ENGLISH
BERKSHIRE HATHAWAY INC.
Chairman's Letter
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1996 was $6.2 billion, or 36.1%. Per-
share book value, however, grew by less, 31.8%, because the number of
Berkshire shares increased: We issued stock in acquiring FlightSafety
International and also sold new Class B shares.* Over the last 32 years
(that is, since present management took over) per-share book value has
grown from $19 to $19,011, or at a rate of 23.8% compounded annually.
* Each Class B share has an economic interest equal to 1/30th of
that possessed by a Class A share, which is the new designation for
the only stock that Berkshire had outstanding before May 1996.
Throughout this report, we state all per-share figures in terms of
"Class A equivalents," which are the sum of the Class A shares
outstanding and 1/30th of the Class B shares outstanding.
For technical reasons, we have restated our 1995 financial
statements, a matter that requires me to present one of my less-than-
thrilling explanations of accounting arcana. I'll make it brief.
The restatement was required because GEICO became a wholly-owned
subsidiary of Berkshire on January 2, 1996, whereas it was previously
classified as an investment. From an economic viewpoint - taking into
account major tax efficiencies and other benefits we gained - the value
of the 51% of GEICO we owned at year-end 1995 increased significantly
when we acquired the remaining 49% of the company two days later.
Accounting rules applicable to this type of "step acquisition," however,
required us to write down the value of our 51% at the time we moved to
100%. That writedown - which also, of course, reduced book value -
amounted to $478.4 million. As a result, we now carry our original 51%
of GEICO at a value that is both lower than its market value at the time
we purchased the remaining 49% of the company and lower than the value at
which we carry that 49% itself.
There is an offset, however, to the reduction in book value I have
just described: Twice during 1996 we issued Berkshire shares at a
premium to book value, first in May when we sold the B shares for cash
and again in December when we used both A and B shares as part-payment
for FlightSafety. In total, the three non-operational items affecting
book value contributed less than one percentage point to our 31.8% per-
share gain last year.
I dwell on this rise in per-share book value because it roughly
indicates our economic progress during the year. But, as Charlie Munger,
Berkshire's Vice Chairman, and I have repeatedly told you, what counts at
Berkshire is intrinsic value, not book value. The last time you got that
message from us was in the Owner's Manual, sent to you in June after we
issued the Class B shares. In that manual, we not only defined certain
key terms - such as intrinsic value - but also set forth our economic
principles.
For many years, we have listed these principles in the front of our
annual report, but in this report, on pages 58 to 67, we reproduce the
entire Owner's Manual. In this letter, we will occasionally refer to the
manual so that we can avoid repeating certain definitions and
explanations. For example, if you wish to brush up on "intrinsic value,"
see pages 64 and 65.
Last year, for the first time, we supplied you with a table that
Charlie and I believe will help anyone trying to estimate Berkshire's
intrinsic value. In the updated version of that table, which follows, we
trace two key indices of value. The first column lists our per-share
ownership of investments (including cash and equivalents) and the second
column shows our per-share earnings from Berkshire's operating businesses
before taxes and purchase-accounting adjustments but after all interest
and corporate overhead expenses. The operating-earnings column excludes
all dividends, interest and capital gains that we realized from the
investments presented in the first column. In effect, the two columns
show what Berkshire would have reported had it been broken into two parts.
Pre-tax Earnings Per Share
Investments Excluding All Income from
Year Per Share Investments
---- ----------- -------------------------
1965................................$ 4 $ 4.08
1975................................ 159 (6.48)
1985................................ 2,443 18.86
1995................................ 22,088 258.20
1996................................ 28,500 421.39
Annual Growth Rate, 1965-95......... 33.4% 14.7%
One-Year Growth Rate, 1995-96 ...... 29.0% 63.2%
As the table tells you, our investments per share increased in 1996
by 29.0% and our non-investment earnings grew by 63.2%. Our goal is to
keep the numbers in both columns moving ahead at a reasonable (or, better
yet, unreasonable) pace.
Our expectations, however, are tempered by two realities. First,
our past rates of growth cannot be matched nor even approached:
Berkshire's equity capital is now large - in fact, fewer than ten
businesses in America have capital larger - and an abundance of funds
tends to dampen returns. Second, whatever our rate of progress, it will
not be smooth: Year-to-year moves in the first column of the table above
will be influenced in a major way by fluctuations in securities markets;
the figures in the second column will be affected by wide swings in the
profitability of our catastrophe-reinsurance business.
In the table, the donations made pursuant to our shareholder-
designated contributions program are charged against the second column,
though we view them as a shareholder benefit rather than as an expense.
All other corporate expenses are also charged against the second column.
These costs may be lower than those of any other large American
corporation: Our after-tax headquarters expense amounts to less than two
basis points (1/50th of 1%) measured against net worth. Even so, Charlie
used to think this expense percentage outrageously high, blaming it on my
use of Berkshire's corporate jet, The Indefensible. But Charlie has
recently experienced a "counter-revelation": With our purchase of
FlightSafety, whose major activity is the training of corporate pilots,
he now rhapsodizes at the mere mention of jets.
Seriously, costs matter. For example, equity mutual funds incur
corporate expenses - largely payments to the funds' managers - that
average about 100 basis points, a levy likely to cut the returns their
investors earn by 10% or more over time. Charlie and I make no promises
about Berkshire's results. We do promise you, however, that virtually
all of the gains Berkshire makes will end up with shareholders. We are
here to make money with you, not off you.
The Relationship of Intrinsic Value to Market Price
In last year's letter, with Berkshire shares selling at $36,000, I
told you: (1) Berkshire's gain in market value in recent years had
outstripped its gain in intrinsic value, even though the latter gain had
been highly satisfactory; (2) that kind of overperformance could not
continue indefinitely; (3) Charlie and I did not at that moment consider
Berkshire to be undervalued.
Since I set down those cautions, Berkshire's intrinsic value has
increased very significantly - aided in a major way by a stunning
performance at GEICO that I will tell you more about later - while the
market price of our shares has changed little. This, of course, means
that in 1996 Berkshire's stock underperformed the business.
Consequently, today's price/value relationship is both much different
from what it was a year ago and, as Charlie and I see it, more
appropriate.
Over time, the aggregate gains made by Berkshire shareholders must
of necessity match the business gains of the company. When the stock
temporarily overperforms or underperforms the business, a limited number
of shareholders - either sellers or buyers - receive outsized benefits at
the expense of those they trade with. Generally, the sophisticated have
an edge over the innocents in this game.
Though our primary goal is to maximize the amount that our
shareholders, in total, reap from their ownership of Berkshire, we wish
also to minimize the benefits going to some shareholders at the expense
of others. These are goals we would have were we managing a family
partnership, and we believe they make equal sense for the manager of a
public company. In a partnership, fairness requires that partnership
interests be valued equitably when partners enter or exit; in a public
company, fairness prevails when market price and intrinsic value are in
sync. Obviously, they won't always meet that ideal, but a manager - by
his policies and communications - can do much to foster equity.
Of course, the longer a shareholder holds his shares, the more
bearing Berkshire's business results will have on his financial
experience - and the less it will matter what premium or discount to
intrinsic value prevails when he buys and sells his stock. That's one
reason we hope to attract owners with long-term horizons. Overall, I
think we have succeeded in that pursuit. Berkshire probably ranks number
one among large American corporations in the percentage of its shares
held by owners with a long-term view.
Acquisitions of 1996
We made two acquisitions in 1996, both possessing exactly the
qualities we seek - excellent business economics and an outstanding
manager.
The first acquisition was Kansas Bankers Surety (KBS), an insurance
company whose name describes its specialty. The company, which does
business in 22 states, has an extraordinary underwriting record, achieved
through the efforts of Don Towle, an extraordinary manager. Don has
developed first-hand relationships with hundreds of bankers and knows
every detail of his operation. He thinks of himself as running a company
that is "his," an attitude we treasure at Berkshire. Because of its
relatively small size, we placed KBS with Wesco, our 80%-owned
subsidiary, which has wanted to expand its insurance operations.
You might be interested in the carefully-crafted and sophisticated
acquisition strategy that allowed Berkshire to nab this deal. Early in
1996 I was invited to the 40th birthday party of my nephew's wife, Jane
Rogers. My taste for social events being low, I immediately, and in my
standard, gracious way, began to invent reasons for skipping the event.
The party planners then countered brilliantly by offering me a seat next
to a man I always enjoy, Jane's dad, Roy Dinsdale - so I went.
The party took place on January 26. Though the music was loud - Why
must bands play as if they will be paid by the decibel? - I just managed
to hear Roy say he'd come from a directors meeting at Kansas Bankers
Surety, a company I'd always admired. I shouted back that he should let
me know if it ever became available for purchase.
On February 12, I got the following letter from Roy: "Dear Warren:
Enclosed is the annual financial information on Kansas Bankers Surety.
This is the company that we talked about at Janie's party. If I can be
of any further help, please let me know." On February 13, I told Roy we
would pay $75 million for the company - and before long we had a deal.
I'm now scheming to get invited to Jane's next party.
Our other acquisition in 1996 - FlightSafety International, the
world's leader in the training of pilots - was far larger, at about $1.5
billion, but had an equally serendipitous origin. The heroes of this
story are first, Richard Sercer, a Tucson aviation consultant, and
second, his wife, Alma Murphy, an ophthalmology graduate of Harvard
Medical School, who in 1990 wore down her husband's reluctance and got
him to buy Berkshire stock. Since then, the two have attended all our
Annual Meetings, but I didn't get to know them personally.
Fortunately, Richard had also been a long-time shareholder of
FlightSafety, and it occurred to him last year that the two companies
would make a good fit. He knew our acquisition criteria, and he thought
that Al Ueltschi, FlightSafety's 79-year-old CEO, might want to make a
deal that would both give him a home for his company and a security in
payment that he would feel comfortable owning throughout his lifetime.
So in July, Richard wrote Bob Denham, CEO of Salomon Inc, suggesting that
he explore the possibility of a merger.
Bob took it from there, and on September 18, Al and I met in New
York. I had long been familiar with FlightSafety's business, and in
about 60 seconds I knew that Al was exactly our kind of manager. A month
later, we had a contract. Because Charlie and I wished to minimize the
issuance of Berkshire shares, the transaction we structured gave
FlightSafety shareholders a choice of cash or stock but carried terms
that encouraged those who were tax-indifferent to take cash. This nudge
led to about 51% of FlightSafety's shares being exchanged for cash, 41%
for Berkshire A and 8% for Berkshire B.
Al has had a lifelong love affair with aviation and actually piloted
Charles Lindbergh. After a barnstorming career in the 1930s, he began
working for Juan Trippe, Pan Am's legendary chief. In 1951, while still
at Pan Am, Al founded FlightSafety, subsequently building it into a
simulator manufacturer and a worldwide trainer of pilots (single-engine,
helicopter, jet and marine). The company operates in 41 locations,
outfitted with 175 simulators of planes ranging from the very small, such
as Cessna 210s, to Boeing 747s. Simulators are not cheap - they can cost
as much as $19 million - so this business, unlike many of our
operations, is capital intensive. About half of the company's revenues
are derived from the training of corporate pilots, with most of the
balance coming from airlines and the military.
Al may be 79, but he looks and acts about 55. He will run
operations just as he has in the past: We never fool with success. I
have told him that though we don't believe in splitting Berkshire stock,
we will split his age 2-for-1 when he hits 100.
An observer might conclude from our hiring practices that Charlie
and I were traumatized early in life by an EEOC bulletin on age
discrimination. The real explanation, however, is self-interest: It's
difficult to teach a new dog old tricks. The many Berkshire managers who
are past 70 hit home runs today at the same pace that long ago gave them
reputations as young slugging sensations. Therefore, to get a job with
us, just employ the tactic of the 76-year-old who persuaded a dazzling
beauty of 25 to marry him. "How did you ever get her to accept?" asked
his envious contemporaries. The comeback: "I told her I was 86."
* * * * * * * * * * * *
And now we pause for our usual commercial: If you own a large
business with good economic characteristics and wish to become associated
with an exceptional collection of businesses having similar
characteristics, Berkshire may well be the home you seek. Our
requirements are set forth on page 21. If your company meets them - and
if I fail to make the next birthday party you attend - give me a call.
Insurance Operations - Overview
Our insurance business was terrific in 1996. In both primary
insurance, where GEICO is our main unit, and in our "super-cat"
reinsurance business, results were outstanding.
As we've explained in past reports, what counts in our insurance
business is, first, the amount of "float" we generate and, second, its
cost to us. These are matters that are important for you to understand
because float is a major component of Berkshire's intrinsic value that is
not reflected in book value.
To begin with, float is money we hold but don't own. In an
insurance operation, float arises because premiums are received before
losses are paid. Secondly, the premiums that an insurer takes in
typically do not cover the losses and expenses it eventually must pay.
That leaves it running an "underwriting loss," which is the cost of
float. An insurance business has value if its cost of float over time is
less than the cost the company would otherwise incur to obtain funds.
But the business is an albatross if the cost of its float is higher than
market rates for money.
As the numbers in the following table show, Berkshire's insurance
business has been a huge winner. For the table, we have calculated our
float - which we generate in large amounts relative to our premium
volume - by adding loss reserves, loss adjustment reserves, funds held
under reinsurance assumed and unearned premium reserves, and then
subtracting agents' balances, prepaid acquisition costs, prepaid taxes
and deferred charges applicable to assumed reinsurance. Our cost of
float is determined by our underwriting loss or profit. In those years
when we have had an underwriting profit, such as the last four, our cost
of float has been negative. In effect, we have been paid for holding
money.
(1) (2) Yearend Yield
Underwriting Approximat on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- ---------------- -------------
(In $ Millions) (Ratio of 1 to 2)
1967.......... profit 17.3 less than zero 5.50%
1968.......... profit 19.9 less than zero 5.90%
1969.......... profit 23.4 less than zero 6.79%
1970.......... 0.37 32.4 1.14% 6.25%
1971.......... profit 52.5 less than zero 5.81%
1972.......... profit 69.5 less than zero 5.82%
1973.......... profit 73.3 less than zero 7.27%
1974.......... 7.36 79.1 9.30% 8.13%
1975.......... 11.35 87.6 12.96% 8.03%
1976.......... profit 102.6 less than zero 7.30%
1977.......... profit 139.0 less than zero 7.97%
1978.......... profit 190.4 less than zero 8.93%
1979.......... profit 227.3 less than zero 10.08%
1980.......... profit 237.0 less than zero 11.94%
1981.......... profit 228.4 less than zero 13.61%
1982.......... 21.56 220.6 9.77% 10.64%
1983.......... 33.87 231.3 14.64% 11.84%
1984.......... 48.06 253.2 18.98% 11.58%
1985.......... 44.23 390.2 11.34% 9.34%
1986.......... 55.84 797.5 7.00% 7.60%
1987.......... 55.43 1,266.7 4.38% 8.95%
1988.......... 11.08 1,497.7 0.74% 9.00%
1989.......... 24.40 1,541.3 1.58% 7.97%
1990.......... 26.65 1,637.3 1.63% 8.24%
1991.......... 119.59 1,895.0 6.31% 7.40%
1992.......... 108.96 2,290.4 4.76% 7.39%
1993.......... profit 2,624.7 less than zero 6.35%
1994.......... profit 3,056.6 less than zero 7.88%
1995.......... profit 3,607.2 less than zero 5.95%
1996.......... profit 6,702.0 less than zero 6.64%
Since 1967, when we entered the insurance business, our float has
grown at an annual compounded rate of 22.3%. In more years than not, our
cost of funds has been less than nothing. This access to "free" money has
boosted Berkshire's performance in a major way. Moreover, our acquisition
of GEICO materially increases the probability that we can continue to
obtain "free" funds in increasing amounts.
Super-Cat Insurance
As in the past three years, we once again stress that the good results
we are reporting for Berkshire stem in part from our super-cat business
having a lucky year. In this operation, we sell policies that insurance
and reinsurance companies buy to protect themselves from the effects of
mega-catastrophes. Since truly major catastrophes are rare occurrences,
our super-cat business can be expected to show large profits in most years
- and to record a huge loss occasionally. In other words, the
attractiveness of our super-cat business will take a great many years to
measure. What you must understand, however, is that a truly terrible year
in the super-cat business is not a possibility - it's a certainty. The
only question is when it will come.
I emphasize this lugubrious point because I would not want you to
panic and sell your Berkshire stock upon hearing that some large
catastrophe had cost us a significant amount. If you would tend to react
that way, you should not own Berkshire shares now, just as you should
entirely avoid owning stocks if a crashing market would lead you to panic
and sell. Selling fine businesses on "scary" news is usually a bad
decision. (Robert Woodruff, the business genius who built Coca-Cola over
many decades and who owned a huge position in the company, was once asked
when it might be a good time to sell Coke stock. Woodruff had a simple
answer: "I don't know. I've never sold any.")
In our super-cat operation, our customers are insurers that are
exposed to major earnings volatility and that wish to reduce it. The
product we sell - for what we hope is an appropriate price - is our
willingness to shift that volatility to our own books. Gyrations in
Berkshire's earnings don't bother us in the least: Charlie and I would
much rather earn a lumpy 15% over time than a smooth 12%. (After all, our
earnings swing wildly on a daily and weekly basis - why should we demand
that smoothness accompany each orbit that the earth makes of the sun?) We
are most comfortable with that thinking, however, when we have
shareholder/partners who can also accept volatility, and that's why we
regularly repeat our cautions.
We took on some major super-cat exposures during 1996. At mid-year we
wrote a contract with Allstate that covers Florida hurricanes, and though
there are no definitive records that would allow us to prove this point, we
believe that to have then been the largest single catastrophe risk ever
assumed by one company for its own account. Later in the year, however, we
wrote a policy for the California Earthquake Authority that goes into
effect on April 1, 1997, and that exposes us to a loss more than twice that
possible under the Florida contract. Again we retained all the risk for
our own account. Large as these coverages are, Berkshire's after-tax
"worst-case" loss from a true mega-catastrophe is probably no more than
$600 million, which is less than 3% of our book value and 1.5% of our market
value. To gain some perspective on this exposure, look at the table on
page 2 and note the much greater volatility that security markets have
delivered us.
In the super-cat business, we have three major competitive advantages.
First, the parties buying reinsurance from us know that we both can and
will pay under the most adverse of circumstances. Were a truly cataclysmic
disaster to occur, it is not impossible that a financial panic would
quickly follow. If that happened, there could well be respected reinsurers
that would have difficulty paying at just the moment that their clients
faced extraordinary needs. Indeed, one reason we never "lay off" part of
the risks we insure is that we have reservations about our ability to
collect from others when disaster strikes. When it's Berkshire promising,
insureds know with certainty that they can collect promptly.
Our second advantage - somewhat related - is subtle but important.
After a mega-catastrophe, insurers might well find it difficult to obtain
reinsurance even though their need for coverage would then be particularly
great. At such a time, Berkshire would without question have very
substantial capacity available - but it will naturally be our long-standing
clients that have first call on it. That business reality has made major
insurers and reinsurers throughout the world realize the desirability of
doing business with us. Indeed, we are currently getting sizable "stand-
by" fees from reinsurers that are simply nailing down their ability to get
coverage from us should the market tighten.
Our final competitive advantage is that we can provide dollar
coverages of a size neither matched nor approached elsewhere in the
industry. Insurers looking for huge covers know that a single call to
Berkshire will produce a firm and immediate offering.
A few facts about our exposure to California earthquakes - our largest
risk - seem in order. The Northridge quake of 1994 laid homeowners' losses
on insurers that greatly exceeded what computer models had told them to
expect. Yet the intensity of that quake was mild compared to the "worst-
case" possibility for California. Understandably, insurers became - ahem -
shaken and started contemplating a retreat from writing earthquake coverage
into their homeowners' policies.
In a thoughtful response, Chuck Quackenbush, California's insurance
commissioner, designed a new residential earthquake policy to be written by
a state-sponsored insurer, The California Earthquake Authority. This
entity, which went into operation on December 1, 1996, needed large layers
of reinsurance - and that's where we came in. Berkshire's layer of
approximately $1 billion will be called upon if the Authority's aggregate
losses in the period ending March 31, 2001 exceed about $5 billion. (The
press originally reported larger figures, but these would have applied only
if all California insurers had entered into the arrangement; instead only
72% signed up.)
So what are the true odds of our having to make a payout during the
policy's term? We don't know - nor do we think computer models will help
us, since we believe the precision they project is a chimera. In fact,
such models can lull decision-makers into a false sense of security and
thereby increase their chances of making a really huge mistake. We've
already seen such debacles in both insurance and investments. Witness
"portfolio insurance," whose destructive effects in the 1987 market crash
led one wag to observe that it was the computers that should have been
jumping out of windows.
Even if perfection in assessing risks is unattainable, insurers can
underwrite sensibly. After all, you need not know a man's precise age to
know that he is old enough to vote nor know his exact weight to recognize
his need to diet. In insurance, it is essential to remember that virtually
all surprises are unpleasant, and with that in mind we try to price our
super-cat exposures so that about 90% of total premiums end up being
eventually paid out in losses and expenses. Over time, we will find out
how smart our pricing has been, but that will not be quickly. The super-
cat business is just like the investment business in that it often takes a
long time to find out whether you knew what you were doing.
What I can state with certainty, however, is that we have the best
person in the world to run our super-cat business: Ajit Jain, whose value
to Berkshire is simply enormous. In the reinsurance field, disastrous
propositions abound. I know that because I personally embraced all too
many of these in the 1970s and also because GEICO has a large runoff
portfolio made up of foolish contracts written in the early-1980s, able
though its then-management was. Ajit, I can assure you, won't make
mistakes of this type.
I have mentioned that a mega-catastrophe might cause a catastrophe in
the financial markets, a possibility that is unlikely but not far-fetched.
Were the catastrophe a quake in California of sufficient magnitude to tap
our coverage, we would almost certainly be damaged in other ways as well.
For example, See's, Wells Fargo and Freddie Mac could be hit hard. All in
all, though, we can handle this aggregation of exposures.
In this respect, as in others, we try to "reverse engineer" our future
at Berkshire, bearing in mind Charlie's dictum: "All I want to know is
where I'm going to die so I'll never go there." (Inverting really works:
Try singing country western songs backwards and you will quickly regain
your house, your car and your wife.) If we can't tolerate a possible
consequence, remote though it may be, we steer clear of planting its seeds.
That is why we don't borrow big amounts and why we make sure that our
super-cat business losses, large though the maximums may sound, will not
put a major dent in Berkshire's intrinsic value.
Insurance - GEICO and Other Primary Operations
When we moved to total ownership of GEICO early last year, our
expectations were high - and they are all being exceeded. That is true
from both a business and personal perspective: GEICO's operating chief,
Tony Nicely, is a superb business manager and a delight to work with.
Under almost any conditions, GEICO would be an exceptionally valuable
asset. With Tony at the helm, it is reaching levels of performance that
the organization would only a few years ago have thought impossible.
There's nothing esoteric about GEICO's success: The company's
competitive strength flows directly from its position as a low-cost
operator. Low costs permit low prices, and low prices attract and retain
good policyholders. The final segment of a virtuous circle is drawn when
policyholders recommend us to their friends. GEICO gets more than one
million referrals annually and these produce more than half of our new
business, an advantage that gives us enormous savings in acquisition
expenses - and that makes our costs still lower.
This formula worked in spades for GEICO in 1996: Its voluntary auto
policy count grew 10%. During the previous 20 years, the company's best-
ever growth for a year had been 8%, a rate achieved only once. Better yet,
the growth in voluntary policies accelerated during the year, led by major
gains in the nonstandard market, which has been an underdeveloped area at
GEICO. I focus here on voluntary policies because the involuntary business
we get from assigned risk pools and the like is unprofitable. Growth in
that sector is most unwelcome.
GEICO's growth would mean nothing if it did not produce reasonable
underwriting profits. Here, too, the news is good: Last year we hit our
underwriting targets and then some. Our goal, however, is not to widen our
profit margin but rather to enlarge the price advantage we offer customers.
Given that strategy, we believe that 1997's growth will easily top that of
last year.
We expect new competitors to enter the direct-response market, and
some of our existing competitors are likely to expand geographically.
Nonetheless, the economies of scale we enjoy should allow us to maintain or
even widen the protective moat surrounding our economic castle. We do best
on costs in geographical areas in which we enjoy high market penetration.
As our policy count grows, concurrently delivering gains in penetration, we
expect to drive costs materially lower. GEICO's sustainable cost advantage
is what attracted me to the company way back in 1951, when the entire
business was valued at $7 million. It is also why I felt Berkshire should
pay $2.3 billion last year for the 49% of the company that we didn't then
own.
Maximizing the results of a wonderful business requires management and
focus. Lucky for us, we have in Tony a superb manager whose business focus
never wavers. Wanting also to get the entire GEICO organization
concentrating as he does, we needed a compensation plan that was itself
sharply focused - and immediately after our purchase, we put one in.
Today, the bonuses received by dozens of top executives, starting with
Tony, are based upon only two key variables: (1) growth in voluntary auto
policies and (2) underwriting profitability on "seasoned" auto business
(meaning policies that have been on the books for more than one year). In
addition, we use the same yardsticks to calculate the annual contribution
to the company's profit-sharing plan. Everyone at GEICO knows what counts.
The GEICO plan exemplifies Berkshire's incentive compensation
principles: Goals should be (1) tailored to the economics of the specific
operating business; (2) simple in character so that the degree to which
they are being realized can be easily measured; and (3) directly related to
the daily activities of plan participants. As a corollary, we shun
"lottery ticket" arrangements, such as options on Berkshire shares, whose
ultimate value - which could range from zero to huge - is totally out of
the control of the person whose behavior we would like to affect. In our
view, a system that produces quixotic payoffs will not only be wasteful for
owners but may actually discourage the focused behavior we value in
managers.
Every quarter, all 9,000 GEICO associates can see the results that
determine our profit-sharing plan contribution. In 1996, they enjoyed the
experience because the plan literally went off the chart that had been
constructed at the start of the year. Even I knew the answer to that
problem: Enlarge the chart. Ultimately, the results called for a record
contribution of 16.9% ($40 million), compared to a five-year average of
less than 10% for the comparable plans previously in effect. Furthermore,
at Berkshire, we never greet good work by raising the bar. If GEICO's
performance continues to improve, we will happily keep on making larger
charts.
Lou Simpson continues to manage GEICO's money in an outstanding
manner: Last year, the equities in his portfolio outdid the S&P 500 by 6.2
percentage points. In Lou's part of GEICO's operation, we again tie
compensation to performance - but to investment performance over a four-
year period, not to underwriting results nor to the performance of GEICO as
a whole. We think it foolish for an insurance company to pay bonuses that
are tied to overall corporate results when great work on one side of the
business - underwriting or investment - could conceivably be completely
neutralized by bad work on the other. If you bat .350 at Berkshire, you
can be sure you will get paid commensurately even if the rest of the team
bats .200. In Lou and Tony, however, we are lucky to have Hall-of-Famers
in both key positions.
* * * * * * * * * * * *
Though they are, of course, smaller than GEICO, our other primary
insurance operations turned in equally stunning results last year.
National Indemnity's traditional business had a combined ratio of 74.2 and,
as usual, developed a large amount of float compared to premium volume.
Over the last three years, this segment of our business, run by Don
Wurster, has had an average combined ratio of 83.0. Our homestate
operation, managed by Rod Eldred, recorded a combined ratio of 87.1 even
though it absorbed the expenses of expanding to new states. Rod's three-
year combined ratio is an amazing 83.2. Berkshire's workers' compensation
business, run out of California by Brad Kinstler, has now moved into six
other states and, despite the costs of that expansion, again achieved an
excellent underwriting profit. Finally, John Kizer, at Central States
Indemnity, set new records for premium volume while generating good
earnings from underwriting. In aggregate, our smaller insurance operations
(now including Kansas Bankers Surety) have an underwriting record virtually
unmatched in the industry. Don, Rod, Brad and John have all created
significant value for Berkshire, and we believe there is more to come.
Taxes
In 1961, President Kennedy said that we should ask not what our
country can do for us, but rather ask what we can do for our country. Last
year we decided to give his suggestion a try - and who says it never hurts
to ask? We were told to mail $860 million in income taxes to the U.S.
Treasury.
Here's a little perspective on that figure: If an equal amount had
been paid by only 2,000 other taxpayers, the government would have had a
balanced budget in 1996 without needing a dime of taxes - income or Social
Security or what have you - from any other American. Berkshire
shareholders can truly say, "I gave at the office."
Charlie and I believe that large tax payments by Berkshire are
entirely fitting. The contribution we thus make to society's well-being is
at most only proportional to its contribution to ours. Berkshire prospers
in America as it would nowhere else.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported
earnings. In this presentation, purchase-accounting adjustments are not
assigned to the specific businesses to which they apply, but are instead
aggregated and shown separately. This procedure lets you view the earnings
of our businesses as they would have been reported had we not purchased
them. For the reasons discussed on pages 65 and 66, this form of
presentation seems to us to be more useful to investors and managers than
one utilizing generally-accepted accounting principles (GAAP), which
require purchase-premiums to be charged off business-by-business. The
total earnings we show in the table are, of course, identical to the GAAP
total in our audited financial statements.
(in millions)
--------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-tax Earnings minority interests)
---------------- -------------------
1996 1995(1) 1996 1995(1)
------- -------- ------- -------
Operating Earnings:
Insurance Group:
Underwriting.....................$ 222.1 $ 20.5 $ 142.8 $ 11.3
Net Investment Income............ 726.2 501.6 593.1 417.7
Buffalo News........................... 50.4 46.8 29.5 27.3
Fechheimer............................. 17.3 16.9 9.3 8.8
Finance Businesses..................... 23.1 20.8 14.9 12.6
Home Furnishings....................... 43.8 29.7(2) 24.8 16.7(2)
Jewelry................................ 27.8 33.9(3) 16.1 19.1(3)
Kirby.................................. 58.5 50.2 39.9 32.1
Scott Fetzer Manufacturing Group....... 50.6 34.1 32.2 21.2
See's Candies.......................... 51.9 50.2 30.8 29.8
Shoe Group............................. 61.6 58.4 41.0 37.5
World Book............................. 12.6 8.8 9.5 7.0
Purchase-Accounting Adjustments........ (75.7) (27.0) (70.5) (23.4)
Interest Expense(4).................... (94.3) (56.0) (56.6) (34.9)
Shareholder-Designated Contributions... (13.3) (11.6) (8.5) (7.0)
Other.................................. 58.8 37.4 34.8 24.4
------- -------- -------- -------
Operating Earnings.......................1,221.4 814.7 883.1 600.2
Sales of Securities......................2,484.5 194.1 1,605.5 125.0
------- -------- -------- -------
Total Earnings - All Entities...........$3,705.9 $1,008.8 $2,488.6 $ 725.2
======= ======== ======== =======
(1) Before the GEICO-related restatement. (3) Includes Helzberg's from
April 30, 1995.
(2) Includes R.C. Willey from June 29, 1995. (4) Excludes interest expense
of Finance Businesses.
In this section last year, I discussed three businesses that reported
a decline in earnings - Buffalo News, Shoe Group and World Book. All, I'm
happy to say, recorded gains in 1996.
World Book, however, did not find it easy: Despite the operation's
new status as the only direct-seller of encyclopedias in the country
(Encyclopedia Britannica exited the field last year), its unit volume fell.
Additionally, World Book spent heavily on a new CD-ROM product that began
to take in revenues only in early 1997, when it was launched in association
with IBM. In the face of these factors, earnings would have evaporated had
World Book not revamped distribution methods and cut overhead at
headquarters, thereby dramatically reducing its fixed costs. Overall, the
company has gone a long way toward assuring its long-term viability in both
the print and electronic marketplaces.
Our only disappointment last year was in jewelry: Borsheim's did
fine, but Helzberg's suffered a material decline in earnings. Its expense
levels had been geared to a sizable increase in same-store sales,
consistent with the gains achieved in recent years. When sales were
instead flat, profit margins fell. Jeff Comment, CEO of Helzberg's, is
addressing the expense problem in a decisive manner, and the company's
earnings should improve in 1997.
Overall, our operating businesses continue to perform exceptionally,
far outdoing their industry norms. For this, Charlie and I thank our
managers. If you should see any of them at the Annual Meeting, add your
thanks as well.
More information about our various businesses is given on pages 36-
46, where you will also find our segment earnings reported on a GAAP
basis. In addition, on pages 51-57, we have rearranged Berkshire's
financial data into four segments on a non-GAAP basis, a presentation
that corresponds to the way Charlie and I think about the company. Our
intent is to supply you with the financial information that we would wish
you to give us if our positions were reversed.
"Look-Through" Earnings
Reported earnings are a poor measure of economic progress at
Berkshire, in part because the numbers shown in the table presented
earlier include only the dividends we receive from investees - though
these dividends typically represent only a small fraction of the earnings
attributable to our ownership. Not that we mind this division of money,
since on balance we regard the undistributed earnings of investees as
more valuable to us than the portion paid out. The reason is simple:
Our investees often have the opportunity to reinvest earnings at high
rates of return. So why should we want them paid out?
To depict something closer to economic reality at Berkshire than
reported earnings, though, we employ the concept of "look-through"
earnings. As we calculate these, they consist of: (1) the operating
earnings reported in the previous section, plus; (2) our share of the
retained operating earnings of major investees that, under GAAP
accounting, are not reflected in our profits, less; (3) an allowance for
the tax that would be paid by Berkshire if these retained earnings of
investees had instead been distributed to us. When tabulating "operating
earnings" here, we exclude purchase-accounting adjustments as well as
capital gains and other major non-recurring items.
The following table sets forth our 1996 look-through earnings,
though I warn you that the figures can be no more than approximate, since
they are based on a number of judgment calls. (The dividends paid to us
by these investees have been included in the operating earnings itemized
on page 12, mostly under "Insurance Group: Net Investment Income.")
Berkshire's Share
of Undistributed
Berkshire's Approximate Operating Earnings
Berkshire's Major Investees Ownership at Yearend(1) (in millions)(2)
-------------------------------- ----------------------- ------------------
American Express Company........ 10.5% $ 132
The Coca-Cola Company........... 8.1% 180
The Walt Disney Company......... 3.6% 50
Federal Home Loan Mortgage Corp. 8.4% 77
The Gillette Company............ 8.6% 73
McDonald's Corporation.......... 4.3% 38
The Washington Post Company..... 15.8% 27
Wells Fargo & Company........... 8.0% 84
------
Berkshire's share of undistributed earnings of major investees.. 661
Hypothetical tax on these undistributed investee earnings(3).... (93)
Reported operating earnings of Berkshire........................ 954
------
Total look-through earnings of Berkshire..................$1,522
======
(1) Does not include shares allocable to minority interests
(2) Calculated on average ownership for the year
(3) The tax rate used is 14%, which is the rate Berkshire pays on
the dividends it receives
Common Stock Investments
Below we present our common stock investments. Those with a market
value of more than $500 million are itemized.
12/31/96
Shares Company Cost* Market
----------- --------------------------------- -------- ---------
(dollars in millions)
49,456,900 American Express Company...........$1,392.7 $ 2,794.3
200,000,000 The Coca-Cola Company.............. 1,298.9 10,525.0
24,614,214 The Walt Disney Company............ 577.0 1,716.8
64,246,000 Federal Home Loan Mortgage Corp.... 333.4 1,772.8
48,000,000 The Gillette Company............... 600.0 3,732.0
30,156,600 McDonald's Corporation............. 1,265.3 1,368.4
1,727,765 The Washington Post Company........ 10.6 579.0
7,291,418 Wells Fargo & Company.............. 497.8 1,966.9
Others............................. 1,934.5 3,295.4
-------- ---------
Total Common Stocks................$7,910.2 $27,750.6
======== =========
* Represents tax-basis cost which, in aggregate, is $1.2 billion
less than GAAP cost.
Our portfolio shows little change: We continue to make more money
when snoring than when active.
Inactivity strikes us as intelligent behavior. Neither we nor most
business managers would dream of feverishly trading highly-profitable
subsidiaries because a small move in the Federal Reserve's discount rate
was predicted or because some Wall Street pundit had reversed his views
on the market. Why, then, should we behave differently with our minority
positions in wonderful businesses? The art of investing in public
companies successfully is little different from the art of successfully
acquiring subsidiaries. In each case you simply want to acquire, at a
sensible price, a business with excellent economics and able, honest
management. Thereafter, you need only monitor whether these qualities
are being preserved.
When carried out capably, an investment strategy of that type will
often result in its practitioner owning a few securities that will come
to represent a very large portion of his portfolio. This investor would
get a similar result if he followed a policy of purchasing an interest
in, say, 20% of the future earnings of a number of outstanding college
basketball stars. A handful of these would go on to achieve NBA stardom,
and the investor's take from them would soon dominate his royalty stream.
To suggest that this investor should sell off portions of his most
successful investments simply because they have come to dominate his
portfolio is akin to suggesting that the Bulls trade Michael Jordan
because he has become so important to the team.
In studying the investments we have made in both subsidiary
companies and common stocks, you will see that we favor businesses and
industries unlikely to experience major change. The reason for that is
simple: Making either type of purchase, we are searching for operations
that we believe are virtually certain to possess enormous competitive
strength ten or twenty years from now. A fast-changing industry
environment may offer the chance for huge wins, but it precludes the
certainty we seek.
I should emphasize that, as citizens, Charlie and I welcome change:
Fresh ideas, new products, innovative processes and the like cause our
country's standard of living to rise, and that's clearly good. As
investors, however, our reaction to a fermenting industry is much like
our attitude toward space exploration: We applaud the endeavor but
prefer to skip the ride.
Obviously all businesses change to some extent. Today, See's is
different in many ways from what it was in 1972 when we bought it: It
offers a different assortment of candy, employs different machinery and
sells through different distribution channels. But the reasons why
people today buy boxed chocolates, and why they buy them from us rather
than from someone else, are virtually unchanged from what they were in
the 1920s when the See family was building the business. Moreover, these
motivations are not likely to change over the next 20 years, or even 50.
We look for similar predictability in marketable securities. Take
Coca-Cola: The zeal and imagination with which Coke products are sold
has burgeoned under Roberto Goizueta, who has done an absolutely
incredible job in creating value for his shareholders. Aided by Don
Keough and Doug Ivester, Roberto has rethought and improved every aspect
of the company. But the fundamentals of the business - the qualities
that underlie Coke's competitive dominance and stunning economics - have
remained constant through the years.
I was recently studying the 1896 report of Coke (and you think that
you are behind in your reading!). At that time Coke, though it was
already the leading soft drink, had been around for only a decade. But
its blueprint for the next 100 years was already drawn. Reporting sales
of $148,000 that year, Asa Candler, the company's president, said: "We
have not lagged in our efforts to go into all the world teaching that
Coca-Cola is the article, par excellence, for the health and good feeling
of all people." Though "health" may have been a reach, I love the fact
that Coke still relies on Candler's basic theme today - a century later.
Candler went on to say, just as Roberto could now, "No article of like
character has ever so firmly entrenched itself in public favor." Sales
of syrup that year, incidentally, were 116,492 gallons versus about 3.2
billion in 1996.
I can't resist one more Candler quote: "Beginning this year about
March 1st . . . we employed ten traveling salesmen by means of which,
with systematic correspondence from the office, we covered almost the
territory of the Union." That's my kind of sales force.
Companies such as Coca-Cola and Gillette might well be labeled "The
Inevitables." Forecasters may differ a bit in their predictions of
exactly how much soft drink or shaving-equipment business these companies
will be doing in ten or twenty years. Nor is our talk of inevitability
meant to play down the vital work that these companies must continue to
carry out, in such areas as manufacturing, distribution, packaging and
product innovation. In the end, however, no sensible observer - not even
these companies' most vigorous competitors, assuming they are assessing
the matter honestly - questions that Coke and Gillette will dominate
their fields worldwide for an investment lifetime. Indeed, their
dominance will probably strengthen. Both companies have significantly
expanded their already huge shares of market during the past ten years,
and all signs point to their repeating that performance in the next
decade.
Obviously many companies in high-tech businesses or embryonic
industries will grow much faster in percentage terms than will The
Inevitables. But I would rather be certain of a good result than hopeful
of a great one.
Of course, Charlie and I can identify only a few Inevitables, even
after a lifetime of looking for them. Leadership alone provides no
certainties: Witness the shocks some years back at General Motors, IBM
and Sears, all of which had enjoyed long periods of seeming
invincibility. Though some industries or lines of business exhibit
characteristics that endow leaders with virtually insurmountable
advantages, and that tend to establish Survival of the Fattest as almost
a natural law, most do not. Thus, for every Inevitable, there are dozens
of Impostors, companies now riding high but vulnerable to competitive
attacks. Considering what it takes to be an Inevitable, Charlie and I
recognize that we will never be able to come up with a Nifty Fifty or
even a Twinkling Twenty. To the Inevitables in our portfolio, therefore,
we add a few "Highly Probables."
You can, of course, pay too much for even the best of businesses.
The overpayment risk surfaces periodically and, in our opinion, may now
be quite high for the purchasers of virtually all stocks, The Inevitables
included. Investors making purchases in an overheated market need to
recognize that it may often take an extended period for the value of even
an outstanding company to catch up with the price they paid.
A far more serious problem occurs when the management of a great
company gets sidetracked and neglects its wonderful base business while
purchasing other businesses that are so-so or worse. When that happens,
the suffering of investors is often prolonged. Unfortunately, that is
precisely what transpired years ago at both Coke and Gillette. (Would
you believe that a few decades back they were growing shrimp at Coke and
exploring for oil at Gillette?) Loss of focus is what most worries
Charlie and me when we contemplate investing in businesses that in
general look outstanding. All too often, we've seen value stagnate in
the presence of hubris or of boredom that caused the attention of
managers to wander. That's not going to happen again at Coke and
Gillette, however - not given their current and prospective managements.
* * * * * * * * * * * *
Let me add a few thoughts about your own investments. Most
investors, both institutional and individual, will find that the best way
to own common stocks is through an index fund that charges minimal fees.
Those following this path are sure to beat the net results (after fees
and expenses) delivered by the great majority of investment
professionals.
Should you choose, however, to construct your own portfolio, there
are a few thoughts worth remembering. Intelligent investing is not
complex, though that is far from saying that it is easy. What an
investor needs is the ability to correctly evaluate selected businesses.
Note that word "selected": You don't have to be an expert on every
company, or even many. You only have to be able to evaluate companies
within your circle of competence. The size of that circle is not very
important; knowing its boundaries, however, is vital.
To invest successfully, you need not understand beta, efficient
markets, modern portfolio theory, option pricing or emerging markets.
You may, in fact, be better off knowing nothing of these. That, of
course, is not the prevailing view at most business schools, whose
finance curriculum tends to be dominated by such subjects. In our view,
though, investment students need only two well-taught courses - How to
Value a Business, and How to Think About Market Prices.
Your goal as an investor should simply be to purchase, at a rational
price, a part interest in an easily-understandable business whose
earnings are virtually certain to be materially higher five, ten and
twenty years from now. Over time, you will find only a few companies
that meet these standards - so when you see one that qualifies, you
should buy a meaningful amount of stock. You must also resist the
temptation to stray from your guidelines: If you aren't willing to own a
stock for ten years, don't even think about owning it for ten minutes.
Put together a portfolio of companies whose aggregate earnings march
upward over the years, and so also will the portfolio's market value.
Though it's seldom recognized, this is the exact approach that has
produced gains for Berkshire shareholders: Our look-through earnings
have grown at a good clip over the years, and our stock price has risen
correspondingly. Had those gains in earnings not materialized, there
would have been little increase in Berkshire's value.
The greatly enlarged earnings base we now enjoy will inevitably
cause our future gains to lag those of the past. We will continue,
however, to push in the directions we always have. We will try to build
earnings by running our present businesses well - a job made easy because
of the extraordinary talents of our operating managers - and by
purchasing other businesses, in whole or in part, that are not likely to
be roiled by change and that possess important competitive advantages.
USAir
When Richard Branson, the wealthy owner of Virgin Atlantic Airways,
was asked how to become a millionaire, he had a quick answer: "There's
really nothing to it. Start as a billionaire and then buy an airline."
Unwilling to accept Branson's proposition on faith, your Chairman decided
in 1989 to test it by investing $358 million in a 9.25% preferred stock of
USAir.
I liked and admired Ed Colodny, the company's then-CEO, and I still
do. But my analysis of USAir's business was both superficial and wrong.
I was so beguiled by the company's long history of profitable
operations, and by the protection that ownership of a senior security
seemingly offered me, that I overlooked the crucial point: USAir's
revenues would increasingly feel the effects of an unregulated, fiercely-
competitive market whereas its cost structure was a holdover from the
days when regulation protected profits. These costs, if left unchecked,
portended disaster, however reassuring the airline's past record might
be. (If history supplied all of the answers, the Forbes 400 would
consist of librarians.)
To rationalize its costs, however, USAir needed major improvements
in its labor contracts - and that's something most airlines have found it
extraordinarily difficult to get, short of credibly threatening, or
actually entering, bankruptcy. USAir was to be no exception.
Immediately after we purchased our preferred stock, the imbalance between
the company's costs and revenues began to grow explosively. In the 1990-
1994 period, USAir lost an aggregate of $2.4 billion, a performance that
totally wiped out the book equity of its common stock.
For much of this period, the company paid us our preferred
dividends, but in 1994 payment was suspended. A bit later, with the
situation looking particularly gloomy, we wrote down our investment by
75%, to $89.5 million. Thereafter, during much of 1995, I offered to
sell our shares at 50% of face value. Fortunately, I was unsuccessful.
Mixed in with my many mistakes at USAir was one thing I got right:
Making our investment, we wrote into the preferred contract a somewhat
unusual provision stipulating that "penalty dividends" - to run five
percentage points over the prime rate - would be accrued on any
arrearages. This meant that when our 9.25% dividend was omitted for two
years, the unpaid amounts compounded at rates ranging between 13.25% and
14%.
Facing this penalty provision, USAir had every incentive to pay
arrearages just as promptly as it could. And in the second half of 1996,
when USAir turned profitable, it indeed began to pay, giving us $47.9
million. We owe Stephen Wolf, the company's CEO, a huge thank-you for
extracting a performance from the airline that permitted this payment.
Even so, USAir's performance has recently been helped significantly by an
industry tailwind that may be cyclical in nature. The company still has
basic cost problems that must be solved.
In any event, the prices of USAir's publicly-traded securities tell
us that our preferred stock is now probably worth its par value of $358
million, give or take a little. In addition, we have over the years
collected an aggregate of $240.5 million in dividends (including $30
million received in 1997).
Early in 1996, before any accrued dividends had been paid, I tried
once more to unload our holdings - this time for about $335 million.
You're lucky: I again failed in my attempt to snatch defeat from the
jaws of victory.
In another context, a friend once asked me: "If you're so rich, why
aren't you smart?" After reviewing my sorry performance with USAir, you
may conclude he had a point.
Financings
We wrote four checks to Salomon Brothers last year and in each case
were delighted with the work for which we were paying. I've already
described one transaction: the FlightSafety purchase in which Salomon was
the initiating investment banker. In a second deal, the firm placed a
small debt offering for our finance subsidiary.
Additionally, we made two good-sized offerings through Salomon, both
with interesting aspects. The first was our sale in May of 517,500
shares of Class B Common, which generated net proceeds of $565 million.
As I have told you before, we made this sale in response to the
threatened creation of unit trusts that would have marketed themselves as
Berkshire look-alikes. In the process, they would have used our past,
and definitely nonrepeatable, record to entice naive small investors and
would have charged these innocents high fees and commissions.
I think it would have been quite easy for such trusts to have sold
many billions of dollars worth of units, and I also believe that early
marketing successes by these trusts would have led to the formation of
others. (In the securities business, whatever can be sold will be sold.)
The trusts would have meanwhile indiscriminately poured the proceeds of
their offerings into a supply of Berkshire shares that is fixed and
limited. The likely result: a speculative bubble in our stock. For at
least a time, the price jump would have been self-validating, in that it
would have pulled new waves of naive and impressionable investors into
the trusts and set off still more buying of Berkshire shares.
Some Berkshire shareholders choosing to exit might have found that
outcome ideal, since they could have profited at the expense of the
buyers entering with false hopes. Continuing shareholders, however,
would have suffered once reality set in, for at that point Berkshire
would have been burdened with both hundreds of thousands of unhappy,
indirect owners (trustholders, that is) and a stained reputation.
Our issuance of the B shares not only arrested the sale of the
trusts, but provided a low-cost way for people to invest in Berkshire if
they still wished to after hearing the warnings we issued. To blunt the
enthusiasm that brokers normally have for pushing new issues - because
that's where the money is - we arranged for our offering to carry a
commission of only 1.5%, the lowest payoff that we have ever seen in a
common stock underwriting. Additionally, we made the amount of the
offering open-ended, thereby repelling the typical IPO buyer who looks
for a short-term price spurt arising from a combination of hype and
scarcity.
Overall, we tried to make sure that the B stock would be purchased
only by investors with a long-term perspective. Those efforts were
generally successful: Trading volume in the B shares immediately
following the offering - a rough index of "flipping" - was far below the
norm for a new issue. In the end we added about 40,000 shareholders,
most of whom we believe both understand what they own and share our time
horizons.
Salomon could not have performed better in the handling of this
unusual transaction. Its investment bankers understood perfectly what we
were trying to achieve and tailored every aspect of the offering to meet
these objectives. The firm would have made far more money - perhaps ten
times as much - if our offering had been standard in its make-up. But
the investment bankers involved made no attempt to tweak the specifics in
that direction. Instead they came up with ideas that were counter to
Salomon's financial interest but that made it much more certain
Berkshire's goals would be reached. Terry Fitzgerald captained this
effort, and we thank him for the job that he did.
Given that background, it won't surprise you to learn that we again
went to Terry when we decided late in the year to sell an issue of
Berkshire notes that can be exchanged for a portion of the Salomon shares
that we hold. In this instance, once again, Salomon did an absolutely
first-class job, selling $500 million principal amount of five-year notes
for $447.1 million. Each $1,000 note is exchangeable into 17.65 shares
and is callable in three years at accreted value. Counting the original
issue discount and a 1% coupon, the securities will provide a yield of 3%
to maturity for holders who do not exchange them for Salomon stock. But
it seems quite likely that the notes will be exchanged before their
maturity. If that happens, our interest cost will be about 1.1% for the
period prior to exchange.
In recent years, it has been written that Charlie and I are unhappy
about all investment-banking fees. That's dead wrong. We have paid a
great many fees over the last 30 years - beginning with the check we
wrote to Charlie Heider upon our purchase of National Indemnity in 1967 -
and we are delighted to make payments that are commensurate with
performance. In the case of the 1996 transactions at Salomon Brothers,
we more than got our money's worth.
Miscellaneous
Though it was a close decision, Charlie and I have decided to enter
the 20th Century. Accordingly, we are going to put future quarterly and
annual reports of Berkshire on the Internet, where they can be accessed
via http://www.berkshirehathaway.com. We will always "post" these
reports on a Saturday so that anyone interested will have ample time to
digest the information before trading begins. Our publishing schedule
for the next 12 months is May 17, 1997, August 16, 1997, November 15,
1997, and March 14, 1998. We will also post any press releases that we
issue.
At some point, we may stop mailing our quarterly reports and simply
post these on the Internet. This move would eliminate significant costs.
Also, we have a large number of "street name" holders and have found
that the distribution of our quarterlies to them is highly erratic: Some
holders receive their mailings weeks later than others.
The drawback to Internet-only distribution is that many of our
shareholders lack computers. Most of these holders, however, could
easily obtain printouts at work or through friends. Please let me know
if you prefer that we continue mailing quarterlies. We want your input -
starting with whether you even read these reports - and at a minimum will
make no change in 1997. Also, we will definitely keep delivering the
annual report in its present form in addition to publishing it on the
Internet.
* * * * * * * * * * * *
About 97.2% of all eligible shares participated in Berkshire's 1996
shareholder-designated contributions program. Contributions made were
$13.3 million, and 3,910 charities were recipients. A full description
of the shareholder-designated contributions program appears on pages 48-
49.
Every year a few shareholders miss out on the program because they
don't have their shares registered in their own names on the prescribed
record date or because they fail to get the designation form back to us
within the 60-day period allowed. This is distressing to Charlie and me.
But if replies are received late, we have to reject them because we
can't make exceptions for some shareholders while refusing to make them
for others.
To participate in future programs, you must own Class A shares that
are registered in the name of the actual owner, not the nominee name of a
broker, bank or depository. Shares not so registered on August 31, 1997,
will be ineligible for the 1997 program. When you get the form, return
it promptly so that it does not get put aside or forgotten.
The Annual Meeting
Our capitalist's version of Woodstock -the Berkshire Annual Meeting-
will be held on Monday, May 5. Charlie and I thoroughly enjoy this
event, and we hope that you come. We will start at 9:30 a.m., break for
about 15 minutes at noon (food will be available - but at a price, of
course), and then continue talking to hard-core attendees until at least
3:30. Last year we had representatives from all 50 states, as well as
Australia, Greece, Israel, Portugal, Singapore, Sweden, Switzerland, and
the United Kingdom. The annual meeting is a time for owners to get their
business-related questions answered, and therefore Charlie and I will
stay on stage until we start getting punchy. (When that happens, I hope
you notice a change.)
Last year we had attendance of 5,000 and strained the capacity of
the Holiday Convention Centre, even though we spread out over three
rooms. This year, our new Class B shares have caused a doubling of our
stockholder count, and we are therefore moving the meeting to the
Aksarben Coliseum, which holds about 10,000 and also has a huge parking
lot. The doors will open for the meeting at 7:00 a.m., and at 8:30 we
will - upon popular demand - show a new Berkshire movie produced by Marc
Hamburg, our CFO. (In this company, no one gets by with doing only a
single job.)
Overcoming our legendary repugnance for activities even faintly
commercial, we will also have an abundant array of Berkshire products for
sale in the halls outside the meeting room. Last year we broke all
records, selling 1,270 pounds of See's candy, 1,143 pairs of Dexter
shoes, $29,000 of World Books and related publications, and 700 sets of
knives manufactured by our Quikut subsidiary. Additionally, many
shareholders made inquiries about GEICO auto policies. If you would like
to investigate possible insurance savings, bring your present policy to
the meeting. We estimate that about 40% of our shareholders can save
money by insuring with us. (We'd like to say 100%, but the insurance
business doesn't work that way: Because insurers differ in their
underwriting judgments, some of our shareholders are currently paying
rates that are lower than GEICO's.)
An attachment to the proxy material enclosed with this report
explains how you can obtain the card you will need for admission to the
meeting. We expect a large crowd, so get both plane and hotel
reservations promptly. American Express (800-799-6634) will be happy to
help you with arrangements. As usual, we will have buses servicing the
larger hotels to take you to and from the meeting, and also to take you
to Nebraska Furniture Mart, Borsheim's and the airport after it is over.
NFM's main store, located on a 75-acre site about a mile from
Aksarben, is open from 10 a.m. to 9 p.m. on weekdays, 10 a.m. to 6 p.m.
on Saturdays, and noon to 6 p.m. on Sundays. Come by and say hello to
"Mrs. B" (Rose Blumkin). She's 103 now and sometimes operates with an
oxygen mask that is attached to a tank on her cart. But if you try to
keep pace with her, it will be you who needs oxygen. NFM did about $265
million of business last year - a record for a single-location home
furnishings operation - and you'll see why once you check out its
merchandise and prices.
Borsheim's normally is closed on Sunday but will be open for
shareholders from 10 a.m. to 6 p.m. on May 4th. Last year on
"Shareholder Sunday" we broke every Borsheim's record in terms of
tickets, dollar volume and, no doubt, attendees per square inch. Because
we expect a capacity crowd this year as well, all shareholders attending
on Sunday must bring their admission cards. Shareholders who prefer a
somewhat less frenzied experience will get the same special treatment on
Saturday, when the store is open from 10 a.m. to 5:30 p.m., or on Monday
between 10 a.m. and 8 p.m. Come by at any time this year and let Susan
Jacques, Borsheim's CEO, and her skilled associates perform a painless
walletectomy on you.
My favorite steakhouse, Gorat's, was sold out last year on the
weekend of the annual meeting, even though it added an additional seating
at 4 p.m. on Sunday. You can make reservations beginning on April 1st
(but not earlier) by calling 402-551-3733. I will be at Gorat's on
Sunday after Borsheim's, having my usual rare T-bone and double order of
hashbrowns. I can also recommend - this is the standard fare when Debbie
Bosanek, my invaluable assistant, and I go to lunch - the hot roast beef
sandwich with mashed potatoes and gravy. Mention Debbie's name and you
will be given an extra boat of gravy.
The Omaha Royals and Indianapolis Indians will play baseball on
Saturday evening, May 3rd, at Rosenblatt Stadium. Pitching in my normal
rotation - one throw a year - I will start.
Though Rosenblatt is normal in appearance, it is anything but: The
field sits on a unique geological structure that occasionally emits short
gravitational waves causing even the most smoothly-delivered pitch to
sink violently. I have been the victim of this weird phenomenon several
times in the past but am hoping for benign conditions this year. There
will be lots of opportunities for photos at the ball game, but you will
need incredibly fast reflexes to snap my fast ball en route to the plate.
Our proxy statement includes information about obtaining tickets to
the game. We will also provide an information packet listing restaurants
that will be open on Sunday night and describing various things that you
can do in Omaha on the weekend. The entire gang at Berkshire looks
forward to seeing you.
Warren E. Buffett
February 28, 1997 Chairman of the Board
中文译文
伯克希尔·哈撒韦公司
董事长致股东信
致伯克希尔·哈撒韦公司全体股东：
1996年，我们的净值增加了62亿美元，增幅36.1%。不过，每股账面价值的增长幅度较小，为31.8%，原因是伯克希尔的股份数量增加了：我们在收购FlightSafety International时发行了股票，同时还出售了新发行的B类股。* 过去32年（即现任管理层接手以来），每股账面价值从19美元增长到19,011美元，年复合增长率为23.8%。
* 每份B类股的经济权益相当于A类股的1/30。A类股是伯克希尔在1996年5月之前唯一发行在外的股票的新名称。在本报告中，所有每股数据均以"A类股等价"表示，即A类股发行在外数量加上B类股发行在外数量的1/30。
由于技术原因，我们重述了1995年的财务报表，这需要我对会计学的深奥之处做一个不太令人兴奋的解释。我会长话短说。
重述的原因在于，GEICO于1996年1月2日成为伯克希尔的全资子公司，而此前它被归类为一项投资。从经济角度（考虑到我们获得的重大税收效率和其他收益）看，我们在1995年底持有的GEICO 51%股权，在两天后我们收购了其余49%时，其价值大幅提升。然而，适用于这类"分步收购"的会计准则要求我们在达到100%持股时，对我们原来持有的51%股权进行减值。这项减值——当然也减少了账面价值——金额为4.784亿美元。结果，我们现在账面上对最初持有的51% GEICO的计价，既低于我们收购剩余49%时的市场价值，也低于我们对那49%本身的账面价值。
不过，我刚才描述的账面价值减少有一个抵消项：1996年期间，我们两次以高于账面价值的价格发行了伯克希尔股票——第一次是在5月，我们以现金方式出售了B类股；第二次是在12月，我们同时用A类股和B类股作为收购FlightSafety的部分对价。总的来说，这三个非经营项目对去年每股账面价值31.8%的增长贡献了不到一个百分点。
我之所以详细谈论每股账面价值的增长，是因为它大致反映了我们当年的经济进展。但正如查理·芒格（伯克希尔副董事长）和我反复告诉过你们的，对伯克希尔来说，重要的是内在价值，而不是账面价值。上一次你们听到这个信息是在我们于6月份发行B类股后寄给你们的《所有者手册》中。在那本手册中，我们不仅定义了一些关键术语（例如内在价值），还阐述了我们的经济原则。
多年来，我们一直把这些原则列在年报的前面，但今年这份年报的第58至67页，我们完整重印了《所有者手册》。在这封信中，我们偶尔会引用该手册，以避免重复某些定义和解释。例如，如果你想重温"内在价值"的定义，请看第64和65页。
去年，我们首次向各位提供了一份表格——我和Charlie认为，这份表格有助于任何人估算伯克希尔的内在价值。下表是更新后的版本，其中追踪了两项关键的价值指标。第一列是我们的每股投资额（含现金及等价物），第二列是伯克希尔经营性业务在税前、扣除并购会计调整前，但扣除所有利息及公司管理费后的每股收益。经营性收益一列排除了第一列投资所产生的全部股息、利息和已实现资本利得。实际上，这两列展示的是：如果伯克希尔被拆成两部分，它本应报告的数据。
每股税前收益
投资额 （不含投资收入）
年份 每股 每股
---- ----------- -------------------------
1965................................$ 4 $ 4.08
1975................................ 159 (6.48)
1985................................ 2,443 18.86
1995................................ 22,088 258.20
1996................................ 28,500 421.39
年增长率，1965-95......... 33.4% 14.7%
单年增长率，1995-96 ...... 29.0% 63.2%
正如上表所示，1996年我们的每股投资额增长了29.0%，非投资类收益增长了63.2%。我们的目标，是让这两列数字都按合理的（最好是不合理的）速度前进。
不过，我们的期望被两个现实打了折扣。第一，我们过去的增长速度已无法复制，甚至无法接近：伯克希尔现在的股本规模很大——实际上，美国资本超过我们的企业不到十家——而资金充裕往往会压低回报率。第二，无论进步速度如何，它都不会平稳：上表第一列的年度变动会深受证券市场波动的影响；第二列的数字则会被巨灾再保险业务的利润剧烈波动所左右。
在上表中，根据股东指定捐款计划捐出的款项被计入第二列的成本，但我们认为这是股东福利而非费用。所有其他公司费用也计入第二列。这些成本可能低于美国任何其他大公司：我们税后总部费用占净值的比例不到两个基点（即万分之一）。即便如此，Charlie过去还觉得这个费用比例高得离谱，怪罪于我使用伯克希尔的公司飞机“不可辩护号”。不过，Charlie最近经历了一场“反向启示”：自从我们收购了FlightSafety（主要业务是培训公司飞行员），他现在一提到飞机就眉飞色舞。
说正经的，成本很重要。举例来说，股票型共同基金发生的公司费用——主要是支付给基金管理人的费用——平均约为100个基点，这一收费长期可能使投资者的回报减少10%或更多。Charlie和我不会对伯克希尔的业绩做出任何承诺。但我们向各位承诺：伯克希尔创造的几乎全部收益，最终都会归属股东。我们在这里是为了和你们一起赚钱，而不是从你们身上赚钱。
内在价值与市场价格的关系
去年致股东信中，当时伯克希尔股价为36,000美元，我曾告诉各位：(1) 伯克希尔的市值增长在近年已超越了内在价值的增长——尽管后者同样令人满意；(2) 这种超额表现不可能永远持续；(3) 当时查理和我并不认为伯克希尔被低估。
自写下这些警示以来，伯克希尔的内在价值已大幅提升——GEICO的杰出表现功不可没，稍后我会详述——而我们的股价却几乎未变。这自然意味着，1996年伯克希尔股票的表现跑输了其业务。因此，今日的股价与价值关系，与一年前已大不相同，而且——在查理和我看来——更为合理了。
长期而言，伯克希尔股东的整体收益必然与公司的业务收益相匹配。当股票暂时跑赢或跑输业务时，少数股东——无论是卖方还是买方——会以交易对手为代价获得超额收益。在这场游戏中，老手通常比新手更有优势。
尽管我们的首要目标是最大化伯克希尔股东从其所有权中获得的整体收益，我们也希望尽量减少部分股东以其他股东为代价而获益的情况。如果我们管理的是一个家族合伙企业，这些目标同样适用，而且我们相信，对于上市公司的管理者来说，这些目标同样合理。在合伙企业里，公平要求合伙人进出时，合伙权益得到公平估值；在上市公司中，当市场价格与内在价值同步时，公平便得以实现。显然，两者不会总是吻合，但一位管理者——通过其政策与沟通——可以大大促进公平的实现。
当然，股东持有股票的时间越长，伯克希尔的业务成果对其财务体验的影响就越大——而他买入和卖出时相对于内在价值的溢价或折价也就越不重要。这也是我们希望吸引长期持有者的原因之一。总体而言，我认为我们在这方面取得了成功。在大型美国公司中，伯克希尔的股东中长线持有者的比例可能位居第一。
---
**1996年的收购**
1996年我们完成了两起收购，它们都具备我们寻求的特质——出色的业务经济性和杰出的管理者。
第一起是Kansas Bankers Surety (KBS，堪萨斯银行家担保公司)，这是一家保险公司，其名称已点明专营领域。该公司的业务遍及22个州，承销业绩卓越，这一切归功于杰出管理者Don Towle的努力。Don与数百位银行家建立了直接关系，对自己业务的每个细节了如指掌。他视自己为经营一家"他的"公司——这正是我们在伯克希尔珍视的态度。由于规模相对较小，我们将KBS归入我们持股80%的子公司Wesco，后者一直希望扩大其保险业务。
你们或许会对伯克希尔拿下这笔交易时所运用的精心策划且高明的收购策略感兴趣。1996年初，我受邀参加侄媳Jane Rogers的40岁生日派对。我生性不喜社交，于是立刻——以我一贯的优雅方式——开始找借口不去。派对策划者随后祭出妙招，安排我坐在我始终欣赏的一个人——Jane的父亲Roy Dinsdale——旁边，于是我就去了。
派对是在1月26日举行的。虽然音乐很吵——为什么乐队非得按分贝收费似的演奏？——我还是勉强听到罗伊说，他刚参加完堪萨斯银行家保证保险（Kansas Bankers Surety）的董事会会议，这家公司我一直很欣赏。我大声回喊，让他如果这家公司要出售，一定通知我。
2月12日，我收到罗伊的来信："亲爱的沃伦：随信附上堪萨斯银行家保证保险的年度财务资料。这就是我们在简妮的派对上聊到的那家公司。如果还需要我帮忙，请随时告诉我。"2月13日，我告诉罗伊，我们愿意出价7500万美元收购这家公司——不久我们就达成了交易。我现在正盘算着怎么才能被邀请参加简的下一次派对。
我们1996年的另一笔收购——飞行安全国际（FlightSafety International），全球飞行员培训领域的领导者——规模要大得多，约15亿美元，但起源同样充满机缘。这个故事的主角首先是理查德·瑟瑟（Richard Sercer），一位图森市的航空顾问，其次是他妻子阿尔玛·墨菲（Alma Murphy），哈佛医学院眼科毕业，她在1990年说服了本不情愿的丈夫，买入了伯克希尔的股票。从那以后，两人每年都参加我们的年度股东大会，但我一直没与他们私下认识。
幸运的是，理查德也是飞行安全的长期股东，去年他忽然想到，这两家公司很合适。他知道我们的收购标准，也觉得飞行安全79岁的CEO阿尔·尤尔奇（Al Ueltschi）可能愿意做一笔交易，既能给他的公司找个好归宿，又能获得一种他愿意终生持有的对价证券。于是7月，理查德写信给所罗门公司（Salomon Inc）的CEO鲍勃·德纳姆（Bob Denham），建议他探索合并的可能性。
鲍勃接手了这件事，9月18日，阿尔和我在纽约见面。我一直很熟悉飞行安全的业务，大约60秒内，我就知道阿尔正是我们想要的那种经理人。一个月后，我们签了合同。由于查理和我希望尽量减少伯克希尔股票的发行，我们设计的交易方案给了飞行安全股东现金或股票的选择，但条款上鼓励那些对税负不敏感的股东选择现金。这种引导的结果是，大约51%的飞行安全股份换成了现金，41%换成了伯克希尔A类股，8%换成了伯克希尔B类股。
阿尔一生热爱航空，实际上曾为查尔斯·林德伯格（Charles Lindbergh）驾驶过飞机。在1930年代做过巡回飞行表演后，他开始为传奇的泛美航空（Pan Am）总裁胡安·特里普（Juan Trippe）工作。1951年，还在泛美航空时，阿尔创立了飞行安全，随后将其发展成模拟机制造商和全球飞行员培训机构（涵盖单引擎、直升机、喷气机和海上机型）。该公司在41个地点运营，配备175台模拟机，机型从非常小的塞斯纳210到波音747。模拟机可不便宜——一台可能高达1900万美元——因此这项业务与我们的许多运营不同，属于资本密集型。公司约一半收入来自企业飞行员培训，其余大部分来自航空公司和军方。
阿尔可能79岁了，但他看起来和行动起来都像55岁。他将像过去一样继续负责运营：我们从不瞎动成功模式。我告诉他，虽然我们不相信拆股伯克希尔的股票，但等他到100岁时，我们会对他的年龄进行2比1的拆细。
一位旁观者可能会从我们的招聘实践中得出结论：查理和我在早年曾被平等就业机会委员会（EEOC）关于年龄歧视的通告深深伤害过。但真正的解释其实是利己主义：老狗学不会新把戏。伯克希尔许多年过七旬的经理人，今天仍然像当年他们作为年轻重炮手时那样频频打出本垒打。因此，想在我们这儿谋份差事，不妨效仿那位76岁老兄的策略——他说服了一位25岁的绝色美女嫁给他。“你到底是怎么让她接受的？”嫉妒的同龄人问。他回敬道：“我告诉她我86岁。”
* * * * * * * * * * * *
现在插播我们的例行广告：如果你拥有一家经济特质良好的大型企业，并希望与一组同样特质卓越的企业群为伍，伯克希尔很可能就是你要找的归宿。我们的要求列在第21页。如果你的公司符合条件——而且我碰巧没能出席你下一次的生日派对——给我打个电话。
保险业务——概览
我们的保险业务在1996年表现非凡。无论是直接保险（我们的主力是GEICO），还是“超级巨灾”再保险业务，业绩都极为出色。
正如我们在过去报告中解释过的，对保险业务而言，重要的首先是我们的“浮存金”规模，其次是它的成本。这些事你必须理解，因为浮存金是伯克希尔内在价值的重要组成部分，而它并不反映在账面价值上。
首先，浮存金是我们持有但并不拥有的资金。在保险业务中，浮存金的产生是因为保费在赔付之前就已收取。其次，保险公司收取的保费通常不足以覆盖它最终必须支付的赔付和费用。这就造成了“承销损失”——这就是浮存金的成本。如果一家保险公司长期的平均浮存金成本低于它通过其他方式获取资金的成本，那么这项业务就有价值。但如果浮存金成本高于市场利率，这项业务就是一只沉重负担。
如下表所示，伯克希尔的保险业务是一个巨大的赢家。在表格中，我们通过以下方式计算浮存金（相对于保费规模，我们的浮存金生成量很大）：将损失准备金、损失调整准备金、承担再保险项下持有的资金以及未赚保费准备金相加，再减去代理余额、预付购置成本、预付税款以及适用于承担再保险的递延费用。浮存金的成本由我们的承销亏损或盈利决定。在那些我们有承销盈利的年份（比如过去四年），我们的浮存金成本为负。实际上，我们是收钱来持有资金。
(1) (2) 年末长期
承销损失 平均浮存金 近似资金成本 政府债券收益率
------------ ------------- ---------------- -------------
（单位：百万美元） （1与2的比率）
1967.......... 盈利 17.3 低于零 5.50%
1968.......... 盈利 19.9 低于零 5.90%
1969.......... 盈利 23.4 低于零 6.79%
1970.......... 0.37 32.4 1.14% 6.25%
1971.......... 盈利 52.5 低于零 5.81%
1972.......... 盈利 69.5 低于零 5.82%
1973.......... 盈利 73.3 低于零 7.27%
1974.......... 7.36 79.1 9.30% 8.13%
1975.......... 11.35 87.6 12.96% 8.03%
1976.......... 盈利 102.6 低于零 7.30%
1977.......... 盈利 139.0 低于零 7.97%
1978.......... 盈利 190.4 低于零 8.93%
1979.......... 盈利 227.3 低于零 10.08%
1980.......... 盈利 237.0 低于零 11.94%
1981.......... 盈利 228.4 低于零 13.61%
1982.......... 21.56 220.6 9.77% 10.64%
1983.......... 33.87 231.3 14.64% 11.84%
1984.......... 48.06 253.2 18.98% 11.58%
1985.......... 44.23 390.2 11.34% 9.34%
1986.......... 55.84 797.5 7.00% 7.60%
1987.......... 55.43 1,266.7 4.38% 8.95%
1988.......... 11.08 1,497.7 0.74% 9.00%
1989.......... 24.40 1,541.3 1.58% 7.97%
1990.......... 26.65 1,637.3 1.63% 8.24%
1991.......... 119.59 1,895.0 6.31% 7.40%
1992.......... 108.96 2,290.4 4.76% 7.39%
1993.......... 盈利 2,624.7 低于零 6.35%
1994.......... 盈利 3,056.6 低于零 7.88%
1995.......... 盈利 3,607.2 低于零 5.95%
1996.......... 盈利 6,702.0 低于零 6.64%
自1967年我们进入保险业务以来，浮存金以每年22.3%的复利速度增长。在大多数年份，我们的资金成本都低于零。这种获取“免费”资金的渠道极大地提升了伯克希尔的业绩。此外，收购GEICO（政府雇员保险公司）大大增加了我们继续获取更多“免费”资金的可能性。
**超级巨灾保险**
与过去三年一样，我们再次强调，伯克希尔报告的出色业绩部分源于我们的超级巨灾业务今年运气不错。在这项业务中，我们销售保单给保险公司和再保险公司，以保护它们免受特大灾难的影响。由于真正的大灾难很少发生，我们的超级巨灾业务在大多数年份预计会显示大额利润——偶尔会记录一次巨额亏损。换句话说，超级巨灾业务的吸引力需要很多年才能衡量。然而，你必须明白的是，超级巨灾业务出现真正糟糕的年份不是一种可能性——而是一种确定性。唯一的问题是什么时候到来。
我强调这个令人沮丧的观点，是因为我不希望你在听说某次大灾难让我们损失惨重后惊慌失措，抛售伯克希尔的股票。如果你倾向于那样反应，那你现在就不该持有伯克希尔股票，正如如果市场暴跌会让你恐慌抛售，你就应该完全避免持有股票一样。根据“可怕”的消息抛售优质企业通常是一个糟糕的决定。（Robert Woodruff，这位商业天才用几十年时间打造了可口可乐并持有该公司大量股份，曾有人问他何时是卖出可口可乐股票的好时机。Woodruff的回答很简单：“我不知道。我从来没卖过一股。”）
在我们的超级巨灾业务中，客户是那些面临重大盈利波动并希望减少这种波动的保险公司。我们销售的产品——以我们认为合适的价格——是将这种波动转移到我们自己的账面上。伯克希尔的盈利波动丝毫不会让我们困扰：查理和我宁愿获得一条起伏不平的15%长期回报，也不愿要一条平滑的12%。（毕竟，我们的盈利每天都在剧烈波动——凭什么我们要求它在每次地球绕太阳公转时都保持平滑？）然而，只有当我们的股东/合伙人也能接受这种波动时，我们才对这种想法感到最自在，这也是我们一再重复警示的原因。
我们在1996年承接了一些大规模的超级巨灾风险。年中，我们与好事达（Allstate）签了一份承包佛罗里达飓风的合同，尽管没有明确的记录能证明这一点，但我们相信这是当时一家公司为自身账户承担过的最大单笔巨灾风险。不过，同年晚些时候，我们为加州地震局（California Earthquake Authority）承保了一项保单，该保单于1997年4月1日生效，并且我们面临的可能损失是佛罗里达合同下可能损失的两倍以上。我们再次将所有风险保留在自身账户。尽管这些承保范围很大，但对于真正的超级巨灾，伯克希尔税后“最坏情况”下的损失可能不超过6亿美元，这不到我们账面价值的3%，市值的1.5%。要想了解这种风险敞口的大小，可以看看第2页的表格，注意证券市场给我们带来的波动要大得多。
在超级巨灾业务中，我们有三大竞争优势。第一，从我们这里购买再保险的各方都知道，在最不利的情况下，我们既有能力也会履行赔付。如果真的发生一场灾难性的大灾，随之而来的很可能是一场金融恐慌。如果发生这种情况，很可能会有一些声誉良好的再保险公司，恰好在客户面临特殊需求时难以支付。事实上，我们从不将承保的部分风险“转分保”出去的原因之一，就是我们对灾难来临时能否从别人那里收到赔款心存疑虑。当伯克希尔做出承诺时，投保人确信他们能及时收到赔付。
我们的第二个优势——有点关联——虽微妙但很重要。在一场超级巨灾之后，保险公司很可能会发现难以获得再保险，尽管那时它们对保障的需求尤其大。在这种时候，伯克希尔毫无疑问会拥有非常充裕的承保能力——但能够优先利用它的自然是我们长期合作的客户。这一商业现实使全球主要保险公司和再保险公司都认识到与我们做生意的可取之处。实际上，我们目前从再保险公司那里收取了可观的“备用”费用，这些公司只是为了在市场收紧时确保能从我们这里获得保障。
我们的最后一个竞争优势是，我们能够提供行业其他任何地方都无法匹敌或接近的大额美元保障。寻找巨额保障的保险公司知道，只要给伯克希尔打一个电话，就能得到一个确定且即时的报价。
关于我们在加州地震上的最大风险敞口——似乎有必要解释几句。1994年的北岭地震给保险公司带来的房主损失，远超计算机模型此前预估的水平。然而，那次地震的烈度与加州“最坏情况”的可能性相比还算温和。可以理解的是，保险公司变得——嗯哼——震动了，并开始考虑从他们的房主保单中撤出地震险。
加利福尼亚州保险专员 Chuck Quackenbush 设计了一项全新的住宅地震保险政策，由一家州政府资助的保险机构——加州地震局（The California Earthquake Authority）承保。该机构于1996年12月1日开始运营，需要大量分保——这正是我们的切入点。如果该机构在截至2001年3月31日的期间内累计损失超过约50亿美元，伯克希尔提供的约10亿美元分保层将被触发。（媒体最初报道的数字更大，但那只有在所有加州保险公司都参与该计划时才适用；实际只有72%的保险公司签约。）
那么，我们在保单有效期内实际需要赔付的概率有多大？我们不知道——也不认为计算机模型能帮上忙，因为我们相信它们预测的精确性不过是幻影。事实上，这类模型可能让决策者产生虚假的安全感，从而增加他们犯下巨大错误的几率。我们在保险和投资领域都已目睹过这样的惨剧。看看"投资组合保险"吧——它在1987年市场崩盘中的破坏性效果曾让一位风趣的人说，真正该跳窗的是那些计算机。
即使风险评估无法做到尽善尽美，保险公司仍可以理性承保。毕竟，你不需要知道一个人的确切年龄，也能知道他已到了投票的年龄；不需要知道他的精确体重，也知道他需要节食。在保险业中，必须记住几乎所有的意外都是不愉快的，基于这一点，我们努力为超级巨灾风险定价，使得总保费中大约90%最终会用于赔付和费用。随着时间的推移，我们会知道我们的定价有多明智，但这不会很快显现。超级巨灾业务就像投资业务一样，通常需要很长时间才能发现你是否真的知道自己在做什么。
不过，我可以肯定地说，我们拥有世界上最优秀的超级巨灾业务运营者：Ajit Jain，他对伯克希尔的价值无比巨大。在再保险领域，灾难性的提案比比皆是。我知道这一点，因为我在1970年代亲身拥抱了太多这样的提案，同时GEICO也有大量由1980年代早期签订的愚蠢保单形成的未了责任——尽管当时的GEICO管理层能力出色。Ajit，我可以向你保证，他不会犯这类错误。
我提到过，一场超级巨灾可能会引发金融市场灾难，这种可能性虽小但并非牵强。如果这场灾难是加州地震，震级大到足以触发我们的承保，我们几乎肯定会以其他方式遭受损失。例如，时思糖果、富国银行和房地美可能受到严重冲击。但总的来说，我们能够应对这些风险敞口的叠加。
在这方面，和其他方面一样，我们试图对伯克希尔的未来进行"逆向推演"，牢记Charlie的箴言："我只想知道我会死在哪里，这样我就永远不会去那里。"（逆向思维真的管用：试着倒着唱乡村西部歌曲，你会很快重新得到你的房子、车子和妻子。）如果我们不能容忍某种可能的结果——无论多么遥远——我们就会避开种下它的种子。这就是为什么我们不大量举债，也是为什么我们要确保超级巨灾业务的损失——尽管其上限听起来很大——不会对伯克希尔的内在价值造成重大影响。
保险——GEICO及其他主营业务
去年早些时候，我们对GEICO（政府雇员保险公司）实现了全资收购，当时期望很高——而如今样样都超额兑现了。无论从业务角度还是从个人角度来看，都是如此：GEICO的运营主管Tony Nicely是一位卓越的经理人，与他共事令人愉快。几乎在任何条件下，GEICO都会是一笔格外宝贵的资产。有Tony掌舵，它正达到几年前公司上下还认为不可能的业绩水平。
GEICO的成功并没有什么玄妙之处：公司的竞争优势直接源于其低成本运营商的地位。低成本带来低价格，低价格吸引并留住优质保单持有人。良性循环的最后一环，是保单持有人向朋友推荐我们。GEICO每年收到超过100万次推荐，这些推荐带来了我们一半以上的新业务——这一优势为我们节省了巨额获客开支，进而使我们的成本更低。
这套模式在1996年为GEICO带来了巨大成功：自愿汽车保单数量增长了10%。在之前的20年里，公司年度最高增长率仅为8%，而且只达到过一次。更妙的是，自愿保单的增长在年内还加速了，主要得益于非标准市场的大幅增长——这个市场在GEICO一直属于欠开发领域。我在此专注于自愿保单，是因为我们从指定风险池等渠道获得的非自愿业务无利可图。那个领域的增长最不受欢迎。
如果增长没有带来合理的承销利润，那便毫无意义。这方面消息也不错：去年我们达到了承销目标，甚至还有超出。不过，我们的目标不是扩大利润率，而是扩大我们提供给客户的价格优势。基于这一策略，我们相信1997年的增长将轻易超越去年。
我们预计会有新竞争者进入直接回应市场，一些现有竞争者也可能进行地域扩张。尽管如此，我们所享受的规模经济应能让我们维持甚至加宽围绕经济城堡的护城河。在市场渗透率高的地区，我们的成本控制得最好。随着保单数量增长，同时渗透率也得以提升，我们预计将大幅降低单位成本。GEICO可持续的成本优势，早在1951年就吸引了我——当时整个公司的估值仅为700万美元。也正是出于这个原因，我认为Berkshire（伯克希尔·哈撒韦）去年应该为当时尚未拥有的49%股权支付23亿美元。
要让一家优秀企业的成果最大化，需要管理能力和专注力。幸运的是，我们拥有Tony这样一位卓越的管理者，他的业务专注从未动摇。为了让整个GEICO组织也像他一样专注，我们需要一套同样高度聚焦的薪酬计划——收购完成后我们立即落实了一套。
如今，从Tony起，数十位高管的奖金仅依据两个关键变量：(1)自愿汽车保单的增长；(2)成熟汽车业务的承销盈利水平（即账龄超过一年的保单）。此外，我们还用同样的标准来计算公司利润分享计划的年度贡献额。GEICO的每个人都清楚什么才是重要的。
GEICO的计划 exemplifies 伯克希尔的激励薪酬原则：目标必须 (1) 针对具体运营业务的经济特性量身定制；(2) 性质简单，便于衡量实现程度；(3) 与参与者的日常工作直接挂钩。作为推论，我们摒弃“彩票式”安排——比如伯克希尔的股票期权，其最终价值（从零到巨幅）完全不受我们希望激励对象的行为控制。在我们看来，这种产生反复无常回报的机制不仅对股东是种浪费，甚至可能削弱我们所看重的经理人专注行为。
每个季度，GEICO的9000名员工都能看到决定我们利润分享计划贡献额的业绩结果。1996年，他们享受了这种体验，因为该计划的实际表现彻底超越了年初设定的图表刻度。连我都知道解决办法：把图表放大。最终，业绩要求拨出创纪录的16.9%（4000万美元）作为贡献，而此前同类计划五年的平均贡献率不到10%。此外，在伯克希尔，我们从不因业绩出色而提高门槛。如果GEICO的表现持续改善，我们乐意继续制作更大的图表。
Lou Simpson继续以卓越的方式管理GEICO的资金：去年，他投资组合中的股票跑赢标普500指数6.2个百分点。在Lou负责的GEICO运营部分，我们再次将薪酬与业绩挂钩——但挂钩的是四年期的投资业绩，而非承销结果或整个GEICO的表现。我们认为，对于保险公司而言，如果业务的一边（承销或投资）表现杰出，而另一边却可能因糟糕表现完全抵消，却仍按整体公司业绩发放奖金，那是愚蠢的。如果你在伯克希尔打出0.350的打击率，即使团队其他成员只有0.200，你也可以确信自己会得到相应的报酬。幸运的是，我们在Lou和Tony这两个关键位置上都有名人堂级别的选手。
* * * * * * * * * * * *
尽管规模比GEICO小，但我们其他主要保险业务去年同样交出了惊艳的成绩单。National Indemnity的传统业务综合成本率为74.2，并且像往常一样，相对于保费规模积累了大量的浮存金。过去三年，由Don Wurster管理的这部分业务平均综合成本率为83.0。由Rod Eldred管理的本州业务综合成本率为87.1，尽管这包含了向新州扩张的费用。Rod的三年综合成本率惊人地低至83.2。伯克希尔由Brad Kinstler在加州管理的工伤赔偿业务现已扩展到另外六个州，尽管扩张成本高昂，但仍再次实现了优异的承保利润。最后，Central States Indemnity的John Kizer在保费规模上创下新纪录，同时从承保中获得了可观的收益。总体而言，我们较小的保险业务（现包括Kansas Bankers Surety）的承保记录在业内几乎无与伦比。Don、Rod、Brad和John都为伯克希尔创造了巨大价值，我们相信未来还有更多。
税收
1961年，肯尼迪总统曾说，我们不应问国家能为我们做什么，而应问我们能为国家做什么。去年，我们决定试试他的建议——谁说问问不会有坏处呢？我们被告知要向美国财政部缴纳8.6亿美元的所得税。
下面是这份关于这一数字的一点背景：如果只有另外 2,000 名纳税人支付了同样多的钱，那么政府在 1996 年就能实现预算平衡，而无需从其他任何美国人那里征收一分钱的税——无论是所得税、社保税还是其他任何税种。伯克希尔股东可以真诚地说：“我已经在办公室捐过了。”
查理和我认为伯克希尔大额纳税是完全恰当的。我们对社会福祉的贡献最多只是与它对我们的贡献成比例。伯克希尔在美国繁荣昌盛，换作任何其他地方都不可能。
报告盈利来源
下表显示了伯克希尔报告盈利的主要来源。在此列示中，购买会计调整没有被分配到它们所适用的具体业务，而是汇总后单独列示。这样您就可以看到我们的业务就像我们没有收购它们时所报告的那样。原因在第 65 和 66 页讨论过，这种列示方式在我们看来比使用美国通用会计准则（GAAP）的方式对投资者和管理者更有用，因为 GAAP 要求购买溢价逐项业务摊销。当然，我们表中展示的总盈利与经审计财务报表中的 GAAP 总数一致。
（百万美元）
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伯克希尔应占净利润
（税后及扣除少数股东权益）
税前利润
---------------- -------------------
1996 1995(1) 1996 1995(1)
------- -------- ------- -------
营业利润：
保险集团：
承销.....................$ 222.1 $ 20.5 $ 142.8 $ 11.3
净投资收益................ 726.2 501.6 593.1 417.7
布法罗新闻报................... 50.4 46.8 29.5 27.3
费奇海默..................... 17.3 16.9 9.3 8.8
金融业务..................... 23.1 20.8 14.9 12.6
家居业务..................... 43.8 29.7(2) 24.8 16.7(2)
珠宝业务...................... 27.8 33.9(3) 16.1 19.1(3)
柯比.......................... 58.5 50.2 39.9 32.1
斯科特·费策尔制造集团....... 50.6 34.1 32.2 21.2
喜诗糖果...................... 51.9 50.2 30.8 29.8
鞋业集团..................... 61.6 58.4 41.0 37.5
世界图书..................... 12.6 8.8 9.5 7.0
购买会计调整................. (75.7) (27.0) (70.5) (23.4)
利息支出(4).................. (94.3) (56.0) (56.6) (34.9)
股东指定捐款................. (13.3) (11.6) (8.5) (7.0)
其他......................... 58.8 37.4 34.8 24.4
------- -------- -------- -------
营业利润.......................1,221.4 814.7 883.1 600.2
证券出售......................2,484.5 194.1 1,605.5 125.0
------- -------- -------- -------
所有实体总盈利................$3,705.9 $1,008.8 $2,488.6 $ 725.2
======= ======== ======== =======
(1) 与GEICO相关的重述之前。
(2) 包括1995年6月29日起的R.C. Willey。
(3) 包括1995年4月30日起的Helzberg's（赫兹伯格）。
(4) 不含金融业务利息支出。
去年在这一节里，我讨论了三家收益下滑的企业——布法罗新闻报（Buffalo News）、鞋业集团（Shoe Group）和世界图书公司（World Book）。我很高兴地说，它们在1996年全都实现了增长。
不过，世界图书公司并不轻松：尽管它已成为国内唯一的百科全书直销商（大英百科全书去年退出了该领域），其销量仍有所下降。此外，世界图书斥巨资开发了一款新的CD-ROM产品，直到1997年年初与IBM联合推出后才开始产生收入。面对这些因素，要不是世界图书改革了分销方式并削减了总部的管理费用，从而大幅降低了固定成本，其收益恐怕早已化为乌有。总体而言，该公司在确保其在印刷和电子市场长期生存能力方面取得了长足进步。
去年我们唯一的遗憾在于珠宝业务：Borsheim's（波仙珠宝）表现不错，但Helzberg's（赫兹伯格）却遭遇收益大幅下滑。其费用水平原本是根据同店销售额的大幅增长来设定的，这与近年来的增长一致。然而当销售额变得持平时，利润率便下降了。赫兹伯格的首席执行官Jeff Comment正在果断处理费用问题，公司的收益应在1997年得到改善。
总体而言，我们的运营业务表现出色，远超行业平均水平。为此，查理和我感谢我们的经理们。如果您在股东年会上见到他们中的任何一位，也请一并致谢。
关于我们各项业务的更多信息，请参见第36-46页，您也可以在那里找到按美国通用会计准则（GAAP）报告的各分部收益。此外，在第51-57页，我们按非GAAP口径将伯克希尔的财务数据重新划分为四个分部，这种列报方式与查理和我的公司思考方式一致。我们的意图是向您提供我们希望在角色互换时您能提供给我们的财务信息。
"透视盈余"
报告收益并不能很好地衡量伯克希尔的经济进展，部分原因在于前面表格中显示的数字仅包括我们从被投资公司收到的股息——尽管这些股息通常只占我们所有权对应收益的一小部分。我们并非在意这种资金划分，因为总体而言，我们认为被投资公司未分配的收益比已分配的部分对我们更有价值。原因很简单：我们的被投资公司常常有机会以高回报率将收益进行再投资。那我们为何要它们把收益分给我们呢？
不过，为了更贴近伯克希尔的经济现实，我们采用了"透视盈余"的概念。按照我们的计算，它由以下部分组成：（1）上一节报告的营业利润，加上；（2）我们占主要被投资公司留存营业利润的份额（这些利润按照美国通用会计准则未反映在我们的利润中），减去；（3）如果这些被投资公司留存收益已分配给我们，伯克希尔应付税款的备抵金额。在此处统计"营业利润"时，我们剔除了购买法会计调整以及资本利得和其他重大非经常性项目。
以下表格列示了我们1996年的透视盈余，但我得提醒您，这些数字只能是近似值，因为它们是基于若干主观判断得出的。（这些被投资公司支付给我们的股息已计入第12页详列的经营利润中，主要归在“保险集团：净投资收益”项下。）
伯克希尔应占
未分配经营利润
伯克希尔主要被投资公司 伯克希尔年底持股比例(1) （单位：百万美元）(2)
美国运通公司（American Express Company）....... 10.5% $ 132
可口可乐公司（The Coca-Cola Company）.......... 8.1% 180
华特迪士尼公司（The Walt Disney Company）...... 3.6% 50
联邦住房贷款抵押公司（Federal Home Loan Mortgage Corp.） 8.4% 77
吉列公司（The Gillette Company）............... 8.6% 73
麦当劳公司（McDonald's Corporation）.......... 4.3% 38
华盛顿邮报公司（The Washington Post Company）.. 15.8% 27
富国银行（Wells Fargo & Company）.............. 8.0% 84
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伯克希尔应占主要被投资公司未分配收益.......... 661
对这些未分配被投资公司收益的假设税负(3)....... (93)
伯克希尔报告的经营利润........................ 954
------
伯克希尔透视盈余合计.......................... $1,522
======
(1) 未计入归属于少数股东权益的股份
(2) 按当年平均持股比例计算
(3) 所使用的税率为14%，即伯克希尔对其收到的股息所支付的税率
### 普通股投资
下文列示我们的普通股投资。其中市值超过5亿美元的投资单独列出。
1996年12月31日
持股数 公司 成本* 市值
（单位：百万美元）
49,456,900 美国运通公司（American Express Company）... $1,392.7 $ 2,794.3
200,000,000 可口可乐公司（The Coca-Cola Company）...... 1,298.9 10,525.0
24,614,214 华特迪士尼公司（The Walt Disney Company）.. 577.0 1,716.8
64,246,000 联邦住房贷款抵押公司（Federal Home Loan Mortgage Corp.） 333.4 1,772.8
48,000,000 吉列公司（The Gillette Company）............. 600.0 3,732.0
30,156,600 麦当劳公司（McDonald's Corporation）....... 1,265.3 1,368.4
1,727,765 华盛顿邮报公司（The Washington Post Company） 10.6 579.0
7,291,418 富国银行（Wells Fargo & Company）.......... 497.8 1,966.9
其他....................................... 1,934.5 3,295.4
-------- --------
普通股合计................................. $7,910.2 $27,750.6
======== ========
- 代表税基成本，总额比美国通用会计准则成本低12亿美元。
我们的投资组合变化不大：我们继续在打瞌睡时赚得比忙活时更多。
不动对我们来说是一种明智的行为。无论是我们还是大多数企业经理，都不会因为有人预测美联储贴现率将小幅变动，或某位华尔街权威人士改变了市场观点，就疯狂地交易那些利润丰厚的子公司。那么，对于我们在优秀企业中的少数股权，我们为什么要采取不同的做法呢？成功投资上市公司的艺术，与成功收购子公司的艺术并无太大区别。在这两种情况下，你只需要以合理的价格，买入一家经济前景卓越、管理层能干且诚实的企业。此后，你只需关注这些品质是否得以保持即可。
如果执行得当，这种投资策略往往会使实践者持有少数几只证券，而这些证券最终会占据其投资组合的很大比例。这位投资者如果采取类似的政策，购买比如说一批杰出大学篮球明星未来收入的20%，结果也会类似。其中少数人会成为NBA球星，投资者从他们身上获得的收益很快就会主导他的版税收入流。如果建议这位投资者出售其最成功投资的一部分，仅仅因为它们已经主导了他的投资组合，那就好比建议芝加哥公牛队交易迈克尔·乔丹，因为他已经对球队变得如此重要。
在研究我们对子公司和普通股所做的投资时，你会发现我们偏爱那些不太可能经历重大变化的企业和行业。原因很简单：无论进行哪种类型的购买，我们寻找的都是我们认为从现在起十年或二十年后几乎必然拥有巨大竞争优势的业务。快速变化的行业环境或许能带来巨大收益的机会，但它排除了我们所追求的那种确定性。
我要强调，作为公民，查理和我欢迎变化：新思想、新产品、新流程等等有助于提高我们国家的生活水平，这显然是好事情。然而，作为投资者，我们对一个变革活跃的行业的反应，很像我们对太空探索的态度：我们为这项事业鼓掌，但宁愿不搭乘这趟旅程。
显然，所有企业都在某种程度上发生变化。如今，See's 与我们在1972年购买它时相比，在很多方面都不同了：它提供了不同的糖果品种，使用了不同的机器，并通过不同的分销渠道销售。但人们今天购买盒装巧克力的原因，以及他们为什么从我们这里而不是别人那里购买，与1920年代 See 家族创建这项业务时几乎如出一辙。而且，这些动机在未来20年甚至50年内也不太可能改变。
我们在可流通证券中也寻找同样的可预测性。以可口可乐为例：在 Roberto Goizueta 的领导下，可口可乐产品的销售热情和想象力蓬勃增长，他为股东创造价值的工作绝对令人难以置信。在 Don Keough 和 Doug Ivester 的协助下，Roberto 重新思考并改进了公司的方方面面。但业务的基本面——那些支撑可口可乐竞争优势和惊人经济状况的品质——多年来始终如一。
我最近在翻阅1896年的可口可乐（Coke）年报（你会觉得自己的阅读进度落后了吧！）。那时，可口可乐虽然已经是领先的软饮料，但才诞生了十年。然而，它未来一百年的蓝图已经描绘好了。当年销售额为14.8万美元，公司总裁阿萨·坎德勒（Asa Candler）说："我们从未松懈过努力，要走向全世界，教导人们可口可乐（Coca-Cola）是让所有人健康和愉悦的首屈一指的产品。"尽管"健康"可能有点夸张，但我喜欢的一点是，一个世纪后的今天，可口可乐仍然沿用着坎德勒的基本主题。坎德勒接着说道，就像现在的罗伯托（Roberto）也会说的那样："同类产品中，从来没有哪一款能这样深入人心。"顺带一提，当年糖浆销量是116,492加仑，而1996年大约是32亿加仑。
我忍不住再引用一句坎德勒的话："从今年3月1日起……我们雇用了十名巡回推销员，配合办公室的系统化信函联系，几乎覆盖了合众国的全部领土。"这才是我心目中的销售队伍。
像可口可乐和吉列（Gillette）这样的公司，完全可以被称为"必然赢家"。预测者们对它们未来十年或二十年的软饮料或剃须设备业务量，或许在具体数字上有些分歧。我们谈论"必然性"，也不是要贬低这些公司在制造、分销、包装和产品创新等领域必须持续做好的重要工作。但最终，任何理性的观察者——甚至这些公司最激烈的竞争对手，如果他们诚实评估的话——都不会怀疑，可口可乐和吉列将在整整一代投资者的时间里，主宰全球的各自领域。事实上，它们的统治地位很可能还会加强。过去十年，两家公司已经在原本巨大的市场份额上大幅扩张，所有迹象都表明，未来十年它们会重演这种表现。
显然，许多高科技或新兴行业的公司，其增长率百分比远远超过这些"必然赢家"。但我宁愿要一个确定的好结果，也不要一个可能的大好结果。
当然，即使查理和我找了一辈子，也只能识别出少数几个"必然赢家"。光靠领导地位并不能保证确定性：看看几年前通用汽车（General Motors）、IBM和西尔斯（Sears）受到的冲击，它们都曾长期享有看似不可战胜的优势。尽管有些行业或业务线赋予领导者几乎不可逾越的护城河，使得"最强者生存"几乎成为自然规律，但大多数行业并非如此。因此，每有一个"必然赢家"，就有几十个"冒牌货"——这些公司现在风头正劲，但容易受到竞争攻击。考虑到成为"必然赢家"需要什么条件，查理和我认识到，我们永远也凑不出一个"漂亮50"，甚至连"闪亮20"都凑不出来。因此，在我们投资组合中的"必然赢家"之外，我们还会加入几个"高度可能者"。
当然，即使是最好的生意，你也可能付过高的价格。这种多付的风险会周期性出现，而且在我们看来，对于几乎所有股票的买家（包括"必然赢家"在内），这种风险现在可能相当高。在过热的市场上买入的投资者需要认识到，即使是一家卓越的公司，其价值追上买入价，也往往需要很长一段时间。
一个远为严重的问题发生在伟大公司的管理层分心之时——他们忽视了本已出色的基本业务，却去收购平庸甚至更差的生意。一旦如此，投资者的痛苦往往被延长。不幸的是，这正是多年前可口可乐和吉列身上发生的事（你能相信吗？几十年前，可口可乐在养虾，吉列在找油？）。每当我们考虑投资那些整体看来出色的企业时，最让查理和我担忧的就是专注力的丧失。我们见过太多次，傲慢或厌倦让管理层心思游移，导致价值停滞不前。不过，这种事情不会再在可口可乐和吉列身上发生了——鉴于他们当前及未来的管理层。
* * * * * * * * * * * *
让我就你自己的投资再多说几句。大多数投资者，无论是机构还是个人，都会发现持有普通股的最佳方式是通过一只收费极低的指数基金。遵循这条路径的人，其净回报（扣除费用后）必定超过绝大多数投资专业人士。
然而，如果你选择构建自己的投资组合，有几个想法值得牢记。明智的投资并不复杂，尽管这远不等于说它容易。投资者需要的是正确评估特定企业的能力。请注意"特定"这个词：你不必成为每家公司的专家，甚至不必成为许多公司的专家。你只需要能够评估那些在你能力圈内的公司。这个圈子的大小并不重要；了解它的边界才是关键。
要成功投资，你不需要理解贝塔、有效市场、现代投资组合理论、期权定价或新兴市场。事实上，你对这些一无所知反而可能更好。当然，这并非大多数商学院的主流观点，那里的金融课程往往被这类主题主导。然而在我们看来，投资学生只需要两门讲授得当的课程——如何评估一家企业，以及如何思考市场价格。
作为投资者，你的目标应该只是以合理价格买入一家容易理解的企业的一部分权益，该企业的盈利几乎可以肯定在五年、十年、二十年后会大幅增长。随着时间的推移，你会发现只有少数公司符合这些标准——所以当你看到一家符合条件时，就应该买入相当数量的股票。你还必须抵制偏离准则的诱惑：如果你不愿意持有一支股票十年，那就连十分钟都不要考虑。构建一个由那些总体盈利逐年向上的公司组成的投资组合，那么投资组合的市场价值也会随之上升。
尽管这一点很少被认识到，但这正是为伯克希尔股东带来收益的精确方法：多年来，我们的透视盈余以相当不错的速度增长，我们的股价也相应上涨。如果这些盈利增长没有实现，伯克希尔的价值也不会有多大提升。
我们如今拥有的已大幅扩大的盈利基础，必然会导致我们未来的收益增长落后于过去。然而，我们将继续朝着我们一贯的方向推进。我们将努力通过经营好现有业务来构建盈利——这之所以容易，是因为我们运营经理非凡的才能——以及通过购买其他企业（整体或部分），这些企业不太可能被变革搅动，并拥有重要的竞争优势。
全美航空
当维珍大西洋航空（Virgin Atlantic Airways）的富豪老板理查德·布兰森（Richard Branson）被问及如何成为百万富翁时，他脱口而出：“这其实没什么难的。先当个亿万富翁，然后买一家航空公司就行了。”你的董事长不愿意盲目相信布兰森的说法，于是在1989年决定亲自验证一下——投资3.58亿美元买入了全美航空（USAir）9.25%的优先股。
我当时欣赏并钦佩该公司当时的CEO埃德·科洛德尼（Ed Colodny），至今仍然如此。但我在分析全美航空业务时，既肤浅又错误。我被该公司长期盈利的辉煌历史，以及持有优先证券似乎能提供的保护所迷惑，以至于忽略了一个关键点：全美航空的收入将日益受到一个放松管制、竞争激烈的市场的影响，而它的成本结构却是从管制保护利润的年代遗留下来的。这些成本如果不加控制，无论该公司的过往记录多么令人放心，都预示着灾难。（如果历史能提供所有答案，福布斯400富豪榜上就该全是图书管理员了。）
然而，要合理化其成本，全美航空需要在劳动合同上做出重大改进——而大多数航空公司发现，除非可信地威胁要申请破产，或者真的进入破产程序，否则这极其难以实现。全美航空也不例外。就在我们买入优先股之后，公司成本与收入之间的失衡开始急剧扩大。1990-1994年间，全美航空累计亏损24亿美元，这一表现彻底抹去了其普通股的账面权益。
在这段时期的大部分时间里，公司仍向我们支付优先股股息，但1994年暂停了支付。不久之后，形势尤其黯淡，我们将这笔投资减记75%，降至8950万美元。此后，在1995年的大部分时间里，我曾提出以面值50%的价格出售我们的股份。幸运的是，我没有成功。
我在全美航空犯下的众多错误中，有一件事我做对了：在投资时，我们在优先股合同中写入了一条有点不同寻常的条款，规定任何拖欠款项将累积“惩罚性股息”——比基准利率高出五个百分点。这意味着，当我们的9.25%股息被拖欠两年时，未支付的款项以13.25%至14%的利率复利累积。
面对这一惩罚条款，全美航空有充分的动力尽快支付拖欠款项。而在1996年下半年，当全美航空恢复盈利时，它确实开始支付，给了我们4790万美元。我们欠该公司CEO斯蒂芬·沃尔夫（Stephen Wolf）一个巨大的人情，是他让这家航空公司实现了盈利，从而使得这笔支付成为可能。即便如此，全美航空近期的业绩在很大程度上还得益于行业顺风，而这种顺风可能具有周期性。该公司仍有基本的成本问题需要解决。
无论如何，全美航空公开交易证券的价格告诉我们，我们的优先股现在很可能值其面值3.58亿美元左右，上下浮动不大。此外，多年来我们累计收取了2.405亿美元的股息（包括1997年收到的3000万美元）。
1996年初，在累积股息尚未支付之前，我曾再次试图脱手我们的持股——这次要价约3.35亿美元。你们很走运：我再次试图在胜利在望时把它搞砸，但又一次失败了。
换个角度说，一位朋友曾问我：“如果你这么有钱，怎么就不够聪明呢？”在回顾了我在全美航空的糟糕表现后，你可能会觉得他说得有道理。
融资事宜
去年，我们向所罗门兄弟公司开出了四张支票，每一次都对他们提供的服务感到满意。其中一笔交易我已经描述过：所罗门作为发起投资银行促成了FlightSafety的收购。第二笔交易中，他们为我们的融资子公司安排了一次小规模的债券发行。
此外，我们还通过所罗门进行了两次规模较大的证券发行，两者都颇具看点。第一次是5月份我们出售了517,500股B类普通股，净募集资金5.65亿美元。正如我之前告诉过你们的，这次发行是为了应对那些威胁要成立的、自称是伯克希尔"翻版"的单位信托基金。这些信托基金会利用我们过去——且显然不可复制的——业绩记录来诱骗天真的小投资者，并向这些无辜者收取高额费用和佣金。
我认为这类信托基金很容易就能卖出价值数十亿美元的份额，而且我也相信，这些信托基金早期的成功销售会催生出更多的同类产品。（在证券行业，只要能卖出去的东西，就一定会有人卖。）与此同时，这些信托基金会不加区分地将发行所得投入固定且有限的伯克希尔股票供应中。可能的结果是：我们的股票出现投机性泡沫。至少在一段时间内，股价的上涨会自我验证，因为它会吸引新一波天真、易受影响的投资者涌入信托基金，并引发更多对伯克希尔股票的购买。
一些选择退出伯克希尔的股东可能觉得这种结果很理想，因为他们可以牺牲那些抱着虚幻希望买入的买家利益来获利。然而，一旦现实到来，留下的股东就会遭殃，因为到那时伯克希尔将背负着数十万不快乐的间接所有者（即信托持有人）以及受损的声誉。
我们发行B股不仅阻止了这些信托基金的销售，还为那些在听到我们发出的警告后仍希望投资伯克希尔的人提供了一个低成本的方式。为了抑制券商通常对推销新股的热情——因为那才是赚钱的地方——我们安排此次发行的佣金仅为1.5%，这是我们见过的普通股承销中最低的报酬。此外，我们使发行规模无上限，从而赶走了那些指望靠炒作和稀缺性引发短期价格飙升的典型IPO买家。
总体而言，我们努力确保B股只被具有长期眼光的投资者购买。这些努力大体上取得了成功：发行后B股的交易量——衡量"倒手"的粗略指标——远低于新股发行的正常水平。最终，我们增加了约4万名股东，我们相信其中大多数人既了解他们拥有什么，也认同我们的时间跨度。
所罗门在处理这笔非同寻常的交易中表现得无可挑剔。他们的投资银行家完全理解我们试图实现的目标，并根据这些目标量身定制了发行的每一个方面。如果我们的发行是按标准方式构建的，他们赚的钱会多得多——可能多出十倍。但参与的投资银行家完全没有试图往那个方向调整细节。相反，他们提出了与所罗门自身经济利益相悖、但更能确保伯克希尔达成目标的方案。Terry Fitzgerald领导了这项工作，我们感谢他所做的一切。
基于以上背景，去年年底，当我们决定发行一批伯克希尔债券（该债券可交换为我们持有的部分所罗门股份）时，我们再次找到了Terry，这应该不会让你感到意外。这一次，所罗门再次展现了绝对一流的能力，以4.471亿美元的价格售出了面值5亿美元的五年期债券。每张1,000美元的债券可交换为17.65股所罗门股票，并可在三年后按增值价值赎回。考虑到原始发行折价和1%的票面利率，对于那些不将其交换为所罗门股票的持有人，这些证券到期时将提供3%的收益率。但很有可能，这些债券会在到期前被交换。如果发生这种情况，我们在交换前的利息成本将约为1.1%。
近年来，有文章称查理和我对所有投资银行收费感到不满。这种说法大错特错。在过去的30年里——从1967年我们收购National Indemnity（国民赔偿公司）时付给Charlie Heider的支票开始——我们支付了大量的费用，并且乐于支付与业绩相称的费用。就1996年在所罗门兄弟公司的交易而言，我们感到物超所值。
杂项
尽管是个艰难的决定，查理和我还是决定进入20世纪。因此，我们打算将伯克希尔未来的季度和年度报告发布在互联网上，可通过 http://www.berkshirehathaway.com 访问。我们始终会在周六“张贴”这些报告，以便任何感兴趣的人都有充足的时间在交易开始前消化这些信息。我们未来12个月的发布时间安排如下：1997年5月17日、1997年8月16日、1997年11月15日和1998年3月14日。我们也会张贴发布的所有新闻稿。
在某个时候，我们可能会停止邮寄季度报告，而仅仅将它们发布在互联网上。此举将大幅削减成本。此外，我们拥有大量的“名义持有人”股东，并发现向他们分发季度报告的情况非常不稳定：一些持有人收到邮件的时间比别人晚数周。
仅通过互联网发布的缺点是，我们的许多股东没有电脑。然而，这些持有人中的大多数可以轻松在工作单位或通过朋友获得打印件。如果您希望我们继续邮寄季度报告，请告知我们。我们希望能得到您的反馈——首先是从您是否阅读这些报告开始——并且至少在1997年不会做出任何改变。此外，除了在互联网上发布外，我们肯定会继续以目前的形式寄送年度报告。
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大约97.2%的合格股份参与了伯克希尔1996年度的股东指定捐赠计划。捐款总额为1,330万美元，共有3,910家慈善机构受益。股东指定捐赠计划的完整描述见第48-49页。
每年都有少数股东错过该计划，原因要么是他们在规定的登记日没有以自己的名义登记股票，要么是未能在允许的60天期限内将指定表格返还给我们。这令查理和我感到苦恼。但如果回复收到晚了，我们必须拒绝，因为我们不能为某些股东破例，同时拒绝为其他股东破例。
要参与未来的计划，您必须拥有A类股，并且这些股票必须以实际所有者的名义登记，而不是以经纪人、银行或存管机构的代理人名义登记。在1997年8月31日之前未如此登记的股票将没有资格参与1997年度的计划。当您收到表格时，请及时返还，以免被搁置一旁或遗忘。
年度股东大会
我们资本家的伍德斯托克盛会——伯克希尔年度股东大会——将于5月5日（星期一）举行。查理和我非常享受这场盛会，希望您也能来。会议上午9:30开始，中午休息约15分钟（届时会有食物供应——当然，要付钱），然后我们会继续跟铁杆股东们聊到至少下午3:30。去年，我们接待了来自美国全部50个州，以及澳大利亚、希腊、以色列、葡萄牙、新加坡、瑞典、瑞士和英国的参会者。年度股东大会是股东们解答业务相关问题的好时机，因此查理和我会一直待在台上，直到我们开始打瞌睡为止。（真到那一步时，希望您能注意到变化。）
去年参会人数达5,000人，尽管我们在三个会场分散安排，假日会议中心还是不堪重负。今年，由于新发行的B类股，我们的股东人数翻了一番，因此我们将会议地点迁至能容纳约10,000人、且拥有超大停车场的阿克萨本体育馆。会议当天早上7:00开门，8:30我们将——应大家要求——放映一部由我们首席财务官Marc Hamburg制作的全新伯克希尔电影。（在我们公司，没有哪个人能只干一件事。）
克服了我们对于哪怕一丁点商业活动的传奇般的厌恶之后，我们还会在会议厅外的走廊里摆上琳琅满目的伯克希尔产品供您选购。去年我们打破了所有纪录，卖出了1,270磅喜诗糖果、1,143双德克斯特鞋、29,000美元的世界百科全书及相关出版物，以及700套由我们子公司奎库特生产的小刀。此外，许多股东还询问了GEICO汽车保单的事宜。如果您想了解保险方面可能省下的钱，请带上您现有的保单来参会。我们估计，大约40%的股东可以通过向我们投保省下钱来。（我们很想说100%，但保险业务不是这么回事：因为各保险公司在承保判断上存在差异，我们一些股东目前支付的保费已经低于GEICO的费率了。）
随本报告附上的委托材料里有一份附件，说明了如何获取参会所需的入场卡。预计参会人数众多，请尽快预订机票和酒店。美国运通（800-799-6634）很乐意为您安排行程。和往常一样，我们会安排巴士往返于各大酒店与会场之间，会议结束后还会送您去内布拉斯加家具城、波仙珠宝店和机场。
NFM总店位于距阿克萨本约一英里的一处75英亩地块上，工作日营业时间为上午10点至晚上9点，周六上午10点至下午6点，周日中午12点至下午6点。欢迎过来跟"B太太"（Rose Blumkin）打个招呼。她今年103岁了，有时会戴着连接在手推车氧气罐上的氧气面罩。但如果您想跟上她的步伐，需要吸氧的恐怕是您自己。NFM去年销售额约2.65亿美元——这创下了单体家居卖场的纪录——一旦您看过那里的商品和价格，您就会明白为什么了。
波仙珠宝（Borsheim's）平时周日不营业，但今年5月4日将破例从上午10点开到下午6点，专门接待股东。去年那个"股东星期天"，我们创下了波仙的历史纪录——交易笔数、销售额，当然还有每平方英寸的客流密度都前所未有。今年预计又是人满为患，所以周日来的股东务必带上入场券。如果想避开过于拥挤的场面，周六（营业时间上午10点到下午5点半）或周一（上午10点到晚上8点）来也能享受同样的特别待遇。今年随时欢迎光临，让波仙的CEO Susan Jacques和她那帮技艺高超的伙计们，给您来一场无痛"钱包切除术"。
我最钟爱的牛排馆——戈拉特（Gorat's）——去年年会那个周末早就被订满了，尽管周日下午4点还加了一轮座。从4月1日起（别提前），您可以拨打电话402-551-3733预订。周日逛完波仙后，我会去戈拉特，照例点一份三分熟的T骨牛排和双份薯饼。我还推荐另一道——这也是我和得力助手Debbie Bosanek去吃午饭时的标配——热烤牛肉三明治配土豆泥和肉汁。报Debbie的名字，人家会多给您一份肉汁。
5月3日（周六）晚上，奥马哈皇家队（Omaha Royals）和印第安纳波利斯印第安人队（Indianapolis Indians）将在罗森布拉特体育场（Rosenblatt Stadium）打棒球。按照我的常规轮换——一年只投一球——我会首发登场。
罗森布拉特体育场外表看着正常，实则大不寻常：球场坐落在一个特殊的地质结构上，偶尔会释放出短时引力波，导致哪怕最平稳的投球也会剧烈下坠。过去我多次中招，希望今年天气能配合。比赛现场有很多拍照机会，但要想抓拍我那直冲本垒的快速球，您的手速可得快得惊人。
我们的股东委托书里附有获取球票的信息。我们还会提供一份信息包，列出周日晚上营业的餐馆，并介绍周末在奥马哈可以做的各种事。伯克希尔的全体同仁期待与您相见。
沃伦·E·巴菲特
董事会主席
1997年2月28日