ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1986 was $492.5 million, or
26.1%. Over the last 22 years (that is, since present management
took over), our per-share book value has grown from $19.46 to
$2,073.06, or 23.3% compounded annually. Both the numerator and
denominator are important in the per-share book value
calculation: during the 22-year period our corporate net worth
has increased 10,600% while shares outstanding have increased
less than 1%.
In past reports I have noted that book value at most
companies differs widely from intrinsic business value - the
number that really counts for owners. In our own case, however,
book value has served for more than a decade as a reasonable if
somewhat conservative proxy for business value. That is, our
business value has moderately exceeded our book value, with the
ratio between the two remaining fairly steady.
The good news is that in 1986 our percentage gain in
business value probably exceeded the book value gain. I say
"probably" because business value is a soft number: in our own
case, two equally well-informed observers might make judgments
more than 10% apart.
A large measure of our improvement in business value
relative to book value reflects the outstanding performance of
key managers at our major operating businesses. These managers -
the Blumkins, Mike Goldberg, the Heldmans, Chuck Huggins, Stan
Lipsey, and Ralph Schey - have over the years improved the
earnings of their businesses dramatically while, except in the
case of insurance, utilizing little additional capital. This
accomplishment builds economic value, or "Goodwill," that does
not show up in the net worth figure on our balance sheet, nor in
our per-share book value. In 1986 this unrecorded gain was
substantial.
So much for the good news. The bad news is that my
performance did not match that of our managers. While they were
doing a superb job in running our businesses, I was unable to
skillfully deploy much of the capital they generated.
Charlie Munger, our Vice Chairman, and I really have only
two jobs. One is to attract and keep outstanding managers to run
our various operations. This hasn’t been all that difficult.
Usually the managers came with the companies we bought, having
demonstrated their talents throughout careers that spanned a wide
variety of business circumstances. They were managerial stars
long before they knew us, and our main contribution has been to
not get in their way. This approach seems elementary: if my job
were to manage a golf team - and if Jack Nicklaus or Arnold
Palmer were willing to play for me - neither would get a lot of
directives from me about how to swing.
Some of our key managers are independently wealthy (we hope
they all become so), but that poses no threat to their continued
interest: they work because they love what they do and relish the
thrill of outstanding performance. They unfailingly think like
owners (the highest compliment we can pay a manager) and find all
aspects of their business absorbing.
(Our prototype for occupational fervor is the Catholic
tailor who used his small savings of many years to finance a
pilgrimage to the Vatican. When he returned, his parish held a
special meeting to get his first-hand account of the Pope. "Tell
us," said the eager faithful, "just what sort of fellow is he?"
Our hero wasted no words: "He’s a forty-four, medium.")
Charlie and I know that the right players will make almost
any team manager look good. We subscribe to the philosophy of
Ogilvy & Mather’s founding genius, David Ogilvy: "If each of us
hires people who are smaller than we are, we shall become a
company of dwarfs. But, if each of us hires people who are
bigger than we are, we shall become a company of giants."
A by-product of our managerial style is the ability it gives
us to easily expand Berkshire’s activities. We’ve read
management treatises that specify exactly how many people should
report to any one executive, but they make little sense to us.
When you have able managers of high character running businesses
about which they are passionate, you can have a dozen or more
reporting to you and still have time for an afternoon nap.
Conversely, if you have even one person reporting to you who is
deceitful, inept or uninterested, you will find yourself with
more than you can handle. Charlie and I could work with double
the number of managers we now have, so long as they had the rare
qualities of the present ones.
We intend to continue our practice of working only with
people whom we like and admire. This policy not only maximizes
our chances for good results, it also ensures us an
extraordinarily good time. On the other hand, working with
people who cause your stomach to churn seems much like marrying
for money - probably a bad idea under any circumstances, but
absolute madness if you are already rich.
The second job Charlie and I must handle is the allocation
of capital, which at Berkshire is a considerably more important
challenge than at most companies. Three factors make that so: we
earn more money than average; we retain all that we earn; and, we
are fortunate to have operations that, for the most part, require
little incremental capital to remain competitive and to grow.
Obviously, the future results of a business earning 23% annually
and retaining it all are far more affected by today’s capital
allocations than are the results of a business earning 10% and
distributing half of that to shareholders. If our retained
earnings - and those of our major investees, GEICO and Capital
Cities/ABC, Inc. - are employed in an unproductive manner, the
economics of Berkshire will deteriorate very quickly. In a
company adding only, say, 5% to net worth annually, capital-
allocation decisions, though still important, will change the
company’s economics far more slowly.
Capital allocation at Berkshire was tough work in 1986. We
did make one business acquisition - The Fechheimer Bros.
Company, which we will discuss in a later section. Fechheimer is
a company with excellent economics, run by exactly the kind of
people with whom we enjoy being associated. But it is relatively
small, utilizing only about 2% of Berkshire’s net worth.
Meanwhile, we had no new ideas in the marketable equities
field, an area in which once, only a few years ago, we could
readily employ large sums in outstanding businesses at very
reasonable prices. So our main capital allocation moves in 1986
were to pay off debt and stockpile funds. Neither is a fate
worse than death, but they do not inspire us to do handsprings
either. If Charlie and I were to draw blanks for a few years in
our capital-allocation endeavors, Berkshire’s rate of growth
would slow significantly.
We will continue to look for operating businesses that meet
our tests and, with luck, will acquire such a business every
couple of years. But an acquisition will have to be large if it
is to help our performance materially. Under current stock
market conditions, we have little hope of finding equities to buy
for our insurance companies. Markets will change significantly -
you can be sure of that and some day we will again get our turn
at bat. However, we haven’t the faintest idea when that might
happen.
It can’t be said too often (although I’m sure you feel I’ve
tried) that, even under favorable conditions, our returns are
certain to drop substantially because of our enlarged size. We
have told you that we hope to average a return of 15% on equity
and we maintain that hope, despite some negative tax law changes
described in a later section of this report. If we are to
achieve this rate of return, our net worth must increase $7.2
billion in the next ten years. A gain of that magnitude will be
possible only if, before too long, we come up with a few very big
(and good) ideas. Charlie and I can’t promise results, but we do
promise you that we will keep our efforts focused on our goals.
Sources of Reported Earnings
The table on the next page shows the major sources of
Berkshire’s reported earnings. This table differs in several
ways from the one presented last year. We have added four new
lines of business because of the Scott Fetzer and Fechheimer
acquisitions. In the case of Scott Fetzer, the two major units
acquired were World Book and Kirby, and each is presented
separately. Fourteen other businesses of Scott Fetzer are
aggregated in Scott Fetzer - Diversified Manufacturing. SF
Financial Group, a credit company holding both World Book and
Kirby receivables, is included in "Other." This year, because
Berkshire is so much larger, we also have eliminated separate
reporting for several of our smaller businesses.
In the table, 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 aggregated as
a separate item. (A Compendium of earlier letters, including the
Goodwill discussion, is available upon request.) Both the Scott
Fetzer and Fechheimer acquisitions created accounting Goodwill,
which is why the amortization charge for Goodwill increased in
1986.
Additionally, the Scott Fetzer acquisition required other
major purchase-price accounting adjustments, as prescribed by
generally accepted accounting principles (GAAP). The GAAP
figures, of course, are the ones used in our consolidated
financial statements. But, in our view, the GAAP figures are not
necessarily the most useful ones for investors or managers.
Therefore, the figures shown for specific operating units are
earnings before purchase-price adjustments are taken into
account. In effect, these are the earnings that would have been
reported by the businesses if we had not purchased them.
A discussion of our reasons for preferring this form of
presentation is in the Appendix to this letter. This Appendix
will never substitute for a steamy novel and definitely is not
required reading. However, I know that among our 6,000
shareholders there are those who are thrilled by my essays on
accounting - and I hope that both of you enjoy the Appendix.
In the Business Segment Data on pages 41-43 and in the
Management’s Discussion section on pages 45-49, you will find
much additional information about our businesses. I urge you to
read those sections, as well as Charlie Munger’s letter to Wesco
shareholders, describing the various businesses of that
subsidiary, which starts on page 50.
(000s omitted)
------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1986 1985 1986 1985
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............... $(55,844) $(44,230) $(29,864) $(23,569)
Net Investment Income ...... 107,143 95,217 96,440 79,716
Buffalo News ................. 34,736 29,921 16,918 14,580
Fechheimer (Acquired 6/3/86) 8,400 --- 3,792 ---
Kirby ........................ 20,218 --- 10,508 ---
Nebraska Furniture Mart ...... 17,685 12,686 7,192 5,181
Scott Fetzer - Diversified Mfg. 25,358 --- 13,354 ---
See’s Candies ................ 30,347 28,989 15,176 14,558
Wesco - other than insurance 5,542 16,018 5,550 9,684
World Book ................... 21,978 --- 11,670 ---
Amortization of Goodwill (2,555) (1,475) (2,555) (1,475)
Other purchase-price
accounting charges ........ (10,033) --- (11,031) ---
Interest on Debt and
Pre-Payment penalty ....... (23,891) (14,415) (12,213) (7,288)
Shareholder-Designated
Contributions ............. (3,997) (4,006) (2,158) (2,164)
Other ........................ 20,770 6,744 8,685 3,725
-------- -------- -------- --------
Operating Earnings ............. 195,857 125,449 131,464 92,948
Special General Foods
Distribution ................ --- 4,127 --- 3,779
Special Washington Post
Distribution ................ ---	 14,877 --- 13,851
Sales of securities ............ 216,242 468,903 150,897 325,237
-------- -------- -------- --------
Total Earnings - all entities .. $412,099 $613,356 $282,361 $435,815
======== ======== ======== ========
As you can see, operating earnings substantially improved
during 1986. Some of the improvement came from the insurance
operation, whose results I will discuss in a later section.
Fechheimer also will be discussed separately. Our other major
businesses performed as follows:
o Operating results at The Buffalo News continue to reflect a
truly superb managerial job by Stan Lipsey. For the third year
in a row, man-hours worked fell significantly and other costs
were closely controlled. Consequently, our operating margins
improved materially in 1986, even though our advertising rate
increases were well below those of most major newspapers.
Our cost-control efforts have in no way reduced our
commitment to news. We continue to deliver a 50% "news hole"
(the portion of the total space in the paper devoted to news), a
higher percentage, we believe, than exists at any dominant
newspaper in this country of our size or larger.
The average news hole at papers comparable to the News is
about 40%. The difference between 40% and 50% is more important
than it might first seem: a paper with 30 pages of ads and a 40%
news hole delivers 20 pages of news a day, whereas our paper
matches 30 pages of ads with 30 pages of news. Therefore, given
ad pages equal in number, we end up delivering our readers no
less than 50% more news.
We believe this heavy commitment to news is one of the
reasons The Buffalo News has the highest weekday penetration rate
(the percentage of households in the paper’s primary marketing
area purchasing it each day) among any of the top 50 papers in
the country. Our Sunday penetration, where we are also number
one, is even more impressive. Ten years ago, the only Sunday
paper serving Buffalo (the Courier-Express) had circulation of
271,000 and a penetration ratio of about 63%. The Courier-
Express had served the area for many decades and its penetration
ratio - which was similar to those existing in many metropolitan
markets - was thought to be a "natural" one, accurately
reflecting the local citizenry’s appetite for a Sunday product.
Our Sunday paper was started in late 1977. It now has a
penetration ratio of 83% and sells about 100,000 copies more each
Sunday than did the Courier-Express ten years ago - even though
population in our market area has declined during the decade. In
recent history, no other city that has long had a local Sunday
paper has experienced a penetration gain anywhere close to
Buffalo’s.
Despite our exceptional market acceptance, our operating
margins almost certainly have peaked. A major newsprint price
increase took effect at the end of 1986, and our advertising rate
increases in 1987 will again be moderate compared to those of the
industry. However, even if margins should materially shrink, we
would not reduce our news-hole ratio.
As I write this, it has been exactly ten years since we
purchased The News. The financial rewards it has brought us have
far exceeded our expectations and so, too, have the non-financial
rewards. Our respect for the News - high when we bought it - has
grown consistently ever since the purchase, as has our respect
and admiration for Murray Light, the editor who turns out the
product that receives such extraordinary community acceptance.
The efforts of Murray and Stan, which were crucial to the News
during its dark days of financial reversals and litigation, have
not in the least been lessened by prosperity. Charlie and I are
grateful to them.
o The amazing Blumkins continue to perform business miracles
at Nebraska Furniture Mart. Competitors come and go (mostly go),
but Mrs. B. and her progeny roll on. In 1986 net sales increased
10.2% to $132 million. Ten years ago sales were $44 million and,
even then, NFM appeared to be doing just about all of the
business available in the Greater Omaha Area. Given NFM’s
remarkable dominance, Omaha’s slow growth in population and the
modest inflation rates that have applied to the goods NFM sells,
how can this operation continue to rack up such large sales
gains? The only logical explanation is that the marketing
territory of NFM’s one-and-only store continues to widen because
of its ever-growing reputation for rock-bottom everyday prices
and the broadest of selections. In preparation for further
gains, NFM is expanding the capacity of its warehouse, located a
few hundred yards from the store, by about one-third.
Mrs. B, Chairman of Nebraska Furniture Mart, continues at
age 93 to outsell and out-hustle any manager I’ve ever seen.
She’s at the store seven days a week, from opening to close.
Competing with her represents a triumph of courage over judgment.
It’s easy to overlook what I consider to be the critical
lesson of the Mrs. B saga: at 93, Omaha based Board Chairmen have
yet to reach their peak. Please file this fact away to consult
before you mark your ballot at the 2024 annual meeting of
Berkshire.
o At See’s, sales trends improved somewhat from those of
recent years. Total pounds sold rose about 2%. (For you
chocaholics who like to fantasize, one statistic: we sell over
12,000 tons annually.) Same-store sales, measured in pounds, were
virtually unchanged. In the previous six years, same store
poundage fell, and we gained or maintained poundage volume only
by adding stores. But a particularly strong Christmas season in
1986 stemmed the decline. By stabilizing same-store volume and
making a major effort to control costs, See’s was able to
maintain its excellent profit margin in 1986 though it put
through only minimal price increases. We have Chuck Huggins, our
long-time manager at See’s, to thank for this significant
achievement.
See’s has a one-of-a-kind product "personality" produced by
a combination of its candy’s delicious taste and moderate price,
the company’s total control of the distribution process, and the
exceptional service provided by store employees. Chuck
rightfully measures his success by the satisfaction of our
customers, and his attitude permeates the organization. Few
major retailing companies have been able to sustain such a
customer-oriented spirit, and we owe Chuck a great deal for
keeping it alive and well at See’s.
See’s profits should stay at about their present level. We
will continue to increase prices very modestly, merely matching
prospective cost increases.
o World Book is the largest of 17 Scott Fetzer operations
that joined Berkshire at the beginning of 1986. Last year I
reported to you enthusiastically about the businesses of Scott
Fetzer and about Ralph Schey, its manager. A year’s experience
has added to my enthusiasm for both. Ralph is a superb
businessman and a straight shooter. He also brings exceptional
versatility and energy to his job: despite the wide array of
businesses that he manages, he is on top of the operations,
opportunities and problems of each. And, like our other
managers, Ralph is a real pleasure to work with. Our good
fortune continues.
World Book’s unit volume increased for the fourth
consecutive year, with encyclopedia sales up 7% over 1985 and 45%
over 1982. Childcraft’s unit sales also grew significantly.
World Book continues to dominate the U.S. direct-sales
encyclopedia market - and for good reasons. Extraordinarily
well-edited and priced at under 5 cents per page, these books are
a bargain for youngster and adult alike. You may find one
editing technique interesting: World Book ranks over 44,000 words
by difficulty. Longer entries in the encyclopedia include only
the most easily comprehended words in the opening sections, with
the difficulty of the material gradually escalating as the
exposition proceeds. As a result, youngsters can easily and
profitably read to the point at which subject matter gets too
difficult, instead of immediately having to deal with a
discussion that mixes up words requiring college-level
comprehension with others of fourth-grade level.
Selling World Book is a calling. Over one-half of our
active salespeople are teachers or former teachers, and another
5% have had experience as librarians. They correctly think of
themselves as educators, and they do a terrific job. If you
don’t have a World Book set in your house, I recommend one.
o Kirby likewise recorded its fourth straight year of unit
volume gains. Worldwide, unit sales grew 4% from 1985 and 33%
from 1982. While the Kirby product is more expensive than most
cleaners, it performs in a manner that leaves cheaper units far
behind ("in the dust," so to speak). Many 30- and 40-year-old
Kirby cleaners are still in active duty. If you want the best,
you buy a Kirby.
Some companies that historically have had great success in
direct sales have stumbled in recent years. Certainly the era of
the working woman has created new challenges for direct sales
organizations. So far, the record shows that both Kirby and
World Book have responded most successfully.
The businesses described above, along with the insurance
operation and Fechheimer, constitute our major business units.
The brevity of our descriptions is in no way meant to diminish
the importance of these businesses to us. All have been
discussed in past annual reports and, because of the tendency of
Berkshire owners to stay in the fold (about 98% of the stock at
the end of each year is owned by people who were owners at the
start of the year), we want to avoid undue repetition of basic
facts. You can be sure that we will immediately report to you in
detail if the underlying economics or competitive position of any
of these businesses should materially change. In general, the
businesses described in this section can be characterized as
having very strong market positions, very high returns on capital
employed, and the best of operating managements.
The Fechheimer Bros. Co.
Every year in Berkshire’s annual report I include a
description of the kind of business that we would like to buy.
This "ad" paid off in 1986.
On January 15th of last year I received a letter from Bob
Heldman of Cincinnati, a shareholder for many years and also
Chairman of Fechheimer Bros. Until I read the letter, however, I
did not know of either Bob or Fechheimer. Bob wrote that he ran
a company that met our tests and suggested that we get together,
which we did in Omaha after their results for 1985 were compiled.
He filled me in on a little history: Fechheimer, a uniform
manufacturing and distribution business, began operations in
1842. Warren Heldman, Bob’s father, became involved in the
business in 1941 and his sons, Bob and George (now President),
along with their sons, subsequently joined the company. Under
the Heldmans’ management, the business was highly successful.
In 1981 Fechheimer was sold to a group of venture
capitalists in a leveraged buy out (an LBO), with management
retaining an equity interest. The new company, as is the case
with all LBOS, started with an exceptionally high debt/equity
ratio. After the buy out, however, operations continued to be
very successful. So by the start of last year debt had been paid
down substantially and the value of the equity had increased
dramatically. For a variety of reasons, the venture capitalists
wished to sell and Bob, having dutifully read Berkshire’s annual
reports, thought of us.
Fechheimer is exactly the sort of business we like to buy.
Its economic record is superb; its managers are talented, high-
grade, and love what they do; and the Heldman family wanted to
continue its financial interest in partnership with us.
Therefore, we quickly purchased about 84% of the stock for a
price that was based upon a $55 million valuation for the entire
business.
The circumstances of this acquisition were similar to those
prevailing in our purchase of Nebraska Furniture Mart: most of
the shares were held by people who wished to employ funds
elsewhere; family members who enjoyed running their business
wanted to continue both as owners and managers; several
generations of the family were active in the business, providing
management for as far as the eye can see; and the managing family
wanted a purchaser who would not re-sell, regardless of price,
and who would let the business be run in the future as it had
been in the past. Both Fechheimer and NFM were right for us, and
we were right for them.
You may be amused to know that neither Charlie nor I have
been to Cincinnati, headquarters for Fechheimer, to see their
operation. (And, incidentally, it works both ways: Chuck Huggins,
who has been running See’s for 15 years, has never been to
Omaha.) If our success were to depend upon insights we developed
through plant inspections, Berkshire would be in big trouble.
Rather, in considering an acquisition, we attempt to evaluate the
economic characteristics of the business - its competitive
strengths and weaknesses - and the quality of the people we will
be joining. Fechheimer was a standout in both respects. In
addition to Bob and George Heldman, who are in their mid-60s -
spring chickens by our standards - there are three members of the
next generation, Gary, Roger and Fred, to insure continuity.
As a prototype for acquisitions, Fechheimer has only one
drawback: size. We hope our next acquisition is at least several
times as large but a carbon copy in all other respects. Our
threshold for minimum annual after-tax earnings of potential
acquisitions has been moved up to $10 million from the $5 million
level that prevailed when Bob wrote to me.
Flushed with success, we repeat our ad. If you have a
business that fits, call me or, preferably, write.
Here’s what we’re looking for:
(1) large purchases (at least $10 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 issuing stock when we receive
as much in intrinsic business value as we give. Indeed,
following recent advances in the price of Berkshire stock,
transactions involving stock issuance may be quite feasible. 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.
On the other hand, we frequently get approached about
acquisitions that don’t come close to meeting our tests: new
ventures, turnarounds, auction-like sales, and the ever-popular
(among brokers) "I’m-sure-something-will-work-out-if-you-people-
get-to-know-each-other." None of these attracts us in the least.
* * *
Besides being interested in the purchases of entire
businesses as described above, we are also interested in the
negotiated purchase of large, but not controlling, blocks of
stock, as in our Cap Cities purchase. Such purchases appeal to
us only when we are very comfortable with both the economics of
the business and the ability and integrity of the people running
the operation. We prefer large transactions: in the unusual case
we might do something as small as $50 million (or even smaller),
but our preference is for commitments many times that size.
Insurance Operations
We present our usual table of industry figures, expanded
this year to include data about incurred losses and the GNP
inflation index. The contrast in 1986 between the growth in
premiums and growth in incurred losses will show you why
underwriting results for the year improved materially:
Statutory
Yearly Change Combined Ratio Yearly Change Inflation Rate
in Premiums After Policyholder in Incurred Measured by
Written (%) Dividends Losses (%) GNP Deflator (%)
------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.7
1982 ..... 4.4 109.8 8.4 6.4
1983 ..... 4.6 112.0 6.8 3.9
1984 ..... 9.2 117.9 16.9 3.8
1985 ..... 22.1 116.5 16.1 3.3
1986 (Est.) 22.6 108.5 15.5 2.6
Source: Best’s Insurance Management Reports
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. When the investment income that an insurer
earns from holding on to policyholders’ funds ("the float") is
taken into account, a combined ratio in the 107-112 range
typically produces an overall break-even result, exclusive of
earnings on the funds provided by shareholders.
The math of the insurance business, encapsulated by the
table, is not very complicated. In years when the industry’s
annual gain in revenues (premiums) pokes along at 4% or 5%,
underwriting losses are sure to mount. This is not because auto
accidents, fires, windstorms and the like are occurring more
frequently, nor has it lately been the fault of general
inflation. Today, social and judicial inflation are the major
culprits; the cost of entering a courtroom has simply ballooned.
Part of the jump in cost arises from skyrocketing verdicts, and
part from the tendency of judges and juries to expand the
coverage of insurance policies beyond that contemplated by the
insurer when the policies were written. Seeing no let-up in
either trend, we continue to believe that the industry’s revenues
must grow at close to 10% annually for it to just hold its own
in terms of profitability, even though general inflation may be
running only 2% - 4%.
In 1986, as noted, the industry’s premium volume soared even
faster than loss costs. Consequently, the underwriting loss of
the industry fell dramatically. In last year’s report we
predicted this sharp improvement but also predicted that
prosperity would be fleeting. Alas, this second prediction is
already proving accurate. The rate of gain in the industry’s
premium volume has slowed significantly (from an estimated 27.1%
in 1986’s first quarter, to 23.5% in the second, to 21.8% in the
third, to 18.7% in the fourth), and we expect further slowing in
1987. Indeed, the rate of gain may well fall below my 10%
"equilibrium" figure by the third quarter.
Nevertheless, underwriting results in 1987, assuming they
are not dragged down by a major natural catastrophe, will again
improve materially because price increases are recognized in
revenues on a lagged basis. In effect, the good news in earnings
follows the good news in prices by six to twelve months. But the
improving trend in earnings will probably end by late 1988 or
early 1989. Thereafter the industry is likely to head south in a
hurry.
Pricing behavior in the insurance industry continues to be
exactly what can be expected in a commodity-type business. Only
under shortage conditions are high profits achieved, and such
conditions don’t last long. When the profit sun begins to shine,
long-established insurers shower investors with new shares in
order to build capital. In addition, newly-formed insurers rush
to sell shares at the advantageous prices available in the new-
issue market (prices advantageous, that is, to the insiders
promoting the company but rarely to the new shareholders). These
moves guarantee future trouble: capacity soars, competitive
juices flow, and prices fade.
It’s interesting to observe insurance leaders beseech their
colleagues to behave in a more "statesmanlike" manner when
pricing policies. "Why," they ask, "can’t we learn from history,
even out the peaks and valleys, and consistently price to make
reasonable profits?" What they wish, of course, is pricing that
resembles, say, that of The Wall Street journal, whose prices are
ample to start with and rise consistently each year.
Such calls for improved behavior have all of the efficacy of
those made by a Nebraska corn grower asking his fellow growers,
worldwide, to market their corn with more statesmanship. What’s
needed is not more statesmen, but less corn. By raising large
amounts of capital in the last two years, the insurance industry
has, to continue our metaphor, vastly expanded its plantings of
corn. The resulting increase in "crop" - i.e., the proliferation
of insurance capacity - will have the same effect on prices and
profits that surplus crops have had since time immemorial.
Our own insurance operation did well in 1986 and is also
likely to do well in 1987. We have benefited significantly from
industry conditions. But much of our prosperity arises from the
efforts and ability of Mike Goldberg, manager of all insurance
operations.
Our combined ratio (on a statutory basis and excluding
structured settlements and financial reinsurance) fell from 111
in 1985 to 103 in 1986. In addition, our premium growth has been
exceptional: although final figures aren’t available, I believe
that over the past two years we were the fastest growing company
among the country’s top 100 insurers. Some of our growth, it is
true, came from our large quota-share contract with Fireman’s
Fund, described in last year’s report and updated in Charlie’s
letter on page 54. But even if the premiums from that contract
are excluded from the calculation, we probably still ranked first
in growth.
Interestingly, we were the slowest-growing large insurer in
the years immediately preceding 1985. In fact, we shrank - and
we will do so again from time to time in the future. Our large
swings in volume do not mean that we come and go from the
insurance marketplace. Indeed, we are its most steadfast
participant, always standing ready, at prices we believe
adequate, to write a wide variety of high-limit coverages. The
swings in our volume arise instead from the here-today, gone-
tomorrow behavior of other insurers. When most insurers are
"gone," because their capital is inadequate or they have been
frightened by losses, insureds rush to us and find us ready to
do business. But when hordes of insurers are "here," and are
slashing prices far below expectable costs, many customers
naturally leave us in order to take advantage of the bargains
temporarily being offered by our competition.
Our firmness on prices works no hardship on the consumer: he
is being bombarded by attractively priced insurance offers at
those times when we are doing little business. And it works no
hardship on our employees: we don’t engage in layoffs when we
experience a cyclical slowdown at one of our generally-profitable
insurance operations. This no-layoff practice is in our self-
interest. Employees who fear that large layoffs will accompany
sizable reductions in premium volume will understandably produce
scads of business through thick and thin (mostly thin).
The trends in National Indemnity’s traditional business -
the writing of commercial auto and general liability policies
through general agents - suggest how gun-shy other insurers
became for a while and how brave they are now getting. In the
last quarter of 1984, NICO’s monthly volume averaged $5 million,
about what it had been running for several years. By the first
quarter of 1986, monthly volume had climbed to about $35 million.
In recent months, a sharp decline has set in. Monthly volume is
currently about $20 million and will continue to fall as new
competitors surface and prices are cut. Ironically, the managers
of certain major new competitors are the very same managers that
just a few years ago bankrupted insurers that were our old
competitors. Through state-mandated guaranty funds, we must pay
some of the losses these managers left unpaid, and now we find
them writing the same sort of business under a new name. C’est
la guerre.
The business we call "large risks" expanded significantly
during 1986, and will be important to us in the future. In this
operation, we regularly write policies with annual premiums of $1
- $3 million, or even higher. This business will necessarily be
highly volatile - both in volume and profitability - but our
premier capital position and willingness to write large net lines
make us a very strong force in the market when prices are right.
On the other hand, our structured settlement business has become
near-dormant because present prices make no sense to us.
The 1986 loss reserve development of our insurance group is
chronicled on page 46. The figures show the amount of error in
our yearend 1985 liabilities that a year of settlements and
further evaluation has revealed. As you can see, what I told you
last year about our loss liabilities was far from true - and that
makes three years in a row of error. If the physiological rules
that applied to Pinocchio were to apply to me, my nose would now
draw crowds.
When insurance executives belatedly establish proper
reserves, they often speak of "reserve strengthening," a term
that has a rather noble ring to it. They almost make it sound as
if they are adding extra layers of strength to an already-solid
balance sheet. That’s not the case: instead the term is a
euphemism for what should more properly be called "correction of
previous untruths" (albeit non-intentional ones).
We made a special effort at the end of 1986 to reserve
accurately. However, we tried just as hard at the end of 1985.
Only time will tell whether we have finally succeeded in
correctly estimating our insurance liabilities.
Despite the difficulties we have had in reserving and the
commodity economics of the industry, we expect our insurance
business to both grow and make significant amounts of money - but
progress will be distinctly irregular and there will be major
unpleasant surprises from time to time. It’s a treacherous
business and a wary attitude is essential. We must heed Woody
Allen: "While the lamb may lie down with the lion, the lamb
shouldn’t count on getting a whole lot of sleep."
In our insurance operations we have an advantage in
attitude, we have an advantage in capital, and we are developing
an advantage in personnel. Additionally, I like to think we have
some long-term edge in investing the float developed from
policyholder funds. The nature of the business suggests that we
will need all of these advantages in order to prosper.
* * *
GEICO Corporation, 41% owned by Berkshire, had an
outstanding year in 1986. Industrywide, underwriting experience
in personal lines did not improve nearly as much as it did in
commercial lines. But GEICO, writing personal lines almost
exclusively, improved its combined ratio to 96.9 and recorded a
16% gain in premium volume. GEICO also continued to repurchase
its own shares and ended the year with 5.5% fewer shares
outstanding than it had at the start of the year. Our share of
GEICO’s premium volume is over $500 million, close to double that
of only three years ago. GEICO’s book of business is one of the
best in the world of insurance, far better indeed than
Berkshire’s own book.
The most important ingredient in GEICO’s success is rock-
bottom operating costs, which set the company apart from
literally hundreds of competitors that offer auto insurance. The
total of GEICO’s underwriting expense and loss adjustment expense
in 1986 was only 23.5% of premiums. Many major companies show
percentages 15 points higher than that. Even such huge direct
writers as Allstate and State Farm incur appreciably higher costs
than does GEICO.
The difference between GEICO’s costs and those of its
competitors is a kind of moat that protects a valuable and much-
sought-after business castle. No one understands this moat-
around-the-castle concept better than Bill Snyder, Chairman of
GEICO. He continually widens the moat by driving down costs
still more, thereby defending and strengthening the economic
franchise. Between 1985 and 1986, GEICO’s total expense ratio
dropped from 24.1% to the 23.5% mentioned earlier and, under
Bill’s leadership, the ratio is almost certain to drop further.
If it does - and if GEICO maintains its service and underwriting
standards - the company’s future will be brilliant indeed.
The second stage of the GEICO rocket is fueled by Lou
Simpson, Vice Chairman, who has run the company’s investments
since late 1979. Indeed, it’s a little embarrassing for me, the
fellow responsible for investments at Berkshire, to chronicle
Lou’s performance at GEICO. Only my ownership of a controlling
block of Berkshire stock makes me secure enough to give you the
following figures, comparing the overall return of the equity
portfolio at GEICO to that of the Standard & Poor’s 500:
Year GEICO’s Equities S&P 500
---- ---------------- -------
1980 .................. 23.7% 32.3%
1981 .................. 5.4 (5.0)
1982 .................. 45.8 21.4
1983 .................. 36.0 22.4
1984 .................. 21.8 6.2
1985 .................. 45.8 31.6
1986 .................. 38.7 18.6
These are not only terrific figures but, fully as important,
they have been achieved in the right way. Lou has consistently
invested in undervalued common stocks that, individually, were
unlikely to present him with a permanent loss and that,
collectively, were close to risk-free.
In sum, GEICO is an exceptional business run by exceptional
managers. We are fortunate to be associated with them.
Marketable Securities
During 1986, our insurance companies purchased about $700
million of tax-exempt bonds, most having a maturity of 8 to 12
years. You might think that this commitment indicates a
considerable enthusiasm for such bonds. Unfortunately, that’s
not so: at best, the bonds are mediocre investments. They simply
seemed the least objectionable alternative at the time we bought
them, and still seem so. (Currently liking neither stocks nor
bonds, I find myself the polar opposite of Mae West as she
declared: "I like only two kinds of men - foreign and domestic.")
We must, of necessity, hold marketable securities in our
insurance companies and, as money comes in, we have only five
directions to go: (1) long-term common stock investments; (2)
long-term fixed-income securities; (3) medium-term fixed-income
securities; (4) short-term cash equivalents; and (5) short-term
arbitrage commitments.
Common stocks, of course, are the most fun. When conditions
are right that is, when companies with good economics and good
management sell well below intrinsic business value - stocks
sometimes provide grand-slam home runs. But we currently find no
equities that come close to meeting our tests. This statement in
no way translates into a stock market prediction: we have no idea
- and never have had - whether the market is going to go up,
down, or sideways in the near- or intermediate term future.
What we do know, however, is that occasional outbreaks of
those two super-contagious diseases, fear and greed, will forever
occur in the investment community. The timing of these epidemics
will be unpredictable. And the market aberrations produced by
them will be equally unpredictable, both as to duration and
degree. Therefore, we never try to anticipate the arrival or
departure of either disease. Our goal is more modest: we simply
attempt to be fearful when others are greedy and to be greedy
only when others are fearful.
As this is written, little fear is visible in Wall Street.
Instead, euphoria prevails - and why not? What could be more
exhilarating than to participate in a bull market in which the
rewards to owners of businesses become gloriously uncoupled from
the plodding performances of the businesses themselves.
Unfortunately, however, stocks can’t outperform businesses
indefinitely.
Indeed, because of the heavy transaction and investment
management costs they bear, stockholders as a whole and over the
long term must inevitably underperform the companies they own.
If American business, in aggregate, earns about 12% on equity
annually, investors must end up earning significantly less. Bull
markets can obscure mathematical laws, but they cannot repeal
them.
The second category of investments open to our insurance
companies is long-term bonds. These are unlikely to be of
interest to us except in very special situations, such as the
Washington Public Power Supply System #1, #2 and #3 issues,
discussed in our 1984 report. (At yearend, we owned WPPSS issues
having an amortized cost of $218 million and a market value of
$310 million, paying us $31.7 million in annual tax-exempt
income.) Our aversion to long-term bonds relates to our fear that
we will see much higher rates of inflation within the next
decade. Over time, the behavior of our currency will be
determined by the behavior of our legislators. This relationship
poses a continuing threat to currency stability - and a
corresponding threat to the owners of long-term bonds.
We continue to periodically employ money in the arbitrage
field. However, unlike most arbitrageurs, who purchase dozens of
securities each year, we purchase only a few. We restrict
ourselves to large deals that have been announced publicly and do
not bet on the come. Therefore, our potential profits are apt to
be small; but, with luck, our disappointments will also be few.
Our yearend portfolio shown below includes one arbitrage
commitment, Lear-Siegler. Our balance sheet also includes a
receivable for $145 million, representing the money owed us (and
paid a few days later) by Unilever, then in the process of
purchasing Chesebrough-Ponds, another of our arbitrage holdings.
Arbitrage is an alternative to Treasury Bills as a short-term
parking place for money - a choice that combines potentially
higher returns with higher risks. To date, our returns from the
funds committed to arbitrage have been many times higher than
they would have been had we left those funds in Treasury Bills.
Nonetheless, one bad experience could change the scorecard
markedly.
We also, though it takes some straining, currently view
medium-term tax-exempt bonds as an alternative to short-term
Treasury holdings. Buying these bonds, we run a risk of
significant loss if, as seems probable, we sell many of them well
before maturity. However, we believe this risk is more than
counter-balanced first, by the much higher after-tax returns
currently realizable from these securities as compared to
Treasury Bills and second, by the possibility that sales will
produce an overall profit rather than a loss. Our expectation of
a higher total return, after allowing for the possibility of loss
and after taking into account all tax effects, is a relatively
close call and could well be wrong. Even if we sell our bonds at
a fairly large loss, however, we may end up reaping a higher
after-tax return than we would have realized by repeatedly
rolling over Treasury Bills.
In any event, you should know that our expectations for both
the stocks and bonds we now hold are exceptionally modest, given
current market levels. Probably the best thing that could happen
to us is a market in which we would choose to sell many of our
bond holdings at a significant loss in order to re-allocate funds
to the far-better equity values then very likely to exist. The
bond losses I am talking about would occur if high interest rates
came along; the same rates would probably depress common stocks
considerably more than medium-term bonds.
We show below our 1986 yearend net holdings in marketable
equities. All positions with a market value of over $25 million
are listed, and the interests attributable to minority
shareholdings of Wesco Financial Corp. and Nebraska Furniture
Mart are excluded.
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
2,990,000 Capital Cities/ABC, Inc. ....... $515,775 $ 801,694
6,850,000 GEICO Corporation .............. 45,713 674,725
2,379,200 Handy & Harman ................. 27,318 46,989
489,300 Lear Siegler, Inc. ............. 44,064 44,587
1,727,765 The Washington Post Company .... 9,731 269,531
---------- ----------
642,601 1,837,526
All Other Common Stockholdings 12,763 36,507
---------- ----------
Total Common Stocks ............ $655,364 $1,874,033
We should note that we expect to keep permanently our three
primary holdings, Capital Cities/ABC, Inc., GEICO Corporation,
and The Washington Post. Even if these securities were to appear
significantly overpriced, we would not anticipate selling them,
just as we would not sell See’s or Buffalo Evening News if
someone were to offer us a price far above what we believe those
businesses are worth.
This attitude may seem old-fashioned in a corporate world in
which activity has become the order of the day. The modern
manager refers to his "portfolio" of businesses - meaning that
all of them are candidates for "restructuring" whenever such a
move is dictated by Wall Street preferences, operating conditions
or a new corporate "concept." (Restructuring is defined narrowly,
however: it extends only to dumping offending businesses, not to
dumping the officers and directors who bought the businesses in
the first place. "Hate the sin but love the sinner" is a
theology as popular with the Fortune 500 as it is with the
Salvation Army.)
Investment managers are even more hyperkinetic: their
behavior during trading hours makes whirling dervishes appear
sedated by comparison. Indeed, the term "institutional investor"
is becoming one of those self-contradictions called an oxymoron,
comparable to "jumbo shrimp," "lady mudwrestler" and "inexpensive
lawyer."
Despite the enthusiasm for activity that has swept business
and financial America, we will stick with our ‘til-death-do-us-
part policy. It’s the only one with which Charlie and I are
comfortable, it produces decent results, and it lets our managers
and those of our investees run their businesses free of
distractions.
NHP, Inc.
Last year we paid $23.7 million for about 50% of NHP, Inc.,
a developer, syndicator, owner and manager of multi-family rental
housing. Should all executive stock options that have been
authorized be granted and exercised, our equity interest will
decline to slightly over 45%.
NHP, Inc. has a most unusual genealogy. In 1967, President
Johnson appointed a commission of business and civic leaders, led
by Edgar Kaiser, to study ways to increase the supply of
multifamily housing for low- and moderate-income tenants.
Certain members of the commission subsequently formed and
promoted two business entities to foster this goal. Both are now
owned by NHP, Inc. and one operates under unusual ground rules:
three of its directors must be appointed by the President, with
the advice and consent of the Senate, and it is also required by
law to submit an annual report to the President.
Over 260 major corporations, motivated more by the idea of
public service than profit, invested $42 million in the two
original entities, which promptly began, through partnerships, to
develop government-subsidized rental property. The typical
partnership owned a single property and was largely financed by a
non-recourse mortgage. Most of the equity money for each
partnership was supplied by a group of limited partners who were
primarily attracted by the large tax deductions that went with
the investment. NHP acted as general partner and also purchased
a small portion of each partnership’s equity.
The Government’s housing policy has, of course, shifted and
NHP has necessarily broadened its activities to include non-
subsidized apartments commanding market-rate rents. In addition,
a subsidiary of NHP builds single-family homes in the Washington,
D.C. area, realizing revenues of about $50 million annually.
NHP now oversees about 500 partnership properties that are
located in 40 states, the District of Columbia and Puerto Rico,
and that include about 80,000 housing units. The cost of these
properties was more than $2.5 billion and they have been well
maintained. NHP directly manages about 55,000 of the housing
units and supervises the management of the rest. The company’s
revenues from management are about $16 million annually, and
growing.
In addition to the equity interests it purchased upon the
formation of each partnership, NHP owns varying residual
interests that come into play when properties are disposed of and
distributions are made to the limited partners. The residuals on
many of NHP’s "deep subsidy" properties are unlikely to be of
much value. But residuals on certain other properties could
prove quite valuable, particularly if inflation should heat up.
The tax-oriented syndication of properties to individuals
has been halted by the Tax Reform Act of 1986. In the main, NHP
is currently trying to develop equity positions or significant
residual interests in non-subsidized rental properties of quality
and size (typically 200 to 500 units). In projects of this kind,
NHP usually works with one or more large institutional investors
or lenders. NHP will continue to seek ways to develop low- and
moderate-income apartment housing, but will not likely meet
success unless government policy changes.
Besides ourselves, the large shareholders in NHP are
Weyerhauser (whose interest is about 25%) and a management group
led by Rod Heller, chief executive of NHP. About 60 major
corporations also continue to hold small interests, none larger
than 2%.
Taxation
The Tax Reform Act of 1986 affects our various businesses in
important and divergent ways. Although we find much to praise in
the Act, the net financial effect for Berkshire is negative: our
rate of increase in business value is likely to be at least
moderately slower under the new law than under the old. The net
effect for our shareholders is even more negative: every dollar
of increase in per-share business value, assuming the increase is
accompanied by an equivalent dollar gain in the market value of
Berkshire stock, will produce 72 cents of after-tax gain for our
shareholders rather than the 80 cents produced under the old law.
This result, of course, reflects the rise in the maximum tax rate
on personal capital gains from 20% to 28%.
Here are the main tax changes that affect Berkshire:
o The tax rate on corporate ordinary income is scheduled to
decrease from 46% in 1986 to 34% in 1988. This change obviously
affects us positively - and it also has a significant positive
effect on two of our three major investees, Capital Cities/ABC
and The Washington Post Company.
I say this knowing that over the years there has been a lot
of fuzzy and often partisan commentary about who really pays
corporate taxes - businesses or their customers. The argument,
of course, has usually turned around tax increases, not
decreases. Those people resisting increases in corporate rates
frequently argue that corporations in reality pay none of the
taxes levied on them but, instead, act as a sort of economic
pipeline, passing all taxes through to consumers. According to
these advocates, any corporate-tax increase will simply lead to
higher prices that, for the corporation, offset the increase.
Having taken this position, proponents of the "pipeline" theory
must also conclude that a tax decrease for corporations will not
help profits but will instead flow through, leading to
correspondingly lower prices for consumers.
Conversely, others argue that corporations not only pay the
taxes levied upon them, but absorb them also. Consumers, this
school says, will be unaffected by changes in corporate rates.
What really happens? When the corporate rate is cut, do
Berkshire, The Washington Post, Cap Cities, etc., themselves soak
up the benefits, or do these companies pass the benefits along to
their customers in the form of lower prices? This is an
important question for investors and managers, as well as for
policymakers.
Our conclusion is that in some cases the benefits of lower
corporate taxes fall exclusively, or almost exclusively, upon the
corporation and its shareholders, and that in other cases the
benefits are entirely, or almost entirely, passed through to the
customer. What determines the outcome is the strength of the
corporation’s business franchise and whether the profitability of
that franchise is regulated.
For example, when the franchise is strong and after-tax
profits are regulated in a relatively precise manner, as is the
case with electric utilities, changes in corporate tax rates are
largely reflected in prices, not in profits. When taxes are cut,
prices will usually be reduced in short order. When taxes are
increased, prices will rise, though often not as promptly.
A similar result occurs in a second arena - in the price-
competitive industry, whose companies typically operate with very
weak business franchises. In such industries, the free market
"regulates" after-tax profits in a delayed and irregular, but
generally effective, manner. The marketplace, in effect,
performs much the same function in dealing with the price-
competitive industry as the Public Utilities Commission does in
dealing with electric utilities. In these industries, therefore,
tax changes eventually affect prices more than profits.
In the case of unregulated businesses blessed with strong
franchises, however, it’s a different story: the corporation
and its shareholders are then the major beneficiaries of tax
cuts. These companies benefit from a tax cut much as the
electric company would if it lacked a regulator to force down
prices.
Many of our businesses, both those we own in whole and in
part, possess such franchises. Consequently, reductions in their
taxes largely end up in our pockets rather than the pockets of
our customers. While this may be impolitic to state, it is
impossible to deny. If you are tempted to believe otherwise,
think for a moment of the most able brain surgeon or lawyer in
your area. Do you really expect the fees of this expert (the
local "franchise-holder" in his or her specialty) to be reduced
now that the top personal tax rate is being cut from 50% to 28%?
Your joy at our conclusion that lower rates benefit a number
of our operating businesses and investees should be severely
tempered, however, by another of our convictions: scheduled 1988
tax rates, both individual and corporate, seem totally
unrealistic to us. These rates will very likely bestow a fiscal
problem on Washington that will prove incompatible with price
stability. We believe, therefore, that ultimately - within, say,
five years - either higher tax rates or higher inflation rates
are almost certain to materialize. And it would not surprise us
to see both.
o Corporate capital gains tax rates have been increased from
28% to 34%, effective in 1987. This change will have an
important adverse effect on Berkshire because we expect much of
our gain in business value in the future, as in the past, to
arise from capital gains. For example, our three major
investment holdings - Cap Cities, GEICO, and Washington Post - at
yearend had a market value of over $1.7 billion, close to 75% of
the total net worth of Berkshire, and yet they deliver us only
about $9 million in annual income. Instead, all three retain a
very high percentage of their earnings, which we expect to
eventually deliver us capital gains.
The new law increases the rate for all gains realized in the
future, including the unrealized gains that existed before the
law was enacted. At yearend, we had $1.2 billion of such
unrealized gains in our equity investments. The effect of the new
law on our balance sheet will be delayed because a GAAP rule
stipulates that the deferred tax liability applicable to
unrealized gains should be stated at last year’s 28% tax rate
rather than the current 34% rate. This rule is expected to change
soon. The moment it does, about $73 million will disappear from
our GAAP net worth and be added to the deferred tax account.
o Dividend and interest income received by our insurance
companies will be taxed far more heavily under the new law.
First, all corporations will be taxed on 20% of the dividends
they receive from other domestic corporations, up from 15% under
the old law. Second, there is a change concerning the residual
80% that applies only to property/casualty companies: 15% of that
residual will be taxed if the stocks paying the dividends were
purchased after August 7, 1986. A third change, again applying
only to property/casualty companies, concerns tax-exempt bonds:
interest on bonds purchased by insurers after August 7, 1986 will
only be 85% tax-exempt.
The last two changes are very important. They mean that our
income from the investments we make in future years will be
significantly lower than would have been the case under the old
law. My best guess is that these changes alone will eventually
reduce the earning power of our insurance operation by at least
10% from what we could previously have expected.
o The new tax law also materially changes the timing of tax
payments by property/casualty insurance companies. One new rule
requires us to discount our loss reserves in our tax returns, a
change that will decrease deductions and increase taxable income.
Another rule, to be phased in over six years, requires us to
include 20% of our unearned premium reserve in taxable income.
Neither rule changes the amount of the annual tax accrual in
our reports to you, but each materially accelerates the schedule
of payments. That is, taxes formerly deferred will now be front-
ended, a change that will significantly cut the profitability of
our business. An analogy will suggest the toll: if, upon turning
21, you were required to immediately pay tax on all income you
were due to receive throughout your life, both your lifetime
wealth and your estate would be a small fraction of what they
would be if all taxes on your income were payable only when you
died.
Attentive readers may spot an inconsistency in what we say.
Earlier, discussing companies in price-competitive industries, we
suggested that tax increases or reductions affect these companies
relatively little, but instead are largely passed along to their
customers. But now we are saying that tax increases will affect
profits of Berkshire’s property/casualty companies even though
they operate in an intensely price-competitive industry.
The reason this industry is likely to be an exception to our
general rule is that not all major insurers will be working with
identical tax equations. Important differences will exist for
several reasons: a new alternative minimum tax will materially
affect some companies but not others; certain major insurers have
huge loss carry-forwards that will largely shield their income
from significant taxes for at least a few years; and the results
of some large insurers will be folded into the consolidated
returns of companies with non-insurance businesses. These
disparate conditions will produce widely varying marginal tax
rates in the property/casualty industry. That will not be the
case, however, in most other price-competitive industries, such
as aluminum, autos and department stores, in which the major
players will generally contend with similar tax equations.
The absence of a common tax calculus for property/casualty
companies means that the increased taxes falling on the industry
will probably not be passed along to customers to the degree that
they would in a typical price-competitive industry. Insurers, in
other words, will themselves bear much of the new tax burdens.
o A partial offset to these burdens is a "fresh start"
adjustment that occurred on January 1, 1987 when our December 31,
1986 loss reserve figures were converted for tax purposes to the
newly-required discounted basis. (In our reports to you, however,
reserves will remain on exactly the same basis as in the past -
undiscounted except in special cases such as structured
settlements.) The net effect of the "fresh start" is to give us a
double deduction: we will get a tax deduction in 1987 and future
years for a portion of our-incurred-but-unpaid insurance losses
that have already been fully deducted as costs in 1986 and
earlier years.
The increase in net worth that is produced by this change is
not yet reflected in our financial statements. Rather, under
present GAAP rules (which may be changed), the benefit will flow
into the earnings statement and, consequently, into net worth
over the next few years by way of reduced tax charges. We expect
the total benefit from the fresh-start adjustment to be in the
$30 - $40 million range. It should be noted, however, that this
is a one-time benefit, whereas the negative impact of the other
insurance-related tax changes is not only ongoing but, in
important respects, will become more severe as time passes.
o The General Utilities Doctrine was repealed by the new tax
law. This means that in 1987 and thereafter there will be a
double tax on corporate liquidations, one at the corporate level
and another at the shareholder level. In the past, the tax at
the corporate level could be avoided, If Berkshire, for example,
were to be liquidated - which it most certainly won’t be -
shareholders would, under the new law, receive far less from the
sales of our properties than they would have if the properties
had been sold in the past, assuming identical prices in each
sale. Though this outcome is theoretical in our case, the change
in the law will very materially affect many companies.
Therefore, it also affects our evaluations of prospective
investments. Take, for example, producing oil and gas
businesses, selected media companies, real estate companies, etc.
that might wish to sell out. The values that their shareholders
can realize are likely to be significantly reduced simply because
the General Utilities Doctrine has been repealed - though the
companies’ operating economics will not have changed adversely at
all. My impression is that this important change in the law has
not yet been fully comprehended by either investors or managers.
This section of our report has been longer and more
complicated than I would have liked. But the changes in the law
are many and important, particularly for property/casualty
insurers. As I have noted, the new law will hurt Berkshire’s
results, but the negative impact is impossible to quantify with
any precision.
Miscellaneous
We bought a corporate jet last year. What you have heard about such
planes is true: they are very expensive and a luxury in
situations like ours where little travel to out-of-the-way places
is required. And planes not only cost a lot to operate, they cost
a lot just to look at. Pre-tax, cost of capital plus depreciation
on a new $15 million plane probably runs $3 million annually. On
our own plane, bought for $850,000 used, such costs run close to
$200,000 annually.
Cognizant of such figures, your Chairman, unfortunately, has
in the past made a number of rather intemperate remarks about
corporate jets. Accordingly, prior to our purchase, I was forced
into my Galileo mode. I promptly experienced the necessary
"counter-revelation" and travel is now considerably easier - and
considerably costlier - than in the past. Whether Berkshire will
get its money’s worth from the plane is an open question, but I
will work at achieving some business triumph that I can (no
matter how dubiously) attribute to it. I’m afraid Ben Franklin
had my number. Said he: "So convenient a thing it is to be a
reasonable creature, since it enables one to find or make a
reason for everything one has a mind to do."
About 97% of all eligible shares participated in Berkshire’s
1986 shareholder-designated contributions program. Contributions
made through the program were $4 million, and 1,934 charities
were recipients.
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 58 and 59. If you wish to participate in future programs,
we strongly urge that you immediately make sure 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, 1987
will be ineligible for the 1987 program.
* * *
Last year almost 450 people attended our shareholders’
meeting, up from about 250 the year before (and from about a
dozen ten years ago). I hope you can join us on May 19th in
Omaha. Charlie and I like to answer owner-related questions
and I can promise you that our shareholders will pose many good
ones. Finishing up the questions may take quite a while - we
had about 65 last year so you should feel free to leave once
your own have been answered.
Last year, after the meeting, one shareholder from New
Jersey and another from New York went to the Furniture Mart,
where each purchased a $5,000 Oriental rug from Mrs. B. (To be
precise, they purchased rugs that might cost $10,000 elsewhere
for which they were charged about $5,000.) Mrs. B was pleased -
but not satisfied - and she will be looking for you at the store
after this year’s meeting. Unless our shareholders top last
year’s record, I’ll be in trouble. So do me (and yourself) a
favor, and go see her.
Warren E. Buffett
February 27, 1987 Chairman of the Board
Appendix
Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy
First a short quiz: below are abbreviated 1986 statements of earnings for two companies. Which business is the more valuable?
|
Company O |
Company N |
|||||||||||
|
(000s Omitted) |
||||||||||||
|
Revenues………………………. |
$677,240 |
$677,240 |
||||||||||
|
Costs of Goods Sold: |
||||||||||||
|
Historical costs, excluding depreciation……………………. |
$341,170 |
$341,170 |
||||||||||
|
Special non-cash inventory costs……………………………. |
4,979 |
(1) |
||||||||||
|
Depreciation of plant and equipment ……………………... |
8,301 |
13,355 |
(2) |
|||||||||
|
|
349,471 |
359,504 |
||||||||||
|
$327,769 |
$317,736 |
|||||||||||
|
Gross Profit ……………………. |
||||||||||||
|
Selling & Admin. Expense........ |
$260,286 |
$260,286 |
||||||||||
|
Amortization of Goodwill ......... |
______ |
____595 |
(3) |
|||||||||
|
260,286 |
260,881 |
|||||||||||
|
Operating Profit .....................… |
$ 67,483 |
$ 56,855 |
||||||||||
|
Other Income, Net .................… |
4,135 |
4,135 |
||||||||||
|
Pre-Tax Income ......................… |
$ 71,618 |
$ 60,990 |
||||||||||
|
Applicable Income Tax: |
||||||||||||
|
Historical deferred and current tax ………………………………. |
$ 31,387 |
$ 31,387 |
||||||||||
|
Non-Cash Inter-period Allocation Adjustment ............. |
______ |
_____998 |
(4) |
|||||||||
|
31,387 |
32,385 |
|||||||||||
Net Income ............ $40,231 $28,605
======= =======
(Numbers (1) through (4) designate items discussed later in this section.)
As you've probably guessed, Companies O and N are the same business - Scott Fetzer. In the "O" (for "old") column we have shown what the company's 1986 GAAP earnings would have been if we had not purchased it; in the "N" (for "new") column we have shown Scott Fetzer's GAAP earnings as actually reported by Berkshire.
It should be emphasized that the two columns depict identical economics - i.e., the same sales, wages, taxes, etc. And both "companies" generate the same amount of cash for owners. Only the accounting is different.
So, fellow philosophers, which column presents truth? Upon which set of numbers should managers and investors focus?
Before we tackle those questions, let's look at what produces the disparity between O and N. We will simplify our discussion in some respects, but the simplification should not produce any inaccuracies in analysis or conclusions.
The contrast between O and N comes about because we paid an amount for Scott Fetzer that was different from its stated net worth. Under GAAP, such differences - such premiums or discounts - must be accounted for by "purchase-price adjustments." In Scott Fetzer's case, we paid \$315 million for net assets that were carried on its books at \$172.4 million. So we paid a premium of \$142.6 million.
The first step in accounting for any premium paid is to adjust the carrying value of current assets to current values. In practice, this requirement usually does not affect receivables, which are routinely carried at current value, but often affects inventories. Because of a \$22.9 million LIFO reserve and other accounting intricacies, Scott Fetzer's inventory account was carried at a \$37.3 million discount from current value. So, making our first accounting move, we used \$37.3 million of our \$142.6 million premium to increase the carrying value of the inventory.
Assuming any premium is left after current assets are adjusted, the next step is to adjust fixed assets to current value. In our case, this adjustment also required a few accounting acrobatics relating to deferred taxes. Since this has been billed as a simplified discussion, I will skip the details and give you the bottom line: \$68.0 million was added to fixed assets and \$13.0 million was eliminated from deferred tax liabilities. After making this \$81.0 million adjustment, we were left with \$24.3 million of premium to allocate.
Had our situation called for them two steps would next have been required: the adjustment of intangible assets other than Goodwill to current fair values, and the restatement of liabilities to current fair values, a requirement that typically affects only long-term debt and unfunded pension liabilities. In Scott Fetzer's case, however, neither of these steps was necessary.
The final accounting adjustment we needed to make, after recording fair market values for all assets and liabilities, was the assignment of the residual premium to Goodwill (technically known as "excess of cost over the fair value of net assets acquired"). This residual amounted to \$24.3 million. Thus, the balance sheet of Scott Fetzer immediately before the acquisition, which is summarized below in column O, was transformed by the purchase into the balance sheet shown in column N. In real terms, both balance sheets depict the same assets and liabilities - but, as you can see, certain figures differ significantly.
|
Company O |
Company N |
|
|
(000s Omitted) |
||
|
Assets |
||
|
Cash and Cash Equivalents …………………………... |
$ 3,593 |
$ 3,593 |
|
Receivables, net ……………………………………….. |
90,919 |
90,919 |
|
Inventories …………………………………………… |
77,489 |
114,764 |
|
Other ……………………………………………………. |
5,954 |
5,954 |
|
Total Current Assets ………………………………….. |
177,955 |
215,230 |
|
Property, Plant, and Equipment, net …………………. |
80,967 |
148,960 |
|
Investments in and Advances to Unconsolidated Subsidiaries and Joint Ventures ……………………… |
93,589 |
93,589 |
|
Other Assets, including Goodwill ……………………. |
9,836 |
34,210 |
|
$362,347 |
$491,989 |
|
|
Liabilities |
||
|
Notes Payable and Current Portion of Long-term Debt ……………………………………………………… |
$ 4,650 |
$ 4,650 |
|
Accounts Payable ……………………………………... |
39,003 |
39,003 |
|
Accrued Liabilities …………………………………….. |
84,939 |
84,939 |
|
Total Current Liabilities ……………………………….. |
128,592 |
128,592 |
|
Long-term Debt and Capitalized Leases ……………. |
34,669 |
34,669 |
|
Deferred Income Taxes ……………………………….. |
17,052 |
4,075 |
|
Other Deferred Credits ………………………………… |
9,657 |
9,657 |
|
Total Liabilities ………………………………………… |
189,970 |
176,993 |
|
Shareholders' Equity …………………………………... |
172,377 |
314,996 |
$362,347 $491,989
======== ========
The higher balance sheet figures shown in column N produce the lower income figures shown in column N of the earnings statement presented earlier. This is the result of the asset write-ups and of the fact that some of the written-up assets must be depreciated or amortized. The higher the asset figure, the higher the annual depreciation or amortization charge to earnings must be. The charges that flowed to the earnings statement because of the balance sheet write-ups were numbered in the statement of earnings shown earlier:
-
\$4,979,000 for non-cash inventory costs resulting, primarily, from reductions that Scott Fetzer made in its inventories during 1986; charges of this kind are apt to be small or non-existent in future years.
-
\$5,054,000 for extra depreciation attributable to the write-up of fixed assets; a charge approximating this amount will probably be made annually for 12 more years.
-
\$595,000 for amortization of Goodwill; this charge will be made annually for 39 more years in a slightly larger amount because our purchase was made on January 6 and, therefore, the 1986 figure applies to only 98% of the year.
-
\$998,000 for deferred-tax acrobatics that are beyond my ability to explain briefly (or perhaps even non-briefly); a charge approximating this amount will probably be made annually for 12 more years.
It is important to understand that none of these newly-created accounting costs, totaling \$11.6 million, are deductible for income tax purposes. The "new" Scott Fetzer pays exactly the same tax as the "old" Scott Fetzer would have, even though the GAAP earnings of the two entities differ greatly. And, in respect to operating earnings, that would be true in the future also. However, in the unlikely event that Scott Fetzer sells one of its businesses, the tax consequences to the "old" and "new" company might differ widely.
By the end of 1986 the difference between the net worth of the "old" and "new" Scott Fetzer had been reduced from \$142.6 million to \$131.0 million by means of the extra \$11.6 million that was charged to earnings of the new entity. As the years go by, similar charges to earnings will cause most of the premium to disappear, and the two balance sheets will converge. However, the higher land values and most of the higher inventory values that were established on the new balance sheet will remain unless land is disposed of or inventory levels are further reduced.
What does all this mean for owners? Did the shareholders of Berkshire buy a business that earned \$40.2 million in 1986 or did they buy one earning \$28.6 million? Were those \$11.6 million of new charges a real economic cost to us? Should investors pay more for the stock of Company O than of Company N? And, if a business is worth some given multiple of earnings, was Scott Fetzer worth considerably more the day before we bought it than it was worth the following day?
If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less(c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in(c). However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)
Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since(c) must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes - both for investors in buying stocks and for managers in buying entire businesses. We agree with Keynes's observation: "I would rather be vaguely right than precisely wrong."
The approach we have outlined produces "owner earnings" for Company O and Company N that are identical, which means valuations are also identical, just as common sense would tell you should be the case. This result is reached because the sum of (a) and (b) is the same in both columns O and N, and because(c) is necessarily the same in both cases.
And what do Charlie and I, as owners and managers, believe is the correct figure for the owner earnings of Scott Fetzer? Under current circumstances, we believe(c) is very close to the "old" company's (b) number of $8.3 million and much below the "new" company's (b) number of$ 19.9 million. Therefore, we believe that owner earnings are far better depicted by the reported earnings in the O column than by those in the N column. In other words, we feel owner earnings of Scott Fetzer are considerably larger than the GAAP figures that we report.
That is obviously a happy state of affairs. But calculations of this sort usually do not provide such pleasant news. Most managers probably will acknowledge that they need to spend something more than (b) on their businesses over the longer term just to hold their ground in terms of both unit volume and competitive position. When this imperative exists - that is, when(c) exceeds (b) - GAAP earnings overstate owner earnings. Frequently this overstatement is substantial. The oil industry has in recent years provided a conspicuous example of this phenomenon. Had most major oil companies spent only (b) each year, they would have guaranteed their shrinkage in real terms.
All of this points up the absurdity of the "cash flow" numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) - but do not subtract(c). Most sales brochures of investment bankers also feature deceptive presentations of this kind. These imply that the business being offered is the commercial counterpart of the Pyramids - forever state-of-the-art, never needing to be replaced, improved or refurbished. Indeed, if all U.S. corporations were to be offered simultaneously for sale through our leading investment bankers - and if the sales brochures describing them were to be believed - governmental projections of national plant and equipment spending would have to be slashed by 90%.
"Cash Flow", true, may serve as a shorthand of some utility in descriptions of certain real estate businesses or other enterprises that make huge initial outlays and only tiny outlays thereafter. A company whose only holding is a bridge or an extremely long-lived gas field would be an example. But "cash flow" is meaningless in such businesses as manufacturing, retailing, extractive companies, and utilities because, for them,(c) is always significant. To be sure, businesses of this kind may in a given year be able to defer capital spending. But over a five- or ten-year period, they must make the investment - or the business decays.
Why, then, are "cash flow" numbers so popular today? In answer, we confess our cynicism: we believe these numbers are frequently used by marketers of businesses and securities in attempts to justify the unjustifiable (and thereby to sell what should be the unsalable). When (a) - that is, GAAP earnings - looks by itself inadequate to service debt of a junk bond or justify a foolish stock price, how convenient it becomes for salesmen to focus on (a) + (b). But you shouldn't add (b) without subtracting(c): though dentists correctly claim that if you ignore your teeth they'll go away, the same is not true for(c). The company or investor believing that the debt-servicing ability or the equity valuation of an enterprise can be measured by totaling (a) and (b) while ignoring(c) is headed for certain trouble.
To sum up: in the case of both Scott Fetzer and our other businesses, we feel that (b) on an historical-cost basis - i.e., with both amortization of intangibles and other purchase-price adjustments excluded - is quite close in amount to(c). (The two items are not identical, of course. For example, at See's we annually make capitalized expenditures that exceed depreciation by \$500,000 to \$1 million, simply to hold our ground competitively.) Our conviction about this point is the reason we show our amortization and other purchase-price adjustment items separately in the table on page 8 and is also our reason for viewing the earnings of the individual businesses as reported there as much more closely approximating owner earnings than the GAAP figures.
Questioning GAAP figures may seem impious to some. After all, what are we paying the accountants for if it is not to deliver us the "truth" about our business. But the accountants' job is to record, not to evaluate. The evaluation job falls to investors and managers.
Accounting numbers, of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it.
中文译文
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦全体股东：
1986年，我们的净值增长了4.925亿美元，增幅为26.1%。在过去的22年里（即自现任管理层接手以来），我们的每股账面价值已从19.46美元增长至2,073.06美元，年复合增长率为23.3%。在每股账面价值的计算中，分子和分母都很重要：在这22年间，公司净值增长了10,600%，而流通股数量的增长却不到1%。
在过去的报告中，我曾指出，大多数公司的账面价值与内在商业价值——也就是对股东真正有意义的数字——之间存在巨大差异。然而，就我们自身而言，十多年来，账面价值一直可以作为商业价值的合理（尽管略显保守）近似指标。也就是说，我们的商业价值适度高于账面价值，且两者之间的比率保持相当稳定。
好消息是，1986年，我们的商业价值增长率很可能超过了账面价值的增长率。我说"很可能"，是因为商业价值是一个软性数字：即使在我们自己的案例中，两位同样见多识广的观察者做出的判断也可能相差超过10%。
我们的商业价值相对于账面价值的大幅提升，很大程度上反映了我们主要运营业务中核心管理层的卓越表现。这些管理者——Blumkins家族、Mike Goldberg*（注：人名按规则保留英文）、Heldmans家族、Chuck Huggins、Stan Lipsey和Ralph Schey——多年来在几乎未动用额外资本的情况下（保险业务除外），大幅提升了其所在业务的盈利能力。这一成就创造了经济价值，即"商誉"，它既不会出现在我们资产负债表的净值数字中，也不会体现在每股账面价值里。1986年，这笔未记录的收益相当可观。
好消息说完了。坏消息是，我的表现比不上我们的管理者们。当他们在运营公司方面做得极为出色时，我却未能娴熟地配置他们创造的大量资本。
查理·芒格，我们的副董事长，和我其实只有两项工作。第一项是吸引并留住优秀的管理者来运营我们的各项业务。这并非多么困难。通常，这些管理者在购入公司时就一并加入了我们，他们在跨越多种商业环境职业生涯中早已证明了自身才华。在认识我们之前，他们就是管理明星，而我们主要的贡献就是不挡他们的道。这个方法看似浅显：如果我的工作是管理一支高尔夫球队——而杰克·尼克劳斯或阿诺德·帕尔默愿意为我打球——我也不会给他们太多关于如何挥杆的指令。
我们的一些关键管理者已经财富独立（我们希望他们都能如此），但这并不威胁他们持续投入的兴趣：他们工作是因为热爱自己所做的事，并沉醉于卓越表现带来的兴奋感。他们始终以所有者的方式思考（这是我们对一位管理者的最高评价），并发现自己业务的方方面面都引人入胜。
（我们对职业热情的原型参照是一位天主教裁缝，他用自己多年的一点积蓄资助了一次去梵蒂冈的朝圣之旅。回来后，他的教区举行了一次特别会议，听取他关于教皇的第一手描述。"告诉我们，"热切的信徒们问道，"他到底是个什么样的人？"我们的主人公言简意赅："穿44码，中号。"）
查理和我深知，拥有合适的球员几乎能让任何球队的经理看起来都很出色。我们信奉奥美广告创始天才大卫·奥格威的哲学："如果我们每个人都雇佣比自己矮小的人，我们就会变成一个侏儒公司。但是，如果我们每个人都雇佣比自己高大的人，我们就会变成一个巨人公司。"
我们管理风格的一个副产品，是它赋予了我们轻松拓展伯克希尔业务的能力。我们读过一些管理专著，它们精确规定了任何一位高管应该有多少直接下属，但这对我们来说意义不大。当你身边有一群品德高尚、能力出众、对自己从事的业务充满热情的管理者时，你即使有十几个直接下属，也依然能有时间睡个午觉。反之，即便只有一个人向你汇报，如果他欺瞒、无能或缺乏兴趣，你就会感觉自己忙得不可开交。查理和我的工作量可以翻倍，只要我们现在的管理者那种罕见的品质依然存在。
我们打算继续坚持只与那些我们喜欢并钦佩的人共事的做法。这一政策不仅最大化我们取得良好结果的机会，也确保我们能拥有异常愉快的时光。另一方面，与那些让你感到胃里翻江倒海的人共事，感觉就像是为了钱而结婚——在任何情况下这大概都不是个好主意，但如果你已经很有钱了，这就是彻头彻尾的疯狂。
查理和我必须处理第二项工作是资本配置，这在伯克希尔比在大多数公司是一项更为重大的挑战。之所以如此，有三个原因：我们比一般公司赚得更多；我们留存了所有盈利；而且，我们很幸运地拥有那些大多只需很少增量资本就能保持竞争力和增长的业务。显然，一个年盈利23%并留存全部利润的业务，其未来结果受当前资本配置决策的影响，远大于一个盈利10%并将一半利润分配给股东的业务。如果我们的留存收益——以及我们主要被投资公司，GEICO（政府雇员保险公司）和Capital Cities/ABC, Inc.（大都会/美国广播公司）的留存收益——被以非生产性的方式使用，伯克希尔的经济状况将迅速恶化。对于一家净值仅增长5%的公司来说，资本配置决策虽然仍然重要，但改变公司经济状况的速度要慢得多。
1986年，伯克希尔的资本配置工作颇具挑战。我们确实进行了一项业务收购——Fechheimer Bros. 公司，我们将在后面部分讨论。Fechheimer是一家经济效益极佳的公司，由我们非常喜欢与之共事的那类人运营。但它相对较小，仅动用了伯克希尔净值的约2%。
与此同时，我们在可交易股票领域没有新的想法。就在几年前，这个领域还能让我们轻松地将大量资金投入杰出企业，且价格非常合理。因此，我们1986年主要的资本配置动作是偿还债务和储备资金。这两者都不是比死亡更糟的命运，但也不会让我们兴奋得翻跟头。如果查理和我在资本配置努力上持续几年毫无建树，伯克希尔的增长速度将显著放缓。
我们会继续寻找符合我们测试标准的运营业务，运气好的话，每隔一两年就能收购一家这样的公司。但为了对我们的业绩产生实质性帮助，收购标的必须足够大。在当前的股票市场状况下，我们几乎不抱希望为我们的保险公司找到可买入的股票。市场将发生显著变化——你可以确信这一点——总有一天我们会再次迎来击球机会。然而，我们对此何时发生毫无头绪。
这话怎么说都不嫌多（虽然我觉得你已经听烦了）：即便环境顺风顺水，我们的回报率也势必因为规模扩大而大幅下降。我们告诉过大家，希望平均实现15%的净资产收益率，这个期望至今未变，尽管后面会提到一些不利的税法变化。要达成这个回报率，未来十年我们的净资产必须增加72亿美元。如此巨大的增幅，只有尽快拿出几个非常大（而且非常好）的主意才有可能实现。查理和我无法承诺结果，但我们保证会集中精力，盯着目标干。
### 报告收益的来源
下一页的表格列示了伯克希尔报告收益的主要来源。和去年相比，这张表有几处不同。因为收购了Scott Fetzer和Fechheimer，我们新增了四个业务板块。Scott Fetzer的两个主要子公司分别是World Book和Kirby，各自单独列出。Scott Fetzer其余14家业务合并为"Scott Fetzer - 多元化制造"项。SF金融集团（一家持有World Book和Kirby应收账款的信贷公司）归入"其他"项。今年，由于伯克希尔规模大得多，我们也取消了几个较小业务的单独列示。
表中，商誉摊销不向特定业务分摊，而是按照1983年年报附录中说明的原因，单独汇总列示。（过往信件汇编，包括商誉讨论，可索取）。Scott Fetzer和Fechheimer的收购都产生了会计商誉，因此1986年的商誉摊销费用上升了。
此外，按照美国通用会计准则（GAAP）的规定，Scott Fetzer的收购还要求进行其他重大的购买价格会计调整。当然，合并财务报表使用的是GAAP数字。但我们认为，GAAP数字对投资者和管理者未必最有用。因此，各经营单元列示的，是扣除购买价格调整前的利润。实际上，这些就是如果我们没有收购这些业务，它们本应报告的利润。
我们更偏好这种列示方式的原因，在信后的附录中讨论。这个附录绝不会取代一本荡气回肠的小说，也绝对不需要必读。不过，我知道我们6000名股东中，总有那么几位对我的会计文章津津乐道——希望你们两位都能享受这个附录。
在第41-43页的业务分部数据，以及第45-49页的管理层讨论部分，你会找到关于我们业务的更多信息。我强烈建议你阅读这些部分，以及Charlie Munger写给Wesco股东的信（从第50页开始），其中描述了该子公司的各项业务。
(千美元省略)
------------------------------------------
伯克希尔所占
净利润份额
(税后及扣
税前利润 除少数股东权益)
------------------- -------------------
1986 1985 1986 1985
-------- -------- -------- --------
经营利润：
保险集团：
承销 ............... $(55,844) $(44,230) $(29,864) $(23,569)
净投资收益 ...... 107,143 95,217 96,440 79,716
Buffalo News ................. 34,736 29,921 16,918 14,580
Fechheimer（1986年6月3日收购） 8,400 --- 3,792 ---
Kirby ........................ 20,218 --- 10,508 ---
内布拉斯加家具城 ...... 17,685 12,686 7,192 5,181
Scott Fetzer - 多元化制造 25,358 --- 13,354 ---
喜诗糖果 ................ 30,347 28,989 15,176 14,558
Wesco - 除保险外 5,542 16,018 5,550 9,684
World Book ................... 21,978 --- 11,670 ---
商誉摊销 (2,555) (1,475) (2,555) (1,475)
其他购买价格
会计调整 .......... (10,033) --- (11,031) ---
债务利息及
提前还款罚金 ....... (23,891) (14,415) (12,213) (7,288)
股东指定
捐款 ............. (3,997) (4,006) (2,158) (2,164)
其他 ........................ 20,770 6,744 8,685 3,725
-------- -------- -------- --------
经营利润 ............. 195,857 125,449 131,464 92,948
特别通用食品
分配 ................ --- 4,127 --- 3,779
特别华盛顿邮报
分配 ................ --- 14,877 --- 13,851
证券出售 ............. 216,242 468,903 150,897 325,237
-------- -------- -------- --------
全部实体总利润 .. $412,099 $613,356 $282,361 $435,815
======== ======== ======== ========
如你所见，1986年经营利润显著改善。部分改善来自保险业务，我将在后面讨论其结果。Fechheimer也将单独讨论。其他主要业务的表现如下：
o Buffalo News的经营成果持续反映出Stan Lipsey卓越的管理才能。连续第三年，工时大幅下降，其他成本也得到严密控制。因此，1986年我们的营业利润率显著提升，即便我们的广告费率涨幅远低于大多数主要报纸。
我们的成本控制努力丝毫没有弱化对新闻的投入。我们继续提供50%的"新闻版面率"（报纸总版面中用于新闻的比例），我们认为，这个比例高于国内任何同等规模或更大规模的强势报纸。
与《新闻报》规模相当的报纸，平均新闻版面率约为40%。40%与50%的差距比表面看起来更重要：一份报纸如果有30版广告、40%的新闻版面率，每天只能提供20版新闻；而我们用30版广告配上30版新闻。因此，在广告版数相等的情况下，我们给读者提供的新闻量至少多了50%。
我们认为，这种对新闻的大力投入是《新闻报》在全国前50大报纸中拥有最高工作日渗透率（报纸主要市场区域内每天购买该报的家庭比例）的原因之一。我们的周日渗透率同样排名第一，甚至更为突出。十年前，布法罗唯一一份周日报纸（《信使快报》）发行量为27.1万份，渗透率约63%。《信使快报》在该地区服务了几十年，其渗透率——与许多大都市市场的水平相似——被认为是"自然"的，准确反映了当地居民对周日产品的需求。
我们周日的报纸于1977年底创刊。目前渗透率已达83%，每周日销量比十年前《信使快报》（Courier-Express）高出约10万份——尽管这十年我们市场区域的人口有所下降。在近代历史上，其他长期拥有本地周日版报纸的城市，渗透率增长远不及布法罗。
尽管市场接受度出类拔萃，我们的营业利润率几乎肯定已经见顶。1986年底一项重大新闻纸提价生效，而1987年我们的广告费率涨幅将再次比行业温和。不过，即便利润率大幅缩水，我们也不会降低新闻版面比例。
写下这段文字时，距我们收购《新闻报》（The News）正好十年。它带来的财务回报远超预期，非财务回报也是如此。我们对《新闻报》的敬意——收购时本已很高——自收购以来与日俱增，我们对主编Murray Light的尊重和钦佩也是如此，他打造的产品获得了社区非凡的认可。Murray和Stan的努力，在《新闻报》财务逆转和诉讼的黑暗日子里至关重要，而繁荣时期丝毫未减。查理和我对他们心存感激。
• 神奇的Blumkin家族继续在内布拉斯加家具城（Nebraska Furniture Mart）创造商业奇迹。竞争对手来了又去（多半是去了），但Mrs. B.和她的后代一路高歌猛进。1986年净销售额增长10.2%，达到1.32亿美元。十年前销售额为4400万美元，即便那时，NFM似乎已经包揽了大奥马哈地区几乎所有的生意。鉴于NFM非凡的主导地位、奥马哈人口缓慢增长以及NFM所售商品适用的温和通胀率，这家店如何能继续取得如此大的销售增长？唯一合乎逻辑的解释是，NFM这唯一一家店的市场范围持续扩大，因其每日低价和广泛选择的口碑日益增长。为准备进一步增长，NFM正将其位于店外几百码的仓库容量扩大约三分之一。
内布拉斯加家具城董事长Mrs. B.，现年93岁，依然比我见过的任何经理都卖得更多、拼得更凶。她每周七天从开店到关店都在店里。与她竞争，是勇气战胜判断力的胜利。
人们容易忽视我认为的Mrs. B.传奇中的关键教训：在93岁时，总部位于奥马哈的董事会主席尚未达到顶峰。请记住这一点，在2024年伯克希尔年会上投票前再参考一下。
• 在喜诗糖果（See's），销售趋势较近几年有所改善。总磅数销量增长约2%。（对于喜欢幻想的巧克力爱好者，有个数据：我们每年销售超过12000吨。）以磅数计的同店销售额几乎未变。此前六年，同店磅数下降，我们仅通过增加门店来获得或维持磅数销量。但1986年特别强劲的圣诞季止住了下滑。通过稳定同店销量并大力控制成本，喜诗在1986年仅进行了最低限度的涨价，就得以维持其卓越的利润率。我们要感谢喜诗长期以来的经理Chuck Huggins，他实现了这一重要成就。
喜诗拥有独一无二的产品“个性”，源于其糖果的美味和适中价格、公司对分销流程的完全控制以及门店员工提供的卓越服务。Chuck正确以客户满意度衡量自己的成功，他的态度贯穿整个组织。很少有大型零售公司能维持这种以客户为导向的精神，我们非常感谢Chuck在喜诗保持并弘扬了这一精神。
喜诗的利润应能维持在当前水平。我们将继续以非常温和的方式提价，仅跟上预期成本增长。
• 世界图书（World Book）是1986年初加入伯克希尔的17家斯科特·费策尔（Scott Fetzer）业务中最大的一家。去年我曾热情地向大家介绍斯科特·费策尔的业务及其经理Ralph Schey。一年的经历让我对两者的热情有增无减。Ralph是一位出色的商人和正直的人。他还为工作带来了非凡的多才多艺和精力：尽管管理着众多业务，他对每项业务的运营、机会和问题都了如指掌。而且，像我们的其他经理一样，与Ralph共事非常愉快。我们的好运在继续。
世界图书的销量连续第四年增长，百科全书销量比1985年增长7%，比1982年增长45%。Childcraft的销量也大幅增长。
世界图书继续主导美国直销百科全书市场——原因充分。编辑极其精良，每页定价不到5美分，这些书对儿童和成人来说都是划算的。你可能会对一个编辑技巧感兴趣：世界图书按难度排列超过44,000个单词。较长的条目中，开头部分只包含最容易理解的词汇，随着论述展开，材料难度逐渐升级。因此，儿童可以轻松有益地读到主题变得太难之处，而不必立即面对将需要大学理解水平的词汇与四年级水平的词汇混为一谈的讨论。
销售世界图书是一种使命。超过一半的活跃销售人员是教师或前教师，另有5%有图书馆员经验。他们正确把自己视为教育者，工作非常出色。如果你家里没有一套世界图书，我推荐一套。
• 柯比（Kirby）同样录得销量连续第四年增长。全球销量比1985年增长4%，比1982年增长33%。尽管柯比产品比大多数清洁器贵，但其性能让廉价产品远远落后（可以说“望尘莫及”）。许多30年、40年工龄的柯比清洁器仍在服役。如果你想要最好的，就买柯比。
一些历史上在直销方面取得巨大成功的公司近年来遭遇挫折。当然，职业女性时代为直销组织带来了新的挑战。到目前为止，记录显示柯比和世界图书都应对得最为成功。
上述业务，连同保险业务和费希海默（Fechheimer），构成了我们的主要业务单元。描述简短绝不意味着削弱这些业务对我们的重要性。所有这些在过去的年报中都已讨论过，而且由于伯克希尔股东倾向于留在大家庭中（每年年底约98%的股票由年初的股东持有），我们希望避免对基本事实进行不必要的重复。你可以放心，如果这些业务中任何一个的基本面或竞争地位发生重大变化，我们会立即详细报告。总体而言，本节描述的业务可以概括为：拥有非常强大的市场地位、非常高的资本回报率以及最优秀的运营管理层。
The Fechheimer Bros. Co.
每年在伯克希尔的年报中，我都会附上一段关于我们想收购哪种生意的描述。这个“广告”在1986年奏效了。
去年1月15日，我收到辛辛那提的Bob Heldman写来的一封信。他是我们多年的股东，也是Fechheimer Bros.（费奇海默兄弟公司）的董事长。但在读到这封信之前，我既不知道Bob，也不知道Fechheimer。Bob在信中说，他经营着一家符合我们条件的企业，建议我们见个面。1985年的业绩汇总出来后，我们在奥马哈碰了头。
他给我补了些背景：Fechheimer是一家制服制造和经销公司，1842年就开始运营了。Bob的父亲Warren Heldman在1941年加入公司，随后他的儿子Bob和George（现任总裁），以及他们的儿子也陆续加入了。在Heldman家族的管理下，公司非常成功。
1981年，Fechheimer被卖给了由一群风险投资人组成的杠杆收购（LBO）团队，管理层保留了股权。像所有LBO一样，新公司起步时负债率极高。但收购后，经营依然非常成功。所以到去年初，债务已大幅降低，股权价值也大幅提升。出于各种原因，风险投资人希望退出，而Bob尽职尽责地读了伯克希尔的年报，想到了我们。
Fechheimer正是我们喜欢收购的那种生意。它的经济记录非常出色；管理层才华横溢、品格高尚，并且热爱他们所做的工作；Heldman家族希望继续与我们合作，保留其财务权益。于是我们迅速以全公司估值5500万美元为基础，购买了约84%的股份。
这次收购的背景与我们当年收购内布拉斯加家具城的情况类似：大部分股份由希望将资金投入别处的人持有；而热爱经营生意的家族成员希望继续既当所有者又当管理者；家族中几代人都活跃在生意中，提供了放眼望去源源不断的管理层；并且管理家族希望找一个无论什么价格都不会转手、能让生意像过去一样继续运行的买家。无论对费奇海默还是内布拉斯加家具城，我们双方都称心如意。
你可能会觉得有意思：我和Charlie都没去过Fechheimer的总部辛辛那提看他们的运营。（顺便说一句，反过来也一样：经营了See's 15年的Chuck Huggins，也从没来过奥马哈。）如果我们的成功要靠视察工厂来获取洞见，那伯克希尔就麻烦大了。相反，在考虑收购时，我们试图评估生意的经济特征——它的竞争优势和弱点——以及我们将与之共事的人的质量。费奇海默在这两方面都出类拔萃。除了Bob和George Heldman（他们60多岁——按我们的标准算是年轻小伙子），还有下一代的三个成员Gary、Roger和Fred，确保了连续性。
作为收购的样板，费奇海默只有一个缺点：规模。我们希望下一次收购至少要大几倍，但其他方面一模一样。我们对潜在收购标的的最低年税后收益门槛，已从Bob写信给我时的500万美元提高到了1000万美元。
旗开得胜，我们再把广告登一遍。如果你有合适的生意，给我打电话，或者最好写信。
以下是我们寻找的条件：
（1）大额收购（至少1000万美元的税后收益），
（2）证明有持续盈利能力的生意（未来预测我们对它兴趣不大，“扭亏为盈”的情况也一样），
（3）净资产收益率高且很少或不用债务的生意，
（4）现有管理层到位（我们无法提供），
（5）简单的生意（如果技术性太强，我们理解不了），
（6）有报价（我们不愿在价格未知的情况下，哪怕是初步谈论一项交易，既浪费自己的时间也浪费卖家的时间）。
我们不会参与敌意收购。我们可以承诺完全保密并极速回复——通常五分钟内——告诉您我们是否有兴趣。我们倾向于现金收购，但如果我们获得的内在商业价值与我们付出的相当，也会考虑发行股份。事实上，随着最近伯克希尔股票价格上涨，涉及股票发行的交易可能相当可行。我们欢迎潜在卖家通过联系我们过去合作过的生意伙伴来了解我们。合适的生意和合适的人，我们能提供一个好归宿。
另一方面，我们经常收到一些收购提议，根本不符合我们的标准：新创企业、扭亏为盈、拍卖式销售，以及（在经纪人中永远流行的）“只要你们双方认识了，肯定能成事”。这些对我们一点吸引力都没有。
* * *
除了对上述完整生意的收购感兴趣，我们也有兴趣通过谈判收购大量但非控制性的股份，就像我们收购Cap Cities（大都会通信公司）那样。只有当我们对生意的经济状况以及经营者的能力和诚信感到非常满意时，这种收购才会吸引我们。我们偏爱大交易；在极少数情况下，我们可能会做5000万美元（甚至更小）的交易，但我们更倾向于数倍于此规模的承诺。
保险业务
我们照例呈上行业数据表格，今年有所扩充，加入了已发生损失和GNP通胀指数的数据。1986年保费增长与已发生损失增长之间的对比，将告诉你为什么当年的承保业绩显著改善：
法定综合成本率
年度保费增长率 （支付保单持有人红利后） 年度已发生损失增长率 GNP平减指数衡量的通胀率
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1981 3.8 106.0 6.5 9.7
1982 4.4 109.8 8.4 6.4
1983 4.6 112.0 6.8 3.9
1984 9.2 117.9 16.9 3.8
1985 22.1 116.5 16.1 3.3
1986(估计) 22.6 108.5 15.5 2.6
来源：Best's保险管理报告
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意味着承保利润，高于100意味着损失。如果考虑保险商持有保单持有人资金（“浮存金”）所获得的投资收益，综合成本率在107-112之间通常会产生盈亏平衡的结果，不包括股东资金带来的收益。
保险业务的数学，用这张表格一总结，并不复杂。当整个行业的年保费收入增长徘徊在4%或5%时，承销亏损必然会增加。这并非因为车祸、火灾、风暴等事故更频繁发生，也不是最近一般性通货膨胀的过错。如今，社会和司法通胀才是罪魁祸首；走进法庭的成本简直膨胀得无法无天。成本激增，一部分源于天价判决，另一部分则源于法官和陪审团倾向于扩大保单的承保范围，远远超出保险公司当初制定保单时的设想。这两种趋势目前都没有缓和的迹象，因此我们仍然认为，即便一般性通胀率可能仅在2%-4%之间，整个行业的保费收入也必须以接近每年10%的速度增长，才能仅仅维持住自身的盈利能力。
正如前文所述，1986年整个行业的保费规模增长之快，甚至超过了赔付成本的增速。因此，该行业的承销亏损大幅下降。在去年的报告中，我们预测到了这一显著好转，但同时也预言，这种繁荣将是短暂的。唉，第二个预言已经应验了。行业保费收入的增速已明显放缓，从1986年第一季度估计的27.1%，降至第二季度的23.5%，第三季度的21.8%，再到第四季度的18.7%，我们预计1987年还会进一步放缓。事实上，到第三季度，这个增速很可能就会跌破我所说的10%这个“均衡”线。
尽管如此，假设没有重大自然灾害的拖累，1987年的承销业绩仍会显著改善，因为价格上涨的效益会在收入中滞后体现。实际上，盈利方面的好消息会比价格方面的好消息晚六到十二个月到来。但盈利改善的趋势大概会在1988年底或1989年初结束。此后，整个行业很可能就会掉头南下，而且速度很快。
保险业的定价行为，仍然完全符合大宗商品式行业的特征。只有在供给短缺时才能实现高利润，而这种情形又持续不了多久。当利润的阳光开始普照，老牌保险公司就会向投资者大肆增发新股以充实资本。与此同时，新成立的保险公司也竞相趁着新股市场行情看好的时机抛售股份（这个好时机，是对那些发起公司的内部人士而言，对新股东可鲜有好处）。这些举措注定了未来的麻烦：产能飙升，竞争之火熊熊燃烧，价格随之萎靡。
有趣的是，我们能看到保险业的领导者们恳求同行在制定保单价格时，要采取更有“政治家风度”的举措。“为什么，”他们问道，“我们就不能从历史中吸取教训，削平峰谷，始终如一地定价以赚取合理利润呢？”当然，他们心里想要的定价模式，大概就像《华尔街日报》那样——起始定价就足够丰厚，并且每年稳步上涨。
这种呼吁行业自律的号召，其效果就好比内布拉斯加一位玉米种植户，对全球的同行们说，请大家在推销玉米时拿出更多的政治家风范来。其实，眼下需要的不是更多政治家，而是更少的玉米。过去两年，保险业筹集了大量资金，用我们那个种田的比喻来说，就是大幅扩大了玉米的种植面积。由此导致的“庄稼”增产——即保险供给能力激增——对价格和利润的影响，将与古往今来农产品过剩对价格的影响别无二致。
我们自己的保险业务在1986年表现不错，1987年预计也会很好。我们受益于行业景气度颇多。但我们的繁荣，很大程度上归功于所有保险业务经理Mike Goldberg的努力和能力。
我们的综合成本率（按法定会计准则计算，且不包括结构性赔付和财务再保险）从1985年的111降到了1986年的103。此外，我们的保费增长也异常出色：尽管最终数据还未公布，但我相信，在过去两年里，我们是全美前100大保险公司中增长最快的。诚然，我们的一部分增长来自于与消防员基金保险公司签订的大额比例再保险合同（该合同在去年的报告中已有描述，并在Charlie的第54页信中做了更新）。但即便将这部分的保费排除在外，我们很可能在增长速度上仍然位居榜首。
有意思的是，在1985年之前的那些年里，我们却是增长最慢的大型保险公司。事实上，我们当时是在萎缩——将来我们也会时不时再次如此。我们业务量的巨大波动，并不意味着我们会在保险市场上打游击、时进时退。恰恰相反，我们是市场上最坚定的参与者，始终准备着，以我们认为是合适的价格，承保各种各样高保额的险种。我们业务量的波动，根源在于其他保险公司那种“今天还在，明天就跑了”的行为。当多数保险公司因为资本不足或被亏损吓怕而“跑路”时，投保人就会蜂拥而至，发现我们随时准备做买卖。但当成群的保险公司又回来了，并大肆降价，甚至远低于预期成本时，许多客户自然会离开我们，去享受竞争对手暂时提供的那些便宜货。
我们对价格的坚持，对消费者并无损害：在我们业务清淡的时候，市场上到处都是价格诱人的保险报价。对我们的员工也没有影响：当我们某个通常盈利的保险业务经历周期性低迷时，我们不会进行裁员。这种不裁员的做法符合我们自身的利益。如果员工担心保费收入大幅减少会伴随大规模裁员，那他们不管市场好坏（通常是在市场差时）都会拼命拉业务，这完全可以理解。
国家赔偿保险公司传统业务的发展趋势——即通过总代理来承保商业汽车险和一般责任险——生动地显示了其他保险公司曾经有多么畏首畏尾，现在又变得多么胆大包天。1984年第四季度，NICO的月保费规模平均为500万美元，这个水平已经持续好几年了。到了1986年第一季度，月保费规模攀升到了约3500万美元。而在近几个月，急剧下滑已经开始。目前月保费规模大约在2000万美元，而且随着新的竞争对手不断涌现和价格战开打，这个数字还将继续下降。颇具讽刺意味的是，某些主要新竞争对手的经理人，正是几年前把那些曾经是我们老对手的保险公司搞垮的同一批人。通过州政府设立的担保基金，我们不得不为他们留下的部分烂账买单，而现在却发现他们换个名头又在做同样的买卖。这就是商场如战场吧。
我们称之为“大额风险”的业务在1986年显著扩张，未来对我们也会很重要。在这项业务中，我们经常承保年保费在100万到300万美元甚至更高的保单。这项业务的业务量和盈利能力必然会有很大的波动性，但凭借我们卓越的资本实力和愿意承保大额净自留额的态度，当价格合适时，我们在市场上就是一股非常强大的力量。另一方面，我们的结构性赔付业务已经近乎停滞，因为目前的价格对我们来说毫无意义。
我们保险集团1986年的损失准备金进展已记录在第46页。这些数字显示，经过一年的赔付和进一步评估，1985年底负债中的误差有多大。如你所见，去年我关于损失负债的说法远非事实——这已经是连续第三年出错。如果匹诺曹的生理规则用在我身上，我的鼻子现在恐怕会引来围观。
当保险业高管迟迟建立恰当准备金时，他们常称之为"准备金强化"，这个术语听起来颇为高尚。他们几乎说得好像是在为一个本就坚实的资产负债表额外加固了几层。但事实并非如此：这个词实际上是对"纠正先前的不实之词"（尽管是无意的）的委婉说法。
我们在1986年底特别努力地做了准确准备金估算。然而，1985年底我们也同样努力过。只有时间能告诉我们，是否终于成功估对了保险负债。
尽管我们在准备金方面遇到困难，而且行业具有商品化经济特性，我们仍预计保险业务会增长并赚取可观的利润——但进展会明显不规律，有时还会遭遇重大意外打击。这是一个危险的行业，保持警惕至关重要。我们必须牢记伍迪·艾伦的话："羔羊也许能和狮子同卧，但羔羊别指望能睡个好觉。"
在保险经营中，我们的心态占优势，资本占优势，而且人员配置优势也在形成。此外，我愿意相信，在运用保单持有人资金产生的浮存金进行投资方面，我们也有一些长期优势。业务的性质决定了我们需要所有这些优势才能繁荣发展。
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伯克希尔持股41%的GEICO公司在1986年表现卓越。全行业来看，个人险的承保业绩改善幅度远不如商业险。但GEICO几乎专营个人险，其综合成本率降至96.9，保费收入增长了16%。GEICO还继续回购自身股份，到年底时流通股比年初减少了5.5%。我们按比例享有的GEICO保费收入超过5亿美元，是三年前的两倍左右。GEICO的业务质量是保险界最好的之一，实际上远优于伯克希尔自身的业务。
GEICO成功的最大秘诀是极低的运营成本，这让它与数百家提供车险的竞争对手截然不同。GEICO 1986年的承销费用和理赔调整费用合计仅占保费的23.5%。许多大公司这个比例要高出15个百分点。即便是Allstate和State Farm这样的大型直销公司，其成本也明显高于GEICO。
GEICO成本与竞争对手之间的差距，就像一道护城河，保护着一个宝贵且备受追捧的商业城堡。没有人比GEICO董事长Bill Snyder更理解这种"城堡周围有护城河"的概念。他通过不断降低成本来加宽护城河，从而捍卫并强化经济特许权。从1985年到1986年，GEICO的总费用率从24.1%降到了前面提到的23.5%，在Bill的领导下，这个比率几乎肯定会进一步下降。如果确实如此——并且GEICO保持其服务和承保标准——公司的未来将非常光明。
GEICO火箭的第二级由副董事长Lou Simpson推动，他自1979年底起负责公司的投资。说实话，我作为伯克希尔的投资负责人，来讲述Lou在GEICO的业绩，还真有点不好意思。只有凭借我拥有伯克希尔控股股权这一点，我才敢给你们看下面这些数据，将GEICO股票投资组合的总回报与标普500指数比较：
年份 GEICO股票组合 标普500
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1980 .................. 23.7% 32.3%
1981 .................. 5.4 (5.0)
1982 .................. 45.8 21.4
1983 .................. 36.0 22.4
1984 .................. 21.8 6.2
1985 .................. 45.8 31.6
1986 .................. 38.7 18.6
这不仅是了不起的数字，同样重要的是，这些成绩是正路取得的。Lou始终投资于被低估的普通股，这些股票个体上不太可能给他带来永久性损失，整体上几乎是无风险的。
总之，GEICO是一家由杰出经理人经营的杰出企业。能与之相伴，我们非常幸运。
有价证券
1986年，我们的保险公司购买了约7亿美元的免税债券，多数期限为8至12年。你们可能认为这一投入表明我们对这类债券相当热衷。但不幸的是，并非如此：这些债券充其量只是平庸的投资。它们只是在我们购买时显得最不令人反感的选择，现在仍然如此。（目前既不喜欢股票也不喜欢债券，我发现自己与Mae West截然相反，她曾说："我只喜欢两种男人——本国的和进口的。"）
我们必须在保险公司中持有有价证券，而且随着资金流入，我们只有五个方向可去：（1）长期普通股投资；（2）长期固定收益证券；（3）中期固定收益证券；（4）短期现金等价物；（5）短期套利承诺。
普通股当然是最有趣的。当条件合适——即那些经济状况良好、管理层优秀的公司，其售价远低于内在商业价值时——股票有时能打出全垒打。但目前我们找不到任何接近我们测试标准的股票。这一说法绝不等于股市预测：我们不知道——也从未知道——市场在短期或中期内会涨、会跌还是横盘。
然而，我们确实知道，投资界会永远周期性爆发两种超级传染病：恐惧和贪婪。这些疫情的时间无法预测。它们导致的市场失常同样无法预测，无论是持续时间还是程度。因此，我们从不试图预测这两种疾病的到来或离去。我们的目标更为谦逊：我们只是试图在别人贪婪时恐惧，在别人恐惧时贪婪。
写这封信时，华尔街几乎看不到恐惧。相反，一片欢腾——为什么不呢？还有什么比参与一个牛市更令人振奋的？在这个牛市里，企业所有者的回报与企业本身缓慢的业绩表现美妙地脱了钩。但不幸的是，股票不可能永远跑赢企业。
实际上，由于股东们承担了沉重的交易和投资管理成本，从整体和长期来看，他们必然跑输自己所持有的公司。如果美国企业整体每年能获得约12%的净资产收益率，那么投资者最终赚到的钱一定会少得多。牛市可以掩盖数学定律，但无法推翻它们。
我们保险公司可以投资的第二类品种是长期债券。除非出现非常特殊的情况，比如我们在1984年报告中讨论过的华盛顿公共电力供应系统第1、2、3期债券，否则我们不太可能对这类投资感兴趣（年末，我们持有WPPSS债券，摊销成本为2.18亿美元，市值3.1亿美元，每年为我们带来3170万美元的免税利息收入）。我们对长期债券的厌恶源于对下一个十年通胀率将大幅上升的担忧。长远来看，我们货币的行为将由立法者的行为决定。这种关系对货币稳定构成了持续威胁——相应地，也威胁着长期债券的持有者。
我们继续定期将资金用于套利领域。不过，与大多数每年购买几十只证券的套利者不同，我们只买入少数几只。我们只限于那些已经公开宣布的大宗交易，并且不会押注于尚未确定的结果。因此，我们的潜在利润往往很小；但运气好的话，失望的情况也会很少。
我们年末的投资组合如下，其中包括一笔套利承诺——利尔-西格勒（Lear-Siegler）。我们的资产负债表中还有一笔1.45亿美元的应收款，代表当时正在收购切斯布罗-庞兹（Chesebrough-Ponds）（我们的另一笔套利持仓）的联合利华（Unilever）欠我们的钱（几天后已支付）。套利是短期国债作为资金短期存放处的一个替代选择——这个选择兼具潜在更高收益和更高风险。迄今为止，我们用于套利的资金所获得的回报，是将其投入短期国债所能获得的回报的好几倍。不过，一次糟糕的经历就可能显著改变成绩单。
此外，虽然需要费些功夫，我们目前将中期免税债券视为短期国债持仓的一个替代选择。买入这些债券，如果我们在到期前很久就卖出许多（这似乎很可能），我们面临重大亏损的风险。不过，我们认为这种风险被以下两点充分抵消：第一，与短期国债相比，这些证券目前可实现的税后收益要高得多；第二，卖出的结果可能带来整体盈利而非亏损。在考虑了亏损可能性及所有税收影响后，我们对更高总回报的预期是一个相对接近的判断，很可能出错。然而，即使我们以相当大的亏损卖出债券，最终实现的税后回报也可能高于反复滚动投资短期国债所获得的回报。
无论如何，你们应该知道，鉴于当前的市场水平，我们对目前持有的股票和债券的预期都异常保守。可能发生的最好的事情是一个市场，在这个市场中我们愿意以大幅亏损卖出许多债券持仓，以便将资金重新配置到当时很可能存在的、价值远高于债券的股票上。我所说的债券亏损将在高利率出现时发生；同样的利率很可能对普通股的打击远大于对中期债券的打击。
下面我们列出1986年末的可交易股票净持仓。所有市值超过2500万美元的头寸均列出，并排除了归属于韦斯科金融公司（Wesco Financial Corp.）和内布拉斯加家具城（Nebraska Furniture Mart）少数股东权益的部分。
持股数量 成本 市值
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（千美元，零头不计）
2,990,000 大都会/美国广播公司（Capital Cities/ABC, Inc.） $515,775 $ 801,694
6,850,000 GEICO保险公司（GEICO Corporation） 45,713 674,725
2,379,200 汉迪与哈曼（Handy & Harman） 27,318 46,989
489,300 利尔-西格勒公司（Lear Siegler, Inc.） 44,064 44,587
1,727,765 华盛顿邮报公司（The Washington Post Company） 9,731 269,531
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642,601 1,837,526
其他普通股持仓 12,763 36,507
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普通股合计 $655,364 $1,874,033
我们应当指出，我们预计会永久持有三大主要持仓：大都会/美国广播公司（Capital Cities/ABC, Inc.）、GEICO保险公司（GEICO Corporation）和华盛顿邮报公司（The Washington Post）。即使这些证券看起来明显高估，我们也不会考虑卖出它们，就像如果有人出价远高于我们认定的内在价值，我们也不会卖掉喜诗糖果（See's）或布法罗晚报（Buffalo Evening News）一样。
在一个行动已成为日常秩序的企业世界里，这种态度可能显得老派。现代经理人谈论他的企业“组合”——意思是每当华尔街偏好、经营状况或新的公司“理念”要求时，所有这些企业都是“重组”的候选对象（不过，重组的定义很狭隘：它只包括甩掉惹麻烦的业务，而不包括甩掉当初买入这些业务的董事和高管。“恨罪而爱罪人”是一种神学，在财富500强中与在救世军中一样流行）。
投资经理们甚至更加好动：他们在交易时段的行为，相比之下让旋转的托钵僧（whirling dervish）都显得镇静。事实上，“机构投资者”这个词正在变成一种自相矛盾的矛盾修辞法，类似于“大虾”、“女子泥浆摔跤手”和“廉价律师”。
尽管对活动的热情已席卷美国的商业和金融界，我们将坚持我们的“至死方休”政策。这是查理和我唯一感到自在的政策，它产生了不错的业绩，并且让我们的经理人和被投资公司的经理人能够不受干扰地经营业务。
NHP公司（NHP, Inc.）
去年我们以2370万美元购买了NHP公司约50%的股份。NHP公司是一家多户型租赁住房的开发商、联合组织者、所有者和管理者。如果所有已授权的股票期权都被授予并行使，我们的股权比例将下降到略高于45%。
NHP公司有着极不寻常的渊源。1967年，约翰逊总统任命了一个由商业和公民领袖组成的委员会，由埃德加·凯泽（Edgar Kaiser）领导，研究如何增加面向中低收入租户的多户型住房供应。该委员会的某些成员随后成立并推动了两家商业实体来实现这一目标。如今这两家公司都由NHP公司拥有，其中一家在非常规规则下运营：其三位董事必须由总统任命，并经参议院建议和同意，并且法律要求向总统提交年度报告。
超过260家大型企业，更多是出于公共服务而非盈利的动机，向最初的两家实体投资了4,200万美元，这两家实体随即通过合伙企业着手开发政府补贴的租赁房产。典型的合伙企业拥有一处房产，资金主要来自无追索权抵押贷款。每个合伙企业的股权资金大部分由一组有限合伙人提供，他们主要是被投资伴随的大量税收抵扣所吸引。NHP充当普通合伙人，并购买了每个合伙企业一小部分股权。
当然，政府的住房政策已经转变，NHP也必然拓展了业务范围，包括非补贴性质的、按市场租金定价的公寓。此外，NHP的一家子公司在华盛顿特区都会区建造独栋住宅，年收入约5,000万美元。
NHP现在监督着约500个合伙企业房产，分布在40个州、哥伦比亚特区和波多黎各，共包含约80,000套住房单元。这些房产的成本超过25亿美元，且维护良好。NHP直接管理其中约55,000套住房单元，并监督其余单元的管理。该公司来自管理的收入约为每年1,600万美元，且持续增长。
除了在每个合伙企业成立时购买的股权权益外，NHP还拥有各种剩余权益，这些权益在房产处置并向有限合伙人分配时发挥作用。NHP许多"深度补贴"房产的剩余权益不太可能有多大价值。但某些其他房产的剩余权益可能相当有价值，尤其是在通胀升温的情况下。
1986年税制改革法案已终止了针对个人的以税收为导向的房产联合经营。总体而言，NHP目前正试图在非补贴的高品质、大规模（通常200至500套）租赁房产中建立股权头寸或获取重大剩余权益。在这类项目中，NHP通常与一家或多家大型机构投资者或贷款方合作。NHP将继续寻求开发中低收入公寓住房的途径，但除非政府政策改变，否则不太可能成功。
除我们之外，NHP的大股东包括Weyerhauser（其持股约25%）以及由NHP首席执行官Rod Heller领导的管理层团队。约60家大型企业也继续持有少量权益，均不超过2%。
税务
1986年税制改革法案以重要且不同的方式影响着我们的各项业务。尽管我们发现该法案有许多值得称赞之处，但伯克希尔的净财务影响是负面的：在新税法下，我们的企业价值增长率很可能至少比旧税法下适度放缓。对我们股东的净影响甚至更为负面：每股企业价值每增加1美元，假设伴随伯克希尔股票市值相应增加1美元，将为我们的股东产生72美分的税后收益，而非旧税法下的80美分。这一结果当然反映了个人资本利得最高税率从20%升至28%。
以下是影响伯克希尔的主要税法变化：
o 公司普通收入的税率计划从1986年的46%降至1988年的34%。这一变化显然对我们有积极影响——对我们三家主要被投资公司中的两家，即Capital Cities/ABC（大都会/ABC）和华盛顿邮报公司，也具有显著的积极影响。
我这么说，是因为我知道多年来一直有很多模糊且常常带有党派色彩的评论，讨论究竟是谁真正缴纳了公司税——是企业还是它们的客户。当然，这种争论通常围绕加税而非减税展开。那些抵制提高公司税率的人经常辩称，企业实际上并未缴纳对其征收的任何税款，而是充当一种经济管道，将所有税款转嫁给消费者。根据这些支持者的说法，任何公司税增加只会导致价格上涨，从而抵消企业的税款增加。持此立场者，"管道"理论的支持者也必须得出结论：公司税减免不会有助于利润，而是会传导下去，导致消费者价格相应降低。
相反，另一些人则认为，企业不仅缴纳对其征收的税款，而且也承担了这些税款。该学派称，消费者将不受公司税率变化的影响。
实际情况如何？当公司税率降低时，伯克希尔、华盛顿邮报、大都会等公司是自己吸收好处，还是以降价形式将这些好处传递给客户？这对投资者、管理者以及政策制定者而言都是一个重要问题。
我们的结论是：在某些情况下，公司减税的好处完全或几乎完全由企业及其股东享有；而在其他情况下，这些好处则全部或几乎全部转给了客户。决定结果的是企业业务特许权的强弱，以及该特许权的盈利能力是否受到监管。
例如，当特许权强大且税后利润受到相对精确的监管时——正如电力公用事业的情况——公司税率的变化主要反映在价格上，而非利润上。当减税时，价格通常会在短期内降低。当加税时，价格会上升，尽管通常不会那么迅速。
在第二个领域——价格竞争型行业——也会出现类似结果。该行业的公司通常以非常弱的业务特许权运营。在此类行业中，自由市场以延迟、不规则但通常有效的方式"调节"税后利润。实际上，市场在处理价格竞争行业时，其作用与公共事业委员会处理电力公用事业时大致相同。因此，在这些行业中，税收变化最终对价格的影响大于对利润的影响。
然而，对于未受监管但拥有强大特许权的企业来说，情况则不同：此时企业及其股东是减税的主要受益者。这些公司从减税中受益，就像电力公司如果没有监管机构迫使降价一样。
我们的许多企业，无论全资还是部分持股，都拥有这样的特许权。因此，减税带来的好处大部分落入我们的口袋，而不是我们客户的口袋。虽然这样说可能不合时宜，但无法否认。如果你倾向于相信相反的情况，不妨想一想你所在地区最出色的脑外科医生或律师。你现在真的期望这位专家（其所在专业领域的当地"特许权持有者"）的收费会因个人最高税率从50%降至28%而降低吗？
然而，你因我们得出“低利率有利于部分运营子公司及投资对象”这一结论而生的喜悦，应当被另一个信念狠狠泼一盆冷水：在我们看来，1988年既定的税率（无论是个人还是企业税）完全不切实际。这些税率极有可能给华盛顿带来一个与物价稳定不可兼得的财政难题。因此我们相信，最终——比方说五年内——几乎必然会出现更高税率或更高通胀率，甚至两者齐升，我们也不会意外。
○ 自1987年起，企业资本利得税率已从28%提高至34%。这一变化将对伯克希尔产生重大不利影响，因为我们预期未来企业价值的增长，与过去一样，大部分将来自资本利得。例如，我们三大重仓股——Cap Cities（大都会/美国广播公司）、GEICO（政府雇员保险公司）和华盛顿邮报——在年末的总市值超过17亿美元，接近伯克希尔净资产的75%，但它们每年仅为我们带来约900万美元的收益。相反，这三家公司留存了极高比例的利润，我们预期这些利润最终将转化为资本利得。
新税法提高了未来所有已实现利得的税率，包括法律颁布前就已存在的未实现利得。年末，我们的股权投资中约有12亿美元的此类未实现利得。新税法对我们资产负债表的影响将延迟显现，因为美国通用会计准则规定，适用于未实现利得的递延所得税负债应按去年的28%税率而非当前的34%税率列报。这一规则预计很快会改变。届时，约7300万美元将从我们的美国通用会计准则净资产中消失，转入递延所得税账户。
○ 根据新税法，我们保险公司收到的股息和利息收入将被大幅加税。首先，所有企业从其他国内公司收到的股息中，有20%需要纳税，高于旧法的15%。其次，针对剩余80%的部分，有一项仅适用于财产/意外险公司的变化：如果支付股息的股票是在1986年8月7日之后购买的，那么剩余部分的15%将被征税。第三项变化同样仅适用于财产/意外险公司，涉及免税债券：保险公司在1986年8月7日之后购买的债券所获利息，只有85%可以免税。
最后两项变化非常重要。它们意味着我们未来年份投资所获得的收入将显著低于旧法下应有的水平。我最好的猜测是，仅这些变化最终就会将我们保险业务的盈利能力至少降低10%，低于我们先前的预期。
○ 新税法还显著改变了财产/意外险公司税款支付的时间安排。一项新规则要求我们在纳税申报中对损失准备金进行折现，这一变化将减少抵扣额并增加应税收入。另一项规则将在六年内逐步实施，要求我们将20%的未到期保费准备金纳入应税收入。
这两项规则都不会改变我们报告中年度应计税额的金额，但每一项都大幅加快了税款支付的时间表。也就是说，原本递延的税款现在被前置，这一变化将显著降低我们业务的盈利能力。打个比方就能看出代价：如果你在21岁时就要求立即为一生应得的全部收入纳税，那么你终身的财富和遗产将仅为所有收入税款在你死亡时才支付时的一个零头。
细心的读者可能会发现我们的说法前后矛盾。之前，在讨论价格竞争型行业的公司时，我们说过税收的增加或减少对这些公司影响相对较小，反而很大程度上会转嫁给客户。但现在我们又说，尽管伯克希尔的财产/意外险公司身处激烈的价格竞争型行业，税收增加仍会影响其利润。
这个行业可能成为我们一般规则例外的原因在于，并非所有主要保险公司都面对相同的税收计算公式。存在重大差异的原因有几个：一项新的替代性最低税额将实质性影响部分公司而其他公司不受影响；某些大型保险公司拥有巨额的亏损结转，至少几年内能基本屏蔽它们的收入，免于缴纳大额税款；一些大型保险公司的业绩会被合并到拥有非保险业务的公司的合并申报表中。这些差异导致财产/意外险行业的边际税率差异很大。然而，在大多数其他价格竞争型行业（如铝材、汽车和百货商店）中，主要参与者通常面对相似的税收公式，因此不会出现这种情况。
财产/意外险公司缺乏统一的税收计算，意味着行业承担的增税部分很可能无法像典型的价格竞争型行业那样转嫁给客户。换句话说，保险公司自身将承担大部分新增税负。
○ 这些负担的一个部分抵销项是1987年1月1日发生的“新起点”调整，当时我们1986年12月31日的损失准备金数字在税务上转换为新要求的折现基础。（但在递交给各位的报告中，准备金将保持与过去完全相同的基础——除非是结构性理赔等特殊情况，否则不做折现。）“新起点”的净结果是给我们带来双重抵扣：我们在1987年及以后年度将获得对一部分已发生但未支付的保险损失的税务抵扣，而这些损失已在1986年及以前年度被全额计入成本。
这一变化带来的净资产增加尚未反映在我们的财务报表中。相反，按照目前美国通用会计准则的规则（可能改变），该收益将在未来几年内通过降低税负逐步流入利润表，进而进入净资产。我们预期“新起点”调整的总收益在3000万至4000万美元之间。但应注意，这是一次性收益，而其他保险相关税收变化的负面影响不仅持续存在，而且在重要方面将随时间推移而变得更加严重。
o 通用公用事业准则（General Utilities Doctrine）已被新税法废除。这意味着从1987年起，公司清算将面临双重征税——先是公司层面，然后是股东层面。过去，公司层面的税可以避免。举例来说，如果伯克希尔被清算（这绝对不会发生），根据新税法，股东从出售资产中获得的收益将远低于旧税法下的情况（假设每次售价相同）。虽然这种情况在我们这里只是理论上的，但法律变更将对许多公司产生实质性影响，因此也影响我们对潜在投资的评估。例如，那些可能寻求出售的油气生产企业、特定媒体公司、房地产公司等。股东所能实现的价值很可能显著降低，仅仅因为通用公用事业准则被废除——尽管这些公司的经营经济状况完全没有变差。我的印象是，投资者和管理层尚未完全理解这项重要的税法变更。
我们报告的这部分比我预想的要长且复杂。但税法变更众多且重要，尤其是对财产/意外险保险公司而言。如前所述，新税法将损害伯克希尔的业绩，但负面影响难以精确量化。
**杂项**
去年我们买了一架公司飞机。你听说的关于这类飞机的情况没错：它们非常昂贵，像我们这种很少需要去偏远地方的情况，纯属奢侈品。飞机不仅运营成本高，光看着也费钱。税前，一架新的1500万美元飞机的资金成本加折旧，每年大概要300万美元。而我们这架二手买的85万美元的飞机，这类成本每年接近20万美元。
鉴于这些数字，不巧的是，你们的董事长过去曾对公司飞机发表过一些相当激烈的言论。因此，在购买之前，我被迫进入了我的伽利略模式。我随即体验了必要的“反向启示”，现在出差比过去方便多了——也贵多了。伯克希尔能否从这架飞机上获得物有所值的回报，还是个悬而未决的问题，但我会努力取得一些商业成功，好让我能（不管多么可疑地）归功于它。恐怕本·富兰克林说中了我。他说：“做一个理性的生物真是方便，因为它能让一个人为自己想做的任何事找到或制造一个理由。”
约97%的合格股份参与了伯克希尔1986年的股东指定捐赠计划。通过该计划共捐赠了400万美元，有1934家慈善机构受益。
我们敦促新股东阅读第58和59页关于我们股东指定捐赠计划的说明。如果您希望参与未来的计划，我们强烈建议您立即确保您的股份以实际所有者名义登记，而非“经纪商名义”或代名人名义。未在1987年9月30日以这种形式登记的股份将不符合1987年计划的资格。
* * *
去年将近450人参加了我们的股东大会，高于前年的约250人（以及十年前的大约12人）。希望您能于5月19日来奥马哈参加。查理和我喜欢回答股东的问题，我可以向您保证我们的股东会提出很多好问题。回答完所有问题可能需要相当长的时间——去年我们大概有65个问题，所以您的问题得到解答后可以随时离开。
去年会议结束后，一位来自新泽西和一位来自纽约的股东去了家具城，各自从B太太那里买了一块5000美元的东方地毯。（准确地说，他们买的地毯别处可能卖10000美元，在这里只花了约5000美元。）B太太很高兴——但还不满足——她会在今年会议结束后在店里等你们。除非我们的股东打破去年的记录，否则我可就有麻烦了。所以帮个忙（也帮你自己），去看看她吧。
沃伦·E·巴菲特
1987年2月27日 董事会主席
Appendix
Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy
First a short quiz: below are abbreviated 1986 statements of earnings for two companies. Which business is the more valuable?
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Company O |
Company N |
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|
(000s Omitted) |
||||||||||||
|
Revenues………………………. |
$677,240 |
$677,240 |
||||||||||
|
Costs of Goods Sold: |
||||||||||||
|
Historical costs, excluding depreciation……………………. |
$341,170 |
$341,170 |
||||||||||
|
Special non-cash inventory costs……………………………. |
4,979 |
(1) |
||||||||||
|
Depreciation of plant and equipment ……………………... |
8,301 |
13,355 |
(2) |
|||||||||
|
|
349,471 |
359,504 |
||||||||||
|
$327,769 |
$317,736 |
|||||||||||
|
Gross Profit ……………………. |
||||||||||||
|
Selling & Admin. Expense........ |
$260,286 |
$260,286 |
||||||||||
|
Amortization of Goodwill ......... |
______ |
____595 |
(3) |
|||||||||
|
260,286 |
260,881 |
|||||||||||
|
Operating Profit .....................… |
$ 67,483 |
$ 56,855 |
||||||||||
|
Other Income, Net .................… |
4,135 |
4,135 |
||||||||||
|
Pre-Tax Income ......................… |
$ 71,618 |
$ 60,990 |
||||||||||
|
Applicable Income Tax: |
||||||||||||
|
Historical deferred and current tax ………………………………. |
$ 31,387 |
$ 31,387 |
||||||||||
|
Non-Cash Inter-period Allocation Adjustment ............. |
______ |
_____998 |
(4) |
|||||||||
|
31,387 |
32,385 |
|||||||||||
净收入 ............ $40,231 $28,605
======= =======
(Numbers (1) through (4) designate items discussed later in this section.)
As you've probably guessed, Companies O and N are the same business - Scott Fetzer. In the "O" (for "old") column we have shown what the company's 1986 GAAP earnings would have been if we had not purchased it; in the "N" (for "new") column we have shown Scott Fetzer's GAAP earnings as actually reported by Berkshire.
It should be emphasized that the two columns depict identical economics - i.e., the same sales, wages, taxes, etc. And both "companies" generate the same amount of cash for owners. Only the accounting is different.
So, fellow philosophers, which column presents truth? Upon which set of numbers should managers and investors focus?
Before we tackle those questions, let's look at what produces the disparity between O and N. We will simplify our discussion in some respects, but the simplification should not produce any inaccuracies in analysis or conclusions.
The contrast between O and N comes about because we paid an amount for Scott Fetzer that was different from its stated net worth. Under GAAP, such differences - such premiums or discounts - must be accounted for by "purchase-price adjustments." In Scott Fetzer's case, we paid \$315 million for net assets that were carried on its books at \$172.4 million. So we paid a premium of \$142.6 million.
The first step in accounting for any premium paid is to adjust the carrying value of current assets to current values. In practice, this requirement usually does not affect receivables, which are routinely carried at current value, but often affects inventories. Because of a \$22.9 million LIFO reserve and other accounting intricacies, Scott Fetzer's inventory account was carried at a \$37.3 million discount from current value. So, making our first accounting move, we used \$37.3 million of our \$142.6 million premium to increase the carrying value of the inventory.
Assuming any premium is left after current assets are adjusted, the next step is to adjust fixed assets to current value. In our case, this adjustment also required a few accounting acrobatics relating to deferred taxes. Since this has been billed as a simplified discussion, I will skip the details and give you the bottom line: \$68.0 million was added to fixed assets and \$13.0 million was eliminated from deferred tax liabilities. After making this \$81.0 million adjustment, we were left with \$24.3 million of premium to allocate.
Had our situation called for them two steps would next have been required: the adjustment of intangible assets other than Goodwill to current fair values, and the restatement of liabilities to current fair values, a requirement that typically affects only long-term debt and unfunded pension liabilities. In Scott Fetzer's case, however, neither of these steps was necessary.
The final accounting adjustment we needed to make, after recording fair market values for all assets and liabilities, was the assignment of the residual premium to Goodwill (technically known as "excess of cost over the fair value of net assets acquired"). This residual amounted to \$24.3 million. Thus, the balance sheet of Scott Fetzer immediately before the acquisition, which is summarized below in column O, was transformed by the purchase into the balance sheet shown in column N. In real terms, both balance sheets depict the same assets and liabilities - but, as you can see, certain figures differ significantly.
|
Company O |
Company N |
|
|
(000s Omitted) |
||
|
Assets |
||
|
Cash and Cash Equivalents …………………………... |
$ 3,593 |
$ 3,593 |
|
Receivables, net ……………………………………….. |
90,919 |
90,919 |
|
Inventories …………………………………………… |
77,489 |
114,764 |
|
Other ……………………………………………………. |
5,954 |
5,954 |
|
Total Current Assets ………………………………….. |
177,955 |
215,230 |
|
Property, Plant, and Equipment, net …………………. |
80,967 |
148,960 |
|
Investments in and Advances to Unconsolidated Subsidiaries and Joint Ventures ……………………… |
93,589 |
93,589 |
|
Other Assets, including Goodwill ……………………. |
9,836 |
34,210 |
|
$362,347 |
$491,989 |
|
|
Liabilities |
||
|
Notes Payable and Current Portion of Long-term Debt ……………………………………………………… |
$ 4,650 |
$ 4,650 |
|
Accounts Payable ……………………………………... |
39,003 |
39,003 |
|
Accrued Liabilities …………………………………….. |
84,939 |
84,939 |
|
Total Current Liabilities ……………………………….. |
128,592 |
128,592 |
|
Long-term Debt and Capitalized Leases ……………. |
34,669 |
34,669 |
|
Deferred Income Taxes ……………………………….. |
17,052 |
4,075 |
|
Other Deferred Credits ………………………………… |
9,657 |
9,657 |
|
Total Liabilities ………………………………………… |
189,970 |
176,993 |
|
Shareholders' Equity …………………………………... |
172,377 |
314,996 |
$362,347 $491,989
======== ========
较高的资产负债表数字（列N所示）导致了先前列示的收益表中列N的较低收入数字。这是资产增值以及部分增值资产必须计提折旧或摊销的结果。资产数字越高，每年从收益中扣除的折旧或摊销费用就越高。因资产负债表增值而产生的收益表费用，在先前列示的收益表中编号如下：
1. 4,979,000美元的非现金存货成本，主要源于Scott Fetzer在1986年减少库存所致；此类费用在未来几年可能很小或不存在。
1. 5,054,000美元的额外折旧，源于固定资产增值；此类费用大概会每年发生，持续12年。
1. 595,000美元的商誉摊销；此类费用将每年发生，持续39年，金额略大，因为我们的收购是在1月6日完成的，因此1986年的数字仅适用于该年度的98%。
1. 998,000美元的递延税款把戏，我无法简要（甚至可能无法不简要）解释；此类费用大概会每年发生，持续12年。
重要的是要理解，这些新产生的会计成本总计1160万美元，均不能用于所得税抵扣。“新”Scott Fetzer缴纳的税款与“旧”Scott Fetzer原本需缴纳的税款完全相同，尽管两者的GAAP收益大相径庭。就经营收益而言，未来也是如此。然而，在Scott Fetzer出售其某项业务的极小可能情况下，“旧”公司与“新”公司的税务后果可能截然不同。
到1986年底，“旧”Scott Fetzer与“新”Scott Fetzer之间的净资产差额已从1.426亿美元减少至1.310亿美元，因为新实体额外从收益中扣除了1160万美元。随着时间推移，类似的收益扣除将导致大部分溢价消失，两家公司的资产负债表将趋同。然而，新资产负债表上确立的高土地价值及大部分高存货价值将保留，除非土地被处置或存货水平进一步降低。
* * *
这对所有者意味着什么？伯克希尔的股东是买了一家1986年赚取4020万美元的企业，还是赚取2860万美元的企业？那1160万美元的新成本对我们来说是真实的经济成本吗？投资者应该为O公司的股票支付比N公司更高的价格吗？如果一家企业值某个给定市盈率的倍数，那么Scott Fetzer在我们收购前一天的价值是否远高于收购后一天的价值？
如果我们仔细思考这些问题，就能对所谓的"所有者盈余"有所了解。它等于(a)报告利润加上(b)折旧、损耗、摊销以及其他某些非现金费用（如N公司的项目(1)和(4)），再减去(c)企业为全面维持其长期竞争地位和单位产量所需的厂房设备等资本性支出的年平均金额。（如果企业需要额外的营运资金来维持竞争地位和单位产量，该增加额也应计入(c)。不过，采用后进先出（LIFO）存货法的企业，在单位产量不变时通常不需要额外营运资金。）
我们的所有者盈余公式，并不能给出GAAP（美国通用会计准则）所提供的那种看似精确的数字，因为(c)必然是一个估计——有时还相当难以确定。尽管存在这个问题，我们认为在估值时——无论是投资者买入股票，还是经理人收购整个企业——相关的数字是所有者盈余，而不是GAAP数字。我们赞同Keynes的观点："我宁愿大致正确，也不愿精确错误。"
我们概述的方法为O公司和N公司计算出的"所有者盈余"是相同的，这意味着估值也相同，常识也会告诉你应该如此。得到这个结果，是因为(a)与(b)之和在O、N两列中相等，并且(c)在两种情况下也必然相等。
那么，作为所有者和经理人，Charlie和我认为Scott Fetzer的所有者盈余的正确数字是多少？在目前情况下，我们认为(c)非常接近"旧"公司的(b)数字830万美元，而远低于"新"公司的(b)数字1990万美元。因此，我们认为O列中的报告利润比N列中的更能准确描述所有者盈余。换句话说，我们觉得Scott Fetzer的所有者盈余远大于我们所报告的GAAP数字。
这显然是一种可喜的情况。但这类计算通常不会带来如此令人愉快的消息。大多数经理人可能都会承认，从长期来看，他们需要在企业上投入比(b)更多的资金，才能保持单位产量和竞争地位。当这种必须存在时——也就是当(c)超过(b)时——GAAP利润就夸大了所有者盈余。这种夸大常常相当严重。石油行业近年提供了这方面的一个显著例子。如果大多数大型石油公司每年只花(b)那么多钱，它们就注定了实际上的萎缩。
所有这些都凸显了华尔街报告中常见的"现金流"数字的荒谬。这些数字通常包括(a)加(b)——但不减去(c)。大多数投资银行的销售说明书也充斥着此类欺骗性表述。它们暗示，待售的企业是商业界的金字塔——永远是最先进的，永远不需要更换、改进或翻新。的确，如果美国所有公司都通过我们顶尖的投资银行同时出售——而且如果描述它们的销售说明书都可信的话——那么政府对全国厂房设备支出的预测就需要削减90%。
"现金流"确实可以作为某些房地产企业或其他需要大量初始支出、随后仅需少量支出的企业的有用简写。一个唯一资产是一座桥梁或寿命极长的气田的公司就是例子。但"现金流"在制造业、零售业、采掘业和公用事业等行业中毫无意义，因为对于这些企业，(c)始终是重要的。诚然，这类企业在某一年或许能够推迟资本支出。但五年或十年内，它们必须进行投资——否则企业就会衰落。
那么，为什么"现金流"数字如今如此流行？回答时，我们承认自己的愤世嫉俗：我们相信，企业和证券的推销者经常使用这些数字，试图为不可辩护之事辩护（并借此卖出本来卖不掉的东西）。当(a)——即GAAP利润——本身看起来不足以支付垃圾债券的利息或证明一个愚蠢的股价合理时，销售人员将注意力集中在(a)+(b)上就变得多么方便。但你不能只加(b)而不减(c)：尽管牙医正确地声称，如果你忽视牙齿，它们就会脱落，但(c)可不是这样。如果一家公司或投资者相信，企业的偿债能力或股权估值可以通过汇总(a)和(b)而忽略(c)来衡量，那注定会遇到麻烦。
* * *
总结：对于Scott Fetzer和我们其他企业，我们认为，基于历史成本的(b)——即排除无形资产摊销和其他购买价格调整后——在金额上与(c)非常接近。（当然，这两项并不完全相同。例如，在喜诗糖果（See's），我们每年进行的资本性支出超过折旧50万到100万美元，仅仅是为了保持竞争地位。）我们对这一点的确信，就是为什么我们在第8页的表格中单独列示摊销和其他购买价格调整项目，也是为什么我们认为该表格中报告的各企业利润比GAAP数字更接近所有者盈余。
质疑GAAP数字在有些人看来可能是不敬的。毕竟，如果我们不是付钱给会计师来提供我们企业的"真相"，那又是为什么？但会计师的工作是记录，而不是评估。评估的工作落在了投资者和经理人身上。
当然，会计数字是商业的语言，对任何评估企业价值、追踪其进展的人都大有帮助。没有这些数字，Charlie和我将不知所措：它们始终是我们评估自己和他人企业的起点。然而，经理人和所有者需要记住，会计只是商业思考的辅助，绝不能替代思考。