BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our per-share book value increased 14.3% during 1993. Over
the last 29 years (that is, since present management took over)
book value has grown from $19 to $8,854, or at a rate of 23.3%
compounded annually.
During the year, Berkshire's net worth increased by $1.5
billion, a figure affected by two negative and two positive non-
operating items. For the sake of completeness, I'll explain them
here. If you aren't thrilled by accounting, however, feel free
to fast-forward through this discussion:
1. The first negative was produced by a change in
Generally Accepted Accounting Principles (GAAP)
having to do with the taxes we accrue against
unrealized appreciation in the securities we
carry at market value. The old rule said that
the tax rate used should be the one in effect
when the appreciation took place. Therefore,
at the end of 1992, we were using a rate of 34%
on the $6.4 billion of gains generated after
1986 and 28% on the $1.2 billion of gains
generated before that. The new rule stipulates
that the current tax rate should be applied to
all gains. The rate in the first quarter of
1993, when this rule went into effect, was 34%.
Applying that rate to our pre-1987 gains
reduced net worth by $70 million.
2. The second negative, related to the first, came
about because the corporate tax rate was raised
in the third quarter of 1993 to 35%. This
change required us to make an additional charge
of 1% against all of our unrealized gains, and
that charge penalized net worth by $75 million.
Oddly, GAAP required both this charge and the
one described above to be deducted from the
earnings we report, even though the unrealized
appreciation that gave rise to the charges was
never included in earnings, but rather was
credited directly to net worth.
3. Another 1993 change in GAAP affects the value
at which we carry the securities that we own.
In recent years, both the common stocks and
certain common-equivalent securities held by
our insurance companies have been valued at
market, whereas equities held by our non-
insurance subsidiaries or by the parent company
were carried at their aggregate cost or market,
whichever was lower. Now GAAP says that all
common stocks should be carried at market, a
rule we began following in the fourth quarter
of 1993. This change produced a gain in
Berkshire's reported net worth of about $172
million.
4. Finally, we issued some stock last year. In a
transaction described in last year's Annual
Report, we issued 3,944 shares in early
January, 1993 upon the conversion of $46
million convertible debentures that we had
called for redemption. Additionally, we issued
25,203 shares when we acquired Dexter Shoe, a
purchase discussed later in this report. The
overall result was that our shares outstanding
increased by 29,147 and our net worth by about
$478 million. Per-share book value also grew,
because the shares issued in these transactions
carried a price above their book value.
Of course, it's per-share intrinsic value, not book value,
that counts. Book value is an accounting term that measures the
capital, including retained earnings, that has been put into a
business. Intrinsic value is a present-value estimate of the
cash that can be taken out of a business during its remaining
life. At most companies, the two values are unrelated.
Berkshire, however, is an exception: Our book value, though
significantly below our intrinsic value, serves as a useful
device for tracking that key figure. In 1993, each measure grew
by roughly 14%, advances that I would call satisfactory but
unexciting.
These gains, however, were outstripped by a much larger gain
- 39% - in Berkshire's market price. Over time, of course,
market price and intrinsic value will arrive at about the same
destination. But in the short run the two often diverge in a
major way, a phenomenon I've discussed in the past. Two years
ago, Coca-Cola and Gillette, both large holdings of ours, enjoyed
market price increases that dramatically outpaced their earnings
gains. In the 1991 Annual Report, I said that the stocks of
these companies could not continuously overperform their
businesses.
From 1991 to 1993, Coke and Gillette increased their annual
operating earnings per share by 38% and 37% respectively, but
their market prices moved up only 11% and 6%. In other words,
the companies overperformed their stocks, a result that no doubt
partly reflects Wall Street's new apprehension about brand names.
Whatever the reason, what will count over time is the earnings
performance of these companies. If they prosper, Berkshire will
also prosper, though not in a lock-step manner.
Let me add a lesson from history: Coke went public in 1919
at $40 per share. By the end of 1920 the market, coldly
reevaluating Coke's future prospects, had battered the stock down
by more than 50%, to $19.50. At yearend 1993, that single share,
with dividends reinvested, was worth more than $2.1 million. As
Ben Graham said: "In the short-run, the market is a voting
machine - reflecting a voter-registration test that requires only
money, not intelligence or emotional stability - but in the long-
run, the market is a weighing machine."
So how should Berkshire's over-performance in the market
last year be viewed? Clearly, Berkshire was selling at a higher
percentage of intrinsic value at the end of 1993 than was the
case at the beginning of the year. On the other hand, in a world
of 6% or 7% long-term interest rates, Berkshire's market price
was not inappropriate if - and you should understand that this is
a huge if - Charlie Munger, Berkshire's Vice Chairman, and I can
attain our long-standing goal of increasing Berkshire's per-share
intrinsic value at an average annual rate of 15%. We have not
retreated from this goal. But we again emphasize, as we have for
many years, that the growth in our capital base makes 15% an
ever-more difficult target to hit.
What we have going for us is a growing collection of good-
sized operating businesses that possess economic characteristics
ranging from good to terrific, run by managers whose performance
ranges from terrific to terrific. You need have no worries about
this group.
The capital-allocation work that Charlie and I do at the
parent company, using the funds that our managers deliver to us,
has a less certain outcome: It is not easy to find new
businesses and managers comparable to those we have. Despite
that difficulty, Charlie and I relish the search, and we are
happy to report an important success in 1993.
Dexter Shoe
What we did last year was build on our 1991 purchase of H.
H. Brown, a superbly-run manufacturer of work shoes, boots and
other footwear. Brown has been a real winner: Though we had
high hopes to begin with, these expectations have been
considerably exceeded thanks to Frank Rooney, Jim Issler and the
talented managers who work with them. Because of our confidence
in Frank's team, we next acquired Lowell Shoe, at the end of
1992. Lowell was a long-established manufacturer of women's and
nurses' shoes, but its business needed some fixing. Again,
results have surpassed our expectations. So we promptly jumped
at the chance last year to acquire Dexter Shoe of Dexter, Maine,
which manufactures popular-priced men's and women's shoes.
Dexter, I can assure you, needs no fixing: It is one of the
best-managed companies Charlie and I have seen in our business
lifetimes.
Harold Alfond, who started working in a shoe factory at 25
cents an hour when he was 20, founded Dexter in 1956 with $10,000
of capital. He was joined in 1958 by Peter Lunder, his nephew.
The two of them have since built a business that now produces over
7.5 million pairs of shoes annually, most of them made in Maine
and the balance in Puerto Rico. As you probably know, the
domestic shoe industry is generally thought to be unable to
compete with imports from low-wage countries. But someone forgot
to tell this to the ingenious managements of Dexter and H. H.
Brown and to their skilled labor forces, which together make the
U.S. plants of both companies highly competitive against all
comers.
Dexter's business includes 77 retail outlets, located
primarily in the Northeast. The company is also a major
manufacturer of golf shoes, producing about 15% of U.S. output.
Its bread and butter, though, is the manufacture of traditional
shoes for traditional retailers, a job at which it excels: Last
year both Nordstrom and J.C. Penney bestowed special awards upon
Dexter for its performance as a supplier during 1992.
Our 1993 results include Dexter only from our date of
merger, November 7th. In 1994, we expect Berkshire's shoe
operations to have more than $550 million in sales, and we would
not be surprised if the combined pre-tax earnings of these
businesses topped $85 million. Five years ago we had no thought
of getting into shoes. Now we have 7,200 employees in that
industry, and I sing "There's No Business Like Shoe Business" as
I drive to work. So much for strategic plans.
At Berkshire, we have no view of the future that dictates
what businesses or industries we will enter. Indeed, we think
it's usually poison for a corporate giant's shareholders if it
embarks upon new ventures pursuant to some grand vision. We
prefer instead to focus on the economic characteristics of
businesses that we wish to own and the personal characteristics
of managers with whom we wish to associate - and then to hope we
get lucky in finding the two in combination. At Dexter, we did.
* * * * * * * * * * * *
And now we pause for a short commercial: Though they owned
a business jewel, we believe that Harold and Peter (who were not
interested in cash) made a sound decision in exchanging their
Dexter stock for shares of Berkshire. What they did, in effect,
was trade a 100% interest in a single terrific business for a
smaller interest in a large group of terrific businesses. They
incurred no tax on this exchange and now own a security that can
be easily used for charitable or personal gifts, or that can be
converted to cash in amounts, and at times, of their own
choosing. Should members of their families desire to, they can
pursue varying financial paths without running into the
complications that often arise when assets are concentrated in a
private business.
For tax and other reasons, private companies also often find
it difficult to diversify outside their industries. Berkshire,
in contrast, can diversify with ease. So in shifting their
ownership to Berkshire, Dexter's shareholders solved a
reinvestment problem. Moreover, though Harold and Peter now have
non-controlling shares in Berkshire, rather than controlling
shares in Dexter, they know they will be treated as partners and
that we will follow owner-oriented practices. If they elect to
retain their Berkshire shares, their investment result from the
merger date forward will exactly parallel my own result. Since I
have a huge percentage of my net worth committed for life to
Berkshire shares - and since the company will issue me neither
restricted shares nor stock options - my gain-loss equation will
always match that of all other owners.
Additionally, Harold and Peter know that at Berkshire we can
keep our promises: There will be no changes of control or
culture at Berkshire for many decades to come. Finally, and of
paramount importance, Harold and Peter can be sure that they will
get to run their business - an activity they dearly love -
exactly as they did before the merger. At Berkshire, we do not
tell .400 hitters how to swing.
What made sense for Harold and Peter probably makes sense
for a few other owners of large private businesses. So, if you
have a business that might fit, let me hear from you. Our
acquisition criteria are set forth in the appendix on page 22.
Sources of Reported Earnings
The table below shows the major sources of Berkshire's
reported earnings. In this presentation, amortization of
Goodwill and other major purchase-price accounting adjustments
are not charged against 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. I've
explained in past reports why this form of presentation seems to
us to be more useful to investors and managers than one utilizing
GAAP, which requires purchase-price adjustments to be made on a
business-by-business basis. The total net earnings we show in
the table are, of course, identical to the GAAP total in our
audited financial statements.
(000s omitted)
------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
---------------------- ------------------
1993 1992 1993 1992
---------- ---------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............... $ 30,876 $(108,961) $ 20,156 $(71,141)
Net Investment Income ...... 375,946 355,067 321,321 305,763
H. H. Brown, Lowell,
and Dexter ............... 44,025* 27,883 28,829 17,340
Buffalo News ................. 50,962 47,863 29,696 28,163
Commercial & Consumer Finance 22,695 19,836 14,161 12,664
Fechheimer ................... 13,442 13,698 6,931 7,267
Kirby ........................ 39,147 35,653 25,056 22,795
Nebraska Furniture Mart ...... 21,540 17,110 10,398 8,072
Scott Fetzer Manufacturing Group 38,196 31,954 23,809 19,883
See's Candies ................ 41,150 42,357 24,367 25,501
World Book ................... 19,915 29,044 13,537 19,503
Purchase-Price Accounting &
Goodwill Charges ......... (17,033) (12,087) (13,996) (13,070)
Interest Expense** ........... (56,545) (98,643) (35,614) (62,899)
Shareholder-Designated
Contributions ............ (9,448) (7,634) (5,994) (4,913)
Other ........................ 28,428 67,540 15,094 32,798
---------- ---------- -------- --------
Operating Earnings ............. 643,296 460,680 477,751 347,726
Sales of Securities ............ 546,422 89,937 356,702 59,559
Tax Accruals Caused by
New Accounting Rules ........ --- --- (146,332) ---
---------- ---------- -------- --------
Total Earnings - All Entities .. $1,189,718 $ 550,617 $688,121 $407,285
* Includes Dexter's earnings only from the date it was acquired,
November 7, 1993.
**Excludes interest expense of Commercial and Consumer Finance
businesses. In 1992 includes $22.5 million of premiums paid on
the early redemption of debt.
A large amount of information about these businesses is given
on pages 38-49, where you will also find our segment earnings
reported on a GAAP basis. In addition, on pages 52-59, 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 company. Our intent is to supply you with the
financial information that we would wish you to give us if our
positions were reversed.
"Look-Through" Earnings
We've previously discussed look-through earnings, which we
believe more accurately portray the earnings of Berkshire than does
our GAAP result. As we calculate them, look-through earnings
consist of: (1) the operating earnings reported in the previous
section, plus; (2) 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. The "operating earnings" of which we speak here
exclude capital gains, special accounting items and major
restructuring charges.
Over time, our look-through earnings need to increase at about
15% annually if our intrinsic value is to grow at that rate. Last
year, I explained that we had to increase these earnings to about
$1.8 billion in the year 2000, were we to meet the 15% goal.
Because we issued additional shares in 1993, the amount needed has
risen to about $1.85 billion.
That is a tough goal, but one that we expect you to hold us
to. In the past, we've criticized the managerial practice of
shooting the arrow of performance and then painting the target,
centering it on whatever point the arrow happened to hit. We will
instead risk embarrassment by painting first and shooting later.
If we are to hit the bull's-eye, we will need markets that
allow the purchase of businesses and securities on sensible terms.
Right now, markets are difficult, but they can - and will - change
in unexpected ways and at unexpected times. In the meantime, we'll
try to resist the temptation to do something marginal simply
because we are long on cash. There's no use running if you're on
the wrong road.
The following table shows how we calculate look-through
earnings, though I warn you that the figures are necessarily very
rough. (The dividends paid to us by these investees have been
included in the operating earnings itemized on page 8, mostly
under "Insurance Group: Net Investment Income.")
Berkshire's Share
of Undistributed
Berkshire's Approximate Operating Earnings
Berkshire's Major Investees Ownership at Yearend (in millions)
--------------------------- ----------------------- --------------------
1993 1992 1993 1992
------ ------ ------ ------
Capital Cities/ABC, Inc. ..... 13.0% 18.2% $ 83(2) $ 70
The Coca-Cola Company ........ 7.2% 7.1% 94 82
Federal Home Loan Mortgage Corp. 6.8%(1) 8.2%(1) 41(2) 29(2)
GEICO Corp. .................. 48.4% 48.1% 76(3) 34(3)
General Dynamics Corp. ....... 13.9% 14.1% 25 11(2)
The Gillette Company ......... 10.9% 10.9% 44 38
Guinness PLC ................. 1.9% 2.0% 8 7
The Washington Post Company .. 14.8% 14.6% 15 11
Wells Fargo & Company ........ 12.2% 11.5% 53(2) 16(2)
Berkshire's share of undistributed
earnings of major investees $439 $298
Hypothetical tax on these undistributed
investee earnings(4) (61) (42)
Reported operating earnings of Berkshire 478 348
Total look-through earnings of Berkshire $856 $604
(1) Does not include shares allocable to the minority interest
at Wesco
(2) Calculated on average ownership for the year
(3) Excludes realized capital gains, which have been both
recurring and significant
(4) The tax rate used is 14%, which is the rate Berkshire pays
on the dividends it receives
We have told you that we expect the undistributed,
hypothetically-taxed earnings of our investees to produce at least
equivalent gains in Berkshire's intrinsic value. To date, we have
far exceeded that expectation. For example, in 1986 we bought
three million shares of Capital Cities/ABC for $172.50 per share
and late last year sold one-third of that holding for $630 per
share. After paying 35% capital gains taxes, we realized a $297
million profit from the sale. In contrast, during the eight years
we held these shares, the retained earnings of Cap Cities
attributable to them - hypothetically taxed at a lower 14% in
accordance with our look-through method - were only $152 million.
In other words, we paid a much larger tax bill than our look-
through presentations to you have assumed and nonetheless realized
a gain that far exceeded the undistributed earnings allocable to
these shares.
We expect such pleasant outcomes to recur often in the future
and therefore believe our look-through earnings to be a
conservative representation of Berkshire's true economic earnings.
Taxes
As our Cap Cities sale emphasizes, Berkshire is a substantial
payer of federal income taxes. In aggregate, we will pay 1993
federal income taxes of $390 million, about $200 million of that
attributable to operating earnings and $190 million to realized
capital gains. Furthermore, our share of the 1993 federal and
foreign income taxes paid by our investees is well over $400
million, a figure you don't see on our financial statements but
that is nonetheless real. Directly and indirectly, Berkshire's
1993 federal income tax payments will be about 1/2 of 1% of the total
paid last year by all American corporations.
Speaking for our own shares, Charlie and I have absolutely no
complaint about these taxes. We know we work in a market-based
economy that rewards our efforts far more bountifully than it does
the efforts of others whose output is of equal or greater benefit
to society. Taxation should, and does, partially redress this
inequity. But we still remain extraordinarily well-treated.
Berkshire and its shareholders, in combination, would pay a
much smaller tax if Berkshire operated as a partnership or "S"
corporation, two structures often used for business activities.
For a variety of reasons, that's not feasible for Berkshire to do.
However, the penalty our corporate form imposes is mitigated -
though far from eliminated - by our strategy of investing for the
long term. Charlie and I would follow a buy-and-hold policy even
if we ran a tax-exempt institution. We think it the soundest way
to invest, and it also goes down the grain of our personalities. A
third reason to favor this policy, however, is the fact that taxes
are due only when gains are realized.
Through my favorite comic strip, Li'l Abner, I got a chance
during my youth to see the benefits of delayed taxes, though I
missed the lesson at the time. Making his readers feel superior,
Li'l Abner bungled happily, but moronically, through life in
Dogpatch. At one point he became infatuated with a New York
temptress, Appassionatta Van Climax, but despaired of marrying her
because he had only a single silver dollar and she was interested
solely in millionaires. Dejected, Abner took his problem to Old
Man Mose, the font of all knowledge in Dogpatch. Said the sage:
Double your money 20 times and Appassionatta will be yours (1, 2,
4, 8 . . . . 1,048,576).
My last memory of the strip is Abner entering a roadhouse,
dropping his dollar into a slot machine, and hitting a jackpot that
spilled money all over the floor. Meticulously following Mose's
advice, Abner picked up two dollars and went off to find his next
double. Whereupon I dumped Abner and began reading Ben Graham.
Mose clearly was overrated as a guru: Besides failing to
anticipate Abner's slavish obedience to instructions, he also
forgot about taxes. Had Abner been subject, say, to the 35%
federal tax rate that Berkshire pays, and had he managed one double
annually, he would after 20 years only have accumulated $22,370.
Indeed, had he kept on both getting his annual doubles and paying a
35% tax on each, he would have needed 7 1/2 years more to reach the
$1 million required to win Appassionatta.
But what if Abner had instead put his dollar in a single
investment and held it until it doubled the same 27 1/2 times? In
that case, he would have realized about $200 million pre-tax or,
after paying a $70 million tax in the final year, about $130
million after-tax. For that, Appassionatta would have crawled to
Dogpatch. Of course, with 27 1/2 years having passed, how
Appassionatta would have looked to a fellow sitting on $130 million
is another question.
What this little tale tells us is that tax-paying investors
will realize a far, far greater sum from a single investment that
compounds internally at a given rate than from a succession of
investments compounding at the same rate. But I suspect many
Berkshire shareholders figured that out long ago.
Insurance Operations
At this point in the report we've customarily provided you
with a table showing the annual "combined ratio" of the insurance
industry for the preceding decade. This ratio compares total
insurance costs (losses incurred plus expenses) to revenue from
premiums. For many years, the ratio has been above 100, a level
indicating an underwriting loss. That is, the industry has taken
in less money each year from its policyholders than it has had to
pay for operating expenses and for loss events that occurred during
the year.
Offsetting this grim equation is a happier fact: Insurers get
to hold on to their policyholders' money for a time before paying
it out. This happens because most policies require that premiums
be prepaid and, more importantly, because it often takes time to
resolve loss claims. Indeed, in the case of certain lines of
insurance, such as product liability or professional malpractice,
many years may elapse between the loss event and payment.
To oversimplify the matter somewhat, the total of the funds
prepaid by policyholders and the funds earmarked for incurred-but-
not-yet-paid claims is called "the float." In the past, the
industry was able to suffer a combined ratio of 107 to 111 and
still break even from its insurance writings because of the
earnings derived from investing this float.
As interest rates have fallen, however, the value of float has
substantially declined. Therefore, the data that we have provided
in the past are no longer useful for year-to-year comparisons of
industry profitability. A company writing at the same combined
ratio now as in the 1980's today has a far less attractive business
than it did then.
Only by making an analysis that incorporates both underwriting
results and the current risk-free earnings obtainable from float
can one evaluate the true economics of the business that a
property-casualty insurer writes. Of course, the actual investment
results that an insurer achieves from the use of both float and
stockholders' funds is also of major importance and should be
carefully examined when an investor is assessing managerial
performance. But that should be a separate analysis from the one
we are discussing here. The value of float funds - in effect,
their transfer price as they move from the insurance operation to
the investment operation - should be determined simply by the risk-
free, long-term rate of interest.
On the next page we show the numbers that count in an
evaluation of Berkshire's insurance business. We calculate our
float - which we generate in exceptional amounts relative to our
premium volume - by adding loss reserves, loss adjustment reserves
and unearned premium reserves and then subtracting agent's
balances, prepaid acquisition costs and deferred charges applicable
to assumed reinsurance. Our cost of float is determined by our
underwriting loss or profit. In those years when we have had an
underwriting profit, which includes 1993, our cost of float has
been negative, and we have determined our insurance earnings by
adding underwriting profit to float income.
(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- --------------- -------------
(In $ Millions) (Ratio of 1 to 2)
1967 profit $ 17.3 less than zero 5.50%
1968 profit 19.9 less than zero 5.90%
1969 profit 23.4 less than zero 6.79%
1970 $ 0.37 32.4 1.14% 6.25%
1971 profit 52.5 less than zero 5.81%
1972 profit 69.5 less than zero 5.82%
1973 profit 73.3 less than zero 7.27%
1974 7.36 79.1 9.30% 8.13%
1975 11.35 87.6 12.96% 8.03%
1976 profit 102.6 less than zero 7.30%
1977 profit 139.0 less than zero 7.97%
1978 profit 190.4 less than zero 8.93%
1979 profit 227.3 less than zero 10.08%
1980 profit 237.0 less than zero 11.94%
1981 profit 228.4 less than zero 13.61%
1982 21.56 220.6 9.77% 10.64%
1983 33.87 231.3 14.64% 11.84%
1984 48.06 253.2 18.98% 11.58%
1985 44.23 390.2 11.34% 9.34%
1986 55.84 797.5 7.00% 7.60%
1987 55.43 1,266.7 4.38% 8.95%
1988 11.08 1,497.7 0.74% 9.00%
1989 24.40 1,541.3 1.58% 7.97%
1990 26.65 1,637.3 1.63% 8.24%
1991 119.59 1,895.0 6.31% 7.40%
1992 108.96 2,290.4 4.76% 7.39%
1993 profit 2,624.7 less than zero 6.35%
As you can see, in our insurance operation last year we had
the use of $2.6 billion at no cost; in fact we were paid $31
million, our underwriting profit, to hold these funds. This sounds
good - is good - but is far from as good as it sounds.
We temper our enthusiasm because we write a large volume of
"super-cat" policies (which other insurance and reinsurance
companies buy to recover part of the losses they suffer from mega-
catastrophes) and because last year we had no losses of consequence
from this activity. As that suggests, the truly catastrophic
Midwestern floods of 1993 did not trigger super-cat losses, the
reason being that very few flood policies are purchased from
private insurers.
It would be fallacious, however, to conclude from this single-
year result that the super-cat business is a wonderful one, or even
a satisfactory one. A simple example will illustrate the fallacy:
Suppose there is an event that occurs 25 times in every century.
If you annually give 5-for-1 odds against its occurrence that year,
you will have many more winning years than losers. Indeed, you may
go a straight six, seven or more years without loss. You also will
eventually go broke.
At Berkshire, we naturally believe we are obtaining adequate
premiums and giving more like 3 1/2-for-1 odds. But there is no way
for us - or anyone else - to calculate the true odds on super-cat
coverages. In fact, it will take decades for us to find out
whether our underwriting judgment has been sound.
What we do know is that when a loss comes, it's likely to be a
lulu. There may well be years when Berkshire will suffer losses
from the super-cat business equal to three or four times what we
earned from it in 1993. When Hurricane Andrew blew in 1992, we
paid out about $125 million. Because we've since expanded our
super-cat business, a similar storm today could cost us $600
million.
So far, we have been lucky in 1994. As I write this letter,
we are estimating that our losses from the Los Angeles earthquake
will be nominal. But if the quake had been a 7.5 instead of a 6.8,
it would have been a different story.
Berkshire is ideally positioned to write super-cat policies.
In Ajit Jain, we have by far the best manager in this business.
Additionally, companies writing these policies need enormous
capital, and our net worth is ten to twenty times larger than that
of our main competitors. In most lines of insurance, huge
resources aren't that important: An insurer can diversify the
risks it writes and, if necessary, can lay off risks to reduce
concentration in its portfolio. That isn't possible in the super-
cat business. So these competitors are forced into offering far
smaller limits than those we can provide. Were they bolder, they
would run the risk that a mega-catastrophe - or a confluence of
smaller catastrophes - would wipe them out.
One indication of our premier strength and reputation is that
each of the four largest reinsurance companies in the world buys
very significant reinsurance coverage from Berkshire. Better than
anyone else, these giants understand that the test of a reinsurer
is its ability and willingness to pay losses under trying
circumstances, not its readiness to accept premiums when things
look rosy.
One caution: There has recently been a substantial increase
in reinsurance capacity. Close to $5 billion of equity capital has
been raised by reinsurers, almost all of them newly-formed
entities. Naturally these new entrants are hungry to write
business so that they can justify the projections they utilized in
attracting capital. This new competition won't affect our 1994
operations; we're filled up there, primarily with business written
in 1993. But we are now seeing signs of price deterioration. If
this trend continues, we will resign ourselves to much-reduced
volume, keeping ourselves available, though, for the large,
sophisticated buyer who requires a super-cat insurer with large
capacity and a sure ability to pay losses.
In other areas of our insurance business, our homestate
operation, led by Rod Eldred; our workers' compensation business,
headed by Brad Kinstler; our credit-card operation, managed by the
Kizer family; and National Indemnity's traditional auto and general
liability business, led by Don Wurster, all achieved excellent
results. In combination, these four units produced a significant
underwriting profit and substantial float.
All in all, we have a first-class insurance business. Though
its results will be highly volatile, this operation possesses an
intrinsic value that exceeds its book value by a large amount -
larger, in fact, than is the case at any other Berkshire business.
Common Stock Investments
Below we list our common stockholdings having a value of over
$250 million. A small portion of these investments belongs to
subsidiaries of which Berkshire owns less than 100%.
12/31/93
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
2,000,000 Capital Cities/ABC, Inc. ............. $ 345,000 $1,239,000
93,400,000 The Coca-Cola Company. ............... 1,023,920 4,167,975
13,654,600 Federal Home Loan Mortgage Corp.
("Freddie Mac") ................... 307,505 681,023
34,250,000 GEICO Corp. .......................... 45,713 1,759,594
4,350,000 General Dynamics Corp. ............... 94,938 401,287
24,000,000 The Gillette Company ................. 600,000 1,431,000
38,335,000 Guinness PLC ......................... 333,019 270,822
1,727,765 The Washington Post Company. ......... 9,731 440,148
6,791,218 Wells Fargo & Company ................ 423,680 878,614
Considering the similarity of this year's list and the last,
you may decide your management is hopelessly comatose. But we
continue to think that it is usually foolish to part with an
interest in a business that is both understandable and durably
wonderful. Business interests of that kind are simply too hard to
replace.
Interestingly, corporate managers have no trouble
understanding that point when they are focusing on a business they
operate: A parent company that owns a subsidiary with superb long-
term economics is not likely to sell that entity regardless of
price. "Why," the CEO would ask, "should I part with my crown
jewel?" Yet that same CEO, when it comes to running his personal
investment portfolio, will offhandedly - and even impetuously -
move from business to business when presented with no more than
superficial arguments by his broker for doing so. The worst of
these is perhaps, "You can't go broke taking a profit." Can you
imagine a CEO using this line to urge his board to sell a star
subsidiary? In our view, what makes sense in business also makes
sense in stocks: An investor should ordinarily hold a small piece
of an outstanding business with the same tenacity that an owner
would exhibit if he owned all of that business.
Earlier I mentioned the financial results that could have been
achieved by investing $40 in The Coca-Cola Co. in 1919. In 1938,
more than 50 years after the introduction of Coke, and long after
the drink was firmly established as an American icon, Fortune did
an excellent story on the company. In the second paragraph the
writer reported: "Several times every year a weighty and serious
investor looks long and with profound respect at Coca-Cola's
record, but comes regretfully to the conclusion that he is looking
too late. The specters of saturation and competition rise before
him."
Yes, competition there was in 1938 and in 1993 as well. But
it's worth noting that in 1938 The Coca-Cola Co. sold 207 million
cases of soft drinks (if its gallonage then is converted into the
192-ounce cases used for measurement today) and in 1993 it sold
about 10.7 billion cases, a 50-fold increase in physical volume
from a company that in 1938 was already dominant in its very major
industry. Nor was the party over in 1938 for an investor: Though
the $40 invested in 1919 in one share had (with dividends
reinvested) turned into $3,277 by the end of 1938, a fresh $40 then
invested in Coca-Cola stock would have grown to $25,000 by yearend
1993.
I can't resist one more quote from that 1938 Fortune story:
"It would be hard to name any company comparable in size to Coca-
Cola and selling, as Coca-Cola does, an unchanged product that can
point to a ten-year record anything like Coca-Cola's." In the 55
years that have since passed, Coke's product line has broadened
somewhat, but it's remarkable how well that description still fits.
Charlie and I decided long ago that in an investment lifetime
it's just too hard to make hundreds of smart decisions. That
judgment became ever more compelling as Berkshire's capital
mushroomed and the universe of investments that could significantly
affect our results shrank dramatically. Therefore, we adopted a
strategy that required our being smart - and not too smart at that
- only a very few times. Indeed, we'll now settle for one good
idea a year. (Charlie says it's my turn.)
The strategy we've adopted precludes our following standard
diversification dogma. Many pundits would therefore say the
strategy must be riskier than that employed by more conventional
investors. We disagree. We believe that a policy of portfolio
concentration may well decrease risk if it raises, as it should,
both the intensity with which an investor thinks about a business
and the comfort-level he must feel with its economic characteristics
before buying into it. In stating this opinion, we define risk,
using dictionary terms, as "the possibility of loss or injury."
Academics, however, like to define investment "risk"
differently, averring that it is the relative volatility of a stock
or portfolio of stocks - that is, their volatility as compared to
that of a large universe of stocks. Employing data bases and
statistical skills, these academics compute with precision the
"beta" of a stock - its relative volatility in the past - and then
build arcane investment and capital-allocation theories around this
calculation. In their hunger for a single statistic to measure
risk, however, they forget a fundamental principle: It is better
to be approximately right than precisely wrong.
For owners of a business - and that's the way we think of
shareholders - the academics' definition of risk is far off the
mark, so much so that it produces absurdities. For example, under
beta-based theory, a stock that has dropped very sharply compared
to the market - as had Washington Post when we bought it in 1973 -
becomes "riskier" at the lower price than it was at the higher
price. Would that description have then made any sense to someone
who was offered the entire company at a vastly-reduced price?
In fact, the true investor welcomes volatility. Ben Graham
explained why in Chapter 8 of The Intelligent Investor. There he
introduced "Mr. Market," an obliging fellow who shows up every day
to either buy from you or sell to you, whichever you wish. The
more manic-depressive this chap is, the greater the opportunities
available to the investor. That's true because a wildly
fluctuating market means that irrationally low prices will
periodically be attached to solid businesses. It is impossible to
see how the availability of such prices can be thought of as
increasing the hazards for an investor who is totally free to
either ignore the market or exploit its folly.
In assessing risk, a beta purist will disdain examining what a
company produces, what its competitors are doing, or how much
borrowed money the business employs. He may even prefer not to
know the company's name. What he treasures is the price history of
its stock. In contrast, we'll happily forgo knowing the price
history and instead will seek whatever information will further our
understanding of the company's business. After we buy a stock,
consequently, we would not be disturbed if markets closed for a
year or two. We don't need a daily quote on our 100% position in
See's or H. H. Brown to validate our well-being. Why, then, should
we need a quote on our 7% interest in Coke?
In our opinion, the real risk that an investor must assess is
whether his aggregate after-tax receipts from an investment
(including those he receives on sale) will, over his prospective
holding period, give him at least as much purchasing power as he
had to begin with, plus a modest rate of interest on that initial
stake. Though this risk cannot be calculated with engineering
precision, it can in some cases be judged with a degree of accuracy
that is useful. The primary factors bearing upon this evaluation
are:
1) The certainty with which the long-term economic
characteristics of the business can be evaluated;
2) The certainty with which management can be evaluated,
both as to its ability to realize the full potential of
the business and to wisely employ its cash flows;
3) The certainty with which management can be counted on
to channel the rewards from the business to the
shareholders rather than to itself;
4) The purchase price of the business;
5) The levels of taxation and inflation that will be
experienced and that will determine the degree by which
an investor's purchasing-power return is reduced from his
gross return.
These factors will probably strike many analysts as unbearably
fuzzy, since they cannot be extracted from a data base of any kind.
But the difficulty of precisely quantifying these matters does not
negate their importance nor is it insuperable. Just as Justice
Stewart found it impossible to formulate a test for obscenity but
nevertheless asserted, "I know it when I see it," so also can
investors - in an inexact but useful way - "see" the risks inherent
in certain investments without reference to complex equations or
price histories.
Is it really so difficult to conclude that Coca-Cola and
Gillette possess far less business risk over the long term than,
say, any computer company or retailer? Worldwide, Coke sells about
44% of all soft drinks, and Gillette has more than a 60% share (in
value) of the blade market. Leaving aside chewing gum, in which
Wrigley is dominant, I know of no other significant businesses in
which the leading company has long enjoyed such global power.
Moreover, both Coke and Gillette have actually increased their
worldwide shares of market in recent years. The might of their
brand names, the attributes of their products, and the strength of
their distribution systems give them an enormous competitive
advantage, setting up a protective moat around their economic
castles. The average company, in contrast, does battle daily
without any such means of protection. As Peter Lynch says, stocks
of companies selling commodity-like products should come with a
warning label: "Competition may prove hazardous to human wealth."
The competitive strengths of a Coke or Gillette are obvious to
even the casual observer of business. Yet the beta of their stocks
is similar to that of a great many run-of-the-mill companies who
possess little or no competitive advantage. Should we conclude
from this similarity that the competitive strength of Coke and
Gillette gains them nothing when business risk is being measured?
Or should we conclude that the risk in owning a piece of a company
- its stock - is somehow divorced from the long-term risk inherent
in its business operations? We believe neither conclusion makes
sense and that equating beta with investment risk also makes no
sense.
The theoretician bred on beta has no mechanism for
differentiating the risk inherent in, say, a single-product toy
company selling pet rocks or hula hoops from that of another toy
company whose sole product is Monopoly or Barbie. But it's quite
possible for ordinary investors to make such distinctions if they
have a reasonable understanding of consumer behavior and the
factors that create long-term competitive strength or weakness.
Obviously, every investor will make mistakes. But by confining
himself to a relatively few, easy-to-understand cases, a reasonably
intelligent, informed and diligent person can judge investment
risks with a useful degree of accuracy.
In many industries, of course, Charlie and I can't determine
whether we are dealing with a "pet rock" or a "Barbie." We
couldn't solve this problem, moreover, even if we were to spend
years intensely studying those industries. Sometimes our own
intellectual shortcomings would stand in the way of understanding,
and in other cases the nature of the industry would be the
roadblock. For example, a business that must deal with fast-moving
technology is not going to lend itself to reliable evaluations of
its long-term economics. Did we foresee thirty years ago what
would transpire in the television-manufacturing or computer
industries? Of course not. (Nor did most of the investors and
corporate managers who enthusiastically entered those industries.)
Why, then, should Charlie and I now think we can predict the
future of other rapidly-evolving businesses? We'll stick instead
with the easy cases. Why search for a needle buried in a haystack
when one is sitting in plain sight?
Of course, some investment strategies - for instance, our
efforts in arbitrage over the years - require wide diversification.
If significant risk exists in a single transaction, overall risk
should be reduced by making that purchase one of many mutually-
independent commitments. Thus, you may consciously purchase a
risky investment - one that indeed has a significant possibility of
causing loss or injury - if you believe that your gain, weighted
for probabilities, considerably exceeds your loss, comparably
weighted, and if you can commit to a number of similar, but
unrelated opportunities. Most venture capitalists employ this
strategy. Should you choose to pursue this course, you should
adopt the outlook of the casino that owns a roulette wheel, which
will want to see lots of action because it is favored by
probabilities, but will refuse to accept a single, huge bet.
Another situation requiring wide diversification occurs when
an investor who does not understand the economics of specific
businesses nevertheless believes it in his interest to be a long-
term owner of American industry. That investor should both own a
large number of equities and space out his purchases. By
periodically investing in an index fund, for example, the know-
nothing investor can actually out-perform most investment
professionals. Paradoxically, when "dumb" money acknowledges its
limitations, it ceases to be dumb.
On the other hand, if you are a know-something investor, able
to understand business economics and to find five to ten sensibly-
priced companies that possess important long-term competitive
advantages, conventional diversification makes no sense for you.
It is apt simply to hurt your results and increase your risk. I
cannot understand why an investor of that sort elects to put money
into a business that is his 20th favorite rather than simply adding
that money to his top choices - the businesses he understands best
and that present the least risk, along with the greatest profit
potential. In the words of the prophet Mae West: "Too much of a
good thing can be wonderful."
Corporate Governance
At our annual meetings, someone usually asks "What happens to
this place if you get hit by a truck?" I'm glad they are still
asking the question in this form. It won't be too long before the
query becomes: "What happens to this place if you don't get hit by
a truck?"
Such questions, in any event, raise a reason for me to discuss
corporate governance, a hot topic during the past year. In
general, I believe that directors have stiffened their spines
recently and that shareholders are now being treated somewhat more
like true owners than was the case not long ago. Commentators on
corporate governance, however, seldom make any distinction among
three fundamentally different manager/owner situations that exist
in publicly-held companies. Though the legal responsibility of
directors is identical throughout, their ability to effect change
differs in each of the cases. Attention usually falls on the first
case, because it prevails on the corporate scene. Since Berkshire
falls into the second category, however, and will someday fall into
the third, we will discuss all three variations.
The first, and by far most common, board situation is one in
which a corporation has no controlling shareholder. In that case,
I believe directors should behave as if there is a single absentee
owner, whose long-term interest they should try to further in all
proper ways. Unfortunately, "long-term" gives directors a lot of
wiggle room. If they lack either integrity or the ability to think
independently, directors can do great violence to shareholders
while still claiming to be acting in their long-term interest. But
assume the board is functioning well and must deal with a
management that is mediocre or worse. Directors then have the
responsibility for changing that management, just as an intelligent
owner would do if he were present. And if able but greedy managers
over-reach and try to dip too deeply into the shareholders'
pockets, directors must slap their hands.
In this plain-vanilla case, a director who sees something he
doesn't like should attempt to persuade the other directors of his
views. If he is successful, the board will have the muscle to make
the appropriate change. Suppose, though, that the unhappy director
can't get other directors to agree with him. He should then feel
free to make his views known to the absentee owners. Directors
seldom do that, of course. The temperament of many directors would
in fact be incompatible with critical behavior of that sort. But I
see nothing improper in such actions, assuming the issues are
serious. Naturally, the complaining director can expect a vigorous
rebuttal from the unpersuaded directors, a prospect that should
discourage the dissenter from pursuing trivial or non-rational
causes.
For the boards just discussed, I believe the directors ought
to be relatively few in number - say, ten or less - and ought to
come mostly from the outside. The outside board members should
establish standards for the CEO's performance and should also
periodically meet, without his being present, to evaluate his
performance against those standards.
The requisites for board membership should be business savvy,
interest in the job, and owner-orientation. Too often, directors
are selected simply because they are prominent or add diversity to
the board. That practice is a mistake. Furthermore, mistakes in
selecting directors are particularly serious because appointments
are so hard to undo: The pleasant but vacuous director need never
worry about job security.
The second case is that existing at Berkshire, where the
controlling owner is also the manager. At some companies, this
arrangement is facilitated by the existence of two classes of stock
endowed with disproportionate voting power. In these situations,
it's obvious that the board does not act as an agent between owners
and management and that the directors cannot effect change except
through persuasion. Therefore, if the owner/manager is mediocre or
worse - or is over-reaching - there is little a director can do
about it except object. If the directors having no connections to
the owner/manager make a unified argument, it may well have some
effect. More likely it will not.
If change does not come, and the matter is sufficiently
serious, the outside directors should resign. Their resignation
will signal their doubts about management, and it will emphasize
that no outsider is in a position to correct the owner/manager's
shortcomings.
The third governance case occurs when there is a controlling
owner who is not involved in management. This case, examples of
which are Hershey Foods and Dow Jones, puts the outside directors
in a potentially useful position. If they become unhappy with
either the competence or integrity of the manager, they can go
directly to the owner (who may also be on the board) and report
their dissatisfaction. This situation is ideal for an outside
director, since he need make his case only to a single, presumably
interested owner, who can forthwith effect change if the argument
is persuasive. Even so, the dissatisfied director has only that
single course of action. If he remains unsatisfied about a
critical matter, he has no choice but to resign.
Logically, the third case should be the most effective in
insuring first-class management. In the second case the owner is
not going to fire himself, and in the first case, directors often
find it very difficult to deal with mediocrity or mild over-
reaching. Unless the unhappy directors can win over a majority of
the board - an awkward social and logistical task, particularly if
management's behavior is merely odious, not egregious - their hands
are effectively tied. In practice, directors trapped in situations
of this kind usually convince themselves that by staying around
they can do at least some good. Meanwhile, management proceeds
unfettered.
In the third case, the owner is neither judging himself nor
burdened with the problem of garnering a majority. He can also
insure that outside directors are selected who will bring useful
qualities to the board. These directors, in turn, will know that
the good advice they give will reach the right ears, rather than
being stifled by a recalcitrant management. If the controlling
owner is intelligent and self-confident, he will make decisions in
respect to management that are meritocratic and pro-shareholder.
Moreover - and this is critically important - he can readily
correct any mistake he makes.
At Berkshire we operate in the second mode now and will for as
long as I remain functional. My health, let me add, is excellent.
For better or worse, you are likely to have me as an owner/manager
for some time.
After my death, all of my stock will go to my wife, Susie,
should she survive me, or to a foundation if she dies before I do.
In neither case will taxes and bequests require the sale of
consequential amounts of stock.
When my stock is transferred to either my wife or the
foundation, Berkshire will enter the third governance mode, going
forward with a vitally interested, but non-management, owner and
with a management that must perform for that owner. In preparation
for that time, Susie was elected to the board a few years ago, and
in 1993 our son, Howard, joined the board. These family members
will not be managers of the company in the future, but they will
represent the controlling interest should anything happen to me.
Most of our other directors are also significant owners of
Berkshire stock, and each has a strong owner-orientation. All in
all, we're prepared for "the truck."
Shareholder-Designated Contributions
About 97% of all eligible shares participated in Berkshire's
1993 shareholder-designated contributions program. Contributions
made through the program were $9.4 million and 3,110 charities were
recipients.
Berkshire's practice in respect to discretionary philanthropy
- as contrasted to its policies regarding contributions that are
clearly related to the company's business activities - differs
significantly from that of other publicly-held corporations.
There, most corporate contributions are made pursuant to the wishes
of the CEO (who often will be responding to social pressures),
employees (through matching gifts), or directors (through matching
gifts or requests they make of the CEO).
At Berkshire, we believe that the company's money is the
owners' money, just as it would be in a closely-held corporation,
partnership, or sole proprietorship. Therefore, if funds are to be
given to causes unrelated to Berkshire's business activities, it is
the charities favored by our owners that should receive them.
We've yet to find a CEO who believes he should personally fund the
charities favored by his shareholders. Why, then, should they foot
the bill for his picks?
Let me add that our program is easy to administer. Last fall,
for two months, we borrowed one person from National Indemnity to
help us implement the instructions that came from our 7,500
registered shareholders. I'd guess that the average corporate
program in which employee gifts are matched incurs far greater
administrative costs. Indeed, our entire corporate overhead is
less than half the size of our charitable contributions. (Charlie,
however, insists that I tell you that $1.4 million of our $4.9 million overhead is
attributable to our corporate jet, The Indefensible.)
Below is a list showing the largest categories to which our
shareholders have steered their contributions.
(a) 347 churches and synagogues received 569 gifts
(b) 283 colleges and universities received 670 gifts
(c) 244 K-12 schools (about two-thirds secular, one-
third religious) received 525 gifts
(d) 288 institutions dedicated to art, culture or the
humanities received 447 gifts
(e) 180 religious social-service organizations (split
about equally between Christian and Jewish) received
411 gifts
(f) 445 secular social-service organizations (about 40%
youth-related) received 759 gifts
(g) 153 hospitals received 261 gifts
(h) 186 health-related organizations (American Heart
Association, American Cancer Society, etc.) received
320 gifts
Three things about this list seem particularly interesting to
me. First, to some degree it indicates what people choose to give
money to when they are acting of their own accord, free of pressure
from solicitors or emotional appeals from charities. Second, the
contributions programs of publicly-held companies almost never
allow gifts to churches and synagogues, yet clearly these
institutions are what many shareholders would like to support.
Third, the gifts made by our shareholders display conflicting
philosophies: 130 gifts were directed to organizations that
believe in making abortions readily available for women and 30
gifts were directed to organizations (other than churches) that
discourage or are opposed to abortion.
Last year I told you that I was thinking of raising the amount
that Berkshire shareholders can give under our designated-
contributions program and asked for your comments. We received a
few well-written letters opposing the entire idea, on the grounds
that it was our job to run the business and not our job to force
shareholders into making charitable gifts. Most of the
shareholders responding, however, noted the tax efficiency of the
plan and urged us to increase the designated amount. Several
shareholders who have given stock to their children or
grandchildren told me that they consider the program a particularly
good way to get youngsters thinking at an early age about the
subject of giving. These people, in other words, perceive the
program to be an educational, as well as philanthropic, tool. The
bottom line is that we did raise the amount in 1993, from $8 per
share to $10.
In addition to the shareholder-designated contributions that
Berkshire distributes, our operating businesses make contributions,
including merchandise, averaging about $2.5 million annually.
These contributions support local charities, such as The United
Way, and produce roughly commensurate benefits for our businesses.
We suggest that new shareholders read the description of our
shareholder-designated contributions program that appears on pages
50-51. To participate in future programs, you must make sure your
shares are registered in the name of the actual owner, not in the
nominee name of a broker, bank or depository. Shares not so
registered on August 31, 1994 will be ineligible for the 1994
program.
A Few Personal Items
Mrs. B - Rose Blumkin - had her 100th birthday on December 3,
1993. (The candles cost more than the cake.) That was a day on
which the store was scheduled to be open in the evening. Mrs. B,
who works seven days a week, for however many hours the store
operates, found the proper decision quite obvious: She simply
postponed her party until an evening when the store was closed.
Mrs. B's story is well-known but worth telling again. She
came to the United States 77 years ago, unable to speak English and
devoid of formal schooling. In 1937, she founded the Nebraska
Furniture Mart with $500. Last year the store had sales of $200
million, a larger amount by far than that recorded by any other
home furnishings store in the United States. Our part in all of
this began ten years ago when Mrs. B sold control of the business
to Berkshire Hathaway, a deal we completed without obtaining
audited financial statements, checking real estate records, or
getting any warranties. In short, her word was good enough for us.
Naturally, I was delighted to attend Mrs. B's birthday party.
After all, she's promised to attend my 100th.
* * * * * * * * * * * *
Katharine Graham retired last year as the chairman of The
Washington Post Company, having relinquished the CEO title three
years ago. In 1973, we purchased our stock in her company for
about $10 million. Our holding now garners $7 million a year in
dividends and is worth over $400 million. At the time of our
purchase, we knew that the economic prospects of the company were
good. But equally important, Charlie and I concluded that Kay
would prove to be an outstanding manager and would treat all
shareholders honorably. That latter consideration was particularly
important because The Washington Post Company has two classes of
stock, a structure that we've seen some managers abuse.
All of our judgments about this investment have been validated
by events. Kay's skills as a manager were underscored this past
year when she was elected by Fortune's Board of Editors to the
Business Hall of Fame. On behalf of our shareholders, Charlie and
I had long ago put her in Berkshire's Hall of Fame.
* * * * * * * * * * * *
Another of last year's retirees was Don Keough of Coca-Cola,
although, as he puts it, his retirement lasted "about 14 hours."
Don is one of the most extraordinary human beings I've ever known -
a man of enormous business talent, but, even more important, a man
who brings out the absolute best in everyone lucky enough to
associate with him. Coca-Cola wants its product to be present at
the happy times of a person's life. Don Keough, as an individual,
invariably increases the happiness of those around him. It's
impossible to think about Don without feeling good.
I will edge up to how I met Don by slipping in a plug for my
neighborhood in Omaha: Though Charlie has lived in California for
45 years, his home as a boy was about 200 feet away from the house
where I now live; my wife, Susie, grew up 1 1/2 blocks away; and we
have about 125 Berkshire shareholders in the zip code. As for Don,
in 1958 he bought the house directly across the street from mine.
He was then a coffee salesman with a big family and a small income.
The impressions I formed in those days about Don were a factor
in my decision to have Berkshire make a record $1 billion
investment in Coca-Cola in 1988-89. Roberto Goizueta had become
CEO of Coke in 1981, with Don alongside as his partner. The two of
them took hold of a company that had stagnated during the previous
decade and moved it from $4.4 billion of market value to $58
billion in less than 13 years. What a difference a pair of
managers like this makes, even when their product has been around
for 100 years.
* * * * * * * * * * * *
Frank Rooney did double duty last year. In addition to
leading H. H. Brown to record profits - 35% above the 1992 high -
he also was key to our merger with Dexter.
Frank has known Harold Alfond and Peter Lunder for decades,
and shortly after our purchase of H. H. Brown, told me what a
wonderful operation they managed. He encouraged us to get together
and in due course we made a deal. Frank told Harold and Peter that
Berkshire would provide an ideal corporate "home" for Dexter, and
that assurance undoubtedly contributed to their decision to join
with us.
I've told you in the past of Frank's extraordinary record in
building Melville Corp. during his 23 year tenure as CEO. Now, at
72, he's setting an even faster pace at Berkshire. Frank has a
low-key, relaxed style, but don't let that fool you. When he
swings, the ball disappears far over the fence.
The Annual Meeting
This year the Annual Meeting will be held at the Orpheum
Theater in downtown Omaha at 9:30 a.m. on Monday, April 25, 1994.
A record 2,200 people turned up for the meeting last year, but the
theater can handle many more. We will have a display in the lobby
featuring many of our consumer products - candy, spray guns, shoes,
cutlery, encyclopedias, and the like. Among my favorites slated to
be there is a See's candy assortment that commemorates Mrs. B's
100th birthday and that features her picture, rather than Mrs.
See's, on the package.
We recommend that you promptly get hotel reservations at one
of these hotels: (1) The Radisson-Redick Tower, a small (88 rooms)
but nice hotel across the street from the Orpheum; (2) the much
larger Red Lion Hotel, located about a five-minute walk from the
Orpheum; or (3) the Marriott, located in West Omaha about 100 yards
from Borsheim's, which is a twenty-minute drive from downtown. We
will have buses at the Marriott that will leave at 8:30 and 8:45
for the meeting and return after it ends.
An attachment to our proxy material explains how you can
obtain the card you will need for admission to the meeting. With
the admission card, we will enclose information about parking
facilities located near the Orpheum. If you are driving, come a
little early. Nearby lots fill up quickly and you may have to walk
a few blocks.
As usual, we will have buses to take you to Nebraska Furniture
Mart and Borsheim's after the meeting and to take you from there to
downtown hotels or the airport later. Those of you arriving early
can visit the Furniture Mart any day of the week; it is open from
10 a.m. to 5:30 p.m. on Saturdays and from noon to 5:30 p.m. on
Sundays. Borsheim's normally is closed on Sunday but will be open
for shareholders and their guests from noon to 6 p.m. on Sunday,
April 24.
In past trips to Borsheim's, many of you have met Susan
Jacques. Early in 1994, Susan was made President and CEO of the
company, having risen in 11 years from a $4-an-hour job that she
took at the store when she was 23. Susan will be joined at
Borsheim's on Sunday by many of the managers of our other
businesses, and Charlie and I will be there as well.
On the previous evening, Saturday, April 23, there will be a
baseball game at Rosenblatt Stadium between the Omaha Royals and
the Nashville Sounds (which could turn out to be Michael Jordan's
team). As you may know, a few years ago I bought 25% of the Royals
(a capital-allocation decision for which I will not become famous)
and this year the league has cooperatively scheduled a home stand
at Annual Meeting time.
I will throw the first pitch on the 23rd, and it's a certainty
that I will improve on last year's humiliating performance. On
that occasion, the catcher inexplicably called for my "sinker" and
I dutifully delivered a pitch that barely missed my foot. This
year, I will go with my high hard one regardless of what the
catcher signals, so bring your speed-timing devices. The proxy
statement will include information about obtaining tickets to the
game. I regret to report that you won't have to buy them from
scalpers.
Warren E. Buffett
March 1, 1994 Chairman of the Board