BERKSHIRE HATHAWAY INC.
1997 Chairman's Letter
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1997 was \$8.0 billion, which increased the per-share book value of both our Class A and Class B stock by 34.1%. Over the last 33 years (that is, since present management took over) per-share book value has grown from \$19 to \$25,488, a rate of 24.1% compounded annually.(1)
1. All figures used in this report apply to Berkshire's A shares,
the successor to the only stock that the company had outstanding
before 1996. The B shares have an economic interest equal to 1/30th
that of the A.
Given our gain of 34.1%, it is tempting to declare victory and move on. But last year's performance was no great triumph: Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.
So what's our duck rating for 1997? The table on the facing page shows that though we paddled furiously last year, passive ducks that simply invested in the S&P Index rose almost as fast as we did. Our appraisal of 1997's performance, then: Quack.
When the market booms, we tend to suffer in comparison with the S&P Index. The Index bears no tax costs, nor do mutual funds, since they pass through all tax liabilities to their owners. Last year, on the other hand, Berkshire paid or accrued \$4.2 billion for federal income tax, or about 18% of our beginning net worth.
Berkshire will always have corporate taxes to pay, which means it needs to overcome their drag in order to justify its existence. Obviously, Charlie Munger, Berkshire's Vice Chairman and my partner, and I won't be able to lick that handicap every year. But we expect over time to maintain a modest advantage over the Index, and that is the yardstick against which you should measure us. We will not ask you to adopt the philosophy of the Chicago Cubs fan who reacted to a string of lackluster seasons by saying, "Why get upset? Everyone has a bad century now and then."
Gains in book value are, of course, not the bottom line at Berkshire. What truly counts are gains in per-share intrinsic business value. Ordinarily, though, the two measures tend to move roughly in tandem, and in 1997 that was the case: Led by a blow-out performance at GEICO, Berkshire's intrinsic value (which far exceeds book value) grew at nearly the same pace as book value.
For more explanation of the term, intrinsic value, you may wish to refer to our Owner's Manual, reprinted on pages 62 to 71. This manual sets forth our owner-related business principles, information that is important to all of Berkshire's shareholders.
In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments (discussed on pages 69 and 70), but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.
Pre-tax Earnings Per Share
Investments Excluding All Income from
Year Per Share Investments
1967 $ 41 $ 1.09
1977 372 12.44
1987 3,910 108.14
1997 38,043 717.82
Pundits who ignore what our 38,000 employees contribute to the company, and instead simply view Berkshire as a de facto investment company, should study the figures in the second column. We made our first business acquisition in 1967, and since then our pre-tax operating earnings have grown from \$1 million to \$888 million. Furthermore, as noted, in this exercise we have assigned all of Berkshire's corporate expenses -- overhead of \$6.6 million, interest of \$66.9 million and shareholder contributions of \$15.4 million -- to our business operations, even though a portion of these could just as well have been assigned to the investment side.
Here are the growth rates of the two segments by decade:
Pre-tax Earnings Per Share
Investments Excluding All Income from
Decade Ending Per Share Investments
1977 24.6% 27.6%
1987 26.5% 24.1%
1997 25.5% 20.8%
Annual Growth
Rate, 1967-1997 25.6% 24.2%
During 1997, both parts of our business grew at a satisfactory rate, with investments increasing by \$9,543 per share, or 33.5%, and operating earnings growing by \$296.43 per share, or 70.3%. One important caveat: Because we were lucky in our super-cat insurance business (to be discussed later) and because GEICO's underwriting gain was well above what we can expect in most years, our 1997 operating earnings were much better than we anticipated and also more than we expect for 1998.
Our rate of progress in both investments and operations is certain to fall in the future. For anyone deploying capital, nothing recedes like success. My own history makes the point: Back in 1951, when I was attending Ben Graham's class at Columbia, an idea giving me a \$10,000 gain improved my investment performance for the year by a full 100 percentage points. Today, an idea producing a \$500 million pre-tax profit for Berkshire adds one percentage point to our performance. It's no wonder that my annual results in the 1950s were better by nearly thirty percentage points than my annual gains in any subsequent decade. Charlie's experience was similar. We weren't smarter then, just smaller. At our present size, any performance superiority we achieve will be minor.
We will be helped, however, by the fact that the businesses to which we have already allocated capital -- both operating subsidiaries and companies in which we are passive investors -- have splendid long-term prospects. We are also blessed with a managerial corps that is unsurpassed in ability and focus. Most of these executives are wealthy and do not need the pay they receive from Berkshire to maintain their way of life. They are motivated by the joy of accomplishment, not by fame or fortune.
Though we are delighted with what we own, we are not pleased with our prospects for committing incoming funds. Prices are high for both businesses and stocks. That does not mean that the prices of either will fall -- we have absolutely no view on that matter -- but it does mean that we get relatively little in prospective earnings when we commit fresh money.
Under these circumstances, we try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his "best" cell, he knew, would allow him to bat .400; reaching for balls in his "worst" spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.
If they are in the strike zone at all, the business "pitches" we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today's balls go by, there can be no assurance that the next ones we see will be more to our liking. Perhaps the attractive prices of the past were the aberrations, not the full prices of today. Unlike Ted, we can't be called out if we resist three pitches that are barely in the strike zone; nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun.
Unconventional Commitments
When we can't find our favorite commitment -- a well-run and sensibly-priced business with fine economics -- we usually opt to put new money into very short-term instruments of the highest quality. Sometimes, however, we venture elsewhere. Obviously we believe that the alternative commitments we make are more likely to result in profit than loss. But we also realize that they do not offer the certainty of profit that exists in a wonderful business secured at an attractive price. Finding that kind of opportunity, we know that we are going to make money -- the only question being when. With alternative investments, we think that we are going to make money. But we also recognize that we will sometimes realize losses, occasionally of substantial size.
We had three non-traditional positions at yearend. The first was derivative contracts for 14.0 million barrels of oil, that being what was then left of a 45.7 million barrel position we established in 1994-95. Contracts for 31.7 million barrels were settled in 1995-97, and these supplied us with a pre-tax gain of about \$61.9 million. Our remaining contracts expire during 1998 and 1999. In these, we had an unrealized gain of \$11.6 million at yearend. Accounting rules require that commodity positions be carried at market value. Therefore, both our annual and quarterly financial statements reflect any unrealized gain or loss in these contracts. When we established our contracts, oil for future delivery seemed modestly underpriced. Today, though, we have no opinion as to its attractiveness.
Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of \$97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal's fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand. Inflation expectations, it should be noted, play no part in our calculation of silver's value.
Finally, our largest non-traditional position at yearend was $4.6 billion, at amortized cost, of long-term zero-coupon
obligations of the U.S. Treasury. These securities pay no interest. Instead,
they provide their holders a return by way of the discount at which they
are purchased, a characteristic that makes their market prices move rapidly
when interest rates change. If rates rise, you lose heavily with zeros,
and if rates fall, you make outsized gains. Since rates fell in 1997, we
ended the year with an unrealized pre-tax gain of$ 598.8 million in our zeros. Because we carry the securities at market value, that gain is reflected in yearend book value.
In purchasing zeros, rather than staying with cash-equivalents, we risk looking very foolish: A macro-based commitment such as this never has anything close to a 100% probability of being successful. However, you pay Charlie and me to use our best judgment -- not to avoid embarrassment -- and we will occasionally make an unconventional move when we believe the odds favor it. Try to think kindly of us when we blow one. Along with President Clinton, we will be feeling your pain: The Munger family has more than 90% of its net worth in Berkshire and the Buffetts more than 99%.
How We Think About Market Fluctuations
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.
Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.
At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.
So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to " Dis investors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")
We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.
Insurance Operations -- Overview
What does excite us, however, is our insurance business. GEICO is flying, and we expect that it will continue to do so. Before we expound on that, though, let's discuss "float" and how to measure its cost. Unless you understand this subject, it will be impossible for you to make an informed judgment about Berkshire's intrinsic value.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Estimating errors, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed. As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to you, because we have found that virtually all surprises in insurance are unpleasant ones.
As the numbers in the following table show, Berkshire's insurance business has been a huge winner. For the table, we have calculated our float -- which we generate in large amounts relative to our premium volume -- by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting agents' balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance. Our cost of float is determined by our underwriting loss or profit. In those years when we have had an underwriting profit, such as the last five, our cost of float has been negative. In effect, we have been paid for holding money.
(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%
1991 119.59 1,895.0 6.31% 7.40%
1992 108.96 2,290.4 4.76% 7.39%
1993 profit 2,624.7 less than zero 6.35%
1994 profit 3,056.6 less than zero 7.88%
1995 profit 3,607.2 less than zero 5.95%
1996 profit 6,702.0 less than zero 6.64%
1997 profit 7,093.1 less than zero 5.92%
Since 1967, when we entered the insurance business, our float has grown at an annual compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had.
The expiration of several large contracts will cause our float to decline during the first quarter of 1998, but we expect it to grow substantially over the long term. We also believe that our cost of float will continue to be highly favorable.
Super-Cat Insurance
Occasionally, however, the cost of our float will spike severely. That will occur because of our heavy involvement in the super-cat business, which by its nature is the most volatile of all insurance lines. In this operation, we sell policies that insurance and reinsurance companies purchase in order to limit their losses when mega-catastrophes strike. Berkshire is the preferred market for sophisticated buyers: When the "big one" hits, the financial strength of super-cat writers will be tested, and Berkshire has no peer in this respect.
Since truly major catastrophes are rare occurrences, our super-cat business can be expected to show large profits in most years -- and to record a huge loss occasionally. In other words, the attractiveness of our super-cat business will take a great many years to measure. What you must understand, however, is that a truly terrible year in the super-cat business is not a possibility -- it's a certainty. The only question is when it will come.
Last year, we were very lucky in our super-cat operation. The world suffered no catastrophes that caused huge amounts of insured damage, so virtually all premiums that we received dropped to the bottom line. This pleasant result has a dark side, however. Many investors who are "innocents" -- meaning that they rely on representations of salespeople rather than on underwriting knowledge of their own -- have come into the reinsurance business by means of purchasing pieces of paper that are called "catastrophe bonds." The second word in this term, though, is an Orwellian misnomer: A true bond obliges the issuer to pay; these bonds, in effect, are contracts that lay a provisional promise to pay on the purchaser.
This convoluted arrangement came into being because the promoters of the contracts wished to circumvent laws that prohibit the writing of insurance by entities that haven't been licensed by the state. A side benefit for the promoters is that calling the insurance contract a "bond" may also cause unsophisticated buyers to assume that these instruments involve far less risk than is actually the case.
Truly outsized risks will exist in these contracts if they are not properly priced. A pernicious aspect of catastrophe insurance, however, makes it likely that mispricing, even of a severe variety, will not be discovered for a very long time. Consider, for example, the odds of throwing a 12 with a pair of dice -- 1 out of 36. Now assume that the dice will be thrown once a year; that you, the "bond-buyer," agree to pay \$50 million if a 12 appears; and that for "insuring" this risk you take in an annual "premium" of \$1 million. That would mean you had significantly underpriced the risk. Nevertheless, you could go along for years thinking you were making money -- indeed, easy money. There is actually a 75.4% probability that you would go for a decade without paying out a dime. Eventually, however, you would go broke.
In this dice example, the odds are easy to figure. Calculations involving monster hurricanes and earthquakes are necessarily much fuzzier, and the best we can do at Berkshire is to estimate a range of probabilities for such events. The lack of precise data, coupled with the rarity of such catastrophes, plays into the hands of promoters, who typically employ an "expert" to advise the potential bond-buyer about the probability of losses. The expert puts no money on the table. Instead, he receives an up-front payment that is forever his no matter how inaccurate his predictions. Surprise: When the stakes are high, an expert can invariably be found who will affirm -- to return to our example -- that the chance of rolling a 12 is not 1 in 36, but more like 1 in 100. (In fairness, we should add that the expert will probably believe that his odds are correct, a fact that makes him less reprehensible -- but more dangerous.)
The influx of "investor" money into catastrophe bonds -- which may well live up to their name -- has caused super-cat prices to deteriorate materially. Therefore, we will write less business in 1998. We have some large multi-year contracts in force, however, that will mitigate the drop. The largest of these are two policies that we described in last year's report -- one covering hurricanes in Florida and the other, signed with the California Earthquake Authority, covering earthquakes in that state. Our "worst-case" loss remains about \$600 million after-tax, the maximum we could lose under the CEA policy. Though this loss potential may sound large, it is only about 1% of Berkshire's market value. Indeed, if we could get appropriate prices, we would be willing to significantly increase our "worst-case" exposure.
Our super-cat business was developed from scratch by Ajit Jain, who has contributed to Berkshire's success in a variety of other ways as well. Ajit possesses both the discipline to walk away from business that is inadequately priced and the imagination to then find other opportunities. Quite simply, he is one of Berkshire's major assets. Ajit would have been a star in whatever career he chose; fortunately for us, he enjoys insurance.
Insurance -- GEICO (1-800-555-2756) and Other Primary Operations
Last year I wrote about GEICO's Tony Nicely and his terrific management skills. If I had known then what he had in store for us in 1997, I would have searched for still greater superlatives. Tony, now 54, has been with GEICO for 36 years and last year was his best. As CEO, he has transmitted vision, energy and enthusiasm to all members of the GEICO family -- raising their sights from what has been achieved to what can be achieved.
We measure GEICO's performance by first, the net increase in its voluntary auto policies (that is, not including policies assigned us by the state) and, second, the profitability of "seasoned" auto business, meaning policies that have been with us for more than a year and are thus past the period in which acquisition costs cause them to be money-losers. In 1996, in-force business grew 10%, and I told you how pleased I was, since that rate was well above anything we had seen in two decades. Then, in 1997, growth jumped to 16%.
Below are the new business and in-force figures for the last five years:
New Voluntary Voluntary Auto
Years Auto Policies Policies in Force
1993 354,882 2,011,055
1994 396,217 2,147,549
1995 461,608 2,310,037
1996 617,669 2,543,699
1997 913,176 2,949,439
Of course, any insurer can grow rapidly if it gets careless about underwriting. GEICO's underwriting profit for the year, though, was 8.1% of premiums, far above its average. Indeed, that percentage was higher than we wish it to be: Our goal is to pass on most of the benefits of our low-cost operation to our customers, holding ourselves to about 4% in underwriting profit. With that in mind, we reduced our average rates a bit during 1997 and may well cut them again this year. Our rate changes varied, of course, depending on the policyholder and where he lives; we strive to charge a rate that properly reflects the loss expectancy of each driver.
GEICO is not the only auto insurer obtaining favorable results these days. Last year, the industry recorded profits that were far better than it anticipated or can sustain. Intensified competition will soon squeeze margins very significantly. But this is a development we welcome: Long term, a tough market helps the low-cost operator, which is what we are and intend to remain.
Last year I told you about the record 16.9% profit-sharing contribution that GEICO's associates had earned and explained that two simple variables set the amount: policy growth and profitability of seasoned business. I further explained that 1996's performance was so extraordinary that we had to enlarge the chart delineating the possible payouts. The new configuration didn't make it through 1997: We enlarged the chart's boundaries again and awarded our 10,500 associates a profit-sharing contribution amounting to 26.9% of their base compensation, or \$71 million. In addition, the same two variables -- policy growth and profitability of seasoned business -- determined the cash bonuses that we paid to dozens of top executives, starting with Tony.
At GEICO, we are paying in a way that makes sense for both our owners and our managers. We distribute merit badges, not lottery tickets: In none of Berkshire's subsidiaries do we relate compensation to our stock price, which our associates cannot affect in any meaningful way. Instead, we tie bonuses to each unit's business performance, which is the direct product of the unit's people. When that performance is terrific -- as it has been at GEICO -- there is nothing Charlie and I enjoy more than writing a big check.
GEICO's underwriting profitability will probably fall in 1998, but the company's growth could accelerate. We're planning to step on the gas: GEICO's marketing expenditures this year will top $100 million, up 50% from 1997. Our market share today is
only 3%, a level of penetration that should increase dramatically in the
next decade. The auto insurance industry is huge -- it does about$ 115 billion of volume annually -- and there are tens of millions of drivers who would save substantial money by switching to us.
In the 1995 report, I described the enormous debt that you and I owe to Lorimer Davidson. On a Saturday early in 1951, he patiently explained the ins and outs of both GEICO and its industry to me -- a 20-year-old stranger who'd arrived at GEICO's headquarters uninvited and unannounced. Davy later became the company's CEO and has remained my friend and teacher for 47 years. The huge rewards that GEICO has heaped on Berkshire would not have materialized had it not been for his generosity and wisdom. Indeed, had I not met Davy, I might never have grown to understand the whole field of insurance, which over the years has played such a key part in Berkshire's success.
Davy turned 95 last year, and it's difficult for him to travel. Nevertheless, Tony and I hope that we can persuade him to attend our annual meeting, so that our shareholders can properly thank him for his important contributions to Berkshire. Wish us luck.
Though they are, of course, far smaller than GEICO, our other primary insurance operations turned in results last year that, in aggregate, were fully as stunning. National Indemnity's traditional business had an underwriting profit of 32.9% and, as usual, developed a large amount of float compared to premium volume. Over the last three years, this segment of our business, run by Don Wurster, has had a profit of 24.3%. Our homestate operation, managed by Rod Eldred, recorded an underwriting profit of 14.1% even though it continued to absorb the expenses of geographical expansion. Rod's three-year record is an amazing 15.1%. Berkshire's workers' compensation business, run out of California by Brad Kinstler, had a modest underwriting loss in a difficult environment; its three-year underwriting record is a positive 1.5%. John Kizer, at Central States Indemnity, set a new volume record while generating good underwriting earnings. At Kansas Bankers Surety, Don Towle more than lived up to the high expectations we had when we purchased the company in 1996.
In aggregate, these five operations recorded an underwriting profit of 15.0%. The two Dons, along with Rod, Brad and John, have created significant value for Berkshire, and we believe there is more to come.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation, purchase-accounting adjustments are not assigned to 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. For the reasons discussed on pages 69 and 70, 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-premiums to be charged off business-by-business. The total earnings we show in the table are, of course, identical to the GAAP total in our audited financial statements.
(in millions)
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
1997 1996 1997 1996
Operating Earnings:
Insurance Group:
Underwriting -- Super-Cat. . . . . . . .$ 283.0 $ 167.0 $ 182.7 $ 107.4
Underwriting -- Other Reinsurance. . . . (155.2) (174.8) (100.1) (112.4)
Underwriting -- GEICO. . . . . . . . . . 280.7 171.4 181.1 110.2
Underwriting -- Other Primary. . . . . . 52.9 58.5 34.1 37.6
Net Investment Income. . . . . . . . . . 882.3 726.2 703.6 593.1
Buffalo News . . . . . . . . . . . . . . . 55.9 50.4 32.7 29.5
Finance Businesses . . . . . . . . . . . . 28.1 23.1 18.0 14.9
FlightSafety . . . . . . . . . . . . . . . 139.5 3.1(1) 84.4 1.9(1)
Home Furnishings . . . . . . . . . . . . . 56.8(2) 43.8 32.2(2) 24.8
Jewelry. . . . . . . . . . . . . . . . . . 31.6 27.8 18.3 16.1
Scott Fetzer(excluding finance operation). 118.9 121.7 77.3 81.6
See's Candies. . . . . . . . . . . . . . . 58.6 51.9 35.0 30.8
Shoe Group . . . . . . . . . . . . . . . . 48.8 61.6 32.2 41.0
Purchase-Accounting Adjustments. . . . . . (104.9) (75.7) (97.0) (70.5)
Interest Expense(3). . . . . . . . . . . . (106.6) (94.3) (67.1) (56.6)
Shareholder-Designated Contributions . . . (15.4) (13.3) (9.9) (8.5)
Other. . . . . . . . . . . . . . . . . . . 60.7 73.0 37.0 42.2
-------- -------- -------- --------
Operating Earnings . . . . . . . . . . . . . 1,715.7 1,221.4 1,194.5 883.1
Capital Gains from Investments . . . . . . . 1,111.9 2,484.5 707.1 1,605.5
-------- -------- -------- --------
Total Earnings - All Entities. . . . . . . .$2,827.6 $3,705.9 $1,901.6 $2,488.6
======== ======== ======== ========
(1) From date of acquisition, December 23, 1996.
(2) Includes Star Furniture from July 1, 1997.
(3) Excludes interest expense of Finance Businesses.
Overall, our operating businesses continue to perform exceptionally well, far outdoing their industry norms. We are particularly pleased that profits improved at Helzberg's after a disappointing 1996. Jeff Comment, Helzberg's CEO, took decisive steps early in 1997 that enabled the company to gain real momentum by the crucial Christmas season. In the early part of this year, as well, sales remained strong.
Casual observers may not appreciate just how extraordinary the performance of many of our businesses has been: If the earnings history of, say, Buffalo News or Scott Fetzer is compared to the records of their publicly-owned peers, their performance might seem to have been unexceptional. But most public companies retain two-thirds or more of their earnings to fund their corporate growth. In contrast, those Berkshire subsidiaries have paid 100% of their earnings to us, their parent company, to fund our growth.
In effect, the records of the public companies reflect the cumulative benefits of the earnings they have retained, while the records of our operating subsidiaries get no such boost. Over time, however, the earnings these subsidiaries have distributed have created truly huge amounts of earning power elsewhere in Berkshire. The News, See's and Scott Fetzer have alone paid us \$1.8 billion, which we have gainfully employed elsewhere. We owe their managements our gratitude for much more than the earnings that are detailed in the table.
Additional information about our various businesses is given on pages 36 - 50, where you will also find our segment earnings reported on a GAAP basis. In addition, on pages 55 - 61, we have rearranged Berkshire's financial data into four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the company. Our intent is to supply you with the financial information that we would wish you to give us if our positions were reversed.
Look-Through Earnings
Reported earnings are a poor measure of economic progress at Berkshire, in part because the numbers shown in the table presented earlier include only the dividends we receive from investees -- though these dividends typically represent only a small fraction of the earnings attributable to our ownership. Not that we mind this division of money, since on balance we regard the undistributed earnings of investees as more valuable to us than the portion paid out. The reason is simple: Our investees often have the opportunity to reinvest earnings at high rates of return. So why should we want them paid out?
To depict something closer to economic reality at Berkshire than reported earnings, though, we employ the concept of "look-through" earnings. As we calculate these, they consist of: (1) the operating earnings reported in the previous section, plus; (2) our share of the retained operating earnings of major investees that, under GAAP accounting, are not reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of investees had instead been distributed to us. When tabulating "operating earnings" here, we exclude purchase-accounting adjustments as well as capital gains and other major non-recurring items.
The following table sets forth our 1997 look-through earnings, though I warn you that the figures can be no more than approximate, since they are based on a number of judgment calls. (The dividends paid to us by these investees have been included in the operating earnings itemized on page 11, mostly under "Insurance Group: Net Investment Income.")
Berkshire's Share
of Undistributed
Berkshire's Approximate Operating Earnings
Berkshire's Major Investees Ownership at Yearend(1) (in millions)(2)
American Express Company 10.7% $161
The Coca-Cola Company 8.1% 216
The Walt Disney Company 3.2% 65
Freddie Mac 8.6% 86
The Gillette Company 8.6% 82
The Washington Post Company 16.5% 30
Wells Fargo & Company 7.8% 103
------
Berkshire's share of undistributed earnings of major investees 743
Hypothetical tax on these undistributed investee earnings(3) (105)
Reported operating earnings of Berkshire 1,292
------
Total look-through earnings of Berkshire $1,930
======
(1) Does not include shares allocable to minority interests
(2) Calculated on average ownership for the year
(3) The tax rate used is 14%, which is the rate Berkshire
pays on the dividends it receives
Acquisitions of 1997
In 1997, we agreed to acquire Star Furniture and International Dairy Queen (a deal that closed early in 1998). Both businesses fully meet our criteria: They are understandable; possess excellent economics; and are run by outstanding people.
The Star transaction has an interesting history. Whenever we buy into an industry whose leading participants aren't known to me, I always ask our new partners, "Are there any more at home like you?" Upon our purchase of Nebraska Furniture Mart in 1983, therefore, the Blumkin family told me about three outstanding furniture retailers in other parts of the country. At the time, however, none was for sale.
Many years later, Irv Blumkin learned that Bill Child, CEO of R.C. Willey -- one of the recommended three -- might be interested in merging, and we promptly made the deal described in the 1995 report. We have been delighted with that association -- Bill is the perfect partner. Furthermore, when we asked Bill about industry standouts, he came up with the remaining two names given me by the Blumkins, one of these being Star Furniture of Houston. But time went by without there being any indication that either of the two was available.
On the Thursday before last year's annual meeting, however, Bob Denham of Salomon told me that Melvyn Wolff, the long-time controlling shareholder and CEO of Star, wanted to talk. At our invitation, Melvyn came to the meeting and spent his time in Omaha confirming his positive feelings about Berkshire. I, meanwhile, looked at Star's financials, and liked what I saw.
A few days later, Melvyn and I met in New York and made a deal in a single, two-hour session. As was the case with the Blumkins and Bill Child, I had no need to check leases, work out employment contracts, etc. I knew I was dealing with a man of integrity and that's what counted.
Though the Wolff family's association with Star dates back to 1924, the business struggled until Melvyn and his sister Shirley Toomin took over in 1962. Today Star operates 12 stores -- ten in Houston and one each in Austin and Bryan -- and will soon move into San Antonio as well. We won't be surprised if Star is many times its present size a decade from now.
Here's a story illustrating what Melvyn and Shirley are like: When they told their associates of the sale, they also announced that Star would make large, special payments to those who had helped them succeed -- and then defined that group as everyone in the business. Under the terms of our deal, it was Melvyn and Shirley's money, not ours, that funded this distribution. Charlie and I love it when we become partners with people who behave like that.
The Star transaction closed on July 1. In the months since, we've watched Star's already-excellent sales and earnings growth accelerate further. Melvyn and Shirley will be at the annual meeting, and I hope you get a chance to meet them.
Next acquisition: International Dairy Queen. There are 5,792 Dairy Queen stores operating in 23 countries -- all but a handful run by franchisees -- and in addition IDQ franchises 409 Orange Julius operations and 43 Karmelkorn operations. In 190 locations, "treat centers" provide some combination of the three products.
For many years IDQ had a bumpy history. Then, in 1970, a Minneapolis group led by John Mooty and Rudy Luther took control. The new managers inherited a jumble of different franchising agreements, along with some unwise financing arrangements that had left the company in a precarious condition. In the years that followed, management rationalized the operation, extended food service to many more locations, and, in general, built a strong organization.
Last summer Mr. Luther died, which meant his estate needed to sell stock. A year earlier, Dick Kiphart of William Blair & Co., had introduced me to John Mooty and Mike Sullivan, IDQ's CEO, and I had been impressed with both men. So, when we got the chance to merge with IDQ, we offered a proposition patterned on our FlightSafety acquisition, extending selling shareholders the option of choosing either cash or Berkshire shares having a slightly lower immediate value. By tilting the consideration as we did, we encouraged holders to opt for cash, the type of payment we by far prefer. Even then, only 45% of IDQ shares elected cash.
Charlie and I bring a modicum of product expertise to this transaction: He has been patronizing the Dairy Queens in Cass Lake and Bemidji, Minnesota, for decades, and I have been a regular in Omaha. We have put our money where our mouth is.
A Confession
I've mentioned that we strongly prefer to use cash rather than Berkshire stock in acquisitions. A study of the record will tell you why: If you aggregate all of our stock-only mergers (excluding those we did with two affiliated companies, Diversified Retailing and Blue Chip Stamps), you will find that our shareholders are slightly worse off than they would have been had I not done the transactions. Though it hurts me to say it, when I've issued stock, I've cost you money.
Be clear about one thing: This cost has not occurred because we were misled in any way by sellers or because they thereafter failed to manage with diligence and skill. On the contrary, the sellers were completely candid when we were negotiating our deals and have been energetic and effective ever since.
Instead, our problem has been that we own a truly marvelous collection of businesses, which means that trading away a portion of them for something new almost never makes sense. When we issue shares in a merger, we reduce your ownership in all of our businesses -- partly-owned companies such as Coca-Cola, Gillette and American Express, and all of our terrific operating companies as well. An example from sports will illustrate the difficulty we face: For a baseball team, acquiring a player who can be expected to bat .350 is almost always a wonderful event -- except when the team must trade a .380 hitter to make the deal.
Because our roster is filled with .380 hitters, we have tried to pay cash for acquisitions, and here our record has been far better. Starting with National Indemnity in 1967, and continuing with, among others, See's, Buffalo News, Scott Fetzer and GEICO, we have acquired -- for cash -- a number of large businesses that have performed incredibly well since we bought them. These acquisitions have delivered Berkshire tremendous value -- indeed, far more than I anticipated when we made our purchases.
We believe that it is almost impossible for us to "trade up" from our present businesses and managements. Our situation is the opposite of Camelot's Mordred, of whom Guenevere commented, "The one thing I can say for him is that he is bound to marry well. Everybody is above him." Marrying well is extremely difficult for Berkshire.
So you can be sure that Charlie and I will be very reluctant to issue shares in the future. In those cases when we simply must do so -- when certain shareholders of a desirable acquiree insist on getting stock -- we will include an attractive cash option in order to tempt as many of the sellers to take cash as is possible.
Merging with public companies presents a special problem for us. If we are to offer any premium to the acquiree, one of two conditions must be present: Either our own stock must be overvalued relative to the acquiree's, or the two companies together must be expected to earn more than they would if operated separately. Historically, Berkshire has seldom been overvalued. In this market, moreover, undervalued acquirees are almost impossible to find. That other possibility -- synergy gains -- is usually unrealistic, since we expect acquirees to operate after we've bought them just as they did before. Joining with Berkshire does not normally raise their revenues nor cut their costs.
Indeed, their reported costs (but not their true ones) will rise after they are bought by Berkshire if the acquiree has been granting options as part of its compensation packages. In these cases, "earnings" of the acquiree have been overstated because they have followed the standard -- but, in our view, dead wrong -- accounting practice of ignoring the cost to a business of issuing options. When Berkshire acquires an option-issuing company, we promptly substitute a cash compensation plan having an economic value equivalent to that of the previous option plan. The acquiree's true compensation cost is thereby brought out of the closet and charged, as it should be, against earnings.
The reasoning that Berkshire applies to the merger of public companies should be the calculus for all buyers. Paying a takeover premium does not make sense for any acquirer unless a) its stock is overvalued relative to the acquiree's or b) the two enterprises will earn more combined than they would separately. Predictably, acquirers normally hew to the second argument because very few are willing to acknowledge that their stock is overvalued. However, voracious buyers -- the ones that issue shares as fast as they can print them -- are tacitly conceding that point. (Often, also, they are running Wall Street's version of a chain-letter scheme.)
In some mergers there truly are major synergies -- though oftentimes the acquirer pays too much to obtain them -- but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.
Common Stock Investments
Below we present our common stock investments. Those with a market value of more than \$750 million are itemized.
12/31/97
Shares Company Cost* Market
(dollars in millions)
49,456,900 American Express Company $1,392.7 $ 4,414.0
200,000,000 The Coca-Cola Company 1,298.9 13,337.5
21,563,414 The Walt Disney Company 381.2 2,134.8
63,977,600 Freddie Mac 329.4 2,683.1
48,000,000 The Gillette Company 600.0 4,821.0
23,733,198 Travelers Group Inc. 604.4 1,278.6
1,727,765 The Washington Post Company 10.6 840.6
6,690,218 Wells Fargo & Company 412.6 2,270.9
Others 2,177.1 4,467.2
-------- ----------
Total Common Stocks $7,206.9 $ 36,247.7
======== ==========
- Represents tax-basis cost which, in aggregate, is \$1.8 billion less than GAAP cost.
We made net sales during the year that amounted to about 5% of our beginning portfolio. In these, we significantly reduced a few of our holdings that are below the \$750 million threshold for itemization, and we also modestly trimmed a few of the larger positions that we detail. Some of the sales we made during 1997 were aimed at changing our bond-stock ratio moderately in response to the relative values that we saw in each market, a realignment we have continued in 1998.
Our reported positions, we should add, sometimes reflect the investment decisions of GEICO's Lou Simpson. Lou independently runs an equity portfolio of nearly \$2 billion that may at times overlap the portfolio that I manage, and occasionally he makes moves that differ from mine.
Though we don't attempt to predict the movements of the stock market, we do try, in a very rough way, to value it. At the annual meeting last year, with the Dow at 7,071 and long-term Treasury yields at 6.89%, Charlie and I stated that we did not consider the market overvalued if 1) interest rates remained where they were or fell, and 2) American business continued to earn the remarkable returns on equity that it had recently recorded. So far, interest rates have fallen -- that's one requisite satisfied -- and returns on equity still remain exceptionally high. If they stay there -- and if interest rates hold near recent levels -- there is no reason to think of stocks as generally overvalued. On the other hand, returns on equity are not a sure thing to remain at, or even near, their present levels.
In the summer of 1979, when equities looked cheap to me, I wrote a Forbes article entitled "You pay a very high price in the stock market for a cheery consensus." At that time skepticism and disappointment prevailed, and my point was that investors should be glad of the fact, since pessimism drives down prices to truly attractive levels. Now, however, we have a very cheery consensus. That does not necessarily mean this is the wrong time to buy stocks: Corporate America is now earning far more money than it was just a few years ago, and in the presence of lower interest rates, every dollar of earnings becomes more valuable. Today's price levels, though, have materially eroded the "margin of safety" that Ben Graham identified as the cornerstone of intelligent investing.
In last year's annual report, I discussed Coca-Cola, our largest holding. Coke continues to increase its market dominance throughout the world, but, tragically, it has lost the leader responsible for its outstanding performance. Roberto Goizueta, Coke's CEO since 1981, died in October. After his death, I read every one of the more than 100 letters and notes he had written me during the past nine years. Those messages could well serve as a guidebook for success in both business and life.
In these communications, Roberto displayed a brilliant and clear strategic vision that was always aimed at advancing the well-being of Coke shareholders. Roberto knew where he was leading the company, how he was going to get there, and why this path made the most sense for his owners -- and, equally important, he had a burning sense of urgency about reaching his goals. An excerpt from one handwritten note he sent to me illustrates his mind-set: "By the way, I have told Olguita that what she refers to as an obsession, you call focus. I like your term much better." Like all who knew Roberto, I will miss him enormously.
Consistent with his concern for the company, Roberto prepared for a seamless succession long before it seemed necessary. Roberto knew that Doug Ivester was the right man to take over and worked with Doug over the years to ensure that no momentum would be lost when the time for change arrived. The Coca-Cola Company will be the same steamroller under Doug as it was under Roberto.
Convertible Preferreds
Two years ago, I gave you an update on the five convertible preferreds that we purchased through private placements in the 1987-1991 period. At the time of that earlier report, we had realized a small profit on the sale of our Champion International holding. The four remaining preferred commitments included two, Gillette and First Empire State, that we had converted into common stock in which we had large unrealized gains, and two others, USAir and Salomon, that had been trouble-prone. At times, the last two had me mouthing a line from a country song: "How can I miss you if you won't go away?"
Since I delivered that report, all four holdings have grown significantly in value. The common stocks of both Gillette and First Empire have risen substantially, in line with the companies' excellent performance. At yearend, the \$600 million we put into Gillette in 1989 had appreciated to \$4.8 billion, and the \$40 million we committed to First Empire in 1991 had risen to \$236 million.
Our two laggards, meanwhile, have come to life in a very major way. In a transaction that finally rewarded its long-suffering shareholders, Salomon recently merged into Travelers Group. All of Berkshire's shareholders -- including me, very personally -- owe a huge debt to Deryck Maughan and Bob Denham for, first, playing key roles in saving Salomon from extinction following its 1991 scandal and, second, restoring the vitality of the company to a level that made it an attractive acquisition for Travelers. I have often said that I wish to work with executives that I like, trust and admire. No two fit that description better than Deryck and Bob.
Berkshire's final results from its Salomon investment won't be tallied for some time, but it is safe to say that they will be far better than I anticipated two years ago. Looking back, I think of my Salomon experience as having been both fascinating and instructional, though for a time in 1991-92 I felt like the drama critic who wrote: "I would have enjoyed the play except that I had an unfortunate seat. It faced the stage."
The resuscitation of US Airways borders on the miraculous. Those who have watched my moves in this investment know that I have compiled a record that is unblemished by success. I was wrong in originally purchasing the stock, and I was wrong later, in repeatedly trying to unload our holdings at 50 cents on the dollar.
Two changes at the company coincided with its remarkable rebound: 1) Charlie and I left the board of directors and 2) Stephen Wolf became CEO. Fortunately for our egos, the second event was the key: Stephen Wolf's accomplishments at the airline have been phenomenal.
There still is much to do at US Airways, but survival is no longer an issue. Consequently, the company made up the dividend arrearages on our preferred during 1997, adding extra payments to compensate us for the delay we suffered. The company's common stock, furthermore, has risen from a low of \$4 to a recent high of \$73.
Our preferred has been called for redemption on March 15. But the rise in the company's stock has given our conversion rights, which we thought worthless not long ago, great value. It is now almost certain that our US Airways shares will produce a decent profit -- that is, if my cost for Maalox is excluded -- and the gain could even prove indecent.
Next time I make a big, dumb decision, Berkshire shareholders will know what to do: Phone Mr. Wolf.
In addition to the convertible preferreds, we purchased one other private placement in 1991, \$300 million of American Express Percs. This security was essentially a common stock that featured a tradeoff in its first three years: We received extra dividend payments during that period, but we were also capped in the price appreciation we could realize. Despite the cap, this holding has proved extraordinarily profitable thanks to a move by your Chairman that combined luck and skill -- 110% luck, the balance skill.
Our Percs were due to convert into common stock in August 1994, and in the month before I was mulling whether to sell upon conversion. One reason to hold was Amex's outstanding CEO, Harvey Golub, who seemed likely to maximize whatever potential the company had (a supposition that has since been proved -- in spades). But the size of that potential was in question: Amex faced relentless competition from a multitude of card-issuers, led by Visa. Weighing the arguments, I leaned toward sale.
Here's where I got lucky. During that month of decision, I played golf at Prouts Neck, Maine with Frank Olson, CEO of Hertz. Frank is a brilliant manager, with intimate knowledge of the card business. So from the first tee on I was quizzing him about the industry. By the time we reached the second green, Frank had convinced me that Amex's corporate card was a terrific franchise, and I had decided not to sell. On the back nine I turned buyer, and in a few months Berkshire owned 10% of the company.
We now have a \$3 billion gain in our Amex shares, and I naturally feel very grateful to Frank. But George Gillespie, our mutual friend, says that I am confused about where my gratitude should go. After all, he points out, it was he who arranged the game and assigned me to Frank's foursome.
Quarterly Reports to Shareholders
In last year's letter, I described the growing costs we incur in mailing quarterly reports and the problems we have encountered in delivering them to "street-name" shareholders. I asked for your opinion about the desirability of our continuing to print reports, given that we now publish our quarterly and annual communications on the Internet, at our site, www.berkshirehathaway.com. Relatively few shareholders responded, but it is clear that at least a small number who want the quarterly information have no interest in getting it off the Internet. Being a life-long sufferer from technophobia, I can empathize with this group.
The cost of publishing quarterlies, however, continues to balloon, and we have therefore decided to send printed versions only to shareholders who request them. If you wish the quarterlies, please complete the reply card that is bound into this report. In the meantime, be assured that all shareholders will continue to receive the annual report in printed form.
Those of you who enjoy the computer should check out our home page. It contains a large amount of current information about Berkshire and also all of our annual letters since 1977. In addition, our website includes links to the home pages of many Berkshire subsidiaries. On these sites you can learn more about our subsidiaries' products and -- yes -- even place orders for them.
We are required to file our quarterly information with the SEC no later than 45 days after the end of each quarter. One of our goals in posting communications on the Internet is to make this material information -- in full detail and in a form unfiltered by the media -- simultaneously available to all interested parties at a time when markets are closed. Accordingly, we plan to send our 1998 quarterly information to the SEC on three Fridays, May 15, August 14, and November 13, and on those nights to post the same information on the Internet. This procedure will put all of our shareholders, whether they be direct or "street-name," on an equal footing. Similarly, we will post our 1998 annual report on the Internet on Saturday, March 13, 1999, and mail it at about the same time.
Shareholder-Designated Contributions
About 97.7% of all eligible shares participated in Berkshire's 1997 shareholder-designated contributions program. Contributions made were \$15.4 million, and 3,830 charities were recipients. A full description of the program appears on pages 52 - 53.
Cumulatively, over the 17 years of the program, Berkshire has made contributions of \$113.1 million pursuant to the instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries, which stick to the philanthropic patterns that prevailed before they were acquired (except that their former owners themselves take on the responsibility for their personal charities). In aggregate, our subsidiaries made contributions of \$8.1 million in 1997, including in-kind donations of \$4.4 million.
Every year a few shareholders miss out on our contributions program because they don't have their shares registered in their own names on the prescribed record date or because they fail to get the designation form back to us within the 60-day period allowed. Charlie and I regret this. But if replies are received late, we have to reject them because we can't make exceptions for some shareholders while refusing to make them for others.
To participate in future programs, you must own Class A shares that are registered in the name of the actual owner, not the nominee name of a broker, bank or depository. Shares not so registered on August 31, 1998, will be ineligible for the 1998 program. When you get the contributions form from us, return it promptly so that it does not get put aside or forgotten.
The Annual Meeting
Woodstock Weekend at Berkshire will be May 2-4 this year. The finale will be the annual meeting, which will begin at 9:30 a.m. on Monday, May 4. Last year we met at Aksarben Coliseum, and both our staff and the crowd were delighted with the venue. There was only one crisis: The night before the meeting, I lost my voice, thereby fulfilling Charlie's wildest fantasy. He was crushed when I showed up the next morning with my speech restored.
Last year about 7,500 attended the meeting. They represented all 50 states, as well as 16 countries, including Australia, Brazil, Israel, Saudi Arabia, Singapore and Greece. Taking into account several overflow rooms, we believe that we can handle more than 11,000 people, and that should put us in good shape this year even though our shareholder count has risen significantly. Parking is ample at Aksarben; acoustics are excellent; and seats are comfortable.
The doors will open at 7 a.m. on Monday and at 8:30 we will again feature the world premiere of a movie epic produced by Marc Hamburg, our CFO. The meeting will last until 3:30, with a short break at noon. This interval will permit the exhausted to leave unnoticed and allow time for the hardcore to lunch at Aksarben's concession stands. Charlie and I enjoy questions from owners, so bring up whatever is on your mind.
Berkshire products will again be for sale in the halls outside the meeting room. Last year -- not that I pay attention to this sort of thing -- we again set sales records, moving 2,500 pounds of See's candy, 1,350 pairs of Dexter shoes, \$75,000 of World Books and related publications, and 888 sets of Quikut knives. We also took orders for a new line of apparel, featuring our Berkshire logo, and sold about 1,000 polo, sweat, and T-shirts. At this year's meeting, we will unveil our 1998 collection.
GEICO will again be on hand with a booth staffed by star associates from its regional offices. Find out whether you can save money by shifting your auto insurance to GEICO. About 40% of those who check us out learn that savings are possible. The proportion is not 100% because insurers differ in their underwriting judgments, with some favoring drivers who live in certain geographical areas and work at certain occupations more than we do. We believe, however, that we more frequently offer the low price than does any other national carrier selling insurance to all comers. In the GEICO informational material that accompanies this report, you will see that in 38 states we now offer a special discount of as much as 8% to our shareholders. We also have applications pending that would extend this discount to drivers in other states.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the card you will need for admission to the meeting. We expect a large crowd, so get plane, hotel and car reservations promptly. American Express (800-799-6634) will be happy to help you with arrangements. As usual, we will have buses at the larger hotels that will take you to and from the meeting and also deliver you to Nebraska Furniture Mart, Borsheim's and the airport after its conclusion. You are likely, however, to find a car handy.
NFM's main store, located on a 75-acre site about a mile from Aksarben, is open from 10 a.m. to 9 p.m. on weekdays, 10 a.m. to 6 p.m. on Saturdays, and noon to 6 p.m. on Sundays. During the period from May 1 to May 5, shareholders who present NFM with the coupon that will accompany their meeting ticket will be entitled to a discount that is otherwise restricted to its employees.
Borsheim's normally is closed on Sunday but will be open for shareholders from 10 a.m. to 6 p.m. on May 3rd. Last year was our second-best shareholder's day, exceeded only by 1996's. I regard this slippage as an anomaly and hope that you will prove me right this year. Charlie will be available for autographs. He smiles, however, only if the paper he signs is a Borsheim's sales ticket. Shareholders who wish to visit on Saturday (10 a.m. to 5:30 p.m.) or on Monday (10 a.m.-8 p.m.) should be sure to identify themselves as Berkshire owners so that Susan Jacques, Borsheim's CEO, can make you especially welcome. Susan, I should add, had a fabulous year in 1997. As a manager, she is everything that an owner hopes for.
On Sunday afternoon we will also have a special treat for bridge players in the mall outside of Borsheim's. There, Bob Hamman -- a legend of the game for more than three decades -- will take on all comers. Join in and dazzle Bob with your skill.
My favorite steakhouse, Gorat's, opens one Sunday a year -- for Berkshire shareholders on the night before the annual meeting. Last year the restaurant started serving at 4 p.m. and finished about 1:30 a.m, an endurance trial that was the result of taking 1,100 reservations vs. a seating capacity of 235. If you make a reservation and then can't attend, be sure to let Gorat's know promptly, since it goes to great effort to help us and we want to reciprocate. You can make reservations beginning on April 1st (but not before) by calling 402-551-3733. Last year I had to leave Gorat's a little early because of my voice problem, but this year I plan to leisurely savor every bite of my rare T-bone and double order of hash browns.
After this warmup, Charlie and I will head for the Dairy Queen on 114th, just south of Dodge. There are 12 great Dairy Queens in metropolitan Omaha, but the 114th Street location is the best suited to handle the large crowd that we expect. South of the property, there are hundreds of parking spaces on both sides of the street. Also, this Dairy Queen will extend its Sunday hours to 11 p.m. in order to accommodate our shareholders.
The 114th Street operation is now run by two sisters, Coni Birge and Deb Novotny, whose grandfather put up the building in 1962 at what was then the outer edge of the city. Their mother, Jan Noble, took over in 1972, and Coni and Deb continue as third generation owner-managers. Jan, Coni and Deb will all be on hand Sunday evening, and I hope that you meet them. Enjoy one of their hamburgers if you can't get into Gorat's. And then, around eight o'clock, join me in having a Dusty Sundae for dessert. This item is a personal specialty -- the Dairy Queen will furnish you a copy of my recipe -- and will be offered only on Shareholder Sunday.
The Omaha Royals and Albuquerque Dukes will play baseball on Saturday evening, May 2nd, at Rosenblatt Stadium. As usual, your Chairman, shamelessly exploiting his 25% ownership of the team, will take the mound. But this year you will see something new.
In past games, much to the bafflement of the crowd, I have shaken off the catcher's first call. He has consistently asked for my sweeping curve, and I have just as regularly resisted. Instead, I have served up a pathetic fast ball, which on my best day was clocked at eight miles per hour (with a following wind).
There's a story behind my unwillingness to throw the curve ball. As some of you may know, Candy Cummings invented the curve in 1867 and used it to great effect in the National Association, where he never won less than 28 games in a season. The pitch, however, drew immediate criticism from the very highest of authorities, namely Charles Elliott, then president of Harvard University, who declared, "I have heard that this year we at Harvard won the baseball championship because we have a pitcher who has a fine curve ball. I am further instructed that the purpose of the curve ball is to deliberately deceive the batter. Harvard is not in the business of teaching deception." (I'm not making this up.)
Ever since I learned of President Elliott's moral teachings on this subject, I have scrupulously refrained from using my curve, however devastating its effect might have been on hapless batters. Now, however, it is time for my karma to run over Elliott's dogma and for me to quit holding back. Visit the park on Saturday night and marvel at the majestic arc of my breaking ball.
Our proxy statement includes information about obtaining tickets to the game. We will also provide an information packet describing the local hot spots, including, of course, those 12 Dairy Queens.
Come to Omaha -- the cradle of capitalism -- in May and enjoy yourself.
Warren E. Buffett
February 27, 1998 Chairman of the Board
伯克希尔·哈撒韦公司
1997年致股东信
致伯克希尔·哈撒韦公司的股东们：
1997年，我们的净资产增加了80亿美元，使得A类股和B类股的每股账面价值均增长了34.1%。过去33年（即现任管理层接手以来），每股账面价值从19美元增长至25,488美元，年复合增长率为24.1%。(1)
面对34.1%的增长，我们很容易宣布胜利并继续前进。但去年的表现算不上什么伟大的胜利：任何投资者都能在股市飙升时（就像1997年那样）获得丰厚回报。在牛市中，必须避免像一只自鸣得意的鸭子那样的错误——它在暴雨过后呱呱吹嘘，以为是自己的划水本领让自己升到了高位。而一只头脑清醒的鸭子会将自己暴雨后的位置与池塘里的其他鸭子相比较。
那么，我们1997年的"鸭子评级"如何？对面的表格显示，尽管我们去年拼命划水，那些仅仅投资于标普指数的被动鸭子们涨得几乎和我们一样快。我们对1997年表现的评估：呱呱叫（注：此处"Quack"双关，既指鸭叫，也暗指表现平庸）。
当市场繁荣时，我们往往会在与标普指数的比较中处于下风。该指数不承担税收成本，共同基金也不承担，因为所有税负都转嫁给了持有人。而另一方面，伯克希尔去年支付或计提了42亿美元的联邦所得税，约占我们年初净值的18%。
伯克希尔永远需要缴纳公司所得税，这意味着它必须克服这一拖累才能证明其存在的合理性。显然，查理·芒格（伯克希尔副董事长兼我的合伙人）和我无法每年都克服这一劣势。但我们期望随着时间的推移，能够保持对指数的微弱优势，这也是你们衡量我们的标尺。我们不会要求你们采纳那位芝加哥小熊队球迷的哲学——他在经历一连串糟糕的赛季后说："何必烦恼？每个人每隔一个世纪都会遇到一个糟糕的世纪。"
当然，账面价值的增长并非伯克希尔的最终指标。真正重要的是每股内在业务价值的增长。不过，这两项指标通常大致同步变动，1997年也是如此：在GEICO的出色表现引领下，伯克希尔的内在价值（远高于账面价值）几乎与账面价值同步增长。
关于"内在价值"这一术语的更多解释，请参阅我们的《所有者手册》（重印于第62至71页）。该手册阐述了我们与所有者相关的经营原则，这些信息对所有伯克希尔股东都很重要。
在最近两年的年报中，我们提供了一张表格，查理和我认为它对估算伯克希尔的内在价值至关重要。以下该表格的更新版本中，我们追溯了价值的两个关键组成部分。第一列列出了我们每股持有的投资（包括现金及等价物），第二列列出了伯克希尔经营性业务在扣除利息和公司费用前、不考虑购买会计调整（见第69-70页）情况下的每股收益。第二列不包括我们从第一列投资中实现的任何股息、利息和资本利得。实际上，这些列显示了如果将伯克希尔拆分为两部分——一个实体持有我们的投资，另一个实体运营我们所有业务并承担所有公司成本——伯克希尔会是什么样子。
那些无视我们38,000名员工对公司贡献的评论家，仅仅把伯克希尔看作一家事实上的投资公司，他们真该好好研究第二栏的数字。我们在1967年进行了第一次企业收购，从那以后，我们的税前经营利润从100万美元增长到了8.88亿美元。此外，如前所述，在此计算中，我们将伯克希尔所有的公司费用——660万美元的间接费用、6690万美元的利息以及1540万美元的股东捐赠——都归入了我们的业务运营，尽管其中一部分本可以归入投资部门。
以下是两个部分按十年计的增长速度：
1997年间，我们业务的两个部分都取得了令人满意的增长速度，投资部分每股增长9,543美元，即33.5%，经营利润每股增长296.43美元，即70.3%。一个重要的提醒：因为我们在超级巨灾保险业务上运气不错（稍后讨论），也因为GEICO的承销收益远高于我们多数年份的预期，我们1997年的经营利润远好于我们的预期，也高于我们对1998年的预期。
我们投资和运营两方面的进步速度未来必定会下降。对于任何配置资本的人来说，没有什么比成功更会带来衰退。我自己的历史就说明了这一点：早在1951年，当我在哥伦比亚大学上本·格雷厄姆的课时，一个能给我带来1万美元收益的想法，让我当年的投资业绩提高了整整100个百分点。如今，一个能为伯克希尔带来5亿美元税前利润的想法，也只能为我们的业绩增加一个百分点。难怪我在1950年代的年度业绩比之后任何一个十年的年度收益都要高出近三十个百分点。查理的经历也类似。我们当年并不更聪明，只是规模更小。以我们现在的规模，即使能取得任何业绩优势，也将微不足道。
不过，我们也有有利因素：我们已经配置资本的那些企业——无论是运营子公司还是我们作为被动投资者的公司——都拥有极好的长期前景。我们还拥有能力与专注度无人能及的管理团队。这些高管中的大多数都很富有，不需要从伯克希尔拿到的薪酬来维持他们的生活方式。驱动他们的是成就带来的喜悦，而非名望或财富。
虽然我们对现有持仓感到满意，但对投入新增资金的前景却不那么乐观。企业和股票的价格都很高。这并不意味着它们的价格一定会下跌——我们对那件事完全没有看法——但确实意味着，当我们投入新资金时，能获得的预期收益相对很少。
在这种情况下，我们努力奉行泰德·威廉姆斯式的纪律。在他的书《击球的科学》中，泰德解释说他将好球区分成77个格子，每个格子大小相当于一个棒球。他知道，只挥棒击打属于他"最佳"格子的球，就能让他的击球率达到4成；而去够他"最差"位置——好球区外角低处的球，则会让他的击球率降到2成3。换句话说，等待那个好打的球意味着入选棒球名人堂；乱挥棒则意味着去小联盟报到。
就算这些商业'投球'确实落进了好球区，我们目前看到的也只是擦着外角低处的边缘。如果挥棒，我们就会锁定低回报。但如果让今天所有的球都飞过，谁也不能保证下一个看到的球就会更合我们的心意。也许过去那些诱人的价格才是反常现象，而今天的全价才是常态。和泰德不同，我们即使对三颗勉强落在好球区边线上的球不出棒，也不会被判三振出局；然而，日复一日地站在那儿，把球棒扛在肩上，可不是我心目中的乐事。
非传统承诺
当我们找不到心仪的投资标的时——即一家运营良好、定价合理且经济特征优异的公司——我们通常会将新资金投入期限极短的最高质量品种。但有时，我们也会另辟蹊径。显然，我们相信这些替代投资盈利的可能性大于亏损。但我们同样意识到，它们并不像以诱人价格买入优质公司那样能带来确定的利润。找到后者那种机会时，我们知道一定能赚钱——唯一的问题只是何时。而替代投资，我们认为能赚钱，但也承认有时会亏损，偶尔亏损幅度不小。
年底我们持有三个非传统头寸。第一个是衍生品合约，对应1400万桶原油，这是1994-95年我们建立的4570万桶头寸中剩余的未平仓部分。1995-97年间，我们平仓了3170万桶，获得了约6190万美元的税前收益。剩余合约在1998年和1999年到期。年底时，这些合约有1160万美元的未实现收益。会计准则要求商品头寸按市值计价。因此，我们的年度和季度财务报表都反映了这些合约的未实现损益。我们建立头寸时，远期交割的石油价格似乎略微低估。但如今，我们对其吸引力没有看法。
我们的第二个非传统投资是白银。去年，我们购买了1.112亿盎司。按市价计算，这一头寸在1997年为我们带来了9740万美元的税前收益。从某种意义上说，这对我而言是回归过去：三十年前，我买入白银，是因为预期美国政府会使其非货币化。从那以后，我一直关注这种金属的基本面，但并未持有。近年来，银条库存大幅下降，去年夏天，查理和我得出结论，需要更高的价格才能实现供需平衡。需要指出的是，通胀预期在我们计算白银价值时不起作用。
最后，年底我们最大的非传统头寸是46亿美元（按摊余成本计）的长期美国国债零息债券。这些证券不付利息。相反，它们通过购买时的折价为持有者提供回报，这一特性使其市场价格在利率变动时快速波动。如果利率上升，零息债券会大幅亏损；利率下降，则获得超额收益。由于1997年利率下降，我们的零息债券在年底产生了5.988亿美元的未实现税前收益。因为我们按市值计价这些证券，该收益反映在年底的账面价值中。
在买入零息债券而非持有现金等价物时，我们面临着看起来很愚蠢的风险：像这样基于宏观判断的头寸，其成功的概率永远不可能接近100%。然而，你们付钱给查理和我，是要我们运用最佳判断——而不是为了避免尴尬——当我们认为几率有利时，偶尔会采取非常规行动。当我们搞砸的时候，请善意地看待我们。与克林顿总统一样，我们会感受到你们的痛苦：芒格家族超过90%的净资产都在伯克希尔，而巴菲特家族更是超过99%。
我们如何看待市场波动
一个简短的小测验：如果你打算一辈子吃汉堡，又不是养牛的，你希望牛肉价格更高还是更低？同样，如果你时不时会买车，又不是汽车制造商，你希望汽车价格更高还是更低？这些问题当然不言自明。
但现在到了终极考验：如果你预期未来五年是净储蓄者，你希望这期间股市是涨还是跌？许多投资者在这道题上答错了。尽管他们在未来很多年里都会是股票的净买家，但看到股价上涨时他们兴高采烈，股价下跌时却垂头丧气。实际上，他们因为自己即将买到的"汉堡包"涨价了而欢喜——这种反应毫无道理。只有那些在近期内会卖出股票的人，才应该为股价上涨而高兴。潜在的买家应该更欢迎价格下跌才对。
对于伯克希尔的股东——那些不打算卖出的股东来说，选择就更清晰了。首先，我们的所有者自动就在储蓄，即便他们把个人赚到的每一分钱都花掉：伯克希尔通过保留所有盈利为他们"储蓄"，然后用这些储蓄去收购企业和证券。显然，我们买入的价格越低，所有者的间接储蓄计划获利就越丰。
此外，通过伯克希尔，你持有了那些持续回购自家股份的公司的大量头寸。价格下跌时，这些回购计划给我们带来的好处会增长：当股价低时，被投公司用于回购的资金能使我们在该公司中的持股比例增加得比股价高时更多。例如，可口可乐、华盛顿邮报和富国银行过去在极低价位进行的回购，对伯克希尔的益处远超它们如今在更高价位进行的回购。
每年年底，伯克希尔大约97%的股份仍由年初就持有的同一批投资者拥有。这使得他们成为储蓄者。因此，他们应该为市场下跌而高兴，因为这让我们以及被投公司能以更有利的方式配置资金。
所以，当你读到"市场下跌，投资者亏损"这样的标题时，请微笑。在心里把它改成"市场下跌，短线者亏损——但投资者获利"。尽管写文章的人常常忘记这个简单道理，但每一笔卖出都对应一个买家，一方受损必然使另一方受益。（就像高尔夫比赛里说的："每一记推杆都会让某个人开心。"）
我们在20世纪70年代和80年代从许多股票和企业的低价中获益良多。那时对短线投机者不友好的市场，对长期定居者却非常友好。近些年来，我们当年那些行动得到了验证，但我们几乎没找到什么新机会。作为一家企业的"储蓄者"，伯克希尔不断寻找合理配置资本的方法，但可能要过一段时间才能找到真正让我们兴奋的机会。
保险业务——概览
然而，真正让我们兴奋的是我们的保险业务。GEICO 正在腾飞，我们预计它还会继续。但在详细阐述之前，我们先谈谈"浮存金"以及如何衡量其成本。除非你理解了这个问题，否则你不可能对伯克希尔的内在价值做出有依据的判断。
首先，浮存金是我们持有但不拥有的资金。在保险业务中，浮存金产生是因为保费在赔付损失之前就已收到，这个间隔有时会持续很多年。在此期间，保险公司用这些资金进行投资。通常，这种令人愉快的活动伴随着一个负面因素：保险公司收取的保费通常不足以覆盖最终必须支付的损失和费用。这就导致了"承保亏损"，也就是浮存金的成本。如果一家保险公司的浮存金成本长期低于该公司为获取资金而本应承担的成本，那么这项业务就有价值。但如果浮存金成本高于市场利率，那么这项业务就是个柠檬（指有缺陷的东西）。
这里需要提醒一句：由于损失成本必须估算，保险公司在计算承销业绩时有巨大的操作空间，这使得投资者很难算出公司真实的浮存金成本。估算错误（通常是无心的，但有时并非如此）可能非常巨大。这些计算失误的后果会直接传导至盈利。有经验的观察者通常能察觉准备金计提中的大规模差错，但普通公众往往只能接受呈现在眼前的数字——有时连我都被那些大牌审计师默许认可的数字震惊。至于伯克希尔，查理和我努力在向你们呈报承销业绩时保持保守，因为我们发现保险业的意外几乎全是坏消息。
如下表所示，伯克希尔的保险业务取得了巨大成功。在表中，我们计算了浮存金——相对于保费规模而言，我们的浮存量很大——方法是：加上未决损失准备金、损失调整准备金、假设再保险项下持有的资金、未赚保费准备金，再减去代理人余额、预付取得成本、预付税款和适用于假设再保险的递延费用。我们的浮存金成本由承销损失或利润决定。在那些我们有承销利润的年份（比如过去五年），我们的浮存金成本为负数。实际上，我们是被人付钱来持有资金。
自1967年我们进入保险业以来，浮存金以每年21.7%的复利增长。更棒的是，它没让我们花一分钱，反而还帮我们赚了钱。这里有一个会计上的反讽：虽然浮存金在资产负债表上列为负债，但它对伯克希尔的价值却超过了同等数额的净资产。
几个大合同的到期将使我们的浮存金在1998年第一季度有所下降，但我们预计从长期看它仍会大幅增长。我们也相信，浮存金的成本将继续非常有利。
超级巨灾保险
不过，偶尔我们的浮存金成本会急剧飙升。这是因为我们大量涉足超级巨灾业务，而这类业务本质上是所有保险险种中波动性最大的。在这项业务中，我们出售保单给保险公司和再保险公司，以便在特大灾难发生时限制它们的损失。伯克希尔是老练买家的首选市场：当"大灾"来临时，超级巨灾承保人的财务实力会受到考验，而在这方面伯克希尔没有对手。
由于真正的大灾难发生频率很低，我们的超级巨灾业务在大多数年份预计会显示大额利润——偶尔会录得巨额亏损。换句话说，超级巨灾业务的吸引力需要很多年才能衡量。但你必须明白的是：超级巨灾业务中出现一个真正糟糕的年份不是可能性——而是确定性。唯一的问题是它何时到来。
去年我们在超级巨灾业务上非常幸运。全世界没有发生造成巨大保险损失的大灾难，所以我们几乎所有的保费都直接变成了利润。然而这种愉快的后果也有阴暗的一面。许多"天真的"投资者——即依赖销售人员的宣传而非自身的承销知识——通过购买被称为"巨灾债券"的凭证进入了再保险业。这个术语中的第二个词其实是一个奥威尔式的用词不当：真正的债券要求发行人必须支付；而这些债券，实际上是一些契约，它们向购买者施加了一个有条件的支付承诺。
这种绕来绕去的安排之所以出现，是因为这些合约的发起人希望规避法律——该法律规定，未经州政府许可的实体不得承保保险。对发起人来说，还有一个附带的好处：把保险合同叫作"债券"，可能会让不够老练的买家以为，这些工具的借钱比实际风险小得多。
如果这些合约定价不当，其中就会蕴含真正超乎寻常的风险。然而，巨灾保险有一个阴险之处，那就是即使出现严重的错误定价，也很可能在很长时间内不被发现。举例来说，掷一对骰子掷出12点的概率是36分之1。现在假设骰子每年只掷一次；你作为"债券买家"同意，如果掷出12点，你就支付5000万美元；而你为"承保"这一风险，每年收取100万美元的"保费"。这就意味着你显著低估了风险。尽管如此，你仍可能在多年里觉得自己在赚钱——而且钱太好赚了。实际上，你有75.4%的概率连续十年都不用赔付一分钱。但最终，你会彻底栽了。
在这个掷骰子的例子里，概率很好算。而涉及超级飓风和地震的计算，则必然模糊得多。在伯克希尔，我们能做到的最好程度，就是估算这类事件的一个概率范围。精确数据的缺乏，加上这类大灾难的罕见性，正中那些发起人的下怀——他们通常雇一位"专家"去给潜在的"债券买家"提供损失概率的建议。这位专家自己可不用出钱。相反，他收一笔预付费，这笔钱永远是他的——不管他的预测有多离谱。没想到吧：当赌注很大的时候，总能找到一位专家来拍胸脯说——回到我们的例子——掷出12点的概率不是36分之1，而是更像100分之1。（公平地说，我们应该补充一句：这位专家很可能会相信自己的概率是对的，这让他不那么可鄙——却更危险了。）
涌入巨灾债券（这个名字说不定真名副其实）的"投资者"资金，已经导致超级巨灾的定价大幅恶化。因此，我们在1998年将减少承保量。不过，我们目前有几份多年期的大额合约，这会在一定程度上缓冲业务量的下降。其中最大的两份保单在去年的年报中已经提到过——一份承保佛罗里达的飓风风险，另一份是与加州地震局签订的，承保加州的地震风险。我们的"最坏情况"损失扣除税后仍约为6亿美元，这是CEA保单下我们可能损失的上限。虽然这个损失金额听起来很大，但它只占伯克希尔市值的大约1%。实际上，如果能获得合适的价格，我们愿意显著提高我们的"最坏情况"风险敞口。
我们的超级巨灾业务是阿吉特·杰因从零开始发展起来的，他还以其他多种方式为伯克希尔的成功做出了贡献。阿吉特既有对定价不足的业务果断放弃的纪律，也有寻找其他机会的想象力。简而言之，他是伯克希尔的主要资产之一。无论选择什么职业，阿吉特都会是一颗明星；幸运的是，他热爱保险。
保险业务——GEICO（1-800-555-2756）及其它主营业务
去年我写过GEICO的托尼·奈斯利和他出色的管理才能。如果当时我就知道他1997年会给我们带来怎样的惊喜，我会用上更加溢美之词。现年54岁的托尼已在GEICO工作36年，去年是他最好的一年。作为CEO，他将愿景、能量和热情传递给了GEICO大家庭的所有成员——把他们的目光从已经取得的成绩，提升到未来可以企及的高度。
我们衡量GEICO（盖可保险）业绩的标准有两个：第一，自愿汽车保单（即不包括州政府分配给我们的保单）的净增长量；第二，“成熟”汽车业务（即保单持有时间超过一年、已度过因获客成本导致亏损的阶段）的盈利能力。1996年，有效保单业务增长了10%，我曾告诉你们我对此非常满意，因为这个增速远高于过去二十年中的任何一年。接着，1997年增速跃升至16%。
以下是过去五年新增保单和有效保单的数据：
当然，任何保险公司如果对承销掉以轻心，都能实现快速增长。但GEICO当年的承销利润占保费收入的8.1%，远高于其平均水平。实际上，这个比例比我们希望的要高：我们的目标是将低成本运营带来的大部分好处让利给客户，将自身承销利润控制在4%左右。基于此，我们在1997年小幅下调了平均费率，并且今年很可能再次下调。当然，我们的费率调整因投保人和居住地而异；我们致力于收取能恰当反映每位驾驶员预期损失水平的费率。
如今，GEICO并非唯一取得优异业绩的汽车保险公司。去年，整个行业实现了远超预期且不可持续的利润。加剧的竞争很快就会大幅压缩利润空间。但这是我们乐见的发展：长期来看，激烈的市场有利于低成本运营商——这正是我们现在的定位，并且我们打算保持下去。
去年，我向你们提到GEICO员工获得了创纪录的16.9%利润分享金，并解释了决定这一金额的两个简单变量：保单增长和成熟业务的盈利能力。我还进一步说明，1996年的业绩如此出色，以至于我们不得不扩大描述可能支付金额的图表。新图表在1997年就不够用了：我们再次扩大了图表边界，并向我们的10,500名员工发放了相当于其基本薪酬26.9%的利润分享金，总额达7100万美元。此外，同样的两个变量——保单增长和成熟业务的盈利能力——也决定了我们从Tony开始向数十名高管支付的现金奖金。
在GEICO，我们的薪酬方式对股东和管理者都有意义。我们发放的是功绩勋章，而非彩票：在伯克希尔的任何一家子公司，我们都不将薪酬与本公司股价挂钩，因为员工无法以任何有意义的方式影响股价。相反，我们将奖金与各单位的业务业绩挂钩，而这直接源于该单位员工的努力。当业绩出色时——就像GEICO这样——没有什么比开出一张大额支票更让查理和我高兴的了。
1998年GEICO的承销利润可能会下降，但公司的增长可能会加速。我们正准备踩下油门：GEICO今年的营销支出将超过1亿美元，比1997年增长50%。目前我们的市场份额仅为3%，而这一渗透率水平在未来十年内应会大幅提升。汽车保险行业规模巨大——年保费总额约为1150亿美元——并且有数千万驾驶员如果转投我们，就能节省一大笔钱。
在1995年的年报中，我描述了我和你们欠Lorimer Davidson的巨大恩情。1951年初的一个星期六，他耐心地向我这个不请自来、事先未打招呼就闯进GEICO（政府雇员保险公司）总部的20岁陌生人，讲解了GEICO及其所在行业的方方面面。Davy后来成为该公司的CEO，并在47年里一直是我的朋友和导师。若非他的慷慨与智慧，GEICO为伯克希尔带来的巨额回报根本不可能实现。事实上，如果没有遇见Davy，我可能永远不会真正理解整个保险领域，而这一领域多年来在伯克希尔的成功中扮演了关键角色。
Davy去年满95岁，出行对他来说已很困难。尽管如此，Tony和我仍希望说服他出席我们的年度股东大会，让我们的股东有机会对他为伯克希尔做出的重要贡献表达诚挚谢意。祝我们好运。
当然，相比之下规模远小于GEICO，但我们其他的主要保险业务去年交出的成绩单，总体上同样令人惊叹。National Indemnity的传统业务实现了32.9%的承保利润，并且像往常一样，相对于保费规模，产生了大量浮存金。过去三年，由Don Wurster管理的这部分业务实现了24.3%的利润。由Rod Eldred管理的本州业务，尽管持续承担地域扩张的支出，仍录得14.1%的承保利润。Rod的三年业绩记录令人惊叹：15.1%。伯克希尔在加州由Brad Kinstler管理的工伤赔偿业务，在艰难环境下出现了小幅承保亏损；其三年承保记录为正向1.5%。Central States Indemnity的John Kizer在创造良好承保收益的同时，创下了新的业务量纪录。Kansas Bankers Surety的Don Towle完全达到了我们在1996年收购该公司时的高度期望。
总体而言，这五项业务录得了15.0%的承保利润。两位Don，以及Rod、Brad和John，为伯克希尔创造了巨大价值，我们相信未来还会更多。
报告收益的来源
下表列示了伯克希尔报告收益的主要来源。在此表中，购买会计调整并未分配至其适用的具体业务，而是汇总后单独列示。这样你可以看到如果我们没有收购这些业务，它们原本会报告的收益。基于第69页和第70页讨论的原因，我们认为这种列示方式对投资者和管理者来说，比使用公认会计准则（GAAP）要求将购买溢价逐项分摊至各业务的方式更为有用。当然，表中显示的收益总额与经审计财务报表中的GAAP总额完全一致。
(1) 自收购日1996年12月23日起。
(2) 包括自1997年7月1日起的Star Furniture。
(3) 不含金融业务的利息支出。
总体而言，我们的经营业务持续表现异常出色，远超行业常规水平。我们尤其高兴的是，Helzberg's在令人失望的1996年之后，利润有所改善。Helzberg's的CEO Jeff Comment在1997年初采取了果断措施，使公司在关键的圣诞季获得了真正的增长动力。进入今年年初，销售依然强劲。
局外人或许难以体会，我们旗下许多公司的表现到底有多出色：比方说，如果把布法罗新闻报（Buffalo News）或斯科特·费泽（Scott Fetzer）的盈利历史与其上市同行的记录相比，它们的业绩似乎很一般。但大多数上市公司会将三分之二甚至更多的盈利留存起来，用于支持自身的企业发展。相比之下，那些伯克希尔子公司却把100%的盈利都交给了我们——它们的母公司——由我们来推动增长。
实际上，上市公司的记录反映的是它们留存盈利累积下来的好处，而我们运营子公司的记录却没有得到这种加持。但随着时间的推移，这些子公司分配出来的盈利在伯克希尔的其他地方创造了真正巨大的盈利能力。仅布法罗新闻报、喜诗糖果（See's）和斯科特·费泽这三家，就向我们支付了18亿美元，我们把这些钱投到了别处，收益颇丰。对于表中详细列出的盈利数字，我们感谢它们的管理层，但我们要感谢的远不止这些。
关于我们各项业务的更多信息，请见第36至50页，那里还有按照美国通用会计准则（GAAP）列报的各分部盈利。此外，在第55至61页，我们按非美国通用会计准则基准将伯克希尔的财务数据重新划分为四个分部——这样的列报方式与查理和我的思考方式一致。我们的用意是：如果情况反过来，我们希望你们提供什么样的财务信息，我们就提供什么样的财务信息。
透视盈余
报告的盈利并不能很好地衡量伯克希尔的经济进展，部分原因在于前面那张表格里列出的数字只包含我们从被投资公司收到的股息——尽管这些股息通常只占我们持股对应盈利的一小部分。我们并不是在意这种资金分割方式，因为总体而言，我们认为被投资公司未分配的盈利对我们来说比已分配的部分更有价值。原因很简单：我们的被投资公司常常有机会以高回报率将盈利再投资。那我们为什么还想要它们把盈利分出来呢？
为了更贴近伯克希尔的经济现实，我们采用了“透视盈余”的概念。按照我们的计算方法，透视盈余包括：（1）上一节列报的经营利润，加上；（2）我们应占的主要被投资公司未分配的经营利润——这部分按照美国通用会计准则并未反映在我们的利润中，减去；（3）如果这些被投资公司未分配盈利改为分配给我们，伯克希尔本应缴纳的税款拨备。在汇总“经营利润”时，我们剔除了购买法会计调整以及资本利得和其他重大非经常性项目。
下表列出了我们1997年的透视盈余，不过我提醒你，这些数字充其量只是近似值，因为它们基于许多主观判断。（这些被投资公司支付给我们的股息已包含在第11页列出的经营利润中，大部分列在“保险集团：净投资收益”项下。）
1997年的收购
1997年，我们同意收购星家具（Star Furniture）和国际乳品皇后（International Dairy Queen）——这笔交易在1998年初完成。两家企业完全符合我们的标准：他们业务易懂、经济特性优秀，并且由杰出的人运营。
星家具这桩交易还有一段有趣的渊源。每当我们进入一个行业，而我对该行业的主要参与者并不熟悉时，总会问我们的新合作伙伴：“你们那里还有像你们这样的公司吗？”因此，在1983年收购内布拉斯加家具城（Nebraska Furniture Mart）时，布卢姆金家族（Blumkin family）告诉我，美国其他地方还有三家杰出的家具零售商。不过，当时它们都没有出售的意愿。
多年之后，Irv Blumkin得知，他推荐的三家公司之一——R.C. Willey的CEO Bill Child可能有合并意向，我们便迅速完成了1995年年报中提到的那笔交易。我们对这次合作非常满意——Bill是完美的合伙人。此外，当我们请Bill推荐行业杰出企业时，他给出了当年Blumkin夫妇给我的另外两个名字，其中之一是休斯顿的Star Furniture。但此后时间流逝，始终没有迹象表明这两家公司中任何一家有意出售。
然而，在去年年会前的那个星期四，Salomon的Bob Denham告诉我，Star的长期控股股东兼CEO Melvyn Wolff想谈谈。应我们邀请，Melvyn来到年会，并在奥马哈度过了几天时间，确认了他对伯克希尔的积极看法。与此同时，我查看了Star的财务数据，并对其感到满意。
几天后，Melvyn和我在纽约见面，仅一次两小时的会谈就达成了交易。与Blumkin夫妇和Bill Child的情况一样，我无需核查租约、拟定雇佣合同等。我知道我是在和一个诚信的人打交道，而这才是最重要的。
尽管Wolff家族与Star的渊源可追溯到1924年，但生意一直挣扎，直到1962年Melvyn和他的妹妹Shirley Toomin接手。如今，Star经营着12家门店——10家在休斯顿，奥斯汀和布莱恩各一家——并即将进入圣安东尼奥市场。如果十年后Star的规模是现在的数倍，我们不会感到意外。
有一个故事可以说明Melvyn和Shirley的为人：当他们向同事们宣布出售时，他们还宣布Star将向那些帮助他们成功的人发放大额特别奖金——而他们将这个群体定义为公司的每一位员工。根据我们的交易条款，支付这笔奖金的资金来自Melvyn和Shirley的自有资金，而非我们的。当Charlie和我与这样行事的合伙人共事时，我们感到非常欣喜。
Star交易于7月1日完成。此后几个月，我们看到Star本已出色的销售和盈利增长进一步加速。Melvyn和Shirley将出席年会，我希望你们有机会见到他们。
下一笔收购：International Dairy Queen（国际冰雪皇后）。目前有5,792家Dairy Queen门店遍布23个国家——除少数外均由加盟商经营——此外，IDQ还特许经营了409家Orange Julius和43家Karmelkorn门店。在190个地点，“甜品中心”提供这三种产品的某种组合。
多年来，IDQ的历史一波三折。1970年，由John Mooty和Rudy Luther领导的明尼阿波利斯集团接管了公司。新管理层继承了一堆混乱的加盟协议，以及一些不明智的融资安排，这些使公司处于岌岌可危的境地。此后数年，管理层理顺了运营，将餐饮服务扩展到更多门店，并总体上建立了一个强大的组织。
去年夏天，Rudy Luther去世，其遗产需要出售股票。一年前，William Blair & Co.的Dick Kiphart将我介绍给了John Mooty和IDQ的CEO Mike Sullivan，我对两人印象深刻。因此，当有机会与IDQ合并时，我们提出了一项以FlightSafety收购为蓝本的方案，允许出售股票的股东选择现金或即时价值略低的伯克希尔股票。通过这样倾斜对价方式，我们鼓励持股人选择现金——这是我们最偏好的支付方式。即便如此，也只有45%的IDQ股票选择了现金。
Charlie和我在这次交易中贡献了一点产品专业知识：几十年来，他一直是明尼苏达州Cass Lake和Bemidji的Dairy Queen常客，而我则是奥马哈的常客。我们为自己的言论付出了真金白银。
一份自白
我提过，在收购中我们强烈倾向于使用现金而非伯克希尔的股票。回顾历史记录你就会明白原因：如果你把我们所有纯股票并购（排除与两家关联公司——多元化零售公司和蓝筹印花公司——的交易）加总来看，你会发现，比起我没做这些交易的情况，股东们的处境反而略为吃亏。虽然说出来让我难受，但当我发行股票时，我让你们亏钱了。
有一点要说清楚：这种损失不是因为我们被卖方误导，也不是因为他们此后经营不力或缺乏技巧。恰恰相反，在我们谈判交易时，卖方完全坦诚，而之后的经营上也一直充满干劲且卓有成效。
问题其实在于，我们拥有一个真正出色的企业组合，这意味着为了收购新东西而交易掉其中任何一部分，几乎都是不划算的。当我们以发行股票的方式并购时，会稀释你对所有业务的所有权——既包括可口可乐、吉列和美国运通这类部分持股公司，也包括我们所有优秀的运营企业。用一个体育界的例子来说明我们面临的困境：对于一支棒球队来说，签下一名预计打击率能达到.350的球员，几乎总是件大好事——除非球队为此不得不交易走一名打击率.380的球员。
因为我们的阵容里全是.380的打击高手，所以我们一直尽量用现金进行收购，这方面的记录要好得多。从1967年的国民赔偿公司开始，再到后来的喜诗糖果、布法罗新闻报、斯科特·费泽和GEICO等，我们用现金收购了一系列大企业，自买入以来它们的表现一直极其出色。这些收购给伯克希尔带来了巨大价值——实际上，远超我当初收购时的预期。
我们认为，从我们现有的业务和管理层往上"升级"，几乎是不可能的事。我们的处境和卡美洛王国里莫德雷德的正好相反——桂妮薇儿评价他说："我对他的唯一评价就是，他肯定能攀上高枝结婚，因为人人都比他地位高。"对于伯克希尔来说，"高攀"式联姻极其困难。
所以你们可以放心，查理和我在未来对发行股票会非常慎重。在那些我们实在不得不发行的情况——比如某家心仪收购标的的股东执意要拿股票时——我们会附上颇具吸引力的现金选择权，尽量引诱尽可能多的卖方选择现金。
与上市公司合并对我们来说有一个特殊难题。如果我们想向收购标的支付溢价，必须满足两个条件之一：要么我们自己的股票相对于被收购方被高估，要么两家公司合并后预期能赚到比单独经营更多的钱。历史上，伯克希尔的股票很少被高估。而且在这个市场里，被低估的收购标的几乎不可能找到。另一个可能性——协同效应——通常也不现实，因为我们期望买入后标的企业跟之前一样独立运营。加入伯克希尔通常既不会提高它们的收入，也不会降低它们的成本。
实际上，如果被收购方此前将期权作为薪酬包的一部分发放，那么在加入伯克希尔后，它们的报告成本（而非真实成本）反而会上升。在这些案例中，被收购方的"利润"此前一直被高估，因为它们遵循了标准——但依我们看，大错特错——的会计做法，忽略了企业发放期权的成本。当伯克希尔收购一家发放期权的公司时，我们会立即用经济价值相当的数字薪酬方案替代原有的期权计划。这样一来，被收购方真实的薪酬成本才被公之于众，并正确地从利润中扣除。
以下是符合所有要求的译文：
伯克希尔在上市公司并购中运用的推理，应当适用于所有买家。支付收购溢价对任何收购方来说都没有意义，除非：a) 其股票相对于被收购方被高估，或者 b) 两家企业合并后的盈利高于各自独立运营。可以预见的是，收购方通常坚持第二种理由，因为几乎没人愿意承认自己的股票被高估。然而，那些贪婪的买家——他们发股票的速度就像印钞票一样——实际上是默认了这一点。（通常，他们也是在运行华尔街版的连锁信骗局。）
某些合并确实存在重大协同效应——尽管收购方往往为获得这些效应支付了过高代价——但在其他时候，预期的成本和收入收益最终被证明是虚幻的。不过有一点可以肯定：如果一位CEO对某个特别愚蠢的收购热情高涨，他的内部员工和外部顾问都会拿出任何必要的预测来证明他的立场。只有在童话故事里，皇帝才会被告知他没穿衣服。
普通股投资
以下列示我们的普通股投资。市值超过7.5亿美元的投资项目单独列出。
- 代表税基成本，该成本总计比美国通用会计准则成本低18亿美元。
我们在年内进行了净卖出，金额约为期初组合的5%。其中，我们大幅减持了几个未达到7.5亿美元单独列示门槛的持仓，同时小幅减持了明细中列出的几个较大持仓。1997年我们进行的一些卖出操作，旨在根据我们在两个市场中看到的相对价值，适度调整债券-股票比例——这一调整在1998年仍在继续。
我们还应补充一点，我们披露的持仓有时反映了GEICO的Lou Simpson的投资决策。Lou独立管理着近20亿美元的股票组合，该组合有时会与我管理的组合重叠，偶尔他的操作也会与我的不同。
虽然我们不试图预测股市的走势，但我们确实尝试以非常粗略的方式对其进行估值。在去年的年会上，当时道指在7,071点，长期国债收益率为6.89%，查理和我曾表示，如果1) 利率维持在当前水平或下降，以及2) 美国企业持续保持其近期创下的非凡净资产收益率，我们并不认为市场被高估。迄今为止，利率已经下降——这是满足的第一个条件——而净资产收益率仍处于异常高水平。如果它们保持在这个水平——并且如果利率维持在近期水平附近——就没有理由认为股票普遍被高估。另一方面，净资产收益率并不确定能保持在当前水平，甚至接近当前水平。
1979年夏天，当股票在我看来很便宜时，我写了一篇题为《在股市中，你为乐观共识付出了非常高昂的代价》的福布斯文章。当时市场上盛行怀疑和失望，我的观点是投资者应该对此感到高兴，因为悲观情绪会将股价压低到真正有吸引力的水平。然而现在，我们拥有一个非常乐观的共识。这并不一定意味着现在不是买入股票的好时机：美国企业目前赚取的利润比几年前多得多，而且在利率较低的背景下，每一美元的盈利都变得更有价值。但眼下的价格水平已严重侵蚀了本·格雷厄姆所指出的“安全边际”——他称之为明智投资的基石。
在去年的年报中，我谈到了我们最大的持仓——可口可乐。可口可乐在全球的市场主导地位仍在持续增强，但令人痛心的是，它失去了那位带领公司取得非凡成就的领导人。可口可乐自1981年以来的CEO Roberto Goizueta于十月去世。他去世后，我读了他过去九年里写给我的每一封信和便条，总计超过100封。这些文字堪称商业与人生成功的指南。
在这些信函中，Roberto展现出了卓越而清晰的战略眼光，始终以增进可口可乐股东利益为目标。Roberto清楚自己要把公司带向何方，如何到达那里，以及为什么这条道路对股东最合理——同样重要的是，他对实现目标抱有炽热的紧迫感。他写给我的一封手写信中的一段话，可以体现他的心态："顺便说一句，我告诉Olguita，她所谓的'执念'，你称之为'专注'。我更喜欢你的说法。"就像所有认识Roberto的人一样，我会非常想念他。
出于对公司的关心，Roberto早在看起来还不需要的时候，就为无缝交接做好了准备。Roberto知道Doug Ivester是接替他的合适人选，多年来他一直与Doug合作，确保在换帅之时不会失去任何动力。可口可乐公司在Doug的领导下，将和Roberto领导时一样，是一台势不可挡的压路机。
可转换优先股
两年前，我向大家更新过我们在1987-1991年间通过私募购入的五只可转换优先股的情况。在那次报告时，我们出售了Champion International的持仓，实现了小额利润。剩下的四笔优先股投资中，有两笔——吉列和First Empire State——我们已经转换为普通股，并获得了大量未实现收益，另外两笔——全美航空和所罗门——则麻烦不断。有时，后两只股票让我想起一首乡村歌曲的歌词："如果你不走，我又怎能想念你？"
自那篇报告以来，这四笔持仓的价值都大幅增长。吉列和First Empire的普通股价格随着公司出色的表现而大幅上涨。到年底，我们1989年投入吉列的6亿美元已经增值到48亿美元，而1991年投入First Empire的4000万美元已增至2.36亿美元。
与此同时，我们那两只落后股也焕发出了巨大生机。在一桩终于回报了长期受苦股东的交易中，所罗门最近并入旅行者集团。伯克希尔的所有股东——包括我个人在内——都深深感谢Deryck Maughan和Bob Denham：首先，他们在1991年丑闻后拯救所罗门免于消亡中发挥了关键作用；其次，他们恢复了公司的活力，使其成为旅行者有吸引力的收购目标。我经常说，我希望与我喜欢、信任和钦佩的管理者共事。Deryck和Bob就是最符合这一描述的人选。
伯克希尔从所罗门投资中获得的最终结果还要过一段时间才能确定，但可以肯定地说，结果将远比我两年前预想的要好。回头来看，我觉得在所罗门的经历既有趣又有教育意义，尽管在1991-1992年间，我有种像那位剧评家写的感觉："我本来会喜欢这出戏的，可惜座位选得不好——正对着舞台。"
全美航空的复苏堪称奇迹。那些关注我在这项投资中动作的人都知道，我创下了一个未被成功玷污的记录。我最初买入这只股票是错误的，后来我一再试图以五毛钱卖出一块钱的持仓，也是错误的。
公司发生的两个变化，与它惊人的反弹同步出现：1）查理和我退出了董事会；2）Stephen Wolf 成为了CEO。幸好我们还有点自知之明——第二个事件才是关键：Stephen Wolf 在全美航空的成就堪称现象级。
全美航空仍有大量工作要做，但生存已不再是问题。因此，公司在1997年补上了我们优先股上的股息欠款，并额外支付了一笔补偿金，弥补了我们此前遭受的延迟。此外，公司的普通股股价已从最低的4美元，涨到了近期最高的73美元。
我们的优先股已被通知于3月15日赎回。但公司股价的上涨，让我们一度认为一文不值的转换权，如今具备了巨大的价值。现在几乎可以肯定，全美航空的这笔投资将带来不错的利润——当然，前提是不把我买胃药（Maalox）的钱算进去——甚至有可能赚得相当"不体面"。
下次我再做出一个又大又蠢的决定时，伯克希尔的股东们就知道该怎么做了：给 Wolf 先生打电话。
除了可转换优先股，我们在1991年还买入了另一笔私募：3亿美元的美国运通Percs（一种可转换优先股）。这种证券本质上就是普通股，只是在前三年做了一点取舍：那段时间我们获得了额外的股息，但股价上涨时我们的收益空间也受到限制。尽管有上限，这笔持仓却取得了异常丰厚的回报——这要归功于你们主席的一次操作，其中运气和技巧各占多少？110%是运气，剩下的才是技巧。
我们的Percs按计划应在1994年8月转换成普通股，在那之前一个月，我一直在纠结是否要在转换后卖出。持有的理由之一是美国运通杰出的CEO Harvey Golub，他似乎有能力将公司的潜力发挥到极致（这一假设后来被证明不折不扣地成立了）。但潜力到底有多大却存疑：美国运通面临着以Visa为首的多家卡发行商的激烈竞争。权衡再三，我倾向于卖出。
这时我交了好运。在那一个月里，我在缅因州Prouts Neck和赫兹公司CEO Frank Olson一起打高尔夫。Frank是一位杰出的管理者，对信用卡业务了如指掌。所以从第一洞开球开始，我就不断向他请教行业情况。等我们打到第二洞果岭时，Frank已经让我相信美国运通的企业卡是一笔极好的特许经营权，我也决定不卖。到了后九洞，我变成了买家——几个月内，伯克希尔就持有了公司10%的股份。
如今我们在美国运通的股票上获得了30亿美元的收益，我自然对Frank感激不尽。但我们的共同朋友George Gillespie却说，我搞错了该感谢谁。他指出，毕竟是他安排了这场球局，并把我分到了Frank那一组。
致股东的季度报告
在去年的信中，我描述了寄送季度报告日益增长的成本，以及我们在向"名义持有人"股东递送时遇到的问题。考虑到我们现在已经在公司网站www.berkshirehathaway.com上发布季度和年度信息，我问你们是否认为继续印纸质报告是必要的。回复的股东不多，但显然至少有一小部分想要季度信息的股东，不愿意从网上获取。作为一个终生患有"技术恐惧症"的人，我很能理解这群人。
然而，印刷季度报告的成本仍在不断膨胀，因此我们决定只向提出请求的股东寄送纸质版。如果你需要季度报告，请填写夹在本年报中的回函卡。与此同时，请放心，所有股东将继续收到印刷版的年度报告。
喜欢用电脑的股东朋友们，不妨去瞧瞧我们的主页。上面有大量关于伯克希尔的最新信息，以及我们自1977年以来的所有致股东信。此外，我们的网站还链接了许多伯克希尔子公司的首页。在这些网站上，你可以了解更多子公司的产品——甚至——直接下单购买。
按规定，我们必须在每个季度结束后45天内向美国证券交易委员会（SEC）提交季度报告。我们在互联网上发布信息的一个目标，就是让这些重要信息——详实完整、不经媒体过滤——在市场休市时同时传达给所有相关方。因此，我们计划在三个周五（5月15日、8月14日和11月13日）向SEC提交1998年的季度信息，并在当晚将相同信息发布到互联网上。这一程序将使所有股东——无论是直接持股还是"街名"持股——都处于同等地位。同样，我们将在1999年3月13日（周六）将1998年年报发布在互联网上，并大致在同一时间寄出纸质版。
股东指定捐赠计划
约97.7%的合格股份参与了伯克希尔1997年的股东指定捐赠计划。捐赠总额为1540万美元，受益慈善机构达3830家。该计划的完整描述见第52-53页。
在该计划实施的17年间，伯克希尔累计按照股东指示捐赠了1.131亿美元。伯克希尔其余的捐赠由我们的子公司完成，这些子公司延续了被收购前的慈善模式（只不过其原所有者自己承担了个人慈善的责任）。总体而言，我们的子公司1997年捐赠了810万美元，其中包括440万美元的实物捐赠。
每年都有少数股东错过我们的捐赠计划，原因要么是他们未在规定登记日以自己的名字登记股份，要么是未能在60天期限内将指定表格寄回给我们。查理和我对此感到遗憾。但如果回复逾期，我们不得不拒绝，因为我们不能对某些股东破例而对其他股东不破例。
要参与未来的计划，你必须持有A类股，且股份必须以实际所有者的名义登记，而不能以经纪人、银行或存管机构的代名人名义持有。未在1998年8月31日以这种方式登记的股份，将无法参与1998年的计划。收到我们寄来的捐赠表格后，请及时寄回，以免搁置或遗忘。
年度股东大会
今年的伯克希尔"伍德斯托克周末"将在5月2日至4日举行。压轴大戏是年度股东大会，将于5月4日（周一）上午9:30开始。去年我们在阿克萨本体育馆开会，我们的工作人员和参会人群都对场地非常满意。只有一个危机：会议前一晚，我失声了，这正好满足了查理的狂野幻想。结果第二天早上我嗓子恢复了出现时，他大失所望。
去年约有7500人参加了会议。他们来自全美50个州以及16个国家，包括澳大利亚、巴西、以色列、沙特阿拉伯、新加坡和希腊。考虑到几个备用房间，我们相信可以容纳超过11000人，即便今年股东人数大幅增加，也应该能应付自如。阿克萨本停车位充足，音响效果极佳，座位也很舒适。
上午7点开门，8点半我们照例先来一场由CFO马克·汉姆伯格制作的电影史诗全球首映。会议持续到下午3点半，中午短暂休息。这一安排让累坏了的可以悄悄溜走，也让铁杆股东有时间在阿克萨本（Aksarben）的食品摊吃顿午饭。查理和我爱听股东提问题，心里有什么尽管问。
伯克希尔的产品照旧在会场外的大厅出售。去年——倒不是说我会留意这种事——我们又创了销售纪录：卖掉了2,500磅喜诗糖果、1,350双戴克斯特鞋、价值75,000美元的《世界百科全书》及相关出版物，还有888套奎库特（Quikut）刀具。我们还接受了一批新系列服装的订单，印有伯克希尔标志，大约卖出1,000件马球衫、卫衣和T恤。今年的股东大会上，我们将推出1998年新款。
GEICO也照常到场，由各地分公司的明星员工搭起展台。来看看把你的车险换到GEICO能不能省钱。来咨询的人中约有40%发现能省。比例不是100%，因为各家保险公司承销判断不同，有些公司比我们更偏爱住在某些地区、从事某些职业的车主。不过我们相信，比起任何一家向所有人卖保险的全国性保险公司，我们更经常提供低价。在本报告附带的GEICO资料中，你会看到我们在38个州为股东提供最多8%的特别折扣。我们也在申请将这一折扣扩展到其他州的司机。
本报告所附的股东委托书材料中，附有如何获取入场证件的说明。预计到场人数众多，请及早预订机票、酒店和租车。美国运通（800-799-6634）乐意为您安排。和往年一样，我们会在较大的酒店安排巴士接送，会议结束后还会送您去内布拉斯加家具城（Nebraska Furniture Mart）、波仙珠宝（Borsheim's）和机场。不过，您可能会发现租辆车更方便。
NFM主店占地75英亩，距阿克萨本约一英里，工作日早10点到晚9点营业，周六早10点到晚6点，周日中午12点到晚6点。5月1日至5日期间，股东凭会议门票附带的优惠券，在NFM购物可享仅限其员工才有的折扣。
波仙珠宝通常周日歇业，但5月3日（周日）将为股东特别营业，早10点到晚6点。去年是我们股东日销售第二好的年份，仅次于1996年。我把这次下滑看作偶然，希望今年各位能证明我是对的。查理会在现场签名。不过他只在签波仙珠宝的销售小票时才笑得出来。股东们若在周六（早10点到晚5点半）或周一（早10点到晚8点）前往，务必表明伯克希尔股东身份，这样波仙CEO苏珊·雅克（Susan Jacques）才能特别热情地招待各位。顺便说一句，苏珊1997年干得极其出色。作为经理人，她正是股东们希望的那种人。
周日下午，我们还给桥牌爱好者准备了特别节目，地点在波仙外面的商场走廊。在那里，鲍勃·汉曼（Bob Hamann）——这项游戏三十多年的传奇人物——将迎战所有来者。参加进去，用你的牌技让他大开眼界吧。
我最喜欢的牛排馆Gorat's每年只在股东大会前夜的那个周日对股东开放一次。去年这家餐厅从下午4点开始营业，一直忙到凌晨1:30左右——这是一场耐力考验，因为预订了1100个座位，而餐厅只能容纳235人。如果你预订了但无法到场，请务必及时通知Gorat's，因为他们为招待我们付出了巨大努力，我们也应该回报他们。你可以从4月1日（不能提前）开始打电话预订，号码是402-551-3733。去年我因为嗓子问题不得不提前离开Gorat's，但今年我打算悠闲地品味每一口三分熟T骨牛排和双份薯饼。
热身之后，查理和我会前往道奇街以南114街的Dairy Queen。奥克兰大都会区有12家很棒的Dairy Queen，但114街这家最适合接待我们预期的大批股东。店南边的街道两侧有数百个停车位。此外，这家Dairy Queen会把周日的营业时间延长到晚上11点，以便招待我们的股东。
114街这家店现在由两姐妹Coni Birge和Deb Novotny经营，她们的祖父在1962年建起了这栋建筑，当时那儿还是城市的边缘。她们的母亲Jan Noble在1972年接手，Coni和Deb作为第三代所有者兼管理者继续经营。Jan、Coni和Deb周日晚上都会在场，我希望你们能认识她们。如果排不上Gorat's，就去尝尝她们家的汉堡吧。然后，大约8点左右，和我一起来一份"灰尘圣代"当甜点。这是本人的特色——Dairy Queen会送你一份我的配方——而且只在股东周日供应。
5月2日周六晚上，奥克兰皇家队和阿尔伯克基公爵队将在罗森布拉特体育场举行棒球赛。和往常一样，你们的董事长——无耻地利用他拥有球队25%股份的身份——会站上投手丘。但今年你们会看到些新花样。
在过去的比赛中，我总是一脸困惑地摇掉捕手喊出的第一个暗号，这让观众摸不着头脑。捕手每次都让我投大曲球，而我每次都拒绝。相反，我投出一个可怜兮兮的快球，就算状态最好的时候，测速也只有每小时8英里（顺风时）。
我之所以不愿意投曲球，背后有个故事。你们有些人可能知道，Candy Cummings在1867年发明了曲球，并在全国联盟中大放异彩，他一个赛季从未少于28场胜利。然而，这种投法立刻遭到了最高权威的批评——时任哈佛大学校长Charles Elliott宣称："我听说今年哈佛赢得棒球冠军，是因为我们有个投手擅长投漂亮的曲球。我还被告知，曲球的目的是故意欺骗击球手。哈佛大学的宗旨不是教人欺骗。"（我没瞎编。）
自从得知Elliott校长在这个问题上的道德教诲后，我一直严格约束自己不用曲球，尽管它对倒霉的击球手可能造成毁灭性打击。不过现在，是时候让我的业力碾过Elliott的教条了，我也不再克制。周六晚上来球场吧，惊叹我变化球那壮丽的弧线。
我们的股东委托书里有如何获取比赛门票的信息。我们还会提供一份资料包，介绍当地的热门去处——当然包括那12家Dairy Queen。
5月来奥马哈吧——资本主义的摇篮——好好享受一番。