October 12, 2010

BERKSHIRE HATHAWAY letter to shareholders 1993

it's per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business.  Intrinsic value is a present-value estimate of the cash that can be taken out of a business during its remaining life

Coca-Cola and Gillette, both large holdings of ours, enjoyed
market price increases that dramatically outpaced their earnings

From 1991 to 1993, Coke and Gillette increased their annual
operating earnings per share by 38% and 37% respectively, but
their market prices moved up only 11% and 6%.  In other words,
the companies overperformed their stocks, a result that no doubt
partly reflects Wall Street's new apprehension about brand names.
Whatever the reason, what will count over time is the earnings
performance of these companies.

Coke went public in 1919 at $40 per share.  By the end of 1920 the market, coldly reevaluating Coke's future prospects, had battered the stock down
by more than 50%, to $19.50.  At yearend 1993, that single share,
with dividends reinvested, was worth more than $2.1 million.  As
Ben Graham said:  "In the short-run, the market is a voting
machine - reflecting a voter-registration test that requires only
money, not intelligence or emotional stability - but in the long-
run, the market is a weighing machine."

look-through earnings consist of: (1) the operating earnings reported in the previous section, plus; (2) the retained operating earnings of major 
investees that, under GAAP accounting, are not reflected in our 
profits, less; (3) an allowance for the tax that would be paid by 
Berkshire if these retained earnings of investees had instead been 
distributed to us.  The "operating earnings" of which we speak here 
exclude capital gains, special accounting items and major 
restructuring charges.
Employing data bases and statistical skills, these academics compute with precision the "beta" of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation.  In their hunger for a single statistic to measure 
risk, however, they forget a fundamental principle:  It is better 
to be approximately right than precisely wrong.

     In our opinion, the real risk that an investor must assess is
whether his aggregate after-tax receipts from an investment
(including those he receives on sale) will, over his prospective
holding period, give him at least as much purchasing power as he
had to begin with, plus a modest rate of interest on that initial

As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label:  "Competition may prove hazardous to human wealth."

The competitive strengths of a Coke or Gillette are obvious to 
even the casual observer of business.  Yet the beta of their stocks 
is similar to that of a great many run-of-the-mill companies who 
possess little or no competitive advantage.  Should we conclude 
from this similarity that the competitive strength of Coke and 
Gillette gains them nothing when business risk is being measured?  
Or should we conclude that the risk in owning a piece of a company 
- its stock - is somehow divorced from the long-term risk inherent 
in its business operations?  We believe neither conclusion makes 
sense and that equating beta with investment risk also makes no 
Another situation requiring wide diversification occurs when
an investor who does not understand the economics of specific
businesses nevertheless believes it in his interest to be a long-
term owner of American industry.  That investor should both own a
large number of equities and space out his purchases.  By
periodically investing in an index fund, for example, the know-
nothing investor can actually out-perform most investment
professionals.  Paradoxically, when "dumb" money acknowledges its
limitations, it ceases to be dumb.

     On the other hand, if you are a know-something investor, able
to understand business economics and to find five to ten sensibly-
priced companies that possess important long-term competitive
advantages, conventional diversification makes no sense for you. 

October 11, 2010

BERKSHIRE HATHAWAY letter to shareholders 1994

We define intrinsic value as the discounted value of the
cash that can be taken out of a business during its remaining
life. Anyone calculating intrinsic value necessarily comes up
with a highly subjective figure that will change both as
estimates of future cash flows are revised and as interest rates
move. Despite its fuzziness, however, intrinsic value is all-
important and is the only logical way to evaluate the relative
attractiveness of investments and businesses

The reasons for Ralph's success are not complicated. Ben
Graham taught me 45 years ago that in investing it is not
necessary to do extraordinary things to get extraordinary
results. In later life, I have been surprised to find that this
statement holds true in business management as well. What a
manager must do is handle the basics well and not get diverted.
That's precisely Ralph's formula. He establishes the right goals
and never forgets what he set out to do. On the personal side,
Ralph is a joy to work with. He's forthright about problems and
is self-confident without being self-important.

At bottom, we subscribe to Ronald Reagan's creed: "It's probably true that hard work never killed anyone, but I figure why take the chance."

Our investments continue to be few in number and simple in
concept: The truly big investment idea can usually be explained in
a short paragraph. We like a business with enduring competitive
advantages that is run by able and owner-oriented people. When
these attributes exist, and when we can make purchases at sensible
prices, it is hard to go wrong (a challenge we periodically manage
to overcome).

October 7, 2010

BERKSHIRE HATHAWAY letter to shareholders 1995

Even so, we do have a few advantages, perhaps the greatestbeing that we don't have a strategic plan.  Thus we feel no needto proceed in an ordained direction (a course leading almost invariably to silly purchase prices) but can instead simply
decide what makes sense for our owners.
 Talking to Time Magazine a few years back, Peter Drucker got to the heart of things:  "I will tell you a secret: Dealmaking
beats working.  Dealmaking is exciting and fun, and working is grubby.  Running anything is primarily an enormous amount of 
grubby detail work . . . dealmaking is romantic, sexy.  That's why you have deals that make no sense."

Retailing is a tough business.  During my investment career, I have watched a large number of retailers enjoy terrific growth 
and superb returns on equity for a period, and then suddenly nosedive, often all the way into bankruptcy.  This shooting-star 
phenomenon is far more common in retailing than it is in manufacturing or service businesses.  In part, this is because a 
retailer must stay smart, day after day.  Your competitor is always copying and then topping whatever you do.  Shoppers are 
meanwhile beckoned in every conceivable way to try a stream of new merchants.  In retailing, to coast is to fail.

Alas, I sold my entire GEICO position in 1952 for $15,259, primarily to switch into Western Insurance Securities.  This act 
of infidelity can partially be excused by the fact that Western was selling for slightly more than one times its current earnings, 
a p/e ratio that for some reason caught my eye.  But in the next 20 years, the GEICO stock I sold grew in value to about $1.3 
million, which taught me a lesson about the inadvisability of selling a stake in an identifiably-wonderful company.
Any company's level of profitability is determined by threeitems:  (1) what its assets earn; (2) what its liabilities cost;
and (3) its utilization of "leverage" - that is, the degree towhich its assets are funded by liabilities rather than by equity. 
Over the years, we have done well on Point 1, having produced highreturns on our assets.  But we have also benefitted greatly - to adegree that is not generally well-understood - because ourliabilities have cost us very little.  An important reason for thislow cost is that we have obtained float on very advantageous terms.
The same cannot be said by many other property and casualtyinsurers, who may generate plenty of float, but at a cost that
exceeds what the funds are worth to them.  In those circumstances,leverage becomes a disadvantage

Charlie and I have never had a conviction about the paper industry - actually, I can't remember ever owning the common stock 
of a paper producer in my 54 years of investing - so our choice in August was whether to sell in the market or to the company.  
Champion's management had always been candid and honorable in dealing with us and wished to repurchase common shares, so we 
offered our stock to the company.  Our Champion capital gain was moderate - about 19% after tax from a six-year investment - but the 
preferred delivered us a good after-tax dividend yield throughout our holding period.  (That said, many press accounts have 
overstated the after-tax yields earned by property-casualty insurance companies on dividends paid to them.  What the press has 
failed to take into account is a change in the tax law that took effect in 1987 and that significantly reduced the dividends 
received credit applicable to insurers.  For details, see our 1986 Annual Report.)

October 4, 2010

BERKSHIRE HATHAWAY letter to shareholders 1996

We issued stock in acquiring FlightSafety International and also sold new Class B shares.* 

In 1961, President Kennedy said that we should ask not what our 
country can do for us, but rather ask what we can do for our country.  Last 
year we decided to give his suggestion a try - and who says it never hurts 
to ask?  We were told to mail $860 million in income taxes to the U.S. 

When carried out capably, an investment strategy of that type will 
often result in its practitioner owning a few securities that will come 
to represent a very large portion of his portfolio.  This investor would 
get a similar result if he followed a policy of purchasing an interest 
in, say, 20% of the future earnings of a number of outstanding college 
basketball stars.  A handful of these would go on to achieve NBA stardom, 
and the investor's take from them would soon dominate his royalty stream. 
To suggest that this investor should sell off portions of his most 
successful investments simply because they have come to dominate his 
portfolio is akin to suggesting that the Bulls trade Michael Jordan 
because he has become so important to the team.
Let me add a few thoughts about your own investments.  Most 
investors, both institutional and individual, will find that the best way 
to own common stocks is through an index fund that charges minimal fees. 
Those following this path are sure to beat the net results (after fees 
and expenses) delivered by the great majority of investment 
     Should you choose, however, to construct your own portfolio, there 
are a few thoughts worth remembering.  Intelligent investing is not 
complex, though that is far from saying that it is easy.  What an 
investor needs is the ability to correctly evaluate selected businesses. 
Note that word "selected":  You don't have to be an expert on every 
company, or even many.  You only have to be able to evaluate companies 
within your circle of competence.  The size of that circle is not very 
important; knowing its boundaries, however, is vital.
     To invest successfully, you need not understand beta, efficient 
markets, modern portfolio theory, option pricing or emerging markets.  
You may, in fact, be better off knowing nothing of these.  That, of 
course, is not the prevailing view at most business schools, whose 
finance curriculum tends to be dominated by such subjects.  In our view, 
though, investment students need only two well-taught courses - How to 
Value a Business, and How to Think About Market Prices.
     Your goal as an investor should simply be to purchase, at a rational 
price, a part interest in an easily-understandable business whose 
earnings are virtually certain to be materially higher five, ten and 
twenty years from now.  Over time, you will find only a few companies 
that meet these standards - so when you see one that qualifies, you 
should buy a meaningful amount of stock.  You must also resist the 
temptation to stray from your guidelines:  If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.  
Put together a portfolio of companies whose aggregate earnings march 
upward over the years, and so also will the portfolio's market value.

BERKSHIRE HATHAWAY letter to shareholders 1997

In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices

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