BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1999 was \$358 million, which increased the per-share book value of both our Class A and Class B stock by 0.5%. Over the last 35 years (that is, since present management took over) per-share book value has grown from \$19 to \$37,987, a rate of 24.0% compounded annually.*
The numbers on the facing page show just how poor our 1999 record was. We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well. Relative results are what concern us: Over time, bad relative numbers will produce unsatisfactory absolute results.
Even Inspector Clouseau could find last year’s guilty party: your Chairman. My performance reminds me of the quarterback whose report card showed four Fs and a D but who nonetheless had an understanding coach. “Son,” he drawled, “I think you’re spending too much time on that one subject.”
My “one subject” is capital allocation, and my grade for 1999 most assuredly is a D. What most hurt us during the year was the inferior performance of Berkshire’s equity portfolio — and responsibility for that portfolio, leaving aside the small piece of it run by Lou Simpson of GEICO, is entirely mine. Several of our largest investees badly lagged the market in 1999 because they’ve had disappointing operating results. We still like these businesses and are content to have major investments in them. But their stumbles damaged our performance last year, and it’s no sure thing that they will quickly regain their stride.
The fallout from our weak results in 1999 was a more-than-commensurate drop in our stock price. In 1998, to go back a bit, the stock outperformed the business. Last year the business did much better than the stock, a divergence that has continued to the date of this letter. Over time, of course, the performance of the stock must roughly match the performance of the business.
Despite our poor showing last year, Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect that the gain in Berkshire’s intrinsic value over the next decade will modestly exceed the gain from owning the S&P. We can’t guarantee that, of course. But we are willing to back our conviction with our own money. To repeat a fact you’ve heard before, well over 99% of my net worth resides in Berkshire. Neither my wife nor I have ever sold a share of Berkshire and — unless our checks stop clearing — we have no intention of doing so.
Please note that I spoke of hoping to beat the S&P “modestly.” For Berkshire, truly large superiorities over that index are a thing of the past. They existed then because we could buy both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us today.
Our optimism about Berkshire’s performance is also tempered by the expectation — indeed, in our minds, the virtual certainty — that the S&P will do far less well in the next decade or two than it has done since 1982. A recent article in Fortune expressed my views as to why this is inevitable, and I’m enclosing a copy with this report.
Our goal is to run our present businesses well — a task made easy because of the outstanding managers we have in place — and to acquire additional businesses having economic characteristics and managers comparable to those we already own. We made important progress in this respect during 1999 by acquiring Jordan’s Furniture and contracting to buy a major portion of MidAmerican Energy. We will talk more about these companies later in the report but let me emphasize one point here: We bought both for cash, issuing no Berkshire shares. Deals of that kind aren’t always possible, but that is the method of acquisition that Charlie and I vastly prefer.
Guides to Intrinsic Value
I often talk in these pages about intrinsic value, a key, though far from precise, measurement we utilize in our acquisitions of businesses and common stocks. (For an extensive discussion of this, and other investment and accounting terms and concepts, please refer to our Owner’s Manual on pages 55 - 62. Intrinsic value is discussed on page 60.)
In our last four reports, we have furnished you a table that we regard as useful in estimating Berkshire’s intrinsic value. In the updated version of that table, which follows, we trace two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents but excluding assets held in our financial products operation) and the second column shows our per-share earnings from Berkshire’s operating businesses before taxes and purchase-accounting adjustments (discussed on page 61), 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 how Berkshire would look if it were split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.
| Year | Investments Per Share | Pre-tax Earnings (Loss) Per Share With All Income from Investments Excluded |
| 1969 | $ 45 | $ 4.39 |
| 1979 | 577 | 13.07 |
| 1989 | 7,200 | 108.86 |
| 1999 | 47,339 | (458.55) |
Here are the growth rates of the two segments by decade:
| Decade Ending | Investments Per Share | Pre-tax Earnings Per Share With All Income from Investments Excluded |
| 1979 | 29.0% | 11.5% |
| 1989 | 28.7% | 23.6% |
| 1999 | 20.7% | N.A. |
| Annual Growth Rate, 1969-1999 | 25.4% | N.A. |
In 1999, our per-share investments changed very little, but our operating earnings, affected by negatives that overwhelmed some strong positives, fell apart. Most of our operating managers deserve a grade of A for delivering fine results and for having widened the difference between the intrinsic value of their businesses and the value at which these are carried on our balance sheet. But, offsetting this, we had a huge — and, I believe, aberrational — underwriting loss at General Re. Additionally, GEICO’s underwriting profit fell, as we had predicted it would. GEICO’s overall performance, though, was terrific, outstripping my ambitious goals.
We do not expect our underwriting earnings to improve in any dramatic way this year. Though GEICO’s intrinsic value should grow by a highly satisfying amount, its underwriting performance is almost certain to weaken. That’s because auto insurers, as a group, will do worse in 2000, and because we will materially increase our marketing expenditures. At General Re, we are raising rates and, if there is no mega-catastrophe in 2000, the company’s underwriting loss should fall considerably. It takes some time, however, for the full effect of rate increases to kick in, and General Re is therefore likely to have another unsatisfactory underwriting year.
You should be aware that one item regularly working to widen the amount by which intrinsic value exceeds book value is the annual charge against income we take for amortization of goodwill — an amount now running about \$500 million. This charge reduces the amount of goodwill we show as an asset and likewise the amount that is included in our book value. This is an accounting matter having nothing to do with true economic goodwill, which increases in most years. But even if economic goodwill were to remain constant, the annual amortization charge would persistently widen the gap between intrinsic value and book value.
Though we can’t give you a precise figure for Berkshire’s intrinsic value, or even an approximation, Charlie and I can assure you that it far exceeds our \$57.8 billion book value. Businesses such as See’s and Buffalo News are now worth fifteen to twenty times the value at which they are carried on our books. Our goal is to continually widen this spread at all subsidiaries.
A Managerial Story You Will Never Read Elsewhere
Berkshire’s collection of managers is unusual in several important ways. As one example, a very high percentage of these men and women are independently wealthy, having made fortunes in the businesses that they run. They work neither because they need the money nor because they are contractually obligated to — we have no contracts at Berkshire. Rather, they work long and hard because they love their businesses. And I use the word “their” advisedly, since these managers are truly in charge — there are no show-and-tell presentations in Omaha, no budgets to be approved by headquarters, no dictums issued about capital expenditures. We simply ask our managers to run their companies as if these are the sole asset of their families and will remain so for the next century.
Charlie and I try to behave with our managers just as we attempt to behave with Berkshire’s shareholders, treating both groups as we would wish to be treated if our positions were reversed. Though “working” means nothing to me financially, I love doing it at Berkshire for some simple reasons: It gives me a sense of achievement, a freedom to act as I see fit and an opportunity to interact daily with people I like and trust. Why should our managers — accomplished artists at what they do — see things differently?
In their relations with Berkshire, our managers often appear to be hewing to President Kennedy’s charge, “Ask not what your country can do for you; ask what you can do for your country.” Here’s a remarkable story from last year: It’s about R. C. Willey, Utah’s dominant home furnishing business, which Berkshire purchased from Bill Child and his family in 1995. Bill and most of his managers are Mormons, and for this reason R. C. Willey’s stores have never operated on Sunday. This is a difficult way to do business: Sunday is the favorite shopping day for many customers. Bill, nonetheless, stuck to his principles -- and while doing so built his business from \$250,000 of annual sales in 1954, when he took over, to \$342 million in 1999.
Bill felt that R. C. Willey could operate successfully in markets outside of Utah and in 1997 suggested that we open a store in Boise. I was highly skeptical about taking a no-Sunday policy into a new territory where we would be up against entrenched rivals open seven days a week. Nevertheless, this was Bill’s business to run. So, despite my reservations, I told him to follow both his business judgment and his religious convictions.
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store — for about \$9 million as it turned out — and would sell it to us at his cost if it proved to be successful. On the other hand, if sales fell short of his expectations, we could exit the business without paying Bill a cent. This outcome, of course, would leave him with a huge investment in an empty building. I told him that I appreciated his offer but felt that if Berkshire was going to get the upside it should also take the downside. Bill said nothing doing: If there was to be failure because of his religious beliefs, he wanted to take the blow personally.
The store opened last August and immediately became a huge success. Bill thereupon turned the property over to us — including some extra land that had appreciated significantly — and we wrote him a check for his cost. And get this: Bill refused to take a dime of interest on the capital he had tied up over the two years.
If a manager has behaved similarly at some other public corporation, I haven’t heard about it. You can understand why the opportunity to partner with people like Bill Child causes me to tap dance to work every morning.
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A footnote: After our “soft” opening in August, we had a grand opening of the Boise store about a month later. Naturally, I went there to cut the ribbon (your Chairman, I wish to emphasize, is good for something). In my talk I told the crowd how sales had far exceeded expectations, making us, by a considerable margin, the largest home furnishings store in Idaho. Then, as the speech progressed, my memory miraculously began to improve. By the end of my talk, it all had come back to me: Opening a store in Boise had been my idea.
The Economics of Property/Casualty Insurance
Our main business — though we have others of great importance — is insurance. To understand Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these factors.
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. This pleasant activity typically 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. Errors of estimation, 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. In 1999 a number of insurers announced reserve adjustments that made a mockery of the “earnings” that investors had relied on earlier when making their buy and sell decisions. At Berkshire, we strive to be conservative and consistent in our reserving. Even so, we warn you that an unpleasant surprise is always possible.
The table that follows shows (at intervals) the float generated by the various segments of Berkshire’s insurance operations since we entered the business 33 years ago upon acquiring National Indemnity Company (whose traditional lines are included in the segment “Other Primary”). 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. (Got that?)
Yearend Float (in \$ millions)
| Year | GEICO | General Re | Other Reinsurance | Other Primary | Total |
| 1967 | 20 | 20 | |||
| 1977 | 40 | 131 | 171 | ||
| 1987 | 701 | 807 | 1,508 | ||
| 1997 | 2,917 | 4,014 | 455 | 7,386 | |
| 1998 | 3,125 | 14,909 | 4,305 | 415 | 22,754 |
| 1999 | 3,444 | 15,166 | 6,285 | 403 | 25,298 |
Growth of float is important — but its cost is what’s vital. Over the years we have usually recorded only a small underwriting loss — which means our cost of float was correspondingly low — or actually had an underwriting profit, which means we were being paid for holding other people’s money. Indeed, our cumulative result through 1998 was an underwriting profit. In 1999, however, we incurred a \$1.4 billion underwriting loss that left us with float cost of 5.8%. One mildly mitigating factor: We enthusiastically welcomed \$400 million of the loss because it stems from business that will deliver us exceptional float over the next decade. The balance of the loss, however, was decidedly unwelcome, and our overall result must be judged extremely poor. Absent a mega-catastrophe, we expect float cost to fall in 2000, but any decline will be tempered by our aggressive plans for GEICO, which we will discuss later.
There are a number of people who deserve credit for manufacturing so much “no-cost” float over the years. Foremost is Ajit Jain. It’s simply impossible to overstate Ajit’s value to Berkshire: He has from scratch built an outstanding reinsurance business, which during his tenure has earned an underwriting profit and now holds \$6.3 billion of float.
In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks; the realism to forget about those he can’t evaluate; the courage to write huge policies when the premium is appropriate; and the discipline to reject even the smallest risk when the premium is inadequate. It is rare to find a person possessing any one of these talents. For one person to have them all is remarkable.
Since Ajit specializes in super-cat reinsurance, a line in which losses are infrequent but extremely large when they occur, his business is sure to be far more volatile than most insurance operations. To date, we have benefitted from good luck on this volatile book. Even so, Ajit’s achievements are truly extraordinary.
In a smaller but nevertheless important way, our “other primary” insurance operation has also added to Berkshire’s intrinsic value. This collection of insurers has delivered a \$192 million underwriting profit over the past five years while supplying us with the float shown in the table. In the insurance world, results like this are uncommon, and for their feat we thank Rod Eldred, Brad Kinstler, John Kizer, Don Towle and Don Wurster.
As I mentioned earlier, the General Re operation had an exceptionally poor underwriting year in 1999 (though investment income left the company well in the black). Our business was extremely underpriced, both domestically and internationally, a condition that is improving but not yet corrected. Over time, however, the company should develop a growing amount of low-cost float. At both General Re and its Cologne subsidiary, incentive compensation plans are now directly tied to the variables of float growth and cost of float, the same variables that determine value for owners.
Even though a reinsurer may have a tightly focused and rational compensation system, it cannot count on every year coming up roses. Reinsurance is a highly volatile business, and neither General Re nor Ajit’s operation is immune to bad pricing behavior in the industry. But General Re has the distribution , the underwriting skills, the culture, and — with Berkshire’s backing — the financial clout to become the world’s most profitable reinsurance company. Getting there will take time, energy and discipline, but we have no doubt that Ron Ferguson and his crew can make it happen.
GEICO (1-800-847-7536 or GEICO.com)
GEICO made exceptional progress in 1999. The reasons are simple: We have a terrific business idea being implemented by an extraordinary manager, Tony Nicely. When Berkshire purchased GEICO at the beginning of 1996, we handed the keys to Tony and asked him to run the operation exactly as if he owned 100% of it. He has done the rest. Take a look at his scorecard:
| Years | New AutoPolicies(1)(2) | Auto PoliciesIn-Force(1) |
| 1993 | 346,882 | 2,011,055 |
| 1994 | 384,217 | 2,147,549 |
| 1995 | 443,539 | 2,310,037 |
| 1996 | 592,300 | 2,543,699 |
| 1997 | 868,430 | 2,949,439 |
| 1998 | 1,249,875 | 3,562,644 |
| 1999 | 1,648,095 | 4,328,900 |
“Voluntary” only; excludes assigned risks and the like. (1)
Revised to exclude policies moved from one GEICO company to another. (2)
In 1995, GEICO spent \$33 million on marketing and had 652 telephone counselors. Last year the company spent \$242 million, and the counselor count grew to 2,631. And we are just starting: The pace will step up materially in 2000. Indeed, we would happily commit \$1 billion annually to marketing if we knew we could handle the business smoothly and if we expected the last dollar spent to produce new business at an attractive cost.
Currently two trends are affecting acquisition costs. The bad news is that it has become more expensive to develop inquiries. Media rates have risen, and we are also seeing diminishing returns — that is, as both we and our competitors step up advertising, inquiries per ad fall for all of us. These negatives are partly offset, however, by the fact that our closure ratio — the percentage of inquiries converted to sales — has steadily improved. Overall, we believe that our cost of new business, though definitely rising, is well below that of the industry. Of even greater importance, our operating costs for renewal business are the lowest among broad-based national auto insurers. Both of these major competitive advantages are sustainable. Others may copy our model, but they will be unable to replicate our economics.
The table above makes it appear that GEICO’s retention of policyholders is falling, but for two reasons appearances are in this case deceiving. First, in the last few years our business mix has moved away from “preferred” policyholders, for whom industrywide retention rates are high, toward “standard” and “non-standard” policyholders for whom retention rates are much lower. (Despite the nomenclature, the three classes have similar profit prospects.) Second, retention rates for relatively new policyholders are always lower than those for long-time customers — and because of our accelerated growth, our policyholder ranks now include an increased proportion of new customers. Adjusted for these two factors, our retention rate has changed hardly at all.
We told you last year that underwriting margins for both GEICO and the industry would fall in 1999, and they did. We make a similar prediction for 2000. A few years ago margins got too wide, having enjoyed the effects of an unusual and unexpected decrease in the frequency and severity of accidents. The industry responded by reducing rates but now is having to contend with an increase in loss costs. We would not be surprised to see the margins of auto insurers deteriorate by around three percentage points in 2000.
Two negatives besides worsening frequency and severity will hurt the industry this year. First, rate increases go into effect only slowly, both because of regulatory delay and because insurance contracts must run their course before new rates can be put in. Second, reported earnings of many auto insurers have benefitted in the last few years from reserve releases, made possible because the companies overestimated their loss costs in still-earlier years. This reservoir of redundant reserves has now largely dried up, and future boosts to earnings from this source will be minor at best.
In compensating its associates — from Tony on down — GEICO continues to use two variables, and only two, in determining what bonuses and profit-sharing contributions will be: 1) its percentage growth in policyholders and 2) the earnings of its “seasoned” business, meaning policies that have been with us for more than a year. We did outstandingly well on both fronts during 1999 and therefore made a profit-sharing payment of 28.4% of salary (in total, \$113.3 million) to the great majority of our associates. Tony and I love writing those checks.
At Berkshire, we want to have compensation policies that are both easy to understand and in sync with what we wish our associates to accomplish. Writing new business is expensive (and, as mentioned, getting more expensive). If we were to include those costs in our calculation of bonuses — as managements did before our arrival at GEICO — we would be penalizing our associates for garnering new policies, even though these are very much in Berkshire’s interest. So, in effect, we say to our associates that we will foot the bill for new business. Indeed, because percentage growth in policyholders is part of our compensation scheme, we reward our associates for producing this initiallyunprofitable business. And then we reward them additionally for holding down costs on our seasoned business.
Despite the extensive advertising we do, our best source of new business is word-of-mouth recommendations from existing policyholders, who on the whole are pleased with our prices and service. An article published last year by Kiplinger’s Personal Finance Magazine gives a good picture of where we stand in customer satisfaction: The magazine’s survey of 20 state insurance departments showed that GEICO’s complaint ratio was well below the ratio for most of its major competitors.
Our strong referral business means that we probably could maintain our policy count by spending as little as \$50 million annually on advertising. That’s a guess, of course, and we will never know whether it is accurate because Tony’s foot is going to stay on the advertising pedal (and my foot will be on his). Nevertheless, I want to emphasize that a major percentage of the \$300-\$350 million we will spend in 2000 on advertising, as well as large additional costs we will incur for sales counselors, communications and facilities, are optional outlays we choose to make so that we can both achieve significant growth and extend and solidify the promise of the GEICO brand in the minds of Americans.
Personally, I think these expenditures are the best investment Berkshire can make. Through its advertising, GEICO is acquiring a direct relationship with a huge number of households that, on average, will send us \$1,100 year after year. That makes us — among all companies, selling whatever kind of product — one of the country’s leading direct merchandisers. Also, as we build our long-term relationships with more and more families, cash is pouring in rather than going out (no Internet economics here). Last year, as GEICO increased its customer base by 766,256, it gained \$590 million of cash from operating earnings and the increase in float.
In the past three years, we have increased our market share in personal auto insurance from 2.7% to 4.1%. But we rightfully belong in many more households — maybe even yours. Give us a call and find out. About 40% of those people checking our rates find that they can save money by doing business with us. The proportion is not 100% because insurers differ in their underwriting judgments, with some giving more credit than we do to drivers who live in certain geographic areas or work at certain occupations. Our closure rate indicates, however, that we more frequently offer the low price than does any other national carrier selling insurance to all comers. Furthermore, in 40 states we can offer a special discount — usually 8% — to our shareholders. Just be sure to identify yourself as a Berkshire owner so that our sales counselor can make the appropriate adjustment.
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It’s with sadness that I report to you that Lorimer Davidson, GEICO’s former Chairman, died last November, a few days after his 97 birthday. For GEICO, Davy was a business giant who moved the company up to the big leagues. th For me, he was a friend, teacher and hero. I have told you of his lifelong kindnesses to me in past reports. Clearly, my life would have developed far differently had he not been a part of it. Tony, Lou Simpson and I visited Davy in August and marveled at his mental alertness — particularly in all matters regarding GEICO. He was the company’s number one supporter right up to the end, and we will forever miss him.
Aviation Services
Our two aviation services companies — FlightSafety International (“FSI”) and Executive Jet Aviation (“EJA”) — are both runaway leaders in their field. EJA, which sells and manages the fractional ownership of jet aircraft, through its NetJets® program, is larger than its next two competitors combined. FSI trains pilots (as well as other transportation professionals) and is five times or so the size of its nearest competitor.
Another common characteristic of the companies is that they are still managed by their founding entrepreneurs. Al Ueltschi started FSI in 1951 with \$10,000, and Rich Santulli invented the fractional-ownership industry in 1986. These men are both remarkable managers who have no financial need to work but thrive on helping their companies grow and excel.
Though these two businesses have leadership positions that are similar, they differ in their economic characteristics. FSI must lay out huge amounts of capital. A single flight simulator can cost as much as \$15 million and we have 222. Only one person at a time, furthermore, can be trained in a simulator, which means that the capital investment per dollar of revenue at FSI is exceptionally high. Operating margins must therefore also be high, if we are to earn a reasonable return on capital. Last year we made capital expenditures of \$215 million at FSI and FlightSafety Boeing, its 50%-owned affiliate.
At EJA, in contrast, the customer owns the equipment, though we, of course, must invest in a core fleet of our own planes to ensure outstanding service. For example, the Sunday after Thanksgiving, EJA’s busiest day of the year, strains our resources since fractions of 169 planes are owned by 1,412 customers, many of whom are bent on flying home between 3 and 6 p.m. On that day, and certain others, we need a supply of company-owned aircraft to make sure all parties get where they want, when they want.
Still, most of the planes we fly are owned by customers, which means that modest pre-tax margins in this business can produce good returns on equity. Currently, our customers own planes worth over \$2 billion, and in addition we have \$4.2 billion of planes on order. Indeed, the limiting factor in our business right now is the availability of planes. We now are taking delivery of about 8% of all business jets manufactured in the world, and we wish we could get a bigger share than that. Though EJA was supply-constrained in 1999, its recurring revenues — monthly management fees plus hourly flight fees — increased 46%.
The fractional-ownership industry is still in its infancy. EJA is now building critical mass in Europe, and over time we will expand around the world. Doing that will be expensive — very expensive — but we will spend what it takes. Scale is vital to both us and our customers: The company with the most planes in the air worldwide will be able to offer its customers the best service. “Buy a fraction, get a fleet” has real meaning at EJA.
EJA enjoys another important advantage in that its two largest competitors are both subsidiaries of aircraft manufacturers and sell only the aircraft their parents make. Though these are fine planes, these competitors are severely limited in the cabin styles and mission capabilities they can offer. EJA, in contrast, offers a wide array of planes from five suppliers. Consequently, we can give the customer whatever he needs to buy — rather than his getting what the competitor’s parent needs to sell.
Last year in this report, I described my family’s delight with the one-quarter (200 flight hours annually) of a Hawker 1000 that we had owned since 1995. I got so pumped up by my own prose that shortly thereafter I signed up for one-sixteenth of a Cessna V Ultra as well. Now my annual outlays at EJA and Borsheim’s, combined, total ten times my salary. Think of this as a rough guideline for your own expenditures with us.
During the past year, two of Berkshire’s outside directors have also signed on with EJA. (Maybe we’re paying them too much.) You should be aware that they and I are charged exactly the same price for planes and service as is any other customer: EJA follows a “most favored nations” policy, with no one getting a special deal.
And now, brace yourself. Last year, EJA passed the ultimate test: Charlie signed up. No other endorsement could speak more eloquently to the value of the EJA service. Give us a call at 1-800-848-6436 and ask for our “white paper” on fractional ownership.
Acquisitions of 1999
At both GEICO and Executive Jet, our best source of new customers is the happy ones we already have. Indeed, about 65% of our new owners of aircraft come as referrals from current owners who have fallen in love with the service.
Our acquisitions usually develop in the same way. At other companies, executives may devote themselves to pursuing acquisition possibilities with investment bankers, utilizing an auction process that has become standardized. In this exercise the bankers prepare a “book” that makes me think of the Superman comics of my youth. In the Wall Street version, a formerly mild-mannered company emerges from the investment banker’s phone booth able to leap over competitors in a single bound and with earnings moving faster than a speeding bullet. Titillated by the book’s description of the acquiree’s powers, acquisition-hungry CEOs — Lois Lanes all, beneath their cool exteriors — promptly swoon.
What’s particularly entertaining in these books is the precision with which earnings are projected for many years ahead. If you ask the author-banker, however, what his own firm will earn next month, he will go into a protective crouch and tell you that business and markets are far too uncertain for him to venture a forecast.
Here’s one story I can’t resist relating: In 1985, a major investment banking house undertook to sell Scott Fetzer, offering it widely — but with no success. Upon reading of this strikeout, I wrote Ralph Schey, then and now Scott Fetzer’s CEO, expressing an interest in buying the business. I had never met Ralph, but within a week we had a deal. Unfortunately, Scott Fetzer’s letter of engagement with the banking firm provided it a \$2.5 million fee upon sale, even if it had nothing to do with finding the buyer. I guess the lead banker felt he should do something for his payment, so he graciously offered us a copy of the book on Scott Fetzer that his firm had prepared. With his customary tact, Charlie responded: “I’ll pay \$2.5 million not to read it.”
At Berkshire, our carefully-crafted acquisition strategy is simply to wait for the phone to ring. Happily, it sometimes does so, usually because a manager who sold to us earlier has recommended to a friend that he think about following suit.
Which brings us to the furniture business. Two years ago I recounted how the acquisition of Nebraska Furniture Mart in 1983 and my subsequent association with the Blumkin family led to follow-on transactions with R. C. Willey (1995) and Star Furniture (1997). For me, these relationships have all been terrific. Not only did Berkshire acquire three outstanding retailers; these deals also allowed me to become friends with some of the finest people you will ever meet.
Naturally, I have persistently asked the Blumkins, Bill Child and Melvyn Wolff whether there are any more out there like you. Their invariable answer was the Tatelman brothers of New England and their remarkable furniture business, Jordan’s.
I met Barry and Eliot Tatelman last year and we soon signed an agreement for Berkshire to acquire the company. Like our three previous furniture acquisitions, this business had long been in the family — in this case since 1927, when Barry and Eliot’s grandfather began operations in a Boston suburb. Under the brothers’ management, Jordan’s has grown ever more dominant in its region, becoming the largest furniture retailer in New Hampshire as well as Massachusetts.
The Tatelmans don’t just sell furniture or manage stores. They also present customers with a dazzling entertainment experience called “shoppertainment.” A family visiting a store can have a terrific time, while concurrently viewing an extraordinary selection of merchandise. The business results are also extraordinary: Jordan’s has the highest sales per square foot of any major furniture operation in the country. I urge you to visit one of their stores if you are in the Boston area — particularly the one at Natick, which is Jordan’s newest. Bring money.
Barry and Eliot are classy people — just like their counterparts at Berkshire’s three other furniture operations. When they sold to us, they elected to give each of their employees at least 50¢ for every hour that he or she had worked for Jordan’s. This payment added up to \$9 million, which came from the Tatelmans’ own pockets, not from Berkshire’s. And Barry and Eliot were thrilled to write the checks.
Each of our furniture operations is number one in its territory. We now sell more furniture than anyone else in Massachusetts, New Hampshire, Texas, Nebraska, Utah and Idaho. Last year Star’s Melvyn Wolff and his sister, Shirley Toomim, scored two major successes: a move into San Antonio and a significant enlargement of Star’s store in Austin.
There’s no operation in the furniture retailing business remotely like the one assembled by Berkshire. It’s fun for me and profitable for you. W. C. Fields once said, “It was a woman who drove me to drink, but unfortunately I never had the chance to thank her.” I don’t want to make that mistake. My thanks go to Louie, Ron and Irv Blumkin for getting me started in the furniture business and for unerringly guiding me as we have assembled the group we now have.
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Now, for our second acquisition deal: It came to us through my good friend, Walter Scott, Jr., chairman of Level 3 Communications and a director of Berkshire. Walter has many other business connections as well, and one of them is with MidAmerican Energy, a utility company in which he has substantial holdings and on whose board he sits. At a conference in California that we both attended last September, Walter casually asked me whether Berkshire might be interested in making a large investment in MidAmerican, and from the start the idea of being in partnership with Walter struck me as a good one. Upon returning to Omaha, I read some of MidAmerican’s public reports and had two short meetings with Walter and David Sokol, MidAmerican’s talented and entrepreneurial CEO. I then said that, at an appropriate price, we would indeed like to make a deal.
Acquisitions in the electric utility industry are complicated by a variety of regulations including the Public Utility Holding Company Act of 1935. Therefore, we had to structure a transaction that would avoid Berkshire gaining voting control. Instead we are purchasing an 11% fixed-income security, along with a combination of common stock and exchangeable preferred that will give Berkshire just under 10% of the voting power of MidAmerican but about 76% of the equity interest. All told, our investment will be about \$2 billion.
Walter characteristically backed up his convictions with real money: He and his family will buy more MidAmerican stock for cash when the transaction closes, bringing their total investment to about \$280 million. Walter will also be the controlling shareholder of the company, and I can’t think of a better person to hold that post.
Though there are many regulatory constraints in the utility industry, it’s possible that we will make additional commitments in the field. If we do, the amounts involved could be large.
Acquisition Accounting
Once again, I would like to make some comments about accounting, in this case about its application to acquisitions. This is currently a very contentious topic and, before the dust settles, Congress may even intervene (a truly terrible idea).
When a company is acquired, generally accepted accounting principles (“GAAP”) currently condone two very different ways of recording the transaction: “purchase” and “pooling.” In a pooling, stock must be the currency; in a purchase, payment can be made in either cash or stock. Whatever the currency, managements usually detest purchase accounting because it almost always requires that a “goodwill” account be established and subsequently written off a process that saddles earnings with a large annual charge that normally persists for decades. In contrast, pooling avoids a goodwill account, which is why managements love it.
Now, the Financial Accounting Standards Board (“FASB”) has proposed an end to pooling, and many CEOs are girding for battle. It will be an important fight, so we’ll venture some opinions. To begin with, we agree with the many managers who argue that goodwill amortization charges are usually spurious. You’ll find my thinking about this in the appendix to our 1983 annual report, which is available on our website, and in the Owner’s Manual on pages 55 - 62.
For accounting rules to mandate amortization that will, in the usual case, conflict with reality is deeply troublesome: Most accounting charges relate to what’s going on, even if they don’t precisely measure it. As an example, depreciation charges can’t with precision calibrate the decline in value that physical assets suffer, but these charges do at least describe something that is truly occurring: Physical assets invariably deteriorate. Correspondingly, obsolescence charges for inventories, bad debt charges for receivables and accruals for warranties are among the charges that reflect true costs. The annual charges for these expenses can’t be exactly measured, but the necessity for estimating them is obvious.
In contrast, economic goodwill does not, in many cases, diminish. Indeed, in a great many instances — perhaps most — it actually grows in value over time. In character, economic goodwill is much like land: The value of both assets is sure to fluctuate, but the direction in which value is going to go is in no way ordained. At See’s, for example, economic goodwill has grown, in an irregular but very substantial manner, for 78 years. And, if we run the business right, growth of that kind will probably continue for at least another 78 years.
To escape from the fiction of goodwill charges, managers embrace the fiction of pooling. This accounting convention is grounded in the poetic notion that when two rivers merge their streams become indistinguishable. Under this concept, a company that has been merged into a larger enterprise has not been “purchased” (even though it will often have received a large “sell-out” premium). Consequently, no goodwill is created, and those pesky subsequent charges to earnings are eliminated. Instead, the accounting for the ongoing entity is handled as if the businesses had forever been one unit.
So much for poetry. The reality of merging is usually far different: There is indisputably an acquirer and an acquiree, and the latter has been “purchased,” no matter how the deal has been structured. If you think otherwise, just ask employees severed from their jobs which company was the conqueror and which was the conquered. You will find no confusion. So on this point the FASB is correct: In most mergers, a purchase has been made. Yes, there are some true “mergers of equals,” but they are few and far between.
Charlie and I believe there’s a reality-based approach that should both satisfy the FASB, which correctly wishes to record a purchase, and meet the objections of managements to nonsensical charges for diminution of goodwill. We would first have the acquiring company record its purchase price — whether paid in stock or cash — at fair value. In most cases, this procedure would create a large asset representing economic goodwill. We would then leave this asset on the books, not requiring its amortization. Later, if the economic goodwill became impaired, as it sometimes would, it would be written down just as would any other asset judged to be impaired.
If our proposed rule were to be adopted, it should be applied retroactively so that acquisition accounting would be consistent throughout America — a far cry from what exists today. One prediction: If this plan were to take effect, managements would structure acquisitions more sensibly, deciding whether to use cash or stock based on the real consequences for their shareholders rather than on the unreal consequences for their reported earnings.
In our purchase of Jordan’s, we followed a procedure that will maximize the cash produced for our shareholders but minimize the earnings we report to you. Berkshire purchased assets for cash, an approach that on our tax returns permits us to amortize the resulting goodwill over a 15-year period. Obviously, this tax deduction materially increases the amount of cash delivered by the business. In contrast, when stock, rather than assets, is purchased for cash, the resulting writeoffs of goodwill are not tax-deductible. The economic difference between these two approaches is substantial.
From the economic standpoint of the acquiring company, the worst deal of all is a stock-for-stock acquisition. Here, a huge price is often paid without there being any step-up in the tax basis of either the stock of the acquiree or its assets. If the acquired entity is subsequently sold, its owner may owe a large capital gains tax (at a 35% or greater rate), even though the sale may truly be producing a major economic loss.
We have made some deals at Berkshire that used far-from-optimal tax structures. These deals occurred because the sellers insisted on a given structure and because, overall, we still felt the acquisition made sense. We have never done an inefficiently-structured deal, however, in order to make our figures look better.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported earnings. In this presentation, purchaseaccounting 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 page 61, 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 purchasepremiums 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) | ||||
| Pre-Tax Earnings | Berkshire’s Share of Net Earnings (after taxes and minority interests) | |||
| 1999 | 1998 | 1999 | 1998 | |
| Operating Earnings: | ||||
| Insurance Group: | ||||
| Underwriting — Reinsurance | $(1,440) | $(21) | $(927) | $(14) |
| Underwriting — GEICO | 24 | 269 | 16 | 175 |
| Underwriting — Other Primary | 22 | 17 | 14 | 10 |
| Net Investment Income | 2,482 | 974 | 1,764 | 731 |
| Buffalo News | 55 | 53 | 34 | 32 |
| Finance and Financial Products Businesses | 125 | 205(1) | 86 | 133(1) |
| Flight Services | 225(2) | 181(1) | 132(2) | 110(1) |
| Home Furnishings | 79 | 72 | 46 | 41 |
| International Dairy Queen | 56 | 58 | 35 | 35 |
| Jewelry | 51 | 39 | 31 | 23 |
| Scott Fetzer (excluding finance operation) | 147 | 137 | 92 | 85 |
| See’s Candies | 74 | 62 | 46 | 40 |
| Shoe Group | 17 | 33 | 11 | 23 |
| Purchase-Accounting Adjustments | (739) | (123) | (648) | (118) |
| Interest Expense(3) | (109) | (100) | (70) | (63) |
| Shareholder-Designated Contributions | (17) | (17)(4) | (11) | (11)(4) |
| Other | 33 | 60 | 20 | 45 |
| Operating Earnings | 1,085 | 1,899 | 671 | 1,277 |
| Capital Gains from Investments | 1,365 | 2,415 | 886 | 1,553 |
| Total Earnings - All Entities | $2,450 | $4,314 | $1,557 | $2,830 |
Includes Executive Jet from August 7, 1998 .(1)
Includes Jordan’s Furniture from November 13, 1999.(2)
Excludes interest expense of Finance Businesses. (3)
Includes General Re operations for ten days in 1998. (4)
Almost all of our manufacturing, retailing and service businesses had excellent results in 1999. The exception was Dexter Shoe, and there the shortfall did not occur because of managerial problems: In skills, energy and devotion to their work, the Dexter executives are every bit the equal of our other managers. But we manufacture shoes primarily in the U.S., and it has become extremely difficult for domestic producers to compete effectively. In 1999, approximately 93% of the 1.3 billion pairs of shoes purchased in this country came from abroad, where extremely low-cost labor is the rule.
Counting both Dexter and H. H. Brown, we are currently the leading domestic manufacturer of shoes, and we are likely to continue to be. We have loyal, highly-skilled workers in our U.S. plants, and we want to retain every job here that we can. Nevertheless, in order to remain viable, we are sourcing more of our output internationally. In doing that, we have incurred significant severance and relocation costs that are included in the earnings we show in the table.
A few years back, Helzberg’s, our 200-store jewelry operation, needed to make operating adjustments to restore margins to appropriate levels. Under Jeff Comment’s leadership, the job was done and profits have dramatically rebounded. In the shoe business, where we have Harold Alfond, Peter Lunder, Frank Rooney and Jim Issler in charge, I believe we will see a similar improvement over the next few years.
See’s Candies deserves a special comment, given that it achieved a record operating margin of 24% last year. Since we bought See’s for \$25 million in 1972, it has earned \$857 million pre-tax. And, despite its growth, the business has required very little additional capital. Give the credit for this performance to Chuck Huggins. Charlie and I put him in charge the day of our purchase, and his fanatical insistence on both product quality and friendly service has rewarded customers, employees and owners.
Chuck gets better every year. When he took charge of See’s at age 46, the company’s pre-tax profit, expressed in millions, was about 10% of his age. Today he’s 74, and the ratio has increased to 100%. Having discovered this mathematical relationship — let’s call it Huggins’ Law — Charlie and I now become giddy at the mere thought of Chuck’s birthday.
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Additional information about our various businesses is given on pages 39 - 54, where you will also find our segment earnings reported on a GAAP basis. In addition, on pages 63 - 69, 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.
Look-Through Earnings
Reported earnings are an inadequate 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 for our thinking 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 purchaseaccounting adjustments as well as capital gains and other major non-recurring items.
The following table sets forth our 1999 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 13, mostly under "Insurance Group: Net Investment Income.")
| Berkshire's Major Investees | Berkshire's Approximate Ownership at Yearend(1) | Berkshire's Share of Undistributed Operating Earnings (in millions)(2) |
| American Express Company | 11.3% | $228 |
| The Coca-Cola Company | 8.1% | 144 |
| Freddie Mac | 8.6% | 127 |
| The Gillette Company | 9.0% | 53 |
| M&T Bank | 6.5% | 17 |
| The Washington Post Company | 18.3% | 30 |
| Wells Fargo & Company | 3.6% | 108 |
| Berkshire's share of undistributed earnings of major investees | 707 | |
| Hypothetical tax on these undistributed investee earnings(3) | (99) | |
| Reported operating earnings of Berkshire | 1,318 | |
| Total look-through earnings of Berkshire | $ 1,926 | |
(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
Investments
Below we present our common stock investments. Those that had a market value of more than \$750 million at the end of 1999 are itemized.
| Shares | Company | 12/31/99 | |
| Cost* | Market | ||
| (dollars in millions) | |||
| 50,536,900 | American Express Company | $1,470 | $ 8,402 |
| 200,000,000 | The Coca-Cola Company | 1,299 | 11,650 |
| 59,559,300 | Freddie Mac | 294 | 2,803 |
| 96,000,000 | The Gillette Company | 600 | 3,954 |
| 1,727,765 | The Washington Post Company | 11 | 960 |
| 59,136,680 | Wells Fargo & Company | 349 | 2,391 |
| Others | 4,180 | 6,848 | |
| Total Common Stocks | $8,203 | $37,008 | |
* Represents tax-basis cost which, in aggregate, is \$691 million less than GAAP cost.
We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can’t — not at least with a high degree of conviction. This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.
Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise. For instance, we bring nothing to the table when it comes to evaluating patents, manufacturing processes or geological prospects. So we simply don’t get into judgments in those fields.
If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out.
Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That’s why we haven’t added to our present holdings. Nevertheless, we haven’t yet scaled back our portfolio in a major way: If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.
Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.
We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments.
If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future. If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.
Berkshire will someday have opportunities to deploy major amounts of cash in equity markets — we are confident of that. But, as the song goes, “Who knows where or when?” Meanwhile, if anyone starts explaining to you what is going on in the truly-manic portions of this “enchanted” market, you might remember still another line of song: “Fools give you reasons, wise men never try.”
Share Repurchases
Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests were rationally based, but a few leaned on spurious logic.
There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise, insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.
The business “needs” that I speak of are of two kinds: First, expenditures that a company must make to maintain its competitive position (e.g., the remodeling of stores at Helzberg’s) and, second, optional outlays, aimed at business growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey’s expansion into Idaho).
When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares. If a company’s stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management.
That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for \$1.10 is not good business for those who stick around.
Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They also know a whole lot more about them than I do. However, I can’t help but feel that too often today’s repurchases are dictated by management’s desire to “show confidence” or be in fashion rather than by a desire to enhance per-share value.
Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised. This “buy high, sell low” strategy is one many unfortunate investors have employed — but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.
Of course, both option grants and repurchases may make sense — but if that’s the case, it’s not because the two activities are logically related. Rationally, a company’s decision to repurchase shares or to issue them should stand on its own feet. Just because stock has been issued to satisfy options — or for any other reason — does not mean that stock should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value should be repurchased whether or not stock has previously been issued (or may be because of outstanding options).
You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities — though Berkshire’s trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say, 2% of a company’s shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at most — and even less if the funds could alternatively have been deployed in value-building moves.)
Some of the letters we’ve received clearly imply that the writer is unconcerned about intrinsic value considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer wants to sell tomorrow, his thinking makes sense — for him! — but if he intends to hold, he should instead hope the stock falls and trades in enough volume for us to buy a lot of it. That’s the only way a repurchase program can have any real benefit for a continuing shareholder.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders — and potential shareholders — the same valuation-related information we would wish to have if our positions were reversed.
Recently, when the A shares fell below \$45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock’s intrinsic value.
Shareholder-Designated Contributions
About 97.3% of all eligible shares participated in Berkshire's 1999 shareholder-designated contributions program, with contributions totaling \$17.2 million. A full description of the program appears on pages 70 - 71.
Cumulatively, over the 19 years of the program, Berkshire has made contributions of \$147 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 \$13.8 million in 1999, including in-kind donations of \$2.5 million.
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, 2000, will be ineligible for the 2000 program. When you get the contributions form from us, return it promptly so that it does not get put aside or forgotten. Designations received after the due date will not be honored.
The Annual Meeting
This year’s Woodstock Weekend for Capitalists will follow a format slightly different from that of recent years. We need to make a change because the Aksarben Coliseum, which served us well the past three years, is gradually being closed down. Therefore, we are relocating to the Civic Auditorium (which is on Capitol Avenue between 18 and 19 ,th th behind the Doubletree Hotel), the only other facility in Omaha offering the space we require.
The Civic, however, is located in downtown Omaha, and we would create a parking and traffic nightmare if we were to meet there on a weekday. We will, therefore, convene on Saturday, April 29, with the doors opening at 7 a.m., the movie beginning at 8:30 and the meeting itself commencing at 9:30. As in the past, we will run until 3:30 with a short break at noon for food, which will be available at the Civic’s concession stands.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we have again signed up American Express (800-799-6634) to give you special help. In our normal fashion, we will run buses from the larger hotels to the meeting. After the meeting, the buses will make trips back to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you are likely to find a car useful.
We have scheduled the meeting in 2002 and 2003 on the customary first Saturday in May. In 2001, however, the Civic is already booked on that Saturday, so we will meet on April 28. The Civic should fit our needs well on any weekend, since there will then be more than ample parking in nearby lots and garages as well as on streets. We will also be able to greatly enlarge the space we give exhibitors. So, overcoming my normal commercial reticence, I will see that you have a wide display of Berkshire products at the Civic that you can purchase. As a benchmark, in 1999 shareholders bought 3,059 pounds of See’s candy, \$16,155 of World Book Products, 1,928 pairs of Dexter shoes, 895 sets of Quikut knives, 1,752 golf balls with the Berkshire Hathaway logo and 3,446 items of Berkshire apparel. I know you can do better.
Last year, we also initiated the sale of at least eight fractions of Executive Jet aircraft. We will again have an array of models at the Omaha airport for your inspection on Saturday and Sunday. Ask an EJA representative at the Civic about viewing any of these planes.
Dairy Queen will also be on hand at the Civic and again will donate all proceeds to the Children’s Miracle Network. Last year we sold 4,586 Dilly® bars, fudge bars and vanilla/orange bars. Additionally, GEICO will have a booth that will be staffed by a number of our top counselors from around the country, all of them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to offer you a special shareholder’s discount. Bring the details of your existing insurance, and check out whether we can save you some money.
Finally, Ajit Jain and his associates will be on hand to offer both no-commission annuities and a liability policy with jumbo limits of a size rarely available elsewhere. Talk to Ajit and learn how to protect yourself and your family against a \$10 million judgment.
NFM’s newly remodeled complex, located on a 75-acre site on 72 Street between Dodge and Pacific, is open from nd 10 a.m. to 9 p.m. on weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays. This operation offers an unrivaled breadth of merchandise — furniture, electronics, appliances, carpets and computers — all at can’t-be-beat prices. In 1999 NFM did more than \$300 million of business at its 72 Street location, which in a metropolitan area of 675,000 nd is an absolute miracle. During the Thursday, April 27 to Monday, May 1 period, any shareholder presenting his or her meeting credential will receive a discount that is customarily given only to employees. We have offered this break to shareholders the last couple of years, and sales have been amazing. In last year’s five-day “Berkshire Weekend,” NFM’s volume was \$7.98 million, an increase of 26% from 1998 and 51% from 1997.
Borsheim’s — the largest jewelry store in the country except for Tiffany’s Manhattan store — will have two shareholder-only events. The first will be a champagne and dessert party from 6 p.m.-10 p.m. on Friday, April 28. The second, the main gala, will be from 9 a.m. to 6 p.m. on Sunday, April 30. On that day, Charlie and I will be on hand to sign sales tickets. Shareholder prices will be available Thursday through Monday, so if you wish to avoid the largest crowds, which will form on Friday evening and Sunday, come at other times and identify yourself as a shareholder. On Saturday, we will be open until 7 p.m. Borsheim’s operates on a gross margin that is fully twenty percentage points below that of its major rivals, so be prepared to be blown away by both our prices and selection.
In the mall outside of Borsheim’s, we will again have Bob Hamman — the best bridge player the game has ever seen — available to play with our shareholders on Sunday. We will also have a few other experts playing at additional tables. In 1999, we had more demand than tables, but we will cure that problem this year.
Patrick Wolff, twice US chess champion, will again be in the mall playing blindfolded against all comers. He tells me that he has never tried to play more than four games simultaneously while handicapped this way but might try to bump that limit to five or six this year. If you’re a chess fan, take Patrick on — but be sure to check his blindfold before your first move.
Gorat’s — my favorite steakhouse — will again be open exclusively for Berkshire shareholders on Sunday, April 30, and will be serving from 4 p.m. until about midnight. Please remember that you can’t come to Gorat’s on Sunday without a reservation. To make one, call 402-551-3733 on April 3 (but not before). If Sunday is sold out, try Gorat’s on one of the other evenings you will be in town. I make a “quality check” of Gorat’s about once a week and can report that their rare T-bone (with a double order of hash browns) is still unequaled throughout the country.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on Saturday night. This year the Omaha Golden Spikes will play the Iowa Cubs. Come early, because that’s when the real action takes place. Those who attended last year saw your Chairman pitch to Ernie Banks.
This encounter proved to be the titanic duel that the sports world had long awaited. After the first few pitches — which were not my best, but when have I ever thrown my best? — I fired a brushback at Ernie just to let him know who was in command. Ernie charged the mound, and I charged the plate. But a clash was avoided because we became exhausted before reaching each other.
Ernie was dissatisfied with his performance last year and has been studying the game films all winter. As you may know, Ernie had 512 home runs in his career as a Cub. Now that he has spotted telltale weaknesses in my delivery, he expects to get #513 on April 29. I, however, have learned new ways to disguise my “flutterball.” Come and watch this matchup.
I should add that I have extracted a promise from Ernie that he will not hit a “come-backer” at me since I would never be able to duck in time to avoid it. My reflexes are like Woody Allen’s, who said his were so slow that he was once hit by a car being pushed by two guys.
Our proxy statement contains instructions about obtaining tickets to the game and also a large quantity of other information that should help you enjoy your visit in Omaha. Join us at the Capitalist Caper on Capitol Avenue.
March 1, 2000
Warren E. Buffett
Chairman of the Board
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦公司的股东：
1999年我们的净资产增加了3.58亿美元，使A类股和B类股的每股账面价值均增长了0.5%。过去35年（即自现任管理层接手以来），每股账面价值从19美元增长至37,987美元，年复合增长率达24.0%。*
对面那页的数字显示，我们1999年的业绩有多糟糕。这是我任期内绝对表现最差的一年，与标普500相比，相对表现也是最差的。我们关注的是相对结果：长期来看，糟糕的相对数字会带来令人不满意的绝对结果。
就连傻瓜探长（Inspector Clouseau）也能找出去年的罪魁祸首：那就是你们的主席。我的表现让我想起那个成绩单上拿了四个F和一个D、却拥有一位善解人意教练的四分卫。“孩子，”教练慢悠悠地说，“我觉得你在那一科上花的时间太多了。”
我的“那一科”是资本配置，而我1999年的成绩绝对是个D。这一年最拖累我们的是伯克希尔股票投资组合的低劣表现——而该组合的责任，除了GEICO的Lou Simpson管理的一小部分外，完全在我。1999年，我们几家最大的被投资公司因经营业绩令人失望而远远落后于市场。我们仍然喜欢这些企业，并乐于在其中持有大额投资。但它们去年的失足损害了我们的表现，而且它们能否迅速重振旗鼓也并无把握。
1999年疲软业绩带来的后果是，我们股票价格的下跌幅度超过了应有关联。回顾一下，1998年股票表现优于企业表现。去年企业表现远好于股票表现，这种背离持续到了本信撰写之日。当然，长期来看，股票表现必须大致与企业表现相符。
尽管去年表现不佳，但查理·芒格（Charlie Munger），伯克希尔的副董事长兼我的合伙人，和我预期，未来十年伯克希尔内在价值的增长将适度超过持有标普500的收益。当然，我们无法保证这一点。但我们愿意用自己的钱来支持这一信念。再重复一遍你们以前听过的事实：我净资产的99%以上都投在伯克希尔。我和妻子从未卖出一股伯克希尔股票——除非我们的支票被退票——我们也没有这个打算。
请注意，我说的是希望“适度”超越标普500。对伯克希尔而言，真正大幅跑赢该指数已成过去。那种情况之所以存在，是因为过去我们可以用比现在便宜得多的价格买下企业和股票，而且当时的资本规模小得多，这让我们能考虑比今天多得多的投资机会。
我们对伯克希尔表现的乐观态度，也因另一预期而有所缓和——实际上在我们看来几乎是必然——即标普500在未来一二十年的表现将远不如1982年以来的水平。近期《财富》杂志的一篇文章阐述了我认为这为何不可避免的观点，我随本报告附上一份副本。
我们的目标是经营好现有业务——由于我们拥有出色的经理人，这项任务变得容易——并收购更多具有与现有业务类似经济特征和管理层的企业。1999年我们在这方面取得了重要进展，收购了Jordan's Furniture，并签约购买MidAmerican Energy的大部分股份。我们将在报告后面详细讨论这些公司，但在此强调一点：我们是用现金收购的，没有发行任何伯克希尔股票。这类交易并非总能实现，但查理和我最偏爱这种收购方式。
内在价值指南
我常在这些页面上谈论内在价值——这是一个关键但远非精确的衡量指标，我们在收购企业和普通股时都会用到它。（关于这个及其他投资与会计术语和概念的详细讨论，请参阅我们的《所有者手册》第55-62页。内在价值在第60页有论述。）
在过去的四份报告中，我们向您提供了一份我们认为有助于估算伯克希尔内在价值的表格。在下文该表格的更新版中，我们追溯了两个关键价值组成部分。第一列列出了我们每股拥有的投资额（包括现金及现金等价物，但不包括金融产品业务持有的资产），第二列显示了我们每股从伯克希尔运营业务中获得的税前收益（扣除利息和公司费用后，但未考虑购买会计调整——见第61页）。第二列不包括我们从第一列投资中实现的所有股息、利息和资本利得。实际上，这些列展示了如果伯克希尔被拆分为两部分，一部分持有我们的投资，另一部分经营我们所有业务并承担所有公司成本，它会是什么样子。
| 年份 | 每股投资额 | 每股税前收益（亏损）（不含所有投资收入） |
| 1969 | $ 45 | $ 4.39 |
| 1979 | 577 | 13.07 |
| 1989 | 7,200 | 108.86 |
| 1999 | 47,339 | (458.55) |
以下是这两个部分按十年的增长率：
| 截止十年末 | 每股投资额 | 每股税前收益（不含所有投资收入） |
| 1979 | 29.0% | 11.5% |
| 1989 | 28.7% | 23.6% |
| 1999 | 20.7% | 不适用 |
| 年增长率，1969-1999 | 25.4% | 不适用 |
1999年，我们的每股投资额变化很小，但运营收益却因一些消极因素压倒了一些强劲积极因素而分崩离析。我们大多数运营经理都值得得A，因为他们交出了出色的成绩单，并扩大了其业务内在价值与资产负债表上账面价值之间的差距。但与此相抵消的是，我们在通用再保险遭遇了一笔巨大的——而且我认为是反常的——承销亏损。此外，正如我们预测的那样，盖可保险的承销利润下降了。不过，盖可保险的整体表现非常出色，超越了我雄心勃勃的目标。
我们预计今年承销收益不会有任何显著改善。尽管盖可保险的内在价值应该会以非常令人满意的幅度增长，但其承销业绩几乎肯定会走弱。这是因为汽车保险公司作为一个群体，在2000年会表现更差，而且我们会大幅增加营销支出。在通用再保险，我们正在提高费率，如果2000年没有超级巨灾，公司的承销亏损应该会大幅下降。然而，费率上涨的全面效果需要一段时间才能显现，因此通用再保险很可能会经历又一个不尽如人意的承销年份。
您应该注意到，有一个项目定期扩大内在价值超过账面价值的幅度，那就是我们每年从收入中扣除的商誉摊销费用——目前这一金额约为5亿美元。这笔费用减少了我们作为资产列示的商誉，也减少了计入账面价值的部分。这是一个会计问题，与真正的经济商誉毫无关系——后者在大多数年份都在增长。但即使经济商誉保持不变，每年的摊销费用也会持续扩大内在价值与账面价值之间的差距。
尽管我们无法向您提供伯克希尔内在价值的精确数字，甚至连近似值也给不出，但查理和我可以向您保证，它远远超过我们578亿美元的账面价值。像喜诗糖果和《布法罗新闻报》这样的企业，如今的价值是我们账面上所记价值的15到20倍。我们的目标是持续在所有子公司中扩大这一差额。
您在别处永远读不到的管理故事
伯克希尔的经理人团队在几个重要方面都非同寻常。举个例子，这些男男女女中极高比例的人都已财务独立，在他们经营的企业中早就赚到了家产。他们工作既不是因为缺钱，也不是因为合同义务——我们在伯克希尔没有任何合同。相反，他们长期勤奋工作，是因为热爱自己的事业。我特意用了"他们的"这个词，因为这些经理人真正当家作主——奥马哈没有汇报展示会，没有需要总部批准的预算，也没有关于资本支出的指令。我们只要求经理人把公司当成自家唯一的资产来经营，并且未来一百年都如此。
查理和我在对待经理人时，努力遵循与对待伯克希尔股东相同的原则：如果我们角色互换，我们希望被怎样对待，我们就怎样对待他们。虽然"工作"对我个人财务而言毫无意义，但我喜欢在伯克希尔干活，原因很简单：它给我成就感，给我按自己认为合适的方式行事的自由，还给我每天与我喜欢和信任的人打交道的机会。我们的经理人——个个都是自己领域的出色艺术家——又怎么会看法不同呢？
在与伯克希尔的关系中，我们的经理人时常像是在遵循肯尼迪总统的训诫："不要问国家能为你做什么，要问你能为国家做什么。"去年就有一个了不起的故事：讲的是R. C. Willey，犹他州领先的家居用品零售商，伯克希尔在1995年从Bill Child（比尔·柴尔德）及其家族手中收购了它。比尔和大部分经理人是摩门教徒，因此R. C. Willey的店铺周日从不营业。这是一种很难做的生意：周日是很多顾客最喜欢的购物日。但比尔坚持原则——与此同时，他把生意从1954年接手时的年销售额25万美元，做到了1999年的3.42亿美元。
比尔觉得R. C. Willey可以在犹他州以外的市场成功经营，1997年他提议我们在博伊西开一家店。我对此高度怀疑——把周日不营业的政策带到新地盘，去跟那些一周七天开门迎客的根深蒂固的对手竞争。不过，这毕竟是比尔的生意，由他做主。所以，尽管有保留意见，我还是告诉他：按你的商业判断和宗教信仰去办吧。
接着，比尔提出了一个真正非同寻常的提议：他个人出资买地并建店——最后花了大约900万美元——如果证明成功，就按成本价卖给我们。反之，如果销售额不及他的预期，我们可以退出这笔生意，不用付给比尔一分钱。当然，这种情况下他就要在一栋空置建筑上砸下巨额投资。我告诉他，我很感激他的提议，但觉得如果伯克希尔要享受好处，也应该承担风险。比尔坚决不同意：如果失败是因为他的宗教信仰造成的，那他情愿个人承担损失。
那家店去年8月开业，立刻大获成功。于是比尔把房产转给我们——连同一块大幅增值的额外土地——我们按他的成本价给他开了张支票。您猜怎么着：比尔拒绝收取他在那两年间所占用资金的一分钱利息。
如果哪位管理者在其他上市公司也有类似表现，我还没听说过。各位不难理解，能与比尔·蔡尔德这样的人共事，为什么我每天早晨都跳着踢踏舞去上班。
************
补充说明：八月份我们"软"开业后，大约一个月后在博伊西店举行了盛大开业典礼。自然，我去那里剪彩了（我想强调，你们的董事长还是有点用处的）。在讲话中，我告诉观众销售额如何远超预期，使我们毫无悬念地成为爱达荷州最大的家居用品店。然后，随着演讲的进行，我的记忆奇迹般地开始恢复。到讲话结束时，我全都想起来了：在博伊西开店本来就是我的主意。
财产/意外险的经济学
我们的主要业务——尽管还有其他重要业务——是保险。因此，要理解伯克希尔，你必须懂得如何评估一家保险公司。关键决定因素有：(1) 业务产生的浮存金规模；(2) 浮存金的成本；以及 (3) 最关键的一点——这两项因素的长期前景。
首先，浮存金是我们持有但不拥有的资金。在保险业务中，浮存金之所以产生，是因为保费在赔付发生之前就已收取，这个间隔有时会持续多年。在此期间，保险公司将这笔资金用于投资。这种令人愉快的活动通常有一个缺点：保险公司收取的保费通常不足以覆盖它最终必须支付的损失和费用。这就导致它产生"承保亏损"，也就是浮存金的成本。一家保险公司如果其浮存金成本长期低于公司通过其他方式获取资金所需付出的成本，那它就有价值。但如果浮存金成本高于市场资金利率，那这门生意就是个柠檬。
这里需要提醒一点：由于损失成本必须估算，保险公司在计算其承保结果时有很大的自由度，这使得投资者很难计算公司的真实浮存金成本。估算错误——通常是无心的，但有时并非如此——可能规模巨大。这些误算的后果会直接反映在盈利中。经验丰富的观察者通常能发现准备金方面的大规模错误，但普通公众通常只能接受所呈现的数据，而有时我对知名审计师默认认可的数字感到惊讶。1999年，多家保险公司宣布准备金调整，这让投资者此前在做出买卖决策时所依赖的"盈利"成了笑话。在伯克希尔，我们在准备金计提上力求保守和一贯。即便如此，我们也要提醒大家：不愉快的意外随时可能发生。
下表显示了自33年前我们收购国民 indemnity 公司（其传统险种包含在"其他主险"板块中）进入保险业务以来，伯克希尔保险各板块产生的浮存金（按间隔年份列出）。对于该表，我们通过加计未决赔款准备金、理赔费用准备金、分保接受项下持有资金和未赚保费准备金，再减去代理人余额、预付收购成本、预付税款和适用于分保接受的递延费用，来计算我们的浮存金（我们相对于保费规模产生了大量浮存金）。（明白了吗？）
年末浮存金（单位：百万美元）
| 年份 | GEICO | 通用再保险 | 其他再保险 | 其他直接保险 | 总计 |
| 1967 | 20 | 20 | |||
| 1977 | 40 | 131 | 171 | ||
| 1987 | 701 | 807 | 1,508 | ||
| 1997 | 2,917 | 4,014 | 455 | 7,386 | |
| 1998 | 3,125 | 14,909 | 4,305 | 415 | 22,754 |
| 1999 | 3,444 | 15,166 | 6,285 | 403 | 25,298 |
浮存金的增长固然重要，但其成本才是关键。多年来，我们通常只录得少量承销亏损——这意味着我们的浮存金成本也相应很低——甚至实际录得承销利润，也就是说，我们持有别人的钱还能收钱。事实上，截至1998年，我们的累计结果都是承销利润。然而，1999年我们却出现了14亿美元的承销亏损，导致浮存金成本达到5.8%。有一点勉强算安慰：我们热情地欢迎了这4亿美元的亏损，因为它来自于未来十年将为我们带来异常丰厚浮存金的业务。但其余亏损则完全不讨人喜欢，我们的整体结果必须被评价为极其糟糕。除非发生超级巨灾，我们预计2000年的浮存金成本会下降，但任何下降都会被我们在GEICO（政府雇员保险公司）的激进计划所缓和，这一点我们后面再谈。
多年来，有好几位人士值得称赞，因为他们生产了这么多的"零成本"浮存金。首当其冲的是Ajit Jain。无论怎样强调Ajit对伯克希尔的价值都不为过：他从零开始建立了一家杰出的再保险业务，在他任职期间，这项业务不仅录得了承销利润，如今还持有63亿美元的浮存金。
在Ajit身上，我们找到了一位具备以下特质的承销商：他拥有正确评估大多数风险的智慧；有自知之明，能果断放弃他无法评估的风险；当保费合适时，有勇气承保大额保单；当保费不足时，有纪律拒绝哪怕最小的风险。很少有人能拥有其中任何一项才能，而一个人能集所有于一身，则堪称非凡。
由于Ajit专攻超级巨灾再保险，这一险种损失不常发生，但一旦发生则极为巨大，因此他的业务肯定比大多数保险业务波动性大得多。迄今为止，我们在这份波动剧烈的业务上运气不错。即便如此，Ajit的成就依然真正卓越。
规模较小但同样重要的是，我们的"其他直接保险"业务也为伯克希尔的内在价值做出了贡献。过去五年，这群保险公司在为我们提供表格所示浮存金的同时，还带来了1.92亿美元的承销利润。在保险界，这样的结果并不常见，为此我们感谢Rod Eldred、Brad Kinstler、John Kizer、Don Towle和Don Wurster。
正如我之前提到的，通用再保险业务在1999年承销业绩特别糟糕（尽管投资收益使公司保持了良好的盈余）。我们的业务在国内外都被极其低估了定价，这种情况正在改善但尚未纠正。不过，随着时间的推移，该公司应该能发展出越来越多低成本浮存金。在通用再保险及其科隆子公司，员工激励补偿计划现在已直接与浮存金增长和浮存金成本这两个变量挂钩，而正是这两个变量决定了所有者价值。
即使再保险公司拥有高度聚焦且合理的薪酬体系，也不能指望年年都顺风顺水。再保险是一个波动性极大的行业，通用再保险和阿吉特的业务都无法幸免于行业内不合理的定价行为。但通用再保险拥有分销网络、承销技能、企业文化，再加上伯克希尔的支持，以及财务实力，足以成为全球最赚钱的再保险公司。实现这一目标需要时间、精力和纪律，但我们毫不怀疑罗恩·弗格森和他的团队能够做到。
GEICO（1-800-847-7536 或 GEICO.com）
GEICO在1999年取得了非凡的进展。原因很简单：我们有一个出色的商业创意，并由一位杰出的经理人托尼·奈斯利来执行。伯克希尔在1996年初收购GEICO时，我们把钥匙交给了托尼，要求他全权运营，就像他100%拥有这家公司一样。剩下的就由他来做了。看看他的成绩单：
| 年份 | 新增汽车保单(1)(2) | 有效汽车保单(1) |
| 1993 | 346,882 | 2,011,055 |
| 1994 | 384,217 | 2,147,549 |
| 1995 | 443,539 | 2,310,037 |
| 1996 | 592,300 | 2,543,699 |
| 1997 | 868,430 | 2,949,439 |
| 1998 | 1,249,875 | 3,562,644 |
| 1999 | 1,648,095 | 4,328,900 |
仅限“自愿”投保；不包括指定风险等。(1)
已修正，排除了从一家GEICO公司转移到另一家的保单。(2)
1995年，GEICO在营销上花费了3,300万美元，拥有652名电话顾问。去年，公司花费了2.42亿美元，顾问人数增长到2,631人。而且我们才刚刚开始：2000年的节奏将大幅加快。事实上，如果我们知道能够顺利处理业务，并且预期最后一美元的花费能够以有吸引力的成本带来新业务，我们很乐意每年在营销上投入10亿美元。
目前有两个趋势影响了获取成本。坏消息是，获取客户咨询的费用更高了。媒体费率上升了，同时我们也看到了边际收益递减——也就是说，随着我们和竞争对手都加大广告投入，每个广告带来的咨询数量对所有公司都在下降。不过，这些负面因素在一定程度上被一个事实所抵消：我们的成交率——即咨询转化为销售的比例——在稳步提高。总体而言，我们相信，尽管新业务的成本确实在上升，但远低于行业平均水平。更重要的是，我们在续期业务上的运营成本是所有大型全国性汽车保险公司中最低的。这两大竞争优势都是可持续的。其他人或许可以复制我们的模式，但无法复制我们的经济效益。
上表似乎显示GEICO的保单持有人留存率在下降，但有两个原因使表象具有欺骗性。首先，在过去几年里，我们的业务结构从行业留存率较高的“优选”保单持有人转向了留存率低得多的“标准”和“非标准”保单持有人。（尽管名称不同，这三类保单持有人的盈利前景相似。）其次，相对较新的保单持有人的留存率总是低于老客户——而由于我们的快速增长，新客户在保单持有人中的比例提高了。如果调整这两个因素，我们的留存率几乎没有变化。
去年我们告诉过您，GEICO和整个行业的承销利润都会在1999年下降，事实确实如此。对于2000年，我们做出同样的预测。几年前，受益于一场意外且非比寻常的事故频率和严重程度下降，承销利润变得过高。行业随之降低费率，但如今却不得不应对损失成本的上升。我们不会惊讶地看到，汽车保险公司的承销利润在2000年恶化大约三个百分点。
除了事故频率和严重程度恶化，今年还有两个负面因素将损害行业。第一，费率上调生效缓慢——既因为监管延迟，也因为在新费率可实施前，保险合同必须到期。第二，许多汽车保险公司报告的前几年利润得益于准备金释放，而这之所以可能，是因为公司在更早年份高估了损失成本。这一冗余准备金的水库如今已基本干涸，未来来自这一来源的利润提振最多只会是小打小闹。
在补偿员工方面——从Tony往下——GEICO继续使用两个变量，且只有两个，来决定奖金和利润分享贡献的金额：(1) 保单持有人的百分比增长，以及(2) 其“老业务”的盈利情况，即保单生效超过一年的业务。我们在1999年这两方面都做得非常出色，因此向绝大多数员工支付了占工资28.4%的利润分享金（总计1.133亿美元）。Tony和我喜欢开那些支票。
在伯克希尔，我们希望薪酬政策既容易理解，又与我们希望员工达成的目标同步。承揽新业务是昂贵的（而且如前所述，越来越贵）。如果我们把这些成本纳入奖金计算——就像我们接手GEICO之前管理层做的那样——我们就会因员工争取新保单而惩罚他们，尽管这些保单非常符合伯克希尔的利益。所以，实际上，我们对我们员工说，我们会为新业务买单。的确，因为保单持有人百分比增长是我们薪酬计划的一部分，我们奖励员工产生这种最初不盈利的业务。然后我们再额外奖励他们为老业务降低成本。
尽管我们做了大量广告，但我们新业务的最佳来源还是现有保单持有人的口碑推荐，这些保单持有人总体上对我们的价格和服务感到满意。《Kiplinger's Personal Finance Magazine》去年发表的一篇文章很好地描绘了我们在客户满意度方面的位置：该杂志对20个州保险部门的调查显示，GEICO的投诉比率远低于其主要竞争对手中的大多数。
我们强大的推荐业务意味着，我们可能只需每年花费5000万美元的广告费就能维持保单数量。当然，这只是猜测，我们永远不会知道它是否准确，因为托尼的脚会一直踩在广告油门上（而我的脚会踩在他的脚上）。尽管如此，我想强调的是，我们在2000年将花费的3亿至3.5亿美元广告中的很大一部分，以及我们还将为销售顾问、通信设施和基础设施承担的巨额外加成本，都是我们选择承担的任意性支出——这样我们才能实现显著增长，并在美国人心中延伸和巩固GEICO品牌的承诺。
个人认为，这些支出是伯克希尔能做的最佳投资。通过广告投放，GEICO正与大量家庭建立直接关系——这些家庭平均每年会向我们支付1,100美元。这使我们在全美所有销售各类商品的公司中，成为领先的直销商之一。此外，随着我们与越来越多家庭建立长期关系，现金正源源不断地流入而非流出（这里没有互联网经济学那一套）。去年，GEICO的客户基础增加了766,256人，同时从经营利润和浮存金增长中获得了5.9亿美元现金。
过去三年，我们在个人车险市场的份额从2.7%提升至4.1%。但我们理应走进更多家庭——也许包括你家。给我们打个电话试试看。大约40%查询我们费率的人发现，与我们交易可以省钱。这个比例不是100%，因为保险公司的承销判断各有不同，有些公司对居住在某些地区或从事某些职业的驾驶人给予的折扣比我们更多。不过，我们的成交率表明，在面向所有投保人的全国性保险公司中，我们提供低价方案的频率最高。此外，在40个州，我们可以向股东提供特别折扣——通常为8%。请务必表明自己是伯克希尔股东，这样我们的销售顾问就能做出相应调整。
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我怀着悲伤的心情向各位报告，GEICO前董事长Lorimer Davidson于去年11月去世，距他97岁生日仅几天之隔。对GEICO而言，戴维（Davy）是一位商业巨人，他把公司带入了大联盟。对我而言，他是朋友、导师，也是英雄。我在以往的报告中曾提及他一生的善意。显然，如果我的生命中不曾有他，我的人生轨迹将截然不同。托尼（Tony）、卢·辛普森（Lou Simpson）和我8月曾拜访戴维，惊叹于他思维的敏锐——尤其在与GEICO相关的一切事务上。他一直力挺公司直到最后一刻，我们将永远怀念他。
航空服务
我们的两家航空服务公司——FlightSafety International（简称"FSI"）和Executive Jet Aviation（简称"EJA"）——在其各自领域都是遥遥领先的霸主。EJA通过其NetJets®项目销售和管理公务机分时所有权，规模超过其后两位竞争对手的总和。FSI负责培训飞行员（以及其他运输专业人士），规模约为其最接近竞争对手的五倍。
这两家公司的另一个共同点是，它们仍由创始企业家管理。Al Ueltschi于1951年用1万美元创办了FSI，Rich Santulli则在1986年开创了分时所有权行业。这两位都是杰出的管理者，他们无需为钱工作，却乐在其中，致力于帮助公司成长并超越自我。
尽管这两项业务具有相似的领导地位，但它们的经济特征截然不同。FSI需要投入巨额资本。一台飞行模拟器的成本高达1,500万美元，而我们拥有222台。此外，一台模拟器每次只能培训一人，这意味着FSI每美元收入的资本投入极高。因此，若想获得合理的资本回报，营业利润率也必须很高。去年，我们在FSI及其持股50%的附属公司FlightSafety Boeing上投入了2.15亿美元资本支出。
与EJA不同，EJA的客户拥有飞机所有权，当然，我们自身也必须投资一支核心机队，以确保提供卓越服务。例如，感恩节后的那个周日是EJA一年中最繁忙的一天，我们的资源会变得紧张——因为1,412位客户共同拥有169架飞机的部分所有权，其中许多人铁了心要在下午3点到6点之间飞回家。在那一天以及某些其他日子，我们需要一批公司自有机队来确保所有客户都能在想要的时间到达想去的地方。
不过，我们执飞的大多数飞机仍归客户所有，这意味着这项业务的微薄税前利润率仍能带来可观的净资产收益率。目前，客户拥有的飞机价值超过20亿美元，此外我们还有42亿美元的飞机订单。事实上，当前制约我们业务发展的因素是飞机的供应量。我们目前接收的飞机约占全球所有公务机制造量的8%，而我们希望能拿到更大的份额。尽管1999年EJA受供应限制，但其经常性收入——月度管理费加上每小时飞行费——仍增长了46%。
分时所有权行业仍处于萌芽期。EJA目前正在欧洲建立关键规模，随着时间的推移，我们将向全球扩张。这样做代价高昂——非常高昂——但我们会不惜代价。规模对我们和客户都至关重要：在全球拥有最多在飞飞机的公司，才能为客户提供最佳服务。"买一份所有权，得到一支机队"在EJA是实实在在的承诺。
EJA还拥有另一项重要优势：其两个最大的竞争对手都是飞机制造商的子公司，只销售它们母公司制造的飞机。这些飞机固然不错，但竞争对手在客舱风格和任务能力方面受到极大限制。相比之下，EJA提供来自五家供应商的多种飞机。因此，我们能给客户一切他需要购买的东西——而不是让他买到竞争对手母公司需要卖的东西。
去年在这份报告中，我描述了我们家从1995年起拥有的一架豪客1000的四分之一所有权（每年200飞行小时）所带来的喜悦。我被自己的文字煽动得热血沸腾，随后又签约买了一架赛斯纳V Ultra的十六分之一所有权。现在，我每年在EJA和Borsheim's的总支出加起来是我年薪的十倍。你们可以把这个当作自己在我们这里消费的粗略参考。
过去一年，伯克希尔的两位外部董事也签约加入了EJA。（也许我们付给他们太多了）。但你们要知道，他们和我购买飞机和服务时支付的价格与其他任何客户完全一样：EJA奉行"最惠国待遇"政策，没有人能拿到特殊优惠。
现在，请坐稳了。去年，EJA通过了终极考验：查理签约了。没有比这更有力的背书来证明EJA服务的价值了。请致电1-800-848-6436，索取我们关于分时所有权的"白皮书"。
1999年的收购
在GEICO和Executive Jet，我们新客户的最佳来源就是已经满意了的现有客户。事实上，大约65%的新飞机所有者来自现有客户的推荐——这些客户已经爱上了我们的服务。
我们的收购通常以同样的方式展开。在其他公司，高管们可能会与投资银行家一起投入寻找收购机会，利用一种已经标准化的拍卖流程。在这场游戏中，银行家们会准备一本“书”，让我想起小时候的超人漫画。在华尔街版本中，一家曾经温文尔雅的公司从投资银行家的电话亭里一跃而出，能够轻松跨越竞争者，盈利增长快过飞驰的子弹。被这本书对收购目标的描述撩拨得心痒难耐的CEO们——外表冷静的皮囊底下，个个都是露易丝·莱恩——立马就晕倒过去。
这些书里最有趣的地方，是它们对未来多年盈利预估的精确程度。然而，如果你问这位写书的银行家，他自己的公司下个月能赚多少钱，他会蜷缩起来防御，告诉你商业和市场太不确定了，他不敢贸然预测。
有一个故事我忍不住要讲：1985年，一家大型投资银行试图出售斯科特·费泽（Scott Fetzer），广泛地推销——但无功而返。看到这次三振出局的消息后，我写信给当时以及现在的斯科特·费泽CEO拉尔夫·谢伊（Ralph Schey），表示想收购这家公司。我从未见过拉尔夫，但一周之内我们就达成了交易。不幸的是，斯科特·费泽与那家银行签订的委托书规定，即使银行没有参与寻找买家，出售时也要支付250万美元的费用。我猜那位首席银行家觉得自己总得做点什么来换取这笔报酬，于是慷慨地送给我们一本他的公司为斯科特·费泽准备的那本“书”。以他一贯的机智，查理回应道：“我宁愿付250万美元不去读它。”
在伯克希尔，我们精心设计的收购策略很简单：等待电话铃响。幸运的是，电话有时确实会响，通常是因为之前卖给我们公司的经理向朋友推荐，让他考虑效仿。
这就说到家具生意了。两年前我讲过，1983年收购内布拉斯加家具城（Nebraska Furniture Mart）以及随后我与布卢姆金家族的交往，如何引出了后续与R.C.威尔利（R. C. Willey，1995年）和星辰家具（Star Furniture，1997年）的交易。对我来说，这些关系都非常棒。伯克希尔不仅收购了三家杰出的零售商，这些交易还让我与一些你能遇到的最好的人成为了朋友。
自然，我不断问布卢姆金家族、比尔·蔡尔德（Bill Child）和梅尔文·沃尔夫（Melvyn Wolff），还有没有像你们这样的人？他们总是回答：新英格兰地区的塔特尔曼兄弟（Tatelman）和他们非凡的家具业务——乔丹家具（Jordan's）。
去年我见到了巴里·塔特尔曼（Barry Tatelman）和埃利奥特·塔特尔曼（Eliot Tatelman），很快我们就签署了伯克希尔收购该公司的协议。与我们之前的三次家具收购一样，这家企业长期由家族经营——这次是从1927年开始，当时巴里和埃利奥特的祖父在波士顿郊区开始创业。在兄弟二人的管理下，乔丹家具在其所在区域越来越占据主导地位，成为新罕布什尔州和马萨诸塞州最大的家具零售商。
塔特尔曼兄弟不只是卖家具或经营门店。他们还为客户提供一种令人眼花缭乱的娱乐体验，名为“购物娱乐”（shoppertainment）。一个家庭到店里，可以度过一段美妙时光，同时欣赏到品类极其丰富的商品。经营成果也极其出色：乔丹家具的每平方英尺销售额在美国所有大型家具商中是最高的。如果你在波士顿地区，我强烈建议你光顾他们的门店——特别是位于纳蒂克的那家，那是乔丹家具最新开的一家。记得带上钱。
巴里和艾略特是很有品位的人——就像伯克希尔旗下另外三家家具业务的管理者一样。他们决定把乔丹家具卖给我们时，主动提出要向每一位员工支付他们为乔丹工作期间每小时至少50美分的奖励。这笔钱总额达900万美元，全部来自塔特尔曼家族自己的腰包，而不是伯克希尔的。巴里和艾略特开这些支票时还乐在其中。
我们旗下的每家家具业务都在各自区域排名第一。现在我们在马萨诸塞、新罕布什尔、得克萨斯、内布拉斯加、犹他和爱达荷州卖出的家具比任何其他公司都多。去年，Star的梅尔文·沃尔夫和他妹妹雪莉·图米姆取得了两大成功：打入圣安东尼奥市场，以及大幅扩建Star在奥斯汀的门店。
整个家具零售行业里，没有哪家公司的业务版图能和伯克希尔拼凑起来的这个组合相提并论。这让我乐在其中，也让你们赚钱。W. C. Fields曾说过：“是女人把我逼到借酒浇愁的份上，但不幸的是，我从没机会谢谢她。”我不想犯同样的错误。我要感谢路易、罗恩和欧文·布鲁姆金，是他们带我走进家具行业，并在我组建现在这个团队的过程中给了我精准的指引。
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接下来，说说我们的第二笔收购交易：这笔生意是通过我的好朋友、Level 3 Communications（第三层通信公司）董事长兼伯克希尔董事沃尔特·斯科特二世找上门的。沃尔特还有许多其他商业关系，其中一个是中美能源（MidAmerican Energy），他持有这家公用事业公司大量股份并担任其董事。去年九月，我们一起参加加州的一个会议时，沃尔特随口问我，伯克希尔是否有兴趣对中美能源进行大额投资。从一开始，我就觉得和沃尔特合伙是个好主意。回到奥马哈后，我读了一些中美能源的公开报告，并与沃尔特和该公司能干且有企业家精神的CEO戴维·索科尔开了两次短会。随后我说，在价格合适的情况下，我们确实愿意做这笔交易。
电力公用事业行业的收购因各种法规而变得复杂，包括1935年《公用事业控股公司法》。因此，我们设计了一笔能避免伯克希尔获得投票控制权的交易。我们买入的是一笔11%的固定收益证券，外加普通股和可交换优先股，这些将使伯克希尔拥有中美能源不到10%的投票权，但大约76%的股权权益。总投资额约为20亿美元。
沃尔特一如既往地用真金白银支持他的判断：交易完成后，他和他的家人将用现金购买更多中美能源股票，使他们的总投资达到约2.8亿美元。沃尔特还将成为公司的控股股东，我想不出有比他更合适的人选来担任此职。
尽管公用事业行业监管限制很多，但我们未来可能还会在这一领域追加投资。如果这样做，涉及的金额可能会很大。
收购会计
再次，我想就会计问题说几句，这次是关于它在收购中的应用。当前这个话题争议很大，尘埃落定之前，国会甚至可能插手干预（这简直是个糟糕透顶的主意）。
当一家公司被收购时，目前公认会计准则（GAAP）允许以两种截然不同的方式记录交易：“购买法”和“权益结合法”。采用权益结合法时，股票必须作为支付货币；采用购买法时，可以现金或股票支付。无论支付何种货币，管理层通常厌恶购买会计法，因为它几乎总要设立一个“商誉”账户，随后逐年摊销——这一过程会使利润表背上通常持续数十年的巨额年度费用。相反，权益结合法避免了商誉账户的设置，这正是管理层偏爱它的原因。
如今，财务会计准则委员会（FASB）提议终止权益结合法，许多CEO正在集结备战。这将是一场重要的较量，所以我们斗胆发表一些看法。首先，我们同意许多管理者的观点：商誉摊销费用通常是一种虚假负担。你可以在我们1983年年报的附录中找到关于这一点的思考（年报可在我们网站上查阅），也可以参考《所有者手册》第55-62页。
会计准则强制要求摊销，而这在通常情况下与事实相悖，这是非常棘手的问题：大部分会计费用都与实际发生的情况相关，即便它们无法精确衡量。举例来说，折旧费用无法精确反映实物资产价值的下降，但这些费用至少描述了某种真实发生的事：实物资产总会不断衰败。相应地，存货跌价费用、应收账款坏账费用以及保修预提费用，都属于反映真实成本的项目。这些费用的年度金额无法准确计量，但对其做出估算的必要性显而易见。
相比之下，经济商誉在很多情况下并不会减少。事实上，在大量案例中——也许在多数情况下——它的价值反而会随时间增长。从性质上看，经济商誉很像土地：这两种资产的价值必然会波动，但价值走向绝不是注定的。以喜诗糖果为例，经济商誉在78年间以不规律但非常可观的方式增长。如果我们经营得当，这种增长很可能至少再持续78年。
为了逃避商誉摊销的虚假负担，管理层又拥抱了权益结合法的虚构性。这一会计惯例建立在一种诗意的概念上：当两条河流汇合时，它们的流水变得难以区分。按照这一概念，并入更大企业的那家公司并未被“购买”（尽管它通常收到了巨额的“卖断”溢价）。因此，不会产生商誉，那些恼人的后续利润表费用也得以消除。取而代之的是，存续实体的会计处理仿佛这两家企业从一开始就是一体。
诗意就说到这里。并购的现实往往大相径庭：毫无疑问存在收购方和被收购方，而且后者是被“购买”的——无论交易结构如何安排。如果你对此有异议，不妨问问那些被裁掉的员工，哪家公司是征服者，哪家又是被征服者。你会发现答案毫无困惑。所以，财务会计准则委员会在这点上是对的：在大多数并购中，购买行为确实发生了。没错，确实存在一些真正的“对等合并”，但这种情况少之又少。
查理和我认为，有一种基于现实的方法，既能满足财务会计准则委员会（FASB）正确记录收购的期望，又能回应管理层对商誉减值这一无意义费用的反对。我们首先让收购公司以公允价值记录其收购价格——无论以股票还是现金支付。在大多数情况下，这种做法会产生一笔代表经济商誉的庞大资产。然后我们将这笔资产留在账面上，不要求其摊销。此后，如果经济商誉发生减值（有时确实会发生），就同其他被判定减值的资产一样进行减记。
如果我们的提议规则被采纳，应当追溯适用，以使全美的收购会计处理保持一致——这与现状相去甚远。一个预测：如果这一计划生效，管理层将更明智地构建收购，决定使用现金还是股票时，依据的是对股东的实际后果，而非对报告盈利的虚幻影响。
在收购Jordan's时，我们遵循了一个程序，该程序能为股东最大化地产生现金，但会最小化我们向你们报告盈利。伯克希尔以现金收购资产，这种方式在我们的纳税申报表中允许我们将由此产生的商誉在15年内摊销。显然，这一税收抵扣大幅增加了该业务产生的现金量。相比之下，当用现金收购股票（而非资产）时，由此产生的商誉冲销不可抵税。这两种方式之间的经济差异是巨大的。
从收购公司的经济角度看，最糟糕的交易是股票换股票收购。在这种情况下，通常支付了巨额价格，但被收购方股票或资产的税基没有任何提升。如果被收购实体随后被出售，其所有者可能需要缴纳大笔资本利得税（税率高达35%或更高），即使这次出售实际上可能造成了重大经济亏损。
我们在伯克希尔做过一些交易，其税收结构远非最优。这些交易之所以发生，是因为卖方坚持特定的结构，而且从整体看，我们仍然觉得收购是合理的。然而，我们从未为了美化数字而做过结构低效的交易。
报告盈利的来源
下表显示了伯克希尔报告盈利的主要来源。在此呈现中，收购会计调整不分配到所适用的具体业务，而是汇总后单独列示。这种程序使你们能够看到我们各业务在未收购情况下的盈利表现。由于第61页讨论的原因，我们认为这种呈现方式对投资者和管理者比使用美国通用会计准则（GAAP）更有用，因为后一种方法要求逐业务冲销收购溢价。当然，表中显示的总盈利与经审计财务报表中的GAAP总额相同。
| （单位：百万美元） | ||||
| 税前利润 | 伯克希尔应占净利润（扣除税项及少数股东权益后） | |||
| 1999年 | 1998年 | 1999年 | 1998年 | |
| 经营利润： | ||||
| 保险集团： | ||||
| 承销 — 再保险 | $(1,440) | $(21) | $(927) | $(14) |
| 承销 — GEICO | 24 | 269 | 16 | 175 |
| 承销 — 其他原保险 | 22 | 17 | 14 | 10 |
| 净投资收益 | 2,482 | 974 | 1,764 | 731 |
| 布法罗新闻报 | 55 | 53 | 34 | 32 |
| 金融及金融产品业务 | 125 | 205(1) | 86 | 133(1) |
| 飞行服务 | 225(2) | 181(1) | 132(2) | 110(1) |
| 家居用品 | 79 | 72 | 46 | 41 |
| 国际乳品皇后 | 56 | 58 | 35 | 35 |
| 珠宝 | 51 | 39 | 31 | 23 |
| 斯科特-费策（不含金融业务） | 147 | 137 | 92 | 85 |
| 喜诗糖果 | 74 | 62 | 46 | 40 |
| 鞋业集团 | 17 | 33 | 11 | 23 |
| 收购会计调整 | (739) | (123) | (648) | (118) |
| 利息费用(3) | (109) | (100) | (70) | (63) |
| 股东指定捐赠 | (17) | (17)(4) | (11) | (11)(4) |
| 其他 | 33 | 60 | 20 | 45 |
| 经营利润 | 1,085 | 1,899 | 671 | 1,277 |
| 投资资本利得 | 1,365 | 2,415 | 886 | 1,553 |
| 所有实体总收益 | $2,450 | $4,314 | $1,557 | $2,830 |
包含自1998年8月7日起的Executive Jet。(1)
包含自1999年11月13日起的Jordan's Furniture。(2)
不含金融业务的利息费用。(3)
包含1998年十天的通用再保险业绩。(4)
1999年，我们几乎所有的制造、零售和服务业务都取得了出色的业绩。唯一的例外是Dexter鞋业，而那里的业绩落差并非管理问题所致：论技能、精力和对工作的投入，Dexter的管理层丝毫不逊色于我们其他的经理人。但问题在于我们主要在美国生产鞋子，而本土制造商已经极难有效竞争。1999年，美国购买的13亿双鞋中约93%来自海外，那些地方盛行极低的劳动力成本。
算上Dexter和H. H. Brown，我们目前是美国最大的制鞋商，未来也很有可能继续保持。我们在美国的工厂拥有一批忠诚且技术娴熟的工人，我们希望能尽最大努力保住这里的每一个岗位。但为了生存下去，我们不得不将更多产量外包到国际市场。在此过程中，我们承担了巨额的解雇补偿和搬迁成本，这些已包含在表格所列的收益中。
几年前，我们旗下拥有200家门店的Helzberg珠宝业务需要调整经营策略，才能把利润率恢复到合理水平。在Jeff Comment的领导下，这项任务已经完成，利润也大幅回升。而在鞋业业务上，我们有Harold Alfond、Peter Lunder、Frank Rooney和Jim Issler掌舵，我相信未来几年我们也会看到类似的改善。
喜诗糖果值得一提——去年它的经营利润率达到了创纪录的24%。自1972年我们以2500万美元收购喜诗以来，这家公司已累计实现税前利润8.57亿美元。而且，尽管规模增长，这项业务所需的额外资本却极少。这一切功劳归于Chuck Huggins。查理和我在收购当天就让他负责，他对产品质量和友好服务近乎狂热的坚持，回报了顾客、员工和所有者。
Chuck一年比一年优秀。他46岁接管喜诗时，公司的税前利润（以百万美元计）大约是他年龄的10%。如今他74岁，这个比例已升至100%。发现了这一数学关系——我们姑且称之为“哈金斯定律”——之后，查理和我如今一想到Chuck的生日就兴奋得头晕目眩。
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关于我们各项业务的更多信息见第39-54页，那里也列出了按美国通用会计准则报告的部门利润。此外，在第63-69页，我们按非美国通用会计准则将伯克希尔的财务数据重新划分为四个板块，这种呈现方式对应于查理和我对公司的思考方式。
透视盈余
报告利润不足以衡量伯克希尔的经济进步，部分原因在于前面表格中显示的金额只包含我们从被投资公司收到的股息——尽管这些股息通常仅占我们持股对应利润的一小部分。我们倒并不介意这种资金分配方式，因为总体而言，我们认为被投资公司未分配的利润对我们来说比已分配的部分更有价值。原因很简单：我们的被投资公司往往有机会以高回报率将利润进行再投资。那我们何必希望它们把钱分出来呢？
然而，为了更贴近伯克希尔的经济现实而非报告利润，我们采用了“透视盈余”这一概念。按我们的计算，透视盈余包括：(1)上一节报告的经营利润，加上；(2)我们在主要被投资公司留存经营利润中的份额——根据美国通用会计准则，这部分并未反映在我们的利润中，减去；(3)如果这些被投资公司的留存利润改为分配给伯克希尔，伯克希尔需缴纳的假设税负。在汇总这里的“经营利润”时，我们剔除了收购会计调整以及资本利得和其他重大非经常性项目。
下表列示了我们1999年的透视盈余，但我提醒您，这些数字只能是近似值，因为它们基于许多判断。（这些被投资公司支付给我们的股息已包含在第13页列出的经营利润中，主要归入“保险集团：净投资收益”。）
| 伯克希尔主要被投资公司 | 伯克希尔年末大致持股比例(1) | 伯克希尔享有的未分配经营利润份额（百万美元）(2) |
| 美国运通公司 | 11.3% | $228 |
| 可口可乐公司 | 8.1% | 144 |
| 房地美 | 8.6% | 127 |
| 吉列公司 | 9.0% | 53 |
| M&T银行 | 6.5% | 17 |
| 华盛顿邮报公司 | 18.3% | 30 |
| 富国银行 | 3.6% | 108 |
| 伯克希尔在主要被投资公司未分配利润中的份额 | 707 | |
| 这些被投资公司未分配利润的假设税负(3) | (99) | |
| 伯克希尔报告的经营利润 | 1,318 | |
| 伯克希尔透视盈余合计 | $1,926 | |
(1) 不包括可分配给少数股东权益的股份
(2) 按当年平均持股比例计算
(3) 使用的税率为14%，即伯克希尔为所获股息支付的税率
投资
以下是我们的普通股投资。截至1999年底市值超过7.5亿美元的投资已逐项列出。
| 股数 | 公司 | 1999年12月31日 | |
| 成本* | 市值 | ||
| （单位：百万美元） | |||
| 50,536,900 | 美国运通公司 | $1,470 | $ 8,402 |
| 200,000,000 | 可口可乐公司 | 1,299 | 11,650 |
| 59,559,300 | 房地美 | 294 | 2,803 |
| 96,000,000 | 吉列公司 | 600 | 3,954 |
| 1,727,765 | 华盛顿邮报公司 | 11 | 960 |
| 59,136,680 | 富国银行公司 | 349 | 2,391 |
| 其他 | 4,180 | 6,848 | |
| 普通股合计 | $8,203 | $37,008 | |
* 代表税基成本，合计比GAAP成本低6.91亿美元。
1999年我们很少调整投资组合。如我之前所述，我们重仓持有的几家公司去年业务表现令人失望。不过，我们相信这些公司拥有长期可持续的重要竞争优势。这一特质能带来良好的长期投资回报，我和查理有时自认为能够识别出来。但更多时候我们无法识别——至少没有十足把握。顺便说一句，这也解释了为什么我们不持有科技公司股票——尽管我们和大家一样，认为科技产品和服务将改变社会。我们的问题——即便拼命学习也无法解决——是我们无法看清科技领域的哪些参与者拥有真正持久的竞争优势。
需要补充的是，缺乏科技洞察力并不让我们烦恼。毕竟，在大量商业领域，查理和我在资本配置方面并无专长。比如，评估专利、制造工艺或地质前景时，我们完全插不上手。因此，我们干脆不对这些领域做判断。
如果说我们有什么长处，那就是能识别自己何时在能力圈内运作，何时正接近能力圈边界。预测快速变化行业里公司的长期经济状况，完全超出了我们的能力圈边界。如果别人声称对这些行业有预测能力——而且股市表现似乎也印证了他们的说法——我们既不羡慕，也不效仿。我们只坚守自己懂的东西。即便我们偏离能力圈，那也是无意之举，而不是因为我们心浮气躁、用希望替代了理性。幸运的是，几乎可以肯定，伯克希尔在我们划定的能力圈内时常会有好机会。
眼下，我们已持有的优秀企业，其股价并不那么有吸引力。换句话说，我们对这些企业的感觉远好于对其股票的感觉。这就是我们没有增持现有仓位的原因。不过，我们也没有大幅削减投资组合：如果非要在一家前景不明但价格合适的企业，和一家前景优秀但价格不合适的企业之间做选择，我们更倾向于后者。但真正让我们心动的，是一家前景优秀且价格也合适的企业。
我们对所持证券价格的担忧，同样适用于当前的整体股价水平。我们从不试图预测股市未来一个月或一年会怎样，现在也不打算这么做。但正如我在随函附上的文章中所指出的，股票投资者目前对未来回报的预期似乎过于乐观。
我们认为企业利润的增长在很大程度上与国家经济（GDP）息息相关，而GDP的实际增速约为3%。此外，我们假设通胀率为2%。查理和我对2%这个数字是否精确并无特别把握，但这是市场普遍看法：通胀保值国债（TIPS）的收益率比标准国债低约两个百分点——如果你相信通胀率会更高，只需买入TIPS并做空普通国债就能获利。
如果利润确实随GDP以约5%的速度增长，那么美国企业的估值不太可能以更高幅度攀升。再加上一些股息，从股票中获得的回报将远低于多数投资者过去的实际收益或未来的预期。一旦投资者的预期回归现实——这几乎必然会发生——市场调整可能会很剧烈，尤其是那些投机集中的板块。
伯克希尔终将有机会在股市部署大量资金——我们对此深信不疑。但正如那首歌所唱："谁知道何时何地？"与此同时，如果有人开始向你解释这个"着魔"市场中真正狂热的部分到底在发生什么，你不妨记住另一句歌词："愚人给你理由，智者从不尝试。"
股份回购
最近，不少股东建议伯克希尔回购其股份。这些请求通常有理有据，但少数基于谬误的逻辑。
一家公司回购股份只有一种情况是明智的：第一，公司拥有超出近期业务需求的可用资金（现金加合理的借贷能力）；第二，发现其股票在市场上的售价低于保守计算的内在价值。对此我们还有一条警示：股东应已获得评估该价值所需的所有信息。否则，内部人士可能利用不知情的合伙人，以远低于真实价值的价格买走他们的权益。我们偶尔见过这种情况。当然，通常欺骗手法是用来推高股价，而非压低股价。
我所说的业务"需求"有两种：第一，公司为维持竞争地位必须进行的支出（例如Helzberg门店的改造）；第二，旨在业务增长的可选支出，且管理层预期每投入一美元能产生超过一美元的回报（例如R.C. Willey扩展到爱达荷州）。
当可用资金超过这些需求时，一家拥有成长型股东群体的公司可以收购新业务或回购股份。如果公司股价远低于内在价值，回购通常最合理。20世纪70年代中期，回购的明智之处几乎呼之欲出，但很少有管理层响应。大多数情况下，那些确实回购的公司为所有者创造的财富远多于其他选择。实际上，在20世纪70年代（及之后断断续续的几年里），我们曾寻找大量回购自家股份的公司。这通常是一个信号，表明该公司既被低估，又由以股东为导向的管理层经营。
那段日子已经过去了。如今，回购蔚然成风，但太多时候，回购的动机是未明说且在我看来不光彩的：为了拉抬或支撑股价。当然，选择在今天卖出的股东，无论买家是谁、出于何种动机，都能从中受益。但继续持有的股东，则会因为高于内在价值的回购而蒙受损失。对于选择留下的股东来说，用1.10美元买1美元钞票可不是什么好生意。
查理和我承认，我们只对部分交易股票的股票有信心估计其内在价值，而且只有当我们采用一个价值区间，而非某个伪精确的数字时，才有把握。尽管如此，在我们看来，如今许多进行回购的公司，都是在以牺牲留下来的股东为代价，向离开的股东支付过高的价格。为这些公司辩护的话，我得说，CEO们对自己的业务感到乐观是很自然的。他们对自己的业务了解的也远比我多。然而，我忍不住觉得，如今太多的回购是出于管理层想要“展现信心”或追赶时髦的愿望，而非出于提升每股价值的愿望。
有时，公司还声称它们回购股票是为了抵消因行使价格低得多的股票期权而发行的股份。这种“高买低卖”的策略，是许多不幸的投资者用过的——但绝非有意为之！然而，管理层似乎兴高采烈地遵循这种反常的做法。
当然，授予期权和回购股票可能都有其道理——但如果是这样的话，那也并非因为这两种活动在逻辑上是相关的。理性地讲，公司关于回购股票或发行股票的决定，应该有自己的独立判断。仅仅因为股票是为了满足期权而行权的——或出于任何其他原因——并不意味着应该以高于内在价值的价格回购股票。相应地，一只售价远低于内在价值的股票，无论之前是否发行过股票（或者可能因为未行权的期权），都应该进行回购。
你们应该知道，在过去某些时候，我犯了错误，没有进行回购。那时我对伯克希尔价值的评估过于保守，或者我对某些替代性资金用途过于热衷。因此，我们错过了一些机会——尽管在这些时间点，伯克希尔的交易量太小，我们无法进行大量买入，这意味着我们每股价值的提升微乎其微。（比方说，一家公司以低于每股内在价值25%的折价回购2%的股份，最多只能使每股价值提升0.5%——如果这些资金以其他方式用于增值行动，提升幅度甚至会更小。）
我们收到的一些信件明确暗示，写信人并不关心内在价值的考量，而是希望我们大张旗鼓地宣布回购意向，以便股价上涨（或停止下跌）。如果写信人打算明天就卖掉股票，他的想法对他来说是有道理的——但如果是打算长期持有，他反而应该希望股价下跌，并且交易量足够大，以便我们能大量买入。这才是回购计划对持续股东真正有益的唯一途径。
除非我们认为伯克希尔的股票售价远低于保守计算的内在价值，否则我们不会回购股票。我们也不会试图抬高或压低股价。（无论在公开场合还是私下，我从未告诉任何人买入或卖出伯克希尔的股票。）相反，我们会向所有股东——以及潜在股东——提供我们换位思考时希望获得的、与估值相关的相同信息。
最近，当A股跌至45,000美元以下时，我们曾考虑进行回购。但我们最终决定，如果真的选择回购，也要等到股东有机会审阅这份报告后再行动。如果我们确实认为回购是合理的，我们将极少在纽约证券交易所（"NYSE"）出价。相反，我们会回应那些直接向我们提出的、价格不高于NYSE报价的卖单。如果你有意出售股票，请让你的经纪人致电Mark Millard，电话402-346-1400。成交时，经纪人可以选择在"第三市场"或NYSE上记录交易。如果B股相对于A股的折价超过2%，我们会优先购买B股。我们不会参与少于10股A股或50股B股的交易。
请务必明确一点：我们永远不会为了阻止伯克希尔股价下跌而进行回购。相反，只有当且仅当我们认为回购是公司资金的一种有吸引力的用途时，我们才会进行。充其量，回购对我们股票内在价值未来增长率的贡献可能微乎其微。
股东指定捐赠
大约97.3%的合格股份参与了伯克希尔1999年的股东指定捐赠计划，捐赠总额为1,720万美元。该计划的完整说明见第70-71页。
累计来看，在该计划实施的19年中，伯克希尔根据股东的指示共捐赠了1.47亿美元。伯克希尔其余捐赠由我们的子公司完成，这些子公司延续了被收购前盛行的慈善模式（只不过原所有者自身承担了其个人慈善的责任）。总体而言，我们的子公司在1999年捐赠了1,380万美元，其中包括价值250万美元的实物捐赠。
要参与未来的计划，你必须持有以实际所有者名义登记（而非以经纪人、银行或存管机构的代名人名义登记）的A类股。在2000年8月31日之前未如此登记的股份将没有资格参与2000年计划。当你收到我们寄来的捐赠表格时，请及时寄回，以免被搁置或遗忘。截止日期后收到的指定将不予受理。
股东大会
今年的"资本家伍德斯托克周末"将采用与近几年略有不同的形式。我们需要做出改变，因为过去三年为我们提供良好服务的阿克萨本体育馆正逐步关闭。因此，我们将迁往市政礼堂（位于国会大道18街与19街之间，双树酒店后面），这是奥马哈唯一另一个能满足我们场地需求的设施。
不过，市政礼堂位于奥马哈市中心，如果我们在工作日开会，会造成停车和交通噩梦。因此，我们将于4月29日（星期六）召开会议，早上7点开门，8:30放映电影，9:30开始正式会议。与以往一样，会议将持续到下午3:30，中午短暂休息供应食物，市政礼堂的餐饮摊位将提供食品。
随本报告附上的股东委托材料附件说明了如何获取参加会议及其他活动所需的凭证。至于机票、酒店和租车预订，我们再次签约美国运通（800-799-6634）为您提供特别帮助。按惯例，我们将安排大巴从各大酒店接送至会场。会后，大巴将返回酒店，并途经内布拉斯加家具城、波仙珠宝店和机场。即便如此，您可能还是会发现自驾更为方便。
我们已将2002年和2003年的会议定在往年惯例的5月第一个周六。但2001年那个周六市民中心已被预订，所以我们将会议改在4月28日举行。市民中心在任何周末应该都能满足我们的需求，届时附近停车场、车库以及街道上都有充足的停车位。我们还能大大增加提供给参展商的空间。所以，克服我向来不爱做广告的羞涩，我要让你们知道，在市民中心会有大量伯克希尔产品供你们选购。打个比方：1999年股东们买了3059磅See's糖果、16155美元的世界图书产品、1928双Dexter鞋、895套Quikut刀具、1752个印有伯克希尔·哈撒韦标志的高尔夫球，以及3446件伯克希尔服装。我知道你们能做得更好。
去年，我们还首次开始销售至少八分之一的Executive Jet（利捷航空）飞机。今年周六和周日，我们会在奥马哈机场展示一系列机型供你们参观。想观看这些飞机，请向市民中心的EJA代表咨询。
冰雪皇后（Dairy Queen）也会在市民中心设摊，并再次将所有收入捐给儿童奇迹网络。去年我们卖出了4586根Dilly®棒、软糖棒和香草/橙子棒。此外，GEICO会设立一个展位，由我们全国各地的高级顾问驻守，他们都准备随时为你提供车险报价。多数情况下，GEICO能为你提供专门的股东折扣。带上你现有保险的详细信息，看看我们能否帮你省些钱。
最后，Ajit Jain和他的同事们也会到场，提供免佣年金险以及保额极高、别处难得一见的巨额责任险。跟Ajit聊聊，学学如何保护你和你家人免受1000万美元的诉讼赔偿。
NFM（内布拉斯加家具城）新装修的商场位于72街Dodge与Pacific之间75英亩的地块上，工作日早10点到晚9点营业，周六周日早10点到晚6点。这家店提供无与伦比的商品种类——家具、电子产品、家电、地毯和电脑——价格低到无法被超越。1999年NFM在72街门店做了超过3亿美元的生意，这在一个人口67.5万的大都会区简直是个奇迹。在4月27日（周四）到5月1日（周一）期间，任何出示会议证件的股东都能享受通常只给员工的折扣。过去几年我们为股东提供了这一优惠，销售额一直惊人。在去年为期五天的"伯克希尔周末"期间，NFM的销售额达到798万美元，比1998年增长26%，比1997年增长51%。
Borsheim's——全美除蒂芙尼曼哈顿店外最大的珠宝店——将举办两场仅限股东参加的活动。第一场是4月28日（周五）下午6点到10点的香槟甜点派对。第二场是主盛会，4月30日（周日）早9点到下午6点。那天，查理和我会到场为销售票据签名。股东价格将从周四到周一全程有效，所以如果你想避开周五晚和周日的最大人流，请在其他时间光临并表明股东身份。周六我们营业到下午7点。Borsheim's的毛利率比其主要竞争对手整整低20个百分点，所以准备好被我们的价格和选择惊艳吧。
在Borsheim's外面的商场里，我们还将请来Bob Hamman——有史以来最伟大的桥牌手——周日与我们的股东对弈。我们还会在其他桌安排几位专家。1999年我们的需求超过了桌数，但今年我们会解决这个问题。
Patrick Wolff，两届美国国际象棋冠军，今年将再次在商场里蒙眼下棋，挑战所有来者。他告诉我，他从未尝试过在这种受限的情况下同时下超过四盘棋，但今年可能会尝试把上限提高到五到六盘。如果你是个棋迷，去跟Patrick过过招吧——不过在你走第一步之前，一定要检查他的眼罩。
Gorat's——我最爱的牛排馆——将在4月30日（星期日）再次专为伯克希尔股东开放，营业时间从下午4点至午夜。请记住，周日来Gorat's必须提前预订。预订请于4月3日（不要提前）致电402-551-3733。如果周日已满，可以尝试你在城里其他晚上去Gorat's。我大约每周对Gorat's做一次"质量抽查"，可以负责任地告诉你们，他们家的带骨牛排（再加双份土豆煎饼）在全美仍然无出其右。
传统棒球赛将于周六晚上7点在Rosenblatt体育场举行。今年由奥马哈金钉队对阵爱荷华小熊队。早点来，因为好戏在开场前就上演了。去年到场的人看到了你们的董事长（我）投球给Ernie Banks。
这场对决堪称体育界期待已久的史诗级较量。投了几球之后——那些并非我的最佳状态，不过话说回来，我什么时候有过最佳状态？——我朝Ernie投了一记近身球，让他知道谁说了算。Ernie冲向投手丘，我冲向本垒板。但冲突没有发生，因为我们还没冲到对方面前就已累得不行了。
Ernie对自己去年的表现很不满意，整个冬天都在研究比赛录像。大家都知道，Ernie在小熊队生涯中击出过512支本垒打。如今他已经看穿了我投球姿势的破绽，打算在4月29日打出第513支。不过，我也学会了新的伪装"飘球"的方法。来看看这场对决吧。
我还得补充一句，我已经让Ernie答应我，他不会朝我打"平飞球"（come-backer），因为我绝对来不及躲开。我的反应速度和Woody Allen差不多——他说自己的反应慢到曾经被两个人推着的一辆车撞到。
我们的股东委托书中包含获取比赛门票的说明，以及大量其他信息，帮助你享受奥马哈之行。加入我们，参加国会大道上的"资本家狂欢"吧。
2000年3月1日
Warren E. Buffett
董事会主席