Warren Buffett's Letters
To Berkshire Shareholders 1984



To the Shareholders of Berkshire Hathaway Inc.:


Our gain in net worth during 1984 was $152.6 million, or $133 per
share. This sounds pretty good but actually it’s mediocre. Economic
gains must be evaluated by comparison with the capital that produces them.
Our twenty-year compounded annual gain in book value has been 22.1%
(from $19.46 in 1964 to $1108.77 in 1984), but our gain in 1984 was only

1,108.77) ,不過去年只有13.6%。

As we discussed last year, the gain in per-share intrinsic business
value is the economic measurement that really counts. But calculations of
intrinsic business value are subjective. In our case, book value serves as a
useful, although somewhat understated, proxy. In my judgment, intrinsic
business value and book value increased during 1984 at about the same

主觀的意見而難以計算,所以我們改以帳面價值當作代替(雖然通常是有點低估) ,我

Using my academic voice, I have told you in the past of the drag that a
mushrooming capital base exerts upon rates of return. Unfortunately, my
academic voice is now giving way to a reportorial voice. Our historical 22%
rate is just that - history. To earn even 15% annually over the next decade
(assuming we continue to follow our present dividend policy, about which
more will be said later in this letter) we would need profits aggregating
about $3.9 billion. Accomplishing this will require a few big ideas - small
ones just won’t do. Charlie Munger, my partner in general management,
and I do not have any such ideas at present, but our experience has been
that they pop up occasionally. (How’s that for a strategic plan?)

合夥人Charlie Munger目前並無任何夠棒點子,不過我們的經驗是有時它會突然冒

Sources of Reported Earnings


The table on the following page shows the sources of Berkshire’s
reported earnings. Berkshire’s net ownership interest in many of the
constituent businesses changed at midyear 1983 when the Blue Chip
merger took place. Because of these changes, the first two columns of the
table provide the best measure of underlying business performance.

下表顯示Berkshire帳列盈餘的來源,由於年中與Blue Chips合併致使我們在一些

All of the significant gains and losses attributable to unusual sales of
assets by any of the business entities are aggregated with securities
transactions on the line near the bottom of the table, and are not included
in operating earnings. (We regard any annual figure for realized capital
gains or losses as meaningless, but we regard the aggregate realized and
unrealized capital gains over a period of years as very important.)


Furthermore, amortization of Goodwill is not charged against the
specific businesses but, for reasons outlined in the Appendix to my letter in
the 1983 annual report, is set forth as a separate item.


(000s omitted)


Net Earnings

Earnings Before Income Taxes After Tax

-------------------------------------- ------------------

Total Berkshire Share Berkshire Share

------------------ ------------------ ------------------

1984 1983 1984 1983 1984 1983

-------- -------- -------- -------- -------- --------

Operating Earnings:

Insurance Group:

Underwriting ............ $(48,060) $(33,872) $(48,060) $(33,872) $(25,955) $(18,400)

Net Investment Income ... 68,903 43,810 68,903 43,810 62,059 39,114

Buffalo News .............. 27,328 19,352 27,328 16,547 13,317 8,832

Nebraska Furniture Mart(1) 14,511 3,812 11,609 3,049 5,917 1,521

See’s Candies ............. 26,644 27,411 26,644 24,526 13,380 12,212

Associated Retail Stores .. (1,072) 697 (1,072) 697 (579) 355

Blue Chip Stamps(2) (1,843) (1,422) (1,843) (1,876) (899) (353)

Mutual Savings and Loan ... 1,456 (798) 1,166 (467) 3,151 1,917

Precision Steel ........... 4,092 3,241 3,278 2,102 1,696 1,136

Textiles .................. 418 (100) 418 (100) 226 (63)

Wesco Financial ........... 9,777 7,493 7,831 4,844 4,828 3,448

Amortization of Goodwill .. (1,434) (532) (1,434) (563) (1,434) (563)

Interest on Debt .......... (14,734) (15,104) (14,097) (13,844) (7,452) (7,346)


Contributions .......... (3,179) (3,066) (3,179) (3,066) (1,716) (1,656)

Other ..................... 4,932 10,121 4,529 9,623 3,476 8,490

-------- -------- -------- -------- -------- --------

Operating Earnings .......... 87,739 61,043 82,021 51,410 70,015 48,644

Special GEICO Distribution .. -- 19,575 -- 19,575 -- 18,224

Special Gen. Foods Distribution 8,111 -- 7,896 -- 7,294 --

Sales of securities and

unusual sales of assets .. 104,699 67,260 101,376 65,089 71,587 45,298

-------- -------- -------- -------- -------- --------

Total Earnings - all entities $200,549 $147,878 $191,293 $136,074 $148,896 $112,166

====== ====== ====== ====== ====== ======

(1) 1983 figures are those for October through December.

(2) 1984 and 1983 are not comparable; major assets were

transferred in the mid-year 1983 merger of Blue Chip Stamps.

Sharp-eyed shareholders will notice that the amount of the special
GEICO distribution and its location in the table have been changed from the
presentation of last year. Though they reclassify and reduce accounting
earnings, the changes are entirely of form, not of substance. The story
behind the changes, however, is interesting.


As reported last year: (1) in mid-1983 GEICO made a tender offer to
buy its own shares; (2) at the same time, we agreed by written contract to
sell GEICO an amount of its shares that would be proportionately related to
the aggregate number of shares GEICO repurchased via the tender from all
other shareholders; (3) at completion of the tender, we delivered 350,000
shares to GEICO, received $21 million cash, and were left owning exactly
the same percentage of GEICO that we owned before the tender; (4) GEICO’s
transaction with us amounted to a proportionate redemption, an opinion
rendered us, without qualification, by a leading law firm; (5) the Tax Code
logically regards such proportionate redemptions as substantially
equivalent to dividends and, therefore, the $21 million we received was
taxed at only the 6.9% inter-corporate dividend rate; (6) importantly, that
$21 million was far less than the previously-undistributed earnings that
had inured to our ownership in GEICO and, thus, from the standpoint of
economic substance, was in our view equivalent to a dividend.

如同去年我報告過的:(1)1983年中GEICO 宣布實施庫藏股買回自家股票(2)同時我
們簽署協議同意GEICO 自我們手中買回等比例的股份(3)總結最後我們賣還給GEICO

Because it was material and unusual, we highlighted the GEICO
distribution last year to you, both in the applicable quarterly report and in
this section of the annual report. Additionally, we emphasized the
transaction to our auditors, Peat, Marwick, Mitchell & Co. Both the Omaha
office of Peat Marwick and the reviewing Chicago partner, without objection,
concurred with our dividend presentation.


In 1984, we had a virtually identical transaction with General Foods.
The only difference was that General Foods repurchased its stock over a
period of time in the open market, whereas GEICO had made a
団ne-shot?tender offer. In the General Foods case we sold to the company,
on each day that it repurchased shares, a quantity of shares that left our
ownership percentage precisely unchanged. Again our transaction was
pursuant to a written contract executed before repurchases began. And
again the money we received was far less than the retained earnings that
had inured to our ownership interest since our purchase. Overall we
received $21,843,601 in cash from General Foods, and our ownership
remained at exactly 8.75%.

而1984年General Foods也發生同樣的狀況,只是後者是直接自公開市場中買回,

At this point the New York office of Peat Marwick came into the picture.
Late in 1984 it indicated that it disagreed with the conclusions of the firm’s
Omaha office and Chicago reviewing partner. The New York view was that
the GEICO and General Foods transactions should be treated as sales of
stock by Berkshire rather than as the receipt of dividends. Under this
accounting approach, a portion of the cost of our investment in the stock of
each company would be charged against the redemption payment and any
gain would be shown as a capital gain, not as dividend income. This is an
accounting approach only, having no bearing on taxes: Peat Marwick agrees
that the transactions were dividends for IRS purposes.

與GEICO 與General Foods之間的交易屬於股權買賣而非股利分配,在這種情況

We disagree with the New York position from both the viewpoint of
economic substance and proper accounting. But, to avoid a qualified
auditor’s opinion, we have adopted herein Peat Marwick’s 1984 view and
restated 1983 accordingly. None of this, however, has any effect on
intrinsic business value: our ownership interests in GEICO and General
Foods, our cash, our taxes, and the market value and tax basis of our
holdings all remain the same.


This year we have again entered into a contract with General Foods
whereby we will sell them shares concurrently with open market purchases
that they make. The arrangement provides that our ownership interest will
remain unchanged at all times. By keeping it so, we will insure ourselves
dividend treatment for tax purposes. In our view also, the economic
substance of this transaction again is the creation of dividend income.
However, we will account for the redemptions as sales of stock rather than
dividend income unless accounting rules are adopted that speak directly to
this point. We will continue to prominently identify any such special
transactions in our reports to you.

而今年我們又與General Foods簽訂類似的協議,為了確保在稅法上得以認定為股利

While we enjoy a low tax charge on these proportionate redemptions,
and have participated in several of them, we view such repurchases as at
least equally favorable for shareholders who do not sell. When companies
with outstanding businesses and comfortable financial positions find their
shares selling far below intrinsic value in the marketplace, no alternative
action can benefit shareholders as surely as repurchases.


(Our endorsement of repurchases is limited to those dictated by
price/value relationships and does not extend to the greenmail’s
repurchase - a practice we find odious and repugnant. In these
transactions, two parties achieve their personal ends by exploitation of an
innocent and unconsulted third party. The players are: (1) the
shareholder’s extortionist who, even before the ink on his stock certificate
dries, delivers his your-money-or-your-life message to managers; (2) the
corporate insiders who quickly seek peace at any price - as long as the
price is paid by someone else; and (3) the shareholders whose money is
used by (2) to make (1) go away. As the dust settles, the mugging,
transient shareholder gives his speech on free enterprise the muggee
management gives its speech on the best interests of the company and the
innocent shareholder standing by mutely funds the payoff.)


The companies in which we have our largest investments have all
engaged in significant stock repurhases at times when wide discrepancies
existed between price and value. As shareholders, we find this
encouraging and rewarding for two important reasons - one that is obvious,
and one that is subtle and not always understood. The obvious point
involves basic arithmetic: major repurchases at prices well below per-share
intrinsic business value immediately increase, in a highly significant way,
that value. When companies purchase their own stock, they often find it
easy to get $2 of present value for $1. Corporate acquisition programs
almost never do as well and, in a discouragingly large number of cases, fail
to get anything close to $1 of value for each $1 expended.


The other benefit of repurchases is less subject to precise
measurement but can be fully as important over time. By making
repurchases when a company’s market value is well below its business
value, management clearly demonstrates that it is given to actions that
enhance the wealth of shareholders, rather than to actions that expand
management’s domain but that do nothing for (or even harm) shareholders.
Seeing this, shareholders and potential shareholders increase their
estimates of future returns from the business. This upward revision, in
turn, produces market prices more in line with intrinsic business value.
These prices are entirely rational. Investors should pay more for a
business that is lodged in the hands of a manager with demonstrated
pro-shareholder leanings than for one in the hands of a self-interested
manager marching to a different drummer. (To make the point extreme,
how much would you pay to be a minority shareholder of a company
controlled by Robert Wesco?)

多少錢成為Robert Wesco所掌管公司的小股東)

The key word is demonstrated. A manager who consistently turns his
back on repurchases, when these clearly are in the interests of owners,
reveals more than he knows of his motivations. No matter how often or
how eloquently he mouths some public relations-inspired phrase such as
maximizing shareholder wealth?(this season’s favorite), the market
correctly discounts assets lodged with him. His heart is not listening to his
mouth - and, after a while, neither will the market.


We have prospered in a very major way - as have other shareholders -
by the large share repurchases of GEICO, Washington Post, and General
Foods, our three largest holdings. (Exxon, in which we have our fourth
largest holding, has also wisely and aggressively repurchased shares but, in
this case, we have only recently established our position.) In each of these
companies, shareholders have had their interests in outstanding businesses
materially enhanced by repurchases made at bargain prices. We feel very
comfortable owning interests in businesses such as these that offer
excellent economics combined with shareholder-conscious managements.

最近我們靠前三大持股-GEICO、General Foods與華盛頓郵報大量買回自家股票(艾

The following table shows our 1984 yearend net holdings in
marketable equities. All numbers exclude the interests attributable to
minority shareholders of Wesco and Nebraska Furniture Mart.


No. of Shares Cost Market

------------- ---------- ----------

(000s omitted)

690,975 Affiliated Publications, Inc. ....... $ 3,516 $ 32,908

740,400 American Broadcasting Companies, Inc. 44,416 46,738

3,895,710 Exxon Corporation ................... 173,401 175,307

4,047,191 General Foods Corporation ........... 149,870 226,137

6,850,000 GEICO Corporation ................... 45,713 397,300

2,379,200 Handy & Harman ...................... 27,318 38,662

818,872 Interpublic Group of Companies, Inc. 2,570 28,149

555,949 Northwest Industries 26,581 27,242

2,553,488 Time, Inc. .......................... 89,327 109,162

1,868,600 The Washington Post Company ......... 10,628 149,955

---------- ----------

$573,340 $1,231,560

All Other Common Stockholdings 11,634 37,326

---------- ----------

Total Common Stocks $584,974 $1,268,886

========== ==========

It’s been over ten years since it has been as difficult as now to find
equity investments that meet both our qualitative standards and our
quantitative standards of value versus price. We try to avoid compromise
of these standards, although we find doing nothing the most difficult task
of all. (One English statesman attributed his country’s greatness in the
nineteenth century to a policy of 単asterly inactivity? This is a strategy that
is far easier for historians to commend than for participants to follow.)


In addition to the figures supplied at the beginning of this section,
information regarding the businesses we own appears in Management’s
Discussion on pages 42-47. An amplified discussion of Wesco’s
businesses appears in Charlie Munger’s report on pages 50-59. You will
find particularly interesting his comments about conditions in the thrift
industry. Our other major controlled businesses are Nebraska Furniture
Mart, See’s, Buffalo Evening News, and the Insurance Group, to which we
will give some special attention here.

除了先前曾提到的數字,有關Wesco的經營理念在Charlie Munger寫的報告中會詳

Nebraska Furniture Mart


Last year I introduced you to Mrs. B (Rose Blumkin) and her family. I
told you they were terrific, and I understated the case. After another year
of observing their remarkable talents and character, I can honestly say that I
never have seen a managerial group that either functions or behaves better
than the Blumkin family.


Mrs. B, Chairman of the Board, is now 91, and recently was quoted in
the local newspaper as saying, 戦 come home to eat and sleep, and that’s
about it. I can急 wait until it gets daylight so I can get back to the business?
Mrs. B is at the store seven days a week, from opening to close, and
probably makes more decisions in a day than most CEOs do in a year
(better ones, too).


In May Mrs. B was granted an Honorary Doctorate in Commercial
Science by New York University. (She’s a fast track student: not one day in
her life was spent in a school room prior to her receipt of the doctorate.)
Previous recipients of honorary degrees in business from NYU include
Clifton Garvin, Jr., CEO of Exxon Corp.; Walter Wriston, then CEO of Citicorp;
Frank Cary, then CEO of IBM; Tom Murphy, then CEO of General Motors; and,
most recently, Paul Volcker. (They are in good company.)


The Blumkin blood did not run thin. Louie, Mrs. B旧 son, and his three
boys, Ron, Irv, and Steve, all contribute in full measure to NFM’s amazing
success. The younger generation has attended the best business school of
them all - that conducted by Mrs. B and Louie - and their training is evident
in their performance.


Last year NFM’s net sales increased by $14.3 million, bringing the total
to $115 million, all from the one store in Omaha. That is by far the largest
volume produced by a single home furnishings store in the United States.
In fact, the gain in sales last year was itself greater than the annual volume
of many good-sized successful stores. The business achieves this success
because it deserves this success. A few figures will tell you why.


In its fiscal 1984 10-K, the largest independent specialty retailer of
home furnishings in the country, Levitz Furniture, described its prices as
帯enerally lower than the prices charged by conventional furniture stores in
its trading area? Levitz, in that year, operated at a gross margin of 44.4%
(that is, on average, customers paid it $100 for merchandise that had cost
it $55.60 to buy). The gross margin at NFM is not much more than half of
that. NFM’s low mark-ups are possible because of its exceptional
efficiency: operating expenses (payroll, occupancy, advertising, etc.) are
about 16.5% of sales versus 35.6% at Levitz.

根據去年財報,全國最大的家具零售商-Levitz 自誇其所賣價格要比當地所有傳統家

None of this is in criticism of Levitz, which has a well-managed
operation. But the NFM operation is simply extraordinary (and, remember,
it all comes from a $500 investment by Mrs. B in 1937). By unparalleled
efficiency and astute volume purchasing, NFM is able to earn excellent
returns on capital while saving its customers at least $30 million annually
from what, on average, it would cost them to buy the same merchandise at
stores maintaining typical mark-ups. Such savings enable NFM to
constantly widen its geographical reach and thus to enjoy growth well
beyond the natural growth of the Omaha market.


I have been asked by a number of people just what secrets the
Blumkins bring to their business. These are not very esoteric. All
members of the family: (1) apply themselves with an enthusiasm and energy
that would make Ben Franklin and Horatio Alger look like dropouts; (2)
define with extraordinary realism their area of special competence and act
decisively on all matters within it; (3) ignore even the most enticing
propositions failing outside of that area of special competence; and, (4)
unfailingly behave in a high-grade manner with everyone they deal with.
(Mrs. B boils it down to 昼ell cheap and tell the truth?)

他們整個家族(1)對事業懷抱的熱情與衝勁會讓富蘭克林與Horatio Alger看起來

Our evaluation of the integrity of Mrs. B and her family was
demonstrated when we purchased 90% of the business: NFM had never had
an audit and we did not request one; we did not take an inventory nor verify
the receivables; we did not check property titles. We gave Mrs. B a check
for $55 million and she gave us her word. That made for an even


You and I are fortunate to be in partnership with the Blumkin family.


See’s Candy Shops, Inc.


Below is our usual recap of See’s performance since the time of
purchase by Blue Chip Stamps:

下表是該公司自從被Blue Chips買下後,對其表現的一段回顧:

52-53 Week Year Operating Number of Number of

Ended About Sales Profits Pounds of Stores Open

December 31 Revenues After Taxes Candy Sold at Year End

------------------- ------------ ----------- ---------- -----------

1984 .............. $135,946,000 $13,380,000 24,759,000 214

1983 (53 weeks) ... 133,531,000 13,699,000 24,651,000 207

1982 .............. 123,662,000 11,875,000 24,216,000 202

1981 .............. 112,578,000 10,779,000 24,052,000 199

1980 .............. 97,715,000 7,547,000 24,065,000 191

1979 .............. 87,314,000 6,330,000 23,985,000 188

1978 .............. 73,653,000 6,178,000 22,407,000 182

1977 .............. 62,886,000 6,154,000 20,921,000 179

1976 (53 weeks) ... 56,333,000 5,569,000 20,553,000 173

1975 .............. 50,492,000 5,132,000 19,134,000 172

1974 .............. 41,248,000 3,021,000 17,883,000 170

1973 .............. 35,050,000 1,940,000 17,813,000 169

1972 .............. 31,337,000 2,083,000 16,954,000 167

This performance has not been produced by a generally rising tide.
To the contrary, many well-known participants in the boxed-chocolate
industry either have lost money in this same period or have been marginally
profitable. To our knowledge, only one good-sized competitor has
achieved high profitability. The success of See’s reflects the combination
of an exceptional product and an exceptional manager, Chuck Huggins.

而喜斯的成功要歸功於優秀的產品與傑出的經營人才-Chuck Huggins.

During 1984 we increased prices considerably less than has been our
practice in recent years: per-pound realization was $5.49, up only 1.4%
from 1983. Fortunately, we made good progress on cost control, an area
that has caused us problems in recent years. Per-pound costs - other than
those for raw materials, a segment of expense largely outside of our control
- increased by only 2.2% last year.


Our cost-control problem has been exacerbated by the problem of
modestly declining volume (measured by pounds, not dollars) on a
same-store basis. Total pounds sold through shops in recent years has
been maintained at a roughly constant level only by the net addition of a
few shops annually. This more-shops-to-get-the-same-volume situation
naturally puts heavy pressure on per-pound selling costs.


In 1984, same-store volume declined 1.1%. Total shop volume,
however, grew 0.6% because of an increase in stores. (Both percentages are
adjusted to compensate for a 53-week fiscal year in 1983.)


See’s business tends to get a bit more seasonal each year. In the four
weeks prior to Christmas, we do 40% of the year’s volume and earn about
75% of the year’s profits. We also earn significant sums in the Easter and
Valentine’s Day periods, but pretty much tread water the rest of the year.
In recent years, shop volume at Christmas has grown in relative importance,
and so have quantity orders and mail orders. The increased concentration
of business in the Christmas period produces a multitude of managerial
problems, all of which have been handled by Chuck and his associates with
exceptional skill and grace.


Their solutions have in no way involved compromises in either quality
of service or quality of product. Most of our larger competitors could not
say the same. Though faced with somewhat less extreme peaks and
valleys in demand than we, they add preservatives or freeze the finished
product in order to smooth the production cycle and thereby lower unit
costs. We reject such techniques, opting, in effect, for production
headaches rather than product modification.


Our mall stores face a host of new food and snack vendors that
provide particularly strong competition at non-holiday periods. We need
new products to fight back and during 1984 we introduced six candy bars
that, overall, met with a good reception. Further product introductions are


In 1985 we will intensify our efforts to keep per-pound cost increases
below the rate of inflation. Continued success in these efforts, however,
will require gains in same-store poundage. Prices in 1985 should average
6% - 7% above those of 1984. Assuming no change in same-store volume,
profits should show a moderate gain.


Buffalo Evening News


Profits at the News in 1984 were considerably greater than we
expected. As at See’s, excellent progress was made in controlling costs.
Excluding hours worked in the newsroom, total hours worked decreased by
about 2.8%. With this productivity improvement, overall costs increased
only 4.9%. This performance by Stan Lipsey and his management team was
one of the best in the industry.

Stan Lipsey與其經營團隊的表現為業界之最。

However, we now face an acceleration in costs. In mid-1984 we
entered into new multi-year union contracts that provided for a large
属atch-up?wage increase. This catch-up is entirely appropriate: the
cooperative spirit of our unions during the unprofitable 1977-1982 period
was an important factor in our success in remaining cost competitive with
The Courier-Express. Had we not kept costs down, the outcome of that
struggle might well have been different.


Because our new union contracts took effect at varying dates, little of
the catch-up increase was reflected in our 1984 costs. But the increase
will be almost totally effective in 1985 and, therefore, our unit labor costs
will rise this year at a rate considerably greater than that of the industry.
We expect to mitigate this increase by continued small gains in productivity,
but we cannot avoid significantly higher wage costs this year. Newsprint
price trends also are less favorable now than they were in 1984. Primarily
because of these two factors, we expect at least a minor contraction in
margins at the News.


Working in our favor at the News are two factors of major economic


(1) Our circulation is concentrated to an unusual degree

in the area of maximum utility to our advertisers.

壮egional?newspapers with wide-ranging circulation, on

the other hand, have a significant portion of their

circulation in areas that are of negligible utility to

most advertisers. A subscriber several hundred miles

away is not much of a prospect for the puppy you are

offering to sell via a classified ad - nor for the

grocer with stores only in the metropolitan area.

巣asted?circulation - as the advertisers call it -

hurts profitability: expenses of a newspaper are

determined largely by gross circulation while

advertising revenues (usually 70% - 80% of total

revenues) are responsive only to useful circulation;


(2) Our penetration of the Buffalo retail market is

exceptional; advertisers can reach almost all of their

potential customers using only the News.


Last year I told you about this unusual reader acceptance: among the
100 largest newspapers in the country, we were then number one, daily,
and number three, Sunday, in penetration. The most recent figures show
us number one in penetration on weekdays and number two on Sunday.
(Even so, the number of households in Buffalo has declined, so our current
weekday circulation is down slightly; on Sundays it is unchanged.)

一、而假日則排第三) ,最新的資料顯示前者仍維持第一、而後者則躍居第二位(不過

I told you also that one of the major reasons for this unusual
acceptance by readers was the unusual quantity of news that we delivered
to them: a greater percentage of our paper is devoted to news than is the
case at any other dominant paper in our size range. In 1984 our 嘆ews
hole?ratio was 50.9%, (versus 50.4% in 1983), a level far above the typical
35% - 40%. We will continue to maintain this ratio in the 50% area. Also,
though we last year reduced total hours worked in other departments, we
maintained the level of employment in the newsroom and, again, will
continue to do so. Newsroom costs advanced 9.1% in 1984, a rise far
exceeding our overall cost increase of 4.9%.

提供的新聞量是最多的) ,1984年的比率是50.9%(相較於去年的50.4%),遠較一般

Our news hole policy costs us significant extra money for newsprint.
As a result, our news costs (newsprint for the news hole plus payroll and
expenses of the newsroom) as a percentage of revenue run higher than
those of most dominant papers of our size. There is adequate room,
however, for our paper or any other dominant paper to sustain these costs:
the difference between high and low news costs at papers of comparable
size runs perhaps three percentage points while pre-tax profit margins are
often ten times that amount.


The economics of a dominant newspaper are excellent, among the
very best in the business world. Owners, naturally, would like to believe
that their wonderful profitability is achieved only because they unfailingly
turn out a wonderful product. That comfortable theory wilts before an
uncomfortable fact. While first-class newspapers make excellent profits,
the profits of third-rate papers are as good or better - as long as either
class of paper is dominant within its community. Of course, product
quality may have been crucial to the paper in achieving dominance. We
believe this was the case at the News, in very large part because of people
such as Alfred Kirchhofer who preceded us.


Once dominant, the newspaper itself, not the marketplace, determines
just how good or how bad the paper will be. Good or bad, it will prosper.
That is not true of most businesses: inferior quality generally produces
inferior economics. But even a poor newspaper is a bargain to most
citizens simply because of its 臓ulletin board?value. Other things being
equal, a poor product will not achieve quite the level of readership achieved
by a first-class product. A poor product, however, will still remain
essential to most citizens, and what commands their attention will
command the attention of advertisers.


Since high standards are not imposed by the marketplace,
management must impose its own. Our commitment to an above-average
expenditure for news represents an important quantitative standard. We
have confidence that Stan Lipsey and Murray Light will continue to apply the
far-more important qualitative standards. Charlie and I believe that
newspapers are very special institutions in society. We are proud of the
News, and intend an even greater pride to be justified in the years ahead.

的方面具體地要求新聞成本須高於一般同業水準,而我們也有信心Stan Lipsey與
Murray Light會繼續在質的方面予以加強,Charlie與我皆相信報紙是社會中的一特

Insurance Operations


Shown below is an updated version of our usual table listing two key
figures for the insurance industry:


Yearly Change Combined Ratio

in Premiums after Policy-holder

Written (%) Dividends

------------- -------------------

1972 .............................. 10.2 96.2

1973 .............................. 8.0 99.2

1974 .............................. 6.2 105.4

1975 .............................. 11.0 107.9

1976 .............................. 21.9 102.4

1977 .............................. 19.8 97.2

1978 .............................. 12.8 97.5

1979 .............................. 10.3 100.6

1980 .............................. 6.0 103.1

1981 .............................. 3.9 106.0

1982 .............................. 4.4 109.7

1983 (Revised) .................... 4.5 111.9

1984 (Estimated) .................. 8.1 117.7

Source: Best’s Aggregates and Averages

Best’s data reflect the experience of practically the entire industry,
including stock, mutual, and reciprocal companies. The combined ratio
represents total insurance costs (losses incurred plus expenses) compared
to revenue from premiums; a ratio below 100 indicates an underwriting
profit, and one above 100 indicates a loss.

上表充份顯示出整個產險業所面臨到的狀況,Combined Ratio綜合比率代表保險總

For a number of years, we have told you that an annual increase by the
industry of about 10% per year in premiums written is necessary for the
combined ratio to remain roughly unchanged. We assumed in making that
assertion that expenses as a percentage of premium volume would stay
relatively stable and that losses would grow at about 10% annually because
of the combined influence of unit volume increases, inflation, and judicial
rulings that expand what is covered by the insurance policy.


Our opinion is proving dismayingly accurate: a premium increase of
10% per year since 1979 would have produced an aggregate increase
through 1984 of 61% and a combined ratio in 1984 almost identical to the
100.6 of 1979. Instead, the industry had only a 30% increase in premiums
and a 1984 combined ratio of 117.7. Today, we continue to believe that the
key index to the trend of underwriting profitability is the year-to-year
percentage change in industry premium volume.


It now appears that premium volume in 1985 will grow well over 10%.
Therefore, assuming that catastrophes are at a normal level, we would
expect the combined ratio to begin easing downward toward the end of the
year. However, under our industry-wide loss assumptions (i.e., increases
of 10% annually), five years of 15%-per-year increases in premiums would
be required to get the combined ratio back to 100. This would mean a
doubling of industry volume by 1989, an outcome that seems highly
unlikely to us. Instead, we expect several years of premium gains
somewhat above the 10% level, followed by highly-competitive pricing that
generally will produce combined ratios in the 108-113 range.


Our own combined ratio in 1984 was a humbling 134. (Here, as
throughout this report, we exclude structured settlements and the
assumption of loss reserves in reporting this ratio. Much additional detail,
including the effect of discontinued operations on the ratio, appears on
pages 42-43). This is the third year in a row that our underwriting
performance has been far poorer than that of the industry. We expect an
improvement in the combined ratio in 1985, and also expect our
improvement to be substantially greater than that of the industry. Mike
Goldberg has corrected many of the mistakes I made before he took over
insurance operations. Moreover, our business is concentrated in lines that
have experienced poorer-than-average results during the past several years,
and that circumstance has begun to subdue many of our competitors and
even eliminate some. With the competition shaken, we were able during
the last half of 1984 to raise prices significantly in certain important lines
with little loss of business.

變好,而且也會比同業表現的好,Mike 自從從我手中接下保險業務後已改正了不少

For some years I have told you that there could be a day coming when
our premier financial strength would make a real difference in the
competitive position of our insurance operation. That day may have
arrived. We are almost without question the strongest property/casualty
insurance operation in the country, with a capital position far superior to
that of well-known companies of much greater size.


Equally important, our corporate policy is to retain that superiority.
The buyer of insurance receives only a promise in exchange for his cash.
The value of that promise should be appraised against the possibility of
adversity, not prosperity. At a minimum, the promise should appear able
to withstand a prolonged combination of depressed financial markets and
exceptionally unfavorable underwriting results. Our insurance subsidiaries
are both willing and able to keep their promises in any such environment -
and not too many other companies clearly are.


Our financial strength is a particular asset in the business of
structured settlements and loss reserve assumptions that we reported on
last year. The claimant in a structured settlement and the insurance
company that has reinsured loss reserves need to be completely confident
that payments will be forthcoming for decades to come. Very few
companies in the property/casualty field can meet this test of unquestioned
long-term strength. (In fact, only a handful of companies exists with which
we will reinsure our own liabilities.)

我們的財務實力對於去年曾提過的Structured Settlement與損失準備提列業務上來
說是一項很好用的利器,Structured Settlement的理賠申請戶與申請再保的保險公

We have grown in these new lines of business: funds that we hold to
offset assumed liabilities grew from $16.2 million to $30.6 million during
the year. We expect growth to continue and perhaps to greatly accelerate.
To support this projected growth we have added substantially to the capital
of Columbia Insurance Company, our reinsurance unit specializing in
structured settlements and loss reserve assumptions. While these
businesses are very competitive, returns should be satisfactory.


At GEICO the news, as usual, is mostly good. That company achieved
excellent unit growth in its primary insurance business during 1984, and
the performance of its investment portfolio continued to be extraordinary.
Though underwriting results deteriorated late in the year, they still remain
far better than those of the industry. Our ownership in GEICO at yearend
amounted to 36% and thus our interest in their direct property/casualty
volume of $885 million amounted to $320 million, or well over double our
own premium volume.


I have reported to you in the past few years that the performance of
GEICO’s stock has considerably exceeded that company’s business
performance, brilliant as the latter has been. In those years, the carrying
value of our GEICO investment on our balance sheet grew at a rate greater
than the growth in GEICO’s intrinsic business value. I warned you that over
performance by the stock relative to the performance of the business
obviously could not occur every year, and that in some years the stock must
under perform the business. In 1984 that occurred and the carrying value
of our interest in GEICO changed hardly at all, while the intrinsic business
value of that interest increased substantially. Since 27% of Berkshire’s net
worth at the beginning of 1984 was represented by GEICO, its static market
value had a significant impact upon our rate of gain for the year. We are
not at all unhappy with such a result: we would far rather have the business
value of GEICO increase by X during the year, while market value decreases,
than have the intrinsic value increase by only 1/2 X with market value
soaring. In GEICO’s case, as in all of our investments, we look to business
performance, not market performance. If we are correct in expectations
regarding the business, the market eventually will follow along.


You, as shareholders of Berkshire, have benefited in enormous
measure from the talents of GEICO’s Jack Byrne, Bill Snyder, and Lou
Simpson. In its core business - low-cost auto and homeowners insurance
- GEICO has a major, sustainable competitive advantage. That is a rare
asset in business generally, and it’s almost non-existent in the field of
financial services. (GEICO, itself, illustrates this point: despite the
company’s excellent management, superior profitability has eluded GEICO
in all endeavors other than its core business.) In a large industry, a
competitive advantage such as GEICO’s provides the potential for unusual
economic rewards, and Jack and Bill continue to exhibit great skill in
realizing that potential.

所有的Berkshire股東皆由於GEICO的經營團隊,包括Jack Byrne、Bill Snyder與
Lou Simpson而獲益良多,在他們的核心事業-低成本的汽車與房屋住宅保險,GEICO

Most of the funds generated by GEICO’s core insurance operation are
made available to Lou for investment. Lou has the rare combination of
temperamental and intellectual characteristics that produce outstanding
long-term investment performance. Operating with below-average risk,
he has generated returns that have been by far the best in the insurance
industry. I applaud and appreciate the efforts and talents of these three
outstanding managers.

GEICO核心事業所產生的資金大部份皆交由Lou Simpson來投資,Lou是一個情緒

Errors in Loss Reserving


Any shareholder in a company with important interests in the
property/casualty insurance business should have some understanding of
the weaknesses inherent in the reporting of current earnings in that
industry. Phil Graham, when publisher of the Washington Post, described
the daily newspaper as first rough draft of history? Unfortunately, the
financial statements of a property/casualty insurer provide, at best, only a
first rough draft of earnings and financial condition.

意,Phil Graham在擔任華盛頓郵報的發行人時曾說:「新聞日報是攥寫歷史的第一手

The determination of costs is the main problem. Most of an insurer’s
costs result from losses on claims, and many of the losses that should be
charged against the current year’s revenue are exceptionally difficult to
estimate. Sometimes the extent of these losses, or even their existence, is
not known for decades.


The loss expense charged in a property/casualty company’s current
income statement represents: (1) losses that occurred and were paid during
the year; (2) estimates for losses that occurred and were reported to the
insurer during the year, but which have yet to be settled; (3) estimates of
ultimate dollar costs for losses that occurred during the year but of which
the insurer is unaware (termed BNR incurred but not reported); and (4) the
net effect of revisions this year of similar estimates for (2) and (3) made in
past years.

一般來說,產險業當年度認列的損失主要包含有下列幾項: (1)當年發生且支付的損失
(2)對於已發生且提報但仍未合解案件的估計損失 (3) 對於已發生但尚未提報,亦即
報) 以及 (4)對於以前年度對於前述(2)(3)項估計所作之調整。

Such revisions may be long delayed, but eventually any estimate of
losses that causes the income for year X to be misstated must be corrected,
whether it is in year X + 1, or X + 10. This, perforce, means that
earnings in the year of correction also are misstated. For example, assume
a claimant was injured by one of our insureds in 1979 and we thought a
settlement was likely to be made for $10,000. That year we would have
charged $10,000 to our earnings statement for the estimated cost of the
loss and, correspondingly, set up a liability reserve on the balance sheet for
that amount. If we settled the claim in 1984 for $100,000, we would
charge earnings with a loss cost of $90,000 in 1984, although that cost was
truly an expense of 1979. And if that piece of business was our only
activity in 1979, we would have badly misled ourselves as to costs, and you
as to earnings.

異,於以後年度不論是X+1 或是 X+10年,一定要修正回來,而這無可避免地,也

The necessarily-extensive use of estimates in assembling the figures
that appear in such deceptively precise form in the income statement of
property/casualty companies means that some error must seep in, no
matter how proper the intentions of management. In an attempt to
minimize error, most insurers use various statistical techniques to adjust
the thousands of individual loss evaluations (called case reserves) that
comprise the raw data for estimation of aggregate liabilities. The extra
reserves created by these adjustments are variously labeled bulk
development or supplemental reserves. The goal of the adjustments
should be a loss-reserve total that has a 50-50 chance of being proved
either slightly too high or slightly too low when all losses that occurred
prior to the date of the financial statement are ultimately paid.


At Berkshire, we have added what we thought were appropriate
supplemental reserves but in recent years they have not been adequate. It
is important that you understand the magnitude of the errors that have
been involved in our reserving. You can thus see for yourselves just how
imprecise the process is, and also judge whether we may have some
systemic bias that should make you wary of our current and future figures.


The following table shows the results from insurance underwriting as
we have reported them to you in recent years, and also gives you
calculations a year later on an if-we-knew-then-what-we
think-we-know-now basis. I say that we think we know now because the
adjusted figures still include a great many estimates for losses that
occurred in the earlier years. However, many claims from the earlier years
have been settled so that our one-year-later estimate contains less guess
work than our earlier estimate:


Underwriting Results Corrected Figures

as Reported After One Year’s

Year to You Experience

---- -------------------- -----------------

1980 $ 6,738,000 $ 14,887,000

1981 1,478,000 (1,118,000)

1982 (21,462,000) (25,066,000)

1983 (33,192,000) (50,974,000)

1984 (45,413,000) ?

Our structured settlement and loss-reserve assumption

businesses are not included in this table. Important

additional information on loss reserve experience appears

on pages 43-45.

(Structured Settlement 與loss reserve assumption等保險業務不包括其中)

To help you understand this table, here is an explanation of the most
recent figures: 1984’s reported pre-tax underwriting loss of $45.4 million
consists of $27.6 million we estimate that we lost on 1984’s business, plus
the increased loss of $17.8 million reflected in the corrected figure for


As you can see from reviewing the table, my errors in reporting to you
have been substantial and recently have always presented a better
underwriting picture than was truly the case. This is a source of particular
chagrin to me because: (1) I like for you to be able to count on what I say;
(2) our insurance managers and I undoubtedly acted with less urgency than
we would have had we understood the full extent of our losses; and (3) we
paid income taxes calculated on overstated earnings and thereby gave the
government money that we didn’t need to. (These overpayments
eventually correct themselves, but the delay is long and we don急 receive
interest on the amounts we overpaid.)


Because our business is weighted toward casualty and reinsurance
lines, we have more problems in estimating loss costs than companies that
specialize in property insurance. (When a building that you have insured
burns down, you get a much faster fix on your costs than you do when an
employer you have insured finds out that one of his retirees has contracted
a disease attributable to work he did decades earlier.) But I still find our
errors embarrassing. In our direct business, we have far underestimated
the mushrooming tendency of juries and courts to make the deep pocket
pay, regardless of the factual situation and the past precedents for
establishment of liability. We also have underestimated the contagious
effect that publicity regarding giant awards has on juries. In the
reinsurance area, where we have had our worst experience in under
reserving, our customer insurance companies have made the same
mistakes. Since we set reserves based on information they supply us, their
mistakes have become our mistakes.


I heard a story recently that is applicable to our insurance accounting
problems: a man was traveling abroad when he received a call from his
sister informing him that their father had died unexpectedly. It was
physically impossible for the brother to get back home for the funeral, but
he told his sister to take care of the funeral arrangements and to send the
bill to him. After returning home he received a bill for several thousand
dollars, which he promptly paid. The following month another bill came
along for $15, and he paid that too. Another month followed, with a
similar bill. When, in the next month, a third bill for $15 was presented,
he called his sister to ask what was going on. Oh! she said. I forgot to
tell you. We buried Dad in a rented suit.

「噢! 沒什麼,忘了告訴你,那是因為爸爸身上穿的那套西裝是用租的」。

If you’re been in the insurance business in recent years - particularly the
reinsurance business - this story hurts. We have tried to include all of our
rented suit liabilities in our current financial statement, but our record of
past error should make us humble, and you suspicious. I will continue to
report to you the errors, plus or minus, that surface each year.


Not all reserving errors in the industry have been of the
innocent-but-dumb variety. With underwriting results as bad as they have
been in recent years - and with managements having as much discretion as
they do in the presentation of financial statements - some unattractive
aspects of human nature have manifested themselves. Companies that
would be out of business if they realistically appraised their loss costs have,
in some cases, simply preferred to take an extraordinarily optimistic view
about these yet-to-be-paid sums. Others have engaged in various
transactions to hide true current loss costs.


Both of these approaches can work for a considerable time: external
auditors cannot effectively police the financial statements of
property/casualty insurers. If liabilities of an insurer, correctly stated,
would exceed assets, it falls to the insurer to volunteer this morbid
information. In other words, the corpse is supposed to file the death
certificate. Under this honor system of mortality, the corpse sometimes
gives itself the benefit of the doubt.


In most businesses, of course, insolvent companies run out of cash.
Insurance is different: you can be broke but flush. Since cash comes in at
the inception of an insurance policy and losses are paid much later,
insolvent insurers don’t run out of cash until long after they have run out of
net worth. In fact, these talking dead often redouble their efforts to write
business, accepting almost any price or risk, simply to keep the cash
flowing in. With an attitude like that of an embezzler who has gambled
away his purloined funds, these companies hope that somehow they can
get lucky on the next batch of business and thereby cover up earlier
shortfalls. Even if they don’t get lucky, the penalty to managers is usually
no greater for a $100 million shortfall than one of $10 million; in the
meantime, while the losses mount, the managers keep their jobs and


The loss-reserving errors of other property/casualty companies are of
more than academic interest to Berkshire. Not only does Berkshire suffer
from sell-at-any-price competition by the talking dead but we also suffer
when their insolvency is finally acknowledged. Through various state
guarantee funds that levy assessments, Berkshire ends up paying a portion
of the insolvent insurers asset deficiencies, swollen as they usually are by
the delayed detection that results from wrong reporting. There is even
some potential for cascading trouble. The insolvency of a few large
insurers and the assessments by state guarantee funds that would follow
could imperil weak-but-previously-solvent insurers. Such dangers can be
mitigated if state regulators become better at prompt identification and
termination of insolvent insurers, but progress on that front has been slow.


Washington Public Power Supply System


From October, 1983 through June, 1984 Berkshire’s insurance
subsidiaries continuously purchased large quantities of bonds of Projects 1,
2, and 3 of Washington Public Power Supply System (巣PPSS?. This is the
same entity that, on July 1, 1983, defaulted on $2.2 billion of bonds issued
to finance partial construction of the now-abandoned Projects 4 and 5.
While there are material differences in the obligors, promises, and
properties underlying the two categories of bonds, the problems of Projects
4 and 5 have cast a major cloud over Projects 1, 2, and 3, and might
possibly cause serious problems for the latter issues. In addition, there
vhave been a multitude of problems related directly to Projects 1, 2, and 3
that could weaken or destroy an otherwise strong credit position arising
from guarantees by Bonneville Power Administration.

公用電力供應系統的一、二、三期債券(WPPSS 就是那家在1983年七月因無法履約

Despite these important negatives, Charlie and I judged the risks at
the time we purchased the bonds and at the prices Berkshire paid (much
lower than present prices) to be considerably more than compensated for
by prospects of profit.


As you know, we buy marketable stocks for our insurance companies
based upon the criteria we would apply in the purchase of an entire
business. This business-valuation approach is not widespread among
professional money managers and is scorned by many academics.
Nevertheless, it has served its followers well (to which the academics seem
to say, well, it may be all right in practice, but it will never work in theory.
Simply put, we feel that if we can buy small pieces of businesses with
satisfactory underlying economics at a fraction of the per-share value of the
entire business, something good is likely to happen to us - particularly if
we own a group of such securities.


We extend this business-valuation approach even to bond purchases
such as WPPSS. We compare the $139 million cost of our yearend
investment in WPPSS to a similar $139 million investment in an operating
business. In the case of WPPSS, the business contractually earns $22.7
million after tax (via the interest paid on the bonds), and those earnings are
available to us currently in cash. We are unable to buy operating
businesses with economics close to these. Only a relatively few businesses
earn the 16.3% after tax on unleveraged capital that our WPPSS investment
does and those businesses, when available for purchase, sell at large
premiums to that capital. In the average negotiated business transaction,
unleveraged corporate earnings of $22.7 million after-tax (equivalent to
about $45 million pre-tax) might command a price of $250 - $300 million
(or sometimes far more). For a business we understand well and strongly
like, we will gladly pay that much. But it is double the price we paid to
realize the same earnings from WPPSS bonds.


However, in the case of WPPSS, there is what we view to be a very
slight risk that the business could be worth nothing within a year or two.
There also is the risk that interest payments might be interrupted for a
considerable period of time. Furthermore, the most that the business
could be worth is about the $205 million face value of the bonds that we
own, an amount only 48% higher than the price we paid.


This ceiling on upside potential is an important minus. It should be
realized, however, that the great majority of operating businesses have a
limited upside potential also unless more capital is continuously invested in
them. That is so because most businesses are unable to significantly
improve their average returns on equity - even under inflationary
conditions, though these were once thought to automatically raise returns.


(Let’s push our bond-as-a-business example one notch further: if you
elect to retain the annual earnings of a 12% bond by using the proceeds
from coupons to buy more bonds, earnings of that bond business will grow
at a rate comparable to that of most operating businesses that similarly
reinvest all earnings. In the first instance, a 30-year, zero-coupon, 12%
bond purchased today for $10 million will be worth $300 million in 2015.
In the second, a $10 million business that regularly earns 12% on equity
and retains all earnings to grow, will also end up with $300 million of
capital in 2015. Both the business and the bond will earn over $32 million
in the final year.)


Our approach to bond investment - treating it as an unusual sort of
business with special advantages and disadvantages - may strike you as a
bit quirky. However, we believe that many staggering errors by investors
could have been avoided if they had viewed bond investment with a
businessman’s perspective. For example, in 1946, 20-year AAA
tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer
of those bonds at that time bought a business that earned about 1% on
book value (and that, moreover, could never earn a dime more than 1% on
book), and paid 100 cents on the dollar for that abominable business.


If an investor had been business-minded enough to think in those
terms - and that was the precise reality of the bargain struck - he would
have laughed at the proposition and walked away. For, at the same time,
businesses with excellent future prospects could have been bought at, or
close to, book value while earning 10%, 12%, or 15% after tax on book.
Probably no business in America changed hands in 1946 at book value that
the buyer believed lacked the ability to earn more than 1% on book. But
investors with bond-buying habits eagerly made economic commitments
throughout the year on just that basis. Similar, although less extreme,
conditions prevailed for the next two decades as bond investors happily
signed up for twenty or thirty years on terms outrageously inadequate by
business standards. (In what I think is by far the best book on investing
ever written - the Intelligent Investor by Ben Graham - the last section of
the last chapter begins with, investment is most intelligent when it is most
businesslike. This section is called Final Word and it is appropriately titled.)

件,簽下長達二、三十年的約定,(在至今我個人認為最佳的投資教材- 由葛拉罕所寫
的the intelligent investor書中最後一段提到,最佳的投資是以商業角度來看的投

We will emphasize again that there is unquestionably some risk in the
WPPSS commitment. It is also the sort of risk that is difficult to evaluate.
Were Charlie and I to deal with 50 similar evaluations over a lifetime, we
would expect our judgment to prove reasonably satisfactory. But we do
not get the chance to make 50 or even 5 such decisions in a single year.
Even though our long-term results may turn out fine, in any given year we
run a risk that we will look extraordinarily foolish. (That’s why all of these
sentences say Charlie and I or we)


Most managers have very little incentive to make the
intelligent-but-with-some-chance-of-looking-like-an-idiot decision.
Their personal gain/loss ratio is all too obvious: if an unconventional
decision works out well, they get a pat on the back and, if it works out
poorly, they get a pink slip. (Failing conventionally is the route to go; as a
group, lemmings may have a rotten image, but no individual lemming has
ever received bad press.)


Our equation is different. With 47% of Berkshire’s stock, Charlie and I
don’t worry about being fired, and we receive our rewards as owners, not
managers. Thus we behave with Berkshire’s money as we would with our
own. That frequently leads us to unconventional behavior both in
investments and general business management.


We remain unconventional in the degree to which we concentrate the
investments of our insurance companies, including those in WPPSS bonds.
This concentration makes sense only because our insurance business is
conducted from a position of exceptional financial strength. For almost all
other insurers, a comparable degree of concentration (or anything close to
it) would be totally inappropriate. Their capital positions are not strong
enough to withstand a big error, no matter how attractive an investment
opportunity might appear when analyzed on the basis of probabilities.

投資) ,而這種作法之有當像我們一樣具備特別雄厚的財務實力方能成功,對其它保

With our financial strength we can own large blocks of a few securities
that we have thought hard about and bought at attractive prices. (Billy Rose
described the problem of over-diversification: if you have a harem of forty
women, you never get to know any of them very well. Over time our policy
of concentration should produce superior results, though these will be
tempered by our large size. When this policy produces a really bad year,
as it must, at least you will know that our money was committed on the
same basis as yours.

(Bill Rose形容過度分散投資的麻煩,若你擁有四十位妻妾,你一定沒有辦法對每一

We made the major part of our WPPSS investment at different prices
and under somewhat different factual circumstances than exist at present.
If we decide to change our position, we will not inform shareholders until
long after the change has been completed. (We may be buying or selling as
you read this.) The buying and selling of securities is a competitive
business, and even a modest amount of added competition on either side
can cost us a great deal of money. Our WPPSS purchases illustrate this
principle. From October, 1983 through June, 1984, we attempted to buy
almost all the bonds that we could of Projects 1, 2, and 3. Yet we purchased
less than 3% of the bonds outstanding. Had we faced even a few additional
well-heeled investors, stimulated to buy because they knew we were, we
could have ended up with a materially smaller amount of bonds, purchased
at a materially higher price. (A couple of coat-tail riders easily could have
cost us $5 million.) For this reason, we will not comment about our
activities in securities - neither to the press, nor shareholders, nor to
anyone else - unless legally required to do so.

碼相關部位) ,由於股票的買賣是屬於競爭激烈的零和遊戲,所以即使是因此加入一

One final observation regarding our WPPSS purchases: we dislike the
purchase of most long-term bonds under most circumstances and have
bought very few in recent years. That’s because bonds are as sound as a
dollar - and we view the long-term outlook for dollars as dismal. We
believe substantial inflation lies ahead, although we have no idea what the
average rate will turn out to be. Furthermore, we think there is a small,
but not insignificant, chance of runaway inflation.


Such a possibility may seem absurd, considering the rate to which
inflation has dropped. But we believe that present fiscal policy - featuring
a huge deficit - is both extremely dangerous and difficult to reverse. (So far,
most politicians in both parties have followed Charlie Brown’s advice: No
problem is so big that it can’t be run away from. Without a reversal, high
rates of inflation may be delayed (perhaps for a long time), but will not be
avoided. If high rates materialize, they bring with them the potential for a
runaway upward spiral.

Charlie Brown的建議,沒有什麼問題是無法加以控制的)但若不能加以改善,高通膨
或許暫時不再發生(但卻無法完全擺脫) ,而且一旦成形,可能會加快速度向上飆漲。

While there is not much to choose between bonds and stocks (as a
class) when annual inflation is in the 5%-10% range, runaway inflation is a
different story. In that circumstance, a diversified stock portfolio would
almost surely suffer an enormous loss in real value. But bonds already
outstanding would suffer far more. Thus, we think an all-bond portfolio
carries a small but unacceptable 聴ipe out?risk, and we require any purchase
of long-term bonds to clear a special hurdle. Only when bond purchases
appear decidedly superior to other business opportunities will we engage in
them. Those occasions are likely to be few and far between.


Dividend Policy


Dividend policy is often reported to shareholders, but seldom
explained. A company will say something like, our goal is to pay out 40%
to 50% of earnings and to increase dividends at a rate at least equal to the
rise in the CPI. And that’s it - no analysis will be supplied as to why that
particular policy is best for the owners of the business. Yet, allocation of
capital is crucial to business and investment management. Because it is,
we believe managers and owners should think hard about the
circumstances under which earnings should be retained and under which
they should be distributed.


The first point to understand is that all earnings are not created equal.
In many businesses particularly those that have high asset/profit ratios -
inflation causes some or all of the reported earnings to become ersatz.
The ersatz portion - let’s call these earnings restricted - cannot, if the
business is to retain its economic position, be distributed as dividends.
Were these earnings to be paid out, the business would lose ground in one
or more of the following areas: its ability to maintain its unit volume of
sales, its long-term competitive position, its financial strength. No matter
how conservative its payout ratio, a company that consistently distributes
restricted earnings is destined for oblivion unless equity capital is otherwise

質,萬一要是勉強發放,將會使得公司在以下幾方面失去競爭力: (1)維持原有銷售數

Restricted earnings are seldom valueless to owners, but they often
must be discounted heavily. In effect, they are conscripted by the business,
no matter how poor its economic potential. (This
retention-no-matter-how-unattractive-the-return situation was
communicated unwittingly in a marvelously ironic way by Consolidated
Edison a decade ago. At the time, a punitive regulatory policy was a major
factor causing the company’s stock to sell as low as one-fourth of book
value; i.e., every time a dollar of earnings was retained for reinvestment in
the business, that dollar was transformed into only 25 cents of market
value. But, despite this gold-into-lead process, most earnings were
reinvested in the business rather than paid to owners. Meanwhile, at
construction and maintenance sites throughout New York, signs proudly
proclaimed the corporate slogan, dig We Must?)

觀一律保留的情況,在十年前由Consolidated Edison無意間所提出而後令人難以置

Restricted earnings need not concern us further in this dividend
discussion. Let’s turn to the much-more-valued unrestricted variety.
These earnings may, with equal feasibility, be retained or distributed. In
our opinion, management should choose whichever course makes greater
sense for the owners of the business.


This principle is not universally accepted. For a number of reasons
managers like to withhold unrestricted, readily distributable earnings from
shareholders - to expand the corporate empire over which the managers
rule, to operate from a position of exceptional financial comfort, etc. But
we believe there is only one valid reason for retention. Unrestricted
earnings should be retained only when there is a reasonable prospect -
backed preferably by historical evidence or, when appropriate, by a
thoughtful analysis of the future - that for every dollar retained by the
corporation, at least one dollar of market value will be created for owners.
This will happen only if the capital retained produces incremental earnings
equal to, or above, those generally available to investors.


To illustrate, let’s assume that an investor owns a risk-free 10%
perpetual bond with one very unusual feature. Each year the investor can
elect either to take his 10% coupon in cash, or to reinvest the coupon in
more 10% bonds with identical terms; i.e., a perpetual life and coupons
offering the same cash-or-reinvest option. If, in any given year, the
prevailing interest rate on long-term, risk-free bonds is 5%, it would be
foolish for the investor to take his coupon in cash since the 10% bonds he
could instead choose would be worth considerably more than 100 cents on
the dollar. Under these circumstances, the investor wanting to get his
hands on cash should take his coupon in additional bonds and then
immediately sell them. By doing that, he would realize more cash than if
he had taken his coupon directly in cash. Assuming all bonds were held by
rational investors, no one would opt for cash in an era of 5% interest rates,
not even those bondholders needing cash for living purposes.


If, however, interest rates were 15%, no rational investor would want
his money invested for him at 10%. Instead, the investor would choose to
take his coupon in cash, even if his personal cash needs were nil. The
opposite course - reinvestment of the coupon - would give an investor
additional bonds with market value far less than the cash he could have
elected. If he should want 10% bonds, he can simply take the cash
received and buy them in the market, where they will be available at a large


An analysis similar to that made by our hypothetical bondholder is
appropriate for owners in thinking about whether a company’s unrestricted
earnings should be retained or paid out. Of course, the analysis is much
more difficult and subject to error because the rate earned on reinvested
earnings is not a contractual figure, as in our bond case, but rather a
fluctuating figure. Owners must guess as to what the rate will average
over the intermediate future. However, once an informed guess is made,
the rest of the analysis is simple: you should wish your earnings to be
reinvested if they can be expected to earn high returns, and you should
wish them paid to you if low returns are the likely outcome of reinvestment.


Many corporate managers reason very much along these lines in
determining whether subsidiaries should distribute earnings to their parent
company. At that level,. the managers have no trouble thinking like
intelligent owners. But payout decisions at the parent company level often
are a different story. Here managers frequently have trouble putting
themselves in the shoes of their shareholder-owners.


With this schizoid approach, the CEO of a multi-divisional company
will instruct Subsidiary A, whose earnings on incremental capital may be
expected to average 5%, to distribute all available earnings in order that
they may be invested in Subsidiary B, whose earnings on incremental capital
are expected to be 15%. The CEO’s business school oath will allow no
lesser behavior. But if his own long-term record with incremental capital is
5% - and market rates are 10% - he is likely to impose a dividend policy on
shareholders of the parent company that merely follows some historical or
industry-wide payout pattern. Furthermore, he will expect managers of
subsidiaries to give him a full account as to why it makes sense for earnings
to be retained in their operations rather than distributed to the
parent-owner. But seldom will he supply his owners with a similar analysis
pertaining to the whole company.


In judging whether managers should retain earnings, shareholders
should not simply compare total incremental earnings in recent years to
total incremental capital because that relationship may be distorted by what
is going on in a core business. During an inflationary period, companies
with a core business characterized by extraordinary economics can use
small amounts of incremental capital in that business at very high rates of
return (as was discussed in last year’s section on Goodwill). But, unless
they are experiencing tremendous unit growth, outstanding businesses by
definition generate large amounts of excess cash. If a company sinks most
of this money in other businesses that earn low returns, the company’s
overall return on retained capital may nevertheless appear excellent
because of the extraordinary returns being earned by the portion of
earnings incrementally invested in the core business. The situation is
analogous to a Pro-Am golf event: even if all of the amateurs are hopeless
duffers, the team’s best-ball score will be respectable because of the
dominating skills of the professional.

譽) ,除非是經歷銷售量的鉅幅成長,否則一家好的企業定義上應該是指那些可以產

Many corporations that consistently show good returns both on equity
and on overall incremental capital have, indeed, employed a large portion of
their retained earnings on an economically unattractive, even disastrous,
basis. Their marvelous core businesses, however, whose earnings grow
year after year, camouflage repeated failures in capital allocation elsewhere
(usually involving high-priced acquisitions of businesses that have
inherently mediocre economics). The managers at fault periodically report
on the lessons they have learned from the latest disappointment. They
then usually seek out future lessons. (Failure seems to go to their heads.)


In such cases, shareholders would be far better off if earnings were
retained only to expand the high-return business, with the balance paid in
dividends or used to repurchase stock (an action that increases the owners
interest in the exceptional business while sparing them participation in
subpar businesses). Managers of high-return businesses who consistently
employ much of the cash thrown off by those businesses in other ventures
with low returns should be held to account for those allocation decisions,
regardless of how profitable the overall enterprise is.


Nothing in this discussion is intended to argue for dividends that
bounce around from quarter to quarter with each wiggle in earnings or in
investment opportunities. Shareholders of public corporations
understandably prefer that dividends be consistent and predictable.
Payments, therefore, should reflect long-term expectations for both
earnings and returns on incremental capital. Since the long-term
corporate outlook changes only infrequently, dividend patterns should
change no more often. But over time distributable earnings that have been
withheld by managers should earn their keep. If earnings have been
unwisely retained, it is likely that managers, too, have been unwisely


Let’s now turn to Berkshire Hathaway and examine how these dividend
principles apply to it. Historically, Berkshire has earned well over market
rates on retained earnings, thereby creating over one dollar of market value
for every dollar retained. Under such circumstances, any distribution
would have been contrary to the financial interest of shareholders, large or


In fact, significant distributions in the early years might have been
disastrous, as a review of our starting position will show you. Charlie and I
then controlled and managed three companies, Berkshire Hathaway Inc.,
Diversified Retailing Company, Inc., and Blue Chip Stamps (all now merged
into our present operation). Blue Chip paid only a small dividend,
Berkshire and DRC paid nothing. If, instead, the companies had paid out
their entire earnings, we almost certainly would have no earnings at all now
- and perhaps no capital as well. The three companies each originally
made their money from a single business: (1) textiles at Berkshire; (2)
department stores at Diversified; and (3) trading stamps at Blue Chip.
These cornerstone businesses (carefully chosen, it should be noted, by your
Chairman and Vice Chairman) have, respectively, (1) survived but earned
almost nothing, (2) shriveled in size while incurring large losses, and (3)
shrunk in sales volume to about 5% its size at the time of our entry. (Who
says you can急 lose 蟇m all?) Only by committing available funds to much
better businesses were we able to overcome these origins. (It’s been like
overcoming a misspent youth.) Clearly, diversification has served us well.

藍籌郵票公司(現在已合併為一家公司) ,藍籌郵票公司只發放一點股利而其餘兩家皆
連一點資本也沒有,這三家公司當初各自靠一種事業起家(1) Berkshire的紡織(2) 多
元零售的百貨公司(3) 藍籌郵票的郵票買賣,這些基礎事業(特別要提到的是,那些我

We expect to continue to diversify while also supporting the growth of
current operations though, as we挙e pointed out, our returns from these
efforts will surely be below our historical returns. But as long as
prospective returns are above the rate required to produce a dollar of
market value per dollar retained, we will continue to retain all earnings.
Should our estimate of future returns fall below that point, we will
distribute all unrestricted earnings that we believe can not be effectively
used. In making that judgment, we will look at both our historical record
and our prospects. Because our year-to-year results are inherently volatile,
we believe a five-year rolling average to be appropriate for judging the
historical record.


Our present plan is to use our retained earnings to further build the
capital of our insurance companies. Most of our competitors are in
weakened financial condition and reluctant to expand substantially. Yet
large premium-volume gains for the industry are imminent, amounting
probably to well over $15 billion in 1985 versus less than $5 billion in 1983.
These circumstances could produce major amounts of profitable business
for us. Of course, this result is no sure thing, but prospects for it are far
better than they have been for many years.




This is the spot where each year I run my small business wanted ad.
In 1984 John Loomis, one of our particularly knowledgeable and alert
shareholders, came up with a company that met all of our tests. We
immediately pursued this idea, and only a chance complication prevented a
deal. Since our ad is pulling, we will repeat it in precisely last year’s form:

又到了每年我刊登小廣告的時候了,去年我們一位特別有心的股東John Loomis,跟

We prefer:

(1) large purchases (at least $5 million of after-tax


(2) demonstrated consistent earning power (future

projections are of little interest to us, nor are

turn-around situations),

(3) businesses earning good returns on equity while

employing little or no debt,

(4) management in place (we can’t supply it),

(5) simple businesses (if there’s lots of technology, we

won’t understand it),

(6) an offering price (we don’t want to waste our time or

that of the seller by talking, even preliminarily,

about a transaction when price is unknown).

We will not engage in unfriendly takeovers. We can promise complete
confidentiality and a very fast answer - customarily within five minutes - as
to whether we虐e interested. We prefer to buy for cash, but will consider
issuance of stock when we receive as much in intrinsic business value as we
give. We invite potential sellers to check us out by contacting people with
whom we have done business in the past. For the right business - and the
right people - we can provide a good home.

鐘) ,我們傾向採現金交易,除非我們所換得的內含價值跟我們付出的一樣多,否則

* * *

A record 97.2% of all eligible shares participated in Berkshire’s 1984
shareholder-designated contributions program. Total contributions made
through this program were $3,179,000, and 1,519 charities were recipients.
Our proxy material for the annual meeting will allow you to cast an advisory
vote expressing your views about this program - whether you think we
should continue it and, if so, at what per-share level. (You may be
interested to learn that we were unable to find a precedent for an advisory
vote in which management seeks the opinions of shareholders about
owner-related corporate policies. Managers who put their trust in
capitalism seem in no hurry to put their trust in capitalists.)


We urge new shareholders to read the description of our
shareholder-designated contributions program that appears on pages 60
and 61. If you wish to participate in future programs, we strongly urge
that you immediately make sure that your shares are registered in the name
of the actual owner, not in street name or nominee name. Shares not so
registered on September 30, 1985 will be ineligible for the 1985 program.


* * *

Our annual meeting will be on May 21, 1985 in Omaha, and I hope
that you attend. Many annual meetings are a waste of time, both for
shareholders and for management. Sometimes that is true because
management is reluctant to open up on matters of business substance.
More often a nonproductive session is the fault of shareholder participants
who are more concerned about their own moment on stage than they are
about the affairs of the corporation. What should be a forum for business
discussion becomes a forum for theatrics, spleen-venting and advocacy of
issues. (The deal is irresistible: for the price of one share you get to tell a
captive audience your ideas as to how the world should be run.) Under such
circumstances, the quality of the meeting often deteriorates from year to
year as the antics of those interested in themselves discourage attendance
by those interested in the business.

意,只要買進一股,你就可以讓一大群人坐著聽你高談闊論) ,最後往往是劣幣驅逐

Berkshire’s meetings are a different story. The number of
shareholders attending grows a bit each year and we have yet to experience
a silly question or an ego-inspired commentary. Instead, we get a wide
variety of thoughtful questions about the business. Because the annual
vmeeting is the time and place for these, Charlie and I are happy to answer
them all, no matter how long it takes. (We cannot, however, respond to
written or phoned questions at other times of the year; one-person-at-a
time reporting is a poor use of management time in a company with 3000
shareholders.) The only business matters that are off limits at the annual
meeting are those about which candor might cost our company real money.
Our activities in securities would be the main example.

率了) ,而我們惟一無法回答的商業問題是正直要花多少代價去證明,尤其是我們在

We always have bragged a bit on these pages about the quality of our
shareholder-partners. Come to the annual meeting and you will see why.
Out-of-towners should schedule a stop at Nebraska Furniture Mart. If you
make some purchases, you’ll save far more than enough to pay for your trip,
and you’ll enjoy the experience.


Warren E. Buffett

February 25, 1985 Chairman of the Board




Subsequent Event: On March 18, a week after copy for this report went
to the typographer but shortly before production, we agreed to purchase
three million shares of Capital Cities Communications, Inc. at $172.50 per
share. Our purchase is contingent upon the acquisition of American
Broadcasting Companies, Inc. by Capital Cities, and will close when that
transaction closes. At the earliest, that will be very late in 1985. Our
admiration for the management of Capital Cities, led by Tom Murphy and
Dan Burke, has been expressed several times in previous annual reports.
Quite simply, they are tops in both ability and integrity. We will have more
to say about this investment in next year’s report.

股資本城廣播Capital Cities Communications,其中有一項附帶要件是資本城必須
城的領導階層-包括Tom Murphy 與Dan Burke表示推崇,原因很簡單,因為他們


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