is operating. For example, is one of our businesses enjoying an industry tailwind or is it facing a
headwind? Charlie and I need to know exactly which situation prevails and to adjust our expectations accordingly. We will
also pass along our conclusions to you.
Over time, the large majority of our businesses have exceeded our expectations. But sometimes we have disappointments,
and we will try to be as candid in informing you about those as we are in describing the happier experiences. When we use
unconventional measures to chart our progress – for instance, you will be reading in our annual reports about insurance
“float” – we will try to explain these concepts and why we regard them as important. In other words, we believe in telling
you how we think so that you can evaluate not only Berkshire’s businesses but also assess our approach to management
and capital allocation.
6. Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are
similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than
to purchase $1 of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose
earnings will be fully reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be
largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic
business value through capital gains.
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to
Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This
pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often
employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their
shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, but overall we
have garnered far more than a dollar of value for each dollar they have retained. We consequently regard look-through
earnings as realistically portraying our yearly gain from operations.
7. We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. We will
reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results
but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, lenders and
the many equity holders who have committed unusually large portions of their net worth to our care. (As one of the
Indianapolis “500” winners said: “To finish first, you must first finish.”)
The financial calculus that Charlie and I employ would never permit our trading a good night’s sleep for a shot at a few
extra percentage points of return. I’ve never believed in risking what my family and friends have and need in order to
pursue what they don’t have and don’t need.
Besides, Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own far more assets
than our equity capital alone would permit: deferred taxes and “float,” the funds of others that our insurance business holds
because it receives premiums before needing to pay out losses. Both of these funding sources have grown rapidly and now
total about $80 billion.
90
Better yet, this funding to date has often been cost-free. Deferred tax liabilities bear no interest. And as long as we can
break even in our insurance underwriting the cost of the float developed from that operation is zero. Neither item, of
course, is equity; these are real liabilities. But they are liabilities without covenants or due dates attached to them. In effect,
they give us the benefit of debt – an ability to have more assets working for us – but saddle us with none of its drawbacks.
Of course, there is no guarantee that we can obtain our float in the future at no cost. But we feel our chances of attaining
that goal are as good as those of anyone in the insurance business. Not only have we reached the goal in the past (despite a
number of important mistakes by your Chairman), our 1996 acquisition of GEICO, materially improved our prospects for
getting there in the future.
In our present configuration (2010) we expect additional borrowings to be concentrated in our utilities and railroad businesses,
loans that are non-recourse to Berkshire. Here, we will favor long-term, fixed-rate loans. When we make a truly large
purchase, as we did with BNSF, we will borrow money at the parent company level with the intent of quickly paying it back.
8. A managerial “wish list” will not be filled at shareholder expense. We will not diversify by purchasing entire businesses at
control prices that ignore long-term economic consequences to our shareholders. We will only do with your money what
we would do with our own, weighing fully the values you can obtain by diversifying your own portfolios through direct
purchases in the stock market.
Charlie and I are interested only in acquisitions that we believe will raise the per-share intrinsic value of Berkshire’s stock.
The size of our paychecks or our offices will never be related to the size of Berkshire’s balance sheet.
9. We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by
assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this
test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to
use retained earnings wisely.
I should have written the “five-year rolling basis” sentence differently, an error I didn’t realize until I received a question
about this subject at the 2009 annual meeting.
When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has
sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early
as 1971-75, well before I wrote this principle in 1983.
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did
our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than
$1? If these tests are met, retaining earnings has made sense.
10. We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of
issuance – not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as
well. We will not sell small portions of your company – and that is what the issuance of shares amounts to – on a basis
inconsistent with the value of the entire enterprise.
When we sold the Class B shares in 1996, we stated that Berkshire stock was not undervalued – and some people found
that shocking. That reaction was not well-founded. Shock should have registered instead had we issued shares when our
stock was undervalued. Managements that say or imply during a public offering that their stock is undervalued are usually
being economical with the truth or uneconomical with their existing shareholders’ money: Owners unfairly lose if their
managers deliberately sell assets for 80¢ that in fact are worth $1. We didn’t commit that kind of crime in our offering of
Class B shares and we never will. (We did not, however, say at the time of the sale that our stock was overvalued, though
many media have reported that we did.)
11. You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we
have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par
businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and
labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we
react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major
capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional
investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy
managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our
overall results penalized a bit than engage in that kind of behavior.
We continue to avoid gin rummy behavior. True, we closed our textile business in the mid-1980’s after 20 years of
struggling with it, but only because we felt it was doomed to run never-ending operating losses. We have not, however,
given thought to selling operations that would command very fancy prices nor have we dumped our laggards, though we
focus hard on curing the problems that cause them to lag.
91
12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our
guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less.
Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of
accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when
reporting on others. We also believe candor benefits us as managers: The CEO who misleads others in public may
eventually mislead himself in private.
At Berkshire you will find no “big bath” accounting maneuvers or restructurings nor any “smoothing” of quarterly or
annual results. We will always tell you how many strokes we have taken on each hole and never play around with the
scorecard. When the numbers are a very rough “guesstimate,” as they necessarily must be in insurance reserving, we will
try to be both consistent and conservative in our approach.
We will be communicating with you in several ways. Through the annual report, I try to give all shareholders as much
value-defining information as can be conveyed in a document kept to reasonable length. We also try to convey a liberal
quantity of condensed but important information in the quarterly reports we post on the internet, though I don’t write those
(one recital a year is enough). Still another important occasion for communication is our Annual Meeting, at which Charlie
and I are delighted to spend five hours or more answering questions about Berkshire. But there is one way we can’t
communicate: on a one-on-one basis. That isn’t feasible given Berkshire’s many thousands of owners.
In all of our communications, we try to make sure that no single shareholder gets an edge: We do not follow the usual
practice of giving earnings “guidance” or other information of value to analysts or large shareholders. Our goal is to have
all of our owners updated at the same time.
13. Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required.
Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business
acquisition ideas are. Therefore we normally will not talk about our investment ideas. This ban extends even to securities
we have sold (because we may purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny
those reports but say “no comment” on other occasions, the no-comments become confirmation.
Though we continue to be unwilling to talk about specific stocks, we freely discuss our business and investment
philosophy. I benefitted enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of
finance, and I believe it appropriate to pass along what I learned from him, even if that creates new and able investment
competitors for Berkshire just as Ben’s teachings did for him.
TWO ADDED PRINCIPLES
14. To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period
of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that
holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire
share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s
stock price at a fair level than a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies
and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock
price that is also rational. Our it’s-as-bad-to-be-overvalued-as-to-be-undervalued approach may disappoint some
shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to
profit from the progress of the company rather than from the investment mistakes of their partners.
15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope to
outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings that
are described in the next section. Moreover, it now is less meaningful on a year-to-year basis than was formerly the case. That
is because our equity holdings, whose value tends to move with the S&P 500, are a far smaller portion of our net worth than
they were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index, whereas gains in
Berkshire’s equity holdings are counted at 65% because of the federal tax we incur. We, therefore, expect to outperform the
S&P in lackluster years for the stock market and underperform when the market has a strong year.
INTRINSIC VALUE
Now let’s focus on a term that I mentioned earlier and that you will encounter in future annual reports.
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of
investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of
a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than
a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are
92
revised. Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost
inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of
intrinsic value.What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The
limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather
the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far
different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire’s per-share book
value was $19.46. However, that figure considerably overstated the company’s intrinsic value, since all of the company’s resources
were tied up in a sub-profitable textile business. Our textile assets had neither going-concern nor liquidation values equal to their
carrying values. Today, however, Berkshire’s situation is reversed: Now, our book value far understates Berkshire’s intrinsic value,
a point true because many of the businesses we control are worth much more than their carrying value.
Inadequate though they are in telling the story, we give you Berkshire’s book-value figures because they today serve as a
rough, albeit significantly understated, tracking measure for Berkshire’s intrinsic value. In other words, the percentage change in
book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of
investment, a college education. Think of the education’s cost as its “book value.” If this cost is to be accurate, it should include
the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value.
First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what
he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an
appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid
for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value,
a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of
intrinsic value.
THE MANAGING OF BERKSHIRE
I think it’s appropriate that I conclude with a discussion of Berkshire’s management, today and in the future. As our first
owner-related principle tells you, Charlie and I are the managing partners of Berkshire. But we subcontract all of the heavy
lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication: Though
Berkshire has about 257,000 employees, only 21 of these are at headquarters.
Charlie and I mainly attend to capital allocation and the care and feeding of our key managers. Most of these managers are
happiest when they are left alone to run their businesses, and that is customarily just how we leave them. That puts them in
charge of all operating decisions and of dispatching the excess cash they generate to headquarters. By sending it to us, they
don’t get diverted by the various enticements that would come their way were they responsible for deploying the cash their
businesses throw off. Furthermore, Charlie and I are exposed to a much wider range of possibilities for investing these funds
than any of our managers could find in his or her own industry.
Most of our managers are independently wealthy, and it’s therefore up to us to create a climate that encourages them to
choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that we
would wish to be treated if our positions were reversed.
As for the allocation of capital, that’s an activity both Charlie and I enjoy and in which we have acquired some useful
experience. In a general sense, grey hair doesn’t hurt on this playing field: You don’t need good hand-eye coordination or welltoned
muscles to push money around (thank heavens). As long as our minds continue to function effectively, Charlie and I can
keep on doing our jobs pretty much as we have in the past.
On my death, Berkshire’s ownership picture will change but not in a disruptive way: None of my stock will have to be sold to
take care of the cash bequests I have made or for taxes. Other assets of mine will take care of these requirements. All Berkshire
shares will be left to foundations that will likely receive the stock in roughly equal installments over a dozen or so years.
93
At my death, the Buffett family will not be involved in managing the business but, as very substantial shareholders, will
help in picking and overseeing the managers who do. Just who those managers will be, of course, depends on the date of my
death. But I can anticipate what the management structure will be: Essentially my job will be split into two parts. One executive
will become CEO and responsible for operations. The responsibility for investments will be given to one or more executives. If
the acquisition of new businesses is in prospect, these executives will cooperate in making the decisions needed, subject, of
course, to board approval. We will continue to have an extraordinarily shareholder-minded board, one whose interests are
solidly aligned with yours.
Were we to need the management structure I have just described on an immediate basis, our directors know my
recommendations for both posts. All candidates currently work for or are available to Berkshire and are people in whom I have
total confidence. Our managerial roster has never been stronger.
I will continue to keep the directors posted on the succession issue. Since Berkshire stock will make up virtually my entire
estate and will account for a similar portion of the assets of various foundations for a considerable period after my death, you
can be sure that the directors and I have thought through the succession question carefully and that we are well prepared. You
can be equally sure that the principles we have employed to date in running Berkshire will continue to guide the managers who
succeed me and that our unusually strong and well-defined culture will remain intact. As an added assurance that this will be the
case, I believe it would be wise when I am no longer CEO to have a member of the Buffett family serve as the non-paid,
non-executive Chairman of the Board. That decision, however, will be the responsibility of the then Board of Directors.
Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if
enjoying life promotes longevity, Methuselah’s record is in jeopardy.
Warren E. Buffett
Chairman

[ 本帖最后由 长白游人 于 2010-6-4 11:36 编辑 ]

长白游人

WESCO FINANCIAL CORPORATION
LETTER TO SHAREHOLDERS
To Our Shareholders:
Consolidated net “operating” income (i.e., before realized investment gains shown in
the table below) for the calendar year 2009 decreased to $54,073,000 ($7.59 per share) from
$77,562,000 ($10.89 per share) in the previous year.
Consolidated net income decreased to $54,073,000 ($7.59 per share) from $82,116,000
($11.53 per share) in 2008. The 2008 figure included realized after-tax investment gains of
$4,554,000 ($.64 per share). No investment gains or losses were realized in 2009.
Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (“Wes-
FIC”), headquartered in Omaha and engaged principally in the reinsurance business, (2) The
Kansas Bankers Surety Company (“Kansas Bankers”), owned byWes-FIC and specializing in
insurance products tailored to Midwestern community banks, (3) CORT Business Services
Corporation (“CORT”), headquartered in Fairfax, Virginia and engaged principally in the
furniture rental business, and (4) Precision Steel Warehouse, Inc. (“Precision Steel”), headquartered
in Chicago and engaged in the steel warehousing and specialty metal products
businesses.
Consolidated net income for the two years just ended breaks down as follows (in
thousands except for per-share amounts)(1):
Amount
Per
Wesco
Share(2) Amount
Per
Wesco
Share(2)
December 31, 2009 December 31, 2008
Year Ended
Wesco-Financial and Kansas Bankers insurance
businesses—
Underwriting gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,222 $1.01 $ (2,942) $ (.42)
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,781 7.83 64,274 9.03
CORT furniture rental business . . . . . . . . . . . . . . . . . . . . . . . . (1,359) (.19) 15,744 2.21
Precision Steel businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (648) (.09) 842 .12
All other “normal” net operating earnings (loss)(3) . . . . . . . . . . (6,923) (.97) (356) (.05)
54,073 7.59 77,562 10.89
Realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 4,554 .64
Wesco consolidated net income . . . . . . . . . . . . . . . . . . . . . . . $54,073 $7.59 $82,116 $11.53
(1) All figures are net of income taxes.
(2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents.
(3) Includes income from ownership of the Wesco headquarters office building, primarily leased to outside tenants, and interest and
dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other
corporate expenses, and, in 2009, a $6.2 million (after taxes) writedown of real estate held for sale.
This supplementary breakdown of earnings differs somewhat from that used in audited
financial statements which follow standard accounting convention. The foregoing supplementary
breakdown is furnished because it is considered useful to shareholders. The total
consolidated net income shown above is, of course, identical to the total in our audited
financial statements.
1
Insurance Businesses
Consolidated operating earnings from insurance businesses represent the combination
of the results of their insurance underwriting (premiums earned, less insurance losses, loss
adjustment expenses and underwriting expenses) with their investment income. Following is
a summary of these figures as they pertain to all insurance operations (in 000s).
2009 2008
Year Ended December 31,
Premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,191 $316,472
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $323,221 $237,964
Underwriting gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,111 $ (4,527)
Dividend and interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,049 84,920
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,160 80,393
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,157 19,061
Total operating income— insurance businesses . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,003 $ 61,332
Following is a breakdown of premiums written (in 000s):
Wes-FIC reinsurance—
Swiss Re contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $294,142 $265,248
Aviation pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,085 33,374
Kansas Bankers primary insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,964 17,850
Premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,191 $316,472
Following is a breakdown of premiums earned (in 000s):
Wes-FIC reinsurance—
Swiss Re contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $276,681 $183,166
Aviation pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,463 34,418
Kansas Bankers primary insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,077 20,380
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $323,221 $237,964
Following is a breakdown of after-tax results (in 000s):
Underwriting gain (loss)—
Wes-FIC reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,379 $ (1,405)
Kansas Bankers primary insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,157) (1,537)
Underwriting gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,222 (2,942)
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,781 64,274
Total operating income— insurance businesses . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,003 $ 61,332
As shown above, operating income includes significant net investment income, representing
dividends and interest earned from marketable securities. However, operating
income excludes after-tax investment gains of $4.6 million realized in 2008. The discussion
below will concentrate on insurance underwriting, not on the results from investments.
Wes-FIC engages in the reinsurance business. At the beginning of 2008, it entered into a
retrocession agreement with National Indemnity Company (“NICO”), an insurance subsidiary
of Berkshire Hathaway, Wesco’s 80%-owning parent. Under the contract, Wes-FIC has
assumed 10% of NICO’s 20% quota-share reinsurance of Swiss Reinsurance Companyand its
2
principal property-casualty affiliates (“Swiss Re”). Under this agreement, which was enthusiastically
approved by Wesco’s Board of Directors, Wes-FIC assumed 2% of essentially all
Swiss Re property-casualty risks incepting over the five-year period which began on January 1,
2008, on the same terms as NICO’s agreement with Swiss Re.Wes-FIC’s share of written and
earned premiums under the contract were $294.1 million and $276.7 million for 2009 and
$265.2 million and $183.2 million for 2008, representing very significant increases in Wes-
FIC’s reinsurance activities. It is important to keep in mind that premiums assumed under the
contract in each of the next three years could vary significantly depending on market
conditions and opportunities.
For several years, through yearend 2007, Wes-FIC’s principal reinsurance activity consisted
only of its participation in several pools managed by a subsidiary of General Reinsurance
Corporation (“Gen Re”), another insurance subsidiary of Berkshire Hathaway. The
arrangement became effective in 2001 and has covered domestic hull, liability and workers’
compensation exposures relating to the aviation industry. For the past three years, Wes-FIC
has reinsured 16.67% of the hull and liability pools and 5% of the workers’ compensation
pool. Since mid-2009 Wes-FIC has also been reinsuring 25% of an international hull and
liability pool. Another subsidiary of Gen Re provides a portion of the upper-level reinsurance
protection to these aviation risk pools on terms that could result in the Berkshire subsidiary
having a different interest from that of Wes-FIC under certain conditions, e.g., in settling a
large loss. Premium volume under these pools has approximated $35 million annually.
It is the nature of even the finest property-casualty insurance businesses that in keeping
their accounts they must estimate and deduct all future costs and losses from premiums
already earned. Uncertainties inherent in this undertaking make financial statements more
mere “best honest guesses” than is typically the case with accounts of non-insurance-writing
corporations. And the reinsurance portion of the property-casualty insurance business,
because it contains one or more extra links in the loss-reporting chain, usually creates more
accounting uncertainty than the non-reinsurance portion. Wesco shareholders should
remain aware of the inherent imperfections of Wes-FIC’s financial reporting, based as it is
on forecasts of outcomes over many future years.
Wes-FIC’s underwriting results have typically fluctuated from year to year, but have been
satisfactory. When stated as a percentage, the sum of insurance losses, loss adjustment
expenses and underwriting expenses, divided by premiums, gives the combined ratio. Wes-
FIC’s combined ratios from reinsurance activities were 94.9% for 2009, 101.0% for 2008 and
93.9% for 2007, much better than average for insurers. We try to create some underwriting
gain as results are averaged out over many years. We expect this to become increasingly
difficult.
Float is the term for money we hold temporarily. Its major components are unpaid losses
and unearned premiums, less premiums and reinsurance receivable, and deferred policy
acquisition costs. As long as our insurance underwriting results are break-even or better, float
costs us nothing. The new Swiss Re venture with NICO has significantly increasedWes-FIC’s
float, from $76 million at the end of 2007, to $264 million at yearend 2009, thus providing
additional opportunities for investment.We hope to see our float continue to increase, but we
make no predictions.
Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in
cash. Its tangible net worth now exceeds its acquisition price, and it has been a very
satisfactory acquisition, reflecting the sound management of President Don Towle and his
team.
3
Kansas Bankerswas chartered in 1909 to underwrite deposit insurance for Kansas banks.
Its offices are in Topeka, Kansas. Over the years its service has continued to adapt to the
changing needs of the banking industry. Today its customer base, consisting mostly of smalland
medium-sized community banks, is spread throughout 29 mainly Midwestern states.
Kansas Bankers offers policies for crime insurance, check kiting fraud indemnification,
Internet banking catastrophe theft insurance, Internet banking privacy liability insurance,
directors and officers liability, bank employment practices, and bank insurance agents
professional errors and omissions indemnity.
Last year we reported that events in the banking industry, including a number of bank
failures, caused us to become less confident in the long-term profitability of Kansas Bankers’
long-established line of deposit guarantee bonds. These bonds insure specific customer bank
deposits above Federal insurance limits. After sustaining a loss of $4.7 million, after taxes,
from a bank failure in the latter half of 2008, Kansas Bankers discontinued writing deposit
guarantee bonds, and in September 2008 it began to exit this line of insurance as rapidly as
feasible. The aggregate face amount of outstanding deposit guarantee bonds has been
reduced, from $9.7 billion, insuring 1,671 institutions at September 30, 2008, to $33 million,
insuring 10 institutions, currently. We believe that none of the banks whose deposits are
currently insured are facing significant risk of failure.
This decrease in exposure to loss, of course, has caused a sharp decline in Kansas
Bankers’ insurance volume, inasmuch as premiums from guarantee bonds not only approximated
half of Kansas Bankers’ written premiums for 2008, but also represented the entirety of
the business it had conducted in almost half of the states in which it was licensed to write
insurance in 2008. The insurance business is highly competitive, with lengthy periods during
which competitors offer coverages at prices we do not consider adequate. Kansas Bankers is
now licensed to sell insurance in 29 states, down from 39 states one year earlier, with plans
soon to withdraw from 4 more. We expect that Kansas Bankers will ultimately expand its
premium volume, at prices deemed satisfactory.
WhenWesco purchased Kansas Bankers, it had been ceding almost half of its premium
volume to reinsurers. In 2009 it reinsured only about 1%. And, because it has also restructured
the layers of losses reinsured, it is now better protected from the downside risk of large
losses. Effective in 2006, insurance subsidiaries of Berkshire Hathaway became KBS’s sole
reinsurers. Previously, an unaffiliated reinsurer was also involved. The increased volume of
business retained comes, of course, with increased irregularity in the income stream. Kansas
Bankers’ combined ratios were 140.2% for 2009, 111.6% for 2008 and 55.1% for 2007.
Kansas Bankers’ business activities require a base of operations supported by significant fixed
operating costs which do not lend themselves to downsizing in proportion to the recent
decline in premium volume. We continue to expect volatile but favorable long-term results
from the now much smaller business remaining in Kansas Bankers.
CORT Business Services Corporation (“CORT”)
In February 2000,Wesco purchased CORT Business Services Corporation (“CORT”) for
$386 million in cash.
CORT is a very long-established company that is the country’s leader in rentals of highquality
furniture that lessees have no intention of buying. In the trade, people call CORT’s
activity “rent-to-rent” to distinguish it from “lease-to-purchase” businesses that are, in
essence, installment sellers of furniture.
4
However, just as Enterprise, as a rent-to-rent auto lessor in short-term arrangements,
must be skilled in selling used cars, CORT must be and is skilled in selling used furniture.
CORT’s revenues totaled $380 million for calendar 2009, versus $410 million for
calendar 2008. Of these amounts, furniture rental revenues were $312 million and $340 million,
furniture sales revenues were $61 million and $62 million, and rental relocation
revenues were $7 million and $8 million. CORT operated at an after-tax loss of $1.4 million
for 2009 versus after-tax profits of $15.7 million for 2008 and $20.3 million for 2007.
Headwinds from the “Great Recession” that began in 2008 have caused the shift from
moderate profit to the small loss that occurred last year.
CORT has made several “tuck-in” acquisitions since its purchase by Wesco; most
recently, the residential furniture rental division of Aaron Rents, Inc., purchased late in
2008. Earlier in 2008, CORTexpanded its operations internationally, through the purchase of
Roomservice Group, a small regional provider of rental furniture and relocation services in
the United Kingdom, now doing business as CORT Business Services UK Ltd. Factoring out
the effects of those acquisitions, CORT’s core revenues fell by almost 20% in 2009, reflecting
the hammering caused by the severe economic recession. So far, CORT’s business has been
melting away faster than CORT can fix it.
Shortly after its acquisition byWesco, CORT started up a nation-wide apartment locator
service, originally intended mainly to supplement CORT’s furniture rental business by
providing apartment locator and ancillary services to relocating individuals. Paul Arnold,
long CORT’s able CEO, and his management team, have devoted much effort in recent years,
expanding CORT’s rental relocation services, and redirecting them toward the needs of
businesses and government agencies who require a skilled and able partner to provide
comprehensive and seamless relocation services for the temporary relocation of employees
worldwide. These efforts had not yet gained traction when recession hit. CORT is now
focusing its efforts more on cost containment than on expansion of services.
Under Wesco’s ownership, CORT has continuously undertaken to improve its competitive
position. With several websites, principally, www.cort.com and www.apartmentsearch.
com, professionals in more than 80 domestic metropolitan markets, affiliates
servicing more than 50 countries, almost twenty-one thousand apartment communities
referring their tenants to CORT, many ancillary services, and its entrée to the business
community as a Berkshire Hathaway company, CORTis better positioned than previously to
benefit from an economic turnaround if it occurs in due course. Near term, we expect more of
the difficult business conditions of the recent past, but we do not expect another operating
loss at CORT in 2010. Instead, we expect disappointing profits.
More details with respect to CORTare contained throughout this annual report, towhich
your careful attention is directed.
Precision Steel Warehouse, Inc. (“Precision Steel”)
The businesses of Wesco’s Precision Steel subsidiary, headquartered in the outskirts of
Chicago at Franklin Park, Illinois, were pounded by the “Great Recession,” exacerbating a
long-term reduction in demand resulting from movement of manufacturing outside the
United States. Revenues were $38.4 million for 2009 versus $60.9 million for 2008. Sales
volume for 2009, in terms of pounds sold, declined by one-third and represented less than
half the annual volume that Precision Steel had sold thirty years earlier, when it was acquired
by Wesco.
5
Precision Steel operated at an after-tax loss of $0.6 million in 2009 versus an after-tax
profit of $0.8 million in 2008. These figures reflect after-tax LIFO inventory accounting
adjustments increasing after-tax income by $1.5 million for 2009 and decreasing after-tax
income by $0.7 million for 2008. Had it not been for the LIFO accounting adjustments,
Precision Steel would have reported an after-tax operating loss of $2.1 million for 2009 versus
after-tax operating income of $1.5million for 2008.Moreover, the $2.1million pre-LIFO-effect
loss last yearwould have been about $0.5 million greaterwithout after-tax profits froma couple
of Precision Steel’s small businesses that are different from conventional steel warehousing.
We do not consider Precision Steel’s recent operating results to be a satisfactory
investment outcome, particularly when one compares its recent performance with its
after-tax operating earnings which averaged $2.3 million for the years 1998 through
2000. And, because of the ongoing recession, more difficulty for Precision Steel will surely
lie ahead.
Apart from the recessionary-caused weakness, the general and ongoing decline in
Precision Steel’s physical volume is a serious reverse, not likely to disappear in some “bounce
back” effect once the economy recovers.
Terry Piper, who became Precision Steel’s President and Chief Executive Officer in 1999,
has done an outstanding job in leading Precision Steel through very difficult years. But he has
no magicwand withwhich to compensate for competitive losses among his best customers or
from the weak economic conditions. He is redoubling his efforts to pare costs, which must be
his response to conditions faced.
Tag Ends from Savings and Loan Days
All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco’s
former involvement with Mutual Savings,Wesco’s long-held savings and loan subsidiary, is a
small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real
estate assets consisting mainly of the nine-story commercial office building in downtown
Pasadena, where Wesco is headquartered. Adjacent to that building is a multi-story luxury
condominium building which MS Property Company has recently built and is in process of
marketing. For more information, if you want a very-high-end condominium, simply phone
Chris Greco (626-585-6700). MS Property Company’s results of operations, immaterial
versus Wesco’s present size, are included in the breakdown of earnings on page 1 within
“other operating earnings.”
Other Operating Earnings (Loss)
Other operating earnings (loss), net of interest paid and general corporate expenses,
amounted to ($6.9 million) in 2009 and ($0.4 million) in 2008. The 2009 figure includes a
$6.2 million after-tax writedown of the book carrying value of a condominium building that
was completed in the worst condominium market in decades. Other components of the other
operating loss in 2009 were (1) rents ($4.1 million gross) principally fromWesco’s Pasadena
office property (leased almost entirely to outsiders, including Citibank as the ground floor
tenant), and (2) interest and dividends from cash equivalents and marketable securities held
outside the insurance subsidiaries, less (3) general corporate expenses plus expenses involving
tag-end real estate and real estate held for sale.
6
Consolidated Balance Sheet and Related Discussion
Wesco has unusual balance sheet strength, concentrated in security holdings of its
insurance subsidiaries. These holdings, in turn, are concentrated in a few securities. Details
can be found in Note 2 to the accompanying financial statements.
Wesco carries its investments at fair value. As a result, unrealized appreciation or
depreciation, after income tax effect, is included as a component of shareholders’ equity and
net worth per share.
Affected substantially by changes in market value of securities owned,Wesco’s yearend net
worth per share has varied only slightly during recent tumultuous years. Figures are as follows:
2006 $337
2007 356
2008 334
2009 358
These results are not impressive. Moreover, if net worth per share had been computed at
its low point in the recent stock market panic, stability implied by the foregoing figureswould
have been considerably lessened.
We repeat our standard warning. Business and human quality in place at Wesco
continues to be not nearly as good, all factors considered, as that in place at Berkshire
Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better
because its small size makes growth easier. Instead, each dollar of book value at Wesco
continues plainly to provide much less intrinsic value than a similar dollar of book value at
Berkshire Hathaway. Moreover, the quality disparity in book value’s intrinsic merits has, in
recent years, continued to widen in favor of Berkshire Hathaway.
The Board of Directors recently increasedWesco’s regular dividend from 391⁄2 cents per
share to 41 cents per share, payable March 4, 2010, to shareholders of record as of the close of
business on February 4, 2010. Shareholders can thank Director Elizabeth Peters for the
recommendation that Wesco increase its next and future dividends to ensure that shareholders
are paid in even pennies.
This annual report contains Form 10-K, a report filed with the Securities and Exchange
Commission, and includes detailed information aboutWesco and its subsidiaries, as well as
audited financial statements bearing extensive footnotes. As usual, your careful attention is
sought with respect to these items.
Shareholders can access much Wesco information, including printed annual reports,
earnings releases, SEC filings, and the websites ofWesco’s subsidiaries and parent, Berkshire
Hathaway, from Wesco’s website: www.wescofinancial.com.
Charles T. Munger
Chairman of the Board
and President
Dated: February 26, 2010

[ 本帖最后由 长白游人 于 2010-6-4 11:57 编辑 ]

长白游人

没事儿看巴菲特的报告和给投资者的信是最大的享受，芒格的也不错。对我们投资者而言，读他们的文字，能让我们内心恬淡，安适。

[ 本帖最后由 长白游人 于 2010-6-4 12:14 编辑 ]

长白游人

To the Shareholders of Berkshire Hathaway Inc.:
Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of
both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over)
book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value
and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for
corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied
and confused, much as if they were small birds that had strayed into a badminton game.
As the year progressed, a series of life-threatening problems within many of the world’s great financial
institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned
non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was
young: “In God we trust; all others pay cash.”
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a
paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have
never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback
cycle. Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities
and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
challenge. They won’t leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if
the financial system was to avoid a total breakdown. Had one occurred, the consequences for every area of our
economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various
Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In
the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or
so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of
the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of
challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the
real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones
Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which
humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic
system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it
will continue to do so. America’s best days lie ahead.
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/30th of those shown for A.
3
Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a
gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie
Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will
be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell
us whether the stock market will rise or fall.
In good years and bad, Charlie and I simply focus on four goals:
(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of
excess liquidity, near-term obligations that are modest, and dozens of sources of earnings
and cash;
(2) widening the “moats” around our operating businesses that give them durable competitive
advantages;
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years,
have delivered Berkshire exceptional results.
Berkshire in 2008
Most of the Berkshire businesses whose results are significantly affected by the economy earned below
their potential last year, and that will be true in 2009 as well. Our retailers were hit particularly hard, as were our
operations tied to residential construction. In aggregate, however, our manufacturing, service and retail
businesses earned substantial sums and most of them – particularly the larger ones – continue to strengthen their
competitive positions. Moreover, we are fortunate that Berkshire’s two most important businesses – our
insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both
businesses delivered outstanding results in 2008 and have excellent prospects.
As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses
realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for
the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to
us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to
hold our float during 2008. Charlie and I find this enjoyable.
Over time, most insurers experience a substantial underwriting loss, which makes their economics far
different from ours. Of course, we too will experience underwriting losses in some years. But we have the best
group of managers in the insurance business, and in most cases they oversee entrenched and valuable franchises.
Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float
will therefore cost us nothing. Our insurance operation, the core business of Berkshire, is an economic
powerhouse.
Charlie and I are equally enthusiastic about our utility business, which had record earnings last year
and is poised for future gains. Dave Sokol and Greg Abel, the managers of this operation, have achieved results
unmatched elsewhere in the utility industry. I love it when they come up with new projects because in this
capital-intensive business these ventures are often large. Such projects offer Berkshire the opportunity to put out
substantial sums at decent returns.
4
Things also went well on the capital-allocation front last year. Berkshire is always a buyer of both
businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing,
pessimism is your friend, euphoria the enemy.
In our insurance portfolios, we made three large investments on terms that would be unavailable in
normal markets. These should add about $11⁄2 billion pre-tax to Berkshire’s annual earnings and offer
possibilities for capital gains as well. We also closed on our Marmon acquisition (we own 64% of the company
now and will purchase its remaining stock over the next six years). Additionally, certain of our subsidiaries made
“tuck-in” acquisitions that will strengthen their competitive positions and earnings.
That’s the good news. But there’s another less pleasant reality: During 2008 I did some dumb things in
investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts
came in that should have caused me to re-examine my thinking and promptly take action.
Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant
decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines
if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you
pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise
when it is marked down.
Yardsticks
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash
equivalents. At yearend those totaled $122 billion (not counting the investments held by our finance and utility
operations, which we assign to our second bucket of value). About $58.5 billion of that total is funded by our
insurance float.
Berkshire’s second component of value is earnings that come from sources other than investments and
insurance. These earnings are delivered by our 67 non-insurance companies, itemized on page 96. We exclude
our insurance earnings from this calculation because the value of our insurance operation comes from the
investable funds it generates, and we have already included this factor in our first bucket.
In 2008, our investments fell from $90,343 per share of Berkshire (after minority interest) to $77,793, a
decrease that was caused by a decline in market prices, not by net sales of stocks or bonds. Our second segment
of value fell from pre-tax earnings of $4,093 per Berkshire share to $3,921 (again after minority interest).
Both of these performances are unsatisfactory. Over time, we need to make decent gains in each area if
we are to increase Berkshire’s intrinsic value at an acceptable rate. Going forward, however, our focus will be on
the earnings segment, just as it has been for several decades. We like buying underpriced securities, but we like
buying fairly-priced operating businesses even more.

[ 本帖最后由 长白游人 于 2010-6-4 21:18 编辑 ]

长白游人

Now, let’s take a look at the four major operating sectors of Berkshire. Each of these has vastly
different balance sheet and income account characteristics. Therefore, lumping them together, as is done in
standard financial statements, impedes analysis. So we’ll present them as four separate businesses, which is how
Charlie and I view them.
5
Regulated Utility Business
Berkshire has an 87.4% (diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.8 million end users make it the U.K.’s third largest distributor of electricity; (2) MidAmerican Energy, which
serves 723,000 electric customers, primarily in Iowa; (3) Pacific Power and Rocky Mountain Power, serving
about 1.7 million electric customers in six western states; and (4) Kern River and Northern Natural pipelines,
which carry about 9% of the natural gas consumed in the U.S.
Our partners in ownership of MidAmerican are its two terrific managers, Dave Sokol and Greg Abel,
and my long-time friend, Walter Scott. It’s unimportant how many votes each party has; we make major moves
only when we are unanimous in thinking them wise. Nine years of working with Dave, Greg and Walter have
reinforced my original belief: Berkshire couldn’t have better partners.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in the
U.S., HomeServices of America. This company operates through 21 locally-branded firms that have 16,000
agents. Last year was a terrible year for home sales, and 2009 looks no better. We will continue, however, to
acquire quality brokerage operations when they are available at sensible prices.
Here are some key figures on MidAmerican’s operations:
Earnings (in millions)
2008 2007
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339 $ 337
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425 412
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703 692
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 473
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) 42
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 130
Operating earnings before corporate interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,203 2,086
Constellation Energy* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092 –
Interest, other than to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (332) (312)
Interest on Berkshire junior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111) (108)
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,002) (477)
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,850 $ 1,189
Earnings applicable to Berkshire** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,704 $ 1,114
Debt owed to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,145 19,002
Debt owed to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,087 821
*Consists of a breakup fee of $175 million and a profit on our investment of $917 million.
**Includes interest earned by Berkshire (net of related income taxes) of $72 in 2008 and $70 in 2007.
MidAmerican’s record in operating its regulated electric utilities and natural gas pipelines is truly
outstanding. Here’s some backup for that claim.
Our two pipelines, Kern River and Northern Natural, were both acquired in 2002. A firm called Mastio
regularly ranks pipelines for customer satisfaction. Among the 44 rated, Kern River came in 9th when we
purchased it and Northern Natural ranked 39th. There was work to do.
In Mastio’s 2009 report, Kern River ranked 1st and Northern Natural 3rd. Charlie and I couldn’t be more
proud of this performance. It came about because hundreds of people at each operation committed themselves to
a new culture and then delivered on their commitment.
Achievements at our electric utilities have been equally impressive. In 1995, MidAmerican became the
major provider of electricity in Iowa. By judicious planning and a zeal for efficiency, the company has kept
electric prices unchanged since our purchase and has promised to hold them steady through 2013.
6
MidAmerican has maintained this extraordinary price stability while making Iowa number one among
all states in the percentage of its generation capacity that comes from wind. Since our purchase, MidAmerican’s
wind-based facilities have grown from zero to almost 20% of total capacity.
Similarly, when we purchased PacifiCorp in 2006, we moved aggressively to expand wind generation.
Wind capacity was then 33 megawatts. It’s now 794, with more coming. (Arriving at PacifiCorp, we found
“wind” of a different sort: The company had 98 committees that met frequently. Now there are 28. Meanwhile,
we generate and deliver considerably more electricity, doing so with 2% fewer employees.)
In 2008 alone, MidAmerican spent $1.8 billion on wind generation at our two operations, and today the
company is number one in the nation among regulated utilities in ownership of wind capacity. By the way,
compare that $1.8 billion to the $1.1 billion of pre-tax earnings of PacifiCorp (shown in the table as “Western”)
and Iowa. In our utility business, we spend all we earn, and then some, in order to fulfill the needs of our service
areas. Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Its
earnings have instead been reinvested to develop the utility systems our customers require and deserve. In
exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership
for all concerned.
* * * * * * * * * * * *
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned
by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid
leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies
through thick and thin (though we prefer thick and thicker).
Our record matches our rhetoric. Most buyers competing against us, however, follow a different path.
For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators are
contemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly
care about the future of their businesses.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a
bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change,
though, were the essential ingredients of their previous operations, including their cherished fee structures and
love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a
business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s
capital structure compared to that previously existing. A number of these acquirees, purchased only two to three
years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of
the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The privateequity
firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead,
they’re keeping their remaining funds very private.
In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be
the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of
purchasers when transactions are proposed.
There is no hiding your history when you stand before these regulators. They can – and do – call their
counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the
business, including a willingness to commit adequate equity capital.
7
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states we
would be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and
capabilities. We passed this examination, just as we expect to pass future ones.
There are two reasons for our confidence. First, Dave Sokol and Greg Abel are going to run any
businesses with which they are associated in a first-class manner. They don’t know of any other way to operate.
Beyond that is the fact that we hope to buy more regulated utilities in the future – and we know that our business
behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions
tomorrow.
Insurance
Our insurance group has propelled Berkshire’s growth since we first entered the business in 1967. This
happy result has not been due to general prosperity in the industry. During the 25 years ending in 2007, return on
net worth for insurers averaged 8.5% versus 14.0% for the Fortune 500. Clearly our insurance CEOs have not
had the wind at their back. Yet these managers have excelled to a degree Charlie and I never dreamed possible in
the early days. Why do I love them? Let me count the ways.
At GEICO, Tony Nicely – now in his 48th year at the company after joining it when he was 18 –
continues to gobble up market share while maintaining disciplined underwriting. When Tony became CEO in
1993, GEICO had 2.0% of the auto insurance market, a level at which the company had long been stuck. Now we
have a 7.7% share, up from 7.2% in 2007.
The combination of new business gains and an improvement in the renewal rate on existing business
has moved GEICO into the number three position among auto insurers. In 1995, when Berkshire purchased
control, GEICO was number seven. Now we trail only State Farm and Allstate.
GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually
everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service.
Efficiency is the key to low cost, and efficiency is Tony’s specialty. Five years ago the number of policies per
employee was 299. In 2008, the number was 439, a huge increase in productivity.
As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist
camp. Juicy targets are everywhere. First, and most important, our new business in auto insurance is now
exploding. Americans are focused on saving money as never before, and they are flocking to GEICO. In January
2009, we set a monthly record – by a wide margin – for growth in policyholders. That record will last exactly 28
days: As we go to press, it’s clear February’s gain will be even better.
Beyond this, we are gaining ground in allied lines. Last year, our motorcycle policies increased by
23.4%, which raised our market share from about 6% to more than 7%. Our RV and ATV businesses are also
growing rapidly, albeit from a small base. And, finally, we recently began insuring commercial autos, a big
market that offers real promise.
GEICO is now saving money for millions of Americans. Go to GEICO.com or call 1-800-847-7536
and see if we can save you money as well.
General Re, our large international reinsurer, also had an outstanding year in 2008. Some time back,
the company had serious problems (which I totally failed to detect when we purchased it in late 1998). By 2001,
when Joe Brandon took over as CEO, assisted by his partner, Tad Montross, General Re’s culture had further
deteriorated, exhibiting a loss of discipline in underwriting, reserving and expenses. After Joe and Tad took
charge, these problems were decisively and successfully addressed. Today General Re has regained its luster.
Last spring Joe stepped down, and Tad became CEO. Charlie and I are grateful to Joe for righting the ship and
are certain that, with Tad, General Re’s future is in the best of hands.
8
Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This
past year has retaught clients a crucial principle: A promise is no better than the person or institution making it.
That’s where General Re excels: It is the only reinsurer that is backed by an AAA corporation. Ben Franklin once
said, “It’s difficult for an empty sack to stand upright.” That’s no worry for General Re clients.
Our third major insurance operation is Ajit Jain’s reinsurance division, headquartered in Stamford and
staffed by only 31 employees. This may be one of the most remarkable businesses in the world, hard to
characterize but easy to admire.
From year to year, Ajit’s business is never the same. It features very large transactions, incredible
speed of execution and a willingness to quote on policies that leave others scratching their heads. When there is a
huge and unusual risk to be insured, Ajit is almost certain to be called.
Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent.
So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home.
Of course, I knew the answer before writing. There isn’t anyone like Ajit.
Our smaller insurers are just as outstanding in their own way as the “big three,” regularly delivering
valuable float to us at a negative cost. We aggregate their results below under “Other Primary.” For space
reasons, we don’t discuss these insurers individually. But be assured that Charlie and I appreciate the
contribution of each.
Here is the record for the four legs to our insurance stool. The underwriting profits signify that all four
provided funds to Berkshire last year without cost, just as they did in 2007. And in both years our underwriting
profitability was considerably better than that achieved by the industry. Of course, we ourselves will periodically
have a terrible year in insurance. But, overall, I expect us to average an underwriting profit. If so, we will be
using free funds of large size for the indefinite future.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2008 2007 2008 2007
General Re . . . . . . . . . . . . . . . . . . . . . . $ 342 $ 555 $21,074 $23,009
BH Reinsurance . . . . . . . . . . . . . . . . . . 1,324 1,427 24,221 23,692
GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 916 1,113 8,454 7,768
Other Primary . . . . . . . . . . . . . . . . . . . 210 279 4,739 4,229
$2,792 $3,374 $58,488 $58,698
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet
and earnings statement for the entire group.
Balance Sheet 12/31/08 (in millions)
Assets
Cash and equivalents . . . . . . . . . . . . . . . . . $ 2,497
Accounts and notes receivable . . . . . . . . . . 5,047
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Other current assets . . . . . . . . . . . . . . . . . . 752
Total current assets . . . . . . . . . . . . . . . . . . . 15,796
Goodwill and other intangibles . . . . . . . . . 16,515
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . 16,338
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,248
$49,897
Liabilities and Equity
Notes payable . . . . . . . . . . . . . . . . . . . . . . . $ 2,212
Other current liabilities . . . . . . . . . . . . . . . 8,087
Total current liabilities . . . . . . . . . . . . . . . . 10,299
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . 2,786
Term debt and other liabilities . . . . . . . . . . 6,033
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,779
$49,897
9
Earnings Statement (in millions)
2008 2007 2006
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,099 $59,100 $52,660
Operating expenses (including depreciation of $1,280 in 2008, $955 in 2007 and
$823 in 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,937 55,026 49,002
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 127 132
Pre-tax earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,023* 3,947* 3,526*
Income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,740 1,594 1,395
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,283 $ 2,353 $ 2,131
*Does not include purchase-accounting adjustments.
This motley group, which sells products ranging from lollipops to motor homes, earned an impressive
17.9% on average tangible net worth last year. It’s also noteworthy that these operations used only minor
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many of
them, however, at large premiums to net worth – a point reflected in the goodwill item shown on our balance
sheet – and that fact reduces the earnings on our average carrying value to 8.1%.
Though the full-year result was satisfactory, earnings of many of the businesses in this group hit the
skids in last year’s fourth quarter. Prospects for 2009 look worse. Nevertheless, the group retains strong earning
power even under today’s conditions and will continue to deliver significant cash to the parent company. Overall,
these companies improved their competitive positions last year, partly because our financial strength let us make
advantageous tuck-in acquisitions. In contrast, many competitors were treading water (or sinking).
The most noteworthy of these acquisitions was Iscar’s late-November purchase of Tungaloy, a leading
Japanese producer of small tools. Charlie and I continue to look with astonishment – and appreciation! – at the
accomplishments of Iscar’s management. To secure one manager like Eitan Wertheimer, Jacob Harpaz or Danny
Goldman when we acquire a company is a blessing. Getting three is like winning the Triple Crown. Iscar’s
growth since our purchase has exceeded our expectations – which were high – and the addition of Tungaloy will
move performance to the next level.
MiTek, Benjamin Moore, Acme Brick, Forest River, Marmon and CTB also made one or more
acquisitions during the year. CTB, which operates worldwide in the agriculture equipment field, has now picked
up six small firms since we purchased it in 2002. At that time, we paid $140 million for the company. Last year
its pre-tax earnings were $89 million. Vic Mancinelli, its CEO, followed Berkshire-like operating principles long
before our arrival. He focuses on blocking and tackling, day by day doing the little things right and never getting
off course. Ten years from now, Vic will be running a much larger operation and, more important, will be
earning excellent returns on invested capital.
Finance and Financial Products
I will write here at some length about the mortgage operation of Clayton Homes and skip any financial
commentary, which is summarized in the table at the end of this section. I do this because Clayton’s recent
experience may be useful in the public-policy debate about housing and mortgages. But first a little background.
Clayton is the largest company in the manufactured home industry, delivering 27,499 units last year.
This came to about 34% of the industry’s 81,889 total. Our share will likely grow in 2009, partly because much
of the rest of the industry is in acute distress. Industrywide, units sold have steadily declined since they hit a peak
of 372,843 in 1998.
10
At that time, much of the industry employed sales practices that were atrocious. Writing about the
period somewhat later, I described it as involving “borrowers who shouldn’t have borrowed being financed by
lenders who shouldn’t have lent.”
To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was
involved. (“That certainly looks like a $2,000 cat to me” says the salesman who will receive a $3,000
commission if the loan goes through.) Moreover, impossible-to-meet monthly payments were being agreed to by
borrowers who signed up because they had nothing to lose. The resulting mortgages were usually packaged
(“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and
it did.
Clayton, it should be emphasized, followed far more sensible practices in its own lending throughout
that time. Indeed, no purchaser of the mortgages it originated and then securitized has ever lost a dime of
principal or interest. But Clayton was the exception; industry losses were staggering. And the hangover continues
to this day.
This 1997-2000 fiasco should have served as a canary-in-the-coal-mine warning for the far-larger
conventional housing market. But investors, government and rating agencies learned exactly nothing from the
manufactured-home debacle. Instead, in an eerie rerun of that disaster, the same mistakes were repeated with
conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their
incomes, and borrowers just as happily signed up to meet those payments. Both parties counted on “house-price
appreciation” to make this otherwise impossible arrangement work. It was Scarlett O’Hara all over again: “I’ll
think about it tomorrow.” The consequences of this behavior are now reverberating through every corner of our
economy.
Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash,
handing us no unexpected losses. This is not because these borrowers are unusually creditworthy, a point proved
by FICO scores (a standard measure of credit risk). Their median FICO score is 644, compared to a national
median of 723, and about 35% are below 620, the segment usually designated “sub-prime.” Many disastrous
pools of mortgages on conventional homes are populated by borrowers with far better credit, as measured by
FICO scores.
Yet at yearend, our delinquency rate on loans we have originated was 3.6%, up only modestly from
2.9% in 2006 and 2.9% in 2004. (In addition to our originated loans, we’ve also bought bulk portfolios of various
types from other financial institutions.) Clayton’s foreclosures during 2008 were 3.0% of originated loans
compared to 3.8% in 2006 and 5.3% in 2004.
Why are our borrowers – characteristically people with modest incomes and far-from-great credit
scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply
looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then
decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention
of paying it off, whatever the course of home prices.
Just as important is what our borrowers did not do. They did not count on making their loan payments
by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their
income. And they did not assume that they could always sell their home at a profit if their mortgage payments
became onerous. Jimmy Stewart would have loved these folks.
Of course, a number of our borrowers will run into trouble. They generally have no more than minor
savings to tide them over if adversity hits. The major cause of delinquency or foreclosure is the loss of a job, but
death, divorce and medical expenses all cause problems. If unemployment rates rise – as they surely will in
2009 – more of Clayton’s borrowers will have troubles, and we will have larger, though still manageable, losses.
But our problems will not be driven to any extent by the trend of home prices.
11
Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do
not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures
take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have
made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away
from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they
can’t make the monthly payments.
Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years,
with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi
possibilities. And the home purchased ought to fit the income of the purchaser.
The present housing debacle should teach home buyers, lenders, brokers and government some simple
lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment
of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.
Keeping them in their homes should be the ambition.
* * * * * * * * * * * *
Clayton’s lending operation, though not damaged by the performance of its borrowers, is nevertheless
threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee –
banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and
others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have
money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing
borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the
government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t
enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the
“haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course
feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our
cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the
moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Today’s extreme conditions may soon end. At worst, we believe we will find at least a partial solution
that will allow us to continue much of Clayton’s lending. Clayton’s earnings, however, will surely suffer if we
are forced to compete for long against government-favored lenders.
Pre-Tax Earnings
(in millions)
2008 2007
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $330 $ 272
Life and annuity operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (60)
Leasing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 111
Manufactured-housing finance (Clayton) . . . . . . . . . . . . . . . . . . . . . . . . 206 526
Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 157
Income before investment and derivatives gains or losses . . . . . . . . . . . $787 $1,006
*Includes $92 million in 2008 and $85 million in 2007 of fees that Berkshire charges Clayton for the
use of Berkshire’s credit.
12
Tax-Exempt Bond Insurance
Early in 2008, we activated Berkshire Hathaway Assurance Company (“BHAC”) as an insurer of the
tax-exempt bonds issued by states, cities and other local entities. BHAC insures these securities for issuers both
at the time their bonds are sold to the public (primary transactions) and later, when the bonds are already owned
by investors (secondary transactions).
By yearend 2007, the half dozen or so companies that had been the major players in this business had
all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White,
but I drifted.”
The monolines (as the bond insurers are called) initially insured only tax-exempt bonds that were
low-risk. But over the years competition for this business intensified, and rates fell. Faced with the prospect of
stagnating or declining earnings, the monoline managers turned to ever-riskier propositions. Some of these
involved the insuring of residential mortgage obligations. When housing prices plummeted, the monoline
industry quickly became a basket case.
Early in the year, Berkshire offered to assume all of the insurance issued on tax-exempts that was on
the books of the three largest monolines. These companies were all in life-threatening trouble (though they said
otherwise.) We would have charged a 11⁄2% rate to take over the guarantees on about $822 billion of bonds. If
our offer had been accepted, we would have been required to pay any losses suffered by investors who owned
these bonds – a guarantee stretching for 40 years in some cases. Ours was not a frivolous proposal: For reasons
we will come to later, it involved substantial risk for Berkshire.
The monolines summarily rejected our offer, in some cases appending an insult or two. In the end,
though, the turndowns proved to be very good news for us, because it became apparent that I had severely
underpriced our offer.
Thereafter, we wrote about $15.6 billion of insurance in the secondary market. And here’s the punch
line: About 77% of this business was on bonds that were already insured, largely by the three aforementioned
monolines. In these agreements, we have to pay for defaults only if the original insurer is financially unable to do
so.
We wrote this “second-to-pay” insurance for rates averaging 3.3%. That’s right; we have been paid far
more for becoming the second to pay than the 1.5% we would have earlier charged to be the first to pay. In one
extreme case, we actually agreed to be fourth to pay, nonetheless receiving about three times the 1% premium
charged by the monoline that remains first to pay. In other words, three other monolines have to first go broke
before we need to write a check.
Two of the three monolines to which we made our initial bulk offer later raised substantial capital.
This, of course, directly helps us, since it makes it less likely that we will have to pay, at least in the near term,
any claims on our second-to-pay insurance because these two monolines fail. In addition to our book of
secondary business, we have also written $3.7 billion of primary business for a premium of $96 million. In
primary business, of course, we are first to pay if the issuer gets in trouble.
We have a great many more multiples of capital behind the insurance we write than does any other
monoline. Consequently, our guarantee is far more valuable than theirs. This explains why many sophisticated
investors have bought second-to-pay insurance from us even though they were already insured by another
monoline. BHAC has become not only the insurer of preference, but in many cases the sole insurer acceptable to
bondholders.
Nevertheless, we remain very cautious about the business we write and regard it as far from a sure
thing that this insurance will ultimately be profitable for us. The reason is simple, though I have never seen even
a passing reference to it by any financial analyst, rating agency or monoline CEO.
13
The rationale behind very low premium rates for insuring tax-exempts has been that defaults have
historically been few. But that record largely reflects the experience of entities that issued uninsured bonds.
Insurance of tax-exempt bonds didn’t exist before 1971, and even after that most bonds remained uninsured.
A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different
loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different.
To understand why, let’s go back to 1975 when New York City was on the edge of bankruptcy. At the time its
bonds – virtually all uninsured – were heavily held by the city’s wealthier residents as well as by New York
banks and other institutions. These local bondholders deeply desired to solve the city’s fiscal problems. So before
long, concessions and cooperation from a host of involved constituencies produced a solution. Without one, it
was apparent to all that New York’s citizens and businesses would have experienced widespread and severe
financial losses from their bond holdings.
Now, imagine that all of the city’s bonds had instead been insured by Berkshire. Would similar belttightening,
tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire
would have been asked to “share” in the required sacrifices. And, considering our deep pockets, the required
contribution would most certainly have been substantial.
Local governments are going to face far tougher fiscal problems in the future than they have to date.
The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities
and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between
assets and a realistic actuarial valuation of present liabilities is simply staggering.
When faced with large revenue shortfalls, communities that have all of their bonds insured will be
more prone to develop “solutions” less favorable to bondholders than those communities that have uninsured
bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be
highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that
others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local
citizens in the form of major tax increases over pain to a far-away bond insurer?
Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in
fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a
devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in
this business, eschewing many classes of bonds that other monolines regularly embrace.
* * * * * * * * * * * *
The type of fallacy involved in projecting loss experience from a universe of non-insured bonds onto a
deceptively-similar universe in which many bonds are insured pops up in other areas of finance. “Back-tested”
models of many kinds are susceptible to this sort of error. Nevertheless, they are frequently touted in financial
markets as guides to future action. (If merely looking up past financial data would tell you what the future holds,
the Forbes 400 would consist of librarians.)
Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed,
history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience
over periods when home prices rose only moderately and speculation in houses was negligible. They then made
this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had
recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford.
In short, universe “past” and universe “current” had very different characteristics. But lenders, government and
media largely failed to recognize this all-important fact.
14
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood
using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often,
though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing
formulas.
* * * * * * * * * * * *
A final post-script on BHAC: Who, you may wonder, runs this operation? While I help set policy, all
of the heavy lifting is done by Ajit and his crew. Sure, they were already generating $24 billion of float along
with hundreds of millions of underwriting profit annually. But how busy can that keep a 31-person group?
Charlie and I decided it was high time for them to start doing a full day’s work.
Investments
Because of accounting rules, we divide our large holdings of common stocks this year into two
categories. The table below, presenting the first category, itemizes investments that are carried on our balance
sheet at market value and that had a yearend value of more than $500 million.
12/31/08
Shares Company
Percentage of
Company
Owned Cost* Market
(in millions)
151,610,700 American Express Company . . . . . . . . . . . . . . . . . . . . 13.1 $ 1,287 $ 2,812
200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . 8.6 1,299 9,054
84,896,273 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 7,008 4,398
30,009,591 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1,847 1,795
130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 4,330 3,498
3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 768 1,191
91,941,010 The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1 643 5,684
22,111,966 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,827 1,404
11,262,000 Swiss Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 773 530
227,307,000 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 1,326 1,193
75,145,426 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 2,337 1,879
19,944,300 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 942 1,118
1,727,765 The Washington Post Company . . . . . . . . . . . . . . . . . . 18.4 11 674
304,392,068 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . 7.2 6,702 8,973
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,035 4,870
Total Common Stocks Carried at Market . . . . . . . . . . $37,135 $49,073
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of
write-ups or write-downs that have been required.
In addition, we have holdings in Moody’s and Burlington Northern Santa Fe that we now carry at
“equity value” – our cost plus retained earnings since our purchase, minus the tax that would be paid if those
earnings were paid to us as dividends. This accounting treatment is usually required when ownership of an
investee company reaches 20%.
We purchased 15% of Moody’s some years ago and have not since bought a share. Moody’s, though,
has repurchased its own shares and, by late 2008, those repurchases reduced its outstanding shares to the point
that our holdings rose above 20%. Burlington Northern has also repurchased shares, but our increase to 20%
primarily occurred because we continued to buy this stock.
15
Unless facts or rules change, you will see these holdings reflected in our balance sheet at “equity
accounting” values, whatever their market prices. You will also see our share of their earnings (less applicable
taxes) regularly included in our quarterly and annual earnings.
I told you in an earlier part of this report that last year I made a major mistake of commission (and
maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of
ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in
energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in
the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise,
moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.
I made some other already-recognizable errors as well. They were smaller, but unfortunately not that
small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we
wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined
even further. The tennis crowd would call my mistakes “unforced errors.”
On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued
by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high
current yields that, in themselves, make the investments more than satisfactory. But in each of these three
purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to
sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter &
Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and myself – to always run
Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet
tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra
profits.
The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that
yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free
governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the
financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the
housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost
equally extraordinary.
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a
terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable –
in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment
confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning
close to nothing and will surely find its purchasing power eroded over time.
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it
sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
Derivatives
Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial
system. They have made it almost impossible for investors to understand and analyze our largest commercial
banks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of
earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more
than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the
books.
16
Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial
institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include
Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get
our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had
never heard of). So we decided to close up shop. Though we were under no pressure and were operating in
benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the
task. Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I
got to know you so well.”
Improved “transparency” – a favorite remedy of politicians, commentators and financial regulators for
averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism
that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives.
Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in
10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is
going on in their portfolios (and then I reach for some aspirin).
For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example.
These giant institutions were created by Congress, which retained control over them, dictating what they could
and could not do. To aid its oversight, Congress created OFHEO in 1992, admonishing it to make sure the two
behemoths were behaving themselves. With that move, Fannie and Freddie became the most intensely-regulated
companies of which I am aware, as measured by manpower assigned to the task.
On June 15, 2003, OFHEO (whose annual reports are available on the Internet) sent its 2002 report to
Congress – specifically to its four bosses in the Senate and House, among them none other than Messrs. Sarbanes
and Oxley. The report’s 127 pages included a self-congratulatory cover-line: “Celebrating 10 Years of
Excellence.” The transmittal letter and report were delivered nine days after the CEO and CFO of Freddie had
resigned in disgrace and the COO had been fired. No mention of their departures was made in the letter, even
while the report concluded, as it always did, that “Both Enterprises were financially sound and well managed.”
In truth, both enterprises had engaged in massive accounting shenanigans for some time. Finally, in
2006, OFHEO issued a 340-page scathing chronicle of the sins of Fannie that, more or less, blamed the fiasco on
every party but – you guessed it – Congress and OFHEO.
The Bear Stearns collapse highlights the counterparty problem embedded in derivatives transactions, a
time bomb I first discussed in Berkshire’s 2002 report. On April 3, 2008, Tim Geithner, then the able president of
the New York Fed, explained the need for a rescue: “The sudden discovery by Bear’s derivative counterparties
that important financial positions they had put in place to protect themselves from financial risk were no longer
operative would have triggered substantial further dislocation in markets. This would have precipitated a rush by
Bear’s counterparties to liquidate the collateral they held against those positions and to attempt to replicate those
positions in already very fragile markets.” This is Fedspeak for “We stepped in to avoid a financial chain reaction
of unpredictable magnitude.” In my opinion, the Fed was right to do so.
A normal stock or bond trade is completed in a few days with one party getting its cash, the other its
securities. Counterparty risk therefore quickly disappears, which means credit problems can’t accumulate. This
rapid settlement process is key to maintaining the integrity of markets. That, in fact, is a reason for NYSE and
NASDAQ shortening the settlement period from five days to three days in 1995.
Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties
building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become
important parts of financial statements though these items will not be validated for many years. Additionally, a
frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by
the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other
ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal
disease: It’s not just whom you sleep with, but also whom they are sleeping with.
17
Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because
it assures them government aid if trouble hits. In other words, only companies having problems that can infect
the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m
sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious
CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply
won’t do; it’s mindboggling screw-ups that are required.
Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives
contracts (other than those used for operational purposes at MidAmerican and the few left over at Gen Re). The
answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both
initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any
large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be
my fault.
Our derivatives dealings require our counterparties to make payments to us when contracts are
initiated. Berkshire therefore always holds the money, which leaves us assuming no meaningful counterparty
risk. As of yearend, the payments made to us less losses we have paid – our derivatives “float,” so to speak –
totaled $8.1 billion. This float is similar to insurance float: If we break even on an underlying transaction, we will
have enjoyed the use of free money for a long time. Our expectation, though it is far from a sure thing, is that we
will do better than break even and that the substantial investment income we earn on the funds will be frosting on
the cake.
Only a small percentage of our contracts call for any posting of collateral when the market moves
against us. Even under the chaotic conditions existing in last year’s fourth quarter, we had to post less than 1% of
our securities portfolio. (When we post collateral, we deposit it with third parties, meanwhile retaining the
investment earnings on the deposited securities.) In our 2002 annual report, we warned of the lethal threat that
posting requirements create, real-life illustrations of which we witnessed last year at a variety of financial
institutions (and, for that matter, at Constellation Energy, which was within hours of bankruptcy when
MidAmerican arrived to effect a rescue).
Our contracts fall into four major categories. With apologies to those who are not fascinated by
financial instruments, I will explain them in excruciating detail.
• We have added modestly to the “equity put” portfolio I described in last year’s report. Some of our
contracts come due in 15 years, others in 20. We must make a payment to our counterparty at
maturity if the reference index to which the put is tied is then below what it was at the inception of
the contract. Neither party can elect to settle early; it’s only the price on the final day that counts.
To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at,
say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million.
If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In
the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to
$150 million – that we would be free to invest as we wish.
Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major
indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the
Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24,
2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have
paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black-
Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change
on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9
billion in premiums we have received – means that we have so far reported a mark-to-market loss
of $5.1 billion from these contracts.
18
We endorse mark-to-market accounting. I will explain later, however, why I believe the Black-
Scholes formula, even though it is the standard for establishing the dollar liability for options,
produces strange results when the long-term variety are being valued.
One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion
we have at risk, all stocks in all four indices would have to go to zero on their various termination
dates. If, however – as an example – all indices fell 25% from their value at the inception of each
contract, and foreign-exchange rates remained as they are today, we would owe about $9 billion,
payable between 2019 and 2028. Between the inception of the contract and those dates, we would
have held the $4.9 billion premium and earned investment income on it.
• The second category we described in last year’s report concerns derivatives requiring us to pay
when credit losses occur at companies that are included in various high-yield indices. Our standard
contract covers a five-year period and involves 100 companies. We modestly expanded our position
last year in this category. But, of course, the contracts on the books at the end of 2007 moved one
year closer to their maturity. Overall, our contracts now have an average life of 21⁄3 years, with the
first expiration due to occur on September 20, 2009 and the last on December 20, 2013.
By yearend we had received premiums of $3.4 billion on these contracts and paid losses of $542
million. Using mark-to-market principles, we also set up a liability for future losses that at yearend
totaled $3.0 billion. Thus we had to that point recorded a loss of about $100 million, derived from
our $3.5 billion total in paid and estimated future losses minus the $3.4 billion of premiums we
received. In our quarterly reports, however, the amount of gain or loss has swung wildly from a
profit of $327 million in the second quarter of 2008 to a loss of $693 million in the fourth quarter of
2008.
Surprisingly, we made payments on these contracts of only $97 million last year, far below the
estimate I used when I decided to enter into them. This year, however, losses have accelerated
sharply with the mushrooming of large bankruptcies. In last year’s letter, I told you I expected these
contracts to show a profit at expiration. Now, with the recession deepening at a rapid rate, the
possibility of an eventual loss has increased. Whatever the result, I will keep you posted.
• In 2008 we began to write “credit default swaps” on individual companies. This is simply credit
insurance, similar to what we write in BHAC, except that here we bear the credit risk of
corporations rather than of tax-exempt issuers.
If, say, the XYZ company goes bankrupt, and we have written a $100 million contract, we are
obligated to pay an amount that reflects the shrinkage in value of a comparable amount of XYZ’s
debt. (If, for example, the company’s bonds are selling for 30 after default, we would owe $70
million.) For the typical contract, we receive quarterly payments for five years, after which our
insurance expires.
At yearend we had written $4 billion of contracts covering 42 corporations, for which we receive
annual premiums of $93 million. This is the only derivatives business we write that has any
counterparty risk; the party that buys the contract from us must be good for the quarterly premiums
it will owe us over the five years. We are unlikely to expand this business to any extent because
most buyers of this protection now insist that the seller post collateral, and we will not enter into
such an arrangement.
• At the request of our customers, we write a few tax-exempt bond insurance contracts that are
similar to those written at BHAC, but that are structured as derivatives. The only meaningful
difference between the two contracts is that mark-to-market accounting is required for derivatives
whereas standard accrual accounting is required at BHAC.
19
But this difference can produce some strange results. The bonds covered – in effect, insured – by
these derivatives are largely general obligations of states, and we feel good about them. At yearend,
however, mark-to-market accounting required us to record a loss of $631 million on these
derivatives contracts. Had we instead insured the same bonds at the same price in BHAC, and used
the accrual accounting required at insurance companies, we would have recorded a small profit for
the year. The two methods by which we insure the bonds will eventually produce the same
accounting result. In the short term, however, the variance in reported profits can be substantial.
We have told you before that our derivative contracts, subject as they are to mark-to-market
accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother
Charlie and me. Indeed, the “downs” can be helpful in that they give us an opportunity to expand a position on
favorable terms. I hope this explanation of our dealings will lead you to think similarly.
* * * * * * * * * * * *
The Black-Scholes formula has approached the status of holy writ in finance, and we use it when
valuing our equity put options for financial statement purposes. Key inputs to the calculation include a contract’s
maturity and strike price, as well as the analyst’s expectations for volatility, interest rates and dividends.
If the formula is applied to extended time periods, however, it can produce absurd results. In fairness,
Black and Scholes almost certainly understood this point well. But their devoted followers may be ignoring
whatever caveats the two men attached when they first unveiled the formula.
It’s often useful in testing a theory to push it to extremes. So let’s postulate that we sell a 100- year $1
billion put option on the S&P 500 at a strike price of 903 (the index’s level on 12/31/08). Using the implied
volatility assumption for long-dated contracts that we do, and combining that with appropriate interest and
dividend assumptions, we would find the “proper” Black-Scholes premium for this contract to be $2.5 million.
To judge the rationality of that premium, we need to assess whether the S&P will be valued a century
from now at less than today. Certainly the dollar will then be worth a small fraction of its present value (at only
2% inflation it will be worth roughly 14¢). So that will be a factor pushing the stated value of the index higher.
Far more important, however, is that one hundred years of retained earnings will hugely increase the value of
most of the companies in the index. In the 20th Century, the Dow-Jones Industrial Average increased by about
175-fold, mainly because of this retained-earnings factor.
Considering everything, I believe the probability of a decline in the index over a one-hundred-year
period to be far less than 1%. But let’s use that figure and also assume that the most likely decline – should one
occur – is 50%. Under these assumptions, the mathematical expectation of loss on our contract would be $5
million ($1 billion X 1% X 50%).
But if we had received our theoretical premium of $2.5 million up front, we would have only had to
invest it at 0.7% compounded annually to cover this loss expectancy. Everything earned above that would have
been profit. Would you like to borrow money for 100 years at a 0.7% rate?
Let’s look at my example from a worst-case standpoint. Remember that 99% of the time we would pay
nothing if my assumptions are correct. But even in the worst case among the remaining 1% of possibilities – that
is, one assuming a total loss of $1 billion – our borrowing cost would come to only 6.2%. Clearly, either my
assumptions are crazy or the formula is inappropriate.
20
The ridiculous premium that Black-Scholes dictates in my extreme example is caused by the inclusion
of volatility in the formula and by the fact that volatility is determined by how much stocks have moved around
in some past period of days, months or years. This metric is simply irrelevant in estimating the probabilityweighted
range of values of American business 100 years from now. (Imagine, if you will, getting a quote every
day on a farm from a manic-depressive neighbor and then using the volatility calculated from these changing
quotes as an important ingredient in an equation that predicts a probability-weighted range of values for the farm
a century from now.)
Though historical volatility is a useful – but far from foolproof – concept in valuing short-term options,
its utility diminishes rapidly as the duration of the option lengthens. In my opinion, the valuations that the Black-
Scholes formula now place on our long-term put options overstate our liability, though the overstatement will
diminish as the contracts approach maturity.
Even so, we will continue to use Black-Scholes when we are estimating our financial-statement
liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might
offer would engender extreme skepticism. That would be perfectly understandable: CEOs who have concocted
their own valuations for esoteric financial instruments have seldom erred on the side of conservatism. That club
of optimists is one that Charlie and I have no desire to join.
The Annual Meeting
Our meeting this year will be held on Saturday, May 2nd. As always, the doors will open at the Qwest
Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the
question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. Then, after
a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day’s
question periods, please do so while Charlie is talking.
The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-squarefoot
hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 31,000 people
who came to the meeting did their part, and almost every location racked up record sales. But you can do better.
(A friendly warning: If I find sales are lagging, I lock the exits.)
This year Clayton will showcase its new i-house that includes Shaw flooring, Johns Manville insulation
and MiTek fasteners. This innovative “green” home, featuring solar panels and numerous other energy-saving
products, is truly a home of the future. Estimated costs for electricity and heating total only about $1 per day
when the home is sited in an area like Omaha. After purchasing the i-house, you should next consider the Forest
River RV and pontoon boat on display nearby. Make your neighbors jealous.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of
them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a
shareholder discount (usually 8%). This special offer is permitted by 44 of the 50 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given
certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For
at least 50% of you, I believe we can.
On Saturday, at the Omaha airport, we will have the usual array of NetJets aircraft available for your
inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to Omaha by bus;
leave in your new plane. And take along – with no fear of a strip search – the Ginsu knives that you’ve purchased
at the exhibit of our Quikut subsidiary.
Next, if you have any money left, visit the Bookworm, which will be selling about 30 books and
DVDs. A shipping service will be available for those whose thirst for knowledge exceeds their carrying capacity.
21
Finally, we will have three fascinating cars on the exhibition floor, including one from the past and one
of the future. Paul Andrews, CEO of our subsidiary, TTI, will bring his 1935 Duesenberg, a car that once
belonged to Mrs. Forrest Mars, Sr., parent and grandparent of our new partners in the Wrigley purchase. The
future will be represented by a new plug-in electric car developed by BYD, an amazing Chinese company in
which we have a 10% interest.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations,
we have again signed up American Express (800-799-6634) to give you special help. Carol Pedersen, who
handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find,
but work with Carol and you will get one.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we
will again be having “Berkshire Weekend” discount pricing. We initiated this special event at NFM twelve years
ago, and sales during the “Weekend” grew from $5.3 million in 1997 to a record $33.3 million in 2008. On
Saturday of that weekend, we also set a single day record of $7.2 million. Ask any retailer what he thinks of such
volume.
To obtain the Berkshire discount, you must make your purchases between Thursday, April 30th and
Monday, May 4th inclusive, and also present your meeting credential. The period’s special pricing will even
apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting
but which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their
cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m. to 6 p.m. on Sunday.
On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a western cookout to which you are all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception
from 6 p.m. to 10 p.m. on Friday, May 1st. The second, the main gala, will be held on Sunday, May 3rd, from 9
a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore,
shareholder prices will be available from Monday, April 27th through Saturday, May 9th. During that period,
please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess champion,
will take on all comers – who will have their eyes wide open – in groups of six. Nearby, Norman Beck, a
remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon
Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday
afternoon.
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 3rd, and will be
serving from 1 p.m. until 10 p.m. Last year Gorat’s, which seats 240, served 975 dinners on Shareholder Sunday.
The three-day total was 2,448 including 702 T-bone steaks, the entrée preferred by the cognoscenti. Please don’t
embarrass me by ordering foie gras. Remember: To come to Gorat’s on that day, you must have a reservation. To
make one, call 402-551-3733 on April 1st (but not before).
We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come from
outside North America. Every year our meeting draws many people from around the globe, and Charlie and I
want to be sure we personally greet those who have come so far. Last year we enjoyed meeting more than 700 of
you from many dozens of countries. Any shareholder who comes from outside the U.S. or Canada will be given a
special credential and instructions for attending this function.
* * * * * * * * * * * *
22
This year we will be making important changes in how we handle the meeting’s question periods. In
recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last
year there were practically none. So we need to steer the discussion back to Berkshire’s businesses.
In a related problem, there has been a mad rush when the doors open at 7 a.m., led by people who wish
to be first in line at the 12 microphones available for questioners. This is not desirable from a safety standpoint,
nor do we believe that sprinting ability should be the determinant of who gets to pose questions. (At age 78, I’ve
concluded that speed afoot is a ridiculously overrated talent.) Again, a new procedure is desirable.
In our first change, several financial journalists from organizations representing newspapers,
magazines and television will participate in the question-and-answer period, asking Charlie and me questions that
shareholders have submitted by e-mail. The journalists and their e-mail addresses are: Carol Loomis, of Fortune,
who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com,
and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted,
each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your
e-mail, let the journalist know if you would like your name mentioned if your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the
journalists will pick some tough ones and that’s the way we like it.
In our second change, we will have a drawing at 8:15 at each microphone for those shareholders
hoping to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with
those from the winning shareholders. At least half the questions – those selected by the panel from your
submissions – are therefore certain to be Berkshire-related. We will meanwhile continue to get some good – and
perhaps entertaining – questions from the audience as well.
So join us at our Woodstock for Capitalists and let us know how you like the new format. Charlie and I
look forward to seeing you.
February 27, 2009 Warren E. Buffett
Chairman of the Board

[ 本帖最后由 长白游人 于 2010-6-4 21:19 编辑 ]

长白游人

To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2007 was $12.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 11%. Over the last 43 years (that is, since present management took
over) book value has grown from $19 to $78,008, a rate of 21.1% compounded annually.*
Overall, our 76 operating businesses did well last year. The few that had problems were primarily
those linked to housing, among them our brick, carpet and real estate brokerage operations. Their setbacks
are minor and temporary. Our competitive position in these businesses remains strong, and we have firstclass
CEOs who run them right, in good times or bad.
Some major financial institutions have, however, experienced staggering problems because they
engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells
Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented
new ways to lose money when the old ways seemed to work just fine.”
You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that
house prices would forever rise. That conviction made a borrower’s income and cash equity seem
unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would
cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.
As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been
swimming naked when the tide goes out – and what we are witnessing at some of our largest financial
institutions is an ugly sight.
Turning to happier thoughts, we can report that Berkshire’s newest acquisitions of size, TTI and
Iscar, led by their CEOs, Paul Andrews and Jacob Harpaz respectively, performed magnificently in 2007.
Iscar is as impressive a manufacturing operation as I’ve seen, a view I reported last year and that was
confirmed by a visit I made in the fall to its extraordinary plant in Korea.
Finally, our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the
reason is that we have the best collection of insurance managers in the business – more about them later.
But we also were very lucky in 2007, the second year in a row free of major insured catastrophes.
That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall
significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third
consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points
or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower
insurance earnings during the next few years.
Yardsticks
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash
equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations,
which we assign to our second bucket of value).
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares
are 1/30th of those shown for the A.
3
Insurance float – money we temporarily hold in our insurance operations that does not belong to
us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks
even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance
underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however,
we’ve been profitable, and I expect we will average breakeven results or better in the future. If we do that,
our investments can be viewed as an unencumbered source of value for Berkshire shareholders.
Berkshire’s second component of value is earnings that come from sources other than investments
and insurance. These earnings are delivered by our 66 non-insurance companies, itemized on page 76. In
our early years, we focused on the investment side. During the past two decades, however, we have put
ever more emphasis on the development of earnings from non-insurance businesses.
The following tables illustrate this shift. In the first we tabulate per-share investments at 14-year
intervals. We exclude those applicable to minority interests.
Year
Per-Share
Investments Years
Compounded Annual
Gain in Per-Share Investments
1965 $ 4
1979 577 1965-1979 42.8%
1993 13,961 1979-1993 25.6%
2007 90,343 1993-2007 14.3%
For the entire 42 years, our compounded annual gain in per-share investments was 27.1%. But the
trend has been downward as we increasingly used our available funds to buy operating businesses.
Here’s the record on how earnings of our non-insurance businesses have grown, again on a pershare
basis and after applicable minority interests.
Year
Per Share
Pre-Tax Earnings Years
Compounded Annual Gain in Per-
Share Pre-Tax Earnings
1965 $ 4
1979 18 1965-1979 11.1%
1993 212 1979-1993 19.1%
2007 4,093 1993-2007 23.5%
For the entire period, the compounded annual gain was 17.8%, with gains accelerating as our
focus shifted.
Though these tables may help you gain historical perspective and be useful in valuation, they are
completely misleading in predicting future possibilities. Berkshire’s past record can’t be duplicated or
even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the
future.
Charlie Munger, my partner at Berkshire, and I will continue to measure our progress by the two
yardsticks I have just described and will regularly update you on the results. Though we can’t come close
to duplicating the past, we will do our best to make sure the future is not disappointing.
* * * * * * * * * * * *
In our efforts, we will be aided enormously by the managers who have joined Berkshire. This is
an unusual group in several ways. First, most of them have no financial need to work. Many sold us their
businesses for large sums and run them because they love doing so, not because they need the money.
Naturally they wish to be paid fairly, but money alone is not the reason they work hard and productively.
4
A second, somewhat related, point about these managers is that they have exactly the job they
want for the rest of their working years. At almost any other company, key managers below the top aspire
to keep climbing the pyramid. For them, the subsidiary or division they manage today is a way station – or
so they hope. Indeed, if they are in their present positions five years from now, they may well feel like
failures.
Conversely, our CEOs’ scorecards for success are not whether they obtain my job but instead are
the long-term performances of their businesses. Their decisions flow from a here-today, here-forever
mindset. I think our rare and hard-to-replicate managerial structure gives Berkshire a real advantage.
Acquisitions
Though our managers may be the best, we will need large and sensible acquisitions to get the
growth in operating earnings we wish. Here, we made little progress in 2007 until very late in the year.
Then, on Christmas day, Charlie and I finally earned our paychecks by contracting for the largest cash
purchase in Berkshire’s history.
The seeds of this transaction were planted in 1954. That fall, only three months into a new job, I
was sent by my employers, Ben Graham and Jerry Newman, to a shareholders’ meeting of Rockwood
Chocolate in Brooklyn. A young fellow had recently taken control of this company, a manufacturer of
assorted cocoa-based items. He had then initiated a one-of-a-kind tender, offering 80 pounds of cocoa
beans for each share of Rockwood stock. I described this transaction in a section of the 1988 annual report
that explained arbitrage. I also told you that Jay Pritzker – the young fellow mentioned above – was the
business genius behind this tax-efficient idea, the possibilities for which had escaped all the other experts
who had thought about buying Rockwood, including my bosses, Ben and Jerry.
At the meeting, Jay was friendly and gave me an education on the 1954 tax code. I came away
very impressed. Thereafter, I avidly followed Jay’s business dealings, which were many and brilliant. His
valued partner was his brother, Bob, who for nearly 50 years ran Marmon Group, the home for most of the
Pritzker businesses.
Jay died in 1999, and Bob retired early in 2002. Around then, the Pritzker family decided to
gradually sell or reorganize certain of its holdings, including Marmon, a company operating 125
businesses, managed through nine sectors. Marmon’s largest operation is Union Tank Car, which together
with a Canadian counterpart owns 94,000 rail cars that are leased to various shippers. The original cost of
this fleet is $5.1 billion. All told, Marmon has $7 billion in sales and about 20,000 employees.
We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six
years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula
tied to earnings. Prior to our entry into the picture, the Pritzker family received substantial consideration
from Marmon’s distribution of cash, investments and certain businesses.
This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s
financial statements, employing no advisors and engaging in no nit-picking. I knew that the business
would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however
chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed
entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
Marmon’s CEO, Frank Ptak, works closely with a long-time associate, John Nichols. John was
formerly the highly successful CEO of Illinois Tool Works (ITW), where he teamed with Frank to run a
mix of industrial businesses. Take a look at their ITW record; you’ll be impressed.
5
Byron Trott of Goldman Sachs – whose praises I sang in the 2003 report – facilitated the Marmon
transaction. Byron is the rare investment banker who puts himself in his client’s shoes. Charlie and I trust
him completely.
You’ll like the code name that Goldman Sachs assigned the deal. Marmon entered the auto
business in 1902 and exited it in 1933. Along the way it manufactured the Wasp, a car that won the first
Indianapolis 500 race, held in 1911. So this deal was labeled “Indy 500.”
* * * * * * * * * * * *
In May 2006, I spoke at a lunch at Ben Bridge, our Seattle-based jewelry chain. The audience was
a number of its vendors, among them Dennis Ulrich, owner of a company that manufactured gold jewelry.
In January 2007, Dennis called me, suggesting that with Berkshire’s support he could build a large
jewelry supplier. We soon made a deal for his business, simultaneously purchasing a supplier of about
equal size. The new company, Richline Group, has since made two smaller acquisitions. Even with those,
Richline is far below the earnings threshold we normally require for purchases. I’m willing to bet,
however, that Dennis – with the help of his partner, Dave Meleski – will build a large operation, earning
good returns on capital employed.
Businesses – The Great, the Good and the Gruesome
Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss
what we wish to avoid.
Charlie and I look for companies that have a) a business we understand; b) favorable long-term
economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole
business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t
available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket
purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
A truly great business must have an enduring “moat” that protects excellent returns on invested
capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost
producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American
Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.
Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and
continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes
investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.
Additionally, this criterion eliminates the business whose success depends on having a great
manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an
abundance of these managers. Their abilities have created billions of dollars of value that would never
have materialized if typical CEOs had been running their businesses.
But if a business requires a superstar to produce great results, the business itself cannot be deemed
great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing
earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You
can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.
6
Long-term competitive advantage in a stable industry is what we seek in a business. If that comes
with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will
simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no
rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly
great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large
portion of their earnings internally at high rates of return.
Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates
industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t
grow. Many once-important brands have disappeared, and only three companies have earned more than
token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues
from only a few states, accounts for nearly half of the entire industry’s earnings.
At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the
company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last
year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive
advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck
Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less
than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt
was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on
invested capital. Two factors helped to minimize the funds required for operations. First, the product was
sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was
short, which minimized inventories.
Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now
required to run the business is $40 million. This means we have had to reinvest only $32 million since
1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business.
In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has
been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we
have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led
to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command
to “be fruitful and multiply” is one we take seriously at Berkshire.)
There aren’t many See’s in Corporate America. Typically, companies that increase their earnings
from $5 million to $82 million require, say, $400 million or so of capital investment to finance their
growth. That’s because growing businesses have both working capital needs that increase in proportion to
sales growth and significant requirements for fixed asset investments.
A company that needs large increases in capital to engender its growth may well prove to be a
satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82
million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different
from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no
major capital requirements. Ask Microsoft or Google.
One example of good, but far from sensational, business economics is our own FlightSafety. This
company delivers benefits to its customers that are the equal of those delivered by any business that I know
of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the
best is like taking the low bid on a surgical procedure.
7
Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When
we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment
in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But
capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane
models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have
273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating
earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far
from See’s-like, return on our incremental investment of $509 million.
Consequently, if measured only by economic returns, FlightSafety is an excellent but not
extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For
example, our large investment in regulated utilities falls squarely in this category. We will earn
considerably more money in this business ten years from now, but we will invest many billions to make it.
Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires
significant capital to engender the growth, and then earns little or no money. Think airlines. Here a
durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a
farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by
shooting Orville down.
The airline industry’s demand for capital ever since that first flight has been insatiable. Investors
have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.
And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in
1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred
dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always
misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain.
In the decade following our sale, the company went bankrupt. Twice.
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high
interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be
earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate
and requires you to keep adding money at those disappointing returns.
* * * * * * * * * * * *
And now it’s confession time. It should be noted that no consultant, board of directors or
investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced
errors.
To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was
adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and
that $1.35 billion would have gone to somebody else.
About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting,
called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort
Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it.
I knew that TV stations were See’s-like businesses that required virtually no capital investment and had
excellent prospects for growth. They were simple to run and showered cash on their owners.
Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager
and outstanding human being. He knew the television business forward and backward and would not have
called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But
I didn’t listen.
8
In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the
deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now
has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had
gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once
described: “If his I.Q. was any lower, you would have to water him twice a day.”)
Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in
1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive
advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I
compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but
rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion
– to buy a worthless business.
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you
can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions:
“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

[ 本帖最后由 长白游人 于 2010-6-4 21:29 编辑 ]

长白游人

Now, let’s examine the four major operating sectors of Berkshire. Each sector has vastly different
balance sheet and income account characteristics. Therefore, lumping them together impedes analysis. So
we’ll present them as four separate businesses, which is how Charlie and I view them.
Insurance
The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney,
who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be
president?” To which she replied, “Honey, you weren’t in my wildest dreams.”
When we first entered the property/casualty insurance business in 1967, my wildest dreams did
not envision our current operation. Here’s how we did in the first five years after purchasing National
Indemnity:
Year Underwriting Profit (Loss) Float
(in millions)
1967 $ 0.4 $18.5
1968 0.6 21.3
1969 0.1 25.4
1970 (0.4) 39.4
1971 1.4 65.6
To put it charitably, we were a slow starter. But things changed. Here’s the record of the last five
years:
Year Underwriting Profit (Loss) Float
(in millions)
2003 $1,718 $44,220
2004 1,551 46,094
2005 53 49,287
2006 3,838 50,887
2007 3,374 58,698
This metamorphosis has been accomplished by some extraordinary managers. Let’s look at what
each has achieved.
9
• GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by
Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto
insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share
was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million
to $751 million during the same period.
Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company –
proud of how it could both save money for its customers and provide growth opportunities for its
associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I.
Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle
market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in
November we wrote our first commercial auto policy. GEICO and National Indemnity are
working together in the commercial field, and early results are very encouraging.
Even in aggregate, these lines will remain a small fraction of our personal auto volume.
Nevertheless, they should deliver a growing stream of underwriting profits and float.
• General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23
billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however,
had a shaky start.
For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills
and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I
completely missed when I made the decision in 1998 to merge with General Re. The General Re
of 1998 was not operated as the General Re of 1968 or 1978.
Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the
company has been restored. Joe and Tad have been running the business for six years and have
been doing first-class business in a first-class way, to use the words of J. P. Morgan. They have
restored discipline to underwriting, reserving and the selection of clients.
Their job was made more difficult by costly and time-consuming legacy problems, both in the
U.S. and abroad. Despite that diversion, Joe and Tad have delivered excellent underwriting results
while skillfully repositioning the company for the future.
• Since joining Berkshire in 1986, Ajit Jain has built a truly great specialty reinsurance operation
from scratch. For one-of-a-kind mammoth transactions, the world now turns to him.
Last year I told you in detail about the Equitas transfer of huge, but capped, liabilities to Berkshire
for a single premium of $7.1 billion. At this very early date, our experience has been good. But
this doesn’t tell us much because it’s just one straw in a fifty-year-or-more wind. What we know
for sure, however, is that the London team who joined us, headed by Scott Moser, is first-rate and
has become a valuable asset for our insurance business.
• Finally, we have our smaller operations, which serve specialized segments of the insurance
market. In aggregate, these companies have performed extraordinarily well, earning aboveaverage
underwriting profits and delivering valuable float for investment.
Last year BoatU.S., headed by Bill Oakerson, was added to the group. This company manages an
association of about 650,000 boat owners, providing them services similar to those offered by
AAA auto clubs to drivers. Among the association’s offerings is boat insurance. Learn more
about this operation by visiting its display at the annual meeting.
10
Below we show the record of our four categories of property/casualty insurance.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2007 2006 2007 2006
General Re ....................... $ 555 $ 526 $23,009 $22,827
BH Reinsurance ............... 1,427 1,658 23,692 16,860
GEICO ............................. 1,113 1,314 7,768 7,171
Other Primary................... 279 340* 4,229 4,029*
$3,374 $3,838 $58,698 $50,887
* Includes Applied Underwriters from May 19, 2006.
Regulated Utility Business
Berkshire has an 87.4% (diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.8 million electric customers make it the third largest distributor of electricity in the U.K.; (2)
MidAmerican Energy, which serves 720,000 electric customers, primarily in Iowa; (3) Pacific Power and
Rocky Mountain Power, serving about 1.7 million electric customers in six western states; and (4) Kern
River and Northern Natural pipelines, which carry about 8% of the natural gas consumed in the U.S.
Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave
Sokol and Greg Abel. It’s unimportant how many votes each party has; we make major moves only when
we are unanimous in thinking them wise. Eight years of working with Dave, Greg and Walter have
underscored my original belief: Berkshire couldn’t have better partners.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in
the U.S., HomeServices of America. This company operates through 20 locally-branded firms with 18,800
agents. Last year was a slow year for residential sales, and 2008 will probably be slower. We will
continue, however, to acquire quality brokerage operations when they are available at sensible prices.
Here are some key figures on MidAmerican’s operation:
Earnings (in millions)
2007 2006
U.K. utilities ....................................................................................................... $ 337 $ 338
Iowa utility ......................................................................................................... 412 348
Western utilities (acquired March 21, 2006) ..................................................... 692 356
Pipelines ............................................................................................................. 473 376
HomeServices..................................................................................................... 42 74
Other (net) .......................................................................................................... 130 245
Earnings before corporate interest and taxes ...................................................... 2,086 1,737
Interest, other than to Berkshire ......................................................................... (312) (261)
Interest on Berkshire junior debt ........................................................................ (108) (134)
Income tax .......................................................................................................... (477) (426)
Net earnings........................................................................................................ $ 1,189 $ 916
Earnings applicable to Berkshire*...................................................................... $ 1,114 $ 885
Debt owed to others............................................................................................ 19,002 16,946
Debt owed to Berkshire ...................................................................................... 821 1,055
*Includes interest earned by Berkshire (net of related income taxes) of $70 in 2007 and $87 in 2006.
11
We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in
which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business
was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several
days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s
offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to
$35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the
time, it hurt.
Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of
one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793
shares at $145 per share.
In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a
reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So
call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary
balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/07 (in millions)
Assets Liabilities and Equity
Cash and equivalents .............................. $ 2,080 Notes payable ............................ $ 1,278
Accounts and notes receivable ............... 4,488 Other current liabilities.............. 7,652
Inventory ................................................ 5,793 Total current liabilities .............. 8,930
Other current assets ................................ 470
Total current assets................................. 12,831
Goodwill and other intangibles............... 14,201 Deferred taxes............................ 828
Fixed assets............................................. 9,605 Term debt and other liabilities... 3,079
Other assets............................................. 1,685 Equity ........................................ 25,485
$38,322 $38,322
Earnings Statement (in millions)
2007 2006 2005
Revenues .................................................................................... $59,100 $52,660 $46,896
Operating expenses (including depreciation of $955 in 2007,
$823 in 2006 and $699 in 2005).......................................... 55,026 49,002 44,190
Interest expense .......................................................................... 127 132 83
Pre-tax earnings.......................................................................... 3,947* 3,526* 2,623*
Income taxes and minority interests ........................................... 1,594 1,395 977
Net income ................................................................................. $ 2,353 $ 2,131 $ 1,646
*Does not include purchase-accounting adjustments.
This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing
23% on average tangible net worth last year. It’s noteworthy also that these operations used only minor
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many
of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the
balance sheet – and that fact reduces the earnings on our average carrying value to 9.8%.
12
Here are a few newsworthy items about companies in this sector:
• Shaw, Acme Brick, Johns Manville and MiTek were all hurt in 2007 by the sharp housing
downturn, with their pre-tax earnings declining 27%, 41%, 38%, and 9% respectively. Overall,
these companies earned $941 million pre-tax compared to $1.296 billion in 2006.
Last year, Shaw, MiTek and Acme contracted for tuck-in acquisitions that will help future
earnings. You can be sure they will be looking for more of these.
• In a tough year for retailing, our standouts were See’s, Borsheims and Nebraska Furniture Mart.
Two years ago Brad Kinstler was made CEO of See’s. We very seldom move managers from one
industry to another at Berkshire. But we made an exception with Brad, who had previously run
our uniform company, Fechheimer, and Cypress Insurance. The move could not have worked out
better. In his two years, profits at See’s have increased more than 50%.
At Borsheims, sales increased 15.1%, helped by a 27% gain during Shareholder Weekend. Two
years ago, Susan Jacques suggested that we remodel and expand the store. I was skeptical, but
Susan was right.
Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a
managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the
business, and she loves her associates. That beats having an MBA degree any time.
(An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and
integrity. Another of our great managers is Cathy Baron Tamraz, who has significantly increased
Business Wire’s earnings since we purchased it early in 2006. She is an owner’s dream. It is
positively dangerous to stand between Cathy and a business prospect. Cathy, it should be noted,
began her career as a cab driver.)
Finally, at Nebraska Furniture Mart, earnings hit a record as our Omaha and Kansas City stores
each had sales of about $400 million. These, by some margin, are the two top home furnishings
stores in the country. In a disastrous year for many furniture retailers, sales at Kansas City
increased 8%, while in Omaha the gain was 6%.
Credit the remarkable Blumkin brothers, Ron and Irv, for this performance. Both are close
personal friends of mine and great businessmen.
• Iscar continues its wondrous ways. Its products are small carbide cutting tools that make large and
very expensive machine tools more productive. The raw material for carbide is tungsten, mined in
China. For many decades, Iscar moved tungsten to Israel, where brains turned it into something
far more valuable. Late in 2007, Iscar opened a large plant in Dalian, China. In effect, we’ve now
moved the brains to the tungsten. Major opportunities for growth await Iscar. Its management
team, led by Eitan Wertheimer, Jacob Harpaz, and Danny Goldman, is certain to make the most of
them.
• Flight services set a record in 2007 with pre-tax earnings increasing 49% to $547 million.
Corporate aviation had an extraordinary year worldwide, and both of our companies – as runaway
leaders in their fields – fully participated.
FlightSafety, our pilot training business, gained 14% in revenues and 20% in pre-tax earnings.
We estimate that we train about 58% of U.S. corporate pilots. Bruce Whitman, the company’s
CEO, inherited this leadership position in 2003 from Al Ueltschi, the father of advanced flight
training, and has proved to be a worthy successor.
13
At NetJets, the inventor of fractional-ownership of jets, we also remain the unchallenged leader.
We now operate 487 planes in the U.S. and 135 in Europe, a fleet more than twice the size of that
operated by our three major competitors combined. Because our share of the large-cabin market is
near 90%, our lead in value terms is far greater.
The NetJets brand – with its promise of safety, service and security – grows stronger every year.
Behind this is the passion of one man, Richard Santulli. If you were to pick someone to join you
in a foxhole, you couldn’t do better than Rich. No matter what the obstacles, he just doesn’t stop.
Europe is the best example of how Rich’s tenacity leads to success. For the first ten years we
made little financial progress there, actually running up cumulative losses of $212 million. After
Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we
have real momentum, and last year earnings tripled.
In November, our directors met at NetJets headquarters in Columbus and got a look at the
sophisticated operation there. It is responsible for 1,000 or so flights a day in all kinds of weather,
with customers expecting top-notch service. Our directors came away impressed by the facility
and its capabilities – but even more impressed by Rich and his associates.
Finance and Finance Products
Our major operation in this category is Clayton Homes, the largest U.S. manufacturer and
marketer of manufactured homes. Clayton’s market share hit a record 31% last year. But industry volume
continues to shrink: Last year, manufactured home sales were 96,000, down from 131,000 in 2003, the
year we bought Clayton. (At the time, it should be remembered, some commentators criticized its directors
for selling at a cyclical bottom.)
Though Clayton earns money from both manufacturing and retailing its homes, most of its
earnings come from an $11 billion loan portfolio, covering 300,000 borrowers. That’s why we include
Clayton’s operation in this finance section. Despite the many problems that surfaced during 2007 in real
estate finance, the Clayton portfolio is performing well. Delinquencies, foreclosures and losses during the
year were at rates similar to those we experienced in our previous years of ownership.
Clayton’s loan portfolio is financed by Berkshire. For this funding, we charge Clayton one
percentage point over Berkshire’s borrowing cost – a fee that amounted to $85 million last year. Clayton’s
2007 pre-tax earnings of $526 million are after its paying this fee. The flip side of this transaction is that
Berkshire recorded $85 million as income, which is included in “other” in the following table.
Pre-Tax Earnings
(in millions)
2007 2006
Trading – ordinary income............................. $ 272 $ 274
Life and annuity operation ............................ (60) 29
Leasing operations ........................................ 111 182
Manufactured-housing finance (Clayton)....... 526 513
Other............................................................... 157 159
Income before capital gains............................ 1,006 1,157
Trading – capital gains .................................. 105 938
$1,111 $2,095
The leasing operations tabulated are XTRA, which rents trailers, and CORT, which rents furniture.
Utilization of trailers was down considerably in 2007 and that led to a drop in earnings at XTRA. That
company also borrowed $400 million last year and distributed the proceeds to Berkshire. The resulting
higher interest it is now paying further reduced XTRA’s earnings.
14
Clayton, XTRA and CORT are all good businesses, very ably run by Kevin Clayton, Bill Franz
and Paul Arnold. Each has made tuck-in acquisitions during Berkshire’s ownership. More will come.
Investments
We show below our common stock investments at yearend, itemizing those with a market value of
at least $600 million.
12/31/07
Percentage of
Shares Company Company Owned Cost* Market
(in millions)
151,610,700 American Express Company ................... 13.1 $ 1,287 $ 7,887
35,563,200 Anheuser-Busch Companies, Inc............. 4.8 1,718 1,861
60,828,818 Burlington Northern Santa Fe.................. 17.5 4,731 5,063
200,000,000 The Coca-Cola Company ........................ 8.6 1,299 12,274
17,508,700 Conoco Phillips ....................................... 1.1 1,039 1,546
64,271,948 Johnson & Johnson.................................. 2.2 3,943 4,287
124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059
48,000,000 Moody’s Corporation .............................. 19.1 499 1,714
3,486,006 POSCO.................................................... 4.5 572 2,136
101,472,000 The Procter & Gamble Company ............ 3.3 1,030 7,450
17,170,953 Sanofi-Aventis......................................... 1.3 1,466 1,575
227,307,000 Tesco plc.................................................. 2.9 1,326 2,156
75,176,026 U.S. Bancorp ........................................... 4.4 2,417 2,386
17,072,192 USG Corp................................................ 17.2 536 611
19,944,300 Wal-Mart Stores, Inc. .............................. 0.5 942 948
1,727,765 The Washington Post Company .............. 18.2 11 1,367
303,407,068 Wells Fargo & Company......................... 9.2 6,677 9,160
1,724,200 White Mountains Insurance Group Ltd. .. 16.3 369 886
Others ...................................................... 5,238 7,633
Total Common Stocks ............................. $39,252 $74,999
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required.
Overall, we are delighted by the business performance of our investees. In 2007, American
Express, Coca-Cola and Procter & Gamble, three of our four largest holdings, increased per-share earnings
by 12%, 14% and 14%. The fourth, Wells Fargo, had a small decline in earnings because of the popping of
the real estate bubble. Nevertheless, I believe its intrinsic value increased, even if only by a minor amount.
In the strange world department, note that American Express and Wells Fargo were both
organized by Henry Wells and William Fargo, Amex in 1850 and Wells in 1852. P&G and Coke began
business in 1837 and 1886 respectively. Start-ups are not our game.
I should emphasize that we do not measure the progress of our investments by what their market
prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the
businesses we own. The first test is improvement in earnings, with our making due allowance for industry
conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities
they possess that make life difficult for their competitors – have widened during the year. All of the “big
four” scored positively on that test.
15
We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for
$488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the
company was worth about $100 billion. By 2007, two factors had materially increased its value: the price
of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas
reserves. In the second half of last year, the market value of the company rose to $275 billion, about what
we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion.
A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of
the U.S. government – defense, social security, you name it – for about four hours.
* * * * * * * * * * * *
Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few
left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories.
First, we have written 54 contracts that require us to make payments if certain bonds that are
included in various high-yield indices default. These contracts expire at various times from 2009 to 2013.
At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses;
and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7
billion.
We are certain to make many more payments. But I believe that on premium revenues alone,
these contracts will prove profitable, leaving aside what we can earn on the large sums we hold. Our
yearend liability for this exposure was recorded at $1.8 billion and is included in “Derivative Contract
Liabilities” on our balance sheet.
The second category of contracts involves various put options we have sold on four stock indices
(the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were
struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of
$4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between
2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a
level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate,
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
Two aspects of our derivative contracts are particularly important. First, in all cases we hold the
money, which means that we have no counterparty risk.
Second, accounting rules for our derivative contracts differ from those applying to our investment
portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance
sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a
derivative contract, however, must be applied each quarter to earnings.
Thus, our derivative positions will sometimes cause large swings in reported earnings, even
though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will
not be bothered by these swings – even though they could easily amount to $1 billion or more in a quarter –
and we hope you won’t be either. You will recall that in our catastrophe insurance business, we are always
ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the
long run. That is our philosophy in derivatives as well.
* * * * * * * * * * * *
The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why:
Americans like buying products made elsewhere more than the rest of the world likes buying products
made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the
rest of the world. And over time, that puts pressure on the dollar.
16
When the dollar falls, it both makes our products cheaper for foreigners to buy and their products
more expensive for U.S. citizens. That’s why a falling currency is supposed to cure a trade deficit. Indeed,
the U.S. deficit has undoubtedly been tempered by the large drop in the dollar. But ponder this: In 2002
when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was
$36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45
billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with
Canada rose as well, from $50 billion in 2002 to $64 billion in 2007. So far, at least, a plunging dollar has
not done much to bring our trade activity into balance.
There’s been much talk recently of sovereign wealth funds and how they are buying large pieces
of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade
equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest
of the world, they must invest in something here. Why should we complain when they choose stocks over
bonds?
Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed
countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible
trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take
actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both
our country and the rest of the world.
Our legislators should recognize, however, that the current imbalances are unsustainable and
should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2
billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant
sort. (For other comments about the unsustainability of our trade deficits, see Alan Greenspan’s comments
on November 19, 2004, the Federal Open Market Committee’s minutes of June 29, 2004, and Ben
Bernanke’s statement on September 11, 2007.)
* * * * * * * * * * * *
At Berkshire we held only one direct currency position during 2007. That was in – hold your
breath – the Brazilian real. Not long ago, swapping dollars for reals would have been unthinkable. After
all, during the past century five versions of Brazilian currency have, in effect, turned into confetti. As has
been true in many countries whose currencies have periodically withered and died, wealthy Brazilians
sometimes stashed large sums in the U.S. to preserve their wealth.
But any Brazilian who followed this apparently prudent course would have lost half his net worth
over the past five years. Here’s the year-by-year record (indexed) of the real versus the dollar from the end
of 2002 to yearend 2007: 100; 122; 133; 152; 166; 199. Every year the real went up and the dollar fell.
Moreover, during much of this period the Brazilian government was actually holding down the value of the
real and supporting our currency by buying dollars in the market.
Our direct currency positions have yielded $2.3 billion of pre-tax profits over the past five years,
and in addition we have profited by holding bonds of U.S. companies that are denominated in other
currencies. For example, in 2001 and 2002 we purchased

长白游人

巴菲特的股东信暂且转载至此，待通读3遍以上时再转载早年股东信。

下面是有关券商的评测：
佣金战之殇 低配为宜

时间：2010年06月05日 08:48:45 中财网

　　我们曾在前期的行业动态报告《佣金价格战正在进行时》中明确提示佣金率下滑带来的风险。时间过去近2个多月，我们观察到佣金率依然运行在下滑通道之中。由于预计全年日均股票交易量与去年持平，并无新增交易量来弥补佣金率预计下滑17%带来的损失，正所谓经纪业务"无量补价"。
　　首先，此轮调整导致交易量萎缩，预计全年交易量与上年持平；其次，佣金率仍处于下降通道中。我们预计全年佣金率同比下降17%；第三，经纪业务营业利润下降。经纪业务面临两大挑战：其一是佣金收入下降；其二是成本上升。新增网点增加固定成本投入，价格竞争拉升变动成本。二者共同作用，导致营业利润下降。利润对佣金率敏感度由高到低的大券商分别是华泰、光大、广发、海通、招商、中信。
　　从客户结构到竞争格局，中国大陆与台湾10年前证券行业发展颇具相似之处。台湾也曾采用过固定经纪佣金率（3％。）的模式，随后经历了弹性佣金率和自由化三个阶段。从台湾经验来判断，佣金价格战尚未停止。主要理由如下：首先，我们预计2010年毛佣金率1.09％。，仍比台湾（0.912％。）高出20%；第二，行业内并购整合尚未开始。台湾2001年前10大券商市场份额合计44%，2009年升至52%，价格战带来了行业集中度的提升。截至4月底，国内前10大券商市场份额合计41%，较2009年非但没有上升，反而下降。
　　考虑到2010年盈利依赖经纪业务的形势难以逆转，全年交易量同比持平，佣金率继续同比下滑17%，无量补价，我们建议证券行业低配，维持"中性"评级。如果有配置需求，建议关注中信、广发及广发系。中信证券考虑出售中信建投、华夏基金股权因素后，2010年PB1.88倍，具有相对估值优势。广发证券流通市值32亿元，是证券行业中最小的，盈利对佣金率的敏感性排名第4，具有灵活性的优势。另外，成大、敖东估值相对较低，影子股价值仍在，给予上述个股"谨慎推荐"。值得一提的是，有可能成为股价变化的催化因素有：政策放开带来创新业务突破，实现业务量增长；指数反弹、交易量上升、佣金率止跌。
　　

　 .证.券.时.报. .国.信.证.券

[ 本帖最后由 长白游人 于 2010-6-5 18:29 编辑 ]

长白游人

发改委急议水价市场化 铺路民资涉水http://www.sina.com.cn  2010年06月04日 22:38  华夏时报

　　本报记者 于华鹏 北京报道
　　新水务改革如火如荼，水价改革也进入日程。5月31日，国务院明确要求发改委、住建部、水利部和财政部四部委联合推进水价改革。这是继2002年水务市场化改革以来，水价市场化的正式提速。
　　据悉，为推进水价改革，发改委近期召集全国的供水公司与物价部门进行座谈。6月4日，《华夏时报》记者从知情人士处得知，水价市场化改革实际是为民资进入水务领域做铺垫。而对于下一步计划，发改委称将对酝酿提出的水价成本公开试点方案进行修改，并将在部分城市部署实施水价成本公开试点。
　　铺垫民资开闸涉水
　　水价市场化一直在提，但始终未有实质性进展。直到近期，发改委价格司召集全国的供水公司与物价部门进行座谈，研究推出水价市场化形成机制，才再一次将水价推向改革的风口浪尖。
　　据上述知情人士透露，这次座谈会提及的水价改革实际是为5月7日提出的《国务院关于鼓励和引导民间投资健康发展的若干意见》中鼓励民资进入水务领域进行铺路。
　　根据《意见》，将鼓励民间资本参与市政公用事业(1937.135,3.64,0.19%)建设，支持民间资本进入城市供水、供气、供热、污水和垃圾处理等领域。
　　“水务公司业绩亏损是一个普遍的共识，要民间资本进入就必须让其看到盈利的可能，所以意见中提到了必须加快推进市政公用产品价格和收费制度改革。”上述知情人士表示，“而对水价进行改革，必须实现水价的成本公开，实行市场与价格联动。”
　　当前，供水行业属于市政公用事业，水权为国有垄断，外资和民资介入多为BOT和TOT形式的特许经营，然而并不是所有垄断行业都有巨额利润，水务行业目前就多数亏损或盈利水平偏低。
　　据了解，2009年初，全国供水企业的亏损面达79%，实行企业化经营的污水处理企业亏损面达30%以上。
　　一位不愿具名的专家接受本报记者采访时分析称，输配成本是造成亏损的重头。“供水输配需要庞大的管网，而由其产生的输送线折旧、维护和跑冒滴漏等费用几乎占到运营成本的一半。其中跑冒滴漏造成的水损失多者多达运送量的40%，但这些费用应该由政府财政支出还是由用水人平摊一直很难厘定，一般情况是企业自行消化，这就造成了亏损。”
　　发改委急议水价市场化
　　不能打通水价市场化形成机制，完善水价成本监审和公开，就难以引入民资，这是相关部门必须正视的一个问题。
　　在近期国家发改委价格司召开的水价调整成本公开工作座谈会上，围绕水价市场化和成本公开的水价改革议题，来自全国的供水公司与物价部门进行了激辩。
　　据上述知情人士透露，当天上午，发改委价格司先与来自北京、上海、南京、郑州、深圳、贵阳、兰州等地区各地的水企进行了会谈，各地代表意见基本一致，在高度的价格管制下各地水务公司政策性亏损严重，不仅管网改造资金严重不足，资产的负债率也一路高企，企业融资也面临各种困难。“面对发改委提出的水价成本公开和推进水价市场化形成机制的方案，各地代表一致叫好。”
　　“但下午峰回路转，各地物价部门对于成本的公开却有不同意见。”上述知情人士表示，“地方物价部门的反对主要集中在水价成本中有些方面不适宜公开，比如一些不合理的费用分摊和转嫁等。”
　　对此，发改委认为：“要使价格调整更加顺利，没有一个好的定价机制不行，否则水务企业亏损严重，旗下上市公司融资也难以进行，下一步将研究推动水价市场化的形成机制。”
　　苏伊士环境亚洲首席执行官苏文晋对本报记者表示，水价市场化更有利于提高水质和服务。他称：“当前用水人对水质要求日益增加，政府对污水处理以及环境保护不断强调，水价的调整则包含了与此相关的费用。水价既不能造成居民的重负，同时也应确保水务服务的升级变革，这就需要水价市场化的形成机制出台。”
　　成本监审政策出台在即
　　水企与物价部门的意见不一，直接将水价改革的阻碍和争议指向了水价成本的公开，而从目前来看，若想水价成本实现透明，必须出台水价成本的监管法规。
　　“其实对企业供水的成本监审有专门办法和公式。”清华大学水业政策研究中心主任傅涛此前对本报记者表示，专门针对水价成本的《城市供水定价成本监审办法》早在2006年11月就开始征求意见，但至今还处于难产。
　　不过6月4日，发改委对于这份《办法》却表示出了少有的高调，不仅提出了下一步将对水价成本公开试点方案进行修改，并将在部分城市部署实施水价成本公开试点，而且表示“近期还对《办法》又作了修改，重点就城市供水定价成本的项目构成、监审原则、主要指标核定标准等作出原则规定，目前《办法》正在征求有关方面意见，待进一步论证完善后将尽快出台。”
　　言下之意，水价成本公开，《办法》出台近在咫尺。
　　“如果不把成本中不透明和不合理的成分晒出来，水企依旧是继续亏损，水价市场化根本无法进行。”北京国融大通咨询公司总经理李智慧对本报记者表示，当前水价成本主要包括原水成本、输配成本和污水处理成本。但在供水成本中，许多不合理的成分直接造成了水企亏损和水价普涨。
　　另外，上述知情人士还表示，水价完全市场化在世界上目前尚无先例，任何激进都可能导致价格失控，如果不加以重视和深度研究，将给水业带来始料未及的问题。
　　“理想状态是市民支付合理价格、供水企业提供优质服务、政府负责供水设施投资，并在供水企业因履行公用职能而发生政策性亏损时提供财政补贴。”李智慧表示，水价改革应以建立“水价与成本联动机制”为根本目标，从引进市场机制入手，抓好成本监审这个必要前提和法制保障。

[ 本帖最后由 长白游人 于 2010-6-6 06:34 编辑 ]

长白游人

水价今年确定调整 资源费可能从2毛涨到1元http://www.sina.com.cn  2010年06月02日 02:24  每日经济新闻

　　每经记者 宛霞 发自北京
　　伴随着天然气价改序幕的拉开，水价改革的准备工作也在悄悄而紧密地进行。日前《每日经济新闻》记者独家获悉，国家发改委价格司已经组织多轮水价调整内部会，推动各地水务企业按照市场化机制进行改革。
　　刚刚公布的2010年34项重点改革中，“深化水、电、燃油、天然气等资源性产品价格改革”将成为发改委今年的重点工作之一。在这一轮密集的调研中，有专家建议将水资源费的全国平均价由每立方米2毛提至1元。
　　发改委密集调研
　　近一段时间，发改委价格司展开了密集的水价调研。上月中旬，在昆明召开为期一周的座谈会前，国家发改委价格司在京召开座谈会，发改委在会上拿出了一份水价成本公开的办法征求各地意见。
　　事实证明，北京会议是在为推动水价市场化机制的形成“清扫障碍”。国融大通财务顾问公司总经理李智慧告诉《每日经济新闻》记者，2009年初，全国供水企业的亏损面达79%，实行企业化经营的污水处理企业亏损面达30%以上。
　　发改委价格司人士认为，水价调整前需建立一个合理的定价机制。否则水务企业亏损严重，旗下上市公司融资也难以进行。据悉，发改委认为，经过几年来的探索，水价改革模式已经成型，具备了在全国推广的条件。
　　两种改革模式
　　一位参加发改委昆明会议的人士告诉记者，自来水公司公开上市或将部分股权转让是目前比较被认可的两种改革模式。而曾在全国引发广泛争议的 “兰州水务改革”已经成为全国水务市场化改革的“标杆”。
　　在公用行业国企改制重组中，兰州供水集团股权合资经营项目颇受瞩目。所谓“兰州模式”，是指地方政府将水务公司股权高溢价卖给外国民营水务集团，在合同中注明城市水价与物价挂钩或者承诺公司盈利的改革模式。目前该模式已在数十个大中城市中实行。
　　全国工商联发布的公告指出：在政府定价的背景下，水业资产溢价是地方城市用以后预期的水价和水量收益进行的短期资产融资，因此，溢价的收益最终将进入消费者的支付体系中，结果，水价上涨不可避免。
　　专家建议从2毛提到1元
　　事实上，稳步推进水价改革已是国家发改委今年的重点工作之一。4月28日召开的国务院常务会议明确提出，“深化水、电、燃油、天然气等资源性产品价格改革”。而国家发改委此前亦预测，2010年二季度，水、电、油、天然气等价格将有一定幅度的上涨。
　　曾负责兰州水务改革项目的大岳咨询公司业务总监蔡建升分析认为，今年水价调整已经板上钉钉，但与天然气价改不同，目前全国大小水务公司众多，各地情况不同，国家难以给出统一的价改方案，需要各地引入合格的投资者。李智慧则表示，“新36条”为加快市政公用产品价格改革客观上创造了条件。
　　记者了解到，由于我国平均水资源费征收额度偏低，有关部门希望提高水资源费征收额度，既能够解决一部分以往水价偏低带来的“欠账”，又能更真实反映水作为一种稀缺资源的价值。据悉，地表水水资源费全国平均价为每立方米2毛，已有专家向发改委建议至少提升至1元。
　　统计显示，目前我国水价在家庭可支配收入中占据的比例非常低，在我国大多数中心城市，这一比例仅为1%，远远低于加拿大、挪威等国家2%~3%的比例。

[ 本帖最后由 长白游人 于 2010-6-6 06:49 编辑 ]

长白游人

Negative Reviews for Warren Buffett's Defense of Moody's to Crisis Commission
Published: Thursday, 3 Jun 2010 | 7:39 PM ET

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By: Alex Crippen
Executive Producer

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CNBC TV Warren Buffett is sworn in before testifying to the Financial Crisis Inquiry Commission in New York on June 2, 2010.

Warren Buffett is getting a lot of negative reviews for his appearance under subpoena yesterday (Wednesday) before the Financial Crisis Inquiry Commission.

In response to respectful, but pointed, questioning, Buffett argued that Moody's shouldn't bear all the blamefor giving favorable ratings to subprime mortgage loans that later went horribly bad, sparking the financial crisis we've all been living through these past few years.

Almost everyone, he said, believed at the time that housing prices couldn't crash.  "Look at me.  I was wrong on it too."

Buffett was there because his Berkshire Hathaway holding company is Moody's largest shareholder with a stake now, after months of selling, of about 13 percent, down from almost 20 percent a year ago.

After the hearing, panel Chairman Phil Angelides told Reuters, "I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture."

Warren Buffett to Panel: Moody's Doesn't Deserve All the Blame for Bubble Watch Buffett's testimony Warren Buffett to CNBC: Market Demands 'Brand Name' Credit Rating Agencies
• Read the CNBC interview transcript

Reuter's Felix Salmon writes that it was "arguably the single worst day of Buffett's life" from a PR standpoint.

Among other pans, Salmon cites Pragmatic Capitalism's criticism of Buffett's Moody's defense: "Angelides (and just about every other rational American) thinks the ratings agencies played a central role in misleading investors.  The fact is plain as day to anyone who doesn't own millions of dollars worth of their stock."

AP Warren Buffett testifying before the FCIC

Bond Girl writes on Self-Evident that "Buffett has gone from being the authority on value to defending some of the most dysfunctional and socially worthless elements of the global financial system. It’s funny how heroes end up cutting themselves down to size even when no one else can."

On Capital Gains and Games, Edmund Andrews calls Buffett's performance "shameful," adding that "I never thought I would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon."

Money Watch's John Keefe writes his criticism under the headline, "Warren Buffett Shows His True Colors: Green, and Uncooperative."

Kevin Hall of McClatchy Newspapers focused on one aspect of Buffett's testimony, reporting his assertion that he wasn't tipped off to problems with bonds highly rated by Moody's is a "direct contradiction" of email evidence "presented privately to the panel."

On Fox Business, Charlie Gasparino accuses Buffett of "defending the most corrupt business model in corporate America" (the people issuing the debt pay for that debt to be rated, creating a conflict of interest) just because Moody's was a good investment.

CNBC.com Senior Editor John Carney wrote on this site that "it would be unfair to Buffett to wonder if he is just talking his book here."  But he rejects Buffett's view that increased competition among credit rating agencies (by loosening government regulations that support a "duopoly" in the business) could result in more laxity in the ratings.  

Carney also highlights Buffett's statement to the Commission that he looks for misrated securities because "that will give us a chance to turn a profit if we disagree."

Carney's conclusion: "The same Buffett who profits from the duopoly status of the top ratings agencies also profits from the mistakes allowed to fester under our anti-competitive system. Perhaps we should think twice before anointing him our oracle when it comes to ratings agency reform."

Current stock prices:

Berkshire Class B: [BRK.B  70.19    -2.15  (-2.97%)
   ]

Berkshire Class A: [BRK.A  104950.0    -3530.00  (-3.25%)
   ]

Moody's: [MCO  18.89    -0.80  (-4.06%)
   ]

For more Buffett Watch updates follow alexcrippen on Twitter.

Email comments to buffettwatch@cnbc.com
© 2010 CNBC, Inc. All Rights Reserved

[ 本帖最后由 长白游人 于 2010-6-6 08:00 编辑 ]

长白游人

巴菲特还是股神,不会因此次听证而变化.风暴只是暂时的.

[ 本帖最后由 长白游人 于 2010-6-6 08:02 编辑 ]

长白游人

下面是一位网友的评论,比较中肯:

The_WB | Jun 4, 2010 12:52 PM  ET

Buffet was put into a no win situation which is why he didn't want to testify before Congress in the first place.

And he didn't defend Moody's so much as put things into perspective.

They were only part of the problem, he doesn't use Moody's ratings when buying debt, he is forced to pay them when Berkshire issues debt, they are a duopoly, competition won't necessarily improve laxity in ratings because firms might let things slide to get business, ...

He also can't go after one of the problems of the crisis - Congress. They controlled Fannie Mae and Freddie.

Not to mention Homeowners themselves for buying homes they couldn't afford in the first place.

He's right there were alot of people to blame besides Wall Street and Banks and mortage companies,...

And he can't do alot about warning them because no one who is "high on rising prices" likes to hear the party is going to end.

Congress only acts in the rear view mirror.

[ 本帖最后由 长白游人 于 2010-6-6 08:21 编辑 ]

长白游人

The 'Next' Warren Buffett on What He's Learned From the 'Current' Warren Buffett
Published: Friday, 14 May 2010 | 4:19 PM ET




By: Alex Crippen
Executive Producer

• 
  

MidAmerican Energy Holdings Chairman David Sokol, widely seen as a frontrunner to follow Warren Buffett at Berkshire Hathaway, talks about the key lesson he's learned from Buffett, in this excerpt from the new book Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett's Top Business Leaders by Ronald W. Chan.

During the late 1990s, a stock market bubble was in the making. In addition to Internet stocks, energy stocks also soared to sky-high levels. Hindsight has revealed that many of these companies were cooking the books and telling elaborate stories to investors. David, in contrast, had the self-discipline to remain calm and not make foolish investment decisions.

Being out of step with the times, however, has consequences. "We were by any measure a large company at that point," David explained. "We were generating solid profits every quarter, and we looked at our business in a risk-weighted way. Our stock was rising, but our peers were doubling and tripling theirs. Analysts became critical of us because our stock was lagging behind."

Stock analysts recommended that David adopt a more short-term perspective, complaining that the company's projects were too long-term oriented: "One analyst said to me that we needed more 'deal velocity.' He explained that our peers, including Enron, were making two to three deals a month, but we were only making one or two a year. In the end, I was just fed up."

By 1999, David could no longer bear the shortsighted nature of the investment community. His mounting frustration, and a family tragedy (his son, David Jr., had just succumbed to cancer), prompted David to consider ceasing to play the analysts' game by taking the company private. He set up a special board meeting to discuss the possible privatization of MidAmerican and carefully laid out his reasons for doing so.

"We came up with a leveraged-buyout plan in which the management team would take over the company with debt," David explained, "but this would naturally force us to break the company apart and hurt our employees. We did not want that, so I phoned Walter for advice. Coincidentally, he was with Warren Buffett in California at the time and said he'd ask Warren if he was interested."

MidAmerican Energy Holdings Chairman David Sokol

The following week, David, Scott, and Buffett met. After just an hour together, a deal was struck. On October 25, 1999, Buffett's Berkshire Hathaway announced the acquisition of MidAmerican Energy Holdings Company for $35.05 a share, valuing the company at roughly $2 billion.



"Selling MidAmerican to Berkshire Hathaway is the best decision I have ever made in my career," David exclaimed. "Dealing with the two most important men in Omaha – Walter Scott Jr. and Warren Buffett — I am constantly reminded of their business virtues."

Of Buffett, David said: "He has both breadth and depth of knowledge. He understands all sectors of business, and understands the logic behind each. Sometimes he sounds like he does not know much about the technical issues of a sector because he isn't actively engaged in it. But he actually knows a lot because he reads so much, and he has the ability to put all of his research and information together to come to rational decisions."

Having been associated with Buffett for over a decade now, David has become even more disciplined in his work: "What I have learned from Warren is that one should never bring emotion to a decision. Business decisions should always be based on facts, data, and circumstances. You can be an emotional person, but your business decisions must be based on fundamentals, because a business is only worth so much, and emotion can crowd out your business judgment. In Warren's words, 'you have to be disciplined enough not to swing at every pitch!'"

Ronald W. Chan is the Founder and CEO of Hong Kong's Chartwell Capital Limited

[ 本帖最后由 长白游人 于 2010-6-6 08:32 编辑 ]

长白游人

长白游人按: 巴菲特此次采访在前面的帖子(65楼) 里有文字实录,此为相关报道.
Warren Buffett to CNBC: Economy Showing Signs of 'Real Strength'
Published: Monday, 3 May 2010 | 8:41 AM ET


By: Alex Crippen
Executive Producer

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Warren Buffett tells CNBC the U.S. economy has started to show signs of "real strength" in March and April, and it's not just companies replenishing their inventories.

Buffett says there's been an increase in manufacturing activity and some improvement in consumer demand as people regain confidence.

"We're glad we have inventory because it's been flying out the door."

He says Berkshire Hathaway is a "net hiring" right now, and that's happening because there is renewed demand for the products its subsidiaries make.

Warren Buffett to CNBC: "I Don't See Problem" With Goldman's Abacus Deal
• Squawk Box Live Interview Transcript & Video

But he notes that Berkshire's residential housing businesses are lagging, due to a hangover of demand in that market.  He thinks that housing inventory will be gone within a year.


Buffett again warns that the U.S. government will need to reduce its enormous deficits and says the country faces potentially significant inflation in the years to come.

As for the national debt problems in Europe, Buffett says he doesn't know "how that will turn out" but it is an "interesting movie to watch."

Still, he says, "I don't like betting on the future purchasing power of any currency."

Buffett was interviewed live on Squawk Box by Becky Quick in a Burlington Northern dining car after this weekend's Berkshire Hathaway shareholders meeting drew over 40,000 people to Omaha.

[ 本帖最后由 长白游人 于 2010-6-6 10:19 编辑 ]

长白游人

Charlie Munger: Lehman Was the Worst, But 'Impressed' By Goldman's Blankfein
Published: Friday, 30 Apr 2010 | 2:39 PM ET

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By: Alex Crippen
Executive Producer




Charlie Munger tells CNBC that Lehman Brothers' behavior was the worst of the big Wall Street firms in recent years, and it "came right from the top."

By contrast, he says he's "favorably impressed" by Goldman Sachs chief Lloyd Blankfein. [GS  Loading...  
  
He does note, however, that Goldman did "participate with its industry in urging permissive rules for investment banking that I think were socially undesirable."

In a taped interview today with CNBC's Becky Quick, Munger says Lehman's Richard Fuld was guilty of "megalomania" and "isolation."  Lehman's spectacular collapse in September of 2008 helped deepen the credit crisis.

Munger, and his long-time partner Warren Buffett, will almost certainly get questions at tomorrow's shareholders meeting about Berkshire's 2008 investment of $5 billion in Goldman, in light of the SEC's accusations of fraud against the firm, and a related criminal investigation.

2010 CNBC, Inc. All Rights Reserved

[ 本帖最后由 长白游人 于 2010-6-6 11:21 编辑 ]