BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1999 was $358 million, which increased
the per-share book value of both our Class A and Class B stock by 0.5%.
Over the last 35 years (that is, since present management took over)
per-share book value has grown from $19 to $37,987, a rate of 24.0%
*All figures used in this report apply to Berkshire's A shares, the successor to the only stock that
the company had outstanding before 1996. The B shares have an economic interest equal to
1/30th that of the A.
The numbers on the facing page show just how poor our 1999 record
was. We had the worst absolute performance of my tenure and,
compared to the S&P, the worst relative performance as well. Relative
results are what concern us: Over time, bad relative numbers will
produce unsatisfactory absolute results.
Even Inspector Clouseau could find last year's guilty party: your
Chairman. My performance reminds me of the quarterback whose
report card showed four Fs and a D but who nonetheless had an
understanding coach. "Son," he drawled, "I think you're spending too
much time on that one subject."
My "one subject" is capital allocation, and my grade for 1999 most
assuredly is a D. What most hurt us during the year was the inferior
performance of Berkshire's equity portfolio -- and responsibility for
that portfolio, leaving aside the small piece of it run by Lou Simpson of
GEICO, is entirely mine. Several of our largest investees badly lagged the
market in 1999 because they've had disappointing operating results. We
still like these businesses and are content to have major investments in
them. But their stumbles damaged our performance last year, and it's no
sure thing that they will quickly regain their stride.
The fallout from our weak results in 1999 was a more-than-
commensurate drop in our stock price. In 1998, to go back a bit, the
stock outperformed the business. Last year the business did much
better than the stock, a divergence that has continued to the date of this
letter. Over time, of course, the performance of the stock must roughly
match the performance of the business.
Despite our poor showing last year, Charlie Munger, Berkshire's Vice
Chairman and my partner, and I expect that the gain in Berkshire's
intrinsic value over the next decade will modestly exceed the gain from
owning the S&P. We can't guarantee that, of course. But we are willing to
back our conviction with our own money. To repeat a fact you've heard
before, well over 99% of my net worth resides in Berkshire. Neither my
wife nor I have ever sold a share of Berkshire and -- unless our checks
stop clearing -- we have no intention of doing so.
Please note that I spoke of hoping to beat the S&P "modestly." For
Berkshire, truly large superiorities over that index are a thing of the
past. They existed then because we could buy both businesses and
stocks at far more attractive prices than we can now, and also because
we then had a much smaller capital base, a situation that allowed us to
consider a much wider range of investment opportunities than are
available to us today.
Our optimism about Berkshire's performance is also tempered by the
expectation -- indeed, in our minds, the virtual certainty -- that the S&P
will do far less well in the next decade or two than it has done since
1982. A recent article in Fortune expressed my views as to why this is
inevitable, and I'm enclosing a copy with this report.
Our goal is to run our present businesses well -- a task made easy
because of the outstanding managers we have in place -- and to acquire
additional businesses having economic characteristics and managers
comparable to those we already own. We made important progress in
this respect during 1999 by acquiring Jordan's Furniture and
contracting to buy a major portion of MidAmerican Energy. We will talk
more about these companies later in the report but let me emphasize
one point here: We bought both for cash, issuing no Berkshire shares.
Deals of that kind aren't always possible, but that is the method of
acquisition that Charlie and I vastly prefer.
Guides to Intrinsic Value
I often talk in these pages about intrinsic value, a key, though far from
precise, measurement we utilize in our acquisitions of businesses and
common stocks. (For an extensive discussion of this, and other
investment and accounting terms and concepts, please refer to our
Owner's Manual on pages 55 - 62. Intrinsic value is discussed on page
In our last four reports, we have furnished you a table that we regard as
useful in estimating Berkshire's intrinsic value. In the updated version of
that table, which follows, we trace two key components of value. The
first column lists our per-share ownership of investments (including
cash and equivalents but excluding assets held in our financial products
operation) and the second column shows our per-share earnings from
Berkshire's operating businesses before taxes and purchase-accounting
adjustments (discussed on page 61), but after all interest and corporate
expenses. The second column excludes all dividends, interest and
capital gains that we realized from the investments presented in the
first column. In effect, the columns show how Berkshire would look if it
were split into two parts, with one entity holding our investments and
the other operating all of our businesses and bearing all corporate
With All Income from
Pre-tax Earnings Per Share
With All Income from
Annual Growth Rate, 1969-1999 .................
In 1999, our per-share investments changed very little, but our
operating earnings, affected by negatives that overwhelmed some
strong positives, fell apart. Most of our operating managers deserve a
grade of A for delivering fine results and for having widened the
difference between the intrinsic value of their businesses and the value
at which these are carried on our balance sheet. But, offsetting this, we
had a huge -- and, I believe, aberrational -- underwriting loss at
General Re. Additionally, GEICO's underwriting profit fell, as we had
predicted it would. GEICO's overall performance, though, was terrific,
outstripping my ambitious goals.
We do not expect our underwriting earnings to improve in any dramatic
way this year. Though GEICO's intrinsic value should grow by a highly
satisfying amount, its underwriting performance is almost certain to
weaken. That's because auto insurers, as a group, will do worse in 2000,
and because we will materially increase our marketing expenditures. At
General Re, we are raising rates and, if there is no mega-catastrophe in
2000, the company's underwriting loss should fall considerably. It takes
some time, however, for the full effect of rate increases to kick in, and
General Re is therefore likely to have another unsatisfactory
You should be aware that one item regularly working to widen the
amount by which intrinsic value exceeds book value is the annual
charge against income we take for amortization of goodwill -- an
amount now running about $500 million. This charge reduces the
amount of goodwill we show as an asset and likewise the amount that is
included in our book value. This is an accounting matter having nothing
to do with true economic goodwill, which increases in most years. But
even if economic goodwill were to remain constant, the annual
amortization charge would persistently widen the gap between intrinsic
value and book value.
Though we can't give you a precise figure for Berkshire's intrinsic value,
or even an approximation, Charlie and I can assure you that it far
exceeds our $57.8 billion book value. Businesses such as See's and
Buffalo News are now worth fifteen to twenty times the value at which
they are carried on our books. Our goal is to continually widen this
spread at all subsidiaries.
A Managerial Story You Will Never Read Elsewhere
Berkshire's collection of managers is unusual in several important ways.
As one example, a very high percentage of these men and women are
independently wealthy, having made fortunes in the businesses that
they run. They work neither because they need the money nor because
they are contractually obligated to -- we have no contracts at Berkshire.
Rather, they work long and hard because they love their businesses.
And I use the word "their" advisedly, since these managers are truly in
charge -- there are no show-and-tell presentations in Omaha, no
budgets to be approved by headquarters, no dictums issued about
capital expenditures. We simply ask our managers to run their
companies as if these are the sole asset of their families and will remain
so for the next century.
Charlie and I try to behave with our managers just as we attempt to
behave with Berkshire's shareholders, treating both groups as we would
wish to be treated if our positions were reversed. Though "working"
means nothing to me financially, I love doing it at Berkshire for some
simple reasons: It gives me a sense of achievement, a freedom to act as
I see fit and an opportunity to interact daily with people I like and trust.
Why should our managers -- accomplished artists at what they do --
see things differently?
In their relations with Berkshire, our managers often appear to be
hewing to President Kennedy's charge, "Ask not what your country can
do for you; ask what you can do for your country." Here's a remarkable
story from last year: It's about R. C. Willey, Utah's dominant home
furnishing business, which Berkshire purchased from Bill Child and his
family in 1995. Bill and most of his managers are Mormons, and for this
reason R. C. Willey's stores have never operated on Sunday. This is a
difficult way to do business: Sunday is the favorite shopping day for
many customers. Bill, nonetheless, stuck to his principles -- and while
doing so built his business from $250,000 of annual sales in 1954,
when he took over, to $342 million in 1999.
Bill felt that R. C. Willey could operate successfully in markets outside of
Utah and in 1997 suggested that we open a store in Boise. I was highly
skeptical about taking a no-Sunday policy into a new territory where we
would be up against entrenched rivals open seven days a week.
Nevertheless, this was Bill's business to run. So, despite my
reservations, I told him to follow both his business judgment and his
Bill then insisted on a truly extraordinary proposition: He would
personally buy the land and build the store -- for about $9 million as it
turned out -- and would sell it to us at his cost if it proved to be
successful. On the other hand, if sales fell short of his expectations, we
could exit the business without paying Bill a cent. This outcome, of
course, would leave him with a huge investment in an empty building. I
told him that I appreciated his offer but felt that if Berkshire was going
to get the upside it should also take the downside. Bill said nothing
doing: If there was to be failure because of his religious beliefs, he
wanted to take the blow personally.
The store opened last August and immediately became a huge success.
Bill thereupon turned the property over to us -- including some extra
land that had appreciated significantly -- and we wrote him a check for
his cost. And get this: Bill refused to take a dime of interest on the
capital he had tied up over the two years.
If a manager has behaved similarly at some other public corporation, I
haven't heard about it. You can understand why the opportunity to
partner with people like Bill Child causes me to tap dance to work every
* * * * * * * * * * * *
A footnote: After our "soft" opening in August, we had a grand opening
of the Boise store about a month later. Naturally, I went there to cut the
ribbon (your Chairman, I wish to emphasize, is good for something). In
my talk I told the crowd how sales had far exceeded expectations,
making us, by a considerable margin, the largest home furnishings
store in Idaho. Then, as the speech progressed, my memory
miraculously began to improve. By the end of my talk, it all had come
back to me: Opening a store in Boise had been my idea.
The Economics of Property/Casualty Insurance
Our main business -- though we have others of great importance -- is
insurance. To understand Berkshire, therefore, it is necessary that you
understand how to evaluate an insurance company. The key
determinants are: (1) the amount of float that the business generates;
(2) its cost; and (3) most critical of all, the long-term outlook for both of
To begin with, float is money we hold but don't own. In an insurance
operation, float arises because premiums are received before losses are
paid, an interval that sometimes extends over many years. During that
time, the insurer invests the money. This pleasant activity typically
carries with it a downside: The premiums that an insurer takes in usually
do not cover the losses and expenses it eventually must pay. That leaves
it running an "underwriting loss," which is the cost of float. An insurance
business has value if its cost of float over time is less than the cost the
company would otherwise incur to obtain funds. But the business is a
lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated,
insurers have enormous latitude in figuring their underwriting results,
and that makes it very difficult for investors to calculate a company's
true cost of float. Errors of estimation, usually innocent but sometimes
not, can be huge. The consequences of these miscalculations flow
directly into earnings. An experienced observer can usually detect
large-scale errors in reserving, but the general public can typically do
no more than accept what's presented, and at times I have been amazed
by the numbers that big-name auditors have implicitly blessed. In 1999
a number of insurers announced reserve adjustments that made a
mockery of the "earnings" that investors had relied on earlier when
making their buy and sell decisions. At Berkshire, we strive to be
conservative and consistent in our reserving. Even so, we warn you that
an unpleasant surprise is always possible.
The table that follows shows (at intervals) the float generated by the
various segments of Berkshire's insurance operations since we entered
the business 33 years ago upon acquiring National Indemnity Company
(whose traditional lines are included in the segment "Other Primary").
For the table we have calculated our float -- which we generate in large
amounts relative to our premium volume -- by adding net loss reserves,
loss adjustment reserves, funds held under reinsurance assumed and
unearned premium reserves, and then subtracting agents balances,
prepaid acquisition costs, prepaid taxes and deferred charges
applicable to assumed reinsurance. (Got that?)
Yearend Float (in $ millions)
Growth of float is important -- but its cost is what's vital. Over the years
we have usually recorded only a small underwriting loss -- which means
our cost of float was correspondingly low -- or actually had an
underwriting profit, which means we were being paid for holding other
people's money. Indeed, our cumulative result through 1998 was an
underwriting profit. In 1999, however, we incurred a $1.4 billion
underwriting loss that left us with float cost of 5.8%. One mildly
mitigating factor: We enthusiastically welcomed $400 million of the loss
because it stems from business that will deliver us exceptional float
over the next decade. The balance of the loss, however, was decidedly
unwelcome, and our overall result must be judged extremely poor.
Absent a mega-catastrophe, we expect float cost to fall in 2000, but any
decline will be tempered by our aggressive plans for GEICO, which we
will discuss later.
There are a number of people who deserve credit for manufacturing so
much "no-cost" float over the years. Foremost is Ajit Jain. It's simply
impossible to overstate Ajit's value to Berkshire: He has from scratch
built an outstanding reinsurance business, which during his tenure has
earned an underwriting profit and now holds $6.3 billion of float.
In Ajit, we have an underwriter equipped with the intelligence to
properly rate most risks; the realism to forget about those he can't
evaluate; the courage to write huge policies when the premium is
appropriate; and the discipline to reject even the smallest risk when the
premium is inadequate. It is rare to find a person possessing any one of
these talents. For one person to have them all is remarkable.
Since Ajit specializes in super-cat reinsurance, a line in which losses are
infrequent but extremely large when they occur, his business is sure to
be far more volatile than most insurance operations. To date, we have
benefitted from good luck on this volatile book. Even so, Ajit's
achievements are truly extraordinary.
In a smaller but nevertheless important way, our "other primary"
insurance operation has also added to Berkshire's intrinsic value. This
collection of insurers has delivered a $192 million underwriting profit
over the past five years while supplying us with the float shown in the
table. In the insurance world, results like this are uncommon, and for
their feat we thank Rod Eldred, Brad Kinstler, John Kizer, Don Towle and
As I mentioned earlier, the General Re operation had an exceptionally
poor underwriting year in 1999 (though investment income left the
company well in the black). Our business was extremely underpriced,
both domestically and internationally, a condition that is improving but
not yet corrected. Over time, however, the company should develop a
growing amount of low-cost float. At both General Re and its Cologne
subsidiary, incentive compensation plans are now directly tied to the
variables of float growth and cost of float, the same variables that
determine value for owners.
Even though a reinsurer may have a tightly focused and rational
compensation system, it cannot count on every year coming up roses.
Reinsurance is a highly volatile business, and neither General Re nor
Ajit's operation is immune to bad pricing behavior in the industry. But
General Re has the distribution, the underwriting skills, the culture, and
-- with Berkshire's backing -- the financial clout to become the world's
most profitable reinsurance company. Getting there will take time,
energy and discipline, but we have no doubt that Ron Ferguson and his
crew can make it happen.
GEICO (1-800-847-7536 or GEICO.com)
蓋可保險 (1-800-847-7536 or GEICO.com)
GEICO made exceptional progress in 1999. The reasons are simple: We
have a terrific business idea being implemented by an extraordinary
manager, Tony Nicely. When Berkshire purchased GEICO at the
beginning of 1996, we handed the keys to Tony and asked him to run
the operation exactly as if he owned 100% of it. He has done the rest.
Take a look at his scorecard:
- "Voluntary" only; excludes assigned risks and the like.
- (2) Revised to exclude policies moved from one GEICO company to another.
In 1995, GEICO spent $33 million on marketing and had 652
telephone counselors. Last year the company spent $242 million, and
the counselor count grew to 2,631. And we are just starting: The pace
will step up materially in 2000. Indeed, we would happily commit $1
billion annually to marketing if we knew we could handle the business
smoothly and if we expected the last dollar spent to produce new
business at an attractive cost.
Currently two trends are affecting acquisition costs. The bad news is
that it has become more expensive to develop inquiries. Media rates
have risen, and we are also seeing diminishing returns -- that is, as
both we and our competitors step up advertising, inquiries per ad fall
for all of us. These negatives are partly offset, however, by the fact that
our closure ratio -- the percentage of inquiries converted to sales --
has steadily improved. Overall, we believe that our cost of new business,
though definitely rising, is well below that of the industry. Of even
greater importance, our operating costs for renewal business are the
lowest among broad-based national auto insurers. Both of these major
competitive advantages are sustainable. Others may copy our model,
but they will be unable to replicate our economics.
The table above makes it appear that GEICO's retention of policyholders
is falling, but for two reasons appearances are in this case deceiving.
First, in the last few years our business mix has moved away from
"preferred" policyholders, for whom industrywide retention rates are
high, toward "standard" and "non-standard" policyholders for whom
retention rates are much lower. (Despite the nomenclature, the three
classes have similar profit prospects.) Second, retention rates for
relatively new policyholders are always lower than those for long-time
customers -- and because of our accelerated growth, our policyholder
ranks now include an increased proportion of new customers. Adjusted
for these two factors, our retention rate has changed hardly at all.
We told you last year that underwriting margins for both GEICO and the
industry would fall in 1999, and they did. We make a similar prediction
for 2000. A few years ago margins got too wide, having enjoyed the
effects of an unusual and unexpected decrease in the frequency and
severity of accidents. The industry responded by reducing rates -- but
now is having to contend with an increase in loss costs. We would not be
surprised to see the margins of auto insurers deteriorate by around
three percentage points in 2000.
Two negatives besides worsening frequency and severity will hurt the
industry this year. First, rate increases go into effect only slowly, both
because of regulatory delay and because insurance contracts must run
their course before new rates can be put in. Second, reported earnings
of many auto insurers have benefitted in the last few years from reserve
releases, made possible because the companies overestimated their
loss costs in still-earlier years. This reservoir of redundant reserves has
now largely dried up, and future boosts to earnings from this source will
be minor at best.
In compensating its associates -- from Tony on down -- GEICO
continues to use two variables, and only two, in determining what
bonuses and profit-sharing contributions will be: 1) its percentage
growth in policyholders and 2) the earnings of its "seasoned" business,
meaning policies that have been with us for more than a year. We did
outstandingly well on both fronts during 1999 and therefore made a
profit-sharing payment of 28.4% of salary (in total, $113.3 million) to
the great majority of our associates. Tony and I love writing those
At Berkshire, we want to have compensation policies that are both easy
to understand and in sync with what we wish our associates to
accomplish. Writing new business is expensive (and, as mentioned,
getting more expensive). If we were to include those costs in our
calculation of bonuses -- as managements did before our arrival at
GEICO -- we would be penalizing our associates for garnering new
policies, even though these are very much in Berkshire's interest. So, in
effect, we say to our associates that we will foot the bill for new
business. Indeed, because percentage growth in policyholders is part of
our compensation scheme, we reward our associates for producing this
initially-unprofitable business. And then we reward them additionally
for holding down costs on our seasoned business.
Despite the extensive advertising we do, our best source of new
business is word-of-mouth recommendations from existing
policyholders, who on the whole are pleased with our prices and service.
An article published last year by Kiplinger's Personal Finance Magazine
gives a good picture of where we stand in customer satisfaction: The
magazine's survey of 20 state insurance departments showed that
GEICO's complaint ratio was well below the ratio for most of its major
Our strong referral business means that we probably could maintain our
policy count by spending as little as $50 million annually on advertising.
That's a guess, of course, and we will never know whether it is accurate
because Tony's foot is going to stay on the advertising pedal (and my
foot will be on his). Nevertheless, I want to emphasize that a major
percentage of the $300-$350 million we will spend in 2000 on
advertising, as well as large additional costs we will incur for sales
counselors, communications and facilities, are optional outlays we
choose to make so that we can both achieve significant growth and
extend and solidify the promise of the GEICO brand in the minds of
Personally, I think these expenditures are the best investment Berkshire
can make. Through its advertising, GEICO is acquiring a direct
relationship with a huge number of households that, on average, will
send us $1,100 year after year. That makes us -- among all companies,
selling whatever kind of product -- one of the country's leading direct
merchandisers. Also, as we build our long-term relationships with more
and more families, cash is pouring in rather than going out (no Internet
economics here). Last year, as GEICO increased its customer base by
766,256, it gained $590 million of cash from operating earnings and
the increase in float.
In the past three years, we have increased our market share in personal
auto insurance from 2.7% to 4.1%. But we rightfully belong in many
more households -- maybe even yours. Give us a call and find out.
About 40% of those people checking our rates find that they can save
money by doing business with us. The proportion is not 100% because
insurers differ in their underwriting judgments, with some giving more
credit than we do to drivers who live in certain geographic areas or work
at certain occupations. Our closure rate indicates, however, that we
more frequently offer the low price than does any other national carrier
selling insurance to all comers. Furthermore, in 40 states we can offer a
special discount -- usually 8% -- to our shareholders. Just be sure to
identify yourself as a Berkshire owner so that our sales counselor can
make the appropriate adjustment.
* * * * * * * * * * * *
It's with sadness that I report to you that Lorimer Davidson, GEICO's
former Chairman, died last November, a few days after his 97th birthday.
For GEICO, Davy was a business giant who moved the company up to the
big leagues. For me, he was a friend, teacher and hero. I have told you of
his lifelong kindnesses to me in past reports. Clearly, my life would have
developed far differently had he not been a part of it. Tony, Lou Simpson
and I visited Davy in August and marveled at his mental alertness --
particularly in all matters regarding GEICO. He was the company's
number one supporter right up to the end, and we will forever miss him.
在這裡很遺憾地向各位報告， GEICO前董事長-Lorimer Davidson，於去年十
Our two aviation services companies -- FlightSafety International ("FSI")
and Executive Jet Aviation ("EJA") -- are both runaway leaders in their
field. EJA, which sells and manages the fractional ownership of jet
aircraft, through its NetJetsR program, is larger than its next two
competitors combined. FSI trains pilots (as well as other transportation
professionals) and is five times or so the size of its nearest competitor.
Another common characteristic of the companies is that they are still
managed by their founding entrepreneurs. Al Ueltschi started FSI in
1951 with $10,000, and Rich Santulli invented the fractional-ownership
industry in 1986. These men are both remarkable managers who have
no financial need to work but thrive on helping their companies grow
Though these two businesses have leadership positions that are similar,
they differ in their economic characteristics. FSI must lay out huge
amounts of capital. A single flight simulator can cost as much as $15
million -- and we have 222. Only one person at a time, furthermore, can
be trained in a simulator, which means that the capital investment per
dollar of revenue at FSI is exceptionally high. Operating margins must
therefore also be high, if we are to earn a reasonable return on capital.
Last year we made capital expenditures of $215 million at FSI and
FlightSafety Boeing, its 50%-owned affiliate.
At EJA, in contrast, the customer owns the equipment, though we, of
course, must invest in a core fleet of our own planes to ensure
outstanding service. For example, the Sunday after Thanksgiving, EJA's
busiest day of the year, strains our resources since fractions of 169
planes are owned by 1,412 customers, many of whom are bent on flying
home between 3 and 6 p.m. On that day, and certain others, we need a
supply of company-owned aircraft to make sure all parties get where
they want, when they want.
Still, most of the planes we fly are owned by customers, which means
that modest pre-tax margins in this business can produce good returns
on equity. Currently, our customers own planes worth over $2 billion,
and in addition we have $4.2 billion of planes on order. Indeed, the
limiting factor in our business right now is the availability of planes. We
now are taking delivery of about 8% of all business jets manufactured in
the world, and we wish we could get a bigger share than that. Though
EJA was supply-constrained in 1999, its recurring revenues -- monthly
management fees plus hourly flight fees -- increased 46%.
The fractional-ownership industry is still in its infancy. EJA is now
building critical mass in Europe, and over time we will expand around
the world. Doing that will be expensive -- very expensive -- but we will
spend what it takes. Scale is vital to both us and our customers: The
company with the most planes in the air worldwide will be able to offer
its customers the best service. "Buy a fraction, get a fleet" has real
meaning at EJA.
EJA enjoys another important advantage in that its two largest
competitors are both subsidiaries of aircraft manufacturers and sell only
the aircraft their parents make. Though these are fine planes, these
competitors are severely limited in the cabin styles and mission
capabilities they can offer. EJA, in contrast, offers a wide array of planes
from five suppliers. Consequently, we can give the customer whatever
he needs to buy -- rather than his getting what the competitor's parent
needs to sell.
Last year in this report, I described my family's delight with the one-
quarter (200 flight hours annually) of a Hawker 1000 that we had owned
since 1995. I got so pumped up by my own prose that shortly thereafter
I signed up for one-sixteenth of a Cessna V Ultra as well. Now my
annual outlays at EJA and Borsheim's, combined, total ten times my
salary. Think of this as a rough guideline for your own expenditures
厲簽約買下一架Cessna V Ultra型六分之一的所有權，現在每年我在EJA以及
During the past year, two of Berkshire's outside directors have also
signed on with EJA. (Maybe we're paying them too much.) You should be
aware that they and I are charged exactly the same price for planes and
service as is any other customer: EJA follows a "most favored nations"
policy, with no one getting a special deal.
And now, brace yourself. Last year, EJA passed the ultimate test: Charlie
signed up. No other endorsement could speak more eloquently to the
value of the EJA service. Give us a call at 1-800-848-6436 and ask for
our "white paper" on fractional ownership.
Acquisitions of 1999
At both GEICO and Executive Jet, our best source of new customers is
the happy ones we already have. Indeed, about 65% of our new owners
of aircraft come as referrals from current owners who have fallen in love
with the service.
Our acquisitions usually develop in the same way. At other companies,
executives may devote themselves to pursuing acquisition possibilities
with investment bankers, utilizing an auction process that has become
standardized. In this exercise the bankers prepare a "book" that makes
me think of the Superman comics of my youth. In the Wall Street version,
a formerly mild-mannered company emerges from the investment
banker's phone booth able to leap over competitors in a single bound
and with earnings moving faster than a speeding bullet. Titillated by the
book's description of the acquiree's powers, acquisition-hungry CEOs
-- Lois Lanes all, beneath their cool exteriors -- promptly swoon.
What's particularly entertaining in these books is the precision with
which earnings are projected for many years ahead. If you ask the
author-banker, however, what his own firm will earn next month, he will
go into a protective crouch and tell you that business and markets are
far too uncertain for him to venture a forecast.
Here's one story I can't resist relating: In 1985, a major investment
banking house undertook to sell Scott Fetzer, offering it widely -- but
with no success. Upon reading of this strikeout, I wrote Ralph Schey,
then and now Scott Fetzer's CEO, expressing an interest in buying the
business. I had never met Ralph, but within a week we had a deal.
Unfortunately, Scott Fetzer's letter of engagement with the banking firm
provided it a $2.5 million fee upon sale, even if it had nothing to do with
finding the buyer. I guess the lead banker felt he should do something
for his payment, so he graciously offered us a copy of the book on Scott
Fetzer that his firm had prepared. With his customary tact, Charlie
responded: "I'll pay $2.5 million not to read it."
At Berkshire, our carefully-crafted acquisition strategy is simply to wait
for the phone to ring. Happily, it sometimes does so, usually because a
manager who sold to us earlier has recommended to a friend that he
think about following suit.
Which brings us to the furniture business. Two years ago I recounted
how the acquisition of Nebraska Furniture Mart in 1983 and my
subsequent association with the Blumkin family led to follow-on
transactions with R. C. Willey (1995) and Star Furniture (1997). For me,
these relationships have all been terrific. Not only did Berkshire acquire
three outstanding retailers; these deals also allowed me to become
friends with some of the finest people you will ever meet.
Naturally, I have persistently asked the Blumkins, Bill Child and Melvyn
Wolff whether there are any more out there like you. Their invariable
answer was the Tatelman brothers of New England and their remarkable
furniture business, Jordan's.
I met Barry and Eliot Tatelman last year and we soon signed an
agreement for Berkshire to acquire the company. Like our three
previous furniture acquisitions, this business had long been in the
family -- in this case since 1927, when Barry and Eliot's grandfather
began operations in a Boston suburb. Under the brothers' management,
Jordan's has grown ever more dominant in its region, becoming the
largest furniture retailer in New Hampshire as well as Massachusetts.
The Tatelmans don't just sell furniture or manage stores. They also
present customers with a dazzling entertainment experience called
"shoppertainment." A family visiting a store can have a terrific time,
while concurrently viewing an extraordinary selection of merchandise.
The business results are also extraordinary: Jordan's has the highest
sales per square foot of any major furniture operation in the country. I
urge you to visit one of their stores if you are in the Boston area --
particularly the one at Natick, which is Jordan's newest. Bring money.
Barry and Eliot are classy people -- just like their counterparts at
Berkshire's three other furniture operations. When they sold to us, they
elected to give each of their employees at least 50￠ for every hour that
he or she had worked for Jordan's. This payment added up to $9 million,
which came from the Tatelmans' own pockets, not from Berkshire's. And
Barry and Eliot were thrilled to write the checks.
Each of our furniture operations is number one in its territory. We now
sell more furniture than anyone else in Massachusetts, New Hampshire,
Texas, Nebraska, Utah and Idaho. Last year Star's Melvyn Wolff and his
sister, Shirley Toomim, scored two major successes: a move into San
Antonio and a significant enlargement of Star's store in Austin.
There's no operation in the furniture retailing business remotely like the
one assembled by Berkshire. It's fun for me and profitable for you. W. C.
Fields once said, "It was a woman who drove me to drink, but
unfortunately I never had the chance to thank her." I don't want to make
that mistake. My thanks go to Louie, Ron and Irv Blumkin for getting me
started in the furniture business and for unerringly guiding me as we
have assembled the group we now have.
* * * * * * * * * * * *
Now, for our second acquisition deal: It came to us through my good
friend, Walter Scott, Jr., chairman of Level 3 Communications and a
director of Berkshire. Walter has many other business connections as
well, and one of them is with MidAmerican Energy, a utility company in
which he has substantial holdings and on whose board he sits. At a
conference in California that we both attended last September, Walter
casually asked me whether Berkshire might be interested in making a
large investment in MidAmerican, and from the start the idea of being in
partnership with Walter struck me as a good one. Upon returning to
Omaha, I read some of MidAmerican's public reports and had two short
meetings with Walter and David Sokol, MidAmerican's talented and
entrepreneurial CEO. I then said that, at an appropriate price, we would
indeed like to make a deal.
接下去要報告的是第二個購併案，這件案子係透過我多年的好朋友，Level 3 通
Acquisitions in the electric utility industry are complicated by a variety
of regulations including the Public Utility Holding Company Act of 1935.
Therefore, we had to structure a transaction that would avoid Berkshire
gaining voting control. Instead we are purchasing an 11% fixed-income
security, along with a combination of common stock and exchangeable
preferred that will give Berkshire just under 10% of the voting power of
MidAmerican but about 76% of the equity interest. All told, our
investment will be about $2 billion.
Walter characteristically backed up his convictions with real money: He
and his family will buy more MidAmerican stock for cash when the
transaction closes, bringing their total investment to about $280
million. Walter will also be the controlling shareholder of the company,
and I can't think of a better person to hold that post.
Though there are many regulatory constraints in the utility industry, it's
possible that we will make additional commitments in the field. If we do,
the amounts involved could be large.
Once again, I would like to make some comments about accounting, in
this case about its application to acquisitions. This is currently a very
contentious topic and, before the dust settles, Congress may even
intervene (a truly terrible idea).
When a company is acquired, generally accepted accounting principles
("GAAP") currently condone two very different ways of recording the
transaction: "purchase" and "pooling." In a pooling, stock must be the
currency; in a purchase, payment can be made in either cash or stock.
Whatever the currency, managements usually detest purchase
accounting because it almost always requires that a "goodwill" account
be established and subsequently written off -- a process that saddles
earnings with a large annual charge that normally persists for decades.
In contrast, pooling avoids a goodwill account, which is why
managements love it.
Now, the Financial Accounting Standards Board ("FASB") has proposed
an end to pooling, and many CEOs are girding for battle. It will be an
important fight, so we'll venture some opinions. To begin with, we agree
with the many managers who argue that goodwill amortization charges
are usually spurious. You'll find my thinking about this in the appendix
to our 1983 annual report, which is available on our website, and in the
Owner's Manual on pages 55 - 62.
For accounting rules to mandate amortization that will, in the usual
case, conflict with reality is deeply troublesome: Most accounting
charges relate to what's going on, even if they don't precisely measure
it. As an example, depreciation charges can't with precision calibrate the
decline in value that physical assets suffer, but these charges do at least
describe something that is truly occurring: Physical assets invariably
deteriorate. Correspondingly, obsolescence charges for inventories,
bad debt charges for receivables and accruals for warranties are among
the charges that reflect true costs. The annual charges for these
expenses can't be exactly measured, but the necessity for estimating
them is obvious.
In contrast, economic goodwill does not, in many cases, diminish.
Indeed, in a great many instances -- perhaps most -- it actually grows
in value over time. In character, economic goodwill is much like land:
The value of both assets is sure to fluctuate, but the direction in which
value is going to go is in no way ordained. At See's, for example,
economic goodwill has grown, in an irregular but very substantial
manner, for 78 years. And, if we run the business right, growth of that
kind will probably continue for at least another 78 years.
To escape from the fiction of goodwill charges, managers embrace the
fiction of pooling. This accounting convention is grounded in the poetic
notion that when two rivers merge their streams become
indistinguishable. Under this concept, a company that has been merged
into a larger enterprise has not been "purchased" (even though it will
often have received a large "sell-out" premium). Consequently, no
goodwill is created, and those pesky subsequent charges to earnings
are eliminated. Instead, the accounting for the ongoing entity is handled
as if the businesses had forever been one unit.
So much for poetry. The reality of merging is usually far different: There
is indisputably an acquirer and an acquiree, and the latter has been
"purchased," no matter how the deal has been structured. If you think
otherwise, just ask employees severed from their jobs which company
was the conqueror and which was the conquered. You will find no
confusion. So on this point the FASB is correct: In most mergers, a
purchase has been made. Yes, there are some true "mergers of equals,"
but they are few and far between.
Charlie and I believe there's a reality-based approach that should both
satisfy the FASB, which correctly wishes to record a purchase, and meet
the objections of managements to nonsensical charges for diminution
of goodwill. We would first have the acquiring company record its
purchase price -- whether paid in stock or cash -- at fair value. In most
cases, this procedure would create a large asset representing economic
goodwill. We would then leave this asset on the books, not requiring its
amortization. Later, if the economic goodwill became impaired, as it
sometimes would, it would be written down just as would any other
asset judged to be impaired.
If our proposed rule were to be adopted, it should be applied
retroactively so that acquisition accounting would be consistent
throughout America -- a far cry from what exists today. One prediction:
If this plan were to take effect, managements would structure
acquisitions more sensibly, deciding whether to use cash or stock based
on the real consequences for their shareholders rather than on the
unreal consequences for their reported earnings.
* * * * * * * * * * * *
In our purchase of Jordan's, we followed a procedure that will maximize
the cash produced for our shareholders but minimize the earnings we
report to you. Berkshire purchased assets for cash, an approach that on
our tax returns permits us to amortize the resulting goodwill over a
15-year period. Obviously, this tax deduction materially increases the
amount of cash delivered by the business. In contrast, when stock,
rather than assets, is purchased for cash, the resulting writeoffs of
goodwill are not tax-deductible. The economic difference between
these two approaches is substantial.
From the economic standpoint of the acquiring company, the worst deal
of all is a stock-for-stock acquisition. Here, a huge price is often paid
without there being any step-up in the tax basis of either the stock of
the acquiree or its assets. If the acquired entity is subsequently sold, its
owner may owe a large capital gains tax (at a 35% or greater rate), even
though the sale may truly be producing a major economic loss.
We have made some deals at Berkshire that used far-from-optimal tax
structures. These deals occurred because the sellers insisted on a given
structure and because, overall, we still felt the acquisition made sense.
We have never done an inefficiently-structured deal, however, in order
to make our figures look better.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire's reported
earnings. In this presentation, purchase-accounting adjustments are
not assigned to the specific businesses to which they apply, but are
instead aggregated and shown separately. This procedure lets you view
the earnings of our businesses as they would have been reported had
we not purchased them. For the reasons discussed on page 61, this
form of presentation seems to us to be more useful to investors and
managers than one utilizing generally accepted accounting principles
(GAAP), which require purchase-premiums to be charged off business-
by-business. The total earnings we show in the table are, of course,
identical to the GAAP total in our audited financial statements.
of Net Earnings
(after taxes and
1999 1998 1999 1998
Underwriting -- Reinsurance ....................$(1,440) $(21)$(927)$(14)
Underwriting -- GEICO ..........................24 269 16 175
Underwriting -- Other Primary .................22 17 14 10
Net Investment Income ............................2,482 974 1,764 731
Buffalo News ...........................................55 53 34 32
Finance and Financial Products Businesses125 205 86 133
Flight Services .........................................225 181 (1)132 110 (1)
Home Furnishings ....................................79 (2)72 46 (2)41
International Dairy Queen ........................56 58 35 35
Jewelry ...................................................51 39 31 23
Scott Fetzer (excluding finance operation)147 137 92 85
See's Candies .........................................74 62 46 40
Shoe Group ............................................17 33 11 23
Purchase-Accounting Adjustments .........(739)(123)(648)(118)
Interest Expense (3) ...............................(109)(100)(70)(63)
Shareholder-Designated Contributions ....(17)(17)(11)(11)
Other ......................................................33 60 (4)20 45 (4)
Operating Earnings ....................................1,085 1,899 671 1,277
Capital Gains from Investments .................1,365 2,415 886 1,553
Total Earnings - All Entities .......................$2,450 $4,314 $1,557 $ 2,830
(1) Includes Executive Jet from August 7, 1998.
(3) Excludes interest expense of Finance Businesses.
(2) Includes Jordan's Furniture from November 13, 1999.
(4) Includes General Re operations for ten days in 1998.
Almost all of our manufacturing, retailing and service businesses had
excellent results in 1999. The exception was Dexter Shoe, and there the
shortfall did not occur because of managerial problems: In skills, energy
and devotion to their work, the Dexter executives are every bit the equal
of our other managers. But we manufacture shoes primarily in the U.S.,
and it has become extremely difficult for domestic producers to
compete effectively. In 1999, approximately 93% of the 1.3 billion pairs
of shoes purchased in this country came from abroad, where extremely
low-cost labor is the rule.
Counting both Dexter and H. H. Brown, we are currently the leading
domestic manufacturer of shoes, and we are likely to continue to be. We
have loyal, highly-skilled workers in our U.S. plants, and we want to
retain every job here that we can. Nevertheless, in order to remain
viable, we are sourcing more of our output internationally. In doing that,
we have incurred significant severance and relocation costs that are
included in the earnings we show in the table.
A few years back, Helzberg's, our 200-store jewelry operation, needed
to make operating adjustments to restore margins to appropriate levels.
Under Jeff Comment's leadership, the job was done and profits have
dramatically rebounded. In the shoe business, where we have Harold
Alfond, Peter Lunder, Frank Rooney and Jim Issler in charge, I believe we
will see a similar improvement over the next few years.
See's Candies deserves a special comment, given that it achieved a
record operating margin of 24% last year. Since we bought See's for $25
million in 1972, it has earned $857 million pre-tax. And, despite its
growth, the business has required very little additional capital. Give the
credit for this performance to Chuck Huggins. Charlie and I put him in
charge the day of our purchase, and his fanatical insistence on both
product quality and friendly service has rewarded customers,
employees and owners.
Chuck gets better every year. When he took charge of See's at age 46,
the company's pre-tax profit, expressed in millions, was about 10% of
his age. Today he's 74, and the ratio has increased to 100%. Having
discovered this mathematical relationship -- let's call it Huggins' Law -
- Charlie and I now become giddy at the mere thought of Chuck's
* * * * * * * * * * * *
Additional information about our various businesses is given on pages
39 - 54, where you will also find our segment earnings reported on a
GAAP basis. In addition, on pages 63 - 69, we have rearranged
Berkshire's financial data into four segments on a non-GAAP basis, a
presentation that corresponds to the way Charlie and I think about the
Reported earnings are an inadequate measure of economic progress at
Berkshire, in part because the numbers shown in the table presented
earlier include only the dividends we receive from investees -- though
these dividends typically represent only a small fraction of the earnings
attributable to our ownership. Not that we mind this division of money,
since on balance we regard the undistributed earnings of investees as
more valuable to us than the portion paid out. The reason for our
thinking is simple: Our investees often have the opportunity to reinvest
earnings at high rates of return. So why should we want them paid out?
To depict something closer to economic reality at Berkshire than
reported earnings, though, we employ the concept of "look-through"
earnings. As we calculate these, they consist of: (1) the operating
earnings reported in the previous section, plus; (2) our share of the
retained operating earnings of major investees that, under GAAP
accounting, are not reflected in our profits, less; (3) an allowance for the
tax that would be paid by Berkshire if these retained earnings of
investees had instead been distributed to us. When tabulating
"operating earnings" here, we exclude purchase-accounting
adjustments as well as capital gains and other major non-recurring
The following table sets forth our 1999 look-through earnings, though I
warn you that the figures can be no more than approximate, since they
are based on a number of judgment calls. (The dividends paid to us by
these investees have been included in the operating earnings itemized
on page 13, mostly under "Insurance Group: Net Investment Income.")
Berkshire's Share of Undistributed
Berkshire's Major Investees
Ownership at Yearend(1)
Operating Earnings (in millions)(2)
American Express Company ...........
The Coca-Cola Company ...............
Freddie Mac ..................................
The Gillette Company ....................
M&T Bank ...................................
The Washington Post Company .....
Wells Fargo & Company ...............
Berkshire's share of undistributed earnings of major investees
Hypothetical tax on these undistributed investee earnings(3)
Reported operating earnings of Berkshire
Total look-through earnings of Berkshire
(1) Does not include shares allocable to minority interests
(2) Calculated on average ownership for the year
(3) The tax rate used is 14%, which is the rate Berkshire pays on the dividends it receives
Below we present our common stock investments. Those that had a
market value of more than $750 million at the end of 1999 are itemized.
(dollars in millions)
American Express Company .......
The Coca-Cola Company ........
Freddie Mac ................
The Gillette Company ..........
The Washington Post Company .......
Wells Fargo & Company ........
Total Common Stocks .............
* Represents tax-basis cost which, in aggregate, is $691 million less than GAAP cost.
We made few portfolio changes in 1999. As I mentioned earlier, several
of the companies in which we have large investments had disappointing
business results last year. Nevertheless, we believe these companies
have important competitive advantages that will endure over time. This
attribute, which makes for good long-term investment results, is one
Charlie and I occasionally believe we can identify. More often, however,
we can't -- not at least with a high degree of conviction. This explains,
by the way, why we don't own stocks of tech companies, even though we
share the general view that our society will be transformed by their
products and services. Our problem -- which we can't solve by studying
up -- is that we have no insights into which participants in the tech field
possess a truly durable competitive advantage.
Our lack of tech insights, we should add, does not distress us. After all,
there are a great many business areas in which Charlie and I have no
special capital-allocation expertise. For instance, we bring nothing to
the table when it comes to evaluating patents, manufacturing processes
or geological prospects. So we simply don't get into judgments in those
If we have a strength, it is in recognizing when we are operating well
within our circle of competence and when we are approaching the
perimeter. Predicting the long-term economics of companies that
operate in fast-changing industries is simply far beyond our perimeter.
If others claim predictive skill in those industries -- and seem to have
their claims validated by the behavior of the stock market -- we neither
envy nor emulate them. Instead, we just stick with what we understand.
If we stray, we will have done so inadvertently, not because we got
restless and substituted hope for rationality. Fortunately, it's almost
certain there will be opportunities from time to time for Berkshire to do
well within the circle we've staked out.
Right now, the prices of the fine businesses we already own are just not
that attractive. In other words, we feel much better about the businesses
than their stocks. That's why we haven't added to our present holdings.
Nevertheless, we haven't yet scaled back our portfolio in a major way: If
the choice is between a questionable business at a comfortable price or
a comfortable business at a questionable price, we much prefer the
latter. What really gets our attention, however, is a comfortable business
at a comfortable price.
Our reservations about the prices of securities we own apply also to the
general level of equity prices. We have never attempted to forecast what
the stock market is going to do in the next month or the next year, and
we are not trying to do that now. But, as I point out in the enclosed
article, equity investors currently seem wildly optimistic in their
expectations about future returns.
We see the growth in corporate profits as being largely tied to the
business done in the country (GDP), and we see GDP growing at a real
rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie
and I have no particular conviction about the accuracy of 2%. However,
it's the market's view: Treasury Inflation-Protected Securities (TIPS) yield
about two percentage points less than the standard treasury bond, and
if you believe inflation rates are going to be higher than that, you can
profit by simply buying TIPS and shorting Governments.
If profits do indeed grow along with GDP, at about a 5% rate, the
valuation placed on American business is unlikely to climb by much
more than that. Add in something for dividends, and you emerge with
returns from equities that are dramatically less than most investors
have either experienced in the past or expect in the future. If investor
expectations become more realistic -- and they almost certainly will --
the market adjustment is apt to be severe, particularly in sectors in
which speculation has been concentrated.
Berkshire will someday have opportunities to deploy major amounts of
cash in equity markets -- we are confident of that. But, as the song
goes, "Who knows where or when?" Meanwhile, if anyone starts
explaining to you what is going on in the truly-manic portions of this
"enchanted" market, you might remember still another line of song:
"Fools give you reasons, wise men never try."
Recently, a number of shareholders have suggested to us that Berkshire
repurchase its shares. Usually the requests were rationally based, but a
few leaned on spurious logic.
There is only one combination of facts that makes it advisable for a
company to repurchase its shares: First, the company has available
funds -- cash plus sensible borrowing capacity -- beyond the near-
term needs of the business and, second, finds its stock selling in the
market below its intrinsic value, conservatively-calculated. To this we
add a caveat: Shareholders should have been supplied all the
information they need for estimating that value. Otherwise, insiders
could take advantage of their uninformed partners and buy out their
interests at a fraction of true worth. We have, on rare occasions, seen
that happen. Usually, of course, chicanery is employed to drive stock
prices up, not down.
The business "needs" that I speak of are of two kinds: First,
expenditures that a company must make to maintain its competitive
position (e.g., the remodeling of stores at Helzberg's) and, second,
optional outlays, aimed at business growth, that management expects
will produce more than a dollar of value for each dollar spent (R. C.
Willey's expansion into Idaho).
When available funds exceed needs of those kinds, a company with a
growth-oriented shareholder population can buy new businesses or
repurchase shares. If a company's stock is selling well below intrinsic
value, repurchases usually make the most sense. In the mid-1970s, the
wisdom of making these was virtually screaming at managements, but
few responded. In most cases, those that did made their owners much
wealthier than if alternative courses of action had been pursued. Indeed,
during the 1970s (and, spasmodically, for some years thereafter) we
searched for companies that were large repurchasers of their shares.
This often was a tipoff that the company was both undervalued and run
by a shareholder-oriented management.
That day is past. Now, repurchases are all the rage, but are all too often
made for an unstated and, in our view, ignoble reason: to pump or
support the stock price. The shareholder who chooses to sell today, of
course, is benefitted by any buyer, whatever his origin or motives. But
the continuing shareholder is penalized by repurchases above intrinsic
value. Buying dollar bills for $1.10 is not good business for those who
Charlie and I admit that we feel confident in estimating intrinsic value
for only a portion of traded equities and then only when we employ a
range of values, rather than some pseudo-precise figure. Nevertheless,
it appears to us that many companies now making repurchases are
overpaying departing shareholders at the expense of those who stay. In
defense of those companies, I would say that it is natural for CEOs to be
optimistic about their own businesses. They also know a whole lot more
about them than I do. However, I can't help but feel that too often
today's repurchases are dictated by management's desire to "show
confidence" or be in fashion rather than by a desire to enhance per-
Sometimes, too, companies say they are repurchasing shares to offset
the shares issued when stock options granted at much lower prices are
exercised. This "buy high, sell low" strategy is one many unfortunate
investors have employed -- but never intentionally! Managements,
however, seem to follow this perverse activity very cheerfully.
Of course, both option grants and repurchases may make sense -- but
if that's the case, it's not because the two activities are logically related.
Rationally, a company's decision to repurchase shares or to issue them
should stand on its own feet. Just because stock has been issued to
satisfy options -- or for any other reason -- does not mean that stock
should be repurchased at a price above intrinsic value. Correspondingly,
a stock that sells well below intrinsic value should be repurchased
whether or not stock has previously been issued (or may be because of
You should be aware that, at certain times in the past, I have erred in not
making repurchases. My appraisal of Berkshire's value was then too
conservative or I was too enthused about some alternative use of funds.
We have therefore missed some opportunities -- though Berkshire's
trading volume at these points was too light for us to have done much
buying, which means that the gain in our per-share value would have
been minimal. (A repurchase of, say, 2% of a company's shares at a 25%
discount from per-share intrinsic value produces only a ?% gain in that
value at most -- and even less if the funds could alternatively have been
deployed in value-building moves.)
Some of the letters we've received clearly imply that the writer is
unconcerned about intrinsic value considerations but instead wants us
to trumpet an intention to repurchase so that the stock will rise (or quit
going down). If the writer wants to sell tomorrow, his thinking makes
sense -- for him! -- but if he intends to hold, he should instead hope
the stock falls and trades in enough volume for us to buy a lot of it.
That's the only way a repurchase program can have any real benefit for a
We will not repurchase shares unless we believe Berkshire stock is
selling well below intrinsic value, conservatively calculated. Nor will we
attempt to talk the stock up or down. (Neither publicly or privately have
I ever told anyone to buy or sell Berkshire shares.) Instead we will give all
shareholders -- and potential shareholders -- the same valuation-
related information we would wish to have if our positions were
Recently, when the A shares fell below $45,000, we considered making
repurchases. We decided, however, to delay buying, if indeed we elect to
do any, until shareholders have had the chance to review this report. If
we do find that repurchases make sense, we will only rarely place bids
on the New York Stock Exchange ("NYSE"). Instead, we will respond to
offers made directly to us at or below the NYSE bid. If you wish to offer
stock, have your broker call Mark Millard at 402-346-1400. When a
trade occurs, the broker can either record it in the "third market" or on
the NYSE. We will favor purchase of the B shares if they are selling at
more than a 2% discount to the A. We will not engage in transactions
involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the
intention of stemming a decline in Berkshire's price. Rather we will make
them if and when we believe that they represent an attractive use of the
Company's money. At best, repurchases are likely to have only a very
minor effect on the future rate of gain in our stock's intrinsic value.
About 97.3% of all eligible shares participated in Berkshire's 1999
shareholder-designated contributions program, with contributions
totaling $17.2 million. A full description of the program appears on
pages 70 - 71.
Cumulatively, over the 19 years of the program, Berkshire has made
contributions of $147 million pursuant to the instructions of our
shareholders. The rest of Berkshire's giving is done by our subsidiaries,
which stick to the philanthropic patterns that prevailed before they were
acquired (except that their former owners themselves take on the
responsibility for their personal charities). In aggregate, our
subsidiaries made contributions of $13.8 million in 1999, including
in-kind donations of $2.5 million.
To participate in future programs, you must own Class A shares that are
registered in the name of the actual owner, not the nominee name of a
broker, bank or depository. Shares not so registered on August 31,
2000, will be ineligible for the 2000 program. When you get the
contributions form from us, return it promptly so that it does not get
put aside or forgotten. Designations received after the due date will not
The Annual Meeting
This year's Woodstock Weekend for Capitalists will follow a format
slightly different from that of recent years. We need to make a change
because the Aksarben Coliseum, which served us well the past three
years, is gradually being closed down. Therefore, we are relocating to
the Civic Auditorium (which is on Capitol Avenue between 18th and 19th,
behind the Doubletree Hotel), the only other facility in Omaha offering
the space we require.
The Civic, however, is located in downtown Omaha, and we would create
a parking and traffic nightmare if we were to meet there on a weekday.
We will, therefore, convene on Saturday, April 29, with the doors
opening at 7 a.m., the movie beginning at 8:30 and the meeting itself
commencing at 9:30. As in the past, we will run until 3:30 with a short
break at noon for food, which will be available at the Civic's concession
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. In our normal fashion, we will run buses
from the larger hotels to the meeting. After the meeting, the buses will
make trips back to the hotels and to Nebraska Furniture Mart,
Borsheim's and the airport. Even so, you are likely to find a car useful.
We have scheduled the meeting in 2002 and 2003 on the customary
first Saturday in May. In 2001, however, the Civic is already booked on
that Saturday, so we will meet on April 28. The Civic should fit our needs
well on any weekend, since there will then be more than ample parking
in nearby lots and garages as well as on streets. We will also be able to
greatly enlarge the space we give exhibitors. So, overcoming my normal
commercial reticence, I will see that you have a wide display of Berkshire
products at the Civic that you can purchase. As a benchmark, in 1999
shareholders bought 3,059 pounds of See's candy, $16,155 of World
Book Products, 1,928 pairs of Dexter shoes, 895 sets of Quikut knives,
1,752 golf balls with the Berkshire Hathaway logo and 3,446 items of
Berkshire apparel. I know you can do better.
Last year, we also initiated the sale of at least eight fractions of
Executive Jet aircraft. We will again have an array of models at the
Omaha airport for your inspection on Saturday and Sunday. Ask an EJA
representative at the Civic about viewing any of these planes.
Dairy Queen will also be on hand at the Civic and again will donate all
proceeds to the Children's Miracle Network. Last year we sold 4,586
DillyR bars, fudge bars and vanilla/orange bars. Additionally, GEICO will
have a booth that will be staffed by a number of our 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 offer you a special
shareholder's discount. Bring the details of your existing insurance, and
check out whether we can save you some money.
Finally, Ajit Jain and his associates will be on hand to offer both no-
commission annuities and a liability policy with jumbo limits of a size
rarely available elsewhere. Talk to Ajit and learn how to protect yourself
and your family against a $10 million judgment.
NFM's newly remodeled complex, located on a 75-acre site on 72nd
Street between Dodge and Pacific, is open from 10 a.m. to 9 p.m. on
weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays. This
operation offers an unrivaled breadth of merchandise -- furniture,
electronics, appliances, carpets and computers -- all at can't-be-beat
prices. In 1999 NFM did more than $300 million of business at its 72nd
Street location, which in a metropolitan area of 675,000 is an absolute
miracle. During the Thursday, April 27 to Monday, May 1 period, any
shareholder presenting his or her meeting credential will receive a
discount that is customarily given only to employees. We have offered
this break to shareholders the last couple of years, and sales have been
amazing. In last year's five-day "Berkshire Weekend," NFM's volume was
$7.98 million, an increase of 26% from 1998 and 51% from 1997.
Borsheim's -- the largest jewelry store in the country except for
Tiffany's Manhattan store -- will have two shareholder-only events. The
first will be a champagne and dessert party from 6 p.m.-10 p.m. on
Friday, April 28. The second, the main gala, will be from 9 a.m. to 6 p.m.
on Sunday, April 30. On that day, Charlie and I will be on hand to sign
sales tickets. Shareholder prices will be available Thursday through
Monday, so if you wish to avoid the largest crowds, which will form on
Friday evening and Sunday, come at other times and identify yourself as
a shareholder. On Saturday, we will be open until 7 p.m. Borsheim's
operates on a gross margin that is fully twenty percentage points below
that of its major rivals, so be prepared to be blown away by both our
prices and selection.
In the mall outside of Borsheim's, we will again have Bob Hamman --
the best bridge player the game has ever seen -- available to play with
our shareholders on Sunday. We will also have a few other experts
playing at additional tables. In 1999, we had more demand than tables,
but we will cure that problem this year.
Patrick Wolff, twice US chess champion, will again be in the mall playing
blindfolded against all comers. He tells me that he has never tried to
play more than four games simultaneously while handicapped this way
but might try to bump that limit to five or six this year. If you're a chess
fan, take Patrick on -- but be sure to check his blindfold before your
Gorat's -- my favorite steakhouse -- will again be open exclusively for
Berkshire shareholders on Sunday, April 30, and will be serving from 4
p.m. until about midnight. Please remember that you can't come to
Gorat's on Sunday without a reservation. To make one, call 402-551-
3733 on April 3 (but not before). If Sunday is sold out, try Gorat's on one
of the other evenings you will be in town. I make a "quality check" of
Gorat's about once a week and can report that their rare T-bone (with a
double order of hash browns) is still unequaled throughout the country.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on
Saturday night. This year the Omaha Golden Spikes will play the Iowa
Cubs. Come early, because that's when the real action takes place.
Those who attended last year saw your Chairman pitch to Ernie Banks.
This encounter proved to be the titanic duel that the sports world had
long awaited. After the first few pitches -- which were not my best, but
when have I ever thrown my best? -- I fired a brushback at Ernie just to
let him know who was in command. Ernie charged the mound, and I
charged the plate. But a clash was avoided because we became
exhausted before reaching each other.
Ernie was dissatisfied with his performance last year and has been
studying the game films all winter. As you may know, Ernie had 512
home runs in his career as a Cub. Now that he has spotted telltale
weaknesses in my delivery, he expects to get #513 on April 29. I,
however, have learned new ways to disguise my "flutterball." Come and
watch this matchup.
I should add that I have extracted a promise from Ernie that he will not
hit a "come-backer" at me since I would never be able to duck in time to
avoid it. My reflexes are like Woody Allen's, who said his were so slow
that he was once hit by a car being pushed by two guys.
Our proxy statement contains instructions about obtaining tickets to
the game and also a large quantity of other information that should help
you enjoy your visit in Omaha. Join us at the Capitalist Caper on Capitol
March 1, 2000
Warren E. Buffett
Chairman of the Board