巴菲特致股東的信2

1BERKSHIREHATHAWAYINC.1997Chairman'sLetter

TotheShareholdersofBerkshireHathawayInc.:

Ourgaininnetworthduring1997was$8.0billion,whichincreasedtheper-sharebookvalueofbothourClassAandClassBstockby34.1%.Overthelast33years(thatis,sincepresentmanagementtookover)per-sharebookvaluehasgrownfrom$19to$25,488,arateof24.1%compoundedannually.(1)1.AllfiguresusedinthisreportapplytoBerkshire'sAshares,thesuccessortotheonlystockthatthecompanyhadoutstandingbefore1996.TheBshareshaveaneconomicinterestequalto1/30ththatoftheA.

Givenourgainof34.1%,itistemptingtodeclarevictoryandmoveon.Butlastyear'sperformancewasnogreattriumph:Anyinvestorcanchalkuplargereturnswhenstockssoar,astheydidin1997.Inabullmarket,onemustavoidtheerrorofthepreeningduckthatquacksboastfullyafteratorrentialrainstorm,thinkingthatitspaddlingskillshavecausedittoriseintheworld.Aright-thinkingduckwouldinsteadcompareitspositionafterthedownpourtothatoftheotherducksonthepond.

Sowhat'sourduckratingfor1997?Thetableonthefacingpageshowsthatthoughwepaddledfuriouslylastyear,passiveducksthatsimplyinvestedintheS&PIndexrosealmostasfastaswedid.Ourappraisalof1997'sperformance,then:Quack.

Whenthemarketbooms,wetendtosufferincomparisonwiththeS&PIndex.TheIndexbearsnotaxcosts,nordomutualfunds,sincetheypassthroughalltaxliabilitiestotheirowners.Lastyear,ontheotherhand,Berkshirepaidoraccrued$4.2billionforfederalincometax,orabout18%ofourbeginningnetworth.

Berkshirewillalwayshavecorporatetaxestopay,whichmeansitneedstoovercometheirdraginordertojustifyitsexistence.Obviously,CharlieMunger,Berkshire'sViceChairmanandmypartner,andIwon'tbeabletolickthathandicapeveryyear.ButweexpectovertimetomaintainamodestadvantageovertheIndex,andthatistheyardstickagainstwhichyoushouldmeasureus.WewillnotaskyoutoadoptthephilosophyoftheChicagoCubsfanwhoreactedtoastringoflacklusterseasonsbysaying,"Whygetupset?Everyonehasabadcenturynowandthen."

Gainsinbookvalueare,ofcourse,notthebottomlineatBerkshire.Whattrulycountsaregainsinper-shareintrinsicbusinessvalue.Ordinarily,though,thetwomeasurestendtomoveroughlyintandem,andin1997thatwasthecase:Ledbyablow-outperformanceatGEICO,Berkshire'sintrinsicvalue(whichfarexceedsbookvalue)grewatnearlythesamepaceasbookvalue.

Formoreexplanationoftheterm,intrinsicvalue,youmaywishtorefertoourOwner'sManual,reprintedonpages62to71.Thismanualsetsforthourowner-relatedbusinessprinciples,informationthatisimportanttoallofBerkshire'sshareholders.

Inourlasttwoannualreports,wefurnishedyouatablethatCharlieandIbelieveiscentraltoestimatingBerkshire'sintrinsicvalue.Intheupdatedversionofthattable,whichfollows,wetraceourtwokeycomponentsofvalue.Thefirstcolumnlistsourper-shareownershipofinvestments(includingcashandequivalents)andthesecondcolumnshowsourper-shareearningsfromBerkshire'soperatingbusinessesbeforetaxesandpurchase-accountingadjustments(discussedonpages69and70),butafterallinterestandcorporateexpenses.Thesecondcolumnexcludesalldividends,interestandcapitalgainsthatwerealizedfromtheinvestmentspresentedinthefirstcolumn.Ineffect,thecolumnsshowwhatBerkshirewouldlooklikewereitsplitintotwoparts,withoneentityholdingourinvestmentsandtheotheroperatingallofourbusinessesandbearingallcorporatecosts.熱膠疼魯比角我縱上緞恢歸跨獻(xiàn)濃帆氣紡?fù)腭g忙虹P轎re敢-t昂ax王E噸ar匪ni崗ng叛s煤Pe軋r針Sh豆ar漏e溪僻母洗贏醒紐譜疫氏洲爭In呼ve舊st笑me縱nt解s殘?zhí)m睡蛙撤E班xc儲(chǔ)lu洲di炸ng勺A償ll謙I餃nc諷om儲(chǔ)e毯fr攀om侍賊乏蚊Y輔ea土r恨水泄粱顫光冶P槳er餓S侮ha尸re撥敲珠傘爸獅尺閑偶憲I壟nv肆es焦tm附en差ts刑月信尋飛惱鎖筋1澤96單7炸默搭礙繞卷聰$裂蚊4刷1帽鮮細(xì)研搭堡留門劫喊萬$乖妻1.火09弄沸膚恩1割97佳7溝敘從羞消摧鬧臺(tái)極37昨2省洞質(zhì)耐士候角折拆絞孝臺(tái)1凡2.謹(jǐn)44久描焰偶船隙1闊98須7藍(lán)購犬寫軌黃惡熄3,裹91壤0監(jiān)局概慢權(quán)湊輕氣約接酸前10繭8.叫14跑瓜青明勤怕1誰99叨7尺萄瞞亭善某展3裙8,擱04瞧3資穴將弊拾岸嘉祝架凳申究71袖7.縫82怖禁

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Furthermore,throughBerkshireyouownmajorpositionsincompaniesthatconsistentlyrepurchasetheirshares.Thebenefitsthattheseprogramssupplyusgrowaspricesfall:Whenstockpricesarelow,thefundsthataninvesteespendsonrepurchasesincreaseourownershipofthatcompanybyagreateramountthanisthecasewhenpricesarehigher.Forexample,therepurchasesthatCoca-Cola,TheWashingtonPostandWellsFargomadeinpastyearsatverylowpricesbenefittedBerkshirefarmorethandotoday'srepurchases,madeatloftierprices.

Attheendofeveryyear,about97%ofBerkshire'ssharesareheldbythesameinvestorswhoownedthematthestartoftheyear.Thatmakesthemsavers.Theyshouldthereforerejoicewhenmarketsdeclineandallowbothusandourinvesteestodeployfundsmoreadvantageously.

Sosmilewhenyoureadaheadlinethatsays"Investorsloseasmarketfalls."Edititinyourmindto"Disinvestorsloseasmarketfalls--butinvestorsgain."Thoughwritersoftenforgetthistruism,thereisabuyerforeverysellerandwhathurtsonenecessarilyhelpstheother.(Astheysayingolfmatches:"Everyputtmakessomeonehappy.")

Wegainedenormouslyfromthelowpricesplacedonmanyequitiesandbusinessesinthe1970sand1980s.Marketsthatthenwerehostiletoinvestmenttransientswerefriendlytothosetakinguppermanentresidence.Inrecentyears,theactionswetookinthosedecadeshavebeenvalidated,butwehavefoundfewnewopportunities.Initsroleasacorporate"saver,"Berkshirecontinuallylooksforwaystosensiblydeploycapital,butitmaybesometimebeforewefindopportunitiesthatgetustrulyexcited.

InsuranceOperations--Overview

Whatdoesexciteus,however,isourinsurancebusiness.GEICOisflying,andweexpectthatitwillcontinuetodoso.Beforeweexpoundonthat,though,let'sdiscuss"float"andhowtomeasureitscost.Unlessyouunderstandthissubject,itwillbeimpossibleforyoutomakeaninformedjudgmentaboutBerkshire'sintrinsicvalue.

Tobeginwith,floatismoneyweholdbutdon'town.Inaninsuranceoperation,floatarisesbecausepremiumsarereceivedbeforelossesarepaid,anintervalthatsometimesextendsovermanyyears.Duringthattime,theinsurerinveststhemoney.Typically,thispleasantactivitycarrieswithitadownside:Thepremiumsthataninsurertakesinusuallydonotcoverthelossesandexpensesiteventuallymustpay.Thatleavesitrunningan"underwritingloss,"whichisthecostoffloat.Aninsurancebusinesshasvalueifitscostoffloatovertimeislessthanthecostthecompanywouldotherwiseincurtoobtainfunds.Butthebusinessisalemonifitscostoffloatishigherthanmarketratesformoney.

Acautionisappropriatehere:Becauselosscostsmustbeestimated,insurershaveenormouslatitudeinfiguringtheirunderwritingresults,andthatmakesitverydifficultforinvestorstocalculateacompany'struecostoffloat.Estimatingerrors,usuallyinnocentbutsometimesnot,canbehuge.Theconsequencesofthesemiscalculationsflowdirectlyintoearnings.Anexperiencedobservercanusuallydetectlarge-scaleerrorsinreserving,butthegeneralpubliccantypicallydonomorethanacceptwhat'spresented,andattimesIhavebeenamazedbythenumbersthatbig-nameauditorshaveimplicitlyblessed.AsforBerkshire,CharlieandIattempttobeconservativeinpresentingitsunderwritingresultstoyou,becausewehavefoundthatvirtuallyallsurprisesininsuranceareunpleasantones.

Asthenumbersinthefollowingtableshow,Berkshire'sinsurancebusinesshasbeenahugewinner.Forthetable,wehavecalculatedourfloat--whichwegenerateinlargeamountsrelativetoourpremiumvolume--byaddingnetlossreserves,lossadjustmentreserves,fundsheldunderreinsuranceassumedandunearnedpremiumreserves,andthensubtractingagents'balances,prepaidacquisitioncosts,prepaidtaxesanddeferredchargesapplicabletoassumedreinsurance.Ourcostoffloatisdeterminedbyourunderwritinglossorprofit.Inthoseyearswhenwehavehadanunderwritingprofit,suchasthelastfive,ourcostoffloathasbeennegative.Ineffect,wehavebeenpaidforholdingmoney.

(1)(2)YearendYieldUnderwritingApproximateonLong-TermLossAverageFloatCostofFundsGovt.Bonds(In$Millions)(Ratioof1to2)1967profit17.3lessthanzero5.50%1968profit19.9lessthanzero5.90%1969profit23.4lessthanzero6.79%19700.3732.41.14%6.25%1971profit52.5lessthanzero5.81%1972profit69.5lessthanzero5.82%1973profit73.3lessthanzero7.27%19747.3679.19.30%8.13%197511.3587.612.96%8.03%1976profit102.6lessthanzero7.30%1977profit139.0lessthanzero7.97%1978profit190.4lessthanzero8.93%1979profit227.3lessthanzero10.08%1980profit237.0lessthanzero11.94%1981profit228.4lessthanzero13.61%198221.56220.69.77%10.64%198333.87231.314.64%11.84%198448.06253.218.98%11.58%198544.23390.211.34%9.34%198655.84797.57.00%7.60%198755.431,266.74.38%8.95%198811.081,497.70.74%9.00%198924.401,541.31.58%7.97%199026.651,637.31.63%8.24%1991119.591,895.06.31%7.40%1992108.962,290.44.76%7.39%1993profit2,624.7lessthanzero6.35%1994profit3,056.6lessthanzero7.88%1995profit3,607.2lessthanzero5.95%1996profit6,702.0lessthanzero6.64%1997profit7,093.1lessthanzero5.92%

Since1967,whenweenteredtheinsurancebusiness,ourfloathasgrownatanannualcompoundedrateof21.7%.Betteryet,ithascostusnothing,andinfacthasmadeusmoney.Thereinliesanaccountingirony:Thoughourfloatisshownonourbalancesheetasaliability,ithashadavaluetoBerkshiregreaterthananequalamountofnetworthwouldhavehad.

Theexpirationofseverallargecontractswillcauseourfloattodeclineduringthefirstquarterof1998,butweexpectittogrowsubstantiallyoverthelongterm.Wealsobelievethatourcostoffloatwillcontinuetobehighlyfavorable.

Super-CatInsurance

Occasionally,however,thecostofourfloatwillspikeseverely.Thatwilloccurbecauseofourheavyinvolvementinthesuper-catbusiness,whichbyitsnatureisthemostvolatileofallinsurancelines.Inthisoperation,wesellpoliciesthatinsuranceandreinsurancecompaniespurchaseinordertolimittheirlosseswhenmega-catastrophesstrike.Berkshireisthepreferredmarketforsophisticatedbuyers:Whenthe"bigone"hits,thefinancialstrengthofsuper-catwriterswillbetested,andBerkshirehasnopeerinthisrespect.

Sincetrulymajorcatastrophesarerareoccurrences,oursuper-catbusinesscanbeexpectedtoshowla