巴菲特 2013 年致股东信
(2013-03-02 20:02:40)
巴菲特致股东的信是最好的投资学习资料
巴菲特 2013 年致股东公开信(要点全译) 2013 年 03 月 02 日 新浪财经
新浪财经讯北京时间 3 月 2 日晚间消息，股神巴菲特已在伯克希尔-哈撒
韦网站上公布 2012 年致股东公开信。鉴于发表于 2013 年，媒体一般称为巴菲
特 2013 年致股东公开信，但信中主要讨论的是伯克希尔 2012 年得失。对价值投
资者来说，巴菲特每年致股东信是宝贵的学习资料，新浪财经将这封长达 24 页
信件的要点部分全部翻译附后。
依照惯例，第一页是伯克希尔业绩与标普 500 指数表现的对比，2012 年
伯克希尔每股账面价值的增幅是 %，而标普 500 指数的增幅为 %，伯克
希尔跑输 个百分点。但是，从长期来看，1965-2012 年，伯克希尔的复合年
增长率为 %，明显超过标普 500 指数的 %，而 1964-2012 年伯克希尔的整
体增长率是令人吃惊的 586817%(即 5868 倍以上)，而标普 500 指数为 7433%。
巴菲特致股东信第 1 页对比企业绩效与标普 500 指数表现
与此前部分市场人士猜测的不同，巴菲特在 2013 年股东信中明确表示
不派发股息。在译文的最后部分对此有专门阐述。以下是股东信要点全文翻译：
致伯克希尔-哈撒韦公司的股东：
2012 年伯克希尔为股东创造的总收益是 241 亿美元。我们使用了 13 亿
美元来购买我们的股票，因此我们去年净增值 228 亿美元。我们每 A 类和 B 类
股的账面价值增长 %。在过去 48 年中(即目前管理层上任以来)，每股账面价
值已从 19 美元增至 114214 美元，复合年增长率为 %。(注：本文所有的每
股数据均为适用于 A 类股数据，B 类股对应数据为 A 类股的 1/1500。)
去年伯克希尔有很多成绩，但首先我们说说主要的坏消息。
* 在 1965 年我的合伙企业控制伯克希尔之时，我可能连做梦都不会想
到，我们一年赚钱 241 亿美元还是没有跑赢大盘，请参照我们在第一页贴出的对
照表。
但是，我们确实没有跑赢。在过去 48 年中，2012 年伯克希尔账面价值
的百分比增幅第九次低于标普 500 指数的涨幅(后者的计算包括了股息以及股价
上涨)。应指出的是，在这九年中的八年，标普 500 指数的涨幅为 15%甚至更高。
在大市不好时我们的表现要出色一些。
迄今为止，我们从来没有过在 5 年时段的表现不及大盘，在 48 年中我
们已有 43 次的 5 年表现超越标普 500 指数。但是，标普 500 指数在过去 4 年中
每年都上涨，整体表现已超过我们这 4 年的业绩。如果市场在 2013 年继续上涨，
我们 5 年业绩跑赢标普 500 指数的纪录将终结。
有一件事情你们可以放心，无论伯克希尔的业绩如何，我的合伙人、公
司副主席查理-芒格和我不会改变我们的绩效标准。我们的工作就是以超过标普
500 指数涨幅的速度来提升企业内在价值，而我们使用账面价值这一显著低估了
内在价值的尺度来衡量它。如果我们做到了，伯克希尔的股价将随着时间推移跑
赢标普 500 指数，虽然年度间的表现是难以预测的。但是，如果我们没有做到，
我们管理层没有给投资者带来价值，投资者可以自己购买低成本的指数基金来获
得与标普 500 指数相同的回报。
查理和我相信，伯克希尔的内在价值随着时间推移将小幅跑赢标普 500
指数。我们的自信是因为我们拥有一些出色的企业，一批极为出色的经营管理者
和以股东为尊的文化。然而，在市场下跌或持平时，我们的相对表现几乎肯定会
超越大盘，但在市场特别强势的年份，估计我们的表现将不及大盘。
* 2012 年第二件令人失望的事情是我们没有完成一桩大型收购。我曾追
逐好几只大象，但最终空手而归。
但幸运的是，今年初我们已有了改变。今年 2 月，我们同意收购拥有亨
氏公司全部股份的一家控股公司 50%股权。另一半股权将归属一个以雷曼(Jorge
Paulo Lemann)为首的小规模投资人集团，他是一位倍受尊敬的巴西商人和慈善
家。
我们不可能找到一家比这更好的公司了。雷曼是我的多年好友，是一位
出色的经理人。他的集团和伯克希尔每家将贡献约 40 亿美元收购这家控股公司
50%的普通股。伯克希尔还将投资 80 亿美元购买股息率为 9%的优先股。这些优
先股还有两项可显著增加其价值的特点：在某个时刻它们将以大幅溢价的方式被
赎回，这些优先股附有权证，允许我们以名义价格收购该控股公司 5%的普通股。
我们总计约 120 亿美元的投资花掉了伯克希尔去年所赚资金的很大一
部分。但是，我们依然拥有充足现金，同时正在以良好步调产生更多的现金。因
此工作又恢复正常了，查理和我已再次穿好我们的狩猎装备，重新开始搜寻大象。
现在说说 2012 年的一些好消息：
* 去年我已经通告你们，我们五个最赚钱的非保险类公司：伯灵顿北圣
达菲铁路公司(BNSF)、伊斯卡机械公司(Iscar)、路博润化学品公司(Lubrizol)、美
联集团(Marmon Group)和中美能源公司(MidAmerican Energy)在 2012 年可能赚
得超过 100 亿美元的税前利润。它们做到了。虽然美国经济增长缓慢，世界大部
分地区的经济放缓，我们的“盈利 5 强”总计赚钱 101 亿美元，较 2011 年多出约
6 亿美元。
在 5 强中，仅有中美能源是伯克希尔 8 年前收购的，当时它的税前利润
为 亿美元。此后，我们用纯现金的方式收购了 5 强中的 3 家。在收购第 5
家，即伯灵顿北圣达菲时，我们购款中约 70%是现金，而剩下的来自发行股票，
这导致我们的在外流通股增加 %。因此，这 5 家公司交给伯克希尔 97 亿美元
年盈利的同时仅产生了很小稀释作用。这符合我们的目标，即不仅仅是简单增长，
而是要增加每股的业绩。
除非美国经济崩盘，其实我们预计这不会发生，我们的盈利 5 强在 2013
年应会交出更高利润。五位经营这 5 家公司的优秀 CEO 将负责办到。
* 虽然我在 2012 年没有进行一桩大型收购，但我们子公司的经理人做
得比我好得多。我们的“补强收购”创下了历史纪录，斥资约 23 亿美元收购了 26
家公司，它们已融合到我们现有的企业之中。这些交易是在伯克希尔没有发行任
何股票的条件下完成的。
查理和我都很欣赏这些收购：一般而言它们都是低风险，不会给总公司
带来任何负担，拓展的是我们成熟经理人熟知的领域。
* 我们的保险企业去年表现出色。它们不仅提供给伯克希尔 730 亿美元
的自由资金进行投资，还交出了 16 亿美元的承保收益，承保业务连续第十年盈
利。这真的是鱼与熊掌兼得。
GEICO 表现领先，它继续赢取市场份额同时没有牺牲承保规则。自 1995
年我们获得 GEICO 的控制权以来，GEICO 在个人汽车市场的份额已从 %增
至 %。与此同时保费总额从 28 亿美元增至 167 亿美元。未来它还会有更大成
长。
GEICO 的优异表现应归功于莱斯利(Tony Nicely)和他的 万名同事。
在这份名单中，我们还应该加上我们的吉科壁虎(Gecko)。(注：GEICO 的宣传吉
祥物，英文中壁虎 Gecko 的发音与 GEICO 类似)。无论风雨还是昼夜都不能停止
它工作，这小家伙始终坚持不懈，告诉美国人如何上 能帮助他们省
很多钱。
当我盘点我的好运气时，我会把 GEICO 算两次。
* 我们新聘的投资经理人：库姆斯(Todd Combs)和惠斯勒(Ted Weschler)
已证明自己富有智慧、品德高尚，在很多方面而不是在资产管理一域有助于伯克
希尔，同时完美符合我们的企业文化。这两位让我们中了大奖。2012 年他们每
个人的业绩比标普 500 指数都高出 10%以上。他们也让我望尘莫及。
因此，我们已将两位所管理的资金每人增加约 50 亿美元(其中一些源自
我们子公司的退休基金)。库姆斯和惠斯勒都年轻，在查理和我谢幕的很久之后，
他们还会管理伯克希尔的庞大资产组合。在他们接管公司后，你们可以高枕无忧。
* 截至 2012 年底伯克希尔的雇员总数达到创纪录的 28 万 8462 人，较
此前一年增加 1 万 7604 人。但是，我们的总部人数没有变化，还是 24 个，为此
抓狂实在是毫无意义。
* 伯克希尔的“四大”投资 – 美国运通、可口可乐、IBM 和富国银行 –
在过去多年都有良好表现。2012 年我们在这四家公司的股权都有所增长。我们
收购了富国和 IBM 的更多股份，前者已增至 %而 2011 年底为 %，后者现
在为 %而 2011 年底为 %。与此同时，可口可乐和美国运通的股票回购推
动我们的持股比例增加。我们在可口可乐的比例从 %增至 %，美国运通的
从 %增至 %。
未来伯克希尔在所有这四家公司的股份可能继续增长。蕙丝(Mae West)
说得对：“好东西越多越好”。
这四家公司都拥有非凡的业务，由既有才干又尊重股东的经理人经营。
在伯克希尔，我们更倾向于拥有一家优秀企业非控制性但很大的股份，而不去拥
有一家很一般公司 100%的所有权。我们在资本配置方面的灵活性使我们能明显
领先于那些只限于收购自己能运营企业的公司。
根据我们年底的持股比例计算，2012 年“四大”公司利润属于我们的股份
总计 39 亿美元。但是，在我们提交你们的盈利报告中，我们仅计算了我们收到
的约 11 亿美元股息。但不要误会，这 28 亿我们没有报告的利润对我们来说与已
纪录的利润是同等珍贵。
“四大”公司所保有的利润经常用于回购，这将提升我们在它们未来利润
中的份额，它们还将用于为商业机会提供资金，而这通常将给企业带来优势。我
们预计，随着时间推移我们将从这四家公司获得显著增长的利润。如果我们是正
确的，派给伯克希尔的股息将增加，更为重要的是，将增加我们的未实现资本收
益(截至 2012 年底，这四家公司的这一收益总计 267 亿美元)。
* 去年 CEO 们面临很多棘手的问题，当面临资本配置决策时，他们都
呐喊“不确定性”(虽然其中许多 CEO 企业的利润和现金都达到了创纪录的水平)。
在伯克希尔这里，我们不存在他们那样的恐惧，2012 年我们在工厂和设备方面
花了创纪录的 98 亿美元，其中约 88%用在美国境内，这一金额较 2011 年高出
19%，而 2011 年的数字还是我们此前的历史新高。查理和我都喜欢向值得投入
的项目大额投资，而不管专家们说什么。相反，我们认同歌手艾伦(Gary Allan)
新乡村民谣的歌词：“每场风雨后都是阳光”。我们将继续致力于此，几乎可以肯
定的是，2013 年的资本开支又将创纪录。美国境内的机会多得很。
有一点想法与我的 CEO 朋友们分享，当然未来近期内是不确定的，但
美国自 1776 年以来一直面临未知。只是有时人们看重其实一直存在的数不清不
确定性，有时人们又忽略它们(通常这是因为此前一段时间平安无事)。
美国企业随着时间推移会有良好表现。股市也会向好是肯定的，因为市
场的命运与企业业绩联系在一起。是的，周期性的挫折会发生，但投资者和经理
人参加的这场博弈给他们积累了大额筹码。(20 世纪道指从 66 点增至 11497 点，
令人吃惊的 17320%增长已成为现实，虽然期间伴随四次代价惨重的战争、大萧
条和许多次经济衰退。不要忘记，在整个世纪中股东也收到了丰厚股息。)
既然博弈的基本格局非常有利，查理和我认为，试图步入舞池却根据塔
罗牌的翻转就退场是一个可怕的错误，依据所谓专家的预测、企业活动的潮涨潮
落而退出都是如此。不参加这场游戏的风险要远大于参与其中的风险。
我自己的经历提供了一个绝佳的例子：我在 1942 年春首次购买股票，
当时美国正承受整个太平洋战争的战区所带来的巨大损失。每天媒体头条都是更
多的失败。即使如此，当时也没有关于不确定的议论，我认识的每个美国人都相
信我们将赢得胜利。
这个国家的成功源自那个令人困惑的危险时期，从 1941 至 2012 年，对
通胀做出修正的人均 GDP 增长了三倍以上。这一时期从始至终，每一个明天都
是不确定的。但是，美国的运数始终是确定的：富足程度不断增长。
如果你是一个拥有大型可盈利项目但因为短期内忧虑而搁置的 CEO，请
给伯克希尔打电话。让我们来给你减压。
总的来说，查理和我希望通过以下方式增加每股内在价值：(1)提升我们
多家子公司的盈利能力；(2)通过补强收购进一步提高它们的利润；(3)参与我们
所投资对象的成长；(4)在可获取价格显著低于内在价值时回购伯克希尔的股票；
(5)不定期进行大规模收购。我们还将通过一种很罕见但并非不可能的方式来为
股东实现业绩最大化，那就是发行伯克希尔的股票。
我们企业的砖石建立在磐石般稳固的基础之上。未来一个世纪，伯灵顿
北圣达菲和中美能源将继续在美国经济中扮演重要角色。此外，保险对企业和个
人来说仍将是基本保障，没有那家公司能比伯克希尔更多地将资源引入这一领域。
鉴于我们深知这些以及公司其他的优势，查理和我看好公司的前景。
企业内在价值
虽然查理和我谈企业内在价值谈得这么多，我们却不能精确告诉你伯克
希尔每股内在价值是多少(对任何其他股票也是如此)。但是，在我们 2010 年报
中，我们列出了三个基本要素，其中一个是定性的，我们相信这些是明智估计伯
克希尔内在价值的关键。这方面的讨论我们已复制在完整股东报告的 104-105 页。
以下是对剩下的两个定量指标的更新：2012 年我们的每股投资增加
%，至 11 万 3786 美元，我们来自保险和投资之外业务的每股税前利润也增
长 %，至 8085 美元。
1970 年以来，我们每股投资的复合年增长率为 %，我们每股利润的
这一增长率为 %。在这 42 年里，伯克希尔股价的增长率与我们这两个价值
指标的增速很接近，这绝对不是一个巧合。查理和我乐于看到这两个指标的增长，
但我们最为强调的始终是持续增加运营盈利。
股息
多位伯克希尔的股东，其中包括一些我的好朋友都希望伯克希尔支付现
金股息。让他们感到不解的是，我们喜欢收取伯克希尔拥有的多数股票所产生的
股息，但却不给自己股东任何股息。因此，让我们审视何时派息对股东有意义，
何时又是无益的。
一家盈利的公式可将利润通过多种方式配置(这些方式并不相互排斥)。
一家公司的管理层首先应探寻当前业务能提供的再投资可能性，诸如使公司变得
更有效率的项目，扩大经营地域，增加和改善产品线或其他能加深公司与竞争对
手之间经济护城河的措施等。
总的来说，股息政策应该是清晰、连贯和理性的。反复的政策将困惑股
东，同时赶走可能的投资者。54 年前，费雪(Phil Fisher)就惊人地将这一表述写
在他所著《普通股和不普通的利润》的第 7 章。对严肃投资者来说，这本书在历
史最佳书单上仅排名于《聪明的投资者》和 1940 年版的《证券分析》之后。费
雪解释了你可以成功经营一家提供汉堡的餐馆，或者也能成功经营一家中国食品
餐馆，但你不能在这两者之间变来变去又保住两方面的食客粉丝。
多数公司持续支付股息，通常它们试图每年增加股息，非常不愿削减股
息。我们投资组合中的“四大”公司奉行这一明智和可理解的方式，在某些情况下
还积极回购股票。
我们赞同它们的行动，希望它们继续保持现在的路线。我们喜欢派息增
加，我们深爱企业以合适价格回购股票。
但是，在伯克希尔方面，我们一直奉行一种不同的而我们一直认为明智
的方式。只要我们认为我们所设定的增加账面价值和市场价格溢价的前提是合理
的，我们将坚持这一政策。假如这两个因素中任何一个前景恶化，我们将重新评
估我们的行动。(立悟/编译)
巴菲特致股东的信(2013 年 3 月 1 日)英文原版
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
in Per-Share in S&P500
BookValueof with Dividends Relative
Berkshire Inclued Results
Year (1) (2) (1)-(2)
1965 ........................................................
1966 ........................................................ ()
1967 ........................................................ ()
1968 ........................................................
1969 ........................................................ ()
1970 ........................................................
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Compounded Annual Gain–1965-2012 ........................... % %
Overall Gain–1964-2012 ....................................... 586,817% 7,433%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year
ended 9/30; 1967, 15 months ended 12/31. Starting in 1979, accounting rules required
insurance companies to value the equity securities they hold at market rather than at
the lower of cost or market, which was previously the requirement. In this table,
Berkshire’s results through 1978 have been restated to conform to the changed rules.
In all other respects, the results are calculated using the numbers originally reported.
The S&P 500 numbers are pretax whereas the Berkshire numbers are after-tax. If a
corporation such as Berkshire were simply to have owned the S&P 500 and accrued
the appropriate taxes, its results would have lagged the S&P 500 in years when that
index showed a positive return, but would have exceeded the S&P 500 in years when
the index showed a negative return. Over the years, the tax costs would have caused
the aggregate lag to be substantial.
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
In 2012, Berkshire achieved a total gain for its shareholders of $ billion. We
used $ billion of that to repurchase our stock, which left us with an increase in net
worth of $ billion for the year. The per-share book value of both our Class A and
Class B stock increased by %. Over the last 48 years (that is, since present
management took over), book value has grown from $19 to $114,214, a rate of %
compounded annually.*(* All per-share figures used in this report apply to
Berkshire’s A shares. Figures for the B shares are 1/1500th of those shown for A.)
A number of good things happened at Berkshire last year, but let’s first get the
bad news out of the way.
. When the partnership I ran took control of Berkshire in 1965, I could never have
dreamed that a year in which we had a gain of $ billion would be subpar, in terms
of the comparison we present on the facing page.
But subpar it was. For the ninth time in 48 years, Berkshire’s percentage increase
in book value was less than the S&P’s percentage gain (a calculation that includes
dividends as well as price appreciation). In eight of those nine years, it should be
noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.
To date, we’ve never had a five-year period of underperformance, having
managed 43 times to surpass the S&P over such a stretch. (The record is on page
103.) But the S&P has now had gains in each of the last four years, outpacing us over
that period. If the market continues to advance in 2013, our streak of five-year wins
will end.
One thing of which you can be certain: Whatever Berkshire’s results, my partner
Charlie Munger, the company’s Vice Chairman, and I will not change yardsticks. It’s
our job to increase intrinsic business value – for which we use book value as a
significantly understated proxy – at a faster rate than the market gains of the S&P. If
we do so, Berkshire’s share price, though unpredictable from year to year, will itself
outpace the S&P over time. If we fail, however, our management will bring no value
to our investors, who themselves can earn S&P returns by buying a low-cost index
fund.
Charlie and I believe the gain in Berkshire’s intrinsic value will over time likely
surpass the S&P returns by a small margin. We’re confident of that because we have
some outstanding businesses, a cadre of terrific operating mangers and a
shareholder-oriented culture. Our relative performance, however, is almost certain to
be better when the market is down or flat. In years when the market is particularly
strong, expect us to fall short.
. The second disappointment in 2012 was my inability to make a major
acquisition. I pursued a couple of elephants, but came up empty-handed.
Our luck, however, changed early this year. In February, we agreed to buy 50%
of a holding company that will own all of H. J. Heinz. The other half will be owned
by a small group of investors led by Jorge Paulo Lemann, a renowned Brazilian
businessman and philanthropist.
We couldn’t be in better company. Jorge Paulo is a long-time friend of mine and
an extraordinary manager. His group and Berkshire will each contribute about $4
billion for common equity in the holding company. Berkshire will also invest $8
billion in preferred shares that pay a 9% dividend. The preferred has two other
features that materially increase its value: at some point it will be redeemed at a
significant premium price and the preferred also comes with warrants permitting us to
buy 5% of the holding company’s common stock for a nominal sum.
Our total investment of about $12 billion soaks up much of what Berkshire
earned last year. But we still have plenty of cash and are generating more at a good
clip. So it’s back to work; Charlie and I have again donned our safari outfits and
resumed our search for elephants.
Now to some good news from 2012:
. Last year I told you that BNSF, Iscar, Lubrizol, Marmon Group and
MidAmerican Energy – our five most profitable non-insurance companies – were
likely to earn more than $10 billion pre-tax in 2012. They delivered. Despite tepid
. growth and weakening economies throughout much of the world, our
“powerhouse five” had aggregate earnings of $ billion, about $600 million more
than in 2011.
Of this group, only MidAmerican, then earning $393 million pre-tax, was owned
by Berkshire eight years ago. Subsequently, we purchased another three of the five on
an all-cash basis. In acquiring the fifth, BNSF, we paid about 70% of the cost in cash,
and for the remainder, issued shares that increased the amount outstanding by %.
Consequently, the $ billion gain in annual earnings delivered Berkshire by the five
companies has been accompanied by only minor dilution. That satisfies our goal of
not simply growing, but rather increasing per-share results.
Unless the . economy tanks – which we don’t expect – our powerhouse five
should again deliver higher earnings in 2013. The five outstanding CEOs who run
them will see to that.
. Though I failed to land a major acquisition in 2012, the managers of our
subsidiaries did far better. We had a record year for “bolt-on” purchases, spending
about $ billion for 26 companies that were melded into our existing businesses.
These transactions were completed without Berkshire issuing any shares.
Charlie and I love these acquisitions: Usually they are low-risk, burden
headquarters not at all, and expand the scope of our proven managers.
. Our insurance operations shot the lights out last year. While giving Berkshire
$73 billion of free money to invest, they also delivered a $ billion underwriting
gain, the tenth consecutive year of profitable underwriting. This is truly having your
cake and eating it too.
GEICO led the way, continuing to gobble up market share without sacrificing
underwriting discipline. Since 1995, when we obtained control, GEICO’s share of the
personal-auto market has grown from % to %. Premium volume meanwhile
increased from $ billion to $ billion. Much more growth lies ahead.
The credit for GEICO’s extraordinary performance goes to Tony Nicely and his
27,000 associates. And to that cast, we should add our Gecko. Neither rain nor storm
nor gloom of night can stop him; the little lizard just soldiers on, telling Americans
how they can save big money by going to .
When I count my blessings, I count GEICO twice.
. Todd Combs and Ted Weschler, our new investment managers, have proved to
be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio
management, and a perfect cultural fit. We hit the jackpot with these two. In 2012
each outperformed the S&P 500 by double-digit margins. They left me in the dust as
well.
Consequently, we have increased the funds managed by each to almost $5 billion
(some of this emanating from the pension funds of our subsidiaries). Todd and Ted
are young and will be around to manage Berkshire’s massive portfolio long after
Charlie and I have left the scene. You can rest easy when they take over.
. Berkshire’s yearend employment totaled a record 288,462 (see page 106 for
details), up 17,604 from last year. Our headquarters crew, however, remained
unchanged at 24. No sense going crazy.
. Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and
Wells Fargo – all had good years. Our ownership interest in each of these companies
increased during the year. We purchased additional shares of Wells Fargo (our
ownership now is % versus % at yearend 2011) and IBM (% versus %).
Meanwhile, stock repurchases at Coca-Cola and American Express raised our
percentage ownership. Our equity in Coca-Cola grew from % to % and our
interest at American Express from % to %.
Berkshire’s ownership interest in all four companies is likely to increase in the
future. Mae West had it right: “Too much of a good thing can be wonderful.”
The four companies possess marvelous businesses and are run by managers who
are both talented and shareholder-oriented. At Berkshire we much prefer owning a
non-controlling but substantial portion of a wonderful business to owning 100% of a
so-so business. Our flexibility in capital allocation gives us a significant advantage
over companies that limit themselves only to acquisitions they can operate.
Going by our yearend share count, our portion of the “Big Four’s” 2012 earnings
amounted to $ billion. In the earnings we report to you, however, we include only
the dividends we receive – about $ billion. But make no mistake: The $ billion
of earnings we do not report is every bit as valuable to us as what we record.
The earnings that the four companies retain are often used for repurchases –
which enhance our share of future earnings – and also for funding business
opportunities that are usually advantageous. Over time we expect substantially greater
earnings from these four investees. If we are correct, dividends to Berkshire will
increase and, even more important, so will our unrealized capital gains (which, for the
four, totaled $ billion at yearend).
. There was a lot of hand-wringing last year among CEOs who cried
“uncertainty” when faced with capital-allocation decisions (despite many of their
businesses having enjoyed record levels of both earnings and cash). At Berkshire, we
didn’t share their fears, instead spending a record $ billion on plant and equipment
in 2012, about 88% of it in the United States. That’s 19% more than we spent in 2011,
our previous high. Charlie and I love investing large sums in worthwhile projects,
whatever the pundits are saying. We instead heed the words from Gary Allan’s new
country song, “Every Storm Runs Out of Rain.”
We will keep our foot to the floor and will almost certainly set still another record
for capital expenditures in 2013. Opportunities abound in America.
************
A thought for my fellow CEOs: Of course, the immediate future is uncertain;
America has faced the
unknown since 1776. It’s just that sometimes people focus on the myriad of
uncertainties that always exist
while at other times they ignore them (usually because the recent past has been
uneventful).
American business will do fine over time. And stocks will do well just as
certainly, since their fate is tied to business performance. Periodic setbacks will occur,
yes, but investors and managers are in a game that is heavily stacked in their favor.
(The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a
staggering 17,320% increase that materialized despite four costly wars, a Great
Depression and many recessions. And don’t forget that shareholders received
substantial dividends throughout the century as well.)
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.
My own history provides a dramatic example: I made my first stock purchase in
the spring of 1942 when the . was suffering major losses throughout the Pacific
war zone. Each day’s headlines told of more setbacks. Even so, there was no talk
about uncertainty; every American I knew believed we would prevail.
The country’s success since that perilous time boggles the mind: On an
inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and
2012. Throughout that period, every tomorrow has been uncertain. America’s destiny,
however, has always been clear: ever-increasing abundance.
If you are a CEO who has some large, profitable project you are shelving because
of short-term worries, call Berkshire. Let us unburden you.
************
In summary, Charlie and I hope to build per-share intrinsic value by (1)
improving the earning power of our many subsidiaries; (2) further increasing their
earnings through bolt-on acquisitions; (3) participating in the growth of our investees;
(4) repurchasing Berkshire shares when they are available at a meaningful discount
from intrinsic value; and (5) making an occasional large acquisition. We will also try
to maximize results for you by rarely, if ever, issuing Berkshire shares.
Those building blocks rest on a rock-solid foundation. A century hence, BNSF
and MidAmerican Energy will continue to play major roles in the American economy.
Insurance, moreover, will always be essential for both businesses and individuals –
and no company brings greater resources to that arena than Berkshire. As we view
these and other strengths, Charlie and I like your company’s prospects.
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you
precisely what that number is for Berkshire shares (or, for that matter, any other
stock). In our 2010 annual report, however, we laid out the three elements – one of
which was qualitative – that we believe are the keys to a sensible estimate of
Berkshire’s intrinsic value. That discussion is reproduced in full on pages 104-105.
Here is an update of the two quantitative factors: In 2012 our per-share
investments increased % to $113,786, and our per-share pre-tax earnings from
businesses other than insurance and investments also increased % to $8,085.
Since 1970, our per-share investments have increased at a rate of %
compounded annually, and our per-share earnings figure has grown at a % clip. It
is no coincidence that the price of Berkshire stock over the 42-year period has
increased at a rate very similar to that of our two measures of value. Charlie and I like
to see gains in both areas, but our strong emphasis will always be on building
operating earnings.
************
Now, let’s examine the four major sectors of our operations. Each has vastly
different balance sheet and income characteristics from the others. Lumping them
together therefore impedes analysis. So we’ll present them as four separate
businesses, which is how Charlie and I view them.
Insurance
Let’s look first at insurance, Berkshire’s core operation and the engine that has
propelled our expansion over the years.
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims
later. In extreme cases, such as those arising from certain workers’ compensation
accidents, payments can stretch over decades. This collect-now, pay-later model
leaves us holding large sums – money we call “float” – that will eventually go to
others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though
individual policies and claims come and go, the amount of float we hold remains quite
stable in relation to premium volume. Consequently, as our business grows, so does
our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2012 73,125
Last year I told you that our float was likely to level off or even decline a bit in
the future. Our insurance CEOs set out to prove me wrong and did, increasing float
last year by $ billion. I now expect a further increase in 2013. But further gains
will be tough to achieve. On the plus side, GEICO’s float will almost certainly grow.
In National Indemnity’s reinsurance division, however, we have a number of run-off
contracts whose float drifts downward. If we do experience a decline in float at some
future time, it will be very gradual – at the outside no more than 2% in any year.
If our premiums exceed the total of our expenses and eventual losses, we register
an underwriting profit that adds to the investment income our float produces. When
such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it. That’s like your taking out a loan and
having the bank pay you interest.
Unfortunately, the wish of all insurers to achieve this happy result creates intense
competition, so vigorous in most years that it causes the P/C industry as a whole to
operate at a significant underwriting loss. This loss, in effect, is what the industry
pays to hold its float. For example, State Farm, by far the country’s largest insurer and
a well-managed company besides, incurred an underwriting loss in eight of the eleven
years ending in 2011. (Their financials for 2012 are not yet available.) There are a lot
of ways to lose money in insurance, and the industry never ceases searching for new
ones.
As noted in the first section of this report, we have now operated at an
underwriting profit for ten consecutive years, our pre-tax gain for the period having
totaled $ billion. Looking ahead, I believe we will continue to underwrite
profitably in most years. If we do, our float will be better than free money.
So how does our attractive float affect the calculations of intrinsic value? When
Berkshire’s book value is calculated, the full amount of our float is deducted as a
liability, just as if we had to pay it out tomorrow and were unable to replenish it. But
that’s an incorrect way to look at float, which should instead be viewed as a revolving
fund. If float is both costless and long-enduring, which I believe Berkshire’s will be,
the true value of this liability is dramatically less than the accounting liability.
A partial offset to this overstated liability is $ billion of “goodwill” that is
attributable to our insurance companies and included in book value as an asset. In
effect, this goodwill represents the price we paid for the float-generating capabilities
of our insurance operations. The cost of the goodwill, however, has no bearing on its
true value. For example, if an insurance business sustains large and prolonged
underwriting losses, any goodwill asset carried on the books should be deemed
valueless, whatever its original cost.
Fortunately, that’s not the case at Berkshire. Charlie and I believe the true
economic value of our insurance goodwill – what we would happily pay to purchase
an insurance operation producing float of similar quality –tobe far in excess of its
historic carrying value. The value of our float is one reason – a huge reason – why we
believe Berkshire’s intrinsic business value substantially exceeds its book value.
Let me emphasize once again that cost-free float is not an outcome to be expected
for the P/C industry as a whole: There is very little “Berkshire-quality” float existing
in the insurance world. In 37 of the 45 years ending in 2011, the industry’s premiums
have been inadequate to cover claims plus expenses. Consequently, the industry’s
overall return on tangible equity has for many decades fallen far short of the average
return realized by American industry, a sorry performance almost certain to continue.
A further unpleasant reality adds to the industry’s dim prospects: Insurance
earnings are now benefitting from “legacy” bond portfolios that deliver much higher
yields than will be available when funds are reinvested during the next few years –
and perhaps for many years beyond that. Today’s bond portfolios are, in effect,
wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature
and are rolled over.
************ Berkshire’s outstanding economics exist only because we have
some terrific managers running some extraordinary insurance operations. Let me tell
you about the major units.
First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain.
Ajit insures risks that no one else has the desire or the capital to take on. His operation
combines capacity, speed, decisiveness and, most important, brains in a manner
unique in the insurance business. Yet he never exposes Berkshire to risks that are
inappropriate in relation to our resources. Indeed, we are far more conservative in
avoiding risk than most large insurers. For example, if the insurance industry should
experience a $250 billion loss from some mega-catastrophe
– a loss about triple anything it has ever experienced – Berkshire as a whole
would likely record a significant profit for the year because it has so many streams of
earnings. All other major insurers and reinsurers would meanwhile be far in the red,
with some facing insolvency.
From a standing start in 1985, Ajit has created an insurance business with float of
$35 billion and a significant cumulative underwriting profit, a feat that no other
insurance CEO has come close to matching. He has thus added a great many billions
of dollars to the value of Berkshire. If you meet Ajit at the annual meeting, bow
deeply.
************
We have another reinsurance powerhouse in General Re, managed by Tad
Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It
must (1) understand all exposures that might cause a policy to incur losses; (2)
conservatively assess the likelihood of any exposure actually causing a loss and the
probable cost if it does; (3) set a premium that, on average, will deliver a profit after
both prospective loss costs and operating expenses are covered; and (4) be willing to
walk away if the appropriate premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. They simply can’t
turn their back on business that is being eagerly written by their competitors. That old
line, “The other guy is doing it, so we must as well,” spells trouble in any business,
but none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his
results. General Re’s huge float has been better than cost-free under his leadership,
and we expect that, on average, it will continue to be. We are particularly enthusiastic
about General Re’s international life reinsurance business, which has achieved
consistent and profitable growth since we acquired the company in 1998.
************ Finally, there is GEICO, the insurer on which I cut my teeth 62
years ago. GEICO is run by Tony Nicely, who joined the company at 18 and
completed 51 years of service in 2012.
I rub my eyes when I look at what Tony has accomplished. Last year, it should be
noted, his record was considerably better than is indicated by GEICO’s GAAP
underwriting profit of $680 million. Because of a change in accounting rules at the
beginning of the year, we recorded a charge to GEICO’s underwriting earnings of
$410 million. This item had nothing to do with 2012’s operating results, changing
neither cash, revenues, expenses nor taxes. In effect, the writedown simply widened
the already huge difference between GEICO’s intrinsic value and the value at which
we carry it on our books.
GEICO earned its underwriting profit, moreover, despite the company suffering
its largest single loss in history. The cause was Hurricane Sandy, which cost GEICO
more than three times the loss it sustained from Katrina, the previous record-holder.
We insured 46,906 vehicles that were destroyed or damaged in the storm, a staggering
number reflecting GEICO’s leading market share in the New York metropolitan area.
Last year GEICO enjoyed a meaningful increase in both the renewal rate for
existing policyholders (“persistency”) and in the percentage of rate quotations that
resulted in sales (“closures”). Big dollars ride on those two factors: A sustained gain
in persistency of a bare one percentage point increases intrinsic value by more than $1
billion. GEICO’s gains in 2012 offer dramatic proof that when people check the
company’s prices, they usually find they can save important sums. (Give us a try at
1-800-847-7536 or . Be sure to mention that you are a shareholder; that
fact will usually result in a discount.)
************
In addition to our three major insurance operations, we own a group of smaller
companies, most of them plying their trade in odd corners of the insurance world. In
aggregate, these companies have consistently delivered an underwriting profit.
Moreover, as the table below shows, they also provide us with substantial float.
Charlie and I treasure these companies and their managers.
Late in 2012, we enlarged this group by acquiring Guard Insurance, a
Wilkes-Barre company that writes workers compensation insurance, primarily for
smaller businesses. Guard’s annual premiums total about $300 million. The company
has excellent prospects for growth in both its traditional business and new lines it has
begun to offer.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2012 2011 2012 2011
BH Reinsurance ......... $ 304 $(714) $34,821 $33,728
GeneralRe............. 355 144 20,128 19,714
GEICO................ 680* 576 11,578 11,169
OtherPrimary .......... 286 242 6,598 5,960
$1,625 $ 248 $73,125 $70,571
*After a $410 million charge against earnings arising from an industry-wide
accounting change.
Among large insurance operations, Berkshire’s impresses me as the best in the
world. It was our lucky day when, in March 1967, Jack Ringwalt sold us his two
property-casualty insurers for $ million.
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and MidAmerican Energy, that have
important common characteristics distinguishing them from our other businesses.
Consequently, we assign them their own section in this letter and split out their
combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is their huge investment in very
long-lived, regulated assets, with these partially funded by large amounts of long-term
debt that is not guaranteed by Berkshire. Our credit is in fact not needed because each
business has earning power that even under terrible conditions amply covers its
interest requirements. In last year’s tepid economy, for example, BNSF’s interest
coverage was . (Our definition of coverage is pre-tax earnings/interest, not
EBITDA/interest, a commonly-used measure we view as deeply flawed.) At
MidAmerican, meanwhile, two key factors ensure its ability to service debt under all
circumstances: the company’s recession-resistant earnings, which result from our
exclusively offering an essential service, and its great diversity of earnings streams,
which shield it from being seriously harmed by any single regulatory body.
Every day, our two subsidiaries power the American economy in major ways:
. BNSF carries about 15% (measured by ton-miles) of all inter-city freight,
whether it is transported by truck, rail, water, air, or pipeline. Indeed, we move more
ton-miles of goods than anyone else, a fact making BNSF the most important artery in
our economy’s circulatory system.
BNSF also moves its cargo in an extraordinarily fuel-efficient and
environmentally friendly way, carrying a ton of freight about 500 miles on a single
gallon of diesel fuel. Trucks taking on the same job guzzle about four times as much
fuel.
. MidAmerican’s electric utilities serve regulated retail customers in ten states.
Only one utility holding company serves more states. In addition, we are the leader in
renewables: first, from a standing start nine years ago, we now account for 6% of the
country’s wind generation capacity. Second, when we complete three projects now
under construction, we will own about 14% of . solar-generation capacity.
Projects like these require huge capital investments. Upon completion, indeed,
our renewables portfolio will have cost $13 billion. We relish making such
commitments if they promise reasonable returns – and on that front, we put a large
amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that
society will forever need massive investment in both transportation and energy. It is in
the self-interest of governments to treat capital providers in a manner that will ensure
the continued flow of funds to essential projects. And it is in our self-interest to
conduct our operations in a manner that earns the approval of our regulators and the
people they represent.
Our managers must think today of what the country will need far down the road.
Energy and transportation projects can take many years to come to fruition; a growing
country simply can’t afford to get behind the curve.
We have been doing our part to make sure that doesn’t happen. Whatever you
may have heard about our country’s crumbling infrastructure in no way applies to
BNSF or railroads generally. America’s rail system has never been in better shape, a
consequence of huge investments by the industry. We are not, however, resting on our
laurels: BNSF will spend about $4 billion on the railroad in 2013, roughly double its
depreciation charge and more than any railroad has spent in a single year.
In Matt Rose, at BNSF, and Greg Abel, at MidAmerican, we have two
outstanding CEOs. They are extraordinary managers who have developed businesses
that serve both their customers and owners well. Each has my gratitude and each
deserves yours. Here are the key figures for their businesses:
MidAmerican (% owned) Earnings (in millions) 2012 2011
.................................................... $ 429 $ 469
Iowautility ..................................................... 236 279
Westernutilities ................................................. 737 771
Pipelines ....................................................... 383 388
HomeServices ................................................... 82 39
Other(net)...................................................... 91 36
Operating earnings before corporate interest and taxes ................... 1,958 1,982
Interest ........................................................ 314 336
Incometaxes .................................................... 172 315
Netearnings .................................................... $ 1,472 $ 1,331
EarningsapplicabletoBerkshire .................................... $ 1,323 $ 1,204
BNSF Earnings (in millions) 2012 2011
Revenues....................................................... $20,835 $19,548
Operatingexpenses ............................................... 14,835 14,247
Operatingearningsbeforeinterestandtaxes ........................... 6,000 5,301
Interest(net) .................................................... 623 560
Incometaxes .................................................... 2,005 1,769
Netearnings .................................................... $ 3,372 $ 2,972
Sharp-eyed readers will notice an incongruity in the MidAmerican earnings
tabulation. What in the world is HomeServices, a real estate brokerage operation,
doing in a section entitled “Regulated, Capital-Intensive Businesses?”
Well, its ownership came with MidAmerican when we bought control of that
company in 2000. At that time, I focused on MidAmerican’s utility operations and
barely noticed HomeServices, which then owned only a few real estate brokerage
companies.
Since then, however, the company has regularly added residential brokers – three
in 2012 – and now has about 16,000 agents in a string of major . cities. (Our real
estate brokerage companies are listed on page 107.) In 2012, our agents participated
in $42 billion of home sales, up 33% from 2011.
Additionally, HomeServices last year purchased 67% of the Prudential and Real
Living franchise operations, which together license 544 brokerage companies
throughout the country and receive a small royalty on their sales. We have an
arrangement to purchase the balance of those operations within five years. In the
coming years, we will gradually rebrand both our franchisees and the franchise firms
we own as Berkshire Hathaway HomeServices.
Ron Peltier has done an outstanding job in managing HomeServices during a
depressed period. Now, as the housing market continues to strengthen, we expect
earnings to rise significantly.
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at
a summary balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/12 (in millions)
Assets Liabilities and Equity
Cash and equivalents .............. $ 5,338 Notes payable ............... $ 1,454
Accounts and notes receivable ....... 7,382 Other current liabilities ........ 8,527
Inventory ....................... 9,675 Total current liabilities ........ 9,981
Other current assets ............... 734
Total current assets ................ 23,129
Deferred taxes ............... 4,907
Goodwill and other intangibles ...... 26,017 Term debt and other liabilities . .
5,826
Fixed assets ..................... 18,871 Non-controlling interests ...... 2,062
Other assets ..................... 3,416 Berkshire equity ............. 48,657
$71,433 $71,433
Earnings Statement (in millions) 2012 2011* 2010
Revenues ............................................ $83,255 $72,406 $66,610
Operatingexpenses .................................... 76,978 67,239 62,225
Interestexpense ....................................... 146 130 111
Pre-taxearnings ....................................... 6,131 5,037 4,274 Income taxes and
non-controlling interests .................. 2,432 1,998 1,812
Netearnings .......................................... $ 3,699 $ 3,039 $ 2,462 *Includes earnings of
Lubrizol from September 16.
Our income and expense data conforming to Generally Accepted Accounting
Principles (“GAAP”) is on page 29. In contrast, the operating expense figures above
are non-GAAP. In particular, they exclude some purchase-accounting items, primarily
the amortization of certain intangible assets. We present the data in this manner
because Charlie and I believe the adjusted numbers more accurately reflect the real
expenses and profits of the businesses aggregated in the table.
I won’t explain all of the adjustments – some are small and arcane – but serious
investors should understand the disparate nature of intangible assets: Some truly
deplete over time while others never lose value. With software, for example,
amortization charges are very real expenses. Charges against other intangibles such as
the amortization of customer relationships, however, arise through
purchase-accounting rules and are clearly not real expenses. GAAP accounting draws
no distinction between the two types of charges. Both, that is, are recorded as
expenses when calculating earnings – even though from an investor’s viewpoint they
could not be more different.
In the GAAP-compliant figures we show on page 29, amortization charges of
$600 million for the companies included in this section are deducted as expenses. We
would call about 20% of these “real” – and indeed that is the portion we have
included in the table above – and the rest not. This difference has become significant
because of the many acquisitions we have made.
“Non-real” amortization expense also looms large at some of our major investees.
IBM has made many small acquisitions in recent years and now regularly reports
“adjusted operating earnings,” a non-GAAP figure that excludes certain
purchase-accounting adjustments. Analysts focus on this number, as they should.
A “non-real” amortization charge at Wells Fargo, however, is not highlighted by
the company and never, to my knowledge, has been noted in analyst reports. The
earnings that Wells Fargo reports are heavily burdened by an “amortization of core
deposits” charge, the implication being that these deposits are disappearing at a fairly
rapid clip. Yet core deposits regularly increase. The charge last year was about $
billion. In no sense, except GAAP accounting, is this whopping charge an expense.
And that ends today’s accounting lecture. Why is no one shouting “More, more?”
************
The crowd of companies in this section sell products ranging from lollipops to jet
airplanes. 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.
More than 50 years ago, Charlie told me that it was far better to buy a wonderful
business at a fair price than to buy a fair business at a wonderful price. Despite the
compelling logic of his position, I have sometimes reverted to my old habit of
bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my
mistakes have usually occurred when I made smaller purchases. Our large
acquisitions have generally worked out well and, in a few cases, more than well.
Viewed as a single entity, therefore, the companies in this group are an excellent
business. They employ $ billion of net tangible assets and, on that base, earned
% after-tax.
Of course, a business with terrific economics can be a bad investment if the price
paid is excessive. We have paid substantial premiums to net tangible assets for most
of our businesses, a cost that is reflected in the large figure we show for intangible
assets. Overall, however, we are getting a decent return on the capital we have
deployed in this sector. Furthermore, the intrinsic value of the businesses, in
aggregate, exceeds their carrying value by a good margin. Even so, the difference
between intrinsic value and carrying value in the insurance and regulated-industry
segments is far greater. It is there that the huge winners reside.
************ Marmon provides an example of a clear and substantial gap
existing between book value and intrinsic value. Let me explain the odd origin of this
differential.
Last year I told you that we had purchased additional shares in Marmon, raising
our ownership to 80% (up from the 64% we acquired in 2008). I also told you that
GAAP accounting required us to immediately record the 2011 purchase on our books
at far less than what we paid. I’ve now had a year to think about this weird accounting
rule, but I’ve yet to find an explanation that makes any sense – nor can Charlie or
Marc Hamburg, our CFO, come up with one. My confusion increases when I am told
that if we hadn’t already owned 64%, the 16% we purchased in 2011 would have been
entered on our books at our cost.
In 2012 (and in early 2013, retroactive to yearend 2012) we acquired an
additional 10% of Marmon and the same bizarre accounting treatment was required.
The $700 million write-off we immediately incurred had no effect on earnings but did
reduce book value and, therefore, 2012’s gain in net worth.
The cost of our recent 10% purchase implies a $ billion value for the 90% of
Marmon we now own. Our balance-sheet carrying value for the 90%, however, is $8
billion. Charlie and I believe our current purchase represents excellent value. If we are
correct, our Marmon holding is worth at least $ billion more than its carrying
value.
Marmon is a diverse enterprise, comprised of about 150 companies operating in a
wide variety of industries. Its largest business involves the ownership of tank cars that
are leased to a variety of shippers, such as oil and chemical companies. Marmon
conducts this business through two subsidiaries, Union Tank Car in the . and
Procor in Canada.
Union Tank Car has been around a long time, having been owned by the Standard
Oil Trust until that empire was broken up in 1911. Look for its UTLX logo on tank
cars when you watch trains roll by. As a Berkshire shareholder, you own the cars with
that insignia. When you spot a UTLX car, puff out your chest a bit and enjoy the same
satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a
century ago.
Tank cars are owned by either shippers or lessors, not by railroads. At yearend
Union Tank Car and Procor together owned 97,000 cars having a net book value of $4
billion. A new car, it should be noted, costs upwards of $100,000. Union Tank Car is
also a major manufacturer of tank cars – some of them to be sold but most to be
owned by it and leased out. Today, its order book extends well into 2014.
At both BNSF and Marmon, we are benefitting from the resurgence of . oil
production. In fact, our railroad is now transporting about 500,000 barrels of oil daily,
roughly 10% of the total produced in the “lower 48”
(. not counting Alaska and offshore). All indications are that BNSF’s oil
shipments will grow substantially in coming years.
************ Space precludes us from going into detail about the many other
businesses in this segment. Company-specific information about the 2012 operations
of some of the larger units appears on pages 76 to 79.
Finance and Financial Products
This sector, our smallest, includes two rental companies, XTRA (trailers) and
CORT (furniture), as well as Clayton Homes, the country’s leading producer and
financer of manufactured homes. Aside from these 100%-owned subsidiaries, we also
include in this category a collection of financial assets and our 50% interest in
Berkadia Commercial Mortgage.
We include Clayton in this sector because it owns and services 332,000
mortgages, totaling $ billion. In large part, these loans have been made to lower
and middle-income families. Nevertheless, the loans have performed well throughout
the housing collapse, thereby validating our conviction that a reasonable down
payment and a sensible payments-to-income ratio will ward off outsized foreclosure
losses, even during stressful times.
Clayton also produced 25,872 manufactured homes last year, up % from
2011. That output accounted for about % of all single-family residences built in the
country, a share that makes Clayton America’s number one homebuilder.
CORT and XTRA are leaders in their industries as well. Our expenditures for
new rental equipment at XTRA totaled $256 million in 2012, more than double its
depreciation expense. While competitors fret about today’s uncertainties, XTRA is
preparing for tomorrow.
Berkadia continues to do well. Our partners at Leucadia do most of the work in
this venture, an arrangement that Charlie and I happily embrace.
Here’s the pre-tax earnings recap for this sector:
2012 2011 (in millions)
Berkadia ........................ $ 35 $ 25
Clayton ......................... 255 154
CORT .......................... 42 29
XTRA.......................... 106 126
Netfinancialincome* ............. 410 440
$848 $774
*Excludes capital gains or losses
Investments
Below we show our common stock investments that at yearend had a market
value of more than $1 billion.
12/31/12
Percentage of Shares Company Company Cost* Market Owned (in millions)
151,610,700 American Express Company .............. $ 1,287 $ 8,715
400,000,000 The Coca-Cola Company ................. 1,299 14,500
24,123,911 ConocoPhillips ......................... 1,219 1,399
22,999,600 DIRECTV ............................ 1,057 1,154
68,115,484 International Business Machines Corp. ...... 11,680 13,048
28,415,250 Moody’s Corporation .................... 287 1,430
20,060,390 Munich Re ............................ 2,990 3,599
20,668,118 Phillips 66 ............................ 660 1,097
3,947,555 POSCO ............................... 768 1,295
52,477,678 The Procter & Gamble Company ........... 336 3,563
25,848,838 Sanofi ................................ 2,073 2,438
415,510,889 Tesco plc ............................. 2,350 2,268
78,060,769 . Bancorp .......................... 2,401 2,493
54,823,433 Wal-Mart Stores, Inc. .................... 2,837 3,741
456,170,061 Wells Fargo & Company ................. 10,906 15,592
Others ................................ 7,646 11,330
Total Common Stocks Carried at Market .... $49,796 $87,662
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in
a few cases because of write-ups or write-downs that have been required.
One point about the composition of this list deserves mention. In Berkshire’s past
annual reports, every stock itemized in this space has been bought by me, in the sense
that I made the decision to buy it for Berkshire. But starting with this list, any
investment made by Todd Combs or Ted Weschler – or a combined purchase by them
– that meets the dollar threshold for the list ($1 billion this year) will be included.
Above is the first such stock, DIRECTV, which both Todd and Ted hold in their
portfolios and whose combined holdings at the end of 2012 were valued at the $
billion shown.
Todd and Ted also manage the pension funds of certain Berkshire subsidiaries,
while others, for regulatory reasons, are managed by outside advisers. We do not
include holdings of the pension funds in our annual report tabulations, though their
portfolios often overlap Berkshire’s.
************
We continue to wind down the part of our derivatives portfolio that involved the
assumption by Berkshire of insurance-like risks. (Our electric and gas utility
businesses, however, will continue to use derivatives for operational purposes.) New
commitments would require us to post collateral and, with minor exceptions, we are
unwilling to do that. Markets can behave in extraordinary ways, and we have no
interest in exposing Berkshire to some out-of-the-blue event in the financial world
that might require our posting mountains of cash on a moment’s notice.
Charlie and I believe in operating with many redundant layers of liquidity, and
we avoid any sort of obligation that could drain our cash in a material way. That
reduces our returns in 99 years out of 100. But we will survive in the 100th while
many others fail. And we will sleep well in all 100.
The derivatives we have sold that provide credit protection for corporate bonds
will all expire in the next year. It’s now almost certain that our profit from these
contracts will approximate $1 billion pre-tax. We also received very substantial sums
upfront on these derivatives, and the “float” attributable to them has averaged about
$2 billion over their five-year lives. All told, these derivatives have provided a
more-than-satisfactory result, especially considering the fact that we were
guaranteeing corporate credits – mostly of the high-yield variety – throughout the
financial panic and subsequent recession.
In our other major derivatives commitment, we sold long-term puts on four
leading stock indices in the ., ., Europe and Japan. These contracts were
initiated between 2004 and 2008 and even under the worst of circumstances have only
minor collateral requirements. In 2010 we unwound about 10% of our exposure at a
profit of $222 million. The remaining contracts expire between 2018 and 2026. Only
the index value at expiration date counts; our counterparties have no right to early
termination.
Berkshire received premiums of $ billion when we wrote the contracts that
remain outstanding. If all of these contracts had come due at yearend 2011, we would
have had to pay $ billion; the corresponding figure at yearend 2012 was $
billion. With this large drop in immediate settlement liability, we reduced our GAAP
liability at yearend 2012 to $ billion from $ billion at the end of 2011. Though
it’s no sure thing, Charlie and I believe it likely that the final liability will be
considerably less than the amount we currently carry on our books. In the meantime,
we can invest the $ billion of float derived from these contracts as we see fit.
We Buy Some Newspapers . . . Newspapers?
During the past fifteen months, we acquired 28 daily newspapers at a cost of $344
million. This may puzzle you for two reasons. First, I have long told you in these
letters and at our annual meetings that the circulation, advertising and profits of the
newspaper industry overall are certain to decline. That prediction still holds. Second,
the properties we purchased fell far short of meeting our oft-stated size requirements
for acquisitions.
We can address the second point easily. Charlie and I love newspapers and, if
their economics make sense, will buy them even when they fall far short of the size
threshold we would require for the purchase of, say, a widget company. Addressing
the first point requires me to provide a more elaborate explanation, including some
history.
News, to put it simply, is what people don’t know that they want to know. And
people will seek their news
– what’s important to them – from whatever sources provide the best combination
of immediacy, ease of access, reliability, comprehensiveness and low cost. The
relative importance of these factors varies with the nature of the news and the person
wanting it.
Before television and the Internet, newspapers were the primary source for an
incredible variety of news, a fact that made them indispensable to a very high
percentage of the population. Whether your interests were international, national,
local, sports or financial quotations, your newspaper usually was first to tell you the
latest information. Indeed, your paper contained so much you wanted to learn that you
received your money’s worth, even if only a small number of its pages spoke to your
specific interests. Better yet, advertisers typically paid almost all of the product’s cost,
and readers rode their coattails.
Additionally, the ads themselves delivered information of vital interest to hordes
of readers, in effect providing even more “news.” Editors would cringe at the thought,
but for many readers learning what jobs or apartments were available, what
supermarkets were carrying which weekend specials, or what movies were showing
where and when was far more important than the views expressed on the editorial
page.
In turn, the local paper was indispensable to advertisers. If Sears or Safeway built
stores in Omaha, they required a “megaphone” to tell the city’s residents why their
stores should be visited today. Indeed, big department stores and grocers vied to
outshout their competition with multi-page spreads, knowing that the goods they
advertised would fly off the shelves. With no other megaphone remotely comparable
to that of the newspaper, ads sold themselves.
As long as a newspaper was the only one in its community, its profits were
certain to be extraordinary; whether it was managed well or poorly made little
difference. (As one Southern publisher famously confessed, “I owe my exalted
position in life to two great American institutions – nepotism and monopoly.”)
Over the years, almost all cities became one-newspaper towns (or harbored two
competing papers that joined forces to operate as a single economic unit). This
contraction was inevitable because most people wished to read and pay for only one
paper. When competition existed, the paper that gained a significant lead in
circulation almost automatically received the most ads. That left ads drawing readers
and readers drawing ads. This symbiotic process spelled doom for the weaker paper
and became known as “survival of the fattest.”
Now the world has changed. Stock market quotes and the details of national
sports events are old news long before the presses begin to roll. The Internet offers
extensive information about both available jobs and homes. Television bombards
viewers with political, national and international news. In one area of interest after
another, newspapers have therefore lost their “primacy.” And, as their audiences have
fallen, so has advertising. (Revenues from “help wanted” classified ads – long a huge
source of income for newspapers – have plunged more than 90% in the past 12 years.)
Newspapers continue to reign supreme, however, in the delivery of local news. If
you want to know what’s going on in your town – whether the news is about the
mayor or taxes or high school football – there is no substitute for a local newspaper
that is doing its job. A reader’s eyes may glaze over after they take in a couple of
paragraphs about Canadian tariffs or political developments in Pakistan; a story about
the reader himself or his neighbors will be read to the end. Wherever there is a
pervasive sense of community, a paper that serves the special informational needs of
that community will remain indispensable to a significant portion of its residents.
Even a valuable product, however, can self-destruct from a faulty business
strategy. And that process has been underway during the past decade at almost all
papers of size. Publishers – including Berkshire in Buffalo – have offered their paper
free on the Internet while charging meaningful sums for the physical specimen. How
could this lead to anything other than a sharp and steady drop in sales of the printed
product? Falling circulation, moreover, makes a paper less essential to advertisers.
Under these conditions, the “virtuous circle” of the past reverses.
The Wall Street Journal went to a pay model early. But the main exemplar for
local newspapers is the Arkansas Democrat-Gazette, published by Walter Hussman,
Jr. Walter also adopted a pay format early, and over the past decade his paper has
retained its circulation far better than any other large paper in the country. Despite
Walter’s powerful example, it’s only been in the last year or so that other papers,
including Berkshire’s, have explored pay arrangements. Whatever works best – and
the answer is not yet clear – will be copied widely.
************
Charlie and I believe that papers delivering comprehensive and reliable
information to tightly-bound communities and having a sensible Internet strategy will
remain viable for a long time. We do not believe that success will come from cutting
either the news content or frequency of publication. Indeed, skimpy news coverage
will almost certainly lead to skimpy readership. And the less-than-daily publication
that is now being tried in some large towns or cities – while it may improve profits in
the short term – seems certain to diminish the papers’ relevance over time. Our goal is
to keep our papers loaded with content of interest to our readers and to be paid
appropriately by those who find us useful, whether the product they view is in their
hands or on the Internet.
Our confidence is buttressed by the availability of Terry Kroeger’s outstanding
management group at the Omaha World-Herald, a team that has the ability to oversee
a large group of papers. The individual papers, however, will be independent in their
news coverage and editorial opinions. (I voted for Obama; of our 12 dailies that
endorsed a presidential candidate, 10 opted for Romney.)
Our newspapers are certainly not insulated from the forces that have been driving
revenues downward. Still, the six small dailies we owned throughout 2012 had
unchanged revenues for the year, a result far superior to that experienced by big-city
dailies. Moreover, the two large papers we operated throughout the year – The
Buffalo News and the Omaha World-Herald – held their revenue loss to 3%, which
was also an above-average outcome. Among newspapers in America’s 50 largest
metropolitan areas, our Buffalo and Omaha papers rank near the top in circulation
penetration of their home territories.
This popularity is no accident: Credit the editors of those papers – Margaret
Sullivan at the News and Mike Reilly at the World-Herald — for delivering
information that has made their publications indispensable to community-interested
readers. (Margaret, I regret to say, recently left us to join The New York Times,
whose job offers are tough to turn down. That paper made a great hire, and we wish
her the best.)
Berkshire’s cash earnings from its papers will almost certainly trend downward
over time. Even a sensible Internet strategy will not be able to prevent modest erosion.
At our cost, however, I believe these papers will meet or exceed our economic test for
acquisitions. Results to date support that belief.
Charlie and I, however, still operate under economic principle 11 (detailed on
page 99) and will not continue the operation of any business doomed to unending
losses. One daily paper that we acquired in a bulk purchase from Media General was
significantly unprofitable under that company’s ownership. After analyzing the
paper’s results, we saw no remedy for the losses and reluctantly shut it down. All of
our remaining dailies, however, should be profitable for a long time to come. (They
are listed on page 108.) At appropriate prices – and that means at a very low multiple
of current earnings – we will purchase more papers of the type we like.
************ A milestone in Berkshire’s newspaper operations occurred at
yearend when Stan Lipsey retired as publisher of The Buffalo News. It’s no
exaggeration for me to say that the News might now be extinct were it not for Stan.
Charlie and I acquired the News in April 1977. It was an evening paper, dominant
on weekdays but lacking a Sunday edition. Throughout the country, the circulation
trend was toward morning papers. Moreover, Sunday was becoming ever more
critical to the profitability of metropolitan dailies. Without a Sunday paper, the News
was destined to lose out to its morning competitor, which had a fat and entrenched
Sunday product.
We therefore began to print a Sunday edition late in 1977. And then all hell broke
loose. Our competitor sued us, and District Judge Charles Brieant, Jr. authored a harsh
ruling that crippled the introduction of our paper. His ruling was later reversed – after
17 long months – in a 3-0 sharp rebuke by the Second Circuit Court of Appeals.
While the appeal was pending, we lost circulation, hemorrhaged money and stood in
constant danger of going out of business.
Enter Stan Lipsey, a friend of mine from the 1960s, who, with his wife, had sold
Berkshire a small Omaha weekly. I found Stan to be an extraordinary newspaperman,
knowledgeable about every aspect of circulation, production, sales and editorial. (He
was a key person in gaining that small weekly a Pulitzer Prize in 1973.) So when I
was in big trouble at the News, I asked Stan to leave his comfortable way of life in
Omaha to take over in Buffalo.
He never hesitated. Along with Murray Light, our editor, Stan persevered through
four years of very dark days until the News won the competitive struggle in 1982.
Ever since, despite a difficult Buffalo economy, the performance of the News has
been exceptional. As both a friend and as a manager, Stan is simply the best.
Dividends
A number of Berkshire shareholders – including some of my good friends –
would like Berkshire to pay a cash dividend. It puzzles them that we relish the
dividends we receive from most of the stocks that Berkshire owns, but pay out
nothing ourselves. So let’s examine when dividends do and don’t make sense for
shareholders.
A profitable company can allocate its earnings in various ways (which are not
mutually exclusive). A company’s management should first examine reinvestment
possibilities offered by its current business – projects to become more efficient,
expand territorially, extend and improve product lines or to otherwise widen the
economic moat separating the company from its competitors.
I ask the managers of our subsidiaries to unendingly focus on moat-widening
opportunities, and they find many that make economic sense. But sometimes our
managers misfire. The usual cause of failure is that they start with the answer they
want and then work backwards to find a supporting rationale. Of course, the process is
subconscious; that’s what makes it so dangerous.
Your chairman has not been free of this sin. In Berkshire’s 1986 annual report, I
described how twenty years of management effort and capital improvements in our
original textile business were an exercise in futility. I wanted the business to succeed
and wished my way into a series of bad decisions. (I even bought another New
England textile company.) But wishing makes dreams come true only in Disney
movies; it’s poison in business.
Despite such past miscues, our first priority with available funds will always be to
examine whether they can be intelligently deployed in our various businesses. Our
record $ billion of fixed-asset investments and bolt-on acquisitions in 2012
demonstrate that this is a fertile field for capital allocation at Berkshire. And here we
have an advantage: Because we operate in so many areas of the economy, we enjoy a
range of choices far wider than that open to most corporations. In deciding what to do,
we can water the flowers and skip over the weeds.
Even after we deploy hefty amounts of capital in our current operations,
Berkshire will regularly generate a lot of additional cash. Our next step, therefore, is
to search for acquisitions unrelated to our current businesses. Here our test is simple:
Do Charlie and I think we can effect a transaction that is likely to leave our
shareholders wealthier on a per-share basis than they were prior to the acquisition?
I have made plenty of mistakes in acquisitions and will make more. Overall,
however, our record is satisfactory, which means that our shareholders are far
wealthier today than they would be if the funds we used for acquisitions had instead
been devoted to share repurchases or dividends.
But, to use the standard disclaimer, past performance is no guarantee of future
results. That’s particularly true at Berkshire: Because of our present size, making
acquisitions that are both meaningful and sensible is now more difficult than it has
been during most of our years.
Nevertheless, a large deal still offers us possibilities to add materially to per-share
intrinsic value. BNSF is a case in point: It is now worth considerably more than our
carrying value. Had we instead allocated the funds required for this purchase to
dividends or repurchases, you and I would have been worse off. Though large
transactions of the BNSF kind will be rare, there are still some whales in the ocean.
The third use of funds – repurchases – is sensible for a company when its shares
sell at a meaningful discount to conservatively calculated intrinsic value. Indeed,
disciplined repurchases are the surest way to use funds intelligently: It’s hard to go
wrong when you’re buying dollar bills for 80￠ or less. We explained our criteria for
repurchases in last year’s report and, if the opportunity presents itself, we will buy
large quantities of our stock. We originally said we would not pay more than 110% of
book value, but that proved unrealistic. Therefore, we increased the limit to 120% in
December when a large block became available at about 116% of book value.
But never forget: In repurchase decisions, price is all-important. Value is
destroyed when purchases are made above intrinsic value. The directors and I believe
that continuing shareholders are benefitted in a meaningful way by purchases up to
our 120% limit.
And that brings us to dividends. Here we have to make a few assumptions and
use some math. The numbers will require careful reading, but they are essential to
understanding the case for and against dividends. So bear with me.
We’ll start by assuming that you and I are the equal owners of a business with $2
million of net worth. The business earns 12% on tangible net worth – $240,000 – and
can reasonably expect to earn the same 12% on reinvested earnings. Furthermore,
there are outsiders who always wish to buy into our business at 125% of net worth.
Therefore, the value of what we each own is now $ million.
You would like to have the two of us shareholders receive one-third of our
company’s annual earnings and have two-thirds be reinvested. That plan, you feel,
will nicely balance your needs for both current income and capital growth. So you
suggest that we pay out $80,000 of current earnings and retain $160,000 to increase
the future earnings of the business. In the first year, your dividend would be $40,000,
and as earnings grew and the one-third payout was maintained, so too would your
dividend. In total, dividends and stock value would increase 8% each year (12%
earned on net worth less 4% of net worth paid out).
After ten years our company would have a net worth of $4,317,850 (the original
$2 million compounded at 8%) and your dividend in the upcoming year would be
$86,357. Each of us would have shares worth $2,698,656 (125% of our half of the
company’s net worth). And we would live happily ever after – with dividends and the
value of our stock continuing to grow at 8% annually.
There is an alternative approach, however, that would leave us even happier.
Under this scenario, we would leave all earnings in the company and each sell %
of our shares annually. Since the shares would be sold at 125% of book value, this
approach would produce the same $40,000 of cash initially, a sum that would grow
annually. Call this option the “sell-off” approach.
Under this “sell-off” scenario, the net worth of our company increases to
$6,211,696 after ten years ($2 million compounded at 12%). Because we would be
selling shares each year, our percentage ownership would have declined, and, after ten
years, we would each own % of the business. Even so, your share of the net
worth of the company at that time would be $2,243,540. And, remember, every dollar
of net worth attributable to each of us can be sold for $. Therefore, the market
value of your remaining shares would be $2,804,425, about 4% greater than the value
of your shares if we had followed the dividend approach.
Moreover, your annual cash receipts from the sell-off policy would now be
running 4% more than you would have received under the dividend scenario. Voila! –
you would have both more cash to spend annually and more capital value.
This calculation, of course, assumes that our hypothetical company can earn an
average of 12% annually on net worth and that its shareholders can sell their shares
for an average of 125% of book value. To that point, the S&P 500 earns considerably
more than 12% on net worth and sells at a price far above 125% of that net worth.
Both assumptions also seem reasonable for Berkshire, though certainly not assured.
Moreover, on the plus side, there also is a possibility that the assumptions will be
exceeded. If they are, the argument for the sell-off policy becomes even stronger.
Over Berkshire’s history – admittedly one that won’t come close to being repeated –
the sell-off policy would have produced results for shareholders dramatically superior
to the dividend policy.
Aside from the favorable math, there are two further – and important – arguments
for a sell-off policy. First, dividends impose a specific cash-out policy upon all
shareholders. If, say, 40% of earnings is the policy, those who wish 30% or 50% will
be thwarted. Our 600,000 shareholders cover the waterfront in their desires for cash. It
is safe to say, however, that a great many of them – perhaps even most of them – are
in a net-savings mode and logically should prefer no payment at all.
The sell-off alternative, on the other hand, lets each shareholder make his own
choice between cash receipts and capital build-up. One shareholder can elect to cash
out, say, 60% of annual earnings while other shareholders elect 20% or nothing at all.
Of course, a shareholder in our dividend-paying scenario could turn around and use
his dividends to purchase more shares. But he would take a beating in doing so: He
would both incur taxes and also pay a 25% premium to get his dividend reinvested.
(Keep remembering, open-market purchases of the stock take place at 125% of book
value.)
The second disadvantage of the dividend approach is of equal importance: The
tax consequences for all taxpaying shareholders are inferior – usually far inferior – to
those under the sell-off program. Under the dividend program, all of the cash received
by shareholders each year is taxed whereas the sell-off program results in tax on only
the gain portion of the cash receipts.
Let me end this math exercise – and I can hear you cheering as I put away the
dentist drill – by using my own case to illustrate how a shareholder’s regular disposals
of shares can be accompanied by an increased investment in his or her business. For
the last seven years, I have annually given away about %ofmyBerkshire shares.
Through this process, my original position of 712,497,000 B-equivalent shares
(split-adjusted) has decreased to 528,525,623 shares. Clearly my ownership
percentage of the company has significantly decreased.
Yet my investment in the business has actually increased: The book value of my
current interest in Berkshire considerably exceeds the book value attributable to my
holdings of seven years ago. (The actual figures are $ billion for 2005 and $
billion for 2012.) In other words, I now have far more money working for me at
Berkshire even though my ownership of the company has materially decreased. It’s
also true that my share of both Berkshire’s intrinsic business value and the company’s
normal earning power is far greater than it was in 2005. Over time, I expect this
accretion of value to continue – albeit in a decidedly irregular fashion – even as I now
annually give away more than % of my shares (the increase having occurred
because I’ve recently doubled my lifetime pledges to certain foundations).
************
Above all, dividend policy should always be clear, consistent and rational. A
capricious policy will confuse owners and drive away would-be investors. Phil Fisher
put it wonderfully 54 years ago in Chapter 7 of his 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. Phil explained that
you can successfully run a restaurant that serves hamburgers or, alternatively, one that
features Chinese food. But you can’t switch capriciously between the two and retain
the fans of either.
Most companies pay consistent dividends, generally trying to increase them
annually and cutting them very reluctantly. Our “Big Four” portfolio companies
follow this sensible and understandable approach and, in certain cases, also
repurchase shares quite aggressively.
We applaud their actions and hope they continue on their present paths. We like
increased dividends, and we love repurchases at appropriate prices.
At Berkshire, however, we have consistently followed a different approach that
we know has been sensible and that we hope has been made understandable by the
paragraphs you have just read. We will stick with this policy as long as we believe our
assumptions about the book-value buildup and the market-price premium seem
reasonable. If the prospects for either factor change materially for the worse, we will
reexamine our actions.
The Annual Meeting
The annual meeting will be held on Saturday, May 4th at the CenturyLink Center.
Carrie Sova will be in charge. (Though that’s a new name, it’s the same wonderful
Carrie as last year; she got married in June to a very lucky guy.) All of our
headquarters group pitches in to help her; the whole affair is a homemade production,
and I couldn’t be more proud of those who put it together.
The doors will open at 7 ., and at 7:30 we will have our second International
Newspaper Tossing Challenge. The target will be the porch of a Clayton Home,
precisely 35 feet from the throwing line. Last year I successfully fought off all
challengers. But now Berkshire has acquired a large number of newspapers and with
them came much tossing talent (or so the throwers claim). Come see whether their
talent matches their talk. Better yet, join in. The papers will be 36 to 42 pages and you
must fold them yourself (no rubber bands).
At 8:30, a new Berkshire movie will be shown. An hour later, we will start the
question-and-answer period, which (with a break for lunch at the CenturyLink’s
stands) will last until 3:30. After a short recess, Charlie and I will convene the annual
meeting at 3:45. If you decide to leave during the day’s question periods, please do so
while Charlie is talking.
The best reason to exit, of course, is to shop. We will help you do so by filling the
194,300-square-foot hall that adjoins the meeting area with products from dozens of
Berkshire subsidiaries. Last year, you did your part, and most locations racked up
record sales. In a nine-hour period, we sold 1,090 pairs of Justin boots, (that’s a pair
every 30 seconds), 10,010 pounds of See’s candy, 12,879 Quikut knives (24 knives
per minute) and 5,784 pairs of Wells Lamont gloves, always a hot item. But you can
do better. Remember: Anyone who says money can’t buy happiness simply hasn’t
shopped at our meeting.
Last year, Brooks, our running shoe company, exhibited for the first time and ran
up sales of $150,000. Brooks is on fire: Its volume in 2012 grew 34%, and that was on
top of a similar 34% gain in 2011. The company’s management expects another jump
of 23% in 2013. We will again have a special commemorative shoe to offer at the
meeting.
On Sunday at 8 ., we will initiate the “Berkshire 5K,” a race starting at the
CenturyLink. Full details for participating will be included in the Visitor’s Guide that
you will receive with your credentials for the meeting. We will have plenty of
categories for competition, including one for the media. (It will be fun to report on
their performance.) Regretfully, I will forego running; someone has to man the
starting gun.
I should warn you that we have a lot of home-grown talent. Ted Weschler has run
the marathon in 3:01. Jim Weber, Brooks’ dynamic CEO, is another speedster with a
3:31 best. Todd Combs specializes in the triathlon, but has been clocked at 22 minutes
in the 5K.
That, however, is just the beginning: Our directors are also fleet of foot (that is,
some of our directors are). Steve Burke has run an amazing 2:39 Boston marathon.
(It’s a family thing; his wife, Gretchen, finished the New York marathon in 3:25.)
Charlotte Guyman’s best is 3:37, and Sue Decker crossed the tape in New York in
3:36. Charlie did not return his questionnaire.
GEICO will have a booth in the shopping area, staffed by a number of its top
counselors from around the country. Stop by for a quote. In most cases, GEICO will
be able to give you a shareholder discount (usually 8%). This special offer is
permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point:
The discount is not additive if you qualify for another, such as that given certain
groups.) Bring the details of your existing insurance and check out whether we can
save you money. For at least half of you, I believe we can.
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, including
a couple of new ones. Carol Loomis, who has been invaluable to me in editing this
letter since 1977, has recently authored Tap Dancing to Work: Warren Buffett on
Practically Everything. She and I have cosigned 500 copies, available exclusively at
the meeting.
The Outsiders, by William Thorndike, Jr., is an outstanding book about CEOs
who excelled at capital allocation. It has an insightful chapter on our director, Tom
Murphy, overall the best business manager I’ve ever met. I also recommend The
Clash of the Cultures by Jack Bogle and Laura Rittenhouse’s Investing Between the
Lines. Should you need to ship your book purchases, a shipping service will be
available nearby.
The Omaha World-Herald will again have a booth, offering a few books it has
recently published. Red-blooded Husker fans – is there any Nebraskan who isn’t one?
– will surely want to purchase Unbeatable. It tells the story of Nebraska football
during 1993-97, a golden era in which Tom Osborne’s teams went 60-3.
If you are a big spender – or aspire to become one – visit Signature Aviation on
the east side of the Omaha airport between noon and 5:00 . on Saturday. There we
will have a fleet of NetJets aircraft that will get your pulse racing. Come by bus; leave
by private jet. Live a little.
An attachment to the proxy material that is enclosed with this report explains how
you can obtain the credential you will need for admission to the meeting and other
events. Airlines have sometimes jacked up prices for the Berkshire weekend. If you
are coming from far away, compare the cost of flying to Kansas City versus Omaha.
The drive between the two cities is about hours, and it may be that you can save
significant money, particularly if you had planned to rent a car in Omaha. Spend the
savings with us.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between
Dodge and Pacific, we will again be having “Berkshire Weekend” discount pricing.
Last year the store did $ million of business during its annual meeting sale, an
all-time record that makes other retailers turn green. To obtain the Berkshire discount,
you must make your purchases between Tuesday, April 30th and Monday, May 6th
inclusive, and also present your meeting credential. The period’s special pricing will
even apply to the products of several prestigious manufacturers that normally have
ironclad rules against discounting but which, in the spirit of our shareholder weekend,
have made an exception for you. We appreciate their cooperation. NFM is open from
10 . to 9 . Monday through Saturday, and 10 . to 6 . on Sunday. On
Saturday this year, from 5:30 . to 8 ., NFM is having a picnic to which you are
all invited.
At Borsheims, we will again have two shareholder-only events. The first will be a
cocktail reception from ,May 3rd. The second, the main gala,
will be held on Sunday, May 5th, from 9 . to 4 . On Saturday, we will be open
until 6 . In recent years, our three-day volume has far exceeded sales in all of
December, normally a jeweler’s best month.
Around 1 . on Sunday, I will begin clerking at Borsheims. Last year my sales
totaled $ million. This year I won’t quit until I hit $2 million. Because I need to
leave well before sundown, I will be desperate to do business. Come take advantage
of me. Ask for my “Crazy Warren” price.
We will have huge crowds at Borsheims throughout the weekend. For your
convenience, therefore, shareholder prices will be available from Monday, April 29th
through Saturday, May 11th. During that period, please identify yourself as a
shareholder by presenting your meeting credentials or a brokerage statement that
shows you are a Berkshire holder.
On Sunday, in the mall outside of Borsheims, a blindfolded Patrick Wolff, twice
. chess champion, will take on all comers – who will have their eyes wide open –
in groups of six. Nearby, Norman Beck, a remarkable magician from Dallas, will
bewilder onlookers. Additionally, we will have Bob Hamman and Sharon Osberg, two
of the world’s top bridge experts, available to play bridge with our shareholders on
Sunday afternoon. Don’t play them for money.
Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders
on Sunday, May 5th. Both will be serving until 10 ., with Gorat’s opening at 1
. and Piccolo’s opening at 4 . These restaurants are my favorites, and I will eat
at both of them on Sunday evening. Remember: To make a reservation at Gorat’s, call
402-551-3733 on April 1st (but not before) and at Piccolo’s call 402-342-9038. At
Piccolo’s, order a giant root beer float for dessert. Only sissies get the small one. (I
once saw Bill Gates polish off two of the giant variety after a full-course dinner; that’s
when I knew he would make a great director.)
We will again have the same three financial journalists lead the
question-and-answer period at the meeting, asking Charlie and me questions that
shareholders have submitted to them by e-mail. The journalists and their e-mail
addresses are: Carol Loomis, of Fortune, who may be emailed at
cloomis@; Becky Quick, of CNBC, at
BerkshireQuestions@, and Andrew Ross Sorkin, of The New York Times,
at arsorkin@.
From the questions submitted, each journalist will choose the six he or she
decides are the most interesting and important. The journalists have told me your
question has the best chance of being selected if you keep it concise, avoid sending it
in at the last moment, make it Berkshire-related and include no more than two
questions in any email you send them. (In your email, let the journalist know if you
would like your name mentioned if your question is selected.)
Last year we had a second panel of three analysts who follow Berkshire. All were
insurance specialists, and shareholders subsequently indicated they wanted a little
more variety. Therefore, this year we will have one insurance analyst, Cliff Gallant of
Nomura Securities. Jonathan Brandt of Ruane, Cunniff & Goldfarb will join the
analyst panel to ask questions that deal with our non-insurance operations.
Finally – to spice things up – we would like to add to the panel a credentialed
bear on Berkshire, preferably one who is short the stock. Not yet having a bear
identified, we would like to hear from applicants. The only requirement is that you be
an investment professional and negative on Berkshire. The three analysts will bring
their own Berkshire-specific questions and alternate with the journalists and the
audience in asking them.
Charlie and I believe that all shareholders should have access to new Berkshire
information simultaneously and should also have adequate time to analyze it, which is
why we try to issue financial information after the market close on a Friday and why
our annual meeting is held on Saturdays. We do not talk one-on-one to large
institutional investors or analysts. Our hope is that the journalists and analysts will ask
questions that will further educate shareholders about their investment.
Neither Charlie nor I will get so much as a clue about the questions to be asked.
We know the journalists and analysts will come up with some tough ones, and that’s
the way we like it. All told, we expect at least 54 questions, which will allow for six
from each analyst and journalist and 18 from the audience. If there is some extra time,
we will take more from the audience. Audience questioners will be determined by
drawings that will take place at 8:15 . at each of the 11 microphones located in the
arena and main overflow room.
************
For good reason, I regularly extol the accomplishments of our operating
managers. They are truly All-Stars, who run their businesses as if they were the only
asset owned by their families. I believe their mindset to be as shareholder-oriented as
can be found in the universe of large publicly-owned companies. Most have no
financial need to work; the joy of hitting business “home runs” means as much to
them as their paycheck.
Equally important, however, are the 23 men and women who work with me at our
corporate office (all on one floor, which is the way we intend to keep it!).
This group efficiently deals with a multitude of SEC and other regulatory
requirements, files a 21,500-page Federal income tax return as well as state and
foreign returns, responds to countless shareholder and media inquiries, gets out the
annual report, prepares for the country’s largest annual meeting, coordinates the
Board’s activities – and the list goes on and on.
They handle all of these business tasks cheerfully and with unbelievable
efficiency, making my life easy and pleasant. Their efforts go beyond activities
strictly related to Berkshire: Last year they dealt with 48 universities (selected from
200 applicants) who sent students to Omaha for a Q&A day with me. They also
handle all kinds of requests that I receive, arrange my travel, and even get me
hamburgers for lunch. No CEO has it better; I truly do feel like tap dancing to work
every day.
This home office crew, along with our operating managers, has my deepest
thanks and deserves yours as well. Come to Omaha – the cradle of capitalism – on
May 4th and chime in.
March 1, 2013 Warren E. Buffett Chairman of the Board
