ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1988 was $569 million, or
20.0%. Over the last 24 years (that is, since present management
took over), our per-share book value has grown from $19.46 to
$2,974.52, or at a rate of 23.0% compounded annually.
We’ve emphasized in past reports that what counts, however,
is intrinsic business value - the figure, necessarily an
estimate, indicating what all of our constituent businesses are
worth. By our calculations, Berkshire’s intrinsic business value
significantly exceeds its book value. Over the 24 years,
business value has grown somewhat faster than book value; in
1988, however, book value grew the faster, by a bit.
Berkshire’s past rates of gain in both book value and
business value were achieved under circumstances far different
from those that now exist. Anyone ignoring these differences
makes the same mistake that a baseball manager would were he to
judge the future prospects of a 42-year-old center fielder on the
basis of his lifetime batting average.
Important negatives affecting our prospects today are: (1) a
less attractive stock market than generally existed over the past
24 years; (2) higher corporate tax rates on most forms of
investment income; (3) a far more richly-priced market for the
acquisition of businesses; and (4) industry conditions for
Capital Cities/ABC, Inc., GEICO Corporation, and The Washington
Post Company - Berkshire’s three permanent investments,
constituting about one-half of our net worth - that range from
slightly to materially less favorable than those existing five to
ten years ago. All of these companies have superb management and
strong properties. But, at current prices, their upside
potential looks considerably less exciting to us today than it
did some years ago.
The major problem we face, however, is a growing capital
base. You’ve heard that from us before, but this problem, like
age, grows in significance each year. (And also, just as with
age, it’s better to have this problem continue to grow rather
than to have it “solved.”)
Four years ago I told you that we needed profits of $3.9
billion to achieve a 15% annual return over the decade then
ahead. Today, for the next decade, a 15% return demands profits
of $10.3 billion. That seems like a very big number to me and to
Charlie Munger, Berkshire’s Vice Chairman and my partner. (Should
that number indeed prove too big, Charlie will find himself, in
future reports, retrospectively identified as the senior
partner.)
As a partial offset to the drag that our growing capital
base exerts upon returns, we have a very important advantage now
that we lacked 24 years ago. Then, all our capital was tied up
in a textile business with inescapably poor economic
characteristics. Today part of our capital is invested in some
really exceptional businesses.
Last year we dubbed these operations the Sainted Seven:
Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott
Fetzer Manufacturing Group, See’s, and World Book. In 1988 the
Saints came marching in. You can see just how extraordinary
their returns on capital were by examining the historical-cost
financial statements on page 45, which combine the figures of the
Sainted Seven with those of several smaller units. With no
benefit from financial leverage, this group earned about 67% on
average equity capital.
In most cases the remarkable performance of these units
arises partially from an exceptional business franchise; in all
cases an exceptional management is a vital factor. The
contribution Charlie and I make is to leave these managers alone.
In my judgment, these businesses, in aggregate, will
continue to produce superb returns. We’ll need these: Without
this help Berkshire would not have a chance of achieving our 15%
goal. You can be sure that our operating managers will deliver;
the question mark in our future is whether Charlie and I can
effectively employ the funds that they generate.
In that respect, we took a step in the right direction early
in 1989 when we purchased an 80% interest in Borsheim’s, a
jewelry business in Omaha. This purchase, described later in
this letter, delivers exactly what we look for: an outstanding
business run by people we like, admire, and trust. It’s a great
way to start the year.
Accounting Changes
We have made a significant accounting change that was
mandated for 1988, and likely will have another to make in 1990.
When we move figures around from year to year, without any change
in economic reality, one of our always-thrilling discussions of
accounting is necessary.
First, I’ll offer my customary disclaimer: Despite the
shortcomings of generally accepted accounting principles (GAAP),
I would hate to have the job of devising a better set of rules.
The limitations of the existing set, however, need not be
inhibiting: CEOs are free to treat GAAP statements as a beginning
rather than an end to their obligation to inform owners and
creditors - and indeed they should. After all, any manager of a
subsidiary company would find himself in hot water if he reported
barebones GAAP numbers that omitted key information needed by his
boss, the parent corporation’s CEO. Why, then, should the CEO
himself withhold information vitally useful to his bosses - the
shareholder-owners of the corporation?
What needs to be reported is data - whether GAAP, non-GAAP,
or extra-GAAP - that helps financially-literate readers answer
three key questions: (1) Approximately how much is this company
worth? (2) What is the likelihood that it can meet its future
obligations? and (3) How good a job are its managers doing, given
the hand they have been dealt?
In most cases, answers to one or more of these questions are
somewhere between difficult and impossible to glean from the
minimum GAAP presentation. The business world is simply too
complex for a single set of rules to effectively describe
economic reality for all enterprises, particularly those
operating in a wide variety of businesses, such as Berkshire.
Further complicating the problem is the fact that many
managements view GAAP not as a standard to be met, but as an
obstacle to overcome. Too often their accountants willingly
assist them. (“How much,” says the client, “is two plus two?”
Replies the cooperative accountant, “What number did you have in
mind?”) Even honest and well-intentioned managements sometimes
stretch GAAP a bit in order to present figures they think will
more appropriately describe their performance. Both the
smoothing of earnings and the “big bath” quarter are “white lie”
techniques employed by otherwise upright managements.
Then there are managers who actively use GAAP to deceive and
defraud. They know that many investors and creditors accept GAAP
results as gospel. So these charlatans interpret the rules
“imaginatively” and record business transactions in ways that
technically comply with GAAP but actually display an economic
illusion to the world.
As long as investors - including supposedly sophisticated
institutions - place fancy valuations on reported “earnings” that
march steadily upward, you can be sure that some managers and
promoters will exploit GAAP to produce such numbers, no matter
what the truth may be. Over the years, Charlie and I have
observed many accounting-based frauds of staggering size. Few of
the perpetrators have been punished; many have not even been
censured. It has been far safer to steal large sums with a pen
than small sums with a gun.
Under one major change mandated by GAAP for 1988, we have
been required to fully consolidate all our subsidiaries in our
balance sheet and earnings statement. In the past, Mutual
Savings and Loan, and Scott Fetzer Financial (a credit company
that primarily finances installment sales of World Book and Kirby
products) were consolidated on a “one-line” basis. That meant we
(1) showed our equity in their combined net worths as a single-
entry asset on Berkshire’s consolidated balance sheet and (2)
included our equity in their combined annual earnings as a
single-line income entry in our consolidated statement of
earnings. Now the rules require that we consolidate each asset
and liability of these companies in our balance sheet and each
item of their income and expense in our earnings statement.
This change underscores the need for companies also to
report segmented data: The greater the number of economically
diverse business operations lumped together in conventional
financial statements, the less useful those presentations are and
the less able investors are to answer the three questions posed
earlier. Indeed, the only reason we ever prepare consolidated
figures at Berkshire is to meet outside requirements. On the
other hand, Charlie and I constantly study our segment data.
Now that we are required to bundle more numbers in our GAAP
statements, we have decided to publish additional supplementary
information that we think will help you measure both business
value and managerial performance. (Berkshire’s ability to
discharge its obligations to creditors - the third question we
listed - should be obvious, whatever statements you examine.) In
these supplementary presentations, we will not necessarily follow
GAAP procedures, or even corporate structure. Rather, we will
attempt to lump major business activities in ways that aid
analysis but do not swamp you with detail. Our goal is to give
you important information in a form that we would wish to get it
if our roles were reversed.
On pages 41-47 we show separate combined balance sheets and
earnings statements for: (1) our subsidiaries engaged in finance-
type operations, which are Mutual Savings and Scott Fetzer
Financial; (2) our insurance operations, with their major
investment positions itemized; (3) our manufacturing, publishing
and retailing businesses, leaving aside certain non-operating
assets and purchase-price accounting adjustments; and (4) an all-
other category that includes the non-operating assets (primarily
marketable securities) held by the companies in (3) as well as
various assets and debts of the Wesco and Berkshire parent
companies.
If you combine the earnings and the net worths of these four
segments, you will derive totals matching those shown on our GAAP
statements. However, we want to emphasize that our new
presentation does not fall within the purview of our auditors,
who in no way bless it. (In fact, they may be horrified; I don’t
want to ask.)
I referred earlier to a major change in GAAP that is
expected in 1990. This change relates to the calculation of
deferred taxes, and is both complicated and controversial - so
much so that its imposition, originally scheduled for 1989, was
postponed for a year.
When implemented, the new rule will affect us in various
ways. Most important, we will be required to change the way we
calculate our liability for deferred taxes on the unrealized
appreciation of stocks held by our insurance companies.
Right now, our liability is layered. For the unrealized
appreciation that dates back to 1986 and earlier years, $1.2
billion, we have booked a 28% tax liability. For the unrealized
appreciation built up since, $600 million, the tax liability has
been booked at 34%. The difference reflects the increase in tax
rates that went into effect in 1987.
It now appears, however, that the new accounting rule will
require us to establish the entire liability at 34% in 1990,
taking the charge against our earnings. Assuming no change in
tax rates by 1990, this step will reduce our earnings in that
year (and thereby our reported net worth) by $71 million. The
proposed rule will also affect other items on our balance sheet,
but these changes will have only a minor impact on earnings and
net worth.
We have no strong views about the desirability of this
change in calculation of deferred taxes. We should point out,
however, that neither a 28% nor a 34% tax liability precisely
depicts economic reality at Berkshire since we have no plans to
sell the stocks in which we have the great bulk of our gains.
To those of you who are uninterested in accounting, I
apologize for this dissertation. I realize that many of you do
not pore over our figures, but instead hold Berkshire primarily
because you know that: (1) Charlie and I have the bulk of our
money in Berkshire; (2) we intend to run things so that your
gains or losses are in direct proportion to ours; and (3) the
record has so far been satisfactory. There is nothing
necessarily wrong with this kind of “faith” approach to
investing. Other shareholders, however, prefer an “analysis”
approach and we want to supply the information they need. In our
own investing, we search for situations in which both approaches
give us the same answer.
Sources of Reported Earnings
In addition to supplying you with our new four-sector
accounting material, we will continue to list the major sources
of Berkshire’s reported earnings just as we have in the past.
In the following table, amortization of Goodwill and other
major purchase-price accounting adjustments are not charged
against the specific businesses to which they apply but are
instead aggregated and shown separately. This procedure lets you
view the earnings of our businesses as they would have been
reported had we not purchased them. I’ve explained in past
reports why this form of presentation seems to us to be more
useful to investors and managers than the standard GAAP
presentation, which makes purchase-price adjustments on a
business-by-business basis. The total net earnings we show in
the table are, of course, identical to the GAAP total in our
audited financial statements.
Further information about these businesses is given in the
Business Segment section on pages 32-34, and in the Management’s
Discussion section on pages 36-40. In these sections you also
will find our segment earnings reported on a GAAP basis. For
information on Wesco’s businesses, I urge you to read Charlie
Munger’s letter, which starts on page 52. It contains the best
description I have seen of the events that produced the present
savings-and-loan crisis. Also, take special note of Dave
Hillstrom’s performance at Precision Steel Warehouse, a Wesco
subsidiary. Precision operates in an extremely competitive
industry, yet Dave consistently achieves good returns on invested
capital. Though data is lacking to prove the point, I think it
is likely that his performance, both in 1988 and years past,
would rank him number one among his peers.
(000s omitted)
------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1988 1987 1988 1987
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............... $(11,081) $(55,429) $ (1,045) $(20,696)
Net Investment Income ...... 231,250 152,483 197,779 136,658
Buffalo News ................. 42,429 39,410 25,462 21,304
Fechheimer ................... 14,152 13,332 7,720 6,580
Kirby ........................ 26,891 22,408 17,842 12,891
Nebraska Furniture Mart ...... 18,439 16,837 9,099 7,554
Scott Fetzer
Manufacturing Group ....... 28,542 30,591 17,640 17,555
See’s Candies ................ 32,473 31,693 19,671 17,363
Wesco - other than Insurance 16,133 6,209 10,650 4,978
World Book ................... 27,890 25,745 18,021 15,136
Amortization of Goodwill ..... (2,806) (2,862) (2,806) (2,862)
Other Purchase-Price
Accounting Charges ........ (6,342) (5,546) (7,340) (6,544)
Interest on Debt* ............ (35,613) (11,474) (23,212) (5,905)
Shareholder-Designated
Contributions ............. (4,966) (4,938) (3,217) (2,963)
Other ........................ 41,059 23,217 27,177 13,697
-------- -------- -------- --------
Operating Earnings ............. 418,450 281,676 313,441 214,746
Sales of Securities ............ 131,671 28,838 85,829 19,806
-------- -------- -------- --------
Total Earnings - All Entities .. $550,121 $310,514 $399,270 $234,552
*Excludes interest expense of Scott Fetzer Financial Group.
The earnings achieved by our operating businesses are
superb, whether measured on an absolute basis or against those of
their competitors. For that we thank our operating managers: You
and I are fortunate to be associated with them.
At Berkshire, associations like these last a long time. We
do not remove superstars from our lineup merely because they have
attained a specified age - whether the traditional 65, or the 95
reached by Mrs. B on the eve of Hanukkah in 1988. Superb
managers are too scarce a resource to be discarded simply because
a cake gets crowded with candles. Moreover, our experience with
newly-minted MBAs has not been that great. Their academic
records always look terrific and the candidates always know just
what to say; but too often they are short on personal commitment
to the company and general business savvy. It’s difficult to
teach a new dog old tricks.
Here’s an update on our major non-insurance operations:
o At Nebraska Furniture Mart, Mrs. B (Rose Blumkin) and her
cart roll on and on. She’s been the boss for 51 years, having
started the business at 44 with $500. (Think what she would have
done with $1,000!) With Mrs. B, old age will always be ten years
away.
The Mart, long the largest home furnishings store in the
country, continues to grow. In the fall, the store opened a
detached 20,000 square foot Clearance Center, which expands our
ability to offer bargains in all price ranges.
Recently Dillard’s, one of the most successful department
store operations in the country, entered the Omaha market. In
many of its stores, Dillard’s runs a full furniture department,
undoubtedly doing well in this line. Shortly before opening in
Omaha, however, William Dillard, chairman of the company,
announced that his new store would not sell furniture. Said he,
referring to NFM: “We don’t want to compete with them. We think
they are about the best there is.”
At the Buffalo News we extol the value of advertising, and
our policies at NFM prove that we practice what we preach. Over
the past three years NFM has been the largest ROP advertiser in
the Omaha World-Herald. (ROP advertising is the kind printed in
the paper, as contrasted to the preprinted-insert kind.) In no
other major market, to my knowledge, is a home furnishings
operation the leading customer of the newspaper. At times, we
also run large ads in papers as far away as Des Moines, Sioux
City and Kansas City - always with good results. It truly does
pay to advertise, as long as you have something worthwhile to
offer.
Mrs. B’s son, Louie, and his boys, Ron and Irv, complete the
winning Blumkin team. It’s a joy to work with this family. All
its members have character that matches their extraordinary
abilities.
o Last year I stated unequivocally that pre-tax margins at
The Buffalo News would fall in 1988. That forecast would have
proved correct at almost any other newspaper our size or larger.
But Stan Lipsey - bless him - has managed to make me look
foolish.
Though we increased our prices a bit less than the industry
average last year, and though our newsprint costs and wage rates
rose in line with industry norms, Stan actually improved margins
a tad. No one in the newspaper business has a better managerial
record. He has achieved it, furthermore, while running a paper
that gives readers an extraordinary amount of news. We believe
that our “newshole” percentage - the portion of the paper devoted
to news - is bigger than that of any other dominant paper of our
size or larger. The percentage was 49.5% in 1988 versus 49.8% in
1987. We are committed to keeping it around 50%, whatever the
level or trend of profit margins.
Charlie and I have loved the newspaper business since we
were youngsters, and we have had great fun with the News in the
12 years since we purchased it. We were fortunate to find Murray
Light, a top-flight editor, on the scene when we arrived and he
has made us proud of the paper ever since.
o See’s Candies sold a record 25.1 million pounds in 1988.
Prospects did not look good at the end of October, but excellent
Christmas volume, considerably better than the record set in
1987, turned the tide.
As we’ve told you before, See’s business continues to become
more Christmas-concentrated. In 1988, the Company earned a
record 90% of its full-year profits in December: $29 million out
of $32.5 million before tax. (It’s enough to make you believe in
Santa Claus.) December’s deluge of business produces a modest
seasonal bulge in Berkshire’s corporate earnings. Another small
bulge occurs in the first quarter, when most World Book annuals
are sold.
Charlie and I put Chuck Huggins in charge of See’s about
five minutes after we bought the company. Upon reviewing his
record, you may wonder what took us so long.
o At Fechheimer, the Heldmans - Bob, George, Gary, Roger and
Fred - are the Cincinnati counterparts of the Blumkins. Neither
furniture retailing nor uniform manufacturing has inherently
attractive economics. In these businesses, only exceptional
managements can deliver high returns on invested capital. And
that’s exactly what the five Heldmans do. (As Mets announcer
Ralph Kiner once said when comparing pitcher Steve Trout to his
father, Dizzy Trout, the famous Detroit Tigers pitcher: “There’s
a lot of heredity in that family.”)
Fechheimer made a fairly good-sized acquisition in 1988.
Charlie and I have such confidence in the business savvy of the
Heldman family that we okayed the deal without even looking at
it. There are very few managements anywhere - including those
running the top tier companies of the Fortune 500 - in which we
would exhibit similar confidence.
Because of both this acquisition and some internal growth,
sales at Fechheimer should be up significantly in 1989.
o All of the operations managed by Ralph Schey - World Book,
Kirby, and The Scott Fetzer Manufacturing Group - performed
splendidly in 1988. Returns on the capital entrusted to Ralph
continue to be exceptional.
Within the Scott Fetzer Manufacturing Group, particularly
fine progress was recorded at its largest unit, Campbell
Hausfeld. This company, the country’s leading producer of small
and medium-sized air compressors, has more than doubled earnings
since 1986.
Unit sales at both Kirby and World Book were up
significantly in 1988, with export business particularly strong.
World Book became available in the Soviet Union in September,
when that country’s largest American book store opened in Moscow.
Ours is the only general encyclopedia offered at the store.
Ralph’s personal productivity is amazing: In addition to
running 19 businesses in superb fashion, he is active at The
Cleveland Clinic, Ohio University, Case Western Reserve, and a
venture capital operation that has spawned sixteen Ohio-based
companies and resurrected many others. Both Ohio and Berkshire
are fortunate to have Ralph on their side.
Borsheim’s
It was in 1983 that Berkshire purchased an 80% interest in
The Nebraska Furniture Mart. Your Chairman blundered then by
neglecting to ask Mrs. B a question any schoolboy would have
thought of: “Are there any more at home like you?” Last month I
corrected the error: We are now 80% partners with another branch
of the family.
After Mrs. B came over from Russia in 1917, her parents and
five siblings followed. (Her two other siblings had preceded
her.) Among the sisters was Rebecca Friedman who, with her
husband, Louis, escaped in 1922 to the west through Latvia in a
journey as perilous as Mrs. B’s earlier odyssey to the east
through Manchuria. When the family members reunited in Omaha
they had no tangible assets. However, they came equipped with an
extraordinary combination of brains, integrity, and enthusiasm
for work - and that’s all they needed. They have since proved
themselves invincible.
In 1948 Mr. Friedman purchased Borsheim’s, a small Omaha
jewelry store. He was joined in the business by his son, Ike, in
1950 and, as the years went by, Ike’s son, Alan, and his sons-in-
law, Marvin Cohn and Donald Yale, came in also.
You won’t be surprised to learn that this family brings to
the jewelry business precisely the same approach that the
Blumkins bring to the furniture business. The cornerstone for
both enterprises is Mrs. B’s creed: “Sell cheap and tell the
truth.” Other fundamentals at both businesses are: (1) single
store operations featuring huge inventories that provide
customers with an enormous selection across all price ranges, (2)
daily attention to detail by top management, (3) rapid turnover,
(4) shrewd buying, and (5) incredibly low expenses. The
combination of the last three factors lets both stores offer
everyday prices that no one in the country comes close to
matching.
Most people, no matter how sophisticated they are in other
matters, feel like babes in the woods when purchasing jewelry.
They can judge neither quality nor price. For them only one rule
makes sense: If you don’t know jewelry, know the jeweler.
I can assure you that those who put their trust in Ike
Friedman and his family will never be disappointed. The way in
which we purchased our interest in their business is the ultimate
testimonial. Borsheim’s had no audited financial statements;
nevertheless, we didn’t take inventory, verify receivables or
audit the operation in any way. Ike simply told us what was so -
- and on that basis we drew up a one-page contract and wrote a
large check.
Business at Borsheim’s has mushroomed in recent years as the
reputation of the Friedman family has spread. Customers now come
to the store from all over the country. Among them have been
some friends of mine from both coasts who thanked me later for
getting them there.
Borsheim’s new links to Berkshire will change nothing in the
way this business is run. All members of the Friedman family
will continue to operate just as they have before; Charlie and I
will stay on the sidelines where we belong. And when we say “all
members,” the words have real meaning. Mr. and Mrs. Friedman, at
88 and 87, respectively, are in the store daily. The wives of
Ike, Alan, Marvin and Donald all pitch in at busy times, and a
fourth generation is beginning to learn the ropes.
It is great fun to be in business with people you have long
admired. The Friedmans, like the Blumkins, have achieved success
because they have deserved success. Both families focus on
what’s right for the customer and that, inevitably, works out
well for them, also. We couldn’t have better partners.
Insurance Operations
Shown below is an updated version of our usual table
presenting key figures for the insurance industry:
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 9.6
1982 ..... 3.7 109.6 8.4 6.4
1983 ..... 5.0 112.0 6.8 3.8
1984 ..... 8.5 118.0 16.9 3.7
1985 ..... 22.1 116.3 16.1 3.2
1986 ..... 22.2 108.0 13.5 2.7
1987 ..... 9.4 104.6 7.8 3.3
1988 (Est.) 3.9 105.4 4.2 3.6
Source: A.M. Best Co.
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 107-111 range
typically produces an overall break-even result, exclusive of
earnings on the funds provided by shareholders.
For the reasons laid out in previous reports, we expect the
industry’s incurred losses to grow by about 10% annually, even in
years when general inflation runs considerably lower. If premium
growth meanwhile materially lags that 10% rate, underwriting
losses will mount, though the industry’s tendency to underreserve
when business turns bad may obscure their size for a time. As
the table shows, the industry’s underwriting loss grew in 1988.
This trend is almost certain to continue - and probably will
accelerate - for at least two more years.
The property-casualty insurance industry is not only
subnormally profitable, it is subnormally popular. (As Sam
Goldwyn philosophized: “In life, one must learn to take the
bitter with the sour.”) One of the ironies of business is that
many relatively-unprofitable industries that are plagued by
inadequate prices habitually find themselves beat upon by irate
customers even while other, hugely profitable industries are
spared complaints, no matter how high their prices.
Take the breakfast cereal industry, whose return on invested
capital is more than double that of the auto insurance industry
(which is why companies like Kellogg and General Mills sell at
five times book value and most large insurers sell close to
book). The cereal companies regularly impose price increases,
few of them related to a significant jump in their costs. Yet
not a peep is heard from consumers. But when auto insurers raise
prices by amounts that do not even match cost increases,
customers are outraged. If you want to be loved, it’s clearly
better to sell high-priced corn flakes than low-priced auto
insurance.
The antagonism that the public feels toward the industry can
have serious consequences: Proposition 103, a California
initiative passed last fall, threatens to push auto insurance
prices down sharply, even though costs have been soaring. The
price cut has been suspended while the courts review the
initiative, but the resentment that brought on the vote has not
been suspended: Even if the initiative is overturned, insurers
are likely to find it tough to operate profitably in California.
(Thank heavens the citizenry isn’t mad at bonbons: If Proposition
103 applied to candy as well as insurance, See’s would be forced
to sell its product for $5.76 per pound. rather than the $7.60 we
charge - and would be losing money by the bucketful.)
The immediate direct effects on Berkshire from the
initiative are minor, since we saw few opportunities for profit
in the rate structure that existed in California prior to the
vote. However, the forcing down of prices would seriously affect
GEICO, our 44%-owned investee, which gets about 10% of its
premium volume from California. Even more threatening to GEICO
is the possibility that similar pricing actions will be taken in
other states, through either initiatives or legislation.
If voters insist that auto insurance be priced below cost,
it eventually must be sold by government. Stockholders can
subsidize policyholders for a short period, but only taxpayers
can subsidize them over the long term. At most property-casualty
companies, socialized auto insurance would be no disaster for
shareholders. Because of the commodity characteristics of the
industry, most insurers earn mediocre returns and therefore have
little or no economic goodwill to lose if they are forced by
government to leave the auto insurance business. But GEICO,
because it is a low-cost producer able to earn high returns on
equity, has a huge amount of economic goodwill at risk. In turn,
so do we.
At Berkshire, in 1988, our premium volume continued to fall,
and in 1989 we will experience a large decrease for a special
reason: The contract through which we receive 7% of the business
of Fireman’s Fund expires on August 31. At that time, we will
return to Fireman’s Fund the unearned premiums we hold that
relate to the contract. This transfer of funds will show up in
our “premiums written” account as a negative $85 million or so
and will make our third-quarter figures look rather peculiar.
However, the termination of this contract will not have a
significant effect on profits.
Berkshire’s underwriting results continued to be excellent
in 1988. Our combined ratio (on a statutory basis and excluding
structured settlements and financial reinsurance) was 104.
Reserve development was favorable for the second year in a row,
after a string of years in which it was very unsatisfactory.
Details on both underwriting and reserve development appear on
pages 36-38.
Our insurance volume over the next few years is likely to
run very low, since business with a reasonable potential for
profit will almost certainly be scarce. So be it. At Berkshire,
we simply will not write policies at rates that carry the
expectation of economic loss. We encounter enough troubles when
we expect a gain.
Despite - or perhaps because of - low volume, our profit
picture during the next few years is apt to be considerably
brighter than the industry’s. We are sure to have an exceptional
amount of float compared to premium volume, and that augurs well
for profits. In 1989 and 1990 we expect our float/premiums
ratio to be at least three times that of the typical
property/casualty company. Mike Goldberg, with special help from
Ajit Jain, Dinos Iordanou, and the National Indemnity managerial
team, has positioned us well in that respect.
At some point - we don’t know when - we will be deluged with
insurance business. The cause will probably be some major
physical or financial catastrophe. But we could also experience
an explosion in business, as we did in 1985, because large and
increasing underwriting losses at other companies coincide with
their recognition that they are far underreserved. in the
meantime, we will retain our talented professionals, protect our
capital, and try not to make major mistakes.
Marketable Securities
In selecting marketable securities for our insurance
companies, we can choose among five major categories: (1) long-
term common stock investments, (2) medium-term fixed-income
securities, (3) long-term fixed-income securities, (4) short-term
cash equivalents, and (5) short-term arbitrage commitments.
We have no particular bias when it comes to choosing from
these categories. We just continuously search among them for the
highest after-tax returns as measured by “mathematical
expectation,” limiting ourselves always to investment
alternatives we think we understand. Our criteria have nothing
to do with maximizing immediately reportable earnings; our goal,
rather, is to maximize eventual net worth.
o Below we list our common stock holdings having a value over
$100 million, not including arbitrage commitments, which will be
discussed later. A small portion of these investments belongs to
subsidiaries of which Berkshire owns less than 100%.
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. .............. $517,500 $1,086,750
14,172,500 The Coca-Cola Company ................. 592,540 632,448
2,400,000 Federal Home Loan Mortgage
Corporation Preferred* ............. 71,729 121,200
6,850,000 GEICO Corporation ..................... 45,713 849,400
1,727,765 The Washington Post Company ........... 9,731 364,126
*Although nominally a preferred stock, this security is
financially equivalent to a common stock.
Our permanent holdings - Capital Cities/ABC, Inc., GEICO
Corporation, and The Washington Post Company - remain unchanged.
Also unchanged is our unqualified admiration of their
managements: Tom Murphy and Dan Burke at Cap Cities, Bill Snyder
and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The
Washington Post. Charlie and I appreciate enormously the talent
and integrity these managers bring to their businesses.
Their performance, which we have observed at close range,
contrasts vividly with that of many CEOs, which we have
fortunately observed from a safe distance. Sometimes these CEOs
clearly do not belong in their jobs; their positions,
nevertheless, are usually secure. The supreme irony of business
management is that it is far easier for an inadequate CEO to keep
his job than it is for an inadequate subordinate.
If a secretary, say, is hired for a job that requires typing
ability of at least 80 words a minute and turns out to be capable
of only 50 words a minute, she will lose her job in no time.
There is a logical standard for this job; performance is easily
measured; and if you can’t make the grade, you’re out.
Similarly, if new sales people fail to generate sufficient
business quickly enough, they will be let go. Excuses will not
be accepted as a substitute for orders.
However, a CEO who doesn’t perform is frequently carried
indefinitely. One reason is that performance standards for his
job seldom exist. When they do, they are often fuzzy or they may
be waived or explained away, even when the performance shortfalls
are major and repeated. At too many companies, the boss shoots
the arrow of managerial performance and then hastily paints the
bullseye around the spot where it lands.
Another important, but seldom recognized, distinction
between the boss and the foot soldier is that the CEO has no
immediate superior whose performance is itself getting measured.
The sales manager who retains a bunch of lemons in his sales
force will soon be in hot water himself. It is in his immediate
self-interest to promptly weed out his hiring mistakes.
Otherwise, he himself may be weeded out. An office manager who
has hired inept secretaries faces the same imperative.
But the CEO’s boss is a Board of Directors that seldom
measures itself and is infrequently held to account for
substandard corporate performance. If the Board makes a mistake
in hiring, and perpetuates that mistake, so what? Even if the
company is taken over because of the mistake, the deal will
probably bestow substantial benefits on the outgoing Board
members. (The bigger they are, the softer they fall.)
Finally, relations between the Board and the CEO are
expected to be congenial. At board meetings, criticism of the
CEO’s performance is often viewed as the social equivalent of
belching. No such inhibitions restrain the office manager from
critically evaluating the substandard typist.
These points should not be interpreted as a blanket
condemnation of CEOs or Boards of Directors: Most are able and
hard-working, and a number are truly outstanding. But the
management failings that Charlie and I have seen make us thankful
that we are linked with the managers of our three permanent
holdings. They love their businesses, they think like owners,
and they exude integrity and ability.
o In 1988 we made major purchases of Federal Home Loan
Mortgage Pfd. (“Freddie Mac”) and Coca Cola. We expect to hold
these securities for a long time. In fact, when we own portions
of outstanding businesses with outstanding managements, our
favorite holding period is forever. We are just the opposite of
those who hurry to sell and book profits when companies perform
well but who tenaciously hang on to businesses that disappoint.
Peter Lynch aptly likens such behavior to cutting the flowers and
watering the weeds. Our holdings of Freddie Mac are the maximum
allowed by law, and are extensively described by Charlie in his
letter. In our consolidated balance sheet these shares are
carried at cost rather than market, since they are owned by
Mutual Savings and Loan, a non-insurance subsidiary.
We continue to concentrate our investments in a very few
companies that we try to understand well. There are only a
handful of businesses about which we have strong long-term
convictions. Therefore, when we find such a business, we want to
participate in a meaningful way. We agree with Mae West: “Too
much of a good thing can be wonderful.”
o We reduced our holdings of medium-term tax-exempt bonds by
about $100 million last year. All of the bonds sold were
acquired after August 7, 1986. When such bonds are held by
property-casualty insurance companies, 15% of the “tax-exempt”
interest earned is subject to tax.
The $800 million position we still hold consists almost
entirely of bonds “grandfathered” under the Tax Reform Act of
1986, which means they are entirely tax-exempt. Our sales
produced a small profit and our remaining bonds, which have an
average maturity of about six years, are worth modestly more than
carrying value.
Last year we described our holdings of short-term and
intermediate-term bonds of Texaco, which was then in bankruptcy.
During 1988, we sold practically all of these bonds at a pre-tax
profit of about $22 million. This sale explains close to $100
million of the reduction in fixed-income securities on our
balance sheet.
We also told you last year about our holdings of another
security whose predominant characteristics are those of an
intermediate fixed-income issue: our $700 million position in
Salomon Inc 9% convertible preferred. This preferred has a
sinking fund that will retire it in equal annual installments
from 1995 to 1999. Berkshire carries this holding at cost. For
reasons discussed by Charlie on page 69, the estimated market
value of our holding has improved from moderately under cost at
the end of last year to moderately over cost at 1988 year end.
The close association we have had with John Gutfreund, CEO
of Salomon, during the past year has reinforced our admiration
for him. But we continue to have no great insights about the
near, intermediate or long-term economics of the investment
banking business: This is not an industry in which it is easy to
forecast future levels of profitability. We continue to believe
that our conversion privilege could well have important value
over the life of our preferred. However, the overwhelming
portion of the preferred’s value resides in its fixed-income
characteristics, not its equity characteristics.
o We have not lost our aversion to long-term bonds. We will
become enthused about such securities only when we become
enthused about prospects for long-term stability in the
purchasing power of money. And that kind of stability isn’t in
the cards: Both society and elected officials simply have too
many higher-ranking priorities that conflict with purchasing-
power stability. The only long-term bonds we hold are those of
Washington Public Power Supply Systems (WPPSS). A few of our
WPPSS bonds have short maturities and many others, because of
their high coupons, are likely to be refunded and paid off in a
few years. Overall, our WPPSS holdings are carried on our
balance sheet at $247 million and have a market value of about
$352 million.
We explained the reasons for our WPPSS purchases in the 1983
annual report, and are pleased to tell you that this commitment
has worked out about as expected. At the time of purchase, most
of our bonds were yielding around 17% after taxes and carried no
ratings, which had been suspended. Recently, the bonds were
rated AA- by Standard & Poor’s. They now sell at levels only
slightly below those enjoyed by top-grade credits.
In the 1983 report, we compared the economics of our WPPSS
purchase to those involved in buying a business. As it turned
out, this purchase actually worked out better than did the
general run of business acquisitions made in 1983, assuming both
are measured on the basis of unleveraged, after tax returns
achieved through 1988.
Our WPPSS experience, though pleasant, does nothing to alter
our negative opinion about long-term bonds. It only makes us
hope that we run into some other large stigmatized issue, whose
troubles have caused it to be significantly misappraised by the
market.
Arbitrage
In past reports we have told you that our insurance
subsidiaries sometimes engage in arbitrage as an alternative to
holding short-term cash equivalents. We prefer, of course, to
make major long-term commitments, but we often have more cash
than good ideas. At such times, arbitrage sometimes promises
much greater returns than Treasury Bills and, equally important,
cools any temptation we may have to relax our standards for long-
term investments. (Charlie’s sign off after we’ve talked about
an arbitrage commitment is usually: “Okay, at least it will keep
you out of bars.”)
During 1988 we made unusually large profits from arbitrage,
measured both by absolute dollars and rate of return. Our pre-
tax gain was about $78 million on average invested funds of about
$147 million.
This level of activity makes some detailed discussion of
arbitrage and our approach to it appropriate. Once, the word
applied only to the simultaneous purchase and sale of securities
or foreign exchange in two different markets. The goal was to
exploit tiny price differentials that might exist between, say,
Royal Dutch stock trading in guilders in Amsterdam, pounds in
London, and dollars in New York. Some people might call this
scalping; it won’t surprise you that practitioners opted for the
French term, arbitrage.
Since World War I the definition of arbitrage - or “risk
arbitrage,” as it is now sometimes called - has expanded to
include the pursuit of profits from an announced corporate event
such as sale of the company, merger, recapitalization,
reorganization, liquidation, self-tender, etc. In most cases the
arbitrageur expects to profit regardless of the behavior of the
stock market. The major risk he usually faces instead is that
the announced event won’t happen.
Some offbeat opportunities occasionally arise in the
arbitrage field. I participated in one of these when I was 24
and working in New York for Graham-Newman Corp. Rockwood & Co.,
a Brooklyn based chocolate products company of limited
profitability, had adopted LIFO inventory valuation in 1941
when cocoa was selling for 5¢ per pound. In 1954 a
temporary shortage of cocoa caused the price to soar to over
60¢. Consequently Rockwood wished to unload its valuable
inventory - quickly, before the price dropped. But if the cocoa
had simply been sold off, the company would have owed close to
a 50% tax on the proceeds.
The 1954 Tax Code came to the rescue. It contained an
arcane provision that eliminated the tax otherwise due on LIFO
profits if inventory was distributed to shareholders as part of a
plan reducing the scope of a corporation’s business. Rockwood
decided to terminate one of its businesses, the sale of cocoa
butter, and said 13 million pounds of its cocoa bean inventory
was attributable to that activity. Accordingly, the company
offered to repurchase its stock in exchange for the cocoa beans
it no longer needed, paying 80 pounds of beans for each share.
For several weeks I busily bought shares, sold beans, and
made periodic stops at Schroeder Trust to exchange stock
certificates for warehouse receipts. The profits were good and
my only expense was subway tokens.
The architect of Rockwood’s restructuring was an unknown,
but brilliant Chicagoan, Jay Pritzker, then 32. If you’re
familiar with Jay’s subsequent record, you won’t be surprised to
hear the action worked out rather well for Rockwood’s continuing
shareholders also. From shortly before the tender until shortly
after it, Rockwood stock appreciated from 15 to 100, even though
the company was experiencing large operating losses. Sometimes
there is more to stock valuation than price-earnings ratios.
In recent years, most arbitrage operations have involved
takeovers, friendly and unfriendly. With acquisition fever
rampant, with anti-trust challenges almost non-existent, and with
bids often ratcheting upward, arbitrageurs have prospered
mightily. They have not needed special talents to do well; the
trick, a la Peter Sellers in the movie, has simply been “Being
There.” In Wall Street the old proverb has been reworded: “Give a
man a fish and you feed him for a day. Teach him how to
arbitrage and you feed him forever.” (If, however, he studied at
the Ivan Boesky School of Arbitrage, it may be a state
institution that supplies his meals.)
To evaluate arbitrage situations you must answer four
questions: (1) How likely is it that the promised event will
indeed occur? (2) How long will your money be tied up? (3) What
chance is there that something still better will transpire - a
competing takeover bid, for example? and (4) What will happen if
the event does not take place because of anti-trust action,
financing glitches, etc.?
Arcata Corp., one of our more serendipitous arbitrage
experiences, illustrates the twists and turns of the business.
On September 28, 1981 the directors of Arcata agreed in principle
to sell the company to Kohlberg, Kravis, Roberts & Co. (KKR),
then and now a major leveraged-buy out firm. Arcata was in the
printing and forest products businesses and had one other thing
going for it: In 1978 the U.S. Government had taken title to
10,700 acres of Arcata timber, primarily old-growth redwood, to
expand Redwood National Park. The government had paid $97.9
million, in several installments, for this acreage, a sum Arcata
was contesting as grossly inadequate. The parties also disputed
the interest rate that should apply to the period between the
taking of the property and final payment for it. The enabling
legislation stipulated 6% simple interest; Arcata argued for a
much higher and compounded rate.
Buying a company with a highly-speculative, large-sized
claim in litigation creates a negotiating problem, whether the
claim is on behalf of or against the company. To solve this
problem, KKR offered $37.00 per Arcata share plus two-thirds of
any additional amounts paid by the government for the redwood
lands.
Appraising this arbitrage opportunity, we had to ask
ourselves whether KKR would consummate the transaction since,
among other things, its offer was contingent upon its obtaining
“satisfactory financing.” A clause of this kind is always
dangerous for the seller: It offers an easy exit for a suitor
whose ardor fades between proposal and marriage. However, we
were not particularly worried about this possibility because
KKR’s past record for closing had been good.
We also had to ask ourselves what would happen if the KKR
deal did fall through, and here we also felt reasonably
comfortable: Arcata’s management and directors had been shopping
the company for some time and were clearly determined to sell.
If KKR went away, Arcata would likely find another buyer, though
of course, the price might be lower.
Finally, we had to ask ourselves what the redwood claim
might be worth. Your Chairman, who can’t tell an elm from an
oak, had no trouble with that one: He coolly evaluated the claim
at somewhere between zero and a whole lot.
We started buying Arcata stock, then around $33.50, on
September 30 and in eight weeks purchased about 400,000 shares,
or 5% of the company. The initial announcement said that the
$37.00 would be paid in January, 1982. Therefore, if everything
had gone perfectly, we would have achieved an annual rate of
return of about 40% - not counting the redwood claim, which would
have been frosting.
All did not go perfectly. In December it was announced that
the closing would be delayed a bit. Nevertheless, a definitive
agreement was signed on January 4. Encouraged, we raised our
stake, buying at around $38.00 per share and increasing our
holdings to 655,000 shares, or over 7% of the company. Our
willingness to pay up - even though the closing had been
postponed - reflected our leaning toward “a whole lot” rather
than “zero” for the redwoods.
Then, on February 25 the lenders said they were taking a
“second look” at financing terms “ in view of the severely
depressed housing industry and its impact on Arcata’s outlook.”
The stockholders’ meeting was postponed again, to April. An
Arcata spokesman said he “did not think the fate of the
acquisition itself was imperiled.” When arbitrageurs hear such
reassurances, their minds flash to the old saying: “He lied like
a finance minister on the eve of devaluation.”
On March 12 KKR said its earlier deal wouldn’t work, first
cutting its offer to $33.50, then two days later raising it to
$35.00. On March 15, however, the directors turned this bid down
and accepted another group’s offer of $37.50 plus one-half of any
redwood recovery. The shareholders okayed the deal, and the
$37.50 was paid on June 4.
We received $24.6 million versus our cost of $22.9 million;
our average holding period was close to six months. Considering
the trouble this transaction encountered, our 15% annual rate of
return excluding any value for the redwood claim - was more than
satisfactory.
But the best was yet to come. The trial judge appointed two
commissions, one to look at the timber’s value, the other to
consider the interest rate questions. In January 1987, the first
commission said the redwoods were worth $275.7 million and the
second commission recommended a compounded, blended rate of
return working out to about 14%.
In August 1987 the judge upheld these conclusions, which
meant a net amount of about $600 million would be due Arcata.
The government then appealed. In 1988, though, before this
appeal was heard, the claim was settled for $519 million.
Consequently, we received an additional $29.48 per share, or
about $19.3 million. We will get another $800,000 or so in 1989.
Berkshire’s arbitrage activities differ from those of many
arbitrageurs. First, we participate in only a few, and usually
very large, transactions each year. Most practitioners buy into
a great many deals perhaps 50 or more per year. With that many
irons in the fire, they must spend most of their time monitoring
both the progress of deals and the market movements of the
related stocks. This is not how Charlie nor I wish to spend our
lives. (What’s the sense in getting rich just to stare at a
ticker tape all day?)
Because we diversify so little, one particularly profitable
or unprofitable transaction will affect our yearly result from
arbitrage far more than it will the typical arbitrage operation.
So far, Berkshire has not had a really bad experience. But we
will - and when it happens we’ll report the gory details to you.
The other way we differ from some arbitrage operations is
that we participate only in transactions that have been publicly
announced. We do not trade on rumors or try to guess takeover
candidates. We just read the newspapers, think about a few of
the big propositions, and go by our own sense of probabilities.
At yearend, our only major arbitrage position was 3,342,000
shares of RJR Nabisco with a cost of $281.8 million and a market
value of $304.5 million. In January we increased our holdings to
roughly four million shares and in February we eliminated our
position. About three million shares were accepted when we
tendered our holdings to KKR, which acquired RJR, and the
returned shares were promptly sold in the market. Our pre-tax
profit was a better-than-expected $64 million.
Earlier, another familiar face turned up in the RJR bidding
contest: Jay Pritzker, who was part of a First Boston group that
made a tax-oriented offer. To quote Yogi Berra; “It was deja vu
all over again.”
During most of the time when we normally would have been
purchasers of RJR, our activities in the stock were restricted
because of Salomon’s participation in a bidding group.
Customarily, Charlie and I, though we are directors of Salomon,
are walled off from information about its merger and acquisition
work. We have asked that it be that way: The information would
do us no good and could, in fact, occasionally inhibit
Berkshire’s arbitrage operations.
However, the unusually large commitment that Salomon
proposed to make in the RJR deal required that all directors be
fully informed and involved. Therefore, Berkshire’s purchases of
RJR were made at only two times: first, in the few days
immediately following management’s announcement of buyout plans,
before Salomon became involved; and considerably later, after the
RJR board made its decision in favor of KKR. Because we could
not buy at other times, our directorships cost Berkshire
significant money.
Considering Berkshire’s good results in 1988, you might
expect us to pile into arbitrage during 1989. Instead, we expect
to be on the sidelines.
One pleasant reason is that our cash holdings are down -
because our position in equities that we expect to hold for a
very long time is substantially up. As regular readers of this
report know, our new commitments are not based on a judgment
about short-term prospects for the stock market. Rather, they
reflect an opinion about long-term business prospects for
specific companies. We do not have, never have had, and never
will have an opinion about where the stock market, interest
rates, or business activity will be a year from now.
Even if we had a lot of cash we probably would do little in
arbitrage in 1989. Some extraordinary excesses have developed in
the takeover field. As Dorothy says: “Toto, I have a feeling
we’re not in Kansas any more.”
We have no idea how long the excesses will last, nor do we
know what will change the attitudes of government, lender and
buyer that fuel them. But we do know that the less the prudence
with which others conduct their affairs, the greater the prudence
with which we should conduct our own affairs. We have no desire
to arbitrage transactions that reflect the unbridled - and, in
our view, often unwarranted - optimism of both buyers and
lenders. In our activities, we will heed the wisdom of Herb
Stein: “If something can’t go on forever, it will end.”
Efficient Market Theory
The preceding discussion about arbitrage makes a small
discussion of “efficient market theory” (EMT) also seem relevant.
This doctrine became highly fashionable - indeed, almost holy
scripture in academic circles during the 1970s. Essentially, it
said that analyzing stocks was useless because all public
information about them was appropriately reflected in their
prices. In other words, the market always knew everything. As a
corollary, the professors who taught EMT said that someone
throwing darts at the stock tables could select a stock portfolio
having prospects just as good as one selected by the brightest,
most hard-working security analyst. Amazingly, EMT was embraced
not only by academics, but by many investment professionals and
corporate managers as well. Observing correctly that the market
was frequently efficient, they went on to conclude incorrectly
that it was always efficient. The difference between these
propositions is night and day.
In my opinion, the continuous 63-year arbitrage experience
of Graham-Newman Corp. Buffett Partnership, and Berkshire
illustrates just how foolish EMT is. (There’s plenty of other
evidence, also.) While at Graham-Newman, I made a study of its
earnings from arbitrage during the entire 1926-1956 lifespan of
the company. Unleveraged returns averaged 20% per year.
Starting in 1956, I applied Ben Graham’s arbitrage principles,
first at Buffett Partnership and then Berkshire. Though I’ve not
made an exact calculation, I have done enough work to know that
the 1956-1988 returns averaged well over 20%. (Of course, I
operated in an environment far more favorable than Ben’s; he had
1929-1932 to contend with.)
All of the conditions are present that are required for a
fair test of portfolio performance: (1) the three organizations
traded hundreds of different securities while building this 63-
year record; (2) the results are not skewed by a few fortunate
experiences; (3) we did not have to dig for obscure facts or
develop keen insights about products or managements - we simply
acted on highly-publicized events; and (4) our arbitrage
positions were a clearly identified universe - they have not been
selected by hindsight.
Over the 63 years, the general market delivered just under a
10% annual return, including dividends. That means $1,000 would
have grown to $405,000 if all income had been reinvested. A 20%
rate of return, however, would have produced $97 million. That
strikes us as a statistically-significant differential that
might, conceivably, arouse one’s curiosity.
Yet proponents of the theory have never seemed interested in
discordant evidence of this type. True, they don’t talk quite as
much about their theory today as they used to. But no one, to my
knowledge, has ever said he was wrong, no matter how many
thousands of students he has sent forth misinstructed. EMT,
moreover, continues to be an integral part of the investment
curriculum at major business schools. Apparently, a reluctance
to recant, and thereby to demystify the priesthood, is not
limited to theologians.
Naturally the disservice done students and gullible
investment professionals who have swallowed EMT has been an
extraordinary service to us and other followers of Graham. In
any sort of a contest - financial, mental, or physical - it’s an
enormous advantage to have opponents who have been taught that
it’s useless to even try. From a selfish point of view,
Grahamites should probably endow chairs to ensure the perpetual
teaching of EMT.
All this said, a warning is appropriate. Arbitrage has
looked easy recently. But this is not a form of investing that
guarantees profits of 20% a year or, for that matter, profits of
any kind. As noted, the market is reasonably efficient much of
the time: For every arbitrage opportunity we seized in that 63-
year period, many more were foregone because they seemed
properly-priced.
An investor cannot obtain superior profits from stocks by
simply committing to a specific investment category or style. He
can earn them only by carefully evaluating facts and continuously
exercising discipline. Investing in arbitrage situations, per
se, is no better a strategy than selecting a portfolio by
throwing darts.
New York Stock Exchange Listing
Berkshire’s shares were listed on the New York Stock
Exchange on November 29, 1988. On pages 50-51 we reproduce the
letter we sent to shareholders concerning the listing.
Let me clarify one point not dealt with in the letter:
Though our round lot for trading on the NYSE is ten shares, any
number of shares from one on up can be bought or sold.
As the letter explains, our primary goal in listing was to
reduce transaction costs, and we believe this goal is being
achieved. Generally, the spread between the bid and asked price
on the NYSE has been well below the spread that prevailed in the
over-the-counter market.
Henderson Brothers, Inc., the specialist in our shares, is
the oldest continuing specialist firm on the Exchange; its
progenitor, William Thomas Henderson, bought his seat for $500 on
September 8, 1861. (Recently, seats were selling for about
$625,000.) Among the 54 firms acting as specialists, HBI ranks
second in number of stocks assigned, with 83. We were pleased
when Berkshire was allocated to HBI, and have been delighted with
the firm’s performance. Jim Maguire, Chairman of HBI, personally
manages the trading in Berkshire, and we could not be in better
hands.
In two respects our goals probably differ somewhat from
those of most listed companies. First, we do not want to
maximize the price at which Berkshire shares trade. We wish
instead for them to trade in a narrow range centered at intrinsic
business value (which we hope increases at a reasonable - or,
better yet, unreasonable - rate). Charlie and I are bothered as
much by significant overvaluation as significant undervaluation.
Both extremes will inevitably produce results for many
shareholders that will differ sharply from Berkshire’s business
results. If our stock price instead consistently mirrors
business value, each of our shareholders will receive an
investment result that roughly parallels the business results of
Berkshire during his holding period.
Second, we wish for very little trading activity. If we ran
a private business with a few passive partners, we would be
disappointed if those partners, and their replacements,
frequently wanted to leave the partnership. Running a public
company, we feel the same way.
Our goal is to attract long-term owners who, at the time of
purchase, have no timetable or price target for sale but plan
instead to stay with us indefinitely. We don’t understand the
CEO who wants lots of stock activity, for that can be achieved
only if many of his owners are constantly exiting. At what other
organization - school, club, church, etc. - do leaders cheer when
members leave? (However, if there were a broker whose livelihood
depended upon the membership turnover in such organizations, you
could be sure that there would be at least one proponent of
activity, as in: “There hasn’t been much going on in Christianity
for a while; maybe we should switch to Buddhism next week.“)
Of course, some Berkshire owners will need or want to sell
from time to time, and we wish for good replacements who will pay
them a fair price. Therefore we try, through our policies,
performance, and communications, to attract new shareholders who
understand our operations, share our time horizons, and measure
us as we measure ourselves. If we can continue to attract this
sort of shareholder - and, just as important, can continue to be
uninteresting to those with short-term or unrealistic
expectations - Berkshire shares should consistently sell at
prices reasonably related to business value.
David L. Dodd
Dave Dodd, my friend and teacher for 38 years, died last
year at age 93. Most of you don’t know of him. Yet any long-
time shareholder of Berkshire is appreciably wealthier because of
the indirect influence he had upon our company.
Dave spent a lifetime teaching at Columbia University, and
he co-authored Security Analysis with Ben Graham. From the
moment I arrived at Columbia, Dave personally encouraged and
educated me; one influence was as important as the other.
Everything he taught me, directly or through his book, made
sense. Later, through dozens of letters, he continued my
education right up until his death.
I have known many professors of finance and investments but
I have never seen any, except for Ben Graham, who was the match
of Dave. The proof of his talent is the record of his students:
No other teacher of investments has sent forth so many who have
achieved unusual success.
When students left Dave’s classroom, they were equipped to
invest intelligently for a lifetime because the principles he
taught were simple, sound, useful, and enduring. Though these
may appear to be unremarkable virtues, the teaching of principles
embodying them has been rare.
It’s particularly impressive that Dave could practice as
well as preach. just as Keynes became wealthy by applying his
academic ideas to a very small purse, so, too, did Dave. Indeed,
his financial performance far outshone that of Keynes, who began
as a market-timer (leaning on business and credit-cycle theory)
and converted, after much thought, to value investing. Dave was
right from the start.
In Berkshire’s investments, Charlie and I have employed the
principles taught by Dave and Ben Graham. Our prosperity is the
fruit of their intellectual tree.
Miscellaneous
We hope to buy more businesses that are similar to the ones
we have, and we can use some help. If you have a business that
fits the following criteria, 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 “turnaround”
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.
Our favorite form of purchase is one fitting the Blumkin-
Friedman-Heldman mold. In cases like these, the company’s owner-
managers wish to generate significant amounts of cash, sometimes
for themselves, but often for their families or inactive
shareholders. However, these managers also wish to remain
significant owners who continue to run their companies just as
they have in the past. We think we offer a particularly good fit
for owners with these objectives and invite potential sellers to
check us out by contacting people with whom we have done business
in the past.
Charlie and I frequently get approached about acquisitions
that don’t come close to meeting our tests: We’ve found that if
you advertise an interest in buying collies, a lot of people will
call hoping to sell you their cocker spaniels. Our interest in
new ventures, turnarounds, or auction-like sales can best be
expressed by another Goldwynism: “Please include me out.”
Besides being interested in the purchase of businesses as
described above, we are also interested in the negotiated
purchase of large, but not controlling, blocks of stock
comparable to those we hold in Cap Cities and Salomon. We have a
special interest in purchasing convertible preferreds as a long-
term investment, as we did at Salomon.
* * *
We received some good news a few weeks ago: Standard &
Poor’s raised our credit rating to AAA, which is the highest
rating it bestows. Only 15 other U.S. industrial or property-
casualty companies are rated AAA, down from 28 in 1980.
Corporate bondholders have taken their lumps in the past few
years from “event risk.” This term refers to the overnight
degradation of credit that accompanies a heavily-leveraged
purchase or recapitalization of a business whose financial
policies, up to then, had been conservative. In a world of
takeovers inhabited by few owner-managers, most corporations
present such a risk. Berkshire does not. Charlie and I promise
bondholders the same respect we afford shareholders.
* * *
About 97.4% of all eligible shares participated in
Berkshire’s 1988 shareholder-designated contributions program.
Contributions made through the program were $5 million, and 2,319
charities were recipients. If we achieve reasonable business
results, we plan to increase the per-share contributions in 1989.
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 48-49. 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 the nominee
name of a broker, bank or depository. Shares not so registered
on September 30, 1989 will be ineligible for the 1989 program.
* * *
Berkshire’s annual meeting will be held in Omaha on Monday,
April 24, 1989, and I hope you will come. The meeting provides
the forum for you to ask any owner-related questions you may
have, and we will keep answering until all (except those dealing
with portfolio activities or other proprietary information) have
been dealt with.
After the meeting we will have several buses available to
take you to visit Mrs. B at The Nebraska Furniture Mart and Ike
Friedman at Borsheim’s. Be prepared for bargains.
Out-of-towners may prefer to arrive early and visit Mrs. B
during the Sunday store hours of noon to five. (These Sunday
hours seem ridiculously short to Mrs. B, who feels they scarcely
allow her time to warm up; she much prefers the days on which the
store remains open from 10 a.m. to 9 p.m.) Borsheims, however, is
not open on Sunday.
Ask Mrs. B the secret of her astonishingly low carpet
prices. She will confide to you - as she does to everyone - how
she does it: “I can sell so cheap ‘cause I work for this dummy
who doesn’t know anything about carpet.”
Warren E. Buffett
February 28, 1989 Chairman of the Board
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：
我们1988年的净值增长为5.69亿美元，增幅20.0%。过去24年来（即自现任管理层接手以来），每股账面价值从19.46美元增长至2,974.52美元，年复合增长率达23.0%。
我们在过去的报告中一直强调，真正重要的是内在商业价值——这个数字必然是一个估值，表明我们所有旗下企业的价值。根据我们的计算，伯克希尔的内在商业价值显著高于其账面价值。过去24年间，商业价值的增长速度略快于账面价值；但在1988年，账面价值增长得更快，幅度也稍大一些。
伯克希尔过去在账面价值和商业价值上的增长速度，是在与现在截然不同的条件下实现的。任何忽视这些差异的人，都犯了一个棒球经理会犯的错误——他根据终身击球率来判断一个42岁外野手的未来前景。
影响我们当前前景的重大不利因素包括：（1）股市吸引力不如过去24年；（2）大多投资收入的公司税率更高；（3）收购企业的市场定价远高于以往；（4）Capital Cities/ABC（大都会/ABC公司）、GEICO（政府雇员保险公司）和Washington Post（华盛顿邮报公司）——伯克希尔的三项永久投资，约占我们净值的50%——所处行业状况，比五到十年前或多或少有所恶化。这些公司都拥有卓越的管理层和雄厚的资产。但以目前价格来看，它们未来的上涨潜力对我们而言，远不如几年前那么令人兴奋。
然而，我们面临的主要问题是资本规模日益庞大。你们之前就听我们说过，但这个问题就像年龄一样，每年都愈发显著。（而且，也正像年龄一样，让这个问题继续增长也比“解决”它要好。）
四年前我曾告诉过你们，为了在未来十年实现15%的年回报率，我们需要获得39亿美元的利润。如今，在未来十年，要实现15%的回报率则需要103亿美元的利润。这个数字对我来说，以及对于我的合伙人、伯克希尔副董事长Charlie Munger（查理·芒格）来说，似乎都非常庞大。（如果这个数字确实太大，查理将在未来的报告中被追溯认定为资深合伙人。）
为了部分抵消资本规模增长对回报率的拖累，我们现在拥有一个24年前没有的非常重要的优势。那时，我们的全部资本都困在一个纺织品业务里，该业务的经济特征糟糕透顶，无法摆脱。如今，部分资本投资于一些真正卓越的企业。
去年，我们将这些业务称为“圣徒七人组”：Buffalo News（布法罗新闻报）、Fechheimer（费奇海默公司）、Kirby（柯比公司）、Nebraska Furniture Mart（内布拉斯加家具城）、Scott Fetzer Manufacturing Group（斯科特费策制造集团）、See’s（喜诗糖果）和World Book（世界图书）。1988年，圣徒们凯旋归来了。你们可以通过第45页按历史成本编制的财务报表看出，它们的资本回报率是多么惊人。这些报表将圣徒七人组与几个较小单位的财务数据合并在一起。在没有利用财务杠杆的情况下，这个群体的平均权益资本回报率约为67%。
在大多数情况下，这些业务的卓越表现部分源于其非凡的商业特许经营权；而在所有情况下，卓越的管理层都是至关重要的因素。Charlie和我所做的贡献，就是不去打扰这些管理者。
在我看来，这些企业总体上将继续创造极佳的回报。我们需要这些收益——否则伯克希尔不可能有机会实现我们15%的目标。你们可以放心，我们的运营经理们不会掉链子；未来真正的不确定性在于，查理和我能否有效运用他们创造的资金。
这方面，我们在1989年初迈出了正确的一步——收购了奥马哈珠宝商Borsheim's 80%的权益。这笔收购（后文会详述）完全符合我们的追求：一家杰出企业，由我们喜爱、钦佩且信任的人经营。这是开启新一年的绝佳方式。
**会计变更**
我们在1988年被强制实施了一项重大会计变更，1990年很可能还要再改一次。当我们在经济实质毫无变化的情况下，逐年调整数字时，就免不了要展开一场我们一贯“激动人心”的会计讨论。
首先，我要做常规免责声明：尽管美国通用会计准则（GAAP）有诸多缺陷，但我也懒得去设计一套更好的规则。然而，现有规则的局限性并非不可克服：CEO们完全可以自由地把GAAP报表作为起点，而非终点——他们本应如此，向所有者和债权人履行信息披露义务。毕竟，任何子公司的经理如果只汇报干巴巴的GAAP数字，而隐瞒其老板（母公司CEO）所需的关键信息，那他会吃不了兜着走。那么，为什么CEO自己却可以向他的老板——公司的股东兼所有者——隐瞒至关重要的信息呢？
需要报告的数据——无论是GAAP数据、非GAAP数据还是超GAAP数据——应当帮助具备财务素养的读者回答三个关键问题：（1）这家公司大概值多少钱？（2）它有多大可能履行未来义务？（3）考虑到现有条件，管理层干得怎么样？
大多数情况下，从最低限度的GAAP报表中，要找出上述一个或多个问题的答案，难度介于困难到不可能之间。商业世界实在太复杂，单一规则体系无法有效描述所有企业的经济现实，尤其是像伯克希尔这样业务多元的企业。
使问题进一步复杂化的是，许多管理层并不把GAAP当作需要达到的标准，而是当作需要克服的障碍。他们的会计师常常心甘情愿地帮忙。（客户问：“二加二等于几？”合作的会计师答道：“您心里想的是多少？”）即使诚实且善意的管理层，有时也会稍微“拉伸”GAAP，以便呈现他们认为更能恰当描述业绩的数字。无论是平滑利润还是“巨额冲销”季度，都是本分管理层使用的“白色谎言”技巧。
还有一类管理者，积极利用GAAP来欺骗和欺诈。他们知道许多投资者和债权人把GAAP结果奉为圭臬。于是这些江湖骗子“富有想象力地”解释规则，将商业交易记录成技术上符合GAAP、但实际上向世人展示经济幻觉的样子。
只要投资者——包括那些理应成熟的机构——对那些稳步攀升的报表“盈利”给予离谱的估值，你就放心好了，某些管理层和推销员一定会利用GAAP炮制这样的数字，不管真相如何。多年来，查理和我目睹了许多规模惊人的会计欺诈。鲜有肇事者受到惩罚；许多人甚至没有受到谴责。用笔偷大钱，远比用枪偷小钱安全。
根据美国通用会计准则（GAAP）的一项重大调整要求，自1988年起，我们必须将所有子公司的资产与负债及收益与费用全面合并入报表。过去，互助储蓄与贷款公司（Mutual Savings and Loan）以及斯科特·费策金融公司（Scott Fetzer Financial，一家主要为世界图书和柯比产品分期付款销售提供融资的信贷公司）均采用“单行合并法”处理。这意味着我们（1）在伯克希尔的合并资产负债表中，将这两家公司的合并净资产权益记为单行资产；（2）在合并收益表中，将其合并年度收益权益记为单行收入。如今规则要求我们将其每一项资产和负债列入资产负债表，每一项收入和费用列入收益表。
这一调整凸显了企业同时披露分部门数据的必要性：传统财务报表中聚集的经济业务越多样，其呈现的信息就越无用，投资者就越难回答之前提出的三个问题。事实上，我们在伯克希尔编制合并数据的唯一原因，就是为了满足外部要求。而查理和我则始终在研究各部门数据。
既然GAAP报表要求我们捆入更多数字，我们决定额外发布补充信息，帮助各位评估企业价值与管理层业绩。（至于伯克希尔偿还债权人债务的能力——我们列出的第三个问题——无论你查看哪份报表，应该一目了然。）在这些补充披露中，我们不一定遵循GAAP程序，甚至不一定按企业结构来呈现。相反，我们将尝试按有助于分析的方式合并主要业务活动，同时避免用过多细节淹没你。我们的目标是：若角色互换，我们期望以何种形式获得重要信息，就将以何种形式提供给你们。
在第41-47页，我们分别列示了以下四个板块的合并资产负债表和收益表：（1）从事金融业务的子公司——互助储蓄与斯科特·费策金融公司；（2）保险业务及其主要投资明细；（3）制造、出版和零售业务，剔除了部分非经营性资产和收购价格会计调整；（4）其他所有类别，包括第（3）类公司持有的非经营性资产（主要为有价证券），以及Wesco和伯克希尔母公司的各项资产与债务。
如果你将这四个板块的收益与净资产加总，得出的总数应与GAAP报表一致。不过我们想强调，这份新呈报不在审计师的审查范围内，他们并不对其背书。（事实上，他们可能会被吓到——我不想去问。）
此前我提到GAAP预计在1990年发生的一项重大变化，涉及递延税款的计算。这一变化既复杂又有争议——以至于原定1989年实施，被推迟了一年。
新规则实施后，将在多方面影响我们。最重要的是，我们将需要改变计算保险公司所持股票未实现增值对应的递延税款负债的方式。
目前，我们的负债是分层的：对于1986年及更早年份形成的12亿美元未实现增值，我们按28%的税率计提了税款负债；对之后累积的6亿美元未实现增值，则按34%计提。这一差异反映了1987年生效的税率上调。
不过，现在看来新的会计准则将要求我们在1990年按34%的税率计提全部负债，从当期利润中列支。假设1990年税率不变，这项操作将使当年利润（从而我们的报告净资产）减少7100万美元。拟议的规则也会影响资产负债表上的其他项目，但这些变动对利润和净资产的影响不大。
对于递延所得税计算方式的这种改变是否可取，我们没有强烈的看法。不过，我们应当指出，无论是28%还是34%的税率，都不能准确反映伯克希尔的经济现实，因为我们没有计划出售那些持有大部分浮盈的股票。
对于对会计不感兴趣的各位，我为我这番长篇大论致歉。我明白，你们许多人不会细读我们的数字，而是持有伯克希尔的股票主要是因为你们知道：（1）查理和我把大部分资金都投在伯克希尔；（2）我们打算这样经营：你们的收益或亏损与我们的完全同比例变化；（3）过往记录迄今令人满意。这种"信仰"式的投资方式未必有什么不对。然而，其他股东更喜欢"分析"的方式，我们也想提供他们所需要的信息。在我们自己的投资中，我们寻找的是两种方式给出相同答案的情况。
报告利润的来源
除了向各位提供我们新的四板块会计资料外，我们将一如既往地继续列出伯克希尔报告利润的主要来源。
在下表中，商誉摊销及其他重大的购买价格会计调整不分配至具体业务，而是合并后单独列示。这样，各位可以了解这些企业若未被我们收购时的利润报告情况。我在过去的报告中解释过，为什么这种列报形式在我们看来比标准的美国通用会计准则列报（逐项对业务进行购买价格调整）对投资者和管理者更有用。当然，我们在表中列示的净利润总额，与经审计财务报表中的美国通用会计准则总额一致。
关于这些业务更详细的信息，见第32-34页的"业务板块"部分，以及第36-40页的"管理层讨论"部分。在这些部分中，各位也能找到按美国通用会计准则列报的板块利润。关于Wesco的业务，我强烈建议各位阅读查理·芒格的致函，该函始于第52页。它包含了我所见过的对导致当前储蓄与贷款危机的事件的最佳描述。另外，请特别关注Dave Hillstrom在Wesco子公司精密钢铁仓库（Precision Steel Warehouse）的表现。精密钢铁在竞争极其激烈的行业中运营，但Dave始终能在投入资本上取得良好回报。尽管缺乏数据来证明这一点，但我认为他的表现——无论是1988年还是过去几年——很可能在其同行中位居第一。
(金额单位：千美元)
------------------------------------------
伯克希尔应占
净利润份额
（税后，已扣除
税前利润 少数股东权益）
------------------- -------------------
1988 1987 1988 1987
-------- -------- -------- --------
经营利润：
保险集团：
承保业务 ................... $(11,081) $(55,429) $ (1,045) $(20,696)
净投资收益 ................. 231,250 152,483 197,779 136,658
水牛城新闻报 ................. 42,429 39,410 25,462 21,304
Fechheimer ................... 14,152 13,332 7,720 6,580
Kirby ........................ 26,891 22,408 17,842 12,891
内布拉斯加家具城 ............. 18,439 16,837 9,099 7,554
Scott Fetzer
制造集团 ................... 28,542 30,591 17,640 17,555
喜诗糖果 .................... 32,473 31,693 19,671 17,363
Wesco——保险以外业务 ......... 16,133 6,209 10,650 4,978
世界百科全书 ................. 27,890 25,745 18,021 15,136
商誉摊销 .................... (2,806) (2,862) (2,806) (2,862)
其他收购价格
会计调整 ................... (6,342) (5,546) (7,340) (6,544)
债务利息* ................... (35,613) (11,474) (23,212) (5,905)
股东指定
捐款 ....................... (4,966) (4,938) (3,217) (2,963)
其他 ........................ 41,059 23,217 27,177 13,697
-------- -------- -------- --------
经营利润 ....................... 418,450 281,676 313,441 214,746
出售证券收益 ................... 131,671 28,838 85,829 19,806
-------- -------- -------- --------
所有实体总利润 ................. $550,121 $310,514 $399,270 $234,552
*不含Scott Fetzer金融集团的利息费用。
我们旗下经营公司的业绩极为出色，无论是按绝对值衡量，还是与同行业竞争对手相比，都堪称卓越。为此，我们要感谢各位经营管理者：你们和我有幸能与他们共事。
在伯克希尔，这样的合作关系往往能持续很久。我们不会因为某位超级巨星达到某个特定年龄就把他们从队伍中撤下——无论是传统的65岁，还是1988年光明节前夕B太太达到的95岁。卓越的管理者是稀缺资源，不能仅仅因为蛋糕上插满了蜡烛就把他们抛弃。此外，我们与新晋MBA们的合作经历并不那么令人满意。他们的学业成绩总是光彩照人，候选人总是知道该说什么；但太多时候，他们缺乏对公司的个人承诺和基本的商业悟性。教老狗学新把戏，难啊。
以下是各主要非保险业务的最新情况：
○ 在内布拉斯加家具城，B太太（Rose Blumkin）和她的手推车仍在滚滚向前。她做老板已有51年，44岁时以500美元起家。（想想看，如果当初她有1,000美元会做成什么样！）对B太太来说，衰老永远在十年之后。
这家家具城长期以来一直是全美最大的家居用品卖场，而且还在继续扩张。秋季，商场新开了一间2万平方英尺的独立清仓中心，进一步增强了我们在各个价位提供优惠商品的能力。
最近，迪拉德百货（Dillard's）——全美最成功的百货公司之一——进入了奥马哈市场。迪拉德在许多门店都设有完整的家具部，在这条业务线上无疑做得风生水起。然而，在奥马哈店开业前不久，公司董事长威廉·迪拉德（William Dillard）宣布新店不卖家具。他提到内布拉斯加家具市场（NFM）时说："我们不想跟他们竞争。我们认为他们差不多是最好的。"
在《布法罗新闻报》，我们极力推崇广告的价值，而我们在NFM的政策证明我们言行一致。过去三年，NFM一直是《奥马哈世界先驱报》最大的ROP广告客户（ROP广告就是印在报纸上的那种，与预印插页相对）。据我所知，其他任何主要市场都没有一家家居用品商能成为报纸的头号客户。有时，我们还在远至得梅因、苏城和堪萨斯城的报纸上刊登大幅广告——效果始终很好。只要你有值得提供的东西，广告确实物有所值。
B太太的儿子路易（Louie）和他的孩子罗恩（Ron）和欧文（Irv）组成了所向披靡的布朗金团队。与这个家族共事是一种享受。他们每个成员的人格都与非凡的能力相匹配。
○ 去年我明确说过，《布法罗新闻报》1988年的税前利润率会下降。这个预测放在几乎任何跟我们规模相当或更大的报纸上都会应验。但斯坦·利普西（Stan Lipsey）——老天保佑他——硬是让我看起来像个傻瓜。
尽管我们去年的提价幅度略低于行业平均，尽管新闻纸成本和工资率跟行业标准同步上涨，斯坦实际上还让小有提升的利润率。报业没有谁的管理记录比他更出色了。而且，他是在经营一份给读者提供海量新闻的报纸时做到了这一点。我们相信我们的"新闻版面"比例——报纸用于新闻的部分——比任何其他跟我们规模相当或更大的主导报纸都要高。1988年这个比例是49.5%，1987年是49.8%。无论利润率水平或趋势如何，我们都致力于将其保持在50%左右。
查理和我从小就对报业情有独钟，收购《新闻报》以来的12年里，我们一直玩得很开心。我们很幸运，接手时就遇到了顶尖编辑默里·莱特（Murray Light），自那以后他让我们为这份报纸感到自豪。
○ 喜诗糖果（See's Candies）1988年销售了创纪录的2510万磅。10月底前景并不乐观，但出色的圣诞销量——远高于1987年的纪录——扭转了局势。
正如我们以前告诉过你们的，喜诗的业务越来越集中在圣诞节。1988年，公司全年利润的90%是在12月赚得的：税前3250万美元中的2900万美元。（这足以让你相信有圣诞老人。）12月的业务洪流给伯克希尔的公司收益带来了适度的季节性膨胀。第一季度还有一个小膨胀，那时大多数《世界百科全书》年刊售出。
查理和我在收购喜诗大约五分钟后就让查克·哈金斯（Chuck Huggins）负责经营。回顾他的记录，你可能会奇怪我们为什么花了那么久。
○ 在Fechheimer（费希默公司），赫尔德曼家族——鲍勃、乔治、加里、罗杰和弗雷德——是辛辛那提的布朗金家族。家具零售和制服制造本身都没有吸引人的经济特性。在这些行业，只有杰出的管理层才能带来高资本回报率。而赫尔德曼五兄弟正是这么做的。（正如大都会队解说员拉尔夫·基纳在比较投手史蒂夫·特劳特和他的父亲、底特律老虎队著名投手迪齐·特劳特时所说："那个家族有很多遗传。"）
Fechheimer在1988年进行了一笔相当规模的收购。
查理和我对Heldman家族在商业上的精明深信不疑，以至于我们甚至没看一眼就批准了这笔交易。在任何地方都极少有管理层——包括那些《财富》500强顶尖公司的管理层——能让我们展现出同样的信任。
由于这次收购以及一些内部增长，Fechheimer在1989年的销售额预计将大幅提升。
○ Ralph Schey管理的所有业务——世界图书、Kirby以及Scott Fetzer制造集团——在1988年都表现出色。交给Ralph的资本持续获得非凡的回报。
在Scott Fetzer制造集团内部，其最大的子公司Campbell Hausfeld取得了尤为突出的进展。这家公司是美国中小型空气压缩机的领先生产商，自1986年以来盈利已翻了一番多。
Kirby和世界图书在1988年的单位销售量均显著增长，其中出口业务尤其强劲。世界图书于9月在苏联上市——当时该国最大的美国书店在莫斯科开业。该书店里，我们的百科全书是唯一在售的综合性百科全书。
Ralph个人的工作效率令人惊叹：除了以出众的方式管理19项业务外，他还在克利夫兰诊所、俄亥俄大学、凯斯西储大学以及一家风险投资运营公司中积极活动——这家风投公司已催生了16家总部位于俄亥俄州的企业，并重振了许多其他公司。俄亥俄州和伯克希尔都有幸拥有Ralph这样的伙伴。
### Borsheim's
1983年，伯克希尔购买了内布拉斯加家具城80%的权益。当时你的主席犯了一个错误：忘了问B夫人一个任何小学生都能想到的问题：“家里还有像你一样的人吗？”上个月我纠正了这个错误：现在我们与这个家族的另一个分支成为了80/20的合作伙伴。
1917年B夫人从俄罗斯过来后，她的父母和五个兄弟姐妹也跟了过来。（她的另外两个兄弟姐妹先于她到达。）姐妹中有一位叫Rebecca Friedman，她与丈夫Louis在1922年经拉脱维亚向西逃亡，其旅途之凶险，堪比B夫人早年经满洲向东的历险。当家族成员在奥马哈重聚时，他们没有任何有形资产。然而，他们拥有智慧、正直和对工作的热情这一非凡组合——而这正是他们所需的一切。此后他们证明了自己是不可战胜的。
1948年，Friedman先生购买了奥马哈一家小型珠宝店Borsheim's。他的儿子Ike于1950年加入生意，随着时间的推移，Ike的儿子Alan以及他的女婿Marvin Cohn和Donald Yale也加入了进来。
你不会惊讶地得知，这个家族对珠宝生意的态度与Blumkin家族对家具生意的态度完全相同。两家企业的基石都是B夫人的信条：“卖得便宜，说老实话。”两家公司的其他基本准则包括：(1) 单店经营，拥有巨大库存，为顾客提供各价位段的广泛选择；(2) 最高管理层每日关注细节；(3) 快速周转；(4) 精明采购；(5) 低得令人难以置信的费用。最后三项因素的结合，使得两家店铺都能提供全国无人能及的日常价格。
大多数人在购买珠宝时，无论在其他方面多么老练，都会感觉像林中的婴儿一样懵懂。他们既无法判断品质，也无法判断价格。对他们来说，只有一条规则有意义：如果你不懂珠宝，就懂珠宝商。
我可以向诸位保证，那些信任 Ike Friedman 及其家族的人绝不会失望。我们收购他们企业股权的做法就是最好的证明。Borsheim's 没有经过审计的财务报表，但我们没有盘点存货、核实应收账款，也没有以任何形式审计这家企业的运营。Ike 只是如实相告——就这样，我们拟定了一页纸的合同，开出了一张大额支票。
近年来，随着 Friedman 家族声誉的远播，Borsheim's 的生意如雨后春笋般迅速增长。如今，顾客从全国各地来到这家店铺。其中不乏我来自东西两岸的朋友，他们后来都感谢我带他们去了那里。
Borsheim's 与伯克希尔的新联系不会改变这家企业的经营方式。Friedman 家族的所有成员将继续像以前一样运营；Charlie 和我将待在我们该待的场边。当我们说"所有成员"时，这个词是有真实含义的。Friedman 先生和夫人，分别是 88 岁和 87 岁，每天都到店里。Ike、Alan、Marvin 和 Donald 的妻子都会在繁忙时节帮忙，第四代也已经开始学习门道。
与你长久敬佩的人一起做生意是件乐事。Friedman 家族，正如 Blumkin 家族一样，之所以成功是因为他们值得成功。这两个家族都专注于做对客户有利的事，而这也最终惠及了他们自身。没有比这更好的合作伙伴了。
保险业务
下表是我们通常列出的保险行业关键数据的最新版本：
法定
保费收入 综合成本率 已发生损失 GNP平减指数
年变化率(%) （含保单持有人分红后） 年变化率(%) 通胀率(%)
------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.6
1982 ..... 3.7 109.6 8.4 6.4
1983 ..... 5.0 112.0 6.8 3.8
1984 ..... 8.5 118.0 16.9 3.7
1985 ..... 22.1 116.3 16.1 3.2
1986 ..... 22.2 108.0 13.5 2.7
1987 ..... 9.4 104.6 7.8 3.3
1988（估） 3.9 105.4 4.2 3.6
来源：A.M. Best 公司
综合成本率代表保险总成本（已发生损失加上费用）与保费收入之比：低于100的比率意味着承保盈利，高于100则意味着亏损。考虑到保险公司持有保单持有人资金（"浮存金"）所赚取的投资收益，综合成本率在107-111区间通常产生盈亏平衡的总体结果，不含股东出资带来的收益。
基于此前报告所述的原因，我们预计行业已发生损失将以每年约10%的速度增长，即使在总体通胀率低得多的年份也是如此。如果保费增长同时大幅落后于10%的速率，承保亏损将加剧，尽管行业在业务转差时倾向于少计提准备金，可能会暂时掩盖亏损的规模。如表所示，1988年行业承保亏损增加了。这一趋势在至少未来两年内几乎肯定会持续——而且很可能会加速。
财产-意外险行业不仅盈利低于正常水平，而且口碑也低于正常水平。（正如Sam Goldwyn所感慨：“人生在世，必须学会吃苦受累，还要受气。”）商业中讽刺的一点是：许多价格低得离谱、利润微薄的行业，却常常被愤怒的客户追着骂；而另一些利润丰厚的行业，无论价格多高，都鲜有投诉。
拿早餐麦片行业来说，其资本回报率是车险行业的两倍多（所以家乐氏和通用磨坊这些公司能以五倍账面价值交易，而大多数大型保险公司则接近账面价值）。麦片公司定期提价，其中很少有哪次是与成本显著上涨挂钩的。然而消费者却一声不吭。但车险公司即使提价幅度连成本上涨都抵不上，客户也会怒火中烧。要想受人喜爱，显然卖高价玉米片比卖低价车险强得多。
公众对保险行业的敌意可能产生严重后果：去年秋天加州通过的103号提案，威胁要大幅压低车险价格，尽管成本一直在飙升。法院审议该提案期间，降价措施暂缓执行，但引发投票的怨恨情绪并未暂缓：即使该提案被推翻，保险公司在加州可能也很难盈利。（谢天谢地，老百姓不恨糖果：如果103号提案既适用于保险也适用于糖果，那么喜诗糖果就得以每磅5.76美元的价格出售产品，而不是我们收取的7.60美元——然后亏得一塌糊涂。）
该提案对伯克希尔的直接短期影响很小，因为在投票前，我们在加州现有的费率结构下就看不到多少盈利机会。然而，强制降价会严重影响我们持股44%的被投资公司GEICO，其约10%的保费收入来自加州。对GEICO而言，更大的威胁是其他州可能通过提案或立法采取类似的定价行动。
如果选民坚持要求车险以低于成本的价格出售，那么最终只能由政府来提供。股东可以在短期内补贴投保人，但长期补贴只能靠纳税人。对于大多数财产-意外险公司来说，车险国有化对股东并非灾难。由于该行业的商品属性，大多数保险公司回报平平，因此如果被迫退出车险业务，它们几乎没有或根本没有经济商誉可损失。但GEICO因为是低成本生产商，能够赚取高额净资产收益率，所以面临巨大的经济商誉风险。相应地，我们也面临风险。
在伯克希尔，1988年我们的保费收入继续下降，而1989年还会因一个特殊原因大幅减少：我们与消防员基金公司（Fireman's Fund）签订的承接其7%业务的合同将于8月31日到期。届时，我们将把与该合同相关的未赚保费返还给消防员基金。这笔资金转移将使我们的“已赚保费”账户出现约8500万美元的负值，并让我们的第三季度数据看起来相当奇怪。不过，这份合同的终止不会对利润产生重大影响。
伯克希尔的承销业绩在1988年继续保持优异。我们的综合成本率（按法定口径计算，不包括结构性理赔和财务再保险）为104。准备金进展连续第二年向好，此前多年一直非常不令人满意。承销和准备金进展的详细情况见第36-38页。
未来几年我们的保险业务量可能很低，因为合理盈利潜力的业务几乎肯定稀缺。那就这样吧。在伯克希尔，我们绝不会按照预期会导致经济损失的费率签发保单。我们在期待盈利的时候遇到的麻烦已经够多了。
尽管——或者说正是因为——业务量低，我们未来几年的盈利前景可能会比行业好得多。相比保费规模，我们的浮存金金额一定非常可观，这对利润来说是好兆头。1989年和1990年，我们预计浮存金/保费比率至少是典型财产/意外险公司的三倍。Mike Goldberg，在Ajit Jain、Dinos Iordanou和National Indemnity管理团队的特别协助下，在这方面让我们处于有利位置。
在某个时刻——我们不知道何时——我们将被保险业务淹没。原因可能是某次重大自然灾害或金融灾难。但也可能出现业务爆炸式增长，就像1985年那样，因为其他公司承保亏损巨大且不断增长，同时它们意识到自己准备金严重不足。与此同时，我们将留住有才华的专业人员，保护我们的资本，并尽量不犯大错。
有价证券
在为我们的保险公司挑选有价证券时，我们可以在五大类中选择：(1) 长期普通股投资，(2) 中期固定收益证券，(3) 长期固定收益证券，(4) 短期现金等价物，(5) 短期套利承诺。
在选择这些类别时，我们没有特别的偏好。我们只是持续在它们之间寻找按"数学期望"衡量的最高税后回报，始终将自己限制在我们认为自己能够理解的投资选择上。我们的标准与最大化可立即报告的收益无关；相反，我们的目标是最大化最终的净资产。
○ 以下列出我们市值超过1亿美元的普通股持仓，不包括将在后面讨论的套利承诺。这些投资中一小部分属于伯克希尔持有不到100%的子公司。
持股数 公司 成本 市值
------ ------- ---------- ----------
（千美元省略）
3,000,000 Capital Cities/ABC（大都会/美国广播公司）... $517,500 $1,086,750
14,172,500 The Coca-Cola Company（可口可乐公司）....... 592,540 632,448
2,400,000 Federal Home Loan Mortgage Corporation
优先股* ................................... 71,729 121,200
6,850,000 GEICO Corporation（政府雇员保险公司）........ 45,713 849,400
1,727,765 The Washington Post Company（华盛顿邮报公司） 9,731 364,126
*尽管名义上是优先股，但该证券在财务上等同于普通股。
我们的永久持仓——Capital Cities/ABC（大都会/美国广播公司）、GEICO Corporation（政府雇员保险公司）和The Washington Post Company（华盛顿邮报公司）——保持不变。同样不变的还有我们对它们管理层毫无保留的钦佩：Cap Cities的Tom Murphy和Dan Burke，GEICO的Bill Snyder和Lou Simpson，以及The Washington Post的Kay Graham和Dick Simmons。查理和我非常欣赏这些管理者带给企业的才华和诚信。
他们的表现，我们近距离观察过，与许多CEO的表现形成了鲜明对比——对后者，我们很庆幸只能远观。有时这些CEO显然并不胜任自己的工作；然而，他们的职位通常却稳如泰山。企业管理中最大的讽刺莫过于：一个不称职的CEO保住饭碗，远比一个不称职的下属容易得多。
比方说，如果招聘秘书时要求打字速度至少每分钟80字，而实际只能打50字，她很快就会丢饭碗。这个职位有合理的标准；业绩容易衡量；达不到标准，就走人。同样，如果新来的销售人员不能迅速拉到足够业务，也会被解雇。借口不能替代订单。
然而，一个业绩不佳的CEO却常常无限期留任。原因之一是，他的职位很少有业绩标准。即便有，也常常模糊不清，或者即使业绩缺口重大且反复出现，也能被豁免或解释过去。太多公司里，老板先射出一支管理业绩之箭，然后匆忙在箭落处画上靶心。
老板和下属之间另一个重要但鲜为人知的区别是：CEO没有直接上级——一个自身业绩也在被考核的上级。销售经理如果手下留着一帮不称职的人，自己很快会陷入麻烦。立即剔除招聘失误符合他的切身利益，否则他自己可能被淘汰。办公室经理如果雇了笨手笨脚的秘书，也面临同样的压力。
但CEO的老板——董事会，却很少自我衡量，也很少因公司业绩不佳而被追究责任。如果董事会招聘失误并延续这个错误，那又怎样？即使公司因此被收购，交易很可能让离任的董事会成员大捞一笔。（他们地位越高，摔得越轻。）
最后，董事会与CEO之间的关系被期望是和谐的。在董事会上批评CEO的业绩，通常被视为社交场合中的打嗝——不合时宜。而办公室经理批评打字不达标的秘书时，可没有这种顾虑。
这些观点不应被解读为对CEO或董事会的全盘否定：多数人能干且勤奋，其中不少确实出类拔萃。但查理和我所看到的管理败笔，让我们庆幸能与三家永久持仓的经理人共事。他们热爱自己的企业，像所有者一样思考，浑身洋溢着诚信与能力。
○ 1988年，我们大举买入了联邦住房贷款抵押公司优先股（Freddie Mac）和可口可乐。我们预期将长期持有这些证券。事实上，当我们拥有出色管理层经营的出色企业的一部分时，我们最喜欢的持有期是永远。我们与那些人截然相反——他们在企业表现良好时急于卖出锁定利润，却在令人失望的企业上死死抱住不放。彼得·林奇巧妙地比喻这种行径为“剪掉鲜花，浇灌杂草”。我们对Freddie Mac的持仓达到了法律允许的上限，查理在他的信中对此有详细描述。在我们的合并资产负债表中，这些股票按成本而非市价列示，因为它们由一家非保险子公司——互助储蓄与贷款公司持有。
我们继续将投资集中在少数几家我们试图深入理解的公司上。我们对其有强烈长期信念的企业屈指可数。因此，当我们找到这样的企业时，我们希望以有意义的方式参与其中。我们赞同梅·韦斯特的话：“好东西再多也不为过。”
○ 去年，我们减持了约1亿美元的中期免税债券。所有售出的债券都是在1986年8月7日之后购入的。当此类债券由财产险保险公司持有时，“免税”利息所得的15%仍需纳税。
我们仍持有的8亿美元头寸几乎全部由1986年《税收改革法案》下的“祖父条款”豁免债券组成，这意味着它们完全免税。出售这些债券带来了小额利润，其余债券平均期限约六年，其市值略高于账面价值。
去年我们描述了所持有的当时处于破产状态的Texaco（德士古）短期及中期债券。1988年期间，我们基本卖出了所有这些债券，税前利润约2200万美元。这笔出售解释了资产负债表中固定收益证券减少的近1亿美元。
去年我们还告知了大家另一项主要特征类似中期固定收益证券的投资：我们持有的Salomon Inc（所罗门公司）9%可转换优先股，规模7亿美元。该优先股设有偿债基金，将于1995至1999年间等额分期赎回。伯克希尔以成本价持有该证券。由于Charlie在第69页讨论的原因，该持仓的估计市值已从去年年底略低于成本，变为1988年底略高于成本。
过去一年与所罗门CEO John Gutfreund的密切合作，加深了我们对他的敬佩。但我们对投资银行业务的短期、中期或长期经济前景仍缺乏深刻洞察：这个行业的未来盈利能力不易预测。我们依然相信，在我们优先股的存续期内，转换权可能具有重要价值。不过，该优先股的价值绝大部分仍来自其固定收益特性，而非股权特性。
○ 我们并未失去对长期债券的厌恶。只有当我们对货币购买力的长期稳定前景充满热情时，我们才会对这些证券产生兴趣。而这种稳定是不可能的：社会和民选官员有太多更优先的事项与购买力稳定相冲突。我们持有的唯一长期债券是Washington Public Power Supply Systems（WPPSS，华盛顿公共电力供应系统）的债券。其中一些WPPSS债券期限较短，另一些则因票息较高，很可能在未来几年内被赎回或偿付。总体而言，我们的WPPSS持仓在资产负债表上列为2.47亿美元，市值约3.52亿美元。
我们在1983年年报中解释了购买WPPSS债券的原因，并很高兴地告诉各位，这项投资的结果与预期基本一致。购入时，我们持有的大部分债券税后收益率约17%，且无评级（评级已被暂停）。近期，标准普尔将这些债券评为AA-级。其当前价格仅略低于顶级信用债券的水平。
在1983年的报告中，我们曾将WPPSS债券的购买逻辑与收购一家企业进行了比较。结果证明，这次购买的实际表现优于1983年企业收购的平均水平——前提是两者都以1988年底实现的、无杠杆的税后回报来衡量。
WPPSS的经历虽然令人愉快，但丝毫未能改变我们对长期债券的负面看法。它只会让我们希望再遇到一些其他被市场严重低估的大型“污名化”债券——那些因自身麻烦而被市场显著误判的品种。
**套利**
在过去的报告中，我们曾告诉各位，我们的保险子公司有时会从事套利，作为持有短期现金等价物的替代方案。当然，我们更倾向于做出重要的长期投资承诺，但手头的现金往往多于好主意。在这种时候，套利有时能提供远比国库券更高的回报，而且同样重要的是，它能浇灭我们任何可能放松长期投资标准的念头。（查理在讨论完某笔套利交易后，通常的告别语是：“好吧，至少这能让你不去泡吧。”）
1988年，我们通过套利赚取了异常丰厚的利润——无论从绝对美元金额还是回报率来看都是如此。我们的税前收益约为7800万美元，平均投入资金约1.47亿美元。
如此高的交易量使得我们有必要详细讨论一下套利以及我们对此的态度。过去，“套利”一词仅指在两个不同市场同时买入并卖出证券或外汇，目的是利用微小价差——比如，皇家荷兰石油公司的股票在阿姆斯特丹以荷兰盾交易、在伦敦以英镑交易、在纽约以美元交易，不同市场间可能存在的价差。有些人可能称之为“剥头皮”；不出各位所料，从业者选择了法语词“arbitrage”（套利）。
自第一次世界大战以来，套利（现在有时也被称为“风险套利”）的定义已经扩大，包括从已公布的公司事件（如公司出售、并购、资本重组、重组、清算、自行要约收购等）中获取利润。在大多数情况下，套利者预期无论股市表现如何都能获利。他们通常面临的主要风险反而是已公布的事件不会发生。
套利领域偶尔也会出现一些另类的机会。我24岁在纽约为格雷厄姆-纽曼公司（Graham-Newman Corp.）工作时，就参与过这样一次机会。布鲁克林的罗克伍德公司（Rockwood & Co.）是一家盈利能力有限的巧克力产品公司，1941年可可豆价格为每磅5美分时，它采用了后进先出法（LIFO）计价存货。1954年，可可豆暂时短缺导致价格飙升至每磅60美分以上。因此，罗克伍德希望迅速清空其宝贵的库存——赶在价格下跌之前。但如果直接出售可可豆，公司需为收益缴纳近50%的税款。
1954年的税法拯救了它。其中有一条晦涩的规定：如果存货作为公司缩减经营规模计划的一部分分配给股东，则因后进先出法产生的利润可免缴税款。罗克伍德决定终止其一项业务——可可脂的销售，并声称其1300万磅的可可豆库存中有一部分归因于该业务。于是，该公司提出以不再需要的可可豆来回购股票，每1股换80磅可可豆。
连续几个星期，我忙着买入股票、卖出可可豆，并定期前往施罗德信托公司（Schroeder Trust）将股票凭证换成仓库收据。利润不错，我唯一的开销就是地铁代币。
罗克伍德重组的设计者是一位当时32岁、名不见经传但才华横溢的芝加哥人——杰伊·普里茨克。如果你了解杰伊后来的业绩，就不会对以下结果感到意外：这次操作对罗克伍德的持续股东也非常有利。从要约收购前到要约收购后不久，尽管公司正经历巨大的经营亏损，罗克伍德的股价却从15美元涨到了100美元。有时候，股票估值的门道远不止市盈率那么简单。
近些年，大多数套利操作都涉及收购，既有友好收购，也有敌意收购。收购热愈演愈烈，反垄断挑战几乎绝迹，报价又常常步步抬高，套利者们赚得盆满钵满。他们根本不需要什么特殊才能；诀窍，就像电影里彼得·塞勒斯那样，无非就是"在场"。华尔街把那句老话改成了："授人以鱼，不如授人以渔；教人套利，他这辈子衣食无忧。"（不过，如果他是在伊万·博斯基套利学校学的艺，那给他供饭的说不定就是州立监狱了。）
要评估套利机会，你必须回答四个问题：
(1) 承诺的事件真的发生的概率有多大？
(2) 你的资金会被占用多久？
(3) 出现更好结果——比如出现竞购方——的机会有多大？
(4) 如果因为反垄断行动、融资问题等原因导致事件未能发生，结果会怎样？
Arcata Corp. 是我们一次比较幸运的套利经历，展现了这门生意的曲折反复。1981年9月28日，Arcata的董事们原则上同意将公司出售给 Kohlberg, Kravis, Roberts & Co.（KKR），这家公司当时和现在都是大型杠杆收购公司。Arcata从事印刷和林产品业务，还有一个特别之处：1978年，美国政府征用了Arcata拥有的10,700英亩林地（主要是古老的红杉林），用于扩建红杉国家公园。政府分期支付了9,790万美元，但Arcata认为这笔补偿严重不足。双方还对征收与最终付款期间的利率有争议。授权法案规定利率为6%单利，Arcata则要求高得多的复利。
收购一家有大额诉讼索赔（无论索赔方是公司还是针对公司）的公司，会给谈判带来难题。为了解决这个问题，KKR出价每股Arcata 37美元，外加政府就红杉林地支付的任何额外金额的三分之二。
在评估这个套利机会时，我们必须问自己：KKR是否会完成交易？因为它的报价附带了"获得满意融资"的条件。这种条款对卖方来说总是危险的：它为求婚者在求婚和结婚之间热情减退时提供了方便的退出路径。不过，我们并不特别担心这种可能性，因为KKR过去的成交记录不错。
我们还得问自己：如果KKR的交易真的告吹会怎样？这方面我们也不太担心：Arcata的管理层和董事们已经兜售公司一段时间了，显然决心要卖掉它。如果KKR跑了，Arcata很可能找到另一个买家，当然价格可能会低一些。
最后，我们得问自己：红杉林的索赔可能值多少钱？你们的主席连榆树和橡树都分不清，但这个问题难不倒他：他很从容地评估，这笔索赔的价值在零到很多之间。
我们是在9月30日开始买入阿卡塔（Arcata）股票的，当时股价在33.50美元左右，八周内共买进了约40万股，占公司总股本的5%。最初公告称，收购方将在1982年1月支付每股37.00美元。因此，如果一切顺利，我们本来能获得约40%的年化收益率——这还不算红杉林的索赔价值，那部分纯属锦上添花。
但事情并未一帆风顺。12月有消息说交割要推迟一段时间。不过，1月4日双方还是签下了最终协议。受到鼓舞后，我们在每股38.00美元左右继续加仓，将持股增至65.5万股，超过公司总股本的7%。尽管交割推迟了，我们仍愿意以更高价格买入——这反映出我们更倾向于红杉林索赔能拿到"一大笔"而非"零蛋"。
随后，2月25日，贷款方表示"鉴于房地产行业严重萧条及其对阿卡塔前景的影响"，他们要"重新审视"融资条件。股东大会再次推迟到4月。阿卡塔的一位发言人表示，他"并不认为收购本身会泡汤"。套利者听到这种安抚话，脑子里立马闪出一句老话："他撒谎的样子就像货币贬值前夕的财政部长。"
3月12日，KKR（科尔伯格-克拉维斯-罗伯茨公司）说之前的方案行不通了，先是把出价降到33.50美元，两天后又提高到35.00美元。然而，3月15日，公司董事会拒绝了这一报价，转而接受了另一家收购方每股37.50美元外加红杉林一半回收价值的出价。股东批准了这项交易，37.50美元于6月4日到账。
我们收到了2,460万美元，而成本是2,290万美元；平均持有期接近六个月。考虑到这笔交易遭遇的波折，不含红杉林索赔价值的年化收益率15%——已经相当令人满意了。
但好戏还在后头。主审法官任命了两个委员会，一个评估木材价值，另一个考虑利率问题。1987年1月，第一个委员会认定红杉林价值2.757亿美元，第二个委员会建议按约14%的复利混合回报率计算。
1987年8月，法官支持了这些结论，这意味着阿卡塔大约能拿到6亿美元的净额。政府随后提起上诉。不过，1988年，在上诉听证之前，双方以5.19亿美元达成和解。结果我们每股额外获得29.48美元，约合1,930万美元。1989年我们还能再拿到大约80万美元。
伯克希尔的套利活动与许多套利者不同。首先，我们每年只参与少数几笔交易，而且通常规模很大。大多数从业者会买入大量交易——每年50笔甚至更多。手里同时堆着这么多事，他们大部分时间都得花在监测交易进展和相关股票的市场波动上。这不是查理和我希望的生活方式。（拼命赚钱就是为了整天盯着行情看，那有什么意思？）
因为我们如此高度集中，一笔特别赚钱或特别亏钱的交易对伯克希尔年度套利收益的影响，远远超过对典型套利操作的影响。到目前为止，伯克希尔还没有真正栽过大跟头。但将来会的——到那时我们会把血淋淋的细节向你们如实报告。
我们与其他套利操作的另一个不同之处在于：我们只参与已经公开宣布的交易。我们不靠谣言买卖，也不去猜测收购候选对象。我们只是读读报纸，思考几个大型交易，然后凭自己的概率感觉行事。
截至年末，我们唯一的重大套利头寸是3,342,000股RJR Nabisco（雷诺兹-纳贝斯克），成本为2.818亿美元，市值为3.045亿美元。1月份我们增持至约400万股，2月份清仓。我们向收购RJR的KKR（科尔伯格-克拉维斯-罗伯茨）公司所持有的股份中，约有300万股被接受，其余退回的股票随即在市场上卖出。我们的税前利润为6,400万美元，好于预期。
早些时候，RJR竞购战中出现了另一个熟悉面孔：杰伊·普利兹克（Jay Pritzker），他是第一波士顿（First Boston）集团的一员，该集团提出了一项以税收为导向的报价。用约吉·贝拉（Yogi Berra）的话说：“又是似曾相识的一幕。”
在我们本应买入RJR的大部分时间里，由于所罗门（Salomon）参与了一个竞购集团，我们在该股票上的交易受到限制。通常，虽然查理和我是所罗门的董事，但我们被屏蔽在有关其并购业务的信息之外。这是我们要求的：这些信息对我们没用，反而可能偶尔妨碍伯克希尔的套利操作。
然而，由于所罗门计划在RJR交易中投入异常巨大的资金，所有董事都必须充分了解和参与。因此，伯克希尔买入RJR股票的时间只有两次：第一次是在管理层公布收购计划后的头几天、所罗门介入之前；第二次则是很久之后，在RJR董事会做出支持KKR的决定之后。由于我们无法在其他时间买入，担任董事让伯克希尔付出了可观代价。
考虑到伯克希尔1988年的良好业绩，你可能会预期我们在1989年大举进入套利领域。相反，我们预计将置身事外。
一个令人愉快的原因是，我们的现金头寸减少了——因为我们预期将长期持有的股票头寸大幅增加了。正如本报告的常客所知，我们的新投资并非基于对股市短期前景的判断。相反，它们反映了我们对特定公司长期业务前景的看法。我们从来没有、现在没有、将来也不会对股市、利率或一年后的商业活动走向有什么看法。
即使我们有很多现金，1989年我们很可能也不会在套利上做太多。在收购领域出现了一些极端的过度行为。正如多萝西所说：“托托，我感觉我们已不在堪萨斯了。”
我们不知道这种过度会持续多久，也不知道是什么会改变推动它们的政府、贷款人和买家的态度。但我们知道，别人行事越不谨慎，我们行事就越应该谨慎。我们无意参与那些反映买家和贷款人无节制——在我们看来常是毫无根据——乐观情绪的套利交易。在我们的活动中，我们将牢记赫布·斯坦（Herb Stein）的智慧：“如果某件事不能永远持续，它终将结束。”
有效市场理论
前文关于套利的讨论，也顺带引出对“有效市场理论”（EMT）的一点探讨。这一学说在20世纪70年代变得极为时髦——甚至可以说，在学术界几乎被奉若神明。其核心思想是：分析股票毫无用处，因为所有公开信息都已恰当地反映在价格中。换句话说，市场永远无所不知。由此推演，教EMT的教授们声称，一个人朝股票行情表扔飞镖选出的投资组合，前景与最聪明、最勤奋的证券分析师选出的组合一样好。令人惊讶的是，EMT不仅被学术界接纳，也被许多投资专业人士和公司高管信奉。他们正确地观察到市场经常是有效的，却错误地得出结论说市场永远有效。这两个命题之间的差别，简直是天壤之别。
依我看，格雷厄姆-纽曼公司、巴菲特合伙企业和伯克希尔延续63年的套利经验，恰恰证明了EMT是多么愚蠢。（当然还有大量其他证据。）在格雷厄姆-纽曼公司期间，我研究了该公司1926年至1956年整个存续期内套利业务的收益。未使用杠杆的年均回报率为20%。从1956年开始，我将本·格雷厄姆的套利原则先后应用于巴菲特合伙企业和伯克希尔。虽然没有精确计算，但凭我做过的工作足以知道，1956年至1988年的年均回报率远高于20%。（当然，我运作的环境比本有利得多；他当年还赶上1929-1932年的大萧条。）
以下条件全部满足，足以对投资组合业绩进行公平检验：（1）三家机构在创造这63年记录期间，交易了数百种不同的证券；（2）结果并未因少数几次幸运经历而偏离；（3）我们无需挖掘隐秘事实，也无需对产品或管理层形成深刻见解——我们仅仅根据高度公开的事件采取行动；（4）我们的套利头寸是明确可识别的组合——并非事后回顾挑选出来的。
63年间，大盘（含股息）的年化回报率略低于10%。这意味着如果将所有收入再投资，1,000美元会增长到405,000美元。而20%的年回报率则能产生9,700万美元。这在我们看来是一个统计上显著的差异，或许，足以勾起人们的好奇心。
然而，EMT的拥护者们似乎从未对这种不合拍的证据产生过兴趣。确实，他们如今不像过去那样大谈特谈自己的理论了。但据我所知，无论他们已误导了多少学生，没有一个人承认过自己错了。而且，EMT仍然是各大商学院投资课程的必备内容。看来，不愿认错、不愿破除理论权威的神秘光环，这种毛病并非神职人员所独有。
自然，EMT对学生和那些轻信的、吞下了这套理论的投资者造成的伤害，对我们及其他格雷厄姆追随者来说，却是一份天大的礼物。在任何形式的较量中——无论是金融、心智还是体能——对手被教导说连尝试都是徒劳，这本身就是巨大的优势。从自私的角度讲，格雷厄姆信徒们或许应该捐资设立教席，以确保EMT被永远教授下去。
话说回来，这里有必要提个醒。套利最近看起来很容易，但这并不是一种能保证每年20%收益——甚至任何收益——的投资方式。如前所述，市场在大部分时候是相当有效的：在那63年里我们抓住的每一个套利机会背后，都有更多机会因为定价看上去已经合理而被我们放弃。
投资者不可能仅仅通过坚持某一种特定的投资类别或风格，就从股票中获得超额收益。他只能通过仔细评估事实、持续运用纪律来赚取超额收益。套利投资本身，并不比用掷飞镖选股更高明。
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纽约证券交易所上市
伯克希尔的股票于1988年11月29日在纽约证券交易所上市。在第50-51页，我们复制了当时寄给股东的有关上市事宜的信件。
请允许我澄清信中未提及的一点：虽然我们在纽交所的最小交易单位是10股，但任何数量的股票（从1股起）都可以买卖。
正如信中所解释的，我们上市的主要目的是降低交易成本，我们相信这个目标已经实现。总体而言，纽交所的买卖价差远低于场外交易市场（OTC）的价差。
亨德森兄弟公司（Henderson Brothers, Inc.）是我们股票的指定做市商（specialist），它是纽交所历史上持续经营最久的做市商；其创始人威廉·托马斯·亨德森（William Thomas Henderson）于1861年9月8日以500美元购买了一个席位（最近席位售价约62.5万美元）。在54家做市商中，HBI以83只股票的数量位列第二。当伯克希尔被分配给HBI时，我们非常高兴，并对其表现一直感到满意。HBI董事长Jim Maguire亲自管理伯克希尔的交易，我们找不到比他更合适的人选了。
在两个方面，我们的目标可能与大多数上市公司有所不同。第一，我们不希望伯克希尔股票的价格最大化。相反，我们希望股价在围绕内在商业价值（我们希望该价值以合理——或者更好，不合理——的速度增长）的窄幅区间内交易。查理和我对股价被显著高估的困扰程度，与对股价被显著低估的困扰程度一样。这两种极端情况都必然会导致许多股东的投资结果与伯克希尔的商业业绩大相径庭。如果股价始终如一地反映商业价值，那么每位股东在其持有期内将获得与伯克希尔经营业绩大致平行的投资回报。
第二，我们希望交易活动非常少。如果我们经营一家只有少数被动合伙人的私人企业，而这些合伙人及其继任者频繁想退出合伙关系，我们会感到失望。经营一家上市公司，我们也有同样的感受。
我们的目标是吸引长期持有者——他们在买入时没有时间表或卖出目标价，而是打算无限期地陪伴我们。我们无法理解那些希望股票交易活跃的CEO，因为交易活跃只能意味着大量股东在不断离场。还有什么组织——学校、俱乐部、教堂等——会在成员离开时受到领导者的欢呼呢？（然而，如果有一个依靠成员更替来谋生的经纪人，你可以肯定至少会有那么一个人鼓吹活动，比如：“基督教已经好一阵子没什么动静了，也许下周我们应该改信佛教。”）
当然，部分伯克希尔股东会不时需要或想要卖出股份，我们希望有优秀的接盘者能以公平价格买入。因此，我们努力通过政策、业绩和沟通，吸引那些理解我们业务、与我们时间视野一致、并用我们衡量自己的标准来衡量我们的新股东。如果我们能持续吸引这类股东——同样重要的是，能继续让那些抱有短期或不切实际期望的人对我们不感兴趣——那么伯克希尔的股价就应该始终以与企业价值合理相关的价格交易。
**David L. Dodd**
我的朋友兼老师Dave Dodd去年去世，享年93岁，我们相识38年。你们大多数人并不认识他。然而，任何长期持有伯克希尔的股东之所以能显著受益，都要归功于他对我们公司产生的间接影响。
Dave毕生在哥伦比亚大学教书，并与Ben Graham合著了《证券分析》。从我踏入哥大那一刻起，Dave就亲自鼓励和教导我；这两种影响同等重要。他直接或通过著作传授给我的每一点，都合情合理。后来，通过数十封书信，他持续教导我，直到去世。
我认识许多金融与投资学教授，但除了Ben Graham，从未见过能与Dave比肩的人。他才华的证明就是学生的成就：没有哪位投资学老师培养出如此多取得非凡成功的学生。
当学生走出Dave的课堂时，他们已经具备了终身聪明投资的能力，因为他教授的准则简单、可靠、有用且经久不衰。尽管这些看上去像是平凡的美德，但真正贯彻这些准则的教学却十分罕见。
尤为令人惊叹的是，Dave不仅言传，更能身教。正如凯恩斯通过将学术理念应用于微薄资金而变得富有，Dave也是如此。事实上，他的投资业绩远超凯恩斯——凯恩斯最初是一位市场择时者（依赖商业与信贷周期理论），经过深入思考后才转向价值投资；而Dave从一开始就是对的。
在伯克希尔的投资中，Charlie和我运用了Dave和Ben Graham所教授的准则。我们的财富是他们智慧之树的果实。
**其他事项**
我们希望收购更多类似于我们现有业务的企业，并且需要一些帮助。如果你有符合以下标准的企业，请给我打电话，或者最好写信。
以下是我们的标准：
(1) 大规模收购（税后盈利至少1000万美元），
(2) 有持续盈利能力的证明（我们对未来预测不感兴趣，对“扭亏为盈”的情况也不感兴趣），
(3) 净资产收益率良好，且很少或没有使用负债，
(4) 现有管理层（我们无法提供），
(5) 业务简单（如果涉及太多技术，我们理解不了），
(6) 报价明确（在价格未知的情况下，我们不想浪费自己或卖方的时间去谈交易，哪怕是初步讨论）。
我们不会进行敌意收购。我们承诺完全保密，并会非常迅速地给出答复——通常在五分钟内——告知我们是否有兴趣。我们倾向于用现金收购，但如果我们收到的内在企业价值与我们付出的相当，也会考虑发行股票。
我们最喜欢的购买方式，是符合Blumkin-Friedman-Heldman模式的那种。在这些案例中，公司的老板兼经理希望变现大量现金，有时是为了自己，但往往是为了家人或不活跃的股东。然而，这些经理也希望继续保留大量股权，像以前那样经营自己的公司。我们认为自己特别适合有这样目标的卖家，并邀请潜在卖家通过联系我们以前的合作伙伴来考察我们。
查理和我经常收到一些收购邀约，这些交易根本不符合我们的标准——我们发现，如果你放出消息说想买柯利犬，很多人会打来电话想卖给你他们的可卡犬。我们对于新创企业、困境反转或拍卖式销售的兴趣，最好用另一句高德温名言来表达："请别把我算在内。"
除了对上述企业购买感兴趣之外，我们也有兴趣通过协议购买大额但非控股的股份，就像我们在Cap Cities（大都会通信公司）和Salomon（所罗门公司）持有的那样。我们尤其有兴趣购买可转换优先股作为长期投资，就像我们在所罗门所做的那样。
* * *
几周前我们收到了一些好消息：标准普尔将我们的信用评级上调至AAA，这是它给出的最高评级。目前只有15家美国工业或财产意外险公司被评为AAA，而1980年有28家。
公司债券持有人在过去几年里一直承受着"事件风险"的打击。这个术语指的是，在一家此前财务政策保守的企业遭遇高杠杆收购或资本重组时，其信用评级在一夜之间被降级。在一个由少数老板兼经理主导的收购世界里，大多数公司都存在这种风险。伯克希尔没有。查理和我向债券持有人承诺，我们会像对待股东一样尊重他们。
* * *
伯克希尔1988年股东指定捐款计划中，约97.4%的合格股份参与了。通过该计划捐赠了500万美元，2319家慈善机构收到了捐款。如果我们业务成果合理，我们计划在1989年提高每股捐款额。
我们敦促新股东阅读第48-49页关于股东指定捐款计划的说明。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的名义登记，而不是以经纪人、银行或存管机构的代名人名义登记。未能在1989年9月30日之前如此登记的股份将没有资格参加1989年的计划。
* * *
伯克希尔年度股东大会将于1989年4月24日星期一在奥马哈举行，我希望您能来。本次股东大会为您提供了一个提问任何与股东相关问题的平台，我们将一直解答，直到所有问题（除了那些涉及投资组合活动或其他专有信息的问题）都被处理完毕。
会后将有数辆大巴送您去拜访The Nebraska Furniture Mart（内布拉斯加家具城）的Mrs. B，以及Borsheim's（博希姆珠宝店）的Ike Friedman。准备好淘便宜货吧。
外地人可能更愿意提前到达，在周日下午12点到5点的营业时间去拜访Mrs. B（这些周日营业时间在Mrs. B看来短得可笑，她觉得这点时间只够她热身；她更喜欢那些从上午10点营业到晚上9点的日子）。不过，Borsheim's（博希姆珠宝店）周日不营业。
问B太太她那低得惊人的地毯价格有什么秘诀。她会像告诉所有人一样，悄悄对你说：“我能卖这么便宜，是因为我给一个完全不懂地毯的傻瓜干活。”
沃伦·E·巴菲特
董事会主席
1989年2月28日