ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1987 was $464 million, or
19.5%. Over the last 23 years (that is, since present management
took over), our per-share book value has grown from $19.46 to
$2,477.47, or at a rate of 23.1% compounded annually.
What counts, of course, is the rate of gain in per-share
business value, not book value. In many cases, a corporation's
book value and business value are almost totally unrelated. For
example, just before they went bankrupt, LTV and Baldwin-United
published yearend audits showing their book values to be $652
million and $397 million, respectively. Conversely, Belridge Oil
was sold to Shell in 1979 for $3.6 billion although its book
value was only $177 million.
At Berkshire, however, the two valuations have tracked
rather closely, with the growth rate in business value over the
last decade moderately outpacing the growth rate in book value.
This good news continued in 1987.
Our premium of business value to book value has widened for
two simple reasons: We own some remarkable businesses and they
are run by even more remarkable managers.
You have a right to question that second assertion. After
all, CEOs seldom tell their shareholders that they have assembled
a bunch of turkeys to run things. Their reluctance to do so
makes for some strange annual reports. Oftentimes, in his
shareholders' letter, a CEO will go on for pages detailing
corporate performance that is woefully inadequate. He will
nonetheless end with a warm paragraph describing his managerial
comrades as "our most precious asset." Such comments sometimes
make you wonder what the other assets can possibly be.
At Berkshire, however, my appraisal of our operating
managers is, if anything, understated. To understand why, first
take a look at page 7, where we show the earnings (on an
historical-cost accounting basis) of our seven largest non-
financial units: Buffalo News, Fechheimer, Kirby, Nebraska
Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies,
and World Book. In 1987, these seven business units had combined
operating earnings before interest and taxes of $180 million.
By itself, this figure says nothing about economic
performance. To evaluate that, we must know how much total
capital - debt and equity - was needed to produce these earnings.
Debt plays an insignificant role at our seven units: Their net
interest expense in 1987 was only $2 million. Thus, pre-tax
earnings on the equity capital employed by these businesses
amounted to $178 million. And this equity - again on an
historical-cost basis - was only $175 million.
If these seven business units had operated as a single
company, their 1987 after-tax earnings would have been
approximately $100 million - a return of about 57% on equity
capital. You'll seldom see such a percentage anywhere, let alone
at large, diversified companies with nominal leverage. Here's a
benchmark: In its 1988 Investor's Guide issue, Fortune reported
that among the 500 largest industrial companies and 500 largest
service companies, only six had averaged a return on equity of
over 30% during the previous decade. The best performer among
the 1000 was Commerce Clearing House at 40.2%.
Of course, the returns that Berkshire earns from these seven
units are not as high as their underlying returns because, in
aggregate, we bought the businesses at a substantial premium to
underlying equity capital. Overall, these operations are carried
on our books at about $222 million above the historical
accounting values of the underlying assets. However, the
managers of the units should be judged by the returns they
achieve on the underlying assets; what we pay for a business does
not affect the amount of capital its manager has to work with.
(If, to become a shareholder and part owner of Commerce Clearing
House, you pay, say, six times book value, that does not change
CCH's return on equity.)
Three important inferences can be drawn from the figures I
have cited. First, the current business value of these seven
units is far above their historical book value and also far above
the value at which they are carried on Berkshire's balance sheet.
Second, because so little capital is required to run these
businesses, they can grow while concurrently making almost all of
their earnings available for deployment in new opportunities.
Third, these businesses are run by truly extraordinary managers.
The Blumkins, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph
Schey all meld unusual talent, energy and character to achieve
exceptional financial results.
For good reasons, we had very high expectations when we
joined with these managers. In every case, however, our
experience has greatly exceeded those expectations. We have
received far more than we deserve, but we are willing to accept
such inequities. (We subscribe to the view Jack Benny expressed
upon receiving an acting award: "I don't deserve this, but then,
I have arthritis and I don't deserve that either.")
Beyond the Sainted Seven, we have our other major unit,
insurance, which I believe also has a business value well above
the net assets employed in it. However, appraising the business
value of a property-casualty insurance company is a decidedly
imprecise process. The industry is volatile, reported earnings
oftentimes are seriously inaccurate, and recent changes in the
Tax Code will severely hurt future profitability. Despite these
problems, we like the business and it will almost certainly
remain our largest operation. Under Mike Goldberg's management,
the insurance business should treat us well over time.
With managers like ours, my partner, Charlie Munger, and I
have little to do with operations. in fact, it is probably fair
to say that if we did more, less would be accomplished. We have
no corporate meetings, no corporate budgets, and no performance
reviews (though our managers, of course, oftentimes find such
procedures useful at their operating units). After all, what can
we tell the Blumkins about home furnishings, or the Heldmans
about uniforms?
Our major contribution to the operations of our subsidiaries
is applause. But it is not the indiscriminate applause of a
Pollyanna. Rather it is informed applause based upon the two
long careers we have spent intensively observing business
performance and managerial behavior. Charlie and I have seen so
much of the ordinary in business that we can truly appreciate a
virtuoso performance. Only one response to the 1987 performance
of our operating managers is appropriate: sustained, deafening
applause.
Sources of Reported Earnings
The table on the following page shows the major sources of
Berkshire's reported earnings. In the table, amortization of
Goodwill and other major purchase-price accounting adjustments
are not charged against the specific businesses to which they
apply but, instead, are aggregated and shown separately. In
effect, this procedure presents the earnings of our businesses as
they would have been reported had we not purchased them. In
appendixes to my letters in the 1983 and 1986 annual reports, I
explained why this form of presentation seems to us to be more
useful to investors and managers than the standard GAAP
presentation, which makes purchase-price adjustments on a
business-by business basis. The total net earnings we show in
the table are, of course, identical to the GAAP figures in our
audited financial statements.
In the Business Segment Data on pages 36-38 and in the
Management's Discussion section on pages 40-44 you will find much
additional information about our businesses. In these sections
you will also find our segment earnings reported on a GAAP basis.
I urge you to read that material, as well as Charlie Munger's
letter to Wesco shareholders, describing the various businesses
of that subsidiary, which starts on page 45.
(000s omitted)
------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1987 1986 1987 1986
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............... $(55,429) $(55,844) $(20,696) $(29,864)
Net Investment Income ...... 152,483 107,143 136,658 96,440
Buffalo News ................. 39,410 34,736 21,304 16,918
Fechheimer (Acquired 6/3/86) 13,332 8,400 6,580 3,792
Kirby ........................ 22,408 20,218 12,891 10,508
Nebraska Furniture Mart ...... 16,837 17,685 7,554 7,192
Scott Fetzer Mfg. Group ...... 30,591 25,358 17,555 13,354
See's Candies ................ 31,693 30,347 17,363 15,176
Wesco - other than Insurance 6,209 5,542 4,978 5,550
World Book ................... 25,745 21,978 15,136 11,670
Amortization of Goodwill ..... (2,862) (2,555) (2,862) (2,555)
Other Purchase-Price
Accounting Adjustments .... (5,546) (10,033) (6,544) (11,031)
Interest on Debt and
Pre-Payment Penalty ....... (11,474) (23,891) (5,905) (12,213)
Shareholder-Designated
Contributions ............. (4,938) (3,997) (2,963) (2,158)
Other ........................ 22,460 20,770 13,696 8,685
-------- -------- -------- --------
Operating Earnings ........... 280,919 195,857 214,745 131,464
Sales of Securities .......... 27,319 216,242 19,807 150,897
-------- -------- -------- --------
Total Earnings - All Entities .. $308,238 $412,099 $234,552 $282,361
======== ======== ======== ========
Gypsy Rose Lee announced on one of her later birthdays: "I
have everything I had last year; it's just that it's all two
inches lower." As the table shows, during 1987 almost all of our
businesses aged in a more upbeat way.
There's not a lot new to report about these businesses - and
that's good, not bad. Severe change and exceptional returns
usually don't mix. Most investors, of course, behave as if just
the opposite were true. That is, they usually confer the highest
price-earnings ratios on exotic-sounding businesses that hold out
the promise of feverish change. That prospect lets investors
fantasize about future profitability rather than face today's
business realities. For such investor-dreamers, any blind date
is preferable to one with the girl next door, no matter how
desirable she may be.
Experience, however, indicates that the best business
returns are usually achieved by companies that are doing
something quite similar today to what they were doing five or ten
years ago. That is no argument for managerial complacency.
Businesses always have opportunities to improve service, product
lines, manufacturing techniques, and the like, and obviously
these opportunities should be seized. But a business that
constantly encounters major change also encounters many chances
for major error. Furthermore, economic terrain that is forever
shifting violently is ground on which it is difficult to build a
fortress-like business franchise. Such a franchise is usually
the key to sustained high returns.
The Fortune study I mentioned earlier supports our view.
Only 25 of the 1,000 companies met two tests of economic
excellence - an average return on equity of over 20% in the ten
years, 1977 through 1986, and no year worse than 15%. These
business superstars were also stock market superstars: During the
decade, 24 of the 25 outperformed the S&P 500.
The Fortune champs may surprise you in two respects. First,
most use very little leverage compared to their interest-paying
capacity. Really good businesses usually don't need to borrow.
Second, except for one company that is "high-tech" and several
others that manufacture ethical drugs, the companies are in
businesses that, on balance, seem rather mundane. Most sell non-
sexy products or services in much the same manner as they did ten
years ago (though in larger quantities now, or at higher prices,
or both). The record of these 25 companies confirms that making
the most of an already strong business franchise, or
concentrating on a single winning business theme, is what usually
produces exceptional economics.
Berkshire's experience has been similar. Our managers have
produced extraordinary results by doing rather ordinary things -
but doing them exceptionally well. Our managers protect their
franchises, they control costs, they search for new products and
markets that build on their existing strengths and they don't get
diverted. They work exceptionally hard at the details of their
businesses, and it shows.
Here's an update:
o Agatha Christie, whose husband was an archaeologist, said
that was the perfect profession for one's spouse: "The older you
become, the more interested they are in you." It is students of
business management, not archaeologists, who should be interested
in Mrs. B (Rose Blumkin), the 94-year-old chairman of Nebraska
Furniture Mart.
Fifty years ago Mrs. B started the business with $500, and
today NFM is far and away the largest home furnishings store in
the country. Mrs. B continues to work seven days a week at the
job from the opening of each business day until the close. She
buys, she sells, she manages - and she runs rings around the
competition. It's clear to me that she's gathering speed and may
well reach her full potential in another five or ten years.
Therefore, I've persuaded the Board to scrap our mandatory
retirement-at-100 policy. (And it's about time: With every
passing year, this policy has seemed sillier to me.)
Net sales of NFM were $142.6 million in 1987, up 8% from
1986. There's nothing like this store in the country, and
there's nothing like the family Mrs. B has produced to carry on:
Her son Louie, and his three boys, Ron, Irv and Steve, possess
the business instincts, integrity and drive of Mrs. B. They work
as a team and, strong as each is individually, the whole is far
greater than the sum of the parts.
The superb job done by the Blumkins benefits us as owners,
but even more dramatically benefits NFM's customers. They saved
about $30 million in 1987 by buying from NFM. In other words,
the goods they bought would have cost that much more if purchased
elsewhere.
You'll enjoy an anonymous letter I received last August:
"Sorry to see Berkshire profits fall in the second quarter. One
way you may gain back part of your lost. (sic) Check the pricing
at The Furniture Mart. You will find that they are leaving 10%
to 20% on the table. This additional profit on $140 million of
sells (sic) is $28 million. Not small change in anyone's pocket!
Check out other furniture, carpet, appliance and T.V. dealers.
Your raising prices to a reasonable profit will help. Thank you.
/signed/ A Competitor."
NFM will continue to grow and prosper by following Mrs. B's
maxim: "Sell cheap and tell the truth."
o Among dominant papers of its size or larger, the Buffalo
News continues to be the national leader in two important ways:
(1) its weekday and Sunday penetration rate (the percentage of
households in the paper's primary market area that purchase it);
and (2) its "news-hole" percentage (the portion of the paper
devoted to news).
It may not be coincidence that one newspaper leads in both
categories: an exceptionally "newsrich" product makes for broad
audience appeal, which in turn leads to high penetration. Of
course, quantity must be matched by quality. This not only
means good reporting and good writing; it means freshness and
relevance. To be indispensable, a paper must promptly tell its
readers many things they want to know but won't otherwise learn
until much later, if ever.
At the News, we put out seven fresh editions every 24 hours,
each one extensively changed in content. Here's a small example
that may surprise you: We redo the obituary page in every edition
of the News, or seven times a day. Any obituary added runs
through the next six editions until the publishing cycle has been
completed.
It's vital, of course, for a newspaper to cover national and
international news well and in depth. But it is also vital for
it to do what only a local newspaper can: promptly and
extensively chronicle the personally-important, otherwise-
unreported details of community life. Doing this job well
requires a very broad range of news - and that means lots of
space, intelligently used.
Our news hole was about 50% in 1987, just as it has been
year after year. If we were to cut it to a more typical 40%, we
would save approximately $4 million annually in newsprint costs.
That interests us not at all - and it won't interest us even if,
for one reason or another, our profit margins should
significantly shrink.
Charlie and I do not believe in flexible operating budgets,
as in "Non-direct expenses can be X if revenues are Y, but must
be reduced if revenues are Y - 5%." Should we really cut our news
hole at the Buffalo News, or the quality of product and service
at See's, simply because profits are down during a given year or
quarter? Or, conversely, should we add a staff economist, a
corporate strategist, an institutional advertising campaign or
something else that does Berkshire no good simply because the
money currently is rolling in?
That makes no sense to us. We neither understand the adding
of unneeded people or activities because profits are booming, nor
the cutting of essential people or activities because
profitability is shrinking. That kind of yo-yo approach is
neither business-like nor humane. Our goal is to do what makes
sense for Berkshire's customers and employees at all times, and
never to add the unneeded. ("But what about the corporate jet?"
you rudely ask. Well, occasionally a man must rise above
principle.)
Although the News' revenues have grown only moderately since
1984, superb management by Stan Lipsey, its publisher, has
produced excellent profit growth. For several years, I have
incorrectly predicted that profit margins at the News would fall.
This year I will not let vou down: Margins will, without
question, shrink in 1988 and profit may fall as well.
Skyrocketing newsprint costs will be the major cause.
o Fechheimer Bros. Company is another of our family
businesses - and, like the Blumkins, what a family. Three
generations of Heldmans have for decades consistently, built the
sales and profits of this manufacturer and distributor of
uniforms. In the year that Berkshire acquired its controlling
interest in Fechheimer - 1986 - profits were a record. The
Heldmans didn't slow down after that. Last year earnings
increased substantially and the outlook is good for 1988.
There's nothing magic about the Uniform business; the only
magic is in the Heldmans. Bob, George, Gary, Roger and Fred know
the business inside and out, and they have fun running it. We
are fortunate to be in partnership with them.
o Chuck Huggins continues to set new records at See's, just as
he has ever since we put him in charge on the day of our purchase
some 16 years ago. In 1987, volume hit a new high at slightly
Under 25 million pounds. For the second year in a row, moreover,
same-store sales, measured in pounds, were virtually unchanged.
In case you are wondering, that represents improvement: In each
of the previous six years, same-store sales had fallen.
Although we had a particularly strong 1986 Christmas season,
we racked up better store-for-store comparisons in the 1987
Christmas season than at any other time of the year. Thus, the
seasonal factor at See's becomes even more extreme. In 1987,
about 85% of our profit was earned during December.
Candy stores are fun to visit, but most have not been fun
for their owners. From what we can learn, practically no one
besides See's has made significant profits in recent years from
the operation of candy shops. Clearly, Chuck's record at See's
is not due to a rising industry tide. Rather, it is a one-of-a-
kind performance.
His achievement requires an excellent product - which we
have - but it also requires genuine affection for the customer.
Chuck is 100% customer-oriented, and his attitude sets the tone
for the rest of the See's organization.
Here's an example of Chuck in action: At See's we regularly
add new pieces of candy to our mix and also cull a few to keep
our product line at about 100 varieties. Last spring we selected
14 items for elimination. Two, it turned out, were badly missed
by our customers, who wasted no time in letting us know what they
thought of our judgment: "A pox on all in See's who participated
in the abominable decision...;" "May your new truffles melt in
transit, may they sour in people's mouths, may your costs go up
and your profits go down...;" "We are investigating the
possibility of obtaining a mandatory injunction requiring you to
supply...;" You get the picture. In all, we received many hundreds of
letters.
Chuck not only reintroduced the pieces, he turned this
miscue into an opportunity. Each person who had written got a
complete and honest explanation in return. Said Chuck's letter:
"Fortunately, when I make poor decisions, good things often
happen as a result...;" And with the letter went a special gift
certificate.
See's increased prices only slightly in the last two years.
In 1988 we have raised prices somewhat more, though still
moderately. To date, sales have been weak and it may be
difficult for See's to improve its earnings this year.
o World Book, Kirby, and the Scott Fetzer Manufacturing Group
are all under the management of Ralph Schey. And what a lucky
thing for us that they are. I told you last year that Scott
Fetzer performance in 1986 had far exceeded the expectations that
Charlie and I had at the time of our purchase. Results in 1987
were even better. Pre-tax earnings rose 10% while average
capital employed declined significantly.
Ralph's mastery of the 19 businesses for which he is
responsible is truly amazing, and he has also attracted some
outstanding managers to run them. We would love to find a few
additional units that could be put under Ralph's wing.
The businesses of Scott Fetzer are too numerous to describe
in detail. Let's just update you on one of our favorites: At the
end of 1987, World Book introduced its most dramatically-revised
edition since 1962. The number of color photos was increased
from 14,000 to 24,000; over 6,000 articles were revised; 840 new
contributors were added. Charlie and I recommend this product to
you and your family, as we do World Book's products for younger
children, Childcraft and Early World of Learning.
In 1987, World Book unit sales in the United States
increased for the fifth consecutive year. International sales
and profits also grew substantially. The outlook is good for
Scott Fetzer operations in aggregate, and for World Book in
particular.
Insurance Operations
Shown below is an updated version of our usual table
presenting key figures for the insurance industry:
Statutory
Yearly Change Combined Ratio Yearly Change Inflation Rate
in Premiums After Policyholder in Incurred Measured by
Written (%) Dividends Losses (%) GNP Deflator (%)
------------- ------------------ ------------- ----------------
1981 ..... 3.8 106.0 6.5 9.6
1982 ..... 4.4 109.8 8.4 6.4
1983 ..... 4.6 112.0 6.8 3.8
1984 ..... 9.2 117.9 16.9 3.7
1985 ..... 22.1 116.3 16.1 3.2
1986 (Rev.) 22.2 108.0 13.5 2.6
1987 (Est.) 8.7 104.7 6.8 3.0
Source: Best's Insurance Management Reports
The combined ratio represents total insurance costs (losses
incurred plus expenses) compared to revenue from premiums: A
ratio below 100 indicates an underwriting profit, and one above
100 indicates a loss. When the investment income that an insurer
earns from holding on to policyholders' funds ("the float") is
taken into account, a combined ratio in the 107-111 range
typically produces an overall break-even result, exclusive of
earnings on the funds provided by shareholders.
The math of the insurance business, encapsulated by the
table, is not very complicated. In years when the industry's
annual gain in revenues (premiums) pokes along at 4% or 5%,
underwriting losses are sure to mount. That is not because auto
accidents, fires, windstorms and the like are occurring more
frequently, nor has it lately been the fault of general
inflation. Today, social and judicial inflation are the major
culprits; the cost of entering a courtroom has simply ballooned.
Part of the jump in cost arises from skyrocketing verdicts, and
part from the tendency of judges and juries to expand the
coverage of insurance policies beyond that contemplated by the
insurer when the policies were written. Seeing no let-up in
either trend, we continue to believe that the industry's revenues
must grow at about 10% annually for it to just hold its own in
terms of profitability, even though general inflation may be
running at a considerably lower rate.
The strong revenue gains of 1985-87 almost guaranteed the
industry an excellent underwriting performance in 1987 and,
indeed, it was a banner year. But the news soured as the
quarters rolled by: Best's estimates that year-over-year volume
increases were 12.9%, 11.1%, 5.7%, and 5.6%. In 1988, the
revenue gain is certain to be far below our 10% "equilibrium"
figure. Clearly, the party is over.
However, earnings will not immediately sink. A lag factor
exists in this industry: Because most policies are written for a
one-year term, higher or lower insurance prices do not have their
full impact on earnings until many months after they go into
effect. Thus, to resume our metaphor, when the party ends and
the bar is closed, you are allowed to finish your drink. If
results are not hurt by a major natural catastrophe, we predict a
small climb for the industry's combined ratio in 1988, followed
by several years of larger increases.
The insurance industry is cursed with a set of dismal
economic characteristics that make for a poor long-term outlook:
hundreds of competitors, ease of entry, and a product that cannot
be differentiated in any meaningful way. In such a commodity-
like business, only a very low-cost operator or someone operating
in a protected, and usually small, niche can sustain high
profitability levels.
When shortages exist, however, even commodity businesses
flourish. The insurance industry enjoyed that kind of climate
for a while but it is now gone. One of the ironies of capitalism
is that most managers in commodity industries abhor shortage
conditions - even though those are the only circumstances
permitting them good returns. Whenever shortages appear, the
typical manager simply can't wait to expand capacity and thereby
plug the hole through which money is showering upon him. This is
precisely what insurance managers did in 1985-87, confirming
again Disraeli's observation: "What we learn from history is that
we do not learn from history."
At Berkshire, we work to escape the industry's commodity
economics in two ways. First, we differentiate our product by our
financial strength, which exceeds that of all others in the
industry. This strength, however, is limited in its usefulness.
It means nothing in the personal insurance field: The buyer of
an auto or homeowners policy is going to get his claim paid even
if his insurer fails (as many have). It often means nothing in
the commercial insurance arena: When times are good, many major
corporate purchasers of insurance and their brokers pay scant
attention to the insurer's ability to perform under the more
adverse conditions that may exist, say, five years later when a
complicated claim is finally resolved. (Out of sight, out of mind
- and, later on, maybe out-of-pocket.)
Periodically, however, buyers remember Ben Franklin's
observation that it is hard for an empty sack to stand upright
and recognize their need to buy promises only from insurers that
have enduring financial strength. It is then that we have a
major competitive advantage. When a buyer really focuses on
whether a $10 million claim can be easily paid by his insurer
five or ten years down the road, and when he takes into account
the possibility that poor underwriting conditions may then
coincide with depressed financial markets and defaults by
reinsurer, he will find only a few companies he can trust.
Among those, Berkshire will lead the pack.
Our second method of differentiating ourselves is the total
indifference to volume that we maintain. In 1989, we will be
perfectly willing to write five times as much business as we
write in 1988 - or only one-fifth as much. We hope, of course,
that conditions will allow us large volume. But we cannot
control market prices. If they are unsatisfactory, we will
simply do very little business. No other major insurer acts with
equal restraint.
Three conditions that prevail in insurance, but not in most
businesses, allow us our flexibility. First, market share is not
an important determinant of profitability: In this business, in
contrast to the newspaper or grocery businesses, the economic
rule is not survival of the fattest. Second, in many sectors of
insurance, including most of those in which we operate,
distribution channels are not proprietary and can be easily
entered: Small volume this year does not preclude huge volume
next year. Third, idle capacity - which in this industry largely
means people - does not result in intolerable costs. In a way
that industries such as printing or steel cannot, we can operate
at quarter-speed much of the time and still enjoy long-term
prosperity.
We follow a price-based-on-exposure, not-on-competition
policy because it makes sense for our shareholders. But we're
happy to report that it is also pro-social. This policy means
that we are always available, given prices that we believe are
adequate, to write huge volumes of almost any type of property-
casualty insurance. Many other insurers follow an in-and-out
approach. When they are "out" - because of mounting losses,
capital inadequacy, or whatever - we are available. Of course,
when others are panting to do business we are also available -
but at such times we often find ourselves priced above the
market. In effect, we supply insurance buyers and brokers with a
large reservoir of standby capacity.
One story from mid-1987 illustrates some consequences of our
pricing policy: One of the largest family-owned insurance
brokers in the country is headed by a fellow who has long been a
shareholder of Berkshire. This man handles a number of large
risks that are candidates for placement with our New York office.
Naturally, he does the best he can for his clients. And, just as
naturally, when the insurance market softened dramatically in
1987 he found prices at other insurers lower than we were willing
to offer. His reaction was, first, to place all of his business
elsewhere and, second, to buy more stock in Berkshire. Had we
been really competitive, he said, we would have gotten his
insurance business but he would not have bought our stock.
Berkshire's underwriting experience was excellent in 1987,
in part because of the lag factor discussed earlier. Our
combined ratio (on a statutory basis and excluding structured
settlements and financial reinsurance) was 105. Although the
ratio was somewhat less favorable than in 1986, when it was 103,
our profitability improved materially in 1987 because we had the
use of far more float. This trend will continue to run in our
favor: Our ratio of float to premium volume will increase very
significantly during the next few years. Thus, Berkshire's
insurance profits are quite likely to improve during 1988 and
1989, even though we expect our combined ratio to rise.
Our insurance business has also made some important non-
financial gains during the last few years. Mike Goldberg, its
manager, has assembled a group of talented professionals to write
larger risks and unusual coverages. His operation is now well
equipped to handle the lines of business that will occasionally
offer us major opportunities.
Our loss reserve development, detailed on pages 41-42, looks
better this year than it has previously. But we write lots of
"long-tail" business - that is, policies generating claims that
often take many years to resolve. Examples would be product
liability, or directors and officers liability coverages. With a
business mix like this, one year of reserve development tells you
very little.
You should be very suspicious of any earnings figures
reported by insurers (including our own, as we have unfortunately
proved to you in the past). The record of the last decade shows
that a great many of our best-known insurers have reported
earnings to shareholders that later proved to be wildly
erroneous. In most cases, these errors were totally innocent:
The unpredictability of our legal system makes it impossible for
even the most conscientious insurer to come close to judging the
eventual cost of long-tail claims.
Nevertheless, auditors annually certify the numbers given
them by management and in their opinions unqualifiedly state that
these figures "present fairly" the financial position of their
clients. The auditors use this reassuring language even though
they know from long and painful experience that the numbers so
certified are likely to differ dramatically from the true
earnings of the period. Despite this history of error, investors
understandably rely upon auditors' opinions. After all, a
declaration saying that "the statements present fairly" hardly
sounds equivocal to the non-accountant.
The wording in the auditor's standard opinion letter is
scheduled to change next year. The new language represents
improvement, but falls far short of describing the limitations of
a casualty-insurer audit. If it is to depict the true state of
affairs, we believe the standard opinion letter to shareholders
of a property-casualty company should read something like: "We
have relied upon representations of management in respect to the
liabilities shown for losses and loss adjustment expenses, the
estimate of which, in turn, very materially affects the earnings
and financial condition herein reported. We can express no
opinion about the accuracy of these figures. Subject to that
important reservation, in our opinion, etc."
If lawsuits develop in respect to wildly inaccurate
financial statements (which they do), auditors will definitely
say something of that sort in court anyway. Why should they not
be forthright about their role and its limitations from the
outset?
We want to emphasize that we are not faulting auditors for
their inability to accurately assess loss reserves (and therefore
earnings). We fault them only for failing to publicly
acknowledge that they can't do this job.
From all appearances, the innocent mistakes that are
constantly made in reserving are accompanied by others that are
deliberate. Various charlatans have enriched themselves at the
expense of the investing public by exploiting, first, the
inability of auditors to evaluate reserve figures and, second,
the auditors' willingness to confidently certify those figures as
if they had the expertise to do so. We will continue to see such
chicanery in the future. Where "earnings" can be created by the
stroke of a pen, the dishonest will gather. For them, long-tail
insurance is heaven. The audit wording we suggest would at least
serve to put investors on guard against these predators.
The taxes that insurance companies pay - which increased
materially, though on a delayed basis, upon enactment of the Tax
Reform Act of 1986 - took a further turn for the worse at the end
of 1987. We detailed the 1986 changes in last year's report. We
also commented on the irony of a statute that substantially
increased 1987 reported earnings for insurers even as it
materially reduced both their long-term earnings potential and
their business value. At Berkshire, the temporarily-helpful
"fresh start" adjustment inflated 1987 earnings by $8.2 million.
In our opinion, the 1986 Act was the most important economic
event affecting the insurance industry over the past decade. The
1987 Bill further reduced the intercorporate dividends-received
credit from 80% to 70%, effective January 1, 1988, except for
cases in which the taxpayer owns at least 20% of an investee.
Investors who have owned stocks or bonds through corporate
intermediaries other than qualified investment companies have
always been disadvantaged in comparison to those owning the same
securities directly. The penalty applying to indirect ownership
was greatly increased by the 1986 Tax Bill and, to a lesser
extent, by the 1987 Bill, particularly in instances where the
intermediary is an insurance company. We have no way of
offsetting this increased level of taxation. It simply means
that a given set of pre-tax investment returns will now translate
into much poorer after-tax results for our shareholders.
All in all, we expect to do well in the insurance business,
though our record is sure to be uneven. The immediate outlook is
for substantially lower volume but reasonable earnings
improvement. The decline in premium volume will accelerate after
our quota-share agreement with Fireman's Fund expires in 1989.
At some point, likely to be at least a few years away, we may see
some major opportunities, for which we are now much better
prepared than we were in 1985.
Marketable Securities - Permanent Holdings
Whenever Charlie and I buy common stocks for Berkshire's
insurance companies (leaving aside arbitrage purchases, discussed
later) we approach the transaction as if we were buying into a
private business. We look at the economic prospects of the
business, the people in charge of running it, and the price we
must pay. We do not have in mind any time or price for sale.
Indeed, we are willing to hold a stock indefinitely so long as we
expect the business to increase in intrinsic value at a
satisfactory rate. When investing, we view ourselves as business
analysts - not as market analysts, not as macroeconomic analysts,
and not even as security analysts.
Our approach makes an active trading market useful, since it
periodically presents us with mouth-watering opportunities. But
by no means is it essential: a prolonged suspension of trading in
the securities we hold would not bother us any more than does the
lack of daily quotations on World Book or Fechheimer.
Eventually, our economic fate will be determined by the economic
fate of the business we own, whether our ownership is partial or
total.
Ben Graham, my friend and teacher, long ago described the
mental attitude toward market fluctuations that I believe to be
most conducive to investment success. He said that you should
imagine market quotations as coming from a remarkably
accommodating fellow named Mr. Market who is your partner in a
private business. Without fail, Mr. Market appears daily and
names a price at which he will either buy your interest or sell
you his.
Even though the business that the two of you own may have
economic characteristics that are stable, Mr. Market's quotations
will be anything but. For, sad to say, the poor fellow has
incurable emotional problems. At times he feels euphoric and can
see only the favorable factors affecting the business. When in
that mood, he names a very high buy-sell price because he fears
that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble
ahead for both the business and the world. On these occasions he
will name a very low price, since he is terrified that you will
unload your interest on him.
Mr. Market has another endearing characteristic: He doesn't
mind being ignored. If his quotation is uninteresting to you
today, he will be back with a new one tomorrow. Transactions are
strictly at your option. Under these conditions, the more manic-
depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning
or everything will turn into pumpkins and mice: Mr. Market is
there to serve you, not to guide you. It is his pocketbook, not
his wisdom, that you will find useful. If he shows up some day
in a particularly foolish mood, you are free to either ignore him
or to take advantage of him, but it will be disastrous if you
fall under his influence. Indeed, if you aren't certain that you
understand and can value your business far better than Mr.
Market, you don't belong in the game. As they say in poker, "If
you've been in the game 30 minutes and you don't know who the
patsy is, you're the patsy."
Ben's Mr. Market allegory may seem out-of-date in today's
investment world, in which most professionals and academicians
talk of efficient markets, dynamic hedging and betas. Their
interest in such matters is understandable, since techniques
shrouded in mystery clearly have value to the purveyor of
investment advice. After all, what witch doctor has ever
achieved fame and fortune by simply advising "Take two aspirins"?
The value of market esoterica to the consumer of investment
advice is a different story. In my opinion, investment success
will not be produced by arcane formulae, computer programs or
signals flashed by the price behavior of stocks and markets.
Rather an investor will succeed by coupling good business
judgment with an ability to insulate his thoughts and behavior
from the super-contagious emotions that swirl about the
marketplace. In my own efforts to stay insulated, I have found
it highly useful to keep Ben's Mr. Market concept firmly in mind.
Following Ben's teachings, Charlie and I let our marketable
equities tell us by their operating results - not by their daily,
or even yearly, price quotations - whether our investments are
successful. The market may ignore business success for a while,
but eventually will confirm it. As Ben said: "In the short run,
the market is a voting machine but in the long run it is a
weighing machine." The speed at which a business's success is
recognized, furthermore, is not that important as long as the
company's intrinsic value is increasing at a satisfactory rate.
In fact, delayed recognition can be an advantage: It may give us
the chance to buy more of a good thing at a bargain price.
Sometimes, of course, the market may judge a business to be
more valuable than the underlying facts would indicate it is. In
such a case, we will sell our holdings. Sometimes, also, we will
sell a security that is fairly valued or even undervalued because
we require funds for a still more undervalued investment or one
we believe we understand better.
We need to emphasize, however, that we do not sell holdings
just because they have appreciated or because we have held them
for a long time. (Of Wall Street maxims the most foolish may be
"You can't go broke taking a profit.") We are quite content to
hold any security indefinitely, so long as the prospective return
on equity capital of the underlying business is satisfactory,
management is competent and honest, and the market does not
overvalue the business.
However, our insurance companies own three marketable common
stocks that we would not sell even though they became far
overpriced in the market. In effect, we view these investments
exactly like our successful controlled businesses - a permanent
part of Berkshire rather than merchandise to be disposed of once
Mr. Market offers us a sufficiently high price. To that, I will
add one qualifier: These stocks are held by our insurance
companies and we would, if absolutely necessary, sell portions of
our holdings to pay extraordinary insurance losses. We intend,
however, to manage our affairs so that sales are never required.
A determination to have and to hold, which Charlie and I
share, obviously involves a mixture of personal and financial
considerations. To some, our stand may seem highly eccentric.
(Charlie and I have long followed David Oglivy's advice: "Develop
your eccentricities while you are young. That way, when you get
old, people won't think you're going ga-ga.") Certainly, in the
transaction-fixated Wall Street of recent years, our posture must
seem odd: To many in that arena, both companies and stocks are
seen only as raw material for trades.
Our attitude, however, fits our personalities and the way we
want to live our lives. Churchill once said, "You shape your
houses and then they shape you." We know the manner in which we
wish to be shaped. For that reason, we would rather achieve a
return of X while associating with people whom we strongly like
and admire than realize 110% of X by exchanging these
relationships for uninteresting or unpleasant ones. And we will
never find people we like and admire more than some of the main
participants at the three companies - our permanent holdings -
shown below:
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ........... $517,500 $1,035,000
6,850,000 GEICO Corporation .................. 45,713 756,925
1,727,765 The Washington Post Company ........ 9,731 323,092
We really don't see many fundamental differences between the
purchase of a controlled business and the purchase of marketable
holdings such as these. In each case we try to buy into
businesses with favorable long-term economics. Our goal is to
find an outstanding business at a sensible price, not a mediocre
business at a bargain price. Charlie and I have found that
making silk purses out of silk is the best that we can do; with
sow's ears, we fail.
(It must be noted that your Chairman, always a quick study,
required only 20 years to recognize how important it was to buy
good businesses. In the interim, I searched for "bargains" - and
had the misfortune to find some. My punishment was an education
in the economics of short-line farm implement manufacturers,
third-place department stores, and New England textile
manufacturers.)
Of course, Charlie and I may misread the fundamental
economics of a business. When that happens, we will encounter
problems whether that business is a wholly-owned subsidiary or a
marketable security, although it is usually far easier to exit
from the latter. (Indeed, businesses can be misread: Witness the
European reporter who, after being sent to this country to
profile Andrew Carnegie, cabled his editor, "My God, you'll never
believe the sort of money there is in running libraries.")
In making both control purchases and stock purchases, we try
to buy not only good businesses, but ones run by high-grade,
talented and likeable managers. If we make a mistake about the
managers we link up with, the controlled company offers a certain
advantage because we have the power to effect change. In
practice, however, this advantage is somewhat illusory:
Management changes, like marital changes, are painful, time-
consuming and chancy. In any event, at our three marketable-but
permanent holdings, this point is moot: With Tom Murphy and Dan
Burke at Cap Cities, Bill Snyder and Lou Simpson at GEICO, and
Kay Graham and Dick Simmons at The Washington Post, we simply
couldn't be in better hands.
I would say that the controlled company offers two main
advantages. First, when we control a company we get to allocate
capital, whereas we are likely to have little or nothing to say
about this process with marketable holdings. This point can be
important because the heads of many companies are not skilled in
capital allocation. Their inadequacy is not surprising. Most
bosses rise to the top because they have excelled in an area such
as marketing, production, engineering, administration or,
sometimes, institutional politics.
Once they become CEOs, they face new responsibilities. They
now must make capital allocation decisions, a critical job that
they may have never tackled and that is not easily mastered. To
stretch the point, it's as if the final step for a highly-
talented musician was not to perform at Carnegie Hall but,
instead, to be named Chairman of the Federal Reserve.
The lack of skill that many CEOs have at capital allocation
is no small matter: After ten years on the job, a CEO whose
company annually retains earnings equal to 10% of net worth will
have been responsible for the deployment of more than 60% of all
the capital at work in the business.
CEOs who recognize their lack of capital-allocation skills
(which not all do) will often try to compensate by turning to
their staffs, management consultants, or investment bankers.
Charlie and I have frequently observed the consequences of such
"help." On balance, we feel it is more likely to accentuate the
capital-allocation problem than to solve it.
In the end, plenty of unintelligent capital allocation takes
place in corporate America. (That's why you hear so much about
"restructuring.") Berkshire, however, has been fortunate. At the
companies that are our major non-controlled holdings, capital has
generally been well-deployed and, in some cases, brilliantly so.
The second advantage of a controlled company over a
marketable security has to do with taxes. Berkshire, as a
corporate holder, absorbs some significant tax costs through the
ownership of partial positions that we do not when our ownership
is 80%, or greater. Such tax disadvantages have long been with
us, but changes in the tax code caused them to increase
significantly during the past year. As a consequence, a given
business result can now deliver Berkshire financial results that
are as much as 50% better if they come from an 80%-or-greater
holding rather than from a lesser holding.
The disadvantages of owning marketable securities are
sometimes offset by a huge advantage: Occasionally the stock
market offers us the chance to buy non-controlling pieces of
extraordinary businesses at truly ridiculous prices -
dramatically below those commanded in negotiated transactions
that transfer control. For example, we purchased our Washington
Post stock in 1973 at $5.63 per share, and per-share operating
earnings in 1987 after taxes were $10.30. Similarly, Our GEICO
stock was purchased in 1976, 1979 and 1980 at an average of $6.67
per share, and after-tax operating earnings per share last year
were $9.01. In cases such as these, Mr. Market has proven to be a
mighty good friend.
An interesting accounting irony overlays a comparison of the
reported financial results of our controlled companies with those
of the permanent minority holdings listed above. As you can see,
those three stocks have a market value of over $2 billion. Yet
they produced only $11 million in reported after-tax earnings for
Berkshire in 1987.
Accounting rules dictate that we take into income only the
dividends these companies pay us - which are little more than
nominal - rather than our share of their earnings, which in 1987
amounted to well over $100 million. On the other hand,
accounting rules provide that the carrying value of these three
holdings - owned, as they are, by insurance companies - must be
recorded on our balance sheet at current market prices. The
result: GAAP accounting lets us reflect in our net worth the up-
to-date underlying values of the businesses we partially own, but
does not let us reflect their underlying earnings in our income
account.
In the case of our controlled companies, just the opposite
is true. Here, we show full earnings in our income account but
never change asset values on our balance sheet, no matter how
much the value of a business might have increased since we
purchased it.
Our mental approach to this accounting schizophrenia is to
ignore GAAP figures and to focus solely on the future earning
power of both our controlled and non-controlled businesses.
Using this approach, we establish our own ideas of business
value, keeping these independent from both the accounting values
shown on our books for controlled companies and the values placed
by a sometimes foolish market on our partially-owned companies.
It is this business value that we hope to increase at a
reasonable (or, preferably, unreasonable) rate in the years
ahead.
Marketable Securities - Other
In addition to our three permanent common stock holdings, we
hold large quantities of marketable securities in our insurance
companies. In selecting these, we can choose among five major
categories: (1) long-term common stock investments, (2) medium-
term fixed-income securities, (3) long-term fixed income
securities, (4) short-term cash equivalents, and (5) short-term
arbitrage commitments.
We have no particular bias when it comes to choosing from
these categories. We just continuously search among them for the
highest after-tax returns as measured by "mathematical
expectation," limiting ourselves always to investment
alternatives we think we understand. Our criteria have nothing
to do with maximizing immediately reportable earnings; our goal,
rather, is to maximize eventual net worth.
o Let's look first at common stocks. During 1987 the stock
market was an area of much excitement but little net movement:
The Dow advanced 2.3% for the year. You are aware, of course, of
the roller coaster ride that produced this minor change. Mr.
Market was on a manic rampage until October and then experienced
a sudden, massive seizure.
We have "professional" investors, those who manage many
billions, to thank for most of this turmoil. Instead of focusing
on what businesses will do in the years ahead, many prestigious
money managers now focus on what they expect other money managers
to do in the days ahead. For them, stocks are merely tokens in a
game, like the thimble and flatiron in Monopoly.
An extreme example of what their attitude leads to is
"portfolio insurance," a money-management strategy that many
leading investment advisors embraced in 1986-1987. This strategy
- which is simply an exotically-labeled version of the small
speculator's stop-loss order dictates that ever increasing
portions of a stock portfolio, or their index-future equivalents,
be sold as prices decline. The strategy says nothing else
matters: A downtick of a given magnitude automatically produces a
huge sell order. According to the Brady Report, $60 billion to
$90 billion of equities were poised on this hair trigger in mid-
October of 1987.
If you've thought that investment advisors were hired to
invest, you may be bewildered by this technique. After buying a
farm, would a rational owner next order his real estate agent to
start selling off pieces of it whenever a neighboring property
was sold at a lower price? Or would you sell your house to
whatever bidder was available at 9:31 on some morning merely
because at 9:30 a similar house sold for less than it would have
brought on the previous day?
Moves like that, however, are what portfolio insurance tells
a pension fund or university to make when it owns a portion of
enterprises such as Ford or General Electric. The less these
companies are being valued at, says this approach, the more
vigorously they should be sold. As a "logical" corollary, the
approach commands the institutions to repurchase these companies
- I'm not making this up - once their prices have rebounded
significantly. Considering that huge sums are controlled by
managers following such Alice-in-Wonderland practices, is it any
surprise that markets sometimes behave in aberrational fashion?
Many commentators, however, have drawn an incorrect
conclusion upon observing recent events: They are fond of saying
that the small investor has no chance in a market now dominated
by the erratic behavior of the big boys. This conclusion is dead
wrong: Such markets are ideal for any investor - small or large -
so long as he sticks to his investment knitting. Volatility
caused by money managers who speculate irrationally with huge
sums will offer the true investor more chances to make
intelligent investment moves. He can be hurt by such volatility
only if he is forced, by either financial or psychological
pressures, to sell at untoward times.
At Berkshire, we have found little to do in stocks during
the past few years. During the break in October, a few stocks
fell to prices that interested us, but we were unable to make
meaningful purchases before they rebounded. At yearend 1987 we
had no major common stock investments (that is, over $50 million)
other than those we consider permanent or arbitrage holdings.
However, Mr. Market will offer us opportunities - you can be sure
of that - and, when he does, we will be willing and able to
participate.
o In the meantime, our major parking place for money is
medium-term tax-exempt bonds, whose limited virtues I explained
in last year's annual report. Though we both bought and sold
some of these bonds in 1987, our position changed little overall,
holding around $900 million. A large portion of our bonds are
"grandfathered" under the Tax Reform Act of 1986, which means
they are fully tax-exempt. Bonds currently purchased by
insurance companies are not.
As an alternative to short-term cash equivalents, our
medium-term tax-exempts have - so far served us well. They have
produced substantial extra income for us and are currently worth
a bit above our cost. Regardless of their market price, we are
ready to dispose of our bonds whenever something better comes
along.
o We continue to have an aversion to long-term bonds (and may
be making a serious mistake by not disliking medium-term bonds as
well). Bonds are no better than the currency in which they are
denominated, and nothing we have seen in the past year - or past
decade - makes us enthusiastic about the long-term future of U.S.
currency.
Our enormous trade deficit is causing various forms of
"claim checks" - U.S. government and corporate bonds, bank
deposits, etc. - to pile up in the hands of foreigners at a
distressing rate. By default, our government has adopted an
approach to its finances patterned on that of Blanche DuBois, of
A Streetcar Named Desire, who said, "I have always depended on
the kindness of strangers." In this case, of course, the
"strangers" are relying on the integrity of our claim checks
although the plunging dollar has already made that proposition
expensive for them.
The faith that foreigners are placing in us may be
misfounded. When the claim checks outstanding grow sufficiently
numerous and when the issuing party can unilaterally determine
their purchasing power, the pressure on the issuer to dilute
their value by inflating the currency becomes almost
irresistible. For the debtor government, the weapon of inflation
is the economic equivalent of the "H" bomb, and that is why very
few countries have been allowed to swamp the world with debt
denominated in their own currency. Our past, relatively good
record for fiscal integrity has let us break this rule, but the
generosity accorded us is likely to intensify, rather than
relieve, the eventual pressure on us to inflate. If we do
succumb to that pressure, it won't be just the foreign holders of
our claim checks who will suffer. It will be all of us as well.
Of course, the U.S. may take steps to stem our trade deficit
well before our position as a net debtor gets out of hand. (In
that respect, the falling dollar will help, though unfortunately
it will hurt in other ways.) Nevertheless, our government's
behavior in this test of its mettle is apt to be consistent with
its Scarlett O'Hara approach generally: "I'll think about it
tomorrow." And, almost inevitably, procrastination in facing up
to fiscal problems will have inflationary consequences.
Both the timing and the sweep of those consequences are
unpredictable. But our inability to quantify or time the risk
does not mean we should ignore it. While recognizing the
possibility that we may be wrong and that present interest rates
may adequately compensate for the inflationary risk, we retain a
general fear of long-term bonds.
We are, however, willing to invest a moderate portion of our
funds in this category if we think we have a significant edge in
a specific security. That willingness explains our holdings of
the Washington Public Power Supply Systems #1, #2 and #3 issues,
discussed in our 1984 report. We added to our WPPSS position
during 1987. At yearend, we had holdings with an amortized cost
of $240 million and a market value of $316 million, paying us
tax-exempt income of $34 million annually.
o We continued to do well in arbitrage last year, though - or
perhaps because - we operated on a very limited scale. We enter
into only a few arbitrage commitments each year and restrict
ourselves to large transactions that have been publicly
announced. We do not participate in situations in which green-
mailers are attempting to put a target company "in play."
We have practiced arbitrage on an opportunistic basis for
decades and, to date, our results have been quite good. Though
we've never made an exact calculation, I believe that overall we
have averaged annual pre-tax returns of at least 25% from
arbitrage. I'm quite sure we did better than that in 1987. But
it should be emphasized that a really bad experience or two -
such as many arbitrage operations suffered in late 1987 - could
change the figures dramatically.
Our only $50 million-plus arbitrage position at yearend 1987
was 1,096,200 shares of Allegis, with a cost of $76 million and a
market value of $78 million.
o We had two other large holdings at yearend that do not fit
precisely into any of our five categories. One was various
Texaco, Inc. bonds with short maturities, all purchased after
Texaco went into bankruptcy. Were it not for the extraordinarily
strong capital position of our insurance companies, it would be
inappropriate for us to buy defaulted bonds. At prices
prevailing after Texaco's bankruptcy filing, however, we regarded
these issues as by far the most attractive bond investment
available to us.
On a worst-case basis with respect to the Pennzoil
litigation, we felt the bonds were likely to be worth about what
we paid for them. Given a sensible settlement, which seemed
likely, we expected the bonds to be worth considerably more. At
yearend our Texaco bonds were carried on our books at $104
million and had a market value of $119 million.
By far our largest - and most publicized - investment in
1987 was a $700 million purchase of Salomon Inc 9% preferred
stock. This preferred is convertible after three years into
Salomon common stock at $38 per share and, if not converted, will
be redeemed ratably over five years beginning October 31, 1995.
From most standpoints, this commitment fits into the medium-term
fixed-income securities category. In addition, we have an
interesting conversion possibility.
We, of course, have no special insights regarding the
direction or future profitability of investment banking. By
their nature, the economics of this industry are far less
predictable than those of most other industries in which we have
major Commitments. This unpredictability is one of the reasons
why our participation is in the form of a convertible preferred.
What we do have a strong feeling about is the ability and
integrity of John Gutfreund, CEO of Salomon Inc. Charlie and I
like, admire and trust John. We first got to know him in 1976
when he played a key role in GEICO's escape from near-bankruptcy.
Several times since, we have seen John steer clients away from
transactions that would have been unwise, but that the client
clearly wanted to make - even though his advice provided no fee
to Salomon and acquiescence would have delivered a large fee.
Such service-above-self behavior is far from automatic in Wall
Street.
For the reasons Charlie outlines on page 50, at yearend we
valued our Salomon investment at 98% of par, $14 million less
than our cost. However, we believe there is a reasonable
likelihood that a leading, high-quality capital-raising and
market-making operation can average good returns on equity. If
so, our conversion right will eventually prove to be valuable.
Two further comments about our investments in marketable
securities are appropriate. First, we give you our usual
warning: Our holdings have changed since yearend and will
continue to do so without notice.
The second comment is related: During 1987, as in some
earlier years, there was speculation in the press from time to
time about our purchase or sale of various securities. These
stories were sometimes true, sometimes partially true, and other
times completely untrue. Interestingly, there has been no
correlation between the size and prestige of the publication and
the accuracy of the report. One dead-wrong rumor was given
considerable prominence by a major national magazine, and another
leading publication misled its readers by writing about an
arbitrage position as if it were a long-term investment
commitment. (In not naming names, I am observing the old warning
that it's not wise to pick fights with people who buy ink by the
barrel.)
You should understand that we simply don't comment in any
way on rumors, whether they are true or false. If we were to
deny the incorrect reports and refuse comment on the correct
ones, we would in effect be commenting on all.
In a world in which big investment ideas are both limited
and valuable, we have no interest in telling potential
competitors what we are doing except to the extent required by
law. We certainly don't expect others to tell us of their
investment ideas. Nor would we expect a media company to
disclose news of acquisitions it was privately pursuing or a
journalist to tell his competitors about stories on which he is
working or sources he is using.
I find it uncomfortable when friends or acquaintances
mention that they are buying X because it has been reported -
incorrectly - that Berkshire is a buyer. However, I do not set
them straight. If they want to participate in whatever Berkshire
actually is buying, they can always purchase Berkshire stock.
But perhaps that is too simple. Usually, I suspect, they find it
more exciting to buy what is being talked about. Whether that
strategy is more profitable is another question.
Financing
Shortly after yearend, Berkshire sold two issues of
debentures, totaling $250 million. Both issues mature in 2018
and will be retired at an even pace through sinking fund
operations that begin in 1999. Our overall interest cost, after
allowing for expenses of issuance, is slightly over 10%. Salomon
was our investment banker, and its service was excellent.
Despite our pessimistic views about inflation, our taste for
debt is quite limited. To be sure, it is likely that Berkshire
could improve its return on equity by moving to a much higher,
though still conventional, debt-to-business-value ratio. It's
even more likely that we could handle such a ratio, without
problems, under economic conditions far worse than any that have
prevailed since the early 1930s.
But we do not wish it to be only likely that we can meet our
obligations; we wish that to be certain. Thus we adhere to
policies - both in regard to debt and all other matters - that
will allow us to achieve acceptable long-term results under
extraordinarily adverse conditions, rather than optimal results
under a normal range of conditions.
Good business or investment decisions will eventually
produce quite satisfactory economic results, with no aid from
leverage. Therefore, it seems to us to be both foolish and
improper to risk what is important (including, necessarily, the
welfare of innocent bystanders such as policyholders and
employees) for some extra returns that are relatively
unimportant. This view is not the product of either our
advancing age or prosperity: Our opinions about debt have
remained constant.
However, we are not phobic about borrowing. (We're far from
believing that there is no fate worse than debt.) We are willing
to borrow an amount that we believe - on a worst-case basis -
will pose no threat to Berkshire's well-being. Analyzing what
that amount might be, we can look to some important strengths
that would serve us well if major problems should engulf our
economy: Berkshire's earnings come from many diverse and well-
entrenched businesses; these businesses seldom require much
capital investment; what debt we have is structured well; and we
maintain major holdings of liquid assets. Clearly, we could be
comfortable with a higher debt-to-business-value ratio than we
now have.
One further aspect of our debt policy deserves comment:
Unlike many in the business world, we prefer to finance in
anticipation of need rather than in reaction to it. A business
obtains the best financial results possible by managing both
sides of its balance sheet well. This means obtaining the
highest-possible return on assets and the lowest-possible cost on
liabilities. It would be convenient if opportunities for
intelligent action on both fronts coincided. However, reason
tells us that just the opposite is likely to be the case: Tight
money conditions, which translate into high costs for
liabilities, will create the best opportunities for acquisitions,
and cheap money will cause assets to be bid to the sky. Our
conclusion: Action on the liability side should sometimes be
taken independent of any action on the asset side.
Alas, what is "tight" and "cheap" money is far from clear at
any particular time. We have no ability to forecast interest
rates and - maintaining our usual open-minded spirit - believe
that no one else can. Therefore, we simply borrow when
conditions seem non-oppressive and hope that we will later find
intelligent expansion or acquisition opportunities, which - as we
have said - are most likely to pop up when conditions in the debt
market are clearly oppressive. Our basic principle is that if
you want to shoot rare, fast-moving elephants, you should always
carry a loaded gun.
Our fund-first, buy-or-expand-later policy almost always
penalizes near-term earnings. For example, we are now earning
about 6 1/2% on the $250 million we recently raised at 10%, a
disparity that is currently costing us about $160,000 per week.
This negative spread is unimportant to us and will not cause us
to stretch for either acquisitions or higher-yielding short-term
instruments. If we find the right sort of business elephant
within the next five years or so, the wait will have been
worthwhile.
Miscellaneous
We hope to buy more businesses that are similar to the ones
we have, and we can use some help. If you have a business that
fits the following criteria, call me or, preferably, write.
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
"turnaround" 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 issuing stock when we receive
as much in intrinsic business value as we give. 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 comparable to those we hold in Cap Cities and Salomon. We
have a special interest in purchasing convertible preferreds as a
long-term investment, as we did at Salomon.
* * *
And now a bit of deja vu. Most of Berkshire's major
stockholders received their shares at yearend 1969 in a
liquidating distribution from Buffett Partnership, Ltd. Some of
these former partners will remember that in 1962 I encountered
severe managerial problems at Dempster Mill Manufacturing Co., a
pump and farm implement manufacturing company that BPL
controlled.
At that time, like now, I went to Charlie with problems that
were too tough for me to solve. Charlie suggested the solution
might lie in a California friend of his, Harry Bottle, whose
special knack was never forgetting the fundamental. I met Harry
in Los Angeles on April 17, 1962, and on April 23 he was in
Beatrice, Nebraska, running Dempster. Our problems disappeared
almost immediately. In my 1962 annual letter to partners, I
named Harry "Man of the Year."
Fade to 24 years later: The scene is K & W Products, a small
Berkshire subsidiary that produces automotive compounds. For
years K & W did well, but in 1985-86 it stumbled badly, as it
pursued the unattainable to the neglect of the achievable.
Charlie, who oversees K & W, knew there was no need to consult
me. Instead, he called Harry, now 68 years old, made him CEO,
and sat back to await the inevitable. He didn't wait long. In
1987 K & W's profits set a record, up more than 300% from 1986.
And, as profits went up, capital employed went down: K & W's
investment in accounts receivable and inventories has decreased
20%.
If we run into another managerial problem ten or twenty
years down the road, you know whose phone will ring.
* * *
About 97.2% of all eligible shares participated in
Berkshire's 1987 shareholder-designated contributions program.
Contributions made through the program were $4.9 million, and
2,050 charities were recipients.
A recent survey reported that about 50% of major American
companies match charitable contributions made by directors
(sometimes by a factor of three to one). In effect, these
representatives of the owners direct funds to their favorite
charities, and never consult the owners as to their charitable
preferences. (I wonder how they would feel if the process were
reversed and shareholders could invade the directors' pockets for
charities favored by the shareholders.) When A takes money from B
to give to C and A is a legislator, the process is called
taxation. But when A is an officer or director of a corporation,
it is called philanthropy. We continue to believe that
contributions, aside from those with quite clear direct benefits
to the company, should reflect the charitable preferences of
owners rather than those of officers and directors.
We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on
pages 54 and 55. If you wish to participate in future programs,
we strongly urge that you immediately make sure 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, l988
will be ineligible for the 1988 program.
* * *
Last year we again had about 450 shareholders at our annual
meeting. The 60 or so questions they asked were, as always,
excellent. At many companies, the annual meeting is a waste of
time because exhibitionists turn it into a sideshow. Ours,
however, is different. It is informative for shareholders and
fun for us. (At Berkshire's meetings, the exhibitionists are on
the dais.)
This year our meeting will be on May 23, 1988 in Omaha, and
we hope that you come. The meeting provides the forum for you to
ask any owner-related questions you may have, and we will keep
answering until all (except those dealing with portfolio
activities or other proprietary information) have been dealt
with.
Last year we rented two buses - for $100 - to take
shareholders interested in the trip to the Furniture Mart. Your
actions demonstrated your good judgment: You snapped up about
$40,000 of bargains. Mrs. B regards this expense/sales ratio as
on the high side and attributes it to my chronic inattention to
costs and generally sloppy managerial practices. But, gracious
as always, she has offered me another chance and we will again
have buses available following the meeting. Mrs. B says you must
beat last year's sales figures, and I have told her she won't be
disappointed.
Warren E. Buffett
February 29, 1988 Chairman of the Board
中文译文
BERKSHIRE HATHAWAY INC.
致伯克希尔·哈撒韦公司股东：
1987年，我们的净资产增加了4.64亿美元，增幅为19.5%。在过去23年中（即自现任管理层接手以来），我们的每股账面价值从19.46美元增长至2,477.47美元，年复合增长率为23.1%。
当然，真正重要的是每股企业价值的增长率，而非账面价值。在许多情况下，一家公司的账面价值与企业价值几乎毫无关联。例如，就在破产之前，LTV和Baldwin-United发布的年终审计报告显示，它们的账面价值分别为6.52亿美元和3.97亿美元。相反，Belridge Oil在1979年以36亿美元出售给壳牌公司，而它的账面价值仅为1.77亿美元。
然而，在伯克希尔，这两种估值的变动相当接近，过去十年企业价值的增长率略高于账面价值的增长率。这一好消息在1987年得以延续。
我们的企业价值相对于账面价值的溢价之所以扩大，有两个简单的原因：我们拥有一些优秀的企业，而这些企业由更杰出的管理者运营。
你有理由质疑后一个论断。毕竟，CEO很少会告诉股东，他们身边聚集了一群火鸡来掌管公司。他们不愿这样做，导致某些年报显得奇怪。很多时候，在致股东的信中，CEO会花上好几页的篇幅详细描述公司业绩，但这些业绩却糟糕得可怜。然而，他最后总会用一段温暖的话来称赞他的管理团队是“我们最宝贵的资产”。这样的评论有时会让你不禁怀疑：其他资产到底是什么？
然而，在伯克希尔，我对我们运营管理者的评价，如果说有什么，那就是过于保守了。要理解为什么，先看看第7页，那里列出了我们七大非金融业务单位按历史成本会计基础计算的盈利：《水牛城新闻报》、Fechheimer、Kirby、内布拉斯加家具城、Scott Fetzer制造集团、喜诗糖果以及世界图书。1987年，这七个业务单位的息税前营业利润合计为1.8亿美元。
单看这个数字并不能说明经济表现。要评估这一点，我们必须知道产生这些利润需要多少总资本——债务和权益。在我们的七个单位中，债务的作用微不足道：它们1987年的净利息支出仅为200万美元。因此，这些业务所用权益资本的税前利润为1.78亿美元。而这项权益——同样按历史成本计算——仅为1.75亿美元。
如果这七家经营单位作为一家独立的公司运营，它们1987年的税后利润将达到约1亿美元——按权益资本计算，净资产收益率约为57%。这样的百分比你很难在别处看到，更不用说那些规模庞大、杠杆率低下的多元化公司了。这里有个参照：在《财富》杂志1988年的《投资者指南》中，它报道称，在500家最大工业公司和500家最大服务公司中，过去十年里只有六家的平均净资产收益率超过了30%。这1000家公司中表现最好的是Commerce Clearing House，达到40.2%。
当然，伯克希尔从这七家单位获得的回报率并没有它们本身的回报率那么高，因为总体而言，我们是以高于其权益资本账面价值的大幅溢价买入这些企业的。总体来看，这些经营单位在我们账面上的价值比其基础资产的历史会计价值高出约2.22亿美元。不过，评判这些单位的经理人时，应该看他们在基础资产上实现的回报率；我们为一家企业支付的价格，并不会影响其经理人可动用的资本金额。（如果你为了成为Commerce Clearing House的股东和部分所有者，支付了比如说六倍于账面价值的价格，这并不会改变CCH的净资产收益率。）
从我引用的数据中可以得出三个重要推论。第一，这七家单位的当前业务价值远高于它们的历史账面价值，也远高于它们在伯克希尔资产负债表上的账面价值。第二，由于运营这些业务所需的资本极少，它们既能实现增长，同时又几乎可以把所有利润都用于投入新的机会。第三，这些业务由真正杰出的经理人管理。Blumkins家族、Heldmans家族、Chuck Huggins、Stan Lipsey和Ralph Schey，他们都将非凡的才华、精力和品格融为一体，创造了卓越的财务成果。
我们有充分的理由在当初与这些经理人合作时抱有极高的期望。然而，在每一个案例中，我们的实际经历都大大超出了这些期望。我们得到的远远超出了我们应得的，但我们愿意接受这种不公平。（我们赞同Jack Benny在获得一个表演奖时的感言：“我不配这个奖，不过话说回来，我有关节炎，我也不配得那个病。”）
除了这七圣徒，我们还有另一个主要业务板块——保险。我相信它的业务价值也远高于其所占用的净资产。不过，对一家财产意外险公司的业务价值进行评估，无疑是一个非常不精确的过程。这个行业波动剧烈，报告的利润往往严重不准确，而且税法近期的变化将严重损害未来的盈利能力。尽管存在这些问题，我们仍然喜欢这项业务，它几乎肯定会一直是我们最大的业务板块。在Mike Goldberg的管理下，保险业务长期来看应该会善待我们。
有了我们这样的经理人，我的合伙人Charlie Munger和我对具体经营几乎没什么可做的。事实上，可以公平地说，如果我们做得更多，完成的反而会更少。我们没有公司会议，没有公司预算，也没有绩效评估（当然，我们的经理人常常发现这些程序对他们的运营单位很有用）。毕竟，我们能告诉Blumkins家族关于家居装潢的事，或者告诉Heldmans家族关于制服的事吗？
我们对子公司运营的主要贡献是掌声。但这并非波莉安娜式的盲目掌声——而是建立在两人漫长职业生涯中密集观察企业绩效与管理行为基础上的知情掌声。查理和我见过太多平庸的企业，因此真正懂得欣赏卓越表现。对于运营经理们1987年的表现，唯一合适的回应是：持续、震耳欲聋的掌声。
报告收益的来源
下页表格展示了伯克希尔报告收益的主要来源。在该表中，商誉摊销及其他重大购买价格会计调整并未分摊到所涉及的特定企业，而是合并后单独列示。实际上，这种处理方法呈现的是我们若不购买这些企业时的收益情况。在1983年和1986年年报信件的附录中，我解释了为何我们认为这种列报方式对投资者和管理者比标准的美国通用会计准则列报更有用——后者是按逐个企业进行购买价格调整。当然，我们表格中列示的总净收益与经审计财务报表中的美国通用会计准则数字完全一致。
在第36–38页的业务分部数据以及第40–44页的管理层讨论部分，你会找到关于我们业务的更多信息。在这些部分，你还会看到按美国通用会计准则列报的分部收益。我强烈建议你阅读这些材料，以及第45页开始的查理·芒格致Wesco（韦斯科）股东的信，其中描述了该子公司的各项业务。
(单位：千美元，尾数已省略)
─────────────────────────────────────────
伯克希尔税后及少数股东权益后
净收益份额
税前利润 （税后及少数股东权益）
───────────────── ──────────────────────
1987 1986 1987 1986
──────── ──────── ──────── ────────
营业利润：
保险集团：
承销..................... $(55,429) $(55,844) $(20,696) $(29,864)
投资收益净额............. 152,483 107,143 136,658 96,440
水牛城新闻报............... 39,410 34,736 21,304 16,918
费希海默（1986年6月3日收购） 13,332 8,400 6,580 3,792
柯比....................... 22,408 20,218 12,891 10,508
内布拉斯加家具城........... 16,837 17,685 7,554 7,192
斯科特费策尔制造集团....... 30,591 25,358 17,555 13,354
喜诗糖果................... 31,693 30,347 17,363 15,176
韦斯科（除保险外）......... 6,209 5,542 4,978 5,550
世界图书................... 25,745 21,978 15,136 11,670
商誉摊销................... (2,862) (2,555) (2,862) (2,555)
其他购买价格会计调整....... (5,546) (10,033) (6,544) (11,031)
债务利息及提前还款罚金..... (11,474) (23,891) (5,905) (12,213)
股东指定捐款............... (4,938) (3,997) (2,963) (2,158)
其他....................... 22,460 20,770 13,696 8,685
──────── ──────── ──────── ────────
营业利润................... 280,919 195,857 214,745 131,464
证券出售................... 27,319 216,242 19,807 150,897
──────── ──────── ──────── ────────
所有实体总利润............... $308,238 $412,099 $234,552 $282,361
════════ ════════ ════════ ════════
吉普赛·罗斯·李在她晚年某个生日上宣布："去年我有的东西今年全都有；只是都往下挪了两英寸。"正如表格所示，1987年我们几乎所有的生意都以一种更乐观的方式"老了"。
关于这些生意，没什么特别新鲜的事可报——这其实是好事，不是坏事。剧烈的变化和超常的回报通常不会同时出现。当然，大多数投资者行事时仿佛正相反。也就是说，他们通常会给那些听起来很新奇、承诺着狂热变化的生意赋予最高的市盈率。这种前景让投资者得以幻想未来的盈利能力，而不是面对今天的生意现实。对这些做美梦的投资者来说，随便一个盲约对象都比隔壁的姑娘强，不管那姑娘有多讨人喜欢。
然而经验表明，最好的生意回报通常来自那些今天做的事情跟五年前、十年前几乎一模一样的公司。这可不是为管理层的自满开脱。生意总有改进服务、产品线、制造技术等等的机会，显然应该抓住这些机会。但一个不断遭遇重大变化的生意，也同时遭遇很多重大错误的机会。更何况，经济地形如果老是剧烈晃动，就很难在上面建起堡垒般的商业特许经营权。而这样的特许经营权，往往是持续高回报的关键。
《财富》杂志前述的研究支持了我们的看法。在1000家公司中，只有25家达到了两项经济卓越的检验标准——1977至1986这十年间平均净资产收益率超过20%，且没有一年低于15%。这些商业超级明星同时也是股市超级明星：十年间，25家中有24家跑赢了标普500。
《财富》杂志的冠军名单可能在两个方面让你惊讶。第一，大多数公司相对于它们支付利息的能力而言，杠杆使用得极少。真正优秀的企业通常不需要借钱。第二，除了一家是"高科技"公司，以及另外几家生产处方药的公司外，其余公司总体上看业务相当普通。多数公司卖的是不性感的产品或服务，销售方式与十年前大体相同（尽管现在销量更大，或价格更高，或两者兼有）。这25家公司的记录证实：将已有的强大商业特许经营权发挥到极致，或者专注于一个成功的业务主题，通常是产生卓越经济效益的秘诀。
伯克希尔的经历也类似。我们的经理人通过做相当普通的事情——但做得异常出色——取得了非凡的业绩。他们捍卫自己的特许经营权，控制成本，寻找基于现有优势的新产品和新市场，并且不受干扰。他们在业务细节上格外努力，成效有目共睹。
以下是最新情况：
○ 阿加莎·克里斯蒂（Agatha Christie）的丈夫是一位考古学家，她说这是作为配偶的完美职业："你越老，他们对你越感兴趣。"对B太太（罗斯·布卢姆金）感兴趣的应该是企业管理专业的学生，而不是考古学家。B太太现年94岁，是内布拉斯加家具城（Nebraska Furniture Mart）的董事长。
五十年前，B太太用500美元创办了这家企业。如今，NFM无疑是全美最大的家居用品店。B太太仍然每周工作七天，从店铺开门一直工作到打烊。她采购、销售、管理——把竞争对手远远甩在身后。我清楚地看到，她还在加速，很可能再过五到十年才能达到她的全部潜力。因此，我说服董事会废除了我们年满100岁强制退休的政策。（也该如此了：随着一年年过去，这政策在我看来越来越荒唐。）
NFM 1987年净销售额为1.426亿美元，比1986年增长8%。全美没有第二家这样的商店，也没有第二个像B太太培养出的这样的家族来接班：她的儿子路易（Louie）和路易的三个儿子罗恩（Ron）、厄夫（Irv）和史蒂夫（Steve）继承了B太太的商业直觉、正直和干劲。他们团队协作，虽然每个人都很强，但整体远大于部分之和。
布卢姆金家族做得出色让我们作为所有者受益，但NFM的客户受益更大。他们1987年从NFM购物节省了约3000万美元。换句话说，他们购买的商品如果从别处购买，要多花那么多钱。
你会喜欢我去年八月收到的一封匿名信："看到伯克希尔第二季度利润下降，很遗憾。有一个办法可以帮你挽回部分损失。去家具城看看价格。你会发现他们少赚了10%到20%。按1.4亿美元的销售额算，这额外的利润就是2800万美元。谁的兜里都不是小钱！去查查其他家具、地毯、家电和电视经销商。你把价格提高到合理水平会有帮助。谢谢。/签名/ 一位竞争对手。"
NFM将继续遵循B太太的座右铭增长和繁荣："卖得便宜，说实话。"
在我市或更大规模的同类报纸中，《水牛城新闻报》继续在两个重要方面位居全国前列：（1）其工作日和周日版的渗透率（即该报主要市场区域内购买该报的家庭占比）；（2）其“新闻版面”占比（报纸中用于报道新闻的部分）。
一家报纸在这两项指标上双双领先，或许并非巧合：一份格外“新闻丰富”的产品能吸引广泛读者，进而带来高渗透率。当然，数量必须与质量匹配。这不仅意味着出色的报道和写作，更意味着新鲜与相关。要成为读者不可或缺的东西，一份报纸必须及时告诉读者许多他们想知道、否则要等到很久以后（甚至永远）才能了解的事情。
在《水牛城新闻报》，我们每24小时出版七个全新版本，每个版本的内容都有大量改动。举个小例子可能会让你吃惊：我们在每个版本中都重编讣告版面，一天七次。任何新加的讣告都会在后续六个版本中连续刊登，直到一个出版周期结束。
当然，一份报纸深入、全面地覆盖国内和国际新闻至关重要。但同样重要的是，它要做只有本地报纸才能做的事：及时、详尽地记录社区生活中那些个人重要、却未被其他媒体报道的细节。做好这项工作需要非常广泛的新闻覆盖——这意味着要有大量版面，并且明智地使用它们。
1987年，我们的新闻版面占比约为50%，多年来一直如此。如果我们将这一比例降至更典型的40%，每年大约能节省400万美元的新闻纸成本。但我们对此毫无兴趣——即使出于某种原因，我们的利润率大幅缩水，我们也同样不会动心。
查理和我都不相信弹性运营预算，比如“如果收入是Y，非直接费用可以是X；但如果收入是Y-5%，就必须削减费用”。难道仅仅因为某一年或某个季度的利润下降，我们就该缩减《水牛城新闻报》的新闻版面，或降低喜诗糖果的产品和服务质量吗？或者反过来说，难道仅仅因为眼下财源滚滚，我们就该增加一位内部经济学家、一位企业战略家、一场机构广告宣传，或其他对伯克希尔毫无益处的东西吗？
这对我们来说毫无意义。我们既不理解因为利润高涨就增加不需要的人或活动，也不理解因为利润萎缩就裁减必要的人或活动。这种忽上忽下的做法既不商业，也不人性。我们的目标是始终做对伯克希尔的客户和员工有意义的事，并且绝不增加不必要的东西。（“可那架公务机呢？”你粗鲁地问道。嗯，偶尔一个人也得超越一下原则。）
尽管自1984年以来，《水牛城新闻报》的收入仅温和增长，但其发行人斯坦·利普西的卓越管理带来了优异的利润增长。多年来，我一直在错误地预测《水牛城新闻报》的利润率将下降。今年我不会再让你失望了：毫无疑问，1988年的利润率将下降，利润也可能随之下降。新闻纸成本的暴涨将是主要原因。
○ 费奇海默兄弟公司是另一家家族企业——和布卢姆金家族一样，这也是一个了不起的家族。赫尔德曼家族三代人几十年来一直持续推动着这家制服制造商和分销商的销售与利润。在伯克希尔收购其控股权的那一年——1986年——利润创下了历史纪录。之后赫尔德曼家族并没有放慢脚步。去年，盈利大幅增长，1988年前景良好。
联合制服业务本身并无神奇之处，神奇的是赫尔德曼家族。鲍勃、乔治、加里、罗杰和弗雷德对这个行业了如指掌，而且乐在其中。能与他们合伙，是我们的幸运。
○ 自大约16年前收购喜诗糖果那天起，查克·哈金斯（Chuck Huggins）就一直在刷新纪录。1987年，销量再创新高，略低于2500万磅。此外，连续第二年以磅计的同店销售额几乎未变。如果你想知道，这意味着进步：在此前六年，同店销售额每年都在下降。
尽管1986年圣诞季我们表现特别强劲，但1987年圣诞季的同类门店比较数据比年内其他任何时候都要好。因此，喜诗的季节性因素变得更加极端。1987年，我们约85%的利润是在12月赚到的。
糖果店逛起来有趣，但对店主来说，大多数并不有趣。据我们所知，近年来除了喜诗，几乎没有人从经营糖果店中赚到可观利润。显然，查克在喜诗的成绩并非得益于行业大潮上涨，而是一份独一无二的表现。
他的成就需要出色的产品——我们有——但还需要对顾客的真诚关爱。查克百分百以顾客为导向，他的态度为整个喜诗组织定下了基调。
举个例子，查克的做法是这样的：在喜诗，我们会定期加入新糖果品种，同时淘汰一些，以保持产品线约100种。去年春天，我们选了14种糖果准备淘汰。结果发现，有两款被顾客深深怀念，他们立刻让我们知道了对我们判断的看法："愿所有参与这一可憎决定的喜诗员工都遭殃……""愿你们的新松露融化在运输途中，在人们嘴里变酸，愿你们成本上升、利润下降……""我们正在调查申请强制禁令的可能性，要求你们必须供应……"你们懂的。总而言之，我们收到了数百封信。
查克不仅重新上架了那两款糖果，还把这次失误变成了机会。每位来信者都收到了一封完整而诚恳的解释信。查克的信写道："幸运的是，当我做出糟糕决定时，好结果往往随之而来……"随信还附赠了一张特别礼券。
喜诗在过去两年仅温和提价。1988年我们提价幅度稍大，但仍属温和。到目前为止，销售疲软，喜诗今年可能难以提高盈利。
○ 世界图书（World Book）、柯比（Kirby）以及斯科特·费泽制造集团（Scott Fetzer Manufacturing Group）均由拉尔夫·谢伊（Ralph Schey）管理。对我们来说，这是多么幸运的事。去年我告诉过你们，斯科特·费泽1986年的业绩远超我和查理（Charlie）在收购时的预期。1987年的结果甚至更好。税前利润上升了10%，而平均动用资本则显著下降。
拉尔夫对他负责的19项业务的精通程度着实令人惊叹，他还吸引了一批出色的经理人来管理这些业务。我们非常希望能再找到一些可以放在拉尔夫羽翼之下的业务单元。
斯科特·费泽（Scott Fetzer）的业务种类繁多，无法一一详述。我们只向各位汇报其中一项最受我们青睐的业务：1987年底，World Book推出了自1962年以来改动幅度最大的一版。彩色照片数量从14,000张增至24,000张；超过6,000篇文章得到修订；新增了840位撰稿人。查理和我向您和您的家人推荐这套产品，也推荐World Book为更年幼的孩子推出的产品：Childcraft和Early World of Learning。
1987年，World Book在美国的销量连续第五年增长。国际销售额和利润也大幅增长。整体来看，斯科特·费泽的业务前景良好，World Book尤其如此。
**保险业务**
下表是我们常用的保险业关键数据表格的最新版：
| 年份 | 保费收入年变化率（%） | 含股东分红的法定综合成本率 | 已发生损失年变化率（%） | GNP平减指数衡量的通胀率（%） |
|------|----------------------|----------------------------|------------------------|------------------------------|
| 1981 | 3.8 | 106.0 | 6.5 | 9.6 |
| 1982 | 4.4 | 109.8 | 8.4 | 6.4 |
| 1983 | 4.6 | 112.0 | 6.8 | 3.8 |
| 1984 | 9.2 | 117.9 | 16.9 | 3.7 |
| 1985 | 22.1 | 116.3 | 16.1 | 3.2 |
| 1986（修订） | 22.2 | 108.0 | 13.5 | 2.6 |
| 1987（估） | 8.7 | 104.7 | 6.8 | 3.0 |
来源：Best's Insurance Management Reports
综合成本率代表保险总成本（已发生损失加费用）与保费收入的比值：比率低于100表示承保盈利，高于100表示承保亏损。如果考虑到保险公司持有投保人资金（"浮存金"）所赚取的投资收益，综合成本率在107-111之间通常能达到盈亏平衡（不包括股东提供的资金所赚取的收益）。
上表所概括的保险业务数学原理并不复杂。当行业年度收入（保费）增长率仅为4%或5%时，承保亏损肯定会加剧。这不是因为车祸、火灾、风暴等发生得更频繁，也不是近年通胀的错。如今，社会通胀和司法通胀是主要元凶：踏入法庭的成本简直飞涨。成本飙升一部分源于天价赔偿判决，另一部分源于法官和陪审团倾向于扩大保单的保障范围，超出保险公司在订立保单时的预期。鉴于这两大趋势都没有缓解迹象，我们仍然认为，行业收入必须每年增长约10%，才能勉强维持盈利水平——即使一般通胀率可能远低于这个数字。
1985-87年的强劲收入增长几乎确保了行业在1987年取得优异的承保表现——实际上，那一年也确实成绩斐然。但随着季度推移，消息逐渐变差：Best's估计，同比销量增幅分别为12.9%、11.1%、5.7%和5.6%。到了1988年，收入增幅必然远低于我们10%的"均衡"水平。显然，盛宴结束了。
然而，盈利不会立刻下滑。这个行业存在一个滞后因素：由于多数保单都是一年期，保险定价的高低要在生效数月后才能充分影响盈利。所以，回到我们之前的比喻，当派对结束、酒吧打烊时，你还可以喝完杯中的酒。如果业绩没有受到重大自然灾害的冲击，我们预测1988年行业综合成本率会小幅上升，随后几年增幅加大。
保险业被一组糟糕的经济特征所诅咒，导致长期前景黯淡：数百家竞争者、进入门槛低，以及产品在本质上毫无差异化可言。在这种类似大宗商品的行业里，只有成本极低的经营者，或者身处受保护（通常很小）利基市场的经营者，才能维持高盈利水平。
然而，当供应短缺出现时，即使是大宗商品行业也会红火。保险业曾享受过一阵这种气候，但现已不复存在。资本主义的一个讽刺之处在于，大多数大宗商品行业的管理者厌恶短缺状况——尽管只有在这种环境下他们才能获得良好回报。每当短缺出现，典型的经理人总是迫不及待地扩大产能，从而堵住那个正向他倾泻财源的窟窿。这正是1985-87年间保险业经理人所做的，再次印证了Disraeli的观察：“我们从历史中学到的教训就是，我们从未从历史中吸取教训。”
在伯克希尔，我们通过两种方式努力避开行业的商品化经济特征。首先，我们凭借财务实力实现产品差异化——我们的财务实力超过业内所有其他公司。然而，这种实力的作用有限。在个人保险领域毫无意义：购买车险或房主险的投保人，即使保险公司破产（很多都已破产），也能获得赔付。在商业保险领域也常常没什么意义：市道好时，许多大型企业保险买家及其经纪人很少关注保险公司在更不利条件下（比如说五年后复杂理赔最终结案时）的履约能力。（眼不见，心不烦——后来，也许就得自掏腰包了。）
然而，买家们偶尔会想起Ben Franklin的观察——空袋子难以直立——并认识到自己需要只向那些拥有持久财务实力的保险公司购买承诺。那时我们就有了重大竞争优势。当买家真正关注一笔1000万美元的理赔金在五年或十年后是否能被其保险公司轻松赔付，并考虑到届时承保状况可能不佳、金融市场低迷、再保险公司违约等可能性时，他会发现只有少数几家公司值得信赖。在这些公司中，伯克希尔将处于领先地位。
我们的第二个差异化方法是对业务量保持完全无动于衷。1989年，我们完全愿意承保五倍于1988年的业务量——或者只有五分之一。当然，我们希望市场条件能允许我们做大业务量。但我们无法控制市场价格。如果价格不令人满意，我们就会少做业务。没有其他大型保险公司能如此克制。
保险业有三个条件（绝大多数行业不具备）赋予了我们灵活性。第一，市场份额并非决定盈利能力的关键要素：与报纸或食品杂货业不同，这一行的经济法则不是"最大者生存"。第二，保险业的许多板块（包括我们经营的绝大多数板块）的销售渠道并非独家占有，进入门槛很低——今年业务量小，不妨碍明年业务量大。第三，闲置产能——在这个行业里主要指的是人力——并不会带来难以承受的成本。在印刷业或钢铁业等行业做不到的方面，我们却可以大部分时间以四分之一的速度运转，却依然长期繁荣。
我们遵循的是以风险暴露为基础、而非以竞争为基础的定价策略，因为这对股东有利。但我们很高兴地报告，这一策略也是亲社会的。这意味着，只要价格我们认为合理，我们随时可以大规模承保几乎任何类型的财产意外险。许多其他保险公司采取的是"进进出出"的做法。当它们"退出"时——无论是因为损失加剧、资本不足还是其他原因——我们就在那里。当然，当别人争先恐后想做业务时，我们也在——但此时我们的报价常常高于市场。实际上，我们为保险买家与经纪人提供了一个巨大的备用容量库。
1987年年中发生的一件事，说明了我们定价策略的某些后果：国内最大的家族式保险经纪公司之一，其负责人长期是伯克希尔的股东。此人经手许多大额风险，这些业务都有可能放在我们纽约办事处。自然，他尽力为客户争取最优。同样自然的是，当1987年保险市场显著走软时，他发现其他保险公司的报价低于我们愿意提供的价格。他的反应是：首先，将所有业务都放在别处；其次，增持伯克希尔的股票。他说，如果我们真的具有竞争力，他本来会把保险业务交给我们，但他就不会买入我们的股票了。
伯克希尔1987年的承保业绩非常出色，部分原因是之前提到的滞后因素。我们的综合成本率（按法定基准计算，且不含结构性结算和财务再保险）为105。虽然该比率略逊于1986年的103，但在1987年我们的盈利能力显著提升，因为我们动用了多得多的浮存金。这一趋势将继续朝有利方向发展：未来几年，浮存金与保费收入的比率将大幅提升。因此，伯克希尔的保险利润在1988年和1989年很可能会改善，尽管我们预期综合成本率会上升。
过去几年，我们的保险业务还取得了一些重要的非财务性进展。经理Mike Goldberg组建了一支才华横溢的专业团队，以承保更大的风险和特殊险种。他的团队现在已做好充分准备，能够应对那些偶尔给我们带来重大机遇的业务线。
我们的损失准备金发展情况（详见第41-42页）今年看起来比以往更好。但我们承保了大量"长尾"业务——即那些理赔常常需要多年才能结清的保单。例如产品责任险，或董事及高级职员责任险。面对这样的业务结构，一年的准备金发展数据说明不了什么问题。
你应该对保险公司报告的任何利润数字（包括我们自己的，很不幸，过去我们已经向你证明过）都持极大的怀疑态度。过去十年的记录显示，许多我们最知名的保险公司向股东报告了利润，但后来这些利润被证明是严重错误的。在大多数情况下，这些错误完全是出于无心：我们法律体系的不可预测性使得即使是最尽职的保险公司也难以接近地判断长尾索赔的最终成本。
然而，审计师每年都背书管理层给他们的数字，并在他们的意见中毫无保留地声明这些数字“公允地呈现”了客户的财务状况。审计师使用这种令人安心的措辞，尽管他们从漫长而痛苦的经验中知道，经他们认证的数字很可能与该期间的真实利润大相径庭。尽管有这种错误史，投资者还是可以理解地依赖审计师的意见。毕竟，一句“报表公允地呈现”的说法，对非会计人士来说几乎听不出任何含糊之处。
审计师标准意见函的措辞预定在明年变更。新措辞有所改进，但远未描述出意外险保险公司审计的局限性。如果它要描述真实情况，我们认为财产-意外险公司给股东的标准意见函应该读起来像这样：“我们依赖管理层就损失及理赔调整费用所列负债所作的陈述，而对这些负债的估计反过来又极大地影响了此处报告的经营利润和财务状况。我们无法对这些数字的准确性发表意见。除这一重要保留外，我们认为，等等。”
如果因严重不准确的财务报表引发诉讼（确实会有），审计师在法庭上反正一定会说出类似的话。为什么他们从一开始就不能坦率地说明自己的角色及其局限性呢？
我们要强调的是，我们并非指责审计师没有能力准确评估损失准备金（从而评估利润）。我们只指责他们没有公开承认他们做不到这份工作。
从各方面看，准备金计提中不断发生的无心之过，往往被蓄意的错误所伴随。各种骗子利用两点中饱私囊，以投资公众为代价：首先，审计师无力评估准备金数字；其次，审计师愿意自信地背书这些数字，仿佛他们具备这样判断的专业能力。未来我们还会继续看到这种欺诈行为。在“利润”可以通过笔尖创造的地方，不诚实的人就会聚集。对他们来说，长尾保险就是天堂。我们建议的审计措辞至少能让投资者警惕这些掠食者。
保险公司支付的税费——在1986年《税制改革法案》颁布后虽然有所延迟，但实质性地增加了——在1987年底进一步恶化。我们在去年的报告中详细介绍了1986年的变化。我们还评论了这样一个讽刺：该法令大幅提高了保险公司1987年的报告利润，同时却实质性地降低了它们的长期盈利潜力和企业价值。在伯克希尔，暂时有益的“新起点”调整使1987年的利润虚增了820万美元。
在我们看来，1986年税法是过去十年间影响保险行业最重要的经济事件。1987年法案又将企业间股利收益抵减比例从80%降至70%，自1988年1月1日起生效，但纳税人持有被投资企业至少20%股份的情况除外。
通过除合格投资公司以外的企业中介持有股票或债券的投资者，相较于直接持有相同证券的投资者，始终处于劣势。1986年税法大幅加重了间接持股的惩罚性税负，1987年法案也进一步加剧了这一情况，尤其是在中介为保险公司的情况下。我们无法抵消这一增加的税负。这直接意味着，给定相同的税前投资回报，我们股东能够获得的税后收益将大打折扣。
总而言之，我们预计在保险业务上会表现不错，尽管业绩必定会有起伏。近期前景是保费收入大幅下降，但盈利合理改善。在我们与消防员基金的比例再保险协议于1989年到期后，保费收入的下降将加速。在某个时点——很可能至少还要等上几年——我们可能会看到一些重大机会，而相比1985年，我们现在准备得要充分得多。
**有价证券——永久持股**
每当查理和我为伯克希尔的保险公司买入普通股时（套利类投资除外，后文会讨论），我们对待这笔交易的态度，就像是在买入一家私营企业。我们关注的是企业的经济前景、掌管企业的人，以及我们必须支付的价格。我们心中没有设定任何卖出时间或价格。事实上，只要我们预期企业的内在价值能以令人满意的速度增长，我们就愿意无限期持有。投资时，我们视自己为企业分析师——而非市场分析师、宏观经济分析师，甚至不是证券分析师。
我们的方法使活跃的交易市场有了用武之地，因为它会定期向我们提供令人垂涎的机会。但这绝不是必不可少的：我们持有的证券长期暂停交易，对我们造成的困扰，绝不会超过世界图书公司或费切海默公司没有每日报价。最终，我们的经济命运将由我们所拥有的企业的经济命运决定，无论我们的所有权是部分还是全部。
我的良师益友本·格雷厄姆很久以前就描述过一种面对市场波动的心理态度，我相信这种态度最有助于投资成功。他说，你应该把市场报价想象成来自一位名叫市场先生的特别随和的家伙，他是你在一家私营企业中的合伙人。市场先生每天都会准时出现，报出一个价格，要么买下你的股份，要么把他的股份卖给你。
尽管你们两人共同拥有的这家企业可能具有稳定的经济特征，但市场先生的报价绝不会稳定。因为，说来遗憾，这个可怜的家伙患有无法治愈的情绪问题。有时候他欣喜若狂，只能看到影响企业的有利因素。在这种情绪下，他会报出一个极高的买卖价格，因为他担心你会抢走他的股份，夺走他即将到手的收益。其他时候他又垂头丧气，只能看到企业和世界未来的一堆麻烦。在这些时候，他会报出一个极低的价格，因为他害怕你会把自己的股份甩给他。
市场先生还有一个可爱的特点：他不介意被人无视。如果你今天对他的报价不感兴趣，他明天会带着新报价回来。交易与否完全由你决定。在这种情况下，他的情绪越癫狂，对你越有利。
但就像舞会上的灰姑娘，你必须记住一个警告，否则一切都会变回南瓜和老鼠：市场先生是为你服务的，不是来指导你的。他的钱包，而不是他的智慧，才是你该利用的。如果哪天他特别犯傻，你大可以无视他，或者利用他，但如果被他牵着鼻子走，那将是一场灾难。事实上，如果你无法确定自己比市场先生更懂、更能评估你的企业，那你就不该玩这个游戏。正如扑克牌里的说法：“如果你打了半小时牌还不知道谁是冤大头，那你就是那个冤大头。”
本的市场先生寓言在今天的投资世界可能显得过时——如今大多数专业人士和学者都在谈论有效市场、动态对冲和贝塔系数。他们对这些话题感兴趣是可以理解的，毕竟，披着神秘外衣的技巧对投资顾问的推销显然有价值。话说回来，哪个巫医是靠简单建议“吃两片阿司匹林”而成名致富的？
对投资建议的消费者来说，那些市场秘术的价值就另当别论了。依我看，投资成功不会来自神秘的公式、计算机程序，或者股票和市场价格行为发出的信号。相反，一个投资者要想成功，需要把良好的商业判断力与一种能力结合起来——把自己的思想和行为与市场中四处弥漫的超强传染性情绪隔离开来。在我自己保持隔离的努力中，我发现牢牢记住本的市场先生概念非常有用。
遵循本的教诲，查理和我让我们持有的可交易股票用它们的经营成果——而不是每日甚至每年的报价——告诉我们投资是否成功。市场可能会暂时忽视企业的成功，但最终会确认它。正如本所说：“短期来看，市场是一台投票机；长期来看，它是一台称重机。”此外，只要公司内在价值在令人满意地增长，市场承认其成功的速度并不那么重要。事实上，推迟承认反而可能是个优势：它可能给我们机会以折扣价买进更多的好东西。
当然，有时市场可能会认为一家企业的价值高于其实际情况。这种情况下，我们会卖出持股。有时，我们也会卖出定价合理甚至低估的证券，因为我们需要资金用于更低估的投资，或者我们自认为更懂的投资。
不过，我们要强调一点：我们不会仅仅因为股价上涨或持有了很长时间就卖出。（华尔街格言中最愚蠢的一句可能是：“获利了结永远不会让你破产。”）我们非常愿意无限期持有一只股票，只要该企业预期的净资产收益率令人满意、管理层称职且诚实，并且市场没有高估该企业。
不过，我们旗下保险公司持有三只可流通普通股，即便它们在市场上变得严重高估，我们也不会出售。实际上，我们把这些投资视同我们成功的控制类企业——是伯克希尔的永久组成部分，而不是一旦市场先生开出足够高的价格就清仓甩卖的商品。对此，我要补充一点说明：这些股票由我们的保险公司持有，如果万不得已，我们会出售部分持仓以支付异常保险损失。然而，我们打算通过妥善管理，确保永远不需要卖出。
这种“持有并珍藏”的决心，是我和Charlie共同秉持的，显然融合了个人与财务的双重考量。在有些人看来，我们的立场可能相当古怪。（Charlie和我长期遵循David Oglivy的建议：“趁年轻培养你的怪癖。这样当你老了，人们就不会以为你老糊涂了。”）当然，在近年来沉迷交易的华尔街，我们的姿态一定显得格格不入：在那片竞技场上，许多人把公司和股票只当作交易的原材料。
然而，我们的态度契合自己的个性以及我们想要的生活方式。丘吉尔曾说过：“你塑造你的房屋，然后房屋塑造你。”我们知道自己希望被塑造成什么样子。正因如此，我们宁愿在和我们深深喜欢与敬佩的人打交道的同时实现X%的回报，也不愿为了获得110%的X%而用这些人际关系去交换一些无聊或令人不快的交往对象。而且，我们永远不可能找到比下面这三家公司（我们的永久持仓）的主要参与者更令我们喜欢和敬佩的人了：
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc.（资本城/ABC公司）......... $517,500 $1,035,000
6,850,000 GEICO Corporation（GEICO公司）.................. 45,713 756,925
1,727,765 The Washington Post Company（华盛顿邮报公司）........ 9,731 323,092
我们真的不认为收购一家控制类企业与购买类似这样的可流通股票之间有什么根本性区别。无论哪种情况，我们都试图买入那些拥有长期良好经济特征的企业。我们的目标是以合理的价格找到一家优秀的企业，而不是以便宜的价格买下一家平庸的企业。Charlie和我发现，用丝绸做丝质钱包是我们能做到的最好结果；用猪耳朵做，我们就会失败。
（必须指出，你们的董事长学得一向很快，只花了20年就认识到购买好企业有多重要。在那期间，我一直在寻找“便宜货”——而且不幸地找到了不少。我的惩罚是上了一堂关于短产品线农具制造商、二流百货公司和新英格兰纺织厂经济学的课。）
当然，Charlie和我也可能误判一家企业的基本经济特征。一旦发生这种情况，无论该企业是全资子公司还是可流通证券，我们都会遇到麻烦——尽管通常从后者脱身要容易得多。（确实，企业也可能被误读：看看那位欧洲记者吧，他被派到美国撰写安德鲁·卡内基的专题报道，之后给编辑发电报说：“天哪，你绝对想不到经营图书馆能赚这么多钱！”）
在控制类购买和股票购买中，我们不仅试图买入好生意，还要找那些品格高尚、能力出众、令人喜欢的经理人来掌管。如果我们对关联的经理人判断失误，控制类公司倒有一个好处——我们有权推动改变。不过在实践中，这个好处多少有些虚幻：更换管理层，就像换婚姻一样，痛苦、耗时而且充满变数。无论如何，在我们三只可交易但永久持有的股票上，这一点根本不成问题：Cap Cities（大都会通讯公司）的Tom Murphy和Dan Burke、GEICO（盖可保险）的Bill Snyder和Lou Simpson，以及The Washington Post（华盛顿邮报）的Kay Graham和Dick Simmons——我们简直找不到比他们更值得托付的人了。
我想说，控制类公司有两个主要优点。第一，当我们控制一家公司时，我们可以自行配置资本；而在可交易股票中，我们对此过程很可能几乎插不上嘴。这一点很重要，因为许多公司的领导并不擅长资本配置。他们的不足并不奇怪。大多数老板之所以能登上高位，是因为他们在营销、生产、工程、行政管理，有时甚至是机构政治等某一领域表现出色。
一旦他们成为CEO，就面临新的职责。他们现在必须做出资本配置决策——这是一项关键工作，可能他们从未接触过，而且不容易掌握。说得夸张一点，这就好比一位才华横溢的音乐家最后的登台不是去卡内基音乐厅演奏，而是被任命为美联储主席。
许多CEO缺乏资本配置技能，这可不是小事：一家公司每年留存收益相当于净资产的10%，十年下来，这位CEO将负责配置超过60%的业务运营资本。
那些意识到自己资本配置能力不足的CEO（并非所有人都能意识到），往往会试图向他们的员工、管理顾问或投资银行家求助。Charlie（查理）和我经常观察到这种"帮助"的后果。总的来说，我们觉得这更可能加剧资本配置问题，而不是解决它。
最终，美国企业界发生了大量不理智的资本配置。（这就是为什么你总听到"重组"这个词。）不过，Berkshire（伯克希尔）是幸运的。在我们那些非控制类的主要持股公司里，资本通常得到了良好配置，在某些情况下甚至极为出色。
控制类公司相对于可交易证券的第二个优点与税收有关。Berkshire作为一家公司持股人，通过持有部分仓位会承担一些可观的税收成本；而当我们的持股达到80%或以上时，则无需承担这些成本。这种税收劣势长期存在，但过去一年税法的变动使其显著加剧。因此，同样的经营成果，如果来自80%或以上的持股，相比来自较低持股比例，能给Berkshire带来的财务结果可以好出多达50%。
持有有价证券的劣势，有时会被一个巨大优势所抵消：偶尔，股票市场会给我们机会，以真正荒谬的价格——远低于控股权转让谈判中的交易价格——买入优秀企业的非控制性股份。例如，我们在1973年以每股5.63美元买入《华盛顿邮报》股票，而1987年税后每股经营利润为10.30美元。同样，我们在1976年、1979年和1980年以平均每股6.67美元买入GEICO股票，去年每股税后经营利润为9.01美元。在这样的案例中，市场先生已被证明是个相当够意思的朋友。
有趣的是，会计上存在一个讽刺性的反差：将我们控股公司与被列为永久性少数持股的上述公司之财务报告结果进行对比时可以看到，这三只股票市值超过20亿美元，但1987年它们为伯克希尔贡献的税后报告收益仅为1100万美元。
会计准则规定，我们只能将这些公司支付给我们的股息计入收入——这些股息几乎只是象征性的——而不能计入我们应占的收益，后者在1987年远超1亿美元。另一方面，会计准则又规定，这三只由保险公司持有的股票，必须按当前市价记录在资产负债表中。结果是：GAAP会计允许我们在净资产中反映部分持股企业的当前根本价值，却不允许我们在损益表中反映它们的根本收益。
而对于我们的控股公司，情况正好相反。在这里，我们将全部收益计入损益表，但资产负债表上的资产价值却从不调整——无论该企业自我们收购后增值了多少。
面对这种会计精神分裂症，我们的思维方法是不理会GAAP数字，只专注于我们控股和非控股企业未来的盈利能力。用这种方法，我们建立起自己的企业价值观念，使其独立于账面上对控股公司的会计价值，也独立于那个时而愚蠢的市场对我们部分持股公司的估值。这正是我们希望在未来以合理（或更好是不合理）速度增长的商业价值。
其他有价证券
除了三只永久性普通股持仓外，我们的保险公司还持有大量有价证券。在选择这些证券时，我们可以在五个主要类别中挑选：(1)长期普通股投资；(2)中期固定收益证券；(3)长期固定收益证券；(4)短期现金等价物；(5)短期套利承诺。
在从这些类别中选择时，我们并无特别偏好。我们只是持续在这几类中寻找按"数学期望"衡量、税后回报最高的投资机会，并且始终将自己限制在自认为理解的替代方案内。我们的标准与最大化当期报告收益无关；相反，我们的目标是最大化最终净资产。
○ 先看普通股。1987年，股票市场热闹非凡，但指数变动不大：道指全年上涨2.3%。你当然知道，在这微小的变动背后是过山车般的行情。市场先生直到10月份都处于疯狂躁动状态，然后突然遭到猛烈打击。
我们这场动荡要好好"感谢"那些专业投资者——掌管着数十亿资金的人。如今，许多赫赫有名的资金管理者，不再关注企业未来几年的经营会怎样，转而猜测其他资金管理者未来几天的举动。对他们来说，股票不过是游戏中的筹码，就像大富翁里的顶针和熨斗。
这种态度的极端例子就是"投资组合保险"——一种1986-1987年间许多顶级投资顾问追捧的资金管理策略。这个策略（不过是给小额投机者使用的止损指令换了个花哨的名字）规定：股价下跌时，就要卖出越来越多比例的股票组合（或其指数期货等价物）。这个策略什么都不管：只要股价下跌一定幅度，就会自动产生巨额卖单。根据布雷迪报告，1987年10月中旬，有600亿到900亿美元的股票就架在这根"发丝扳机"上。
如果你以为投资顾问是雇来投资的，那这个技术可能让你摸不着头脑。一个理性的农场主，在买下农场后，会吩咐房产中介，只要邻居的农场卖得便宜点，就马上卖掉自己农场的一部分吗？或者，你会因为早上9:30有一栋类似的房子比前一天卖得便宜些，就在9:31把自家房子卖给当时出价的任意买家吗？
然而，投资组合保险正是这样指导养老基金或大学，在持有一部分福特或通用电气这类企业时该做的事。这套方法说：这些公司被估值越低，就越应该积极卖出。作为"合乎逻辑"的推论，这套方法又指令这些机构——我不是瞎编——一旦价格大幅反弹，就重新买回这些公司。考虑到巨额资金由遵循这种"爱丽丝梦游仙境"式做法的管理者掌控，市场有时出现反常行为，还有什么好奇怪的呢？
然而，许多评论人士在观察近期事件后得出了错误结论：他们喜欢说，小投资者在如今这个由大玩家反复无常行为主导的市场里毫无机会。这个结论大错特错：只要投资者坚持做自己该做的投资，这样的市场对任何投资者——无论大小——都是理想的。由那些非理性投机巨额资金的管理者引发的波动，反而会给真正的投资者提供更多做出明智投资决策的机会。这种波动只会伤到那些因财务或心理压力而被迫在不恰当的时候卖出的人。
在伯克希尔，过去几年我们在股票上几乎没什么可做的。在10月份的暴跌中，有几只股票跌到了我们感兴趣的价格，但我们还没来得及大笔买入，它们就反弹了。1987年底，除了我们视为永久持有或套利类投资的股票外，我们没有其他重大普通股投资（即超过5000万美元的）。不过，市场先生总会给我们机会——这点你放心——当机会来临时，我们会有意愿也有能力参与。
○ 与此同时，我们的主要资金停放处是中短期免税债券——我在去年年报中解释过它们有限的优点。1987年我们买卖了一些这类债券，总体头寸变化不大，维持在9亿美元左右。我们的大部分债券根据1986年《税改法案》享有"祖父条款"待遇，即完全免税。目前保险公司购买的债券则没有这一待遇。
作为短期现金等价物的替代品，我们持有的中期免税债券——到目前为止——表现不错。它们为我们带来了可观的额外收入，目前市值略高于成本。无论市场价格如何，只要出现更好的机会，我们随时准备卖出这些债券。
○ 我们依然对长期债券心存厌恶（也许对中期债券也不该有好感，这可能是个严重的错误）。债券的价值不会超过其计价货币的价值，而过去一年——乃至过去十年——我们所看到的一切，都让我们对美国货币的长期前景提不起兴致。
我们的巨额贸易逆差正导致各种形式的"兑付凭证"——美国政府和企业债券、银行存款等——以令人担忧的速度堆积在外国人手中。我们的政府在不经意间，采纳了《欲望号街车》中布兰奇·杜波依斯式的理财方式，她说："我一直依赖陌生人的善意。"当然，在这个案例中，"陌生人"依赖的是我们兑付凭证的诚信，尽管美元大幅贬值已经让他们为此付出了高昂代价。
外国人对我们的信任可能放错了地方。当未偿付的兑付凭证数量足够庞大，且发行方可以单方面决定其购买力时，发行方通过通胀来稀释其价值的压力几乎不可抗拒。对负债累累的政府而言，通胀武器在经济上的威力堪比"氢弹"，正因如此，极少有国家被允许用本币计价的债务淹没世界。我们过去在财政诚信方面相对良好的记录，让我们得以打破这条规则，但外界给予我们的宽容，更可能加剧而非缓解我们最终面临通胀的压力。如果我们屈服于这种压力，受害的将不止是那些持有我们兑付凭证的外国人，我们所有人也将深受其害。
当然，美国可能会在我们的净债务国地位失控之前，采取措施遏制贸易逆差。（在这方面，美元贬值会有所帮助，可惜它也会在其他方面造成伤害。）然而，在这场对政府决心的考验中，我们的行为很可能沿袭斯嘉丽·奥哈拉式的做法："明天再想。"面对财政问题一再拖延，几乎必然会导致通胀后果。
这些后果的时机和波及范围都无法预测。但我们无法量化或预判风险，并不意味着我们应该忽视它。尽管我们承认自己可能判断错误，且当前利率或许已充分补偿了通胀风险，我们总体上仍对长期债券心存恐惧。
不过，如果我们认为在某只特定证券上拥有显著优势，我们愿意将适度比例的资金投入这一类别。这种意愿解释了我们对华盛顿公共电力供应系统#1、#2和#3期债券的持仓，这在我们的1984年报告中已有讨论。1987年我们进一步增持了WPPSS头寸。年底时，我们持有这批债券的摊余成本为2.4亿美元，市值3.16亿美元，每年为我们提供3400万美元的免税收入。
○ 去年我们在套利方面继续表现不错，尽管——或许正因为——我们运作的规模非常有限。我们每年只介入少数几笔套利承诺，并且仅限于那些已经公开宣布的大型交易。我们不参与绿邮勒索者试图将目标公司"置于交易状态"的情形。
我们几十年来一直以机会主义方式从事套利操作，至今成绩相当不错。虽然从未精确计算过，但我相信套利业务整体上为我们带来了年均至少25%的税前收益率。我很确定1987年我们做得更好。但必须强调的是，只要有一两个真正的糟糕经历——就像许多套利操作在1987年末遭遇的那样——就可能彻底改变这些数字。
1987年底，我们唯一一项超过5000万美元的套利头寸是1,096,200股阿勒吉斯公司（Allegis）股票，成本为7600万美元，市值为7800万美元。
○ 年底我们还有两项大型持仓，但无法精确归入我们五个（投资）类别中的任何一个。其一是德士古公司（Texaco, Inc.）发行的多种短期债券，全部是在德士古申请破产后买入的。若非我们的保险公司资本实力极其雄厚，购买违约债券对我们来说并不合适。然而，在德士古申请破产后的市场价格下，我们认为这些债券是我们当时能买到的最有吸引力的债券投资。
就彭泽尔（Pennzoil）诉讼的最坏情况而言，我们觉得这些债券的价值很可能与我们买入的成本相当。而如果达成合理的和解（看起来很有可能），我们预期这些债券的价值会大幅上升。年底时，我们的德士古债券账面价值为1.04亿美元，市值为1.19亿美元。
1987年我们规模最大——也最受关注——的投资是斥资7亿美元购买所罗门公司（Salomon Inc）9%的优先股。该优先股三年后可转换为所罗门普通股，转换价为每股38美元；若未转换，则自1995年10月31日起在五年内按比例赎回。从大多数角度看，这项投资属于中期固定收益证券类别。此外，我们还拥有一个有趣的转换选择权。
当然，我们对投资银行业务的方向或未来盈利能力没有任何特殊洞察。就行业本质而言，其经济前景远不如我们持有大量投资的其他大多数行业那样可预测。这种不可预测性正是我们以可转换优先股形式参与的原因之一。
但我们强烈感受到的是所罗门公司CEO约翰·古特弗伦德（John Gutfreund）的能力与诚信。查理和我都喜欢、钦佩并信任约翰。我们最初认识他是在1976年，当时他在GEICO（政府雇员保险公司）摆脱濒临破产困境的过程中发挥了关键作用。此后多次，我们目睹约翰引导客户放弃那些客户明显想做却并不明智的交易——尽管他的建议没有为所罗门带来任何费用，而默许本可带来巨额佣金。这种服务至上的行为在华尔街绝非理所当然。
基于查理在第50页阐述的理由，年底我们将所罗门投资的估值定为面值的98%，低于成本1400万美元。但我们认为，一家领先、高质量的融资和做市机构有很大可能实现良好的净资产收益率。如果这样，我们的转换权最终将被证明是有价值的。
关于我们上市证券投资，还有两点补充说明。首先，我们给出惯常的警告：我们的持仓在年底后已经发生变动，并且将继续变动而无需另行通知。
第二点是相关的：1987年，和前几年一样，媒体时不时会猜测我们买入或卖出某只证券。这些报道有时是真的，有时半真半假，有时则完全是假的。有趣的是，报纸的规模或声望与报道的准确性之间毫无关系。有一家全国性大杂志曾郑重其事地刊登了一则完全失实的传言；另一家主流刊物则把我们的套利仓位当成长期投资承诺来写，误导了读者。（我不点名，谨记那句老古训：与那些成桶买墨水的人打架可不聪明。）
你们应该明白，我们单纯就是不评论任何谣言，不管它是真是假。如果我们去否认假报道，却对真报道拒绝置评，那实际上就等于对所有事都表了态。
在一个重大投资想法既稀缺又有价值的世界里，除非法律要求，我们毫无兴趣告诉潜在竞争对手我们在做什么。我们当然也不指望别人告诉我们他们的投资想法。同样，我们也不会指望一家媒体公司披露它私下正在洽谈的收购消息，或者指望一名记者告诉竞争对手他在写什么报道、用什么信源。
当朋友或熟人提到他们正在买入X股票——因为据报道（且是错的）伯克希尔也在买——时，我会感到不自在。不过我不会去纠正他们。如果他们真想参与伯克希尔实际在买什么，他们随时可以买伯克希尔的股票。但这或许太简单了。我觉得他们通常更享受买那些被热议的股票。至于这种策略是否更赚钱，那是另一回事。
融资
年终过后不久，伯克希尔发行了两期债券，共计2.5亿美元。两期债券均于2018年到期，并从1999年开始通过偿债基金操作逐步均匀赎回。扣除发行费用后，我们的整体利息成本略高于10%。所罗门（Salomon）是我们的投资银行，服务非常出色。
尽管我们对通胀持悲观态度，但对于债务的胃口相当有限。诚然，如果伯克希尔将债务与企业价值比率提到更高但仍属常规的水平，很可能会提高净资产收益率。甚至在经济状况远差于20世纪30年代初以来的任何环境时，我们也很可能毫无问题地承受这样的比率。
但我们不希望仅仅是"很可能"能履行义务，我们希望的是"确定"。因此，我们始终坚持这样的政策——无论是在债务还是其他所有事务上——即让我们在极其不利的条件下也能获得可接受的长期结果，而不是在正常范围内追求最优结果。
好的企业或投资决策，无需杠杆助力，最终也能产生相当令人满意的经济成果。因此，在我们看来，为了某些相对不重要的额外收益，去拿重要的东西冒险（包括必然涉及的无辜旁观者，如保单持有人和雇员的福祉），既愚蠢又不合情理。这个观点并非源于我们年事已高或已然富足：我们对债务的看法始终如一。
然而，我们并不忌讳借钱。（我们远非相信“世上没有比债务更糟糕的命运”这种话。）我们愿意借入的金额，是经过审慎评估——在最坏情况下——也不会危及伯克希尔（Berkshire）生存的数额。要分析这个数额可能多大，我们可以看看几个重要优势。如果重大危机席卷我们的经济，这些优势将为我们提供有力支撑：伯克希尔的盈利来源众多，且遍布根基稳固的业务；这些业务很少需要大量资本投入；我们现有的债务结构合理；并且我们持有大量流动资产。很明显，即使负债/企业价值比率比现在更高，我们也能从容应对。
我们的债务政策还有一点值得评论：与商界许多人不同，我们更喜欢在需求来临之前融资，而非应对需求才融资。一家企业只有妥善管理资产负债表的两个方向，才能获得最好的财务结果——这意味着实现尽可能高的资产回报率和尽可能低的负债成本。如果两边能同时出现明智操作的机会，那自然方便。但理性告诉我们，情况往往恰恰相反：银根紧缩意味着负债成本高昂，却会创造最佳的收购机会；而廉价货币则会把资产价格推上天。我们的结论是：负债端的操作有时需要独立于资产端单独进行。
可惜，在任何一个特定时刻，“紧缩”和“廉价”的边界远非清晰。我们没有预测利率的能力——而且秉持我们一贯开放的心态——相信其他人也没有。因此，我们只在感觉条件不那么压迫时借钱，然后希望日后能找到明智的扩张或收购机会——正如我们所说，这些机会最可能在债务市场明显压迫时突然冒出来。我们的基本原则是：如果你想猎杀罕见而又快速移动的大象，你应该始终随身扛着一把装满子弹的枪。
这种“先融资、再购买或扩张”的策略几乎总是会牺牲近期收益。例如，我们最近以10%的成本筹集了2.5亿美元，但目前这笔钱只能赚到大约6.5%的收益，这个负利差目前每周让我们损失大约16万美元。这个负利差对我们无关紧要，也不会迫使我们勉强去收购或投资高收益的短期工具。如果未来五年左右，我们能找到合适的这种“业务大象”，等待就是值得的。
**杂项**
我们希望继续收购更多与我们现有业务类似的企业，我们也需要一些帮助。如果你有符合以下标准的业务，请给我打电话，或者最好写信。
以下是我们的筛选条件：
1. 大规模收购（税后收益至少 1000 万美元）
2. 有连续盈利能力的证明（我们对未来预测不感兴趣，也不关心“困境反转”类标的）
3. 净资产收益率高且几乎不依赖负债
4. 管理团队已在位（我们无法提供）
5. 简单的业务（如果涉及大量技术，我们看不懂）
(6) 一个报价（连价格都没谈就去讨论交易，哪怕只是初步接触，我们也不想浪费双方的时间）。
我们不参与敌意收购。我们可以承诺完全保密，并且在五分钟左右——通常是五分钟——就能给出是否感兴趣的答复。我们更倾向于现金收购，但如果我们付出的内在价值与得到的相当，也会考虑发行股票。我们邀请潜在卖家通过联系我们过去的交易伙伴来考察我们。对于合适的企业——以及合适的人——我们能提供一个好的归宿。
另一方面，我们经常接到一些根本不符合我们标准的收购提议：新创企业、扭亏为盈项目、拍卖式销售，以及（在经纪人中间）永远流行的“只要你们彼此熟悉起来，事情肯定会有转机”。这些我们一点兴趣也没有。
除了上述对整体企业的收购兴趣外，我们也对通过协商收购大型但非控股的股票板块感兴趣，类似于我们持有Cap Cities（大都会通讯公司）和Salomon（所罗门公司）的仓位。我们特别有兴趣购买可转换优先股作为长期投资，就像我们在Salomon所做的那样。
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现在有点似曾相识。伯克希尔的大部分主要股东是在1969年底从Buffett Partnership, Ltd.（巴菲特合伙公司）的清算分配中获得股份的。一些前合伙人可能还记得，1962年我在Dempster Mill Manufacturing Co.（登普斯特制造公司，一家水泵和农具制造企业，由BPL控制）遇到了严重的经营问题。
当时，就像现在一样，我拿着自己解决不了的难题去找查理。查理建议解决办法可能在于他的一位加州朋友——Harry Bottle，他的特殊才能是从来不会忘记基本面。1962年4月17日，我在洛杉矶见到了Harry，4月23日他就到了内布拉斯加州的比阿特丽斯，接手管理登普斯特。我们的问题几乎立刻消失了。在1962年给合伙人的信中，我称Harry为“年度人物”。
时间快进到24年后：场景切换到K & W Products（K & W产品公司），伯克希尔旗下一家生产汽车化合物的小型子公司。多年来K & W一直表现不错，但在1985-86年，它追逐无法实现的目标，忽视了可实现的目标，步履维艰。负责监督K & W的查理知道没必要找我商量。他打电话给当时68岁的Harry，任命他为CEO，然后坐等必然的结果。他并没有等太久。1987年，K & W的利润创下纪录，比1986年增长了300%以上。而且，随着利润上升，投入的资本却在下降：K & W在应收账款和存货上的投资减少了20%。
如果再遇到管理问题，十年或二十年后，你知道谁的电话会响。
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伯克希尔1987年股东指定捐赠计划中，约有97.2%的合格股份参与了。通过该计划捐赠的金额为490万美元，受益慈善机构共2,050家。
最近一项调查显示，约50%的美国大公司会按董事捐款额进行配捐（有时甚至按三比一的比例）。实际上，这些代表所有者的董事们将资金投向自己偏爱的慈善机构，却从不征求所有者对慈善捐赠的意见。（我不禁好奇，如果反过来——股东可以擅自挪用董事的钱去捐助股东偏爱的慈善机构——他们作何感想。）当A从B处拿钱给C，而A是立法者时，这个过程叫征税；但当A是公司高管或董事时，却被称为慈善。我们依然认为，除了那些对公司有明确直接利益的捐款，其他捐款应反映所有者的慈善偏好，而非高管和董事的偏好。
我们敦促新股东阅读第54页和第55页关于股东指定捐款计划的说明。如果您希望参与未来的计划，我们强烈建议您立即确保您的股票以实际所有人名义登记，而非以"街名"或代名人名义持有。未能在1988年9月30日前以实际所有人名义登记的股票，将不具备参与1988年计划的资格。
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去年我们的年度股东大会又有约450位股东出席。他们提出的约60个问题，一如既往地精彩。在许多公司，股东大会纯属浪费时间，因为爱出风头的人把它变成了闹剧。但我们不同。我们的股东大会既能让股东获取信息，也让我们乐在其中。（在伯克希尔的会上，爱出风头的人都在台上。）
今年的股东大会将于1988年5月23日在奥马哈举行，希望您能光临。届时您可以提出任何与股东相关的问题，我们会一一作答，直到所有问题（涉及投资组合活动或其他专有信息的问题除外）都处理完毕。
去年我们花100美元租了两辆大巴，送有兴趣的股东去家具卖场。您的行为证明了您的判断力：您抢购了约4万美元的便宜货。B夫人觉得这个费用/销售比率偏高，并把这归咎于我长期对成本漫不经心、管理作风粗枝大叶。但她一如既往地宽厚，又给了我一次机会——会后我们还会安排大巴。B夫人说你们必须超过去年的销售额，我告诉她，她不会失望的。
沃伦·E·巴菲特
董事会主席
1988年2月29日