ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
You may remember the wildly upbeat message of last year’s
report: nothing much was in the works but our experience had been
that something big popped up occasionally. This carefully-
crafted corporate strategy paid off in 1985. Later sections of
this report discuss (a) our purchase of a major position in
Capital Cities/ABC, (b) our acquisition of Scott & Fetzer, (c)
our entry into a large, extended term participation in the
insurance business of Fireman’s Fund, and (d) our sale of our
stock in General Foods.
Our gain in net worth during the year was $613.6 million, or
48.2%. It is fitting that the visit of Halley’s Comet coincided
with this percentage gain: neither will be seen again in my
lifetime. Our gain in per-share book value over the last twenty-
one years (that is, since present management took over) has been
from $19.46 to $1643.71, or 23.2% compounded annually, another
percentage that will not be repeated.
Two factors make anything approaching this rate of gain
unachievable in the future. One factor probably transitory - is
a stock market that offers very little opportunity compared to
the markets that prevailed throughout much of the 1964-1984
period. Today we cannot find significantly-undervalued equities
to purchase for our insurance company portfolios. The current
situation is 180 degrees removed from that existing about a
decade ago, when the only question was which bargain to choose.
This change in the market also has negative implications for
our present portfolio. In our 1974 annual report I could say:
“We consider several of our major holdings to have great
potential for significantly increased values in future years.” I
can’t say that now. It’s true that our insurance companies
currently hold major positions in companies with exceptional
underlying economics and outstanding managements, just as they
did in 1974. But current market prices generously appraise these
attributes, whereas they were ignored in 1974. Today’s
valuations mean that our insurance companies have no chance for
future portfolio gains on the scale of those achieved in the
past.
The second negative factor, far more telling, is our size.
Our equity capital is more than twenty times what it was only ten
years ago. And an iron law of business is that growth eventually
dampens exceptional economics. just look at the records of high-
return companies once they have amassed even $1 billion of equity
capital. None that I know of has managed subsequently, over a
ten-year period, to keep on earning 20% or more on equity while
reinvesting all or substantially all of its earnings. Instead,
to sustain their high returns, such companies have needed to shed
a lot of capital by way of either dividends or repurchases of
stock. Their shareholders would have been far better off if all
earnings could have been reinvested at the fat returns earned by
these exceptional businesses. But the companies simply couldn’t
turn up enough high-return opportunities to make that possible.
Their problem is our problem. Last year I told you that we
needed profits of $3.9 billion over the ten years then coming up
to earn 15% annually. The comparable figure for the ten years
now ahead is $5.7 billion, a 48% increase that corresponds - as
it must mathematically - to the growth in our capital base during
1985. (Here’s a little perspective: leaving aside oil companies,
only about 15 U.S. businesses have managed to earn over $5.7
billion during the past ten years.)
Charlie Munger, my partner in managing Berkshire, and I are
reasonably optimistic about Berkshire’s ability to earn returns
superior to those earned by corporate America generally, and you
will benefit from the company’s retention of all earnings as long
as those returns are forthcoming. We have several things going
for us: (1) we don’t have to worry about quarterly or annual
figures but, instead, can focus on whatever actions will maximize
long-term value; (2) we can expand the business into any areas
that make sense - our scope is not circumscribed by history,
structure, or concept; and (3) we love our work. All of these
help. Even so, we will also need a full measure of good fortune
to average our hoped-for 15% - far more good fortune than was
required for our past 23.2%.
We need to mention one further item in the investment
equation that could affect recent purchasers of our stock.
Historically, Berkshire shares have sold modestly below intrinsic
business value. With the price there, purchasers could be
certain (as long as they did not experience a widening of this
discount) that their personal investment experience would at
least equal the financial experience of the business. But
recently the discount has disappeared, and occasionally a modest
premium has prevailed.
The elimination of the discount means that Berkshire’s
market value increased even faster than business value (which,
itself, grew at a pleasing pace). That was good news for any
owner holding while that move took place, but it is bad news for
the new or prospective owner. If the financial experience of new
owners of Berkshire is merely to match the future financial
experience of the company, any premium of market value over
intrinsic business value that they pay must be maintained.
Management cannot determine market prices, although it can,
by its disclosures and policies, encourage rational behavior by
market participants. My own preference, as perhaps you’d guess,
is for a market price that consistently approximates business
value. Given that relationship, all owners prosper precisely as
the business prospers during their period of ownership. Wild
swings in market prices far above and below business value do not
change the final gains for owners in aggregate; in the end,
investor gains must equal business gains. But long periods of
substantial undervaluation and/or overvaluation will cause the
gains of the business to be inequitably distributed among various
owners, with the investment result of any given owner largely
depending upon how lucky, shrewd, or foolish he happens to be.
Over the long term there has been a more consistent
relationship between Berkshire’s market value and business value
than has existed for any other publicly-traded equity with which
I am familiar. This is a tribute to you. Because you have been
rational, interested, and investment-oriented, the market price
for Berkshire stock has almost always been sensible. This
unusual result has been achieved by a shareholder group with
unusual demographics: virtually all of our shareholders are
individuals, not institutions. No other public company our size
can claim the same.
You might think that institutions, with their large staffs
of highly-paid and experienced investment professionals, would be
a force for stability and reason in financial markets. They are
not: stocks heavily owned and constantly monitored by
institutions have often been among the most inappropriately
valued.
Ben Graham told a story 40 years ago that illustrates why
investment professionals behave as they do: An oil prospector,
moving to his heavenly reward, was met by St. Peter with bad
news. “You’re qualified for residence”, said St. Peter, “but, as
you can see, the compound reserved for oil men is packed.
There’s no way to squeeze you in.” After thinking a moment, the
prospector asked if he might say just four words to the present
occupants. That seemed harmless to St. Peter, so the prospector
cupped his hands and yelled, “Oil discovered in hell.”
Immediately the gate to the compound opened and all of the oil
men marched out to head for the nether regions. Impressed, St.
Peter invited the prospector to move in and make himself
comfortable. The prospector paused. “No,” he said, “I think
I’ll go along with the rest of the boys. There might be some
truth to that rumor after all.”
Sources of Reported Earnings
The table on the next page shows the major sources of
Berkshire’s reported earnings. These numbers, along with far
more detailed sub-segment numbers, are the ones that Charlie and
I focus upon. We do not find consolidated figures an aid in
either managing or evaluating Berkshire and, in fact, never
prepare them for internal use.
Segment information is equally essential for investors
wanting to know what is going on in a multi-line business.
Corporate managers always have insisted upon such information
before making acquisition decisions but, until a few years ago,
seldom made it available to investors faced with acquisition and
disposition decisions of their own. Instead, when owners wishing
to understand the economic realities of their business asked for
data, managers usually gave them a we-can’t-tell-you-what-is-
going-on-because-it-would-hurt-the-company answer. Ultimately
the SEC ordered disclosure of segment data and management began
supplying real answers. The change in their behavior recalls an
insight of Al Capone: “You can get much further with a kind word
and a gun than you can with a kind word alone.”
In the table, amortization of Goodwill is not charged against the
specific businesses but, for reasons outlined in the Appendix to
my letter in the 1983 annual report, is aggregated as a separate
item. (A compendium of the 1977-1984 letters is available upon
request.) In the Business Segment Data and Management’s
Discussion sections on pages 39-41 and 49-55, much additional
information regarding our businesses is provided, including
Goodwill and Goodwill Amortization figures for each of the
segments. I urge you to read those sections as well as Charlie
Munger’s letter to Wesco shareholders, which starts on page 56.
(000s omitted)
-----------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1985 1984 1985 1984
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ................ $(44,230) $(48,060) $(23,569) $(25,955)
Net Investment Income ....... 95,217 68,903 79,716 62,059
Associated Retail Stores ...... 270 (1,072) 134 (579)
Blue Chip Stamps .............. 5,763 (1,843) 2,813 (899)
Buffalo News .................. 29,921 27,328 14,580 13,317
Mutual Savings and Loan ....... 2,622 1,456 4,016 3,151
Nebraska Furniture Mart ....... 12,686 14,511 5,181 5,917
Precision Steel ............... 3,896 4,092 1,477 1,696
See’s Candies ................. 28,989 26,644 14,558 13,380
Textiles ...................... (2,395) 418 (1,324) 226
Wesco Financial ............... 9,500 9,777 4,191 4,828
Amortization of Goodwill ...... (1,475) (1,434) (1,475) (1,434)
Interest on Debt .............. (14,415) (14,734) (7,288) (7,452)
Shareholder-Designated
Contributions .............. (4,006) (3,179) (2,164) (1,716)
Other ......................... 3,106 4,932 2,102 3,475
-------- -------- -------- --------
Operating Earnings .............. 125,449 87,739 92,948 70,014
Special General Foods Distribution 4,127 8,111 3,779 7,294
Special Washington Post
Distribution ................. 14,877 --- 13,851 ---
Sales of Securities ............. 468,903 104,699 325,237 71,587
-------- -------- -------- --------
Total Earnings - all entities ... $613,356 $200,549 $435,815 $148,895
======== ======== ======== ========
Our 1985 results include unusually large earnings from the
sale of securities. This fact, in itself, does not mean that we
had a particularly good year (though, of course, we did).
Security profits in a given year bear similarities to a college
graduation ceremony in which the knowledge gained over four years
is recognized on a day when nothing further is learned. We may
hold a stock for a decade or more, and during that period it may
grow quite consistently in both business and market value. In
the year in which we finally sell it there may be no increase in
value, or there may even be a decrease. But all growth in value
since purchase will be reflected in the accounting earnings of
the year of sale. (If the stock owned is in our insurance
subsidiaries, however, any gain or loss in market value will be
reflected in net worth annually.) Thus, reported capital gains or
losses in any given year are meaningless as a measure of how well
we have done in the current year.
A large portion of the realized gain in 1985 ($338 million
pre-tax out of a total of $488 million) came about through the
sale of our General Foods shares. We held most of these shares
since 1980, when we had purchased them at a price far below what
we felt was their per/share business value. Year by year, the
managerial efforts of Jim Ferguson and Phil Smith substantially
increased General Foods’ business value and, last fall, Philip
Morris made an offer for the company that reflected the increase.
We thus benefited from four factors: a bargain purchase price, a
business with fine underlying economics, an able management
concentrating on the interests of shareholders, and a buyer
willing to pay full business value. While that last factor is
the only one that produces reported earnings, we consider
identification of the first three to be the key to building value
for Berkshire shareholders. In selecting common stocks, we
devote our attention to attractive purchases, not to the
possibility of attractive sales.
We have again reported substantial income from special
distributions, this year from Washington Post and General Foods.
(The General Foods transactions obviously took place well before
the Philip Morris offer.) Distributions of this kind occur when
we sell a portion of our shares in a company back to it
simultaneously with its purchase of shares from other
shareholders. The number of shares we sell is contractually set
so as to leave our percentage ownership in the company precisely
the same after the sale as before. Such a transaction is quite
properly regarded by the IRS as substantially equivalent to a
dividend since we, as a shareholder, receive cash while
maintaining an unchanged ownership interest. This tax treatment
benefits us because corporate taxpayers, unlike individual
taxpayers, incur much lower taxes on dividend income than on
income from long-term capital gains. (This difference will be
widened further if the House-passed tax bill becomes law: under
its provisions, capital gains realized by corporations will be
taxed at the same rate as ordinary income.) However, accounting
rules are unclear as to proper treatment for shareholder
reporting. To conform with last year’s treatment, we have shown
these transactions as capital gains.
Though we have not sought out such transactions, we have
agreed to them on several occasions when managements initiated
the idea. In each case we have felt that non-selling
shareholders (all of whom had an opportunity to sell at the same
price we received) benefited because the companies made their
repurchases at prices below intrinsic business value. The tax
advantages we receive and our wish to cooperate with managements
that are increasing values for all shareholders have sometimes
led us to sell - but only to the extent that our proportional
share of the business was undiminished.
At this point we usually turn to a discussion of some of our
major business units. Before doing so, however, we should first
look at a failure at one of our smaller businesses. Our Vice
Chairman, Charlie Munger, has always emphasized the study of
mistakes rather than successes, both in business and other
aspects of life. He does so in the spirit of the man who said:
“All I want to know is where I’m going to die so I’ll never go
there.” You’ll immediately see why we make a good team: Charlie
likes to study errors and I have generated ample material for
him, particularly in our textile and insurance businesses.
Shutdown of Textile Business
In July we decided to close our textile operation, and by
yearend this unpleasant job was largely completed. The history
of this business is instructive.
When Buffett Partnership, Ltd., an investment partnership of
which I was general partner, bought control of Berkshire Hathaway
21 years ago, it had an accounting net worth of $22 million, all
devoted to the textile business. The company’s intrinsic
business value, however, was considerably less because the
textile assets were unable to earn returns commensurate with
their accounting value. Indeed, during the previous nine years
(the period in which Berkshire and Hathaway operated as a merged
company) aggregate sales of $530 million had produced an
aggregate loss of $10 million. Profits had been reported from
time to time but the net effect was always one step forward, two
steps back.
At the time we made our purchase, southern textile plants -
largely non-union - were believed to have an important
competitive advantage. Most northern textile operations had
closed and many people thought we would liquidate our business as
well.
We felt, however, that the business would be run much better
by a long-time employee whom. we immediately selected to be
president, Ken Chace. In this respect we were 100% correct: Ken
and his recent successor, Garry Morrison, have been excellent
managers, every bit the equal of managers at our more profitable
businesses.
In early 1967 cash generated by the textile operation was
used to fund our entry into insurance via the purchase of
National Indemnity Company. Some of the money came from earnings
and some from reduced investment in textile inventories,
receivables, and fixed assets. This pullback proved wise:
although much improved by Ken’s management, the textile business
never became a good earner, not even in cyclical upturns.
Further diversification for Berkshire followed, and
gradually the textile operation’s depressing effect on our
overall return diminished as the business became a progressively
smaller portion of the corporation. We remained in the business
for reasons that I stated in the 1978 annual report (and
summarized at other times also): “(1) our textile businesses are
very important employers in their communities, (2) management has
been straightforward in reporting on problems and energetic in
attacking them, (3) labor has been cooperative and understanding
in facing our common problems, and (4) the business should
average modest cash returns relative to investment.” I further
said, “As long as these conditions prevail - and we expect that
they will - we intend to continue to support our textile business
despite more attractive alternative uses for capital.”
It turned out that I was very wrong about (4). Though 1979
was moderately profitable, the business thereafter consumed major
amounts of cash. By mid-1985 it became clear, even to me, that
this condition was almost sure to continue. Could we have found
a buyer who would continue operations, I would have certainly
preferred to sell the business rather than liquidate it, even if
that meant somewhat lower proceeds for us. But the economics
that were finally obvious to me were also obvious to others, and
interest was nil.
I won’t close down businesses of sub-normal profitability
merely to add a fraction of a point to our corporate rate of
return. However, I also feel it inappropriate for even an
exceptionally profitable company to fund an operation once it
appears to have unending losses in prospect. Adam Smith would
disagree with my first proposition, and Karl Marx would disagree
with my second; the middle ground is the only position that
leaves me comfortable.
I should reemphasize that Ken and Garry have been
resourceful, energetic and imaginative in attempting to make our
textile operation a success. Trying to achieve sustainable
profitability, they reworked product lines, machinery
configurations and distribution arrangements. We also made a
major acquisition, Waumbec Mills, with the expectation of
important synergy (a term widely used in business to explain an
acquisition that otherwise makes no sense). But in the end
nothing worked and I should be faulted for not quitting sooner.
A recent Business Week article stated that 250 textile mills have
closed since 1980. Their owners were not privy to any
information that was unknown to me; they simply processed it more
objectively. I ignored Comte’s advice - “the intellect should be
the servant of the heart, but not its slave” - and believed what
I preferred to believe.
The domestic textile industry operates in a commodity
business, competing in a world market in which substantial excess
capacity exists. Much of the trouble we experienced was
attributable, both directly and indirectly, to competition from
foreign countries whose workers are paid a small fraction of the
U.S. minimum wage. But that in no way means that our labor force
deserves any blame for our closing. In fact, in comparison with
employees of American industry generally, our workers were poorly
paid, as has been the case throughout the textile business. In
contract negotiations, union leaders and members were sensitive
to our disadvantageous cost position and did not push for
unrealistic wage increases or unproductive work practices. To
the contrary, they tried just as hard as we did to keep us
competitive. Even during our liquidation period they performed
superbly. (Ironically, we would have been better off financially
if our union had behaved unreasonably some years ago; we then
would have recognized the impossible future that we faced,
promptly closed down, and avoided significant future losses.)
Over the years, we had the option of making large capital
expenditures in the textile operation that would have allowed us
to somewhat reduce variable costs. Each proposal to do so looked
like an immediate winner. Measured by standard return-on-
investment tests, in fact, these proposals usually promised
greater economic benefits than would have resulted from
comparable expenditures in our highly-profitable candy and
newspaper businesses.
But the promised benefits from these textile investments
were illusory. Many of our competitors, both domestic and
foreign, were stepping up to the same kind of expenditures and,
once enough companies did so, their reduced costs became the
baseline for reduced prices industrywide. Viewed individually,
each company’s capital investment decision appeared cost-
effective and rational; viewed collectively, the decisions
neutralized each other and were irrational (just as happens when
each person watching a parade decides he can see a little better
if he stands on tiptoes). After each round of investment, all
the players had more money in the game and returns remained
anemic.
Thus, we faced a miserable choice: huge capital investment
would have helped to keep our textile business alive, but would
have left us with terrible returns on ever-growing amounts of
capital. After the investment, moreover, the foreign competition
would still have retained a major, continuing advantage in labor
costs. A refusal to invest, however, would make us increasingly
non-competitive, even measured against domestic textile
manufacturers. I always thought myself in the position described
by Woody Allen in one of his movies: “More than any other time in
history, mankind faces a crossroads. One path leads to despair
and utter hopelessness, the other to total extinction. Let us
pray we have the wisdom to choose correctly.”
For an understanding of how the to-invest-or-not-to-invest
dilemma plays out in a commodity business, it is instructive to
look at Burlington Industries, by far the largest U.S. textile
company both 21 years ago and now. In 1964 Burlington had sales
of $1.2 billion against our $50 million. It had strengths in
both distribution and production that we could never hope to
match and also, of course, had an earnings record far superior to
ours. Its stock sold at 60 at the end of 1964; ours was 13.
Burlington made a decision to stick to the textile business,
and in 1985 had sales of about $2.8 billion. During the 1964-85
period, the company made capital expenditures of about $3
billion, far more than any other U.S. textile company and more
than $200-per-share on that $60 stock. A very large part of the
expenditures, I am sure, was devoted to cost improvement and
expansion. Given Burlington’s basic commitment to stay in
textiles, I would also surmise that the company’s capital
decisions were quite rational.
Nevertheless, Burlington has lost sales volume in real
dollars and has far lower returns on sales and equity now than 20
years ago. Split 2-for-1 in 1965, the stock now sells at 34 --
on an adjusted basis, just a little over its $60 price in 1964.
Meanwhile, the CPI has more than tripled. Therefore, each share
commands about one-third the purchasing power it did at the end
of 1964. Regular dividends have been paid but they, too, have
shrunk significantly in purchasing power.
This devastating outcome for the shareholders indicates what
can happen when much brain power and energy are applied to a
faulty premise. The situation is suggestive of Samuel Johnson’s
horse: “A horse that can count to ten is a remarkable horse - not
a remarkable mathematician.” Likewise, a textile company that
allocates capital brilliantly within its industry is a remarkable
textile company - but not a remarkable business.
My conclusion from my own experiences and from much
observation of other businesses is that a good managerial record
(measured by economic returns) is far more a function of what
business boat you get into than it is of how effectively you row
(though intelligence and effort help considerably, of course, in
any business, good or bad). Some years ago I wrote: “When a
management with a reputation for brilliance tackles a business
with a reputation for poor fundamental economics, it is the
reputation of the business that remains intact.” Nothing has
since changed my point of view on that matter. Should you find
yourself in a chronically-leaking boat, energy devoted to
changing vessels is likely to be more productive than energy
devoted to patching leaks.
* * *
There is an investment postscript in our textile saga. Some
investors weight book value heavily in their stock-buying
decisions (as I, in my early years, did myself). And some
economists and academicians believe replacement values are of
considerable importance in calculating an appropriate price level
for the stock market as a whole. Those of both persuasions would
have received an education at the auction we held in early 1986
to dispose of our textile machinery.
The equipment sold (including some disposed of in the few
months prior to the auction) took up about 750,000 square feet of
factory space in New Bedford and was eminently usable. It
originally cost us about $13 million, including $2 million spent
in 1980-84, and had a current book value of $866,000 (after
accelerated depreciation). Though no sane management would have
made the investment, the equipment could have been replaced new
for perhaps $30-$50 million.
Gross proceeds from our sale of this equipment came to
$163,122. Allowing for necessary pre- and post-sale costs, our
net was less than zero. Relatively modern looms that we bought
for $5,000 apiece in 1981 found no takers at $50. We finally
sold them for scrap at $26 each, a sum less than removal costs.
Ponder this: the economic goodwill attributable to two paper
routes in Buffalo - or a single See’s candy store - considerably
exceeds the proceeds we received from this massive collection of
tangible assets that not too many years ago, under different
competitive conditions, was able to employ over 1,000 people.
Three Very Good Businesses (and a Few Thoughts About Incentive
Compensation)
When I was 12, I lived with my grandfather for about four
months. A grocer by trade, he was also working on a book and
each night he dictated a few pages to me. The title - brace
yourself - was “How to Run a Grocery Store and a Few Things I
Have Learned About Fishing”. My grandfather was sure that
interest in these two subjects was universal and that the world
awaited his views. You may conclude from this section’s title
and contents that I was overexposed to Grandpa’s literary style
(and personality).
I am merging the discussion of Nebraska Furniture Mart,
See’s Candy Shops, and Buffalo Evening News here because the
economic strengths, weaknesses, and prospects of these businesses
have changed little since I reported to you a year ago. The
shortness of this discussion, however, is in no way meant to
minimize the importance of these businesses to us: in 1985 they
earned an aggregate of $72 million pre-tax. Fifteen years ago,
before we had acquired any of them, their aggregate earnings were
about $8 million pre-tax.
While an increase in earnings from $8 million to $72 million
sounds terrific - and usually is - you should not automatically
assume that to be the case. You must first make sure that
earnings were not severely depressed in the base year. If they
were instead substantial in relation to capital employed, an even
more important point must be examined: how much additional
capital was required to produce the additional earnings?
In both respects, our group of three scores well. First,
earnings 15 years ago were excellent compared to capital then
employed in the businesses. Second, although annual earnings are
now $64 million greater, the businesses require only about $40
million more in invested capital to operate than was the case
then.
The dramatic growth in earning power of these three
businesses, accompanied by their need for only minor amounts of
capital, illustrates very well the power of economic goodwill
during an inflationary period (a phenomenon explained in detail
in the 1983 annual report). The financial characteristics of
these businesses have allowed us to use a very large portion of
the earnings they generate elsewhere. Corporate America,
however, has had a different experience: in order to increase
earnings significantly, most companies have needed to increase
capital significantly also. The average American business has
required about $5 of additional capital to generate an additional
$1 of annual pre-tax earnings. That business, therefore, would
have required over $300 million in additional capital from its
owners in order to achieve an earnings performance equal to our
group of three.
When returns on capital are ordinary, an earn-more-by-
putting-up-more record is no great managerial achievement. You
can get the same result personally while operating from your
rocking chair. just quadruple the capital you commit to a savings
account and you will quadruple your earnings. You would hardly
expect hosannas for that particular accomplishment. Yet,
retirement announcements regularly sing the praises of CEOs who
have, say, quadrupled earnings of their widget company during
their reign - with no one examining whether this gain was
attributable simply to many years of retained earnings and the
workings of compound interest.
If the widget company consistently earned a superior return
on capital throughout the period, or if capital employed only
doubled during the CEO’s reign, the praise for him may be well
deserved. But if return on capital was lackluster and capital
employed increased in pace with earnings, applause should be
withheld. A savings account in which interest was reinvested
would achieve the same year-by-year increase in earnings - and,
at only 8% interest, would quadruple its annual earnings in 18
years.
The power of this simple math is often ignored by companies
to the detriment of their shareholders. Many corporate
compensation plans reward managers handsomely for earnings
increases produced solely, or in large part, by retained earnings
- i.e., earnings withheld from owners. For example, ten-year,
fixed-price stock options are granted routinely, often by
companies whose dividends are only a small percentage of
earnings.
An example will illustrate the inequities possible under
such circumstances. Let’s suppose that you had a $100,000
savings account earning 8% interest and “managed” by a trustee
who could decide each year what portion of the interest you were
to be paid in cash. Interest not paid out would be “retained
earnings” added to the savings account to compound. And let’s
suppose that your trustee, in his superior wisdom, set the “pay-
out ratio” at one-quarter of the annual earnings.
Under these assumptions, your account would be worth
$179,084 at the end of ten years. Additionally, your annual
earnings would have increased about 70% from $8,000 to $13,515
under this inspired management. And, finally, your “dividends”
would have increased commensurately, rising regularly from $2,000
in the first year to $3,378 in the tenth year. Each year, when
your manager’s public relations firm prepared his annual report
to you, all of the charts would have had lines marching skyward.
Now, just for fun, let’s push our scenario one notch further
and give your trustee-manager a ten-year fixed-price option on
part of your “business” (i.e., your savings account) based on its
fair value in the first year. With such an option, your manager
would reap a substantial profit at your expense - just from
having held on to most of your earnings. If he were both
Machiavellian and a bit of a mathematician, your manager might
also have cut the pay-out ratio once he was firmly entrenched.
This scenario is not as farfetched as you might think. Many
stock options in the corporate world have worked in exactly that
fashion: they have gained in value simply because management
retained earnings, not because it did well with the capital in
its hands.
Managers actually apply a double standard to options.
Leaving aside warrants (which deliver the issuing corporation
immediate and substantial compensation), I believe it is fair to
say that nowhere in the business world are ten-year fixed-price
options on all or a portion of a business granted to outsiders.
Ten months, in fact, would be regarded as extreme. It would be
particularly unthinkable for managers to grant a long-term option
on a business that was regularly adding to its capital. Any
outsider wanting to secure such an option would be required to
pay fully for capital added during the option period.
The unwillingness of managers to do-unto-outsiders, however,
is not matched by an unwillingness to do-unto-themselves.
(Negotiating with one’s self seldom produces a barroom brawl.)
Managers regularly engineer ten-year, fixed-price options for
themselves and associates that, first, totally ignore the fact
that retained earnings automatically build value and, second,
ignore the carrying cost of capital. As a result, these managers
end up profiting much as they would have had they had an option
on that savings account that was automatically building up in
value.
Of course, stock options often go to talented, value-adding
managers and sometimes deliver them rewards that are perfectly
appropriate. (Indeed, managers who are really exceptional almost
always get far less than they should.) But when the result is
equitable, it is accidental. Once granted, the option is blind
to individual performance. Because it is irrevocable and
unconditional (so long as a manager stays in the company), the
sluggard receives rewards from his options precisely as does the
star. A managerial Rip Van Winkle, ready to doze for ten years,
could not wish for a better “incentive” system.
(I can’t resist commenting on one long-term option given an
“outsider”: that granted the U.S. Government on Chrysler shares
as partial consideration for the government’s guarantee of some
lifesaving loans. When these options worked out well for the
government, Chrysler sought to modify the payoff, arguing that
the rewards to the government were both far greater than intended
and outsize in relation to its contribution to Chrysler’s
recovery. The company’s anguish over what it saw as an imbalance
between payoff and performance made national news. That anguish
may well be unique: to my knowledge, no managers - anywhere -
have been similarly offended by unwarranted payoffs arising from
options granted to themselves or their colleagues.)
Ironically, the rhetoric about options frequently describes
them as desirable because they put managers and owners in the
same financial boat. In reality, the boats are far different.
No owner has ever escaped the burden of capital costs, whereas a
holder of a fixed-price option bears no capital costs at all. An
owner must weigh upside potential against downside risk; an
option holder has no downside. In fact, the business project in
which you would wish to have an option frequently is a project in
which you would reject ownership. (I’ll be happy to accept a
lottery ticket as a gift - but I’ll never buy one.)
In dividend policy also, the option holders’ interests are
best served by a policy that may ill serve the owner. Think back
to the savings account example. The trustee, holding his option,
would benefit from a no-dividend policy. Conversely, the owner
of the account should lean to a total payout so that he can
prevent the option-holding manager from sharing in the account’s
retained earnings.
Despite their shortcomings, options can be appropriate under
some circumstances. My criticism relates to their indiscriminate
use and, in that connection, I would like to emphasize three
points:
First, stock options are inevitably tied to the overall
performance of a corporation. Logically, therefore, they should
be awarded only to those managers with overall responsibility.
Managers with limited areas of responsibility should have
incentives that pay off in relation to results under their
control. The .350 hitter expects, and also deserves, a big
payoff for his performance - even if he plays for a cellar-
dwelling team. And the .150 hitter should get no reward - even
if he plays for a pennant winner. Only those with overall
responsibility for the team should have their rewards tied to its
results.
Second, options should be structured carefully. Absent
special factors, they should have built into them a retained-
earnings or carrying-cost factor. Equally important, they should
be priced realistically. When managers are faced with offers for
their companies, they unfailingly point out how unrealistic
market prices can be as an index of real value. But why, then,
should these same depressed prices be the valuations at which
managers sell portions of their businesses to themselves? (They
may go further: officers and directors sometimes consult the Tax
Code to determine the lowest prices at which they can, in effect,
sell part of the business to insiders. While they’re at it, they
often elect plans that produce the worst tax result for the
company.) Except in highly unusual cases, owners are not well
served by the sale of part of their business at a bargain price -
whether the sale is to outsiders or to insiders. The obvious
conclusion: options should be priced at true business value.
Third, I want to emphasize that some managers whom I admire
enormously - and whose operating records are far better than mine
- disagree with me regarding fixed-price options. They have
built corporate cultures that work, and fixed-price options have
been a tool that helped them. By their leadership and example,
and by the use of options as incentives, these managers have
taught their colleagues to think like owners. Such a Culture is
rare and when it exists should perhaps be left intact - despite
inefficiencies and inequities that may infest the option program.
“If it ain’t broke, don’t fix it” is preferable to “purity at any
price”.
At Berkshire, however, we use an incentive@compensation
system that rewards key managers for meeting targets in their own
bailiwicks. If See’s does well, that does not produce incentive
compensation at the News - nor vice versa. Neither do we look at
the price of Berkshire stock when we write bonus checks. We
believe good unit performance should be rewarded whether
Berkshire stock rises, falls, or stays even. Similarly, we think
average performance should earn no special rewards even if our
stock should soar. “Performance”, furthermore, is defined in
different ways depending upon the underlying economics of the
business: in some our managers enjoy tailwinds not of their own
making, in others they fight unavoidable headwinds.
The rewards that go with this system can be large. At our
various business units, top managers sometimes receive incentive
bonuses of five times their base salary, or more, and it would
appear possible that one manager’s bonus could top $2 million in
1986. (I hope so.) We do not put a cap on bonuses, and the
potential for rewards is not hierarchical. The manager of a
relatively small unit can earn far more than the manager of a
larger unit if results indicate he should. We believe, further,
that such factors as seniority and age should not affect
incentive compensation (though they sometimes influence basic
compensation). A 20-year-old who can hit .300 is as valuable to
us as a 40-year-old performing as well.
Obviously, all Berkshire managers can use their bonus money
(or other funds, including borrowed money) to buy our stock in
the market. Many have done just that - and some now have large
holdings. By accepting both the risks and the carrying costs
that go with outright purchases, these managers truly walk in the
shoes of owners.
Now let’s get back - at long last - to our three businesses:
At Nebraska Furniture Mart our basic strength is an
exceptionally low-cost operation that allows the business to
regularly offer customers the best values available in home
furnishings. NFM is the largest store of its kind in the
country. Although the already-depressed farm economy worsened
considerably in 1985, the store easily set a new sales record. I
also am happy to report that NFM’s Chairman, Rose Blumkin (the
legendary “Mrs. B”), continues at age 92 to set a pace at the
store that none of us can keep up with. She’s there wheeling and
dealing seven days a week, and I hope that any of you who visit
Omaha will go out to the Mart and see her in action. It will
inspire you, as it does me.
At See’s we continue to get store volumes that are far
beyond those achieved by any competitor we know of. Despite the
unmatched consumer acceptance we enjoy, industry trends are not
good, and we continue to experience slippage in poundage sales on
a same-store basis. This puts pressure on per-pound costs. We
now are willing to increase prices only modestly and, unless we
can stabilize per-shop poundage, profit margins will narrow.
At the News volume gains are also difficult to achieve.
Though linage increased during 1985, the gain was more than
accounted for by preprints. ROP linage (advertising printed on
our own pages) declined. Preprints are far less profitable than
ROP ads, and also more vulnerable to competition. In 1985, the
News again controlled costs well and our household penetration
continues to be exceptional.
One problem these three operations do not have is
management. At See’s we have Chuck Huggins, the man we put in
charge the day we bought the business. Selecting him remains one
of our best business decisions. At the News we have Stan Lipsey,
a manager of equal caliber. Stan has been with us 17 years, and
his unusual business talents have become more evident with every
additional level of responsibility he has tackled. And, at the
Mart, we have the amazing Blumkins - Mrs. B, Louie, Ron, Irv, and
Steve - a three-generation miracle of management.
I consider myself extraordinarily lucky to be able to work
with managers such as these. I like them personally as much as I
admire them professionally.
Insurance Operations
Shown below is an updated version of our usual table,
listing two key figures for the insurance industry:
Yearly Change Combined Ratio
in Premiums after Policyholder
Written (%) Dividends
------------- ------------------
1972 ............... 10.2 96.2
1973 ............... 8.0 99.2
1974 ............... 6.2 105.4
1975 ............... 11.0 107.9
1976 ............... 21.9 102.4
1977 ............... 19.8 97.2
1978 ............... 12.8 97.5
1979 ............... 10.3 100.6
1980 ............... 6.0 103.1
1981 ............... 3.9 106.0
1982 ............... 4.4 109.7
1983 ............... 4.5 111.9
1984 (Revised) ..... 9.2 117.9
1985 (Estimated) ... 20.9 118.0
Source: Best’s Aggregates and Averages
The combined ratio represents total insurance costs (losses
incurred plus expenses) compared to revenue from premiums: a
ratio below 100 indicates an underwriting profit, and one above
100 indicates a loss.
The industry’s 1985 results were highly unusual. The
revenue gain was exceptional, and had insured losses grown at
their normal rate of most recent years - that is, a few points
above the inflation rate - a significant drop in the combined
ratio would have occurred. But losses in 1985 didn’t cooperate,
as they did not in 1984. Though inflation slowed considerably in
these years, insured losses perversely accelerated, growing by
16% in 1984 and by an even more startling 17% in 1985. The
year’s growth in losses therefore exceeds the inflation rate by
over 13 percentage points, a modern record.
Catastrophes were not the culprit in this explosion of loss
cost. True, there were an unusual number of hurricanes in 1985,
but the aggregate damage caused by all catastrophes in 1984 and
1985 was about 2% of premium volume, a not unusual proportion.
Nor was there any burst in the number of insured autos, houses,
employers, or other kinds of “exposure units”.
A partial explanation for the surge in the loss figures is
all the additions to reserves that the industry made in 1985. As
results for the year were reported, the scene resembled a revival
meeting: shouting “I’ve sinned, I’ve sinned”, insurance managers
rushed forward to confess they had under reserved in earlier
years. Their corrections significantly affected 1985 loss
numbers.
A more disturbing ingredient in the loss surge is the
acceleration in “social” or “judicial” inflation. The insurer’s
ability to pay has assumed overwhelming importance with juries
and judges in the assessment of both liability and damages. More
and more, “the deep pocket” is being sought and found, no matter
what the policy wording, the facts, or the precedents.
This judicial inflation represents a wild card in the
industry’s future, and makes forecasting difficult.
Nevertheless, the short-term outlook is good. Premium growth
improved as 1985 went along (quarterly gains were an estimated
15%, 19%, 24%, and 22%) and, barring a supercatastrophe, the
industry’s combined ratio should fall sharply in 1986.
The profit improvement, however, is likely to be of short
duration. Two economic principles will see to that. First,
commodity businesses achieve good levels of profitability only
when prices are fixed in some manner or when capacity is short.
Second, managers quickly add to capacity when prospects start to
improve and capital is available.
In my 1982 report to you, I discussed the commodity nature
of the insurance industry extensively. The typical policyholder
does not differentiate between products but concentrates instead
on price. For many decades a cartel-like procedure kept prices
up, but this arrangement has disappeared for good. The insurance
product now is priced as any other commodity for which a free
market exists: when capacity is tight, prices will be set
remuneratively; otherwise, they will not be.
Capacity currently is tight in many lines of insurance -
though in this industry, unlike most, capacity is an attitudinal
concept, not a physical fact. Insurance managers can write
whatever amount of business they feel comfortable writing,
subject only to pressures applied by regulators and Best’s, the
industry’s authoritative rating service. The comfort level of
both managers and regulators is tied to capital. More capital
means more comfort, which in turn means more capacity. In the
typical commodity business, furthermore, such as aluminum or
steel, a long gestation precedes the birth of additional
capacity. In the insurance industry, capital can be secured
instantly. Thus, any capacity shortage can be eliminated in
short order.
That’s exactly what’s going on right now. In 1985, about 15
insurers raised well over $3 billion, piling up capital so that
they can write all the business possible at the better prices now
available. The capital-raising trend has accelerated
dramatically so far in 1986.
If capacity additions continue at this rate, it won’t be
long before serious price-cutting appears and next a fall in
profitability. When the fall comes, it will be the fault of the
capital-raisers of 1985 and 1986, not the price-cutters of 198X.
(Critics should be understanding, however: as was the case in our
textile example, the dynamics of capitalism cause each insurer to
make decisions that for itself appear sensible, but that
collectively slash profitability.)
In past reports, I have told you that Berkshire’s strong
capital position - the best in the industry - should one day
allow us to claim a distinct competitive advantage in the
insurance market. With the tightening of the market, that day
arrived. Our premium volume more than tripled last year,
following a long period of stagnation. Berkshire’s financial
strength (and our record of maintaining unusual strength through
thick and thin) is now a major asset for us in securing good
business.
We correctly foresaw a flight to quality by many large
buyers of insurance and reinsurance who belatedly recognized that
a policy is only an IOU - and who, in 1985, could not collect on
many of their IOUs. These buyers today are attracted to
Berkshire because of its strong capital position. But, in a
development we did not foresee, we also are finding buyers drawn
to us because our ability to insure substantial risks sets us
apart from the crowd.
To understand this point, you need a few background facts
about large risks. Traditionally, many insurers have wanted to
write this kind of business. However, their willingness to do so
has been almost always based upon reinsurance arrangements that
allow the insurer to keep just a small portion of the risk itself
while passing on (“laying off”) most of the risk to its
reinsurers. Imagine, for example, a directors and officers
(“D & O”) liability policy providing $25 million of coverage.
By various “excess-of-loss” reinsurance contracts, the company
issuing that policy might keep the liability for only the first
$1 million of any loss that occurs. The liability for any loss
above that amount up to $24 million would be borne by the
reinsurers of the issuing insurer. In trade parlance, a company
that issues large policies but retains relatively little of the
risk for its own account writes a large gross line but a small
net line.
In any reinsurance arrangement, a key question is how the
premiums paid for the policy should be divided among the various
“layers” of risk. In our D & O policy, for example. what part of
the premium received should be kept by the issuing company to
compensate it fairly for taking the first $1 million of risk and
how much should be passed on to the reinsurers to compensate them
fairly for taking the risk between $1 million and $25 million?
One way to solve this problem might be deemed the Patrick
Henry approach: “I have but one lamp by which my feet are guided,
and that is the lamp of experience.” In other words, how much of
the total premium would reinsurers have needed in the past to
compensate them fairly for the losses they actually had to bear?
Unfortunately, the lamp of experience has always provided
imperfect illumination for reinsurers because so much of their
business is “long-tail”, meaning it takes many years before they
know what their losses are. Lately, however, the light has not
only been dim but also grossly misleading in the images it has
revealed. That is, the courts’ tendency to grant awards that are
both huge and lacking in precedent makes reinsurers’ usual
extrapolations or inferences from past data a formula for
disaster. Out with Patrick Henry and in with Pogo: “The future
ain’t what it used to be.”
The burgeoning uncertainties of the business, coupled with
the entry into reinsurance of many unsophisticated participants,
worked in recent years in favor of issuing companies writing a
small net line: they were able to keep a far greater percentage
of the premiums than the risk. By doing so, the issuing
companies sometimes made money on business that was distinctly
unprofitable for the issuing and reinsuring companies combined.
(This result was not necessarily by intent: issuing companies
generally knew no more than reinsurers did about the ultimate
costs that would be experienced at higher layers of risk.)
Inequities of this sort have been particularly pronounced in
lines of insurance in which much change was occurring and losses
were soaring; e.g., professional malpractice, D & 0, products
liability, etc. Given these circumstances, it is not surprising
that issuing companies remained enthusiastic about writing
business long after premiums became woefully inadequate on a
gross basis.
An example of just how disparate results have been for
issuing companies versus their reinsurers is provided by the 1984
financials of one of the leaders in large and unusual risks. In
that year the company wrote about $6 billion of business and kept
around $2 1/2 billion of the premiums, or about 40%. It gave the
remaining $3 1/2 billion to reinsurers. On the part of the
business kept, the company’s underwriting loss was less than $200
million - an excellent result in that year. Meanwhile, the part
laid off produced a loss of over $1.5 billion for the reinsurers.
Thus, the issuing company wrote at a combined ratio of well under
110 while its reinsurers, participating in precisely the same
policies, came in considerably over 140. This result was not
attributable to natural catastrophes; it came from run-of-the-
mill insurance losses (occurring, however, in surprising
frequency and size). The issuing company’s 1985 report is not
yet available, but I would predict it will show that dramatically
unbalanced results continued.
A few years such as this, and even slow-witted reinsurers
can lose interest, particularly in explosive lines where the
proper split in premium between issuer and reinsurer remains
impossible to even roughly estimate. The behavior of reinsurers
finally becomes like that of Mark Twain’s cat: having once sat on
a hot stove, it never did so again - but it never again sat on a
cold stove, either. Reinsurers have had so many unpleasant
surprises in long-tail casualty lines that many have decided
(probably correctly) to give up the game entirely, regardless of
price inducements. Consequently, there has been a dramatic pull-
back of reinsurance capacity in certain important lines.
This development has left many issuing companies under
pressure. They can no longer commit their reinsurers, time after
time, for tens of millions per policy as they so easily could do
only a year or two ago, and they do not have the capital and/or
appetite to take on large risks for their own account. For many
issuing companies, gross capacity has shrunk much closer to net
capacity - and that is often small, indeed.
At Berkshire we have never played the lay-it-off-at-a-profit
game and, until recently, that put us at a severe disadvantage in
certain lines. Now the tables are turned: we have the
underwriting capability whereas others do not. If we believe the
price to be right, we are willing to write a net line larger than
that of any but the largest insurers. For instance, we are
perfectly willing to risk losing $10 million of our own money on
a single event, as long as we believe that the price is right and
that the risk of loss is not significantly correlated with other
risks we are insuring. Very few insurers are willing to risk
half that much on single events - although, just a short while
ago, many were willing to lose five or ten times that amount as
long as virtually all of the loss was for the account of their
reinsurers.
In mid-1985 our largest insurance company, National
Indemnity Company, broadcast its willingness to underwrite large
risks by running an ad in three issues of an insurance weekly.
The ad solicited policies of only large size: those with a
minimum premium of $1 million. This ad drew a remarkable 600
replies and ultimately produced premiums totaling about $50
million. (Hold the applause: it’s all long-tail business and it
will be at least five years before we know whether this marketing
success was also an underwriting success.) Today, our insurance
subsidiaries continue to be sought out by brokers searching for
large net capacity.
As I have said, this period of tightness will pass; insurers
and reinsurers will return to underpricing. But for a year or
two we should do well in several segments of our insurance
business. Mike Goldberg has made many important improvements in
the operation (prior mismanagement by your Chairman having
provided him ample opportunity to do so). He has been
particularly successful recently in hiring young managers with
excellent potential. They will have a chance to show their stuff
in 1986.
Our combined ratio has improved - from 134 in 1984 to 111 in
1985 - but continues to reflect past misdeeds. Last year I told
you of the major mistakes I had made in loss-reserving, and
promised I would update you annually on loss-development figures.
Naturally, I made this promise thinking my future record would be
much improved. So far this has not been the case. Details on
last year’s loss development are on pages 50-52. They reveal
significant underreserving at the end of 1984, as they did in the
several years preceding.
The only bright spot in this picture is that virtually all
of the underreserving revealed in 1984 occurred in the
reinsurance area - and there, in very large part, in a few
contracts that were discontinued several years ago. This
explanation, however, recalls all too well a story told me many
years ago by the then Chairman of General Reinsurance Company.
He said that every year his managers told him that “except for
the Florida hurricane” or “except for Midwestern tornadoes”, they
would have had a terrific year. Finally he called the group
together and suggested that they form a new operation - the
Except-For Insurance Company - in which they would henceforth
place all of the business that they later wouldn’t want to count.
In any business, insurance or otherwise, “except for” should
be excised from the lexicon. If you are going to play the game,
you must count the runs scored against you in all nine innings.
Any manager who consistently says “except for” and then reports
on the lessons he has learned from his mistakes may be missing
the only important lesson - namely, that the real mistake is not
the act, but the actor.
Inevitably, of course, business errors will occur and the
wise manager will try to find the proper lessons in them. But
the trick is to learn most lessons from the experiences of
others. Managers who have learned much from personal experience
in the past usually are destined to learn much from personal
experience in the future.
GEICO, 38%-owned by Berkshire, reported an excellent year in
1985 in premium growth and investment results, but a poor year -
by its lofty standards - in underwriting. Private passenger auto
and homeowners insurance were the only important lines in the
industry whose results deteriorated significantly during the
year. GEICO did not escape the trend, although its record was
far better than that of virtually all its major competitors.
Jack Byrne left GEICO at mid-year to head Fireman’s Fund,
leaving behind Bill Snyder as Chairman and Lou Simpson as Vice
Chairman. Jack’s performance in reviving GEICO from near-
bankruptcy was truly extraordinary, and his work resulted in
enormous gains for Berkshire. We owe him a great deal for that.
We are equally indebted to Jack for an achievement that
eludes most outstanding leaders: he found managers to succeed him
who have talents as valuable as his own. By his skill in
identifying, attracting and developing Bill and Lou, Jack
extended the benefits of his managerial stewardship well beyond
his tenure.
Fireman’s Fund Quota-Share Contract
Never one to let go of a meal ticket, we have followed Jack
Byrne to Fireman’s Fund (“FFIC”) where he is Chairman and CEO of
the holding company.
On September 1, 1985 we became a 7% participant in all of
the business in force of the FFIC group, with the exception of
reinsurance they write for unaffiliated companies. Our contract
runs for four years, and provides that our losses and costs will
be proportionate to theirs throughout the contract period. If
there is no extension, we will thereafter have no participation
in any ongoing business. However, for a great many years in the
future, we will be reimbursing FFIC for our 7% of the losses that
occurred in the September 1, 1985 - August 31, 1989 period.
Under the contract FFIC remits premiums to us promptly and
we reimburse FFIC promptly for expenses and losses it has paid.
Thus, funds generated by our share of the business are held by us
for investment. As part of the deal, I’m available to FFIC for
consultation about general investment strategy. I’m not
involved, however, in specific investment decisions of FFIC, nor
is Berkshire involved in any aspect of the company’s underwriting
activities.
Currently FFIC is doing about $3 billion of business, and it
will probably do more as rates rise. The company’s September 1,
1985 unearned premium reserve was $1.324 billion, and it
therefore transferred 7% of this, or $92.7 million, to us at
initiation of the contract. We concurrently paid them $29.4
million representing the underwriting expenses that they had
incurred on the transferred premium. All of the FFIC business is
written by National Indemnity Company, but two-sevenths of it is
passed along to Wesco-Financial Insurance Company (“Wes-FIC”), a
new company organized by our 80%-owned subsidiary, Wesco
Financial Corporation. Charlie Munger has some interesting
comments about Wes-FIC and the reinsurance business on pages 60-
62.
To the Insurance Segment tables on page 41, we have added a
new line, labeled Major Quota Share Contracts. The 1985 results
of the FFIC contract are reported there, though the newness of
the arrangement makes these results only very rough
approximations.
After the end of the year, we secured another quota-share
contract, whose 1986 volume should be over $50 million. We hope
to develop more of this business, and industry conditions suggest
that we could: a significant number of companies are generating
more business than they themselves can prudently handle. Our
financial strength makes us an attractive partner for such
companies.
Marketable Securities
We show below our 1985 yearend net holdings in marketable
equities. All positions with a market value over $25 million are
listed, and the interests attributable to minority shareholders
of Wesco and Nebraska Furniture Mart are excluded.
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
1,036,461 Affiliated Publications, Inc. ....... $ 3,516 $ 55,710
900,800 American Broadcasting Companies, Inc. 54,435 108,997
2,350,922 Beatrice Companies, Inc. ............ 106,811 108,142
6,850,000 GEICO Corporation ................... 45,713 595,950
2,379,200 Handy & Harman ...................... 27,318 43,718
847,788 Time, Inc. .......................... 20,385 52,669
1,727,765 The Washington Post Company ......... 9,731 205,172
---------- ----------
267,909 1,170,358
All Other Common Stockholdings ...... 7,201 27,963
---------- ----------
Total Common Stocks $275,110 $1,198,321
========== ==========
We mentioned earlier that in the past decade the investment
environment has changed from one in which great businesses were
totally unappreciated to one in which they are appropriately
recognized. The Washington Post Company (“WPC”) provides an
excellent example.
We bought all of our WPC holdings in mid-1973 at a price of
not more than one-fourth of the then per-share business value of
the enterprise. Calculating the price/value ratio required no
unusual insights. Most security analysts, media brokers, and
media executives would have estimated WPC’s intrinsic business
value at $400 to $500 million just as we did. And its $100
million stock market valuation was published daily for all to
see. Our advantage, rather, was attitude: we had learned from
Ben Graham that the key to successful investing was the purchase
of shares in good businesses when market prices were at a large
discount from underlying business values.
Most institutional investors in the early 1970s, on the
other hand, regarded business value as of only minor relevance
when they were deciding the prices at which they would buy or
sell. This now seems hard to believe. However, these
institutions were then under the spell of academics at
prestigious business schools who were preaching a newly-fashioned
theory: the stock market was totally efficient, and therefore
calculations of business value - and even thought, itself - were
of no importance in investment activities. (We are enormously
indebted to those academics: what could be more advantageous in
an intellectual contest - whether it be bridge, chess, or stock
selection than to have opponents who have been taught that
thinking is a waste of energy?)
Through 1973 and 1974, WPC continued to do fine as a
business, and intrinsic value grew. Nevertheless, by yearend
1974 our WPC holding showed a loss of about 25%, with market
value at $8 million against our cost of $10.6 million. What we
had thought ridiculously cheap a year earlier had become a good
bit cheaper as the market, in its infinite wisdom, marked WPC
stock down to well below 20 cents on the dollar of intrinsic
value.
You know the happy outcome. Kay Graham, CEO of WPC, had the
brains and courage to repurchase large quantities of stock for
the company at those bargain prices, as well as the managerial
skills necessary to dramatically increase business values.
Meanwhile, investors began to recognize the exceptional economics
of the business and the stock price moved closer to underlying
value. Thus, we experienced a triple dip: the company’s business
value soared upward, per-share business value increased
considerably faster because of stock repurchases and, with a
narrowing of the discount, the stock price outpaced the gain in
per-share business value.
We hold all of the WPC shares we bought in 1973, except for
those sold back to the company in 1985’s proportionate
redemption. Proceeds from the redemption plus yearend market
value of our holdings total $221 million.
If we had invested our $10.6 million in any of a half-dozen
media companies that were investment favorites in mid-1973, the
value of our holdings at yearend would have been in the area of
$40 - $60 million. Our gain would have far exceeded the gain in
the general market, an outcome reflecting the exceptional
economics of the media business. The extra $160 million or so we
gained through ownership of WPC came, in very large part, from
the superior nature of the managerial decisions made by Kay as
compared to those made by managers of most media companies. Her
stunning business success has in large part gone unreported but
among Berkshire shareholders it should not go unappreciated.
Our Capital Cities purchase, described in the next section,
required me to leave the WPC Board early in 1986. But we intend
to hold indefinitely whatever WPC stock FCC rules allow us to.
We expect WPC’s business values to grow at a reasonable rate, and
we know that management is both able and shareholder-oriented.
However, the market now values the company at over $1.8 billion,
and there is no way that the value can progress from that level
at a rate anywhere close to the rate possible when the company’s
valuation was only $100 million. Because market prices have also
been bid up for our other holdings, we face the same vastly-
reduced potential throughout our portfolio.
You will notice that we had a significant holding in
Beatrice Companies at yearend. This is a short-term arbitrage
holding - in effect, a parking place for money (though not a
totally safe one, since deals sometimes fall through and create
substantial losses). We sometimes enter the arbitrage field when
we have more money than ideas, but only to participate in
announced mergers and sales. We would be a lot happier if the
funds currently employed on this short-term basis found a long-
term home. At the moment, however, prospects are bleak.
At yearend our insurance subsidiaries had about $400 million
in tax-exempt bonds, of which $194 million at amortized cost were
issues of Washington Public Power Supply System (“WPPSS”)
Projects 1, 2, and 3. 1 discussed this position fully last year,
and explained why we would not disclose further purchases or
sales until well after the fact (adhering to the policy we follow
on stocks). Our unrealized gain on the WPPSS bonds at yearend
was $62 million, perhaps one-third arising from the upward
movement of bonds generally, and the remainder from a more
positive investor view toward WPPSS 1, 2, and 3s. Annual tax-
exempt income from our WPPSS issues is about $30 million.
Capital Cities/ABC, Inc.
Right after yearend, Berkshire purchased 3 million shares of
Capital Cities/ABC, Inc. (“Cap Cities”) at $172.50 per share, the
market price of such shares at the time the commitment was made
early in March, 1985. I’ve been on record for many years about
the management of Cap Cities: I think it is the best of any
publicly-owned company in the country. And Tom Murphy and Dan
Burke are not only great managers, they are precisely the sort of
fellows that you would want your daughter to marry. It is a
privilege to be associated with them - and also a lot of fun, as
any of you who know them will understand.
Our purchase of stock helped Cap Cities finance the $3.5
billion acquisition of American Broadcasting Companies. For Cap
Cities, ABC is a major undertaking whose economics are likely to
be unexciting over the next few years. This bothers us not an
iota; we can be very patient. (No matter how great the talent or
effort, some things just take time: you can’t produce a baby in
one month by getting nine women pregnant.)
As evidence of our confidence, we have executed an unusual
agreement: for an extended period Tom, as CEO (or Dan, should he
be CEO) votes our stock. This arrangement was initiated by
Charlie and me, not by Tom. We also have restricted ourselves in
various ways regarding sale of our shares. The object of these
restrictions is to make sure that our block does not get sold to
anyone who is a large holder (or intends to become a large
holder) without the approval of management, an arrangement
similar to ones we initiated some years ago at GEICO and
Washington Post.
Since large blocks frequently command premium prices, some
might think we have injured Berkshire financially by creating
such restrictions. Our view is just the opposite. We feel the
long-term economic prospects for these businesses - and, thus,
for ourselves as owners - are enhanced by the arrangements. With
them in place, the first-class managers with whom we have aligned
ourselves can focus their efforts entirely upon running the
businesses and maximizing long-term values for owners. Certainly
this is much better than having those managers distracted by
“revolving-door capitalists” hoping to put the company “in play”.
(Of course, some managers place their own interests above those
of the company and its owners and deserve to be shaken up - but,
in making investments, we try to steer clear of this type.)
Today, corporate instability is an inevitable consequence of
widely-diffused ownership of voting stock. At any time a major
holder can surface, usually mouthing reassuring rhetoric but
frequently harboring uncivil intentions. By circumscribing our
blocks of stock as we often do, we intend to promote stability
where it otherwise might be lacking. That kind of certainty,
combined with a good manager and a good business, provides
excellent soil for a rich financial harvest. That’s the economic
case for our arrangements.
The human side is just as important. We don’t want managers
we like and admire - and who have welcomed a major financial
commitment by us - to ever lose any sleep wondering whether
surprises might occur because of our large ownership. I have
told them there will be no surprises, and these agreements put
Berkshire’s signature where my mouth is. That signature also
means the managers have a corporate commitment and therefore need
not worry if my personal participation in Berkshire’s affairs
ends prematurely (a term I define as any age short of three
digits).
Our Cap Cities purchase was made at a full price, reflecting
the very considerable enthusiasm for both media stocks and media
properties that has developed in recent years (and that, in the
case of some property purchases, has approached a mania). it’s no
field for bargains. However, our Cap Cities investment allies us
with an exceptional combination of properties and people - and we
like the opportunity to participate in size.
Of course, some of you probably wonder why we are now buying
Cap Cities at $172.50 per share given that your Chairman, in a
characteristic burst of brilliance, sold Berkshire’s holdings in
the same company at $43 per share in 1978-80. Anticipating your
question, I spent much of 1985 working on a snappy answer that
would reconcile these acts.
A little more time, please.
Acquisition of Scott & Fetzer
Right after yearend we acquired The Scott & Fetzer Company
(“Scott Fetzer”) of Cleveland for about $320 million. (In
addition, about $90 million of pre-existing Scott Fetzer debt
remains in place.) In the next section of this report I describe
the sort of businesses that we wish to buy for Berkshire. Scott
Fetzer is a prototype - understandable, large, well-managed, a
good earner.
The company has sales of about $700 million derived from 17
businesses, many leaders in their fields. Return on invested
capital is good to excellent for most of these businesses. Some
well-known products are Kirby home-care systems, Campbell
Hausfeld air compressors, and Wayne burners and water pumps.
World Book, Inc. - accounting for about 40% of Scott
Fetzer’s sales and a bit more of its income - is by far the
company’s largest operation. It also is by far the leader in its
industry, selling more than twice as many encyclopedia sets
annually as its nearest competitor. In fact, it sells more sets
in the U.S. than its four biggest competitors combined.
Charlie and I have a particular interest in the World Book
operation because we regard its encyclopedia as something
special. I’ve been a fan (and user) for 25 years, and now have
grandchildren consulting the sets just as my children did. World
Book is regularly rated the most useful encyclopedia by teachers,
librarians and consumer buying guides. Yet it sells for less
than any of its major competitors. Childcraft, another World
Book, Inc. product, offers similar value. This combination of
exceptional products and modest prices at World Book, Inc. helped
make us willing to pay the price demanded for Scott Fetzer,
despite declining results for many companies in the direct-
selling industry.
An equal attraction at Scott Fetzer is Ralph Schey, its CEO
for nine years. When Ralph took charge, the company had 31
businesses, the result of an acquisition spree in the 1960s. He
disposed of many that did not fit or had limited profit
potential, but his focus on rationalizing the original potpourri
was not so intense that he passed by World Book when it became
available for purchase in 1978. Ralph’s operating and capital-
allocation record is superb, and we are delighted to be
associated with him.
The history of the Scott Fetzer acquisition is interesting,
marked by some zigs and zags before we became involved. The
company had been an announced candidate for purchase since early
1984. A major investment banking firm spent many months
canvassing scores of prospects, evoking interest from several.
Finally, in mid-1985 a plan of sale, featuring heavy
participation by an ESOP (Employee Stock Ownership Plan), was
approved by shareholders. However, as difficulty in closing
followed, the plan was scuttled.
I had followed this corporate odyssey through the
newspapers. On October 10, well after the ESOP deal had fallen
through, I wrote a short letter to Ralph, whom I did not know. I
said we admired the company’s record and asked if he might like
to talk. Charlie and I met Ralph for dinner in Chicago on
October 22 and signed an acquisition contract the following week.
The Scott Fetzer acquisition, plus major growth in our
insurance business, should push revenues above $2 billion in
1986, more than double those of 1985.
Miscellaneous
The Scott Fetzer purchase illustrates our somewhat haphazard
approach to acquisitions. We have no master strategy, no
corporate planners delivering us insights about socioeconomic
trends, and no staff to investigate a multitude of ideas
presented by promoters and intermediaries. Instead, we simply
hope that something sensible comes along - and, when it does, we
act.
To give fate a helping hand, we again repeat our regular
“business wanted” ad. The only change from last year’s copy is
in (1): because we continue to want any acquisition we make to
have a measurable impact on Berkshire’s financial results, we
have raised our minimum profit requirement.
Here’s what we’re looking for:
(1) large purchases (at least $10 million of after-tax
earnings),
(2) demonstrated consistent earning power (future
projections are of little interest to us, nor are
“turn-around” situations),
(3) businesses earning good returns on equity while
employing little or no debt,
(4) management in place (we can’t supply it),
(5) simple businesses (if there’s lots of technology, we
won’t understand it),
(6) an offering price (we don’t want to waste our time
or that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
We will not engage in unfriendly takeovers. We can promise
complete confidentiality and a very fast answer - customarily
within five minutes - as to whether we’re interested. We prefer
to buy for cash, but will consider issuance of stock when we
receive as much in intrinsic business value as we give. Indeed,
following recent advances in the price of Berkshire stock,
transactions involving stock issuance may be quite feasible. We
invite potential sellers to check us out by contacting people
with whom we have done business in the past. For the right
business - and the right people - we can provide a good home.
On the other hand, we frequently get approached about
acquisitions that don’t come close to meeting our tests: new
ventures, turnarounds, auction-like sales, and the ever-popular
(among brokers) “I’m-sure-something-will-work-out-if-you-people-
get-to-know-each-other”. None of these attracts us in the least.
* * *
Besides being interested in the purchases of entire
businesses as described above, we are also interested in the
negotiated purchase of large, but not controlling, blocks of
stock, as in our Cap Cities purchase. Such purchases appeal to
us only when we are very comfortable with both the economics of
the business and the ability and integrity of the people running
the operation. We prefer large transactions: in the unusual case
we might do something as small as $50 million (or even smaller),
but our preference is for commitments many times that size.
* * *
About 96.8% of all eligible shares participated in
Berkshire’s 1985 shareholder-designated contributions program.
Total contributions made through the program were $4 million, and
1,724 charities were recipients. We conducted a plebiscite last
year in order to get your views about this program, as well as
about our dividend policy. (Recognizing that it’s possible to
influence the answers to a question by the framing of it, we
attempted to make the wording of ours as neutral as possible.) We
present the ballot and the results in the Appendix on page 69. I
think it’s fair to summarize your response as highly supportive
of present policies and your group preference - allowing for the
tendency of people to vote for the status quo - to be for
increasing the annual charitable commitment as our asset values
build.
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 66 and 67. If you wish to participate in future programs,
we strongly urge that you immediately make sure that your shares
are registered in the name of the actual owner, not in “street”
name or nominee name. Shares not so registered on September 30,
1986 will be ineligible for the 1986 program.
* * *
Five years ago we were required by the Bank Holding Company
Act of 1969 to dispose of our holdings in The Illinois National
Bank and Trust Company of Rockford, Illinois. Our method of
doing so was unusual: we announced an exchange ratio between
stock of Rockford Bancorp Inc. (the Illinois National’s holding
company) and stock of Berkshire, and then let each of our
shareholders - except me - make the decision as to whether to
exchange all, part, or none of his Berkshire shares for Rockford
shares. I took the Rockford stock that was left over and thus my
own holding in Rockford was determined by your decisions. At the
time I said, “This technique embodies the world’s oldest and most
elementary system of fairly dividing an object. Just as when you
were a child and one person cut the cake and the other got first
choice, I have tried to cut the company fairly, but you get first
choice as to which piece you want.”
Last fall Illinois National was sold. When Rockford’s
liquidation is completed, its shareholders will have received
per-share proceeds about equal to Berkshire’s per-share intrinsic
value at the time of the bank’s sale. I’m pleased that this
five-year result indicates that the division of the cake was
reasonably equitable.
Last year I put in a plug for our annual meeting, and you
took me up on the invitation. Over 250 of our more than 3,000
registered shareholders showed up. Those attending behaved just
as those present in previous years, asking the sort of questions
you would expect from intelligent and interested owners. You can
attend a great many annual meetings without running into a crowd
like ours. (Lester Maddox, when Governor of Georgia, was
criticized regarding the state’s abysmal prison system. “The
solution”, he said, “is simple. All we need is a better class of
prisoners.” Upgrading annual meetings works the same way.)
I hope you come to this year’s meeting, which will be held
on May 20 in Omaha. There will be only one change: after 48
years of allegiance to another soft drink, your Chairman, in an
unprecedented display of behavioral flexibility, has converted to
the new Cherry Coke. Henceforth, it will be the Official Drink
of the Berkshire Hathaway Annual Meeting.
And bring money: Mrs. B promises to have bargains galore if
you will pay her a visit at The Nebraska Furniture Mart after the
meeting.
Warren E. Buffett
Chairman of the Board
March 4, 1986
中文译文
伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦公司股东：
你们或许还记得去年年报中那个极其乐观的信息：当时没有什么大动作，但我们的经验是，偶尔会有大家伙冒出来。这个精心策划的公司战略在1985年得到了回报。本报告后续部分将讨论：(a) 我们购买了大都会/美国广播公司的多数股权，(b) 我们收购了斯科特·费泽公司，(c) 我们参与了一项大规模、长期的火人基金保险业务，以及 (d) 我们卖出了通用食品公司的股票。
我们今年的净资产增加了6.136亿美元，增幅为48.2%。哈雷彗星的到访与这个百分比增幅同时发生，真是恰如其分：这两样东西我这辈子都再也见不着了。过去二十一年（即自现任管理层接手以来），我们每股账面价值的增长是从19.46美元到1,643.71美元，年复合增长率23.2%，这也是一个不会再重复的百分比。
有两个因素使得任何接近这一增长率的事情在未来都不可能实现。一个因素（可能是暂时的）是，与1964-1984年间大部分时间普遍存在的市场相比，现在的股票市场机会寥寥。今天，我们无法为我们的保险公司投资组合找到显著低估的股票。当前的情况与大约十年前截然相反，那时唯一的问题就是选择哪个便宜货。
市场的这种变化也对我们现有的投资组合产生了负面影响。在1974年的年报中，我曾说：“我们认为我们的几个主要持股在未来几年有潜力实现价值的大幅增长。”现在我不能那么说了。诚然，我们的保险公司目前持有一些具有卓越基础经济和杰出管理层的公司的大量股份，就像1974年那样。但当前的市场价格对这些特质给予了慷慨的评估，而在1974年它们却被忽视了。今天的估值意味着我们的保险公司未来不可能再实现过去那样规模的投资组合收益。
第二个负面因素，影响要深远得多，是我们的规模。我们的股本资本是十年前二十多倍。商业的一条铁律是，增长最终会削弱卓越的经济效益。只要看看那些高回报公司的记录，一旦它们积累了哪怕10亿美元的股本资本，情况就变了。据我所知，没有哪家公司后来能在十年期间，将所有或绝大部分收益再投资的同时，继续维持20%或更高的净资产收益率。相反，为了维持高回报，这些公司需要通过分红或股份回购来释放大量资本。如果所有收益都能以这些卓越企业所赚取的丰厚回报进行再投资，它们的股东本会好得多。但公司根本无法找到足够多的高回报机会来实现这一点。
它们的问题就是我们的问题。去年我告诉你们，在接下来的十年里，我们需要39亿美元的利润才能获得15%的年回报率。现在未来十年对应的数字是57亿美元，增长了48%——这在数学上是必然的——对应我们1985年资本基数的增长。（这里提供一点背景：除了石油公司，过去十年中，美国只有大约15家企业成功赚取了超过57亿美元的利润。）
我的合伙人查理·芒格和我，对伯克希尔获得优于美国企业平均水平回报的能力相当乐观，只要这些回报能持续产生，你们将从公司留存所有收益中受益。我们有几个有利因素：(1) 我们不必担心季度或年度数据，而是可以专注于任何能最大化长期价值的行动；(2) 我们可以将业务扩展到任何有意义的领域——我们的范围不受历史、结构或概念的限制；(3) 我们热爱我们的工作。所有这些都有帮助。即便如此，我们仍然需要十足的好运才能达到我们期望的15%的平均回报率——这比我们过去实现23.2%所需要的好运要多得多。
我们还需要提及投资等式中的一个项目，它可能影响我们股票的近期购买者。从历史上看，伯克希尔的股价一直略低于内在商业价值。在这种价格下，购买者可以确定（只要他们没有经历这种折价的扩大），他们的个人投资体验至少会等同于企业的财务体验。但最近，这种折价消失了，偶尔还会出现适度的溢价。
折价的消除意味着伯克希尔的市值增长甚至快于商业价值（商业价值本身也在以令人满意的速度增长）。对于在此过程中持股的所有者来说，这是个好消息，但对于新的或潜在的所有者来说，这是个坏消息。如果伯克希尔新所有者的财务体验仅仅是为了匹配公司未来的财务体验，那么他们支付的任何市值相对于内在商业价值的溢价都必须得以维持。
管理层无法决定市场价格，尽管它可以通过其披露和政策，鼓励市场参与者的理性行为。你们也许猜得到，我个人的偏好是市场价格持续接近商业价值。在这种关系下，所有所有者都能在持有期间，随着企业的繁荣而同步繁荣。市场价格远高于或远低于商业价值的剧烈波动，并不会改变所有者的最终总收益；归根结底，投资者的收益必须等于企业的收益。但是，长期的大幅低估和/或高估，会导致企业收益在不同所有者之间的不公平分配，任何一个特定所有者的投资结果很大程度上取决于他恰好有多幸运、精明或愚蠢。
从长期来看，伯克希尔的市值与商业价值之间的关系，比我所知的任何其他公开交易股票都更为一致。这是对你们的致敬。因为你们理性、感兴趣且以投资为导向，伯克希尔股票的市场价格几乎总是合理的。这一不同寻常的结果是由一个拥有不同寻常人口结构的股东群体实现的：实际上我们所有的股东都是个人，而不是机构。没有其他我们这样规模的上市公司能这么说。
你们可能会认为，机构拥有众多高薪且经验丰富的投资专业人士，应该是金融市场的稳定和理性力量。但它们不是：那些机构大量持有并持续监控的股票，往往是最容易被错误定价的。
本·格雷厄姆40年前讲过一个故事，说明了投资专业人士为何会如此行事：一位石油勘探者，前往天国领取他的奖赏，圣彼得却带来了坏消息。“你有资格在这里居住，”圣彼得说，“但是，你看，为石油商预留的院子已经挤满了。实在没地方塞你了。”勘探者想了一会儿，问他能否对现住的居民说四个字。圣彼得觉得这似乎无害，于是勘探者双手拢成喇叭状大喊：“地狱里发现石油了。”院子的门立刻打开了，所有的石油商都冲出去直奔那下面的世界。圣彼得印象深刻，邀请勘探者搬进去，让自己舒服一点。勘探者犹豫了一下。“不，”他说，“我想我还是跟其他伙计们一起去吧。那个传闻说不定还真有点道理。”
### 报告收益的来源
下一页的表格显示了伯克希尔报告收益的主要来源。这些数字，以及更为详细的子板块数据，是查理和我关注的焦点。我们认为合并数据对于管理或评估伯克希尔并无帮助，事实上，我们也从未为内部使用编制过合并报表。
对于想要了解多元经营企业实际情况的投资者来说，分部信息同样至关重要。公司管理层在做收购决策时，一贯坚持要求获得此类信息，但直到几年前，他们很少向面临自身收购和处置决策的投资者提供这些信息。相反，当希望了解其业务经济现实的所有者要求提供数据时，管理者通常会用“我们不能告诉你发生了什么，因为这会损害公司利益”来搪塞。最终，美国证监会下令披露分部数据，管理层才开始提供真实的答案。他们行为的这种转变，让人想起艾尔·卡彭的一句名言：“用一句好话和一把枪，比光用好话能走得更远。”
在表格中，商誉摊销并未从具体业务中扣除，而是根据我1983年年报信函附录中概述的原因，作为单独项目汇总。（可索取1977-1984年信函汇编。）在第39-41页和第49-55页的“业务分部数据”和“管理层讨论”部分，提供了更多关于我们业务的信息，包括每个分部的商誉和商誉摊销数据。我恳请你们也阅读这些部分，以及从第56页开始的查理·芒格致韦斯科股东的信。
(千美元省略)
-----------------------------------------
伯克希尔应占
净利润（税后
税前利润 并扣除少数股东权益）
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1985 1984 1985 1984
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营业利润：
保险集团：
承销业务 ................ $(44,230) $(48,060) $(23,569) $(25,955)
净投资收益 ............... 95,217 68,903 79,716 62,059
联合零售商店 .............. 270 (1,072) 134 (579)
蓝筹印花公司 .............. 5,763 (1,843) 2,813 (899)
布法罗新闻 ............... 29,921 27,328 14,580 13,317
互助储蓄与贷款 ........... 2,622 1,456 4,016 3,151
内布拉斯加家具城 ......... 12,686 14,511 5,181 5,917
精密钢铁公司 ............. 3,896 4,092 1,477 1,696
喜诗糖果 ................. 28,989 26,644 14,558 13,380
纺织业务 ................. (2,395) 418 (1,324) 226
韦斯科金融公司 ........... 9,500 9,777 4,191 4,828
商誉摊销 ................. (1,475) (1,434) (1,475) (1,434)
债务利息 ................. (14,415) (14,734) (7,288) (7,452)
股东指定
捐赠款项 ............... (4,006) (3,179) (2,164) (1,716)
其他 ..................... 3,106 4,932 2,102 3,475
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营业利润 ................... 125,449 87,739 92,948 70,014
通用食品特别分配收益 ....... 4,127 8,111 3,779 7,294
华盛顿邮报特别分配收益 ..... 14,877 --- 13,851 ---
证券出售收益 ............... 468,903 104,699 325,237 71,587
-------- -------- -------- --------
所有实体总收益 ............. $613,356 $200,549 $435,815 $148,895
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我们1985年的业绩包含了异常高的证券出售收益。这个事实本身并不意味着我们过了一个特别好的年份（当然，我们确实如此）。特定年份的证券利润，有点像大学毕业典礼，四年积累的知识在一天得到认可，但这一天并没有学到新东西。我们可能持有一只股票十年甚至更久，在此期间，其业务价值和市场价值都可能持续增长。但在我们最终卖出的那一年，价值可能没有任何增长，甚至可能下降。但自购买以来的所有价值增长都将反映在该卖出年份的会计收益中。（然而，如果持有的股票在我们的保险子公司中，其市值的任何损益将每年反映在净资产中。）因此，任何特定年份报告实现的资本利得或损失，作为衡量我们当年表现的标准是毫无意义的。
1985年实现收益的很大一部分（税前总额4.88亿美元中的3.38亿美元）来自出售我们持有的通用食品公司股票。我们自1980年起持有大部分这些股票，当时我们以远低于我们认为的每股商业价值的价格买入。年复一年，吉姆·弗格森和菲尔·史密斯的管理努力显著提升了通用食品的商业价值，去年秋天，菲利普·莫里斯公司提出收购该公司，反映了这种增长。因此，我们从四个因素中受益：一个便宜的购买价格，一个基础经济良好的企业，一个专注于股东利益的高效管理层，以及一个愿意支付全部商业价值的买家。虽然最后一个因素是唯一产生报告收益的因素，但我们认为识别前三个因素是为伯克希尔股东创造价值的关键。在选择普通股时，我们把注意力放在有吸引力的买入上，而不是有吸引力的卖出可能性上。
我们再次报告了来自特别分配的大量收入，今年来自华盛顿邮报和通用食品。（通用食品的交易显然远在菲利普·莫里斯提出要约之前。）当我们向公司卖回一部分我们持有的股份，同时公司从其他股东那里购买股份时，就会发生这种分配。我们出售的股份数量是合同约定的，以确保出售后的持股比例与出售前完全一致。美国国税局很恰当地将此类交易视同于股息，因为作为股东，我们在保持所有权不变的情况下获得了现金。这种税务处理对我们有利，因为作为纳税实体的公司，其股息收入的税率远低于长期资本利得收入。（如果众议院通过的税收法案成为法律，这种差异将进一步扩大：根据其规定，公司实现的资本利得将与普通收入按相同税率征税。）然而，会计准则对于股东报告的适当处理尚不明确。为了与去年的处理方式保持一致，我们将这些交易列为资本利得。
虽然我们没有主动寻求此类交易，但当管理层提出想法时，我们曾多次同意。在每种情况下，我们都觉得非出售股东（他们都有机会以我们收到的相同价格出售）受益，因为公司以低于内在商业价值的价格进行了回购。我们获得的税收优惠以及我们希望与那些为所有股东增加价值的管理层合作的愿望，有时导致我们出售——但仅限于我们的持股比例没有减少的程度。
到了这里，我们通常会转向讨论我们的一些主要业务部门。但在这样做之前，我们首先应该看看我们一个小型业务上的失败。我们的副董事长查理·芒格总是强调研究错误而不是成功，无论是在商业还是生活的其他方面。他这样做是本着那个人的精神说的：“我只想知道我会死在哪里，这样我就永远不会去那里。”你们立刻就会明白为什么我们是个好搭档：查理喜欢研究错误，而我为他提供了充足的素材，尤其是在我们的纺织和保险业务方面。
### 纺织业务关闭
七月，我们决定关闭我们的纺织业务，到年底这项令人不快的任务基本完成了。这项业务的历史很有启发性。
21年前，当巴菲特合伙有限公司（一个我担任普通合伙人的投资合伙企业）取得伯克希尔·哈撒韦的控制权时，它的会计净资产为2200万美元，全部投入纺织业务。然而，公司的内在商业价值要低得多，因为纺织资产无法赚取与其会计价值相称的回报。事实上，在之前的九年（伯克希尔和哈撒韦作为合并公司运营的时期），总销售额5.3亿美元产生了总亏损1000万美元。不时有盈利报告，但净效果总是进一步、退两步。
在我们购买时，南方的纺织厂（基本上没有工会）被认为拥有重要的竞争优势。大多数北方的纺织业务已经关闭，许多人认为我们也会清算我们的业务。
然而，我们觉得，如果由一位长期雇员来管理，业务会运营得好得多，我们立即选择肯·蔡斯担任总裁。在这方面，我们百分之百正确：肯和他的继任者加里·莫里森都是优秀的管理者，完全比得上我们更盈利业务的管理者。
1967年初，纺织业务产生的现金被用来购买国民赔偿公司，从而进入保险业。部分资金来自盈利，部分来自减少对纺织库存、应收账款和固定资产的投资。事实证明，这种收缩是明智的：尽管肯的管理有很大改善，但纺织业务从未成为好的盈利者，即使在周期性上升期也是如此。
伯克希尔随后进行了进一步的多元化，随着纺织业务在公司中占比逐渐缩小，它对我们的整体回报产生的压抑效应也减弱了。我们继续经营这项业务的原因，正如我在1978年年报中所述（并在其他场合总结过）： “(1) 我们的纺织企业对所在社区是至关重要的雇主，(2) 管理层在报告问题和积极应对方面一直很坦率，(3) 工人在面对我们共同的问题时一直合作和理解，(4) 相对于投资，该业务平均应能产生适度的现金回报。” 我进一步说，“只要这些条件仍然存在——我们预计会如此——即使有更有吸引力的资本替代用途，我们也打算继续支持我们的纺织业务。”
结果证明我对(4)的看法大错特错。虽然1979年略有盈利，但此后该业务消耗了大量现金。到1985年中，即使是我，也看得很清楚，这种情况几乎肯定会持续下去。如果我们能找到愿意继续经营的买家，我当然更愿意出售业务而不是清算，即使那意味着我们获得的收益会更少。但最终对我显而易见的财务现实，对其他人也同样显而易见，没有人感兴趣。
我不会仅仅为了给我们的公司回报率增加微不足道的一点，就关闭盈利能力低于正常水平的业务。然而，我也认为，即使是一家异常盈利的公司，一旦某项业务看起来前景是持续亏损，继续为其提供资金也是不合适的。亚当·斯密会不同意我的第一个主张，卡尔·马克思会不同意我的第二个；只有中间立场才能让我感到舒服。
我应该再次强调，肯和加里在试图让我们的纺织业务取得成功方面，一直足智多谋、充满活力且富有想象力。为了努力实现可持续的盈利能力，他们重新调整了产品线、机器配置和分销安排。我们还进行了一次重大收购——旺贝克纺织厂——期望能产生重要的协同效应（一个在商业中广泛用来解释那些否则毫无意义的收购的术语）。但最终，一切努力都无济于事，我应为没有更早退出而受到责备。最近一期《商业周刊》的一篇文章称，自1980年以来已有250家纺织厂关闭。它们的老板们并没有掌握什么我不知道的信息；他们只是更客观地处理了这些信息。我无视了孔德的建议——“智力应是心灵的仆人，而非奴隶”——并相信了自己愿意相信的东西。
国内纺织工业在一个商品业务中运营，在一个存在大量过剩产能的世界市场上竞争。我们遇到的许多麻烦，直接或间接地归因于来自外国工人的竞争，他们的工资只是美国最低工资的一小部分。但这绝不意味着我们的劳动力应该为我们的倒闭受到任何责备。事实上，与美国工业的雇员相比，我们的工人收入偏低，整个纺织业历来如此。在合同谈判中，工会领导人和成员对我们不利的成本状况很敏感，并没有要求不切实际的加薪或非生产性的工作惯例。相反，他们和我们一样努力使公司保持竞争力。即使在清算期间，他们也表现得非常出色。（具有讽刺意味的是，如果我们的工会几年前表现得无理取闹，我们财务上反而会好过些；那样我们就会认识到我们面临的未来毫无希望，立即关闭，并避免未来的重大损失。）
多年来，我们曾有机会在纺织业务上进行大规模资本支出，这会使我们能够在一定程度上降低可变成本。每一项这样的提案看起来都像是立竿见影的赢家。实际上，用标准的投资回报率测试来衡量，这些提案通常承诺比在我们高利润的糖果和报纸业务中进行类似支出带来更大的经济利益。
但这些纺织投资所承诺的利益是虚幻的。我们的许多竞争对手，无论是国内还是国外，都在进行同样类型的支出，一旦足够多的公司这样做，它们降低的成本就成为全行业降价的基准。单独来看，每家公司的资本投资决策似乎都成本效益高且合理；整体来看，这些决策相互抵消，变得不合理（就像每个人看游行时都觉得踮起脚尖能看得更清楚一点一样）。每一轮投资之后，所有参与者都投入了更多资金，而回报依然微薄。
因此，我们面临一个悲惨的选择：巨额资本投资本可以帮助保持我们的纺织业务生存，但这会让我们在日益增加的资金上获得糟糕的回报。而且，投资之后，外国竞争对手仍将保持其在劳动力成本上的巨大、持续的优势。然而，拒绝投资会使我们越来越没有竞争力，即使与国内纺织制造商相比也是如此。我总是把自己想象成伍迪·艾伦在一部电影中所描述的那种处境：“在历史上，人类面临着一个比以往任何时候都更重要的十字路口。一条路通向绝望和彻底的无望，另一条通向彻底的灭绝。让我们祈祷我们有智慧做出正确的选择吧。”
为了理解在商品业务中“投资还是不投资”这个困境是如何上演的，看看伯灵顿工业公司是很有启发性的，它21年前和现在都是美国遥遥领先的最大的纺织公司。1964年，伯灵顿的销售额为12亿美元，而我们只有5000万美元。它在分销和生产方面都拥有我们永远无法企及的优势，当然，它的盈利记录也远远超过我们。1964年底，它的股价是60美元；我们的是13美元。
伯灵顿决定坚守纺织业务，1985年销售额约为28亿美元。在1964-1985年期间，该公司的资本支出约为30亿美元，远远超过任何其他美国纺织公司，相当于每股200多美元（基于那60美元的股价）。我确信，其中很大一部分支出用于成本改善和扩张。考虑到伯灵顿坚守纺织业的基本承诺，我也推测该公司的资本决策是相当理性的。
尽管如此，伯灵顿的实际美元销售额已经下降，现在的销售利润率和净资产收益率远低于20年前。该股票在1965年进行了2比1的拆股，现在售价为34美元——调整后，仅略高于其1964年的60美元价格。与此同时，消费者价格指数已上涨超过两倍。因此，每股的购买力仅相当于1964年底的三分之一左右。公司一直支付常规股息，但这些股息的购买力也显著缩水。
股东这一毁灭性的结果说明了当大量的脑力和精力被用于错误的前提时会发生什么。这种情况让人想起塞缪尔·约翰逊的马：“一匹能数到十的马是一匹了不起的马——但不是一位了不起的数学家。”同样，一个在其行业内能出色配置资本的纺织公司是一个了不起的纺织公司——但不是一项了不起的生意。
我从自己的经历和对其他企业的广泛观察中得出的结论是，一个好的管理记录（以经济回报衡量）更多地取决于你登上的是什么样的商业船只，而不是你划桨的效率有多高（当然，在任何业务中，无论是好是坏，智力和努力都非常有帮助）。几年前我写道：“当一个以才华横溢著称的管理层去接手一个以基础经济状况糟糕闻名的企业时，最终保持完好的往往是那家企业的声誉。”此后，我对这个问题的看法没有任何改变。如果你发现自己身处一艘不断漏水的船，与其致力于修补漏洞，不如把精力花在换一艘船上。
* * *
在我们的纺织叙事中，还有一个投资方面的后记。一些投资者在他们的股票购买决策中非常重视账面价值（我早年也是如此）。一些经济学家和学者认为，重置价值在计算整个股票市场的适当价格水平时相当重要。这两种观点的人都会在我们1986年初为处理纺织机械而举行的拍卖中得到教育。
出售的设备（包括在拍卖前几个月处理掉的一些）占据了新贝德福德大约75万平方英尺的厂房空间，而且非常有用。它们最初花费了我们大约1300万美元，包括1980-1984年间花费的200万美元，当前账面价值为86.6万美元（经过加速折旧）。虽然任何理智的管理层都不会进行这样的投资，但重新购买这些新设备可能需要3000到5000万美元。
我们出售这些设备的总收入为163,122美元。扣除必要的事前和事后成本，我们的净收入为负数。我们在1981年以每台5000美元购买的相对现代的织布机，在50美元的价格下都无人问津。我们最终以每台26美元的价格将它们作为废品出售，这个价格还低于拆除成本。
思考一下：归属于布法罗的两条报纸投递路线——或者一家喜诗糖果店——的经济商誉，远远超过了我们从这批庞大的有形资产中获得的收入，而就在不太多年前，在不同的竞争条件下，这些资产曾能雇佣超过1000人。
### 三家非常好的企业（以及关于激励薪酬的一些想法）
我12岁时，和爷爷一起住了大约四个月。他是一名杂货商，同时还在写一本书，每晚他会向我口述几页。书名是——做好准备——“如何经营一家杂货店以及我学到的关于钓鱼的几件事”。我爷爷确信，人们对这两个主题的兴趣是普遍的，世界正期待他的见解。你可能会从这个部分的标题和内容推断出我受到爷爷的文学风格（和个性）影响太深了。
我在这里合并讨论内布拉斯加家具城、喜诗糖果店和布法罗晚报，是因为这些业务的经济优势、劣势和前景与我一年前向你们汇报时相比变化不大。然而，这个讨论的简短绝非要淡化这些业务对我们的重要性：1985年，它们合计赚取了7200万美元的税前利润。十五年前，在我们收购它们之前，它们合计的税前利润大约是800万美元。
虽然利润从800万美元增长到7200万美元听起来很棒——通常也确实如此——但你不应自动假设就是如此。你必须首先确保基准年的利润没有被严重压低。如果它们相对于所用资本已经相当可观，那么一个更重要的问题需要审视：需要多少额外资本来产生这些额外的利润？
在这两个方面，我们这三家企业集团得分都很高。首先，15年前的利润相对于当时投入这些业务的资本已经非常出色。其次，尽管现在的年利润增加了6400万美元，但这些业务运营所需的投入资本仅比那时多了大约4000万美元。
这三家企业盈利能力的戏剧性增长，伴随着它们仅需少量额外资本，非常有力地说明了在经济商誉在通胀时期的力量（这一现象在1983年年报中有详细解释）。这些业务的财务特征使我们能够将它们产生的大部分收益用于别处。然而，美国企业界的经历却不同：为了显著增加利润，大多数公司也需要显著增加资本。一家普通的美国企业大约需要5美元的额外资本才能产生1美元的额外税前年利润。因此，该企业需要从其所有者那里获得超过3亿美元的额外资本，才能达到我们这三家企业的盈利表现。
当资本回报率平平的时候，通过投入更多资金来赚取更多收益的记录算不上什么了不起的管理成就。你坐在摇椅上也能得到同样的结果。只需将你存入储蓄账户的资本翻两番，你的收益就会翻两番。你很难期望因为这一特定成就而获得欢呼。然而，退休公告经常赞美那些在他们任期内，比如，将小器件公司的利润翻了两番的首席执行官——却没有人审视这种增长是否仅仅归因于多年的留存收益和复利的作用。
如果在该期间内，这家小器件公司一直保持着卓越的资本回报率，或者在其CEO任期内所用资本只翻了一番，那么对他的赞扬可能是当之无愧的。但如果资本回报率平平，所用资本与利润同步增长，那么掌声就应该保留。一个再投资利息的储蓄账户，在仅8%的利率下，也能在18年内实现年收益翻两番。
这种简单数学的力量常常被公司忽视，从而损害了股东的利益。许多公司的薪酬计划会因为仅仅或大部分由留存收益（即从股东那里扣留的收益）产生的利润增长，而给予管理者丰厚的奖励。例如，十年期、固定价格的股票期权被常规授予，通常由那些股息只占利润很小百分比的公司发放。
一个例子将说明在这种情况下可能出现的不公平。假设你有一个10万美元的储蓄账户，年利率8%，由一个受托人“管理”，他每年可以决定你以现金形式领取多少利息。未支付的利息将成为“留存收益”添加到储蓄账户中进行复利。再假设你的受托人，以其卓越的智慧，将“支出比例”设定为年收益的四分之一。
在这些假设下，十年后你的账户价值将为179,084美元。此外，在这种英明的管理下，你的年收益将增长约70%，从8,000美元增至13,515美元。最后，你的“股息”也将成比例增长，从第一年的2,000美元稳步上升到第十年的3,378美元。每年，当你的经理的公关公司为你准备年度报告时，所有的图表线条都会向上攀升。
现在，为了好玩，让我们把这个情景再推进一步，给你的受托人-经理一个基于第一年公允价值、针对你“业务”（即你的储蓄账户）部分的十年期固定价格期权。有了这样的期权，你的经理将牺牲你的利益获得可观的利润——仅仅因为保留了你大部分的收益。如果他既马基雅维利又精通数学，一旦他地位稳固，你的经理可能还会降低支出比例。
这个情景并不像你想象的那么牵强。企业界的许多股票期权正是以这种方式运作的：它们之所以增值，仅仅是因为管理层留存了收益，而不是因为他们善于运用手中的资本。
管理者实际上对期权采用了双重标准。撇开认股权证不谈（它能为发行公司提供即时且可观的补偿），我相信可以公平地说，在商业世界中，从未有过将整个或部分业务的十年期固定价格期权授予外部人士的情况。实际上，十个月就已经很极端了。对于一个定期增加资本的企业，管理者授予其长期期权尤其不可想象。任何希望获得这种期权的外部人士，都需要为期权期间内增加的资本支付全额对价。
然而，管理者不愿对外人做的事，却并非不愿对自己做。（和自己谈判很少会引发酒吧斗殴。）管理者经常为自己和同事设计十年期固定价格期权，这些期权首先完全忽略了留存收益会自动创造价值这一事实，其次忽略了资本的持有成本。结果是，这些管理者的获利方式，就像他们拥有一个价值自动增长储蓄账户期权一样。
当然，股票期权通常会授予有才华、能创造价值的管理者，有时会给他们带来完全合适的回报。（事实上，真正卓越的管理者几乎总是得到的远少于应得的。）但当结果是公平的时候，那也是偶然的。期权一旦授予，就对个人表现视而不见。由于它是不可撤销且无条件的（只要管理者留在公司），懒惰者从期权中获得的回报完全等同于明星。一个管理界的里普·凡·温克尔，准备沉睡十年，也找不到比这更好的“激励”系统了。
（我忍不住要评论一个授予“外部人士”的长期期权：作为政府拯救性贷款担保的部分对价，授予美国政府克莱斯勒股票期权。当这些期权对政府有利时，克莱斯勒试图修改偿付方案，辩称对政府的回报既远超预期，相对于其对克莱斯勒复苏的贡献也过大。该公司对它们所认为的回报与贡献之间的不平衡感到的痛苦成了全国新闻。这种痛苦很可能是独一无二的：据我所知，没有任何地方的管理者曾因授予自己或同事期权而产生的不当回报而感到类似的冒犯。）
具有讽刺意味的是，关于期权的言论常常描述它们是可取的，因为它们让管理者和所有者处于同一条财务船上。实际上，这两条船大相径庭。没有哪位所有者能够逃脱资本成本的负担，而固定价格期权的持有者则根本不承担任何资本成本。所有者必须权衡上行潜力与下行风险；期权持有者则没有下行风险。事实上，你希望拥有期权的商业项目，往往是一个你会拒绝作为所有者的项目。（我很乐意接受一张彩票作为礼物——但我绝不会去买一张。）
在股息政策方面，期权持有者的利益也是通过可能对所有者不利的政策得到最佳维护。回想一下储蓄账户的例子。持有期权的受托人会从不分红政策中受益。相反，账户的所有者应该倾向于全额支付，以防止持有期权的管理者分享账户的留存收益。
尽管存在缺点，期权在某些情况下也可能是合适的。我的批评针对的是它们不加区分的使用，在这方面，我想强调三点：
第一，股票期权不可避免地与公司的整体表现挂钩。因此，逻辑上它们只应该授予那些负有全面责任的管理者。负责有限领域的管理者应该获得与他们控制下的结果挂钩的激励。.350的击球手期望，也理应因他的表现获得丰厚回报——即使他效力于垫底的球队。而.150的击球手不应获得任何奖励——即使他为一支冠军球队效力。只有那些对球队负有全面责任的人，他们的奖励才应该与球队的结果挂钩。
第二，期权应该被谨慎设计。除非有特殊因素，否则它们应该内置一个留存收益或持有成本因素。同样重要的是，它们应该被现实地定价。当管理者面临对其公司的收购要约时，他们总是会指出市场价格作为真实价值指标是多么不现实。但是，为什么这些同样被压制的价格，却成为管理者将部分业务出售给自己的估值基础呢？（他们可能更进一步：高管和董事有时会查阅税法，以确定他们可以将部分业务出售给内部人士的最低价格。在这样做的时候，他们常常选择对公司产生最差税收结果方案。）除非在极不寻常的情况下，以低廉的价格出售部分业务不符合所有者的利益——无论出售给外人还是内部人士。显而易见的结论：期权应以真实的商业价值定价。
第三，我想强调，一些我非常钦佩的管理者——他们的运营记录比我好得多——在固定价格期权问题上与我意见相左。他们建立了行之有效的企业文化，而固定价格期权一直是帮助他们实现这一目标的工具。通过他们的领导力和榜样作用，以及使用期权作为激励，这些管理者教导他们的同事像所有者一样思考。这种文化是罕见的，当它存在时，或许应该保持原样——尽管期权计划中可能存在低效和不公。“如果没有坏，就不要去修它”要优于“不惜一切代价追求纯粹”。
然而，在伯克希尔，我们使用一个激励薪酬体系，奖励关键管理者在自己的领域内达到目标。如果喜诗做得好，并不会给布法罗新闻带来激励薪酬——反之亦然。我们在写奖金支票时也不会看伯克希尔的股价。我们相信，无论伯克希尔股价是涨、跌还是持平，良好的单元业绩都应该得到奖励。同样，我们认为，即使我们的股价飙升，平庸的表现也不应该获得特别奖励。此外，“业绩”的定义因业务的基础经济状况而异：在有些业务中，我们的管理者享受并非他们自己创造的顺风；在另一些中，他们要应对不可避免的逆风。
伴随这个体系的回报可能相当可观。在我们各个业务单元，高级管理者有时能获得相当于其基本工资五倍或更多的激励奖金，并且在1986年，有可能一位管理者的奖金会超过200万美元。（我希望如此。）我们不设定奖金上限，并且奖励的潜力不是等级制的。一个小型单元的管理者，如果业绩表明他应该，可以赚得比更大单元的管理者多得多。我们进一步认为，诸如资历和年龄等因素不应影响激励薪酬（尽管它们有时会影响基本薪酬）。一个能打出.300的20岁年轻人和一个表现同样出色的40岁中年人，对我们来说价值一样。
显然，所有伯克希尔的管理者都可以用他们的奖金（或其他资金，包括借来的钱）在市场上购买我们的股票。许多人正是这样做的——现在有些人持有大量股份。通过接受直接购买所带来的风险和持有成本，这些管理者真正与所有者站在一起了。
现在——终于——让我们回到我们的这三家企业：
在内布拉斯加家具城，我们的基本优势是异常低的运营成本，这使得该企业能够持续为客户提供家居用品方面最好的价值。NFM是全国同类商店中规模最大的。尽管已经低迷的农业经济在1985年进一步恶化，该商店却轻松创下了新的销售纪录。我也很高兴地报告，NFM的董事长罗斯·布卢姆金（传奇的“B夫人”）在92岁高龄时，仍然保持着我们在商店里无人能及的节奏。她一周七天都在那里忙碌交易，我希望你们中任何一位访问奥马哈的人，都能去家具城看看她的风采。这会激励你，就像它激励我一样。
在喜诗，我们继续保持着远超我们已知任何竞争对手的单店销售额。尽管我们享有无与伦比的消费者接受度，行业趋势并不好，我们在同店基础上继续经历磅数销售的下降。这给每磅成本带来了压力。我们现在只愿意适度提价，除非我们能稳定单店磅数销售额，否则利润率将会收窄。
在布法罗新闻，广告量的增长也很难实现。尽管1985年广告行数增加了，但增长主要由预印插页贡献。ROP广告（印在我们自己版面上的广告）下降了。预印插页的利润远低于ROP广告，并且也更容易受到竞争的影响。1985年，布法罗新闻再次很好地控制了成本，我们的家庭渗透率继续保持出色。
这三项业务没有的一个问题是管理层。在喜诗，我们有查克·哈金斯，我们买入该业务当天就让他负责。选择他仍然是我们最好的商业决策之一。在布法罗新闻，我们有斯坦·利普西，一位同等才干的管理者。斯坦已经和我们一起17年了，他处理的责任级别每增加一层，其非凡的商业才能就愈发显现。在家具城，我们有令人惊叹的布卢姆金家族——B夫人、路易、罗恩、欧文和史蒂夫——一个三代管理奇迹。
我自认为极其幸运，能与如此出色的管理者们共事。我个人对他们的喜爱之情，不亚于我对他们专业能力的钦佩。
### 保险业务
下面是我们通常表格的更新版本，列出了保险行业两个关键数据：
| | 保费收入年增长率 (%) | 支付保单持有人红利后的综合成本率 |
|------------|----------------------|----------------------------------|
| 1972 | 10.2 | 96.2 |
| 1973 | 8.0 | 99.2 |
| 1974 | 6.2 | 105.4 |
| 1975 | 11.0 | 107.9 |
| 1976 | 21.9 | 102.4 |
| 1977 | 19.8 | 97.2 |
| 1978 | 12.8 | 97.5 |
| 1979 | 10.3 | 100.6 |
| 1980 | 6.0 | 103.1 |
| 1981 | 3.9 | 106.0 |
| 1982 | 4.4 | 109.7 |
| 1983 | 4.5 | 111.9 |
| 1984 (修订)| 9.2 | 117.9 |
| 1985 (预估)| 20.9 | 118.0 |
来源：贝斯特综合与平均数据
综合成本率代表总保险成本（已发生损失加费用）与保费收入之比：低于100表示承保盈利，高于100表示承保亏损。
行业1985年的结果极不寻常。收入增长异常，如果保险损失如同最近几年那样以正常速度增长——即略高于通胀率几个百分点——那么综合成本率本应大幅下降。但1985年的损失并不配合，就像1984年那样。尽管这两年通胀显著放缓，保险损失却反常地加速增长，1984年增长16%，1985年更惊人地增长了17%。因此，今年的损失增长率超过通胀率超过13个百分点，创下现代纪录。
巨灾并非这次损失成本激增的罪魁祸首。诚然，1985年飓风数量异常，但1984年和1985年所有巨灾造成的总损失约占保费收入2%，这是一个并不异常的比例。也没有出现汽车、房屋、雇主或其他类型“风险单位”投保数量的激增。
损失数字飙升的部分原因在于行业在1985年增加的所有准备金。随着当年业绩的公布，场面犹如一场奋兴会：保险经理们高喊着“我有罪，我有罪”，冲向前坦白他们在早年准备金提存不足。他们的修正显著影响了1985年的损失数字。
损失激增中一个更令人不安的成分是“社会性”或“司法性”通胀的加速。在评估责任和损害赔偿时，保险公司的赔付能力对陪审团和法官来说已具有压倒性的重要性。不管保单措辞、事实或先例如何，“深口袋”越来越被寻找和找到。
这种司法通胀是行业未来的一张万能牌，使得预测变得困难。尽管如此，短期前景是好的。随着1985年的推进，保费增长有所改善（季度增幅预估分别为15%、19%、24%和22%），除非发生超级巨灾，否则行业综合成本率应在1986年大幅下降。
然而，利润改善可能持续时间短暂。两个经济原则将确保这一点。首先，商品业务只有在价格以某种方式固定或产能短缺时才能实现良好的盈利水平。第二，当前景开始改善且资本可用时，管理者会迅速增加产能。
在我1982年给你的报告中，我广泛讨论了保险业的商品属性。典型的投保人并不区分产品，而是专注于价格。几十年来，一种类似卡特尔的做法维持了价格，但这种安排已永久消失。现在保险产品的定价如同任何存在自由市场的商品一样：当产能紧张时，价格会设定得有利可图；否则就不会。
目前，许多保险险种的产能是紧张的——尽管在这个行业，与大多数行业不同，产能是一个观念上的概念，而非物理事实。保险经理可以写出他们感到舒适的任何数量的业务，仅受监管机构和行业权威评级机构贝斯特施加的压力限制。经理和监管机构的舒适度都与资本挂钩。资本越多意味着越舒适，这反过来意味着更多的产能。此外，在典型的商品业务中，比如铝或钢铁，新产能的诞生需要很长的孕育期。在保险业，资本可以立即获得。因此，任何产能短缺都可以在短时间内消除。
这正是现在正在发生的事情。1985年，大约15家保险公司筹集了超过30亿美元的资金，堆积资本以便能用现在可获得的更好价格承保尽可能多的业务。进入1986年，资本筹集趋势急剧加速。
如果产能增加继续以这个速度进行，用不了多久就会出现严重的价格竞争，接着是盈利能力的下降。当下降来临时，它将是1985年和1986年资本筹集者的错，而不是198X年价格竞争者的错。（然而，批评者应该表示理解：就像我们纺织业的例子一样，资本主义的动力会导致每家保险公司做出对自己看似合理的决定，但这些决定却集体地削减了盈利能力。）
在过去的报告中，我曾告诉你们，伯克希尔强大的资本状况——业内最佳——有一天应该能让它在保险市场上获得独特的竞争优势。随着市场的紧缩，这一天到来了。在经历了长时间的停滞之后，我们的保费收入去年增长了两倍多。伯克希尔的财务实力（以及我们在顺境和逆境中保持异常实力的记录）现在是我们获得优质业务的主要资产。
我们正确地预见到，许多大型保险和再保险购买者会转向品质，他们姗姗来迟地认识到保单只是一张期票——并在1985年无法兑现他们的许多期票。这些买家现在被伯克希尔强大的资本状况所吸引。但是，在一个我们没有预见到的进展中，我们也发现买家被我们吸引，因为我们承保重大风险的能力使我们与众不同。
要理解这一点，你需要一些关于大风险背景知识。传统上，许多保险公司想要承保这类业务。然而，他们这样做的意愿几乎总是基于再保险安排，这些安排允许保险公司自己只保留一小部分风险，而将大部分风险转嫁给其再保险公司。例如，想象一份提供2500万美元保额的董事及高管责任险保单。通过各种“超赔”再保险合同，签发该保单的公司可能只保留任何损失的前100万美元责任。超过这个数额直到2400万美元的损失将由签发保险公司的再保险公司承担。用行话来说，一家签发大额保单但为自己账户保留相对较少风险的公司，写的是大笔毛承保额，但小笔净承保额。
在任何再保险安排中，一个关键问题是，为保单支付的保费应如何在不同的风险“层”之间分配。例如，在我们的董事及高管责任险保单中，收到的保费中，多少应该由签发公司保留，以公平补偿其承担最初的100万美元风险，多少应该转给再保险公司，以公平补偿他们承担100万至2500万美元之间的风险？
解决这个问题的一种方法可能被称为帕特里克·亨利方法：“指引我脚步的明灯只有一盏，那就是经验之灯。”换句话说，过去再保险公司需要总保费的多少比例才能公平补偿他们实际必须承担的损失？
不幸的是，经验之灯为再保险公司提供的光照总是不完美的，因为他们的大部分业务是“长尾”的，这意味着需要很多年才能知道他们的损失是什么。然而，最近，这盏灯不仅暗淡，而且揭示出的图像具有严重误导性。也就是说，法院倾向于做出既巨大又缺乏先例的判决，这使得再保险公司通常从过去数据进行的外推或推断成为一种灾难公式。帕特里克·亨利出局，波戈上场：“未来已经不是过去的样子了。”
业务日益增长的不确定性，加上许多不成熟的参与者进入再保险领域，近年来有利于签发公司写出小笔净保额：他们能够保留比其风险份额大得多的保费百分比。通过这样做，签发公司有时能在那些对于签发和再保险公司加总而言明显不盈利的业务上赚钱。（这未必是故意的：签发公司通常并不比再保险公司更了解在较高风险层会发生的最终成本。）这种不公平在那些变化很多、损失飙升的保险险种中尤其明显；例如，职业责任险、董事及高管责任险、产品责任险等。鉴于这些情况，即使在毛额基础上保费已经严重不足很长一段时间后，签发公司仍然热衷于承保业务，也就不足为奇了。
一个关于签发公司与其再保险公司结果差异有多大的例子，来自一家在大额及不寻常风险领域领先的公司的1984年财务数据。那一年，该公司承保了约60亿美元的业务，保留了约25亿美元的保费，约占40%。它将剩余的35亿美元交给了再保险公司。在保留的业务部分，该公司的承保损失不到2亿美元——在那一年是很好的结果。与此同时，转嫁出去的部分给再保险公司造成了超过15亿美元的损失。因此，签发公司的综合成本率远低于110，而其再保险公司，参与完全相同的保单，却远高于140。这个结果并非由自然灾害造成；它来自普通的保险损失（然而，以令人惊讶的频率和规模发生）。该签发公司1985年的报告尚未出炉，但我预测它将显示这种极端不平衡的结果仍在继续。
这样的年份再来几年，即使是反应迟钝的再保险公司也会失去兴趣，特别是在那些爆炸性险种中，签发人和再保险人之间的合理保费分配甚至无法粗略估计。再保险公司的行为最终变得像马克·吐温笔下的猫：一旦在热炉子上坐过一次，它就再也不会坐了——但它也再也不会坐在冷炉子上。再保险公司在长尾责任险种中经历了如此多不愉快的意外，以至于许多人（可能正确地）决定完全退出这个游戏，无论价格诱惑如何。因此，在某些重要险种中，再保险产能出现了急剧收缩。
这种发展使得许多签发公司面临压力。他们不能再像一两年前那样轻而易举地，一次又一次地为每张保单向他们的再保险公司承诺数千万美元，而且他们没有资本和/或意愿为自己账户承担大额风险。对于许多签发公司来说，毛承保能力已大幅缩小，更接近于净承保能力——而这往往确实很小。
在伯克希尔，我们从未玩过“转嫁获利”的游戏，直到最近，这使我们在某些险种中处于严重劣势。现在情况逆转了：我们拥有承保能力，而其他人没有。如果我们认为价格合适，我们愿意写出的净承保额，比除了最大几家保险公司以外的任何公司都大。例如，我们完全愿意在一次单一事件上冒损失1000万美元自有资金的风险，只要我们相信价格合适，并且损失风险与我们承保的其他风险没有显著相关性。很少有保险公司愿意在单一事件上冒一半那么多的风险——尽管就在不久之前，许多人愿意损失五倍或十倍于这个数额，只要几乎所有损失都由他们的再保险公司承担。
1985年中，我们最大的保险公司国民赔偿公司在保险周刊的三期上刊登广告，表明其愿意承保大额风险。这则广告只征求大额保单：最低保费100万美元的保单。这则广告吸引了惊人的600个回复，并最终产生了总计约5000万美元的保费。（先别鼓掌：这些都是长尾业务，至少需要五年我们才能知道这次营销成功是否也是承保成功。）今天，我们的保险子公司继续被寻找大量净承保能力的经纪人所追捧。
正如我所说，这段紧张时期将会过去；保险公司和再保险公司会重新回到定价过低的状态。但在一两年内，我们在保险业务的几个板块应该会做得很好。迈克·戈德堡对运营进行了许多重要改进（您的董事长之前的失误管理为他提供了充足的机会）。他在最近招聘具有优秀潜力的年轻管理者方面尤其成功。他们将在1986年有机会展示自己的能力。
我们的综合成本率有所改善——从1984年的134降至1985年的111——但仍在反映过去的错误行为。去年我告诉你们我在损失准备金方面犯的重大错误，并承诺每年向你们更新损失发展数据。自然，我做出这个承诺时认为我未来的记录会好得多。到目前为止，情况并非如此。关于去年损失发展的详细信息在第50-52页。它们显示，在1984年底，准备金有显著不足，正如前几年一样。
这幅画面中唯一的亮点是，1984年暴露出的几乎所有准备金不足都发生在再保险领域——并且，在很大程度上，集中在几份几年前就已终止的合同上。然而，这个解释让人太容易想起许多年前，通用再保险公司当时的主席给我讲的一个故事。他说，每年他的经理都告诉他，“除了佛罗里达州的飓风”或者“除中西部龙卷风”外，他们本会有一个极好的年份。最后，他把大家召集起来，建议成立一个新的业务——“除因”保险公司，今后他们所有后来不想算进去的业务都将放在这家公司里。
在任何业务中，保险或其他，“除因”都应该从词汇表中删除。如果你要玩游戏，你必须把九个局中针对你所得的分都算进去。任何总是说“除因”，然后报告他从错误中学到了教训的经理，可能错过了唯一重要的教训——即，真正的错误不是行为本身，而是行为人。
当然，业务错误不可避免会发生，明智的经理会努力从中找到合适的教训。但诀窍是从他人的经历中学习大部分教训。过去从个人经历中学到很多的经理，通常注定将来也会从个人经历中学到很多。
伯克希尔持股38%的GEICO公司报告称，1985年在保费增长和投资结果方面表现卓越，但在承保方面，按照其高标准，却是不好的一年。私家车险和房主保险是去年行业内业绩显著恶化的仅有的重要险种。GEICO也未能幸免于这一趋势，尽管其记录远优于几乎所有主要竞争对手。
杰克·伯恩在年中离开GEICO去领导火人基金，留下了比尔·斯奈德担任主席，卢·辛普森担任副主席。杰克在将GEICO从濒临破产中复苏的表现确实非凡，他的工作为伯克希尔带来了巨大收益。我们为此非常感激他。
我们同样感激杰克取得了一项大多数杰出领导者都难以企及的成就：他找到了才华与他同样出众的继任管理者。通过他识别、吸引和培养比尔和卢的技巧，杰克将其管理领导力的益处延伸到了远超其任期之后。
### 火人基金配额分享合同
从不放过一个饭碗，我们跟随杰克·伯恩来到了火人基金（FFIC），他是该控股公司的主席兼首席执行官。
1985年9月1日，我们成为FFIC集团所有有效业务的7%参与者，但该公司为非关联公司承保的再保险业务除外。我们的合同为期四年，并规定在合同期内，我们的损失和成本将与他们的损失和成本按比例发生。如果没有延期，此后我们将不参与任何持续经营业务。然而，在未来很多年里，我们将为发生在1985年9月1日至1989年8月31日期间损失的7%向FFIC进行补偿。
根据合同，FFIC迅速向我们汇付保费，我们则迅速向FFIC偿还其已支付的费用和损失。因此，我们业务份额产生的资金由我们持有用于投资。作为交易的一部分，我可以为FFIC提供关于总体投资策略的咨询。但是，我不参与FFIC的具体投资决策，伯克希尔也不参与公司承保活动的任何方面。
目前FFIC每年业务量约30亿美元，随着费率上升，可能会更多。公司1985年9月1日的未赚保费准备金为13.24亿美元，因此它在合同启动时将其中的7%，即9270万美元，转移给了我们。我们同时支付给他们2940万美元，代表他们在转移保费上已发生的承保费用。所有FFIC业务都是由国民赔偿公司承保的，但其中的七分之二被转给了韦斯科金融保险公司（Wes-FIC），这是一家由我们持股80%的子公司韦斯科金融公司新成立的公司。查理·芒格在第60-62页对Wes-FIC和再保险业务有一些有趣的评论。
在第41页的保险分部表格中，我们增加了一行，标记为“主要配额分享合同”。FFIC合同的1985年结果在那里报告，尽管该安排的*新*性质使得这些结果只是非常粗略的近似值。
年底后，我们又获得了一份配额分享合同，其1986年的业务量应超过5000万美元。我们希望发展更多此类业务，行业状况表明我们可能做到：相当数量的公司产生的业务超出了它们自身能够审慎处理的范围。我们的财务实力使我们成为这些公司有吸引力的合作伙伴。
### 有价证券
下面列出我们1985年底在上市权益证券上的净持仓。所有市值超过2500万美元的头寸均已列出，并扣除了韦斯科和内布拉斯加家具城少数股东应占的权益。
股份数量 成本 市场价值
------------- ---------- ----------
(千美元省略)
1,036,461 联合出版公司 ................... $ 3,516 $ 55,710
900,800 美国广播公司 ................... 54,435 108,997
2,350,922 比阿特丽斯公司 ................ 106,811 108,142
6,850,000 GEICO公司 ...................... 45,713 595,950
2,379,200 汉迪与哈曼公司 ................ 27,318 43,718
847,788 时代公司 ...................... 20,385 52,669
1,727,765 华盛顿邮报公司 ................ 9,731 205,172
---------- ----------
267,909 1,170,358
其他普通股持仓 ................ 7,201 27,963
---------- ----------
普通股总计 $275,110 $1,198,321
========== ==========
我们之前提到，在过去十年中，投资环境已从一个伟大企业完全不被赏识的时代，转变为一个它们得到恰当认可的时代。华盛顿邮报公司（WPC）是一个极好的例子。
我们在1973年中买入了所有WPC持仓，价格不超过当时该企业每股商业价值的四分之一。计算价格/价值比率不需要什么非凡的洞察力。大多数证券分析师、媒体经纪人和媒体高管都会像我们一样，估计WPC的内在商业价值在4亿到5亿美元之间。而其1亿美元的股票市场估值是每天公开可见的。相反，我们的优势在于态度：我们本·格雷厄姆那里学到，成功投资的关键是以远低于基础商业价值的价格购买优质企业的股票。
另一方面，在1970年代早期，大多数机构投资者在决定他们买卖股票的价格时，认为商业价值只具有次要的相关性。现在这似乎难以置信。然而，这些机构当时正受到著名商学院学者们的影响，他们宣扬一种新潮的理论：股票市场是完全有效的，因此商业价值的计算——甚至思考本身——在投资活动中都不重要。（我们非常感激那些学者：在一场智力竞赛中——无论是桥牌、国际象棋还是选股——还有什么比对手被告知思考是浪费能量更有优势呢？）
在1973和1974年，WPC作为一家企业继续做得很好，内在价值也在增长。尽管如此，到1974年底，我们的WPC持仓显示亏损约25%，市值800万美元对比我们的成本1060万美元。我们一年前认为出奇便宜的东西，随着市场以其无限的智慧将WPC股票打压到远低于内在价值20美分兑1美元的水平，变得更为便宜了。
你们知道那快乐的结局。WPC的CEO凯·格雷厄姆，有智慧和勇气以那些便宜价格大量回购公司股票，也具备必要的管理技能来戏剧性地提升商业价值。与此同时，投资者开始认识到该业务的卓越经济特性，股价向内在价值靠拢。因此，我们经历了一个三重利好：公司的商业价值飙升，由于股份回购，每股商业价值增长更快，并且随着折价的缩小，股价跑赢了每股商业价值的增长。
我们持有所有1973年购买的WPC股票，除了在1985年按比例回购中卖给公司的那些。回购所得加上我们持仓的年终市值，总计2.21亿美元。
如果我们将1060万美元投资于1973年中期的任何半打媒体公司（当时的投资宠儿），我们持仓的年终价值大约会在4000万到6000万美元。我们的收益将远远超过大盘的收益，这一结果反映了媒体业务的卓越经济特性。我们通过拥有WPC获得的额外大约1.6亿美元，很大程度上来自于凯做出的管理决策的优越性，与大多数媒体公司的管理者相比。她惊人的商业成功在很大程度上未被报道，但在伯克希尔股东中，不应不被理解。
我们的大都会购买，在下节描述，要求我在1986年初离开WPC董事会。但我们打算无限期持有FCC规则允许我们持有的任何WPC股票。我们预期WPC的商业价值将以合理速度增长，并且我们知道管理层既有能力又以股东为导向。然而，现在市场对公司的估值超过18亿美元，从这个水平出发，价值增长的速度不可能接近公司估值仅为1亿美元时的可能速度。由于市场价格也已被抬高到我们其他持仓的水平，我们在整个投资组合中都面临着同样大大降低的潜力。
你们会注意到，年底我们持有比阿特丽斯公司的大额仓位。这是一个短期的套利仓位——实际上，一个资金的临时停放处（尽管并非完全安全，因为交易有时会失败并造成重大损失）。当我们有比想法更多的资金时，我们有时会进入套利领域，但只参与已宣布的并购和出售。如果目前用于这种短期用途的资金能找到一个长期归宿，我们会更高兴。但目前来看，前景黯淡。
年底，我们的保险子公司持有约4亿美元的免税债券，其中按摊销成本计1.94亿美元是华盛顿公共电力供应系统（WPPSS）项目1、2和3的债券。我去年充分讨论了这个仓位，并解释了为什么我们不会在事后很长时间内披露进一步的买入或卖出（遵循我们对股票的政策）。我们在WPPSS债券上的未实现收益在年底为6200万美元，大约三分之一来自债券整体的上涨，其余来自投资者对WPPSS 1、2、3号项目更积极的看法。我们从WPPSS债券获得的年度免税收入约为3000万美元。
### 大都会/美国广播公司
就在年底后，伯克希尔以每股172.50美元的价格购买了300万股大都会/美国广播公司（“大都会”）的股票，这是该股票在1985年3月初承诺时的市场价格。多年来，我一直公开赞扬大都会的管理层：我认为它是全国所有上市公司中最好的。而且汤姆·墨菲和丹·伯克不仅是伟大的管理者，他们正是那种你会希望自己女儿嫁给的人。能与他们交往是一种荣幸——也是一种极大的乐趣，你们中认识他们的人都会理解。
我们购买股票帮助大都会为35亿美元收购美国广播公司提供了资金。对于大都会来说，ABC是一项重大举措，其未来几年的经济前景可能并不令人兴奋。这一点我们丝毫不在意；我们可以非常有耐心。（无论多么伟大的才华或努力，有些事情就是需要时间：你不能通过让九个女人怀孕一个月就生出一个婴儿。）
作为我们信心的证明，我们执行了一项不寻常的协议：在很长一段时间内，汤姆作为CEO（如果丹是CEO，则由他）行使我们股票的投票权。这项安排是查理和我发起的，而不是汤姆。我们还在出售股票方面以各种方式限制了自己。这些限制的目的是确保我们的股份不会被卖给任何大股东（或打算成为大股东的人），除非得到管理层的批准，这一安排类似于我们几年前在GEICO和华盛顿邮报发起的安排。
由于大额股份通常能获得溢价，有些人可能认为我们制造这样的限制损害了伯克希尔的财务利益。我们的观点正好相反。我们认为，这些安排增强了这些业务的长期经济前景——因此，也增强了我们作为所有者的前景。有了这些安排，我们结盟的一流管理者可以将全部精力集中在经营业务和为所有者最大化长期价值上。这当然比让这些管理者被那些希望将公司“置于竞拍之中”的“旋转门资本家”分心要好得多。（当然，有些管理者将自己的利益置于公司及其所有者之上，应该被洗牌——但在做投资时，我们试图避开这种类型。）
今天，公司的不稳定是投票权广泛分散的必然结果。任何时候都可能出现一个大股东，通常说着安抚性的套话，但往往怀有不良意图。通过像我们经常做的那样限制我们的股份，我们打算在其他方面可能缺乏稳定性的地方促进稳定。这种确定性，加上优秀的管理者和良好的业务，为丰硕的财务收获提供了极好的土壤。这是我们安排的商业理由。
人性的方面同样重要。我们不希望我们喜欢和钦佩的管理者——并且他们欢迎我们对他们的重大财务投入——因为担心我们的大额持股可能带来意外而失眠。我告诉过他们不会有意外，而这些协议将伯克希尔的签名放在了我说话的地方。这个签名也意味着这些管理者有一份公司承诺，因此不必担心如果我对伯克希尔事务的个人参与过早结束（我将其定义为任何低于三位数的年龄）。
我们的大都会购买是以一个全价进行的，反映了近年来（在某些物业购买情况下，已接近狂热）对媒体股票和媒体物业的极大热情。这不是一个寻找便宜货的领域。然而，我们对大都会的投资使我们与一个卓越的物业和人员组合结盟——我们喜欢大规模参与的机会。
当然，你们中有些人可能想知道，为什么我们现在以每股172.50美元购买大都会的股票，而你们的主席，以其典型的一阵灵感爆发，在1978-80年间以每股43美元卖出了伯克希尔持有的同一家公司股票。预料到你们的问题，我花了1985年的大部分时间想出一个巧妙的答案来调和这些行为。
请再多给一点时间。
### 收购斯科特·费泽
就在年底后，我们以大约3.2亿美元收购了克利夫兰的斯科特·费泽公司。（此外，大约9000万美元斯科特·费泽原有的债务仍然存在。）在本报告的下一部分，我描述了我们希望为伯克希尔购买的那种业务。斯科特·费泽就是一个典型——可理解、大型、管理良好、盈利能力强。
该公司拥有约7亿美元销售额，来自17项业务，其中许多是其所在领域的领导者。对于大多数这些业务，投资资本回报率良好到极佳。一些知名的产品包括柯比家用护理系统、坎贝尔·豪斯菲尔德空压机，以及韦恩燃烧器和水泵。
世界图书公司——占斯科特·费泽销售额约40%，收入占比略高——是该公司迄今为止最大的业务。它也是其行业中遥遥领先的领导者，每年销售量是最近竞争对手的两倍多。事实上，它在全美销售的数量比其最大的四个竞争对手的总和还要多。
查理和我和对世界图书业务有特别的兴趣，因为我们把它的百科全书视为特别的东西。我是它25年的粉丝（和用户），现在有孙子孙女在查阅，就像我的孩子们当年一样。世界图书经常被教师、图书馆员和消费者购买指南评为最实用的百科全书。然而它的售价却低于任何主要竞争对手。同样由世界图书公司出品的《儿童工艺》产品也提供类似的价值。世界图书公司这种卓越产品与低廉价格的结合，使得我们愿意支付斯科特·费泽所要的价格，尽管许多直营销售行业的公司业绩正在下滑。
斯科特·费泽同样吸引人的是其CEO拉尔夫·谢伊，他已在任九年。当拉尔夫接手时，公司有31项业务，是1960年代收购狂潮的结果。他剥离了许多不匹配或利润潜力有限的业务，但当他专注于合理化最初的大杂烩时，并未因过度投入而错过1978年可以购买世界图书的机会。拉尔夫的运营和资本配置记录非常出色，我们很高兴与他交往。
斯科特·费泽收购史很有趣，在我们参与之前经历了一些曲折。该公司自1984年初就宣布待售。一家大型投资银行花了数月时间接触了大量潜在买家，引起了几家的兴趣。最终，在1985年中，一项由员工持股计划（ESOP）大量参与的出售计划获得了股东批准。然而，随着后续交易难以完成，该计划被放弃。
我通过报纸关注着这次公司奥德赛。10月10日，在ESOP交易失败后很久，我给拉尔夫写了一封简短的信（我并不认识他）。我说我们钦佩公司的记录，问他是否愿意谈谈。查理和我在10月22日在芝加哥与拉尔夫共进晚餐，并在接下来的一周签署了收购合同。
并购斯科特·费泽，加上我们保险业务的重大增长，应该会将1986年的收入推高至20亿美元以上，是1985年的两倍多。
### 杂项
收购斯科特·费泽说明了我们有些随意的并购方法。我们没有总体战略，没有公司规划师为我们提供关于社会经济趋势的洞见，也没有人员来调查发起人和中介机构提出的各种想法。相反，我们只是希望出现有意义的事情——当它出现时，我们就行动。
为了给命运一些帮助，我们再次重复我们常规的“业务求购”广告。与去年相比，唯一的变化在于(1)：由于我们仍然希望所做的任何收购都能对伯克希尔的财务结果产生可衡量的影响，我们提高了最低利润要求。
以下是我们在寻找什么：
(1) 大额收购（至少1000万美元的税后利润），
(2) 有持续且稳定的盈利能力（未来预测我们没什么兴趣，“扭亏为盈”的情况也不感兴趣），
(3) 在很少或没有负债的情况下，能获得良好净资产收益率的企业，
(4) 已有管理层到位（我们提供不了），
(5) 简单的业务（如果有很多技术，我们弄不懂），
(6) 明码标价（我们不想在价格未知的情况下，即使是初步接触，浪费自己或卖方的时间）。
我们不会进行恶意收购。我们可以承诺完全保密和非常快速的答复——通常在五分钟内——告知是否有兴趣。我们倾向于现金收购，但当我们获得与付出相同的内在商业价值时，也会考虑发行股票。实际上，鉴于近期伯克希尔股价的上涨，涉及股票发行的交易可能相当可行。我们邀请潜在的卖家通过联系过去与我们有过业务往来的人来考察我们。对于合适的企业——和合适的人——我们可以提供一个好归宿。
另一方面，我们经常收到关于不符合我们测试标准的收购提议：新创企业、扭亏为盈、拍卖式的销售，以及（经纪人中永远流行的）“我肯定，如果你们这些人彼此认识一下，事情总会解决的”。这些一点都吸引不了我们。
* * *
除了对上述整个企业的收购感兴趣外，我们也对通过谈判购买大量但不构成控制的股份感兴趣，就像我们的大都会购买一样。这种购买只有在我们对业务的经济状况以及运营管理者的能力和正直感到非常满意时，才会吸引我们。我们偏好大额交易；在特殊情况下，我们可能做5000万美元（甚至更小）的交易，但我们的偏好是数倍于这个规模的承诺。
* * *
大约96.8%的合格股份参与了伯克希尔1985年的股东指定捐赠计划。通过该计划的总捐款为400万美元，共有1,724家慈善机构受益。我们去年进行了一次公民投票，以了解你们对这个计划以及我们股息政策的看法。（认识到可以通过提问的措辞来影响答案，我们努力使我们的措辞尽可能中立。）我们在附录第69页公布了选票和结果。我认为可以公平地总结你们的回应：对现行政策高度支持，并且你们的群体偏好——考虑到人们倾向于投票维持现状——是随着我们资产价值的增长而增加年度慈善承诺。
我们敦促新股东阅读第66和67页上关于我们股东指定捐赠计划的描述。如果你们希望参与未来的计划，我们强烈建议你们立即确保你们的股票以实际所有人的名义登记，而不是以“券商”名义或被提名人名义。在1986年9月30日未如此登记的股份将没有资格参加1986年的计划。
* * *
五年前，根据1969年《银行控股公司法》的要求，我们必须处置在伊利诺伊州罗克福德市的伊利诺伊国民银行与信托公司的持股。我们的处置方法不同寻常：我们宣布了罗克福德银行股份有限公司（伊利诺伊国民银行的控股公司）股票与伯克希尔股票之间的兑换比率，然后让我们每个股东——除了我——来决定是用其伯克希尔股票的全部、部分还是不与罗克福德股票进行交换。我拿了剩下的罗克福德股票，因此我自己对罗克福德的持股是由你们的决定决定的。当时我说：“这种技术体现了世界上最古老、最基本的公平分割物体的制度。就像小时候，一个人切蛋糕，另一个人先选一样，我试图公平地切分公司，但你们有权先选择你们想要的那一块。”
去年秋天，伊利诺伊国民银行被出售。当罗克福德的清算完成时，其股东将获得的每股收益大约等于银行出售时伯克希尔的每股内在价值。我很高兴这个五年的结果表明蛋糕的划分是相当公平的。
去年我为我们年会做了广告，你们接受了邀请。我们超过3000名注册股东中有250多人出席。出席者的表现与前几年出席的人一样，提出了你会期望从聪明、感兴趣的所有者那里提出的问题。你可以参加很多很多年会，而不会遇到像我们这样的群体。（莱斯特·马多克斯，佐治亚州州长，因该州极其糟糕的监狱系统而受到批评。“解决办法，”他说，“很简单。我们需要的只是一群更好的囚犯。”提升年会也是同样的道理。）
我希望你们来参加今年的年会，会议将于5月20日在奥马哈举行。仅有一个变化：在忠于另一种软饮料48年后，你们的主席，以前所未有的行为灵活性展示，转投了新的樱桃可乐。此后，它将成为伯克希尔·哈撒韦年会的官方饮料。
记得带钱：B夫人承诺，如果你们在会后去内布拉斯加家具城拜访她，那里将有大量的便宜货。
沃伦·E·巴菲特
董事会主席
1986年3月4日