ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1989 was $1.515 billion, or
44.4%. Over the last 25 years (that is, since present management
took over) our per-share book value has grown from $19.46 to
$4,296.01, or at a rate of 23.8% compounded annually.
What counts, however, is intrinsic value - the figure
indicating what all of our constituent businesses are rationally
worth. With perfect foresight, this number can be calculated by
taking all future cash flows of a business - in and out - and
discounting them at prevailing interest rates. So valued, all
businesses, from manufacturers of buggy whips to operators of
cellular phones, become economic equals.
Back when Berkshire's book value was $19.46, intrinsic
value was somewhat less because the book value was entirely tied
up in a textile business not worth the figure at which it was
carried. Now most of our businesses are worth far more than their
carrying values. This agreeable evolution from a discount to a
premium means that Berkshire's intrinsic business value has
compounded at a rate that somewhat exceeds our 23.8% annual
growth in book value.
The rear-view mirror is one thing; the windshield is
another. A large portion of our book value is represented by
equity securities that, with minor exceptions, are carried on our
balance sheet at current market values. At yearend these
securities were valued at higher prices, relative to their own
intrinsic business values, than has been the case in the past.
One reason is the buoyant 1989 stock market. More important, the
virtues of these businesses have been widely recognized. Whereas
once their stock prices were inappropriately low, they are not
now.
We will keep most of our major holdings, regardless of how
they are priced relative to intrinsic business value. This 'til-
death-do-us-part attitude, combined with the full prices these
holdings command, means that they cannot be expected to push up
Berkshire's value in the future as sharply as in the past. In
other words, our performance to date has benefited from a double-
dip: (1) the exceptional gains in intrinsic value that our
portfolio companies have achieved; (2) the additional bonus we
realized as the market appropriately "corrected" the prices of
these companies, raising their valuations in relation to those of
the average business. We will continue to benefit from good gains
in business value that we feel confident our portfolio companies
will make. But our "catch-up" rewards have been realized, which
means we'll have to settle for a single-dip in the future.
We face another obstacle: In a finite world, high growth
rates must self-destruct. If the base from which the growth is
taking place is tiny, this law may not operate for a time. But
when the base balloons, the party ends: A high growth rate
eventually forges its own anchor.
Carl Sagan has entertainingly described this phenomenon,
musing about the destiny of bacteria that reproduce by dividing
into two every 15 minutes. Says Sagan: "That means four doublings
an hour, and 96 doublings a day. Although a bacterium weighs only
about a trillionth of a gram, its descendants, after a day of
wild asexual abandon, will collectively weigh as much as a
mountain...in two days, more than the sun - and before very long,
everything in the universe will be made of bacteria." Not to
worry, says Sagan: Some obstacle always impedes this kind of
exponential growth. "The bugs run out of food, or they poison
each other, or they are shy about reproducing in public."
Even on bad days, Charlie Munger (Berkshire's Vice Chairman
and my partner) and I do not think of Berkshire as a bacterium.
Nor, to our unending sorrow, have we found a way to double its
net worth every 15 minutes. Furthermore, we are not the least bit
shy about reproducing - financially - in public. Nevertheless,
Sagan's observations apply. From Berkshire's present base of $4.9
billion in net worth, we will find it much more difficult to
average 15% annual growth in book value than we did to average
23.8% from the $22 million we began with.
Taxes
Our 1989 gain of $1.5 billion was achieved after we took a
charge of about $712 million for income taxes. In addition,
Berkshire's share of the income taxes paid by its five major
investees totaled about $175 million.
Of this year's tax charge, about $172 million will be paid
currently; the remainder, $540 million, is deferred. Almost all
of the deferred portion relates to the 1989 increase in
unrealized profits in our common stock holdings. Against this
increase, we have reserved a 34% tax.
We also carry reserves at that rate against all unrealized
profits generated in 1987 and 1988. But, as we explained last
year, the unrealized gains we amassed before 1987 - about $1.2
billion - carry reserves booked at the 28% tax rate that then
prevailed.
A new accounting rule is likely to be adopted that will
require companies to reserve against all gains at the current tax
rate, whatever it may be. With the rate at 34%, such a rule would
increase our deferred tax liability, and decrease our net worth,
by about $71 million - the result of raising the reserve on our
pre-1987 gain by six percentage points. Because the proposed rule
has sparked widespread controversy and its final form is unclear,
we have not yet made this change.
As you can see from our balance sheet on page 27, we would
owe taxes of more than $1.1 billion were we to sell all of our
securities at year-end market values. Is this $1.1 billion
liability equal, or even similar, to a $1.1 billion liability
payable to a trade creditor 15 days after the end of the year?
Obviously not - despite the fact that both items have exactly the
same effect on audited net worth, reducing it by $1.1 billion.
On the other hand, is this liability for deferred taxes a
meaningless accounting fiction because its payment can be
triggered only by the sale of stocks that, in very large part, we
have no intention of selling? Again, the answer is no.
In economic terms, the liability resembles an interest-free
loan from the U.S. Treasury that comes due only at our election
(unless, of course, Congress moves to tax gains before they are
realized). This "loan" is peculiar in other respects as well: It
can be used only to finance the ownership of the particular,
appreciated stocks and it fluctuates in size - daily as market
prices change and periodically if tax rates change. In effect,
this deferred tax liability is equivalent to a very large
transfer tax that is payable only if we elect to move from one
asset to another. Indeed, we sold some relatively small holdings
in 1989, incurring about $76 million of "transfer" tax on $224
million of gains.
Because of the way the tax law works, the Rip Van Winkle
style of investing that we favor - if successful - has an
important mathematical edge over a more frenzied approach. Let's
look at an extreme comparison.
Imagine that Berkshire had only $1, which we put in a
security that doubled by yearend and was then sold. Imagine
further that we used the after-tax proceeds to repeat this
process in each of the next 19 years, scoring a double each time.
At the end of the 20 years, the 34% capital gains tax that we
would have paid on the profits from each sale would have
delivered about $13,000 to the government and we would be left
with about $25,250. Not bad. If, however, we made a single
fantastic investment that itself doubled 20 times during the 20
years, our dollar would grow to $1,048,576. Were we then to cash
out, we would pay a 34% tax of roughly $356,500 and be left with
about $692,000.
The sole reason for this staggering difference in results
would be the timing of tax payments. Interestingly, the
government would gain from Scenario 2 in exactly the same 27:1
ratio as we - taking in taxes of $356,500 vs. $13,000 - though,
admittedly, it would have to wait for its money.
We have not, we should stress, adopted our strategy
favoring long-term investment commitments because of these
mathematics. Indeed, it is possible we could earn greater after-
tax returns by moving rather frequently from one investment to
another. Many years ago, that's exactly what Charlie and I did.
Now we would rather stay put, even if that means slightly
lower returns. Our reason is simple: We have found splendid
business relationships to be so rare and so enjoyable that we
want to retain all we develop. This decision is particularly
easy for us because we feel that these relationships will produce
good - though perhaps not optimal - financial results.
Considering that, we think it makes little sense for us to give
up time with people we know to be interesting and admirable for
time with others we do not know and who are likely to have human
qualities far closer to average. That would be akin to marrying
for money - a mistake under most circumstances, insanity if one
is already rich.
Sources of Reported Earnings
The table below shows the major sources of Berkshire's
reported earnings. In this presentation, 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 one utilizing generally
accepted accounting principles (GAAP), which require purchase-
price adjustments to be made 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 37-39, and in the Management's
Discussion section on pages 40-44. 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 54. In addition, we have
reprinted on page 71 Charlie's May 30, 1989 letter to the U. S.
League of Savings Institutions, which conveyed our disgust with
its policies and our consequent decision to resign.
(000s omitted)
----------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
---------------------- ----------------------
1989 1988 1989 1988
---------- ---------- ---------- ----------
Operating Earnings:
Insurance Group:
Underwriting ............ $(24,400) $(11,081) $(12,259) $ (1,045)
Net Investment Income ... 243,599 231,250 213,642 197,779
Buffalo News .............. 46,047 42,429 27,771 25,462
Fechheimer ................ 12,621 14,152 6,789 7,720
Kirby ..................... 26,114 26,891 16,803 17,842
Nebraska Furniture Mart ... 17,070 18,439 8,441 9,099
Scott Fetzer
Manufacturing Group .... 33,165 28,542 19,996 17,640
See's Candies ............. 34,235 32,473 20,626 19,671
Wesco - other than Insurance 13,008 16,133 9,810 10,650
World Book ................ 25,583 27,890 16,372 18,021
Amortization of Goodwill .. (3,387) (2,806) (3,372) (2,806)
Other Purchase-Price
Accounting Charges ........ (5,740) (6,342) (6,668) (7,340)
Interest Expense* ......... (42,389) (35,613) (27,098) (23,212)
Shareholder-Designated
Contributions .......... (5,867) (4,966) (3,814) (3,217)
Other ..................... 23,755 41,059 12,863 27,177
---------- ---------- ---------- ----------
Operating Earnings .......... 393,414 418,450 299,902 313,441
Sales of Securities ......... 223,810 131,671 147,575 85,829
---------- ---------- ---------- ----------
Total Earnings - All Entities $617,224 $550,121 $447,477 $399,270
*Excludes interest expense of Scott Fetzer Financial Group and
Mutual Savings & Loan.
We refer you also to pages 45-51, where we have rearranged
Berkshire's financial data into four segments. These correspond
to the way Charlie and I think about the business and should help
you calculate Berkshire's intrinsic value. Shown on these pages
are balance sheets and earnings statements for: (1) our
insurance operations, with their major investment positions
itemized; (2) our manufacturing, publishing and retailing
businesses, leaving aside certain non-operating assets and
purchase-price accounting adjustments; (3) our subsidiaries
engaged in finance-type operations, which are Mutual Savings and
Scott Fetzer Financial; and (4) an all-other category that
includes the non-operating assets (primarily marketable
securities) held by the companies in segment (2), all purchase
price accounting adjustments, and various assets and debts of the
Wesco and Berkshire parent companies.
If you combine the earnings and net worths of these four
segments, you will derive totals matching those shown on our GAAP
statements. However, I want to emphasize that this four-category
presentation does not fall within the purview of our auditors,
who in no way bless it.
In addition to our reported earnings, we also benefit from
significant earnings of investees that standard accounting rules
do not permit us to report. On page 15, we list five major
investees from which we received dividends in 1989 of about $45
million, after taxes. However, our share of the retained earnings
of these investees totaled about $212 million last year, not
counting large capital gains realized by GEICO and Coca-Cola. If
this $212 million had been distributed to us, our own operating
earnings, after the payment of additional taxes, would have been
close to $500 million rather than the $300 million shown in the
table.
The question you must decide is whether these undistributed
earnings are as valuable to us as those we report. We believe
they are - and even think they may be more valuable. The reason
for this a-bird-in-the-bush-may-be-worth-two-in-the-hand
conclusion is that earnings retained by these investees will
be deployed by talented, owner-oriented managers who
sometimes have better uses for these funds in their own
businesses than we would have in ours. I would not make such a
generous assessment of most managements, but it is appropriate in
these cases.
In our view, Berkshire's fundamental earning power is best
measured by a "look-through" approach, in which we append our
share of the operating earnings retained by our investees to our
own reported operating earnings, excluding capital gains in both
instances. For our intrinsic business value to grow at an average
of 15% per year, our "look-through" earnings must grow at about
the same pace. We'll need plenty of help from our present
investees, and also need to add a new one from time to time, in
order to reach this 15% goal.
Non-Insurance Operations
In the past, we have labeled our major manufacturing,
publishing and retail operations "The Sainted Seven." With our
acquisition of Borsheim's early in 1989, the challenge was to
find a new title both alliterative and appropriate. We failed:
Let's call the group "The Sainted Seven Plus One."
This divine assemblage - Borsheim's, The Buffalo News,
Fechheimer Bros., Kirby, Nebraska Furniture Mart, Scott Fetzer
Manufacturing Group, See's Candies, World Book - is a collection
of businesses with economic characteristics that range from good
to superb. Its managers range from superb to superb.
Most of these managers have no need to work for a living;
they show up at the ballpark because they like to hit home runs.
And that's exactly what they do. Their combined financial
statements (including those of some smaller operations), shown on
page 49, illustrate just how outstanding their performance is. On
an historical accounting basis, after-tax earnings of these
operations were 57% on average equity capital. Moreover, this
return was achieved with no net leverage: Cash equivalents have
matched funded debt. When I call off the names of our managers -
the Blumkin, Friedman and Heldman families, Chuck Huggins, Stan
Lipsey, and Ralph Schey - I feel the same glow that Miller
Huggins must have experienced when he announced the lineup of his
1927 New York Yankees.
Let's take a look, business by business:
o In its first year with Berkshire, Borsheim's met all
expectations. Sales rose significantly and are now considerably
better than twice what they were four years ago when the company
moved to its present location. In the six years prior to the
move, sales had also doubled. Ike Friedman, Borsheim's managing
genius - and I mean that - has only one speed: fast-forward.
If you haven't been there, you've never seen a jewelry store
like Borsheim's. Because of the huge volume it does at one
location, the store can maintain an enormous selection across all
price ranges. For the same reason, it can hold its expense ratio
to about one-third that prevailing at jewelry stores offering
comparable merchandise. The store's tight control of expenses,
accompanied by its unusual buying power, enable it to offer
prices far lower than those of other jewelers. These prices, in
turn, generate even more volume, and so the circle goes 'round
and 'round. The end result is store traffic as high as 4,000
people on seasonally-busy days.
Ike Friedman is not only a superb businessman and a great
showman but also a man of integrity. We bought the business
without an audit, and all of our surprises have been on the plus
side. "If you don't know jewelry, know your jeweler" makes sense
whether you are buying the whole business or a tiny diamond.
A story will illustrate why I enjoy Ike so much: Every two
years I'm part of an informal group that gathers to have fun and
explore a few subjects. Last September, meeting at Bishop's Lodge
in Santa Fe, we asked Ike, his wife Roz, and his son Alan to come
by and educate us on jewels and the jewelry business.
Ike decided to dazzle the group, so he brought from Omaha
about $20 million of particularly fancy merchandise. I was
somewhat apprehensive - Bishop's Lodge is no Fort Knox - and I
mentioned my concern to Ike at our opening party the evening
before his presentation. Ike took me aside. "See that safe?" he
said. "This afternoon we changed the combination and now even the
hotel management doesn't know what it is." I breathed easier. Ike
went on: "See those two big fellows with guns on their hips?
They'll be guarding the safe all night." I now was ready to
rejoin the party. But Ike leaned closer: "And besides, Warren,"
he confided, "the jewels aren't in the safe."
How can we miss with a fellow like that - particularly when
he comes equipped with a talented and energetic family, Alan,
Marvin Cohn, and Don Yale.
o At See's Candies we had an 8% increase in pounds sold, even
though 1988 was itself a record year. Included in the 1989
performance were excellent same-store poundage gains, our first
in many years.
Advertising played an important role in this outstanding
performance. We increased total advertising expenditures from $4
million to $5 million and also got copy from our agency, Hal
Riney & Partners, Inc., that was 100% on the money in conveying
the qualities that make See's special.
In our media businesses, such as the Buffalo News, we sell
advertising. In other businesses, such as See's, we are buyers.
When we buy, we practice exactly what we preach when we sell. At
See's, we more than tripled our expenditures on newspaper
advertising last year, to the highest percentage of sales that I
can remember. The payoff was terrific, and we thank both Hal
Riney and the power of well-directed newspaper advertising for
this result.
See's splendid performances have become routine. But there
is nothing routine about the management of Chuck Huggins: His
daily involvement with all aspects of production and sales
imparts a quality-and-service message to the thousands of
employees we need to produce and distribute over 27 million
pounds of candy annually. In a company with 225 shops and a
massive mail order and phone business, it is no small trick to
run things so that virtually every customer leaves happy. Chuck
makes it look easy.
o The Nebraska Furniture Mart had record sales and excellent
earnings in 1989, but there was one sad note. Mrs. B - Rose
Blumkin, who started the company 52 years ago with $500 - quit in
May, after disagreeing with other members of the Blumkin
family/management about the remodeling and operation of the
carpet department.
Mrs. B probably has made more smart business decisions than
any living American, but in this particular case I believe the
other members of the family were entirely correct: Over the past
three years, while the store's other departments increased sales
by 24%, carpet sales declined by 17% (but not because of any lack
of sales ability by Mrs. B, who has always personally sold far
more merchandise than any other salesperson in the store).
You will be pleased to know that Mrs. B continues to make
Horatio Alger's heroes look like victims of tired blood. At age
96 she has started a new business selling - what else? - carpet
and furniture. And as always, she works seven days a week.
At the Mart Louie, Ron, and Irv Blumkin continue to propel
what is by far the largest and most successful home furnishings
store in the country. They are outstanding merchants, outstanding
managers, and a joy to be associated with. One reading on their
acumen: In the fourth quarter of 1989, the carpet department
registered a 75.3% consumer share in the Omaha market, up from
67.7% a year earlier and over six times that of its nearest
competitor.
NFM and Borsheim's follow precisely the same formula for
success: (1) unparalleled depth and breadth of merchandise at one
location; (2) the lowest operating costs in the business; (3) the
shrewdest of buying, made possible in part by the huge volumes
purchased; (4) gross margins, and therefore prices, far below
competitors'; and (5) friendly personalized service with family
members on hand at all times.
Another plug for newspapers: NFM increased its linage in the
local paper by over 20% in 1989 - off a record 1988 - and remains
the paper's largest ROP advertiser by far. (ROP advertising is
the kind printed in the paper, as opposed to that in preprinted
inserts.) To my knowledge, Omaha is the only city in which a home
furnishings store is the advertising leader. Many retailers cut
space purchases in 1989; our experience at See's and NFM would
indicate they made a major mistake.
o The Buffalo News continued to star in 1989 in three
important ways: First, among major metropolitan papers, both
daily and Sunday, the News is number one in household penetration
- the percentage of local households that purchase it each day.
Second, in "news hole" - the portion of the paper devoted to news
- the paper stood at 50.1% in 1989 vs. 49.5% in 1988, a level
again making it more news-rich than any comparable American
paper. Third, in a year that saw profits slip at many major
papers, the News set its seventh consecutive profit record.
To some extent, these three factors are related, though
obviously a high-percentage news hole, by itself, reduces profits
significantly. A large and intelligently-utilized news hole,
however, attracts a wide spectrum of readers and thereby boosts
penetration. High penetration, in turn, makes a newspaper
particularly valuable to retailers since it allows them to talk
to the entire community through a single "megaphone." A low-
penetration paper is a far less compelling purchase for many
advertisers and will eventually suffer in both ad rates and
profits.
It should be emphasized that our excellent penetration is
neither an accident nor automatic. The population of Erie County,
home territory of the News, has been falling - from 1,113,000 in
1970 to 1,015,000 in 1980 to an estimated 966,000 in 1988.
Circulation figures tell a different story. In 1975, shortly
before we started our Sunday edition, the Courier-Express, a
long-established Buffalo paper, was selling 207,500 Sunday copies
in Erie County. Last year - with population at least 5% lower -
the News sold an average of 292,700 copies. I believe that in no
other major Sunday market has there been anything close to that
increase in penetration.
When this kind of gain is made - and when a paper attains an
unequaled degree of acceptance in its home town - someone is
doing something right. In this case major credit clearly belongs
to Murray Light, our long-time editor who daily creates an
informative, useful, and interesting product. Credit should go
also to the Circulation and Production Departments: A paper that
is frequently late, because of production problems or
distribution weaknesses, will lose customers, no matter how
strong its editorial content.
Stan Lipsey, publisher of the News, has produced profits
fully up to the strength of our product. I believe Stan's
managerial skills deliver at least five extra percentage points
in profit margin compared to the earnings that would be achieved
by an average manager given the same circumstances. That is an
amazing performance, and one that could only be produced by a
talented manager who knows - and cares - about every nut and bolt
of the business.
Stan's knowledge and talents, it should be emphasized,
extend to the editorial product. His early years in the business
were spent on the news side and he played a key role in
developing and editing a series of stories that in 1972 won a
Pulitzer Prize for the Sun Newspaper of Omaha. Stan and I have
worked together for over 20 years, through some bad times as well
as good, and I could not ask for a better partner.
o At Fechheimer, the Heldman clan - Bob, George, Gary,
Roger and Fred - continue their extraordinary performance. Profits
in 1989 were down somewhat because of problems the business
experienced in integrating a major 1988 acquisition. These
problems will be ironed out in time. Meanwhile, return on invested
capital at Fechheimer remains splendid.
Like all of our managers, the Heldmans have an exceptional
command of the details of their business. At last year's annual
meeting I mentioned that when a prisoner enters San Quentin, Bob
and George probably know his shirt size. That's only a slight
exaggeration: No matter what area of the country is being
discussed, they know exactly what is going on with major
customers and with the competition.
Though we purchased Fechheimer four years ago, Charlie and I
have never visited any of its plants or the home office in
Cincinnati. We're much like the lonesome Maytag repairman: The
Heldman managerial product is so good that a service call is
never needed.
o Ralph Schey continues to do a superb job in managing
our largest group - World Book, Kirby, and the Scott Fetzer
Manufacturing Companies. Aggregate earnings of these businesses
have increased every year since our purchase and returns on
invested capital continue to be exceptional. Ralph is running an
enterprise large enough, were it standing alone, to be on the
Fortune 500. And he's running it in a fashion that would put him
high in the top decile, measured by return on equity.
For some years, World Book has operated out of a single
location in Chicago's Merchandise Mart. Anticipating the imminent
expiration of its lease, the business is now decentralizing into
four locations. The expenses of this transition are significant;
nevertheless profits in 1989 held up well. It will be another
year before costs of the move are fully behind us.
Kirby's business was particularly strong last year,
featuring large gains in export sales. International business has
more than doubled in the last two years and quintupled in the
past four; its share of unit sales has risen from 5% to 20%. Our
largest capital expenditures in 1989 were at Kirby, in
preparation for a major model change in 1990.
Ralph's operations contribute about 40% of the total
earnings of the non-insurance group whose results are shown on
page 49. When we bought Scott Fetzer at the start of 1986, our
acquisition of Ralph as a manager was fully as important as our
acquisition of the businesses. In addition to generating
extraordinary earnings, Ralph also manages capital extremely
well. These abilities have produced funds for Berkshire that, in
turn, have allowed us to make many other profitable commitments.
And that completes our answer to the 1927 Yankees.
Insurance Operations
Shown below is an updated version of our usual table
presenting key figures for the property-casualty 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 6.5
1983 5.0 112.0 6.8 3.8
1984 8.5 118.0 16.9 3.8
1985 22.1 116.3 16.1 3.0
1986 22.2 108.0 13.5 2.6
1987 9.4 104.6 7.8 3.1
1988 4.4 105.4 5.5 3.3
1989 (Est.) 2.1 110.4 8.7 4.2
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 policyholders' funds ("the float") is taken
into account, a combined ratio in the 107-111 range typically
produces an overall breakeven 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. (Actually,
over the last 25 years, incurred losses have grown at a still
faster rate, 11%.) 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.
Last year we said the climb in the combined ratio was
"almost certain to continue - and probably will accelerate - for
at least two more years." This year we will not predict
acceleration, but otherwise must repeat last year's forecast.
Premium growth is running far below the 10% required annually.
Remember also that a 10% rate would only stabilize the combined
ratio, not bring it down.
The increase in the combined ratio in 1989 was a little more
than we had expected because catastrophes (led by Hurricane Hugo)
were unusually severe. These abnormalities probably accounted for
about two points of the increase. If 1990 is more of a "normal"
year, the combined ratio should rise only minimally from the
catastrophe-swollen base of 1989. In 1991, though, the ratio is
apt to climb by a greater degree.
Commentators frequently discuss the "underwriting cycle" and
speculate about its next turn. If that term is used to connote
rhythmic qualities, it is in our view a misnomer that leads to
faulty thinking about the industry's fundamental economics.
The term was appropriate some decades ago when the industry
and regulators cooperated to conduct the business in cartel
fashion. At that time, the combined ratio fluctuated
rhythmically for two reasons, both related to lags. First, data
from the past were analyzed and then used to set new "corrected"
rates, which were subsequently put into effect by virtually all
insurers. Second, the fact that almost all policies were then
issued for a one-to three-year term - which meant that it took a
considerable time for mispriced policies to expire - delayed the
impact of new rates on revenues. These two lagged responses made
combined ratios behave much like alternating current. Meanwhile,
the absence of significant price competition guaranteed that
industry profits, averaged out over the cycle, would be
satisfactory.
The cartel period is long gone. Now the industry has
hundreds of participants selling a commodity-like product at
independently-established prices. Such a configuration - whether
the product being sold is steel or insurance policies - is
certain to cause subnormal profitability in all circumstances but
one: a shortage of usable capacity. Just how often these periods
occur and how long they last determines the average profitability
of the industry in question.
In most industries, capacity is described in physical terms.
In the insurance world, however, capacity is customarily
described in financial terms; that is, it's considered
appropriate for a company to write no more than X dollars of
business if it has Y dollars of net worth. In practice, however,
constraints of this sort have proven ineffective. Regulators,
insurance brokers, and customers are all slow to discipline
companies that strain their resources. They also acquiesce when
companies grossly overstate their true capital. Hence, a company
can write a great deal of business with very little capital if it
is so inclined. At bottom, therefore, the amount of industry
capacity at any particular moment primarily depends on the mental
state of insurance managers.
All this understood, it is not very difficult to
prognosticate the industry's profits. Good profits will be
realized only when there is a shortage of capacity. Shortages
will occur only when insurers are frightened. That happens rarely
- and most assuredly is not happening now.
Some analysts have argued that the more onerous taxes
recently imposed on the insurance industry and 1989's
catastrophes - Hurricane Hugo and the California earthquake -
will cause prices to strengthen significantly. We disagree. These
adversities have not destroyed the eagerness of insurers to write
business at present prices. Therefore, premium volume won't grow
by 10% in 1990, which means the negative underwriting trend will
not reverse.
The industry will meantime say it needs higher prices to
achieve profitability matching that of the average American
business. Of course it does. So does the steel business. But
needs and desires have nothing to do with the long-term
profitability of industries. Instead, economic fundamentals
determine the outcome. Insurance profitability will improve only
when virtually all insurers are turning away business despite
higher prices. And we're a long way from that point.
Berkshire's premium volume may drop to $150 million or so in
1990 (from a high of $1 billion in 1986), partly because our
traditional business continues to shrink and partly because the
contract under which we received 7% of the business of Fireman's
Fund expired last August. Whatever the size of the drop, it will
not disturb us. We have no interest in writing insurance that
carries a mathematical expectation of loss; we experience enough
disappointments doing transactions we believe to carry an
expectation of profit.
However, our appetite for appropriately-priced business is
ample, as one tale from 1989 will tell. It concerns "CAT covers,"
which are reinsurance contracts that primary insurance companies
(and also reinsurers themselves) buy to protect themselves
against a single catastrophe, such as a tornado or hurricane,
that produces losses from a large number of policies. In these
contracts, the primary insurer might retain the loss from a
single event up to a maximum of, say, $10 million, buying various
layers of reinsurance above that level. When losses exceed the
retained amount, the reinsurer typically pays 95% of the excess
up to its contractual limit, with the primary insurer paying the
remainder. (By requiring the primary insurer to keep 5% of each
layer, the reinsurer leaves him with a financial stake in each
loss settlement and guards against his throwing away the
reinsurer's money.)
CAT covers are usually one-year policies that also provide
for one automatic reinstatement, which requires a primary insurer
whose coverage has been exhausted by a catastrophe to buy a
second cover for the balance of the year in question by paying
another premium. This provision protects the primary company from
being "bare" for even a brief period after a first catastrophic
event. The duration of "an event" is usually limited by contract
to any span of 72 hours designated by the primary company. Under
this definition, a wide-spread storm, causing damage for three
days, will be classified as a single event if it arises from a
single climatic cause. If the storm lasts four days, however, the
primary company will file a claim carving out the 72 consecutive
hours during which it suffered the greatest damage. Losses that
occurred outside that period will be treated as arising from a
separate event.
In 1989, two unusual things happened. First, Hurricane Hugo
generated $4 billion or more of insured loss, at a pace, however,
that caused the vast damage in the Carolinas to occur slightly
more than 72 hours after the equally severe damage in the
Caribbean. Second, the California earthquake hit within weeks,
causing insured damage that was difficult to estimate, even well
after the event. Slammed by these two - or possibly three - major
catastrophes, some primary insurers, and also many reinsurers
that had themselves bought CAT protection, either used up their
automatic second cover or became uncertain as to whether they had
done so.
At that point sellers of CAT policies had lost a huge amount
of money - perhaps twice because of the reinstatements - and not
taken in much in premiums. Depending upon many variables, a CAT
premium might generally have run 3% to 15% of the amount of
protection purchased. For some years, we've thought premiums of
that kind inadequate and have stayed away from the business.
But because the 1989 disasters left many insurers either
actually or possibly bare, and also left most CAT writers licking
their wounds, there was an immediate shortage after the
earthquake of much-needed catastrophe coverage. Prices instantly
became attractive, particularly for the reinsurance that CAT
writers themselves buy. Just as instantly, Berkshire Hathaway
offered to write up to $250 million of catastrophe coverage,
advertising that proposition in trade publications. Though we did
not write all the business we sought, we did in a busy ten days
book a substantial amount.
Our willingness to put such a huge sum on the line for a
loss that could occur tomorrow sets us apart from any reinsurer
in the world. There are, of course, companies that sometimes
write $250 million or even far more of catastrophe coverage. But
they do so only when they can, in turn, reinsure a large
percentage of the business with other companies. When they can't
"lay off" in size, they disappear from the market.
Berkshire's policy, conversely, is to retain the business we
write rather than lay it off. When rates carry an expectation of
profit, we want to assume as much risk as is prudent. And in our
case, that's a lot.
We will accept more reinsurance risk for our own account
than any other company because of two factors: (1) by the
standards of regulatory accounting, we have a net worth in our
insurance companies of about $6 billion - the second highest
amount in the United States; and (2) we simply don't care what
earnings we report quarterly, or even annually, just as long as
the decisions leading to those earnings (or losses) were reached
intelligently.
Obviously, if we write $250 million of catastrophe coverage
and retain it all ourselves, there is some probability that we
will lose the full $250 million in a single quarter. That
probability is low, but it is not zero. If we had a loss of that
magnitude, our after-tax cost would be about $165 million. Though
that is far more than Berkshire normally earns in a quarter, the
damage would be a blow only to our pride, not to our well-being.
This posture is one few insurance managements will assume.
Typically, they are willing to write scads of business on terms
that almost guarantee them mediocre returns on equity. But they
do not want to expose themselves to an embarrassing single-
quarter loss, even if the managerial strategy that causes the
loss promises, over time, to produce superior results. I can
understand their thinking: What is best for their owners is not
necessarily best for the managers. Fortunately Charlie and I have
both total job security and financial interests that are
identical with those of our shareholders. We are willing to look
foolish as long as we don't feel we have acted foolishly.
Our method of operation, incidentally, makes us a
stabilizing force in the industry. We add huge capacity when
capacity is short and we become less competitive only when
capacity is abundant. Of course, we don't follow this policy in
the interest of stabilization - we follow it because we believe
it to be the most sensible and profitable course of action.
Nevertheless, our behavior steadies the market. In this case,
Adam Smith's invisible hand works as advertised.
Currently, we hold an exceptional amount of float compared
to premium volume. This circumstance should produce quite
favorable insurance results for us during the next few years as
it did in 1989. Our underwriting losses should be tolerable and
our investment income from policyholder funds large. This
pleasant situation, however, will gradually deteriorate as our
float runs off.
At some point, however, there will be an opportunity for us
to write large amounts of profitable business. Mike Goldberg and
his management team of Rod Eldred, Dinos Iordanou, Ajit Jain,
Phil Urban, and Don Wurster continue to position us well for this
eventuality.
Marketable Securities
In selecting marketable securities for our insurance
companies, we generally 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
of over $100 million. A small portion of these investments belongs
to subsidiaries of which Berkshire owns less than 100%.
12/31/89
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ................ $ 517,500 $1,692,375
23,350,000 The Coca-Cola Co. ....................... 1,023,920 1,803,787
2,400,000 Federal Home Loan Mortgage Corp. ........ 71,729 161,100
6,850,000 GEICO Corp. ............................. 45,713 1,044,625
1,727,765 The Washington Post Company ............. 9,731 486,366
This list of companies is the same as last year's and in
only one case has the number of shares changed: Our holdings of
Coca-Cola increased from 14,172,500 shares at the end of 1988 to
23,350,000.
This Coca-Cola investment provides yet another example of
the incredible speed with which your Chairman responds to
investment opportunities, no matter how obscure or well-disguised
they may be. I believe I had my first Coca-Cola in either 1935 or
1936. Of a certainty, it was in 1936 that I started buying Cokes
at the rate of six for 25 cents from Buffett & Son, the family
grocery store, to sell around the neighborhood for 5 cents each.
In this excursion into high-margin retailing, I duly observed
the extraordinary consumer attractiveness and commercial
possibilities of the product.
I continued to note these qualities for the next 52 years as
Coke blanketed the world. During this period, however, I
carefully avoided buying even a single share, instead allocating
major portions of my net worth to street railway companies,
windmill manufacturers, anthracite producers, textile businesses,
trading-stamp issuers, and the like. (If you think I'm making
this up, I can supply the names.) Only in the summer of 1988 did
my brain finally establish contact with my eyes.
What I then perceived was both clear and fascinating. After
drifting somewhat in the 1970's, Coca-Cola had in 1981 become a
new company with the move of Roberto Goizueta to CEO. Roberto,
along with Don Keough, once my across-the-street neighbor in
Omaha, first rethought and focused the company's policies and
then energetically carried them out. What was already the world's
most ubiquitous product gained new momentum, with sales overseas
virtually exploding.
Through a truly rare blend of marketing and financial
skills, Roberto has maximized both the growth of his product and
the rewards that this growth brings to shareholders. Normally,
the CEO of a consumer products company, drawing on his natural
inclinations or experience, will cause either marketing or
finance to dominate the business at the expense of the other
discipline. With Roberto, the mesh of marketing and finance is
perfect and the result is a shareholder's dream.
Of course, we should have started buying Coke much earlier,
soon after Roberto and Don began running things. In fact, if I
had been thinking straight I would have persuaded my grandfather
to sell the grocery store back in 1936 and put all of the
proceeds into Coca-Cola stock. I've learned my lesson: My
response time to the next glaringly attractive idea will be
slashed to well under 50 years.
As I mentioned earlier, the yearend prices of our major
investees were much higher relative to their intrinsic values
than theretofore. While those prices may not yet cause
nosebleeds, they are clearly vulnerable to a general market
decline. A drop in their prices would not disturb us at all - it
might in fact work to our eventual benefit - but it would cause
at least a one-year reduction in Berkshire's net worth. We think
such a reduction is almost certain in at least one of the next
three years. Indeed, it would take only about a 10% year-to-year
decline in the aggregate value of our portfolio investments to
send Berkshire's net worth down.
We continue to be blessed with extraordinary managers at our
portfolio companies. They are high-grade, talented, and
shareholder-oriented. The exceptional results we have achieved
while investing with them accurately reflect their exceptional
personal qualities.
o We told you last year that we expected to do little in
arbitrage during 1989, and that's the way it turned out.
Arbitrage positions are a substitute for short-term cash
equivalents, and during part of the year we held relatively low
levels of cash. In the rest of the year we had a fairly good-
sized cash position and even so chose not to engage in arbitrage.
The main reason was corporate transactions that made no economic
sense to us; arbitraging such deals comes too close to playing
the greater-fool game. (As Wall Streeter Ray DeVoe says: "Fools
rush in where angels fear to trade.") We will engage in arbitrage
from time to time - sometimes on a large scale - but only when we
like the odds.
o Leaving aside the three convertible preferreds discussed in
the next section, we substantially reduced our holdings in both
medium- and long-term fixed-income securities. In the long-terms,
just about our only holdings have been Washington Public Power
Supply Systems (WPPSS) bonds carrying coupons ranging from low to
high. During the year we sold a number of the low-coupon issues,
which we originally bought at very large discounts. Many of these
issues had approximately doubled in price since we purchased them
and in addition had paid us 15%-17% annually, tax-free. Our
prices upon sale were only slightly cheaper than typical high-
grade tax-exempts then commanded. We have kept all of our high-
coupon WPPSS issues. Some have been called for redemption in 1991
and 1992, and we expect the rest to be called in the early to
mid-1990s.
We also sold many of our medium-term tax-exempt bonds during
the year. When we bought these bonds we said we would be happy to
sell them - regardless of whether they were higher or lower than
at our time of purchase - if something we liked better came
along. Something did - and concurrently we unloaded most of these
issues at modest gains. Overall, our 1989 profit from the sale of
tax-exempt bonds was about $51 million pre-tax.
o The proceeds from our bond sales, along with our excess cash
at the beginning of the year and that generated later through
earnings, went into the purchase of three convertible preferred
stocks. In the first transaction, which took place in July, we
purchased $600 million of The Gillette Co. preferred with an 8
3/4% dividend, a mandatory redemption in ten years, and the right
to convert into common at $50 per share. We next purchased $358
million of USAir Group, Inc. preferred stock with mandatory
redemption in ten years, a dividend of 9 1/4%, and the right to
convert into common at $60 per share. Finally, late in the year
we purchased $300 million of Champion International Corp.
preferred with mandatory redemption in ten years, a 9 1/4%
dividend, and the right to convert into common at $38 per share.
Unlike standard convertible preferred stocks, the issues we
own are either non-salable or non-convertible for considerable
periods of time and there is consequently no way we can gain from
short-term price blips in the common stock. I have gone on the
board of Gillette, but I am not on the board of USAir or
Champion. (I thoroughly enjoy the boards I am on, but can't
handle any more.)
Gillette's business is very much the kind we like. Charlie
and I think we understand the company's economics and therefore
believe we can make a reasonably intelligent guess about its
future. (If you haven't tried Gillette's new Sensor razor, go
right out and get one.) However, we have no ability to forecast
the economics of the investment banking business (in which we
have a position through our 1987 purchase of Salomon convertible
preferred), the airline industry, or the paper industry. This
does not mean that we predict a negative future for these
industries: we're agnostics, not atheists. Our lack of strong
convictions about these businesses, however, means that we must
structure our investments in them differently from what we do
when we invest in a business appearing to have splendid economic
characteristics.
In one major respect, however, these purchases are not
different: We only want to link up with people whom we like,
admire, and trust. John Gutfreund at Salomon, Colman Mockler, Jr.
at Gillette, Ed Colodny at USAir, and Andy Sigler at Champion
meet this test in spades.
They in turn have demonstrated some confidence in us,
insisting in each case that our preferreds have unrestricted
voting rights on a fully-converted basis, an arrangement that is
far from standard in corporate finance. In effect they are
trusting us to be intelligent owners, thinking about tomorrow
instead of today, just as we are trusting them to be intelligent
managers, thinking about tomorrow as well as today.
The preferred-stock structures we have negotiated will
provide a mediocre return for us if industry economics hinder the
performance of our investees, but will produce reasonably
attractive results for us if they can earn a return comparable to
that of American industry in general. We believe that Gillette,
under Colman's management, will far exceed that return and
believe that John, Ed, and Andy will reach it unless industry
conditions are harsh.
Under almost any conditions, we expect these preferreds to
return us our money plus dividends. If that is all we get,
though, the result will be disappointing, because we will have
given up flexibility and consequently will have missed some
significant opportunities that are bound to present themselves
during the decade. Under that scenario, we will have obtained
only a preferred-stock yield during a period when the typical
preferred stock will have held no appeal for us whatsoever. The
only way Berkshire can achieve satisfactory results from its four
preferred issues is to have the common stocks of the investee
companies do well.
Good management and at least tolerable industry conditions
will be needed if that is to happen. But we believe Berkshire's
investment will also help and that the other shareholders of each
investee will profit over the years ahead from our preferred-
stock purchase. The help will come from the fact that each
company now has a major, stable, and interested shareholder whose
Chairman and Vice Chairman have, through Berkshire's investments,
indirectly committed a very large amount of their own money to
these undertakings. In dealing with our investees, Charlie and I
will be supportive, analytical, and objective. We recognize that
we are working with experienced CEOs who are very much in command
of their own businesses but who nevertheless, at certain moments,
appreciate the chance to test their thinking on someone without
ties to their industry or to decisions of the past.
As a group, these convertible preferreds will not produce
the returns we can achieve when we find a business with wonderful
economic prospects that is unappreciated by the market. Nor will
the returns be as attractive as those produced when we make our
favorite form of capital deployment, the acquisition of 80% or
more of a fine business with a fine management. But both
opportunities are rare, particularly in a size befitting our
present and anticipated resources.
In summation, Charlie and I feel that our preferred stock
investments should produce returns moderately above those
achieved by most fixed-income portfolios and that we can play a
minor but enjoyable and constructive role in the investee
companies.
Zero-Coupon Securities
In September, Berkshire issued $902.6 million principal
amount of Zero-Coupon Convertible Subordinated Debentures, which
are now listed on the New York Stock Exchange. Salomon Brothers
handled the underwriting in superb fashion, providing us helpful
advice and a flawless execution.
Most bonds, of course, require regular payments of interest,
usually semi-annually. A zero-coupon bond, conversely, requires
no current interest payments; instead, the investor receives his
yield by purchasing the security at a significant discount from
maturity value. The effective interest rate is determined by the
original issue price, the maturity value, and the amount of time
between issuance and maturity.
In our case, the bonds were issued at 44.314% of maturity
value and are due in 15 years. For investors purchasing the
bonds, that is the mathematical equivalent of a 5.5% current
payment compounded semi-annually. Because we received only
44.31 cents on the dollar, our proceeds from this offering were
$400 million (less about $9.5 million of offering expenses).
The bonds were issued in denominations of $10,000 and each
bond is convertible into .4515 shares of Berkshire Hathaway.
Because a $10,000 bond cost $4,431, this means that the
conversion price was $9,815 per Berkshire share, a 15% premium to
the market price then existing. Berkshire can call the bonds at
any time after September 28, 1992 at their accreted value (the
original issue price plus 5.5% compounded semi-annually) and on
two specified days, September 28 of 1994 and 1999, the
bondholders can require Berkshire to buy the securities at their
accreted value.
For tax purposes, Berkshire is entitled to deduct the 5.5%
interest accrual each year, even though we make no payments to
the bondholders. Thus the net effect to us, resulting from the
reduced taxes, is positive cash flow. That is a very significant
benefit. Some unknowable variables prevent us from calculating
our exact effective rate of interest, but under all circumstances
it will be well below 5.5%. There is meanwhile a symmetry to the
tax law: Any taxable holder of the bonds must pay tax each year
on the 5.5% interest, even though he receives no cash.
Neither our bonds nor those of certain other companies that
issued similar bonds last year (notably Loews and Motorola)
resemble the great bulk of zero-coupon bonds that have been
issued in recent years. Of these, Charlie and I have been, and
will continue to be, outspoken critics. As I will later explain,
such bonds have often been used in the most deceptive of ways and
with deadly consequences to investors. But before we tackle that
subject, let's travel back to Eden, to a time when the apple had
not yet been bitten.
If you're my age you bought your first zero-coupon bonds
during World War II, by purchasing the famous Series E U. S.
Savings Bond, the most widely-sold bond issue in history. (After
the war, these bonds were held by one out of two U. S.
households.) Nobody, of course, called the Series E a zero-coupon
bond, a term in fact that I doubt had been invented. But that's
precisely what the Series E was.
These bonds came in denominations as small as $18.75. That
amount purchased a $25 obligation of the United States government
due in 10 years, terms that gave the buyer a compounded annual
return of 2.9%. At the time, this was an attractive offer: the
2.9% rate was higher than that generally available on Government
bonds and the holder faced no market-fluctuation risk, since he
could at any time cash in his bonds with only a minor reduction
in interest.
A second form of zero-coupon U. S. Treasury issue, also
benign and useful, surfaced in the last decade. One problem with
a normal bond is that even though it pays a given interest rate -
say 10% - the holder cannot be assured that a compounded 10%
return will be realized. For that rate to materialize, each semi-
annual coupon must be reinvested at 10% as it is received. If
current interest rates are, say, only 6% or 7% when these coupons
come due, the holder will be unable to compound his money over
the life of the bond at the advertised rate. For pension funds or
other investors with long-term liabilities, "reinvestment risk"
of this type can be a serious problem. Savings Bonds might have
solved it, except that they are issued only to individuals and
are unavailable in large denominations. What big buyers needed
was huge quantities of "Savings Bond Equivalents."
Enter some ingenious and, in this case, highly useful
investment bankers (led, I'm happy to say, by Salomon Brothers).
They created the instrument desired by "stripping" the semi-
annual coupons from standard Government issues. Each coupon, once
detached, takes on the essential character of a Savings Bond
since it represents a single sum due sometime in the future. For
example, if you strip the 40 semi-annual coupons from a U. S.
Government Bond due in the year 2010, you will have 40 zero-
coupon bonds, with maturities from six months to 20 years, each
of which can then be bundled with other coupons of like maturity
and marketed. If current interest rates are, say, 10% for all
maturities, the six-month issue will sell for 95.24% of maturity
value and the 20-year issue will sell for 14.20%. The purchaser
of any given maturity is thus guaranteed a compounded rate of 10%
for his entire holding period. Stripping of government bonds has
occurred on a large scale in recent years, as long-term
investors, ranging from pension funds to individual IRA accounts,
recognized these high-grade, zero-coupon issues to be well suited
to their needs.
But as happens in Wall Street all too often, what the wise
do in the beginning, fools do in the end. In the last few years
zero-coupon bonds (and their functional equivalent, pay-in-kind
bonds, which distribute additional PIK bonds semi-annually as
interest instead of paying cash) have been issued in enormous
quantities by ever-junkier credits. To these issuers, zero (or
PIK) bonds offer one overwhelming advantage: It is impossible to
default on a promise to pay nothing. Indeed, if LDC governments
had issued no debt in the 1970's other than long-term zero-coupon
obligations, they would now have a spotless record as debtors.
This principle at work - that you need not default for a
long time if you solemnly promise to pay nothing for a long time
- has not been lost on promoters and investment bankers seeking
to finance ever-shakier deals. But its acceptance by lenders took
a while: When the leveraged buy-out craze began some years back,
purchasers could borrow only on a reasonably sound basis, in
which conservatively-estimated free cash flow - that is,
operating earnings plus depreciation and amortization less
normalized capital expenditures - was adequate to cover both
interest and modest reductions in debt.
Later, as the adrenalin of deal-makers surged, businesses
began to be purchased at prices so high that all free cash flow
necessarily had to be allocated to the payment of interest. That
left nothing for the paydown of debt. In effect, a Scarlett
O'Hara "I'll think about it tomorrow" position in respect to
principal payments was taken by borrowers and accepted by a new
breed of lender, the buyer of original-issue junk bonds. Debt now
became something to be refinanced rather than repaid. The change
brings to mind a New Yorker cartoon in which the grateful
borrower rises to shake the hand of the bank's lending officer
and gushes: "I don't know how I'll ever repay you."
Soon borrowers found even the new, lax standards intolerably
binding. To induce lenders to finance even sillier transactions,
they introduced an abomination, EBDIT - Earnings Before
Depreciation, Interest and Taxes - as the test of a company's
ability to pay interest. Using this sawed-off yardstick, the
borrower ignored depreciation as an expense on the theory that it
did not require a current cash outlay.
Such an attitude is clearly delusional. At 95% of American
businesses, capital expenditures that over time roughly
approximate depreciation are a necessity and are every bit as
real an expense as labor or utility costs. Even a high school
dropout knows that to finance a car he must have income that
covers not only interest and operating expenses, but also
realistically-calculated depreciation. He would be laughed out of
the bank if he started talking about EBDIT.
Capital outlays at a business can be skipped, of course, in
any given month, just as a human can skip a day or even a week of
eating. But if the skipping becomes routine and is not made up,
the body weakens and eventually dies. Furthermore, a start-and-
stop feeding policy will over time produce a less healthy
organism, human or corporate, than that produced by a steady
diet. As businessmen, Charlie and I relish having competitors who
are unable to fund capital expenditures.
You might think that waving away a major expense such as
depreciation in an attempt to make a terrible deal look like a
good one hits the limits of Wall Street's ingenuity. If so, you
haven't been paying attention during the past few years.
Promoters needed to find a way to justify even pricier
acquisitions. Otherwise, they risked - heaven forbid! - losing
deals to other promoters with more "imagination."
So, stepping through the Looking Glass, promoters and their
investment bankers proclaimed that EBDIT should now be measured
against cash interest only, which meant that interest accruing on
zero-coupon or PIK bonds could be ignored when the financial
feasibility of a transaction was being assessed. This approach
not only relegated depreciation expense to the let's-ignore-it
corner, but gave similar treatment to what was usually a
significant portion of interest expense. To their shame, many
professional investment managers went along with this nonsense,
though they usually were careful to do so only with clients'
money, not their own. (Calling these managers "professionals" is
actually too kind; they should be designated "promotees.")
Under this new standard, a business earning, say, $100
million pre-tax and having debt on which $90 million of interest
must be paid currently, might use a zero-coupon or PIK issue to
incur another $60 million of annual interest that would accrue
and compound but not come due for some years. The rate on these
issues would typically be very high, which means that the
situation in year 2 might be $90 million cash interest plus $69
million accrued interest, and so on as the compounding proceeds.
Such high-rate reborrowing schemes, which a few years ago were
appropriately confined to the waterfront, soon became models of
modern finance at virtually all major investment banking houses.
When they make these offerings, investment bankers display
their humorous side: They dispense income and balance sheet
projections extending five or more years into the future for
companies they barely had heard of a few months earlier. If you
are shown such schedules, I suggest that you join in the fun:
Ask the investment banker for the one-year budgets that his own
firm prepared as the last few years began and then compare these
with what actually happened.
Some time ago Ken Galbraith, in his witty and insightful
The Great Crash, coined a new economic term: "the bezzle,"
defined as the current amount of undiscovered embezzlement. This
financial creature has a magical quality: The embezzlers are richer
by the amount of the bezzle, while the embezzlees do not yet feel
poorer.
Professor Galbraith astutely pointed out that this sum
should be added to the National Wealth so that we might know the
Psychic National Wealth. Logically, a society that wanted to feel
enormously prosperous would both encourage its citizens to
embezzle and try not to detect the crime. By this means, "wealth"
would balloon though not an erg of productive work had been done.
The satirical nonsense of the bezzle is dwarfed by the real-
world nonsense of the zero-coupon bond. With zeros, one party to
a contract can experience "income" without his opposite
experiencing the pain of expenditure. In our illustration, a
company capable of earning only $100 million dollars annually -
and therefore capable of paying only that much in interest -
magically creates "earnings" for bondholders of $150 million. As
long as major investors willingly don their Peter Pan wings and
repeatedly say "I believe," there is no limit to how much
"income" can be created by the zero-coupon bond.
Wall Street welcomed this invention with the enthusiasm
less-enlightened folk might reserve for the wheel or the plow.
Here, finally, was an instrument that would let the Street make
deals at prices no longer limited by actual earning power. The
result, obviously, would be more transactions: Silly prices will
always attract sellers. And, as Jesse Unruh might have put it,
transactions are the mother's milk of finance.
The zero-coupon or PIK bond possesses one additional
attraction for the promoter and investment banker, which is that
the time elapsing between folly and failure can be stretched out.
This is no small benefit. If the period before all costs must be
faced is long, promoters can create a string of foolish deals -
and take in lots of fees - before any chickens come home to roost
from their earlier ventures.
But in the end, alchemy, whether it is metallurgical or
financial, fails. A base business can not be transformed into a
golden business by tricks of accounting or capital structure. The
man claiming to be a financial alchemist may become rich. But
gullible investors rather than business achievements will usually
be the source of his wealth.
Whatever their weaknesses, we should add, many zero-coupon
and PIK bonds will not default. We have in fact owned some and
may buy more if their market becomes sufficiently distressed.
(We've not, however, even considered buying a new issue from a
weak credit.) No financial instrument is evil per se; it's just
that some variations have far more potential for mischief than
others.
The blue ribbon for mischief-making should go to the zero-
coupon issuer unable to make its interest payments on a current
basis. Our advice: Whenever an investment banker starts talking
about EBDIT - or whenever someone creates a capital structure
that does not allow all interest, both payable and accrued, to be
comfortably met out of current cash flow net of ample capital
expenditures - zip up your wallet. Turn the tables by suggesting
that the promoter and his high-priced entourage accept zero-
coupon fees, deferring their take until the zero-coupon bonds
have been paid in full. See then how much enthusiasm for the deal
endures.
Our comments about investment bankers may seem harsh. But
Charlie and I - in our hopelessly old-fashioned way - believe
that they should perform a gatekeeping role, guarding investors
against the promoter's propensity to indulge in excess.
Promoters, after all, have throughout time exercised the same
judgment and restraint in accepting money that alcoholics have
exercised in accepting liquor. At a minimum, therefore, the
banker's conduct should rise to that of a responsible bartender
who, when necessary, refuses the profit from the next drink to
avoid sending a drunk out on the highway. In recent years,
unfortunately, many leading investment firms have found bartender
morality to be an intolerably restrictive standard. Lately, those
who have traveled the high road in Wall Street have not
encountered heavy traffic.
One distressing footnote: The cost of the zero-coupon folly
will not be borne solely by the direct participants. Certain
savings and loan associations were heavy buyers of such bonds,
using cash that came from FSLIC-insured deposits. Straining to
show splendid earnings, these buyers recorded - but did not
receive - ultra-high interest income on these issues. Many of
these associations are now in major trouble. Had their loans to
shaky credits worked, the owners of the associations would have
pocketed the profits. In the many cases in which the loans will
fail, the taxpayer will pick up the bill. To paraphrase Jackie
Mason, at these associations it was the managers who should have
been wearing the ski masks.
Mistakes of the First Twenty-five Years (A Condensed Version)
To quote Robert Benchley, "Having a dog teaches a boy
fidelity, perseverance, and to turn around three times before
lying down." Such are the shortcomings of experience.
Nevertheless, it's a good idea to review past mistakes before
committing new ones. So let's take a quick look at the last 25
years.
o My first mistake, of course, was in buying control of
Berkshire. Though I knew its business - textile manufacturing -
to be unpromising, I was enticed to buy because the price looked
cheap. Stock purchases of that kind had proved reasonably
rewarding in my early years, though by the time Berkshire came
along in 1965 I was becoming aware that the strategy was not
ideal.
If you buy a stock at a sufficiently low price, there will
usually be some hiccup in the fortunes of the business that gives
you a chance to unload at a decent profit, even though the long-
term performance of the business may be terrible. I call this the
"cigar butt" approach to investing. A cigar butt found on the
street that has only one puff left in it may not offer much of a
smoke, but the "bargain purchase" will make that puff all profit.
Unless you are a liquidator, that kind of approach to buying
businesses is foolish. First, the original "bargain" price
probably will not turn out to be such a steal after all. In a
difficult business, no sooner is one problem solved than another
surfaces - never is there just one cockroach in the kitchen.
Second, any initial advantage you secure will be quickly eroded
by the low return that the business earns. For example, if you
buy a business for $8 million that can be sold or liquidated for
$10 million and promptly take either course, you can realize a
high return. But the investment will disappoint if the business
is sold for $10 million in ten years and in the interim has
annually earned and distributed only a few percent on cost. Time
is the friend of the wonderful business, the enemy of the
mediocre.
You might think this principle is obvious, but I had to
learn it the hard way - in fact, I had to learn it several times
over. Shortly after purchasing Berkshire, I acquired a Baltimore
department store, Hochschild Kohn, buying through a company
called Diversified Retailing that later merged with Berkshire. I
bought at a substantial discount from book value, the people were
first-class, and the deal included some extras - unrecorded real
estate values and a significant LIFO inventory cushion. How could
I miss? So-o-o - three years later I was lucky to sell the
business for about what I had paid. After ending our corporate
marriage to Hochschild Kohn, I had memories like those of the
husband in the country song, "My Wife Ran Away With My Best
Friend and I Still Miss Him a Lot."
I could give you other personal examples of "bargain-
purchase" folly but I'm sure you get the picture: It's far
better to buy a wonderful company at a fair price than a fair
company at a wonderful price. Charlie understood this early; I
was a slow learner. But now, when buying companies or common
stocks, we look for first-class businesses accompanied by first-
class managements.
o That leads right into a related lesson: Good jockeys will
do well on good horses, but not on broken-down nags. Both
Berkshire's textile business and Hochschild, Kohn had able and
honest people running them. The same managers employed in a
business with good economic characteristics would have achieved
fine records. But they were never going to make any progress
while running in quicksand.
I've said many times that when a management with a
reputation for brilliance tackles a business with a reputation
for bad economics, it is the reputation of the business that
remains intact. I just wish I hadn't been so energetic in
creating examples. My behavior has matched that admitted by Mae
West: "I was Snow White, but I drifted."
o A further related lesson: Easy does it. After 25 years of
buying and supervising a great variety of businesses, Charlie and
I have not learned how to solve difficult business problems. What
we have learned is to avoid them. To the extent we have been
successful, it is because we concentrated on identifying one-foot
hurdles that we could step over rather than because we acquired
any ability to clear seven-footers.
The finding may seem unfair, but in both business and
investments it is usually far more profitable to simply stick
with the easy and obvious than it is to resolve the difficult. On
occasion, tough problems must be tackled as was the case when we
started our Sunday paper in Buffalo. In other instances, a great
investment opportunity occurs when a marvelous business
encounters a one-time huge, but solvable, problem as was the case
many years back at both American Express and GEICO. Overall,
however, we've done better by avoiding dragons than by slaying
them.
o My most surprising discovery: the overwhelming importance in
business of an unseen force that we might call "the institutional
imperative." In business school, I was given no hint of the
imperative's existence and I did not intuitively understand it
when I entered the business world. I thought then that decent,
intelligent, and experienced managers would automatically make
rational business decisions. But I learned over time that isn't
so. Instead, rationality frequently wilts when the institutional
imperative comes into play.
For example: (1) As if governed by Newton's First Law of
Motion, an institution will resist any change in its current
direction; (2) Just as work expands to fill available time,
corporate projects or acquisitions will materialize to soak up
available funds; (3) Any business craving of the leader, however
foolish, will be quickly supported by detailed rate-of-return and
strategic studies prepared by his troops; and (4) The behavior of
peer companies, whether they are expanding, acquiring, setting
executive compensation or whatever, will be mindlessly imitated.
Institutional dynamics, not venality or stupidity, set
businesses on these courses, which are too often misguided. After
making some expensive mistakes because I ignored the power of the
imperative, I have tried to organize and manage Berkshire in ways
that minimize its influence. Furthermore, Charlie and I have
attempted to concentrate our investments in companies that appear
alert to the problem.
o After some other mistakes, I learned to go into business
only with people whom I like, trust, and admire. As I noted
before, this policy of itself will not ensure success: A second-
class textile or department-store company won't prosper simply
because its managers are men that you would be pleased to see
your daughter marry. However, an owner - or investor - can
accomplish wonders if he manages to associate himself with such
people in businesses that possess decent economic
characteristics. Conversely, we do not wish to join with managers
who lack admirable qualities, no matter how attractive the
prospects of their business. We've never succeeded in making a
good deal with a bad person.
o Some of my worst mistakes were not publicly visible. These
were stock and business purchases whose virtues I understood and
yet didn't make. It's no sin to miss a great opportunity outside
one's area of competence. But I have passed on a couple of really
big purchases that were served up to me on a platter and that I
was fully capable of understanding. For Berkshire's shareholders,
myself included, the cost of this thumb-sucking has been huge.
o Our consistently-conservative financial policies may appear
to have been a mistake, but in my view were not. In retrospect,
it is clear that significantly higher, though still conventional,
leverage ratios at Berkshire would have produced considerably
better returns on equity than the 23.8% we have actually
averaged. Even in 1965, perhaps we could have judged there to be
a 99% probability that higher leverage would lead to nothing but
good. Correspondingly, we might have seen only a 1% chance that
some shock factor, external or internal, would cause a
conventional debt ratio to produce a result falling somewhere
between temporary anguish and default.
We wouldn't have liked those 99:1 odds - and never will. A
small chance of distress or disgrace cannot, in our view, be
offset by a large chance of extra returns. If your actions are
sensible, you are certain to get good results; in most such
cases, leverage just moves things along faster. Charlie and I
have never been in a big hurry: We enjoy the process far more
than the proceeds - though we have learned to live with those
also.
* * * * * * * * * * * *
We hope in another 25 years to report on the mistakes of the
first 50. If we are around in 2015 to do that, you can count on
this section occupying many more pages than it does here.
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. At the same time, these managers 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 such objectives. We 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 a 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 Capital Cities, Salomon, Gillette,
USAir and Champion. Last year we said we had a special interest
in large purchases of convertible preferreds. We still have an
appetite of that kind, but it is limited since we now are close
to the maximum position we feel appropriate for this category of
investment.
* * * * * * * * * * * *
Two years ago, I told you about Harry Bottle, who in 1962
quickly cured a major business mess at the first industrial
company I controlled, Dempster Mill Manufacturing (one of my
"bargain" purchases) and who 24 years later had reappeared to
again rescue me, this time from problems at K&W Products, a small
Berkshire subsidiary that produces automotive compounds. As I
reported, in short order Harry reduced capital employed at K&W,
rationalized production, cut costs, and quadrupled profits. You
might think he would then have paused for breath. But last year
Harry, now 70, attended a bankruptcy auction and, for a pittance,
acquired a product line that is a natural for K&W. That company's
profitability may well be increased 50% by this coup. Watch this
space for future bulletins on Harry's triumphs.
* * * * * * * * * * * *
With more than a year behind him of trading Berkshire's
stock on the New York Stock Exchange, our specialist, Jim Maguire
of Henderson Brothers, Inc. ("HBI"), continues his outstanding
performance. Before we listed, dealer spreads often were 3% or
more of market price. Jim has maintained the spread at 50 points
or less, which at current prices is well under 1%. Shareholders
who buy or sell benefit significantly from this reduction in
transaction costs.
Because we are delighted by our experience with Jim, HBI and
the NYSE, I said as much in ads that have been run in a series
placed by the NYSE. Normally I shun testimonials, but I was
pleased in this instance to publicly compliment the Exchange.
* * * * * * * * * * * *
Last summer we sold the corporate jet that we purchased for
$850,000 three years ago and bought another used jet for $6.7
million. Those of you who recall the mathematics of the
multiplying bacteria on page 5 will understandably panic: If our
net worth continues to increase at current rates, and the cost of
replacing planes also continues to rise at the now-established
rate of 100% compounded annually, it will not be long before
Berkshire's entire net worth is consumed by its jet.
Charlie doesn't like it when I equate the jet with bacteria;
he feels it's degrading to the bacteria. His idea of traveling in
style is an air-conditioned bus, a luxury he steps up to only
when bargain fares are in effect. My own attitude toward the jet
can be summarized by the prayer attributed, apocryphally I'm
sure, to St. Augustine as he contemplated leaving a life of
secular pleasures to become a priest. Battling the conflict
between intellect and glands, he pled: "Help me, Oh Lord, to
become chaste - but not yet."
Naming the plane has not been easy. I initially suggested
"The Charles T. Munger." Charlie countered with "The Aberration."
We finally settled on "The Indefensible."
* * * * * * * * * * * *
About 96.9% of all eligible shares participated in
Berkshire's 1989 shareholder-designated contributions program.
Contributions made through the program were $5.9 million, and
2,550 charities were recipients.
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 52-53. 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
August 31, 1990 will be ineligible for the 1990 program.
* * * * * * * * * * * *
The annual meeting this year will take place at 9:30 a.m. on
Monday, April 30, 1990. Attendance grew last year to about 1,000,
very close to the seating capacity of the Witherspoon Hall at
Joslyn Museum. So this year's meeting will be moved to the
Orpheum Theatre, which is in downtown Omaha, about one-quarter of
a mile from the Red Lion Hotel. The Radisson-Redick Tower, a much
smaller but nice hotel, is located across the street from the
Orpheum. Or you may wish to stay at the Marriott, which is in
west Omaha, about 100 yards from Borsheim's. We will have buses
at the Marriott that will leave at 8:30 and 8:45 for the meeting
and return after it ends.
Charlie and I always enjoy the meeting, and we hope you can
make it. The quality of our shareholders is reflected in the
quality of the questions we get: We have never attended an annual
meeting anywhere that features such a consistently high level of
intelligent, owner-related questions.
An attachment to our proxy material explains how you can
obtain the card you will need for admission to the meeting.
Because weekday parking can be tight around the Orpheum, we have
lined up a number of nearby lots for our shareholders to use. The
attachment also contains information about them.
As usual, we will have buses to take you to Nebraska
Furniture Mart and Borsheim's after the meeting and to take you
to downtown hotels or to the airport later. I hope that you will
allow plenty of time to fully explore the attractions of both
stores. Those of you arriving early can visit the Furniture Mart
any day of the week; it is open from 10 a.m. to 5:30 p.m. on
Saturdays, and from noon to 5:30 p.m. on Sundays.
Borsheim's normally is closed on Sunday, but we will open
for shareholders and their guests from noon to 6 p.m. on Sunday,
April 29th. Ike likes to put on a show, and you can rely on him
to produce something very special for our shareholders.
In this letter we've had a lot to say about rates of
compounding. If you can bear having your own rate turn negative
for a day - not a pretty thought, I admit - visit Ike on the
29th.
Warren E. Buffett
March 2, 1990 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：
1989年我们的净值增加了15.15亿美元，增幅44.4%。过去25年（即现任管理层接手以来），每股账面价值从19.46美元增长到4,296.01美元，年复合增长率23.8%。
然而，真正重要的是内在价值——这个数字大致反映了我们旗下所有企业按合理标准值多少钱。若能预知未来，你可以把一家企业未来所有的现金流入和流出，按当前利率折现，就能算出这个数字。按这种估值方法，所有企业——从马鞭制造商到手机运营商——都变成了经济上的等价物。
当年伯克希尔的账面价值是19.46美元时，内在价值比这要低一些，因为那点账面价值全绑在一家纺织企业里，而这家企业的实际价值并不及账面记载的数额。如今，我们旗下多数企业的价值都远超账面价值。这种从折价到溢价的喜人转变，意味着伯克希尔内在商业价值的复合增长率，要略高于我们账面价值23.8%的年增长率。
后视镜是一回事；挡风玻璃是另一回事。我们账面价值中很大一块由权益证券构成，除少数例外，这些证券在资产负债表上按当前市价入账。年底时，这些证券的市价相对于它们自身的内在商业价值，比过去任何时期都要高。原因之一是1989年股市高涨。更重要的原因是，这些企业的优点已被广泛认可。过去它们的股价低得不合理，现在则不然。
无论主要持股的定价相对于内在价值是高是低，我们大部分都会继续持有。这种“至死不分离”的态度，加上这些持股如今所拥有的充分定价，意味着它们未来不太可能像过去那样大幅推高伯克希尔的价值。换句话说，我们迄今的业绩受益于“双料收益”：(1) 我们投资组合中企业实现的非凡内在价值增长；(2) 市场对这些公司的股价进行了恰当的“纠偏”，使其估值相对于一般企业有所提升，我们从而获得了额外红利。我们相信投资组合中的企业将继续实现良好的价值增长，我们也会从中受益。但“追赶性”红利已经兑现，这意味着今后我们只能仰仗“单次收益”了。
我们还面临另一个障碍：在一个有限的世界里，高增长率注定会自我终结。如果增长的基础很小，这个规律可能在一段时间内不会发挥作用。但当基础像气球一样膨胀时，派对就结束了：高增长率最终会为自己套上锚。
卡尔·萨根曾生动地描述过这种现象，他设想一种每15分钟分裂一次繁殖的细菌的命运。萨根说：“这意味着每小时分裂四次，一天96次。虽然一个细菌仅重约一万亿分之一克，但经过一天狂野的无性繁殖后，它的后代总重将堪比一座山……两天后，比太阳还重——没过多久，宇宙中的一切将全是细菌。”萨根说，不用慌：总有某种障碍会阻止这种指数增长。“要么细菌吃光了食物，要么它们互相毒死对方，要么它们不好意思在公共场合繁殖。”
即使在不顺心的日子里，Charlie Munger（Berkshire（伯克希尔·哈撒韦）的副董事长兼我的合伙人）和我也不会把Berkshire看作细菌。更让我们痛心不已的是，我们也没能找到一种办法让它的净资产每15分钟翻一番。此外，在众目睽睽之下进行财务繁衍，我们一点都不害羞。不过，萨根的观察结果依然适用。从伯克希尔当前49亿美元的净资产基数出发，要实现账面价值年均15%的增长，将比我们从2200万美元起步时实现23.8%的增长困难得多。
税收
我们1989年15亿美元的收益，是在扣除了约7.12亿美元的所得税费用后实现的。此外，Berkshire在五家主要被投资公司所支付的所得税中分占的份额总计约1.75亿美元。
今年的税收费用中，约1.72亿美元将即期支付；其余5.4亿美元为递延。递延部分几乎全部与1989年我们普通股持仓未实现利润的增加有关。针对这一增加额，我们按34%的税率计提了税款准备金。
我们对1987和1988年产生的所有未实现利润也按该税率计提了准备金。但正如我们去年所解释的，我们在1987年之前积累的未实现收益——约12亿美元——按当时通行的28%税率计提了准备金。
一项新的会计准则可能被采纳，要求公司对所有收益按当前税率（无论税率是多少）计提准备金。若税率为34%，该规则将使我们的递延税负债增加，净资产减少约7100万美元——这是将我们1987年前收益的准备金提高6个百分点的结果。由于拟议中的规则引发广泛争议，且其最终形式尚不明确，我们尚未进行这一调整。
正如你们从第27页的资产负债表所见，如果我们在年底以市值出售所有证券，我们将欠税超过11亿美元。这11亿美元的负债，与应在年底后15天内支付给贸易债权人的11亿美元负债，是否相等，甚至类似？显然不是——尽管这两个项目对经审计的净资产有着完全相同的影响，即各减少11亿美元。
另一方面，这项递延税负债是否只是一种无意义的会计虚构，因为它的支付只能由出售股票触发，而对于其中绝大部分股票，我们并无出售意图？同样，答案是否定的。
从经济角度看，这项负债类似于一笔来自美国财政部的无息贷款，只有在我们选择时才会到期（当然，除非国会采取行动，在收益实现之前就对其征税）。这笔“贷款”在其他方面也很独特：它只能用于为持有特定、已增值的股票提供融资，而且其规模会波动——每天随市场价格变动，不定期地随税率变动。实际上，这项递延税负债相当于一笔非常大的转移税，只有在我们选择从一项资产转移到另一项资产时才需要支付。事实上，我们在1989年出售了一些相对较小的持仓，对2.24亿美元的收益产生了约7600万美元的“转移”税。
由于税法运作的方式，我们偏爱的里普·凡·温克尔（Rip Van Winkle）式的投资风格（比喻长期持有，如同沉睡多年）——如果成功——在数学上相对于更疯狂的方式具有重要优势。我们来看一个极端的比较。
试想，伯克希尔只有1美元，我们把它投进一只证券，年底翻了一番，然后卖出。再设想一下，我们用税后收益，在接下来的19年里每年重复这个过程，每次都翻一番。20年后，我们每次卖出盈利时缴纳的34%资本利得税，总共会给政府带来约1.3万美元，而我们自己剩下约2.525万美元。这不算差。然而，如果我们做了一笔绝佳的投资，这笔投资本身在20年内翻了20倍，我们的1美元就会变成1,048,576美元。如果我们那时套现，需要缴纳约35.65万美元的34%税款，自己剩下约69.2万美元。
造成这种惊人差异的唯一原因，就是纳税的时间点。有趣的是，在情景二中，政府的收益与我们完全一致，同样是27:1的比例——获得税款35.65万美元 vs. 1.3万美元——不过，承认它得等上一段时间才能拿到这笔钱。
需要强调，我们并非因为这种数学关系而采取偏重长期投资承诺的策略。事实上，如果我们频繁地从一项投资转向另一项，反而有可能获得更高的税后回报。很多年前，这正是查理和我做的事情。
但现在，我们宁愿按兵不动，即使这意味着回报略低。原因很简单：我们发现卓越的商业关系是如此罕见、如此令人愉悦，以至于我们想留住所有已经建立起来的关系。这个决定对我们来说尤其容易，因为我们觉得这些关系能带来不错——尽管可能并非最优——的财务成果。考虑到这一点，我们认为，放弃与那些我们了解、有趣且令人钦佩的人相处的时光，转而去跟那些我们不了解、人性很可能更接近平均水平的人打交道，实在没什么意义。那好比为了钱结婚——在大多数情况下是个错误，如果一个人已经很有钱，那就是疯了。
**报告盈利来源**
下表显示了伯克希尔报告盈利的主要来源。在此列示中，商誉摊销及其他重大购买价格会计调整并未分摊到其对应的具体业务中，而是汇总后单独列示。这种做法可以让你看到我们旗下业务在没有被收购时的报告盈利情况。我在过去的年报中已经解释过，为什么我们认为这种列示形式对投资者和管理者来说，比使用美国通用会计准则（GAAP）按业务逐项进行购买价格调整的方式更有用。当然，表中列示的净利润总额与经审计财务报表中的GAAP总额完全一致。
关于这些业务的进一步信息，请参见第37-39页的业务分部部分，以及第40-44页的管理层讨论部分。在这些部分，你还会看到我们按GAAP报告的分部盈利。关于Wesco（威斯科）的业务信息，我强烈建议你阅读查理·芒格的信，该信从第54页开始。此外，我们在第71页重印了查理于1989年5月30日写给美国储蓄机构联盟的信，信中表达了我们对其政策的厌恶以及我们因此决定退出的立场。
（千美元计）
----------------------------------------------
伯克希尔占比
净利润份额
（税后及
税前利润 少数股东权益后）
---------------------- ----------------------
1989 1988 1989 1988
---------- ---------- ---------- ----------
经营利润：
保险集团：
承销 ................. $(24,400) $(11,081) $(12,259) $ (1,045)
净投资收益 ........... 243,599 231,250 213,642 197,779
布法罗新闻报 ........... 46,047 42,429 27,771 25,462
费奇海默 ............... 12,621 14,152 6,789 7,720
科比 ................... 26,114 26,891 16,803 17,842
内布拉斯加家具城 ....... 17,070 18,439 8,441 9,099
斯科特·费泽
制造集团 ............. 33,165 28,542 19,996 17,640
喜诗糖果 ............... 34,235 32,473 20,626 19,671
韦斯科 - 保险以外业务 .. 13,008 16,133 9,810 10,650
世界图书 ............... 25,583 27,890 16,372 18,021
商誉摊销 ............... (3,387) (2,806) (3,372) (2,806)
其他收购价
会计调整 ............. (5,740) (6,342) (6,668) (7,340)
利息费用* .............. (42,389) (35,613) (27,098) (23,212)
股东指定
捐款 ................. (5,867) (4,966) (3,814) (3,217)
其他 ................... 23,755 41,059 12,863 27,177
---------- ---------- ---------- ----------
经营利润 ............... 393,414 418,450 299,902 313,441
证券出售 ............... 223,810 131,671 147,575 85,829
---------- ---------- ---------- ----------
所有实体总利润 ......... $617,224 $550,121 $447,477 $399,270
*不包括斯科特·费泽金融集团和互助储蓄公司的利息费用。
我们还请您参阅第45-51页，在那里我们将伯克希尔的财务数据重新划分为四个板块。这与查理和我思考公司业务的方式一致，应该有助于您计算伯克希尔的内在价值。这几页展示的是以下板块的资产负债表和利润表：(1) 我们的保险业务，并逐项列出其主要投资头寸；(2) 我们的制造、出版和零售业务，剔除某些非经营性资产和收购价会计调整；(3) 从事金融类业务的子公司，即互助储蓄公司和斯科特·费泽金融公司；(4) 其他所有项目，包括第(2)板块公司持有的非经营性资产（主要是有价证券）、所有收购价会计调整，以及韦斯科和伯克希尔母公司的各项资产和债务。
如果您将这四个板块的利润和净资产相加，得出的总数将与我们美国通用会计准则报表上的数字一致。不过，我想强调，这种四板块分类不在我们审计师的职责范围内，他们对此未予认可。
除了我们的报告盈利之外，我们还从被投资公司获得大量盈利，但标准会计准则不允许我们报告这部分收益。在第15页，我们列出了五家主要被投资公司，1989年我们从这些公司获得的税后股息约为4500万美元。然而，去年我们在这几家被投资公司留存收益中的份额总计约为2.12亿美元，这还不包括GEICO和可口可乐实现的大额资本利得。如果这2.12亿美元分配给我们，在支付额外税款后，我们自己的经营利润将接近5亿美元，而不是表格中显示的3亿美元。
你必须判断的问题是：这些未分配盈利对我们来说是否与报告盈利同样有价值？我们认为是的——甚至可能更有价值。得出“一鸟在林可能抵得上两鸟在手”这一结论的原因在于，这些被投资公司留存下来的收益，将由才华横溢、以所有者为导向的管理者来配置，他们在自己企业中使用这些资金，有时会比我们放在自己企业里用得更好。对大多数管理层我不会做如此慷慨的评价，但放在这些案例中却是恰当的。
在我们看来，衡量伯克希尔基本盈利能力的最佳方法是“透视盈余法”：将我们在被投资公司留存经营利润中的份额，加总到我们自己报告的经营利润中，两种情况下均剔除资本利得。要让我们的内在商业价值以年均15%的速度增长，我们的“透视盈余”必须以大致相同的速度增长。要达到这15%的目标，我们需要现有被投资公司大力相助，也需要时不时加入新的被投资公司。
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**非保险业务**
过去，我们把主要的制造、出版和零售业务称为“圣徒七杰”（The Sainted Seven）。1989年初收购Borsheim's之后，挑战在于找一个既押韵又贴切的新名字。我们失败了：就叫这组公司“圣徒七杰加一”吧。
这个神圣的组合——Borsheim's、《布法罗新闻报》（The Buffalo News）、Fechheimer Bros.、Kirby、内布拉斯加家具城（Nebraska Furniture Mart）、Scott Fetzer制造集团、喜诗糖果（See's Candies）、世界图书（World Book）——是一批经济特征从好到极好的企业。其管理者从极好到极好。
这些管理者中的大多数根本不需要为生计而工作；他们出现在球场上是因为喜欢打本垒打。而他们正是这么做的。这些公司（外加一些更小型业务）的合并财务报表见第49页，充分展示了它们何等出色。按历史会计口径，这些业务的税后盈利平均达到权益资本的57%。而且，这个回报是在没有净杠杆的情况下实现的：现金等价物与长期债务相匹配。当我报出这些管理者的名字——Blumkin家族、Friedman家族、Heldman家族、Chuck Huggins、Stan Lipsey和Ralph Schey——我心中涌起的热忱，与Miller Huggins在宣布他1927年纽约洋基队阵容时想必感受到的完全一样。
让我们逐一看看各业务：
- **Borsheim's**：与伯克希尔合作的第一年就达到了所有期望。销售额大幅增长，现在比四年前（公司迁至现址时）高出两倍以上。而在迁址之前的六年里，销售额也已经翻了一番。Borsheim's的管理天才Ike Friedman——我确实是这个意思——只有一个速度：快进。
如果你没去过 Borsheim's，你就永远不会看到这样的珠宝店。由于在同一地址的巨大销量，这家店在所有价格区间都保持着极其丰富的选择。同样地，它能把费用率控制在同类珠宝店的三分之一左右。严格的费用控制，加上非同寻常的采购力，让它能提供远低于其他珠宝商的价格。而这些价格反过来又带来更大的销量，如此循环往复。最终的结果是，在季节性繁忙的日子里，客流量高达 4,000 人。
Ike Friedman 不仅是一位出色的商人和伟大的表演大师，而且是一位正直的人。我们收购这家公司时没有经过审计，而所有的惊喜都来自正面。无论你是买下整家公司，还是一颗小小的钻石，“如果你不懂珠宝，就认准你的珠宝商”这句话都很有道理。
讲个故事说明我为什么如此欣赏 Ike：每两年我会参加一个非正式小组，大家一起找乐子，探讨几个话题。去年九月，我们在圣达菲的 Bishop's Lodge 聚会，邀请了 Ike、他妻子 Roz 和儿子 Alan 过来给我们讲讲珠宝和珠宝生意。
Ike 决定让这群人惊艳一把，所以他从奥马哈带来了大约 2,000 万美元的特别精美商品。我有点担心——Bishop's Lodge 可不是诺克斯堡——于是在他演示前的那晚招待会上，我跟 Ike 提了我的顾虑。Ike 把我拉到一边。“看到那个保险箱了吗？”他说，“今天下午我们换了密码，现在连酒店管理层都不知道是什么了。”我松了口气。Ike 接着说：“看到那两个腰上别着枪的大块头了吗？他们今晚会整夜守着保险箱。”我这才准备回去继续参加派对。但 Ike 凑得更近了：“而且，Warren，”他悄悄透露，“珠宝不在保险箱里。”
有这样的人在身边，我们怎么可能失手——更何况他身边还有一个才华横溢、精力充沛的家庭：Alan、Marvin Cohn 和 Don Yale。
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在 See's Candies，尽管 1988 年已经是创纪录的一年，1989 年我们的糖果销量仍增长了 8%。1989 年的业绩中还包括多年来首次实现的出色同店销量增长。
广告在这场卓越表现中扮演了重要角色。我们将广告总支出从 400 万美元增加到 500 万美元，而且我们的广告代理 Hal Riney & Partners, Inc. 提供的广告文案 100% 切中要点，传达了让 See's 与众不同的特质。
在我们的媒体业务（比如《布法罗新闻》）中，我们出售广告位。在其他业务（比如 See's）中，我们是买家。当我们购买时，我们完全践行自己在销售时宣扬的原则。在 See's，去年我们将报纸广告支出增加了两倍以上，达到我记忆中占销售额的最高比例。回报非常出色，我们感谢 Hal Riney 和精准投放的报纸广告带来的力量。
See's 的出色表现已经变得习以为常。但 Chuck Huggins 的管理绝不平庸：他每天参与生产和销售的方方面面，向数千名员工传递品质与服务的信息——正是这些员工每年生产并配送超过 2,700 万磅糖果。在一家拥有 225 家门店以及大量邮购和电话业务的连锁企业里，要做到几乎每位顾客都满意离开，绝非易事。Chuck 却让这一切看起来轻而易举。
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内布拉斯加家具城在 1989 年实现了创纪录的销售额和优异的盈利，但有一个遗憾。B 太太——52 年前用 500 美元创办这家公司的 Rose Blumkin——在五月离职了，原因是对地毯部门的改造和经营方式，她与其他 Blumkin 家族成员/管理层产生了分歧。
B太太可能比美国任何在世的人都做出了更多明智的商业决策，但在这一具体事件上，我认为家族其他成员完全正确：过去三年里，店里其他部门销售额增长了24%，而地毯销售却下降了17%（但这并非因为B太太销售能力不足——她个人售出的商品数量一直远超店里任何其他销售人员）。
值得高兴的是，B太太依然让Horatio Alger笔下的英雄们显得像个萎靡不振的可怜虫。96岁高龄的她开始创业卖——还能是什么？——地毯和家具。而且一如既往，她每周工作七天。
在商城，Louie、Ron和Irv Blumkin继续推动着这家迄今为止全美规模最大、最成功的家居用品店的运营。他们是杰出的商人、杰出的管理者，与他们共事是一种享受。对其商业智慧的一个例证：1989年第四季度，地毯部门在奥马哈市场占据了75.3%的消费者份额，高于一年前的67.7%，是排名最接近竞争对手的六倍以上。
NFM（内布拉斯加家具城）和Borsheim's（波仙珠宝）遵循着完全相同的成功法则：（1）单一地点无与伦比的商品深度与广度；（2）业内最低的运营成本；（3）极其精明的采购，部分得益于巨大的采购量；（4）毛利率远低于竞争对手，因此价格也远低于对手；（5）家族成员随时在场提供的友好个性化服务。
再次为报纸广告说句好话：NFM 1989年在本地报纸的广告行数比已经创纪录的1988年又增长了20%以上，并且仍然是该报迄今最大的ROP广告客户。（ROP广告指直接印在报纸上的广告，与预印插页广告相对。）据我所知，奥马哈是唯一一个由家居用品店担任广告领头的城市。许多零售商在1989年缩减了广告版面购买；但我们在See's（喜诗糖果）和NFM的经历表明，他们犯了一个大错误。
o 布法罗新闻报（The Buffalo News）在1989年于三个方面继续大放异彩：第一，在主要大都市报纸中（包括日报和周日版），《新闻报》的家庭渗透率（即每天购买该报的当地家庭百分比）位居第一。第二，在"新闻版面占比"——即报纸用于新闻报道的版面比例——方面，该报1989年达到50.1%，高于1988年的49.5%，这一水平再次使其新闻容量超过任何同类美国报纸。第三，在许多大报社利润下滑的一年里，《新闻报》连续第七年创下利润纪录。
在某种程度上，这三个因素相互关联，尽管显然高比例的新闻版面本身会显著降低利润。然而，一个既大又利用得当的新闻版面能吸引广泛的读者群体，从而提升渗透率。高渗透率反过来使报纸对零售商特别有价值，因为它让他们能通过一个单一的"扩音器"与整个社区对话。渗透率低的报纸对许多广告主来说吸引力要小得多，最终会在广告费率和利润上双双受损。
需要强调的是，我们优秀的渗透率既非偶然也不是自动得来的。伊利县是《新闻报》的腹地，人口一直在下降——从1970年的1,113,000人降到1980年的1,015,000人，再到1988年估计的966,000人。发行量数据却呈现另一番景象。1975年，在我们推出周日版之前不久，布法罗的老牌报纸《信使快报》（Courier-Express）在伊利县的周日版销量是207,500份。去年——人口至少减少了5%——《新闻报》平均销售292,700份。我相信，没有任何其他主要的周日市场在渗透率上取得过如此接近的增长。
当这样一笔利润实现——当一份报纸在其本埠获得无可比拟的认可度——一定有人做得对。此番功劳显然主要归于我们的长期主编 Murray Light，他每日打造出一份内容翔实、实用且有趣的产品。功劳同样应归于发行部和生产部：一份报纸若因生产问题或发行短板而频繁延误，无论其编辑内容多么强大，都会流失客户。
《新闻报》的发行人 Stan Lipsey，创造的利润完全匹配我们产品的实力。我相信，与同等条件下由平庸经理人经营所能获得的利润相比，Stan 的管理技能能带来至少高出五个百分点的利润率。这是令人惊叹的表现，只有一位既懂业务、又关注业务每一个螺丝钉的天才经理人才能做到。
需要强调的是，Stan 的知识和才能也延伸至编辑产品。他早年从事新闻采编，在策划和编辑一系列报道中发挥了关键作用，这些报道于1972年为奥马哈《太阳报》（Sun Newspaper of Omaha）赢得了普利策奖。Stan 和我一起合作超过20年，历经风雨与顺境，我找不到比他更好的合伙人了。
o 在 Fechheimer（费希海默），Heldman 家族——Bob、George、Gary、Roger 和 Fred——继续其非凡表现。1989年利润有所下降，原因是公司整合1988年一笔重大收购时遇到了问题。这些问题终将得到解决。与此同时，Fechheimer 的投入资本回报率依然出色。
像我们所有的经理人一样，Heldman 家族对业务细节了如指掌。在去年的股东年会上我曾提到，当一个囚犯进入圣昆廷监狱时，Bob 和 George 很可能知道他的衬衫尺码。这仅略加夸张：无论谈论全国哪个地区，他们都清楚主要客户和竞争对手的动态。
尽管我们在四年前收购了 Fechheimer，查理和我从未参观过其任何工厂或位于辛辛那提的总部。我们很像那位寂寞的美泰克修理工（美泰克以电器耐用著称，广告中的修理工几乎无事可做）：Heldman 家族的管理产品如此出色，以至于根本不需要上门维修。
o Ralph Schey 继续出色地管理着我们规模最大的业务群——World Book（世界图书）、Kirby（克利比）和 Scott Fetzer Manufacturing Companies（斯科特·费泽制造公司）。自我们收购以来，这些业务的合计利润每年都在增长，投入资本回报率始终卓越。Ralph 所管理的企业规模足够大，若独立存在，足以跻身财富500强。而且，以净资产收益率衡量，他的管理风格能使其稳居前十分位之列。
多年来，World Book 一直在芝加哥商品市场（Merchandise Mart）的单一地点运营。由于租约即将到期，该业务正分散至四个地点。这次过渡的费用相当可观；尽管如此，1989年的利润仍表现良好。搬迁成本完全消化还需再等一年。
Kirby 的业务去年尤为强劲，出口销售大幅增长。国际业务在过去两年中增长了一倍以上，过去四年中增长了四倍；其销量占比从5%升至20%。1989年我们最大的资本支出发生在 Kirby，为1990年的主要型号更新做准备。
Ralph管理的业务贡献了非保险集团（其业绩见第49页）总利润的约40%。1986年初我们收购Scott Fetzer（斯科特·费泽）时，将Ralph这位经理人一并纳入，其重要性完全不亚于收购企业本身。他不仅创造了非凡的利润，还极为擅长资本管理。这些能力为伯克希尔带来了资金，进而让我们得以进行许多其他盈利的投资。
至此，我们回答了1927年洋基队的问题。
保险业务
下表是我们常用表格的更新版，列出了财产意外险行业的关键数据：
法定数据
保费收入 支付保单持有人 已发生损失 GNP平减指数
年增长率 股利后综合 年增长率 衡量的
(%) 成本率(%) (%) 通胀率(%)
------------- ------------------ ------------- ----------------
1981 3.8 106.0 6.5 9.6
1982 3.7 109.6 8.4 6.5
1983 5.0 112.0 6.8 3.8
1984 8.5 118.0 16.9 3.8
1985 22.1 116.3 16.1 3.0
1986 22.2 108.0 13.5 2.6
1987 9.4 104.6 7.8 3.1
1988 4.4 105.4 5.5 3.3
1989 (估计) 2.1 110.4 8.7 4.2
数据来源：A.M. Best公司
综合成本率表示保险总成本（已发生损失加费用）与保费收入之比：低于100表示承保盈利，高于100表示承保亏损。若考虑保险公司因持有投保人资金（"浮存金"）而获得的投资收益，综合成本率在107-111范围内通常产生整体盈亏平衡（不计股东提供资金产生的收益）。
基于此前报告所述原因，我们预计行业已发生损失每年将增长约10%，即便是在整体通胀率低得多的年份也是如此。（实际上，过去25年间，已发生损失增速更快，为11%。）若同期保费增长大幅落后于10%的增长率，承保亏损将加剧，不过行业在业务恶化时倾向于少提准备金，这可能会在一段时间内掩盖亏损规模。
去年我们曾表示，综合成本率的上升"几乎肯定会持续——并且可能加速——至少再持续两年"。今年我们不会预测加速，但其他方面必须重复去年的预测。保费增长率远低于每年所需的10%。请记住，10%的增长率只能稳定综合成本率，而非降低它。
1989年综合成本率的上升略超我们预期，因为巨灾（以飓风雨果为首）异常严重。这些异常因素可能约占增幅中的两个百分点。如果1990年更接近"正常"年份，综合成本率应仅从1989年因巨灾推高的基数上小幅上升。不过到1991年，该比率可能会大幅攀升。
评论人士经常讨论"承保周期"并猜测其下一步走向。如果这个词用于暗示规律性，我们认为它用词不当，会导致对行业基本经济状况的错误思考。
"卡特尔"这个说法几十年前还算贴切，当时保险业和监管机构配合，像垄断集团一样运作。那会儿综合成本率会周期性地上下波动，原因有两个，都跟滞后效应有关。第一，先分析过去的数据，再用这些数据制定新的"修正"费率，然后几乎所有保险公司都照此执行。第二，当时几乎所有保单的期限都是一到三年——这意味着定价错误的保单要过相当长的时间才会到期——新费率对收入的影响也就被延迟了。这两个滞后效应让综合成本率的波动很像交流电。与此同时，由于缺乏显著的价格竞争，整个行业在整个周期内的平均利润还算过得去。
卡特尔时代早已一去不返。现在行业里有成百上千的参与者，各自独立定价，销售一种大宗商品似的产品。这样的格局——无论卖的是钢铁还是保单——除非一种情况，否则必然导致利润率低于正常水平：那就是产能短缺。这种短缺期多久出现一次、持续多久，决定了该行业的平均盈利能力。
在大多数行业，产能是用物理指标描述的。但在保险领域，产能通常用财务指标来描述；也就是说，一家公司如果净资产是Y美元，通常认为它承保的业务量不应超过X美元。然而实际上，这类约束往往形同虚设。监管机构、保险经纪人和客户都很难对资本吃紧的公司及时约束。当公司严重虚报真实资本时，他们也默许。所以，只要一家公司愿意，它可以用很少的资本承保大量业务。归根结底，任何特定时刻的行业产能，主要取决于保险经理人的心理状态。
明白了这些，预测保险业的利润就不太难了。只有当产能短缺时，才能实现可观的利润。而短缺只有保险公司感到害怕时才会出现。这种情况很少发生——现在肯定没有。
一些分析师认为，最近保险业税负加重，加上1989年的巨灾——飓风雨果和加州地震——会促使价格显著回升。我们不同意。这些不利因素并没有打消保险公司按当前价格承保的积极性。因此，1990年保费收入增长不会超过10%，这意味着承保亏损趋势不会逆转。
与此同时，保险业会说它需要更高的价格来实现与美国普通企业相当的盈利能力。当然需要。钢铁行业也需要。但需求和愿望与行业的长期盈利能力毫无关系。决定结果的是经济基本面。只有当几乎所有保险公司在高价面前都拒绝承保业务时，保险业的盈利能力才会改善。我们现在离那一步还差得远。
伯克希尔1990年的保费收入可能会降到1.5亿美元左右（1986年曾高达10亿美元），部分原因是我们的传统业务持续萎缩，部分原因是我们获得消防员基金保险公司（Fireman's Fund）7%业务的合同已于去年8月到期。不管跌幅多大，我们都不会感到不安。我们对承保数学期望亏损的业务毫无兴趣；就算是我们认为有望盈利的交易，也已经让我们吃够了失望的苦头。
然而，我们对定价合理的业务胃口很大，有一则1989年的故事可以说明。这个故事涉及"巨灾再保险（CAT covers）"，这是原保险公司（以及再保险公司自身）购买的再保险合同，用于防范单一巨灾事件（如龙卷风或飓风）导致大量保单损失的保障。在这些合同中，原保险人可能自行承担单次事件的损失，最高可达例如1000万美元，然后在此水平之上购买不同层次的再保险。当损失超过自留额时，再保险公司通常支付超出部分的95%，直至其合同限额，原保险人支付剩余部分。（通过要求原保险人保留每一层的5%，再保险公司让原保险人在每次理赔中都有经济利益，防止他浪费再保险公司的钱。）
巨灾再保险通常是一年期保单，还提供一次自动恢复条款，这意味着如果原保险人的覆盖额度因一次巨灾而耗尽，他需要支付另一笔保费来为当年剩余时间购买第二次覆盖。这一条款保护原保险公司在第一次巨灾事件后即使短期也不会处于"裸露风险"状态。"一次事件"的持续时间通常由合同限制为原保险公司指定的任何72小时时段。根据这一定义，一场由同一种气候原因引发的、持续三天的广泛风暴将被归类为一次事件。然而，如果风暴持续四天，原保险公司将提出索赔，划定其遭受最大损失的连续72小时。在此期间之外发生的损失将被视为另一起事件。
1989年发生了两件不寻常的事情。首先，飓风"雨果"造成了40亿美元或更多的保险损失，然而其速度导致加勒比地区遭受的严重损害略过72小时后，卡罗来纳地区才遭受巨大损失。第二，加州地震在几周内发生，造成保险损失难以估计，甚至事件发生很久后依然如此。受到这两起——也可能是三起——重大巨灾的重创，一些原保险公司，以及许多自身购买了巨灾再保险的再保险公司，要么用光了它们的自动第二次覆盖，要么不确定自己是否已经用完。
那时，巨灾再保险保单的卖方已经损失了巨额资金——可能因恢复条款而损失了两倍——而收取的保费却不多。根据许多变量，巨灾再保险保费通常约占所购买保障金额的3%至15%。多年来，我们一直认为这类保费定价不足，因此远离了这个业务。
但是，由于1989年的灾难使许多保险公司要么实际裸奔，要么可能裸奔，并且使大多数巨灾再保险承保商舔舐伤口，地震后急需的巨灾覆盖立即出现短缺。价格瞬间变得有吸引力，特别是对于巨灾再保险承保商自身购买的再保险。伯克希尔·哈撒韦立即提出提供高达2.5亿美元的巨灾覆盖，并在行业刊物上宣传这一提议。虽然我们并未写出我们寻求的所有业务，但在忙碌的十天里，我们确实承保了相当数量的业务。
我们愿意为可能明天就发生的损失承担如此巨额的资金，这使我们区别于世界上任何一家再保险公司。当然，有些公司有时会写2.5亿美元甚至更多的巨灾覆盖。但它们这样做只有一个前提：它们可以将大部分业务再保险给其他公司。当它们无法大量"转嫁"时，它们就会从市场上消失。
伯克希尔的政策则相反：我们自留承保业务，而非分保出去。当费率有盈利预期时，我们愿意承担尽可能多的风险——只要符合审慎原则。以我们而论，这个"尽可能多"可不是小数目。
我们为自己账户承担的再保险风险将超过其他任何公司，原因有二：（1）按监管会计口径，我们的保险公司净资产约60亿美元——全美排名第二；（2）我们根本不在乎季度甚至年度的盈利数字，只要导向这些盈利（或亏损）的决策是明智的。
显然，如果我们承保2.5亿美元的巨灾风险并全部自留，某个季度亏掉全部2.5亿美元的概率虽然很低，但并非为零。若真发生如此规模的损失，税后成本约为1.65亿美元。虽然这远超伯克希尔正常季度的盈利，但伤害仅限于挫伤我们的自尊，而非伤及我们的根基。
这种姿态很少有保险公司管理层愿意效仿。他们通常愿意以几乎保证平庸净资产收益率的条款承保大量业务，却不愿让自己蒙受某个季度亏损的尴尬——即使导致亏损的管理策略长期有望带来卓越回报。我能理解他们的想法：对股东最有利的，未必对管理层最有利。幸运的是，查理和我的工作保障完全稳固，经济利益也与股东完全一致。只要我们没有觉得自己做了蠢事，我们就甘愿在外人眼里显得愚蠢。
顺便说一句，我们的运作方式使我们在行业中成为一股稳定力量。当承保能力稀缺时，我们注入大量产能；只有当承保能力过剩时，我们才会降低竞争力。当然，我们并非为了稳定而遵循这一政策——我们这么做，是因为我们坚信这是最明智、最有利可图的做法。但我们的行为确实稳定了市场。这一次，亚当·斯密的"看不见的手"名副其实地发挥了作用。
目前，相对于保费规模，我们持有异常庞大的浮存金。这种状况应在未来几年内带来相当有利的保险业绩——就像1989年那样。我们的承保损失应在可承受范围内，而来自保单持有人资金的投资收益将相当可观。然而，随着浮存金逐渐减少，这种令人愉悦的局面将逐步消退。
但到了某个时点，我们会有机会承保大量盈利业务。Mike Goldberg 及其管理团队——Rod Eldred、Dinos Iordanou、Ajit Jain、Phil Urban 和 Don Wurster——正在持续为我们未来这种可能性做好准备。
---
### 有价证券
在为我们的保险公司选择有价证券时，我们通常会在五大类中做出选择：（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。
我们在从这些类别中选择时并无特别偏好；我们只是持续在其中搜寻以"数学期望"衡量的最高税后回报，始终只限于我们认为自己理解的替代性投资方案。我们的标准与追求最大化即时报告盈利毫无关系；恰恰相反，我们的目标是最大化最终的净资产。
o 下面列出我们持有市值超过1亿美元的普通股持仓。这些投资中有一小部分属于伯克希尔持股不到100%的子公司。
1989年12月31日
股份数 公司 成本 市值
------ ------- ---------- ----------
（单位：千美元）
3,000,000 Capital Cities/ABC, Inc. ................ $ 517,500 $1,692,375
23,350,000 可口可乐（The Coca-Cola Co.） .......... 1,023,920 1,803,787
2,400,000 联邦住宅贷款抵押公司（Federal Home Loan Mortgage Corp.） .. 71,729 161,100
6,850,000 GEICO Corp. ............................. 45,713 1,044,625
1,727,765 《华盛顿邮报》公司（The Washington Post Company） ......... 9,731 486,366
这些公司与去年相同，仅有一家公司的股份数量发生了变化：我们对可口可乐的持股从1988年底的14,172,500股增至23,350,000股。
这次对可口可乐的投资，又是一个绝佳例证，说明你们的董事长响应投资机会的速度有多么惊人——无论这些机会多么隐晦或伪装。我相信我喝的第一瓶可口可乐是在1935年或1936年。确切地说，1936年我开始以6瓶25美分的价格从家族杂货店Buffett & Son购买可口可乐，再以每瓶5美分在街坊中出售。在这段高毛利率零售的尝试中，我适时观察到了该产品非凡的消费者吸引力和商业潜力。
在接下来的52年里，随着可口可乐席卷全球，我持续注意到这些特质。然而在此期间，我小心翼翼地避免买入哪怕一股，反而将个人净资产的大部分配置到了有轨电车公司、风车制造商、无烟煤生产商、纺织企业、赠券发行商等。如果你觉得我在编故事，我可以提供这些公司的名单。直到1988年夏天，我的大脑才终于与眼睛接通。
我当时看到的既清晰又迷人。在1970年代稍有迷失之后，可口可乐于1981年因Roberto Goizueta出任CEO而成为一家新公司。Roberto与曾是我在奥马哈街对面的邻居Don Keough一起，首先重新思考并聚焦了公司政策，然后精力充沛地付诸实施。这本已是全球最无处不在的产品获得了新动力，海外销售几乎呈爆炸式增长。
凭借真正罕见的营销与财务技能组合，Roberto最大化了他产品的增长以及这种增长给股东带来的回报。通常，消费品公司的CEO会基于自身倾向或经验，让营销或财务中的一个主导业务而牺牲另一个学科。而对Roberto来说，营销与财务的结合完美无缺，其结果是股东的梦想。
当然，我们本应更早开始买入可口可乐，就在Roberto和Don开始掌舵后不久。事实上，如果我当时思路清晰，我会在1936年就说服我祖父卖掉杂货店，把全部收益投入可口可乐股票。我吸取了教训：我对下一个极其诱人的想法的响应时间，将大幅缩短到50年以内。
正如我早先说过的，我们主要投资对象的年终价格相对于其内在价值而言，比以往任何时候都要高得多。虽然这些价格还不至于让人流鼻血，但它们显然容易受到市场整体下跌的影响。它们的价格下跌丝毫不会困扰我们——实际上，这可能最终对我们有利——但至少会导致伯克希尔净资产在一年的减少。我们认为，未来三年内至少有一年出现这种减少几乎是必然的。事实上，只要我们的投资组合总价值每年同比下降约10%，伯克希尔的净资产就会下降。
我们仍然有幸拥有我们投资企业中那些卓越的管理者。他们品行高尚、才华横溢，并且以股东为导向。我们在与他们共同投资时取得的非凡业绩，准确地反映了他们非凡的个人品质。
○ 去年我们曾告诉你，我们预计1989年在套利方面不会有太多动作，事实也正是如此。套利仓位是短期现金等价物的替代品，而在年内部分时间里，我们持有的现金水平相对较低。在其余时间里，我们持有相当大规模的现金头寸，即便如此也选择了不参与套利。主要原因是那些对公司交易而言毫无经济意义；套利这类交易与玩博傻游戏太过接近。（正如华尔街人士Ray DeVoe所说：“天使不敢交易的地方，傻瓜却蜂拥而入。”）我们会不时地参与套利——有时规模还很大——但只有在胜算符合我们心意的时候才会出手。
○ 除了下一节讨论的三只可转换优先股外，我们大幅减少了中期和长期固定收益证券的持仓。在长期债券方面，我们几乎只持有华盛顿公共电力供应系统（WPPSS）的债券，息票利率从低到高不等。年内我们出售了部分低息债券，这些债券最初是以很大折扣购入的。其中许多债券自我们购买以来价格大约翻了一番，并且还每年向我们支付15%-17%的免税利息。我们出售时的价格仅略低于当时典型的高等级免税债券的价格。我们保留了所有高息的WPPSS债券。其中一些将在1991年和1992年被赎回，我们预计其余部分将在1990年代初期至中期被赎回。
年内我们还出售了许多中期免税债券。当初购买这些债券时，我们就曾说过，如果遇到更喜欢的投资机会，我们会乐于将其出售——无论其价格是高于还是低于我们的买入价。这样的机会确实出现了——于是我们在获利不大的情况下卖掉了大部分这些债券。总体而言，我们1989年出售免税债券的税前利润约为5100万美元。
○ 我们出售债券所得的资金，连同年初的过剩现金以及之后通过盈利产生的现金，都用于购买了三只可转换优先股。第一笔交易发生在7月，我们购买了The Gillette Co.（吉列公司）6亿美元的可转换优先股，股息率为8.75%，强制赎回期为10年，可按每股50美元的价格转换为普通股。接着，我们购买了USAir Group, Inc.（美国航空集团）3.58亿美元的可转换优先股，强制赎回期为10年，股息率为9.25%，可按每股60美元的价格转换为普通股。最后，在年底我们购买了Champion International Corp.（冠军国际公司）3亿美元的可转换优先股，强制赎回期为10年，股息率为9.25%，可按每股38美元的价格转换为普通股。
与我们持有的这些优先股不同，标准可转换优先股在一定时期内要么不可出售、要么不可转换，因此我们根本无法从普通股的短期价格波动中获利。我已经加入了吉列（Gillette）的董事会，但没有加入美国航空（USAir）或冠军国际（Champion）的董事会。（我非常享受现在所在的董事会，但实在应付不了更多了。）
吉列的业务正是我们喜欢的那种。查理和我认为我们理解这家公司的经济状况，因此可以对它的未来做出相对明智的预测。（如果你还没试过吉列的新款Sensor剃须刀，赶紧去买一把。）然而，我们没有能力预测投资银行业务（我们通过1987年购买的所罗门可转换优先股持有其头寸）、航空业或造纸业的经济前景。这并不意味着我们预测这些行业前景黯淡：我们是不可知论者，不是无神论者。但我们对这些业务缺乏强烈的确信，意味着我们必须以不同于投资那些经济特性卓越的企业的方式来构建我们的投资。
然而，在一个重要方面，这些购买并无不同：我们只愿与自己喜欢、钦佩和信任的人打交道。所罗门的John Gutfreund、吉列的Colman Mockler, Jr.、美国航空的Ed Colodny以及冠军国际的Andy Sigler完全符合这一标准。
而他们也对我们表现出了一定的信心，在每个案例中都坚持我们的优先股在完全转换基础上拥有不受限制的投票权，这一安排远非公司财务中的标准做法。实际上，他们信任我们是明智的所有者，着眼于明天而非今天，正如我们信任他们是明智的管理者，同样着眼于明天和今天。
我们谈判达成的优先股结构，如果行业经济状况阻碍了被投资公司的业绩，将为我们带来平庸的回报；但如果它们能取得与美国工业整体相当的回报，则会产生相当有吸引力的结果。我们相信，在Colman的管理下，吉列将远远超过这一回报；同时相信，除非行业条件严苛，John、Ed和Andy也能达到这一水平。
几乎在任何条件下，我们都期望这些优先股能返还我们的本金加股息。但如果仅此而已，结果将是令人失望的，因为我们将放弃灵活性，从而错失在这十年间必然会出现的某些重大机会。在这种情况下，我们将只获得优先股的收益率，而在此期间，典型的优先股对我们而言毫无吸引力。伯克希尔想要从其四只优先股中获得满意结果的唯一途径，是被投资公司的普通股表现良好。
要实现这一点，需要优秀的管理层以及至少尚可接受的行业条件。但我们相信伯克希尔的投资也会有所帮助，而且每家被投资公司的其他股东在未来几年将从我们的优先股购买中获利。之所以有帮助，是因为每家公司现在都拥有一个主要、稳定且关切的股东，其董事长和副董事长通过伯克希尔的投资，间接地将自己很大一部分个人资金投入了这些事业。在与被投资公司打交道时，查理和我将提供支持、分析和客观意见。我们认识到，我们正在与经验丰富的CEO们合作，他们对自己的业务掌控自如，但在某些时候，他们也需要有机会与一个与其行业或过去决策无关的人探讨想法。
整体来看，这些可转换优先股的回报率，既比不上我们发现一家经济前景极好却遭市场低估的企业所能获得的收益，也比不上我们最青睐的资本配置方式——收购一家优秀企业80%或以上股权、并拥有优秀管理层——所能带来的收益。但这两种机会都很罕见，尤其是要符合我们当前及预期资源规模的机会。
总之，查理和我认为，我们的优先股投资应该能产生略高于大多数固定收益投资组合的回报，同时我们也能在被投公司中扮演一个虽小却愉快且富有建设性的角色。
**零息证券**
9月，伯克希尔发行了本金总额9.026亿美元的零息可转换次级债券，这些债券如今已在纽约证券交易所上市。所罗门兄弟公司以极其出色的方式处理了这次承销，为我们提供了宝贵的建议和完美的执行。
当然，大多数债券要求定期支付利息，通常是每半年一次。而零息债券则相反，不需要当期付息；投资者通过以远低于到期价值的价格购买证券来获得收益。实际利率由发行价、到期价值以及发行与到期之间的时间长度决定。
在我们的案例中，债券以到期价值的44.314%发行，期限15年。对于购买这些债券的投资者来说，这数学上等同于每半年复利一次、当期利率为5.5%的收益。由于我们每1美元面值只收到44.31美分，此次发行的净筹资额为4亿美元（扣除约950万美元发行费用）。
债券以1万美元为单位发行，每份债券可转换为0.4515股伯克希尔·哈撒韦股票。由于1万美元债券的购买成本是4,431美元，这意味着转换价格为每股9,815美元，比当时市场价格溢价15%。伯克希尔可在1992年9月28日之后的任何时间按应计价值（发行价加上每半年复利5.5%）赎回债券；此外，在1994年9月28日和1999年9月28日这两个指定日期，债券持有人可要求伯克希尔按应计价值回购债券。
出于税务目的，伯克希尔有权每年扣除5.5%的应计利息，尽管我们并未向债券持有人支付任何现金。因此，对我们而言，减税带来的净效果是正向的现金流。这是一个非常重要的好处。一些不可知的变量使我们无法计算确切的实际利率，但在任何情况下，它都将远低于5.5%。同时，税法具有对称性：任何应税债券持有人每年都必须为这5.5%的利息纳税，尽管他并未收到现金。
无论是我们的债券，还是去年发行类似债券的其他公司（尤其是Loews和摩托罗拉），都与近年来发行的大多数零息债券截然不同。对这些零息债券，查理和我一直是、并将继续是直言不讳的批评者。正如我稍后将解释的那样，此类债券经常以最具欺骗性的方式被使用，给投资者带来致命后果。但在讨论这个话题之前，让我们先回到伊甸园，回到那个苹果尚未被咬一口的时代。
如果你和我年纪差不多，那么你最早买入的零息债券是在二战期间，通过购买著名的E系列美国储蓄债券——历史上最畅销的债券。（战后，一半的美国家庭持有这些债券。）当然，没有人把E系列称为零息债券，我怀疑这个术语当时甚至还没被发明出来。但它确实是零息债券。
这些债券的面额小至18.75美元。用这笔钱可以购买一份25美元、10年后到期的美国政府债券，为买方带来2.9%的年复合收益率。在当时，这是个颇具吸引力的条件：2.9%的收益率高于当时政府债券的一般水平，而且持有者无需承担市场波动风险——他随时可以兑付债券，仅需牺牲少量利息。
另一种形式的零息美国国债也在过去十年间出现，同样温和且实用。普通债券有一个问题：即使它标明支付某个利率——比如10%——持有者也无法确保能实现10%的复合回报。要达成这个收益率，每半年收到的息票必须按10%再投资。如果息票到期时当前利率只有6%或7%，那么持有者就无法在债券存续期内按标榜的利率实现复利。对于养老基金或其他有长期负债的投资者而言，这种"再投资风险"可能是个严重问题。储蓄债券本可以解决这个问题，但储蓄债券只对个人发行，且无法买到大规模面额。大买家需要的是大量的"储蓄债券等价物"。
这时，一些富有创意且（在这个案例中）极具实用价值的投资银行家登场了（我很高兴地说，领军的是所罗门兄弟公司）。他们通过从标准政府债券中"剥离"半年付息的息票，创造了所需的工具。每张息票一旦被剥离，就具备了储蓄债券的基本特征——因为它代表未来某个时点一笔到期的款项。例如，如果你从一张2010年到期的美国政府债券中剥离出40张半年付息的息票，你就会得到40张零息债券，期限从6个月到20年不等，然后每张可以与其他同期限的息票捆绑销售。如果当前所有期限的利率都是10%，那么6个月期债券的发行价将是到期价值的95.24%，20年期债券的发行价是14.20%。这样，购买任何特定期限的投资者都能保证在整个持有期内获得10%的复合收益率。近年来，政府债券的剥离大规模进行，因为从养老基金到个人退休金账户的长期投资者都认识到这些高信用等级的零息债券非常适合他们的需求。
然而，正如华尔街一再发生的那样：智者始、愚者终。过去几年里，信用评级越来越差的发行商发行了大量零息债券（以及功能等同的实物支付债券——这种债券每半年发放额外的PIK债券作为利息，而不是支付现金）。对这些发行商来说，零息（或PIK）债券有一个压倒性的优势：你不可能因为承诺不付任何东西而违约。事实上，如果欠发达国家政府在上世纪70年代发行的不是别的，而是长期零息债券，那么它们现在作为债务国的记录将会毫无污点。
这个原则——如果你郑重承诺长期不付任何东西，那么你在很长时间内就不需要违约——那些试图为越来越不可靠的交易融资的发起人和投资银行家自然心知肚明。但贷款人接受这个原则需要时间：几年前杠杆收购热潮刚兴起时，买家只能以相当稳健的基础借款——即保守估计的自由现金流（营业利润加折旧和摊销，减去正常化资本支出）足以覆盖利息并适度减少债务。
后来，随着交易撮合者的肾上腺素飙升，企业开始以高得离谱的价格被收购，所有自由现金流都不得不用于支付利息，根本剩不下钱来偿还债务。实际上，借款人采取了一种斯嘉丽·奥哈拉式（Scarlett O'Hara）的态度——"明天再想吧"——对本金偿还问题视而不见，而新一代放贷人——首发垃圾债券的买家——竟然也接受了这种做法。债务不再是用来偿还的，而是成了用来再融资的。这种变化让我想起《纽约客》上的一幅漫画：一个满怀感激的借款人站起来，握着银行信贷主管的手，激动地说："我不知道该怎么感谢您借我钱，让我这辈子都还不起。"
很快，连这种宽松的新标准也让借款人觉得难以忍受。为了引诱放贷人资助更愚蠢的交易，他们发明了一种可憎之物：EBDIT——息税折旧前利润——作为衡量公司付息能力的指标。用这把锯短的尺子，借款人基于"折旧不需要当期现金支出"的理论，干脆不把折旧算作费用。
这种态度显然是妄想。在美国95%的企业中，长期来看资本支出大致等于折旧，这是必需的，而且和人工成本或公用事业费用一样是真实的支出。就算是高中辍学生也明白，要贷款买车，他的收入不仅要覆盖利息和运营费用，还要覆盖按实际计算的折旧。如果他开口就谈EBDIT，银行会把他笑出来。
当然，企业可以在某个月份跳过资本支出，就像人可以一天甚至一周不吃饭。但如果这种跳过变成常态且不补上，身体就会变弱，最终死亡。而且，时断时续的喂养方式长期来看会让个人或企业的机体变得比稳定饮食的机体更不健康。作为生意人，查理和我乐见竞争对手无力进行资本支出。
你可能会认为，为了把一笔糟糕的交易打扮得好看而忽略折旧这样的大项费用，已经触及华尔街想象力的极限了。如果是这样，那你在过去几年里肯定没太留心看。促销员们需要找到一种方法，来为更昂贵的收购辩护。否则，他们就有可能——天哪！——把交易输给其他更有"想象力"的促销员。
于是，穿过镜子（指爱丽丝梦游仙境），促销员和他们的投资银行家宣称，现在应该用EBDIT仅对现金利息来比较，也就是说，在评估交易的财务可行性时，零息债券或PIK债券上产生的应计利息可以忽略不计。这种做法不仅把折旧费用扔进了"忽略不计"的角落，还同样对待了通常占利息费用很大一部分的应计利息。可耻的是，许多专业投资经理居然附和了这种胡说八道，不过他们通常小心地只拿客户的钱去冒险，自己的钱则毫发无损。（称这些经理为"专业人士"实际上太客气了；他们应该被叫做"促销员"。）
按照这个新标准，一家税前利润比如1亿美元、需要当期支付9000万美元利息的公司，可能会利用零息债券或PIK债券再产生6000万美元的年利息，这些利息会累积并复利，但几年内不需现金支付。这些债券的利率通常非常高，这意味着第二年可能变成9000万美元现金利息加6900万美元应计利息，以此类推，随着复利进行。这种高利率的再借款计划，几年前还只适合出现在码头区（指高利贷/非法借贷），很快却成了几乎所有主要投资银行现代金融的典范。
当他们抛出这些方案时，投资银行家们展示了自己幽默的一面：对于那些几个月前他们还几乎闻所未闻的公司，他们居然能给出未来五年甚至更久的利润表和资产负债表预测。如果你看到这类报表，我建议你也一起玩玩：问问这位投资银行家，他们自己公司过去几年的年度预算是怎么做的，再拿实际结果对比一下。
不久前，肯·加尔布雷思在他的机智精辟之作《大崩盘》里，发明了一个新的经济学术语："盗用公款"（bezzle），定义为当前尚未被发现的贪污总额。这个金融生物有个神奇特质：贪污者因那笔尚未被发现的赃款而更富有，而受害者却还没感到自己变穷了。
加尔布雷思教授敏锐地指出，这笔金额应该加进国民财富里，这样我们才能知道"心理国民财富"。按照逻辑，一个想要显得极其繁荣的社会，就应该鼓励公民去贪污，并尽量不侦破这些罪行。通过这种方式，"财富"会膨胀，尽管没有一丁点生产性劳动被完成。
与零息债券在现实世界中的荒谬相比，盗用公款的讽刺笑话简直是小巫见大巫。零息债券使得合同的一方可以体验"收入"，而另一方却没有承受支出的痛苦。在我们的例子中，一家每年只能赚1亿美元的公司——因此也只能支付那么多利息——居然神奇地为债券持有人创造了1.5亿美元的"收益"。只要大型投资者自愿戴上彼得·潘的翅膀，一遍遍说"我相信"，零息债券能创造出来的"收入"就没有上限。
华尔街对这一发明的热情，就像那些思想不太开化的人对轮子或犁的热情。终于，有了一种工具能让华尔街以不再受实际盈利能力限制的价格做交易。结果自然是更多的交易：愚蠢的价格总会吸引卖家。而且，就像杰西·安鲁可能说过的那样，交易就是金融的母乳。
零息债券或实物支付债券（PIK bond）对发起人和投资银行家还有一个额外吸引力：从愚蠢到失败之间的时间可以拉长。这不是小好处。如果必须面对所有成本之前的时期很长，发起人就可以搞出一连串愚蠢的交易——收取大把费用——而他们先前那些投机业绩的鸡毛蒜皮还没回来啄人。
但到最后，无论冶金炼丹还是金融炼丹，都会失败。一个烂企业不可能通过会计或资本结构的把戏变成金企业。声称自己是金融炼金术士的人可能会富起来。但让他致富的通常不是业务成就，而是轻信的投资者。
不过，不管它们有什么弱点，我们得补充一句，许多零息债券和实物支付债券并不会违约。事实上我们持有过一些，如果它们的市场足够低迷，我们可能还会再买。（不过，我们从未考虑过购买信用弱的发行人新发的债券。）任何金融工具本身都不是邪恶的；只是某些变种比另一些具有更大的捣乱潜力。
在制造麻烦方面，最该获得"蓝丝带奖"的当属那些无力按期支付利息的零息债券发行人。我们的建议是：无论何时，只要投资银行家开始谈论EBDIT（息税折旧前收益），或是有人设计出一种资本结构，使得所有应付和应计利息都无法从扣除充足资本开支后的当期现金流中轻松覆盖——那就赶紧捂紧钱包。反过来，你可以提议让那些发起人及其高薪团队也接受零息收费，把他们的酬劳推迟到零息债券全部还清后再支付。看看他们对这笔交易的热情还能持续多久。
我们关于投资银行家的评论可能显得有些尖刻。但查理和我——以我们无可救药的老派作风——认为他们应当扮演看门人的角色，保护投资者免受发起人过度挥霍的倾向所害。毕竟，自古以来，发起人在接受金钱时所展现的判断力和自制力，与酒鬼在饮酒时所展现的如出一辙。因此，银行家的行为至少应当像一位负责任的酒保那样：必要时，宁愿拒绝下一杯酒的利润，也不让醉汉开车上高速。不幸的是，近年来许多领先的投资机构发现，酒保的道德标准是一个令人难以忍受的约束条件。最近，在华尔街选择走正路的人，路上并不拥挤。
一个令人沮丧的注脚：零息债券闹剧的成本不会只由直接参与者承担。某些储蓄和贷款协会用FSLIC（联邦储蓄与贷款保险公司）担保的存款现金大量买入这类债券。为了展现亮眼的收益，这些买家将这些债券的超高利息收入记在账上——但并未实际收到。许多这类协会现在陷入严重困境。如果它们对信用不稳机构的贷款成功，协会的所有者会揣走利润；而在大量贷款失败的情况下，将由纳税人来买单。借用Jackie Mason的话说：在这些协会里，真正该戴滑雪面罩的其实是那些经理人。
第一个二十五年的错误（浓缩版）
引用Robert Benchley的话："养狗能让一个男孩学会忠诚、坚持，以及躺下前转三圈。"这就是经验的局限。不过，在犯新错误之前回顾过去的错误，总是一个好主意。所以让我们快速回顾一下过去二十五年。
o 我的第一个错误，当然就是买下伯克希尔的控股权。虽然我知道它的业务——纺织制造——前景暗淡，但我被低价所诱惑而买入。在我早年，这类股票购买曾带来相当不错的回报，尽管到1965年伯克希尔出现时，我已逐渐意识到这种策略并不理想。
如果你以足够低的价格买入一只股票，通常公司的命运会出现一些波折，让你有机会以可观的利润脱手，即使公司的长期表现可能很糟糕。我把这称为"雪茄烟蒂"式投资法。在街上捡到一支只剩一口可抽的烟蒂，也许抽不了几口，但"便宜买进"让那一口全是利润。
除非你是个清盘人，否则这种买企业的方式很蠢。首先，那个所谓的"便宜货"价格到最后很可能根本不算捡漏。在困难的企业里，一个问题刚解决，另一个问题又冒出来——厨房里绝不会只有一只蟑螂。其次，你最初得到的任何优势，很快就会被企业微薄的回报侵蚀。比如，如果你花800万美元买下一家能卖或清算出1000万美元的企业，并且立刻采取其中一种行动，你就能获得高回报。但如果这笔投资要等十年后才能以1000万美元卖出，期间每年只赚到并分配几个百分点的成本收益，那它就会让人失望。时间是好公司的朋友，是平庸公司的敌人。
你可能会觉得这个道理显而易见，但我却是吃了苦头才学会的——事实上，我反复学了好几遍。刚收购伯克希尔不久，我又通过一家叫Diversified Retailing的公司买下了巴尔的摩的百货商店Hochschild Kohn，这家公司后来并入了伯克希尔。我买的价格比账面价值低很多，管理层一流，交易里还附带一些额外好处——未记录的房地产价值和大笔后进先出存货缓冲。我怎么可能会失手？所以——三年后，我好不容易才以差不多原价把这家店卖掉。结束了与Hochschild Kohn的"企业婚姻"后，我的感受就像乡村歌曲里那个丈夫唱的一样："我老婆跟最好的朋友跑了，我居然还挺想那哥们儿。"
我还能给你举出其他亲身经历的"便宜货"蠢事，但我相信你已经明白了：用合理的价格买一家好公司，远胜于用绝妙的价格买一家普通的公司。查理很早就懂了这一点；我是个慢学者。但现在，无论买公司还是买股票，我们寻找的都是拥有一流管理的一流企业。
o 这直接引出一个相关教训：好骑手骑好马能跑得快，但骑在破败的老马上就不行。伯克希尔的纺织业务和Hochschild, Kohn都有一流且诚实的人在管理。同样的管理者，如果放到经济特征好的企业里，肯定能做出漂亮业绩。但他们被困在流沙里，永远没法前进。
我说过很多次：当一位以才华著称的管理层去接手一家以糟糕经济特征著称的企业时，最终保留下来的往往是那家企业的名声。我只希望自己当初没那么热衷于创造案例。我的行为跟Mae West招认的如出一辙："我曾是白雪公主，但后来漂移了。"
o 另一个相关的教训：别逞强。经过25年购买和监督各种企业的经历，查理和我并没有学会如何解决困难的企业问题。我们学会的是避开它们。我们之所以能成功，是因为我们专注于识别一英尺高的跨栏，一脚迈过去，而不是因为我们掌握了跨越七英尺高栏的能力。
这个发现可能看起来不公平，但无论是在商业还是投资中，通常坚持做简单明显的事比解决难题要有利得多。偶尔，棘手的问题必须应对——就像我们在布法罗创办周日报纸时那样。其他时候，当一家优秀企业遇到一次性的、巨大但可解决的问题时，也会出现绝佳的投资机会——很多年前的美国运通和GEICO就是例子。但总体而言，避开恶龙比杀死恶龙，我们做得更好。
o 我最意想不到的发现：商业中存在一种无形力量，我们不妨称之为"机构惯性"，其影响之巨大远超想象。在商学院时，没人跟我提过这种惯性的存在；当我踏入商界时，也并未凭直觉理解它。那时我以为，正派、聪明、经验丰富的管理者自然会做出理性的商业决策。但久而久之我认识到，并非如此。相反，一旦机构惯性开始起作用，理性往往就败下阵来。
例如：(1) 就像受牛顿第一运动定律支配，一家机构会抗拒对其当前方向的任何改变；(2) 正如工作会膨胀到填满可用时间，公司项目或收购也会冒出来吸干可用资金；(3) 领导者无论多么愚蠢的生意渴望，都会迅速得到手下人准备的详细回报率与战略研究报告的支持；以及 (4) 同行公司无论扩张、收购、设定高管薪酬还是别的什么，其行为都会被不加思考地模仿。
是机构惯性——而非贪婪或愚笨——将企业推上这些常常误入歧途的道路。因为曾无视这股惯性的威力而付出高昂代价，之后我试图以最小化其影响的方式来组织和经营伯克希尔。此外，Charlie和我一直努力将投资集中于那些对这一问题保持警觉的公司。
o 在另一些错误之后，我学会了只与自己喜欢、信任且敬佩的人共事。正如我之前所说，这条原则本身并不能保证成功：一家二流的纺织或百货公司，不会仅仅因为其管理者是你愿意把女儿嫁给他的人就繁荣起来。然而，如果一位所有者（或投资者）能在具备良好经济特征的生意中与这样的人为伍，他就能创造奇迹。相反，我们不愿与缺乏可敬品质的管理者合作，无论他们公司的前景多么诱人。我们从未与一个坏人做成过一笔好交易。
o 我最糟糕的一些错误并未公之于众。那些是我本应理解其优点却没有买入的股票或生意。错过能力圈以外的重大机会不是罪过。但我曾错过几个真正的大买卖——它们被直接端到我面前，我完全有能力理解却没有行动。对伯克希尔的股东（包括我自己）而言，这种优柔寡断的成本是巨大的。
o 我们一贯保守的财务政策或许看起来是个错误，但在我看来并非如此。回头看，很明显，如果伯克希尔当时采用明显更高（但仍属常规）的杠杆比率，我们的净资产收益率可能会远高于实际平均的23.8%。即使在1965年，我们或许也能判断有99%的概率，更高杠杆只会带来好处。相应地，我们可能只看到1%的概率——某种内部或外部的冲击因素会使常规债务比率导致结果介于暂时痛苦与债务违约之间。
我们不喜欢那种99:1的赔率——永远也不会。在我们看来，微小概率的困境或耻辱，并不能被大概率的高回报所抵消。如果你的行动是明智的，你一定会得到好结果；在大多数此类情况下，杠杆只是让事情更快发生。Charlie和我从不着急：我们享受过程远胜于享受收益——尽管我们也学会了与收益共存。
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我们希望再过25年，还能向各位报告头50年犯下的错误。如果2015年我们还在世，届时你们可以放心，这一节的篇幅会比现在长得多。
其他事项
我们希望能再收购一些像现有企业那样的好生意，而且需要各位帮忙。如果你有符合以下标准的企业，请打电话给我，或者最好写信。
以下是我们的收购标准：
(1) 大宗收购（税后利润至少1,000万美元），
(2) 具备持续而稳定的盈利能力（我们对未来预测不感兴趣，对“扭亏为盈”型也不感冒），
(3) 企业净资产收益率良好，且负债很少或没有负债，
(4) 管理层已经到位（我们无法提供管理人才），
(5) 业务简单易懂（如果涉及大量高科技，我们搞不懂），
(6) 有报价（如果不知道价格，我们不想浪费自己或卖家的时间，连初步洽谈都不必）。
我们不会进行敌意收购。我们可以承诺绝对保密，并且快速答复——通常五分钟内——是否感兴趣。我们倾向于现金收购，但如果收到的内在企业价值与我们付出的相当，也会考虑发行股份。
我们最喜欢的收购方式是像Blumkin-Friedman-Heldman那样的模式。在这些案例中，企业的所有者兼经营者希望获得大量现金，有时是为自己，但更多是为家人或不参与经营的股东。同时，这些经营者希望继续作为重要股东，像过去一样管理自己的公司。我们认为，对于有这类目标的卖家，我们特别合适。欢迎潜在卖家通过和我们有过交易的人士来了解我们。
查理和我经常收到一些根本达不到我们标准的收购提案：我们发现，如果你登广告说想买柯利牧羊犬，很多人会打电话来想卖给你他们的可卡犬。我们对新创企业、扭亏为盈或拍卖式销售的兴趣，可以用高德温（Goldwyn）的一句名言来概括：“请把我排除在外。”
除了收购上述企业之外，我们也对通过协商大量买入（但不控股）的股票感兴趣，就像我们在Capital Cities（大都会）、Salomon（所罗门）、Gillette（吉列）、USAir（全美航空）和Champion（冠军国际）持有的股份那样。去年我们说过，对大额可转换优先股有特别兴趣。现在这种兴趣依然存在，但空间有限，因为我们已经接近这一类投资我们认为合适的最大仓位了。
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两年前，我向大家介绍过Harry Bottle。1962年，他迅速解决了当时我控制的第一家工业公司Dempster Mill Manufacturing的重大经营危机（这是我的一笔“捡烟蒂”式投资）；24年后，他再次出现，拯救了我——这次是在K&W Products（伯克希尔旗下生产汽车化合物的小公司）的问题上。我报告过，Harry在短时间内减少了K&W占用的资本，优化了生产，削减了成本，使利润翻了两番。你可能以为他会喘口气。但去年，现年70岁的Harry参加了一场破产拍卖，用极低的价格为K&W收购了一条非常合适的产品线。这一妙手很可能让该公司利润再增50%。请留意这一栏目，后续会有Harry大捷的报道。
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在纽交所挂牌交易超过一年后，我们的特约经纪商——Henderson Brothers, Inc.（"HBI"）的Jim Maguire——表现依旧出色。挂牌前，做市商价差通常高达市场价格的3%或更多。Jim将价差维持在50点以内，以当前价格计算，远低于1%。买卖股票的股东因此大幅降低了交易成本，受益良多。
我们对Jim、HBI和纽交所的表现非常满意，于是在纽交所投放的一系列广告中，我特意表达了这份认可。一般来说，我不喜欢做推荐广告，但这次我很乐意公开表扬纽交所。
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去年夏天，我们卖掉了三年前以85万美元购买的公务机，又花670万美元买了一架二手飞机。那些还记得第5页细菌繁殖数学题的人，肯定会惊慌：如果我们的净资产继续以当前速度增长，而换飞机的成本继续按现在每年100%的速度复利递增，用不了多久，伯克希尔的全部净资产就会被这架飞机吞掉。
查理不喜欢我把飞机比作细菌；他觉得这对细菌是一种侮辱。他心目中的旅行方式是坐空调大巴——只有票价打折时，他才会奢侈一把。我对飞机的态度，可以借用一句据说（我确信是杜撰的）圣奥古斯丁在放弃世俗享乐、成为神父之前的祷告来概括：他在理智与欲望的冲突中挣扎，祈求道："主啊，请帮助我成为贞洁之人——但不是现在。"
给飞机起名字可不容易。我最初提议叫"查理·T·芒格号"。查理反驳说叫"反常号"。最后我们定名为"不可辩解号"。
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在1989年伯克希尔股东指定捐款计划中，约96.9%的合格股份参与了。通过该计划的捐款总额为590万美元，共有2550家慈善机构受益。
我们敦促新股东阅读第52-53页关于股东指定捐款计划的说明。如果你想参与未来的计划，我们强烈建议你立即确保你的股份以实际所有人名义登记，而不是以经纪商、银行或存管机构的代理人名义登记。未在1990年8月31日之前以这种方式登记的股份，将没有资格参与1990年的计划。
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今年的年会将于1990年4月30日星期一上午9:30举行。去年参会人数增至约1000人，几乎达到了Joslyn博物馆Witherspoon Hall的座位容量。因此，今年的会议将移至奥马哈市中心的Orpheum剧院，距离Red Lion酒店约四分之一英里。Radisson-Redick Tower酒店较小但环境不错，就在Orpheum剧院对面。或者你也可以选择住在奥马哈西区的Marriott酒店，距离Borsheim's约100码。我们会在Marriott安排巴士，8:30和8:45出发前往会场，会议结束后返回。
查理和我都很享受年会，希望你能来。股东们提出的问题质量很高，反映了你们的水准：我们从未在任何其他年会上听到过如此一贯高水平的、以所有者视角出发的聪明问题。
股东委托书附件会说明如何领取参会所需的入场卡。由于工作日奥芬剧院周边停车位紧张，我们已为股东安排了附近多个停车场，附件中亦有相关说明。
和往年一样，会后我们将安排巴士送各位前往内布拉斯加家具卖场和波仙珠宝，之后还可送您去市区酒店或机场。希望您留出充裕时间，好好逛逛这两家店。提前抵达的朋友可随时前往家具卖场：周六上午10点至下午5:30，周日中午12点至下午5:30营业。
波仙珠宝通常周日不营业，但4月29日（周日）我们将为股东及嘉宾破例营业，时间从中午12点到下午6点。Ike喜欢搞点花样，相信他会为股东们准备些特别的惊喜。
这封信里我们谈了不少关于复利的话题。如果您受得了自己的收益率在某天变成负数——我承认这念头不怎么美妙——那就在29号去找Ike吧。
沃伦·E·巴菲特
董事会主席
1990年3月2日