BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Last year we made a prediction: "A reduction [in Berkshire's net worth] is almost certain in at least one of the next three years." During much of 1990's second half, we were on the road to quickly proving that forecast accurate. But some strengthening in stock prices late in the year enabled us to close 1990 with net worth up by \$362 million, or 7.3%. Over the last 26 years (that is, since present management took over) our per-share book value has grown from \$19.46 to \$4,612.06, or at a rate of 23.2% compounded annually.
Our growth rate was lackluster in 1990 because our four major common stock holdings, in aggregate, showed little change in market value. Last year I told you that though these companies - Capital Cities/ABC, Coca-Cola, GEICO, and Washington Post - had fine businesses and superb managements, widespread recognition of these attributes had pushed the stock prices of the four to lofty levels. The market prices of the two media companies have since fallen significantly - for good reasons relating to evolutionary industry developments that I will discuss later - and the price of Coca-Cola stock has increased significantly for what I also believe are good reasons. Overall, yearend 1990 prices of our "permanent four," though far from enticing, were a bit more appealing than they were a year earlier.
Berkshire's 26-year record is meaningless in forecasting future results; so also, we hope, is the one-year record. We continue to aim for a 15% average annual gain in intrinsic value. But, as we never tire of telling you, this goal becomes ever more difficult to reach as our equity base, now \$5.3 billion, increases.
If we do attain that 15% average, our shareholders should fare well. However, Berkshire's corporate gains will produce an identical gain for a specific shareholder only if he eventually sells his shares at the same relationship to intrinsic value that existed when he bought them. For example, if you buy at a 10% premium to intrinsic value; if intrinsic value subsequently grows at 15% a year; and if you then sell at a 10% premium, your own return will correspondingly be 15% compounded. (The calculation assumes that no dividends are paid.) If, however, you buy at a premium and sell at a smaller premium, your results will be somewhat inferior to those achieved by the company.
Ideally, the results of every Berkshire shareholder would closely mirror those of the company during his period of ownership. That is why Charlie Munger, Berkshire's Vice Chairman and my partner, and I hope for Berkshire to sell consistently at about intrinsic value. We prefer such steadiness to the value-ignoring volatility of the past two years: In 1989 intrinsic value grew less than did book value, which was up 44%, while the market price rose 85%; in 1990 book value and intrinsic value increased by a small amount, while the market price fell 23%.
Berkshire's intrinsic value continues to exceed book value by a substantial margin. We can't tell you the exact differential because intrinsic value is necessarily an estimate; Charlie and I might, in fact, differ by 10% in our appraisals. We do know, however, that we own some exceptional businesses that are worth considerably more than the values at which they are carried on our books.
Much of the extra value that exists in our businesses has been created by the managers now running them. Charlie and I feel free to brag about this group because we had nothing to do with developing the skills they possess: These superstars just came that way. Our job is merely to identify talented managers and provide an environment in which they can do their stuff. Having done it, they send their cash to headquarters and we face our only other task: the intelligent deployment of these funds.
My own role in operations may best be illustrated by a small tale concerning my granddaughter, Emily, and her fourth birthday party last fall. Attending were other children, adoring relatives, and Beemer the Clown, a local entertainer who includes magic tricks in his act.
Beginning these, Beemer asked Emily to help him by waving a "magic wand" over "the box of wonders." Green handkerchiefs went into the box, Emily waved the wand, and Beemer removed blue ones. Loose handkerchiefs went in and, upon a magisterial wave by Emily, emerged knotted. After four such transformations, each more amazing than its predecessor, Emily was unable to contain herself. Her face aglow, she exulted: "Gee, I'm really good at this."
And that sums up my contribution to the performance of Berkshire's business magicians - the Blumkins, the Friedman family, Mike Goldberg, the Heldmans, Chuck Huggins, Stan Lipsey and Ralph Schey. They deserve your applause.
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.
Much additional information about these businesses is given on pages 39-46, where 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 56. His letter also contains the clearest and most insightful discussion of the banking industry that I have seen.
(000s omitted)
-----------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1990 1989 1990 1989
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ................ $(26,647) $(24,400) $(14,936) $(12,259)
Net Investment Income ....... 327,048 243,599 282,613 213,642
Buffalo News .................. 43,954 46,047 25,981 27,771
Fechheimer .................... 12,450 12,621 6,605 6,789
Kirby ......................... 27,445 26,114 17,613 16,803
Nebraska Furniture Mart ....... 17,248 17,070 8,485 8,441
Scott Fetzer Manufacturing Group 30,378 33,165 18,458 19,996
See's Candies ................. 39,580 34,235 23,892 20,626
Wesco - other than Insurance .. 12,441 13,008 9,676 9,810
World Book .................... 31,896 25,583 20,420 16,372
Amortization of Goodwill ...... (3,476) (3,387) (3,461) (3,372)
Other Purchase-Price
Accounting Charges ......... (5,951) (5,740) (6,856) (6,668)
Interest Expense* ............. (76,374) (42,389) (49,726) (27,098)
Shareholder-Designated
Contributions .............. (5,824) (5,867) (3,801) (3,814)
Other ......................... 58,309 23,755 35,782 12,863
-------- -------- -------- --------
Operating Earnings .............. 482,477 393,414 370,745 299,902
Sales of Securities ............. 33,989 223,810 23,348 147,575
-------- -------- -------- --------
Total Earnings - All Entities $516,466 $617,224 $394,093 $447,477
======== ======== ======== ========
*Excludes interest expense of Scott Fetzer Financial Group and Mutual Savings & Loan.
We refer you also to pages 47-53, 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 more in estimating Berkshire's intrinsic value than consolidated figures would do. 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.
"Look-Through" Earnings
The term "earnings" has a precise ring to it. And when an earnings figure is accompanied by an unqualified auditor's certificate, a naive reader might think it comparable in certitude to pi, calculated to dozens of decimal places.
In reality, however, earnings can be as pliable as putty when a charlatan heads the company reporting them. Eventually truth will surface, but in the meantime a lot of money can change hands. Indeed, some important American fortunes have been created by the monetization of accounting mirages.
Funny business in accounting is not new. For connoisseurs of chicanery, I have attached as Appendix A on page 22 a previously unpublished satire on accounting practices written by Ben Graham in 1936. Alas, excesses similar to those he then lampooned have many times since found their way into the financial statements of major American corporations and been duly certified by big-name auditors. Clearly, investors must always keep their guard up and use accounting numbers as a beginning, not an end, in their attempts to calculate true "economic earnings" accruing to them.
Berkshire's own reported earnings are misleading in a different, but important, way: We have huge investments in companies ("investees") whose earnings far exceed their dividends and in which we record our share of earnings only to the extent of the dividends we receive. The extreme case is Capital Cities/ABC, Inc. Our 17% share of the company's earnings amounted to more than \$83 million last year. Yet only about \$530,000 (\$600,000 of dividends it paid us less some \$70,000 of tax) is counted in Berkshire's GAAP earnings. The residual \$82 million-plus stayed with Cap Cities as retained earnings, which work for our benefit but go unrecorded on our books.
Our perspective on such "forgotten-but-not-gone" earnings is simple: The way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what's next done with it.
When Coca-Cola uses retained earnings to repurchase its shares, the company increases our percentage ownership in what I regard to be the most valuable franchise in the world. (Coke also, of course, uses retained earnings in many other value-enhancing ways.) Instead of repurchasing stock, Coca-Cola could pay those funds to us in dividends, which we could then use to purchase more Coke shares. That would be a less efficient scenario: Because of taxes we would pay on dividend income, we would not be able to increase our proportionate ownership to the degree that Coke can, acting for us. If this less efficient procedure were followed, however, Berkshire would report far greater "earnings."
I believe the best way to think about our earnings is in terms of "look-through" results, calculated as follows: Take \$250 million, which is roughly our share of the 1990 operating earnings retained by our investees; subtract \$30 million, for the incremental taxes we would have owed had that \$250 million been paid to us in dividends; and add the remainder, \$220 million, to our reported operating earnings of $371 million. Thus our 1990 "look-through earnings" were about$ 590 million.
As I mentioned last year, we hope to have look-through earnings grow about 15% annually. In 1990 we substantially exceeded that rate but in 1991 we will fall far short of it. Our Gillette preferred has been called and we will convert it into common stock on April 1. This will reduce reported earnings by about \$35 million annually and look-through earnings by a much smaller, but still significant, amount. Additionally, our media earnings - both direct and look-through - appear sure to decline. Whatever the results, we will post you annually on how we are doing on a look-through basis.
Non-Insurance Operations
Take another look at the figures on page 51, which aggregate the earnings and balance sheets of our non-insurance operations. After-tax earnings on average equity in 1990 were 51%, a result that would have placed the group about 20th on the 1989 Fortune 500.
Two factors make this return even more remarkable. First, leverage did not produce it: Almost all our major facilities are owned, not leased, and such small debt as these operations have is basically offset by cash they hold. In fact, if the measurement was return on assets - a calculation that eliminates the effect of debt upon returns - our group would rank in Fortune's top ten.
Equally important, our return was not earned from industries, such as cigarettes or network television stations, possessing spectacular economics for all participating in them. Instead it came from a group of businesses operating in such prosaic fields as furniture retailing, candy, vacuum cleaners, and even steel warehousing. The explanation is clear: Our extraordinary returns flow from outstanding operating managers, not fortuitous industry economics.
Let's look at the larger operations:
o It was a poor year for retailing - particularly for big-ticket items - but someone forgot to tell Ike Friedman at Borsheim's. Sales were up 18%. That's both a same-stores and all-stores percentage, since Borsheim's operates but one establishment.
But, oh, what an establishment! We can't be sure about the fact (because most fine-jewelry retailers are privately owned) but we believe that this jewelry store does more volume than any other in the U.S., except for Tiffany's New York store.
Borsheim's could not do nearly that well if our customers came only from the Omaha metropolitan area, whose population is about 600,000. We have long had a huge percentage of greater Omaha's jewelry business, so growth in that market is necessarily limited. But every year business from non-Midwest customers grows dramatically. Many visit the store in person. A large number of others, however, buy through the mail in a manner you will find interesting.
These customers request a jewelry selection of a certain type and value - say, emeralds in the \$10,000 -\$20,000 range - and we then send them five to ten items meeting their specifications and from which they can pick. Last year we mailed about 1,500 assortments of all kinds, carrying values ranging from under \$1,000 to hundreds of thousands of dollars.
The selections are sent all over the country, some to people no one at Borsheim's has ever met. (They must always have been well recommended, however.) While the number of mailings in 1990 was a record, Ike has been sending merchandise far and wide for decades. Misanthropes will be crushed to learn how well our "honor-system" works: We have yet to experience a loss from customer dishonesty.
We attract business nationwide because we have several advantages that competitors can't match. The most important item in the equation is our operating costs, which run about 18% of sales compared to 40% or so at the typical competitor. (Included in the 18% are occupancy and buying costs, which some public companies include in "cost of goods sold.") Just as Wal-Mart, with its 15% operating costs, sells at prices that high-cost competitors can't touch and thereby constantly increases its market share, so does Borsheim's. What works with diapers works with diamonds.
Our low prices create huge volume that in turn allows us to carry an extraordinarily broad inventory of goods, running ten or more times the size of that at the typical fine-jewelry store. Couple our breadth of selection and low prices with superb service and you can understand how Ike and his family have built a national jewelry phenomenon from an Omaha location.
And family it is. Ike's crew always includes son Alan and sons-in-law Marvin Cohn and Donald Yale. And when things are busy - that's often - they are joined by Ike's wife, Roz, and his daughters, Janis and Susie. In addition, Fran Blumkin, wife of Louie (Chairman of Nebraska Furniture Mart and Ike's cousin), regularly pitches in. Finally, you'll find Ike's 89-year-old mother, Rebecca, in the store most afternoons, Wall Street Journal in hand. Given a family commitment like this, is it any surprise that Borsheim's runs rings around competitors whose managers are thinking about how soon 5 o'clock will arrive?
o While Fran Blumkin was helping the Friedman family set records at Borsheim's, her sons, Irv and Ron, along with husband Louie, were setting records at The Nebraska Furniture Mart. Sales at our one-and-only location were \$159 million, up 4% from 1989. Though again the fact can't be conclusively proved, we believe NFM does close to double the volume of any other home furnishings store in the country.
The NFM formula for success parallels that of Borsheim's. First, operating costs are rock-bottom - 15% in 1990 against about 40% for Levitz, the country's largest furniture retailer, and 25% for Circuit City Stores, the leading discount retailer of electronics and appliances. Second, NFM's low costs allow the business to price well below all competitors. Indeed, major chains, knowing what they will face, steer clear of Omaha. Third, the huge volume generated by our bargain prices allows us to carry the broadest selection of merchandise available anywhere.
Some idea of NFM's merchandising power can be gleaned from a recent report of consumer behavior in Des Moines, which showed that NFM was Number 3 in popularity among 20 furniture retailers serving that city. That may sound like no big deal until you consider that 19 of those retailers are located in Des Moines, whereas our store is 130 miles away. This leaves customers driving a distance equal to that between Washington and Philadelphia in order to shop with us, even though they have a multitude of alternatives next door. In effect, NFM, like Borsheim's, has dramatically expanded the territory it serves - not by the traditional method of opening new stores but rather by creating an irresistible magnet that employs price and selection to pull in the crowds.
Last year at the Mart there occurred an historic event: I experienced a counterrevelation. Regular readers of this report know that I have long scorned the boasts of corporate executives about synergy, deriding such claims as the last refuge of scoundrels defending foolish acquisitions. But now I know better: In Berkshire's first synergistic explosion, NFM put a See's candy cart in the store late last year and sold more candy than that moved by some of the full-fledged stores See's operates in California. This success contradicts all tenets of retailing. With the Blumkins, though, the impossible is routine.
o At See's, physical volume set a record in 1990 - but only barely and only because of good sales early in the year. After the invasion of Kuwait, mall traffic in the West fell. Our poundage volume at Christmas dropped slightly, though our dollar sales were up because of a 5% price increase.
That increase, and better control of expenses, improved profit margins. Against the backdrop of a weak retailing environment, Chuck Huggins delivered outstanding results, as he has in each of the nineteen years we have owned See's. Chuck's imprint on the business - a virtual fanaticism about quality and service - is visible at all of our 225 stores.
One happening in 1990 illustrates the close bond between See's and its customers. After 15 years of operation, our store in Albuquerque was endangered: The landlord would not renew our lease, wanting us instead to move to an inferior location in the mall and even so to pay a much higher rent. These changes would have wiped out the store's profit. After extended negotiations got us nowhere, we set a date for closing the store.
On her own, the store's manager, Ann Filkins, then took action, urging customers to protest the closing. Some 263 responded by sending letters and making phone calls to See's headquarters in San Francisco, in some cases threatening to boycott the mall. An alert reporter at the Albuquerque paper picked up the story. Supplied with this evidence of a consumer uprising, our landlord offered us a satisfactory deal. (He, too, proved susceptible to a counterrevelation.)
Chuck subsequently wrote personal letters of thanks to every loyalist and sent each a gift certificate. He repeated his thanks in a newspaper ad that listed the names of all 263. The sequel: Christmas sales in Albuquerque were up substantially.
o Charlie and I were surprised at developments this past year in the media industry, including newspapers such as our Buffalo News. The business showed far more vulnerability to the early stages of a recession than has been the case in the past. The question is whether this erosion is just part of an aberrational cycle - to be fully made up in the next upturn - or whether the business has slipped in a way that permanently reduces intrinsic business values.
Since I didn't predict what has happened, you may question the value of my prediction about what will happen. Nevertheless, I'll proffer a judgment: While many media businesses will remain economic marvels in comparison with American industry generally, they will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago.
The reason media businesses have been so outstanding in the past was not physical growth, but rather the unusual pricing power that most participants wielded. Now, however, advertising dollars are growing slowly. In addition, retailers that do little or no media advertising (though they sometimes use the Postal Service) have gradually taken market share in certain merchandise categories. Most important of all, the number of both print and electronic advertising channels has substantially increased. As a consequence, advertising dollars are more widely dispersed and the pricing power of ad vendors has diminished. These circumstances materially reduce the intrinsic value of our major media investments and also the value of our operating unit, Buffalo News - though all remain fine businesses.
Notwithstanding the problems, Stan Lipsey's management of the News continues to be superb. During 1990, our earnings held up much better than those of most metropolitan papers, falling only 5%. In the last few months of the year, however, the rate of decrease was far greater.
I can safely make two promises about the News in 1991: (1) Stan will again rank at the top among newspaper publishers; and (2) earnings will fall substantially. Despite a slowdown in the demand for newsprint, the price per ton will average significantly more in 1991 and the paper's labor costs will also be considerably higher. Since revenues may meanwhile be down, we face a real squeeze.
Profits may be off but our pride in the product remains. We continue to have a larger "news hole" - the portion of the paper devoted to news - than any comparable paper. In 1990, the proportion rose to 52.3% against 50.1% in 1989. Alas, the increase resulted from a decline in advertising pages rather than from a gain in news pages. Regardless of earnings pressures, we will maintain at least a 50% news hole. Cutting product quality is not a proper response to adversity.
o The news at Fechheimer, our manufacturer and retailer of uniforms, is all good with one exception: George Heldman, at 69, has decided to retire. I tried to talk him out of it but he had one irrefutable argument: With four other Heldmans - Bob, Fred, Gary and Roger - to carry on, he was leaving us with an abundance of managerial talent.
Fechheimer's operating performance improved considerably in 1990, as many of the problems we encountered in integrating the large acquisition we made in 1988 were moderated or solved. However, several unusual items caused the earnings reported in the "Sources" table to be flat. In the retail operation, we continue to add stores and now have 42 in 22 states. Overall, prospects appear excellent for Fechheimer.
o At Scott Fetzer, Ralph Schey runs 19 businesses with a mastery few bring to running one. In addition to overseeing three entities listed on page 6 - World Book, Kirby, and Scott Fetzer Manufacturing - Ralph directs a finance operation that earned a record \$12.2 million pre-tax in 1990.
Were Scott Fetzer an independent company, it would rank close to the top of the Fortune 500 in terms of return on equity, although it is not in businesses that one would expect to be economic champs. The superior results are directly attributable to Ralph.
At World Book, earnings improved on a small decrease in unit volume. The costs of our decentralization move were considerably less in 1990 than 1989 and the benefits of decentralization are being realized. World Book remains far and away the leader in United States encyclopedia sales and we are growing internationally, though from a small base.
Kirby unit volume grew substantially in 1990 with the help of our new vacuum cleaner, The Generation 3, which was an unqualified success. Earnings did not grow as fast as sales because of both start-up expenditures and "learning-curve" problems we encountered in manufacturing the new product. International business, whose dramatic growth I described last year, had a further 20% sales gain in 1990. With the aid of a recent price increase, we expect excellent earnings at Kirby in 1991.
Within the Scott Fetzer Manufacturing Group, Campbell Hausfeld, its largest unit, had a particularly fine year. This company, the country's leading producer of small and medium-sized air compressors, achieved record sales of \$109 million, more than 30% of which came from products introduced during the last five years.
In looking at the figures for our non-insurance operations, you will see that net worth increased by only \$47 million in 1990 although earnings were \$133 million. This does not mean that our managers are in any way skimping on investments that strengthen their business franchises or that promote growth. Indeed, they diligently pursue both goals.
But they also never deploy capital without good reason. The result: In the past five years they have funneled well over 80% of their earnings to Charlie and me for use in new business and investment opportunities.
Insurance Operations
Shown below is an updated version of our usual table presenting key figures for the property-casualty insurance industry:
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 (Revised) 3.2 109.2 7.7 4.1
1990(Est.) 4.5 109.8 5.0 4.1
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. The higher the ratio, the worse the year. 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 at an average of 10% annually, even in periods when general inflation runs considerably lower. (Over the last 25 years, incurred losses have in reality 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 under-reserve when business turns bad may obscure their size for a time.
Last year premium growth fell far short of the required 10% and underwriting results therefore worsened. (In our table, however, the severity of the deterioration in 1990 is masked because the industry's 1989 losses from Hurricane Hugo caused the ratio for that year to be somewhat above trendline.) The combined ratio will again increase in 1991, probably by about two points.
Results will improve only when most insurance managements become so fearful that they run from business, even though it can be done at much higher prices than now exist. At some point these managements will indeed get the message: The most important thing to do when you find yourself in a hole is to stop digging. But so far that point hasn't gotten across: Insurance managers continue to dig - sullenly but vigorously.
The picture would change quickly if a major physical or financial catastrophe were to occur. Absent such a shock, one to two years will likely pass before underwriting losses become large enough to raise management fear to a level that would spur major price increases. When that moment arrives, Berkshire will be ready - both financially and psychologically - to write huge amounts of business.
In the meantime, our insurance volume continues to be small but satisfactory. In the next section of this report we will give you a framework for evaluating insurance results. From that discussion, you will gain an understanding of why I am so enthusiastic about the performance of our insurance manager, Mike Goldberg, and his cadre of stars, Rod Eldred, Dinos Iordanou, Ajit Jain, and Don Wurster.
In assessing our insurance results over the next few years, you should be aware of one type of business we are pursuing that could cause them to be unusually volatile. If this line of business expands, as it may, our underwriting experience will deviate from the trendline you might expect: In most years we will somewhat exceed expectations and in an occasional year we will fall far below them.
The volatility I predict reflects the fact that we have become a large seller of insurance against truly major catastrophes ("super-cats"), which could for example be hurricanes, windstorms or earthquakes. The buyers of these policies are reinsurance companies that themselves are in the business of writing catastrophe coverage for primary insurers and that wish to "lay off," or rid themselves, of part of their exposure to catastrophes of special severity. Because the need for these buyers to collect on such a policy will only arise at times of extreme stress - perhaps even chaos - in the insurance business, they seek financially strong sellers. And here we have a major competitive advantage: In the industry, our strength is unmatched.
A typical super-cat contract is complicated. But in a plain- vanilla instance we might write a one-year, $10 million policy providing that the buyer, a reinsurer, would be paid that sum only if a catastrophe caused two results: (1) specific losses for the reinsurer above a threshold amount; and (2) aggregate losses for the insurance industry of, say, more than$ 5 billion. Under virtually all circumstances, loss levels that satisfy the second condition will also have caused the first to be met.
For this \$10 million policy, we might receive a premium of, say, \$3 million. Say, also, that we take in annual premiums of \$100 million from super-cat policies of all kinds. In that case we are very likely in any given year to report either a profit of close to \$100 million or a loss of well over \$200 million. Note that we are not spreading risk as insurers typically do; we are concentrating it. Therefore, our yearly combined ratio on this business will almost never fall in the industry range of 100 - 120, but will instead be close to either zero or 300%.
Most insurers are financially unable to tolerate such swings. And if they have the ability to do so, they often lack the desire. They may back away, for example, because they write gobs of primary property insurance that would deliver them dismal results at the very time they would be experiencing major losses on super- cat reinsurance. In addition, most corporate managements believe that their shareholders dislike volatility in results.
We can take a different tack: Our business in primary property insurance is small and we believe that Berkshire shareholders, if properly informed, can handle unusual volatility in profits so long as the swings carry with them the prospect of superior long-term results. (Charlie and I always have preferred a lumpy 15% return to a smooth 12%.)
We want to emphasize three points: (1) While we expect our super-cat business to produce satisfactory results over, say, a decade, we're sure it will produce absolutely terrible results in at least an occasional year; (2) Our expectations can be based on little more than subjective judgments - for this kind of insurance, historical loss data are of very limited value to us as we decide what rates to charge today; and (3) Though we expect to write significant quantities of super-cat business, we will do so only at prices we believe to be commensurate with risk. If competitors become optimistic, our volume will fall. This insurance has, in fact, tended in recent years to be woefully underpriced; most sellers have left the field on stretchers.
At the moment, we believe Berkshire to be the largest U.S. writer of super-cat business. So when a major quake occurs in an urban area or a winter storm rages across Europe, light a candle for us.
Measuring Insurance Performance
In the previous section I mentioned "float," the funds of others that insurers, in the conduct of their business, temporarily hold. Because these funds are available to be invested, the typical property-casualty insurer can absorb losses and expenses that exceed premiums by 7% to 11% and still be able to break even on its business. Again, this calculation excludes the earnings the insurer realizes on net worth - that is, on the funds provided by shareholders.
However, many exceptions to this 7% to 11% range exist. For example, insurance covering losses to crops from hail damage produces virtually no float at all. Premiums on this kind of business are paid to the insurer just prior to the time hailstorms are a threat, and if a farmer sustains a loss he will be paid almost immediately. Thus, a combined ratio of 100 for crop hail insurance produces no profit for the insurer.
At the other extreme, malpractice insurance covering the potential liabilities of doctors, lawyers and accountants produces a very high amount of float compared to annual premium volume. The float materializes because claims are often brought long after the alleged wrongdoing takes place and because their payment may be still further delayed by lengthy litigation. The industry calls malpractice and certain other kinds of liability insurance "long- tail" business, in recognition of the extended period during which insurers get to hold large sums that in the end will go to claimants and their lawyers (and to the insurer's lawyers as well).
In long-tail situations a combined ratio of 115 (or even more) can prove profitable, since earnings produced by the float will exceed the 15% by which claims and expenses overrun premiums. The catch, though, is that "long-tail" means exactly that: Liability business written in a given year and presumed at first to have produced a combined ratio of 115 may eventually smack the insurer with 200, 300 or worse when the years have rolled by and all claims have finally been settled.
The pitfalls of this business mandate an operating principle that too often is ignored: Though certain long-tail lines may prove profitable at combined ratios of 110 or 115, insurers will invariably find it unprofitable to price using those ratios as targets. Instead, prices must provide a healthy margin of safety against the societal trends that are forever springing expensive surprises on the insurance industry. Setting a target of 100 can itself result in heavy losses; aiming for 110 - 115 is business suicide.
All of that said, what should the measure of an insurer's profitability be? Analysts and managers customarily look to the combined ratio - and it's true that this yardstick usually is a good indicator of where a company ranks in profitability. We believe a better measure, however, to be a comparison of underwriting loss to float developed.
This loss/float ratio, like any statistic used in evaluating insurance results, is meaningless over short time periods: Quarterly underwriting figures and even annual ones are too heavily based on estimates to be much good. But when the ratio takes in a period of years, it gives a rough indication of the cost of funds generated by insurance operations. A low cost of funds signifies a good business; a high cost translates into a poor business.
On the next page we show the underwriting loss, if any, of our insurance group in each year since we entered the business and relate that bottom line to the average float we have held during the year. From this data we have computed a "cost of funds developed from insurance."
(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- --------------- -------------
(In $ Millions) (Ratio of 1 to 2)
1967 ......... profit $17.3 less than zero 5.50%
1968 ......... profit 19.9 less than zero 5.90%
1969 ......... profit 23.4 less than zero 6.79%
1970 ......... $0.37 32.4 1.14% 6.25%
1971 ......... profit 52.5 less than zero 5.81%
1972 ......... profit 69.5 less than zero 5.82%
1973 ......... profit 73.3 less than zero 7.27%
1974 ......... 7.36 79.1 9.30% 8.13%
1975 ......... 11.35 87.6 12.96% 8.03%
1976 ......... profit 102.6 less than zero 7.30%
1977 ......... profit 139.0 less than zero 7.97%
1978 ......... profit 190.4 less than zero 8.93%
1979 ......... profit 227.3 less than zero 10.08%
1980 ......... profit 237.0 less than zero 11.94%
1981 ......... profit 228.4 less than zero 13.61%
1982 ......... 21.56 220.6 9.77% 10.64%
1983 ......... 33.87 231.3 14.64% 11.84%
1984 ......... 48.06 253.2 18.98% 11.58%
1985 ......... 44.23 390.2 11.34% 9.34%
1986 ......... 55.84 797.5 7.00% 7.60%
1987 ......... 55.43 1,266.7 4.38% 8.95%
1988 ......... 11.08 1,497.7 0.74% 9.00%
1989 ......... 24.40 1,541.3 1.58% 7.97%
1990 ......... 26.65 1,637.3 1.63% 8.24%
The float figures are derived from the total of loss reserves, loss adjustment expense reserves and unearned premium reserves minus agents' balances, prepaid acquisition costs and deferred charges applicable to assumed reinsurance. At some insurers other items should enter into the calculation, but in our case these are unimportant and have been ignored.
During 1990 we held about \$1.6 billion of float slated eventually to find its way into the hands of others. The underwriting loss we sustained during the year was \$27 million and thus our insurance operation produced funds for us at a cost of about 1.6%. As the table shows, we managed in some years to underwrite at a profit and in those instances our cost of funds was less than zero. In other years, such as 1984, we paid a very high price for float. In 19 years out of the 24 we have been in insurance, though, we have developed funds at a cost below that paid by the government.
There are two important qualifications to this calculation. First, the fat lady has yet to gargle, let alone sing, and we won't know our true 1967 - 1990 cost of funds until all losses from this period have been settled many decades from now. Second, the value of the float to shareholders is somewhat undercut by the fact that they must put up their own funds to support the insurance operation and are subject to double taxation on the investment income these funds earn. Direct investments would be more tax-efficient.
The tax penalty that indirect investments impose on shareholders is in fact substantial. Though the calculation is necessarily imprecise, I would estimate that the owners of the average insurance company would find the tax penalty adds about one percentage point to their cost of float. I also think that approximates the correct figure for Berkshire.
Figuring a cost of funds for an insurance business allows anyone analyzing it to determine whether the operation has a positive or negative value for shareholders. If this cost (including the tax penalty) is higher than that applying to alternative sources of funds, the value is negative. If the cost is lower, the value is positive - and if the cost is significantly lower, the insurance business qualifies as a very valuable asset.
So far Berkshire has fallen into the significantly-lower camp. Even more dramatic are the numbers at GEICO, in which our ownership interest is now 48% and which customarily operates at an underwriting profit. GEICO's growth has generated an ever-larger amount of funds for investment that have an effective cost of considerably less than zero. Essentially, GEICO's policyholders, in aggregate, pay the company interest on the float rather than the other way around. (But handsome is as handsome does: GEICO's unusual profitability results from its extraordinary operating efficiency and its careful classification of risks, a package that in turn allows rock-bottom prices for policyholders.)
Many well-known insurance companies, on the other hand, incur an underwriting loss/float cost that, combined with the tax penalty, produces negative results for owners. In addition, these companies, like all others in the industry, are vulnerable to catastrophe losses that could exceed their reinsurance protection and take their cost of float right off the chart. Unless these companies can materially improve their underwriting performance - and history indicates that is an almost impossible task - their shareholders will experience results similar to those borne by the owners of a bank that pays a higher rate of interest on deposits than it receives on loans.
All in all, the insurance business has treated us very well. We have expanded our float at a cost that on the average is reasonable, and we have further prospered because we have earned good returns on these low-cost funds. Our shareholders, true, have incurred extra taxes, but they have been more than compensated for this cost (so far) by the benefits produced by the float.
A particularly encouraging point about our record is that it was achieved despite some colossal mistakes made by your Chairman prior to Mike Goldberg's arrival. Insurance offers a host of opportunities for error, and when opportunity knocked, too often I answered. Many years later, the bills keep arriving for these mistakes: In the insurance business, there is no statute of limitations on stupidity.
The intrinsic value of our insurance business will always be far more difficult to calculate than the value of, say, our candy or newspaper companies. By any measure, however, the business is worth far more than its carrying value. Furthermore, despite the problems this operation periodically hands us, it is the one - among all the fine businesses we own - that has the greatest potential.
Marketable Securities
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%.
12/31/90
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ............ $ 517,500 $1,377,375
46,700,000 The Coca-Cola Co. ................... 1,023,920 2,171,550
2,400,000 Federal Home Loan Mortgage Corp. .... 71,729 117,000	
6,850,000 GEICO Corp. ......................... 45,713 1,110,556
1,727,765 The Washington Post Company ......... 9,731 342,097
5,000,000 Wells Fargo & Company ............... 289,431 289,375
Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings. The exception was Wells Fargo, a superbly-managed, high-return banking operation in which we increased our ownership to just under 10%, the most we can own without the approval of the Federal Reserve Board. About one-sixth of our position was bought in 1989, the rest in 1990.
The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.
Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.
With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another - Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt. (Thomas J. Watson Sr. of IBM followed the same rule: "I'm no genius," he said. "I'm smart in spots - but I stay around those spots.")
Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for \$290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.
Wells Fargo is big - it has \$56 billion in assets - and has been earning more than 20% on equity and 1.25% on assets. Our purchase of one-tenth of the bank may be thought of as roughly equivalent to our buying 100% of a \$5 billion bank with identical financial characteristics. But were we to make such a purchase, we would have to pay about twice the \$290 million we paid for Wells Fargo. Moreover, that \$5 billion bank, commanding a premium price, would present us with another problem: We would not be able to find a Carl Reichardt to run it. In recent years, Wells Fargo executives have been more avidly recruited than any others in the banking business; no one, however, has been able to hire the dean.
Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.
None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than$ 300 million for loan losses. If 10% of all \$48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.
A year like that - which we consider only a low-level possibility, not a likelihood - would not distress us. In fact, at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity. Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices.
Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.) Similarly, at the Buffalo News we would cheer lower prices for newsprint - even though it would mean marking down the value of the large inventory of newsprint we always keep on hand - because we know we are going to be perpetually buying the product.
Identical reasoning guides our thinking about Berkshire's investments. We will be buying businesses - or small parts of businesses, called stocks - year in, year out as long as I live (and longer, if Berkshire's directors attend the seances I have scheduled). Given these intentions, declining prices for businesses benefit us, and rising prices hurt us.
The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.
None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."
Our other major portfolio change last year was large additions to our holdings of RJR Nabisco bonds, securities that we first bought in late 1989. At yearend 1990 we had \$440 million invested in these securities, an amount that approximated market value. (As I write this, however, their market value has risen by more than \$150 million.)
Just as buying into the banking business is unusual for us, so is the purchase of below-investment-grade bonds. But opportunities that interest us and that are also large enough to have a worthwhile impact on Berkshire's results are rare. Therefore, we will look at any category of investment, so long as we understand the business we're buying into and believe that price and value may differ significantly. (Woody Allen, in another context, pointed out the advantage of open-mindedness: "I can't understand why more people aren't bi-sexual because it doubles your chances for a date on Saturday night.")
In the past we have bought a few below-investment-grade bonds with success, though these were all old-fashioned "fallen angels" - bonds that were initially of investment grade but that were downgraded when the issuers fell on bad times. In the 1984 annual report we described our rationale for buying one fallen angel, the Washington Public Power Supply System.
A kind of bastardized fallen angel burst onto the investment scene in the 1980s - "junk bonds" that were far below investment- grade when issued. As the decade progressed, new offerings of manufactured junk became ever junkier and ultimately the predictable outcome occurred: Junk bonds lived up to their name. In 1990 - even before the recession dealt its blows - the financial sky became dark with the bodies of failing corporations.
The disciples of debt assured us that this collapse wouldn't happen: Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger mounted on the steering wheel of a car could be expected to make its driver proceed with intensified care. We'll acknowledge that such an attention-getter would produce a very alert driver. But another certain consequence would be a deadly - and unnecessary - accident if the car hit even the tiniest pothole or sliver of ice. The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.
In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Forty-two years after reading that, I still think those are the right three words. The failure of investors to heed this simple message caused them staggering losses as the 1990s began.
At the height of the debt mania, capital structures were concocted that guaranteed failure: In some cases, so much debt was issued that even highly favorable business results could not produce the funds to service it. One particularly egregious "kill- 'em-at-birth" case a few years back involved the purchase of a mature television station in Tampa, bought with so much debt that the interest on it exceeded the station's gross revenues. Even if you assume that all labor, programs and services were donated rather than purchased, this capital structure required revenues to explode - or else the station was doomed to go broke. (Many of the bonds that financed the purchase were sold to now-failed savings and loan associations; as a taxpayer, you are picking up the tab for this folly.)
All of this seems impossible now. When these misdeeds were done, however, dagger-selling investment bankers pointed to the "scholarly" research of academics, which reported that over the years the higher interest rates received from low-grade bonds had more than compensated for their higher rate of default. Thus, said the friendly salesmen, a diversified portfolio of junk bonds would produce greater net returns than would a portfolio of high-grade bonds. (Beware of past-performance "proofs" in finance: If history books were the key to riches, the Forbes 400 would consist of librarians.)
There was a flaw in the salesmen's logic - one that a first- year student in statistics is taught to recognize. An assumption was being made that the universe of newly-minted junk bonds was identical to the universe of low-grade fallen angels and that, therefore, the default experience of the latter group was meaningful in predicting the default experience of the new issues. (That was an error similar to checking the historical death rate from Kool-Aid before drinking the version served at Jonestown.)
The universes were of course dissimilar in several vital respects. For openers, the manager of a fallen angel almost invariably yearned to regain investment-grade status and worked toward that goal. The junk-bond operator was usually an entirely different breed. Behaving much as a heroin user might, he devoted his energies not to finding a cure for his debt-ridden condition, but rather to finding another fix. Additionally, the fiduciary sensitivities of the executives managing the typical fallen angel were often, though not always, more finely developed than were those of the junk-bond-issuing financiopath.
Wall Street cared little for such distinctions. As usual, the Street's enthusiasm for an idea was proportional not to its merit, but rather to the revenue it would produce. Mountains of junk bonds were sold by those who didn't care to those who didn't think - and there was no shortage of either.
Junk bonds remain a mine field, even at prices that today are often a small fraction of issue price. As we said last year, we have never bought a new issue of a junk bond. (The only time to buy these is on a day with no "y" in it.) We are, however, willing to look at the field, now that it is in disarray.
In the case of RJR Nabisco, we feel the Company's credit is considerably better than was generally perceived for a while and that the yield we receive, as well as the potential for capital gain, more than compensates for the risk we incur (though that is far from nil). RJR has made asset sales at favorable prices, has added major amounts of equity, and in general is being run well.
However, as we survey the field, most low-grade bonds still look unattractive. The handiwork of the Wall Street of the 1980s is even worse than we had thought: Many important businesses have been mortally wounded. We will, though, keep looking for opportunities as the junk market continues to unravel.
Convertible Preferred Stocks
We continue to hold the convertible preferred stocks described in earlier reports: \$700 million of Salomon Inc, \$600 million of The Gillette Company, \$358 million of USAir Group, Inc. and \$300 million of Champion International Corp. Our Gillette holdings will be converted into 12 million shares of common stock on April 1. Weighing interest rates, credit quality and prices of the related common stocks, we can assess our holdings in Salomon and Champion at yearend 1990 as worth about what we paid, Gillette as worth somewhat more, and USAir as worth substantially less.
In making the USAir purchase, your Chairman displayed exquisite timing: I plunged into the business at almost the exact moment that it ran into severe problems. (No one pushed me; in tennis parlance, I committed an "unforced error.") The company's troubles were brought on both by industry conditions and by the post-merger difficulties it encountered in integrating Piedmont, an affliction I should have expected since almost all airline mergers have been followed by operational turmoil.
In short order, Ed Colodny and Seth Schofield resolved the second problem: The airline now gets excellent marks for service. Industry-wide problems have proved to be far more serious. Since our purchase, the economics of the airline industry have deteriorated at an alarming pace, accelerated by the kamikaze pricing tactics of certain carriers. The trouble this pricing has produced for all carriers illustrates an important truth: In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competitor.
However, unless the industry is decimated during the next few years, our USAir investment should work out all right. Ed and Seth have decisively addressed the current turbulence by making major changes in operations. Even so, our investment is now less secure than at the time I made it.
Our convertible preferred stocks are relatively simple securities, yet I should warn you that, if the past is any guide, you may from time to time read inaccurate or misleading statements about them. Last year, for example, several members of the press calculated the value of all our preferreds as equal to that of the common stock into which they are convertible. By their logic, that is, our Salomon preferred, convertible into common at \$38, would be worth 60% of face value if Salomon common were selling at \$22.80. But there is a small problem with this line of reasoning: Using it, one must conclude that all of the value of a convertible preferred resides in the conversion privilege and that the value of a non-convertible preferred of Salomon would be zero, no matter what its coupon or terms for redemption.
The point you should keep in mind is that most of the value of our convertible preferreds is derived from their fixed-income characteristics. That means the securities cannot be worth less than the value they would possess as non-convertible preferreds and may be worth more because of their conversion options.
I deeply regret having to end this section of the report with a note about my friend, Colman Mockler, Jr., CEO of Gillette, who died in January. No description better fitted Colman than "gentleman" - a word signifying integrity, courage and modesty. Couple these qualities with the humor and exceptional business ability that Colman possessed and you can understand why I thought it an undiluted pleasure to work with him and why I, and all others who knew him, will miss Colman so much.
A few days before Colman died, Gillette was richly praised in a Forbes cover story. Its theme was simple: The company's success in shaving products has come not from marketing savvy (though it exhibits that talent repeatedly) but has instead resulted from its devotion to quality. This mind-set has caused it to consistently focus its energies on coming up with something better, even though its existing products already ranked as the class of the field. In so depicting Gillette, Forbes in fact painted a portrait of Colman.
Help! Help!
Regular readers know that I shamelessly utilize the annual letter in an attempt to acquire businesses for Berkshire. And, as we constantly preach at the Buffalo News, advertising does work: Several businesses have knocked on our door because someone has read in these pages of our interest in making acquisitions. (Any good ad salesman will tell you that trying to sell something without advertising is like winking at a girl in the dark.)
In Appendix B (on pages 26-27) I've reproduced the essence of a letter I wrote a few years back to the owner/manager of a desirable business. If you have no personal connection with a business that might be of interest to us but have a friend who does, perhaps you can pass this report along to him.
Here's the sort of business we are 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. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll know it's me."
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. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
Miscellaneous
Ken Chace has decided not to stand for reelection as a director at our upcoming annual meeting. We have no mandatory retirement age for directors at Berkshire (and won't!), but Ken, at 75 and living in Maine, simply decided to cut back his activities.
Ken was my immediate choice to run the textile operation after Buffett Partnership, Ltd. assumed control of Berkshire early in 1965. Although I made an economic mistake in sticking with the textile business, I made no mistake in choosing Ken: He ran the operation well, he was always 100% straight with me about its problems, and he generated the funds that allowed us to diversify into insurance.
My wife, Susan, will be nominated to succeed Ken. She is now the second largest shareholder of Berkshire and if she outlives me will inherit all of my stock and effectively control the company. She knows, and agrees, with my thoughts on successor management and also shares my view that neither Berkshire nor its subsidiary businesses and important investments should be sold simply because some very high bid is received for one or all.
I feel strongly that the fate of our businesses and their managers should not depend on my health - which, it should be added, is excellent - and I have planned accordingly. Neither my estate plan nor that of my wife is designed to preserve the family fortune; instead, both are aimed at preserving the character of Berkshire and returning the fortune to society.
Were I to die tomorrow, you could be sure of three things: (1) None of my stock would have to be sold; (2) Both a controlling shareholder and a manager with philosophies similar to mine would follow me; and (3) Berkshire's earnings would increase by \$1 million annually, since Charlie would immediately sell our corporate jet, The Indefensible (ignoring my wish that it be buried with me).
About 97.3% of all eligible shares participated in Berkshire's 1990 shareholder-designated contributions program. Contributions made through the program were \$5.8 million, and 2,600 charities were recipients.
We suggest that new shareholders read the description of our shareholder-designated contributions program that appears on pages 54-55. To participate in future programs, you must 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, 1991 will be ineligible for the 1991 program.
In addition to the shareholder-designated contributions that Berkshire distributes, managers of our operating businesses make contributions, including merchandise, averaging about \$1.5 million annually. These contributions support local charities, such as The United Way, and produce roughly commensurate benefits for our businesses.
However, neither our operating managers nor officers of the parent company use Berkshire funds to make contributions to broad national programs or charitable activities of special personal interest to them, except to the extent they do so as shareholders. If your employees, including your CEO, wish to give to their alma maters or other institutions to which they feel a personal attachment, we believe they should use their own money, not yours.
The annual meeting this year will be held at the Orpheum Theater in downtown Omaha at 9:30 a.m. on Monday, April 29, 1991. Attendance last year grew to a record 1,300, about a 100-fold increase from ten years ago.
We recommend getting your hotel reservations early at one of these hotels: (1) The Radisson-Redick Tower, a small (88 rooms) but nice hotel across the street from the Orpheum; (2) the much larger Red Lion Hotel, located about a five-minute walk from the Orpheum; or (3) the Marriott, located in West Omaha about 100 yards from Borsheim's and a twenty minute drive from downtown. 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. While there, stop at the See's Candy cart and see for yourself the dawn of synergism at Berkshire.
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 28. At our Sunday opening last year you made Ike very happy: After totaling the day's volume, he suggested to me that we start holding annual meetings quarterly. Join us at Borsheim's even if you just come to watch; it's a show you shouldn't miss.
Last year the first question at the annual meeting was asked by 11-year-old Nicholas Kenner, a third-generation shareholder from New York City. Nicholas plays rough: "How come the stock is down?" he fired at me. My answer was not memorable.
We hope that other business engagements won't keep Nicholas away from this year's meeting. If he attends, he will be offered the chance to again ask the first question; Charlie and I want to tackle him while we're fresh. This year, however, it's Charlie's turn to answer.
| March 1, 1991 | Warren E. Buffett Chairman of the Board |
|---|---|
APPENDIX A
U. S. STEEL ANNOUNCES SWEEPING MODERNIZATION SCHEME*
- An unpublished satire by Ben Graham, written in 1936 and given by the author to Warren Buffett in 1954.
Myron C. Taylor, Chairman of U. S. Steel Corporation, today announced the long awaited plan for completely modernizing the world's largest industrial enterprise. Contrary to expectations, no changes will be made in the company's manufacturing or selling policies. Instead, the bookkeeping system is to be entirely revamped. By adopting and further improving a number of modern accounting and financial devices the corporation's earning power will be amazingly transformed. Even under the subnormal conditions of 1935, it is estimated that the new bookkeeping methods would have yielded a reported profit of close to \$50 per share on the common stock. The scheme of improvement is the result of a comprehensive survey made by Messrs. Price, Bacon, Guthrie & Colpitts; it includes the following six points:
-
Writing down of Plant Account to Minus \$1,000,000,000.
-
Par value of common stock to be reduced to 1 ¢.
-
Payment of all wages and salaries in option warrants.
-
Inventories to be carried at \$1.
-
Preferred Stock to be replaced by non-interest bearing bonds redeemable at 50% discount.
-
A \$1,000,000,000 Contingency Reserve to be established.
The official statement of this extraordinary Modernization Plan follows in full:
The Board of Directors of U. S. Steel Corporation is pleased to announce that after intensive study of the problems arising from changed conditions in the industry, it has approved a comprehensive plan for remodeling the Corporation's accounting methods. A survey by a Special Committee, aided and abetted by Messrs. Price, Bacon, Guthrie & Colpitts, revealed that our company has lagged somewhat behind other American business enterprises in utilizing certain advanced bookkeeping methods, by means of which the earning power may be phenomenally enhanced without requiring any cash outlay or any changes in operating or sales conditions. It has been decided not only to adopt these newer methods, but to develop them to a still higher stage of perfection. The changes adopted by the Board may be summarized under six heads, as follows:
- Fixed Assets to be written down to Minus \$1,000,000,000.
Many representative companies have relieved their income accounts of all charges for depreciation by writing down their plant account to \$1. The Special Committee points out that if their plants are worth only \$1, the fixed assets of U. S. Steel Corporation are worth a good deal less than that sum. It is now a well-recognized fact that many plants are in reality a liability rather than an asset, entailing not only depreciation charges, but taxes, maintenance, and other expenditures. Accordingly, the Board has decided to extend the write-down policy initiated in the 1935 report, and to mark down the Fixed Assets from \$1,338,522,858.96 to a round Minus \$1,000,000,000.
The advantages of this move should be evident. As the plant wears out, the liability becomes correspondingly reduced. Hence, instead of the present depreciation charge of some \$47,000,000 yearly there will be an annual appreciation credit of 5%, or \$50,000,000. This will increase earnings by no less than \$97,000,000 per annum.
-
Reduction of Par Value of Common Stock to 1 ¢, and
-
Payment of Salaries and Wages in Option Warrants.
Many corporations have been able to reduce their overhead expenses substantially by paying a large part of their executive salaries in the form of options to buy stock, which carry no charge against earnings. The full possibilities of this modern device have apparently not been adequately realized. The Board of Directors has adopted the following advanced form of this idea:
The entire personnel of the Corporation are to receive their compensation in the form of rights to buy common stock at \$50 per share, at the rate of one purchase right for each \$50 of salary and/or wages in their present amounts. The par value of the common stock is to be reduced to 1 ¢.
The almost incredible advantages of this new plan are evident from the following:
A. The payroll of the Corporation will be entirely eliminated, a saving of \$250,000,000 per annum, based on 1935 operations.
B. At the same time, the effective compensation of all our employees will be increased severalfold. Because of the large earnings per share to be shown on our common stock under the new methods, it is certain that the shares will command a price in the market far above the option level of \$50 per share, making the readily realizable value of these option warrants greatly in excess of the present cash wages that they will replace.
C. The Corporation will realize an additional large annual profit through the exercise of these warrants. Since the par value of the common stock will be fixed at 1 ¢, there will be a gain of \$49.99 on each share subscribed for. In the interest of conservative accounting, however, this profit will not be included in the income account, but will be shown separately as a credit to Capital Surplus.
D. The Corporation's cash position will be enormously strengthened. In place of the present annual cash outgo of \$250,000,000 for wages (1935 basis), there will be annual cash inflow of \$250,000,000 through exercise of the subscription warrants for 5,000,000 shares of common stock. The Company's large earnings and strong cash position will permit the payment of a liberal dividend which, in turn, will result in the exercise of these option warrants immediately after issuance which, in turn, will further improve the cash position which, in turn, will permit a higher dividend rate -- and so on, indefinitely.
- Inventories to be carried at \$1.
Serious losses have been taken during the depression due to the necessity of adjusting inventory value to market. Various enterprises -- notably in the metal and cotton-textile fields -- have successfully dealt with this problem by carrying all or part of their inventories at extremely low unit prices. The U. S. Steel Corporation has decided to adopt a still more progressive policy, and to carry its entire inventory at \$1. This will be effected by an appropriate write-down at the end of each year, the amount of said write-down to be charged to the Contingency Reserve hereinafter referred to.
The benefits to be derived from this new method are very great. Not only will it obviate all possibility of inventory depreciation, but it will substantially enhance the annual earnings of the Corporation. The inventory on hand at the beginning of the year, valued at \$1, will be sold during the year at an excellent profit. It is estimated that our income will be increased by means of this method to the extent of at least \$150,000,000 per annum which, by a coincidence, will about equal the amount of the write-down to be made each year against Contingency Reserve.
A minority report of the Special Committee recommends that Accounts Receivable and Cash also be written down to \$1, in the interest of consistency and to gain additional advantages similar to those just discussed. This proposal has been rejected for the time being because our auditors still require that any recoveries of receivables and cash so charged off be credited to surplus instead of to the year's income. It is expected, however, that this auditing rule -- which is rather reminiscent of the horse-and-buggy days -- will soon be changed in line with modern tendencies. Should this occur, the minority report will be given further and favorable consideration.
- Replacement of Preferred Stock by Non-Interest-Bearing Bonds Redeemable at 50% Discount.
During the recent depression many companies have been able to offset their operating losses by including in income profits arising from repurchases of their own bonds at a substantial discount from par. Unfortunately the credit of U. S. Steel Corporation has always stood so high that this lucrative source of revenue has not hitherto been available to it. The Modernization Scheme will remedy this condition.
It is proposed that each share of preferred stock be exchanged for \$300 face value of non-interest-bearing sinking-fund notes, redeemable by lot at 50% of face value in 10 equal annual installments. This will require the issuance of \$1,080,000,000 of new notes, of which \$108,000,000 will be retired each year at a cost to the Corporation of only \$54,000,000, thus creating an annual profit of the same amount.
Like the wage-and/or-salary plan described under 3. above, this arrangement will benefit both the Corporation and its preferred stockholders. The latter are assured payment for their present shares at 150% of par value over an average period of five years. Since short-term securities yield practically no return at present, the non-interest-bearing feature is of no real importance. The Corporation will convert its present annual charge of \$25,000,000 for preferred dividends into an annual bond-retirement profit of $54,000,000 -- an aggregate yearly gain of$ 79,000,000.
- Establishment of a Contingency Reserve of \$1,000,000,000.
The Directors are confident that the improvements hereinbefore described will assure the Corporation of a satisfactory earning power under all conditions in the future. Under modern accounting methods, however, it is unnecessary to incur the slightest risk of loss through adverse business developments of any sort, since all these may be provided for in advance by means of a Contingency Reserve.
The Special Committee has recommended that the Corporation create such a Contingency Reserve in the fairly substantial amount of \$1,000,000,000. As previously set forth, the annual write-down of inventory to \$1 will be absorbed by this reserve. To prevent eventual exhaustion of the Contingency Reserve, it has been further decided that it be replenished each year by transfer of an appropriate sum from Capital Surplus. Since the latter is expected to increase each year by not less than \$250,000,000 through the exercise of the Stock Option Warrants (see 3. above), it will readily make good any drains on the Contingency Reserve.
In setting up this arrangement, the Board of Directors must confess regretfully that they have been unable to improve upon the devices already employed by important corporations in transferring large sums between Capital, Capital Surplus, Contingency Reserves and other Balance Sheet Accounts. In fact, it must be admitted that our entries will be somewhat too simple, and will lack that element of extreme mystification that characterizes the most advanced procedure in this field. The Board of Directors, however, have insisted upon clarity and simplicity in framing their Modernization Plan, even at the sacrifice of possible advantage to the Corporation's earning power.
In order to show the combined effect of the new proposals upon the Corporation's earning power, we submit herewith a condensed Income Account for 1935 on two bases, viz:
|
|
|
B. Pro-Forma |
|
|
|
|
|
|
A. As Reported |
|
|
Gross Receipts from all Sources (Including Inter-Company) |
$765,000,000 |
$765,000,000 |
|
Salaries and Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
251,000,000 |
-- |
|
Other Operating Expenses and Taxes . . . . . . . . . . . . . . . . . . |
461,000,000 |
311,000,000 |
|
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
47,000,000 |
(50,000,000) |
|
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
5,000,000 |
5,000,000 |
|
Discount on Bonds Retired . . . . . . . . . . . . . . . . . . . . . . . . . |
-- |
(54,000,000) |
|
Preferred Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
25,000,000 |
-- |
|
Balance for Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(24,000,000) |
553,000,000 |
|
Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . |
8,703,252 |
11,203,252 |
|
Earned Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
($2.76) |
$49.80 |
In accordance with a somewhat antiquated custom there is appended herewith a condensed pro-forma Balance Sheet of the U. S. Steel Corporation as of December 31, 1935, after giving effect to proposed changes in asset and liability accounts.
|
ASSETS |
|
|
Fixed Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
($1,000,000,000) |
|
Cash Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
142,000,000 |
|
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
56,000,000 |
|
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
1 |
|
Miscellaneous Assets . . . . . . . . . . . . . . . . . . . . . . . . . |
27,000,000 |
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
($774,999,999) |
|
LIABILITIES |
|
|
Common Stock Par 1¢ (Par Value $87,032.52) Stated Value* |
($3,500,000,000) |
|
Subsidiaries' Bonds and Stocks . . . . . . . . . . . . . . . . . . |
113,000,000 |
|
New Sinking Fund Notes . . . . . . . . . . . . . . . . . . . . . . |
1,080,000,000 |
|
Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
69,000,000 |
|
Contingency Reserve . . . . . . . . . . . . . . . . . . . . . . . . . |
1,000,000,000 |
|
Other Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
74,000,000 |
|
Initial Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
389,000,001 |
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
($774,999,999) |
*Given a Stated Value differing from Par Value, in accordance with the laws of the State of Virginia, where the company will be re-incorporated.
It is perhaps unnecessary to point out to our stockholders that modern accounting methods give rise to balance sheets differing somewhat in appearance from those of a less advanced period. In view of the very large earning power that will result from these changes in the Corporation's Balance Sheet, it is not expected that undue attention will be paid to the details of assets and liabilities.
In conclusion, the Board desires to point out that the combined procedure, whereby plant will be carried at a minus figure, our wage bill will be eliminated, and inventory will stand on our books at virtually nothing, will give U. S. Steel Corporation an enormous competitive advantage in the industry. We shall be able to sell our products at exceedingly low prices and still show a handsome margin of profit. It is the considered view of the Board of Directors that under the Modernization Scheme we shall be able to undersell all competitors to such a point that the anti-trust laws will constitute the only barrier to 100% domination of the industry.
In making this statement, the Board is not unmindful of the possibility that some of our competitors may seek to offset our new advantages by adopting similar accounting improvements. We are confident, however, that U. S. Steel will be able to retain the loyalty of its customers, old and new, through the unique prestige that will accrue to it as the originator and pioneer in these new fields of service to the user of steel. Should necessity arise, moreover, we believe we shall be able to maintain our deserved superiority by introducing still more advanced bookkeeping methods, which are even now under development in our Experimental Accounting Laboratory.
APPENDIX B
Some Thoughts on Selling Your Business*
*This is an edited version of a letter I sent some years ago to a man who had indicated that he might want to sell his family business. I present it here because it is a message I would like to convey to other prospective sellers. -- W.E.B.
Dear _______:
Here are a few thoughts pursuant to our conversation of the other day.
Most business owners spend the better part of their lifetimes building their businesses. By experience built upon endless repetition, they sharpen their skills in merchandising, purchasing, personnel selection, etc. It's a learning process, and mistakes made in one year often contribute to competence and success in succeeding years.
In contrast, owner-managers sell their business only once -- frequently in an emotionally-charged atmosphere with a multitude of pressures coming from different directions. Often, much of the pressure comes from brokers whose compensation is contingent upon consummation of a sale, regardless of its consequences for both buyer and seller. The fact that the decision is so important, both financially and personally, to the owner can make the process more, rather than less, prone to error. And, mistakes made in the once-in-a-lifetime sale of a business are not reversible.
Price is very important, but often is not the most critical aspect of the sale. You and your family have an extraordinary business -- one of a kind in your field -- and any buyer is going to recognize that. It's also a business that is going to get more valuable as the years go by. So if you decide not to sell now, you are very likely to realize more money later on. With that knowledge you can deal from strength and take the time required to select the buyer you want.
If you should decide to sell, I think Berkshire Hathaway offers some advantages that most other buyers do not. Practically all of these buyers will fall into one of two categories:
(1) A company located elsewhere but operating in your business or in a business somewhat akin to yours. Such a buyer -- no matter what promises are made -- will usually have managers who feel they know how to run your business operations and, sooner or later, will want to apply some hands-on "help." If the acquiring company is much larger, it often will have squads of managers, recruited over the years in part by promises that they will get to run future acquisitions. They will have their own way of doing things and, even though your business record undoubtedly will be far better than theirs, human nature will at some point cause them to believe that their methods of operating are superior. You and your family probably have friends who have sold their businesses to larger companies, and I suspect that their experiences will confirm the tendency of parent companies to take over the running of their subsidiaries, particularly when the parent knows the industry, or thinks it does.
(2) A financial maneuverer, invariably operating with large amounts of borrowed money, who plans to resell either to the public or to another corporation as soon as the time is favorable. Frequently, this buyer's major contribution will be to change accounting methods so that earnings can be presented in the most favorable light just prior to his bailing out. I'm enclosing a recent article that describes this sort of transaction, which is becoming much more frequent because of a rising stock market and the great supply of funds available for such transactions.
If the sole motive of the present owners is to cash their chips and put the business behind them -- and plenty of sellers fall in this category -- either type of buyer that I've just described is satisfactory. But if the sellers' business represents the creative work of a lifetime and forms an integral part of their personality and sense of being, buyers of either type have serious flaws.
Berkshire is another kind of buyer -- a rather unusual one. We buy to keep, but we don't have, and don't expect to have, operating people in our parent organization. All of the businesses we own are run autonomously to an extraordinary degree. In most cases, the managers of important businesses we have owned for many years have not been to Omaha or even met each other. When we buy a business, the sellers go on running it just as they did before the sale; we adapt to their methods rather than vice versa.
We have no one -- family, recently recruited MBAs, etc. -- to whom we have promised a chance to run businesses we have bought from owner-managers. And we won't have.
You know of some of our past purchases. I'm enclosing a list of everyone from whom we have ever bought a business, and I invite you to check with them as to our performance versus our promises. You should be particularly interested in checking with the few whose businesses did not do well in order to ascertain how we behaved under difficult conditions.
Any buyer will tell you that he needs you personally -- and if he has any brains, he most certainly does need you. But a great many buyers, for the reasons mentioned above, don't match their subsequent actions to their earlier words. We will behave exactly as promised, both because we have so promised, and because we need to in order to achieve the best business results.
This need explains why we would want the operating members of your family to retain a 20% interest in the business. We need 80% to consolidate earnings for tax purposes, which is a step important to us. It is equally important to us that the family members who run the business remain as owners. Very simply, we would not want to buy unless we felt key members of present management would stay on as our partners. Contracts cannot guarantee your continued interest; we would simply rely on your word.
The areas I get involved in are capital allocation and selection and compensation of the top man. Other personnel decisions, operating strategies, etc. are his bailiwick. Some Berkshire managers talk over some of their decisions with me; some don't. It depends upon their personalities and, to an extent, upon their own personal relationship with me.
If you should decide to do business with Berkshire, we would pay in cash. Your business would not be used as collateral for any loan by Berkshire. There would be no brokers involved.
Furthermore, there would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed). And finally, you would know exactly with whom you are dealing. You would not have one executive negotiate the deal only to have someone else in charge a few years later, or have the president regretfully tell you that his board of directors required this change or that (or possibly required sale of your business to finance some new interest of the parent's).
It's only fair to tell you that you would be no richer after the sale than now. The ownership of your business already makes you wealthy and soundly invested. A sale would change the form of your wealth, but it wouldn't change its amount. If you sell, you will have exchanged a 100%-owned valuable asset that you understand for another valuable asset -- cash -- that will probably be invested in small pieces (stocks) of other businesses that you understand less well. There is often a sound reason to sell but, if the transaction is a fair one, the reason is not so that the seller can become wealthier.
I will not pester you; if you have any possible interest in selling, I would appreciate your call. I would be extraordinarily proud to have Berkshire, along with the key members of your family, own _; I believe we would do very well financially; and I believe you would have just as much fun running the business over the next 20 years as you have had during the past 20.
| Sincerely, |
|---|
| /s/ Warren E. Buffett |
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦公司的股东：
去年我们做过一个预测："未来三年中，至少有一年（伯克希尔的净值）几乎肯定会下降。"1990年下半年的大部分时间里，我们正走在迅速应验这一预测的路上。但年底股市有所走强，使我们得以在1990年结束时净值增加3.62亿美元，增幅7.3%。过去26年（即现任管理层接手以来），我们的每股账面价值从19.46美元增长到4,612.06美元，年复合增长率23.2%。
1990年我们的增长率乏善可陈，因为我们的四大重仓普通股合计市值几乎未变。去年我告诉过你们，尽管这些公司——Capital Cities/ABC（大都会/美国广播公司）、Coca-Cola（可口可乐）、GEICO（政府雇员保险公司）和Washington Post（华盛顿邮报）——拥有出色的业务和卓越的管理层，但这些优点的广泛认可已将其股价推至高位。此后，两家传媒公司的市价大幅下跌——原因与行业演变的发展有关，这些发展有充分理由，我稍后会讨论——而可口可乐的股价则大幅上涨，我认为这同样有充分理由。总体而言，1990年底我们的"永久四巨头"股价虽然远谈不上诱人，但比一年前稍具吸引力。
伯克希尔26年的记录对预测未来结果毫无意义；同样，我们希望一年的记录也是如此。我们仍然追求内在价值年均增长15%的目标。但正如我们从不厌其烦地告诉你们的，随着我们的权益基数（现已达53亿美元）不断扩大，这个目标变得越来越难以实现。
如果我们确实实现了15%的平均增长率，我们的股东应该会获得良好回报。然而，伯克希尔的公司收益只会使特定股东获得同等收益，前提是他最终以与买入时相同的内在价值关系卖出手中的股票。例如，如果你以高于内在价值10%的价格买入；之后内在价值每年增长15%；然后你以高于内在价值10%的价格卖出，你自己的回报也将是15%的年复合增长率。（这个计算假设不支付股息。）但如果你以溢价买入，以较低的溢价卖出，你的回报就会略低于公司取得的回报。
理想情况下，每位伯克希尔股东在其持股期间的回报都应紧密反映公司的回报。正因如此，查理·芒格（Charlie Munger），伯克希尔副董事长兼我的合伙人，和我都希望伯克希尔的股价始终围绕内在价值交易。我们更喜欢这种稳定，而不是过去两年无视价值的波动：1989年内在价值的增长低于账面价值（账面价值增长44%），而市价上涨了85%；1990年账面价值和内在价值小幅增长，而市价下跌了23%。
伯克希尔的内在价值继续大幅超过账面价值。我们无法确切告诉你差额是多少，因为内在价值必然是一个估计值；事实上，查理和我在评估时可能有10%的出入。但我们确实知道，我们拥有一些出色的企业，其价值远远超过我们账面上列示的数字。
我们企业中的大部分额外价值是由目前管理这些企业的经理人创造的。查理和我觉得可以自由地吹嘘这个群体，因为我们与他们所拥有的技能发展毫无关系：这些超级巨星天生如此。我们的工作只是识别有才华的经理人，并为他们提供施展才华的环境。他们完成工作后，将现金送到总部，我们面临唯一剩下的任务：明智地配置这些资金。
我自己在运营中的角色，可以用去年秋天关于我孙女Emily和她四岁生日派对的一件小事来最好地说明。参加派对的还有别的孩子、疼爱她的亲戚，以及当地一位名叫Beemer的丑角艺人，他的表演包含魔术。
演出开始时，Beemer请Emily帮忙，用"魔杖"在"奇迹盒子"上方挥舞。绿色的手帕放进盒子，Emily挥动魔杖，Beemer拿出蓝色的。松散的手帕放进去，在Emily神气地一挥之后，出来时系成了结。经过四次这样的转变，一次比一次神奇，Emily忍不住了，她满脸放光，欢呼道："哇，我真是太擅长这个了。"
而这正是我对伯克希尔商业魔术师们——Blumkins一家、Friedman家族、Mike Goldberg、Heldmans一家、Chuck Huggins、Stan Lipsey和Ralph Schey——表现的全部贡献。他们值得你们的掌声。
报告收益的来源
下表显示了伯克希尔报告收益的主要来源。在此展示中，商誉摊销及其他重大购买价格会计调整不分配到它们所适用的具体业务中，而是汇总并单独列示。这一做法让你们能看到，如果我们没有购买这些业务，它们原本会报告的收益。我在过去的报告中解释过，为什么我们认为这种展示形式对投资者和经理人比使用美国通用会计准则（GAAP）更有用——GAAP要求按每项业务进行购买价格调整。当然，我们在表格中显示的净收益总额与经审计财务报表中的GAAP总额完全一致。
关于这些业务的更多信息见第39-46页，你们也会在那里找到按GAAP基础报告的业务分部收益。关于Wesco的业务信息，我强烈建议你们阅读Charlie Munger的信，从第56页开始。他的信中还包含了我所见过最清晰、最深刻的银行业讨论。
(000s omitted)
-----------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1990 1989 1990 1989
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ................ $(26,647) $(24,400) $(14,936) $(12,259)
Net Investment Income ....... 327,048 243,599 282,613 213,642
Buffalo News .................. 43,954 46,047 25,981 27,771
Fechheimer .................... 12,450 12,621 6,605 6,789
Kirby ......................... 27,445 26,114 17,613 16,803
Nebraska Furniture Mart ....... 17,248 17,070 8,485 8,441
Scott Fetzer Manufacturing Group 30,378 33,165 18,458 19,996
See's Candies ................. 39,580 34,235 23,892 20,626
Wesco - other than Insurance .. 12,441 13,008 9,676 9,810
World Book .................... 31,896 25,583 20,420 16,372
Amortization of Goodwill ...... (3,476) (3,387) (3,461) (3,372)
Other Purchase-Price
Accounting Charges ......... (5,951) (5,740) (6,856) (6,668)
Interest Expense* ............. (76,374) (42,389) (49,726) (27,098)
Shareholder-Designated
Contributions .............. (5,824) (5,867) (3,801) (3,814)
Other ......................... 58,309 23,755 35,782 12,863
-------- -------- -------- --------
Operating Earnings .............. 482,477 393,414 370,745 299,902
Sales of Securities ............. 33,989 223,810 23,348 147,575
-------- -------- -------- --------
Total Earnings - All Entities $516,466 $617,224 $394,093 $447,477
======== ======== ======== ========
*不包括Scott Fetzer Financial Group和Mutual Savings & Loan的利息支出。
我们还将你们引至第47-53页，在那里我们将伯克希尔的财务数据重新编排为四个分部。这与Charlie和我思考业务的方式相对应，应该能帮助你们更好地估算伯克希尔的内在价值，而不是依赖合并数据。这几页展示了以下各分部的资产负债表和收益表：（1）我们的保险业务，其中详细列明了主要投资头寸；（2）我们的制造、出版和零售业务，扣除了某些非经营性资产和购买价格会计调整；（3）我们从事金融类业务的子公司，即Mutual Savings和Scott Fetzer Financial；（4）一个"其他"类别，包括第（2）分部公司持有的非经营性资产（主要是可流通证券）、所有购买价格会计调整，以及Wesco和伯克希尔母公司的各种资产与债务。
如果你将这四个分部的收益和净资产加总，会得到与GAAP报表中一致的总数。不过，我想强调，这种四分部展示不在我们审计师的审查范围之内，他们对此不作任何背书。
"透视"盈余
"盈余"这个词听起来很精确。当盈余数字附有无保留意见的审计师证书时，天真的读者可能会认为它像圆周率一样确定，可以计算到小数点后许多位。
事实上，当财务报告由骗子掌舵时，盈利就像油灰一样可以随意揉捏。真相迟早会浮出水面，但在此期间大量金钱可能已易手。确实，美国一些重要的财富正是通过将会计幻影变现而创造的。
会计上的造假并非新鲜事。对于识别欺诈的行家，我在第22页的附录A中附上了一篇本·格雷厄姆（Ben Graham）1936年创作的讽刺会计实践的未发表作品。唉，他当年嘲弄的那些过度行为，此后多次在美国大公司的财务报表中出现，并得到了知名审计师的正式认证。显然，投资者必须始终保持警惕，将会计数字作为计算真正属于他们的“经济盈余”的起点，而非终点。
伯克希尔自己的报告盈利以另一种重要但具有误导性的方式呈现：我们在一些公司（“被投资方”）拥有巨额投资，这些公司的盈利远超其分红，而我们仅按所收分红确认应占盈利。极端例子是Cap Cities/ABC公司。去年我们持有该公司17%的股份，应占盈利超过8300万美元。然而，只有约53万美元（公司支付给我们的60万美元分红减去约7万美元税款）计入了伯克希尔的公认会计原则（GAAP）盈利。剩余的8200多万美元留在Cap Cities作为留存收益，为我们工作但未记录在我们的账面上。
我们对这种“被遗忘但并未消失”的盈利的看法很简单：这些盈利如何被会计处理无关紧要，重要的是谁拥有它们以及随后如何运用。我们不在乎审计师是否听到森林中一棵树倒下；我们在乎的是树归谁所有，以及接下来如何对待它。
当可口可乐公司用留存收益回购股份时，它增加了我们在这个世界最有价值商誉（我称之为最宝贵特许经营权）中的持股比例。（当然，可口可乐也用留存收益做了许多其他增值的事情。）如果不回购股票，可口可乐可以以分红形式向股东支付这些资金，然后我们再用来购买更多可口可乐股票。那样效率会更低：因为我们须为分红收入纳税，无法像可口可乐（为我们行事）那样提高我们的持股比例。然而，如果采用这种效率更低的做法，伯克希尔的“报告盈利”会高得多。
我认为思考我们盈利的最佳方式是采用“透视盈余”概念，计算如下：取2.5亿美元（大致是1990年我们应占被投资方留存经营盈利的份额）；减去3000万美元（若这2.5亿美元以分红形式支付给我们，我们须缴纳的增量税款）；将剩余2.2亿美元加到我们报告的3.71亿美元经营盈利中。因此，我们1990年的“透视盈余”约为5.9亿美元。
正如去年提到的，我们希望透视盈余每年增长约15%。1990年我们大幅超过了这一比率，但1991年将远不及此。我们的吉列优先股已被赎回，我们将在4月1日将其转换为普通股。这将使报告盈利每年减少约3500万美元，透视盈余减少的金额虽小得多，但仍可观。此外，我们的媒体业务盈利——无论是直接盈利还是透视盈利——似乎肯定会下降。无论结果如何，我们每年都会向你们报告透视基础上的表现。
非保险业务
再看看第51页的数据，这些数据汇总了我们的非保险业务的盈利和资产负债表。1990年按平均股权计算的税后盈利为51%，这一结果足以让这组公司在1989年《财富》500强中位列第20名左右。
两个因素让这个回报率显得更加出众。第一，杠杆并非其来源：我们几乎所有主要设施都是自有而非租赁，经营中仅有的一点债务也被手头现金基本抵消。事实上，如果以资产回报率——即剔除债务对回报影响的指标——来衡量，我们集团在《财富》杂志的榜单上会排进前十。
同样重要的是，我们的回报并非来自那些所有参与者都能赚得盆满钵满的行业，比如香烟或电视网络。相反，它来自于一批在极其平凡的领域经营的企业——家具零售、糖果、吸尘器，甚至还有钢材仓储。原因很清楚：我们非凡的回报源于出色的经营管理者，而非偶然的行业经济特性。
我们来看看旗下规模较大的业务：
o 对零售业来说，这是糟糕的一年——尤其是大件商品——但似乎有人忘了通知博希姆的Ike Friedman。销售额增长了18%。这个百分比既是同店销售也是全店销售，因为博希姆只经营一家门店。
但，哦，真是一家了不起的店！我们不能确定（因为大多数高档珠宝零售商都是私有企业），但我们相信这家珠宝店的销量在全美仅次于蒂芙尼的纽约店。
如果我们的顾客只来自奥马哈都会区（人口约60万），博希姆不可能做得这么好。长期以来我们在大奥马哈的珠宝生意中占了很大份额，因此那个市场的增长必然有限。但每年来自中西部以外地区的顾客生意都在大幅增长。很多人亲自到店。然而，还有大量顾客通过邮购方式购买，你会觉得这种方式很有趣。
这些顾客会要求一定类型和价位的珠宝选择——比如说，1万到2万美元的祖母绿——然后我们会寄送五到十件符合他们要求的货品供他们挑选。去年我们邮寄了大约1500批各种货品，价值从不到1000美元到几十万美元不等。
这些货品被发往全国，有些收货人博希姆的员工从未谋面。（不过，这些顾客肯定都有良好的推荐。）1990年的邮寄量创了纪录，而Ike几十年来一直在四处寄送商品。厌世者得知我们的“诚信制度”运作得如此之好，一定会心碎：我们从未因顾客不诚实而遭受过损失。
我们之所以能吸引全国业务，是因为我们拥有几个竞争对手无法匹敌的优势。这其中最关键的是我们的运营成本，大约占销售额的18%，而典型竞争对手约为40%。（这18%中包含了店铺租赁和采购成本，有些上市公司将这些费用计入“销售成本”。）就像沃尔玛以15%的运营成本，以高成本竞争对手无法企及的价格销售，从而不断增长市场份额一样，博希姆也是如此。尿布上管用的办法，钻石上也管用。
我们的低价带来了巨大的销量，这反过来又使我们能够维持极其广泛的库存，其规模是典型高档珠宝店的十倍以上。将我们选品的广度、低价与卓越的服务结合起来，你就能理解Ike及其家人是如何从奥马哈打造出一个全国性的珠宝现象的。
说是一家人，一点也不夸张。艾克的团队里总有儿子艾伦、女婿马文·科恩和唐纳德·耶尔。忙的时候——常常如此——他的妻子罗兹、女儿詹尼斯和苏西也会加入。此外，路易（内布拉斯加家具城董事长，也是艾克的表亲）的妻子弗兰·布卢姆金也经常来搭把手。最后，你还会看到艾克89岁的老母亲丽贝卡，下午大多时候都在店里，手里拿着《华尔街日报》。有了这样的家庭承诺，波仙珠宝（Borsheim's）把那些整天盼着五点下班的竞争对手甩开几条街，还有什么好奇怪的？
- 就在弗兰·布卢姆金帮弗里德曼一家在波仙珠宝创下纪录时，她的儿子欧文和罗恩，还有丈夫路易，也在内布拉斯加家具城创下了纪录。我们这唯一一家门店的销售额是1.59亿美元，比1989年增长了4%。虽然同样无法确切证明，但我们相信，NFM的销售额几乎是国内其他任何家具店的两倍。
NFM的成功秘诀与波仙珠宝如出一辙。第一，运营成本极低——1990年是15%，而全国最大的家具零售商Levitz大约40%，领先的电子产品和家电折扣零售商Circuit City Stores是25%。第二，NFM的低成本使其定价远低于所有竞争对手。实际上，大型连锁店知道自己会面对什么，都绕着奥马哈走。第三，我们低价带来的巨大销量，使我们能够提供任何地方都最齐全的商品选择。
NFM的销售威力可以从最近一份关于得梅因消费者行为的报告中窥见一斑：在该市20家家具零售商中，NFM的受欢迎程度排名第三。这听起来可能没什么了不起，但如果你知道这19家零售商都在得梅因本地，而我们的店却在130英里之外，你就会明白其中的分量。这意味着顾客要开车相当于从华盛顿到费城的距离来我们这儿购物，尽管他们家门口就有无数选择。实际上，NFM和波仙珠宝一样，极大地扩展了它的服务区域——不是通过传统的开新店方式，而是创造了一个不可抗拒的磁铁，用价格和选择把人潮吸引过来。
去年在家具城发生了一件历史性事件：我经历了一次"反启示"。本报告的常客都知道，我长期以来一直嘲笑那些企业高管关于协同效应的夸夸其谈，称这种说辞是恶棍为愚蠢收购辩护的最后避难所。但现在我明白了：在伯克希尔第一次协同效应大爆发中，NFM去年年底在店里放了一辆喜诗糖果（See's）推车，卖掉的糖果比喜诗在加州经营的一些"正式"门店还要多。这一成功违背了零售业的所有法则。不过，布卢姆金一家总是能把不可能变成家常便饭。
- 1990年，喜诗糖果的销售量创下了纪录——但只是勉强达到，而且全靠年初的销售不错。科威特被入侵后，西部商场的客流量下降了。圣诞节期间我们的磅数销量略有下降，但因为提价5%，美元销售额还是上涨了。
这次提价加上更好的费用控制，提高了利润率。在零售环境疲软的背景下，查克·哈金斯交出了出色的成绩单——我们拥有喜诗的19年里，他年年如此。查克在这门生意上留下的印记——对质量和服务的近乎狂热——在我们所有225家门店里都能看到。
1990年发生的一件事，足以说明喜诗糖果与其顾客之间的亲密纽带。运营了15年后，我们在阿尔伯克基的门店面临危机：房东不肯续租，要我们搬到商场里一个更差的位置，而且租金还要大幅上涨。这些变化会彻底抹掉这家店的利润。经过漫长谈判毫无结果后，我们定下了关店日期。
门店经理安·菲尔金斯（Ann Filkins）自行采取了行动，她鼓动顾客抗议关店。263名顾客响应，向旧金山的喜诗总部寄信、打电话，有些人甚至威胁要抵制整个商场。《阿尔伯克基报》的一位敏锐记者报道了此事。有了这场消费者起义的证据，房东给了我们一个满意的方案。（事实证明，他也经不起一场反向曝光。）
查克（Chuck）随后亲自给每一位忠诚顾客写了感谢信，并附上一张礼品券。他还在报纸上登了一则致谢广告，列出了全部263人的名字。后续是：阿尔伯克基的圣诞节销售额大幅上升。
o 查理和我对过去一年媒体行业的发展感到意外，包括我们的《布法罗新闻报》。这个行业对经济衰退早期阶段的脆弱性，远高于过去。问题在于，这种侵蚀只是异常周期的一部分——会在下一轮上行中完全弥补——还是说，业务已经以某种方式下滑，永久性地降低了内在商业价值。
既然我没能预测到已经发生的事，你们可能对我关于未来会怎样发生的预测也心存疑虑。但我仍愿提供一个判断：虽然许多媒体企业与美国产业整体相比仍将是经济奇迹，但它们将远不如我本人、业界以及贷款机构仅仅几年前认为的那么神奇。
过去媒体企业之所以如此出色，并非靠物理增长，而是靠大多数参与者所拥有的不寻常定价权。然而如今，广告支出增长缓慢。此外，极少做或根本不做媒体广告（尽管他们有时使用邮政服务）的零售商，在特定商品品类中逐渐抢占了市场份额。最重要的是，印刷和电子广告渠道的数量都大幅增加。其结果是，广告费用分散得更广，广告供应商的定价权减弱。这些情况显著降低了我方主要媒体投资的内在价值，也降低了我们的运营单元《布法罗新闻报》的价值——尽管它们仍是好企业。
尽管问题重重，斯坦·利普西（Stan Lipsey）对《新闻报》的管理依然卓越。1990年，我们的盈利远好于大多数大城市报纸，仅下降了5%。然而，在当年最后几个月，降幅明显加大。
关于1991年的《新闻报》，我可以放心做两个承诺：（1）斯坦将再次在报纸出版商中名列前茅；（2）盈利将大幅下降。尽管新闻纸需求放缓，但1991年每吨均价将显著高于去年，报纸的劳动力成本也将大幅上升。由于收入可能同时下降，我们面临真正的挤压。
利润可能下降，但我们对产品的自豪感依旧。我们的"新闻版面"——报纸中专门用于新闻的部分——依然大于任何同类报纸。1990年，该比例从1989年的50.1%升至52.3%。唉，这一增长是因为广告页数减少，而非新闻页数增加。无论盈利压力多大，我们都将维持至少50%的新闻版面。削减产品质量不是应对困境的正确方式。
致伯克希尔·哈撒韦股东信（节选）
非保险业务
费奇海默（我们的制服制造商和零售商）那边，消息全都很好，只有一个例外：69岁的乔治·赫尔德曼决定退休了。我试着劝他改变主意，但他有一个论据无可辩驳——还有四位赫尔德曼家族的人——鲍勃、弗雷德、加里和罗杰——在接手，他将留给我们一个人才济济的管理团队。
1990年，费奇海默的经营业绩大有起色，我们在整合1988年那笔大收购时遇到的许多问题，要么已经缓解，要么已经解决。不过，有几个非经常性项目导致"来源"表中报告的收益持平。零售业务方面，我们继续增加门店，现已遍布22个州，共42家。总体来看，费奇海默的前景非常不错。
斯科特·费策这边，拉尔夫·谢伊经营着19项业务，其管理水平之高，少有人能及——大多数人连管好一项都难。除了监管第6页列出的三个实体——世界百科全书、柯比和斯科特·费策制造——拉尔夫还指导一项金融业务，该业务在1990年创下了税前利润1,220万美元的纪录。
如果斯科特·费策是一家独立公司，按净资产收益率计算，它应该能排进《财富》500强的前列，尽管它所处的行业并不被看作是经济领域的强者。这种卓越的表现，直接归功于拉尔夫。
世界百科全书方面，销量小幅下降，但盈利却有所改善。我们分权举措的成本在1990年比1989年大幅减少，而且分权的好处正在逐步显现。世界百科全书在美国百科全书销售中仍然遥遥领先，我们也在拓展国际业务，尽管基数还很小。
柯比的单位销量在1990年大幅增长，这得益于我们推出的新款吸尘器"第三代"——这款产品获得了无可置疑的成功。但由于新产品的启动费用和我们在制造过程中遇到的"学习曲线"问题，盈利增长没有销售额增长那么快。国际业务（我去年曾介绍其增长迅猛）在1990年销售收入又增长了20%。最近我们提了价，预计1991年柯比将取得出色的盈利。
在斯科特·费策制造集团内部，其最大子公司坎贝尔·奥斯菲尔德今年表现尤其出色。这家公司是美国中小型空气压缩机的领先生产商，创下了1.09亿美元的销售纪录，其中超过30%来自过去五年推出的产品。
在查看我们非保险业务的数字时，你会注意到，尽管1990年盈利为1.33亿美元，净资产却只增加了4,700万美元。这并不意味着我们的经理人在这方面吝于投资——那些能巩固业务特许经营权或促进增长的投资。实际上，他们两项都在孜孜追求。
但他们也绝不会在缺乏合理理由的情况下动用资本。其结果就是：过去五年里，他们将超过80%的盈利交给我和查理，用于新的商业和投资机会。
保险业务
下表是我们常用的财产意外险行业关键数据的最新版本：
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 (Revised) 3.2 109.2 7.7 4.1
1990(Est.) 4.5 109.8 5.0 4.1
来源：A.M. Best公司
综合成本率是保险总成本（已发生损失加费用）与保费收入的比值：比率低于100表示承销盈利，高于100则表示亏损。比率越高，年份越差。如果把保险公司持有保单持有人资金（"浮存金"）所赚取的投资收益考虑进去，那么综合成本率在107-111之间通常会产生总体盈亏平衡的结果，这不包括股东提供的资金所赚取的收益。
基于此前报告所述的理由，我们预期行业已发生损失将以年均10%的速度增长——即便在整体通胀率远低于此的时期也是如此。（过去25年间，已发生损失的实际增长速度更快，达到11%。）如果保费增长大幅落后于10%这一速度，承销损失将随之攀升，不过行业在业务恶化时倾向于低估准备金，这一做法可能在短期内掩盖损失的严重程度。
去年保费增长远远低于所需的10%，因此承销结果进一步恶化。（但表中1990年的恶化程度有所掩盖，因为1989年飓风雨果造成的损失使当年的综合成本率略高于趋势线。）1991年综合成本率将再次上升，大概提高约2个百分点。
只有当大多数保险业管理层恐惧到主动回避业务——即使这些业务现在能卖得比现有价格高得多——结果才会改善。到某个时刻，这些管理层终会明白：当你发现自己掉进坑里时，最重要的事就是停止挖坑。但至今这个道理还没传达到位：保险经理人继续挖坑——闷闷不乐，但干劲十足。
如果发生一场重大的物理灾难或金融灾难，局面会迅速改变。若没有此类冲击，可能需要一至两年，承销损失才会大到足以将管理层的恐惧提升至促使大幅涨价的水平。那一刻到来时，伯克希尔在财务和心理上都做好了准备，能够承揽大量业务。
与此同时，我们的保险规模仍然不大，但令人满意。在本报告的下一节，我们将给大家提供一个评估保险业绩的框架。通过那部分讨论，你将理解为什么我对我们的保险经理Mike Goldberg、以及他麾下的明星团队Rod Eldred、Dinos Iordanou、Ajit Jain和Don Wurster的表现如此热情。
在评估未来几年我们的保险业绩时，你需要注意我们正在从事的一类业务，它可能导致业绩异常波动。如果这条业务线像预期那样扩张，我们的承销经验将偏离你可能预期的趋势线：多数年份我们会略超预期，但个别年份会远低于预期。
我预测的波动性源于一个事实：我们已成为真正重大巨灾（"超级巨灾"）保险的大额卖家——例如飓风、风暴或地震。这些保单的买家是再保险公司，它们自身也从事为直接保险公司提供巨灾保障的业务，并希望"转嫁"、或者说摆脱自身面临的特别严重巨灾风险的一部分。由于这些买家只有在保险业务面临极端压力——甚至混乱——之时才会需要依据这类保单获得赔付，因此它们寻找财务实力雄厚的卖家。而在这方面，我们拥有一个重大竞争优势：在整个行业中，我们的实力无可匹敌。
典型的超级巨灾合同很复杂。但在一个简单的案例中，我们可能签发一份一年期、1000万美元的保单，规定只有当灾难导致两个结果时，买方（一家再保险公司）才能获得这笔款项：（1）该再保险公司自身特定损失超过一个阈值金额；（2）保险业整体损失超过——比方说——50亿美元。在几乎所有情况下，满足第二个条件的损失水平也会导致第一个条件得到满足。
对于这份1000万美元的保单，我们可能收取300万美元的保费。同样，假设我们从各类超级巨灾保单中每年收取1亿美元保费。在这种情况下，任何一年我们很可能会报告接近1亿美元的利润，或者超过2亿美元的亏损。请注意，我们并非像保险公司通常那样分散风险，而是在集中风险。因此，这项业务的年度综合成本率几乎永远不会落在行业100-120的范围内，而是会接近0%或300%。
大多数保险公司在财务上无法承受这样的波动。即使它们有能力承受，也往往缺乏意愿。例如，它们可能会退缩，因为当它们因超级巨灾再保险遭受重大损失时，其承保的大量基本财产保险也会带来糟糕的业绩。此外，大多数公司管理层认为，股东不喜欢业绩的波动。
我们可以采取不同的策略：我们在基本财产保险方面的业务规模很小，而且我们相信伯克希尔的股东，如果得到充分告知，能够承受利润的异常波动，只要这些波动伴随着卓越长期回报的前景。（查理和我总是更喜欢一块一块的15%回报，而不是平滑的12%。）
我们要强调三点：(1) 虽然我们预期超级巨灾业务在十年左右的时间内能产生令人满意的结果，但我们确信至少会有一年它会带来绝对糟糕的结果；(2) 我们的预期只能基于主观判断——对于这类保险，历史损失数据在我们决定当前收费费率时价值非常有限；(3) 尽管我们预期会承保大量超级巨灾业务，但我们只会在我们认为价格与风险相匹配时这样做。如果竞争对手变得乐观，我们的业务量就会下降。事实上，近年来这类保险的定价往往低得可怜；大多数卖家都是被担架抬出场。
目前，我们认为伯克希尔是美国最大的超级巨灾保单承保商。所以，当城市地区发生大地震或欧洲有暴风雪肆虐时，请为我们点支蜡烛。
衡量保险业绩
在上一节中，我提到了"浮存金"——保险公司在经营业务过程中暂时持有的他人资金。由于这些资金可用于投资，典型的财产意外险公司可以承受超出保费7%至11%的损失和费用，仍能实现盈亏平衡。再次强调，这一计算排除了保险公司从净资产（即股东提供的资金）中获得的收益。
然而，这个7%至11%的范围存在许多例外。例如，承保冰雹对农作物造成的损失的保险几乎不产生任何浮存金。这类保险的保费是在冰雹威胁来临前支付给保险公司的，如果农民遭受损失，他几乎会立即获得赔付。因此，农作物冰雹保险的综合成本率为100对保险公司来说不产生任何利润。
另一个极端是，承保医生、律师和会计师潜在责任的医疗事故保险，与年保费收入相比会产生非常高的浮存金。浮存金的出现是因为索赔通常在被指控的不当行为发生很久之后才提出，而且赔付可能因漫长的诉讼而进一步延迟。业界将医疗事故保险及其他某些责任保险称为"长尾"业务，原因是保险公司在最终将资金支付给索赔人及其律师（以及保险公司的律师）之前，可以持有大笔资金的期限很长。
在长尾险种中，综合成本率115（甚至更高）也有可能盈利，因为浮存金产生的收益将超过赔付和费用超出保费的那15%。然而，问题在于“长尾”恰恰意味着：某一年承保的负债业务，起初被认为产生了115的综合成本率，但随着岁月流逝、所有索赔最终结清，可能最终给保险公司带来200、300甚至更糟糕的结局。
这类业务的陷阱要求一个经常被忽视的经营原则：尽管某些长尾险种在综合成本率110或115时可能盈利，但保险公司若以此类比率作为定价目标，将注定无法盈利。相反，定价必须提供充足的安全边际，以应对那些不断给保险业带来昂贵意外的社会趋势。将目标定在100本身可能导致巨额亏损；以110–115为目标则是商业自杀。
话虽如此，衡量一家保险公司盈利能力的标准应该是什么？分析师和管理者通常关注综合成本率——诚然，这个标尺通常是判断公司盈利水平的好指标。然而，我们认为更好的衡量标准是承保损失与产生的浮存金之比。
这个损失/浮存金比率，与评估保险业绩时使用的任何统计指标一样，在短期内毫无意义：季度承保数据甚至年度数据都过于依赖估算，参考价值不大。但当这一比率涵盖数年时，它便大致反映了保险业务产生资金的成本。低成本资金意味着好生意；高成本资金则意味着烂生意。
下一页我们展示了自进入保险业以来，我们保险集团每年产生的承保损失（如有），并将该利润底线与当年持有的平均浮存金挂钩。根据这些数据，我们计算出了“保险产生的资金成本”。
(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- --------------- -------------
(In $ Millions) (Ratio of 1 to 2)
1967 ......... profit $17.3 less than zero 5.50%
1968 ......... profit 19.9 less than zero 5.90%
1969 ......... profit 23.4 less than zero 6.79%
1970 ......... $0.37 32.4 1.14% 6.25%
1971 ......... profit 52.5 less than zero 5.81%
1972 ......... profit 69.5 less than zero 5.82%
1973 ......... profit 73.3 less than zero 7.27%
1974 ......... 7.36 79.1 9.30% 8.13%
1975 ......... 11.35 87.6 12.96% 8.03%
1976 ......... profit 102.6 less than zero 7.30%
1977 ......... profit 139.0 less than zero 7.97%
1978 ......... profit 190.4 less than zero 8.93%
1979 ......... profit 227.3 less than zero 10.08%
1980 ......... profit 237.0 less than zero 11.94%
1981 ......... profit 228.4 less than zero 13.61%
1982 ......... 21.56 220.6 9.77% 10.64%
1983 ......... 33.87 231.3 14.64% 11.84%
1984 ......... 48.06 253.2 18.98% 11.58%
1985 ......... 44.23 390.2 11.34% 9.34%
1986 ......... 55.84 797.5 7.00% 7.60%
1987 ......... 55.43 1,266.7 4.38% 8.95%
1988 ......... 11.08 1,497.7 0.74% 9.00%
1989 ......... 24.40 1,541.3 1.58% 7.97%
1990 ......... 26.65 1,637.3 1.63% 8.24%
浮存金数据来自损失准备金、损失调整费用准备金和未赚保费准备金的总和，减去代理人余额、预付收购成本以及适用于分入再保险的递延费用。在其他保险公司，计算中可能应包含其他项目，但在我们这里，这些项目不重要，已被忽略。
1990年，我们持有约16亿美元的浮存金，这些资金最终将流入他人手中。当年我们承受了2700万美元的承保损失，因此我们的保险业务以约1.6%的成本为我们提供了资金。如表所示，有些年份我们实现了承保盈利，那时我们的资金成本低于零。在其他年份，比如1984年，我们为浮存金支付了非常高的代价。不过，在我们涉足保险业的24年中，有19年我们以低于政府借款利率的成本获得了资金。
这一计算有两个重要的限定条件。首先，胖女士还没清嗓子，更不用说唱歌了（指结局未定），在几十年后所有此期间的损失最终结清之前，我们不会知道1967–1990年真实的资金成本。其次，浮存金对股东的价值在一定程度上被削弱了，因为股东必须自掏腰包来支持保险业务，并且这些资金赚取的投资收益还要承受双重征税。直接投资在税收上会更有效率。
间接投资给股东带来的税收惩罚实际上相当可观。尽管计算必然不够精确，但我估计，一般保险公司的股东会发现税收惩罚大约会使其浮存金成本增加一个百分点。我认为这也接近伯克希尔的正确数值。
计算保险业务的资金成本，能让任何分析者判断该业务对股东是正价值还是负价值。如果这个成本（包括税收惩罚）高于其他来源资金的成本，那它就是负价值；如果成本更低，就是正价值——而如果成本显著更低，保险业务就称得上是一项非常有价值的资产。
到目前为止，伯克希尔属于“显著更低”的那一类。更惊人的是GEICO（政府雇员保险公司）的数据，我们目前持有其48%的股权，而它通常能获得承保利润。GEICO的增长带来了越来越多可供投资的资金，实际成本远低于零。本质上，GEICO的保单持有人总体上是向公司支付浮存金利息，而不是反过来。（但美姿还需美行：GEICO之所以能获得如此异常的盈利能力，源于其卓越的运营效率和审慎的风险分类——这一组合又反过来让保单持有人享受到底价。）
反观许多知名保险公司，它们承受着承保亏损/浮存金成本，加上税收惩罚，给所有者带来负结果。此外，这些公司和业内其他公司一样，容易受到巨灾损失的影响——这些损失可能超出其再保险的保护范围，让它们的浮存金成本直接脱离图表。除非这些公司能大幅改善承保业绩——而历史表明这几乎是不可能完成的任务——否则它们的股东将体验到类似于银行储户的遭遇：银行支付的存款利率高于贷款利率。
总体而言，保险业务对我们非常友善。我们以平均合理的成本扩大了浮存金，并且因为用这些低成本资金获得了良好回报而进一步受益。我们的股东确实承担了额外税费，但到目前为止，浮存金带来的好处已经远远补偿了这一成本。
特别令人鼓舞的一点是，我们的业绩是在迈克·戈德堡到来之前，你们的董事长犯下了一些巨大错误的情况下取得的。保险行业提供了大量犯错的机会，而每当机会敲门时，我常常应声开门。很多年过去了，这些错误的账单还在不断寄来：在保险业，蠢行没有诉讼时效。
我们保险业务的内在价值永远比糖果公司或报纸公司的价值更难计算。但无论用什么标准衡量，这项业务的价值都远高于其账面价值。此外，尽管这个业务时不时给我们带来麻烦，但在我们拥有的所有优质企业中，它是潜力最大的一个。
有价证券
以下列出了我们持有价值超过1亿美元的普通股投资。其中一小部分属于伯克希尔持股不足100%的子公司。
12/31/90
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ............ $ 517,500 $1,377,375
46,700,000 The Coca-Cola Co. ................... 1,023,920 2,171,550
2,400,000 Federal Home Loan Mortgage Corp. .... 71,729 117,000	
6,850,000 GEICO Corp. ......................... 45,713 1,110,556
1,727,765 The Washington Post Company ......... 9,731 342,097
5,000,000 Wells Fargo & Company ............... 289,431 289,375
近乎怠惰的慵懒，依然是我们投资风格的基石：今年我们六大重仓股中有五只既未买入也未卖出一股。唯一的例外是富国银行——一家管理出色、回报率高的银行——我们将持股比例增至略低于10%，这是无需美联储批准的最高持股比例。其中约六分之一的仓位购于1989年，其余在1990年买入。
银行业务不是我们的心头好。当资产是权益的20倍时——这是该行业的常见比率——哪怕只涉及一小部分资产的错误，也可能摧毁大部分权益。而在许多大型银行中，错误已成为常态而非例外。这些错误大多源于一种管理缺陷，我们去年在讨论"机构惯性"时曾描述过：高管们倾向于盲目模仿同行的行为，不管这样做多么愚蠢。在放贷方面，许多银行家像旅鼠一样狂热地跟风；现在他们正经历旅鼠般的命运。
由于20:1的杠杆放大了管理优势与劣势的影响，我们对以"便宜"价格购买管理不善的银行股份毫无兴趣。相反，我们唯一感兴趣的是以合理价格买入管理良好的银行。
对于富国银行，我们认为我们拥有了业内最优秀的管理者——卡尔·赖卡特和保罗·哈曾。在许多方面，卡尔和保罗的组合让我想起另一对搭档——大都会/美国广播公司的汤姆·墨菲和丹·伯克。首先，每一对组合的力量都大于两人之和，因为彼此理解、信任和欣赏。其次，两支管理团队都舍得给能人高薪，但厌恶不必要的冗员。第三，无论是在利润创纪录时还是面临压力时，他们都同样坚决地削减成本。最后，他们都坚守自己理解的领域，让能力而非自负决定他们的尝试。（IBM的托马斯·J·沃森遵循同样的规则："我不是天才，"他说。"我在某些方面聪明——但我就待在这些方面周围。"）
我们在1990年购入富国银行，得益于当时银行股市场的混乱。这种混乱情有可原：那些曾经备受推崇的银行所做的愚蠢贷款决策，一个月接一个月地被公之于众。随着一笔又一笔巨额亏损被揭露——往往紧跟在管理层保证一切安好之后——投资者有理由认为，没有哪家银行的数字是可信的。得益于他们逃离银行股，我们以2.9亿美元购入了富国银行10%的股份，不到税后利润的5倍，也不到税前利润的3倍。
富国银行规模庞大——拥有560亿美元资产——且净资产收益率一直超过20%，资产收益率超过1.25%。我们购买该银行十分之一的股份，大致相当于我们以同等财务特征全资收购一家50亿美元的银行。但若真做这样的收购，我们可能需要支付我们实际为富国银行支付的2.9亿美元的两倍。而且，那家50亿美元的银行如果索要溢价，还会给我们带来另一个问题：我们找不到一位卡尔·赖卡特来经营它。近年来，富国银行的高管比银行业其他任何高管都更受猎头追捧；然而，没人能挖走这位顶尖人物。
当然，拥有一家银行——或几乎任何其他企业——远非没有风险。加州银行面临大地震这一特定风险，地震可能对借款人造成足够大的破坏，进而摧毁向其放贷的银行。第二个风险是系统性风险——即经济衰退或金融恐慌如此严重，以至于几乎危及所有高杠杆机构，无论其管理多么明智。最后，市场当下最大的担忧是，由于过度建设，西海岸的房地产价值可能暴跌，给那些为扩张提供融资的银行带来巨额亏损。由于富国银行是主要的房地产贷款机构，它被认为尤其脆弱。
这些情况没有一种是可以排除的。不过，前两种发生的概率很低，即使房地产价值出现大幅下跌，也不太可能给管理良好的机构造成大问题。我们来算一道数学题：富国银行（Wells Fargo）目前每年税前盈利超过10亿美元，计提了超过3亿美元的贷款损失准备。如果该行480亿美元贷款中——不单是房地产贷款——有10%在1991年出现问题，并且这些贷款造成的损失（包括利息损失）平均达到本金的30%，那么该行大概只能做到盈亏平衡。
像这样的年份——我们只认为是一种低概率的可能性，而非大概率事件——并不会让我们感到困扰。事实上，在伯克希尔，我们很乐意收购那些一年内毫无回报、但此后能在不断增长的权益资本上赚取20%回报的企业或投资项目。然而，人们对加州房地产会重蹈新英格兰式灾难的担忧，导致富国银行股价在1990年短短几个月内下跌了近50%。即便我们在下跌前就已经以当时的价格买入了一些股票，我们仍然欢迎这次下跌，因为它让我们有机会用新的恐慌价格买进更多股票。
那些预期自己将在有生之年持续买入投资的投资者，应该以类似的态度看待市场波动；相反，许多人却不合逻辑地在股价上涨时欣喜若狂，在股价下跌时闷闷不乐。他们对食品价格的反应可没有这种困惑：知道自己永远要购买食品，他们欢迎降价、痛恨涨价。（不喜欢降价的是卖食品的人。）同样，在《布法罗新闻》报，我们会为新闻纸降价而欢呼——尽管这意味着我们手头大量库存的新闻纸要贬值——因为我们知道自己会一直持续购买这种产品。
同样的推理也指导着我们对伯克希尔投资的思考。只要我活一天（如果伯克希尔的董事们参加我安排的降神会，那么更久），我们就会年复一年地买入企业——或者说买入企业的一小部分，也就是股票。基于这些意图，企业降价对我们有利，涨价则对我们有害。
低价格最常见的原因是悲观情绪——有时是弥漫性的，有时是针对某家公司或某个行业的。我们愿意在这种环境下做生意，不是因为我们喜欢悲观，而是因为我们喜欢悲观所造就的价格。乐观才是理性买家的敌人。
但这并不意味着，一项生意或一只股票仅仅因为不受欢迎就是明智的买入对象；反向操作和跟风策略一样愚蠢。所需的是思考，而不是随大流。不幸的是，伯特兰·罗素关于生活的一般性观察，在金融世界里有着异乎寻常的适用性：“大多数人宁愿死也不愿思考。许多人确实如此。”
去年我们投资组合中的另一个重大变动是大幅增持了RJR纳贝斯克（RJR Nabisco）的债券，这些证券我们最早在1989年底买入。截至1990年底，我们在这类证券上的投资为4.4亿美元，这个数字接近于当时的市值。（不过，在我写这封信时，它们的市值已经上涨了超过1.5亿美元。）
就像买入银行股对我们来说非同寻常一样，购买低于投资级债券也同样罕见。但能让我们感兴趣、同时规模大到足以对伯克希尔业绩产生有意义影响的机会实在稀少。因此，只要我们能理解所买入的生意，并且相信价格与价值可能存在显著差异，我们会审视任何类别的投资。（伍迪·艾伦在另一个语境下指出了思想开放的好处："我真搞不懂为什么不是双性恋的人更多，因为这能让周六晚上约到伴儿的机会翻倍。"）
过去我们曾成功买过几只低于投资级债券，不过它们都是老派的"堕落天使"——最初属于投资级，但发行者陷入困境后被降级的债券。在1984年的年报中，我们描述了买入一只堕落天使（华盛顿公共电力供应系统）的理由。
20世纪80年代，一种变异的堕落天使闯入了投资舞台——发行时即远低于投资级的"垃圾债券"。随着十年光阴流逝，新发行的制造垃圾越来越臭，最终，可预见的结局发生了：垃圾债券名副其实。1990年——甚至在经济衰退给出重击之前——金融业的天空就被失败公司的尸体遮蔽得一片昏暗。
债务的信徒向我们保证这种崩塌不会发生：他们告诉我们，巨额债务会让经营管理者以前所未有的力度聚焦工作，就像在方向盘上装一把匕首，可以预期会让司机开得更小心。我们承认，这种警示装置确实会造就一个非常警觉的司机。但另一个必然结果是：如果汽车哪怕压到最小的一个坑洼或一片薄冰，都会引发一场致命且不必要的车祸。商业的道路上到处都是坑洼；一个要求避开所有坑洼的计划，就是灾难的计划。
在《聪明的投资者》最后一章，本·格雷厄姆有力地否定了匕首理论："面对将稳健投资的秘诀浓缩为三个字的挑战，我们斗胆提出这句格言：安全边际。"读完这句话四十二年后，我仍然认为这三个字是对的。投资者未能听从这个简单信息，导致他们在20世纪90年代初蒙受了惨重损失。
在债务狂潮达到顶峰时，人们编造出注定失败的资本结构：在某些案例中，发行的债务如此之多，以至于即便经营结果极为有利，也无法产生足够的资金来偿还利息。几年前有一个尤其恶劣的"出生即杀"案例，涉及收购坦帕的一家成熟电视台，收购借了这么多债，以至于利息支出超过了电视台的总收入。即使假设所有劳动力、节目和服务都是捐赠而非购买的，这种资本结构也需要收入激增——否则这家电视台注定破产。（为这笔收购融资的许多债券卖给了现已倒闭的储蓄与贷款协会；作为纳税人，你正在为这种愚蠢行为买单。）
这一切如今看来不可思议。然而，当这些恶行发生时，兜售匕首的投资银行家们指出学术界的"学术"研究，该研究称，多年来垃圾债券获得的高利率足以弥补其更高的违约率。因此，和善的推销员说，一个多元化的垃圾债券投资组合比高等级债券组合能产生更高的净回报。（当心金融界那些以过往业绩为"证据"的说法：如果历史书是通往财富的钥匙，福布斯400强里就该全是图书管理员了。）
推销员的逻辑存在一个漏洞——统计学的学生第一年就该学会识别。他们假设：新发行的垃圾债券与低评级堕落天使属于同一类，因此后者的违约历史可以用来预测新发行债券的违约情况。（这错误好比在喝琼斯镇供应的酷爱饮料前，先查查这种饮料的历史死亡率。）
这两个群体当然在几个关键方面截然不同。首先，堕落天使的经营者几乎无一例外地渴望重回投资级，并为此努力。而垃圾债券的操盘手通常完全是另一类人。他们像瘾君子一样，精力不是用在摆脱债务缠身的困境，而是寻找下一次"补给"。此外，管理典型的堕落天使的高管们，其受托人责任感往往（尽管不总是）比那些发行垃圾债券的金融变态更强。
华尔街对这些区别毫不在意。一如既往，华尔街对一个想法的热情与其优劣无关，而是取决于它能带来多少收入。成堆的垃圾债券被那些不在乎的人卖给那些不思考的人——这两类人从来都不缺。
垃圾债券仍然是一片雷区，即使如今其价格往往仅剩发行价的一小部分。正如我们去年所说，我们从未买过新发行的垃圾债券。（唯一该买它们的那天，是日期里没有"日"字的日子。）不过，我们现在愿意看看这个领域，既然它已经乱成一团。
就RJR Nabisco（雷诺兹-纳贝斯克）而言，我们认为该公司的信用比一段时间以来人们普遍认为的要好得多，我们获得的收益率以及潜在的资本增值，足以补偿我们承担的风险（尽管这风险远非为零）。RJR以有利价格出售了资产，增加了大量股权，并且总体经营良好。
然而，纵观整个领域，大多数低评级债券仍然没有吸引力。1980年代华尔街的"杰作"比我们想象的还要糟糕：许多重要企业已受致命伤。不过，随着垃圾债市场继续崩盘，我们会继续寻找机会。
可转换优先股
我们仍持有此前报告中描述的可转换优先股：所罗门公司（Salomon Inc）7亿美元、吉列公司（The Gillette Company）6亿美元、全美航空集团（USAir Group, Inc.）3.58亿美元、冠军国际公司（Champion International Corp.）3亿美元。我们的吉列持股将于4月1日转换为1200万股普通股。综合利率、信用质量及相关普通股价格，我们评估1990年底我们对所罗门和冠军的投资大致等于我们的买入成本，吉列略高于成本，全美航空则大幅低于成本。
在买入全美航空这件事上，你们的董事主席展现了完美的时机把握：我几乎是在它陷入严重问题的同一刻一头扎进去的。（没人推我；用网球术语说，我犯了一个"非受迫性失误"。）公司的困境既源于行业状况，也源于收购皮埃蒙特（Piedmont）后整合中遇到的困难——我本该预料到这一点，因为几乎所有航空并购之后都会出现运营混乱。
埃德·科洛德尼和塞斯·斯科菲尔德很快解决了第二个问题：现在这家航空公司的服务广受好评。全行业的问题却远比这严重得多。自我们买入以来，航空业的经济状况以惊人的速度恶化，某些航空公司自杀式的定价策略更是雪上加霜。这种定价给所有承运商带来的麻烦揭示了一个重要真理：在销售同质化产品的行业中，你不可能比最愚蠢的竞争对手聪明太多。
不过，除非未来几年这个行业被彻底摧毁，否则我们在全美航空的投资应该能安然无恙。埃德和塞斯果断采取了重大运营调整，以应对当前的动荡。即便如此，这笔投资现在的安全性也不及我当初买入时。
我们的可转换优先股是相对简单的证券，但我还是要提醒你们：如果历史经验还有参考价值，你们可能会时不时读到关于它们的不准确或误导性陈述。去年，就有几位媒体人士将我们所有优先股的价值等同于其可转换成的普通股价值。按照他们的逻辑，我们的所罗门优先股（可按38美元转换成普通股），若所罗门普通股售价为22.80美元，则其价值只有面值的60%。但这种推理有个小问题：按照这个逻辑，人们必须得出结论——可转换优先股的全部价值都来自于转换权，而所罗门不可转换优先股的价值为零，不管它的票息或赎回条款如何。
你们需要记住的关键点是：我们可转换优先股的大部分价值来自其固定收益特征。这意味着这些证券的价值不可能低于其作为不可转换优先股的价值，并且由于转换期权，它们可能更有价值。
我深感遗憾，不得不用一段关于我朋友、吉列（Gillette）CEO Colman Mockler, Jr.的悼词来结束本部分报告，他于1月去世。没有比"绅士"更适合描述Colman的词了——这个词代表着正直、勇气和谦虚。将这些品质与Colman所拥有的幽默感和非凡商业能力结合起来，你们就能理解为什么我认为与他共事是一种纯粹的快乐，以及为什么我——以及所有认识他的人——会如此怀念他。
在Colman去世前几天，吉列在《福布斯》一篇封面报道中备受赞誉。报道的主题很简单：该公司在剃须产品上的成功并非来自营销策略（尽管它一再展现出这方面的天赋），而是源于对质量的执着。这种心态使它始终将精力聚焦于推出更好的产品，即便其现有产品已经是同类中的佼佼者。《福布斯》这样描绘吉列，实际上也画出了Colman的肖像。
帮帮忙！帮帮忙！
老读者都知道，我毫不羞耻地利用年度致股东信来为伯克希尔（Berkshire）收购企业。而且，正如我们一直在《布法罗新闻》（Buffalo News）反复强调的：广告确实管用——有好几家企业找上门来，就是因为有人在信里读到了我们收购的兴趣。（任何优秀的广告销售都会告诉你，想卖东西却不打广告，就像在黑暗中对女孩抛媚眼。）
在附录B（第26-27页）中，我重印了几年前写给一家理想企业所有者/管理者的一封信的精华部分。如果你本人与可能让我们感兴趣的企业没有联系，但有朋友与之相关，也许可以把这份报告转交给他。
我们寻找的企业类型如下：
（1）大额收购（至少1000万美元的税后利润），
(2) 具备持续盈利能力（我们对未来预测毫无兴趣，“扭亏为盈”的企业也不例外），
(3) 企业能以极少甚至零债务，获得良好的净资产收益率，
(4) 管理层已就位（我们无法提供管理层），
(5) 业务简单（如果涉及太多技术，我们理解不了），
(6) 报价明确（在价格未知的情况下，我们不愿浪费自己或卖方的时间，哪怕是初步讨论交易）。
我们不会发起敌意收购。我们可以承诺完全保密，并在极短时间内——通常五分钟内——给出是否感兴趣的答复。我们倾向于现金收购，但若得到的业务内在价值与我们付出的相当，也会考虑发行股票。
我们最钟爱的收购模式是像Blumkin-Friedman-Heldman（布卢姆金-弗里德曼-赫尔德曼）家族那样的。这类案例中，公司所有者兼管理者希望获得大量现金，有时是为了自己，但更多是为了家人或不参与经营的股东。同时，这些管理者希望继续作为重要股东，像过去一样经营公司。我们认为，对于抱有此类目标的所有者，我们尤其适合。我们欢迎潜在卖家向我们过去的交易伙伴核实我们的口碑。
Charlie和我经常收到一些远不达标收购条件的提案。我们发现，如果你放出风声想买柯利牧羊犬，很多人会打电话来，想把他们的可卡犬卖给你。一首乡村歌曲的歌词恰好表达了我们对新业务、扭亏为盈或拍卖式收购的态度：“电话不响的时候，你就知道是我。”
除了收购上述类型的企业，我们也对协议收购大额但非控股的股票感兴趣，就像我们持有Capital Cities（首都城市广播公司）、Salomon（所罗门公司）、Gillette（吉列）、USAir（全美航空）和Champion（冠军国际）那样。不过，我们并不希望收到关于在公开市场购买股票的建议。
杂项
Ken Chace决定在即将到来的股东年会上不再竞选连任董事。伯克希尔对董事没有强制退休年龄（将来也不会有！），但现年75岁、住在缅因州的Ken只是想减少一些活动。
Ken是我在1965年初Buffett Partnership, Ltd.（巴菲特合伙有限公司）接管伯克希尔控制权后，经营纺织业务的首选人选。虽然坚持纺织业务是个经济错误，但选择Ken这个决定没错：他经营有方，对问题始终100%坦诚，并且创造了资金，让我们得以多元化进入保险领域。
我的妻子Susan将被提名为Ken的继任者。她现在是伯克希尔的第二大股东，若她比我活得久，将继承我全部股份，实际上控制公司。她了解并同意我对继任管理层的看法，也认同我的观点：不能仅仅因为有人对伯克希尔或其子公司及重要投资出价极高，就将其出售。
我强烈认为，我们企业及其管理层的命运不应取决于我的健康状况——顺便说一句，我身体很好——而且我已经做好了相应规划。我和妻子的遗产计划都不是为了保全家族财富；相反，两者都旨在保持伯克希尔的品格，并将财富归还给社会。
如果我明天去世，请放心三件事：(1) 我的股票一股都不必出售；(2) 我将有一位理念与我相似的控股股东和管理者接替；(3) 伯克希尔的年收益将增加100万美元，因为Charlie会立即卖掉我们的公司专机“The Indefensible（无可辩护号）”——忽略我希望它与我一同埋葬的愿望。
在伯克希尔1990年的股东指定捐赠计划中，约97.3%的合格股份参与了该计划。通过该计划的捐赠总额为580万美元，惠及2,600家慈善机构。
我们建议新股东阅读第54-55页关于股东指定捐赠计划的说明。若要参与未来计划，您必须确保您的股票以实际持有人名义登记，而非以经纪人、银行或存管机构的代名人名义持有。在1991年8月31日之前未以此方式登记的股份，将不具备参与1991年计划的资格。
除伯克希尔分配的股东指定捐赠外，我们的业务经理人也会进行捐赠（包括实物捐赠），年均约150万美元。这些捐赠支持当地慈善机构（如联合劝募协会），并为我们的业务带来大致相当的回报。
然而，无论是我们的业务经理人还是母公司的管理层，都不会使用伯克希尔的资金进行全国性项目捐赠或他们个人特别感兴趣的慈善活动——除非他们是以股东身份这样做。如果您的员工（包括CEO）希望向母校或其他他们个人有感情联系的机构捐款，我们认为他们应该用自己的钱，而不是用您的。
今年的年度股东大会将于1991年4月29日星期一上午9:30在奥马哈市中心的奥芬剧院举行。去年参会人数创下1,300人的纪录，相比十年前增长了约100倍。
我们建议您尽早预订以下酒店：（1）雷迪森-雷迪克大厦酒店——一家小巧（88间客房）但不错的酒店，就在奥芬剧院对面；（2）规模大得多的红狮酒店，距离奥芬剧院步行约五分钟；（3）万豪酒店，位于西奥马哈，距离波仙珠宝店约100码，距市中心约二十分钟车程。我们将在万豪酒店安排巴士，于8:30和8:45出发前往会场，并在会议结束后返回。
查理和我一直很享受这场会议，希望您能参加。我们股东的质量从我们收到的提问质量中可见一斑：我们参加过的任何年度股东大会，其提问水平都从未像这样持续保持高水准——全是聪明、与所有者相关的问题。
随股东委托书附带的附件说明了如何获取入场所需的卡片。由于工作日停车位在奥芬剧院附近可能紧张，我们已为股东安排了附近多个停车场。该附件也包含相关信息。
像往年一样，会议结束后我们将安排巴士送您前往内布拉斯加家具城和波仙珠宝店，之后还可送您回市中心酒店或机场。希望您能预留充足时间，充分探索这两家店的魅力。早到的股东可以在一周中的任何一天造访家具城；周六营业时间为上午10点至下午5:30，周日为中午12点至下午5:30。在那里，别忘了在See's糖果推车前驻足，亲眼见证伯克希尔协同效应的开端。
波仙珠宝店通常周日关门，但我们将在4月28日周日中午12点至下午6点专门为股东及其宾客开放。去年我们的周日营业让艾克非常开心：在统计完当日销售额后，他向我提议我们应该每季度召开一次股东大会。即使您只是来参观，也欢迎来波仙珠宝店坐坐——这是一场您不容错过的秀。
去年年度股东大会的第一个提问来自11岁的尼古拉斯·肯纳，他是来自纽约市的第三代股东。尼古拉斯问得非常犀利："为什么股价跌了？"他冲我发问。我的回答已记不太清了。
我们希望其他业务往来不会让尼古拉斯缺席今年的会议。如果他出席，他将有机会再次提出第一个问题；查理和我想趁我们精力充沛时对付他。不过，今年轮到查理来回答了。
| 1991年3月1日 | 沃伦·E·巴菲特 董事会主席 |
|---|---|
附录A
美国钢铁公司宣布全面现代化计划*
- 本·格雷厄姆在1936年创作的一篇未发表的讽刺文章，由作者于1954年赠予沃伦·巴菲特。
美国钢铁公司董事长Myron C. Taylor今天宣布了期待已久的计划，要全面现代化这家全球最大的工业企业。与预期相反，公司的制造或销售政策不会发生任何变化。相反，会计系统将被彻底改造。通过采用并进一步改进一系列现代会计和财务手段，公司的盈利能力将发生惊人的转变。即使在1935年这样的非正常条件下，据估计，新的会计方法也将为普通股带来每股接近50美元的报告利润。这一改进计划是Price、Bacon、Guthrie & Colpitts先生们进行的一项全面调研的成果；它包括以下六点：
-
将厂房账户减记至负10亿美元。
-
将普通股面值降至1美分。
-
以认股权证支付所有工资和薪金。
-
存货按1美元列账。
-
用无息债券替换优先股，债券以50%折价赎回。
-
设立10亿美元应急储备金。
这一非凡的现代化计划的官方声明全文如下：
美国钢铁公司董事会高兴地宣布，经过对行业形势变化所引发问题的深入研究，董事会批准了一项全面改造公司会计方法的计划。由特别委员会在Price、Bacon、Guthrie & Colpitts先生们的帮助和怂恿下进行的一项调研揭示，本公司在利用某些先进会计方法方面略落后于其他美国企业——借助这些方法，盈利能力可在无需任何现金支出或改变经营与销售条件的情况下惊人提升。董事会决定不仅采用这些较新的方法，还要将其发展到更高的完善阶段。董事会通过的变革可归纳为以下六个方面：
- 固定资产减记至负10亿美元。
许多代表性公司已将厂房账户减记至1美元，从而免除了其损益账户中的所有折旧费用。特别委员会指出，如果它们的厂房仅值1美元，那么美国钢铁公司的固定资产价值要远低于这一数字。现在已是一个公认的事实：许多厂房实际上是负债而非资产，不仅带来折旧费用，还有税费、维护费及其他支出。因此，董事会决定延续1935年报告中启动的减记政策，将固定资产从1,338,522,858.96美元减记至一个整数——负10亿美元。
此举的优势显而易见。随着厂房损耗，负债相应减少。因此，目前每年约4,700万美元的折旧费用将被每年5%即5,000万美元的增值贷项所取代。这将使年收益增加不少于9,700万美元。
-
将普通股面值降至1美分，以及
-
以认股权证支付薪金和工资。
许多公司通过以股票期权（无需从利润中扣除费用）支付大部分高管薪酬，成功大幅降低了管理费用。这一现代手法的全部潜力显然尚未被充分认识。董事会已采纳了该理念的以下升级版：
公司全体员工的薪酬将以认购权形式支付，每认购一股普通股的价格为50美元，每50美元现有薪金/工资对应一份认购权。普通股面值将降至1美分。
新方案几乎令人难以置信的优势从以下各点可见一斑：
A. 公司工资单将完全消失，按1935年经营规模计算，每年节省2.5亿美元。
B. 同时，我们所有员工的实际薪酬将增加数倍。由于新方法下普通股将表现出很高的每股收益，该股票在市场上的售价必将远高于50美元的期权行权价，使得这些期权认股权证的即时变现价值大大超过它们所取代的现行现金工资。
C. 公司将因这些认股权证的行使而获得额外的大额年利润。由于普通股面值定为1美分，每认购一股将获得49.99美元的收益。但出于稳健会计原则的考虑，该利润不计入收入账户，而单独列示为资本公积贷项。
D. 公司现金状况将极大增强。取代当前每年2.5亿美元现金工资支出（按1935年基数）的，将是每年通过行使500万股普通股认购权证而流入的2.5亿美元现金。公司的高额利润和强劲现金状况将允许支付丰厚的股息，这反过来将导致认购权证在发行后立即行使，进而进一步改善现金状况，于是又允许提高股息率——如此循环，永无止境。
- 存货按1美元计价。
大萧条期间因必须将存货价值调整至市价而产生了严重损失。一些企业——特别是在金属和棉纺织领域——已成功解决了这一问题，其方法是将全部或部分存货以极低的单位价格入账。美国钢铁公司决定采取更为进步的政策，将其全部存货按1美元计价。此项政策将通过每年年末进行适当减记来实现，减记金额计入下文所述的或有准备金。
这种新方法带来的好处非常巨大。它不仅完全消除了存货贬值的可能性，还将大幅提升公司年度利润。年初按1美元计价的存货将在年内以丰厚利润售出。据估计，通过此方法我们的收入每年将至少增加1.5亿美元——巧合的是，这大约等于每年需从或有准备金中减记的金额。
特别委员会少数派报告建议，为保持一致性并获取上述类似额外优势，应将应收账款和现金也减记至1美元。该提案目前已被驳回，因为我们的审计师仍坚持要求，此类冲销的应收账款和现金的任何收回款项必须计入盈余，而非当年收入。不过，预计这一审计规则——颇有几分马车时代的遗风——不久将随现代潮流而改变。若真如此，该少数派报告将得到进一步且有利的考虑。
- 以50%折价可赎回的无息债券替换优先股。
在最近的大萧条中，许多公司通过将按大幅折价回购自身债券所产生的利润计入收入，得以抵消经营亏损。不幸的是，美国钢铁公司的信用一向坚挺，以至于此前一直无法获得这一丰厚的收入来源。而“现代化方案”将弥补这一缺憾。
拟议方案为：每股优先股可交换300美元面值的无息偿债基金债券，通过抽签按面值50%的价格在10年内等额分期赎回。这将需要发行10.8亿美元的新债券，每年赎回1.08亿美元，公司仅需花费5400万美元，从而每年创造同等金额的利润。
如同上文第3条所述的工资及/或薪金计划，此安排将使公司及其优先股股东双双受益。后者可确保其现有股份在平均五年内按面值150%的价格获得偿付。鉴于当前短期证券几乎无收益，无息条款并无实际影响。公司将把目前每年2500万美元的优先股股息支出，转化为每年5400万美元的债券赎回利润——年度总收益达7900万美元。
- 设立10亿美元的或有储备。
董事们深信，前述各项改进将确保公司在未来一切条件下均拥有令人满意的盈利能力。然而，按照现代会计方法，完全不必承担因任何不利商业发展而蒙受损失的风险，因为所有这些风险均可通过设立或有储备提前拨备。
特别委员会建议公司设立一笔相当可观的或有储备，金额为10亿美元。如前所述，每年将存货减记至1美元的损失将由该储备吸收。为防止或有储备最终耗尽，已进一步决定每年从资本公积中拨出适当金额予以补充。由于通过行使股票认购权证（见上文第3条），资本公积预计每年至少增加2.5亿美元，因此可轻易弥补或有储备的任何消耗。
在制定此安排时，董事会不得不遗憾地承认，他们未能比重要公司已在使用的、在资本、资本公积、或有储备及其他资产负债表账户之间大规模转移资金的技巧更进一步。事实上，必须承认，我们的账务处理将略显简单，缺乏该领域最先进做法中那种极端的迷惑性。然而，董事会在制订其“现代化计划”时坚持清晰和简洁，哪怕牺牲公司盈利能力的潜在优势也在所不惜。
为显示新提案对公司盈利能力的综合影响，我们特此提交1935年简明损益表，分以下两种基础编制，即：
|
|
|
B. 形式备考 |
|
|
|
|
|
|
A. 据报告数字 |
|
|
来自所有来源的总收入（含公司内部） |
$765,000,000 |
$765,000,000 |
|
工资薪金 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
251,000,000 |
-- |
|
其他运营费用及税项 . . . . . . . . . . . . . . . . . . |
461,000,000 |
311,000,000 |
|
折旧 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
47,000,000 |
(50,000,000) |
|
利息 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
5,000,000 |
5,000,000 |
|
债券赎回折价 . . . . . . . . . . . . . . . . . . . . . . . . . |
-- |
(54,000,000) |
|
优先股股息 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
25,000,000 |
-- |
|
普通股余额 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(24,000,000) |
553,000,000 |
|
平均流通股数 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
8,703,252 |
11,203,252 |
|
每股盈利 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
($2.76) |
$49.80 |
按照一项有些过时的惯例，现附上美国钢铁公司（U. S. Steel Corporation）截至1935年12月31日的简明形式备考资产负债表，该表已反映资产和负债账户拟议变更的影响。
**资产**
固定资产（净值）........................... ($1,000,000,000)
现金资产................................... 142,000,000
应收账款................................... 56,000,000
存货....................................... 1
其他资产................................... 27,000,000
合计....................................... ($774,999,999)
**负债**
普通股面值1美分（面值87,032.52美元）设定价值* ... ($3,500,000,000)
子公司债券和股票........................... 113,000,000
新偿债基金票据............................. 1,080,000,000
流动负债................................... 69,000,000
或有准备金................................. 1,000,000,000
其他准备金................................. 74,000,000
初始盈余................................... 389,000,001
合计....................................... ($774,999,999)
*设定价值与面值不同，符合公司将在弗吉尼亚州重新注册的法律规定。
或许无需向我们股东指出，现代会计方法产生的资产负债表，在形式上与较早期略有不同。鉴于这些资产负债表变更将带来非常巨大的盈利能力，预计不会对资产和负债细节给予过多关注。
最后，董事会想指出，这套组合方案——厂房以负数计价、工资单被取消、库存账面上几乎为零——将使美国钢铁公司在行业内获得巨大的竞争优势。我们能够以极低的价格销售产品，同时仍能显示丰厚的利润率。董事会经过深思熟虑认为，在现代化方案下，我们将能低价击败所有竞争对手，以至于反垄断法将成为我们实现100%行业统治的唯一障碍。
在做出这一声明时，董事会并非没有意识到，某些竞争对手可能会试图通过采用类似的会计改进方法来抵消我们的新优势。然而，我们相信，美国钢铁公司将能够凭借其作为这些服务钢铁用户新领域的开创者和先驱所积累的独特声望，留住新老客户的忠诚。此外，如有必要，我们相信我们能够通过引入更先进的记账方法——这些方法目前正在我们的实验性会计实验室中开发——来维持我们应得的领先地位。
附录B
关于出售企业的一些想法*
*这是几年前我写给一位有意出售家族企业的人的信的编辑版本。我在此呈现，因为这正是我想向其他潜在卖家传达的信息。——W.E.B.
尊敬的_______：
以下是依据我们那天的谈话提出的一些想法。
大多数企业主把大学辈子都花在建立自己的企业上。通过日复一日的实践积累的经验，他们在商品销售、采购、人员选拔等方面打磨着自己的技能。这是一个学习的过程，某一年犯下的错误常常为后续年份的能力和成功做出贡献。
相比之下，企业主—管理者一生只卖一次企业——往往是在情绪激动、四面八方的压力接踵而至的氛围中。通常，很大一部分压力来自经纪人，他们的报酬取决于交易能否完成，而不考虑对买卖双方的影响。这个决定对老板来说无论财务上还是个人都如此重要，这一点反而让过程更容易出错，而不是更少。而且，一生一次的企业出售中犯下的错误是无法挽回的。
价格非常重要，但往往不是出售中最关键的因素。您和您的家族拥有一家非凡的企业——在你们领域是独一无二的——任何买家都会认识到这一点。而且这家企业会随着时间推移越来越有价值。所以如果您决定现在不出售，日后很可能会实现更多的收益。有了这个认识，您就可以从强势地位出发，从容花时间去挑选您想要的买家。
如果您决定出售，我认为 Berkshire Hathaway（伯克希尔·哈撒韦）能提供多数其他买家所不具备的一些优势。实际上，所有这些买家都会归入两类之一：
(1) 一家身处别处但在你所在的行业或类似行业里经营的公司。这样的买家——无论做出什么承诺——通常都会有那么一些管理者，觉得自己懂得如何运营你的业务，迟早会想要施加一些亲力亲为的“帮助”。如果收购方规模大得多，它往往有一批管理者，这些人多年来被招揽进来，部分原因是许诺他们将来能管理收购来的公司。他们有自己的做事方式，即便你的业务记录无疑比他们好得多，人性迟早会让他们相信自己的运营方法更优越。你和你的家人大概有朋友把生意卖给了大公司，我猜测他们的经历会证实母公司倾向于接管子公司的运营，尤其是当母公司懂这个行业，或者自认为懂的时候。
(2) 一个金融操盘手，总是借助大笔借来的资金运作，计划在时机有利时转手卖给公众或另一家公司。这种买家通常的主要贡献是改变会计方法，以便在退出之前把盈利呈现得最为光鲜。我附上最近一篇描述这类交易的文章，这类交易正变得越来越频繁，因为股票市场上涨，而且有大量资金可供此类交易使用。
如果现任所有者的唯一动机是把筹码变现、把生意抛在脑后——不少卖家属于这一类——那么我刚才描述的两种买家，任何一种都令人满意。但如果卖家的生意是一生的创造性成果，并且是其人格和存在感不可或缺的一部分，那么这两种买家都有严重缺陷。
Berkshire（伯克希尔·哈撒韦）是另一种买家——相当不寻常的一种。我们买入是为了长期持有，但我们的母公司没有、也不打算有运营人员。我们拥有的所有企业都以极高的程度自主经营。在大多数情况下，我们持有多年的大型企业的经理人从未去过奥马哈，甚至彼此没见过面。当我们收购一家企业时，卖家继续像出售前一样经营它；我们适应他们的方法，而不是反其道而行之。
我们没有任何人——家人、新招聘的MBA等等——能承诺他们有机会经营我们从所有者兼管理者手中买来的企业。而且我们将来也不会有。
你知道我们过去的一些收购案例。我附上一份我们收购过的所有卖家的名单，邀请你向他们核实我们的言行是否一致。你尤其应该核对那些业务不如意的卖家，看看我们在困难条件下是如何表现的。
任何买家都会告诉你，他们需要你本人——如果他们还有点头脑，他们确实需要你。但很多买家，由于上述原因，后续行动并不匹配之前的承诺。我们会像承诺的那样行事，既因为我们做出了承诺，也因为我们需要这样做才能取得最好的经营成果。
这种需求解释了我们为什么希望你们家族中负责运营的成员保留20%的股份。我们需要80%来合并报表用于税务目的，这对我们很重要。同样重要的是，负责运营的家族成员继续作为所有者。很简单，除非我们觉得现任管理层的关键成员愿意留下来做我们的合伙人，否则我们不会想买。合同无法保证你持续的用心；我们只能依靠你的承诺。
我参与的工作是资本配置、最高管理层的选拔与薪酬。其他人事决策、运营策略等，都属于他的职权范围。有些伯克希尔经理人会和我商量一些决策，有些则不会。这取决于他们的性格，某种程度上也取决于他们与我个人的关系。
如果你决定与伯克希尔做交易，我们会用现金支付。你的业务不会被用作伯克希尔任何贷款的抵押。不会有中介介入。
此外，绝不会出现这样的情况：交易已经宣布，买家却反悔或开始提议调整（当然，他们会道歉，并把责任推给银行、律师、董事会等）。最后，你会确切地知道自己在跟谁打交道。你不会遇到一位高管谈好了交易，几年后却换成了别人负责，或者总裁遗憾地告诉你，他的董事会要求这样那样改变（或者可能要求出售你的业务来为母公司的新兴趣融资）。
坦率地说，出售后你并不会比现在更富有。你已经拥有自己的业务，这让你既富有又投资稳健。出售只会改变你财富的形式，不会改变其数量。如果你卖了，你等于把一项你完全了解、100%拥有的宝贵资产，换成了另一项宝贵资产——现金——而这笔现金很可能要用来零散地投资于你不太了解的其他企业的股票（股份）。出售通常有充分的理由，但如果交易公平，理由绝不会是卖家能变得更富有。
我不会骚扰你；如果你对出售有任何兴趣，欢迎来电。我会非常骄傲能让伯克希尔，连同你的核心家族成员，共同拥有_；我相信我们在财务上会做得非常好；我也相信，你在未来20年经营这项业务时，会像过去20年一样充满乐趣。
| 此致， |
|---|
| /s/ Warren E. Buffett |