Note: The following table appears in the printed Annual Report on the facing page of the Chairman's Letter and is referred to in that letter.
Berkshire's Corporate Performance vs. the S&P 500

Year		Annual Percentage Change		Relative Results (1)-(2)
		in Per-Share Book Value of Berkshire (1)	in S&P 500 with Dividends Included (2)
1965		23.8	10.0	13.8
1966		20.3	(11.7)	32.0
1967		11.0	30.9	(19.9)
1968		19.0	11.0	8.0
1969		16.2	(8.4)	24.6
1970		12.0	3.9	8.1
1971		16.4	14.6	1.8
1972		21.7	18.9	2.8
1973		4.7	(14.8)	19.5
1974		5.5	(26.4)	31.9
1975		21.9	37.2	(15.3)
1976		59.3	23.6	35.7
1977		31.9	(7.4)	39.3
1978		24.0	6.4	17.6
1979		35.7	18.2	17.5
1980		19.3	32.3	(13.0)
1981		31.4	(5.0)	36.4
1982		40.0	21.4	18.6
1983		32.3	22.4	9.9
1984		13.6	6.1	7.5
1985		48.2	31.6	16.6
1986		26.1	18.6	7.5
1987		19.5	5.1	14.4
1988		20.1	16.6	3.5
1989		44.4	31.7	12.7
1990		7.4	(3.1)	10.5
1991		39.6	30.5	9.1
1992		20.3	7.6	12.7
1993		14.3	10.1	4.2
1994		13.9	1.3	12.6
1995		43.1	37.6	5.5
1996		31.8	23.0	8.8
1997		34.1	33.4	.7
1998		48.3	28.6	19.7
1999		.5	21.0	(20.5)
2000		6.5	(9.1)	15.6
2001		(6.2)	(11.9)	5.7
2002		10.0	(22.1)	32.1
Average Annual Gain – 1965-2002		22.2	10.0	12.2
Overall Gain – 1964-2002		214,433	3,663

Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.

BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 2002 was \$6.1 billion, which increased the per-share book value of both our Class A and Class B stock by 10.0%. Over the last 38 years (that is, since present management took over) per-share book value has grown from \$19 to \$41,727, a rate of 22.2% compounded annually.*

In all respects 2002 was a banner year. I'll provide details later, but here's a summary:

• Our various non-insurance operations performed exceptionally well, despite a sluggish economy. A decade ago Berkshire's annual pre-tax earnings from our non-insurance businesses was \$272 million. Now, from our ever-expanding collection of manufacturing, retailing, service and finance businesses, we earn that sum monthly.
• Our insurance group increased its float to \$41.2 billion, a hefty gain of \$5.7 billion. Better yet, the use of these funds in 2002 cost us only 1%. Getting back to low-cost float feels good, particularly after our poor results during the three previous years. Berkshire's reinsurance division and GEICO shot the lights out in 2002, and underwriting discipline was restored at General Re.
• Berkshire acquired some important new businesses – with economic characteristics ranging from good to great, run by managers ranging from great to great. Those attributes are two legs of our “entrance” strategy, the third being a sensible purchase price. Unlike LBO operators and private equity firms, we have no “exit” strategy – we buy to keep. That’s one reason why Berkshire is usually the first – and sometimes the only – choice for sellers and their managers.
• Our marketable securities outperformed most indices. For Lou Simpson, who manages equities at GEICO, this was old stuff. But, for me, it was a welcome change from the last few years, during which my investment record was dismal.

The confluence of these favorable factors in 2002 caused our book-value gain to outstrip the performance of the S&P 500 by 32.1 percentage points. This result is aberrational: Charlie Munger, Berkshire's vice chairman and my partner, and I hope to achieve – at most – an average annual advantage of a few points. In the future, there will be years in which the S&P soundly trounces us. That will in fact almost certainly happen during a strong bull market, because the portion of our assets committed to common stocks has significantly declined. This change, of course, helps our relative performance in down markets such as we had in 2002.

I have another caveat to mention about last year's results. If you've been a reader of financial reports in recent years, you've seen a flood of “pro-forma” earnings statements – tabulations in which managers invariably show “earnings” far in excess of those allowed by their auditors. In these presentations, the CEO tells his owners “don’t count this, don’t count that – just count what makes earnings fat.” Often, a forget-all-this-bad-stuff message is delivered year after year without management so much as blushing.

We've yet to see a pro-forma presentation disclosing that audited earnings were somewhat high. So let's make a little history: Last year, on a pro-forma basis, Berkshire had lower earnings than those we actually reported.

That is true because two favorable factors aided our reported figures. First, in 2002 there was no megacatastrophe, which means that Berkshire (and other insurers as well) earned more from insurance than if losses had been normal. In years when the reverse is true – because of a blockbuster hurricane, earthquake or man-made disaster – many insurers like to report that they would have earned X “except for” the unusual event. The implication is that since such megacats are infrequent, they shouldn’t be counted when “true” earnings are calculated. That is deceptive nonsense. “Except for” losses will forever be part of the insurance business, and they will forever be paid with shareholders’ money.

Nonetheless, for the purposes of this exercise, we'll take a page from the industry's book. For last year, when we didn't have any truly major disasters, a downward adjustment is appropriate if you wish to “normalize” our underwriting result.

Secondly, the bond market in 2002 favored certain strategies we employed in our finance and financial products business. Gains from those strategies will certainly diminish within a year or two – and may well disappear.

Soooo . . . “except for” a couple of favorable breaks, our pre-tax earnings last year would have been about \$500 million less than we actually reported. We’re happy, nevertheless, to bank the excess. As Jack Benny once said upon receiving an award: “I don’t deserve this honor – but, then, I have arthritis, and I don’t deserve that either.”

* * * * * * * * * * * *

We continue to be blessed with an extraordinary group of managers, many of whom haven't the slightest financial need to work. They stick around, though: In 38 years, we've never had a single CEO of a subsidiary elect to leave Berkshire to work elsewhere. Counting Charlie, we now have six managers over 75, and I hope that in four years that number increases by at least two (Bob Shaw and I are both 72). Our rationale: “It’s hard to teach a new dog old tricks.”

Berkshire's operating CEOs are masters of their crafts and run their businesses as if they were their own. My job is to stay out of their way and allocate whatever excess capital their businesses generate. It's easy work.

My managerial model is Eddie Bennett, who was a batboy. In 1919, at age 19, Eddie began his work with the Chicago White Sox, who that year went to the World Series. The next year, Eddie switched to the Brooklyn Dodgers, and they, too, won their league title. Our hero, however, smelled trouble. Changing boroughs, he joined the Yankees in 1921, and they promptly won their first pennant in history. Now Eddie settled in, shrewdly seeing what was coming. In the next seven years, the Yankees won five American League titles.

What does this have to do with management? It’s simple – to be a winner, work with winners. In 1927, for example, Eddie received \$700 for the 1/8th World Series share voted him by the legendary Yankee team of Ruth and Gehrig. This sum, which Eddie earned by working only four days (because New York swept the Series) was roughly equal to the full-year pay then earned by batboys who worked with ordinary associates.

Eddie understood that how he lugged bats was unimportant; what counted instead was hooking up with the cream of those on the playing field. I've learned from Eddie. At Berkshire, I regularly hand bats to many of the heaviest hitters in American business.

Acquisitions

We added some sluggers to our lineup last year. Two acquisitions pending at yearend 2001 were completed: Albecca (which operates under the name Larson-Juhl), the U.S. leader in custom-made picture frames; and Fruit of the Loom, the producer of about $33.3\%$ of the men's and boy's underwear sold in the U.S. and of other apparel as well.

Both companies came with outstanding CEOs: Steve McKenzie at Albecca and John Holland at Fruit. John, who had retired from Fruit in 1996, rejoined it three years ago and rescued the company from the disastrous path it had gone down after he'd left. He's now 70, and I am trying to convince him to make his next retirement coincident with mine (presently scheduled for five years after my death – a date subject, however, to extension).

We initiated and completed two other acquisitions last year that were somewhat below our normal size threshold. In aggregate, however, these businesses earn more than \$60 million pre-tax annually. Both operate in industries characterized by tough economics, but both also have important competitive strengths that enable them to earn decent returns on capital.

The newcomers are:

(a) CTB, a worldwide leader in equipment for the poultry, hog, egg production and grain industries; and
(b) Garan, a manufacturer of children's apparel, whose largest and best-known line is Garanimals®.

These two companies came with the managers responsible for their impressive records: Vic Mancinelli at CTB and Seymour Lichtenstein at Garan.

The largest acquisition we initiated in 2002 was The Pampered Chef, a company with a fascinating history dating back to 1980. Doris Christopher was then a 34-year-old suburban Chicago home economics teacher with a husband, two little girls, and absolutely no business background. Wanting, however, to supplement her family's modest income, she turned to thinking about what she knew best – food preparation. Why not, she wondered, make a business out of marketing kitchenware, focusing on the items she herself had found most useful?

To get started, Doris borrowed \$3,000 against her life insurance policy – all the money ever injected into the company – and went to the Merchandise Mart on a buying expedition. There, she picked up a dozen each of this and that, and then went home to set up operations in her basement.

Her plan was to conduct in-home presentations to small groups of women, gathered at the homes of their friends. While driving to her first presentation, though, Doris almost talked herself into returning home, convinced she was doomed to fail.

But the women she faced that evening loved her and her products, purchased \$175 of goods, and TPC was underway. Working with her husband, Jay, Doris did \$50,000 of business in the first year. Today – only 22 years later – TPC does more than \$700 million of business annually, working through 67,000 kitchen consultants.

I've been to a TPC party, and it's easy to see why the business is a success. The company's products, in large part proprietary, are well-styled and highly useful, and the consultants are knowledgeable and enthusiastic. Everyone has a good time. Hurry to pamperedchef.com on the Internet to find where to attend a party near you.

Two years ago, Doris brought in Sheila O'Connell Cooper, now CEO, to share the management load, and in August they met with me in Omaha. It took me about ten seconds to decide that these were two managers with whom I wished to partner, and we promptly made a deal. Berkshire shareholders couldn't be luckier than to be associated with Doris and Sheila.

* * * * * * * * * * * *

Berkshire also made some important acquisitions last year through MidAmerican Energy Holdings (MEHC), a company in which our equity interest is 80.2%. Because the Public Utility Holding Company Act (PUHCA) limits us to 9.9% voting control, however, we are unable to fully consolidate MEHC's financial statements.

Despite the voting-control limitation – and the somewhat strange capital structure at MEHC it has engendered – the company is a key part of Berkshire. Already it has \$18 billion of assets and delivers our largest stream of non-insurance earnings. It could well grow to be huge.

Last year MEHC acquired two important gas pipelines. The first, Kern River, extends from Southwest Wyoming to Southern California. This line moves about 900 million cubic feet of gas a day and is undergoing a \$1.2 billion expansion that will double throughput by this fall. At that point, the line will carry enough gas to generate electricity for ten million homes.

The second acquisition, Northern Natural Gas, is a 16,600 mile line extending from the Southwest to a wide range of Midwestern locations. This purchase completes a corporate odyssey of particular interest to Omahans.

From its beginnings in the 1930s, Northern Natural was one of Omaha's premier businesses, run by CEOs who regularly distinguished themselves as community leaders. Then, in July, 1985, the company – which in 1980 had been renamed InterNorth – merged with Houston Natural Gas, a business less than half its size. The companies announced that the enlarged operation would be headquartered in Omaha, with InterNorth's CEO continuing in that job.

Within a year, those promises were broken. By then, the former CEO of Houston Natural had taken over the top job at InterNorth, the company had been renamed, and the headquarters had been moved to Houston. These switches were orchestrated by the new CEO – Ken Lay – and the name he chose was Enron.

Fast forward 15 years to late 2001. Enron ran into the troubles we’ve heard so much about and borrowed money from Dynegy, putting up the Northern Natural pipeline operation as collateral. The two companies quickly had a falling out, and the pipeline’s ownership moved to Dynegy. That company, in turn, soon encountered severe financial problems of its own.

MEHC received a call on Friday, July 26, from Dynegy, which was looking for a quick and certain cash sale of the pipeline. Dynegy phoned the right party: On July 29, we signed a contract, and shortly thereafter Northern Natural returned home.

When 2001 began, Charlie and I had no idea that Berkshire would be moving into the pipeline business. But upon completion of the Kern River expansion, MEHC will transport about 8% of all gas used in the U.S. We continue to look for large energy-related assets, though in the electric utility field PUHCA constrains what we can do.

* * * * * * * * * * * *

A few years ago, and somewhat by accident, MEHC found itself in the residential real estate brokerage business. It is no accident, however, that we have dramatically expanded the operation. Moreover, we are likely to keep on expanding in the future.

We call this business HomeServices of America. In the various communities it serves, though, it operates under the names of the businesses it has acquired, such as CBS in Omaha, Edina Realty in Minneapolis and Iowa Realty in Des Moines. In most metropolitan areas in which we operate, we are the clear market leader.

HomeServices is now the second largest residential brokerage business in the country. On one side or the other (or both), we participated in \$37 billion of transactions last year, up 100% from 2001.

Most of our growth came from three acquisitions we made during 2002, the largest of which was Prudential California Realty. Last year, this company, the leading realtor in a territory consisting of Los Angeles, Orange and San Diego Counties, participated in \$16 billion of closings.

In a very short period, Ron Peltier, the company's CEO, has increased HomeServices' revenues – and profits – dramatically. Though this business will always be cyclical, it's one we like and in which we continue to have an appetite for sensible acquisitions.

* * * * * * * * * * * *

Dave Sokol, MEHC's CEO, and Greg Abel, his key associate, are huge assets for Berkshire. They are dealmakers, and they are managers. Berkshire stands ready to inject massive amounts of money into MEHC – and it will be fun to watch how far Dave and Greg can take the business.

The Economics of Property/Casualty Insurance

Our core business — though we have others of great importance — is insurance. To understand Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the long-term outlook for both of these factors.

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, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually 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 a lemon if its cost of float is higher than market rates for money. Moreover, the downward trend of interest rates in recent years has transformed underwriting losses that formerly were tolerable into burdens that move insurance businesses deeply into the lemon category.

Historically, Berkshire has obtained its float at a very low cost. Indeed, our cost has been less than zero in many years; that is, we’ve actually been paid for holding other people’s money. In 2001, however, our cost was terrible, coming in at 12.8%, about half of which was attributable to World Trade Center losses. Back in 1983-84, we had years that were even worse. There’s nothing automatic about cheap float.

The table that follows shows (at intervals) the float generated by the various segments of Berkshire's insurance operations since we entered the business 36 years ago upon acquiring National Indemnity Company (whose traditional lines are included in the segment “Other Primary”). For the table we have calculated our float — which we generate in large amounts relative to our premium volume — by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting insurance-related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance. (Got that?)

Yearend Float (in \$ millions)

Year	GEICO	General Re	Other Reinsurance	Other Primary	Total
1967				20	20
1977			40	131	171
1987			701	807	1,508
1997	2,917		4,014	455	7,386
1998	3,125	14,909	4,305	415	22,754
1999	3,444	15,166	6,285	403	25,298
2000	3,943	15,525	7,805	598	27,871
2001	4,251	19,310	11,262	685	35,508
2002	4,678	22,207	13,396	943	41,224

Last year our cost of float was 1%. As I mentioned earlier, you should temper your enthusiasm about this favorable result given that no megacatastrophe occurred in 2002. We're certain to get one of these disasters periodically, and when we do our float-cost will spike.

Our 2002 results were hurt by 1) a painful charge at General Re for losses that should have been recorded as costs in earlier years, and 2) a “desirable” charge we incur annually for retroactive insurance (see the next section for more about these items). These costs totaled \$1.75 billion, or about 4.6% of float. Fortunately, our overall underwriting experience on 2002 business was excellent, which allowed us, even after the charges noted, to approach a no-cost result.

Absent a megacatastrophe, I expect our cost of float in 2003 to again be very low – perhaps even less than zero. In the rundown of our insurance operations that follows, you will see why I’m optimistic that, over time, our underwriting results will both surpass those achieved by the industry and deliver us investable funds at minimal cost.

Insurance Operations

If our insurance operations are to generate low-cost float over time, they must: (a) underwrite with unwavering discipline; (b) reserve conservatively; and (c) avoid an aggregation of exposures that would allow a supposedly “impossible” incident to threaten their solvency. All of our major insurance businesses, with one exception, have regularly met those tests.

The exception is General Re, and there was much to do at that company last year to get it up to snuff. I'm delighted to report that under Joe Brandon's leadership, and with yeoman assistance by Tad Montross, enormous progress has been made on each of the fronts described.

When I agreed in 1998 to merge Berkshire with Gen Re, I thought that company stuck to the three rules I've enumerated. I had studied the operation for decades and had observed underwriting discipline that was consistent and reserving that was conservative. At merger time, I detected no slippage in Gen Re's standards.

I was dead wrong. Gen Re's culture and practices had substantially changed and unbeknownst to management – and to me – the company was grossly mispricing its current business. In addition, Gen Re had accumulated an aggregation of risks that would have been fatal had, say, terrorists detonated several large-scale nuclear bombs in an attack on the U.S. A disaster of that scope was highly improbable, of course, but it is up to insurers to limit their risks in a manner that leaves their finances rock-solid if the “impossible” happens. Indeed, had Gen Re remained independent, the World Trade Center attack alone would have threatened the company’s existence.

When the WTC disaster occurred, it exposed weaknesses in Gen Re's operations that I should have detected earlier. But I was lucky: Joe and Tad were on hand, freshly endowed with increased authority and eager to rapidly correct the errors of the past. They knew what to do – and they did it.

It takes time for insurance policies to run off, however, and 2002 was well along before we managed to reduce our aggregation of nuclear, chemical and biological risk (NCB) to a tolerable level. That problem is now behind us.

On another front, Gen Re's underwriting attitude has been dramatically altered: The entire organization now understands that we wish to write only properly-priced business, whatever the effect on volume. Joe and Tad judge themselves only by Gen Re's underwriting profitability. Size simply doesn't count.

Finally, we are making every effort to get our reserving right. If we fail at that, we can't know our true costs. And any insurer that has no idea what its costs are is heading for big trouble.

At yearend 2001, General Re attempted to reserve adequately for all losses that had occurred prior to that date and were not yet paid – but we failed badly. Therefore the company’s 2002 underwriting results were penalized by an additional \$1.31 billion that we recorded to correct the estimation mistakes of earlier years. When I review the reserving errors that have been uncovered at General Re, a line from a country song seems apt: “I wish I didn’t know now what I didn’t know then.”

I can promise you that our top priority going forward is to avoid inadequate reserving. But I can't guarantee success. The natural tendency of most casualty-insurance managers is to underreserve, and they must have a particular mindset – which, it may surprise you, has nothing to do with actuarial expertise – if they are to overcome this devastating bias. Additionally, a reinsurer faces far more difficulties in reserving properly than does a primary insurer. Nevertheless, at Berkshire, we have generally been successful in our reserving, and we are determined to be at General Re as well.

In summary, I believe General Re is now well positioned to deliver huge amounts of no-cost float to Berkshire and that its sink-the-ship catastrophe risk has been eliminated. The company still possesses the important competitive strengths that I’ve outlined in the past. And it gained another highly significant advantage last year when each of its three largest worldwide competitors, previously rated AAA, was demoted by at least one rating agency. Among the giants, General Re, rated AAA across-the-board, is now in a class by itself in respect to financial strength.

No attribute is more important. Recently, in contrast, one of the world's largest reinsurers – a company regularly recommended to primary insurers by leading brokers – has all but ceased paying claims, including those both valid and due. This company owes many billions of dollars to hundreds of primary insurers who now face massive write-offs. “Cheap” reinsurance is a fool’s bargain: When an insurer lays out money today in exchange for a reinsurer’s promise to pay a decade or two later, it’s dangerous – and possibly life-threatening – for the insurer to deal with any but the strongest reinsurer around.

Berkshire shareholders owe Joe and Tad a huge thank you for their accomplishments in 2002. They worked harder during the year than I would wish for anyone – and it is paying off.

* * * * * * * * * * * *

At GEICO, everything went so well in 2002 that we should pinch ourselves. Growth was substantial, profits were outstanding, policyholder retention was up and sales productivity jumped significantly. These trends continue in early 2003.

Thank Tony Nicely for all of this. As anyone who knows him will attest, Tony has been in love with GEICO for 41 years – ever since he went to work for the company at 18 – and his results reflect this passion. He is proud of the money we save policyholders – about \$1 billion annually versus what other insurers, on average, would have charged them. He is proud of the service we provide these policyholders: In a key industry survey, GEICO was recently ranked above all major competitors. He is proud of his 19,162 associates, who last year were awarded profit-sharing payments equal to 19% of their base salary because of the splendid results they achieved. And he is proud of the growing profits he delivers to Berkshire shareholders.

GEICO took in \$2.9 billion in premiums when Berkshire acquired full ownership in 1996. Last year, its volume was \$6.9 billion, with plenty of growth to come. Particularly promising is the company's Internet operation, whose new business grew by 75% last year. Check us out at GEICO.com (or call 800-847-7536). In most states, shareholders get a special 8% discount.

Here's one footnote to GEICO's 2002 earnings that underscores the need for insurers to do business with only the strongest of reinsurers. In 1981-1983, the managers then running GEICO decided to try their hand at writing commercial umbrella and product liability insurance. The risks seemed modest: the company took in only \$3,051,000 from this line and used almost all of it – \$2,979,000 – to buy reinsurance in order to limit its losses. GEICO was left with a paltry \$72,000 as compensation for the minor portion of the risk that it retained. But this small bite of the apple was more than enough to make the experience memorable. GEICO's losses from this venture now total a breathtaking \$94.1 million or about 130,000% of the net premium it received. Of the total loss, uncollectable receivables from deadbeat reinsurers account for no less than \$90.3 million (including \$19 million charged in 2002). So much for “cheap” reinsurance.

* * * * * * * * * * * *

Ajit Jain's reinsurance division was the major reason our float cost us so little last year. If we ever put a photo in a Berkshire annual report, it will be of Ajit. In color!

Ajit's operation has amassed \$13.4 billion of float, more than all but a handful of insurers have ever built up. He accomplished this from a standing start in 1986, and even now has a workforce numbering only 20. And, most important, he has produced underwriting profits.

His profits are particularly remarkable if you factor in some accounting arcana that I am about to lay on you. So prepare to eat your spinach (or, alternatively, if debits and credits aren't your thing, skip the next two paragraphs).

Ajit’s 2002 underwriting profit of \$534 million came after his operation recognized a charge of \$428 million attributable to “retroactive” insurance he has written over the years. In this line of business, we assume from another insurer the obligation to pay up to a specified amount for losses they have already incurred – often for events that took place decades earlier – but that are yet to be paid (for example, because a worker hurt in 1980 will receive monthly payments for life). In these arrangements, an insurer pays us a large upfront premium, but one that is less than the losses we expect to pay. We willingly accept this differential because a) our payments are capped, and b) we get to use the money until loss payments are actually made, with these often stretching out over a decade or more. About 80% of the \$6.6 billion in asbestos and environmental loss reserves that we carry arises from capped contracts, whose costs consequently can’t skyrocket.

When we write a retroactive policy, we immediately record both the premium and a reserve for the expected losses. The difference between the two is entered as an asset entitled “deferred charges – reinsurance assumed.” This is no small item: at yearend, for all retroactive policies, it was \$3.4 billion. We then amortize this asset downward by charges to income over the expected life of each policy. These charges – \$440 million in 2002, including charges at Gen Re – create an underwriting loss, but one that is intentional and desirable. And even after this drag on reported results, Ajit achieved a large underwriting gain last year.

We want to emphasize, however, that we assume risks in Ajit's operation that are huge – far larger than those retained by any other insurer in the world. Therefore, a single event could cause a major swing in Ajit's results in any given quarter or year. That bothers us not at all: As long as we are paid appropriately, we love taking on short-term volatility that others wish to shed. At Berkshire, we would rather earn a lumpy 15% over time than a smooth 12%.

If you see Ajit at our annual meeting, bow deeply.

* * * * * * * * * * * *

Berkshire's smaller insurers had an outstanding year. Their aggregate float grew by $38\%$ , and they realized an underwriting profit of \$32 million, or $4.5\%$ of premiums. Collectively, these operations would make one of the finest insurance companies in the country.

Included in these figures, however, were terrible results in our California workers' compensation operation. There, we have work to do. There, too, our reserving severely missed the mark. Until we figure out how to get this business right, we will keep it small.

For the fabulous year they had in 2002, we thank Rod Eldred, John Kizer, Tom Nerney, Don Towle and Don Wurster. They added a lot of value to your Berkshire investment.

Sources of Reported Earnings

The table that follows shows the main sources of Berkshire's reported earnings. You will notice that “Purchase-Accounting Adjustments” dropped sharply in 2002, the reason being that GAAP rules changed then, no longer requiring the amortization of goodwill. This change increases our reported earnings, but has no effect on our economic earnings.

	(in millions)
	Pre-Tax Earnings		Berkshire’s Share of Net Earnings(after taxes and Minority interests)
	2002	2001	2002	2001
Operating Earnings:
Insurance Group:
Underwriting – General Re	$(1,393)	$(3,671)	$(930)	$(2,391)
Underwriting – Berkshire Group	534	(647)	347	(433)
Underwriting – GEICO	416	221	271	144
Underwriting – Other Primary	32	30	20	18
Net Investment Income	3,050	2,824	2,096	1,968
Apparel(1)	229	(33)	156	(28)
Building Products(2)	516	461	313	287
Finance and Financial Products Business	1,016	519	659	336
Flight Services	225	186	133	105
MidAmerican Energy (80% owned)	613	565	359	230
Retail Operations	166	175	97	101
Scott Fetzer (excluding finance operation)	129	129	83	83
Shaw Industries(3)	424	292	258	156
Other Businesses	256	212	160	131
Purchase-Accounting Adjustments	(119)	(726)	(65)	(699)
Corporate Interest Expense	(86)	(92)	(55)	(60)
Shareholder-Designated Contributions	(17)	(17)	(11)	(11)
Other	19	25	12	16
Operating Earnings	6,010	453	3,903	(47)
Capital Gains from Investments	603	1,320	383	842
Total Earnings – All Entities	$6,613	$1,773	$4,286	$ 795

(1) Includes Fruit of the Loom from April 30, 2002 and Garan from September 4, 2002.
(2) Includes Johns Manville from February 27, 2001 and MiTek from July 31, 2001.
$^{(3)}$ From date of acquisition, January 8, 2001.

Here's a summary of major developments at our non-insurance businesses:

• MidAmerican Energy's earnings grew in 2002 and will likely do so again this year. Most of the increase, both present and expected, results from the acquisitions described earlier. To fund these, Berkshire purchased \$1,273 million of MidAmerican junior debt (bringing our total holdings of these 11% obligations to \$1,728 million) and also invested \$402 million in a “common-equivalent” stock. We now own (on a fully-diluted basis) 80.2% of MidAmerican’s equity. MidAmerican’s financial statements are presented in detail on page 37.
• Last year I told you of the problems at Dexter that led to a huge loss in our shoe business. Thanks to Frank Rooney and Jim Issler of H.H. Brown, the Dexter operation has been turned around. Despite the cost of unwinding our problems there, we earned \$24 million in shoes last year, an upward swing of \$70 million from 2001.

Randy Watson at Justin also contributed to this improvement, increasing margins significantly while trimming invested capital. Shoes are a tough business, but we have terrific managers and believe that in the future we will earn reasonable returns on the capital we employ in this operation.

- In a so-so year for home-furnishing and jewelry retailers, our operations did well. Among our eight retailing operations, the best performer was Homemaker's in Des Moines. There, the talented Merschman family achieved outstanding gains in both sales and profits.

Nebraska Furniture Mart will open a new blockbuster store in metropolitan Kansas City in August. With 450,000 square feet of retail space, it could well produce the second largest volume of any furniture store in the country – the Omaha operation being the national champion. I hope Berkshire shareholders in the Kansas City area will come out for the opening (and keep coming).

- Our home and construction-related businesses – Acme Brick, Benjamin Moore Paint, Johns-Manville, MiTek and Shaw – delivered \$941 million of pre-tax earnings last year. Of particular significance was Shaw’s gain from \$292 million in 2001 to \$424 million. Bob Shaw and Julian Saul are terrific operators. Carpet prices increased only 1% last year, but Shaw’s productivity gains and excellent expense control delivered significantly improved margins.

We cherish cost-consciousness at Berkshire. Our model is the widow who went to the local newspaper to place an obituary notice. Told there was a 25-cents-a-word charge, she requested “Fred Brown died.” She was then informed there was a seven-word minimum. “Okay” the bereaved woman replied, “make it ‘Fred Brown died, golf clubs for sale’.”

- Earnings from flight services increased last year – but only because we realized a special pre-tax gain of \$60 million from the sale of our 50% interest in FlightSafety Boeing. Without this gain, earnings from our training business would have fallen slightly in concert with the slowdown in business-aviation activity. FlightSafety training continues to be the gold standard for the industry, and we expect growth in the years to come.

At NetJets, our fractional-ownership operation, we are the runaway leader of the four-company field. FAA records indicate that our industry share in 2002 was 75%, meaning that clients purchased or leased planes from us that were valued at triple those recorded by our three competitors combined. Last year, our fleet flew 132.7 million nautical miles, taking clients to 130 countries.

Our preeminence is directly attributable to Rich Santulli, NetJets' CEO. He invented the business in 1986 and ever since has exhibited an unbending devotion to the highest levels of service, safety and security. Rich, Charlie and I insist on planes (and personnel) worthy of carrying our own families – because they regularly do.

Though NetJets revenues set a record in 2002, the company again lost money. A small profit in the U.S. was more than offset by losses in Europe. Overall, the fractional-ownership industry lost significant sums last year, and that is almost certain to be the outcome in 2003 as well. The bald fact is that airplanes are costly to operate.

Over time, this economic reality should work to our advantage, given that for a great many companies, private aircraft are an essential business tool. And for most of these companies, NetJets makes compelling sense as either a primary or supplementary supplier of the aircraft they need.

Many businesses could save millions of dollars annually by flying with us. Indeed, the yearly savings at some large companies could exceed \$10 million. Equally important, these companies would actually increase their operational capabilities by using us. A fractional ownership of a single NetJets plane allows a client to have several planes in the air simultaneously. Additionally, through the interchange arrangement we make available, an owner of an interest in one plane can fly any of 12 other models, using whatever plane makes most sense for a mission. (One of my sisters owns a fraction of a Falcon 2000, which she uses for trips to Hawaii, but – exhibiting the Buffett gene – she interchanges to a more economical Citation Excel for short trips in the U.S.)

The roster of NetJets users confirms the advantages we offer major businesses. Take General Electric, for example. It has a large fleet of its own but also has an unsurpassed knowledge of how to utilize aircraft effectively and economically. And it is our largest customer.

- Our finance and financial products line covers a variety of operations, among them certain activities in high-grade fixed-income securities that proved highly profitable in 2002. Earnings in this arena will probably continue for a while, but are certain to decrease – and perhaps disappear – in time.

This category also includes a highly satisfactory – but rapidly diminishing – income stream from our Berkadia investment in Finova (described in last year's report). Our partner, Leucadia National Corp., has managed this operation with great skill, willingly doing far more than its share of the heavy lifting. I like this division of labor and hope to join with Leucadia in future transactions.

On the minus side, the Finance line also includes the operations of General Re Securities, a derivatives and trading business. This entity lost \$173 million pre-tax last year, a result that, in part, is a belated acknowledgment of faulty, albeit standard, accounting it used in earlier periods. Derivatives, in fact, deserve an extensive look, both in respect to the accounting their users employ and to the problems they may pose for both individual companies and our economy.

Derivatives

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.

Having delivered that thought, which I'll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts. Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn't want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.

But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That's true because today's earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.

Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one's commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

Of course, both internal and outside auditors review the numbers, but that's no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.

The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”

I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have \$6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.

In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.

Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.

Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for weeks, was far from a worst-case scenario.

One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.

Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don't understand how much risk the institution is running.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Investments

Below we show our common stock investments. Those that had a market value of more than \$500 million at the end of 2002 are itemized.

Shares	Company	12/31/02
		Cost	Market
		(dollars in millions)
151,610,700	American Express Company	$ 1,470	$ 5,359
200,000,000	The Coca-Cola Company	1,299	8,768
96,000,000	The Gillette Company	600	2,915
15,999,200	H&R Block, Inc.	255	643
6,708,760	M&T Bank	103	532
24,000,000	Moody’s Corporation	499	991
1,727,765	The Washington Post Company	11	1,275
53,265,080	Wells Fargo & Company	306	2,497
	Others	4,621	5,383
	Total Common Stocks	$9,164	$28,363

We continue to do little in equities. Charlie and I are increasingly comfortable with our holdings in Berkshire's major investees because most of them have increased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don't yet believe their shares are undervalued.

In our view, the same conclusion fits stocks generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.

The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks – if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6½-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.

Last year we were, however, able to make sensible investments in a few “junk” bonds and loans. Overall, our commitments in this sector sextupled, reaching \$8.3 billion by yearend.

Investing in junk bonds and investing in stocks are alike in certain ways: Both activities require us to make a price-value calculation and also to scan hundreds of securities to find the very few that have attractive reward/risk ratios. But there are important differences between the two disciplines as well. In stocks, we expect every commitment to work out well because we concentrate on conservatively financed businesses with strong competitive strengths, run by able and honest people. If we buy into these companies at sensible prices, losses should be rare. Indeed, during the 38 years we have run the company's affairs, gains from the equities we manage at Berkshire (that is, excluding those managed at General Re and GEICO) have exceeded losses by a ratio of about 100 to one.

Purchasing junk bonds, we are dealing with enterprises that are far more marginal. These businesses are usually overloaded with debt and often operate in industries characterized by low returns on capital. Additionally, the quality of management is sometimes questionable. Management may even have interests that are directly counter to those of debtholders. Therefore, we expect that we will have occasional large losses in junk issues. So far, however, we have done reasonably well in this field.

Corporate Governance

Both the ability and fidelity of managers have long needed monitoring. Indeed, nearly 2,000 years ago, Jesus Christ addressed this subject, speaking (Luke 16:2) approvingly of “a certain rich man” who told his manager, “Give an account of thy stewardship; for thou mayest no longer be steward.”

Accountability and stewardship withered in the last decade, becoming qualities deemed of little importance by those caught up in the Great Bubble. As stock prices went up, the behavioral norms of managers went down. By the late '90s, as a result, CEOs who traveled the high road did not encounter heavy traffic.

Most CEOs, it should be noted, are men and women you would be happy to have as trustees for your children's assets or as next-door neighbors. Too many of these people, however, have in recent years behaved badly at the office, fudging numbers and drawing obscene pay for mediocre business achievements. These otherwise decent people simply followed the career path of Mae West: “I was Snow White but I drifted.”

In theory, corporate boards should have prevented this deterioration of conduct. I last wrote about the responsibilities of directors in the 1993 annual report. (We will send you a copy of this discussion on request, or you may read it on the Internet in the Corporate Governance section of the 1993 letter.) There, I said that directors “should behave as if there was a single absentee owner, whose long-term interest they should try to further in all proper ways.” This means that directors must get rid of a manager who is mediocre or worse, no matter how likable he may be. Directors must react as did the chorus-girl bride of an 85-year-old multimillionaire when he asked whether she would love him if he lost his money. “Of course,” the young beauty replied, “I would miss you, but I would still love you.”

In the 1993 annual report, I also said directors had another job: “If able but greedy managers overreach and try to dip too deeply into the shareholders’ pockets, directors must slap their hands.” Since I wrote that, over-reaching has become common but few hands have been slapped.

Why have intelligent and decent directors failed so miserably? The answer lies not in inadequate laws – it’s always been clear that directors are obligated to represent the interests of shareholders – but rather in what I’d call “boardroom atmosphere.”

It's almost impossible, for example, in a boardroom populated by well-mannered people, to raise the question of whether the CEO should be replaced. It's equally awkward to question a proposed acquisition that has been endorsed by the CEO, particularly when his inside staff and outside advisors are present and unanimously support his decision. (They wouldn't be in the room if they didn't.) Finally, when the compensation committee – armed, as always, with support from a high-paid consultant – reports on a megagrant of options to the CEO, it would be like belching at the dinner table for a director to suggest that the committee reconsider.

These “social” difficulties argue for outside directors regularly meeting without the CEO – a reform that is being instituted and that I enthusiastically endorse. I doubt, however, that most of the other new governance rules and recommendations will provide benefits commensurate with the monetary and other costs they impose.

The current cry is for “independent” directors. It is certainly true that it is desirable to have directors who think and speak independently – but they must also be business-savvy, interested and shareholder-oriented. In my 1993 commentary, those are the three qualities I described as essential.

Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were “independent” as defined by today’s rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence.

So that we may further see the failings of “independence,” let’s look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent.

These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities: obtaining the best possible investment manager and negotiating with that manager for the lowest possible fee. When you are seeking investment help yourself, those two goals are the only ones that count, and directors acting for other investors should have exactly the same priorities. Yet when it comes to independent directors pursuing either goal, their record has been absolutely pathetic.

Many thousands of investment-company boards meet annually to carry out the vital job of selecting who will manage the savings of the millions of owners they represent. Year after year the directors of Fund A select manager A, Fund B directors select manager B, etc. ... in a zombie-like process that makes a mockery of stewardship. Very occasionally, a board will revolt. But for the most part, a monkey will type out a Shakespeare play before an “independent” mutual-fund director will suggest that his fund look at other managers, even if the incumbent manager has persistently delivered substandard performance. When they are handling their own money, of course, directors will look to alternative advisors – but it never enters their minds to do so when they are acting as fiduciaries for others.

The hypocrisy permeating the system is vividly exposed when a fund management company – call it “A” – is sold for a huge sum to Manager “B”. Now the “independent” directors experience a “counter-revelation” and decide that Manager B is the best that can be found – even though B was available (and ignored) in previous years. Not so incidentally, B also could formerly have been hired at a far lower rate than is possible now that it has bought Manager A. That’s because B has laid out a fortune to acquire A, and B must now recoup that cost through fees paid by the A shareholders who were “delivered” as part of the deal. (For a terrific discussion of the mutual fund business, read John Bogle’s Common Sense on Mutual Funds.)

A few years ago, my daughter was asked to become a director of a family of funds managed by a major institution. The fees she would have received as a director were very substantial, enough to have increased her annual income by about 50% (a boost, she will tell you, she could use!). Legally, she would have been an independent director. But did the fund manager who approached her think there was any chance that she would think independently as to what advisor the fund should employ? Of course not. I am proud to say that she showed real independence by turning down the offer. The fund, however, had no trouble filling the slot (and – surprise – the fund has not changed managers).

Investment company directors have failed as well in negotiating management fees (just as compensation committees of many American companies have failed to hold the compensation of their CEOs to sensible levels). If you or I were empowered, I can assure you that we could easily negotiate materially lower management fees with the incumbent managers of most mutual funds. And, believe me, if directors were promised a portion of any fee savings they realized, the skies would be filled with falling fees. Under the current system, though, reductions mean nothing to “independent” directors while meaning everything to managers. So guess who wins?

Having the right money manager, of course, is far more important to a fund than reducing the manager's fee. Both tasks are nonetheless the job of directors. And in stepping up to these all-important responsibilities, tens of thousands of “independent” directors, over more than six decades, have failed miserably. (They’ve succeeded, however, in taking care of themselves; their fees from serving on multiple boards of a single “family” of funds often run well into six figures.)

When the manager cares deeply and the directors don't, what's needed is a powerful countervailing force – and that's the missing element in today's corporate governance. Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners – big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior. In my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved.

Unfortunately, certain major investing institutions have “glass house” problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men.

The acid test for reform will be CEO compensation. Managers will cheerfully agree to board “diversity,” attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.

In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees. (If you can't tell whose side someone is on, they are not on yours.) True, each committee is required by the SEC to state its reasoning about pay in the proxy. But the words are usually boilerplate written by the company's lawyers or its human-relations department.

This costly charade should cease. Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners. They should explain both how they think about pay and how they measure performance. Dealing with shareholders' money, moreover, they should behave as they would were it their own.

In the 1890s, Samuel Gompers described the goal of organized labor as “More!” In the 1990s, America’s CEOs adopted his battle cry. The upshot is that CEOs have often amassed riches while their shareholders have experienced financial disasters.

Directors should stop such piracy. There's nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it's time for directors to shout "Less!" It would be a travesty if the bloated pay of recent years became a baseline for future compensation. Compensation committees should go back to the drawing boards.

* * * * * * * * * * * *

Rules that have been proposed and that are almost certain to go into effect will require changes in Berkshire's board, obliging us to add directors who meet the codified requirements for “independence.”

Doing so, we will add a test that we believe is important, but far from determinative, in fostering independence: We will select directors who have huge and true ownership interests (that is, stock that they or their family have purchased, not been given by Berkshire or received via options), expecting those interests to influence their actions to a degree that dwarfs other considerations such as prestige and board fees.

That gets to an often-overlooked point about directors' compensation, which at public companies averages perhaps \$50,000 annually. It baffles me how the many directors who look to these dollars for perhaps 20% or more of their annual income can be considered independent when Ron Olson, for example, who is on our board, may be deemed not independent because he receives a tiny percentage of his very large income from Berkshire legal fees. As the investment company saga suggests, a director whose moderate income is heavily dependent on directors' fees – and who hopes mightily to be invited to join other boards in order to earn more fees – is highly unlikely to offend a CEO or fellow directors, who in a major way will determine his reputation in corporate circles. If regulators believe that “significant” money taints independence (and it certainly can), they have overlooked a massive class of possible offenders.

At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance. Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don't provide them with officers' and directors' liability insurance (an unorthodoxy that, not so incidentally, has saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our directors to be driven by the effect their decisions will have on their family's net worth, not by their compensation. That's the equation for Charlie and me as managers, and we think it's the right one for Berkshire directors as well.

To find new directors, we will look through our shareholders list for people who directly, or in their family, have had large Berkshire holdings – in the millions of dollars – for a long time. Individuals making that cut should automatically meet two of our tests, namely that they be interested in Berkshire and shareholder-oriented. In our third test, we will look for business savvy, a competence that is far from commonplace.

Finally, we will continue to have members of the Buffett family on the board. They are not there to run the business after I die, nor will they then receive compensation of any kind. Their purpose is to ensure, for both our shareholders and managers, that Berkshire's special culture will be nurtured when I'm succeeded by other CEOs.

Any change we make in the composition of our board will not alter the way Charlie and I run Berkshire. We will continue to emphasize substance over form in our work and waste as little time as possible during board meetings in show-and-tell and perfunctory activities. The most important job of our board is likely to be the selection of successors to Charlie and me, and that is a matter upon which it will focus.

The board we have had up to now has overseen a shareholder-oriented business, consistently run in accord with the economic principles set forth on pages 68-74 (which I urge all new shareholders to read). Our goal is to obtain new directors who are equally devoted to those principles.

The Audit Committee

Audit committees can't audit. Only a company's outside auditor can determine whether the earnings that a management purports to have made are suspect. Reforms that ignore this reality and that instead focus on the structure and charter of the audit committee will accomplish little.

As we’ve discussed, far too many managers have fudged their company’s numbers in recent years, using both accounting and operational techniques that are typically legal but that nevertheless materially mislead investors. Frequently, auditors knew about these deceptions. Too often, however, they remained silent. The key job of the audit committee is simply to get the auditors to divulge what they know.

To do this job, the committee must make sure that the auditors worry more about misleading its members than about offending management. In recent years auditors have not felt that way. They have instead generally viewed the CEO, rather than the shareholders or directors, as their client. That has been a natural result of day-to-day working relationships and also of the auditors' understanding that, no matter what the book says, the CEO and CFO pay their fees and determine whether they are retained for both auditing and other work. The rules that have been recently instituted won't materially change this reality. What will break this cozy relationship is audit committees unequivocally putting auditors on the spot, making them understand they will become liable for major monetary penalties if they don't come forth with what they know or suspect.

In my opinion, audit committees can accomplish this goal by asking four questions of auditors, the answers to which should be recorded and reported to shareholders. These questions are:

1. If the auditor were solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management's argument and the auditor's response should be disclosed. The audit committee should then evaluate the facts.
2. If the auditor were an investor, would he have received – in plain English – the information essential to his understanding the company’s financial performance during the reporting period?
3. Is the company following the same internal audit procedure that would be followed if the auditor himself were CEO? If not, what are the differences and why?
4. Is the auditor aware of any actions – either accounting or operational – that have had the purpose and effect of moving revenues or expenses from one reporting period to another?

If the audit committee asks these questions, its composition – the focus of most reforms – is of minor importance. In addition, the procedure will save time and expense. When auditors are put on the spot, they will do their duty. If they are not put on the spot . . . well, we have seen the results of that.

The questions we have enumerated should be asked at least a week before an earnings report is released to the public. That timing will allow differences between the auditors and management to be aired with the committee and resolved. If the timing is tighter – if an earnings release is imminent when the auditors and committee interact – the committee will feel pressure to rubberstamp the prepared figures. Haste is the enemy of accuracy. My thinking, in fact, is that the SEC’s recent shortening of reporting deadlines will hurt the quality of information that shareholders receive. Charlie and I believe that rule is a mistake and should be rescinded.

The primary advantage of our four questions is that they will act as a prophylactic. Once the auditors know that the audit committee will require them to affirmatively endorse, rather than merely acquiesce to, management's actions, they will resist misdoings early in the process, well before specious figures become embedded in the company's books. Fear of the plaintiff's bar will see to that.

* * * * * * * * * * * *

The Chicago Tribune ran a four-part series on Arthur Andersen last September that did a great job of illuminating how accounting standards and audit quality have eroded in recent years. A few decades ago, an Arthur Andersen audit opinion was the gold standard of the profession. Within the firm, an elite Professional Standards Group (PSG) insisted on honest reporting, no matter what pressures were applied by the client. Sticking to these principles, the PSG took a stand in 1992 that the cost of stock options should be recorded as the expense it clearly was. The PSG's position was reversed, however, by the “rainmaking” partners of Andersen who knew what their clients wanted – higher reported earnings no matter what the reality. Many CEOs also fought expensing because they knew that the obscene megagrants of options they craved would be slashed if the true costs of these had to be recorded.

Soon after the Andersen reversal, the independent accounting standards board (FASB) voted 7-0 for expensing options. Predictably, the major auditing firms and an army of CEOs stormed Washington to pressure the Senate – what better institution to decide accounting questions? – into castrating the FASB. The voices of the protesters were amplified by their large political contributions, usually made with corporate money belonging to the very owners about to be bamboozled. It was not a sight for a civics class.

To its shame, the Senate voted 88-9 against expensing. Several prominent Senators even called for the demise of the FASB if it didn't abandon its position. (So much for independence.) Arthur Levitt, Jr., then Chairman of the SEC – and generally a vigilant champion of shareholders – has since described his reluctant bowing to Congressional and corporate pressures as the act of his chairmanship that he most regrets. (The details of this sordid affair are related in Levitt's excellent book, Take on the Street.)

With the Senate in its pocket and the SEC outgunned, corporate America knew that it was now boss when it came to accounting. With that, a new era of anything-goes earnings reports – blessed and, in some cases, encouraged by big-name auditors – was launched. The licentious behavior that followed quickly became an air pump for The Great Bubble.

After being threatened by the Senate, FASB backed off its original position and adopted an “honor system” approach, declaring expensing to be preferable but also allowing companies to ignore the cost if they wished. The disheartening result: Of the 500 companies in the S&P, 498 adopted the method deemed less desirable, which of course let them report higher “earnings.” Compensation-hungry CEOs loved this outcome: Let FASB have the honor; they had the system.

In our 1992 annual report, discussing the unseemly and self-serving behavior of so many CEOs, I said “the business elite risks losing its credibility on issues of significance to society – about which it may have much of value to say – when it advocates the incredible on issues of significance to itself.”

That loss of credibility has occurred. The job of CEOs is now to regain America's trust – and for the country's sake it's important that they do so. They will not succeed in this endeavor, however, by way of fatuous ads, meaningless policy statements, or structural changes of boards and committees. Instead, CEOs must embrace stewardship as a way of life and treat their owners as partners, not patsies. It's time for CEOs to walk the walk.

* * * * * * * * * * * *

Three suggestions for investors: First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.

Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?

Second, unintelligible footnotes usually indicate untrustworthy management. If you can't understand a footnote or other managerial explanation, it's usually because the CEO doesn't want you to. Enron's descriptions of certain transactions still baffle me.

Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers).

Charlie and I not only don't know today what our businesses will earn next year – we don't even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.

Shareholder-Designated Contributions

About 97.3% of all eligible shares participated in Berkshire's 2002 shareholder-designated contributions program, with contributions totaling \$16.5 million.

Cumulatively, over the 22 years of the program, Berkshire has made contributions of \$197 million pursuant to the instructions of our shareholders. The rest of Berkshire's giving is done by our subsidiaries, which stick to the philanthropic patterns that prevailed before they were acquired (except that their former owners themselves take on the responsibility for their personal charities). In aggregate, our subsidiaries made contributions of \$24 million in 2002, including in-kind donations of \$4 million.

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, 2003 will be ineligible for the 2003 program. When you get the contributions form from us, return it promptly so that it does not get put aside or forgotten. Designations received after the due date will not be honored.

The Annual Meeting

This year's annual meeting will be held on Saturday, May 3, and once again we will be at the Civic Auditorium. The doors will open at 7 a.m., the movie will begin at 8:30, and the meeting itself will commence at 9:30. There will be a short break at noon for food. (Sandwiches will be available at the Civic's concession stands.) That interlude aside, Charlie and I will answer questions until 3:30. Give us your best shot.

An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we have again signed up American Express (800-799-6634) to give you special help. They do a terrific job for us each year, and I thank them for it.

In our usual fashion, we will run vans from the larger hotels to the meeting. Afterwards, the vans will make trips back to the hotels and to Nebraska Furniture Mart, Borsheim's and the airport. Even so, you are likely to find a car useful.

Our exhibit area for Berkshire goods and services will be bigger and better than ever this year. So be prepared to spend. I think you will particularly enjoy visiting The Pampered Chef display, where you may run into Doris and Sheila.

GEICO will have a booth staffed by a number of its top counselors from around the country, all of them ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a special shareholder discount (usually 8%). This special offer is permitted by 41 of the 49 jurisdictions in which we operate. Bring the details of your existing insurance and check out whether we can save you money.

On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets® available for your inspection. Just ask a representative at the Civic about viewing any of these planes. If you buy what we consider an appropriate number of items during the weekend, you may well need your own plane to take them home. Furthermore, if you buy a fraction of a plane, I'll personally see that you get a three-pack of briefs from Fruit of the Loom.

At Nebraska Furniture Mart, located on a 77-acre site on 72 $^{nd}$ Street between Dodge and Pacific, we will again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a discount that is customarily given only to employees. We initiated this special pricing at NFM six years ago, and sales during the “Weekend” grew from 5.3 million in 1997 to 14.2 million in 2002.

To get the discount, you must make your purchases during the Thursday, May 1 through Monday, May 5 period and also present your meeting credential. The period's special pricing will even apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but that, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. on weekdays and 10 a.m. to 6 p.m. on Sundays. On Saturday this year, from 6 p.m. to 10 p.m., we are having a special affair for shareholders only. I'll be there, eating hot dogs and drinking Coke.

Borsheim's — the largest jewelry store in the country except for Tiffany's Manhattan store — will have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May 2. The second, the main gala, will be from 9 a.m. to 5 p.m. on Sunday, May 4. Ask Charlie to autograph your sales ticket.

Shareholder prices will be available Thursday through Monday, so if you wish to avoid the large crowds that will assemble on Friday evening and Sunday, come at other times and identify yourself as a shareholder. On Saturday, we will be open until 6 p.m. Borsheim's operates on a gross margin that is fully twenty percentage points below that of its major rivals, so the more you buy, the more you save (or at least that's what my wife and daughter tell me).

In the mall outside of Borsheim's, we will have some of the world's top bridge experts available to play with our shareholders on Sunday afternoon. We expect Bob Hamman, Sharon Osberg, Fred Gitelman and Sheri Winestock to host tables. Patrick Wolff, twice U.S. chess champion, will also be in the mall, taking on all comers — blindfolded! Last year, Patrick played six games simultaneously — with his blindfold securely in place — and for the first time suffered a loss. (He won the other five games, however.) He's been training overtime ever since and is planning to start a new streak this year.

Additionally, Bill Robertie, one of only two players who have twice won the backgammon world championship, will be on hand to test your skill at that game. Finally, we will have a newcomer: Peter Morris, the winner of the World Scrabble Championship in 1991. Peter will play on five boards simultaneously (no blindfold for him, however) and will also allow his challengers to consult a Scrabble dictionary.

We are also going to test your vocal chords at the mall. My friend, Al Oehrle of Philadelphia, will be at the piano to play any song in any key. Susie and I will lead the singing. She is good.

Gorat's — my favorite steakhouse — will again be open exclusively for Berkshire shareholders on Sunday, May 4, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat's on Sunday, you must have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If Sunday is sold out, try Gorat's on one of the other evenings you will be in town. Show your sophistication by ordering a rare T-bone with a double order of hash browns.

There won't be a ball game this year. After my fastball was clocked at 5 mph last year, I decided to hang up my spikes. So I'll see you on Saturday night at NFM instead.

* * * * * * * * * * * *

Next year our meeting will be held at Omaha's new convention center. This switch in locations will allow us to hold the event on either Saturday or Monday, whichever the majority of you prefer. Using the enclosed special ballot, please vote for your preference – but only if you are likely to attend in the future.

We will make the Saturday/Monday decision based upon a count of shareholders, not shares. That is, a Class B shareholder owning one share will have a vote equal to that of a Class A shareholder owning many shares. If the vote is close, we will go with the preference of out-of-towners.

Again, please vote only if there is a reasonable chance that you will be attending some meetings in the future.

February 21, 2003

Warren E. Buffett

Chairman of the Board

注意：下表出现在印刷版年报中致股东信的对页，并在信中提及。
伯克希尔业绩表现 vs. 标普500

注释：数据按日历年度列示，但1965年和1966年除外，其截至9月30日；1967年为截至12月31日的15个月期。
自1979年起，会计准则要求保险公司按其持有的权益证券的市场价值而非之前要求的成本与市价孰低法进行估值。在本表中，伯克希尔截至1978年的业绩已按更改后的规则重新列示。其他所有方面，业绩均按最初报告的数字计算。
标普500的数据为税前，而伯克希尔的数据为税后。如果像伯克希尔这样的公司只是持有标普500指数并计提相应税款，那么在该指数显示正回报的年份，其业绩将落后于标普500，但在指数显示负回报的年份，其业绩将超过标普500。多年累计下来，税收成本将导致总差距相当大。

伯克希尔·哈撒韦公司

致伯克希尔·哈撒韦公司股东：

2002年，我们的净资产增加了61亿美元，使A类股和B类股的每股账面价值均增长了10.0%。过去38年（即自现任管理层接手以来），每股账面价值从19美元增长至41,727美元，年复合增长率为22.2%。*

从各方面看，2002年都是辉煌的一年。具体细节稍后再说，但这里先做个总结：

• 尽管经济疲软，我们的各项非保险业务仍表现异常出色。十年前，伯克希尔非保险业务的年度税前利润为2.72亿美元。如今，从我们不断扩大的制造、零售、服务和金融业务组合中，我们每月就能赚到这一数额。
• 我们的保险集团将浮存金提升至412亿美元，大幅增加了57亿美元。更棒的是，这些资金在2002年的使用成本仅为1%。重获低成本浮存金的感觉真好，尤其是在此前三年我们业绩糟糕之后。伯克希尔的再保险部门和GEICO在2002年表现卓越，通用再保险也恢复了承保纪律。
• 伯克希尔收购了一些重要的新业务——其经济特征从良好到卓越不等，管理者从卓越到卓越。这些特质是我们“进入”策略的两条腿，第三条腿是合理的购买价格。与杠杆收购运营商和私募股权公司不同，我们没有“退出”策略——我们买入是为了持有。这也是为什么伯克希尔通常是卖方及其管理者的首选——有时甚至是唯一选择。
• 我们的有价证券表现优于大多数指数。对于在GEICO管理股票的Lou Simpson来说，这已是家常便饭。但对我而言，这是近几年来令人欣喜的变化，因为此前我的投资记录惨淡。

2002年这些有利因素共同作用，使我们的账面价值增幅超出标普500指数32.1个百分点。这一结果异常：伯克希尔副董事长、我的合伙人Charlie Munger和我希望——最多——实现平均每年几个百分点的优势。未来，会有一些年份标普500指数显著击败我们。事实上，在强劲的牛市中这几乎肯定会发生，因为我们配置于普通股的资产比例已显著下降。当然，这种变化有助于我们在类似2002年的下跌市场中取得相对更好的表现。
关于去年的业绩，我还想补充一点提醒。如果你近几年经常阅读财务报告，一定见过铺天盖地的“备考”盈利报表——在这些报表里，管理层总是展示出远超审计师认可的“盈利”。在这些报告中，CEO告诉股东们：“这个别算，那个别算——只算那些能让利润变好看的。”通常，这种“忘掉所有坏消息”的说法会年复一年地出现，而管理层连脸都不红一下。

我还没见过哪份备考报表披露说审计后的利润偏高。那么，我们来创造一点历史：去年，按备考基础计算，伯克希尔的盈利实际上低于我们报告的数值。

这是真的，因为报告数据受两个有利因素影响。第一，2002年没有发生超级巨灾，这意味着伯克希尔（以及其他保险公司）从保险业务中赚到的钱比正常损失年份多。在相反年份——因为一场大飓风、地震或人为灾难——很多保险公司喜欢报告说，“要不是”那个异常事件，它们本可以实现X利润。言下之意是，既然这类超级巨灾不常发生，在计算“真实”利润时就不该算进去。这是骗人的鬼话。“要不是”的损失永远是保险业务的一部分，永远由股东的钱来买单。

尽管如此，为了这次讨论，我们就借鉴一下行业惯例。去年，当我们没有真正的大灾难时，如果你想把承销结果“常态化”，做一个向下调整是合适的。

其次，2002年的债券市场对我们金融和金融产品业务采用的某些策略有利。这些策略带来的收益一两年内肯定会减少——很可能完全消失。

那么……“要不是”这两个有利因素，我们去年的税前收益会比实际报告的大约少5亿美元。不过，我们很高兴把这些超额收益收入囊中。正如杰克·班尼在领奖时所说：“我不配得到这个荣誉——但话说回来，我有关节炎，我也不配得关节炎啊。”

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我们继续有幸拥有一群杰出的经理人，其中许多人根本没有财务上的需要去工作。但他们留下来了：38年来，没有一个子公司的CEO选择离开伯克希尔去别处工作。算上查理，我们现在有六位经理人超过75岁，我希望四年后这个数字至少增加两人（鲍勃·肖和我都是72岁）。我们的理由：“教老狗新把戏难啊。”

伯克希尔的运营CEO们是各自领域的大师，他们把业务当做自己的来经营。我的工作是给他们让路，并把他们的业务产生的多余资本配置好。这活儿轻松。

我的管理榜样是埃迪·贝内特，他曾是个球童。1919年，19岁的埃迪开始在芝加哥白袜队工作，那一年他们打进了世界大赛。第二年，埃迪跳槽到布鲁克林道奇队，他们也赢得了联盟冠军。然而，我们的英雄嗅到了不对劲。他换了行政区，1921年加入了扬基队，而扬基队立刻赢得了队史第一个联盟冠军。如今埃迪安顿下来，精明地看到了未来的趋势。接下来的七年里，扬基队赢得了五次美国联盟冠军。

这和管理有什么关系？很简单——想当赢家，就和赢家一起干。例如1927年，埃迪从传奇的鲁斯和格里克率领的扬基队那里获得了1/8份世界大赛奖金，合计700美元。这笔钱是埃迪仅仅工作四天（因为纽约横扫了系列赛）挣到的，大致相当于当时和普通队友一起干活的球童一年的薪水。
Eddie知道，他如何搬运球棒并不重要；重要的是能结识球场上的精英。我从Eddie那里学到了这一点。在伯克希尔·哈撒韦，我经常把球棒递给美国商界最重量级的击球手。

收购

去年，我们又为阵容增添了几位强棒。2001年底悬而未决的两项收购已经完成：Albecca（阿尔贝卡，以Larson-Juhl拉森-朱尔名义运营），美国定制相框的领导者；以及Fruit of the Loom（鲜果布衣），生产美国约33.3%的男士和男童内衣及其他服装的制造商。

两家公司都拥有出色的CEO：Albecca的Steve McKenzie和Fruit的John Holland。John于1996年从Fruit退休，三年前重新加入，将公司从他离开后陷入的灾难性道路上拯救出来。他现年70岁，我正试图说服他让他的下一次退休与我的退休同时进行（目前定在我死后五年——不过这个日期可能还会延长）。

去年我们还发起并完成了另外两项收购，规模略低于我们通常的门槛。但总体而言，这些业务每年税前盈利超过6000万美元。两者都处于经济形势严峻的行业，但都拥有重要的竞争优势，使其能够获得可观资本回报。

新成员是：
(a) CTB，全球领先的家禽、生猪、蛋类和谷物行业设备供应商；以及
(b) Garan，一家儿童服装制造商，其最大、最知名的产品线是Garanimals®。

这两家公司带来了创造其骄人业绩的管理者：CTB的Vic Mancinelli和Garan的Seymour Lichtenstein。

我们在2002年发起的最大的收购是The Pampered Chef（快乐厨师），这家公司有着一段引人入胜的历史，可追溯到1980年。Doris Christopher当时是芝加哥郊区一位34岁的家政学教师，有丈夫、两个小女儿，完全没有商业背景。然而，为了补贴家庭微薄的收入，她开始思考自己最擅长的事情——烹饪。她心想，为什么不把营销厨房用具做成一项生意呢？专注于那些她自己觉得最实用的物品。

为了启动，Doris用自己的人寿保险单借了3000美元——这是公司有史以来投入的全部资金——然后去商品市场采购。在那里，她各样买了十二个，然后回家在地下室开始运营。

她的计划是在家里为小群女性做演示，她们聚集在朋友家中。然而，在开车去第一次演示的路上，Doris几乎说服自己掉头回家，她确信自己注定失败。

但那晚在场的女性喜欢她和她推销的产品，购买了175美元的商品，TPC就此起步。Doris和丈夫Jay一起，第一年做了5万美元的生意。如今——仅仅22年后——TPC每年通过67,000名厨房顾问完成的业务超过7亿美元。

我去过TPC的派对，很容易理解为什么这项业务能成功。公司的产品大部分是专有设计，款式精美而且非常实用，顾问们知识渊博、热情洋溢。每个人都玩得很开心。赶紧上网访问pamperedchef.com，查找在哪里可以参加你附近的派对。

两年前，Doris请来了Sheila O'Connell Cooper——现任CEO——来分担管理重担，8月份她们在奥马哈与我会面。我大约只用了十秒钟就决定，这两位正是我愿意与之合作的经理人，我们迅速达成了交易。伯克希尔·哈撒韦的股东们，能与Doris和Sheila联手，没有比这更幸运的了。

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伯克希尔去年还通过MidAmerican Energy Holdings（中美洲能源控股公司，以下简称MEHC）完成了几项重要收购，我们在这家公司持股80.2%。不过，由于《公用事业控股公司法》（PUHCA）将我们的投票权限制在9.9%以内，我们无法将MEHC的财务报表完全合并。

尽管存在投票权限制——以及由此导致的MEHC略显奇怪的资本结构——这家公司仍是伯克希尔的关键一员。它目前已拥有180亿美元资产，为我们贡献了最大的非保险业务收入流。未来它极有可能成长为一家巨无霸。

去年，MEHC收购了两条重要的天然气管道。第一条是凯恩河管道（Kern River），起自怀俄明州西南部，延伸至南加州。这条管道每天输送约9亿立方英尺天然气，目前正在进行耗资12亿美元的扩建工程，到今年秋季运力将翻倍。届时，这条管道输送的天然气足以满足1000万户家庭的发电需求。

第二次收购是北天然气管道公司（Northern Natural Gas），它拥有16600英里管线，从西南地区一直延伸到中西部大片区域。这笔收购完成了一段对奥马哈人来说尤其意味深长的企业传奇。

北天然气公司从20世纪30年代创立之初起，就是奥马哈最卓越的企业之一，历任CEO都堪称社区领袖。然而，1985年7月，这家公司——1980年已更名为InterNorth——与休斯顿天然气公司（Houston Natural Gas）合并，后者规模还不到它的一半。合并时双方宣布，新公司总部将设在奥马哈，由InterNorth的CEO继续担任掌门人。

不出一年，这些承诺就全被打破了。到那时，休斯顿天然气的前CEO已经接掌了InterNorth的最高职位，公司更名，总部迁往休斯顿。这些变局都是由新任CEO——肯·莱（Ken Lay）——一手策划的，他给公司选的新名字是安然（Enron）。

快进15年，来到2001年底。安然陷入我们耳熟能详的那些麻烦，向Dynegy公司借款，并用北天然气管道业务作为抵押。两家公司很快闹翻，管道的所有权转到了Dynegy手里。而Dynegy自己，不久也遭遇了严重的财务危机。

2002年7月26日，星期五，MEHC接到了Dynegy的电话，对方希望快速、确定地将这条管道以现金出售。Dynegy找对了人：7月29日，我们签了合同，不久之后，北天然气管道公司就回了家。

2001年初，查理和我还不知道伯克希尔会进军管道业务。但凯恩河管道扩建完成后，MEHC将输送美国全部天然气用量的约8%。我们会继续寻找大型能源资产，尽管在电力公用事业领域，PUHCA约束着我们的行动空间。

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几年前，MEHC有点阴差阳错地进入了住宅房地产经纪业务。不过，我们大幅扩展这项业务绝非偶然。而且，未来我们很可能继续扩张。

我们把这个业务叫做HomeServices of America（美国之家服务公司）。但在它服务的各个社区，它使用的是收购来的原有品牌，比如奥马哈的CBS、明尼阿波利斯的Edina Realty、得梅因的Iowa Realty。在我们经营的大部分都会区，我们都稳坐市场头把交椅。

HomeServices现在已是全美第二大住宅经纪公司。算上买卖双方（或其中一方），去年我们参与了370亿美元的交易额，比2001年翻了一倍。

我们的增长大部分来自2002年完成的三笔收购，最大的一笔是保德信加州房地产公司（Prudential California Realty）。这家公司覆盖洛杉矶、橙县和圣地亚哥县，是当地龙头房地产中介，去年参与了160亿美元的成交额。
在很短的时间内，公司CEO Ron Peltier 就令HomeServices的营收和利润大幅增长。虽然这个行业总有周期性，但我们喜欢它，并且将继续寻找合理的收购机会。

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MEHC的CEO Dave Sokol 和他的关键伙伴 Greg Abel 是伯克希尔的巨大资产。他们是交易撮合者，也是管理者。伯克希尔随时准备向MEHC注入大量资金——看着Dave和Greg能把这项业务带多远，将会很有趣。

财产/意外险的经济学

我们的核心业务——尽管还有其他非常重要的业务——是保险。因此，要理解伯克希尔，你必须懂得如何评估一家保险公司。关键决定因素是：(1) 业务产生的浮存金数量；(2) 浮存金的成本；(3) 以及最重要的，这两者的长期前景。

首先，浮存金是我们持有但不拥有的资金。在保险业务中，浮存金产生的原因是保费在赔付之前收取，这个时间间隔有时会延展数年。在此期间，保险公司将资金进行投资。这种愉快的活动通常伴随着一个缺点：保险公司收取的保费通常不足以覆盖最终必须支付的损失和费用。这导致它出现"承销损失"，也就是浮存金的成本。如果一家保险公司长期内的浮存金成本低于公司通过其他方式获取资金的成本，那么这家保险业务就有价值。但如果浮存金成本高于市场利率，这项业务就是个柠檬。此外，近年来利率的下降趋势，使原本可以容忍的承销损失变成了沉重的负担，将保险业务深深推入柠檬类别。

从历史上看，伯克希尔以非常低的成本获得了浮存金。事实上，我们的成本在很多年里都低于零；也就是说，我们实际上是因为持有别人的钱而获得了报酬。然而，2001年我们的成本糟糕透顶，达到了12.8%，其中大约一半归因于世贸中心的损失。更早的1983-84年，我们甚至有过更糟的年份。便宜的浮存金并非理所当然。

下面的表格（间隔年份）显示了自36年前我们收购National Indemnity公司（其传统险种包含在"其他主要"板块中）进入保险业务以来，伯克希尔各保险板块产生的浮存金。对于此表，我们计算浮存金的方式是：将未决赔款准备金、理赔费用准备金、分入再保险持有的资金以及未到期保费准备金相加，再减去保险相关的应收款项、预付获取成本、预付税款以及适用于分入再保险的递延费用。（明白了吗？）

年末浮存金（百万美元）

Year	GEICO	General Re	Other Reinsurance	Other Primary	Total
1967				20	20
1977			40	131	171
1987			701	807	1,508
1997	2,917		4,014	455	7,386
1998	3,125	14,909	4,305	415	22,754
1999	3,444	15,166	6,285	403	25,298
2000	3,943	15,525	7,805	598	27,871
2001	4,251	19,310	11,262	685	35,508
2002	4,678	22,207	13,396	943	41,224

去年我们的浮存金成本是1%。正如我之前提到的，对于这个有利的结果，你不应过分乐观——毕竟2002年没有发生超级巨灾。这类灾难迟早会找上门来，届时我们的浮存金成本就会飙升。

2002年的业绩受到两项拖累：1）通用再保险（General Re）一笔令人痛心的费用——这笔损失本应计入更早的年份；2）我们每年因追溯保险（retroactive insurance）而计提的一笔"合意的"费用（详见下一节）。这两项合计17.5亿美元，约占浮存金的4.6%。幸运的是，我们2002年业务的整体承销业绩非常出色，即使在扣除上述费用后，也几乎实现了零成本。

如果没有超级巨灾，我预计2003年我们的浮存金成本将再次非常低——甚至可能低于零。在接下来对保险业务的逐项分析中，你会看到我为何乐观地认为，长期来看，我们的承销业绩将超越行业水平，并以极低成本为我们提供可投资资金。

保险业务

如果我们的保险业务要长期产生低成本浮存金，就必须做到：(a) 以坚定不移的纪律承保；(b) 保守地计提准备金；(c) 避免风险过度集中，以免一个看似"不可能"的事件威胁到偿付能力。我们所有的主要保险公司——除一家外——都定期满足这些标准。

那家例外是通用再保险（General Re），去年这家公司有很多工作要做才能达标。我很高兴地报告，在Joe Brandon的领导下，加上Tad Montross的辛勤协助，上述每个方面都取得了巨大进展。

1998年我同意伯克希尔与通用再保险合并时，我以为这家公司恪守了我列出的三条规则。我研究其运营已有数十年，观察到其承销纪律一贯严谨，准备金计提保守。在合并之时，我没有发现通用再保险的标准有任何松懈。

我大错特错了。通用再保险的文化和做法已经发生了根本变化，管理层——以及我——都浑然不知，这家公司严重低估了其现有业务的风险定价。此外，通用再保险积累了大量风险，假如——比如说——恐怖分子对美国发动多枚大规模核弹袭击，这些风险将是致命的。这种规模的灾难当然极不可能发生，但保险公司有责任限制风险，确保当"不可能"发生时，其财务状况依然坚如磐石。事实上，如果通用再保险仍是独立公司，仅世贸中心袭击就足以威胁其生存。

世贸中心灾难发生时，暴露了通用再保险运营中的弱点——这些我本应更早发现。但我很幸运：Joe和Tad当时就在现场，拥有更大的权力，并且渴望迅速纠正过去的错误。他们知道该做什么——而且他们做到了。

然而，保险保单需要时间到期，直到2002年过半，我们才将核武器、化学和生物风险（NCB）的集中度降至可容忍水平。这个问题现在已经成为过去。

另一方面，通用再保险的承销态度已彻底改变：整个组织现在都明白，我们只希望以合理价格承保业务，无论对业务量有何影响。Joe和Tad只根据通用再保险的承保利润率来评判自己。规模根本不重要。

最后，我们正全力以赴确保准备金计提准确。如果这一条做不好，我们就无法知道真实成本。任何不清楚自己成本的保险公司，都正在走向大麻烦。
2001年底，通用再保险（General Re）试图为所有当年及此前发生但尚未赔付的损失计提充足准备金——但我们严重失准。因此，公司2002年的承销业绩再度受损，我们额外计提了13.1亿美元，以修正前些年的估算错误。回顾通用再保险暴露出的准备金计提失误，一首乡村歌曲的歌词恰如其分：“我真希望现在不知道当年不懂的事。”

我可以向各位保证，我们未来最重要的任务就是避免准备金计提不足。但我不能保证成功。大多数意外险经理人都有准备金计提不足的天然倾向，而想要克服这种毁灭性偏见，他们必须具备一种特定的心态——说来可能让你惊讶，这心态与精算专业能力毫无关系。此外，再保险公司在合理计提准备金方面面临的困难远大于直接保险公司。尽管如此，在伯克希尔，我们的准备金计提工作总体上是成功的，我们也决心在通用再保险做到同样的事。

总而言之，我相信通用再保险目前已经准备好为伯克希尔提供大量无成本浮存金，而且其沉船级别的巨灾风险已被消除。这家公司仍然拥有我过去阐述过的重要竞争优势。去年它又获得了一项极为重要的优势：其全球三大竞争对手此前均被评为AAA级，但后来均被至少一家评级机构降级。在巨头之中，通用再保险的评级全线保持在AAA，目前其财务实力已独树一帜。

没有比这更重要的特质了。然而，近期一家全球最大的再保险公司——经常被顶级经纪商推荐给直接保险公司的——几乎已停止赔付，包括那些已到期且合法的索赔。这家公司欠数百家直接保险公司数百亿美元，这些公司如今面临大规模坏账。“廉价”再保险是傻瓜的交易：当一家保险公司今天付出现金，以换取再保险公司十年或二十年后的赔付承诺时，与任何不是最强大的再保险公司打交道都是危险的——甚至可能致命。

伯克希尔的股东应当对Joe和Tad在2002年取得的成就表示万分感谢。那一年他们比我希望任何人付出的都要更加努力——而这一切正在结出果实。

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在GEICO，2002年一切顺利得让我们想掐自己一下。增长强劲，利润出色，保单持有人留存率上升，销售生产力大幅提升。这些趋势在2003年初仍在延续。

这一切都要感谢Tony Nicely。任何认识他的人都可以作证，Tony对GEICO的爱已经持续了41年——从他18岁进入这家公司开始——他的成绩反映了这份热忱。他为替保单持有人省下的钱感到自豪：与其他保险公司平均收费标准相比，我们每年为客户节省约10亿美元。他为我们为这些保单持有人提供的服务感到自豪：在一项关键行业调查中，GEICO近期在所有主要竞争对手中排名第一。他为他19,162名同事感到自豪：去年，由于他们取得了辉煌的业绩，公司发放的利润分享奖金相当于他们基本工资的19%。他也为自己为伯克希尔股东带来的日益增长的利润感到自豪。

1996年伯克希尔取得GEICO全资所有权时，该公司保费收入为29亿美元。去年，其保费规模达到69亿美元，未来还有大量增长空间。尤其有潜力的是公司的互联网业务，去年新业务量增长了75%。欢迎访问GEICO.com（或致电800-847-7536）。在大多数州，股东可享受特别8%折扣。
以下是GEICO 2002年业绩的一条脚注，凸显了保险公司必须只与实力最强的再保险公司合作的必要性。在1981年至1983年间，当时管理GEICO的高管决定涉足商业超额责任保险和产品责任保险业务。风险看似不大：公司从该业务线仅收取了3,051,000美元保费，并几乎将其全部——2,979,000美元——用于购买再保险以限制损失。GEICO自身仅保留了微不足道的72,000美元作为承担小部分风险的补偿。但正是这"小尝一口苹果"，就让教训刻骨铭心。如今，GEICO在这项尝试中的损失已高达惊人的9,410万美元，相当于其净保费收入的约130,000%。其中，因违约再保险公司而无法收回的应收账款至少达9,030万美元（包括2002年计提的1,900万美元）。这就是"廉价"再保险的代价。

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Ajit Jain的再保险部门是去年我们浮存金成本极低的主要原因。如果伯克希尔的年报里要放一张照片，那一定是Ajit的。彩色的！

Ajit的部门积累了134亿美元的浮存金，规模超过除少数几家保险公司外的所有同行。他从1986年白手起家，到如今也仅有20名员工。而最重要的是，他创造了承销利润。

如果你考虑一下我接下来要说的会计奥妙，他的利润就尤为引人注目。所以请准备好吃点"菠菜"（或者，如果你对借贷记账不感兴趣，跳过下面两段）。

Ajit 2002年5.34亿美元的承销利润，是在其部门确认了4.28亿美元费用之后实现的，这笔费用归因于他多年来承保的"追溯"保险。在这类业务中，我们接手另一家保险公司的义务，按约定上限赔付他们已经发生但尚未支付的损失——这些损失往往源于几十年前的事故（例如，1980年受伤的工人需要终身按月领款）。在这些安排中，保险公司向我们支付一笔巨额预付保费，但这笔钱少于我们预期需要赔付的损失。我们心甘情愿接受这一差额，因为：a) 我们的赔付有上限，b) 在损失实际支付之前我们可以使用这笔资金，而这些赔付往往要拖上十年甚至更久。我们持有的66亿美元石棉和环境损失准备金中，约80%来自有上限的合同，因此其成本不可能飙升。

当我们签署一份追溯保单时，会立即将保费和预期损失准备金入账。两者之间的差额计入一项名为"递延费用——承担再保险"的资产。这不是个小数目：年末，所有追溯保单的此项资产为34亿美元。随后，我们在每项保单的预期有效期内，通过费用支出逐年摊销这项资产。这些费用——2002年为4.4亿美元，包括通用再保险的费用——会产生承销亏损，但这种亏损是有意为之且可取的。即便在报告利润受到如此拖累的情况下，Ajit去年仍然实现了大幅承销盈利。

不过，我们要强调，Ajit部门承担的风险极为巨大——远超世界上任何其他保险公司自留的风险。因此，单一事件可能在某个季度或年度导致Ajit的业绩出现重大波动。这丝毫不会困扰我们：只要我们能获得适当定价，我们就乐于承担别人希望摆脱的短期波动。在伯克希尔，我们宁愿随时间获得起伏不定的15%，也不要平滑无波的12%。

如果你在我们的年会上见到Ajit，请深鞠一躬。

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伯克希尔旗下的小型保险公司业绩出色。它们的浮存金总额增长了38%，承销利润达3,200万美元，占保费的4.5%。把这些业务加在一起，足以构成全美最优秀的保险公司之一。

不过，这些数字里也包含了我们在加州工人补偿保险业务上的惨淡业绩。这方面我们还有改进空间。同样，我们的准备金计提也严重偏离了目标。在摸清如何让这块业务走上正轨之前，我们会保持小规模运营。

感谢Rod Eldred、John Kizer、Tom Nerney、Don Towle和Don Wurster，他们在2002年表现卓越，为你们的伯克希尔投资增添了巨大价值。

报告盈利来源

下表列示了伯克希尔报告盈利的主要来源。你会注意到，“购买法会计调整”在2002年大幅下降，原因是美国通用会计准则规则发生了变化，不再要求对商誉进行摊销。这一变化增加了我们的报告盈利，但对经济盈利没有影响。

	（单位：百万美元）
	税前利润		伯克希尔应占净利润（扣除税项和少数股东权益后）
	2002年	2001年	2002年	2001年
经营利润：
保险集团：
承销 – 通用再保险	$(1,393)	$(3,671)	$(930)	$(2,391)
承销 – 伯克希尔集团	534	(647)	347	(433)
承销 – GEICO	416	221	271	144
承销 – 其他主要保险	32	30	20	18
净投资收益	3,050	2,824	2,096	1,968
服装(1)	229	(33)	156	(28)
建筑产品(2)	516	461	313	287
金融及金融产品业务	1,016	519	659	336
航空服务	225	186	133	105
中美能源（持股80%）	613	565	359	230
零售业务	166	175	97	101
斯科特·费策（不含金融业务）	129	129	83	83
Shaw Industries(3)	424	292	258	156
其他业务	256	212	160	131
购买法会计调整	(119)	(726)	(65)	(699)
公司利息支出	(86)	(92)	(55)	(60)
股东指定捐赠	(17)	(17)	(11)	(11)
其他	19	25	12	16
经营利润	6,010	453	3,903	(47)
投资资本利得	603	1,320	383	842
所有实体总利润	$6,613	$1,773	$4,286	$795

(1) 含2002年4月30日起的鲜果布衣和2002年9月4日起的Garan。
(2) 含2001年2月27日起的约翰斯·曼维尔和2001年7月31日起的MiTek。
(3) 自收购日2001年1月8日起。

以下是我们非保险业务的主要发展概要：
- 中美能源2002年盈利增长，今年很可能继续增长。目前和预期的增长主要来自之前描述的收购。为资助这些收购，伯克希尔购买了12.73亿美元的中美能源次级债（使我们持有这些11%利率的债务总额达到17.28亿美元），并投资了4.02亿美元购买"普通股等价"股票。我们目前（在完全稀释基础上）拥有中美能源80.2%的股权。中美能源的财务报表详见第37页。
- 去年我曾告诉各位，Dexter的问题导致我们的鞋业业务出现巨额亏损。感谢H.H. Brown的Frank Rooney和Jim Issler，Dexter的经营已扭转。尽管解决我们那里问题的代价不小，去年我们鞋业仍赚了2400万美元，较2001年增长7000万美元。

Justin的Randy Watson也对这一改善做出了贡献，他大幅提高了利润率，同时减少了投入资本。鞋业生意艰难，但我们拥有出色的管理者，相信未来我们能在该业务投入的资本上获得合理回报。

• 对于家居装饰和珠宝零售商而言，去年是个平平的年头，但我们的业务表现不错。在我们八家零售业务中，表现最好的是得梅因的Homemaker's。在那里，才华横溢的Merschman家族实现了销售额和利润的显著增长。

内布拉斯加家具城将于八月在堪萨斯城大都会区开设一家新的旗舰店。拥有45万平方英尺零售面积，它很可能成为全国第二大家具店——奥马哈店是全国冠军。希望堪萨斯城地区的伯克希尔股东能来参加开业（并持续光顾）。

• 我们的家居和建筑相关业务——Acme Brick、Benjamin Moore Paint、Johns-Manville、MiTek和Shaw——去年贡献了9.41亿美元的税前收益。特别值得注意的是Shaw从2001年的2.92亿美元增至4.24亿美元。Bob Shaw和Julian Saul是出色的经营者。去年地毯价格仅上涨1%，但Shaw的生产率提升和出色的费用控制显著提高了利润率。

伯克希尔珍视成本意识。我们的榜样是那位去当地报纸刊登讣告的寡妇。得知每字25美分后，她要求"Fred Brown去世了"。然后她被告知最少七个字。"好吧，"这位悲伤的女士回答，"写成'Fred Brown去世了，高尔夫球杆出售'。"

• 飞行服务去年的盈利有所增长——但这只是因为我们从出售FlightSafety Boeing的50%权益中获得了一笔6亿美元的税前特别收益。如果没有这笔收益，我们的培训业务盈利会随着公务航空活动的放缓而略有下降。FlightSafety的培训仍然是行业的黄金标准，我们预计未来几年会增长。

在我们的分时所有权业务NetJets，我们在四家公司中遥遥领先。FAA记录显示，2002年我们在行业中的份额为75%，这意味着客户从我们这里购买或租赁的飞机价值是三家竞争对手总和的三倍。去年，我们的机队飞行了1.327亿海里，将客户送往130个国家。

我们的卓越地位直接归功于NetJets的CEO Rich Santulli。他于1986年开创了这项业务，此后一直坚定不移地追求最高水平的服务、安全和安保。Rich、Charlie和我坚持飞机（和人员）要足以承载我们自己的家人——因为他们确实经常乘坐。
尽管NetJets在2002年的收入创下纪录，但公司仍然亏损。美国业务的小幅盈利被欧洲业务的亏损所抵消。总体而言，分时所有权行业去年损失惨重，这一情况在2003年几乎肯定还会重演。坦诚地说，飞机的运营成本高昂。

随着时间的推移，这一经济现实应该对我们有利——因为对许多公司而言，私人飞机是必不可少的商业工具。而对其中大多数公司来说，NetJets作为他们所需飞机的主供应商或补充供应商，都是极具吸引力的选择。

许多企业如果选择我们的服务，每年可以节省数百万美元。事实上，一些大公司每年的节省可能超过1000万美元。同样重要的是，这些公司使用我们的服务后，运营能力反而会提升。拥有一架NetJets飞机的分时产权，客户可以同时让多架飞机在空中飞行。此外，通过我们提供的交换安排，拥有一架飞机部分权益的客户，可以飞行其他12种机型，根据任务需求选择最合适的飞机。（我的一位姐姐拥有一架Falcon 2000的部分产权，她用它去夏威夷旅行——但出于巴菲特的基因——她在美国国内短途旅行时会换成更经济的Citation Excel。）

NetJets的用户名单证实了我们为大型企业提供的优势。以通用电气为例。它拥有庞大的自有机队，但同时对如何有效且经济地使用飞机有着无与伦比的经验。而它是我们最大的客户。

——我们的金融与金融产品线涵盖多种业务，其中包括某些高等级固定收益证券的交易，这些在2002年带来了高额利润。这一领域的盈利可能还会持续一段时间，但肯定会逐渐减少——甚至最终消失。

这一类别还包括我们从Berkadia对Finova的投资（去年年报中已描述）中获得的一笔非常令人满意但正在快速减少的收入流。我们的合作伙伴Leucadia National Corp.以高超的技巧管理着这项业务，心甘情愿地承担了远超自己份额的重活。我喜欢这种分工，并希望未来能与Leucadia继续合作。

不利的一面是，金融业务还包括通用再保险证券（General Re Securities）的交易业务，这是一家从事衍生品和交易的公司。去年该业务税前亏损1.73亿美元，这部分是对其早年使用的有缺陷（尽管是标准做法）会计的迟来的承认。事实上，衍生品值得我们深入审视，既包括其使用者所采用的会计方法，也包括它们可能对个体公司乃至整个经济带来的问题。

衍生品

查理和我在如何看待衍生品及其相关交易活动上意见一致：我们认为它们是定时炸弹，无论对交易方还是经济体系都是如此。

在说完这个观点（我还会回头再讲）之后，让我先退一步来解释衍生品——尽管这种解释只能是笼统的，因为这个词涵盖的金融合约范围极其广泛。本质上，这些工具要求在未来某个日期进行资金交割，金额由一项或多项参考指标决定，例如利率、股票价格或货币价值。例如，如果你做多或做空一份标普500指数期货合约，你就参与了一项非常简单的衍生品交易——你的盈亏来自指数的波动。衍生品合约的期限各不相同（有时长达20年或更久），其价值往往与多个变量挂钩。
除非衍生品合约有抵押品或担保，否则其最终价值还取决于交易对手的信用状况。然而，在合约结算之前，交易对手会将盈亏——往往数额巨大——记入当期利润表，而实际上连一分钱都没有易手。

衍生品合约的种类只受人类（有时似乎是疯子）想象力的限制。例如，安然公司把远在多年后结算的新闻纸和宽带衍生品也入了账。或者，你想签一份合约，赌2020年内布拉斯加州出生多少对双胞胎？没问题——只要出得起价，你很容易就能找到一个乐意配合的交易对手。

我们收购通用再保险时，它旗下有一家衍生品交易商——通用再保险证券。查理和我觉得这东西危险，不想要。但我们没能把它卖掉，于是现在正在将其关停。

然而，关闭一家衍生品业务说起来容易做起来难。我们要想彻底摆脱这项业务，还需要很多年（尽管我们每天都在降低风险敞口）。事实上，再保险和衍生品业务很相似：都像地狱——进去容易，出来几乎不可能。在这两个行当里，一旦你签下一份合约（可能要求几十年后支付一大笔钱），通常就被它套牢了。没错，有办法可以把风险转嫁给别人。但大多数这类策略都会让你留下剩余责任。

再保险和衍生品的另一个共同点是，两者产生的报告利润往往被严重夸大。之所以如此，是因为今天的利润在很大程度上基于估计，而这些估计的准确性可能要很多年后才会暴露出来。

错误通常会是诚实的，仅仅反映了人类倾向于对自己承诺的事情持乐观态度。但衍生品的交易对手在会计处理上也有巨大的作弊动机。那些交易衍生品的人，其薪酬（全部或部分）通常取决于按市值计价会计计算出的“利润”。然而，常常并不存在真正的市场（想想我们那个涉及双胞胎的合约），于是便采用“按模型计价”。这种替代可能招致大规模恶作剧。一般而言，涉及多个参照标的且结算日遥远的合约，会增加交易对手使用异想天开假设的机会。例如，在双胞胎案例中，合约双方可能使用不同的模型，让双方都能在多年内显示出可观的利润。极端情况下，按模型计价就退化成了我称之为“按神话计价”的东西。

当然，内部和外部审计师都会审核这些数字，但这绝非易事。例如，通用再保险证券在年底（经过十个月的业务清盘后）仍有14,384份未平仓合约，涉及全球672个交易对手。每份合约都有一个正或负的价值，源自一个或多个参照标的，其中一些复杂得令人瞠目结舌。要评估这样一个投资组合，即使经验丰富的审计师，也很容易产生大相径庭且诚实的意见分歧。

估值问题绝非纸上谈兵：近年来，一些大规模欺诈和近乎欺诈的案例正是通过衍生品交易得以实现的。例如，在能源和电力行业，公司利用衍生品和交易活动报告了巨额的“利润”——直到它们真正试图将资产负债表上与衍生品相关的应收款转化为现金时，才轰然倒塌。“按市值计价”原来才是真正的“按神话计价”。
我可以向你保证，衍生品业务中的估值错误绝非对称的。几乎无一例外，这些错误总是有利于那些觊觎数百万美元奖金的交易员，或者想要报告令人印象深刻的“利润”的CEO（有时两者兼有）。奖金照发，CEO也从他的期权中获利。等到很久以后，股东们才知道，那些报告的利润不过是场骗局。

衍生品的另一个问题是，它们会加剧一家公司因完全不相干的原因而陷入的困境。这种连锁效应之所以产生，是因为许多衍生品合约规定，一旦公司遭遇信用降级，就必须立即向交易对手提供抵押。想象一下这种情况：一家公司因普遍的不利因素而被降级，然后它的衍生品合约瞬间触发，要求公司提供一笔巨额且始料未及的现金抵押。为了满足这一需求，公司可能陷入流动性危机，而这在某些情况下，可能会引发进一步的降级。一切都演变成一个螺旋，最终可能导致公司崩溃。

衍生品还会造成一种串联风险，类似于保险公司或再保险公司将大部分业务转分保给其他公司所承担的风险。在这两种情况下，来自众多交易对手的巨额应收款往往会随着时间的推移而累积。（在通用再保险证券（Gen Re Securities），尽管我们已经进入清算模式近一年，但我们仍有65亿美元的应收款。）一个参与者可能自认为很谨慎，相信自己的大额信用敞口是多元化的，因此并不危险。然而，在某些情况下，一个导致A公司应收款变成坏账的外生事件，同样也会波及B到Z公司的应收款。历史告诉我们，危机常常会使各种问题以太平盛世时难以想象的方式相互关联。

在银行业，认识到“关联性”问题是建立美联储的原因之一。在美联储成立之前，弱势银行的倒闭有时会给之前实力强劲的银行带来突发且未预料到的流动性需求，反过来又导致这些银行倒闭。现在，美联储隔离了强健银行与弱势银行的麻烦。但是，没有一家中央银行被指派去防止保险或衍生品行业的多米诺骨牌倒塌。在这些行业，基本面稳健的公司仅仅因为链条下游其他公司的困境而陷入麻烦。当一个行业存在“连锁反应”的威胁时，尽量减少任何形式的关联是明智的。我们正是这样经营我们的再保险业务的，这也是我们退出衍生品业务的原因之一。

许多人认为衍生品减少了系统性问题，因为无法承受某些风险的市场参与者能够将它们转移给更强的参与方。这些人相信，衍生品有助于稳定经济、促进交易，并消除个体参与者的障碍。从微观层面看，他们说的通常是事实。确实，在伯克希尔，我有时会为了促成某些投资策略而进行大规模的衍生品交易。

然而，查理和我认为，宏观图景是危险的，而且越来越危险。大量的风险，尤其是信用风险，已经集中在相对少数几家衍生品交易商手中，而这些交易商彼此之间还进行着大量的交易。一家交易商遇到麻烦，很快就会传染给其他交易商。除此之外，这些交易商还被非交易商交易对手欠着巨额款项。正如我提到过的，这些交易对手中的一些以某种方式相互关联，可能因一个单一事件（比如电信行业崩溃或商业电力项目价值暴跌）而同时陷入困境。这种关联性一旦突然显现，就可能引发严重的系统性问题。
确实，1998年，一家对冲基金——长期资本管理公司（Long-Term Capital Management）因其杠杆和衍生品交易，让美联储焦虑到火速组织救援。后来在国会作证时，美联储官员承认，如果不是他们出手干预，LTCM这家公众知之甚少、仅雇用几百人的公司，其未平仓交易很可能对美国市场的稳定构成严重威胁。换句话说，美联储出手是因为其领导人担心，如果LTCM的多米诺骨牌倒下，其他金融机构会遭遇什么。这件事虽然让固定收益市场的多个部分瘫痪了数周，但远非最坏的情况。

LTCM使用的衍生品工具之一是总收益互换合约，这种合约能在包括股票在内的各种市场实现100%杠杆。例如，合约的一方（通常是银行）拿出全部资金购买股票，而另一方（不出资）则同意在未来某个日期收取银行实现的任何收益，或承担银行的任何损失。

这类总收益互换合约完全让保证金要求成了笑话。此外，其他类型的衍生品严重削弱了监管机构控制杠杆的能力，也让他们难以全面把握银行、保险公司和其他金融机构的风险状况。同样，即使是经验丰富的投资者和分析师，在分析深度参与衍生品合约的公司的财务状况时也会遇到巨大困难。当查理和我读完详细描述大型银行衍生品活动的长篇脚注后，我们唯一明白的是：我们不明白这家机构正在承担多大的风险。

衍生品这个精灵已经冲出瓶子，这些工具的种类和数量几乎肯定会继续增加，直到某件事让它们的毒性彻底暴露。人们对其危险性的认识已经渗透到电力和天然气行业，重大问题的爆发导致这些领域的衍生品使用大幅减少。但在其他地方，衍生品业务仍在不受约束地扩张。各国央行和政府至今未能找到有效的方法来控制甚至监测这些合约带来的风险。

查理和我认为，伯克希尔应该是一座金融堡垒——为了我们的所有者、债权人、保单持有人和员工。我们努力对任何形式的超级巨灾风险保持警觉，这种态度可能让我们对日益增长的大量长期衍生品合约以及随之而来的巨额无担保应收款过于担忧。但我们的看法是，衍生品是金融大规模杀伤性武器，它们携带的危险虽然目前是潜伏的，但可能致命。

投资

下面我们列示普通股投资。截至2002年底，市值超过5亿美元的投资已逐项列出。

持股数	公司	2002年12月31日
		成本	市值
		（单位：百万美元）
151,610,700	美国运通公司	$1,470	$5,359
200,000,000	可口可乐公司	$1,299	$8,768
96,000,000	吉列公司	$600	$2,915
15,999,200	H&R布洛克公司	$255	$643
6,708,760	M&T银行	$103	$532
24,000,000	穆迪公司	$499	$991
1,727,765	华盛顿邮报公司	$11	$1,275
53,265,080	富国银行	$306	$2,497
	其他	$4,621	$5,383
	普通股合计	$9,164	$28,363

我们在股票上仍然动作寥寥。查理和我对伯克希尔主要投资对象的持仓越来越感到安心，因为其中大多数公司的盈利都在增长，而它们的估值却下降了。但我们不打算加仓。尽管这些企业前景良好，我们还不认为它们的股票被低估了。

在我们看来，这个结论同样适用于整体股票。尽管经历了三年的价格下跌，这已显著提升了普通股的吸引力，但我们仍然发现很少有股票能引起我们哪怕一丝兴趣。这个令人沮丧的事实，证明了在大泡沫期间估值达到了何等疯狂的程度。不幸的是，宿醉的程度可能与狂欢的程度成正比。

查理和我现在表现出的对股票的厌恶，绝非与生俱来。我们热爱持有普通股——前提是能以有吸引力的价格买入。在我61年的投资生涯中，大约有50年提供了这样的机会。这样的年份还会再来。然而，除非我们看到有极高概率获得至少10%的税前收益（换算成公司税后约6.5%至7%），否则我们会选择在场外观望。短期资金税后回报率不到1%，在场外干等着可不好玩。但偶尔成功的投资需要无所作为。

不过去年，我们确实在一些“垃圾”债券和贷款上做出了明智的投资。总体而言，我们在这一领域的投资额增长到六倍，年底达到了83亿美元。

投资垃圾债券和投资股票在某些方面是相似的：两项活动都需要我们进行价格-价值的计算，并且需要扫描数百种证券，从中找出极少数具有吸引人收益/风险比的品种。但这两个领域之间也存在重要差异。在股票方面，我们期望每一笔投资都能顺利成功，因为我们专注于那些财务保守、拥有强大竞争优势、由能干且正直的人管理的企业。如果我们以合理价格买入这些公司，亏损应该是很少见的。事实上，在我们管理公司事务的38年里，我们在伯克希尔管理的股票（即不包括由通用再保险公司（General Re）和政府雇员保险公司（GEICO）管理的部分）的收益与亏损之比约为100比1。

购买垃圾债券时，我们接触的是边缘得多的企业。这些企业通常债务负担过重，并且经常在资本回报率低的行业运营。此外，管理层的质量有时也值得怀疑。管理层甚至可能持有与债权人直接对立的利益。因此，我们预计在垃圾债券上偶尔会出现较大亏损。不过到目前为止，我们在这一领域做得还算不错。

公司治理

管理人的能力和忠诚度长期以来都需要被监督。确实，近两千年前，耶稣基督就谈到了这个话题，他赞许地引用（《路加福音》16:2）"一个财主"对其管理人的话："把你所经管的交代明白，因为你不能再做我的管家了。"

问责与受托责任在过去十年间日渐式微，在那些沉迷于大泡沫的人眼中，这些品质已变得无足轻重。随着股价上涨，管理人的行为准则却在下降。因此，到了90年代末，走正道的CEO们发现路上并不拥堵。

需要说明的是，绝大多数CEO都是你愿意托付子女资产、或愿意做邻居的正派人。然而，近年来太多这样的人在职场上行为失当——篡改数字，并为平庸的业绩攫取天价报酬。这些原本体面的人只是沿袭了梅·韦斯特的职业路径："我本是白雪公主，只是后来跑偏了。"（译注：梅·韦斯特的经典俏皮话，指原本纯洁却逐渐堕落。）

理论上，公司董事会本应阻止这种行为的恶化。我上一次撰写关于董事职责的文章是在1993年的年报中（按需求可寄送该讨论的副本，或访问互联网在1993年信的"公司治理"部分阅读）。当时我说，董事们"应当表现得仿佛有一位唯一的、缺席的股东，他们应以各种正当方式努力增进其长期利益。"这意味着，董事必须撤换平庸或更差的经理人，无论他多么讨人喜欢。董事的反应应如同一位85岁千万富翁的新娘舞女——当富翁问她，如果失去钱财是否还会爱他时，这位年轻美人答道："当然，我会想念你的钱，但我仍然爱你。"

在1993年的年报中，我还提到董事有另一项职责："如果能干但贪婪的管理人越界，试图从股东口袋里掏得太深，董事必须打他们的手。"自那以后，越界行为变得普遍，但被打手的企业却寥寥无几。

为什么聪明且正直的董事们会如此失败？答案不在于法律不健全——董事有义务代表股东利益一向是明确的——而在于我所说的"董事会氛围"。

例如，在一个由彬彬有礼的人组成的董事会里，提出CEO是否该被撤换的问题几乎是不可能的。同样，质疑CEO力推的收购提案也很尴尬，尤其当他的内部员工和外部顾问都在场且一致支持其决定时（他们若不支持就不会在场）。最后，当薪酬委员会——一如既往地有高价顾问的加持——报告给CEO的巨额期权授予时，董事若建议委员会重新考虑，简直就像在餐桌上打嗝一样失礼。

这些"社交"难题表明，外部董事应定期在CEO不在场时开会——这是一项正在推行的改革，我由衷赞同。但我怀疑，其他大多数新的治理规则和建议所带来的收益，能否弥补它们施加的金钱及其他成本。

当下流行的呼声是要求"独立"董事。诚然，拥有能独立思考并直言不讳的董事是可取的——但他们还必须具备商业头脑、有参与感且以股东为导向。在我1993年的评论中，这三点正是我描述为至关重要的品质。
在长达四十年的时间里，我曾在19家上市公司（不包括伯克希尔）董事会任职，并与大约250位董事打过交道。按照今天的标准，他们中的大部分人都算得上“独立”。但这些董事绝大多数都缺少我看重的三个品质中的至少一个。结果，他们对股东福祉的贡献充其量微乎其微，而且常常是负面的。这些人虽然正直且聪明，但就是对企业了解不够，和/或对股东不够关心，以至于不会质疑愚蠢的收购或离谱的薪酬。我不得不遗憾地补充一句，我自己的表现也时常不及格：很多时候，当管理层提出我认为违背股东利益的提案时，我选择了沉默。在那些情况下，同僚情谊压倒了独立性。

为了进一步看清“独立性”的缺陷，我们来看一个跨越62年、涵盖数千家公司的案例研究。自1940年以来，联邦法律就规定投资公司（其中大部分是共同基金）的董事会中必须有相当比例的独立董事。起初要求是40%，现在是50%。无论如何，典型的基金长期以来都由占多数的独立董事构成。

这些董事以及整个董事会承担着许多例行公事的职责，但实际上只有两项重要责任：找到尽可能最好的投资经理，以及与这位经理谈判争取尽可能最低的费用。当你自己寻求投资帮助时，这两个目标是唯一重要的，而代表其他投资者行事的董事理应把同样的目标放在首位。然而，在独立董事追求这两个目标时，他们的记录简直惨不忍睹。

成千上万的投资公司董事会每年开会，执行一项关键工作：选择谁来管理他们代表的数百万所有者的储蓄。年复一年，A基金的董事选择经理A，B基金的董事选择经理B，如此这般……整个过程如同行尸走肉，是对受托责任的嘲弄。偶尔会有董事会起来反抗。但多数时候，一只猴子打出莎士比亚剧本的概率，都比一个“独立”的共同基金董事提议让他的基金考虑其他经理的概率要大——即便现任经理长期表现不佳。当然，当这些董事处理自己的钱时，他们会去寻找替代的顾问；但为他人担任受托人时，他们脑子里从未冒出过这个念头。

当一家基金管理公司——姑且称它为“A”——以高价卖给经理“B”时，渗透在这个体系中的虚伪就暴露无遗了。此时，“独立”董事们经历了一场“反启示”，认定经理B是能找到的最好选择——尽管B在前几年就可以请到（却被忽视了）。顺便说一句，在B收购了经理A之后，B之前的收费标准比现在便宜得多。因为B花了一大笔钱买下A，现在必须通过向A股东（作为交易的一部分被“交割”过来的）收取的费用来收回这笔成本。（关于共同基金业务的精彩讨论，请阅读约翰·博格的《共同基金常识》。）

几年前，我的女儿被邀请担任一家由大型机构管理的基金家族的董事。她作为董事能拿到相当可观的报酬，足以让她年收入增加约50%（她会告诉你，这笔加薪她用得着！）。从法律上讲，她将是一位独立董事。但邀请她的基金经理，会认为她有可能就基金应该聘用哪位顾问独立思考吗？当然不会。我很自豪地说，她展现了真正的独立性——拒绝了邀请。不过，那家基金公司毫不费力就补上了空缺（而且——不出所料——基金并没有更换经理）。
投资公司的董事们在谈判管理费方面同样失败（正如许多美国公司的薪酬委员会未能将CEO的薪酬控制在合理水平一样）。如果你我被赋予权力，我可以向你保证，我们很容易就能与大多数共同基金的现任管理人协商出大幅降低的管理费。而且，相信我，如果董事们能分到他们节省下来的任何一部分费用，那费用的下降就会如天降甘霖。但在现行制度下，费用降低对“独立”董事毫无意义，对管理人却意义重大。那么猜猜谁会赢？

当然，为基金找到合适的资金管理人远比降低管理费重要。但这两项任务都是董事的职责。而在承担这些极其重要的责任时，数以万计的“独立”董事，在六十多年里，惨败得一塌糊涂。（不过，在照顾自己方面他们倒是成功了；因为他们在一个“家族”基金的多家董事会任职，所获酬劳往往高达六位数。）

当管理人非常上心而董事们却不上心时，就需要一股强大的制衡力量——而这正是当今公司治理中缺失的元素。要淘汰平庸的CEO并限制有能力的CEO越界，需要所有者——大型所有者——采取行动。操作起来并不难：近几十年来，股票持有不断集中，如今机构管理者想对问题公司施加影响力轻而易举。二十家甚至更少的大型机构联手，只需投票反对那些容忍恶劣行为的董事，就能有效地改革某家公司的治理。依我看，这种协同行动是实质改善公司治理的唯一途径。

不幸的是，某些大型投资机构在批评其他公司治理不善时，自身也有“玻璃房子”的问题；比如，一想到自己公司的业绩和费用被自家董事会仔细审查，他们就会不寒而栗。但先锋集团的Jack Bogle、Davis Advisors的Chris Davis和Legg Mason的Bill Miller正在带头推动CEO善待股东。养老金基金及其他受托人如果支持这些人，未来将获得更好的投资回报。

改革的试金石将是CEO薪酬。经理们会欣然同意董事会“多元化”、向SEC提交证明文件，并采纳一些毫无意义的程序性提案。但许多人会抗拒的，是对他们自身薪酬和福利的严格审视。

近年来，薪酬委员会常常像摇尾乞怜的小狗，温顺地遵循顾问的建议，而这类顾问以对支付他们费用的无名股东不忠而闻名。（如果你分不清某人站在哪一边，那他们就不站在你这边。）诚然，SEC要求每个委员会在股东委托书中说明薪酬的理由。但那些话通常都是公司律师或人力资源部门编写的套话。

这种代价高昂的闹剧应该停止了。董事们不应在薪酬委员会任职，除非他们自己有能力代表所有者进行谈判。他们应该解释自己对薪酬的看法以及衡量业绩的方法。此外，他们处理股东的钱时，应当像处理自己的钱一样行事。

19世纪90年代，Samuel Gompers将工会的目标描述为“更多！”20世纪90年代，美国的CEO们采纳了他的口号。结果是，CEO们往往聚敛了巨额财富，而他们的股东却经历了财务灾难。
董事们应当叫停这种海盗行径。为真正卓越的业绩支付高薪并无不妥。但除此之外，董事们该大喝一声"够了！"——如果近年虚高的薪酬成了未来薪酬的基准线，那简直是场闹剧。薪酬委员会该回到画板前重新设计了。

* * * * * * * * * * * *

已提出且几乎确定将生效的规则，要求伯克希尔必须调整董事会，迫使我们增补符合"独立"法定标准的董事。

如此一来，我们将在培育独立性方面增加一项我们视作重要、但绝非决定性的检验标准：我们将选择那些拥有巨大且真实的所有者权益（即他们或其家族自掏腰包买入的股票，而非伯克希尔赠送或通过期权获得）的董事——期望这些权益对他们的行为产生的影响，远远盖过声望、董事费等其他考量。

这就涉及到一个常被忽视的董事薪酬问题：上市公司董事的薪酬平均每年约5万美元。令我困惑的是，许多指望这笔钱占其年收入20%甚至更多的董事，居然被视作"独立"——而像我们董事会的Ron Olson，因其从伯克希尔的律师费中获得了其巨额收入的一小部分，反而可能被认定不够独立。正如投资公司丑闻所揭示的，一个中等收入严重依赖董事费、并热切希望受邀加入其他董事会以赚取更多费用的董事，极不可能去得罪CEO或同僚董事，而这些人在很大程度上决定他在企业界的声誉。如果监管者认为"可观"的金钱会玷污独立性（确实可能），那他们忽略了一大类潜在违规者。

在伯克希尔，我们希望董事费对我们董事而言微不足道，因此只付给他们微薄的酬劳。此外，我们不想让董事置身于公司可能遇到的任何灾难之外，所以不给他们投保高管和董事责任险（这种非正统做法——顺便说一句——多年来为股东节省了数千万美元）。基本上，我们希望董事的行为由其决策对其家族净资产的影响来驱动，而非由其薪酬驱动。这是我们作为经理人遵循的等式，我们也认为这对伯克希尔的董事同样适用。

为了寻找新董事，我们将在股东名单中寻找那些直接或通过家族长期持有大额伯克希尔股票（数百万美元级别）的人。满足这一条件的人应自动通过我们的两项检验：即他们对伯克希尔有兴趣且以股东为导向。在我们的第三项检验中，我们将寻找商业头脑——这种能力远非常见。

最后，我们将继续让巴菲特家族成员留在董事会。他们来此的目的并非在我去世后经营公司，届时他们也不会获得任何形式的报酬。他们的职责是确保：当其他CEO接替我时，伯克希尔的特殊文化能得到培育——这对我们的股东和经理人而言都至关重要。

我们对董事会组成所做的任何改变，都不会改变我和Charlie经营伯克希尔的方式。我们将继续在工作中强调实质重于形式，尽可能减少董事会上用于展示汇报和走过场活动的时间。我们董事会最重要的职责很可能是挑选我和Charlie的继任者，而这也将是其关注的重点。
我们现有的董事会一直监督着这家以股东为导向的企业，始终按照第68-74页所述的经济原则来运营（我敦促所有新股东阅读这些原则）。我们的目标是找到同样忠于这些原则的新董事。

审计委员会

审计委员会不能审计。只有公司的外部审计师才能确定管理层声称的盈利是否可疑。忽视这一现实、反而聚焦于审计委员会结构和章程的改革，不会有多大成效。

正如我们讨论过的，近年来有太多管理者利用会计和运营手法——通常是合法的——来粉饰公司数字，尽管如此却严重误导了投资者。审计师常常知道这些欺骗行为。然而，太多时候他们保持沉默。审计委员会的关键工作就是让审计师把他们知道的都说出来。

要做好这项工作，委员会必须确保审计师更担心误导委员会成员，而不是得罪管理层。近年来审计师并没有这种感觉。相反，他们通常把CEO视为客户，而不是股东或董事。这是日常合作关系的自然结果，也源于审计师明白：不管章程怎么说，CEO和CFO支付他们的费用，并决定是否继续聘用他们来做审计和其他工作。最近出台的规则不会实质性地改变这一现实。能打破这种亲密关系的，是审计委员会毫不含糊地把审计师置于风口浪尖，让他们明白：如果不把他们知道或怀疑的事情说出来，他们将面临重大金钱处罚。

依我看，审计委员会可以通过向审计师提出四个问题来实现这一目标，答案应记录并报告给股东。这四个问题是：

1. 如果审计师全权负责编制公司财务报表，他们会不会以与管理层所选方式不同的任何方式编制？这个问题应涵盖重大和非重大差异。如果审计师会以不同方式处理，那么管理层的理由和审计师的回应都应披露。审计委员会随后应评估事实。
2. 如果审计师是投资者，他是否收到了——用通俗易懂的英文——理解公司报告期内财务业绩所必需的关键信息？
3. 公司是否遵循了如果审计师本人担任CEO时也会遵循的相同内部审计程序？如果不是，差异是什么，为什么？
4. 审计师是否知道任何行动——无论是会计方面还是运营方面——其目的和效果是将收入或费用从一个报告期转移到另一个报告期？

如果审计委员会提出这些问题，那么委员会的组成——大多数改革的焦点——就变得次要了。此外，这一程序还能节省时间和费用。当审计师被置于风口浪尖时，他们会履行职责。如果他们没有……嗯，我们已经看到了结果。

我们列举的这些问题应在盈利报告公开发布前至少一周提出。这样的时机安排可以让审计师与管理层之间的分歧在委员会面前充分讨论并得到解决。如果时间更紧——如果审计师和委员会互动时盈利发布在即——委员会就会感到压力，不得不匆忙批准准备好的数字。仓促是准确性的敌人。事实上，我认为SEC最近缩短报告截止日期的做法会损害股东获得的信息质量。Charlie和我认为这一规则是个错误，应该撤销。
我们的四个问题有一个主要优势：它们能起到预防作用。一旦审计师知道审计委员会会要求他们明确支持（而不仅仅是默许）管理层的行动，他们就会在问题早期抵制不当行为，远在那些似是而非的数字被记入公司账簿之前。对原告律师的恐惧会确保这一点。

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去年九月，《芝加哥论坛报》刊登了一组关于安达信（Arthur Andersen）的四篇系列报道，精彩地揭示了近年来会计准则和审计质量是如何滑坡的。几十年前，安达信的审计意见曾是行业的金标准。在公司内部，一个精英专业标准小组（PSG）坚持诚实报告，无论客户施加多大压力。坚守这一原则，PSG在1992年曾坚持认为股票期权的成本应被记为费用——这显然是其本质。然而，安达信那些“拉业务”的合伙人推翻了PSG的立场，他们知道客户想要什么——不管现实如何，更高的报告利润。许多CEO也反对费用化，因为他们知道，如果必须记录真实成本，他们渴望的那笔荒唐的巨额期权就会被大幅削减。

在安达信转向之后不久，独立的会计准则制定委员会（FASB）以7比0投票支持期权费用化。不出所料，各大审计公司和一群CEO冲进华盛顿向参议院施压——还有什么机构比参议院更适合决定会计问题呢？——迫使FASB屈服。抗议者的声音通过他们的大笔政治捐款被放大，这些捐款通常用的是公司资金，而这些资金本属于即将被欺骗的股东。这不是一堂公民课该看到的景象。

可耻的是，参议院以88比9投票反对费用化。几位知名参议员甚至呼吁，如果FASB不放弃其立场，就该解散它。（独立性不过如此。）时任SEC主席阿瑟·莱维特（Arthur Levitt, Jr.）——通常是股东的警惕捍卫者——后来将他被迫向国会和公司压力低头描述为他主席任期内最遗憾的事。（这一丑闻的细节在莱维特的优秀著作《直面华尔街》中有详细描述。）

有了参议院在口袋里，加上SEC被火力压制，美国公司界知道，在会计问题上，现在是他们说了算。随之而来的是一个“一切皆可”的盈利报告新时代——由知名审计师认可、在某些情况下甚至鼓励——被开启了。随后那种放纵的行为迅速成为大泡沫的打气筒。

在受到参议院威胁后，FASB退缩了其原始立场，改为一种“荣誉制度”方法，宣布费用化是更可取的做法，但也允许公司如果愿意可以忽略这一成本。令人沮丧的结果是：标普500中的498家公司选择了被认为不那么可取的方法，这自然让它们报告更高的“利润”。渴望薪酬的CEO们喜欢这个结果：让FASB去要荣誉吧；他们拥有制度。

在我们1992年的年报中，在讨论那么多CEO不体面且自私自利的行为时，我说道：“当商业精英在对自己重要的问题上倡导荒谬的主张时，他们冒着在社会重大问题——对此他们或许有有价值的见解——上失去可信度的风险。”

这种可信度的丧失已经发生了。CEO们现在的任务是重新赢得美国的信任——为了国家利益，他们必须做到这一点。然而，他们不会通过空洞的广告、毫无意义的政策声明或董事会和委员会的结构调整来成功实现这一努力。相反，CEO们必须将受托责任作为一种生活方式，将所有者视为合伙人，而非替罪羊。是时候让CEO们言行一致了。

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给投资者的三条建议：第一，警惕会计处理不严谨的公司。如果一家公司仍不将期权列为费用，或者其养老金假设十分离谱，那就要当心了。当管理层在可见的方面采取低标准做法时，他们在幕后很可能也遵循类似的路径。厨房里很少只有一只蟑螂。

鼓吹EBITDA（息税折旧摊销前利润）是一种尤其有害的做法。这样做暗示折旧并非真正的费用，因为它是一项“非现金”支出。这纯属胡说。事实上，折旧是一项格外令人生厌的费用，因为其所代表的现金支出是预先付出的——在被收购资产为企业带来任何收益之前就已支付。试想一下，如果今年年初，一家公司一次性预付了全体员工未来十年的薪酬（就像他们为一项可使用十年的固定资产预先支付现金那样）。在接下来的九年里，薪酬将是一项“非现金”费用——即今年建立的预付薪酬资产的减少。有谁愿意争辩说，第二年至第十年期间记录这笔费用仅仅是一种记账形式？

第二，难以理解的脚注通常表明管理层不可信。如果你看不懂某条脚注或其他管理层的解释，通常是因为首席执行官不想让你看懂。安然（Enron）对某些交易的描述至今仍让我困惑不解。

最后，警惕那些吹嘘盈利预测和增长预期的公司。企业很少在风平浪静、没有意外的环境中运营，盈利也根本不会平稳增长（当然，除了投资银行的承销说明书里）。

查理和我不仅今天不知道我们的企业明年会赚多少——我们甚至连它们下个季度会赚多少都不知道。我们怀疑那些经常声称知道未来的CEO——而如果他们始终能实现自己宣称的目标，我们更是彻底难以置信。总是承诺“完成数字”的管理者，总有一天会被诱惑去编造数字。

股东指定捐赠

约97.3%的合格股份参与了伯克希尔2002年度的股东指定捐赠计划，捐赠总额为1,650万美元。

在该计划执行的22年间，伯克希尔累计按照股东的指示捐赠了1.97亿美元。伯克希尔其余捐赠由我们的子公司进行，它们沿袭了被收购前的慈善模式（只是其原所有者自己承担个人慈善的责任）。总体而言，我们的子公司在2002年捐赠了2,400万美元，其中包括400万美元的实物捐赠。

要参与未来的计划，您必须拥有以实际所有人名义（而非经纪商、银行或存管机构的代名人名义）登记的A类股。在2003年8月31日之前未如此登记的股份将不符合2003年计划资格。收到我们寄来的捐赠表格后，请及时寄回，以免搁置或遗忘。逾期收到的指定将不予受理。

年度会议

今年的年度会议将于5月3日星期六举行，地点仍为市政礼堂。早上7点开门，电影8:30开始，会议本身9:30开始。中午短暂休息用餐（市政礼堂的售卖亭有售三明治）。除休息时间外，查理和我会回答问题直到下午3:30。请向我们提出你们最尖锐的问题。
随函附上的股东委托书附件会说明如何获取参加年会及其他活动所需的凭证。至于飞机、酒店和租车预订，我们再次签约美国运通（800-799-6634）为您提供特别帮助。他们每年都为我们做得非常出色，我在此表示感谢。

按照惯例，我们会安排大巴从各大酒店接送至会场。会后，大巴将返回酒店，并途经内布拉斯加家具城、波仙珠宝和机场。即便如此，您可能还是会觉得有辆车更方便。

今年我们的伯克希尔商品和服务展区将比以往更大更好。所以准备好花钱吧。我想您会特别喜欢参观“尽情大厨”的展台，在那里您可能会碰到Doris和Sheila。

GEICO将设立一个展位，由来自全国各地的多位顶级顾问坐镇，随时准备为您提供汽车保险报价。在大多数情况下，GEICO能够为您提供特别的股东折扣（通常为8%）。这一特别优惠在我们开展业务的49个辖区中有41个允许提供。请带上您现有保险的详细资料，看看我们能否帮您省钱。

周六，在奥马哈机场，我们将照常陈列NetJets®的各种飞机供您参观。只需在市民中心向工作人员询问即可安排参观。如果您在周末购买了我们认为足够多的商品，您可能真的需要自己的飞机把它们运回家。此外，如果您购买一架飞机的部分产权，我个人会确保您获得一包三条装的Fruit of the Loom内裤。

在内布拉斯加家具城（位于72街，Dodge街和Pacific街之间，占地77英亩），我们将再次推出“伯克希尔周末”定价，这意味着我们将为股东提供通常仅给予员工的折扣。六年前我们首次在内布拉斯加家具城推出这一特别定价，“周末”期间的销售额从1997年的530万美元增长到2002年的1,420万美元。

要获得折扣，您必须在5月1日（周四）至5月5日（周一）期间购物，并出示您的会议凭证。这一期间的特别定价甚至适用于几个名牌厂商的产品，这些厂商通常有严格的不打折规定，但为了我们的股东周末精神，他们破例为您提供了优惠。我们感谢他们的合作。内布拉斯加家具城工作日营业时间为上午10点至晚上9点，周日为上午10点至下午6点。今年周六下午6点至晚上10点，我们将举办仅限股东参加的特别活动。我会在那里，吃热狗、喝可乐。

波仙珠宝——全美除蒂芙尼曼哈顿店外最大的珠宝店——将举办两场仅限股东参加的活动。第一场是5月2日（周五）晚上6点至10点的鸡尾酒招待会。第二场是主要庆典，将于5月4日（周日）上午9点至下午5点举行。让Charlie在您的销售收据上签名吧。

股东优惠价格将于周四至周一有效，因此如果您想避开周五晚上和周日的大批人群，可以选择其他时间前来，并表明您的股东身份。周六我们营业至下午6点。波仙的毛利率比其主要竞争对手整整低20个百分点，所以您买得越多，省得越多（至少我妻子和女儿是这么告诉我的）。
在波仙珠宝店外的商场里，周日下午我们将安排几位世界顶级的桥牌高手与股东们切磋牌技。预计鲍勃·哈曼（Bob Hamman）、莎伦·奥斯伯格（Sharon Osberg）、弗雷德·吉特尔曼（Fred Gitelman）和谢里·温斯托克（Sheri Winestock）各守一桌。美国两届国际象棋冠军帕特里克·沃尔夫（Patrick Wolff）也会到场，蒙着眼睛迎战各路高手！去年，帕特里克同时下六盘棋——双眼被眼罩牢牢蒙住——却头一回输了棋（不过其他五盘全胜）。自那以后他加练了很久，打算今年开启新的连胜纪录。

此外，比尔·罗伯特（Bill Roberti）——世界上仅有的两位两夺西洋双陆棋世界冠军的人之一——也会到场检验大家的棋艺。最后，我们还有一位新朋友：1991年世界拼字比赛冠军彼得·莫里斯（Peter Morris）。彼得将同时与五位挑战者对弈（不过他不用蒙眼），还允许对手查阅拼字词典。

我们还要在商场里考验一下大家的嗓子。我来自费城的朋友阿尔·厄尔利（Al Oehrle）会在钢琴旁伴奏，任何歌曲任何调子都行。苏茜和我领唱——她唱得好，我嘛，跟着喊两声。

戈拉特餐厅（Gorat's）——我最爱的牛排馆——将在5月4日（周日）再次为伯克希尔股东独家营业，营业时间从下午4点到晚上10点。请记住，周日要来戈拉特餐厅必须提前预约。预约电话：402-551-3733，请在4月1日（且只能在4月1日）拨打。如果周日订满了，试试你在奥马哈的其他晚上去戈拉特。点一份带双层土豆饼的嫩T骨牛排，能显出你是行家。

今年不会有棒球赛了。去年我的快速球被计时为时速5英里之后，我决定挂靴。所以咱们周六晚上在NFM见吧。

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明年的会议将在奥马哈新会展中心举行。更换场地后，我们可以把会议安排在周六或周一，由大家多数人偏好决定。请用随函附上的专用选票投出你的偏好——但仅限未来有可能参会的人投票。

我们将根据股东人数（而非持股数）来决定周六还是周一。也就是说，持有一股B类股的股东与持有很多股A类股的股东享有同等投票权。如果投票结果相近，我们优先考虑外地股东的意见。

再次强调，仅当你未来有可能参加某些会议时才请投票。

2003年2月21日

沃伦·E·巴菲特
董事会主席