Kindle highlights from: “Berkshire Hathaway Letters to Shareholders, 1965–2018” by Warren Buffet

Leonardo Max Almeida
65 min readNov 5, 2019

Checkout the distilled and organized version here: Book notes and lessons learnt: “Berkshire Hathaway Letters to Shareholders, 1965–2018” by Warren Buffet


It will continue to be the objective of management to improve return on total capitalization ( long term debt plus equity ) , as well as the return on equity capital .


The direct business of National Indemnity Company , our largest area of insurance activity , produced an underwriting loss of approximately 4 % after several years of high profitability . Volume increased somewhat , but we are not encouraging such increases until rates are more adequate . At some point in the cycle , after major insurance companies have had their fill of red ink , history indicates that we will experience an inflow of business at compensatory rates .


we consider return on shareholders ’ equity to be a much more significant yardstick of economic performance .

You will notice that our major equity holdings are relatively few . We select such investments on a long — term basis , weighing the same factors as would be involved in the purchase of 100 % of an operating business : ( 1 ) favorable long — term economic characteristics ; ( 2 ) competent and honest management ; ( 3 ) purchase price attractive when measured against the yardstick of value to a private owner ; and ( 4 ) an industry with which we are familiar and whose long — term business characteristics we feel competent to judge .


While control would give us the opportunity — and the responsibility — to manage operations and corporate resources , we would not be able to provide management in either of those respects equal to that now in place . In effect , we can obtain a better management result through non — control than control . This is an unorthodox view , but one we believe to be sound .


( We believe that short — term forecasts of stock or bond prices are useless . The forecasts may tell you a great deal about the forecaster ; they tell you nothing about the future . )


We never take the one — year figure very seriously . After all , why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off ? Instead , we recommend not less than a five — year test as a rough yardstick of economic performance .

If the holders of a company’s stock and / or the prospective buyers attracted to it are prone to make irrational or emotion — based decisions , some pretty silly stock prices are going to appear periodically . Manic — depressive personalities produce manic — depressive valuations .

But what are the economic realities ? One reality is that the amortization charges that have been deducted as costs in the earnings statement each year since acquisition of See’s were not true economic costs .

In contrast , a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets . In such cases earnings have bounded upward in nominal dollars , and these dollars have been largely available for the acquisition of additional businesses .

During inflation , Goodwill is the gift that keeps giving . But that statement applies , naturally , only to true economic Goodwill . Spurious accounting Goodwill — and there is plenty of it around — is another matter . When an overexcited management purchases a business at a silly price , the same accounting niceties described earlier are observed . Because it can’t go anywhere else , the silliness ends up in the Goodwill account . Considering the lack of managerial discipline that created the account , under such circumstances it might better be labeled “ No — Will ” . Whatever the term , the 40 — year ritual typically is observed and the adrenalin so capitalized remains on the books as an “ asset ” just as if the acquisition had been a sensible one .

We believe managers and investors alike should view intangible assets from two perspectives : ( 1 ) In analysis of operating results — that is , in evaluating the underlying economics of a business unit — amortization charges should be ignored . What a business can be expected to earn on unleveraged net tangible assets , excluding any charges against earnings for amortization of Goodwill , is the best guide to the economic attractiveness of the operation . It is also the best guide to the current value of the operation’s economic Goodwill . ( 2 ) In evaluating the wisdom of business acquisitions , amortization charges should be ignored also . They should be deducted neither from earnings nor from the cost of the business . This means forever viewing purchased Goodwill at its full cost , before any amortization .


This sounds pretty good but actually it’s mediocre . Economic gains must be evaluated by comparison with the capital that produces them .

As we discussed last year , the gain in per — share intrinsic business value is the economic measurement that really counts . But calculations of intrinsic business value are subjective . In our case , book value serves as a useful , although somewhat understated , proxy . In my judgment , intrinsic business value and book value increased during 1984 at about the same rate .

Charlie Munger , my partner in general management , and I do not have any such ideas at present , but our experience has been that they pop up occasionally . ( How’s that for a strategic plan ? )

All of the significant gains and losses attributable to unusual sales of assets by any of the business entities are aggregated with securities transactions on the line near the bottom of the table , and are not included in operating earnings . ( We regard any annual figure for realized capital gains or losses as meaningless , but we regard the aggregate realized and unrealized capital gains over a period of years as very important . )

The companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies existed between price and value . As shareholders , we find this encouraging and rewarding for two important reasons — one that is obvious , and one that is subtle and not always understood . The obvious point involves basic arithmetic : major repurchases at prices well below per — share intrinsic business value immediately increase , in a highly significant way , that value .

It’s been over ten years since it has been as difficult as now to find equity investments that meet both our qualitative standards and our quantitative standards of value versus price . We try to avoid compromise of these standards , although we find doing nothing the most difficult task of all . ( One English statesman attributed his country’s greatness in the nineteenth century to a policy of “ masterly inactivity ” .

Most managers have very little incentive to make the intelligent — but — with — some — chance — of — looking — like — an — idiot decision . Their personal gain / loss ratio is all too obvious : if an unconventional decision works out well , they get a pat on the back and , if it works out poorly , they get a pink slip . ( Failing conventionally is the route to go ; as a group , lemmings may have a rotten image , but no individual lemming has ever received bad press . )


In selecting common stocks , we devote our attention to attractive purchases , not to the possibility of attractive sales .

with the expectation of important synergy ( a term widely used in business to explain an acquisition that otherwise makes no sense ) .

“ When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics , it is the reputation of the business that remains intact . ” Nothing has since changed my point of view on that matter . Should you find yourself in a chronically — leaking boat , energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks .

But if return on capital was lackluster and capital employed increased in pace with earnings , applause should be withheld .

At Berkshire , however , we use an incentive compensation system that rewards key managers for meeting targets in their own bailiwicks . If See’s does well , that does not produce incentive compensation at the News — nor vice versa . Neither do we look at the price of Berkshire stock when we write bonus checks . We believe good unit performance should be rewarded whether Berkshire stock rises , falls , or stays even . Similarly , we think average performance should earn no special rewards even if our stock should soar . “ Performance ” , furthermore , is defined in different ways depending upon the underlying economics of the business : in some our managers enjoy tailwinds not of their own making , in others they fight unavoidable headwinds .

Pogo : “ The future ain’t what it used to be . ”


What we do know , however , is that occasional outbreaks of those two super — contagious diseases , fear and greed , will forever occur in the investment community . The timing of these epidemics will be unpredictable . And the market aberrations produced by them will be equally unpredictable , both as to duration and degree . Therefore , we never try to anticipate the arrival or departure of either disease . Our goal is more modest : we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful .

Our aversion to long — term bonds relates to our fear that we will see much higher rates of inflation within the next decade . Over time , the behavior of our currency will be determined by the behavior of our legislators . This relationship poses a continuing threat to currency stability — and a corresponding threat to the owners of long — term bonds .

This attitude may seem old — fashioned in a corporate world in which activity has become the order of the day . The modern manager refers to his “ portfolio ” of businesses — meaning that all of them are candidates for “ restructuring ” whenever such a move is dictated by Wall Street preferences , operating conditions or a new corporate “ concept . ”


these seven business units had combined operating earnings before interest and taxes of $ 180 million . By itself , this figure says nothing about economic performance . To evaluate that , we must know how much total capital — debt and equity — was needed to produce these earnings .

Severe change and exceptional returns usually don’t mix . Most investors , of course , behave as if just the opposite were true . That is , they usually confer the highest price — earnings ratios on exotic — sounding businesses that hold out the promise of feverish change . That prospect lets investors fantasize about future profitability rather than face today’s business realities . For such investor — dreamers , any blind date is preferable to one with the girl next door , no matter how desirable she may be .

Experience , however , indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago . That is no argument for managerial complacency . Businesses always have opportunities to improve service , product lines , manufacturing techniques , and the like , and obviously these opportunities should be seized . But a business that constantly encounters major change also encounters many chances for major error . Furthermore , economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress — like business franchise . Such a franchise is usually the key to sustained high returns .

The Fortune study I mentioned earlier supports our view . Only 25 of the 1,000 companies met two tests of economic excellence — an average return on equity of over 20 % in the ten years , 1977 through 1986 , and no year worse than 15 % . These business superstars were also stock market superstars : During the decade , 24 of the 25 outperformed the S & P 500 .

The record of these 25 companies confirms that making the most of an already strong business franchise , or concentrating on a single winning business theme , is what usually produces exceptional economics .

That makes no sense to us . We neither understand the adding of unneeded people or activities because profits are booming , nor the cutting of essential people or activities because profitability is shrinking . That kind of yo — yo approach is neither business — like nor humane . Our goal is to do what makes sense for Berkshire’s customers and employees at all times , and never to add the unneeded . ( “ But what about the corporate jet ? ” you rudely ask . Well , occasionally a man must rise above principle . )

The combined ratio represents total insurance costs ( losses incurred plus expenses ) compared to revenue from premiums : A ratio below 100 indicates an underwriting profit , and one above 100 indicates a loss . When the investment income that an insurer earns from holding on to policyholders ’ funds ( “ the float ” ) is taken into account , a combined ratio in the 107–111 range typically produces an overall break — even result , exclusive of earnings on the funds provided by shareholders .

The insurance industry is cursed with a set of dismal economic characteristics that make for a poor long — term outlook : hundreds of competitors , ease of entry , and a product that cannot be differentiated in any meaningful way . In such a commodity — like business , only a very low — cost operator or someone operating in a protected , and usually small , niche can sustain high profitability levels .

But we cannot control market prices . If they are unsatisfactory , we will simply do very little business . No other major insurer acts with equal restraint . Three conditions that prevail in insurance , but not in most businesses , allow us our flexibility . First , market share is not an important determinant of profitability : In this business , in contrast to the newspaper or grocery businesses , the economic rule is not survival of the fattest . Second , in many sectors of insurance , including most of those in which we operate , distribution channels are not proprietary and can be easily entered : Small volume this year does not preclude huge volume next year . Third , idle capacity — which in this industry largely means people — does not result in intolerable costs . In a way that industries such as printing or steel cannot , we can operate at quarter — speed much of the time and still enjoy long — term prosperity .

We follow a price — based — on — exposure , not — on — competition policy because it makes sense for our shareholders . But we’re happy to report that it is also pro — social . This policy means that we are always available , given prices that we believe are adequate , to write huge volumes of almost any type of property — casualty insurance .

We want to emphasize that we are not faulting auditors for their inability to accurately assess loss reserves ( and therefore earnings ) . We fault them only for failing to publicly acknowledge that they can’t do this job .

When investing , we view ourselves as business analysts — not as market analysts , not as macroeconomic analysts , and not even as security analysts . Our approach makes an active trading market useful , since it periodically presents us with mouth — watering opportunities .

He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr . Market who is your partner in a private business . Without fail , Mr . Market appears daily and names a price at which he will either buy your interest or sell you his . Even though the business that the two of you own may have economic characteristics that are stable , Mr . Market’s quotations will be anything but . For , sad to say , the poor fellow has incurable emotional problems . At times he feels euphoric and can see only the favorable factors affecting the business . When in that mood , he names a very high buy — sell price because he fears that you will snap up his interest and rob him of imminent gains . At other times he is depressed and can see nothing but trouble ahead for both the business and the world . On these occasions he will name a very low price , since he is terrified that you will unload your interest on him . Mr . Market has another endearing characteristic : He doesn’t mind being ignored . If his quotation is uninteresting to you today , he will be back with a new one tomorrow . Transactions are strictly at your option . Under these conditions , the more manic — depressive his behavior , the better for you . But , like Cinderella at the ball , you must heed one warning or everything will turn into pumpkins and mice : Mr . Market is there to serve you , not to guide you . It is his pocketbook , not his wisdom , that you will find useful . If he shows up some day in a particularly foolish mood , you are free to either ignore him or to take advantage of him , but it will be disastrous if you fall under his influence . Indeed , if you aren’t certain that you understand and can value your business far better than Mr . Market , you don’t belong in the game . As they say in poker , “ If you’ve been in the game 30 minutes and you don’t know who the patsy is , you’re the patsy . ” Ben’s Mr . Market allegory may seem out — of — date in today’s investment world , in which most professionals and academicians talk of efficient markets , dynamic hedging and betas . Their interest in such matters is understandable , since techniques shrouded in mystery clearly have value to the purveyor of investment advice . After all , what witch doctor has ever achieved fame and fortune by simply advising “ Take two aspirins ” ?

In the end , plenty of unintelligent capital allocation takes place in corporate America . ( That’s why you hear so much about “ restructuring . ” )


We’ve emphasized in past reports that what counts , however , is intrinsic business value — the figure , necessarily an estimate , indicating what all of our constituent businesses are worth .

The major problem we face , however , is a growing capital base . You’ve heard that from us before , but this problem , like age , grows in significance each year . ( And also , just as with age , it’s better to have this problem continue to grow rather than to have it “ solved . ” )

However , a CEO who doesn’t perform is frequently carried indefinitely . One reason is that performance standards for his job seldom exist . When they do , they are often fuzzy or they may be waived or explained away , even when the performance shortfalls are major and repeated . At too many companies , the boss shoots the arrow of managerial performance and then hastily paints the bullseye around the spot where it lands .

In our consolidated balance sheet these shares are carried at cost rather than market , since they are owned by Mutual Savings and Loan , a non — insurance subsidiary .

Observing correctly that the market was frequently efficient , they went on to conclude incorrectly that it was always efficient . The difference between these propositions is night and day .


What counts , however , is intrinsic value — the figure indicating what all of our constituent businesses are rationally worth . With perfect foresight , this number can be calculated by taking all future cash flows of a business — in and out — and discounting them at prevailing interest rates . So valued , all businesses , from manufacturers of buggy whips to operators of cellular phones , become economic equals .

In other words , our performance to date has benefited from a double — dip : ( 1 ) the exceptional gains in intrinsic value that our portfolio companies have achieved ; ( 2 ) the additional bonus we realized as the market appropriately “ corrected ” the prices of these companies , raising their valuations in relation to those of the average business .

We face another obstacle : In a finite world , high growth rates must self — destruct . If the base from which the growth is taking place is tiny , this law may not operate for a time . But when the base balloons , the party ends : A high growth rate eventually forges its own anchor .


In reality , however , earnings can be as pliable as putty when a charlatan heads the company reporting them . Eventually truth will surface , but in the meantime a lot of money can change hands . Indeed , some important American fortunes have been created by the monetization of accounting mirages .

Clearly , investors must always keep their guard up and use accounting numbers as a beginning , not an end , in their attempts to calculate true “ economic earnings ” accruing to them .

Last year at the Mart there occurred an historic event : I experienced a counter revelation . Regular readers of this report know that I have long scorned the boasts of corporate executives about synergy , deriding such claims as the last refuge of scoundrels defending foolish acquisitions . But now I know better : In Berkshire’s first synergistic explosion , NFM put a See’s candy cart in the store late last year and sold more candy than that moved by some of the full — fledged stores See’s operates in California .

This loss / float ratio , like any statistic used in evaluating insurance results , is meaningless over short time periods : Quarterly underwriting figures and even annual ones are too heavily based on estimates to be much good . But when the ratio takes in a period of years , it gives a rough indication of the cost of funds generated by insurance operations . A low cost of funds signifies a good business ; a high cost translates into a poor business .

The banking business is no favorite of ours . When assets are twenty times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity .

A second risk is systemic — the possibility of a business contraction or financial panic so severe that it would endanger almost every highly — leveraged institution , no matter how intelligently run .

All of this seems impossible now . When these misdeeds were done , however , dagger — selling investment bankers pointed to the “ scholarly ” research of academics , which reported that over the years the higher interest rates received from low — grade bonds had more than compensated for their higher rate of default . Thus , said the friendly salesmen , a diversified portfolio of junk bonds would produce greater net returns than would a portfolio of high — grade bonds . ( Beware of past — performance “ proofs ” in finance : If history books were the key to riches , the Forbes 400 would consist of librarians . )


In this presentation , amortization of Goodwill and other major purchase — price accounting adjustments are not charged against the specific businesses to which they apply , but are instead aggregated and shown separately . This procedure lets you view the earnings of our businesses as they would have been reported had we not purchased them .

We also believe that investors can benefit by focusing on their own look — through earnings . To calculate these , they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these . The goal of each investor should be to create a portfolio ( in effect , a “ company ” ) that will deliver him or her the highest possible look — through earnings a decade or so from now . An approach of this kind will force the investor to think about long — term business prospects rather than short — term stock market prospects , a perspective likely to improve results . It’s true , of course , that , in the long run , the scoreboard for investment decisions is market price . But prices will be determined by future earnings . In investing , just as in baseball , to put runs on the scoreboard one must watch the playing field , not the scoreboard .


You will remember that our goal is to increase our per — share intrinsic value — for which our book value is a conservative , but useful , proxy — at a 15 % annual rate .

We will continue to experience considerable volatility in our annual results . That’s assured by the general volatility of the stock market , by the concentration of our equity holdings in just a few companies , and by certain business decisions we have made , most especially our move to commit large resources to super — catastrophe insurance . We not only accept this volatility but welcome it : A tolerance for short — term swings improves our long — term prospects .

I missed Berkshire and am delighted to be back full — time . There is no job in the world that is more fun than running Berkshire and I count myself lucky to be where I am .

( “ Fanaticism , ” said Santyana , “ consists of redoubling your effort when you’ve forgotten your aim . ” )

Growth is always a component in the calculation of value , constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive .

Growth benefits investors only when the business in point can invest at incremental returns that are enticing — in other words , only when each dollar used to finance the growth creates over a dollar of long — term market value . In the case of a low — return business requiring incremental funds , growth hurts the investor .

Leaving the question of price aside , the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return .

Unfortunately , the first type of business is very hard to find : Most high — return businesses need relatively little capital . Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases .

If a business is complex or subject to constant change , we’re not smart enough to predict future cash flows . Incidentally , that shortcoming doesn’t bother us . What counts for most people in investing is not how much they know , but rather how realistically they define what they don’t know . An investor needs to do very few things right as long as he or she avoids big mistakes . Second , and equally important , we insist on a margin of safety in our purchase price . If we calculate the value of a common stock to be only slightly higher than its price , we’re not interested in buying . We believe this margin — of — safety principle , so strongly emphasized by Ben Graham , to be the cornerstone of investment success .


Right now , markets are difficult , but they can — and will — change in unexpected ways and at unexpected times . In the meantime , we’ll try to resist the temptation to do something marginal simply because we are long on cash . There’s no use running if you’re on the wrong road .

Through my favorite comic strip , Li’l Abner , I got a chance during my youth to see the benefits of delayed taxes , though I missed the lesson at the time .

What this little tale tells us is that tax — paying investors will realize a far , far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same rate . But I suspect many Berkshire shareholders figured that out long ago .

Academics , however , like to define investment “ risk ” differently , averring that it is the relative volatility of a stock or portfolio of stocks — that is , their volatility as compared to that of a large universe of stocks . Employing data bases and statistical skills , these academics compute with precision the “ beta ” of a stock — its relative volatility in the past — and then build arcane investment and capital — allocation theories around this calculation . In their hunger for a single statistic to measure risk , however , they forget a fundamental principle : It is better to be approximately right than precisely wrong . For owners of a business — and that’s the way we think of shareholders — the academics ’ definition of risk is far off the mark , so much so that it produces absurdities . For example , under beta — based theory , a stock that has dropped very sharply compared to the market — as had Washington Post when we bought it in 1973 — becomes “ riskier ” at the lower price than it was at the higher price . Would that description have then made any sense to someone who was offered the entire company at a vastly — reduced price ? In fact , the true investor welcomes volatility .

In assessing risk , a beta purist will disdain examining what a company produces , what its competitors are doing , or how much borrowed money the business employs . He may even prefer not to know the company’s name . What he treasures is the price history of its stock . In contrast , we’ll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company’s business .

The primary factors bearing upon this evaluation are : 1 ) The certainty with which the long — term economic characteristics of the business can be evaluated ; 2 ) The certainty with which management can be evaluated , both as to its ability to realize the full potential of the business and to wisely employ its cash flows ; 3 ) The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself ; 4 ) The purchase price of the business ; 5 ) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing — power return is reduced from his gross return . These factors will probably strike many analysts as unbearably fuzzy , since they cannot be extracted from a data base of any kind . But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable .

by confining himself to a relatively few , easy — to — understand cases , a reasonably intelligent , informed and diligent person can judge investment risks with a useful degree of accuracy .

Of course , some investment strategies — for instance , our efforts in arbitrage over the years — require wide diversification . If significant risk exists in a single transaction , overall risk should be reduced by making that purchase one of many mutually — independent commitments . Thus , you may consciously purchase a risky investment — one that indeed has a significant possibility of causing loss or injury — if you believe that your gain , weighted for probabilities , considerably exceeds your loss , comparably weighted , and if you can commit to a number of similar , but unrelated opportunities . Most venture capitalists employ this strategy .

By periodically investing in an index fund , for example , the know — nothing investor can actually out — perform most investment professionals . Paradoxically , when “ dumb ” money acknowledges its limitations , it ceases to be dumb .


We will continue to ignore political and economic forecasts , which are an expensive distraction for many investors and businessmen . Thirty years ago , no one could have foreseen the huge expansion of the Vietnam War , wage and price controls , two oil shocks , the resignation of a president , the dissolution of the Soviet Union , a one — day drop in the Dow of 508 points , or treasury bill yields fluctuating between 2.8 % and 17.4 % . But , surprise — none of these blockbuster events made the slightest dent in Ben Graham’s investment principles .

We regularly report our per — share book value , an easily calculable number , though one of limited use . Just as regularly , we tell you that what counts is intrinsic value , a number that is impossible to pinpoint but essential to estimate .

Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move . Despite its fuzziness , however , intrinsic value is all — important and is the only logical way to evaluate the relative attractiveness of investments and businesses .

Our approach , rather , has been to follow Wayne Gretzky’s advice : “ Go to where the puck is going to be , not to where it is . ” As a result , our shareholders are now many billions of dollars richer than they would have been if we had used the standard catechism .

The acquisition problem is often compounded by a biological bias : Many CEO’s attain their positions in part because they possess an abundance of animal spirits and ego . If an executive is heavily endowed with these qualities — which , it should be acknowledged , sometimes have their advantages — they won’t disappear when he reaches the top . When such a CEO is encouraged by his advisors to make deals , he responds much as would a teenage boy who is encouraged by his father to have a normal sex life . It’s not a push he needs .

Our investments continue to be few in number and simple in concept : The truly big investment idea can usually be explained in a short paragraph . We like a business with enduring competitive advantages that is run by able and owner — oriented people .

We try to price , rather than time , purchases . In our view , it is folly to forego buying shares in an outstanding business whose long — term future is predictable , because of short — term worries about an economy or a stock market that we know to be unpredictable . Why scrap an informed decision because of an uninformed guess ?


Our practice of making this comparison — acquisitions against passive investments — is a discipline that managers focused simply on expansion seldom use .

An individual or a family wishing to dispose of a single fine business , but also wishing to defer personal taxes indefinitely , is apt to find Berkshire stock a particularly comfortable holding . I believe , in fact , that this calculus played an important part in the two acquisitions for which we paid shares in 1995 .

Retailing is a tough business . During my investment career , I have watched a large number of retailers enjoy terrific growth and superb returns on equity for a period , and then suddenly nosedive , often all the way into bankruptcy . This shooting — star phenomenon is far more common in retailing than it is in manufacturing or service businesses . In part , this is because a retailer must stay smart , day after day . Your competitor is always copying and then topping whatever you do . Shoppers are meanwhile beckoned in every conceivable way to try a stream of new merchants . In retailing , to coast is to fail .

In contrast to this have — to — be — smart — every — day business , there is what I call the have — to — be — smart — once business . For example , if you were smart enough to buy a network TV station very early in the game , you could put in a shiftless and backward nephew to run things , and the business would still do well for decades .


Selling fine businesses on “ scary ” news is usually a bad decision .

Inactivity strikes us as intelligent behavior . Neither we nor most business managers would dream of feverishly trading highly — profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market .

When carried out capably , an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio . This investor would get a similar result if he followed a policy of purchasing an interest in , say , 20 % of the future earnings of a number of outstanding college basketball stars . A handful of these would go on to achieve NBA stardom , and the investor’s take from them would soon dominate his royalty stream . To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team .

In studying the investments we have made in both subsidiary companies and common stocks , you will see that we favor businesses and industries unlikely to experience major change . The reason for that is simple : Making either type of purchase , we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now . A fast — changing industry environment may offer the chance for huge wins , but it precludes the certainty we seek .

as citizens , Charlie and I welcome change : Fresh ideas , new products , innovative processes and the like cause our country’s standard of living to rise , and that’s clearly good . As investors , however , our reaction to a fermenting industry is much like our attitude toward space exploration : We applaud the endeavor but prefer to skip the ride .

But the reasons why people today buy boxed chocolates , and why they buy them from us rather than from someone else , are virtually unchanged from what they were in the 1920s when the See family was building the business . Moreover , these motivations are not likely to change over the next 20 years , or even 50 .

I was recently studying the 1896 report of Coke ( and you think that you are behind in your reading ! ) . At that time Coke , though it was already the leading soft drink , had been around for only a decade . But its blueprint for the next 100 years was already drawn .

observer — not even these companies ’ most vigorous competitors , assuming they are assessing the matter honestly — questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime . Indeed , their dominance will probably strengthen . Both companies have significantly expanded their already huge shares of market during the past ten years , and all signs point to their repeating that performance in the next decade . Obviously

Of course , Charlie and I can identify only a few Inevitables , even after a lifetime of looking for them . Leadership alone provides no certainties : Witness the shocks some years back at General Motors , IBM and Sears , all of which had enjoyed long periods of seeming invincibility . Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages , and that tend to establish Survival of the Fattest as almost a natural law , most do not . Thus , for every Inevitable , there are dozens of Impostors , companies now riding high but vulnerable to competitive attacks . Considering what it takes to be an Inevitable , Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty . To the Inevitables in our portfolio , therefore , we add a few “ Highly Probables . ”

You can , of course , pay too much for even the best of businesses . The overpayment risk surfaces periodically and , in our opinion , may now be quite high for the purchasers of virtually all stocks , The Inevitables included . Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid .

A far more serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so — so or worse . When that happens , the suffering of investors is often prolonged . Unfortunately , that is precisely what transpired years ago at both Coke and Gillette . ( Would you believe that a few decades back they were growing shrimp at Coke and exploring for oil at Gillette ? )

Should you choose , however , to construct your own portfolio , there are a few thoughts worth remembering . Intelligent investing is not complex , though that is far from saying that it is easy . What an investor needs is the ability to correctly evaluate selected businesses . Note that word “ selected ” : You don’t have to be an expert on every company , or even many . You only have to be able to evaluate companies within your circle of competence . The size of that circle is not very important ; knowing its boundaries , however , is vital . To invest successfully , you need not understand beta , efficient markets , modern portfolio theory , option pricing or emerging markets . You may , in fact , be better off knowing nothing of these . That , of course , is not the prevailing view at most business schools , whose finance curriculum tends to be dominated by such subjects . In our view , though , investment students need only two well — taught courses — How to Value a Business , and How to Think About Market Prices .

Your goal as an investor should simply be to purchase , at a rational price , a part interest in an easily — understandable business whose earnings are virtually certain to be materially higher five , ten and twenty years from now . Over time , you will find only a few companies that meet these standards — so when you see one that qualifies , you should buy a meaningful amount of stock . You must also resist the temptation to stray from your guidelines : If you aren’t willing to own a stock for ten years , don’t even think about owning it for ten minutes . Put together a portfolio of companies whose aggregate earnings march upward over the years , and so also will the portfolio’s market value . Though it’s seldom recognized , this is the exact approach that has produced gains for Berkshire shareholders :

Though it was a close decision , Charlie and I have decided to enter the 20th Century . Accordingly , we are going to put future quarterly and annual reports of Berkshire on the Internet , where they can be accessed via http : / / .

Our capitalist’s version of Woodstock — the Berkshire Annual Meeting — will be held on Monday , May 5 .


But last year’s performance was no great triumph : Any investor can chalk up large returns when stocks soar , as they did in 1997 .

So what’s our duck rating for 1997 ? The table on the facing page shows that though we paddled furiously last year , passive ducks that simply invested in the S & P Index rose almost as fast as we did . Our appraisal of 1997 ’ s performance , then : Quack .

So smile when you read a headline that says “ Investors lose as market falls . ” Edit it in your mind to “ Disinvestors lose as market falls — but investors gain . ” Though writers often forget this truism , there is a buyer for every seller and what hurts one necessarily helps the other . ( As they say in golf matches : “ Every putt makes someone happy . ” )

Therein lies an accounting irony : Though our float is shown on our balance sheet as a liability , it has had a value to Berkshire greater than an equal amount of net worth would have had .

their reported costs ( but not their true ones ) will rise after they are bought by Berkshire if the acquiree has been granting options as part of its compensation packages . In these cases , “ earnings ” of the acquiree have been overstated because they have followed the standard — but , in our view , dead wrong — accounting practice of ignoring the cost to a business of issuing options . When Berkshire acquires an option — issuing company , we promptly substitute a cash compensation plan having an economic value equivalent to that of the previous option plan . The acquiree’s true compensation cost is thereby brought out of the closet and charged , as it should be , against earnings .

Though we don’t attempt to predict the movements of the stock market , we do try , in a very rough way , to value it . At the annual meeting last year , with the Dow at 7,071 and long — term Treasury yields at 6.89 % , Charlie and I stated that we did not consider the market overvalued if 1 ) interest rates remained where they were or fell , and 2 ) American business continued to earn the remarkable returns on equity that it had recently recorded . So far , interest rates have fallen — that’s one requisite satisfied — and returns on equity still remain exceptionally high . If they stay there — and if interest rates hold near recent levels — there is no reason to think of stocks as generally overvalued . On the other hand , returns on equity are not a sure thing to remain at , or even near , their present levels .

In the summer of 1979 , when equities looked cheap to me , I wrote a Forbes article entitled “ You pay a very high price in the stock market for a cheery consensus . ” At that time skepticism and disappointment prevailed , and my point was that investors should be glad of the fact , since pessimism drives down prices to truly attractive levels . Now , however , we have a very cheery consensus . That does not necessarily mean this is the wrong time to buy stocks : Corporate America is now earning far more money than it was just a few years ago , and in the presence of lower interest rates , every dollar of earnings becomes more valuable . Today’s price levels , though , have materially eroded the “ margin of safety ” that Ben Graham identified as the cornerstone of intelligent investing .


When we consider investing in an option — issuing company , we make an appropriate downward adjustment to reported earnings , simply subtracting an amount equal to what the company could have realized by publicly selling options of like quantity and structure . Similarly , if we contemplate an acquisition , we include in our evaluation the cost of replacing any option plan . Then , if we make a deal , we promptly take that cost out of hiding .

The earning revisions that Charlie and I have made for options in recent years have frequently cut the reported per — share figures by 5 % , with 10 % not all that uncommon .

A few years ago we asked three questions in these pages to which we have not yet received an answer : “ If options aren’t a form of compensation , what are they ? If compensation isn’t an expense , what is it ? And , if expenses shouldn’t go into the calculation of earnings , where in the world should they go ? ”


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 .

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 .


Market commentators and investment managers who glibly refer to “ growth ” and “ value ” styles as contrasting approaches to investment are displaying their ignorance , not their sophistication . Growth is simply a component — usually a plus , sometimes a minus — in the value equation .

The line separating investment and speculation , which is never bright and clear , becomes blurred still further when most market participants have recently enjoyed triumphs . Nothing sedates rationality like large doses of effortless money .

Obviously , we can never precisely predict the timing of cash flows in and out of a business or their exact amount . We try , therefore , to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners .

Charlie and I tend to be leery of companies run by CEOs who woo investors with fancy predictions . A few of these managers will prove prophetic — but others will turn out to be congenital optimists , or even charlatans . Unfortunately , it’s not easy for investors to know in advance which species they are dealing with .


Bad terminology is the enemy of good thinking . When companies or investment professionals use terms such as “ EBITDA ” and “ pro forma , ” they want you to unthinkingly accept concepts that are dangerously flawed .


( David Ogilvy had it right when he said : “ Develop your eccentricities when young . That way , when you get older , people won’t think you are going gaga . ” Charlie’s family and mine feel that we overreacted to David’s advice . )

A 2003 book that investors can learn much from is Bull ! by Maggie Mahar . Two other books I’d recommend are The Smartest Guys in the Room by Bethany McLean and Peter Elkind , and In an Uncertain World by Bob Rubin . All three are well — reported and well — written . Additionally , Jason Zweig last year did a first — class job in revising The Intelligent Investor , my favorite book on investing .


Over the 35 years , American business has delivered terrific results . It should therefore have been easy for investors to earn juicy returns : All they had to do was piggyback Corporate America in a diversified , low — expense way . An index fund that they never touched would have done the job . Instead many investors have had experiences ranging from mediocre to disastrous .

There have been three primary causes : first , high costs , usually because investors traded excessively or spent far too much on investment management ; second , portfolio decisions based on tips and fads rather than on thoughtful , quantified evaluation of businesses ; and third , a start — and — stop approach to the market marked by untimely entries ( after an advance has been long underway ) and exits ( after periods of stagnation or decline ) . Investors should remember that excitement and expenses are their enemies . And if they insist on trying to time their participation in equities , they should try to be fearful when others are greedy and greedy only when others are fearful .

Our failure here illustrates the importance of a guideline — stay with simple propositions — that we usually apply in investments as well as operations . If only one variable is key to a decision , and the variable has a 90 % chance of going your way , the chance for a successful outcome is obviously 90 % . But if ten independent variables need to break favorably for a successful result , and each has a 90 % probability of success , the likelihood of having a winner is only 35 % .

Clearly , Berkshire’s results would have been far better if I had caught this swing of the pendulum . That may seem easy to do when one looks through an always — clean , rear — view mirror . Unfortunately , however , it’s the windshield through which investors must peer , and that glass is invariably fogged . Our huge positions add to the difficulty of our nimbly dancing in and out of holdings as valuations swing .

Our spendthrift behavior won’t , however , be tolerated indefinitely . And though it’s impossible to forecast just when and how the trade problem will be resolved , it’s improbable that the resolution will foster an increase in the value of our currency relative to that of our trading partners .

If you wish to keep abreast of trade and currency matters , read The Financial Times.This London — based paper has long been the leading source for daily international financial news and now has an excellent American edition . Both its reporting and commentary on trade are first — class .

John Maynard Keynes said in his masterful The General Theory : “ Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally . ” ( Or , to put it in less elegant terms , lemmings as a class may be derided but never does an individual lemming get criticized . )

the three questions that truly count . First , does the company have the right CEO ? Second , is he / she overreaching in terms of compensation ? Third , are proposed acquisitions more likely to create or destroy per — share value ?


Here Berkshire has some advantages : a wide variety of relatively — stable earnings streams , combined with great liquidity and minimum debt . These factors mean that Berkshire’s intrinsic value can be more precisely calculated than can the intrinsic value of most companies .

When growth rates are under discussion , it will pay you to be suspicious as to why the beginning and terminal years have been selected . If either year was aberrational , any calculation of growth will be distorted .

When a problem exists , whether in personnel or in business operations , the time to act is now .

It doesn’t have to be this way : It’s child’s play for a board to design options that give effect to the automatic build — up in value that occurs when earnings are retained . But — surprise , surprise — options of that kind are almost never issued . Indeed , the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation “ experts , ” who are nevertheless encyclopedic about every management — friendly plan that exists . ( “ Whose bread I eat , his song I sing . ” )

Long ago , Sir Isaac Newton gave us three laws of motion , which were the work of genius . But Sir Isaac’s talents didn’t extend to investing : He lost a bundle in the South Sea Bubble , explaining later , “ I can calculate the movement of the stars , but not the madness of men . ” If he had not been traumatized by this loss , Sir Isaac might well have gone on to discover the Fourth Law of Motion : For investors as a whole , returns decrease as motion increases .


When we first began making foreign exchange purchases , interest — rate differentials between the U.S . and most foreign countries favored a direct currency position . But that spread turned negative in 2005 . We therefore looked for other ways to gain foreign — currency exposure , such as the ownership of foreign equities or of U.S . stocks with major earnings abroad . The currency factor , we should emphasize , is not dominant in our selection of equities , but is merely one of many considerations

As our U.S . trade problems worsen , the probability that the dollar will weaken over time continues to be high . I fervently believe in real trade — the more the better for both us and the world . We had about $ 1.44 trillion of this honest — to — God trade in 2006 . But the U.S . also had $ . 76 trillion of pseudo — trade last year — imports for which we exchanged no goods or services .

Making these purchases that weren’t reciprocated by sales , the U.S . necessarily transferred ownership of its assets or IOUs to the rest of the world . Like a very wealthy but self — indulgent family , we peeled off a bit of what we owned in order to consume more than we produced .

These transfers will have consequences , however . Already the prediction I made last year about one fall — out from our spending binge has come true : The “ investment income ” account of our country — positive in every previous year since 1915 — turned negative in 2006 . Foreigners now earn more on their U.S . investments than we do on our investments abroad . In effect , we’ve used up our bank account and turned to our credit card . And , like everyone who gets in hock , the U.S . will now experience “ reverse compounding ” as we pay ever — increasing amounts of interest on interest .

I believe that at some point in the future U.S . workers and voters will find this annual “ tribute ” so onerous that there will be a severe political backlash . How that will play out in markets is impossible to predict — but to expect a “ soft landing ” seems like wishful thinking .

Over time , markets will do extraordinary , even bizarre , things . A single , big mistake could wipe out a long string of successes . We therefore need someone genetically programmed to recognize and avoid serious risks , including those never before encountered . (Black Swans)

For those innocent of this arrangement , let me explain : It’s a lopsided system whereby 2 % of your principal is paid each year to the manager even if he accomplishes nothing — or , for that matter , loses you a bundle — and , additionally , 20 % of your profit is paid to him if he succeeds , even if his success is due simply to a rising tide . For example , a manager who achieves a gross return of 10 % in a year will keep 3.6 percentage points — two points off the top plus 20 % of the residual 8 points — leaving only 6.4 percentage points for his investors . On a $ 3 billion fund , this 6.4 % net “ performance ” will deliver the manager a cool $ 108 million . He will receive this bonanza even though an index fund might have returned 15 % to investors in the same period and charged them only a token fee .

Its effects bring to mind the old adage : When someone with experience proposes a deal to someone with money , too often the fellow with money ends up with the experience , and the fellow with experience ends up with the money .

I first publicly discussed Walter’s remarkable record in 1984 . At that time “ efficient market theory ” ( EMT ) was the centerpiece of investment instruction at most major business schools .


You may recall a 2003 Silicon Valley bumper sticker that implored , “ Please , God , Just One More Bubble . ” Unfortunately , this wish was promptly granted , as just about all Americans came to believe that house prices would forever rise . That conviction made a borrower’s income and cash equity seem unimportant to lenders , who shoveled out money , confident that HPA — house price appreciation — would cure all problems . Today , our country is experiencing widespread pain because of that erroneous belief . As house prices fall , a huge amount of financial folly is being exposed . You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight .

A truly great business must have an enduring “ moat ” that protects excellent returns on invested capital . The dynamics of capitalism guarantee that competitors will repeatedly assault any business “ castle ” that is earning high returns . Therefore a formidable barrier such as a company’s being the low — cost producer ( GEICO , Costco ) or possessing a powerful world — wide brand ( Coca — Cola , Gillette , American Express ) is essential for sustained success . Business history is filled with “ Roman Candles , ” companies whose moats proved illusory and were soon crossed .

Our criterion of “ enduring ” causes us to rule out companies in industries prone to rapid and continuous change . Though capitalism’s “ creative destruction ” is highly beneficial for society , it precludes investment certainty . A moat that must be continuously rebuilt will eventually be no moat at all .

Long — term competitive advantage in a stable industry is what we seek in a business . If that comes with rapid organic growth , great . But even without organic growth , such a business is rewarding . We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere . There’s no rule that you have to invest money where you’ve earned it . Indeed , it’s often a mistake to do so : Truly great businesses , earning huge returns on tangible assets , can’t for any extended period reinvest a large portion of their earnings internally at high rates of return .

( The biblical command to “ be fruitful and multiply ” is one we take seriously at Berkshire . )

To sum up , think of three types of “ savings accounts . ” The great one pays an extraordinarily high interest rate that will rise as the years pass . The good one pays an attractive rate of interest that will be earned also on deposits that are added . Finally , the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns .

Finally , I made an even worse mistake when I said “ yes ” to Dexter , a shoe business I bought in 1993 for $ 433 million in Berkshire stock ( 25,203 shares of A ) . What I had assessed as durable competitive advantage vanished within a few years . But that’s just the beginning : By using Berkshire stock , I compounded this error hugely . That move made the cost to Berkshire shareholders not $ 400 million , but rather $ 3.5 billion . In essence , I gave away 1.6 % of a wonderful business — one now valued at $ 220 billion — to buy a worthless business .

( An aside : Charlie and I are not big fans of resumes . Instead , we focus on brains , passion and integrity .

I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year . Rather , we evaluate their performance by the two methods we apply to the businesses we own . The first test is improvement in earnings , with our making due allowance for industry conditions . The second test , more subjective , is whether their “ moats ” — a metaphor for the superiorities they possess that make life difficult for their competitors — have widened during the year . All of the “ big four ” scored positively on that test .

When the dollar falls , it both makes our products cheaper for foreigners to buy and their products more expensive for U.S . citizens . That’s why a falling currency is supposed to cure a trade deficit . Indeed , the U.S . deficit has undoubtedly been tempered by the large drop in the dollar .

So far , at least , a plunging dollar has not done much to bring our trade activity into balance .

At Berkshire , we will attempt to further increase our stream of direct and indirect foreign earnings . Even if we are successful , however , our assets and earnings will always be concentrated in the U.S . Despite our country’s many imperfections and unrelenting problems of one sort or another , America’s rule of law , market — responsive economic system , and belief in meritocracy are almost certain to produce ever — growing prosperity for its citizens .


The resulting mortgages were usually packaged ( “ securitized ” ) and sold by Wall Street firms to unsuspecting investors . This chain of folly had to end badly , and it did .

Investors should be skeptical of history — based models . Constructed by a nerdy — sounding priesthood using esoteric terms such as beta , gamma , sigma and the like , these models tend to look impressive . Too often , though , investors forget to examine the assumptions behind the symbols . Our advice : Beware of geeks bearing formulas .

But the U.S . Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary . Clinging to cash equivalents or long — term government bonds at present yields is almost certainly a terrible policy if continued for long . Holders of these instruments , of course , have felt increasingly comfortable — in fact , almost smug — in following this policy as financial turmoil has mounted . They regard their judgment confirmed when they hear commentators proclaim “ cash is king , ” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time .

Approval , though , is not the goal of investing . In fact , approval is often counter — productive because it sedates the brain and makes it less receptive to new facts or a re — examination of conclusions formed earlier . Beware the investment activity that produces applause ; the great moves are usually greeted by yawns .

When I read the pages of “ disclosure ” in 10 — Ks of companies that are entangled with these instruments , all I end up knowing is that I don’t know what is going on in their portfolios ( and then I reach for some aspirin ) .

It’s often useful in testing a theory to push it to extremes . -> mental model

Considering everything , I believe the probability of a decline in the index over a one — hundred — year period to be far less than 1 % .

Though historical volatility is a useful — but far from foolproof — concept in valuing short — term options , its utility diminishes rapidly as the duration of the option lengthens .


Charlie and I avoid businesses whose futures we can’t evaluate , no matter how exciting their products may be . In the past , it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos ( in 1910 ) , aircraft ( in 1930 ) and television sets ( in 1950 ) . But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries . Even the survivors tended to come away bleeding . Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy . At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable . Even then , we will make plenty of mistakes .

We entered 2008 with $ 44.3 billion of cash — equivalents , and we have since retained operating earnings of $ 17 billion . Nevertheless , at yearend 2009 , our cash was down to $ 30.6 billion ( with $ 8 billion earmarked for the BNSF acquisition ) . We’ve put a lot of money to work during the chaos of the last two years . It’s been an ideal period for investors : A climate of fear is their best friend . Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance . In the end , what counts in investing is what you pay for a business — through the purchase of a small piece of it in the stock market — and what that business earns in the succeeding decade or two .


This “ what — will — they — do — with — the — money ” factor must always be evaluated along with the “ what — do — we — have — now ” calculation in order for us , or anybody , to arrive at a sensible estimate of a company’s intrinsic value . That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings . If a CEO can be expected to do this job well , the reinvestment prospects add to the company’s current value ; if the CEO’s talents or motives are suspect , today’s value must be discounted . The difference in outcome can be huge .

Often , businesses are priced ridiculously high against what can likely be earned from investments in stocks or bonds . At such moments , we buy securities and bide our time .

Cultures self — propagate . Winston Churchill once said , “ You shape your houses and then they shape you . ” That wisdom applies to businesses as well . Bureaucratic procedures beget more bureaucracy , and imperial corporate palaces induce imperious behavior .

A key characteristic of both companies is the huge investment they have in very long — lived , regulated assets , with these funded by large amounts of long — term debt that is not guaranteed by Berkshire . Our credit is not needed : Both businesses have earning power that , even under very adverse business conditions , amply covers their interest requirements . For example , in recessionary 2010 with BNSF’s car loadings far off peak levels , the company’s interest coverage was 6 : 1 . Both companies are heavily regulated , and both will have a never — ending need to make major investments in plant and equipment . Both also need to provide efficient , customer — satisfying service to earn the respect of their communities and regulators . In return , both need to be assured that they will be allowed to earn reasonable earnings on future capital investments .

Operating earnings , despite having some shortcomings , are in general a reasonable guide as to how our businesses are doing . Ignore our net income figure , however . Regulations require that we report it to you . But if you find reporters focusing on it , that will speak more to their performance than ours . Both realized and unrealized gains and losses are fully reflected in the calculation of our book value . Pay attention to the changes in that metric and to the course of our operating earnings , and you will be on the right track .

We would rather be approximately right than precisely wrong .

Borrowers then learn that credit is like oxygen . When either is abundant , its presence goes unnoticed . When either is missing , that’s all that is noticed . Even a short absence of credit can bring a company to its knees .

Ernest never went to business school — he never in fact finished high school — but he understood the importance of liquidity as a condition for assured survival . (Robustness)


“ Keep thy shop , and thy shop will keep thee . ” Translating this to our regulated businesses , he might today say , “ Take care of your customer , and the regulator — your customer’s representative — will take care of you . ” Good behavior by each party begets good behavior in return .

Some of the businesses enjoy terrific economics , measured by earnings on unleveraged net tangible assets that run from 25 % after — tax to more than 100 % . Others produce good returns in the area of 12–20 % . A few , however , have very poor returns , a result of some serious mistakes I made in my job of capital allocation . These errors came about because I misjudged either the competitive strength of the business being purchased or the future economics of the industry in which it operated . I try to look out ten or twenty years when making an acquisition , but sometimes my eyesight has been poor .

Our approach is far from Darwinian , and many of you may disapprove of it . I can understand your position . However , we have made — and continue to make — a commitment to the sellers of businesses we buy that we will retain those businesses through thick and thin . So far , the dollar cost of that commitment has not been substantial and may well be offset by the goodwill it builds among prospective sellers looking for the right permanent home for their treasured business and loyal associates .

“ Buy commodities , sell brands ” has long been a formula for business success . It has produced enormous and sustained profits for Coca — Cola since 1886 and Wrigley since 1891 . On a smaller scale , we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago .

Investing is often described as the process of laying out money now in the expectation of receiving more money in the future . At Berkshire we take a more demanding approach , defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future . More succinctly , investing is forgoing consumption now in order to have the ability to consume more at a later date .

Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period . And as we will see , a non — fluctuating asset can be laden with risk .

Most of these currency — based investments are thought of as “ safe . ” In truth they are among the most dangerous of assets . Their beta may be zero , but their risk is huge . Over the past century these instruments have destroyed the purchasing power of investors in many countries , even as the holders continued to receive timely payments of interest and principal . This ugly result , moreover , will forever recur . Governments determine the ultimate value of money , and systemic forces will sometimes cause them to gravitate to policies that produce inflation . From time to time such policies spin out of control .

Even in the U.S . , where the wish for a stable currency is strong , the dollar has fallen a staggering 86 % in value since 1965 , when I took over management of Berkshire . It takes no less than $ 7 today to buy what $ 1 did at that time .

Consequently , a tax — free institution would have needed 4.3 % interest annually from bond investments over that period to simply maintain its purchasing power . Its managers would have been kidding themselves if they thought of any portion of that interest as “ income . ”

For tax — paying investors like you and me , the picture has been far worse . During the same 47 — year period , continuous rolling of U.S . Treasury bills produced 5.7 % annually . That sounds satisfactory . But if an individual investor paid personal income taxes at a rate averaging 25 % , this 5.7 % return would have yielded nothing in the way of real income . This investor’s visible income tax would have stripped him of 1.4 points of the stated yield , and the invisible inflation tax would have devoured the remaining

Under today’s conditions , therefore , I do not like currency — based investments . Even so , Berkshire holds significant amounts of them , primarily of the short — term variety . At Berkshire the need for ample liquidity occupies center stage and will never be slighted , however inadequate rates may be . Accommodating this need , we primarily hold U.S . Treasury bills , the only investment that can be counted on for liquidity under the most chaotic of economic conditions . Our working level for liquidity is $ 20 billion ; $ 10 billion is our absolute minimum .

Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk .


Since the basic game is so favorable , Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards , the predictions of “ experts , ” or the ebb and flow of business activity . The risks of being out of the game are huge compared to the risks of being in it .

Common Stocks and Uncommon Profits , a book that ranks behind only The Intelligent Investor and the 1940 edition of Security Analysis in the all — time — best list for the serious investor .


You don’t need to be an expert in order to achieve satisfactory investment returns . But if you aren’t , you must recognize your limitations and follow a course certain to work reasonably well . Keep things simple and don’t swing for the fences . When promised quick profits , respond with a quick “ no . ” Focus on the future productivity of the asset you are considering . If you don’t feel comfortable making a rough estimate of the asset’s future earnings , just forget it and move on . No one has the ability to evaluate every investment possibility . But omniscience isn’t necessary ; you only need to understand the actions you undertake . If you instead focus on the prospective price change of a contemplated purchase , you are speculating . There is nothing improper about that . I know , however , that I am unable to speculate successfully , and I am skeptical of those who claim sustained success at doing so . Half of all coin — flippers will win their first toss ; none of those winners has an expectation of profit if he continues to play the game . And the fact that a given asset has appreciated in the recent past is never a reason to buy it . With my two small investments , I thought only of what the properties would produce and cared not at all about their daily valuations . Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard . If you can enjoy Saturdays and Sundays without looking at stock prices , give it a try on weekdays . Forming macro opinions or listening to the macro or market predictions of others is a waste of time . Indeed , it is dangerous because it may blur your vision of the facts that are truly important . ( When I hear TV commentators glibly opine on what the market will do next , I am reminded of Mickey Mantle’s scathing comment : “ You don’t know how easy this game is until you get into that broadcasting booth . ” ) My two purchases were made in 1986 and 1993 . What the economy , interest rates , or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in making those investments . I can’t remember what the headlines or pundits were saying at the time . Whatever the chatter , corn would keep growing in Nebraska and students would flock to NYU .

We first have to decide whether we can sensibly estimate an earnings range for five years out , or more . If the answer is yes , we will buy the stock ( or business ) if it sells at a reasonable price in relation to the bottom boundary of our estimate .

very low — cost S & P 500 index fund . ( I suggest Vanguard’s . )


In the world of business , bad news often surfaces serially : You see a cockroach in your kitchen ; as the days go by , you meet his relatives .

Stock prices will always be far more volatile than cash — equivalent holdings . Over the long term , however , currency — denominated instruments are riskier investments — far riskier investments — than widely — diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions .

inadequate diversification ,

investors — large and small — should instead read Jack Bogle’s The Little Book of Common Sense Investing .

a broad range of options always sharpens decision — making .

One reason is our ability to move funds between businesses or into new ventures instantly and without tax .

Before I depart the subject of spin — offs , let’s look at a lesson to be learned from a conglomerate mentioned earlier : LTV . I’ll summarize here , but those who enjoy a good financial story should read the piece about Jimmy Ling that ran in the October 1982 issue of D Magazine . Look it up on the Internet .

Periodically , financial markets will become divorced from reality — you can count on that . More Jimmy Lings will appear . They will look and sound authoritative . The press will hang on their every word . Bankers will fight for their business . What they are saying will recently have “ worked . ” Their early followers will be feeling very clever . Our suggestion : Whatever their line , never forget that 2 + 2 will always equal 4 . And when someone tells you how old — fashioned that math is — — — zip up your wallet , take a vacation and come back in a few years to buy stocks at cheap prices .

As Ben Graham said many decades ago : “ In the short — term the market is a voting machine ; in the long — run it acts as a weighing machine . ”

Financial staying power requires a company to maintain three strengths under all circumstances : ( 1 ) a large and reliable stream of earnings ; ( 2 ) massive liquid assets and ( 3 ) no significant near — term cash requirements . Ignoring that last necessity is what usually leads companies to experience unexpected problems : Too often , CEOs of profitable companies feel they will always be able to refund maturing obligations , however large these are . In 2008–2009 , many managements learned how perilous that mindset can be .

Next up is cash . At a healthy business , cash is sometimes thought of as something to be minimized — as an unproductive asset that acts as a drag on such markers as return on equity . Cash , though , is to a business as oxygen is to an individual : never thought about when it is present , the only thing in mind when it is absent .

Though practically all days are relatively uneventful , tomorrow is always uncertain .

In our view , it is madness to risk losing what you need in pursuing what you simply desire .

Eventually — probably between ten and twenty years from now — Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings . At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends , share repurchases or both . If Berkshire shares are selling below intrinsic business value , massive repurchases will almost certainly be the best choice . You can be comfortable that your directors will make the right decision .


Today , the large — and growing — unrecorded gains at our “ winners ” make it clear that Berkshire’s intrinsic value far exceeds its book value . That’s why we would be delighted to repurchase our shares should they sell as low as 120 % of book value . At that level , purchases would instantly and meaningfully increase per — share intrinsic value for Berkshire’s continuing shareholders .

The prolonged period of low interest rates the world is now dealing with also virtually guarantees that earnings on float will steadily decrease for many years to come , thereby exacerbating the profit problems of insurers . It’s a good bet that industry results over the next ten years will fall short of those recorded in the past decade , particularly for those companies that specialize in reinsurance .

Indeed , the depreciation charge we record in our railroad business falls far short of the capital outlays needed to merely keep the railroad running properly , a mismatch that leads to GAAP earnings that are higher than true economic earnings . ( This overstatement of earnings exists at all railroads . ) When CEOs or investment bankers tout pre — depreciation figures such as EBITDA as a valuation guide , watch their noses lengthen while they speak .

Both the originator and the packager of these financings had no skin in the game and were driven by volume and mark — ups .

We need shed no tears for the capitalists ( whether they be private owners or an army of public shareholders ) . It’s their job to take care of themselves . When large rewards can flow to investors from good decisions , these parties should not be spared the losses produced by wrong choices . Moreover , investors who diversify widely and simply sit tight with their holdings are certain to prosper : In America , gains from winning investments have always far more than offset the losses from clunkers .

At some point in the future — though not , in my view , for a long time — GEICO’s premium volume may shrink because of driverless cars .

To date , renewables have helped our utility operation but that could change , particularly if storage capabilities for electricity materially improve . Online retailing threatens the business model of our retailers and certain of our consumer brands .

Call this Noah’s Law : If an ark may be essential for survival , begin building it today , no matter how cloudless the skies appear .


Meg McConnell of the New York Fed aptly described the reality of panics : “ We spend a lot of time looking for systemic risk ; in truth , however , it tends to find us . ”

During such scary periods , you should never forget two things : First , widespread fear is your friend as an investor , because it serves up bargain purchases . Second , personal fear is your enemy . It will also be unwarranted . Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large , conservatively — financed American businesses will almost certainly do well .

To recap Berkshire’s own repurchase policy : I am authorized to buy large amounts of Berkshire shares at 120 % or less of book value because our Board has concluded that purchases at that level clearly bring an instant and material benefit to continuing shareholders . By our estimate , a 120 % — of — book price is a significant discount to Berkshire’s intrinsic value , a spread that is appropriate because calculations of intrinsic value can’t be precise .

To say “ stock — based compensation ” is not an expense is even more cavalier . CEOs who go down that road are , in effect , saying to shareholders , “ If you pay me a bundle in options or restricted stock , don’t worry about its effect on earnings . I’ll ‘ adjust ’ it away . ”

Finally , there are three connected realities that cause investing success to breed failure . First , a good record quickly attracts a torrent of money . Second , huge sums invariably act as an anchor on investment performance : What is easy with millions , struggles with billions ( sob ! ) . Third , most managers will nevertheless seek new money because of their personal equation — namely , the more funds they have under management , the more their fees .

Both large and small investors should stick with low — cost index funds .

Jack Bogle . For decades , Jack has urged investors to invest in ultra — low — cost index funds . In his crusade , he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or , as in our bet , less than nothing — of added value .

Human behavior won’t change . Wealthy individuals , pension funds , endowments and the like will continue to feel they deserve something “ extra ” in investment advice .


At Berkshire what counts most are increases in our normalized per — share earning power . That metric is what Charlie Munger , my long — time partner , and I focus on — and we hope that you do , too .

Betting on people can sometimes be more certain than betting on physical assets .

Depreciation charges for all of these non — insurance operations totaled $ 7.6 billion; capital expenditures were $ 11.5 billion . Berkshire is always looking for ways to expand its businesses and regularly incurs capital expenditures that far exceed its depreciation charge . Almost 90 % of our investments are made in the United States . America’s economic soil remains fertile .

Overall — and over time — we should get decent results . In America , equity investors have the wind at their back .

In the next 53 years our shares ( and others ) will experience declines resembling those in the table . No one can tell you when these will happen . The light can at any time go from green to red without pausing at yellow .

Kipling’s If : “ If you can keep your head when all about you are losing theirs . . . If you can wait and not be tired by waiting . . . If you can think — and not make thoughts your aim . . . If you can trust yourself when all men doubt you . . . Yours is the Earth and everything that’s in it . ”

If a poll of investment “ experts ” had been asked late in 2007 for a forecast of long — term common — stock returns , their guesses would have likely averaged close to the 8.5 % actually delivered by the S & P 500 .

Though markets are generally rational , they occasionally do crazy things . Seizing the opportunities then offered does not require great intelligence , a degree in economics or a familiarity with Wall Street jargon such as alpha and beta . What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals . A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential .

After our purchase , however , some very strange things took place in the bond market . By November 2012 , our bonds — now with about five years to go before they matured — were selling for 95.7 % of their face value . At that price , their annual yield to maturity was less than 1 % . Or , to be precise , . 88 % . Given that pathetic return , our bonds had become a dumb — a really dumb — investment compared to American equities . Over time , the S & P 500 — which mirrors a huge cross — section of American business , appropriately weighted by market value — has earned far more than 10 % annually on shareholders ’ equity ( net worth ) .

Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date . “ Risk ” is the possibility that this objective won’t be attained .

It is a terrible mistake for investors with long — term horizons — among them , pension funds , college endowments and savings — minded individuals — to measure their investment “ risk ” by their portfolio’s ratio of bonds to stocks . Often , high — grade bonds in an investment portfolio increase its risk .

A final lesson from our bet : Stick with big , “ easy ” decisions and eschew activity .


Our advice ? Focus on operating earnings , paying little attention to gains or losses of any variety . My saying that in no way diminishes the importance of our investments to Berkshire . Over time , Charlie and I expect them to deliver substantial gains , albeit with highly irregular timing .

By my estimate , Tony’s management of GEICO has increased Berkshire’s intrinsic value by more than $ 50 billion . On top of that , he is a model for everything a manager should be , helping his 40,000 associates to identify and polish abilities they didn’t realize they possessed .

on a weighted basis , are earning about 20 % on the net tangible equity capital required to run their businesses .

Those who regularly preach doom because of government budget deficits ( as I regularly did myself for many years ) might note that our country’s national debt has increased roughly 400 — fold during the last of my 77 — year periods . That’s 40,000 % ! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency . To “ protect ” yourself , you might have eschewed stocks and opted instead to buy 3 ¼ ounces of gold with your $ 114.75 . And what would that supposed protection have delivered ? You would now have an asset worth about $ 4,200 , less than 1 % of what would have been realized from a simple unmanaged investment in American business .

1953 — The Security I Like Best: Western Insurance

it still appears very attractive as a vehicle for long — term capital growth .

whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices . It embodies a long time span for judgment confirmation , just as does an investment by a corporation in a major new division , plant or product . It treats stock ownership as business ownership with the corresponding adjustment in mental set . And it demands an excess of value over price paid , not merely a favorable short — term earnings or stock market outlook . General stock market considerations simply don’t enter into the purchase decision .

One of my friends always reminds me : “ If a thing’s not worth doing at all , it’s not worth doing well . ”

1978 — Diversified Retailing Merger

Experience indicates that earnings forecasts frequently are very wrong . For what it is worth , my own estimates indicate that the merger would produce some improvement in per share operating earnings for Berkshire stockholders .

2001–9/11 Letter to Managers

What should you be doing in running your business ? Just what you always do : Widen the moat , build enduring competitive advantage , delight your customers , and relentlessly fight costs . With the exception of insurance pricing and coverages , almost all operating decisions that made sense a month ago make sense today .