巴菲特致股东的信1997.docx

巴菲特致股东的信19971997Chairman'sLetterTotheShareholdersofBerkshireHathawaylnc.:1.AllfiguresusedinthisreportapplytoBerkshire'sAshares,thesuccessortotheonlystockthatthecompanyhadoutstandingbefore1996.TheBshareshaveaneconomicinterestequalto130ththatoftheA.Givenourgainof34.1%,itistemptingtodeclarevictoryandmoveon.Butlastyear'sperformancewasnogreattriumph:Anyinvestorcanchalkuplargereturnswhenstockssoar,astheydidin1997.Inabullmarket,onemustavoidtheerrorofthepreeningduckthatquacksboastfullyafteratorrentialrainstorm,thinkingthatitspaddlingskillshavecausedittoriseintheworld.Aright-thinkingduckwouldinsteadcompareitspositionafterthedownpourtothatoftheotherducksonthepond.Sowhat'sourduckratingfor1997?Thetableonthefacingpageshowsthatthoughwepaddledfuriouslylastyear,passiveducksthatsimplyinvestedintheS&PIndexrosealmostasfastaswedid.Ourappraisalof1997'sperformance,then:Quack.Whenthemarketbooms,wetendtosufferincomparisonwiththeS&PIndex.TheIndexbearsnotaxcosts,nordomutualfunds,sincetheypassthroughalltaxliabilitiestotheirowners.Lastyear,ontheotherhand,Berkshirepaidoraccrued$4.2billionforfederalincometax,orabout18%ofourbeginningnetworth.BerkshireW川alwayshavecorporatetaxestopay,whichmeansitneedstoovercometheirdraginordertojustifyitsexistence.Obviously,CharlieMunger,Berkshire'sViceChairmanandmypartner,andIwon,tbeabletolickthathandicapeveryyear.ButweexpectovertimetomaintainamodestadvantageovertheIndex,andthatistheyardstickagainstwhichyoushouldmeasureus.WewillnotaskyoutoadoptthephilosophyoftheChicagoCubsfanwhoreactedtoastringoflacklusterseasonsbysaying,"Whygetupset?Everyonehasabadcenturynowandthen.',Gainsinbookvalueare,ofcourse,notthebottomlineatBerkshire.Whattrulycountsaregainsinper-shareintrinsicbusinessvalue.Ordinarily,though,thetwomeasurestendtomoveroughlyintandem,andin1997thatwasthecase:Ledbyablow-outperformanceatGEICO,Berkshire'sintrinsicvalue(whichfarexceedsbookvalue)grewatnearlythesamepaceasbookvalue.Formoreexplanationoftheterm,intrinsicvalue,youmaywishtorefertoourOwner'sManual,reprintedonpages62to71.Thismanualsetsforthourowner-relatedbusinessprinciples,informationthatisimportanttoallofBerkshire'sshareholders.Inourlasttwoannualreports,wefurnishedyouatablethatCharlieandIbelieveiscentraltoestimatingBerkshire'sintrinsicvalue.Intheupdatedversionofthattable,whichfollows,wetraceourtwokeycomponentsofvalue.Thefirstcolumnlistsourper-shareownershipofinvestments(includingcashandequivalents)andthesecondcolumnshowsourper-shareearningsfromBerkshire'soperatingbusinessesbeforetaxesandpurchase-accountingadjustments(discussedonpages69and70),butafterallinterestandcorporateexpenses.Thesecondcolumnexcludesalldividends,interestandcapitalgainsthatwerealizedfromtheinvestmentspresentedinthefirstcolumn.Ineffect,thecolumnsshowwhatBerkshirewouldlooklikewereitsplitintotwoparts,withoneentityholdingourinvestmentsandtheotheroperatingallofourbusinessesandbearingallcorporatecosts.Pre-taxEarningsPerShareYearInvestmentsPerShareExcludingAllIncomefromInvestments1967$41$1.09197737212.4419873,910108.14199738,043717.82Punditswhoignorewhatour38,000employeescontributetothecompany,andinsteadsimplyviewBerkshireasadefactoinvestmentcompany,shouldstudythefiguresinthesecondcolumn.Wemadeourfirstbusinessacquisitionin1967,andsincethenourpre-taxoperatingearningshavegrownfrom$1millionto$888million.Furthermore,asnoted,inthisexercisewehaveassignedallofBerkshire'scorporateexpenses-overheadof$6.6million,interestof$66.9millionandshareholdercontributionsof$15.4million-toourbusinessoperations,eventhoughaportionofthesecouldjustaswellhavebeenassignedtotheinvestmentside.Herearethegrowthratesofthetwosegmentsbydecade:Pre-taxEarningsPerShareInvestmentsExcludingAllIncomefromDeCadeEndinqPerShareInvestments197724.6%27.6%198726.5%24.1%199725.5%20.8%AnnualGrowthRate,1967-199725.6%24.2%During1997,bothpartsofourbusinessgrewatasatisfactoryrate,withinvestmentsincreasingby$9,543pershare,or33.5%,andoperatingearningsgrowingby$296.43pershare,or70.3%.Oneimportantcaveat:Becausewewereluckyinoursuper-catinsurancebusiness(tobediscussedlater)andbecauseGEICO,sunderwritinggainwaswellabovewhatwecanexpectinmostyears,our1997operatingearningsweremuchbetterthanweanticipatedandalsomorethanweexpectfor1998.Ourrateofprogressinbothinvestmentsandoperationsiscertaintofallinthefuture.Foranyonedeployingcapital,nothingrecedeslikesuccess.Myownhistorymakesthepoint:Backin1951,whenIwasattendingBenGraham'sclassatColumbia,anideagivingmea$10,000gainimprovedmyinvestmentperformancefortheyearbyafull100percentagepoints.Today,anideaproducinga$500millionpre-taxprofitforBerkshireaddsonepercentagepointtoourperformance.It'snowonderthatmyannualresultsinthe1950swerebetterbynearlythirtypercentagepointsthanmyannualgainsinanysubsequentdecade.Charlie'sexperiencewassimilar.Weweren,tsmarterthen,justsmaller.Atourpresentsize,anyperformancesuperiorityweachievewillbeminor.Wewillbehelped,however,bythefactthatthebusinessestowhichwehavealreadyallocatedcapital-bothoperatingsubsidiariesandcompaniesinwhichwearepassiveinvestors-havesplendidlong-termprospects.Wearealsoblessedwithamanagerialcorpsthatisunsurpassedinabilityandfocus.MostoftheseexecutivesarewealthyanddonotneedthepaytheyreceivefromBerkshiretomaintaintheirwayoflife.Theyaremotivatedbythejoyofaccomplishment,notbyfameorfortune.Thoughwearedelightedwithwhatweown,wearenotpleasedwithourprospectsforcommittingincomingfunds.Pricesarehighforbothbusinessesandstocks.Thatdoesnotmeanthatthepricesofeitherwillfall-wehaveabsolutelynoviewonthatmatter-butitdoesmeanthatwegetrelativelylittleinprospectiveearningswhenwecommitfreshmoney.Underthesecircumstances,wetrytoexertaTedWilliamskindofdiscipline.InhisbookTheScienceofHitting,Tedexplainsthathecarvedthestrikezoneinto77cells,eachthesizeofabaseball.Swingingonlyatballsinhis"best"cell,heknew,wouldallowhimtobat.400;reachingforballsinhis"worst"spot,thelowoutsidecornerofthestrikezone,wouldreducehimto.230.Inotherwords,waitingforthefatpitchwouldmeanatriptotheHallofFame;swingingindiscriminatelywouldmeanatickettotheminors.Iftheyareinthestrikezoneatall,thebusiness"pitches"wenowseearejustcatchingtheloweroutsidecorner.Ifweswing,wewillbelockedintolowreturns.Butifweletalloftoday'sballsgoby,therecanbenoassurancethatthenextonesweseewillbemoretoourliking.Perhapstheattractivepricesofthepastweretheaberrations,notthefullpricesoftoday.UnlikeTed,wecan'tbecalledoutifweresistthreepitchesthatarebarelyinthestrikezone;nevertheless,juststandingthere,dayafterday,withmybatonmyshoulderisnotmyideaoffun.UnconventionalCommitmentsWhenwecan'tfindourfavoritecommitment-awell-runandsensibly-pricedbusinesswithfineeconomics-weusuallyopttoputnewmoneyintoveryshort-terminstrumentsofthehighestquality.Sometimes,however,weventureelsewhere.Obviouslywebelievethatthealternativecommitmentswemakearemorelikelytoresultinprofitthanloss.Butwealsorealizethattheydonotofferthecertaintyofprofitthatexistsinawonderfulbusinesssecuredatanattractiveprice.Findingthatkindofopportunity,weRnowthatwearegoingtomakemoney-theonlyquestionbeingwhen.Withalternativeinvestments,wethinkthatwearegoingtomakemoney.Butwealsorecognizethatwewillsometimesrealizelosses,occasionallyofsubstantialsize.Wehadthreenon-traditionalpositionsatyearend.Thefirstwasderivativecontractsfor14.0millionbarrelsofoil,thatbeingwhatwasthenleftofa45.7millionbarrelpositionweestablishedin1994-95.Contractsfor31.7millionbarrelsweresettledin1995-97,andthesesupplieduswithapre-taxgainofabout$61.9million.Ourremainingcontractsexpireduring1998and1999.Inthese,wehadanunrealizedgainof$11.6millionatyearend.Accountingrulesrequirethatcommoditypositionsbecarriedatmarketvalue.Therefore,bothourannualandquarterlyfinancialstatementsreflectanyunrealizedgainorlossinthesecontracts.Whenweestablishedourcontracts,oilforfuturedeliveryseemedmodestlyunderpriced.Today,though,wehavenoopinionastoitsattractiveness.Oursecondnon-traditionalcommitmentisinsilver.Lastyear,wepurchased111.2millionounces.Markedtomarket,thatpositionproducedapre-taxgainof$97.4millionforusin1997.Inaway,thisisareturntothepastforme:Thirtyyearsago,IboughtsilverbecauseIanticipateditsdemonetizationbytheU.S.Government.Eversince,Ihavefollowedthemetal'sfundamentalsbutnotownedit.Inrecentyears,bullioninventorieshavefallenmaterially,andlastsummerCharlieandIconcludedthatahigherpricewouldbeneededtoestablishequilibriumbetweensupplyanddemand.Inflationexpectations,itshouldbenoted,playnopartinourcalculationofsilver,svalue.Finally,ourlargestnon-traditionalpositionatyearendwas$4.6billion,atamortizedcost,oflong-termzero-couponobligationsoftheU.S.Treasury.Thesesecuritiespaynointerest.Instead,theyprovidetheirholdersareturnbywayofthediscountatwhichtheyarepurchased,acharacteristicthatmakestheirmarketpricesmoverapidlywheninterestrateschange.Ifratesrise,youloseheavilywithzeros,andifratesfall,youmakeoutsizedgains.Sinceratesfellin1997,weendedtheyearwithanunrealizedpre-taxgainof$598.8millioninourzeros.Becausewecarrythesecuritiesatmarketvalue,thatgainisreflectedinyearendbookvalue.Inpurchasingzeros,ratherthanstayingwithcash-equivalents,werisklookingveryfoolish:Amacro-basedcommitmentsuchasthisneverhasanythingclosetoa100%probabilityofbeingsuccessful.However,youpayCharlieandmetouseourbestjudgment-nottoavoidembarrassment-andwewilloccasionallymakeanunconventionalmovewhenwebelievetheoddsfavorit.Trytothinkkindlyofuswhenweblowone.AlongwithPresidentClinton,wewillbefeelingyourpain:TheMungerfamilyhasmorethan90%ofitsnetworthinBerkshireandtheBuffettsmorethan99%.HowWeThinkAboutMarketFluctuationsAshortquiz:Ifyouplantoeathamburgersthroughoutyourlifeandarenotacattleproducer,shouldyouwishforhigherorlowerpricesforbeef?Likewise,ifyouaregoingtobuyacarfromtimetotimebutarenotanautomanufacturer,shouldyoupreferhigherorlowercarprices?Thesequestions,ofcourse,answerthemselves.Butnowforthefinalexam:Ifyouexpecttobeanetsaverduringthenextfiveyears,shouldyouhopeforahigherorlowerstockmarketduringthatperiod?Manyinvestorsgetthisonewrong.Eventhoughtheyaregoingtobenetbuyersofstocksformanyyearstocome,theyareelatedwhenstockpricesriseanddepressedwhentheyfall.Ineffect,theyrejoicebecausepriceshaverisenforthe"hamburgers"theywillsoonbebuying.Thisreactionmakesnosense.Onlythosewhowillbesellersofequitiesinthenearfutureshouldbehappyatseeingstocksrise.Prospectivepurchasersshouldmuchprefersinkingprices.ForshareholdersofBerkshirewhodonotexpecttosell,thechoiceisevenclearer.Tobeginwith,ourownersareautomaticallysavingeveniftheyspendeverydimetheypersonallyearn:Berkshire"saves"forthembyretainingallearnings,thereafterusingthesesavingstopurchasebusinessesandsecurities.Clearly,themorecheaplywemakethesebuys,themoreprofitableourowners'indirectsavingsprogramwillbe.Furthermore,throughBerkshireyouownmajorpositionsincompaniesthatconsistentlyrepurchasetheirshares.Thebenefitsthattheseprogramssupplyusgrowaspricesfall:Whenstockpricesarelow,thefundsthataninvesteespendsonrepurchasesincreaseourownershipofthatcompanybyagreateramountthanisthecasewhenpricesarehigher.Forexample,therepurchasesthatCoca-Cola,TheWashingtonPostandWellsFargomadeinpastyearsatverylowpricesbenefittedBerkshirefarmorethandotoday'srepurchases,madeatloftierprices.Attheendofeveryyear,about97%ofBerkshire'ssharesareheldbythesameinvestorswhoownedthematthestartoftheyear.Thatmakesthemsavers.Theyshouldthereforerejoicewhenmarketsdeclineandallowbothusandourinvesteestodeployfundsmoreadvantageously.Sosmilewhenyoureadaheadlinethatsays"Investorsloseasmarketfalls."Edititinyourmindto"D/sinvestorsloseasmarketfalls-butinvestorsgain."Thoughwritersoftenforgetthistruism,thereisabuyerforeverysellerandwhathurtsonenecessarilyhelpstheother.(Astheysayingolfmatches:"Everyputtmakessomeonehappy.")Wegainedenormouslyfromthelowpricesplacedonmanyequitiesandbusinessesinthe1970sand1980s.Marketsthatthenwerehostiletoinvestmenttransientswerefriendlytothosetakinguppermanentresidence.Inrecentyears,theactionswetookinthosedecadeshavebeenvalidated,butwehavefoundfewnewopportunities.Initsroleasacorporate"saver；'Berkshirecontinuallylooksforwaystosensiblydeploycapital,butitmaybesometimebeforewefindopportunitiesthatgetustrulyexcited.InsuranceOperations-OverviewWhatdoesexciteus,however,isourinsurancebusiness.GEICOisflying,andweexpectthatitwillcontinuetodoso.Beforeweexpoundonthat,though,let'sdiscuss"float"andhowtomeasureitscost.Unlessyouunderstandthissubject,itwillbeimpossibleforyoutomakeaninformedjudgmentaboutBerkshire'sintrinsicvalue.Tobeginwith,floatismoneyweholdbutdon'town.Inaninsuranceoperation,floatarisesbecausepremiumsarereceivedbeforelossesarepaid,anintervalthatsometimesextendsovermanyyears.Duringthattime,theinsurerinveststhemoney.Typically,thispleasantactivitycarrieswithitadownside:Thepremiumsthataninsurertakesinusuallydonotcoverthelossesandexpensesiteventuallymustpay.Thatleavesitrunningan"underwritingloss,"whichisthecostoffloat.Aninsurancebusinesshasvalueifitscostoffloatovertimeislessthanthecostthecompanywouldotherwiseincurtoobtainfunds.Butthebusinessisalemonifitscostoffloatishigherthanmarketratesformoney.Acautionisappropriatehere:Becauselosscostsmustbeestimated,insurershaveenormouslatitudeinfiguringtheirunderwritingresults,andthatmakesitverydifficultforinvestorstocalculateacompany'struecostoffloat.Estimatingerrors,usuallyinnocentbutsometimesnot,canbehuge.Theconsequencesofthesemiscalculationsflowdirectlyintoearnings.Anexperiencedobservercanusuallydetectlarge-scaleerrorsinreserving,butthegeneralpubliccantypicallydonomorethanacceptwhat,spresented,andattimesIhavebeenamazedbythenumbersthatbig-nameauditorshaveimplicitlyblessed.AsforBerkshire,CharlieandIattempttobeconservativeinpresentingitsunderwritingresultstoyou,becausewehavefoundthatvirtuallyallsurprisesininsuranceareunpleasantones.Asthenumbersinthefollowingtableshow,Berkshire'sinsurancebusinesshasbeenahugewinner.Forthetable,wehavecalculatedourfloat-whichwegenerateinlargeamountsrelativetoourpremiumvolume-byaddingnetlossreserves,lossadjustmentreserves,fundsheldunderreinsuranceassumedandunearnedpremiumreserves,andthensubtractingagentsbalances,prepaidacquisitioncosts,prepaidtaxesanddeferredchargesapplicabletoassumedreinsurance.Ourcostoffloatisdeterminedbyourunderwritinglossorprofit.Inthoseyearswhenwehavehadanunderwritingprofit,suchasthelastfive,ourcostoffloathasbeennegative.Ineffect,wehavebeenpaidforholdingmoney.19671968196919706.25%19711972197319748.13%19758.03%197619771978197919801981198210.64%198311.84%198411.58%19859.34%ZZOoo Ppp.3635rOooooo Pppppp33.8748.0644.2317.319.923.432.452.569.573.379.187.6102.6139.0190.4227.3237.0228.4220.6231.3253.2390.2less than zero5.50%less than zero5.90%less than zero6.79%1.14%less than zero5.81%less than zero5.82%less than zero7.27%9.30%less than zero7.30%less than zero7.97%less than zero8.93%less than zero10.08%less than zero11.94%less than zero13.61%12.96%9.77%14.64%18.98%11.34%(1)(