ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1984 was $152.6 million, or
$133 per share. This sounds pretty good but actually it’s
mediocre. Economic gains must be evaluated by comparison with
the capital that produces them. Our twenty-year compounded
annual gain in book value has been 22.1% (from $19.46 in 1964 to
$1108.77 in 1984), but our gain in 1984 was only 13.6%.
As we discussed last year, the gain in per-share intrinsic
business value is the economic measurement that really counts.
But calculations of intrinsic business value are subjective. In
our case, book value serves as a useful, although somewhat
understated, proxy. In my judgment, intrinsic business value and
book value increased during 1984 at about the same rate.
Using my academic voice, I have told you in the past of the
drag that a mushrooming capital base exerts upon rates of return.
Unfortunately, my academic voice is now giving way to a
reportorial voice. Our historical 22% rate is just that -
history. To earn even 15% annually over the next decade
(assuming we continue to follow our present dividend policy,
about which more will be said later in this letter) we would need
profits aggregating about $3.9 billion. Accomplishing this will
require a few big ideas - small ones just won’t do. Charlie
Munger, my partner in general management, and I do not have any
such ideas at present, but our experience has been that they pop
up occasionally. (How’s that for a strategic plan?)
Sources of Reported Earnings
The table on the following page shows the sources of
Berkshire’s reported earnings. Berkshire’s net ownership
interest in many of the constituent businesses changed at midyear
1983 when the Blue Chip merger took place. Because of these
changes, the first two columns of the table provide the best
measure of underlying business performance.
All of the significant gains and losses attributable to
unusual sales of assets by any of the business entities are
aggregated with securities transactions on the line near the
bottom of the table, and are not included in operating earnings.
(We regard any annual figure for realized capital gains or losses
as meaningless, but we regard the aggregate realized and
unrealized capital gains over a period of years as very
important.)
Furthermore, amortization of Goodwill is not charged against
the specific businesses but, for reasons outlined in the Appendix
to my letter in the 1983 annual report, is set forth as a
separate item.
(000s omitted)
----------------------------------------------------------
Net Earnings
Earnings Before Income Taxes After Tax
-------------------------------------- ------------------
Total Berkshire Share Berkshire Share
------------------ ------------------ ------------------
1984 1983 1984 1983 1984 1983
-------- -------- -------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............ $(48,060) $(33,872) $(48,060) $(33,872) $(25,955) $(18,400)
Net Investment Income ... 68,903 43,810 68,903 43,810 62,059 39,114
Buffalo News .............. 27,328 19,352 27,328 16,547 13,317 8,832
Nebraska Furniture Mart(1) 14,511 3,812 11,609 3,049 5,917 1,521
See’s Candies ............. 26,644 27,411 26,644 24,526 13,380 12,212
Associated Retail Stores .. (1,072) 697 (1,072) 697 (579) 355
Blue Chip Stamps(2) (1,843) (1,422) (1,843) (1,876) (899) (353)
Mutual Savings and Loan ... 1,456 (798) 1,166 (467) 3,151 1,917
Precision Steel ........... 4,092 3,241 3,278 2,102 1,696 1,136
Textiles .................. 418 (100) 418 (100) 226 (63)
Wesco Financial ........... 9,777 7,493 7,831 4,844 4,828 3,448
Amortization of Goodwill .. (1,434) (532) (1,434) (563) (1,434) (563)
Interest on Debt .......... (14,734) (15,104) (14,097) (13,844) (7,452) (7,346)
Shareholder-Designated
Contributions .......... (3,179) (3,066) (3,179) (3,066) (1,716) (1,656)
Other ..................... 4,932 10,121 4,529 9,623 3,476 8,490
-------- -------- -------- -------- -------- --------
Operating Earnings .......... 87,739 61,043 82,021 51,410 70,015 48,644
Special GEICO Distribution .. -- 19,575 -- 19,575 -- 18,224
Special Gen. Foods Distribution 8,111 -- 7,896 -- 7,294 --
Sales of securities and
unusual sales of assets .. 104,699 67,260 101,376 65,089 71,587 45,298
-------- -------- -------- -------- -------- --------
Total Earnings - all entities $200,549 $147,878 $191,293 $136,074 $148,896 $112,166
======== ======== ======== ======== ======== ========
(1) 1983 figures are those for October through December.
(2) 1984 and 1983 are not comparable; major assets were
transferred in the mid-year 1983 merger of Blue Chip Stamps.
Sharp-eyed shareholders will notice that the amount of the
special GEICO distribution and its location in the table have
been changed from the presentation of last year. Though they
reclassify and reduce “accounting” earnings, the changes are
entirely of form, not of substance. The story behind the
changes, however, is interesting.
As reported last year: (1) in mid-1983 GEICO made a tender
offer to buy its own shares; (2) at the same time, we agreed by
written contract to sell GEICO an amount of its shares that would
be proportionately related to the aggregate number of shares
GEICO repurchased via the tender from all other shareholders; (3)
at completion of the tender, we delivered 350,000 shares to
GEICO, received $21 million cash, and were left owning exactly
the same percentage of GEICO that we owned before the tender; (4)
GEICO’s transaction with us amounted to a proportionate
redemption, an opinion rendered us, without qualification, by a
leading law firm; (5) the Tax Code logically regards such
proportionate redemptions as substantially equivalent to
dividends and, therefore, the $21 million we received was taxed
at only the 6.9% inter-corporate dividend rate; (6) importantly,
that $21 million was far less than the previously-undistributed
earnings that had inured to our ownership in GEICO and, thus,
from the standpoint of economic substance, was in our view
equivalent to a dividend.
Because it was material and unusual, we highlighted the
GEICO distribution last year to you, both in the applicable
quarterly report and in this section of the annual report.
Additionally, we emphasized the transaction to our auditors,
Peat, Marwick, Mitchell & Co. Both the Omaha office of Peat
Marwick and the reviewing Chicago partner, without objection,
concurred with our dividend presentation.
In 1984, we had a virtually identical transaction with
General Foods. The only difference was that General Foods
repurchased its stock over a period of time in the open market,
whereas GEICO had made a “one-shot” tender offer. In the General
Foods case we sold to the company, on each day that it
repurchased shares, a quantity of shares that left our ownership
percentage precisely unchanged. Again our transaction was
pursuant to a written contract executed before repurchases began.
And again the money we received was far less than the retained
earnings that had inured to our ownership interest since our
purchase. Overall we received $21,843,601 in cash from General
Foods, and our ownership remained at exactly 8.75%.
At this point the New York office of Peat Marwick came into
the picture. Late in 1984 it indicated that it disagreed with
the conclusions of the firm’s Omaha office and Chicago reviewing
partner. The New York view was that the GEICO and General Foods
transactions should be treated as sales of stock by Berkshire
rather than as the receipt of dividends. Under this accounting
approach, a portion of the cost of our investment in the stock of
each company would be charged against the redemption payment and
any gain would be shown as a capital gain, not as dividend
income. This is an accounting approach only, having no bearing
on taxes: Peat Marwick agrees that the transactions were
dividends for IRS purposes.
We disagree with the New York position from both the
viewpoint of economic substance and proper accounting. But, to
avoid a qualified auditor’s opinion, we have adopted herein Peat
Marwick’s 1984 view and restated 1983 accordingly. None of this,
however, has any effect on intrinsic business value: our
ownership interests in GEICO and General Foods, our cash, our
taxes, and the market value and tax basis of our holdings all
remain the same.
This year we have again entered into a contract with General
Foods whereby we will sell them shares concurrently with open
market purchases that they make. The arrangement provides that
our ownership interest will remain unchanged at all times. By
keeping it so, we will insure ourselves dividend treatment for
tax purposes. In our view also, the economic substance of this
transaction again is the creation of dividend income. However,
we will account for the redemptions as sales of stock rather than
dividend income unless accounting rules are adopted that speak
directly to this point. We will continue to prominently identify
any such special transactions in our reports to you.
While we enjoy a low tax charge on these proportionate
redemptions, and have participated in several of them, we view
such repurchases as at least equally favorable for shareholders
who do not sell. When companies with outstanding businesses and
comfortable financial positions find their shares selling far
below intrinsic value in the marketplace, no alternative action
can benefit shareholders as surely as repurchases.
(Our endorsement of repurchases is limited to those dictated
by price/value relationships and does not extend to the
“greenmail” repurchase - a practice we find odious and repugnant.
In these transactions, two parties achieve their personal ends by
exploitation of an innocent and unconsulted third party. The
players are: (1) the “shareholder” extortionist who, even before
the ink on his stock certificate dries, delivers his “your-
money-or-your-life” message to managers; (2) the corporate
insiders who quickly seek peace at any price - as long as the
price is paid by someone else; and (3) the shareholders whose
money is used by (2) to make (1) go away. As the dust settles,
the mugging, transient shareholder gives his speech on “free
enterprise”, the muggee management gives its speech on “the best
interests of the company”, and the innocent shareholder standing
by mutely funds the payoff.)
The companies in which we have our largest investments have
all engaged in significant stock repurhases at times when wide
discrepancies existed between price and value. As shareholders,
we find this encouraging and rewarding for two important reasons
- one that is obvious, and one that is subtle and not always
understood. The obvious point involves basic arithmetic: major
repurchases at prices well below per-share intrinsic business
value immediately increase, in a highly significant way, that
value. When companies purchase their own stock, they often find
it easy to get $2 of present value for $1. Corporate acquisition
programs almost never do as well and, in a discouragingly large
number of cases, fail to get anything close to $1 of value for
each $1 expended.
The other benefit of repurchases is less subject to precise
measurement but can be fully as important over time. By making
repurchases when a company’s market value is well below its
business value, management clearly demonstrates that it is given
to actions that enhance the wealth of shareholders, rather than
to actions that expand management’s domain but that do nothing
for (or even harm) shareholders. Seeing this, shareholders and
potential shareholders increase their estimates of future returns
from the business. This upward revision, in turn, produces
market prices more in line with intrinsic business value. These
prices are entirely rational. Investors should pay more for a
business that is lodged in the hands of a manager with
demonstrated pro-shareholder leanings than for one in the hands
of a self-interested manager marching to a different drummer. (To
make the point extreme, how much would you pay to be a minority
shareholder of a company controlled by Robert Wesco?)
The key word is “demonstrated”. A manager who consistently
turns his back on repurchases, when these clearly are in the
interests of owners, reveals more than he knows of his
motivations. No matter how often or how eloquently he mouths
some public relations-inspired phrase such as “maximizing
shareholder wealth” (this season’s favorite), the market
correctly discounts assets lodged with him. His heart is not
listening to his mouth - and, after a while, neither will the
market.
We have prospered in a very major way - as have other
shareholders - by the large share repurchases of GEICO,
Washington Post, and General Foods, our three largest holdings.
(Exxon, in which we have our fourth largest holding, has also
wisely and aggressively repurchased shares but, in this case, we
have only recently established our position.) In each of these
companies, shareholders have had their interests in outstanding
businesses materially enhanced by repurchases made at bargain
prices. We feel very comfortable owning interests in businesses
such as these that offer excellent economics combined with
shareholder-conscious managements.
The following table shows our 1984 yearend net holdings in
marketable equities. All numbers exclude the interests
attributable to minority shareholders of Wesco and Nebraska
Furniture Mart.
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
690,975 Affiliated Publications, Inc. ....... $ 3,516 $ 32,908
740,400 American Broadcasting Companies, Inc. 44,416 46,738
3,895,710 Exxon Corporation ................... 173,401 175,307
4,047,191 General Foods Corporation ........... 149,870 226,137
6,850,000 GEICO Corporation ................... 45,713 397,300
2,379,200 Handy & Harman ...................... 27,318 38,662
818,872 Interpublic Group of Companies, Inc. 2,570 28,149
555,949 Northwest Industries 26,581 27,242
2,553,488 Time, Inc. .......................... 89,327 109,162
1,868,600 The Washington Post Company ......... 10,628 149,955
---------- ----------
$573,340 $1,231,560
All Other Common Stockholdings 11,634 37,326
---------- ----------
Total Common Stocks $584,974 $1,268,886
========== ==========
It’s been over ten years since it has been as difficult as
now to find equity investments that meet both our qualitative
standards and our quantitative standards of value versus price.
We try to avoid compromise of these standards, although we find
doing nothing the most difficult task of all. (One English
statesman attributed his country’s greatness in the nineteenth
century to a policy of “masterly inactivity”. This is a strategy
that is far easier for historians to commend than for
participants to follow.)
In addition to the figures supplied at the beginning of this
section, information regarding the businesses we own appears in
Management’s Discussion on pages 42-47. An amplified discussion
of Wesco’s businesses appears in Charlie Munger’s report on pages
50-59. You will find particularly interesting his comments about
conditions in the thrift industry. Our other major controlled
businesses are Nebraska Furniture Mart, See’s, Buffalo Evening
News, and the Insurance Group, to which we will give some special
attention here.
Nebraska Furniture Mart
Last year I introduced you to Mrs. B (Rose Blumkin) and her
family. I told you they were terrific, and I understated the
case. After another year of observing their remarkable talents
and character, I can honestly say that I never have seen a
managerial group that either functions or behaves better than the
Blumkin family.
Mrs. B, Chairman of the Board, is now 91, and recently was
quoted in the local newspaper as saying, “I come home to eat and
sleep, and that’s about it. I can’t wait until it gets daylight
so I can get back to the business”. Mrs. B is at the store seven
days a week, from opening to close, and probably makes more
decisions in a day than most CEOs do in a year (better ones,
too).
In May Mrs. B was granted an Honorary Doctorate in
Commercial Science by New York University. (She’s a “fast track”
student: not one day in her life was spent in a school room prior
to her receipt of the doctorate.) Previous recipients of honorary
degrees in business from NYU include Clifton Garvin, Jr., CEO of
Exxon Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary,
then CEO of IBM; Tom Murphy, then CEO of General Motors; and,
most recently, Paul Volcker. (They are in good company.)
The Blumkin blood did not run thin. Louie, Mrs. B’s son,
and his three boys, Ron, Irv, and Steve, all contribute in full
measure to NFM’s amazing success. The younger generation has
attended the best business school of them all - that conducted by
Mrs. B and Louie - and their training is evident in their
performance.
Last year NFM’s net sales increased by $14.3 million,
bringing the total to $115 million, all from the one store in
Omaha. That is by far the largest volume produced by a single
home furnishings store in the United States. In fact, the gain
in sales last year was itself greater than the annual volume of
many good-sized successful stores. The business achieves this
success because it deserves this success. A few figures will
tell you why.
In its fiscal 1984 10-K, the largest independent specialty
retailer of home furnishings in the country, Levitz Furniture,
described its prices as “generally lower than the prices charged
by conventional furniture stores in its trading area”. Levitz,
in that year, operated at a gross margin of 44.4% (that is, on
average, customers paid it $100 for merchandise that had cost it
$55.60 to buy). The gross margin at NFM is not much more than
half of that. NFM’s low mark-ups are possible because of its
exceptional efficiency: operating expenses (payroll, occupancy,
advertising, etc.) are about 16.5% of sales versus 35.6% at
Levitz.
None of this is in criticism of Levitz, which has a well-
managed operation. But the NFM operation is simply extraordinary
(and, remember, it all comes from a $500 investment by Mrs. B in
1937). By unparalleled efficiency and astute volume purchasing,
NFM is able to earn excellent returns on capital while saving its
customers at least $30 million annually from what, on average, it
would cost them to buy the same merchandise at stores maintaining
typical mark-ups. Such savings enable NFM to constantly widen
its geographical reach and thus to enjoy growth well beyond the
natural growth of the Omaha market.
I have been asked by a number of people just what secrets
the Blumkins bring to their business. These are not very
esoteric. All members of the family: (1) apply themselves with
an enthusiasm and energy that would make Ben Franklin and Horatio
Alger look like dropouts; (2) define with extraordinary realism
their area of special competence and act decisively on all
matters within it; (3) ignore even the most enticing propositions
failing outside of that area of special competence; and, (4)
unfailingly behave in a high-grade manner with everyone they deal
with. (Mrs. B boils it down to “sell cheap and tell the truth”.)
Our evaluation of the integrity of Mrs. B and her family was
demonstrated when we purchased 90% of the business: NFM had never
had an audit and we did not request one; we did not take an
inventory nor verify the receivables; we did not check property
titles. We gave Mrs. B a check for $55 million and she gave us
her word. That made for an even exchange.
You and I are fortunate to be in partnership with the
Blumkin family.
See’s Candy Shops, Inc.
Below is our usual recap of See’s performance since the time
of purchase by Blue Chip Stamps:
52-53 Week Year Operating Number of Number of
Ended About Sales Profits Pounds of Stores Open
December 31 Revenues After Taxes Candy Sold at Year End
------------------- ------------ ----------- ---------- -----------
1984 .............. $135,946,000 $13,380,000 24,759,000 214
1983 (53 weeks) ... 133,531,000 13,699,000 24,651,000 207
1982 .............. 123,662,000 11,875,000 24,216,000 202
1981 .............. 112,578,000 10,779,000 24,052,000 199
1980 .............. 97,715,000 7,547,000 24,065,000 191
1979 .............. 87,314,000 6,330,000 23,985,000 188
1978 .............. 73,653,000 6,178,000 22,407,000 182
1977 .............. 62,886,000 6,154,000 20,921,000 179
1976 (53 weeks) ... 56,333,000 5,569,000 20,553,000 173
1975 .............. 50,492,000 5,132,000 19,134,000 172
1974 .............. 41,248,000 3,021,000 17,883,000 170
1973 .............. 35,050,000 1,940,000 17,813,000 169
1972 .............. 31,337,000 2,083,000 16,954,000 167
This performance has not been produced by a generally rising
tide. To the contrary, many well-known participants in the
boxed-chocolate industry either have lost money in this same
period or have been marginally profitable. To our knowledge,
only one good-sized competitor has achieved high profitability.
The success of See’s reflects the combination of an exceptional
product and an exceptional manager, Chuck Huggins.
During 1984 we increased prices considerably less than has
been our practice in recent years: per-pound realization was
$5.49, up only 1.4% from 1983. Fortunately, we made good
progress on cost control, an area that has caused us problems in
recent years. Per-pound costs - other than those for raw
materials, a segment of expense largely outside of our control -
increased by only 2.2% last year.
Our cost-control problem has been exacerbated by the problem
of modestly declining volume (measured by pounds, not dollars) on
a same-store basis. Total pounds sold through shops in recent
years has been maintained at a roughly constant level only by the
net addition of a few shops annually. This more-shops-to-get-
the-same-volume situation naturally puts heavy pressure on per-
pound selling costs.
In 1984, same-store volume declined 1.1%. Total shop volume,
however, grew 0.6% because of an increase in stores. (Both
percentages are adjusted to compensate for a 53-week fiscal year
in 1983.)
See’s business tends to get a bit more seasonal each year.
In the four weeks prior to Christmas, we do 40% of the year’s
volume and earn about 75% of the year’s profits. We also earn
significant sums in the Easter and Valentine’s Day periods, but
pretty much tread water the rest of the year. In recent years,
shop volume at Christmas has grown in relative importance, and so
have quantity orders and mail orders. The increased
concentration of business in the Christmas period produces a
multitude of managerial problems, all of which have been handled
by Chuck and his associates with exceptional skill and grace.
Their solutions have in no way involved compromises in
either quality of service or quality of product. Most of our
larger competitors could not say the same. Though faced with
somewhat less extreme peaks and valleys in demand than we, they
add preservatives or freeze the finished product in order to
smooth the production cycle and thereby lower unit costs. We
reject such techniques, opting, in effect, for production
headaches rather than product modification.
Our mall stores face a host of new food and snack vendors
that provide particularly strong competition at non-holiday
periods. We need new products to fight back and during 1984 we
introduced six candy bars that, overall, met with a good
reception. Further product introductions are planned.
In 1985 we will intensify our efforts to keep per-pound cost
increases below the rate of inflation. Continued success in
these efforts, however, will require gains in same-store
poundage. Prices in 1985 should average 6% - 7% above those of
1984. Assuming no change in same-store volume, profits should
show a moderate gain.
Buffalo Evening News
Profits at the News in 1984 were considerably greater than
we expected. As at See’s, excellent progress was made in
controlling costs. Excluding hours worked in the newsroom, total
hours worked decreased by about 2.8%. With this productivity
improvement, overall costs increased only 4.9%. This performance
by Stan Lipsey and his management team was one of the best in the
industry.
However, we now face an acceleration in costs. In mid-1984
we entered into new multi-year union contracts that provided for
a large “catch-up” wage increase. This catch-up is entirely
appropriate: the cooperative spirit of our unions during the
unprofitable 1977-1982 period was an important factor in our
success in remaining cost competitive with The Courier-Express.
Had we not kept costs down, the outcome of that struggle might
well have been different.
Because our new union contracts took effect at varying
dates, little of the catch-up increase was reflected in our 1984
costs. But the increase will be almost totally effective in 1985
and, therefore, our unit labor costs will rise this year at a
rate considerably greater than that of the industry. We expect
to mitigate this increase by continued small gains in
productivity, but we cannot avoid significantly higher wage costs
this year. Newsprint price trends also are less favorable now
than they were in 1984. Primarily because of these two factors,
we expect at least a minor contraction in margins at the News.
Working in our favor at the News are two factors of major
economic importance:
(1) Our circulation is concentrated to an unusual degree
in the area of maximum utility to our advertisers.
“Regional” newspapers with wide-ranging circulation, on
the other hand, have a significant portion of their
circulation in areas that are of negligible utility to
most advertisers. A subscriber several hundred miles
away is not much of a prospect for the puppy you are
offering to sell via a classified ad - nor for the
grocer with stores only in the metropolitan area.
“Wasted” circulation - as the advertisers call it -
hurts profitability: expenses of a newspaper are
determined largely by gross circulation while
advertising revenues (usually 70% - 80% of total
revenues) are responsive only to useful circulation;
(2) Our penetration of the Buffalo retail market is
exceptional; advertisers can reach almost all of their
potential customers using only the News.
Last year I told you about this unusual reader acceptance:
among the 100 largest newspapers in the country, we were then
number one, daily, and number three, Sunday, in penetration. The
most recent figures show us number one in penetration on weekdays
and number two on Sunday. (Even so, the number of households in
Buffalo has declined, so our current weekday circulation is down
slightly; on Sundays it is unchanged.)
I told you also that one of the major reasons for this
unusual acceptance by readers was the unusual quantity of news
that we delivered to them: a greater percentage of our paper is
devoted to news than is the case at any other dominant paper in
our size range. In 1984 our “news hole” ratio was 50.9%, (versus
50.4% in 1983), a level far above the typical 35% - 40%. We will
continue to maintain this ratio in the 50% area. Also, though we
last year reduced total hours worked in other departments, we
maintained the level of employment in the newsroom and, again,
will continue to do so. Newsroom costs advanced 9.1% in 1984, a
rise far exceeding our overall cost increase of 4.9%.
Our news hole policy costs us significant extra money for
newsprint. As a result, our news costs (newsprint for the news
hole plus payroll and expenses of the newsroom) as a percentage
of revenue run higher than those of most dominant papers of our
size. There is adequate room, however, for our paper or any
other dominant paper to sustain these costs: the difference
between “high” and “low” news costs at papers of comparable size
runs perhaps three percentage points while pre-tax profit margins
are often ten times that amount.
The economics of a dominant newspaper are excellent, among
the very best in the business world. Owners, naturally, would
like to believe that their wonderful profitability is achieved
only because they unfailingly turn out a wonderful product. That
comfortable theory wilts before an uncomfortable fact. While
first-class newspapers make excellent profits, the profits of
third-rate papers are as good or better - as long as either class
of paper is dominant within its community. Of course, product
quality may have been crucial to the paper in achieving
dominance. We believe this was the case at the News, in very
large part because of people such as Alfred Kirchhofer who
preceded us.
Once dominant, the newspaper itself, not the marketplace,
determines just how good or how bad the paper will be. Good or
bad, it will prosper. That is not true of most businesses:
inferior quality generally produces inferior economics. But even
a poor newspaper is a bargain to most citizens simply because of
its “bulletin board” value. Other things being equal, a poor
product will not achieve quite the level of readership achieved
by a first-class product. A poor product, however, will still
remain essential to most citizens, and what commands their
attention will command the attention of advertisers.
Since high standards are not imposed by the marketplace,
management must impose its own. Our commitment to an above-
average expenditure for news represents an important quantitative
standard. We have confidence that Stan Lipsey and Murray Light
will continue to apply the far-more important qualitative
standards. Charlie and I believe that newspapers are very
special institutions in society. We are proud of the News, and
intend an even greater pride to be justified in the years ahead.
Insurance Operations
Shown below is an updated version of our usual table listing
two key figures for the insurance industry:
Yearly Change Combined Ratio
in Premiums after Policy-holder
Written (%) Dividends
------------- -------------------
1972 .............................. 10.2 96.2
1973 .............................. 8.0 99.2
1974 .............................. 6.2 105.4
1975 .............................. 11.0 107.9
1976 .............................. 21.9 102.4
1977 .............................. 19.8 97.2
1978 .............................. 12.8 97.5
1979 .............................. 10.3 100.6
1980 .............................. 6.0 103.1
1981 .............................. 3.9 106.0
1982 .............................. 4.4 109.7
1983 (Revised) .................... 4.5 111.9
1984 (Estimated) .................. 8.1 117.7
Source: Best’s Aggregates and Averages
Best’s data reflect the experience of practically the entire
industry, including stock, mutual, and reciprocal companies. The
combined ratio represents total insurance costs (losses incurred
plus expenses) compared to revenue from premiums; a ratio below
100 indicates an underwriting profit, and one above 100 indicates
a loss.
For a number of years, we have told you that an annual
increase by the industry of about 10% per year in premiums
written is necessary for the combined ratio to remain roughly
unchanged. We assumed in making that assertion that expenses as
a percentage of premium volume would stay relatively stable and
that losses would grow at about 10% annually because of the
combined influence of unit volume increases, inflation, and
judicial rulings that expand what is covered by the insurance
policy.
Our opinion is proving dismayingly accurate: a premium
increase of 10% per year since 1979 would have produced an
aggregate increase through 1984 of 61% and a combined ratio in
1984 almost identical to the 100.6 of 1979. Instead, the
industry had only a 30% increase in premiums and a 1984 combined
ratio of 117.7. Today, we continue to believe that the key index
to the trend of underwriting profitability is the year-to-year
percentage change in industry premium volume.
It now appears that premium volume in 1985 will grow well
over 10%. Therefore, assuming that catastrophes are at a
“normal” level, we would expect the combined ratio to begin
easing downward toward the end of the year. However, under our
industrywide loss assumptions (i.e., increases of 10% annually),
five years of 15%-per-year increases in premiums would be
required to get the combined ratio back to 100. This would mean
a doubling of industry volume by 1989, an outcome that seems
highly unlikely to us. Instead, we expect several years of
premium gains somewhat above the 10% level, followed by highly-
competitive pricing that generally will produce combined ratios
in the 108-113 range.
Our own combined ratio in 1984 was a humbling 134. (Here, as
throughout this report, we exclude structured settlements and the
assumption of loss reserves in reporting this ratio. Much
additional detail, including the effect of discontinued
operations on the ratio, appears on pages 42-43). This is the
third year in a row that our underwriting performance has been
far poorer than that of the industry. We expect an improvement
in the combined ratio in 1985, and also expect our improvement to
be substantially greater than that of the industry. Mike
Goldberg has corrected many of the mistakes I made before he took
over insurance operations. Moreover, our business is
concentrated in lines that have experienced poorer-than-average
results during the past several years, and that circumstance has
begun to subdue many of our competitors and even eliminate some.
With the competition shaken, we were able during the last half of
1984 to raise prices significantly in certain important lines
with little loss of business.
For some years I have told you that there could be a day
coming when our premier financial strength would make a real
difference in the competitive position of our insurance
operation. That day may have arrived. We are almost without
question the strongest property/casualty insurance operation in
the country, with a capital position far superior to that of
well-known companies of much greater size.
Equally important, our corporate policy is to retain that
superiority. The buyer of insurance receives only a promise in
exchange for his cash. The value of that promise should be
appraised against the possibility of adversity, not prosperity.
At a minimum, the promise should appear able to withstand a
prolonged combination of depressed financial markets and
exceptionally unfavorable underwriting results. Our insurance
subsidiaries are both willing and able to keep their promises in
any such environment - and not too many other companies clearly
are.
Our financial strength is a particular asset in the business
of structured settlements and loss reserve assumptions that we
reported on last year. The claimant in a structured settlement
and the insurance company that has reinsured loss reserves need
to be completely confident that payments will be forthcoming for
decades to come. Very few companies in the property/casualty
field can meet this test of unquestioned long-term strength. (In
fact, only a handful of companies exists with which we will
reinsure our own liabilities.)
We have grown in these new lines of business: funds that we
hold to offset assumed liabilities grew from $16.2 million to
$30.6 million during the year. We expect growth to continue and
perhaps to greatly accelerate. To support this projected growth
we have added substantially to the capital of Columbia Insurance
Company, our reinsurance unit specializing in structured
settlements and loss reserve assumptions. While these businesses
are very competitive, returns should be satisfactory.
At GEICO the news, as usual, is mostly good. That company
achieved excellent unit growth in its primary insurance business
during 1984, and the performance of its investment portfolio
continued to be extraordinary. Though underwriting results
deteriorated late in the year, they still remain far better than
those of the industry. Our ownership in GEICO at yearend
amounted to 36% and thus our interest in their direct
property/casualty volume of $885 million amounted to $320
million, or well over double our own premium volume.
I have reported to you in the past few years that the
performance of GEICO’s stock has considerably exceeded that
company’s business performance, brilliant as the latter has been.
In those years, the carrying value of our GEICO investment on our
balance sheet grew at a rate greater than the growth in GEICO’s
intrinsic business value. I warned you that over performance by
the stock relative to the performance of the business obviously
could not occur every year, and that in some years the stock must
under perform the business. In 1984 that occurred and the
carrying value of our interest in GEICO changed hardly at all,
while the intrinsic business value of that interest increased
substantially. Since 27% of Berkshire’s net worth at the
beginning of 1984 was represented by GEICO, its static market
value had a significant impact upon our rate of gain for the
year. We are not at all unhappy with such a result: we would far
rather have the business value of GEICO increase by X during the
year, while market value decreases, than have the intrinsic value
increase by only 1/2 X with market value soaring. In GEICO’s
case, as in all of our investments, we look to business
performance, not market performance. If we are correct in
expectations regarding the business, the market eventually will
follow along.
You, as shareholders of Berkshire, have benefited in
enormous measure from the talents of GEICO’s Jack Byrne, Bill
Snyder, and Lou Simpson. In its core business - low-cost auto
and homeowners insurance - GEICO has a major, sustainable
competitive advantage. That is a rare asset in business
generally, and it’s almost non-existent in the field of financial
services. (GEICO, itself, illustrates this point: despite the
company’s excellent management, superior profitability has eluded
GEICO in all endeavors other than its core business.) In a large
industry, a competitive advantage such as GEICO’s provides the
potential for unusual economic rewards, and Jack and Bill
continue to exhibit great skill in realizing that potential.
Most of the funds generated by GEICO’s core insurance
operation are made available to Lou for investment. Lou has the
rare combination of temperamental and intellectual
characteristics that produce outstanding long-term investment
performance. Operating with below-average risk, he has generated
returns that have been by far the best in the insurance industry.
I applaud and appreciate the efforts and talents of these three
outstanding managers.
Errors in Loss Reserving
Any shareholder in a company with important interests in the
property/casualty insurance business should have some
understanding of the weaknesses inherent in the reporting of
current earnings in that industry. Phil Graham, when publisher
of the Washington Post, described the daily newspaper as “a first
rough draft of history”. Unfortunately, the financial statements
of a property/casualty insurer provide, at best, only a first
rough draft of earnings and financial condition.
The determination of costs is the main problem. Most of an
insurer’s costs result from losses on claims, and many of the
losses that should be charged against the current year’s revenue
are exceptionally difficult to estimate. Sometimes the extent of
these losses, or even their existence, is not known for decades.
The loss expense charged in a property/casualty company’s
current income statement represents: (1) losses that occurred and
were paid during the year; (2) estimates for losses that occurred
and were reported to the insurer during the year, but which have
yet to be settled; (3) estimates of ultimate dollar costs for
losses that occurred during the year but of which the insurer is
unaware (termed “IBNR”: incurred but not reported); and (4) the
net effect of revisions this year of similar estimates for (2)
and (3) made in past years.
Such revisions may be long delayed, but eventually any
estimate of losses that causes the income for year X to be
misstated must be corrected, whether it is in year X + 1, or
X + 10. This, perforce, means that earnings in the year of
correction also are misstated. For example, assume a claimant
was injured by one of our insureds in 1979 and we thought a
settlement was likely to be made for $10,000. That year we would
have charged $10,000 to our earnings statement for the estimated
cost of the loss and, correspondingly, set up a liability reserve
on the balance sheet for that amount. If we settled the claim in
1984 for $100,000, we would charge earnings with a loss cost of
$90,000 in 1984, although that cost was truly an expense of 1979.
And if that piece of business was our only activity in 1979, we
would have badly misled ourselves as to costs, and you as to
earnings.
The necessarily-extensive use of estimates in assembling the
figures that appear in such deceptively precise form in the
income statement of property/casualty companies means that some
error must seep in, no matter how proper the intentions of
management. In an attempt to minimize error, most insurers use
various statistical techniques to adjust the thousands of
individual loss evaluations (called case reserves) that comprise
the raw data for estimation of aggregate liabilities. The extra
reserves created by these adjustments are variously labeled
“bulk”, “development”, or “supplemental” reserves. The goal of
the adjustments should be a loss-reserve total that has a 50-50
chance of being proved either slightly too high or slightly too
low when all losses that occurred prior to the date of the
financial statement are ultimately paid.
At Berkshire, we have added what we thought were appropriate
supplemental reserves but in recent years they have not been
adequate. It is important that you understand the magnitude of
the errors that have been involved in our reserving. You can
thus see for yourselves just how imprecise the process is, and
also judge whether we may have some systemic bias that should
make you wary of our current and future figures.
The following table shows the results from insurance
underwriting as we have reported them to you in recent years, and
also gives you calculations a year later on an “if-we-knew-then-
what-we think-we-know-now” basis. I say “what we think we know
now” because the adjusted figures still include a great many
estimates for losses that occurred in the earlier years.
However, many claims from the earlier years have been settled so
that our one-year-later estimate contains less guess work than
our earlier estimate:
Underwriting Results Corrected Figures
as Reported After One Year’s
Year to You Experience
---- -------------------- -----------------
1980 $ 6,738,000 $ 14,887,000
1981 1,478,000 (1,118,000)
1982 (21,462,000) (25,066,000)
1983 (33,192,000) (50,974,000)
1984 (45,413,000) ?
Our structured settlement and loss-reserve assumption
businesses are not included in this table. Important
additional information on loss reserve experience appears
on pages 43-45.
To help you understand this table, here is an explanation of
the most recent figures: 1984’s reported pre-tax underwriting
loss of $45.4 million consists of $27.6 million we estimate that
we lost on 1984’s business, plus the increased loss of $17.8
million reflected in the corrected figure for 1983.
As you can see from reviewing the table, my errors in
reporting to you have been substantial and recently have always
presented a better underwriting picture than was truly the case.
This is a source of particular chagrin to me because: (1) I like
for you to be able to count on what I say; (2) our insurance
managers and I undoubtedly acted with less urgency than we would
have had we understood the full extent of our losses; and (3) we
paid income taxes calculated on overstated earnings and thereby
gave the government money that we didn’t need to. (These
overpayments eventually correct themselves, but the delay is long
and we don’t receive interest on the amounts we overpaid.)
Because our business is weighted toward casualty and
reinsurance lines, we have more problems in estimating loss costs
than companies that specialize in property insurance. (When a
building that you have insured burns down, you get a much faster
fix on your costs than you do when an employer you have insured
finds out that one of his retirees has contracted a disease
attributable to work he did decades earlier.) But I still find
our errors embarrassing. In our direct business, we have far
underestimated the mushrooming tendency of juries and courts to
make the “deep pocket” pay, regardless of the factual situation
and the past precedents for establishment of liability. We also
have underestimated the contagious effect that publicity
regarding giant awards has on juries. In the reinsurance area,
where we have had our worst experience in under reserving, our
customer insurance companies have made the same mistakes. Since
we set reserves based on information they supply us, their
mistakes have become our mistakes.
I heard a story recently that is applicable to our insurance
accounting problems: a man was traveling abroad when he received
a call from his sister informing him that their father had died
unexpectedly. It was physically impossible for the brother to
get back home for the funeral, but he told his sister to take
care of the funeral arrangements and to send the bill to him.
After returning home he received a bill for several thousand
dollars, which he promptly paid. The following month another
bill came along for $15, and he paid that too. Another month
followed, with a similar bill. When, in the next month, a third
bill for $15 was presented, he called his sister to ask what was
going on. “Oh”, she said. “I forgot to tell you. We buried Dad
in a rented suit.”
If you’ve been in the insurance business in recent years -
particularly the reinsurance business - this story hurts. We
have tried to include all of our “rented suit” liabilities in our
current financial statement, but our record of past error should
make us humble, and you suspicious. I will continue to report to
you the errors, plus or minus, that surface each year.
Not all reserving errors in the industry have been of the
innocent-but-dumb variety. With underwriting results as bad as
they have been in recent years - and with managements having as
much discretion as they do in the presentation of financial
statements - some unattractive aspects of human nature have
manifested themselves. Companies that would be out of business
if they realistically appraised their loss costs have, in some
cases, simply preferred to take an extraordinarily optimistic
view about these yet-to-be-paid sums. Others have engaged in
various transactions to hide true current loss costs.
Both of these approaches can “work” for a considerable time:
external auditors cannot effectively police the financial
statements of property/casualty insurers. If liabilities of an
insurer, correctly stated, would exceed assets, it falls to the
insurer to volunteer this morbid information. In other words,
the corpse is supposed to file the death certificate. Under this
“honor system” of mortality, the corpse sometimes gives itself
the benefit of the doubt.
In most businesses, of course, insolvent companies run out
of cash. Insurance is different: you can be broke but flush.
Since cash comes in at the inception of an insurance policy and
losses are paid much later, insolvent insurers don’t run out of
cash until long after they have run out of net worth. In fact,
these “walking dead” often redouble their efforts to write
business, accepting almost any price or risk, simply to keep the
cash flowing in. With an attitude like that of an embezzler who
has gambled away his purloined funds, these companies hope that
somehow they can get lucky on the next batch of business and
thereby cover up earlier shortfalls. Even if they don’t get
lucky, the penalty to managers is usually no greater for a $100
million shortfall than one of $10 million; in the meantime, while
the losses mount, the managers keep their jobs and perquisites.
The loss-reserving errors of other property/casualty
companies are of more than academic interest to Berkshire. Not
only does Berkshire suffer from sell-at-any-price competition by
the “walking dead”, but we also suffer when their insolvency is
finally acknowledged. Through various state guarantee funds that
levy assessments, Berkshire ends up paying a portion of the
insolvent insurers’ asset deficiencies, swollen as they usually
are by the delayed detection that results from wrong reporting.
There is even some potential for cascading trouble. The
insolvency of a few large insurers and the assessments by state
guarantee funds that would follow could imperil weak-but-
previously-solvent insurers. Such dangers can be mitigated if
state regulators become better at prompt identification and
termination of insolvent insurers, but progress on that front has
been slow.
Washington Public Power Supply System
From October, 1983 through June, 1984 Berkshire’s insurance
subsidiaries continuously purchased large quantities of bonds of
Projects 1, 2, and 3 of Washington Public Power Supply System
(“WPPSS”). This is the same entity that, on July 1, 1983,
defaulted on $2.2 billion of bonds issued to finance partial
construction of the now-abandoned Projects 4 and 5. While there
are material differences in the obligors, promises, and
properties underlying the two categories of bonds, the problems
of Projects 4 and 5 have cast a major cloud over Projects 1, 2,
and 3, and might possibly cause serious problems for the latter
issues. In addition, there have been a multitude of problems
related directly to Projects 1, 2, and 3 that could weaken or
destroy an otherwise strong credit position arising from
guarantees by Bonneville Power Administration.
Despite these important negatives, Charlie and I judged the
risks at the time we purchased the bonds and at the prices
Berkshire paid (much lower than present prices) to be
considerably more than compensated for by prospects of profit.
As you know, we buy marketable stocks for our insurance
companies based upon the criteria we would apply in the purchase
of an entire business. This business-valuation approach is not
widespread among professional money managers and is scorned by
many academics. Nevertheless, it has served its followers well
(to which the academics seem to say, “Well, it may be all right
in practice, but it will never work in theory.”) Simply put, we
feel that if we can buy small pieces of businesses with
satisfactory underlying economics at a fraction of the per-share
value of the entire business, something good is likely to happen
to us - particularly if we own a group of such securities.
We extend this business-valuation approach even to bond
purchases such as WPPSS. We compare the $139 million cost of our
yearend investment in WPPSS to a similar $139 million investment
in an operating business. In the case of WPPSS, the “business”
contractually earns $22.7 million after tax (via the interest
paid on the bonds), and those earnings are available to us
currently in cash. We are unable to buy operating businesses
with economics close to these. Only a relatively few businesses
earn the 16.3% after tax on unleveraged capital that our WPPSS
investment does and those businesses, when available for
purchase, sell at large premiums to that capital. In the average
negotiated business transaction, unleveraged corporate earnings
of $22.7 million after-tax (equivalent to about $45 million pre-
tax) might command a price of $250 - $300 million (or sometimes
far more). For a business we understand well and strongly like,
we will gladly pay that much. But it is double the price we paid
to realize the same earnings from WPPSS bonds.
However, in the case of WPPSS, there is what we view to be a
very slight risk that the “business” could be worth nothing
within a year or two. There also is the risk that interest
payments might be interrupted for a considerable period of time.
Furthermore, the most that the “business” could be worth is about
the $205 million face value of the bonds that we own, an amount
only 48% higher than the price we paid.
This ceiling on upside potential is an important minus. It
should be realized, however, that the great majority of operating
businesses have a limited upside potential also unless more
capital is continuously invested in them. That is so because
most businesses are unable to significantly improve their average
returns on equity - even under inflationary conditions, though
these were once thought to automatically raise returns.
(Let’s push our bond-as-a-business example one notch
further: if you elect to “retain” the annual earnings of a 12%
bond by using the proceeds from coupons to buy more bonds,
earnings of that bond “business” will grow at a rate comparable
to that of most operating businesses that similarly reinvest all
earnings. In the first instance, a 30-year, zero-coupon, 12%
bond purchased today for $10 million will be worth $300 million
in 2015. In the second, a $10 million business that regularly
earns 12% on equity and retains all earnings to grow, will also
end up with $300 million of capital in 2015. Both the business
and the bond will earn over $32 million in the final year.)
Our approach to bond investment - treating it as an unusual
sort of “business” with special advantages and disadvantages -
may strike you as a bit quirky. However, we believe that many
staggering errors by investors could have been avoided if they
had viewed bond investment with a businessman’s perspective. For
example, in 1946, 20-year AAA tax-exempt bonds traded at slightly
below a 1% yield. In effect, the buyer of those bonds at that
time bought a “business” that earned about 1% on “book value”
(and that, moreover, could never earn a dime more than 1% on
book), and paid 100 cents on the dollar for that abominable
business.
If an investor had been business-minded enough to think in
those terms - and that was the precise reality of the bargain
struck - he would have laughed at the proposition and walked
away. For, at the same time, businesses with excellent future
prospects could have been bought at, or close to, book value
while earning 10%, 12%, or 15% after tax on book. Probably no
business in America changed hands in 1946 at book value that the
buyer believed lacked the ability to earn more than 1% on book.
But investors with bond-buying habits eagerly made economic
commitments throughout the year on just that basis. Similar,
although less extreme, conditions prevailed for the next two
decades as bond investors happily signed up for twenty or thirty
years on terms outrageously inadequate by business standards.
(In what I think is by far the best book on investing ever
written - “The Intelligent Investor”, by Ben Graham - the last
section of the last chapter begins with, “Investment is most
intelligent when it is most businesslike.” This section is called
“A Final Word”, and it is appropriately titled.)
We will emphasize again that there is unquestionably some
risk in the WPPSS commitment. It is also the sort of risk that
is difficult to evaluate. Were Charlie and I to deal with 50
similar evaluations over a lifetime, we would expect our judgment
to prove reasonably satisfactory. But we do not get the chance
to make 50 or even 5 such decisions in a single year. Even
though our long-term results may turn out fine, in any given year
we run a risk that we will look extraordinarily foolish. (That’s
why all of these sentences say “Charlie and I”, or “we”.)
Most managers have very little incentive to make the
intelligent-but-with-some-chance-of-looking-like-an-idiot
decision. Their personal gain/loss ratio is all too obvious: if
an unconventional decision works out well, they get a pat on the
back and, if it works out poorly, they get a pink slip. (Failing
conventionally is the route to go; as a group, lemmings may have
a rotten image, but no individual lemming has ever received bad
press.)
Our equation is different. With 47% of Berkshire’s stock,
Charlie and I don’t worry about being fired, and we receive our
rewards as owners, not managers. Thus we behave with Berkshire’s
money as we would with our own. That frequently leads us to
unconventional behavior both in investments and general business
management.
We remain unconventional in the degree to which we
concentrate the investments of our insurance companies, including
those in WPPSS bonds. This concentration makes sense only
because our insurance business is conducted from a position of
exceptional financial strength. For almost all other insurers, a
comparable degree of concentration (or anything close to it)
would be totally inappropriate. Their capital positions are not
strong enough to withstand a big error, no matter how attractive
an investment opportunity might appear when analyzed on the basis
of probabilities.
With our financial strength we can own large blocks of a few
securities that we have thought hard about and bought at
attractive prices. (Billy Rose described the problem of over-
diversification: “If you have a harem of forty women, you never
get to know any of them very well.”) Over time our policy of
concentration should produce superior results, though these will
be tempered by our large size. When this policy produces a
really bad year, as it must, at least you will know that our
money was committed on the same basis as yours.
We made the major part of our WPPSS investment at different
prices and under somewhat different factual circumstances than
exist at present. If we decide to change our position, we will
not inform shareholders until long after the change has been
completed. (We may be buying or selling as you read this.) The
buying and selling of securities is a competitive business, and
even a modest amount of added competition on either side can cost
us a great deal of money. Our WPPSS purchases illustrate this
principle. From October, 1983 through June, 1984, we attempted
to buy almost all the bonds that we could of Projects 1, 2, and
3. Yet we purchased less than 3% of the bonds outstanding. Had
we faced even a few additional well-heeled investors, stimulated
to buy because they knew we were, we could have ended up with a
materially smaller amount of bonds, purchased at a materially
higher price. (A couple of coat-tail riders easily could have
cost us $5 million.) For this reason, we will not comment about
our activities in securities - neither to the press, nor
shareholders, nor to anyone else - unless legally required to do
so.
One final observation regarding our WPPSS purchases: we
dislike the purchase of most long-term bonds under most
circumstances and have bought very few in recent years. That’s
because bonds are as sound as a dollar - and we view the long-
term outlook for dollars as dismal. We believe substantial
inflation lies ahead, although we have no idea what the average
rate will turn out to be. Furthermore, we think there is a
small, but not insignificant, chance of runaway inflation.
Such a possibility may seem absurd, considering the rate to
which inflation has dropped. But we believe that present fiscal
policy - featuring a huge deficit - is both extremely dangerous
and difficult to reverse. (So far, most politicians in both
parties have followed Charlie Brown’s advice: “No problem is so
big that it can’t be run away from.”) Without a reversal, high
rates of inflation may be delayed (perhaps for a long time), but
will not be avoided. If high rates materialize, they bring with
them the potential for a runaway upward spiral.
While there is not much to choose between bonds and stocks
(as a class) when annual inflation is in the 5%-10% range,
runaway inflation is a different story. In that circumstance, a
diversified stock portfolio would almost surely suffer an
enormous loss in real value. But bonds already outstanding would
suffer far more. Thus, we think an all-bond portfolio carries a
small but unacceptable “wipe out” risk, and we require any
purchase of long-term bonds to clear a special hurdle. Only when
bond purchases appear decidedly superior to other business
opportunities will we engage in them. Those occasions are likely
to be few and far between.
Dividend Policy
Dividend policy is often reported to shareholders, but
seldom explained. A company will say something like, “Our goal
is to pay out 40% to 50% of earnings and to increase dividends at
a rate at least equal to the rise in the CPI”. And that’s it -
no analysis will be supplied as to why that particular policy is
best for the owners of the business. Yet, allocation of capital
is crucial to business and investment management. Because it is,
we believe managers and owners should think hard about the
circumstances under which earnings should be retained and under
which they should be distributed.
The first point to understand is that all earnings are not
created equal. In many businesses particularly those that have
high asset/profit ratios - inflation causes some or all of the
reported earnings to become ersatz. The ersatz portion - let’s
call these earnings “restricted” - cannot, if the business is to
retain its economic position, be distributed as dividends. Were
these earnings to be paid out, the business would lose ground in
one or more of the following areas: its ability to maintain its
unit volume of sales, its long-term competitive position, its
financial strength. No matter how conservative its payout ratio,
a company that consistently distributes restricted earnings is
destined for oblivion unless equity capital is otherwise infused.
Restricted earnings are seldom valueless to owners, but they
often must be discounted heavily. In effect, they are
conscripted by the business, no matter how poor its economic
potential. (This retention-no-matter-how-unattractive-the-return
situation was communicated unwittingly in a marvelously ironic
way by Consolidated Edison a decade ago. At the time, a punitive
regulatory policy was a major factor causing the company’s stock
to sell as low as one-fourth of book value; i.e., every time a
dollar of earnings was retained for reinvestment in the business,
that dollar was transformed into only 25 cents of market value.
But, despite this gold-into-lead process, most earnings were
reinvested in the business rather than paid to owners.
Meanwhile, at construction and maintenance sites throughout New
York, signs proudly proclaimed the corporate slogan, “Dig We
Must”.)
Restricted earnings need not concern us further in this
dividend discussion. Let’s turn to the much-more-valued
unrestricted variety. These earnings may, with equal
feasibility, be retained or distributed. In our opinion,
management should choose whichever course makes greater sense for
the owners of the business.
This principle is not universally accepted. For a number of
reasons managers like to withhold unrestricted, readily
distributable earnings from shareholders - to expand the
corporate empire over which the managers rule, to operate from a
position of exceptional financial comfort, etc. But we believe
there is only one valid reason for retention. Unrestricted
earnings should be retained only when there is a reasonable
prospect - backed preferably by historical evidence or, when
appropriate, by a thoughtful analysis of the future - that for
every dollar retained by the corporation, at least one dollar of
market value will be created for owners. This will happen only
if the capital retained produces incremental earnings equal to,
or above, those generally available to investors.
To illustrate, let’s assume that an investor owns a risk-
free 10% perpetual bond with one very unusual feature. Each year
the investor can elect either to take his 10% coupon in cash, or
to reinvest the coupon in more 10% bonds with identical terms;
i.e., a perpetual life and coupons offering the same cash-or-
reinvest option. If, in any given year, the prevailing interest
rate on long-term, risk-free bonds is 5%, it would be foolish for
the investor to take his coupon in cash since the 10% bonds he
could instead choose would be worth considerably more than 100
cents on the dollar. Under these circumstances, the investor
wanting to get his hands on cash should take his coupon in
additional bonds and then immediately sell them. By doing that,
he would realize more cash than if he had taken his coupon
directly in cash. Assuming all bonds were held by rational
investors, no one would opt for cash in an era of 5% interest
rates, not even those bondholders needing cash for living
purposes.
If, however, interest rates were 15%, no rational investor
would want his money invested for him at 10%. Instead, the
investor would choose to take his coupon in cash, even if his
personal cash needs were nil. The opposite course - reinvestment
of the coupon - would give an investor additional bonds with
market value far less than the cash he could have elected. If he
should want 10% bonds, he can simply take the cash received
and buy them in the market, where they will be available at a
large discount.
An analysis similar to that made by our hypothetical
bondholder is appropriate for owners in thinking about whether a
company’s unrestricted earnings should be retained or paid out.
Of course, the analysis is much more difficult and subject to
error because the rate earned on reinvested earnings is not a
contractual figure, as in our bond case, but rather a fluctuating
figure. Owners must guess as to what the rate will average over
the intermediate future. However, once an informed guess is
made, the rest of the analysis is simple: you should wish your
earnings to be reinvested if they can be expected to earn high
returns, and you should wish them paid to you if low returns are
the likely outcome of reinvestment.
Many corporate managers reason very much along these lines
in determining whether subsidiaries should distribute earnings to
their parent company. At that level,. the managers have no
trouble thinking like intelligent owners. But payout decisions
at the parent company level often are a different story. Here
managers frequently have trouble putting themselves in the shoes
of their shareholder-owners.
With this schizoid approach, the CEO of a multi-divisional
company will instruct Subsidiary A, whose earnings on incremental
capital may be expected to average 5%, to distribute all
available earnings in order that they may be invested in
Subsidiary B, whose earnings on incremental capital are expected
to be 15%. The CEO’s business school oath will allow no lesser
behavior. But if his own long-term record with incremental
capital is 5% - and market rates are 10% - he is likely to impose
a dividend policy on shareholders of the parent company that
merely follows some historical or industry-wide payout pattern.
Furthermore, he will expect managers of subsidiaries to give him
a full account as to why it makes sense for earnings to be
retained in their operations rather than distributed to the
parent-owner. But seldom will he supply his owners with a
similar analysis pertaining to the whole company.
In judging whether managers should retain earnings,
shareholders should not simply compare total incremental earnings
in recent years to total incremental capital because that
relationship may be distorted by what is going on in a core
business. During an inflationary period, companies with a core
business characterized by extraordinary economics can use small
amounts of incremental capital in that business at very high
rates of return (as was discussed in last year’s section on
Goodwill). But, unless they are experiencing tremendous unit
growth, outstanding businesses by definition generate large
amounts of excess cash. If a company sinks most of this money in
other businesses that earn low returns, the company’s overall
return on retained capital may nevertheless appear excellent
because of the extraordinary returns being earned by the portion
of earnings incrementally invested in the core business. The
situation is analogous to a Pro-Am golf event: even if all of the
amateurs are hopeless duffers, the team’s best-ball score will be
respectable because of the dominating skills of the professional.
Many corporations that consistently show good returns both
on equity and on overall incremental capital have, indeed,
employed a large portion of their retained earnings on an
economically unattractive, even disastrous, basis. Their
marvelous core businesses, however, whose earnings grow year
after year, camouflage repeated failures in capital allocation
elsewhere (usually involving high-priced acquisitions of
businesses that have inherently mediocre economics). The
managers at fault periodically report on the lessons they have
learned from the latest disappointment. They then usually seek
out future lessons. (Failure seems to go to their heads.)
In such cases, shareholders would be far better off if
earnings were retained only to expand the high-return business,
with the balance paid in dividends or used to repurchase stock
(an action that increases the owners’ interest in the exceptional
business while sparing them participation in subpar businesses).
Managers of high-return businesses who consistently employ much
of the cash thrown off by those businesses in other ventures with
low returns should be held to account for those allocation
decisions, regardless of how profitable the overall enterprise
is.
Nothing in this discussion is intended to argue for
dividends that bounce around from quarter to quarter with each
wiggle in earnings or in investment opportunities. Shareholders
of public corporations understandably prefer that dividends be
consistent and predictable. Payments, therefore, should reflect
long-term expectations for both earnings and returns on
incremental capital. Since the long-term corporate outlook
changes only infrequently, dividend patterns should change no
more often. But over time distributable earnings that have been
withheld by managers should earn their keep. If earnings have
been unwisely retained, it is likely that managers, too, have
been unwisely retained.
Let’s now turn to Berkshire Hathaway and examine how these
dividend principles apply to it. Historically, Berkshire has
earned well over market rates on retained earnings, thereby
creating over one dollar of market value for every dollar
retained. Under such circumstances, any distribution would have
been contrary to the financial interest of shareholders, large or
small.
In fact, significant distributions in the early years might
have been disastrous, as a review of our starting position will
show you. Charlie and I then controlled and managed three
companies, Berkshire Hathaway Inc., Diversified Retailing
Company, Inc., and Blue Chip Stamps (all now merged into our
present operation). Blue Chip paid only a small dividend,
Berkshire and DRC paid nothing. If, instead, the companies had
paid out their entire earnings, we almost certainly would have no
earnings at all now - and perhaps no capital as well. The three
companies each originally made their money from a single
business: (1) textiles at Berkshire; (2) department stores at
Diversified; and (3) trading stamps at Blue Chip. These
cornerstone businesses (carefully chosen, it should be noted, by
your Chairman and Vice Chairman) have, respectively, (1) survived
but earned almost nothing, (2) shriveled in size while incurring
large losses, and (3) shrunk in sales volume to about 5% its size
at the time of our entry. (Who says “you can’t lose ‘em all”?)
Only by committing available funds to much better businesses were
we able to overcome these origins. (It’s been like overcoming a
misspent youth.) Clearly, diversification has served us well.
We expect to continue to diversify while also supporting the
growth of current operations though, as we’ve pointed out, our
returns from these efforts will surely be below our historical
returns. But as long as prospective returns are above the rate
required to produce a dollar of market value per dollar retained,
we will continue to retain all earnings. Should our estimate of
future returns fall below that point, we will distribute all
unrestricted earnings that we believe can not be effectively
used. In making that judgment, we will look at both our
historical record and our prospects. Because our year-to-year
results are inherently volatile, we believe a five-year rolling
average to be appropriate for judging the historical record.
Our present plan is to use our retained earnings to further
build the capital of our insurance companies. Most of our
competitors are in weakened financial condition and reluctant to
expand substantially. Yet large premium-volume gains for the
industry are imminent, amounting probably to well over $15
billion in 1985 versus less than $5 billion in 1983. These
circumstances could produce major amounts of profitable business
for us. Of course, this result is no sure thing, but prospects
for it are far better than they have been for many years.
Miscellaneous
This is the spot where each year I run my small “business
wanted” ad. In 1984 John Loomis, one of our particularly
knowledgeable and alert shareholders, came up with a company that
met all of our tests. We immediately pursued this idea, and only
a chance complication prevented a deal. Since our ad is pulling,
we will repeat it in precisely last year’s form:
We prefer:
(1) large purchases (at least $5 million of after-tax
earnings),
(2) demonstrated consistent earning power (future
projections are of little interest to us, nor are
“turn-around” situations),
(3) businesses earning good returns on equity while
employing little or no debt,
(4) management in place (we can’t supply it),
(5) simple businesses (if there’s lots of technology, we
won’t understand it),
(6) an offering price (we don’t want to waste our time or
that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
We will not engage in unfriendly takeovers. We can promise
complete confidentiality and a very fast answer - customarily
within five minutes - as to whether we’re interested. We prefer
to buy for cash, but will consider issuance of stock when we
receive as much in intrinsic business value as we give. We
invite potential sellers to check us out by contacting people
with whom we have done business in the past. For the right
business - and the right people - we can provide a good home.
* * *
A record 97.2% of all eligible shares participated in
Berkshire’s 1984 shareholder-designated contributions program.
Total contributions made through this program were $3,179,000,
and 1,519 charities were recipients. Our proxy material for the
annual meeting will allow you to cast an advisory vote expressing
your views about this program - whether you think we should
continue it and, if so, at what per-share level. (You may be
interested to learn that we were unable to find a precedent for
an advisory vote in which management seeks the opinions of
shareholders about owner-related corporate policies. Managers
who put their trust in capitalism seem in no hurry to put their
trust in capitalists.)
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 60 and 61. If you wish to participate in future programs,
we strongly urge that you immediately make sure that your shares
are registered in the name of the actual owner, not in “street”
name or nominee name. Shares not so registered on September 30,
1985 will be ineligible for the 1985 program.
* * *
Our annual meeting will be on May 21, 1985 in Omaha, and I
hope that you attend. Many annual meetings are a waste of time,
both for shareholders and for management. Sometimes that is true
because management is reluctant to open up on matters of business
substance. More often a nonproductive session is the fault of
shareholder participants who are more concerned about their own
moment on stage than they are about the affairs of the
corporation. What should be a forum for business discussion
becomes a forum for theatrics, spleen-venting and advocacy of
issues. (The deal is irresistible: for the price of one share you
get to tell a captive audience your ideas as to how the world
should be run.) Under such circumstances, the quality of the
meeting often deteriorates from year to year as the antics of
those interested in themselves discourage attendance by those
interested in the business.
Berkshire’s meetings are a different story. The number of
shareholders attending grows a bit each year and we have yet to
experience a silly question or an ego-inspired commentary.
Instead, we get a wide variety of thoughtful questions about the
business. Because the annual meeting is the time and place for
these, Charlie and I are happy to answer them all, no matter how
long it takes. (We cannot, however, respond to written or phoned
questions at other times of the year; one-person-at-a time
reporting is a poor use of management time in a company with 3000
shareholders.) The only business matters that are off limits at
the annual meeting are those about which candor might cost our
company real money. Our activities in securities would be the
main example.
We always have bragged a bit on these pages about the
quality of our shareholder-partners. Come to the annual meeting
and you will see why. Out-of-towners should schedule a stop at
Nebraska Furniture Mart. If you make some purchases, you’ll save
far more than enough to pay for your trip, and you’ll enjoy the
experience.
Warren E. Buffett
February 25, 1985 Chairman of the Board
Subsequent Event: On March 18, a week after copy for this
report went to the typographer but shortly before production, we
agreed to purchase three million shares of Capital Cities
Communications, Inc. at $172.50 per share. Our purchase is
contingent upon the acquisition of American Broadcasting
Companies, Inc. by Capital Cities, and will close when that
transaction closes. At the earliest, that will be very late in
1985. Our admiration for the management of Capital Cities, led
by Tom Murphy and Dan Burke, has been expressed several times in
previous annual reports. Quite simply, they are tops in both
ability and integrity. We will have more to say about this
investment in next year’s report.
中文译文
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦股份有限公司的股东们：
1984年，我们的净资产增加了1.526亿美元，合每股133美元。这听起来相当不错，但实际上表现平庸。经济收益必须与产生这些收益的资本相比较来评估。我们账面价值的二十年复合年增长率是22.1%（从1964年的19.46美元增至1984年的1108.77美元），但1984年的增长率仅有13.6%。
正如去年讨论过的，每股内在商业价值的增长才是真正算数的经济衡量指标。但内在商业价值的计算是主观的。就我们而言，账面价值是一个有用但略有低估的替代指标。依我判断，1984年内，内在商业价值与账面价值的增长速度大致相当。
用我学院派的腔调，我过去曾告诉过你们，不断膨胀的资本基数对回报率造成的拖累。遗憾的是，我那学院派的腔调如今正让位于记者的口吻。我们22%的历史回报率已是过去时了。要在未来十年内每年赚取哪怕15%的回报（假设我们继续执行当前的股利政策，这封信后面会详谈），我们需要总计约39亿美元的利润。实现这个目标需要一些大主意——小打小闹行不通。我的总管理合伙人查理·芒格（Charlie Munger）和我目前没有任何此类想法，但我们的经验是，它们偶尔会自己冒出来。（这战略计划怎么样？）
报告收益的来源
下页表格显示了伯克希尔报告收益的来源。由于蓝筹印花（Blue Chip Stamps）的合并发生在1983年年中，伯克希尔在许多组成业务中的净所有权权益发生了变化。因此，表格的前两列最能反映基础业务的经营表现。
任何业务实体因出售非常规资产而产生的所有重大损益，均与证券交易一起汇总在表格靠近底部的那一行，不计入经营利润。（我们认为任何单一年度的已实现资本利得或损失的数字都毫无意义，但我们认为多年期内已实现和未实现的资本利得总额非常重要。）
此外，商誉的摊销并不计入特定业务，而是基于我在1983年年报信函附录中概述的原因，单独列示。
（单位：千美元）
----------------------------------------------------------
净收益
税前收益 （税后）
-------------------------------------- ------------------
总计 伯克希尔份额 伯克希尔份额
------------------ ------------------ ------------------
1984 1983 1984 1983 1984 1983
-------- -------- -------- -------- -------- --------
经营利润：
保险集团：
承保业务 ............ $(48,060) $(33,872) $(48,060) $(33,872) $(25,955) $(18,400)
净投资收益 ........... 68,903 43,810 68,903 43,810 62,059 39,114
布法罗晚报 .............. 27,328 19,352 27,328 16,547 13,317 8,832
内布拉斯加家具城(1) 14,511 3,812 11,609 3,049 5,917 1,521
喜诗糖果 ............. 26,644 27,411 26,644 24,526 13,380 12,212
联合零售商店 .. (1,072) 697 (1,072) 697 (579) 355
蓝筹印花(2) (1,843) (1,422) (1,843) (1,876) (899) (353)
互助储蓄与贷款 ... 1,456 (798) 1,166 (467) 3,151 1,917
精密钢铁 ........... 4,092 3,241 3,278 2,102 1,696 1,136
纺织业务 .................. 418 (100) 418 (100) 226 (63)
韦斯科金融 ........... 9,777 7,493 7,831 4,844 4,828 3,448
商誉摊销 .. (1,434) (532) (1,434) (563) (1,434) (563)
债务利息 .......... (14,734) (15,104) (14,097) (13,844) (7,452) (7,346)
股东指定
捐赠 .......... (3,179) (3,066) (3,179) (3,066) (1,716) (1,656)
其他 ..................... 4,932 10,121 4,529 9,623 3,476 8,490
-------- -------- -------- -------- -------- --------
经营利润 .......... 87,739 61,043 82,021 51,410 70,015 48,644
GEICO特别分配 .. -- 19,575 -- 19,575 -- 18,224
通用食品特别分配 8,111 -- 7,896 -- 7,294 --
证券出售和
非常规资产出售 .. 104,699 67,260 101,376 65,089 71,587 45,298
-------- -------- -------- -------- -------- --------
所有实体总收益 $200,549 $147,878 $191,293 $136,074 $148,896 $112,166
======== ======== ======== ======== ======== ========
(1) 1983年数据仅为10月至12月期间。
(2) 1984年和1983年不可比；在1983年年中蓝筹印花合并时，主要资产
已被转移。
目光锐利的股东会注意到，GEICO特别分配的金额及其在表格中的位置与去年的呈现方式有所不同。虽然这些调整对“会计”收益进行了重新分类并有所减少，但这纯粹是形式上的调整，而非实质性的。不过，这些调整背后的故事很有意思。
正如去年所报告的：(1) 1983年年中，GEICO发出要约收购，回购其自身股份；(2) 与此同时，我们通过书面合同同意，按GEICO通过要约从所有其他股东处回购的股份总数比例，向GEICO出售相应数量的股份；(3) 要约完成后，我们向GEICO交付了35万股，收到2100万美元现金，我们对GEICO的持股比例与要约前完全相同；(4) GEICO与我们进行的交易属于按比例赎回——一家领先律师事务所对此给出了无保留意见；(5) 税法合乎逻辑地将此类按比例赎回视为与股利实质等同，因此，我们收到的2100万美元仅按6.9%的公司间股利税率征税；(6) 重要的是，这2100万美元远远低于我们持有GEICO所有权期间已累积但未分配给我们的留存收益，因此，从经济实质的角度来看，我们认为这等同于一笔股利。
由于这笔交易金额重大且非常规，去年我们在适用的季度报告和年报的这一部分，都向你们重点说明了GEICO的这笔分配。此外，我们还向我们的审计师——毕马威会计师事务所（Peat, Marwick, Mitchell & Co.）强调了这笔交易。毕马威奥马哈办公室以及负责复核的芝加哥合伙人均未提出异议，同意我们将其列为股利的呈现方式。
1984年，我们与通用食品（General Foods）发生了一笔几乎完全相同的交易。唯一的区别在于，通用食品是在一段时间内通过公开市场回购其股票，而GEICO是进行了一次性的要约收购。在通用食品的案例中，在其回购股票的每一天，我们都向其出售一定数量的股票，使得我们的持股比例精确地保持不变。同样，这笔交易也是根据回购开始前就已签署的书面合同进行的。同样，我们收到的现金远远低于自我们买入以来，归属于我们所有权权益的留存收益。总体而言，我们从通用食品收到了21,843,601美元现金，而我们的持股比例精确地维持在8.75%。
就在这个节骨眼上，毕马威在纽约的办公室介入此事。1984年末，该办公室表示不同意其奥马哈办公室和芝加哥复核合伙人得出的结论。纽约方面的观点是，伯克希尔应将这些与GEICO和通用食品的交易处理为股票出售，而非收到股利。在这种会计处理方法下，我们在每家公司股票投资成本的一部分将用于抵扣赎回所得款项，任何收益将作为资本利得（而非股利收入）列示。这仅仅是会计处理方法，与税收无关：毕马威同意，就美国国税局（IRS）而言，这些交易属于股利。
无论从经济实质还是从恰当的会计处理角度来看，我们都不同意纽约方面的立场。但是，为了避免审计师出具保留意见，我们在本报告中采纳了毕马威1984年的观点，并对1983年的数据进行了相应重述。然而，这些对内在商业价值没有任何影响：我们持有的GEICO和通用食品的所有权权益、我们的现金、我们的税款，以及我们持股的市场价值和计税基础，所有这些都保持不变。
今年我们再次与通用食品签订了一份合同，我们将根据其在公开市场的购买情况，同步向其出售股票。该安排规定，我们的所有权权益将始终保持不变。通过这样做，我们确保在税务处理上被视作股利。在我们看来，这笔交易的经济实质同样是产生股利收入。然而，除非有直接针对此点的会计准则被采纳，否则我们将把这些赎回会计处理为股票出售而非股利收入。我们将继续在我们的报告中显著识别任何此类特殊交易。
虽然我们喜欢这些按比例赎回带来的低税率，并且参与了好几笔此类交易，但我们认为，对于不出售股票的股东而言，此类回购至少同样是同样有利的。当那些拥有杰出业务和稳健财务状况的公司，发现其股票在市场上的售价远低于内在价值时，没有比回购更能切实造福股东的行为了。
（我们对回购的支持仅限于那些由价格/价值关系决定的情况，并不包括“绿票讹诈”式回购——我们认为这种做法是可憎和令人反感的。在这些交易中，两方当事人通过利用一个无辜且未被征询意见的第三方来实现其个人目的。其中的角色是：(1) 进行勒索的“股东”，他甚至等不到股票证书上的墨迹干透，就向经理人发出“要钱还是要命”的信息；(2) 急于不惜任何代价求和的内部人士——只要这代价由别人来付；(3) 那些被(2)用来打发(1)走人的股东们的钱。尘埃落定后，那个打劫的、过路股东发表一通关于“自由企业”的演讲，被劫持的管理层则发表了关于“公司最佳利益”的演讲，而那个默默站在一旁的无辜股东则为和解买单。）
我们持有最大投资的公司，在价格与价值存在巨大差距之时，都进行了大规模股票回购。作为股东，我们发现这令人鼓舞且回报丰厚，有两个重要原因——一个是显而易见的，另一个则较为微妙且常常不被理解。显而易见的一点涉及基本算术：以远低于每股内在商业价值的价格进行大规模回购，会立即以极其显著的方式提升该价值。当公司购买自己的股票时，它们常常能轻松地用1美元换回2美元的现值。公司的并购计划几乎从未做得这么好，而且在数量多得令人沮丧的情况下，连花1美元换回1美元的价值都做不到。
回购的另一个好处则不那么容易精确衡量，但随着时间的推移，其重要性毫不逊色。当一家公司的市值远低于其商业价值时，管理层通过进行回购，清晰地表明其致力于采取提升股东财富的行动，而非那些旨在扩张管理层领地但对股东毫无益处（甚至有害）的行动。看到这一点，股东和潜在股东会提高他们对该业务未来回报的预期。这种上调反过来又会使市场价格更接近内在商业价值。这些价格是完全理性的。投资者应该为一家由已证明倾向于股东利益的经理人管理的企业，支付比一家由只顾自身利益的经理人领导的企业更高的价格。（为了把问题说得极端一点，你愿意花多少钱去成为一家由罗伯特·韦斯科（Robert Wesco）控制的公司的少数股东？）
关键词是“已证明”。当回购显然符合所有者利益时，一个一贯对此视而不见的经理人，暴露出的动机比他自知的要多。无论他多么频繁或多么雄辩地重复一些公关灵感催生的短语，比如“股东价值最大化”（本季的最爱），市场都会正确地对交到他手里的资产打上折扣。他的心并没有听从他的嘴——过不了多久，市场也不会听了。
通过GEICO、华盛顿邮报（Washington Post）和通用食品——我们最大的三项持股——的大规模股票回购，我们与其它股东一样，获得了巨大的成功。（埃克森（Exxon），我们的第四大持股，也明智且积极地进行了股票回购，但在这个案例中，我们只是最近才建立了头寸。）在上述每家公司中，股东们因其在杰出业务中的权益因低价回购而得到实质性提升。我们非常乐意拥有此类业务的所有权权益，这些业务兼具出色的经济特性和关注股东利益的管理层。
下表显示了1984年底我们在可交易股票中的净头寸。所有数字均不包括韦斯科金融（Wesco）和内布拉斯加家具城（Nebraska Furniture Mart）的少数股东权益。
持股数量 成本 市值
------------- ---------- ----------
（单位：千美元）
690,975 联合出版公司（Affiliated Publications, Inc.）.... $ 3,516 $ 32,908
740,400 美国广播公司（American Broadcasting Companies, Inc.） 44,416 46,738
3,895,710 埃克森公司（Exxon Corporation）................... 173,401 175,307
4,047,191 通用食品公司（General Foods Corporation）........... 149,870 226,137
6,850,000 GEICO公司（GEICO Corporation）................... 45,713 397,300
2,379,200 汉迪&哈曼（Handy & Harman）...................... 27,318 38,662
818,872 埃培智集团（Interpublic Group of Companies, Inc.） 2,570 28,149
555,949 西北工业（Northwest Industries） 26,581 27,242
2,553,488 时代公司（Time, Inc.）.......................... 89,327 109,162
1,868,600 华盛顿邮报公司（The Washington Post Company）..... 10,628 149,955
---------- ----------
$573,340 $1,231,560
所有其他普通股持股 11,634 37,326
---------- ----------
普通股总计 $584,974 $1,268,886
========== ==========
现在要找到同时满足我们定性标准和价值与价格的定量标准的股权投资，难度已经超过了十多年来任何时候。我们努力避免在这些标准上妥协——尽管我们发现“什么都不做”是最难的任务。（一位英国政治家将他国家在十九世纪的伟大归功于“以逸待劳”的政策。这是一种历史学家称赞起来远比参与者践行起来要容易得多的策略。）
除了本节开头提供的数字外，关于我们拥有的业务的信息，请参见第42-47页的“管理层讨论”。关于韦斯科业务的更详细讨论，请参见查理·芒格在第50-59页的报告。你会发现他对储蓄行业状况的评论特别有趣。我们其他的主要控股业务包括内布拉斯加家具城、喜诗糖果（See's）、布法罗晚报（Buffalo Evening News）和保险集团，我们将在此对此给予特别关注。
内布拉斯加家具城
去年我向各位介绍了B夫人（罗斯·布卢姆金（Rose Blumkin））和她的家族。我告诉你们他们非常出色，而且我确实说得还不够。在观察他们的卓越才华和品格又一年之后，我可以坦诚地说，我从未见过比布卢姆金家族运作或表现更好的管理团队。
董事会主席B夫人现年91岁，最近当地报纸援引她的话说：“我回家就是为了吃饭和睡觉，仅此而已。我等不及天亮，这样我就可以回到店里去了。”B夫人每周七天都在店里，从开门到打烊，她一天内做出的决定可能比大多数CEO一年做的还多（而且做得也更好）。
五月份，B夫人被纽约大学授予了荣誉商学博士学位。（她是个“快车道”学生：在获得博士学位之前，她一天学校都没上过。）之前获得纽约大学商学荣誉学位的人包括：埃克森公司CEO小克利夫顿·加文（Clifton Garvin, Jr.）；花旗银行时任CEO沃尔特·瑞斯顿（Walter Wriston）；IBM时任CEO弗兰克·卡里（Frank Cary）；通用汽车时任CEO汤姆·墨菲（Tom Murphy）；以及最近的保罗·沃尔克（Paul Volcker）。（他们是一群好伙伴。）
布卢姆金家的血脉并未变淡。B夫人的儿子路易（Louie），以及他的三个儿子罗恩（Ron）、欧文（Irv）和史蒂夫（Steve），都为NFM惊人的成功做出了充分贡献。年轻一代上过了最好的商学院——那就是B夫人和路易开办的商学院的——他们的培训在业绩中显而易见。
去年，NFM的净销售额增加了1430万美元，总额达到1.15亿美元，全部来自奥马哈的同一家门店。这是美国单一家具店产生的迄今为止最大的销售额。事实上，去年销售额的增加额本身就超过了许多规模不错且成功的门店的年销售额。这家企业之所以取得如此成功，是因为它配得上这份成功。几个数字可以告诉你原因。
在1984财年的10-K报告中，全国最大的独立家居用品专业零售商Levitz家具（Levitz Furniture）将其价格描述为“普遍低于其贸易区域内传统家具店的价格”。同年，Levitz的毛利率为44.4%（也就是说，顾客平均支付100美元购买的商品，其进货成本为55.60美元）。而NFM的毛利率还不到这个数字的一半。NFM的低加成之所以可能，是因为其异常高的效率：运营费用（工资、房租、广告等）约占销售额的16.5%，而Levitz的这一比例为35.6%。
这并非批评Levitz，它的运营管理得很好。但NFM的运营简直是非同寻常的（而且，请记住，这一切都源于1937年B夫人500美元的投资）。凭借无与伦比的效率和精明的批量采购，NFM在能够获得卓越资本回报的同时，每年为其顾客节省至少3000万美元——这些钱是他们如果在维持典型加成的商店购买相同商品时，平均需要多付的。这种节省使得NFM能够不断拓宽其地理覆盖范围，从而获得远超奥马哈市场自然增长的发展。
很多人问我，布卢姆金家族经营生意的秘诀是什么。这些算不上什么深奥的道理。家族的每个成员都：(1) 以会让本杰明·富兰克林（Ben Franklin）和霍雷肖·阿尔杰（Horatio Alger）看起来像辍学生的热情和精力投入工作；(2) 以非凡的现实主义定义自己的专业能力范围，并在该范围内对一切事务果断行动；(3) 忽略任何超出该专业能力范围之外的、即使是最诱人的提议；(4) 与所有打交道的人都始终如一地保持高尚的行为举止。（B夫人将其归结为“卖得便宜，说真话”。）
当我们购买该企业90%的股份时，我们对B夫人及其家族诚信的评价得到了证明：NFM此前从未接受过审计，而我们也没有要求审计；我们没有盘点存货，也没有核实应收账款；我们没有检查产权。我们给了B夫人一张5500万美元的支票，她给了我们她的承诺。这是一笔公平的交换。
你我能与布卢姆金家族合伙，实属幸运。
喜诗糖果店有限公司
以下是自蓝筹印花收购以来，喜诗公司业绩的常规回顾：
52-53周财年 营业收入 磅数 年末
大约截止 销售额 税后利润 糖果销量 开业店铺数
12月31日 ------------ ----------- ---------- -----------
1984 .............. $135,946,000 $13,380,000 24,759,000 214
1983 (53周) ... 133,531,000 13,699,000 24,651,000 207
1982 .............. 123,662,000 11,875,000 24,216,000 202
1981 .............. 112,578,000 10,779,000 24,052,000 199
1980 .............. 97,715,000 7,547,000 24,065,000 191
1979 .............. 87,314,000 6,330,000 23,985,000 188
1978 .............. 73,653,000 6,178,000 22,407,000 182
1977 .............. 62,886,000 6,154,000 20,921,000 179
1976 (53周) ... 56,333,000 5,569,000 20,553,000 173
1975 .............. 50,492,000 5,132,000 19,134,000 172
1974 .............. 41,248,000 3,021,000 17,883,000 170
1973 .............. 35,050,000 1,940,000 17,813,000 169
1972 .............. 31,337,000 2,083,000 16,954,000 167
这种业绩并非依靠普遍的涨潮取得的。恰恰相反，盒装巧克力行业中许多知名的参与者，在同一时期内要么亏损，要么仅微利。据我们所知，只有一家规模不错的竞争对手实现了高盈利能力。喜诗的成功是卓越产品与卓越经理人查克·哈金斯（Chuck Huggins）的结晶。
1984年，我们提价的幅度远小于近年来的做法：每磅实际售价为5.49美元，仅比1983年上涨1.4%。幸运的是，我们在成本控制方面取得了良好进展——这是近年来一直困扰我们的领域。除原材料成本（这部分很大程度上不受我们控制）外，每磅成本去年仅增长了2.2%。
我们的成本控制问题因同店销售额（按磅计算，而非按美元）温和下滑而加剧。近年来，通过商店销售的总磅数之所以能大致维持恒定水平，完全依赖于每年净增几家门店。这种“需要更多门店才能维持相同销量”的局面，自然给每磅销售成本带来了沉重压力。
1984年，同店销量下降了1.1%。然而，由于门店数量的增加，门店总销量增长了0.6%。（这两个百分比均根据1983年53周财年的情况进行了调整。）
喜诗的业务逐年变得更加季节性化。在圣诞节前的四周内，我们完成了全年40%的销量，并赚取了全年约75%的利润。我们在复活节和情人节期间也赚取不少利润，但一年中剩余的时间基本只能维持收支平衡。近年来，圣诞节期间的门店销量在全年中的相对重要性有所增加，大宗订单和邮购订单也是如此。业务在圣诞节期间的进一步集中带来了众多管理难题，所有这些都被查克及其同僚以非凡的技巧和优雅处理得井井有条。
他们的解决方案丝毫未涉及对服务质量或产品质量的妥协。我们大多数规模较大的竞争对手就做不到这一点。尽管他们面临的年度需求高峰和低谷没有我们这么极端，但他们通过添加防腐剂或冷冻成品来平滑生产周期，从而降低单位成本。我们拒绝此类技术，实际上选择的是生产上的头疼问题，而非产品上的变更。
我们商场的门店面临众多新的食品和零食供应商的竞争，这些供应商在非假日期间提供了尤为强劲的竞争。我们需要新产品来反击，1984年我们推出了六种糖果棒，总体反响良好。未来计划推出更多产品。
1985年，我们将加大力度，力求每磅成本增幅低于通胀率。然而，要在这些努力上持续成功，需要同店销量的增长。1985年的平均价格应比1984年高出6%-7%。假设同店销量不变，利润应会温和增长。
布法罗晚报
1984年，《新闻报》（News）的利润大幅超出我们的预期。与喜诗一样，在成本控制方面取得了显著进展。排除新闻编辑室的工作时间，总工作时间减少了约2.8%。凭借这种生产效率的提升，整体成本仅增长了4.9%。斯坦·利普西（Stan Lipsey）及其管理团队的这一表现是业内最好的之一。
然而，我们现在面临成本加速上升的局面。1984年年中我们签订了一份新的多年期工会合同，其中包含大幅的“追补”加薪。这一追补完全合理：在1977-1982年亏损期间，工会的合作精神是我们成功保持与《信使快报》（The Courier-Express）成本竞争力并最终胜出的重要因素。如果我们未能控制住成本，那场竞争的结果可能会大不相同。
由于我们新的工会合同在不同日期生效，1984年的成本中几乎没有反映这次追补加薪的影响。但这次加薪在1985年将几乎完全生效，因此，我们今年的单位劳动成本将以远超行业平均水平的速度上升。我们希望通过持续的小幅生产率提升来缓解这一增长，但我们无法避免今年工资成本的大幅上升。新闻纸价格趋势现在也比1984年不利。主要由于这两个因素，我们预计《新闻报》的利润率至少会出现小幅收缩。
在《新闻报》方面，有两个具有重大经济意义的因素对我们有利：
(1) 我们的发行量在对其广告客户效用最大的区域内集中到了非同寻常的程度。相比之下，发行范围广泛的“区域性”报纸，其相当大一部分的发行量集中在多数广告客户认为效用甚微的地区。一位数百英里外的订阅者，不太可能成为你通过分类广告出售小狗的潜在买家——对只在都市区有店铺的杂货商来说也一样。广告客户所谓的“浪费性发行量”会损害盈利能力：报纸的开支主要由总发行量决定，而广告收入（通常占总收入的70%-80%）则只对有效发行量有反应；
(2) 我们对布法罗零售市场的渗透率非同一般；广告客户仅使用《新闻报》就能接触到几乎所有潜在客户。
去年我告诉过你们这种非同寻常的读者接受度：在全国100家最大的报纸中，当时我们在平日渗透率排名第一，周日排名第三。最新的数据显示我们在工作日渗透率排名第一，周日排名第二。（即便如此，布法罗的家庭户数有所下降，所以我们当前的平日发行量略有下降；周日发行量则没有变化。）
我还告诉过你们，读者如此接受我们的主要原因之一，是我们向读者提供了异常丰富的新闻内容：在我们的规模范围内，没有任何一家占主导地位的报纸能够像我们一样，将报纸更大的版面比例用于新闻报道。1984年，我们的“新闻版面”比例为50.9%（1983年为50.4%），远高于通常的35%-40%水平。我们将继续把这一比例维持在50%左右。同时，尽管去年我们减少了其他部门的总工时，但我们维持了新闻编辑室的员工水平，并且今后也会继续这样做。1984年，新闻编辑室成本上升了9.1%，这一涨幅远超过我们整体成本4.9%的增幅。
我们的新闻版面政策在新闻纸方面花费了额外的巨大成本。因此，我们的新闻成本（用于新闻版面的新闻纸加上新闻编辑室的工资和开销）占收入的比例，高于大多数同规模的主导性报纸。不过，对于我们的报纸或任何其他主导性报纸来说，负担这些成本的空间是足够的：在同规模报纸中，“高”与“低”新闻成本之间的差异大约为三个百分点，而税前利润率往往能达到其十倍。
一份主导性报纸的经济效益非常好，属于商业世界中最佳之列。其所有者自然愿意相信，他们如此出色的盈利能力仅仅是因为他们始终如一地生产出出色的产品。这种令人舒适的理论在面对一个令人不安的事实时站不住脚了。虽然一流的报纸能赚取丰厚的利润，但三流报纸的利润也同样好，甚至更好——只要这两类报纸在其社区内占据主导地位。当然，产品质量可能对报纸取得主导地位至关重要。我们认为《新闻报》的情况就是如此，这在很大程度上要归功于像阿尔弗雷德·基尔希霍费尔（Alfred Kirchhofer）这样在我们之前就已工作的人们。
一旦取得主导地位，决定报纸质量好坏的就是报纸本身，而非市场。无论好坏，它都会繁荣发展。这在大多数行业是不成立的：低劣的质量通常会导致低劣的经济效益。但即使是一份糟糕的报纸，仅仅因为其“公告板”价值，对大多数市民来说也是一笔划算的交易。在其他条件相同的情况下，劣质产品无法达到一流产品那样的读者群水平。然而，劣质产品对大多数市民来说仍然是必不可少的，而能吸引他们注意力的东西，也就能吸引广告客户的注意力。
既然市场不强制设定高标准，管理层就必须自己设定。我们承诺在新闻方面进行高于平均水平的支出，这代表了一个重要的量化标准。我们相信斯坦·利普西和默里·莱特（Murray Light）会继续应用更为重要的定性标准。查理和我认为，报纸是社会中的特殊机构。我们为《新闻报》感到自豪，并希望在未来的岁月里，我们有理由感到更加自豪。
保险业务
下面是我们常规表格的更新版本，列出了保险行业的两项关键数据：
保费年变动率 综合成本率
（已赚保费） （已扣除保单持有人
红利后）
------------- -------------------
1972 .............................. 10.2 96.2
1973 .............................. 8.0 99.2
1974 .............................. 6.2 105.4
1975 .............................. 11.0 107.9
1976 .............................. 21.9 102.4
1977 .............................. 19.8 97.2
1978 .............................. 12.8 97.5
1979 .............................. 10.3 100.6
1980 .............................. 6.0 103.1
1981 .............................. 3.9 106.0
1982 .............................. 4.4 109.7
1983 (修订后) .................... 4.5 111.9
1984 (估计) .................. 8.1 117.7
来源：贝斯特汇总与平均数（Best's Aggregates and Averages）
贝斯特（Best's）的数据反映了几乎整个行业的经验，包括股份保险公司、相互保险公司和互惠保险公司。综合成本率代表保险总成本（已发生损失加费用）与保费收入之比；低于100的比率表示承保盈利，高于100则表示承保亏损。
多年来，我们一直告诉你们，行业保费年增长率达到每年约10%才能使综合成本率大致保持不变。我们做出这一论断时假设，费用占保费收入的比例将保持相对稳定，而由于单位数量增长、通货膨胀以及法院判决扩大了保险单承保范围的共同影响，损失将以每年约10%的速度增长。
我们的观点正被证明是令人沮丧的准确：自1979年以来，如果保费每年增长10%，到1984年累计增幅将达到61%，而1984年的综合成本率将与1979年的100.6几乎相同。然而，实际上，该行业的保费仅增长了30%，1984年的综合成本率却达到了117.7。今天，我们仍然相信，承保盈利能力趋势的关键指标是行业保费收入的逐年百分比变化。
现在看来，1985年的保费收入增幅将远超10%。因此，假设巨灾损失处于“正常”水平，我们预计综合成本率将在年底开始向下回落。然而，根据我们全行业的损失假设（即年增长10%），需要连续五年保费年增长15%才能使综合成本率回到100。这意味着到1989年行业保费规模将翻一番，在我们看来，这种结果极不可能发生。相反，我们预计会出现几年保费增长略高于10%的时期，随后将是高度竞争的定价，这通常会产生108-113区间的综合成本率。
我们自己在1984年的综合成本率是令人汗颜的134。（在此，以及整个报告中，我们在报告这一比率时均未包括结构性结算和承揽损失准备金。关于该比率更多细节，包括终止业务的影响，请参见第42-43页。）这是我们的承保业绩连续第三年远逊于行业平均水平。我们预计1985年的综合成本率将有所改善，并且我们的改善幅度将远大于行业平均水平。迈克·戈德堡（Mike Goldberg）已经纠正了我在他接管保险业务之前犯下的许多错误。此外，我们的业务集中在过去几年业绩低于平均水平的险种上，这种情况已开始抑制甚至淘汰我们的一些竞争对手。随着竞争减弱，我们在1984年下半年得以在几个重要险种上大幅提价，而业务损失甚微。
几年来我一直在告诉你们，总有一天我们首屈一指的财务实力会为我们的保险业务带来真正的竞争优势。那一天可能已经到来。我们几乎毫无疑问是全国实力最强的财产/意外险保险公司，资本状况远优于那些名气更大但规模更大的公司。
同样重要的是，我们的公司政策是保持这种优势。保险的购买者用现金交换的只是一个承诺。这个承诺的价值应该放在逆境而非顺境中去评估。最重要的是，这个承诺应该看起来能够经受住长期金融市场低迷与异常不利的承保结果的组合。我们的保险子公司愿意并能够在此类环境下履行承诺——没多少其他公司能明确做到这一点。
在我们的结构性结算和承揽损失准备金业务中（去年已报告），我们的财务实力是一项特别的资产。结构性结算中的索赔人以及已分保损失准备金的保险公司，需要完全确信未来几十年内款项将如期支付。在财产/意外险领域，很少有公司能通过这种无可置疑的长期实力考验。（事实上，我们愿意与之分保我们自身负债的公司也只有少数几家。）
我们在这些新业务线上实现了增长：我们持有的用于抵偿所承担负债的资金从1620万美元增至3060万美元。我们预计增长将持续，甚至可能大幅加速。为支持这一预期增长，我们已为哥伦比亚保险公司（Columbia Insurance Company）——我们专门从事结构性结算和承揽损失准备金的再保险子公司——大幅追加了资本。虽然这些业务竞争非常激烈，但回报应该是令人满意的。
在GEICO方面，和往常一样，消息大多是好的。该公司1984年在其核心保险业务上实现了出色的单位增长，其投资组合的表现也持续出色。尽管年底承保结果有所恶化，但仍远好于行业平均水平。年底，我们在GEICO的持股比例为36%，因此，我们在其8.85亿美元直接财产/意外险保费中的权益为3.2亿美元，是我们自身保费收入的两倍多。
过去几年，我曾向你们报告过，GEICO股票的表现已远超该公司本身的商业表现——尽管后者已经非常出色。在那些年份里，我们资产负债表中对GEICO投资的账面价值增长速度超过了GEICO内在商业价值的增长速度。我曾警告过你们，股票表现持续超过商业表现的情况显然不可能每年发生，有些年份股票必然会落后于商业表现。1984年这种情况发生了，我们对GEICO投资的账面价值几乎没变，而这项投资的内在商业价值却大幅增加了。由于年初伯克希尔27%的净资产都体现在GEICO上，其静态的市场价值对我们当年的增长率产生了重大影响。对这样的结果我们并不感到丝毫不快：我们宁愿年内GEICO的商业价值增长了X，而市值下跌，也不愿其内在价值只增长了0.5X而市值飙升。对于GEICO，如同我们所有的投资一样，我们看重的是商业表现，而非市场表现。如果我们对业务的预期是正确的，市场最终会随之而来。
作为伯克希尔的股东，你们从GEICO的杰克·伯恩（Jack Byrne）、比尔·斯奈德（Bill Snyder）和卢·辛普森（Lou Simpson）的才华中受益匪浅。在其核心业务——低成本车险和房主保险中，GEICO拥有一个重大且可持续的竞争优势。这在商业领域中是罕见的资产，在金融服务领域几乎不存在。（GEICO本身也说明了这一点：尽管管理层出色，但GEICO在其核心业务之外的所有努力中，都未能获得卓越的盈利能力。）在一个庞大的行业中，像GEICO这样的竞争优势提供了获得非凡经济回报的潜力，而杰克和比尔继续展现出实现这一潜力的卓越技巧。
GEICO核心保险业务产生的大部分资金都提供给了卢进行投资。卢具备罕见的气质和智力特质组合，这造就了其卓越的长期投资业绩。在低于平均水平的风险下运作，他创造的回报是保险业中迄今为止最好的。我为这三位杰出管理者的努力和才华喝彩并表示感谢。
损失准备金计提中的错误
任何在财产/意外险行业拥有重要利益的公司股东，都应该了解该行业当前收益报告中所固有的弱点。《华盛顿邮报》的出版商菲尔·格雷厄姆（Phil Graham）曾将日报描述为“历史的初稿”。不幸的是，财产/意外险保险公司的财务报表充其量只能提供收益和财务状况的初稿。
成本确定是主要问题。保险公司的大部分成本源于理赔损失，而许多应计入当前年度收入的损失极难估计。有时这些损失的程度，甚至其存在与否，数十年都不得而知。
计入财产/意外险公司当前损益表的损失费用包括：(1) 年内发生并已支付的损失；(2) 对年内发生并已报告给保险公司但尚未结案的损失的估计；(3) 对年内发生但保险公司尚未得知的损失的最终美元成本的估计（称为“IBNR”：已发生但未报告）；以及(4) 对往年针对(2)和(3)所做的类似估计在本年度进行修订的净影响。
此类修订可能会被长期延迟，但最终，任何导致X年利润被错报的损失估计都必须在X+1年或X+10年进行更正。这必然意味着更正年份的利润也被错报了。例如，假设1979年有一名索赔人被我们的一个被保险人伤害，我们当时认为很可能以10,000美元和解。那一年，我们将10,000美元计入利润表作为该损失的估计成本，并在资产负债表上相应地为该金额设立了一项负债准备金。如果我们在1984年以100,000美元结案，我们将把90,000美元的损失成本计入1984年的利润，尽管该成本实际上是1979年的费用。如果那笔业务是我们1979年的唯一活动，那么我们就在成本方面严重误导了自己，在利润方面严重误导了你们。
在编撰财产/意外险公司损益表中那些看似精确的数字时，必然要大量使用估计，这意味着无论管理层的意图多么正当，某些错误必定会渗入。为了尽量减少错误，大多数保险公司使用各种统计技术来调整构成估计总负债原始数据的数千项单独损失评估（称为个案准备金）。这些调整所产生的额外准备金有各种称呼，如“总量”、“发展”或“补充”准备金。调整的目标应是使损失准备金总额最终在所有财务报表日期之前发生的损失全部支付完毕后，有50-50的概率被证明略高或略低。
在伯克希尔，我们补充了我们认为合理的补充准备金，但近年来这些准备金并不充足。了解我们准备金计提过程中涉及的错误程度非常重要。这样你们可以自行判断这个过程是多么不精确，也可以判断我们是否存在某种系统性偏差，使得你们应对我们当前和未来的数字保持警惕。
下表显示了近年来我们向你们报告的保险承保结果，并给出了“如果我们当时知道我们现在认为我们知道的事情”的基础上一年后的计算。我说“我们现在认为我们知道的事情”，是因为调整后的数字仍然包含大量针对早些年发生的损失的估计。然而，许多早年的索赔已经结案，因此我们一年后的估计比我们早先的估计包含了更少的猜测成分：
向你们报告的承保结果 根据一年后经验
年份 修正后的数字
---- -------------------- -----------------
1980 $ 6,738,000 $ 14,887,000
1981 1,478,000 (1,118,000)
1982 (21,462,000) (25,066,000)
1983 (33,192,000) (50,974,000)
1984 (45,413,000) ?
我们的结构性结算和损失准备金承揽业务不包括在此表中。
有关损失准备金经验的重要补充信息，请参见第43-45页。
为了帮助你们理解此表，以下是对最新数字的解释：1984年报告的税前承保亏损为4540万美元，其中包括我们估计1984年业务亏损的2760万美元，加上1983年修正数字中反映的1780万美元增加的亏损。
在审阅此表时你们可以看到，我在向你们报告时的错误是巨大的，并且近年来总是呈现出比实际情况更好的承保状况。这让我感到特别懊恼，因为：(1) 我希望你们能够信赖我所说的；(2) 如果我们当时充分了解损失的全部程度，我和我们的保险经理们无疑会以更紧迫的态度行事；(3) 我们根据高估的利润缴纳了所得税，从而给了政府我们本不必给的钱。（这些多付的款项最终会自行纠正，但时间拖延很长，而且我们并未因多付款项而获得利息。）
由于我们的业务偏向于意外险和再保险业务，我们在估计损失成本方面比专门从事财产保险的公司遇到更多问题。（当你投保的建筑物烧毁时，你能比当你投保的雇主发现其一名退休人员患有一种与他几十年前所做工作有关的职业病时，更快地确定你的成本。）但我仍然为我们的错误感到尴尬。在我们的直接业务中，我们严重低估了陪审团和法院让“深口袋”买单的日益增长的倾向，无论事实情况如何，也无论过去确立责任标准的先例如何。我们还低估了有关巨额赔偿的公开宣传对陪审团的传染效应。在我们准备金计提不足问题最为严重的再保险领域，我们的客户保险公司也犯了同样的错误。由于我们根据他们提供的信息设定准备金，他们的错误便成了我们的错误。
我最近听到一个故事，很适合用来描述我们保险会计的问题：一个在国外旅行的人接到妹妹的电话，告诉他父亲突然去世了。哥哥的身体状况无法赶回家参加葬礼，但他告诉妹妹，葬礼事宜由她全权处理，账单寄给他。回国后，他收到一张几千美元的账单，并立即付清了。次月又来了一张15美元的账单，他也付了。又过了一个月，又一张类似的账单。当第四个月又收到一张15美元的账单时，他打电话给妹妹问怎么回事。“哦”，她说。“我忘了告诉你。我们是把爸爸租了一套西装下葬的。”
如果你近年来从事保险业——特别是再保险业——这个故事会让你心痛。我们已努力将所有“租来的西装”负债包括在当前的财务报表中，但我们过去的错误记录应该让我们保持谦逊，并让你们保持怀疑。我将继续向你们报告每年浮现出来的正负向错误。
行业中并非所有的准备金计提错误都是那种“无辜但愚蠢”的类型。鉴于近年来承保结果如此糟糕——而且管理层在财务报表的呈现上拥有如此大的自由裁量权——人性中某些不那么光彩的方面就显现出来了。那些如果实事求是地评估损失成本就会倒闭的公司，在某些情况下，宁愿对这些尚未支付的款项采取一种异常乐观的看法。其他公司则通过各种交易来掩盖真实的当前损失成本。
这两种方法都能“奏效”相当长一段时间：外部审计师无法有效监控财产/意外险保险公司的财务报表。如果一家保险公司的负债（如实陈述的话）超过了资产，那么应由该公司主动提供这一不祥的信息。换句话说，尸体应该提交死亡证明。在这种“荣誉制度”的死亡判定下，尸体有时会对自己做出有利的推断。
当然，在大多数行业中，资不抵债的公司会耗尽现金。保险则不同：你可能已经破产了，但手头还很有钱。由于现金在保单生效时流入，而损失很久以后才支付，资不抵债的保险公司在净资产耗尽很久以后，才会耗尽现金。事实上，这些“行尸走肉”通常会加倍努力去承揽业务，几乎接受任何价格或风险，仅仅是为了让现金持续流入。怀着类似于一个赌光了赃款的贪污犯的心态，这些公司希望自己能在下一批业务上侥幸成功，从而掩盖之前的亏空。即使他们运气不佳，对于管理者来说，1亿美元亏空的惩罚通常也不会比1000万美元的亏空更大；与此同时，尽管损失在增加，管理者们仍能保住工作并享受特权。
其他财产/意外险公司的损失准备金计提错误对伯克希尔来说，其重要性远不止于学术兴趣。伯克希尔不仅受到“行尸走肉”公司不惜代价出售保险的竞争，而且当它们的破产最终被承认时，我们也会遭受损失。通过各种州立担保基金的摊派，伯克希尔最终要支付那些破产保险公司资产缺口的一部分——由于错误报告导致的延迟发现，这些缺口通常更加膨胀。甚至还有引发连锁问题的可能性。几家大保险公司的破产及其后的州担保基金摊派，可能会危及那些疲弱但原本有偿付能力的保险公司。如果州监管机构能够更好地迅速识别并终止无力偿债的保险公司，这些危险是可以减轻的，但在这一领域的进展一直缓慢。
华盛顿公共电力供应系统
从1983年10月到1984年6月，伯克希尔的保险子公司持续大量购买华盛顿公共电力供应系统（“WPPSS”）项目1、2和3的债券。这与在1983年7月1日对为现已放弃的项目4和5部分建设融资而发行的22亿美元债券违约的实体是同一个。虽然这两类债券背后的债务人、承诺和财产存在实质性差异，但项目4和5的问题给项目1、2和3笼罩了巨大的阴影，并可能导致后者的发行出现严重问题。此外，还存在许多与项目1、2和3直接相关的问题，这些问题可能会削弱或摧毁由邦纳维尔电力管理局（Bonneville Power Administration）担保所产生的原本强劲的信用地位。
尽管存在这些重大的负面因素，但在我们购买这些债券、并以伯克希尔支付的价格（远低于当前价格）购入时，查理和我判断，利润前景远远补偿了所面临的风险。
如你们所知，我们为保险公司购买可交易股票时，依据的是我们在购买整个企业时会采用的标准。这种企业估值方法在专业资金管理人中并不普遍，并为许多学术界人士所鄙视。然而，它很好地服务了其信奉者（对此，学术界人士似乎要说：“嗯，它在实践中可能没问题，但在理论上行不通。”）简而言之，我们觉得，如果我们能够以整个企业每股价值的零头，购买到具有满意基础经济状况的企业的一小部分，好事很可能会发生在我们身上——特别是如果我们拥有这样一组证券组合的话。
我们将这种企业估值方法甚至延伸到了像WPPSS债券这样的购买上。我们将年底对WPPSS投资的1.39亿美元成本与对一家运营企业进行类似的1.39亿美元投资进行比较。就WPPSS而言，这项“业务”按合同规定每年赚取2270万美元税后利润（通过债券支付的利息），而且这些利润当前以现金形式可供我们使用。我们无法买到经济状况接近如此的运营企业。很少有企业能像我们的WPPSS投资那样，在无杠杆资本上赚取16.3%的税后回报率，而且这样的企业，当可供购买时，其售价相对于该资本会有大幅溢价。在平均水平的商业谈判交易中，2270万美元的税后无杠杆公司利润（相当于约4500万美元税前利润）可能会标价2.5亿至3亿美元（有时甚至更高）。对于一家我们非常理解且非常喜欢的公司，我们很乐意支付这个价钱。但这正是我们为从WPPSS债券中获得相同利润所支付价格的两倍。
然而，就WPPSS而言，存在一个我们认为风险极低的可能，即这项“业务”在一两年内价值可能归零。还存在利息支付可能中断相当长一段时间的风险。此外，这项“业务”的最高价值大约是我们所持债券2.05亿美元的面值，这仅比我们支付的价格高出48%。
这种上行空间的限制是一个重要的负面因素。然而，应该意识到，绝大多数运营企业，除非持续投入更多资本，否则其上行空间也是有限的。这是因为大多数企业无法显著提高其平均净资产回报率——即使在通货膨胀条件下也是如此，尽管人们曾一度认为通胀会自动提高回报率。
（让我们把债券作为企业的例子再推进一步：如果你选择通过使用息票收入购买更多债券来“留存”一只12%债券的年度收益，那么该债券“业务”的收益将以与大多数同样将所有收益再投资的运营企业相当的速度增长。在第一种情况下，一只今天用1000万美元购买的、期限30年、零息票、利率12%的债券，到2015年将价值3亿美元。在第二种情况下，一个用1000万美元购买、净资产回报率稳定在12%并将所有收益留存用于增长的企业，到2015年也将拥有3亿美元的资本。这个企业和这只债券在最后一年都将赚取超过3200万美元。）
我们的债券投资方法——将其视为一种具有特殊优势和劣势的独特“企业”——可能会让您觉得有点古怪。然而，我们相信，如果投资者以企业家的视角看待债券投资，许多令人震惊的投资错误本可以避免。例如，1946年，20年期AAA级免税债券的收益率略低于1%。实际上，那时那些债券的购买者购买了一个“企业”，该企业赚取约1%的“账面价值”回报（而且，它还永远无法从账面价值上赚到超过1%的一分钱），并以面值100美分购买了那个糟糕透顶的企业。
如果投资者有足够的商业头脑去这样思考——而这正是交易所达成的现实——他会对这个提议一笑置之然后走开。因为，与此同时，那些未来前景极佳的企业，可以按账面价值或接近账面价值的价格买入，同时其账面价值税后能赚取10%、12%甚至15%。1946年，大概没有任何一家按账面价值易手的美国企业，买家会认为它缺乏在账面价值上赚取超过1%利润的能力。但具有债券购买习惯的投资者，却只是在那个基础上，全年都在热切地做出经济承诺。类似但不太极端的情况持续了接下来的二十年，债券投资者愉快地签订了二十或三十年的合同，其条款按商业标准来看是极其不充分的。（在我看来，有史以来最好的投资书籍——本·格雷厄姆的《聪明的投资者》——最后一章的最后一部分开头是：“当投资最具有商业头脑时，它才是最明智的。”这一部分被称为“最后的话”，这个标题恰如其分。）
我们将再次强调，WPPSS的承诺无疑存在一些风险。这也是那种难以评估的风险。如果查理和我在一生中需要处理50个类似的评估，我们预计我们的判断会证明相当令人满意。但我们没有机会在一年内做出50个，甚至5个这样的决策。尽管我们的长期结果可能不错，但在任何一个特定年份，我们都冒着看起来极其愚蠢的风险。（这就是为什么所有这些句子都说“查理和我”，或“我们”。）
大多数经理人几乎没有动力去做出那个明智但有可能看起来像白痴的决定。他们的个人得失比太明显了：如果一个非常规决定结果良好，他们能得到一句表扬；如果结果糟糕，他们就会收到解雇通知书。（循规蹈矩地失败是可行之路；作为一个群体，旅鼠（lemming，喻指盲目跟风者）的形象可能很糟糕，但没有一只旅鼠曾收到过负面评价。）
我们的方程式则不同。拥有伯克希尔47%的股份，查理和我不担心被解雇，我们以所有者而非管理者的身份获得回报。因此，我们对待伯克希尔的钱就像对待我们自己的钱一样。这经常导致我们在投资和一般商业管理上采取非常规行为。
我们在集中投资保险公司资产（包括WPPSS债券）的程度方面仍然非常规。这种集中之所以合理，仅仅是因为我们的保险业务是从一个异常强大的财务实力地位出发的。对于几乎所有其他保险公司来说，类似（或任何接近）的集中程度是完全不合适的。他们的资本状况不足以承受一次大的失误，无论从概率上分析某个投资机会看起来多么有吸引力。
凭借我们的财务实力，我们可以拥有大量我们深思熟虑过并以有吸引力的价格买入的少数证券。（比利·罗斯（Billy Rose）描述了过度分散化的问题：“如果你有一个四十个女人的后宫，你永远无法真正了解她们中的任何一个。”）随着时间的推移，我们的集中投资策略应该会产生优异的成果，尽管这些成果会因我们庞大的规模而有所缓和。当这个策略产生真正糟糕的年份时——这是必然的——至少你们会知道，我们的资金是在与你们相同的条件下投入的。
我们WPPSS投资的主要部分是在与目前不同的价格和略有不同的事实情况下做出的。如果我们决定改变我们的头寸，我们不会在改变完成后很久才通知股东。（当你们读到这封信时，我们可能正在买入或卖出。）买卖证券是竞争激烈的业务，即使是任何一方的少量额外竞争都可能让我们付出巨大的代价。我们的WPPSS购买就说明了这一原则。从1983年10月到1984年6月，我们试图购买几乎所有我们能买到的项目1、2和3的债券。然而，我们购买的不到流通债券的3%。如果我们面对的买家再多几个财力雄厚的投资者——他们因为知道我们在买而被刺激买入——我们最终可能只会买到少得多的债券，而且是在高得多的价格上买到的。（一两个跟风者可能轻易让我们损失500万美元。）出于这个原因，除非法律要求，我们不会评论我们在证券方面的活动——对媒体不说，对股东不说，对任何其他人也不说。
关于我们购买WPPSS的最后一点观察：在大多数情况下，我们不喜欢购买大多数长期债券，而且近年来我们很少购买。这是因为债券的价值建立在美元基础上——而我们看待美元的长期前景是暗淡的。我们相信未来会有相当程度的通货膨胀，尽管我们不知道平均通胀率会是多少。此外，我们认为存在一种很小但并非微不足道的失控通胀的可能性。
考虑到通胀率已经下降到这个程度，这种可能性似乎很荒谬。但我们认为，当前的财政政策——以巨额赤字为特征——既极其危险又难以逆转。（到目前为止，两党的大多数政客都遵循了查利·布朗（Charlie Brown）的建议：“没有一个问题是如此之大，以至于你不能逃避它。”）如果不扭转局面，高通胀率可能会被推迟（也许是很长时间），但无法避免。如果高通胀成为现实，它便会带来失控螺旋式上升的潜力。
当年通胀率在5%-10%范围内时，债券和股票（作为一类资产）之间并没什么好选的，但失控的通胀则是另一回事。在这种情况下，一个多元化的股票投资组合几乎肯定会遭受巨大的实际价值损失。但已发行的债券损失会惨重得多。因此，我们认为一个全债券的投资组合承担着一种虽小但不可接受的“清零”风险，并且我们要求任何长期债券的购买都必须通过一个特殊的门槛。只有当债券购买看起来明显优于其他商业机会时，我们才会参与其中。这样的机会很可能少之又少。
股利政策
股利政策经常向股东报告，但很少被解释。一家公司会说类似这样的话：“我们的目标是支付40%到50%的利润，并以至少与CPI涨幅相同的速度增加股息。”然后就完了——不会就为何这一特定政策对企业的所有者最有利提供任何分析。然而，资本配置对于商业和投资管理至关重要。正因如此，我们相信管理者和所有者应该认真思考在什么情况下利润应该被留存，以及在什么情况下应该被分配。
首先需要理解的是，并非所有利润都是生而平等的。在许多企业，特别是那些资产/利润比率较高的企业，通货膨胀会导致部分或全部报告利润变成虚假利润。虚假的部分——我们称之为“受限”利润——如果企业要保持其经济地位，就不能作为股利分配。如果这些利润被支付出去，企业将在以下一个或多个方面失去阵地：维持其单位销售额的能力、其长期竞争地位、其财务实力。无论其派息比率多么保守，一家持续分配受限利润的公司注定会消亡，除非有股权资本另行注入。
受限利润对所有者来说很少毫无价值，但它们通常必须被大打折扣。实际上，无论其经济潜力多么糟糕，它们都被企业征用了。（这种无论回报多么没吸引力都一律留存的状况，在十年前由联合爱迪生公司（Consolidated Edison）以一种讽刺意味十足的方式无意中传达了出来。当时，惩罚性的监管政策是一个主要因素，导致该公司股价跌至账面价值的四分之一；也就是说，每当一美元的利润被留存用于再投资到业务中时，这一美元就会转化成仅25美分的市场价值。但是，尽管经历了这种点金成铁的过程，大部分利润还是被再投资到了公司而不是支付给所有者。与此同时，在纽约各地的建筑和维修工地上，标牌自豪地宣称公司的口号：“我们必须挖下去。”）
受限利润不必在这个股利讨论中进一步涉及。让我们转向更受重视的不受限利润。这些利润同样可以留存或分配。我们认为，管理层应该选择对企业的所有者更有意义的做法。
这一原则并未得到普遍接受。出于多种原因，管理层喜欢对股东扣留不受限制的、容易分配的利润——以扩张管理层统治的企业帝国，或从异常舒适的财务地位出发运营，等等。但我们相信，留存只有一个正当理由。只有当有合理的前景——最好有历史证据支持，或在适当时有对未来进行深思熟虑的分析支持——即公司每留存一美元，就能为所有者创造至少一美元的市场价值时，才应留存不受限利润。只有当留存的资本能产生等于或高于投资者普遍可获得的增量利润时，这种情况才会发生。
为了说明，让我们假设一个投资者持有一只无风险的10%永续债券，该债券有一个非常不寻常的特点。每年，投资者可以选择获取10%的息票现金，或者将息票再投资于更多具有相同条款的10%债券；即永续期限和提供同样的现金或再投资选择的息票。如果在任何特定年份，长期无风险债券的现行利率是5%，那么投资者拿现金息票将是愚蠢的，因为他可以选择获得的10%债券的价值将远高于面值100美分。在这种情况下，想要拿到现金的投资者应该以额外债券的形式获取息票，然后立即卖掉它们。通过这样做，他将比直接拿现金息票变现更多的现金。假设所有债券都由理性投资者持有，那么在5%利率的时代，没有人会选择拿现金，即使是那些需要现金维持生活的债券持有者。
然而，如果利率是15%，没有理性投资者会希望他的钱以10%的利率为他投资。相反，投资者会选择拿着现金息票，即使他个人对现金的需求为零。相反的做法——将息票再投资——会使得投资者获得额外债券，其市场价值远低于他本可以选择的现金。如果他想要10%的债券，他只需拿着收到的现金并在市场上购买它们，在那里它们将以大幅折价出售。
与我们的假设债券持有人所做的类似的分析，对于所有者来说，在考虑公司的未受限利润是否应该留存或支付出去时是合适的。当然，分析要困难得多，并且容易出错，因为再投资利润的回报率并非像我们债券案例中那样的合同数字，而是一个波动的数字。所有者必须猜测未来中期的平均回报率会是多少。然而，一旦做出了知情的猜测，分析的其余部分就很简单了：如果你期望留存利润能赚取高回报，你就希望它们被再投资；如果你认为再投资可能导致低回报，你就希望它们被分配给你。
许多公司经理人在决定子公司是否应向母公司分配利润时，思维方式非常接近上述思路。在那个层面，经理人能够像聪明的所有者一样思考。但母公司层面的股利政策往往就不同了。在这里，经理人常常难以站在他们的股东所有者的立场上思考。
采用这种分裂的方法，一家多部门公司的CEO会指示子公司A（其增量资本的预期平均回报率为5%）分配所有可用利润，以便它们可以投资到子公司B（其增量资本的预期平均回报率为15%）。CEO的商学院誓言不会允许其有任何比这更差的行为。但是，如果他自己在增量资本上的长期记录是5%——而市场利率是10%——他很可能只会对母公司的股东实施一种仅仅遵循某种历史或行业派息模式的股利政策。此外，他会期望子公司的经理人向他充分说明为何在其运营中留存利润有意义，而不是分配给母公司所有者。但他很少会向其所有者提供类似的分析，来说明整个公司的利润留存情况。
在判断经理人是否应该留存利润时，股东不应仅仅比较近年来的总增量利润与总增量资本，因为这种关系可能会被核心业务中的情况所扭曲。在通胀时期，拥有经济特性异常出色的核心业务的公司，可以在该业务中使用少量增量资本获得非常高的回报率（正如去年关于商誉部分所讨论的那样）。但是，除非它们正在经历巨大的单位增长，否则出色的企业按其定义会产生大量的超额现金。如果一家公司将大部分资金投入到其他回报率低的业务中，由于投入核心业务的增量利润部分获得了异常高的回报，公司整体的留存资本回报率可能仍然看起来很出色。这种情况类似于职业业余配对赛（Pro-Am）高尔夫比赛：即使所有这些业余选手都是无可救药的笨球手，由于职业选手的统治性技巧，该队的最佳球位赛（best-ball）成绩仍会可观。
许多持续在净资产回报率和总体增量资本回报率上表现出良好回报的公司，实际上，确实将很大一部分留存利润用在了经济上缺乏吸引力，甚至是灾难性的地方。然而，它们那出色的核心业务，其利润年复一年地增长，掩盖了其他地方资本配置的反复失败（通常涉及对那些天生经济平庸的企业进行高溢价收购）。有责任的经理人偶尔会报告他们从最近一次失望中学到的教训。然后他们通常会寻找未来的教训。（失败似乎让他们上了瘾。）
在这种情况下，如果利润只留存用于扩张高回报业务，而将余额作为股利支付或用于回购股票（此举能提高所有者在卓越业务中的权益，同时使他们免于参与低劣业务），股东会受益得多。一直将高回报业务产生的大量现金投入到低回报的其他投机活动中去的经理人，无论整个企业的盈利能力有多高，都应该为这些配置决策负责。
此讨论中的任何内容都不旨在主张股利应随利润或投资机会的每一次微小波动而逐季跳动。上市公司股东完全可以理解地希望股利是稳定且可预测的。因此，支付应反映对利润和增量资本回报率的长期预期。由于公司的长期前景变化并不频繁，股利模式也不应更频繁地改变。但随着时间的推移，被管理层留存的未分配利润应证明其存在的合理性。如果利润被不明智地留存，那么经理人很可能也应该被不明智地留用。
现在让我们转向伯克希尔·哈撒韦，看看这些股利原则如何适用于它。从历史上看，伯克希尔的留存利润赚取了远高于市场水平的回报，从而为每留存一美元创造了超过一美元的市场价值。在这种情况下，任何分配都将违背大小股东的财务利益。
事实上，早年的大额分配可能已经酿成灾难，回顾我们的起点你们就会明白。那时，查理和我控制并管理着三家公司：伯克希尔·哈撒韦公司、多元零售公司（Diversified Retailing Company, Inc.）和蓝筹印花（现在都已并入我们当前的运营中）。蓝筹印花只支付很少的股利，伯克希尔和DRC则不支付。相反，如果这些公司支付了全部利润，我们现在几乎肯定没有任何利润了——甚至可能连资本都没有了。这三家公司最初都从单一业务赚钱：(1) 伯克希尔的纺织业务；(2) 多元零售的百货商店业务；(3) 蓝筹印花的印花业务。这些基石的业务（应当指出，是由你们的董事长和副董事长精心挑选的）分别：(1) 幸存了下来但几乎没赚到钱；(2) 规模萎缩并产生了巨额亏损；(3) 销售额缩小到我们进入时的大约5%。（谁说“你不能输光所有”？）只有通过将可用资金投入到更好的业务中，我们才能够摆脱这些出身。（这就像克服一个被浪费的青春。）显然，多元化对我们颇有裨益。
我们预计将继续多元化，同时也支持当前业务的增长，尽管正如我们指出的，我们这些努力的回报肯定会低于我们历史上的回报。但是，只要预期回报高于每留存一美元创造一美元市场价值所需的比率，我们将继续留用所有利润。如果我们对未来回报的估计低于那个临界点，我们将分配所有我们认为无法有效使用的不受限利润。在做出这一判断时，我们将同时审视我们的历史记录和前景。由于我们的逐年结果本质上波动较大，我们认为五年滚动平均数是判断历史记录的一个合适标准。
我们目前的计划是利用留存利润进一步充实我们保险公司的资本。我们的大多数竞争对手财务状况较弱，不愿大幅扩张。然而，整个行业巨大的保费收入增长即将到来，1985年很可能远远超过150亿美元，而1983年还不到50亿美元。这些情况可能会为我们带来大量有利可图的业务。当然，这个结果并非板上钉钉，但其前景远比许多年来都好。
杂项
每年此时，我都要登一个小广告：“业务收购意愿”。1984年，我们一位特别见多识广、消息灵通的股东约翰·洛米斯（John Loomis）给我们找了一家公司，它符合我们所有的标准。我们立即跟进这个想法，只是一个偶然的复杂情况阻止了交易。既然我们的广告有了效果，我们将以与去年完全相同的形式重复它：
我们偏好：
(1) 大额收购（至少500万美元税后利润），
(2) 已证明持续的盈利能力（未来预测我们几乎不感兴趣，“转型”案例也不在考虑之列），
(3) 在很少或没有债务的情况下获得良好净资产回报率的企业，
(4) 现有管理层（我们无法提供），
(5) 简单的业务（涉及大量高科技的话，我们理解不了），
(6) 报价（我们不想浪费自己或卖家的时间，在价格未知的情况下，即使只是初步交谈交易）。
我们不会进行敌意收购。我们可以承诺完全保密，并且非常迅速地答复——通常在五分钟内——我们是否感兴趣。我们更喜欢用现金购买，但当我们收到与付出等值的内在商业价值时，也会考虑发行股票。我们邀请潜在的卖家通过与我们过去有过业务往来的人联系来核实我们。对于合适的业务——以及合适的人——我们可以提供一个好归宿。
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创纪录的97.2%的合格股份参与了伯克希尔1984年的股东指定捐赠计划。通过该计划捐赠总额为3,179,000美元，共有1,519家慈善机构收到捐款。我们年度会议的委托书材料将允许您投咨询性投票，表达您对该计划的看法——您是否认为我们应该继续下去，如果继续，每股水平应该是多少。（您可能有兴趣知道，我们未能找到管理方向股东寻求关于所有者相关公司政策意见的咨询性投票的先例。那些相信资本主义的经理人似乎并不急于信任资本家。）
我们敦促新股东阅读第60和61页关于我们股东指定捐赠计划的描述。如果您希望参与未来的计划，我们强烈敦促您立即确保您的股票是以实际所有者的名义注册，而不是以“华尔街”名称或名义人注册。未能在1985年9月30日如此注册的股份，将没有资格参与1985年的计划。
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我们的年度会议将于1985年5月21日在奥马哈举行，我希望您能参加。许多年度会议对股东和管理层来说都是浪费时间。有时这是真的，因为管理层不愿意公开谈论业务实质问题。更常见的是，无成效的会议应归咎于那些更关心自己在台上的时刻而非公司事务的与会股东。本应是商业讨论的论坛变成了戏剧表演、发泄不满和倡导各种议题的场所。（这个交易令人难以抗拒：只需花一股的价钱，你就能向一个被迫的听众讲述你关于世界应该如何运转的想法。）在这种情况下，会议的质量往往逐年下降，因为那些只顾自己表演的人的活动，吓退了那些真正关心企业的人。
伯克希尔的会议则是另一番景象。与会的股东人数每年都在小幅增加，而我们至今没有遇到过一个愚蠢的问题或自我膨胀的评论。相反，我们收到了关于业务的各种深思熟虑的问题。因为年度会议是提出这些问题的正确时间和地点，查理和我很乐意回答所有这些问题，无论花多长时间。（然而，我们在一年中的其他时间无法回复书面或电话提问；在一家拥有3000名股东的公司里，一对一回复是对管理层时间的低效利用。）年度会议上唯一不能谈的业务事项，是那些坦诚可能让公司蒙受实际金钱损失的。我们在证券方面的活动就是主要的例子。
在这些页面上，我们一直有点得意地夸耀我们股东合伙人的高素质。来参加年会，您就会明白为什么了。外地与会者应该安排去内布拉斯加家具城停留一下。如果您买点东西，省下的钱将足以支付您的旅行费用，而且您会享受这个过程。
沃伦·E·巴菲特
1985年2月25日 董事会主席
后续事件：3月18日，也就是本报告的文稿送至排字工人一周后，但在制作前不久，我们同意以每股172.50美元的价格购买三百万股大都会通信公司（Capital Cities Communications, Inc.）的股票。我们的购买取决于大都会通信公司对美国广播公司的收购，并将于该交易完成时交割。最早也要到1985年底了。我们之前几年的年报中曾多次表达过对由汤姆·墨菲（Tom Murphy）和丹·伯克（Dan Burke）领导的大都会通信公司管理层的钦佩。简而言之，他们在能力和诚信方面都是顶尖的。关于这项投资，我们将在明年的报告中详述。