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
2003	......	21.0	28.7	(7.7)
2004	......	10.5	10.9	(.4)
2005	......	6.4	4.9	1.5
2006	......	18.4	15.8	2.6
Compounded Annual Gain – 1965-2006 Overall Gain – 1964-2006		21.4%	10.4%	11.0
		361,156%	6,479%

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 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.

BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 2006 was \$16.9 billion, which increased the per-share book value of both our Class A and Class B stock by 18.4%. Over the last 42 years (that is, since present management took over) book value has grown from \$19 to \$70,281, a rate of 21.4% compounded annually.*

We believe that \$16.9 billion is a record for a one-year gain in net worth – more than has ever been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., AOL's purchase of Time Warner). Of course, Exxon Mobil and other companies earn far more than Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth.

All that said, a confession about our 2006 gain is in order. Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation. After hammering us with hurricanes in 2004 and 2005 – storms that caused us to lose a bundle on super-cat insurance – she just vanished. Last year, the red ink from this activity turned black – very black.

In addition, the great majority of our 73 businesses did outstandingly well in 2006. Let me focus for a moment on one of our largest operations, GEICO. What management accomplished there was simply extraordinary.

As I've told you before, Tony Nicely, GEICO's CEO, went to work at the company 45 years ago, two months after turning 18. He became CEO in 1992, and from then on the company's growth exploded. In addition, Tony has delivered staggering productivity gains in recent years. Between yearend 2003 and yearend 2006, the number of GEICO policies increased from 5.7 million to 8.1 million, a jump of $42\%$ . Yet during that same period, the company's employees (measured on a fulltime-equivalent basis) fell $3.5\%$ . So productivity grew $47\%$ . And GEICO didn't start fat.

That remarkable gain has allowed GEICO to maintain its all-important position as a low-cost producer, even though it has dramatically increased advertising expenditures. Last year GEICO spent \$631 million on ads, up from \$238 million in 2003 (and up from \$31 million in 1995, when Berkshire took control). Today, GEICO spends far more on ads than any of its competitors, even those much larger. We will continue to raise the bar.

Last year I told you that if you had a new son or grandson to be sure to name him Tony. But Don Keough, a Berkshire director, recently had a better idea. After reviewing GEICO's performance in 2006, he wrote me, “Forget births. Tell the shareholders to immediately change the names of their present children to Tony or Antoinette.” Don signed his letter “Tony.”

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

Charlie Munger – my partner and Berkshire’s vice chairman – and I run what has turned out to be a big business, one with 217,000 employees and annual revenues approaching \$100 billion. We certainly didn’t plan it that way. Charlie began as a lawyer, and I thought of myself as a security analyst. Sitting in those seats, we both grew skeptical about the ability of big entities of any type to function well. Size seems to make many organizations slow-thinking, resistant to change and smug. In Churchill’s words: “We shape our buildings, and afterwards our buildings shape us.” Here’s a telling fact: Of the ten non-oil companies having the largest market capitalization in 1965 – titans such as General Motors, Sears, DuPont and Eastman Kodak – only one made the 2006 list.

In fairness, we’ve seen plenty of successes as well, some truly outstanding. There are many giant-company managers whom I greatly admire; Ken Chenault of American Express, Jeff Immelt of G.E. and Dick Kovacevich of Wells Fargo come quickly to mind. But I don’t think I could do the management job they do. And I know I wouldn’t enjoy many of the duties that come with their positions – meetings, speeches, foreign travel, the charity circuit and governmental relations. For me, Ronald Reagan had it right: “It’s probably true that hard work never killed anyone – but why take the chance?”

So I've taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions. Our managers have returned this trust by working hard and effectively.

For their performance over the last 42 years – and particularly for 2006 – Charlie and I thank them.

Yardsticks

Charlie and I measure Berkshire's progress and evaluate its intrinsic value in a number of ways. No single criterion is effective in doing these jobs, and even an avalanche of statistics will not capture some factors that are important. For example, it's essential that we have managers much younger than I available to succeed me. Berkshire has never been in better shape in this regard – but I can't prove it to you with numbers.

There are two statistics, however, that are of real importance. The first is the amount of investments (including cash and cash-equivalents) that we own on a per-share basis. Arriving at this figure, we exclude investments held in our finance operation because these are largely offset by borrowings. Here's the record since present management acquired control of Berkshire:

Year	Per-Share Investments*
1965	$4
1975	159
1985	2,407
1995	21,817
2006	$80,636
Compound Growth Rate 1965-2006	27.5%
Compound Growth Rate 1995-2006	12.6%
*Net of minority interests

In our early years we put most of our retained earnings and insurance float into investments in marketable securities. Because of this emphasis, and because the securities we purchased generally did well, our growth rate in investments was for a long time quite high.

Over the years, however, we have focused more and more on the acquisition of operating businesses. Using our funds for these purchases has both slowed our growth in investments and accelerated our gains in pre-tax earnings from non-insurance businesses, the second yardstick we use. Here's how those earnings have looked:

Year	Pre-Tax Earnings Per Share*
1965	$4
1975	4
1985	52
1995	175
2006	$3,625
Compound Growth Rate 1965-2006	17.9%
Compound Growth Rate 1995-2006	31.7%

*Excluding purchase-accounting adjustments and net of minority interests

Last year we had a good increase in non-insurance earnings – 38%. Large gains from here on in, though, will come only if we are able to make major, and sensible, acquisitions. That will not be easy. We do, however, have one advantage: More and more, Berkshire has become “the buyer of choice” for business owners and managers. Initially, we were viewed that way only in the U.S. (and more often than not by private companies). We’ve long wanted, nonetheless, to extend Berkshire’s appeal beyond U.S. borders. And last year, our globe-trotting finally got underway.

Acquisitions

We began 2006 by completing the three acquisitions pending at yearend 2005, spending about \$6 billion for PacifiCorp, Business Wire and Applied Underwriters. All are performing very well.

The highlight of the year, however, was our July 5 $^{th}$ acquisition of most of ISCAR, an Israeli company, and our new association with its chairman, Eitan Wertheimer, and CEO, Jacob Harpaz. The story here began on October 25, 2005, when I received a 1 $^{1/4}$ -page letter from Eitan, of whom I then knew nothing. The letter began, “I am writing to introduce you to ISCAR,” and proceeded to describe a cutting-tool business carried on in 61 countries. Then Eitan wrote, “We have for some time considered the issues of generational transfer and ownership that are typical for large family enterprises, and have given much thought to ISCAR’s future. Our conclusion is that Berkshire Hathaway would be the ideal home for ISCAR. We believe that ISCAR would continue to thrive as a part of your portfolio of businesses.”

Overall, Eitan's letter made the quality of the company and the character of its management leap off the page. It also made me want to learn more, and in November, Eitan, Jacob and ISCAR's CFO, Danny Goldman, came to Omaha. A few hours with them convinced me that if we were to make a deal, we would be teaming up with extraordinarily talented managers who could be trusted to run the business after a sale with all of the energy and dedication that they had exhibited previously. However, having never bought a business based outside of the U.S. (though I had bought a number of foreign stocks), I needed to get educated on some tax and jurisdictional matters. With that task completed, Berkshire purchased $80\%$ of ISCAR for \$4 billion. The remaining $20\%$ stays in the hands of the Wertheimer family, making it our valued partner.

ISCAR's products are small, consumable cutting tools that are used in conjunction with large and expensive machine tools. It's a business without magic except for that imparted by the people who run it. But Eitan, Jacob and their associates are true managerial magicians who constantly develop tools that make their customers' machines more productive. The result: ISCAR makes money because it enables its customers to make more money. There is no better recipe for continued success.

In September, Charlie and I, along with five Berkshire associates, visited ISCAR in Israel. We – and I mean every one of us – have never been more impressed with any operation. At ISCAR, as throughout Israel, brains and energy are ubiquitous. Berkshire shareholders are lucky to have joined with Eitan, Jacob, Danny and their talented associates.

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

A few months later, Berkshire again became “the buyer of choice” in a deal brought to us by my friend, John Roach, of Fort Worth. John, many of you will remember, was Chairman of Justin Industries, which we bought in 2000. At that time John was helping John Justin, who was terminally ill, find a permanent home for his company. John Justin died soon after we bought Justin Industries, but it has since been run exactly as we promised him it would be.

Visiting me in November, John Roach brought along Paul Andrews, Jr., owner of about 80% of TTI, a Fort Worth distributor of electronic components. Over a 35-year period, Paul built TTI from \$112,000 of sales to \$1.3 billion. He is a remarkable entrepreneur and operator.

Paul, 64, loves running his business. But not long ago he happened to witness how disruptive the death of a founder can be both to a private company's employees and the owner's family. What starts out as disruptive, furthermore, often evolves into destructive. About a year ago, therefore, Paul began to think about selling TTI. His goal was to put his business in the hands of an owner he had carefully chosen, rather than allowing a trust officer or lawyer to conduct an auction after his death.

Paul rejected the idea of a “strategic” buyer, knowing that in the pursuit of “synergies,” an owner of that type would be apt to dismantle what he had so carefully built, a move that would uproot hundreds of his associates (and perhaps wound TTI’s business in the process). He also ruled out a private equity firm, which would very likely load the company with debt and then flip it as soon as possible.

That left Berkshire. Paul and I met on the morning of November 15 $^{th}$ and made a deal before lunch. Later he wrote me: “After our meeting, I am confident that Berkshire is the right owner for TTI . . . I am proud of our past and excited about our future.” And so are Charlie and I.

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

We also made some “tuck-in” acquisitions during 2006 at Fruit of the Loom (“Fruit”), MiTek, CTB, Shaw and Clayton. Fruit made the largest purchases. First, it bought Russell Corp., a leading producer of athletic apparel and uniforms for about \$1.2 billion (including assumed debt) and in December it agreed to buy the intimate apparel business of VF Corp. Together, these acquisitions add about \$2.2 billion to Fruit’s sales and bring with them about 23,000 employees.

Charlie and I love it when we can acquire businesses that can be placed under managers, such as John Holland at Fruit, who have already shown their stuff at Berkshire. MiTek, for example, has made 14 acquisitions since we purchased it in 2001, and Gene Toombs has delivered results from these deals far in excess of what he had predicted. In effect, we leverage the managerial talent already with us by these tuck-in deals. We will make many more.

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

We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.

Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow while both were shopping. The elderly man explained apologetically that he had lost track of his wife and was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also wandered off and suggested that it might be more efficient if they jointly looked for the two women. Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her, we’ll look for yours.”

What we are looking for is described on page 25. If you have an acquisition candidate that fits, call me – day or night. And then watch me shatter a stained glass window.

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

Now, let's examine the four major operating sectors of Berkshire. Lumping their financial figures together impedes analysis. So we'll look at them as four separate businesses, starting with the all-important insurance group.

Insurance

Next month marks the 40 $^{th}$ anniversary of our entrance into the insurance business. It was on March 9, 1967, that Berkshire purchased National Indemnity and its companion company, National Fire & Marine, from Jack Ringwalt for \$8.6 million.

Jack was a long-time friend of mine and an excellent, but somewhat eccentric, businessman. For about ten minutes every year he would get the urge to sell his company. But those moods – perhaps brought on by a tiff with regulators or an unfavorable jury verdict – quickly vanished.

In the mid-1960s, I asked investment banker Charlie Heider, a mutual friend of mine and Jack's, to alert me the next time Jack was “in heat.” When Charlie’s call came, I sped to meet Jack. We made a deal in a few minutes, with me waiving an audit, “due diligence” or anything else that would give Jack an opportunity to reconsider. We just shook hands, and that was that.

When we were due to close the purchase at Charlie's office, Jack was late. Finally arriving, he explained that he had been driving around looking for a parking meter with some unexpired time. That was a magic moment for me. I knew then that Jack was going to be my kind of manager.

When Berkshire purchased Jack's two insurers, they had “float” of \$17 million. We’ve regularly offered a long explanation of float in earlier reports, which you can read on our website. Simply put, float is money we hold that is not ours but which we get to invest.

At the end of 2006, our float had grown to \$50.9 billion, and we have since written a huge retroactive reinsurance contract with Equitas – which I will describe in the next section – that boosts float by another \$7 billion. Much of the gain we’ve made has come through our acquisition of other insurers, but we’ve also had outstanding internal growth, particularly at Ajit Jain’s amazing reinsurance operation. Naturally, I had no notion in 1967 that our float would develop as it has. There’s much to be said for just putting one foot in front of the other every day.

The float from retroactive reinsurance contracts, of which we have many, automatically drifts down over time. Therefore, it will be difficult for us to increase float in the future unless we make new acquisitions in the insurance field. Whatever its size, however, the all-important cost of Berkshire's float over time is likely to be significantly below that of the industry, perhaps even falling to less than zero. Note the words “over time.” There will be bad years periodically. You can be sure of that.

In 2006, though, everything went right in insurance – really right. Our managers – Tony Nicely (GEICO), Ajit Jain (B-H Reinsurance), Joe Brandon and Tad Montross (General Re), Don Wurster (National Indemnity Primary), Tom Nerney (U.S. Liability), Tim Kenesey (Medical Protective), Rod Eldred (Homestate Companies and Cypress), Sid Ferenc and Steve Menzies (Applied Underwriters), John Kizer (Central States) and Don Towle (Kansas Bankers Surety) – simply shot the lights out. When I recite their names, I feel as if I’m at Cooperstown, reading from the Hall of Fame roster. Of course, the overall insurance industry also had a terrific year in 2006. But our managers delivered results generally superior to those of their competitors.

Below is the tally on our underwriting and float for each major sector of insurance. Enjoy the view, because you won't soon see another like it.

	(in $ millions)
	Underwriting Profit (Loss)		Yearend Float
Insurance Operations	2006	2005	2006	2005
General Re	$ 526	$( 334)	$22,827	$22,920
B-H Reinsurance	1,658	(1,069)	16,860	16,233
GEICO	1,314	1,221	7,171	6,692
Other Primary	340**	235*	4,029	3,442
Total	$3,838	$ 53	$50,887	$49,287

* Includes MedPro from June 30, 2005.
** Includes Applied Underwriters from May 19, 2006.
* * * * * * * * * * * *

In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think they will remain satisfactory. The big unknown is super-cat insurance. Were the terrible hurricane seasons of 2004-05 aberrations? Or were they our planet's first warning that the climate of the $21^{\text{st}}$ Century will differ materially from what we've seen in the past? If the answer to the second question is yes, 2006 will soon be perceived as a misleading period of calm preceding a series of devastating storms. These could rock the insurance industry. It's naive to think of Katrina as anything close to a worst-case event.

Neither Ajit Jain, who manages our super-cat operation, nor I know what lies ahead. We do know that it would be a huge mistake to bet that evolving atmospheric changes are benign in their implications for insurers.

Don't think, however, that we have lost our taste for risk. We remain prepared to lose \$6 billion in a single event, if we have been paid appropriately for assuming that risk. We are not willing, though, to take on even very small exposures at prices that don't reflect our evaluation of loss probabilities. Appropriate prices don't guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful.

Lloyd's, Equitas and Retroactive Reinsurance

Last year – we are getting now to Equitas – Berkshire agreed to enter into a huge retroactive reinsurance contract, a policy that protects an insurer against losses that have already happened, but whose cost is not yet known. I’ll give you details of the agreement shortly. But let’s first take a journey through insurance history, following the route that led to our deal.

Our tale begins around 1688, when Edward Lloyd opened a small coffee house in London. Though no Starbucks, his shop was destined to achieve worldwide fame because of the commercial activities of its clientele – shipowners, merchants and venturesome British capitalists. As these parties sipped Edward’s brew, they began to write contracts transferring the risk of a disaster at sea from the owners of ships and their cargo to the capitalists, who wagered that a given voyage would be completed without incident. These capitalists eventually became known as “underwriters at Lloyd’s.”

Though many people believe Lloyd's to be an insurance company, that is not the case. It is instead a place where many member-insurers transact business, just as they did centuries ago.

Over time, the underwriters solicited passive investors to join in syndicates. Additionally, the business broadened beyond marine risks into every imaginable form of insurance, including exotic coverages that spread the fame of Lloyd's far and wide. The underwriters left the coffee house, found grander quarters and formalized some rules of association. And those persons who passively backed the underwriters became known as “names.”

Eventually, the names came to include many thousands of people from around the world, who joined expecting to pick up some extra change without effort or serious risk. True, prospective names were always solemnly told that they would have unlimited and everlasting liability for the consequences of their syndicate's underwriting – “down to the last cufflink,” as the quaint description went. But that warning came to be viewed as perfunctory. Three hundred years of retained cufflinks acted as a powerful sedative to the names poised to sign up.

Then came asbestos. When its prospective costs were added to the tidal wave of environmental and product claims that surfaced in the 1980s, Lloyd's began to implode. Policies written decades earlier – and largely forgotten about – were developing huge losses. No one could intelligently estimate their total, but it was certain to be many tens of billions of dollars. The specter of unending and unlimited losses terrified existing names and scared away prospects. Many names opted for bankruptcy; some even chose suicide.

From these shambles, there came a desperate effort to resuscitate Lloyd's. In 1996, the powers that be at the institution allotted £11.1 billion to a new company, Equitas, and made it responsible for paying all claims on policies written before 1993. In effect, this plan pooled the misery of the many syndicates in trouble. Of course, the money allotted could prove to be insufficient – and if that happened, the names remained liable for the shortfall.

But the new plan, by concentrating all of the liabilities in one place, had the advantage of eliminating much of the costly intramural squabbling that went on among syndicates. Moreover, the pooling allowed claims evaluation, negotiation and litigation to be handled more intelligently than had been the case previously. Equitas embraced Ben Franklin's thinking: “We must all hang together, or assuredly we shall hang separately.”

From the start, many people predicted Equitas would eventually fail. But as Ajit and I reviewed the facts in the spring of 2006 – 13 years after the last exposed policy had been written and after the payment of £11.3 billion in claims – we concluded that the patient was likely to survive. And so we decided to offer a huge reinsurance policy to Equitas.

Because plenty of imponderables continue to exist, Berkshire could not provide Equitas, and its 27,972 names, unlimited protection. But we said – and I’m simplifying – that if Equitas would give us \$7.12 billion in cash and securities (this is the float I spoke about), we would pay all of its future claims and expenses up to \$13.9 billion. That amount was \$5.7 billion above what Equitas had recently guessed its ultimate liabilities to be. Thus the names received a huge – and almost certainly sufficient – amount of future protection against unpleasant surprises. Indeed the protection is so large that Equitas plans a cash payment to its thousands of names, an event few of them had ever dreamed possible.

And how will Berkshire fare? That depends on how much “known” claims will end up costing us, how many yet-to-be-presented claims will surface and what they will cost, how soon claim payments will be made and how much we earn on the cash we receive before it must be paid out. Ajit and I think the odds are in our favor. And should we be wrong, Berkshire can handle it.

Scott Moser, the CEO of Equitas, summarized the transaction neatly: “Names wanted to sleep easy at night, and we think we’ve just bought them the world’s best mattress.”

* * * * * * * * * * *

Warning: It's time to eat your broccoli – I am now going to talk about accounting matters. I owe this to those Berkshire shareholders who love reading about debits and credits. I hope both of you find this discussion helpful. All others can skip this section; there will be no quiz.

Berkshire has done many retroactive transactions – in both number and amount a multiple of such policies entered into by any other insurer. We are the reinsurer of choice for these coverages because the obligations that are transferred to us – for example, lifetime indemnity and medical payments to be made to injured workers – may not be fully satisfied for 50 years or more. No other company can offer the certainty that Berkshire can, in terms of guaranteeing the full and fair settlement of these obligations. This fact is important to the original insurer, policyholders and regulators.

The accounting procedure for retroactive transactions is neither well known nor intuitive. The best way for shareholders to understand it, therefore, is for us to simply lay out the debits and credits. Charlie and I would like to see this done more often. We sometimes encounter accounting footnotes about important transactions that leave us baffled, and we go away suspicious that the reporting company wished it that way. (For example, try comprehending transactions “described” in the old 10-Ks of Enron, even after you know how the movie ended.)

So let us summarize our accounting for the Equitas transaction. The major debits will be to Cash and Investments, Reinsurance Recoverable, and Deferred Charges for Reinsurance Assumed (“DCRA”). The major credit will be to Reserve for Losses and Loss Adjustment Expense. No profit or loss will be recorded at the inception of the transaction, but underwriting losses will thereafter be incurred annually as the DCRA asset is amortized downward. The amount of the annual amortization charge will be primarily determined by how our end-of-the-year estimates as to the timing and amount of future loss payments compare to the estimates made at the beginning of the year. Eventually, when the last claim has been paid, the DCRA account will be reduced to zero. That day is 50 years or more away.

What's important to remember is that retroactive insurance contracts always produce underwriting losses for us. Whether these losses are worth experiencing depends on whether the cash we have received produces investment income that exceeds the losses. Recently our DCRA charges have annually delivered \$300 million or so of underwriting losses, which have been more than offset by the income we have realized through use of the cash we received as a premium. Absent new retroactive contracts, the amount of the annual charge would normally decline over time. After the Equitas transaction, however, the annual DCRA cost will initially increase to about \$450 million a year. This means that our other insurance operations must generate at least that much underwriting gain for our overall float to be cost-free. That amount is quite a hurdle but one that I believe we will clear in many, if not most, years.

Aren't you glad that I promised you there would be no quiz?

Manufacturing, Service and Retailing Operations

Our activities in this part of Berkshire cover the waterfront. Let's look, though, at a summary balance sheet and earnings statement for the entire group.

Balance Sheet 12/31/06 (in millions)

Assets		Liabilities and Equity Notes payable	$ 1,468
Cash and equivalents	$ 1,543
Accounts and notes receivable	3,793	Other current liabilities	6,635
Inventory	5,257	Total current liabilities	8,103
Other current assets	363
Total current assets	10,956
Goodwill and other intangibles	13,314	Deferred taxes	540
Fixed assets	8,934	Term debt and other liabilities	3,014
Other assets	1,168	Equity	22,715
	$34,372		$34,372

Earnings Statement (in millions)

	2006	2005	2004
Revenues	$52,660	$46,896	$44,142
Operating expenses (including depreciation of $823 in 2006, $699 in 2005 and $676 in 2004)	49,002	44,190	41,604
Interest expense	132	83	57
Pre-tax earnings	3,526*	2,623*	2,481*
Income taxes and minority interests	1,395	977	941
Net income	$2,131	$1,646	$1,540

*Does not include purchase-accounting adjustments.

This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing 25% on average tangible net worth last year. It’s noteworthy also that these operations used only minor financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the balance sheet – and that fact reduces the earnings on our average carrying value to 10.8%.

Here are a few newsworthy items about companies in this sector:

• Bob Shaw, a remarkable entrepreneur who from a standing start built Shaw Industries into the country's largest carpet producer, elected last year, at age 75, to retire. To succeed him, Bob recommended Vance Bell, a 31-year veteran at Shaw, and Bob, as usual, made the right call. Weakness in housing has caused the carpet business to slow. Shaw, however, remains a powerhouse and a major contributor to Berkshire's earnings.
• MiTek, a manufacturer of connectors for roof trusses at the time we purchased it in 2001, is developing into a mini-conglomerate. At the rate it is growing, in fact, “mini” may soon be inappropriate. In purchasing MiTek for \$420 million, we lent the company \$200 million at 9% and bought \$198 million of stock, priced at \$10,000 per share. Additionally, 55 employees bought 2,200 shares for \$22 million. Each employee paid exactly the same price that we did, in most cases borrowing money to do so.

And are they ever glad they did! Five years later, MiTek's sales have tripled and the stock is valued at \$71,699 per share. Despite its making 14 acquisitions, at a cost of \$291 million, MiTek has paid off its debt to Berkshire and holds \$35 million of cash. We celebrated the fifth anniversary of our purchase with a party in July. I told the group that it would be embarrassing if MiTek's stock price soared beyond that of Berkshire "A" shares. Don't be surprised, however, if that happens (though Charlie and I will try to make our shares a moving target).

- Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.

When Charlie and I were young, the newspaper business was as easy a way to make huge returns as existed in America. As one not-too-bright publisher famously said, “I owe my fortune to two great American institutions: monopoly and nepotism.” No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits.

The industry's staggering returns could be simply explained. For most of the $20^{\text{th}}$ Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town's supermarkets.

The great majority of families therefore felt the need for a paper every day, but understandably most didn't wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.

Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper's pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven. (Interestingly, though papers regularly – and often in a disapproving way – reported on the profitability of, say, the auto or steel industries, they never enlightened readers about their own Midas-like situation. Hmmm . . .)

As long ago as my 1991 letter to shareholders, I nonetheless asserted that this insulated world was changing, writing that “the media businesses . . . will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago.” Some publishers took umbrage at both this remark and other warnings from me that followed. Newspaper properties, moreover, continued to sell as if they were indestructible slot machines. In fact, many intelligent newspaper executives who regularly chronicled and analyzed important worldwide events were either blind or indifferent to what was going on under their noses.

Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed.

In Berkshire's world, Stan Lipsey does a terrific job running the Buffalo News, and I am enormously proud of its editor, Margaret Sullivan. The News' penetration of its market is the highest among that of this country's large newspapers. We also do better financially than most metropolitan newspapers, even though Buffalo's population and business trends are not good. Nevertheless, this operation faces unrelenting pressures that will cause profit margins to slide.

True, we have the leading online news operation in Buffalo, and it will continue to attract more viewers and ads. However, the economic potential of a newspaper internet site – given the many alternative sources of information and entertainment that are free and only a click away – is at best a small fraction of that existing in the past for a print newspaper facing no competition.

For a local resident, ownership of a city's paper, like ownership of a sports team, still produces instant prominence. With it typically comes power and influence. These are ruboffs that appeal to many people with money. Beyond that, civic-minded, wealthy individuals may feel that local ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper more than 40 years ago.

We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the “psychic” value of possessing one will wane, whereas owning a sports franchise will likely retain its cachet.

Unless we face an irreversible cash drain, we will stick with the News, just as we’ve said that we would. (Read economic principle 11, on page 76.) Charlie and I love newspapers – we each read five a day – and believe that a free and energetic press is a key ingredient for maintaining a great democracy. We hope that some combination of print and online will ward off economic doomsday for newspapers, and we will work hard in Buffalo to develop a sustainable business model. I think we will be successful. But the days of lush profits from our newspaper are over.

- A much improved situation is emerging at NetJets, which sells and manages fractionally-owned aircraft. This company has never had a problem growing: Revenues from flight operations have increased 596% since our purchase in 1998. But profits had been erratic.

Our move to Europe, which began in 1996, was particularly expensive. After five years of operation there, we had acquired only 80 customers. And by mid-year 2006 our cumulative pretax loss had risen to \$212 million. But European demand has now exploded, with a net of 589 customers having been added in 2005-2006. Under Mark Booth's brilliant leadership, NetJets is now operating profitably in Europe, and we expect the positive trend to continue.

Our U.S. operation also had a good year in 2006, which led to worldwide pre-tax earnings of \$143 million at NetJets last year. We made this profit even though we suffered a loss of \$19 million in the first quarter.

Credit Rich Santulli, along with Mark, for this turnaround. Rich, like many of our managers, has no financial need to work. But you'd never know it. He's absolutely tireless – monitoring operations, making sales, and traveling the globe to constantly widen the already-enormous lead that NetJets enjoys over its competitors. Today, the value of the fleet we manage is far greater than that managed by our three largest competitors combined.

There's a reason NetJets is the runaway leader: It offers the ultimate in safety and service. At Berkshire, and at a number of our subsidiaries, NetJets aircraft are an indispensable business tool. I also have a contract for personal use with NetJets and so do members of my family and most Berkshire directors. (None of us, I should add, gets a discount.) Once you've flown NetJets, returning to commercial flights is like going back to holding hands.

Regulated Utility Business

Berkshire has an 86.6% (fully diluted) interest in MidAmerican Energy Holdings, which owns a wide variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 3.7 million electric customers make it the third largest distributor of electricity in the U.K.; (2) MidAmerican Energy, which serves 706,000 electric customers, primarily in Iowa; (3) Pacific Power and Rocky Mountain Power, serving about 1.7 million electric customers in six western states; and (4) Kern River and Northern Natural pipelines, which carry about 8% of the natural gas consumed in the U.S.

Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave Sokol and Greg Abel. It’s unimportant how many votes each party has; we will make major moves only when we are unanimous in thinking them wise. Six years of working with Dave, Greg and Walter have underscored my original belief: Berkshire couldn’t have better partners.

Somewhat incongruously, MidAmerican owns the second largest real estate brokerage firm in the U.S., HomeServices of America. This company operates through 20 locally-branded firms with 20,300 agents. Despite HomeServices' purchase of two operations last year, the company's overall volume fell 9% to \$58 billion, and profits fell 50%.

The slowdown in residential real estate activity stems in part from the weakened lending practices of recent years. The “optional” contracts and “teaser” rates that have been popular have allowed borrowers to make payments in the early years of their mortgages that fall far short of covering normal interest costs. Naturally, there are few defaults when virtually nothing is required of a borrower. As a cynic has said, “A rolling loan gathers no loss.” But payments not made add to principal, and borrowers who can’t afford normal monthly payments early on are hit later with above-normal monthly obligations. This is the Scarlett O’Hara scenario: “I’ll think about that tomorrow.” For many home owners, “tomorrow” has now arrived. Consequently there is a huge overhang of offerings in several of HomeServices’ markets.

Nevertheless, we will be seeking to purchase additional brokerage operations. A decade from now, HomeServices will almost certainly be much larger.

Here are some key figures on MidAmerican's operations:

	Earnings (in $ millions)
	2006	2005
U.K. utilities	$338	$308
Iowa utility	348	288
Western utilities (acquired March 21, 2006)	356	N/A
Pipelines	376	309
HomeServices	74	148
Other (net)	226	115
Earnings before corporate interest and taxes	1,718	1,168
Interest, other than to Berkshire	(261)	(200)
Interest on Berkshire junior debt	(134)	(157)
Income tax	(407)	(248)
Net earnings	$916	$563
Earnings applicable to Berkshire*	$885	$523
Debt owed to others	16,946	10,296
Debt owed to Berkshire	1,055	1,289

*Includes interest earned by Berkshire (net of related income taxes) of \$87 in 2006 and \$102 in 2005.

Finance and Financial Products

You will be happy to hear – and I’m even happier – that this will be my last discussion of the losses at Gen Re’s derivative operation. When we started to wind this business down early in 2002, we had 23,218 contracts outstanding. Now we have 197. Our cumulative pre-tax loss from this operation totals \$409 million, but only \$5 million occurred in 2006. Charlie says that if we had properly classified the \$409 million on our 2001 balance sheet, it would have been labeled “Good Until Reached For.” In any event, a Shakespearean thought – slightly modified – seems appropriate for the tombstone of this derivative business: “All’s well that ends.”

We've also wound up our investment in Value Capital. So earnings or losses from these two lines of business are making their final appearance in the table that annually appears in this section.

Clayton Homes remains an anomaly in the manufactured-housing industry, which last year recorded its lowest unit sales since 1962. Indeed, the industry's volume last year was only about one-third that of 1999. Outside of Clayton, I doubt if the industry, overall, made any money in 2006.

Yet Clayton earned \$513 million pre-tax and paid Berkshire an additional \$86 million as a fee for our obtaining the funds to finance Clayton’s \$10 billion portfolio of installment receivables. Berkshire’s financial strength has clearly been of huge help to Clayton. But the driving force behind the company’s success is Kevin Clayton. Kevin knows the business forward and backward, is a rational decision-maker and a joy to work with. Because of acquisitions, Clayton now employs 14,787 people, compared to 6,661 at the time of our purchase.

We have two leasing operations: CORT (furniture), run by Paul Arnold, and XTRA (truck trailers), run by Bill Franz. CORT's earnings improved significantly last year, and XTRA's remained at the high level attained in 2005. We continue to look for tuck-in acquisitions to be run by Paul or Bill, and also are open to ideas for new leasing opportunities.

Here's a breakdown of earnings in this sector:

	(in millions)
	Pre-Tax Earnings		Interest-Bearing Liabilities
	2006	2005	2006	2005
Trading – ordinary income	$274	$200	$600	$1,061
Gen Re Securities (loss)	(5)	(104)	1,204*	2,617*
Life and annuity operation	29	11	2,459	2,461
Value Capital (loss)	6	(33)	N/A	N/A
Leasing operations	182	173	261	370
Manufactured-housing finance (Clayton)	513	416	10,498	9,299
Other	158	159	N/A	N/A
Income before capital gains	1,157	822
Trading – capital gains (losses)	938	(234)
Total	$2,095	$588

*Includes all liabilities

Investments

We show below our common stock investments. With two exceptions, those that had a market value of more than \$700 million at the end of 2006 are itemized. We don't itemize the two securities referred to, which have a market value of \$1.9 billion, because we continue to buy them. I could, of course, tell you their names. But then I would have to kill you.

Shares	Company	Percentage of Company Owned	12/31/06
			Cost* (in millions)	Market
151,610,700	American Express Company	12.6	$ 1,287	$ 9,198
36,417,400	Anheuser-Busch Cos., Inc.	4.7	1,761	1,792
200,000,000	The Coca-Cola Company	8.6	1,299	9,650
17,938,100	Conoco Phillips	1.1	1,066	1,291
21,334,900	Johnson & Johnson	0.7	1,250	1,409
6,708,760	M&T Bank Corporation	6.1	103	820
48,000,000	Moody’s Corporation	17.2	499	3,315
2,338,961,000	PetroChina “H” shares (or equivalents)	1.3	488	3,313
3,486,006	POSCO	4.0	572	1,158
100,000,000	The Procter & Gamble Company	3.2	940	6,427
229,707,000	Tesco	2.9	1,340	1,820
31,033,800	US Bancorp	1.8	969	1,123
17,072,192	USG Corp	19.0	536	936
19,944,300	Wal-Mart Stores, Inc.	0.5	942	921
1,727,765	The Washington Post Company	18.0	11	1,288
218,169,300	Wells Fargo & Company	6.5	3,697	7,758
1,724,200	White Mountains Insurance	16.0	369	999
	Others		5,866	8,315
	Total Common Stocks		$22,995	$61,533

*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or write-downs that have been required.

We are delighted by the 2006 business performance of virtually all of our investees. Last year, we told you that our expectation was that these companies, in aggregate, would increase their earnings by 6% to 8% annually, a rate that would double their earnings every ten years or so. In 2006 American Express,

Coca-Cola, Procter & Gamble and Wells Fargo, our largest holdings, increased per-share earnings by 18%, 9%, 8% and 11%. These are stellar results, and we thank their CEOs.

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

We’ve come close to eliminating our direct foreign-exchange position, from which we realized about \$186 million in pre-tax profits in 2006 (earnings that were included in the Finance and Financial Products table shown earlier). That brought our total gain since inception of this position in 2002 to \$2.2 billion. Here’s a breakdown by currency:

Total Gain (Loss) in Millions

Australian dollar	$247.1	Mexican peso	$106.1
British pound	287.2	New Zealand dollar	102.6
Canadian dollar	398.3	Singapore dollar	(2.6)
Chinese yuan	(12.7)	South Korean won	261.3
Euro	839.2	Swiss franc	9.6
Hong Kong dollar	(2.5)	Taiwan dollar	(45.3)
Japanese yen	1.9	Miscellaneous options	22.9

We’ve made large indirect currency profits as well, though I’ve never tallied the precise amount. For example, in 2002-2003 we spent about \$82 million buying – of all things – Enron bonds, some of which were denominated in Euros. Already we’ve received distributions of \$179 million from these bonds, and our remaining stake is worth \$173 million. That means our overall gain is \$270 million, part of which came from the appreciation of the Euro that took place after our bond purchase.

When we first began making foreign exchange purchases, interest-rate differentials between the U.S. and most foreign countries favored a direct currency position. But that spread turned negative in 2005. We therefore looked for other ways to gain foreign-currency exposure, such as the ownership of foreign equities or of U.S. stocks with major earnings abroad. The currency factor, we should emphasize, is not dominant in our selection of equities, but is merely one of many considerations.

As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world. We had about \$1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had \$.76 trillion of pseudo-trade last year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were \$.76 trillion – a full 6% of GDP – and we had no exports.) Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.

The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.

These transfers will have consequences, however. Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse compounding” as we pay ever-increasing amounts of interest on interest.

I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won't be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.

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

I should mention that all of the direct currency profits we have realized have come from forward contracts, which are derivatives, and that we have entered into other types of derivatives contracts as well. That may seem odd, since you know of our expensive experience in unwinding the derivatives book at Gen Re and also have heard me talk of the systemic problems that could result from the enormous growth in the use of derivatives. Why, you may wonder, are we fooling around with such potentially toxic material?

The answer is that derivatives, just like stocks and bonds, are sometimes wildly mispriced. For many years, accordingly, we have selectively written derivative contracts – few in number but sometimes for large dollar amounts. We currently have 62 contracts outstanding. I manage them personally, and they are free of counterparty credit risk. So far, these derivative contracts have worked out well for us, producing pre-tax profits in the hundreds of millions of dollars (above and beyond the gains I’ve itemized from forward foreign-exchange contracts). Though we will experience losses from time to time, we are likely to continue to earn – overall – significant profits from mispriced derivatives.

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

I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the Board knows exactly who should take over if I should die tonight. Each of the three is much younger than I. The directors believe it's important that my successor have the prospect of a long tenure.

Frankly, we are not as well-prepared on the investment side of our business. There's a history here: At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO's equity portfolio. But he is only six years younger than I. If I were to die soon, he would fill in magnificently for a short period. For the long-term, though, we need a different answer.

At our October board meeting, we discussed that subject fully. And we emerged with a plan, which I will carry out with the help of Charlie and Lou.

Under this plan, I intend to hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire's chief investment officer when the need for someone to do that arises. As part of the selection process, we may in fact take on several candidates.

Picking the right person(s) will not be an easy task. It's not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is far more to successful long-term investing than brains and performance that has recently been good.

Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.

Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.

Finally, we have a special problem to consider: our ability to keep the person we hire. Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager. We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere.

There are surely people who fit what we need, but they may be hard to identify. In 1979, Jack Byrne and I felt we had found such a person in Lou Simpson. We then made an arrangement with him whereby he would be paid well for sustained overperformance. Under this deal, he has earned large amounts. Lou, however, could have left us long ago to manage far greater sums on more advantageous terms. If money alone had been the object, that's exactly what he would have done. But Lou never considered such a move. We need to find a younger person or two made of the same stuff.

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

The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health. It's amazing what Cherry Coke and hamburgers will do for a fellow.

Some Changes on Berkshire's Board

The composition of our board will change in two ways this spring. One change will involve the Chace family, which has been connected to Berkshire and its predecessor companies for more than a century. In 1929, the first Malcolm G. Chace played an important role in merging four New England textile operations into Berkshire Fine Spinning Associates. That company merged with Hathaway Manufacturing in 1955 to form Berkshire Hathaway, and Malcolm G. Chace, Jr. became its chairman.

Early in 1965, Malcolm arranged for Buffett Partnership Ltd. to buy a key block of Berkshire shares and welcomed us as the new controlling shareholder of the company. Malcolm continued as non-executive chairman until 1969. He was both a wonderful gentleman and helpful partner.

That description also fits his son, Malcolm “Kim” Chace, who succeeded his father on Berkshire’s board in 1992. But last year Kim, now actively and successfully running a community bank that he founded in 1996, suggested that we find a younger person to replace him on our board. We have done so, and Kim will step down as a director at the annual meeting. I owe much to the Chaces and wish to thank Kim for his many years of service to Berkshire.

In selecting a new director, we were guided by our long-standing criteria, which are that board members be owner-oriented, business-savvy, interested and truly independent. I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in many forms, often range between \$150,000 and \$250,000 annually, compensation that may approach or even exceed all other income of the “independent” director. And – surprise, surprise – director compensation has soared in recent years, pushed up by recommendations from corporate America’s favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is not.)

Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?”

The questions I instead get would sound ridiculous to someone seeking candidates for, say, a football team, or an arbitration panel or a military command. In those cases, the selectors would look for people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment.

That's exactly what we've found in Susan Decker, CFO of Yahoo!, who will join our board at the annual meeting. We are lucky to have her: She scores very high on our four criteria and additionally, at 44, is young – an attribute, as you may have noticed, that your Chairman has long lacked. We will seek more young directors in the future, but never by slighting the four qualities that we insist upon.

This and That

Berkshire will pay about \$4.4 billion in federal income tax on its 2006 earnings. In its last fiscal year the U.S. Government spent \$2.6 trillion, or about \$7 billion per day. Thus, for more than half of one day, Berkshire picked up the tab for all federal expenditures, ranging from Social Security and Medicare payments to the cost of our armed services. Had there been only 600 taxpayers like Berkshire, no one else in America would have needed to pay any federal income or payroll taxes.

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

Our federal return last year, we should add, ran to 9,386 pages. To handle this filing, state and foreign tax returns, a myriad of SEC requirements, and all of the other matters involved in running Berkshire, we have gone all the way up to 19 employees at World Headquarters.

This crew occupies 9,708 square feet of space, and Charlie – at World Headquarters West in Los Angeles – uses another 655 square feet. Our home-office payroll, including benefits and counting both locations, totaled \$3,531,978 last year. We’re careful when spending your money.

Corporate bigwigs often complain about government spending, criticizing bureaucrats who they say spend taxpayers' money differently from how they would if it were their own. But sometimes the financial behavior of executives will also vary based on whose wallet is getting depleted. Here's an illustrative tale from my days at Salomon. In the 1980s the company had a barber, Jimmy by name, who came in weekly to give free haircuts to the top brass. A manicurist was also on tap. Then, because of a cost-cutting drive, patrons were told to pay their own way. One top executive (not the CEO) who had previously visited Jimmy weekly went immediately to a once-every-three-weeks schedule.

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

Every now and then Charlie and I catch on early to a tide-like trend, one brimming over with commercial promise. For example, though American Airlines (with its “miles”) and American Express (with credit card points) are credited as being trailblazers in granting customers “rewards,” Charlie and I were far ahead of them in spotting the appeal of this powerful idea. Excited by our insight, the two of us jumped into the reward business way back in 1970 by buying control of a trading stamp operation, Blue Chip Stamps. In that year, Blue Chip had sales of \$126 million, and its stamps papered California.

In 1970, indeed, about 60 billion of our stamps were licked by savers, pasted into books, and taken to Blue Chip redemption stores. Our catalog of rewards was 116 pages thick and chock full of tantalizing items. When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had finally found a sure thing.

Well, not quite. From the day Charlie and I stepped into the Blue Chip picture, the business went straight downhill. By 1980, sales had fallen to \$19.4 million. And, by 1990, sales were bumping along at \$1.5 million. No quitter, I redoubled my managerial efforts.

Sales then fell another 98%. Last year, in Berkshire's \$98 billion of revenues, all of \$25,920 (no zeros omitted) came from Blue Chip. Ever hopeful, Charlie and I soldier on.

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

I mentioned last year that in my service on 19 corporate boards (not counting Berkshire or other controlled companies), I have been the Typhoid Mary of compensation committees. At only one company was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that we faced. My ostracism has been peculiar, considering that I certainly haven't lacked experience in setting CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries and incentives for the CEOs of around 40 significant operating businesses.

How much time does this aspect of my job take? Virtually none. How many CEOs have voluntarily left us for other jobs in our 42-year history? Precisely none.

Berkshire employs many different incentive arrangements, with their terms depending on such elements as the economic potential or capital intensity of a CEO's business. Whatever the compensation arrangement, though, I try to keep it both simple and fair.

When we use incentives – and these can be large – they are always tied to the operating results for which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business performance. If a CEO bats .300, he gets paid for being a .300 hitter, even if circumstances outside of his control cause Berkshire to perform poorly. And if he bats .150, he doesn’t get a payoff just because the successes of others have enabled Berkshire to prosper mightily. An example: We now own \$61 billion of equities at Berkshire, whose value can easily rise or fall by 10% in a given year. Why in the world should the pay of our operating executives be affected by such \$6 billion swings, however important the gain or loss may be for shareholders?

You've read loads about CEOs who have received astronomical compensation for mediocre results. Much less well-advertised is the fact that America's CEOs also generally live the good life. Many, it should be emphasized, are exceptionally able, and almost all work far more than 40 hours a week. But they are usually treated like royalty in the process. (And we're certainly going to keep it that way at Berkshire. Though Charlie still favors sackcloth and ashes, I prefer to be spoiled rotten. Berkshire owns The Pampered Chef; our wonderful office group has made me The Pampered Chief.)

CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees.

Irrational and excessive comp practices will not be materially changed by disclosure or by “independent” comp committee members. Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses.

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

Last year I arranged for the bulk of my Berkshire holdings to go to five charitable foundations, thus carrying out part of my lifelong plan to eventually use all of my shares for philanthropic purposes. Details of the commitments I made, as well as the rationale for them, are posted on our website, www.berkshirehathaway.com. Taxes, I should note, had nothing to do with my decision or its timing. My federal and state income taxes in 2006 were exactly what they would have been had I not made my first contributions last summer, and the same point will apply to my 2007 contributions.

In my will I’ve stipulated that the proceeds from all Berkshire shares I still own at death are to be used for philanthropic purposes within ten years after my estate is closed. Because my affairs are not complicated, it should take three years at most for this closing to occur. Adding this 13-year period to my expected lifespan of about 12 years (though, naturally, I’m aiming for more) means that proceeds from all of my Berkshire shares will likely be distributed for societal purposes over the next 25 years or so.

I've set this schedule because I want the money to be spent relatively promptly by people I know to be capable, vigorous and motivated. These managerial attributes sometimes wane as institutions – particularly those that are exempt from market forces – age. Today, there are terrific people in charge at the five foundations. So at my death, why should they not move with dispatch to judiciously spend the money that remains?

Those people favoring perpetual foundations argue that in the future there will most certainly be large and important societal problems that philanthropy will need to address. I agree. But there will then also be many super-rich individuals and families whose wealth will exceed that of today's Americans and to whom philanthropic organizations can make their case for funding. These funders can then judge firsthand which operations have both the vitality and the focus to best address the major societal problems that then exist. In this way, a market test of ideas and effectiveness can be applied. Some organizations will deserve major support while others will have outlived their usefulness. Even if the people above ground make their decisions imperfectly, they should be able to allocate funds more rationally than a decedent six feet under will have ordained decades earlier. Wills, of course, can always be rewritten, but it's very unlikely that my thinking will change in a material way.

A few shareholders have expressed concern that sales of Berkshire by the foundations receiving shares will depress the stock. These fears are unwarranted. The annual trading volume of many stocks exceeds 100% of the outstanding shares, but nevertheless these stocks usually sell at prices approximating their intrinsic value. Berkshire also tends to sell at an appropriate price, but with annual volume that is only 15% of shares outstanding. At most, sales by the foundations receiving my shares will add three percentage points to annual trading volume, which will still leave Berkshire with a turnover ratio that is the lowest around.

Overall, Berkshire's business performance will determine the price of our stock, and most of the time it will sell in a zone of reasonableness. It's important that the foundations receive appropriate prices as they periodically sell Berkshire shares, but it's also important that incoming shareholders don't overpay. (See economic principle 14 on page 77.) By both our policies and shareholder communications, Charlie and I will do our best to ensure that Berkshire sells at neither a large discount nor large premium to intrinsic value.

The existence of foundation ownership will in no way influence our board's decisions about dividends, repurchases, or the issuance of shares. We will follow exactly the same rule that has guided us in the past: What action will be likely to deliver the best result for shareholders over time?

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

In last year's report I allegorically described the Gotrocks family – a clan that owned all of America's businesses and that counterproductively attempted to increase its investment returns by paying ever-greater commissions and fees to “helpers.” Sad to say, the “family” continued its self-destructive ways in 2006.

In part the family persists in this folly because it harbors unrealistic expectations about obtainable returns. Sometimes these delusions are self-serving. For example, private pension plans can temporarily overstate their earnings, and public pension plans can defer the need for increased taxes, by using investment assumptions that are likely to be out of reach. Actuaries and auditors go along with these tactics, and it can be decades before the chickens come home to roost (at which point the CEO or public official who misled the world is apt to be gone).

Meanwhile, Wall Street's Pied Pipers of Performance will have encouraged the futile hopes of the family. The hapless Gotrocks will be assured that they all can achieve above-average investment performance – but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon.

In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a \$3 billion fund, this 6.4% net “performance” will deliver the manager a cool \$108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.

The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these “hyper- helpers.” Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.

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

Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, from which he took not a dime unless his investors made money. My admiration for Walter, it should be noted, is not based on hindsight. A full fifty years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.

Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin, a graduate of the North Carolina School of the Arts. Walter and Edwin never came within a mile of inside information. Indeed, they used “outside” information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham. When Walter and Edwin were asked in 1989 by Outstanding Investors Digest, “How would you summarize your approach?” Edwin replied, “We try to buy stocks cheap.” So much for Modern Portfolio Theory, technical analysis, macroeconomic thoughts and complex algorithms.

Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500. It’s particularly noteworthy that he built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. It’s safe to say that had millions of investment managers made trades by a) drawing stock names from a hat; b) purchasing these stocks in comparable amounts when Walter made a purchase; and then c) selling when Walter sold his pick, the luckiest of them would not have come close to equaling his record. There is simply no possibility that what Walter achieved over 47 years was due to chance.

I first publicly discussed Walter's remarkable record in 1984. At that time “efficient market theory” (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be $expected$ to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.

And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter's performance and what it meant for the school's cherished theory.

Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.

Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was “right” (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat.

Maybe it was a good thing for his investors that Walter didn't go to college.

The Annual Meeting

Our meeting this year will be held on Saturday, May 5 $^{th}$ . As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest's stands) will last until 3:00. Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day's question periods, please do so while Charlie is talking.

The best reason to exit, of course is to shop. We will help you do that by filling the 194,300 square foot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 24,000 people who came to the meeting did their part, and almost every location racked up record sales. But records are made to be broken, and I know you can do better.

This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, Johns Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that the home, priced at \$139,900, delivers excellent value. Last year, a helper at the Qwest bought one of two homes on display well before we opened the doors to shareholders. Flanking the Clayton home on the exhibition floor this year will be an RV and pontoon boat from Forest River.

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 45 of the 50 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as that given certain groups.) Bring the details of your existing insurance and check out whether we can save you money. For at least 50% of you, I believe we can. And while you're at it, sign up for the new GEICO credit card. It's the one I now use (sparingly, of course).

On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets available for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to Omaha by bus; leave in your new plane. And take all the hair gel that you wish on board with you.

In the Bookworm's corner of our bazaar, there will be about 25 books and DVDs – all discounted – led again by $Poor \ Charlie's \ Almanack$ . (One hapless soul last year asked Charlie what he should do if he didn't enjoy the book. Back came a Mungerism: “No problem – just give it to someone more intelligent.”) We've added a few titles this year. Among them are $Seeking \ Wisdom: \ From \ Darwin \ to \ Munger$ by Peter Bevelin, a long-time Swedish shareholder of Berkshire, and Fred Schwed's classic, $Where \ are \ the \ Customers' \ Yachts?$ This book was first published in 1940 and is now in its $4^{th}$ edition. The funniest book ever written about investing, it lightly delivers many truly important messages on the subject.

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. Carol Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it. Hotel rooms can be hard to find, but work with Carol and you will get one.

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” discount pricing. We initiated this special event at NFM ten years ago, and sales during the “Weekend” grew from 5.3 million in 1997 to 30 million in 2006. I get goose bumps just thinking about this volume.

To obtain the Berkshire discount, you must make your purchases between Thursday, May $3^{\text{rd}}$ and Monday, May $7^{\text{th}}$ inclusive, and also present your meeting credential. The period's special pricing will even apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m. Monday through Saturday, and 10 a.m.

to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a special shareholder picnic featuring chicken and beef tacos (and hamburgers for traditionalists like me).

At a remodeled and expanded Borsheim's, we will again have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May $4^{\text{th}}$ . The second, the main gala, will be held on Sunday, May $6^{\text{th}}$ , from 9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.

We will have huge crowds at Borsheim's throughout the weekend. For your convenience, therefore, shareholder prices will be available from Monday, April $30^{\text{th}}$ through Saturday, May $12^{\text{th}}$ . During that period, please identify yourself as a shareholder by presenting your meeting credentials or a brokerage statement that shows you are a Berkshire holder.

On Sunday, in a tent outside of Borsheim's, a blindfolded Patrick Wolff, twice U.S. chess champion, will take on all comers – who will have their eyes wide open – in groups of six. Last year I carried on a conversation with Patrick while he played in this manner. Nearby, Norman Beck, a remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have Bob Hamman and Sharon Osberg, two of the world's top bridge experts, available to play bridge with our shareholders on Sunday afternoon.

To add to the Sunday fun at Borsheim's, Ariel Hsing will play table tennis (ping-pong to the uninitiated) from 1 p.m. to 4 p.m. against anyone brave enough to take her on. Ariel, though only 11, is ranked number one among girls under 16 in the U.S. (and number 1 among both boys and girls under 12). The week I turned 75 I played Ariel, then 9 and barely tall enough to see across the table, thinking I would take it easy on her so as not to crush her young spirit. Instead she crushed me. I've since devised a plan that will give me a chance against her. At 1 p.m. on Sunday, I will initiate play with a 2-point game against Ariel. If I somehow win the first point, I will then feign injury and claim victory. After this strenuous encounter wears Ariel down, our shareholders can then try their luck against her.

Gorat's will again be open exclusively for Berkshire shareholders on Sunday, May $6^{\text{th}}$ , and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat's on that day, you must have a reservation. To make one, call 402-551-3733 on April $1^{\text{st}}$ (but not before).

In the 2006-2007 school year, 35 university classes, including one from IBMEC in Brazil, will come to Omaha for sessions with me. I take almost all – in aggregate, more than 2,000 students – to lunch at Gorat's. And they love it. To learn why, come join us on Sunday.

We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come from outside of North America. Every year our meeting draws many people from around the globe, and Charlie and I want to be sure we personally greet those who have come so far. Last year we enjoyed meeting more than 400 of you from many dozens of countries. Any shareholder who comes from other than the U.S. or Canada will be given a special credential and instructions for attending this function.

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

Charlie and I are extraordinarily lucky. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped every day in countless ways by talented and cheerful associates. No wonder we tap-dance to work. But nothing is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 5 $^{th}$ at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.

February 28, 2007

Warren E. Buffett

Chairman of the Board

伯克希尔的业绩表现 vs. 标普500

年份		年度百分比变化		相对业绩 (1)-(2)
		伯克希尔每股账面价值 (1)	标普500含股息 (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
2003	......	21.0	28.7	(7.7)
2004	......	10.5	10.9	(.4)
2005	......	6.4	4.9	1.5
2006	......	18.4	15.8	2.6
1965-2006 年复合年增长率 1964-2006 年累计总回报		21.4%	10.4%	11.0
		361,156%	6,479%

注：数据按日历年度统计，以下例外：1965年和1966年截至当年9月30日；1967年为截至12月31日的15个月。
自1979年起，会计准则要求保险公司按市价而非成本与市价孰低法（此前的要求）计量其持有的权益证券。本表中，伯克希尔1978年之前的业绩已按变更后的规则进行了重述。其他所有方面，均使用最初报告的数据计算。

标普500的数据为税前，而伯克希尔的数据为税后。如果一家像伯克希尔这样的公司只是简单持有标普500并计提相应税款，那么在该指数显示正回报的年份，其业绩会落后于标普500；而在该指数显示负回报的年份，则会超越标普500。多年下来，税负成本会导致累计落后幅度相当大。

伯克希尔·哈撒韦公司

致伯克希尔·哈撒韦公司股东：

2006年，我们的净值增加了169亿美元，使A类股和B类股的每股账面价值均增长了18.4%。过去42年（即现任管理层接手以来），账面价值从19美元增长至70,281美元，年复合增长率为21.4%。*

我们认为，169亿美元是年度净值增幅的纪录——超过了任何美国企业曾录得的数字，排除因并购（例如AOL收购时代华纳）带来的增长。当然，埃克森美孚和其他公司的盈利远超伯克希尔，但它们的盈利主要用于分红和/或回购，而非积累净值。

话说回来，关于2006年的收益，有必要坦白：我们最重要的业务——保险——得益于巨大的运气：大自然母亲，真是谢天谢地，休假去了。在2004年和2005年被飓风重创（那些风暴让我们在超级巨灾保险上损失惨重）之后，她突然消失了。去年，这项业务的红字变成了黑字——非常黑。

此外，2006年，我们73家企业中的绝大多数都表现得极为出色。让我花点时间谈谈我们最大的业务之一——GEICO。管理层在那里取得的成就简直非凡。

正如我之前告诉你们的，GEICO的CEO Tony Nicely 45年前加入公司，当时刚满18岁两个月。他于1992年成为CEO，从那以后，公司的增长便爆发了。此外，Tony近年来实现了惊人的生产率提升。从2003年底到2006年底，GEICO的保单数量从570万份增加到810万份，增长了42%。然而同期，公司的员工人数（按全职等效计算）下降了3.5%。因此，生产率提高了47%。而且GEICO的起点并不臃肿。

这一显著增长使GEICO能够维持其作为低成本生产商的至关重要的地位，即使它大幅增加了广告支出。去年，GEICO在广告上花费了6.31亿美元，高于2003年的2.38亿美元（也高于1995年伯克希尔控股时的3,100万美元）。如今，GEICO的广告支出远超任何竞争对手，即便是规模大得多的对手。我们会继续提高标准。

去年我告诉你们，如果有新生儿或孙子，一定要给他取名Tony。但伯克希尔董事Don Keough最近有了更好的主意。在回顾GEICO 2006年的表现后，他给我写信说：“别管出生了。告诉股东们，立刻把现有孩子的名字改成Tony或Antoinette。”Don在署名处签了“Tony”。

* * * * * * * * * * * *
查理·芒格——我的合伙人兼伯克希尔副董事长——和我经营着一家规模不小的企业，拥有21.7万名员工，年收入接近1000亿美元。这当然不是我们刻意为之。查理最初是律师，而我自认为是证券分析师。坐在那个位置上，我们都对任何大型组织能否运转良好抱持怀疑。规模似乎让许多组织变得反应迟钝、抗拒变革、自鸣得意。借用丘吉尔的话：“我们塑造了建筑，之后建筑也塑造了我们。”一个耐人寻味的事实：1965年市值最大的十家非石油公司——通用汽车、西尔斯、杜邦、伊斯曼柯达等巨头——只有一家还在2006年的榜单上。

公平地说，我们也见过不少成功案例，有些确实出类拔萃。有许多大型公司的管理者令我钦佩；美国运通的Ken Chenault、通用电气的Jeff Immelt、富国银行的Dick Kovacevich，很快浮现在我脑海中。但我不觉得自己能胜任他们做的那种管理工作。而且我知道，我不会喜欢他们职位带来的许多职责——会议、演讲、出国旅行、慈善活动和政府关系。对我来说，罗纳德·里根说得对：“辛苦工作从未害死过任何人，这可能是真的——但何必冒这个险？”

所以我走了捷径，只是坐在一旁，通过那些各自掌舵的优秀管理者来运作。我唯一的任务就是为他们加油打气，塑造并强化我们的企业文化，以及做出重大资本配置决策。我们的管理者用勤奋和高效回报了这份信任。

查理和我感谢他们过去42年——尤其是2006年——的表现。

标尺

查理和我用多种方式衡量伯克希尔的进展并评估其内在价值。没有单一标准能有效完成这些工作，即使堆积如山的统计数据也无法捕捉一些重要因素。例如，我们必须拥有比我年轻得多的管理者，以便接替我的职位。伯克希尔在这方面从未像现在这样状态良好——但我无法用数字向你证明。

不过，有两个统计数据至关重要。第一个是我们每股持有的投资额（包括现金及现金等价物）。计算这个数字时，我们剔除了金融业务持有的投资，因为这些投资大多被借款所抵消。以下是自现任管理层取得伯克希尔控制权以来的记录：

年份	每股投资额*
1965	$4
1975	$159
1985	$2,407
1995	$21,817
2006	$80,636
1965-2006复合增长率	27.5%
1995-2006复合增长率	12.6%
*扣除少数股东权益

在早期，我们将大部分留存收益和保险浮存金投入有价证券投资。由于这种侧重，也因为我们购买的证券通常表现良好，长期以来我们的投资增长率相当高。

然而，多年来我们越来越专注于收购经营业务。将资金用于这些收购，既减缓了投资增长，也加速了我们使用的第二个标尺——非保险业务税前利润的增长。以下是这些利润的情况：

年份	每股税前利润
1965	$4
1975	$4
1985	$52
1995	$175
2006	$3,625
1965-2006复合增长率	17.9%
1995-2006复合增长率	31.7%
*不含并购会计调整及少数股东权益

去年我们的非保险业务收益增长了38%，成绩不错。不过，今后要想再大幅增长，除非我们能进行重大且明智的收购。这并不容易。但我们确实有一个优势：越来越多的企业主和管理层把伯克希尔视为“首选买家”。起初，只有美国（而且往往是私营公司）这样看我们。不过，我们一直希望将伯克希尔的吸引力扩展到美国之外。去年，我们的环球之旅终于启动了。

收购

2006年初，我们完成了2005年底待定的三笔收购，斥资约60亿美元收购了PacifiCorp（太平洋电力）、Business Wire（商业新闻社）和Applied Underwriters（应用再保险）。这三家公司都表现优异。

然而，今年的重头戏是7月5日收购了以色列公司ISCAR的大部分股权，以及我们与该公司董事长Eitan Wertheimer（艾坦·韦特海默）和CEO Jacob Harpaz（雅各布·哈帕兹）的新合作。这件事始于2005年10月25日，当时我收到了艾坦一封仅一页半纸的信，此前我对他一无所知。信的开头写道：“我写信是想向您介绍ISCAR”，接着描述了这家在61个国家开展业务的刀具企业。然后艾坦写道：“我们思考了一段时间，关于家族大企业常见的代际传承和所有权问题，并对ISCAR的未来做了很多考虑。我们的结论是：伯克希尔·哈撒韦将是ISCAR的理想归宿。我们相信，作为您业务组合的一部分，ISCAR将继续蓬勃发展。”

总的来说，艾坦的信把公司的质量和管理的品格展现得淋漓尽致。这也让我想了解更多。11月，艾坦、雅各布和ISCAR的首席财务官Danny Goldman（丹尼·戈德曼）来到奥马哈。和他们相处了几个小时，我确信：如果我们达成交易，我们将与极其出色的管理者联手，他们在出售后仍能以之前的干劲和奉献精神来经营企业，这值得信赖。不过，由于我从未买过总部设在美国以外的企业（虽然我买过不少外国股票），我需要了解一些税务和管辖权方面的问题。完成这些工作后，伯克希尔以40亿美元购买了ISCAR 80%的股权。剩余20%仍由韦特海默家族持有，他们成为我们宝贵的合作伙伴。

ISCAR的产品是小型、消耗性的切削刀具，用于大型昂贵的机床。这项业务本身没什么神奇之处，除了经营它的人。但艾坦、雅各布和他们的同事是真正的管理魔术师，他们不断开发工具，让客户的机器更具生产力。结果：ISCAR之所以赚钱，是因为它帮助客户赚了更多的钱。没有比这更可靠的持续成功秘诀了。

9月，我和查理，还有五位伯克希尔的同事一起参观了以色列的ISCAR。我们——我说的是每个人——从未对任何一家公司如此印象深刻。在ISCAR，就像在整个以色列一样，智慧和精力无处不在。伯克希尔的股东很幸运能与艾坦、雅各布、丹尼以及他们才华横溢的同事们携手合作。

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

几个月后，伯克希尔再次成为“首选买家”——这次交易是我在沃斯堡的朋友John Roach（约翰·罗奇）带来的。约翰，你们很多人还记得，曾是Justin Industries（贾斯汀工业）的董事长，该公司我们在2000年收购。当时约翰正在帮助身患绝症的John Justin（约翰·贾斯汀）为他的公司找一个永久的归宿。我们收购Justin Industries后不久，John Justin就去世了，但自那以后，公司一直完全按照我们对他承诺的那样运营。
十一月，John Roach 带着 Paul Andrews, Jr. 来见我。Paul 拥有 TTI 约80%的股份，TTI是沃斯堡一家电子元件分销商。在35年的时间里，Paul 把 TTI 的销售额从11.2万美元做到了13亿美元。他是一位杰出的企业家和经营者。

Paul 现年64岁，热爱经营自己的公司。但不久前，他亲眼目睹了创始人的去世对一家私营公司的员工和创始人家庭会造成多么严重的冲击。而且，起初只是冲击，往往最终演变成毁灭。因此，大约一年前，Paul 开始考虑出售 TTI。他的目标是把公司交给他精心挑选的所有者，而不是在其身后任由信托官员或律师来搞一场拍卖。

Paul 拒绝了“战略性”买家的想法，因为他知道，为了追求“协同效应”，这种类型的买家很可能会拆解他精心打造的一切，此举将使数百名同事流离失所（并可能在此过程中伤害 TTI 的业务）。他还排除了私募股权公司，因为后者极有可能让公司负债累累，然后尽快转手卖掉。

这样一来，伯克希尔就成了唯一选择。11月15日上午，Paul 和我见了面，午饭前就达成了交易。后来他写信给我：“会议之后，我确信伯克希尔是 TTI 的合适所有者……我为我们的过去感到自豪，也对我们的未来充满期待。”查理和我也是同样的心情。

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2006年，我们还进行了一些“补强型”收购，涉及 Fruit of the Loom（鲜果布衣，简称Fruit）、MiTek（米泰克）、CTB（CTB公司）、Shaw（萧氏工业）和Clayton（克莱顿家园）。Fruit 做了最大的一笔收购。首先，它以大约12亿美元（包括承担的债务）收购了 Russell Corp.（罗素公司），一家领先的运动服装和制服生产商；同年12月，它又同意收购 VF Corp.（VF公司）的内衣业务。这些收购合计为 Fruit 增加了约22亿美元的销售额，并带来了约23,000名员工。

查理和我喜欢在收购企业后能将其交给已经在伯克希尔证明过自己的管理者，比如Fruit的John Holland。例如，MiTek自2001年被我们收购以来，已经进行了14次收购，而Gene Toombs在这些交易中取得的成果远超他自己的预期。实际上，我们通过这类补强型交易，充分利用了已有的管理人才。未来我们还会做更多这样的交易。

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然而，我们仍然需要“大象”才能消化伯克希尔源源不断涌入的现金。因此，查理和我必须无视对“老鼠”的追逐，把收购精力集中在更大的猎物上。

我们的榜样是一位老先生，他在购物时推着购物车撞上了一位年轻小伙子的车。老先生抱歉地解释说，他和妻子走散了，正忙着找她。新认识的这位小伙子说，巧了，他妻子也走丢了，并建议两人一起找效率更高。老先生同意了，问新朋友他妻子长什么样。“她是个金发美女，”小伙答道，“身材好到能让主教撞破彩色玻璃窗，而且穿着紧身白色短裤。您妻子呢？”老先生毫不迟疑：“别管她了，我们找你老婆。”

我们在寻找什么样的收购对象，在第25页有描述。如果你有合适的候选标的，打电话给我——白天黑夜都行。然后你就能看到我撞碎彩色玻璃窗。

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现在，让我们来看看伯克希尔的四大运营板块。把它们的财务数据混在一起不利于分析。因此，我们将它们视为四项独立的业务，首先从至关重要的保险集团开始。
下个月将是我们进入保险业40周年。1967年3月9日，伯克希尔以860万美元从Jack Ringwalt手中收购了国民赔偿公司及其姊妹公司国民火险与海事保险公司。

Jack是我的老友，一位优秀但有些古怪的生意人。每年他会有大约十分钟的时间想卖掉自己的公司。但那些情绪——或许是与监管机构发生争执，或是不利的陪审团裁决引发的——很快就会烟消云散。

1960年代中期，我请投资银行家Charlie Heider——他是我和Jack共同的朋友——下次Jack"发情"时通知我。Charlie的电话一响，我就火速赶去见Jack。几分钟内我们就谈成了交易，我放弃了审计、"尽职调查"或任何可能让Jack有机会反悔的步骤。我们只是握了握手，就这么定了。

我们本应在Charlie的办公室完成收购交割，Jack迟到了。他终于出现时解释说，他刚才一直在开车找停车计时器，想找个还有剩余时间的。那对我来说是神奇的一刻。那一刻我就知道，Jack会是我想要的那种经理人。

当伯克希尔收购Jack的两家保险公司时，它们有1700万美元的"浮存金"。我们在以往的报告中经常对浮存金做长篇解释，你可以在我们的网站上读到。简单来说，浮存金是我们持有的、不属于我们、但我们可以拿去投资的金钱。

到2006年底，我们的浮存金已增长到509亿美元，此后我们与Equitas签署了一份巨额追溯再保险合同——我将在下一节中描述——这又使浮存金增加了70亿美元。我们的大部分增长来自于收购其他保险公司，但内部增长也极为出色，尤其是在Ajit Jain领导下的再保险业务。当然，1967年时我根本没想到浮存金会发展成今天这个样子。日拱一卒，功不唐捐。

我们拥有许多追溯再保险合同，这类合同产生的浮存金会随时间自然下降。因此，未来如果不进行新的保险收购，我们很难增加浮存金。但无论规模大小，伯克希尔浮存金最重要的成本长期来看很可能远低于行业水平，甚至可能降至零以下。注意"长期"这个词。周期性会有糟糕的年份。这一点你可以肯定。

不过，2006年保险业务一切顺利——真的太顺了。我们的经理人——Tony Nicely（GEICO）、Ajit Jain（B-H再保险）、Joe Brandon和Tad Montross（通用再保险）、Don Wurster（国民赔偿主险）、Tom Nerney（美国责任险）、Tim Kenesey（医疗防护险）、Rod Eldred（本土州公司和Cypress）、Sid Ferenc和Steve Menzies（Applied Underwriters）、John Kizer（Central States）以及Don Towle（Kansas Bankers Surety）——简直就是火力全开。我念出这些名字时，感觉自己仿佛在库珀斯敦（棒球名人堂所在地），宣读名人堂名单。当然，整个保险业在2006年也表现极佳。但我们的经理人总体上交出了比竞争对手更出色的成绩。

下面是我们各主要保险板块的承保和浮存金数据。好好欣赏吧，因为这样的景象你短期内不会再看到第二次。

	（单位：百万美元）
	承保利润（亏损）		年末浮存金
保险业务	2006年	2005年	2006年	2005年
通用再保险（General Re）	$526	$(334)	$22,827	$22,920
伯克希尔·哈撒韦再保险（B-H Reinsurance）	1,658	(1,069)	16,860	16,233
GEICO	1,314	1,221	7,171	6,692
其他初级保险	340**	235*	4,029	3,442
总计	$3,838	$53	$50,887	$49,287

* 包含2005年6月30日起的MedPro业务。
** 包含2006年5月19日起的Applied Underwriters业务。
* * * * * * * * * * * *

2007年，常规保险业务的结果会恶化，不过我认为它们仍能令人满意。最大的未知数是超级巨灾保险。2004-05年那可怕的飓风季只是反常现象吗？还是我们这个星球发出的第一个警告——21世纪的气候将与我们过去看到的截然不同？如果第二个问题的答案是肯定的，那么2006年很快就会被视为一连串毁灭性风暴到来前一段具有误导性的平静期。这些风暴可能撼动整个保险业。认为卡特里娜飓风接近最坏情况，那是天真的想法。

管理我们超级巨灾业务的阿吉特·贾因（Ajit Jain）和我都不清楚未来会发生什么。但我们知道，押注于不断变化的大气条件对保险业的影响是良性的，会是一个巨大的错误。

不过，别以为我们失去了对风险的兴趣。如果因为我们承担风险而获得了适当的回报，我们依然愿意在单次事件中承受60亿美元的损失。但我们不愿接受那些未能反映我们对损失概率评估的定价，哪怕风险敞口非常小。合适的定价并不能保证在任意一年盈利，但不合理的定价几乎必然导致最终亏损。由于大量资本涌入超级巨灾领域，费率最近已经下降。因此，我们大幅减少了飓风风险敞口。我们在这方面的做法，与金融市场的策略如出一辙：别人贪婪时我恐惧，别人恐惧时我贪婪。

劳合社、Equitas与追溯再保险

去年——我们现在说到Equitas了——伯克希尔同意签订一份巨额追溯再保险合同，这种保单保护保险公司免受已经发生但成本尚不明确的损失。稍后我会告诉你协议的细节。但首先，让我们沿着促成这笔交易的历史路径，回顾一下保险业的历程。

故事大约从1688年开始，当时爱德华·劳埃德（Edward Lloyd）在伦敦开了一家小咖啡馆。虽然比不上星巴克，但因为顾客——船东、商人和富有冒险精神的英国资本家——的商业活动，他的店注定要享誉世界。这些人在啜饮爱德华的咖啡时，开始起草合同，将海上灾难的风险从船东和货主身上转移给那些赌某次航行能平安完成的资本家。这些资本家后来被称为“劳合社承保人”。

尽管许多人认为劳合社是一家保险公司，但事实并非如此。它只是一个许多会员保险人进行交易的场所，就像几个世纪前一样。
长期以来，承保人邀请被动投资者加入辛迪加。此外，业务范围从海上风险扩展到各种可以想象的保险形式，包括那些让劳合社名声远扬的奇特险种。承保人离开了咖啡馆，找到了更气派的办公场所，并正式制定了一些联合规则。而那些被动支持承保人的人，开始被称为“劳合社成员”。

最终，这些成员包括了来自世界各地的成千上万人，他们加入进来，期望能不费吹灰之力、不担什么风险就能赚点外快。确实，潜在成员总会被郑重告知，他们对其辛迪加承保的后果负有无限且永久的责任——用那句古雅的说法就是，“直到最后一颗袖扣”。但这个警告后来被视为例行公事。三百年来累积的袖扣，对那些跃跃欲试的准成员来说，成了一剂强大的镇静剂。

然后石棉来了。当它的预期成本加上20世纪80年代涌现的环境和产品索赔浪潮时，劳合社开始崩溃。几十年前签下的保单——大多已被遗忘——正在产生巨额亏损。没人能明智地估算出总额，但可以肯定高达数百亿美元。无休止且无限亏损的幽灵吓坏了现有成员，也吓跑了潜在成员。许多成员选择了破产，有些人甚至选择了自杀。

从这些废墟中，人们拼命努力试图重振劳合社。1996年，该机构的当权者拨出111亿英镑，成立了一家新公司Equitas，并让它负责支付1993年之前签发的所有保单的索赔。实际上，这个计划将许多陷入困境的辛迪加的苦难集中到了一起。当然，拨出的资金可能不够——如果发生这种情况，成员们仍需对差额负责。

但这个新计划通过将所有负债集中在一个地方，有一个好处：消除了辛迪加之间大量代价高昂的内部争吵。此外，集中处理使得索赔评估、谈判和诉讼比以往更明智。Equitas采纳了本·富兰克林的思路：“我们必须团结一致，否则肯定会被一一绞死。”

从一开始，许多人就预测Equitas最终会失败。但2006年春天——在最后一批有风险的保单签发13年后，在支付了113亿英镑的索赔之后——我和阿吉特审视了事实，得出结论：这个病人可能活下来。于是我们决定向Equitas提供一份巨额的再保险保单。

因为仍存在大量不可预测的因素，伯克希尔无法为Equitas及其27,972名成员提供无限的保护。但我们已经表示——我简化一下——如果Equitas给我们71.2亿美元的现金和证券（这就是我提到的浮存金），我们将支付其未来所有索赔和费用，上限为139亿美元。这个数字比Equitas最近估算的最终负债高出57亿美元。因此，成员们获得了巨额（而且几乎肯定是足够的）未来保护，以应对不愉快的意外。事实上，保护额度如此巨大，以致Equitas计划向其数千名成员支付一笔现金，这是他们中几乎没人曾梦想过的事。

那么伯克希尔会怎么样？这取决于“已知”索赔最终会让我们付出多少，会有多少尚未提出的索赔浮出水面以及它们的成本，索赔支付的速度有多快，以及我们在收到现金到支付之前能赚取多少收益。阿吉特和我认为概率对我们有利。就算我们错了，伯克希尔也能承受。
Scott Moser（Equitas CEO）对这笔交易总结得很精辟：“承保人（Names）想晚上睡个安稳觉，我们觉得自己刚给他们买来了全世界最好的床垫。”

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警告：是时候啃西兰花了——接下来我要讲会计问题。这笔债是我欠那些热爱研究借和贷的伯克希尔股东的。希望你们两位觉得这个讨论有用。其他所有人可以跳过这一节；反正没测验。

伯克希尔做过很多追溯型交易——无论从数量还是金额上看，都远超其他保险公司实施的此类保单的倍数。我们是这些险种的首选再保险人，因为这些转移给我们的义务——例如，要支付给工伤工人的终身补偿和医疗费用——可能50年甚至更久才能全部清偿。在承诺足额、公平地解决这些义务方面，没有其他公司能提供伯克希尔所能提供的确定性。这一点对原保险人、投保人和监管机构都很重要。

追溯型交易的会计处理既不广为人知，也不直观。因此，股东理解它的最佳方式，就是我们简单列出借和贷。查理和我希望这种做法能更常见。我们有时候会碰到一些重要交易的会计脚注，看得我们一头雾水，然后我们就怀疑，报告公司是故意搞成那样的。（举个例子，哪怕你已经知道了结局，试着去理解安然（Enron）旧版10-K报告中“描述”的那些交易吧。）

那么，我们来总结一下Equitas交易的会计处理。主要的借方将是：现金及投资、再保险应收款、以及承担的再保险递延费用（“DCRA”）。主要的贷方将是：损失及损失调整费用准备金。交易初始不确认任何利润或亏损，但此后每年，随着DCRA资产被摊销递减，会产生承销亏损。年度摊销费用的金额，主要取决于我们年终对未来损失支付时间和金额的估计，与年初所作的估计之间的比较结果。最终，当最后一笔索赔支付完毕后，DCRA账户将归零。那一天还要等50年甚至更久。

需要记住的是，追溯型保险合同总能给我们带来承销亏损。这些亏损是否值得承受，取决于我们收到的现金所产生的投资收益能否超过这些亏损。最近几年，我们的DCRA费用每年带来约3亿美元的承销亏损，而这些亏损已被我们用收到的保费现金所获得的收入完全抵消。如果没有新的追溯型合同，年度费用的金额通常会随时间递减。然而，在Equitas交易之后，年度的DCRA成本最初将增加到每年约4.5亿美元。这意味着，我们的其他保险业务必须至少产生那么多承销收益，才能让我们的整体浮存金实现零成本。这个门槛相当高，但我相信，在很多年份（如果不是大多数年份的话），我们能跨过去。

你是不是很高兴我保证过没测验？

制造、服务和零售业务

我们在伯克希尔这一部分的活动涵盖面很广。不过，我们来看看整个集团的资产负债表和收益表摘要。

资产负债表 2006年12月31日（单位：百万美元）

利润表（单位：百万美元）

	2006	2005	2004
营业收入	$52,660	$46,896	$44,142
营业费用（含折旧：2006年$823，2005年$699，2004年$676）	49,002	44,190	41,604
利息费用	132	83	57
税前利润	3,526*	2,623*	2,481*
所得税及少数股东权益	1,395	977	941
净利润	$2,131	$1,646	$1,540

*不含并购会计调整。

这个五花八门的集团——产品从棒棒糖到房车无所不包——去年实现了25%的有形净资产平均回报率，相当喜人。同样值得注意的是，这些业务在实现这一回报时几乎没怎么动用财务杠杆。显然，我们拥有一些非常出色的公司。不过，我们收购它们时，很多都支付了远高于净资产的价格——这一点从资产负债表上的商誉项目中可以看出——而这一事实将我们平均账面价值的回报率拉低至10.8%。

以下是一些与这个板块相关的新闻：

• Bob Shaw，一位了不起的企业家，从零开始将Shaw Industries打造成了全美最大的地毯生产商，去年他在75岁时选择退休。为了接替他，Bob推荐了在公司干了31年的Vance Bell，和往常一样，Bob做出了正确的选择。房地产市场的疲软导致地毯业务放缓，但Shaw仍然是一家实力雄厚的企业，也是伯克希尔利润的重要贡献者。
• MiTek，2001年我们收购它时还是一家屋顶桁架连接件制造商，如今正逐渐发展成一个小型综合集团。按目前的增长速度来看，“小型”这个词可能很快就不适用了。我们以4.2亿美元收购MiTek时，以9%的利率借给公司2亿美元，并斥资1.98亿美元买下股票，每股定价1万美元。此外，55名员工也自掏腰包2200万美元购入了2200股。每位员工支付的价格与我们完全相同，而且多数人是借钱买的。

他们现在别提多高兴了！五年后，MiTek的销售额增长了两倍，股价涨到每股71,699美元。尽管它花了2.91亿美元进行了14次收购，却已还清了欠伯克希尔的债务，还持有3500万美元现金。去年7月，我们举办派对庆祝收购五周年。我告诉大家，如果MiTek的股价涨过了伯克希尔A股，那就尴尬了。不过，真要是那样，也别惊讶（虽然我和Charlie会尽力让我们的股票成为一个移动的目标）。
- 并非我们所有的业务都能命中注定地增长利润。当一个行业的基础经济正在瓦解时，才华横溢的管理层或许能减缓下滑的速度。但最终，根基的侵蚀终将压倒管理层的才智。（正如一位睿智的朋友很久以前对我说的：“如果你想获得优秀商人的名声，一定要先进入一个好行业。”）而报纸行业的基础经济确实正在恶化，这一趋势已导致我们旗下《布法罗新闻报》的利润下滑。这种下滑几乎肯定会持续下去。

当查理和我年轻时，报纸行业在美国是像挖金矿一样轻松赚取巨额回报的生意。正如一位不太聪明的出版商曾有名言：“我的财富归功于美国两大伟大制度：垄断和裙带关系。”在一城一报的城市，无论产品多糟糕、管理多无能，报纸都能财源滚滚。

这个行业惊人的回报率其实很简单就能解释。在20世纪的大部分时间里，报纸是美国公众获取信息的主要来源。无论是体育、金融还是政治话题，报纸都占据统治地位。同样重要的是，它们的广告是寻找工作机会或了解镇上超市食品价格的最便捷途径。

因此，绝大多数家庭每天都觉得需要一份报纸，但可以理解的是，大多数人不愿为两份报纸付费。广告主偏好发行量最大的报纸，而读者则倾向于广告和新闻版面最多的报纸。这种循环导致了报纸丛林的法则：最胖者生存。

于是，当一座大城市存在两家或以上的报纸时（一个世纪前这几乎是普遍现象），领先的那家通常会脱颖而出，成为唯一的赢家。竞争消失后，报纸在广告和发行两端的定价权便被释放。通常，广告商和读者的费率都会逐年上涨——利润随之滚滚而来。对所有者来说，这就是经济上的天堂。（有趣的是，虽然报纸经常以不赞成的口吻报道汽车业或钢铁业的盈利情况，但它们却从未向读者透露过自己那点石成金般的处境。嗯……）

早在1991年致股东的信中，我就断言这个与世隔绝的行业正在发生变化，写道：“媒体业务……将远不如我、行业本身或贷款机构在短短几年前所认为的那样美妙。”一些出版商对我这番言论以及随后发出的其他警告感到不悦。此外，报纸资产继续像永不损坏的摇钱机一样被出售。事实上，许多经常记录和分析全球重大事件的聪明报业高管，要么对眼皮底下发生的事情视而不见，要么漠不关心。

然而现在，几乎所有报纸所有者都意识到，他们在争夺读者眼球的过程中节节败退。简言之，如果有线电视和卫星广播以及互联网先出现，那么我们如今所知的报纸很可能根本就不会存在。

在伯克希尔的世界里，Stan Lipsey 在经营《布法罗新闻报》方面做得非常出色，我也为它的主编 Margaret Sullivan 深感自豪。该报在它所在市场的渗透率是美国大型报纸中最高的。尽管布法罗的人口和商业趋势并不乐观，但我们的财务状况仍比大多数大都市报纸要好。不过，这家报社面临着持续不断的压力，将导致利润率下滑。
确实，我们在布法罗拥有领先的在线新闻业务，它将继续吸引更多读者和广告。然而，考虑到如今无数免费且只需一键点击即可获取的替代信息与娱乐来源，一个报纸网站的经济潜力，充其量只是过去无需面对竞争的纸质报纸所拥有潜力的极小一部分。

对当地居民而言，拥有一座城市的报纸，就像拥有一支体育队一样，仍能带来即时的显赫地位。随之而来的通常是权力和影响力。这些附带效应吸引着许多有钱人。此外，一些有公民意识的富裕人士可能认为，本地所有权有利于服务社区。这就是四十多年前Peter Kiewit收购奥马哈报纸的原因。

因此，我们很可能会看到报纸行业出现非经济动机的个人买家，就像我们看到有这类买家收购主要体育俱乐部一样。不过，有抱负的报业大亨要小心：没有哪条规则规定报纸收入不能低于支出，亏损不会激增。报纸行业的固定成本很高，当发行量下滑时，这就是坏消息。而且，随着报纸重要性的减弱，拥有一家报纸的"心理"价值也会消退，而拥有一支体育俱乐部则很可能保持其魅力。

除非我们面临不可逆转的现金枯竭，否则我们会坚守《新闻报》，就像我们承诺的那样。（参见第76页的经营原则第11条。）查理和我热爱报纸——我们每人每天读五份——并且相信自由而充满活力的新闻界是维护伟大民主的关键要素。我们希望纸质与在线的某种结合能避免报纸的经济末日，我们将在布法罗努力开发可持续的商业模式。我想我们会成功。但从我们的报纸获得丰厚利润的日子已经结束了。

——在NetJets（NetJets，销售和管理分时产权飞机的公司）出现了一个大为改善的局面。这家公司从未存在增长问题：自1998年我们收购以来，飞行业务收入增长了596%。但利润一直起伏不定。

我们于1996年开始进军欧洲，代价尤其高昂。运营五年后，我们只有80位客户。到2006年年中，累计税前亏损已达2.12亿美元。但欧洲需求如今已爆发式增长，2005-2006年净增加了589位客户。在Mark Booth的卓越领导下，NetJets在欧洲已实现盈利运营，我们预计这一积极趋势将持续。

我们在美国的业务在2006年也表现良好，使得NetJets去年全球税前盈利达到1.43亿美元。尽管我们在第一季度亏损了1900万美元，我们仍实现了这一利润。

这次扭亏为盈要归功于Rich Santulli和Mark。像我们许多经理人一样，Rich没有为钱工作的必要。但你完全看不出这一点。他不知疲倦——监控运营、推销产品，并周游世界，不断拉大NetJets已对竞争对手拥有的巨大领先优势。如今，我们管理的机队价值远远超过三大竞争对手的总和。

NetJets能遥遥领先是有原因的：它提供终极的安全与服务。在伯克希尔及我们许多子公司，NetJets飞机是不可或缺的商业工具。我与NetJets也有个人使用合同，我的家人和大多数伯克希尔董事也是如此。（我应当补充一句，我们没有一个人享受折扣。）一旦你乘坐过NetJets，再乘坐商业航班就像回去牵手一样。
伯克希尔持有中美能源控股（MidAmerican Energy Holdings）86.6%（完全稀释后）的权益，后者拥有多种公用事业运营。其中最大的包括：（1）约克郡电力（Yorkshire Electricity）和北方电力（Northern Electric），其370万电力客户使其成为英国第三大电力分销商；（2）中美能源（MidAmerican Energy），服务于70.6万电力客户，主要在爱荷华州；（3）太平洋电力（Pacific Power）和落基山电力（Rocky Mountain Power），为西部六个州约170万电力客户提供服务；（4）科恩河（Kern River）和北方天然（Northern Natural）管道，输送量约占美国天然气消费量的8%。

我们在中美能源的合伙人是Walter Scott，以及两位杰出的管理者Dave Sokol和Greg Abel。每一方拥有多少投票权并不重要；只有当我们一致认为某个重大举动是明智的时候，我们才会采取行动。与Dave、Greg和Walter共事六年来，加深了我最初的信念：伯克希尔不可能拥有更好的合伙人。

有点不协调的是，中美能源还拥有美国第二大房地产经纪公司——美国居家服务（HomeServices of America）。这家公司通过20家本地品牌公司运营，拥有20,300名经纪人。尽管居家服务去年收购了两家业务，但其总交易额下降了9%，降至580亿美元，利润下降了50%。

住宅地产活动的放缓部分源于近年来放贷行为的弱化。盛行的"可调"合同和"诱人利率"允许借款人在按揭初期仅支付远低于正常利息成本的金额。自然，当借款人几乎不需要付出什么的时候，违约是很少的。正如一位愤世嫉俗者所说："滚动贷款不生损失。"但未支付的利息会加入本金，而那些在初期无法承担正常月供的借款人，后来会面临高于正常水平的月供。这就是斯嘉丽·奥哈拉（Scarlett O'Hara）的剧本："我明天再想。"对许多房主来说，"明天"已经来临。因此，居家服务在多个市场的房源出现大量积压。

尽管如此，我们仍会寻求收购更多的经纪业务。十年后，居家服务几乎肯定会变得更大。

以下为中美能源业务的关键数据：

	利润（单位：百万美元）
	2006	2005
英国公用事业	$338	$308
爱荷华公用事业	348	288
西部公用事业（2006年3月21日收购）	356	不适用
管道	376	309
居家服务	74	148
其他（净值）	226	115
息税前利润	1,718	1,168
利息（付给伯克希尔以外）	(261)	(200)
伯克希尔次级债务利息	(134)	(157)
所得税	(407)	(248)
净利润	$916	$563
应归属伯克希尔的利润*	$885	$523
欠他人的债务	16,946	10,296
欠伯克希尔的债务	1,055	1,289

*包括伯克希尔赚取的利息（扣除相关所得税后），2006年为8700万美元，2005年为1.02亿美元。

金融和金融产品

你听到会很开心——而我的心情更加愉快——这将是我最后一次讨论Gen Re（通用再保险）衍生品业务的亏损。2002年初我们开始清理这项业务时，手里还有23,218份未平仓合约。现在就剩下197份了。我们在这项业务上的累计税前亏损总额为4.09亿美元，但2006年只亏损了500万美元。查理说，当初要是我们把这4.09亿美元在2001年的资产负债表上正确分类，应该标注为"伸手必被捉"。无论如何，用一句改编版的莎士比亚名言来给这项衍生品业务立碑，似乎颇为贴切："结局好，一切好。"

我们还清算了Value Capital（价值资本）的投资。因此，这两项业务的收益或亏损将最后一次出现在本部分每年列出的那张表格里。

Clayton Homes（克莱顿家园）在预制房屋行业里仍然是个异类——去年该行业的销量创下1962年以来的最低记录。事实上，去年行业的总销量只有1999年的三分之一左右。除了Clayton，我怀疑2006年整个行业整体上根本没赚到钱。

然而，Clayton实现了5.13亿美元的税前利润，并向伯克希尔额外支付了8,600万美元的费用，作为我们为其100亿美元分期应收账款组合融资的酬劳。伯克希尔的财务实力显然对Clayton帮助巨大。但推动公司成功的核心动力是Kevin Clayton（凯文·克莱顿）。凯文对这个行业了如指掌，决策理性，和他共事非常愉快。通过并购，Clayton现在雇有14,787名员工，而我们收购时只有6,661人。

我们有两家租赁公司：由Paul Arnold（保罗·阿诺德）运营的CORT（家具租赁）和由Bill Franz（比尔·弗朗兹）运营的XTRA（拖车租赁）。去年CORT的利润大幅改善，XTRA则维持在2005年达到的高水平。我们继续在寻找可以由保罗或比尔负责的补强型收购，也愿意听取关于新的租赁机会的想法。

以下是该板块的利润细分：

	（单位：百万美元）
	税前利润		计息负债
	2006	2005	2006	2005
交易——普通收入	274	200	600	1,061
Gen Re Securities（亏损）	(5)	(104)	1,204*	2,617*
寿险与年金业务	29	11	2,459	2,461
Value Capital（亏损）	6	(33)	N/A	N/A
租赁业务	182	173	261	370
预制房屋融资（Clayton）	513	416	10,498	9,299
其他	158	159	N/A	N/A
资本收益前利润	1,157	822
交易——资本收益（亏损）	938	(234)
总计	$2,095	$588

*包含所有负债

投资

下面列示的是我们的普通股投资。除两只证券外，截至2006年底市值超过7亿美元的持仓均逐项列出。我们之所以没有逐项列出那两只证券（市值合计19亿美元），是因为我们仍在继续买入。我当然可以告诉你们它们的名字——但那就得杀人灭口了。

持股数量	公司	持股比例	2006年12月31日
			成本*（百万美元）	市值
151,610,700	American Express Company（美国运通公司）	12.6%	12.87亿美元	91.98亿美元
36,417,400	Anheuser-Busch Cos., Inc.（安海斯-布希公司）	4.7%	17.61亿美元	17.92亿美元
200,000,000	The Coca-Cola Company（可口可乐公司）	8.6%	12.99亿美元	96.50亿美元
17,938,100	Conoco Phillips（康菲石油）	1.1%	10.66亿美元	12.91亿美元
21,334,900	Johnson & Johnson（强生公司）	0.7%	12.50亿美元	14.09亿美元
6,708,760	M&T Bank Corporation（M&T银行）	6.1%	1.03亿美元	8.20亿美元
48,000,000	Moody’s Corporation（穆迪公司）	17.2%	4.99亿美元	33.15亿美元
2,338,961,000	PetroChina “H” shares (or equivalents)（中国石油"H"股或等值股份）	1.3%	4.88亿美元	33.13亿美元
3,486,006	POSCO（浦项制铁）	4.0%	5.72亿美元	11.58亿美元
100,000,000	The Procter & Gamble Company（宝洁公司）	3.2%	9.40亿美元	64.27亿美元
229,707,000	Tesco（乐购）	2.9%	13.40亿美元	18.20亿美元
31,033,800	US Bancorp（合众银行）	1.8%	9.69亿美元	11.23亿美元
17,072,192	USG Corp（USG公司）	19.0%	5.36亿美元	9.36亿美元
19,944,300	Wal-Mart Stores, Inc.（沃尔玛）	0.5%	9.42亿美元	9.21亿美元
1,727,765	The Washington Post Company（华盛顿邮报公司）	18.0%	0.11亿美元	12.88亿美元
218,169,300	Wells Fargo & Company（富国银行）	6.5%	36.97亿美元	77.58亿美元
1,724,200	White Mountains Insurance（白山保险集团）	16.0%	3.69亿美元	9.99亿美元
	其他		58.66亿美元	83.15亿美元
	普通股合计		229.95亿美元	615.33亿美元

*这是我们的实际买入价格，也是我们的计税基础；美国通用会计准则的"成本"因历史要求的调增或调减，在少数情况下有所不同。

我们对2006年几乎所有被投资公司的业务表现感到欣喜。去年我们曾告诉各位，预期这些公司合计每年将以6%至8%的幅度增长盈利，这一速度将使盈利每十年左右翻一番。2006年，American Express（美国运通）、Coca-Cola（可口可乐）、Procter & Gamble（宝洁）和Wells Fargo（富国银行）——我们的四大持仓——每股盈利分别增长了18%、9%、8%和11%。这是非同凡响的成绩，我们感谢它们的CEO。

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

我们已几乎全部平仓了直接外汇头寸，该项持仓在2006年实现了约1.86亿美元的税前利润（该收益已包含在前述"金融及金融产品"表格中）。这使得自2002年建立该头寸以来的总收益达到22亿美元。以下是按币种分类的明细：

总收益（亏损）——百万美元

澳元	2.471亿美元	墨西哥比索	1.061亿美元
英镑	2.872亿美元	新西兰元	1.026亿美元
加拿大元	3.983亿美元	新加坡元	(0.026亿美元)
人民币	(0.127亿美元)	韩元	2.613亿美元
欧元	8.392亿美元	瑞士法郎	0.096亿美元
港元	(0.025亿美元)	新台币	(0.453亿美元)
日元	0.019亿美元	其他期权	0.229亿美元

我们也在外币上获得了大笔间接收益，虽然我从未精确统计过。举个例：2002至2003年间，我们花了大约8200万美元买入——居然是安然债券（Enron bonds），其中一些以欧元计价。如今我们已经从这些债券中获得1.79亿美元的分红，剩余持仓价值1.73亿美元。这意味着我们的总收益是2.7亿美元，其中一部分来自买入债券后欧元的升值。

当初我们开始购买外汇时，美国与多数外国之间的利率差对直接持有外币仓位有利。但到2005年，这个利差变成了负值。于是我们开始寻找其他方式获得外币敞口，比如投资外国股票，或者持有大量海外盈利的美国股票。需要强调的是，汇率因素在我们选股时并非主导因素，只是诸多考量之一。

随着美国贸易问题恶化，美元长期走弱的可能性依然很高。我坚信真正的贸易——对美国和世界来说，贸易越多越好。2006年，我们美国有大约1.44万亿美元的货真价实贸易。但去年美国还有7600亿美元的伪贸易——我们进口这些东西，却没有交换任何商品或服务。（试想一下，如果我们的进口是7600亿美元——整整占GDP的6%——而出口为零，评论员们会如何描述这种局面？）这种没有相应出口的购买，必然导致美国将自身资产或借据的所有权转移给世界其他国家。就像一个极其富有但放纵挥霍的家族，为了消费超过自身产出的部分，我们一点点变卖家产。

美国之所以能如此，是因为我们是一个极其富有的国家，过去又一直行事负责。因此全球都愿意接受我们的债券、房地产、股票和企业。而我们手头也确实有大把这类资产可以拱手相让。

但这类转移会带来后果。去年我曾预言挥霍成性的一个副作用，如今已经应验：美国的"投资收益"账户——自1915年以来每年都是正数——在2006年转为了负数。如今外国人在美国投资赚到的钱，已经超过美国人在海外投资的收益。实际上，我们已经花光了银行存款，开始刷信用卡了。而且，就像所有欠债的人一样，美国即将经历"反向复利"：我们还要为利息支付越来越多的利息。

我要强调：尽管我们的做法不明智，但十年二十年后美国人的生活仍会比今天更好。人均财富会增加。然而，美国公民每年将被迫把当下产出的相当一部分送到国外，仅仅是为了偿还我们这个巨大债务国所欠的利息。每天要花一部分工作时间去偿还祖辈的过度消费，这可不是什么愉快的事。我相信在未来的某个时刻，美国的工人和选民会认为这笔年度"贡赋"过于沉重，从而引发严重的政治反弹。届时市场会怎样演变，无人能够预测——但指望"软着陆"似乎是一厢情愿。

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需要一提的是，我们实现的所有直接外汇利润都来自远期合约——这是一种衍生品——同时我们也参与了其他类型的衍生品合约。这或许看起来有些奇怪，因为你们知道我们在清理通用再保险（Gen Re）的衍生品账本时付出了惨痛代价，也听过我谈论衍生品使用量急剧增长可能引发的系统性问题。你们可能会问：为什么我们还要去瞎折腾这种潜在毒资产？
答案是，衍生品——就像股票和债券一样——有时会被严重错误定价。因此，多年来我们一直有选择地签订衍生品合约——数量不多，但有时金额巨大。目前我们持有62份未到期合约。这些合约由我亲自管理，且不存在对手方信用风险。到目前为止，这些衍生品合约对我们来说运作良好，带来了数亿美元的税前利润（这还不包括我从远期外汇合约中列出的收益）。尽管我们偶尔会遭遇亏损，但总体而言，我们很可能会继续从错误定价的衍生品中赚取可观的利润。

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我曾告诉过你们，伯克希尔有三位出色的候选人可以接替我担任CEO，而且董事会非常清楚，如果我今晚去世，应该由谁来接手。这三位候选人都比我年轻得多。董事们认为，我的继任者应该有长期任期的前景，这一点很重要。

坦率地说，我们在投资业务方面的准备没有那么充分。这里有一段历史：曾经，Charlie是我在投资方面的潜在接班人，后来Lou Simpson接替了这个位置。Lou是一位顶尖的投资者，他在管理GEICO股票投资组合方面有着出色的长期业绩记录。但他只比我小六岁。如果我很快去世，他可以在短期内出色地顶替。但长期来看，我们需要另想办法。

在十月的董事会上，我们充分讨论了这个问题。我们制定了一个计划，我将在Charlie和Lou的帮助下执行。

根据这个计划，我打算聘用一位更年轻的人——男性或女性——具备管理巨额投资组合的潜力，我们期望他/她能在需要时接替我担任伯克希尔的首席投资官。作为选拔过程的一部分，我们实际上可能会考虑多位候选人。

挑选合适的人选并非易事。当然，找到聪明人——包括那些拥有令人印象深刻的投资业绩记录的人——并不难。但成功的长期投资，远不止智力和近期表现良好那么简单。

随着时间的推移，市场会做出非同寻常甚至离奇的事情。一次重大失误就可能抹去一连串的成功。因此，我们需要一个天生就能识别并避免严重风险的人，包括那些从未遇到过的风险。某些潜伏在投资策略中的危险，是无法通过金融机构今天普遍使用的模型来发现的。

性格同样重要。独立思考、情绪稳定，以及对人类和机构行为的敏锐理解，对长期投资成功至关重要。我见过很多非常聪明的人，却缺乏这些品质。

最后，我们还需要考虑一个特殊问题：如何留住我们雇佣的人。能够将伯克希尔写在简历上，会大大提升一位投资经理的市场价值。因此，我们需要确保能留住我们选中的那个人，即便他/她离开后可以在别处赚更多的钱。

肯定有符合我们需要的人，但可能很难识别。1979年，Jack Byrne和我觉得我们在Lou Simpson身上找到了这样的人。当时我们和他达成了一项协议：如果他持续取得超额收益，就会得到丰厚的报酬。根据这一协议，他赚了很多钱。然而，Lou本可以早早离开我们，去管理规模大得多的资金，并且条件更优厚。如果钱是唯一的目标，他早就那么做了。但Lou从未考虑过这样的举动。我们需要找到一位或两位同样素质的年轻人。
好消息：76岁的我精神抖擞，根据一切可测量的指标来看，身体棒极了。樱桃可乐和汉堡包对一个人的功效，真是令人惊叹。

伯克希尔董事会的一些变动

今年春天，我们董事会的构成将有两点变化。其一涉及Chace家族，这个家族与伯克希尔及其前身公司的渊源已超过一个世纪。1929年，第一代Malcolm G. Chace在将新英格兰四家纺织企业合并为Berkshire Fine Spinning Associates（伯克希尔精细纺纱联合公司）的过程中发挥了重要作用。1955年，该公司与Hathaway Manufacturing（哈撒韦制造公司）合并，组成Berkshire Hathaway（伯克希尔·哈撒韦），小Malcolm G. Chace成为其董事长。

1965年初，Malcolm安排巴菲特合伙有限公司（Buffett Partnership Ltd.）买入伯克希尔的一批关键股份，并欢迎我们成为公司新的控股股东。Malcolm担任非执行董事长直至1969年。他既是一位出色的绅士，也是一位乐于助人的合伙人。

这段话也适用于他的儿子Malcolm "Kim" Chace，他于1992年接替父亲成为伯克希尔董事。但去年，Kim——他目前正积极而成功地经营着一家自己于1996年创立的社区银行——建议我们找一个更年轻的人接替他在董事会的席位。我们已经照办，Kim将在年会上卸任董事。我深受Chace家族恩惠，并希望感谢Kim多年来为伯克希尔所做的贡献。

在挑选新董事时，我们遵循一贯的标准：董事会成员必须股东导向、商业敏锐、真正感兴趣且真正独立。我说"真正"，是因为许多被各类机构和观察家视为独立的董事，实际远非如此——他们严重依赖董事费来维持生活水平。这些报酬形式多样，每年通常在15万到25万美元之间，这一薪酬可能接近甚至超过该"独立"董事的所有其他收入。而且——你猜怎么着——近年来董事薪酬飙升，推动力来自美国企业界最青睐的咨询公司"Ratchet, Ratchet and Bingo"的建议。（这个名字可能是假的，但其所传达的行动可不是。）

查理和我认为，如果董事要履行职责——按法律，就是忠实代表股东——那么我们的四条标准至关重要。然而这些标准通常被忽视。相反，咨询顾问和CEO们在寻找董事会候选人时，常常说："我们在找一位女性"，或"一名拉丁裔"，或"一位从国外来的人"，诸如此类。有时听起来，任务似乎是在给诺亚方舟装货。多年来，我被多次问及潜在董事人选，却从未听到有人问："他思考问题像一位聪明的所有者吗？"

而我实际听到的问题，对于寻找足球队、仲裁小组或军事指挥官候选人的人来说，会显得荒谬可笑。在那些情况下，选拔者会寻找具备特定才能和态度、适合专门工作的人。在伯克希尔，我们从事的是运营好企业的专门活动，因此我们寻找商业判断力。

这正是我们在雅虎（Yahoo!）首席财务官Susan Decker身上找到的，她将在年会上加入我们的董事会。我们有幸拥有她：她在我们的四条标准上得分非常高，此外，44岁的她还年轻——正如你可能注意到的，这是你的董事长长期欠缺的品质。未来我们将寻找更多年轻董事，但绝不会轻视我们坚持的那四项品质。

杂七杂八

伯克希尔将为其2006年的利润缴纳约44亿美元的联邦所得税。在上一财年，美国政府支出了2.6万亿美元，相当于每天约70亿美元。因此，在超过半天的时间里，伯克希尔承担了所有联邦开支——从社会保障和医疗保险支出到军费。如果有600个像伯克希尔这样的纳税人，美国其他任何人都不必再缴纳任何联邦所得税或薪资税。

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我们还应补充一点：我们去年的联邦纳税申报表长达9,386页。为了处理这份申报、各州及外国税务申报、美国证券交易委员会（SEC）的无数要求，以及经营伯克希尔涉及的所有其他事务，我们在全球总部总共配备了19名员工。

这支团队占地9,708平方英尺，而查理——在洛杉矶的全球总部西区——另用655平方英尺。去年，我们的总部薪资（含福利，两地合计）总计3,531,978美元。我们花你的钱时很谨慎。

企业大佬们常常抱怨政府开支，批评官僚们花钱的方式跟花自己的钱不一样。但有时，高管的财务行为也会因谁的钱包在缩水而有所不同。以下是我在所罗门公司（Salomon）期间的一个轶事。20世纪80年代，公司有一名理发师，名叫吉米，每周来为高层免费理发。还有一名美甲师随时待命。后来，由于成本削减行动，大家被告知要自掏腰包。一位之前每周都找吉米的高管（不是CEO），立刻改为每三周理一次发。

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时不时地，查理和我会提前捕捉到某种潮水般的趋势，这种趋势蕴含着巨大的商业潜力。例如，虽然美国航空（American Airlines）的“里程”和美国运通（American Express）的信用卡积分被誉为向客户提供“奖励”的先驱，但查理和我在发现这一强大理念的吸引力上远远领先于他们。被自己的洞察力所振奋，我们俩早在1970年就跳入了奖励业务，收购了一家印花票公司——蓝筹印花公司（Blue Chip Stamps）的控制权。那一年，蓝筹印花公司的销售额为1.26亿美元，它的印花票铺满了加利福尼亚州。

确实，在1970年，大约有600亿张我们的印花票被储蓄者舔舐、粘贴到本子上，然后拿到蓝筹印花公司的兑换商店。我们的奖励目录厚达116页，装满诱人的商品。当我听说甚至某些妓院和殡仪馆也在向顾客发放印花票时，我觉得我终于找到了一个稳赚不赔的买卖。

嗯，并不完全如此。从查理和我踏进蓝筹印花公司的那一天起，这项业务就一路下滑。到1980年，销售额降至1,940万美元。到1990年，销售额艰难地维持在150万美元。我从不轻言放弃，加倍努力管理。

然后销售额又下跌了98%。去年，在伯克希尔980亿美元的营收中，仅有25,920美元（没有漏掉一个零）来自蓝筹印花公司。满怀希望，查理和我继续前行。

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我去年提到过，在我任职的19家企业董事会中（不包括伯克希尔或其他控股公司），我成了薪酬委员会的伤寒玛丽（注：比喻带来厄运的人）。只有在一家公司我被分配到了薪酬委员会，然后我在面临的最关键决策上立刻被投票否决。我的被排斥很奇怪，因为我显然在制定CEO薪酬方面不乏经验。毕竟，在伯克希尔，我是一个人组成的薪酬委员会，负责决定大约40家重要运营公司CEO的薪资和激励措施。

这部分工作占了我多少时间？几乎为零。在我们42年的历史中，有多少CEO自愿离开我们跳槽到其他公司？恰好没有。
伯克希尔采用多种不同的激励方案，其条款取决于各CEO所负责业务的经济潜力或资本密集程度等因素。但无论薪酬安排如何，我都力求保持简单且公平。

当我们使用激励措施（有时金额很大）时，这些激励始终与特定CEO负责的经营业绩挂钩。我们不会发放与业务表现无关的彩票式奖励。如果一位CEO的"打击率"达到.300，他就会得到.300打者的报酬——即使外部环境导致伯克希尔整体表现不佳。而如果他的打击率只有.150，他也不会因为其他人的成功让伯克希尔大赚而获得奖励。举个例子：伯克希尔目前持有610亿美元的股票，这些股票的价值在某一年很容易上下波动10%。我们运营高管的薪酬为什么要受这种60亿美元波动的影响？——不管这笔涨跌对股东来说多么重要。

你听过不少关于CEO业绩平庸却拿天文数字薪酬的报道。但较少被提及的是，美国CEO们普遍过着优渥的生活。需要强调的是，他们中的许多人能力极为出色，几乎所有人都每周工作远超40小时。但在这过程中，他们通常被当作皇室对待。（在伯克希尔，我们当然会继续保持这种风格。尽管查理依然偏爱粗衣淡饭，但我更喜欢被宠坏。伯克希尔旗下有"宠坏的大厨"（The Pampered Chef）；我们出色的办公室团队把我变成了"被宠坏的首席"。）

一家公司的CEO福利很快就会被其他公司效仿。"别的小朋友都有"——这个想法在董事会上可能显得过于幼稚。但咨询顾问在向薪酬委员会提出建议时，恰恰就是用这个论据，只不过措辞更优雅罢了。

不合理的、过度的薪酬实践，不会因为披露或"独立"薪酬委员会成员而得到实质性改变。事实上，我认为我之所以被许多薪酬委员会拒之门外，很可能就是因为被认为"过于独立"。薪酬改革只有在大机构股东——只需少数几家——要求对整个体系重新审视时才会发生。咨询顾问们目前那套巧妙挑选"同业"公司来与客户比较的做法，只会让当前的过度现象延续下去。

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去年，我安排将我持有的大部分伯克希尔股票捐给五家慈善基金会，以此落实我人生计划的一部分——最终将所有股份用于慈善用途。我所做的承诺及其理由的详细信息，已发布在我们的网站www.berkshirehathaway.com上。我应当指出，税收与我做出决定或决定的时间毫无关系。我2006年的联邦和州所得税，与去年夏天我未做首批捐赠时完全一样；这个道理同样适用于2007年的捐赠。

在我的遗嘱中，我规定我去世时仍持有的所有伯克希尔股份，其收益应在我的遗产结算后的十年内用于慈善目的。由于我的事务并不复杂，遗产结算最迟应该在三年内完成。将这个13年期限与我预计约12年的寿命（当然，我希望能活得更久）相加，意味着我所有伯克希尔股份的收益很可能在未来25年左右的时间里用于社会公益。
我制定这个时间表，是因为我希望这笔钱能相对迅速地花掉，由那些我了解、能力出众、精力充沛且有干劲的人来支配。这些管理特质有时会随着机构——尤其是那些免于市场压力的机构——的老化而逐渐衰退。如今，这五家基金会都由了不起的人掌管。那么，我去世后，他们为什么不能迅速行动，审慎地花掉剩余的钱呢？

那些偏好永续基金会的人认为，未来肯定会出现重大社会问题，需要慈善事业去应对。我同意。但到那时，也会有大量超级富豪个人和家族，他们的财富将超过今天的美国人，慈善组织可以向他们提出资助理由。这些资助者可以亲自判断，哪些机构既有活力又有专注力，能够最好地解决当时存在的重大社会问题。这样一来，就能对理念和成效进行市场检验。一些机构值得大力支持，而另一些则已无存在价值。即使地上的人决策不够完美，他们也比六尺之下的逝者在几十年前定下的安排更能合理地分配资金。遗嘱当然可以随时改写，但我的想法发生实质性改变的可能性非常小。

一些股东担心，接受我股份的基金会出售伯克希尔股票会打压股价。这些担忧毫无必要。许多股票的年换手率超过100%，但这些股票通常仍以接近其内在价值的价格交易。伯克希尔也往往以合理价格交易，但年换手率仅为流通股的15%。接受我股份的基金会最多每年为换手率增加三个百分点，即便如此，伯克希尔的换手率仍将是最低的。

总体而言，伯克希尔（Berkshire）的经营业绩将决定我们股票的价格，大多数时候它会落在合理区间内。基金会定期出售伯克希尔股票时能获得合理价格固然重要，但新股东不要出价过高也同样重要。（见第77页经济原则14。）通过我们的政策和股东沟通，查理和我将尽最大努力确保伯克希尔的交易价格既不显著低于内在价值，也不显著高于内在价值。

基金会所有权绝不会影响我们董事会在股息、股份回购或股票发行方面的决策。我们将严格遵循过去一直指导我们的同一原则：什么行动最有可能为股东带来长期最佳结果？

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在去年的报告中，我以寓言方式描述了Gotrocks家族——一个拥有美国全部企业的家族，却适得其反地试图通过向"帮手"支付越来越多的佣金和费用来提高投资回报。可悲的是，这个"家族"在2006年继续着这种自毁行为。

部分原因是，这个家族之所以执迷不悟，是因为他们对可实现的回报抱有不可实际的预期。有时这些错觉是自欺欺人的。例如，私人养老金计划可以通过使用可能无法实现的投资假设来暂时夸大其收益；公共养老金计划则可以推迟增税需求。精算师和审计师配合这些手段，可能要等上几十年报应才会降临（到那时，误导世人的CEO或公职人员很可能已经离职了）。
与此同时，华尔街那些吹着业绩魔笛的花衣吹笛手们，还会给这个家庭注入不切实际的希望。可怜的戈特罗克斯家族会被忽悠得深信不疑：他们每个人都能获得超越平均水平的投资业绩——前提是支付越来越高的费用。不妨把这个承诺称为成人版的乌比贡湖（注：美国电台节目中虚构的小镇，那里所有孩子都“高于平均水平”）。

2006年，承诺和费用都创下了新高。洪水般的资金从机构投资者涌向那帮收取“2%管理费加20%业绩提成”的人。对于不了解这套规则的朋友，我解释一下：这是一个失衡的体系——即使基金经理什么都没干，甚至亏了你的大钱，你每年也要把本金的2%付给他；另外，如果他成功了，哪怕成功只是因为潮水上涨，你还要把利润的20%付给他。举个例子，某基金经理一年实现10%的总回报，他会从中拿走3.6个百分点——先扣掉2%管理费，再提取剩余8%中的20%（即1.6%），留给投资者的只剩6.4个百分点。在一只30亿美元的基金上，这6.4%的净“业绩”会给基金经理带来1.08亿美元的巨额收入。而即使同一时期指数基金可能给投资者带来15%的回报，只象征性地收取一点费用，他照样能拿到这笔横财。

这种畸形安排中无情的数学计算，必然会让戈特罗克斯家族随着时间的推移变得更穷，远比他们从未听说过这些“超级帮手”时还要穷。即便如此，这种“2%+20%”的做法仍在蔓延。它的影响让人想起一句老话：当有经验的人向有钱的人提出一笔交易时，到头来往往是那个有钱的人得到了经验，而有经验的人得到了钱。

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让我以讲述一位华尔街的好人——我的老朋友Walter Schloss——来结束这一部分，他去年刚满90岁。从1956年到2002年，Walter管理着一个非常成功的投资合伙企业，除非他的投资者赚钱，否则他一分钱也不拿。需要说明的是，我对Walter的钦佩并非事后诸葛。整整50年前，当圣路易斯的一个家庭想找一位诚实能干的投资经理时，我唯一推荐的人就是Walter。

Walter没上过商学院，甚至没上过大学。1956年他的办公室里只有一个文件柜；到2002年增加到了四个。Walter没有秘书、文员或记账员，他唯一的合伙人是他的儿子Edwin，一位北卡罗来纳艺术学院毕业生。Walter和Edwin从未与内幕信息沾过边。事实上，他们连“外部”信息也很少使用，通常只是根据Walter在为本·格雷厄姆工作时学到的一些简单统计方法来挑选证券。1989年，当《杰出投资者文摘》问Walter和Edwin“你们如何概括自己的方法？”时，Edwin回答说：“我们试图买便宜的股票。”现代投资组合理论、技术分析、宏观经济思考和复杂算法，到此为止。

Walter采用一种没有真正风险（定义为资本的永久性损失）的策略，在47年的合伙企业生涯中，取得了远远超过标普500指数的业绩。尤其值得注意的是，他是通过投资大约1000只证券（大部分是平淡无奇的品种）建立起这一业绩的。少数大赢家并不能解释他的成功。可以肯定地说，如果有数百万投资经理通过以下方式交易：（a）从帽子里抽取股票名称；（b）在Walter买入时以可比数量买入这些股票；然后（c）在Walter卖出时卖出他的选择，那么他们当中最幸运的人也无法接近他的业绩记录。Walter在47年间所取得的成就，完全不可能是运气所致。
我第一次公开谈论Walter的卓越业绩是在1984年。那时，“有效市场理论”（EMT）是大多数顶尖商学院投资教育的核心内容。这个理论在当时的主流教义是：任何股票在任何时刻的价格都不可能被明显错误定价——也就是说，没有任何投资者能靠公开信息稳定跑赢股市平均回报（尽管有些人会靠运气做到）。23年前我谈论Walter时，他的业绩有力地反驳了这一教条。

那么当学术界接触到这一重要新证据时，他们做了什么？可惜，他们的反应充满了人性弱点：不是敞开心扉，而是闭上眼睛。据我所知，没有一所教授EMT的商学院试图研究Walter的业绩及其对该校珍视的理论意味着什么。

相反，这些学校的教授们继续愉快地宣讲EMT，仿佛它是圣经般不可动摇的真理。通常，一个胆敢质疑EMT的金融学讲师，其升职机会大概和伽利略被选为教皇一样渺茫。

于是，成千上万的学生就这样踏入了社会，相信每一天每一只股票的价格都是“正确的”（或者更准确地说，无法证明是错误的），并且认为评估企业——也就是股票——是徒劳的。而Walter则继续跑赢市场，那些被灌输错误思想的年轻头脑反而让他的工作变得更轻松了。毕竟，如果你在做航运生意，让你的潜在竞争对手都相信地球是平的，那对你来说是件好事。

也许，Walter没上过大学对他的投资者来说是件好事。

年度股东大会

今年的股东大会将于5月5日（星期六）举行。和往常一样，Qwest中心早上7点开门，8点30分将播放一部新的伯克希尔电影。9点30分我们直接进入问答环节（中间会在Qwest的摊位休息吃午饭），一直持续到下午3点。短暂休会后，下午3点15分，我和Charlie将主持召开股东大会。如果你决定在白天问答环节期间离场，请趁Charlie说话时再走。

当然，离场的最佳理由是——购物。我们将以此帮助你：在紧邻会议区的194,300平方英尺的大厅里，摆满伯克希尔子公司的产品。去年，前来参会的24,000人各显神通，几乎每个展位都创下了销售记录。但记录就是用来打破的，我知道你们能做得更好。

今年我们将再次展示一套克莱顿（Clayton）房屋（配备阿克米（Acme）砖、肖氏（Shaw）地毯、佳斯曼维尔（Johns Manville）保温材料、MiTek紧固件、Carefree遮阳篷和NFM家具）。你会发现这套定价139,900美元的房屋物超所值。去年，Qwest中心的一名工作人员在向股东开放之前就买走了展示的两套房屋中的一套。今年，在展览大厅里，克莱顿房屋旁边将停放一辆Forest River的房车和浮筒船。

GEICO将会设立一个展台，由来自全国各地的顶级顾问组成，随时准备为你提供汽车保险报价。在大多数情况下，GEICO可以给你提供股东特别折扣（通常为8%）。在我们经营的50个司法管辖区中，有45个允许这项特别优惠。（补充一点：如果你符合其他折扣条件（比如针对特定群体的折扣），这项折扣不可叠加。）带上你现有保险的详细信息，看看我们能不能帮你省钱。我相信至少50%的人我们能省。同时，也请申请新的GEICO信用卡。这正是我现在使用的卡（当然，我很少用）。
周六，在奥马哈机场，我们将安排奈特捷（NetJets）的常规机型供您参观。请前往奎斯特中心的奈特捷展位了解如何参观这些飞机。乘大巴来奥马哈，开新飞机回去。把您想带的发胶统统带上飞机。

在我们集市的书虫角，将有约25种图书和DVD——全部打折——领衔的依然是《穷查理宝典》。（去年有位可怜的家伙问查理，如果他不喜欢这本书该怎么办。芒格式的回答来了：“没问题——送给比你聪明的人就行。”）今年我们新添了几本书。其中包括长期持有伯克希尔股票的瑞典股东彼得·贝弗林所著的《寻找智慧：从达尔文到芒格》，以及弗雷德·施韦德的经典之作《客户的游艇在哪里？》这本书首版于1940年，现已出到第4版。作为有史以来最有趣的投资书籍，它轻松地传递了许多真正重要的投资真谛。

随本报告附上的股东委托书材料中有一份附件，说明了如何获取参会凭证（入场需要）及其他活动凭证。至于飞机、酒店和租车预订，我们再次签约美国运通（800-799-6634），由他们为您提供特别协助。负责处理这些事务的Carol Pedersen每年都做得非常出色，我在此向她致谢。奥马哈的酒店房间可能不好找，但找Carol帮忙，一定能订到。

在内布拉斯加家具城（Nebraska Furniture Mart）——位于72街介于道奇街和太平洋街之间的77英亩地块——我们将再次推出“伯克希尔周末”折扣价。十年前我们在NFM开始这项特惠活动，周末销售额从1997年的530万美元增长到2006年的3000万美元。一想到这个销量，我就激动得起鸡皮疙瘩。

要享受伯克希尔折扣，您必须在5月3日（周四）至5月7日（周一）（含首尾两天）期间购物，并出示参会凭证。这一时段的特价甚至适用于几个知名厂商的产品，这些厂商通常有铁一般的反折扣规定，但本着我们股东周末的精神，为您破了例。我们感谢他们的合作。NFM的营业时间：周一至周六上午10点至晚上9点，周日上午10点至下午6点。今年周六下午5点30分至8点，NFM将举办一场股东专属野餐会，供应鸡肉和牛肉玉米卷（以及像我这样的传统主义者爱吃的汉堡）。

在重新装修并扩大营业面积的波仙珠宝（Borsheim's），我们将再次举办两场股东专属活动。第一场是5月4日（周五）下午6点至10点的鸡尾酒招待会。第二场是主庆典，于5月6日（周日）上午9点至下午4点举行。周六营业至下午6点。

整个周末波仙珠宝都会人山人海。为方便您购物，股东优惠价将从4月30日（周一）持续到5月12日（周六）。在此期间，请出示参会凭证或能证明您持有伯克希尔股票的券商对账单，以表明股东身份。

周日下午，在波仙珠宝外的帐篷里，两次美国国际象棋冠军Patrick Wolff将蒙眼下棋，同时接受六人一组的挑战者（挑战者可睁大眼睛）。去年Patrick这样下棋时，我还跟他说了几句话。旁边，来自达拉斯的杰出魔术师Norman Beck会让观众目眩神迷。此外，我们还有两位世界顶级桥牌大师Bob Hamman和Sharon Osberg，周日下午可与股东们切磋桥牌。
为了给周日在波仙珠宝（Borsheim's）的欢乐气氛再添一把火，Ariel Hsing将从下午1点到4点打乒乓球（对不了解的人来说就是乒乓球），与任何有胆量挑战她的人过招。Ariel虽然只有11岁，却是美国16岁以下女子组排名第一（同时也是12岁以下男女混合排名第一）。我75岁那周曾和她交手，当时她才9岁，个子勉强能越过球台看到对面，我本想对她手下留情，免得打击她的幼小心灵。结果是她把我打得落花流水。后来我设计了一个新计划，让我有机会赢她。周日1点，我先和Ariel打一场两分制的比赛。如果我侥幸赢了第一分，我就假装受伤，然后宣布胜利。等这场激烈的较量把Ariel累垮后，我们的股东就可以轮番上阵碰碰运气了。

Gorat's餐厅将在5月6日（周日）再次专为伯克希尔股东开放，营业时间从下午4点到晚上10点。请记住，当天去Gorat's必须提前预约。预约请于4月1日（且只能在这一天）拨打402-551-3733。

在2006-2007学年，将有35所大学班级（包括来自巴西IBMEC的一个班）来到奥马哈与我交流。我几乎会带所有人——总共有2000多名学生——去Gorat's吃午餐。他们都很喜欢。想知道为什么？周日来和我们一起体验吧。

周六下午4点，我们将再次为来自北美以外的股东举办一场招待会。每年我们的年会都会吸引来自全球各地的人，我和查理（Charlie）希望确保能亲自问候这些远道而来的朋友。去年我们有幸与来自几十个国家的400多位股东见面。任何来自美国或加拿大以外的股东都将获得一份特别凭证和参加该活动的指引。

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我和查理极其幸运。我们出生在美国；拥有出色的父母，确保我们接受了良好教育；享受着美满的家庭和健康的身体；而且天生具备一种"商业"基因，使我们的财富积累方式远超那些为社会福祉做出同样甚至更多贡献的其他人。此外，长期以来我们从事着自己热爱的工作，每天都有才华横溢、乐观向上的同事以无数方式给予我们帮助。难怪我们总是跳着踢踏舞去上班。但对我们来说，最开心的事莫过于在伯克希尔年会上与我们的股东合伙人相聚。所以，5月5日来Qwest中心参加我们的"资本家的伍德斯托克"吧。我们到时见。

2007年2月28日

沃伦·E·巴菲特

董事会主席