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To the Shareholders of Berkshire Hathaway Inc.: Both the numerator and denominator are important in the per-share book value calculation: In past reports I have noted that book value at most companies differs widely from intrinsic business value - the number that really counts for owners. In our own case, however, book value has served for more than a decade as a reasonable if somewhat conservative proxy for business value. That is, our business value has moderately exceeded our book value, with the ratio between the two remaining fairly steady.
The good news is that in our percentage gain in business value probably exceeded the book value gain. I say "probably" because business value is a soft number: A large measure of our improvement in business value relative to book value reflects the outstanding performance of key managers at our major operating businesses.
These managers - the Blumkins, Mike Goldberg, the Heldmans, Chuck Huggins, Stan Lipsey, and Ralph Schey - have over the years improved the earnings of their businesses dramatically while, except in the case of insurance, utilizing little additional capital.
Dead Man's Letters (1986) - IMDb
This accomplishment builds economic value, or "Goodwill," that does not show up in the net worth figure on our balance sheet, nor in our per-share book value. In this unrecorded gain was substantial. So much for the good news.
The bad news is that my performance did not match that of our managers. While they were doing a superb job in running our businesses, I was unable to skillfully deploy much of the capital they generated. Charlie Munger, our Vice Chairman, and I really have only two jobs. One is to attract and keep outstanding managers to run our various operations. Usually the managers came with the companies we bought, having demonstrated their talents throughout careers that spanned a wide variety of business circumstances.
They were managerial stars long before they knew us, and our main contribution has been to not get in their way. This approach seems elementary: Some of our key managers are independently wealthy we hope they all become so , but that poses no threat to their continued interest: They unfailingly think like owners the highest compliment we can pay a manager and find all aspects of their business absorbing.
Our prototype for occupational fervor is the Catholic tailor who used his small savings of many years to finance a pilgrimage to the Vatican.
When he returned, his parish held a special meeting to get his first-hand account of the Pope. But, if each of us hires people who are bigger than we are, we shall become a company of giants. When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap.
Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle.
Charlie and I could work with double the number of managers we now have, so long as they had the rare qualities of the present ones. We intend to continue our practice of working only with people whom we like and admire. This policy not only maximizes our chances for good results, it also ensures us an extraordinarily good time.
On the other hand, working with people who cause your stomach to churn seems much like marrying for money - probably a bad idea under any circumstances, but absolute madness if you are already rich. The second job Charlie and I must handle is the allocation of capital, which at Berkshire is a considerably more important challenge than at most companies. Three factors make that so: Capital allocation at Berkshire was tough work in We did make one business acquisition - The Fechheimer Bros.
Company, which we will discuss in a later section. Fechheimer is a company with excellent economics, run by exactly the kind of people with whom we enjoy being associated. Meanwhile, we had no new ideas in the marketable equities field, an area in which once, only a few years ago, we could readily employ large sums in outstanding businesses at very reasonable prices.
So our main capital allocation moves in were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either. We will continue to look for operating businesses that meet our tests and, with luck, will acquire such a business every couple of years. But an acquisition will have to be large if it is to help our performance materially. Under current stock market conditions, we have little hope of finding equities to buy for our insurance companies.
Markets will change significantly - you can be sure of that and some day we will again get our turn at bat. A gain of that magnitude will be possible only if, before too long, we come up with a few very big and good ideas. This table differs in several ways from the one presented last year.
We have added four new lines of business because of the Scott Fetzer and Fechheimer acquisitions. In the case of Scott Fetzer, the two major units acquired were World Book and Kirby, and each is presented separately. In the table, amortization of Goodwill is not charged against the specific businesses but, for reasons outlined in the Appendix to my letter in the Annual Report, is aggregated as a separate item. A Compendium of earlier letters, including the Goodwill discussion, is available upon request.
Both the Scott Fetzer and Fechheimer acquisitions created accounting Goodwill, which is why the amortization charge for Goodwill increased in Additionally, the Scott Fetzer acquisition required other major purchase-price accounting adjustments, as prescribed by generally accepted accounting principles GAAP. The GAAP figures, of course, are the ones used in our consolidated financial statements.
But, in our view, the GAAP figures are not necessarily the most useful ones for investors or managers. Therefore, the figures shown for specific operating units are earnings before purchase-price adjustments are taken into account. In effect, these are the earnings that would have been reported by the businesses if we had not purchased them. A discussion of our reasons for preferring this form of presentation is in the Appendix to this letter. This Appendix will never substitute for a steamy novel and definitely is not required reading.
However, I know that among our 6, shareholders there are those who are thrilled by my essays on accounting - and I hope that both of you enjoy the Appendix. Some of the improvement came from the insurance operation, whose results I will discuss in a later section.
Fechheimer also will be discussed separately. Our other major businesses performed as follows: For the third year in a row, man-hours worked fell significantly and other costs were closely controlled. Consequently, our operating margins improved materially in , even though our advertising rate increases were well below those of most major newspapers.
Our cost-control efforts have in no way reduced our commitment to news. Our Sunday penetration, where we are also number one, is even more impressive.
Our Sunday paper was started in late Despite our exceptional market acceptance, our operating margins almost certainly have peaked. A major newsprint price increase took effect at the end of , and our advertising rate increases in will again be moderate compared to those of the industry. However, even if margins should materially shrink, we would not reduce our news-hole ratio.
As I write this, it has been exactly ten years since we purchased The News. The financial rewards it has brought us have far exceeded our expectations and so, too, have the non-financial rewards. Our respect for the News - high when we bought it - has grown consistently ever since the purchase, as has our respect and admiration for Murray Light, the editor who turns out the product that receives such extraordinary community acceptance. The efforts of Murray and Stan, which were crucial to the News during its dark days of financial reversals and litigation, have not in the least been lessened by prosperity.
Charlie and I are grateful to them. Competitors come and go mostly go , but Mrs. In net sales increased In preparation for further gains, NFM is expanding the capacity of its warehouse, located a few hundred yards from the store, by about one-third. Competing with her represents a triumph of courage over judgment. Please file this fact away to consult before you mark your ballot at the annual meeting of Berkshire. For you chocaholics who like to fantasize, one statistic: Same-store sales, measured in pounds, were virtually unchanged.
In the previous six years, same store poundage fell, and we gained or maintained poundage volume only by adding stores. But a particularly strong Christmas season in stemmed the decline.
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Chuck rightfully measures his success by the satisfaction of our customers, and his attitude permeates the organization. We will continue to increase prices very modestly, merely matching prospective cost increases. Last year I reported to you enthusiastically about the businesses of Scott Fetzer and about Ralph Schey, its manager. Ralph is a superb businessman and a straight shooter. He also brings exceptional versatility and energy to his job: And, like our other managers, Ralph is a real pleasure to work with.
Our good fortune continues. World Book continues to dominate the U. Extraordinarily well-edited and priced at under 5 cents per page, these books are a bargain for youngster and adult alike.
You may find one editing technique interesting: World Book ranks over 44, words by difficulty. Longer entries in the encyclopedia include only the most easily comprehended words in the opening sections, with the difficulty of the material gradually escalating as the exposition proceeds.
As a result, youngsters can easily and profitably read to the point at which subject matter gets too difficult, instead of immediately having to deal with a discussion that mixes up words requiring college-level comprehension with others of fourth-grade level. Selling World Book is a calling. They correctly think of themselves as educators, and they do a terrific job. While the Kirby product is more expensive than most cleaners, it performs in a manner that leaves cheaper units far behind "in the dust," so to speak.