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Berkshire's Performance vs. the S&P 500
|
|
Annual Percentage Change |
|
||
|
in |
|
in |
in S&P 500 |
|
|
Book Value of |
|
Market Value of |
with Dividends |
|
Year |
Berkshire |
|
Berkshire |
|
Included |
1965 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
23.8 |
49.5 |
|
10.0 |
|
1966 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
20.3 |
(3.4) |
|
(11.7) |
|
1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
11.0 |
13.3 |
|
30.9 |
|
1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
19.0 |
77.8 |
|
11.0 |
|
1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
16.2 |
19.4 |
|
(8.4) |
|
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
12.0 |
(4.6) |
|
3.9 |
|
1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
16.4 |
80.5 |
|
14.6 |
|
1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
21.7 |
8.1 |
|
18.9 |
|
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
4.7 |
(2.5) |
|
(14.8) |
|
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
5.5 |
(48.7) |
|
(26.4) |
|
1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
21.9 |
2.5 |
|
37.2 |
|
1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
59.3 |
129.3 |
|
23.6 |
|
1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
31.9 |
46.8 |
|
(7.4) |
|
1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
24.0 |
14.5 |
|
6.4 |
|
1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
35.7 |
102.5 |
|
18.2 |
|
1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
19.3 |
32.8 |
|
32.3 |
|
1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
31.4 |
31.8 |
|
(5.0) |
|
1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
40.0 |
38.4 |
|
21.4 |
|
1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
32.3 |
69.0 |
|
22.4 |
|
1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
13.6 |
(2.7) |
|
6.1 |
|
1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
48.2 |
93.7 |
|
31.6 |
|
1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
26.1 |
14.2 |
|
18.6 |
|
1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
19.5 |
4.6 |
|
5.1 |
|
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
20.1 |
59.3 |
|
16.6 |
|
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
44.4 |
84.6 |
|
31.7 |
|
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
7.4 |
(23.1) |
|
(3.1) |
|
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
39.6 |
35.6 |
|
30.5 |
|
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
20.3 |
29.8 |
|
7.6 |
|
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
14.3 |
38.9 |
|
10.1 |
|
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
13.9 |
25.0 |
|
1.3 |
|
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
43.1 |
57.4 |
|
37.6 |
|
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
31.8 |
6.2 |
|
23.0 |
|
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
34.1 |
34.9 |
|
33.4 |
|
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
48.3 |
52.2 |
|
28.6 |
|
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
0.5 |
(19.9) |
|
21.0 |
|
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
6.5 |
26.6 |
|
(9.1) |
|
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(6.2) |
6.5 |
|
(11.9) |
|
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
10.0 |
(3.8) |
|
(22.1) |
|
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
21.0 |
15.8 |
|
28.7 |
|
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
10.5 |
4.3 |
|
10.9 |
|
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
6.4 |
0.8 |
|
4.9 |
|
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
18.4 |
24.1 |
|
15.8 |
|
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
11.0 |
28.7 |
|
5.5 |
|
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(9.6) |
(31.8) |
|
(37.0) |
|
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
19.8 |
2.7 |
|
26.5 |
|
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
13.0 |
21.4 |
|
15.1 |
|
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
4.6 |
(4.7) |
|
2.1 |
|
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
14.4 |
16.8 |
|
16.0 |
|
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
18.2 |
32.7 |
|
32.4 |
|
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
8.3 |
27.0 |
|
13.7 |
|
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
6.4 |
(12.5) |
|
1.4 |
|
Compounded Annual Gain ' |
19.2% |
20.8% |
|
9.7% |
|
Overall Gain ' |
798,981% |
1,598,284% |
|
11,355% |
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using the numbers originally reported. The S&P 500 numbers are
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire's gain in net worth during 2015 was $15.4 billion, which increased the
During the first half of those years, Berkshire's net worth was roughly equal to the number that really counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax that would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part 'marked to market.'
By the early 1990s, however, our focus had changed to the outright ownership of businesses, a shift that diminished the relevance of
We've had experience with both outcomes: I've made some dumb purchases, and the amount I paid for the economic goodwill of those companies was later written off, a move that reduced Berkshire's book value. We've also had some winners ' a few of them very big ' but have not written those up by a penny.
Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap between intrinsic value and book value. Today, the large ' and growing ' unrecorded gains at our 'winners' make it clear that Berkshire's intrinsic value far exceeds its book value. That's why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase
The unrecorded increase in the value of our owned businesses explains why Berkshire's aggregate market- value gain ' tabulated on the facing page ' materially exceeds our
* All
3
The Year at Berkshire
Charlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire's normalized earning power to increase every year. (Actual
'The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent.
BNSF moves about 17% of America's intercity freight (measured by revenue
For most American railroads, 2015 was a disappointing year. Aggregate
'BNSF is the largest of our 'Powerhouse Five,' a group that also includes Berkshire Hathaway Energy, Marmon, Lubrizol and IMC. Combined, these companies ' our five most profitable
Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us in 2003. Subsequently, we purchased three of the other four on an
'Next year, I will be discussing the 'Powerhouse Six.' The newcomer will be Precision Castparts Corp. ('PCC'), a business that we purchased a month ago for more than $32 billion of cash. PCC fits perfectly into the Berkshire model and will substantially increase our normalized
Under CEO Mark Donegan, PCC has become the world's premier supplier of aerospace components (most of them destined to be original equipment, though spares are important to the company as well). Mark's accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable Israeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinary products that are used by major manufacturers worldwide. Each is the da Vinci of his craft.
PCC's products, often delivered under
* Throughout this letter, all earnings are stated on a
4
A personal
' they each handle about $9 billion for us ' both of them cheerfully and ably add major value to Berkshire in other ways as well. Hiring these two was one of my best moves.
'With the PCC acquisition, Berkshire will own 101 4 companies that would populate the Fortune 500 if they were
'Our many dozens of smaller
'When you hear talk about America's crumbling infrastructure, rest assured that they're not talking about Berkshire. We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in the United States.
I told you earlier about BNSF's record capital expenditures in 2015. At the end of every year, our railroad's physical facilities will be improved from those existing twelve months earlier.
Berkshire Hathaway Energy ('BHE') is a similar story. That company has invested $16 billion in renewables and now owns 7% of the country's wind generation and 6% of its solar generation. Indeed, the 4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the generation of the
We're not done. Last year, BHE made major commitments to the future development of renewables in support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both for the environment and for Berkshire's economics.
'Berkshire's huge and growing insurance operation again operated at an underwriting profit in 2015 ' that makes 13 years in a row ' and increased its float. During those years, our float ' money that doesn't belong to us but that we can invest for Berkshire's benefit ' grew from $41 billion to $88 billion. Though neither that gain nor the size of our float is reflected in Berkshire's earnings, float generates significant investment income because of the assets it allows us to hold.
Meanwhile, our underwriting profit totaled $26 billion during the
'While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making
Charlie and I encourage
5
'Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of $4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal. (We will have the Oscar Mayer Wienermobile at the annual meeting ' bring your kids.)
Though we sold no Kraft Heinz shares, 'GAAP' (Generally Accepted Accounting Principles) required us to record a $6.8 billion
Berkshire also owns Kraft Heinz preferred shares that pay us $720 million annually and are carried at $7.7 billion on our balance sheet. That holding will almost certainly be redeemed for $8.32 billion in June (the earliest date allowed under the preferred's terms). That will be good news for Kraft Heinz and bad news for Berkshire.
Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal.
Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then ' very promptly ' to make the moves that will get the job done. Their actions significantly boost productivity, the
At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by
We will continue to operate with extreme ' indeed, almost unheard of ' decentralization at Berkshire. But we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the case when his group purchased Tim Horton's, or as a combined
Berkshire, however, will join only with partners making friendly acquisitions. To be sure, certain hostile offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to make the change required. That's when new faces are needed. We, though, will leave these 'opportunities' for others. At Berkshire, we go only where we are welcome.
6
'Berkshire increased its ownership interest last year in each of its 'Big Four' investments ' American Express,
These four investees possess excellent businesses and are run by managers who are both talented and
If Berkshire's yearend holdings are used as the marker, our portion of the 'Big Four's' 2015 earnings amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they pay us ' about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies' earnings we don't report are every bit as valuable to us as the portion Berkshire records.
The earnings our investees retain are often used for repurchases of their own stock ' a move that increases Berkshire's share of future earnings without requiring us to lay out a dime. The retained earnings of these companies also fund business opportunities that usually turn out to be advantageous. All that leads us to expect that the
Our flexibility in capital allocation ' our willingness to invest large sums passively in
* * * * * * * * * * * *
It's an election year, and candidates can't stop speaking about our country's problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that ' in real terms ' is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This
Some commentators bemoan our current 2% per year growth in real GDP ' and, yes, we would all like to see a higher rate. But let's do some simple math using the
7
America's population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding's effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today's politicians need not shed tears for tomorrow's children.
Indeed, most of today's children are doing well. All families in my upper
Though the pie to be shared by the next generation will be far larger than today's, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent
The good news, however, is that even members of the 'losing' sides will almost certainly enjoy ' as they should ' far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want ' nor, even more so, in delivering what people don't yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, 'search' is invaluable to me. (I'm not ready for Tinder, however.)
For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs. America's social security promises will be honored and perhaps made more generous. And, yes, America's kids will live far better than their parents did.
* * * * * * * * * * * *
Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost certainly prosper. The managers who succeed Charlie and me will build Berkshire's
(2) further increasing their earnings through
(4)repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and
(5)making an occasional large acquisition. Management will also try to maximize results for you by rarely, if ever, issuing Berkshire shares.
8
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock). It is possible, however, to make a sensible estimate. In our 2010 annual report we laid out the three elements ' one of them qualitative ' that we believe are the keys to an estimation of Berkshire's intrinsic value. That discussion is reproduced in full on pages
Here is an update of the two quantitative factors: In 2015 our
I used the italics in the paragraph above because we are for the first time including insurance underwriting income in business earnings. We did not do that when we initially introduced Berkshire's two quantitative pillars of valuation because our insurance results were then heavily influenced by catastrophe coverages. If the wind didn't blow and the earth didn't shake, we made large profits. But a
Today, our insurance results are likely to be more stable than was the case a decade or two ago because we have deemphasized catastrophe coverages and greatly expanded our
Since 1970, our
* * * * * * * * * * * *
Now, let's examine the four major sectors of our operations. Each has vastly different balance sheet and income characteristics from the others. So we'll present them as four separate businesses, which is how Charlie and I view them (though there are important and enduring economic advantages to having them all under one roof). Our intent is to provide you with the information we would wish to have if our positions were reversed, with you being the reporting manager and we the absentee shareholders. (Don't get excited; this is not a switch we are considering.)
Insurance
Let's look first at insurance. The
9
One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers' compensation accidents, payments can stretch over many decades. This
Year |
|
Float (in millions) |
|
1970 |
$ |
39 |
|
1980 |
|
237 |
|
1990 |
|
1,632 |
|
2000 |
|
27,871 |
|
2010 |
|
65,832 |
|
2015 |
|
87,722 |
Further gains in float will be tough to achieve. On the plus side, GEICO and several of our specialized operations are almost certain to grow at a good clip. National Indemnity's reinsurance division, however, is party to a number of
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
' and, better yet, get paid for holding it.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal returns on tangible net worth as compared to other American businesses. The prolonged period of low interest rates the world is now dealing with also virtually guarantees that earnings on float will steadily decrease for many years to come, thereby exacerbating the profit problems of insurers. It's a good bet that industry results over the next ten years will fall short of those recorded in the past decade, particularly for those companies that specialize in reinsurance.
As noted early in this report, Berkshire has now operated at an underwriting profit for 13 consecutive years, our
So how does our float affect intrinsic value? When Berkshire's book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses ' a huge $24.5 billion to more than six million claimants in 2015 ' and that reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to float.
10
If our revolving float is both costless and
A partial offset to this overstated liability is a $15.5 billion 'goodwill' asset that we incurred in buying our insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for the
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our insurance goodwill ' what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it ' to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion we carry for goodwill in our insurance business was already on our books in 2000. Yet we subsequently tripled our float. Its value today is one reason ' a huge reason ' why we believe Berkshire's intrinsic business value substantially exceeds its book value.
* * * * * * * * * * * *
Berkshire's attractive insurance economics exist only because we have some terrific managers running disciplined operations that possess
First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources.
Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some
When Ajit entered Berkshire's office on a Saturday in 1986, he did not have a day's experience in the insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of value for Berkshire shareholders.
* * * * * * * * * * * *
We have another reinsurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can't be obtained.
11
Many insurers pass the first three tests and flunk the fourth. They simply can't turn their back on business that is being eagerly written by their competitors. That old line, 'The other guy is doing it, so we must as well,' spells trouble in any business, but in none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re's huge float has been considerably better than
It can be remembered that soon after we purchased General Re, it was beset by problems that caused commentators ' and me as well, briefly ' to believe I had made a huge mistake. That day is long gone. General Re is now a gem.
* * * * * * * * * * * *
Finally, there is GEICO, the insurer on which I cut my teeth 65 years ago. GEICO is managed by Tony Nicely, who joined the company at 18 and completed 54 years of service in 2015. Tony became CEO in 1993, and since then the company has been flying. There is no better manager than Tony. In the 40 years that I've known him, his every action has made great sense.
When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO would succeed because it deserved to succeed.
No one likes to buy auto insurance. Almost everyone, though, likes to drive. The insurance consequently needed is a major expenditure for most families. Savings matter to them ' and only a
GEICO's cost advantage is the factor that has enabled the company to gobble up market share year after year. (We ended 2015 with 11.4% of the market compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The company's low costs create a moat ' an enduring one ' that competitors are unable to cross.
All the while, our gecko never tires of telling Americans how GEICO can save them important money. I love hearing the little guy deliver his message: '15 minutes could save you 15% or more on car insurance.' (Of course, there's always a grouch in the crowd. One of my friends says he is glad that only a few animals can talk, since the ones that do speak seem unable to discuss any subject but insurance.)
* * * * * * * * * * * *
In addition to our three major insurance operations, we own a group of smaller companies that primarily write commercial coverages. In aggregate, these companies are a large, growing and valuable operation that consistently delivers an underwriting profit, usually much better than that reported by their competitors. Indeed, over the past 13 years, this group has earned $4 billion from underwriting ' about 13% of its premium volume ' while increasing its float from $943 million to $9.9 billion.
Less than three years ago, we formed Berkshire Hathaway Specialty Insurance ('BHSI'), which we include in this group. Our first decision was to put Peter Eastwood in charge. That move was a home run: BHSI has already developed $1 billion of annual premium volume and, under Peter's direction, is destined to become one of the world's leading P/C insurers.
12
Here's a recap of underwriting earnings and float by division:
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Underwriting Profit |
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Yearend Float |
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(in millions) |
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|||||||
Insurance Operations |
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2015 |
|
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||||
BH Reinsurance . . . . |
. . . . . . . . . . . . . . . . . . . . . . . . . . . $ |
421 |
$ |
606 |
$ 44,108 |
$ 42,454 |
||||||||||||||
General Re . . . . . . . . |
. . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
132 |
|
|
277 |
18,560 |
19,280 |
||||||||||||
GEICO . . . . . . . . . . . |
. . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
460 |
|
|
1,159 |
15,148 |
13,569 |
||||||||||||
Other Primary . . . . . . |
. . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
824 |
|
|
626 |
9,906 |
8,618 |
||||||||||||
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|
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|
|
|
|
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||||||||||
|
$ |
1,837 |
$ |
2,668 |
$ 87,722 |
$ 83,921 |
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Berkshire's great managers, premier financial strength and a variety of business models protected by wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for Berkshire shareholders that will only get more valuable with time.
Regulated,
We have two major operations, BNSF and BHE, that share important characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and income statement. Together, they last year accounted for 37% of Berkshire's
A key characteristic of both companies is their huge investment in very
At BHE, meanwhile, two factors ensure the company's ability to service its debt under all circumstances. The first is common to all utilities:
All told, BHE and BNSF invested $11.6 billion in plant and equipment last year, a massive commitment to key components of America's infrastructure. We relish making such investments as long as they promise reasonable returns ' and, on that front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever need huge investments in both transportation and energy. It is in the
Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE's average retail rate is 6.8'' per KWH. Alliant, the other major electric utility in the state, averages 9.5''. Here are the comparable industry figures for adjacent states: Nebraska 9.0'', Missouri 9.3'', Illinois 9.3'', Minnesota 9.7''. The national average is 10.4''. Our
13
At BNSF, price comparisons between major railroads are far more difficult to make because of significant differences in both their mix of cargo and the average distance it is carried. To supply a very crude measure, however, our revenue per
Both BHE and BNSF have been leaders in pursuing
BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost 500 miles. That makes the railroads four times as
Here are the key figures for BHE and BNSF: |
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|
|
|
|
|
Berkshire Hathaway Energy (89.9% owned) |
|
Earnings (in millions) |
|||||||
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
460 |
$ |
527 |
$ |
362 |
|||
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
314 |
|
|
298 |
|
|
230 |
|
Nevada utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
586 |
|
|
549 |
|
|
(58) |
|
PacifiCorp (primarily Oregon and Utah) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
1,026 |
|
|
1,010 |
|
|
982 |
|
Gas pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . . |
|
401 |
|
|
379 |
|
|
385 |
|
Canadian transmission utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
170 |
|
|
16 |
|
|
' |
|
Renewable projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
175 |
|
|
194 |
|
|
50 |
|
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
191 |
|
|
139 |
|
|
139 |
|
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
27 |
|
|
26 |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before corporate interest and taxes . . . . . . . . . . . . . . . . . . . . |
|
3,350 |
|
|
3,138 |
|
|
2,102 |
|
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
499 |
|
|
427 |
|
|
296 |
|
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
481 |
|
|
616 |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
2,370 |
$ |
2,095 |
$ |
1,636 |
|||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings applicable to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
2,132 |
$ |
1,882 |
$ |
1,470 |
|||
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BNSF |
|
Earnings (in millions) |
|||||||
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
21,967 |
$ |
23,239 |
$ |
22,014 |
|||
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
14,264 |
|
|
16,237 |
|
|
15,357 |
|
|
|
|
|
|
|
|
|
|
|
Operating earnings before interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
7,703 |
|
|
7,002 |
|
|
6,657 |
|
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
928 |
|
|
833 |
|
|
729 |
|
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
2,527 |
|
|
2,300 |
|
|
2,135 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
4,248 |
$ |
3,869 |
$ |
3,793 |
|||
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|
I currently expect increased
14
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let's look, though, at a summary balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/15 (in millions)
Assets
Cash and equivalents . . . . . . . . . . . . . . . . . .
Accounts and notes receivable . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangibles . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,807 8,886
11,916
970
28,579
30,289
15,161
4,445
$ 78,474
Liabilities and Equity
Notes payable . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . .
Term debt and other liabilities . . . . . . . . .
Berkshire equity . . . . . . . . . . . . . . . . . . . .
$ 2,135 10,565
12,700
3,649
4,767
521
56,837
$ 78,474
Earnings Statement (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
2013* |
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
107,825 |
$ |
97,689 |
$ |
93,472 |
|||
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
100,607 |
|
|
90,788 |
|
|
87,208 |
|
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
103 |
|
|
109 |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
7,115 |
|
|
6,792 |
|
|
6,160 |
||
Income taxes and |
|
2,432 |
|
|
2,324 |
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
4,683 |
$ |
4,468 |
$ |
3,877 |
|||
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|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
*Earnings for 2013 have been restated to exclude Marmon's leasing operations, which are now included in the Finance and Financial Products results.
Our income and expense data conforming to GAAP is on page 38. In contrast, the operating expense figures above are
I won't explain all of the adjustments ' some are tiny and arcane ' but serious investors should understand the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording charges against other intangibles, such as customer relationships, arises from
15
In the
The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years. Eventually, of course, every dollar of these 'assets' will be charged off. When that happens, reported earnings increase even if true earnings are flat. (My gift to my successor.)
I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are all too real.
Wall Street analysts often play their part in this charade, too, parroting the phony,
Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in 51 years I've yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When CEOs or investment bankers tout
Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however, you should remember to add back most of the amortization charges we report. You should also subtract something to reflect BNSF's inadequate depreciation charge.
* * * * * * * * * * * *
Let's get back to our many manufacturing, service and retailing operations, which sell products ranging from lollipops to jet airplanes. Some of this sector's businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25%
A few, however ' these are serious mistakes I made in my job of capital allocation ' have very poor returns. In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates, and we are now paying the price for my misjudgments. At other times, I stumbled in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed. I will commit more errors; you can count on that. If we luck out, they will occur at our smaller operations.
Viewed as a single entity, the companies in this group are an excellent business. They employed an average of $25.6 billion of net tangible assets during 2015 and, despite their holding large quantities of excess cash and using only token amounts of leverage, earned 18.4%
16
Of course, a business with terrific economics can be a bad investment if it is bought at too high a price. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for goodwill and other intangibles. Overall, however, we are getting a decent return on the capital we have deployed in this sector. Earnings from the group should grow substantially in 2016 as Duracell and Precision Castparts enter the fold.
* * * * * * * * * * * *
We have far too many companies in this group to comment on them individually. Moreover, their competitors ' both current and potential ' read this report. In a few of our businesses we might be disadvantaged if others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire, therefore, we only disclose what is required. You can nevertheless find a good bit of detail about many of our operations on pages
Finance and Financial Products
Our three leasing and rental operations are conducted by CORT (furniture), XTRA
Kevin Clayton has again delivered an
Manufactured homes allow the American dream of home ownership to be achieved by
Key to Clayton's operation is its $12.8 billion mortgage portfolio. We originate about 35% of all mortgages on manufactured homes. About 37% of our mortgage portfolio emanates from our retail operation, with the balance primarily originated by independent retailers, some of which sell our homes while others market only the homes of our competitors.
Lenders other than Clayton have come and gone. With Berkshire's backing, however, Clayton steadfastly financed home buyers throughout the panic days of
Our retail outlets, employing simple language and large type, consistently inform home buyers of alternative sources for financing ' most of it coming from local banks ' and always secure acknowledgments from customers that this information has been received and read. (The form we use is reproduced in its actual size on page 119.)
17
(2) promptly sell them to an investment or commercial bank in, say, New York, which would package many mortgages to serve as collateral for a dizzyingly complicated array of
As if these sins weren't sufficient to create an unholy mess, imaginative investment bankers sometimes concocted a second layer of
Both the originator and the packager of these financings had no skin in the game and were driven by volume and
Barney Frank, perhaps the most
At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price ' a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to foreclose on 8,444
The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a daunting commitment for our many
Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get over- extended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his down payment (though his mortgage payments during his time of occupancy may have been well under rental rates for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people earning multiples of our typical borrower's income.
The strong desire of our borrowers to have a home of their own is one reason we've done well with our mortgage portfolio. Equally important, we have financed much of the portfolio with
18
Normally, it is risky business to lend long at fixed rates and borrow short as we have been doing at Clayton. Over the years, some important financial institutions have gone broke doing that. At Berkshire, however, we possess a natural offset in that our businesses always maintain at least $20 billion in
Let me talk about one subject of which I am particularly proud, that having to do with regulation. The Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be assessed many billions of dollars in fines and penalties.
The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to customers $704,678. Furthermore, though we had to foreclose on 2.64% of our
* * * * * * * * * * * *
Marmon's rail fleet expanded to 133,220 units by yearend, a number significantly increased by the company's purchase of 25,085 cars from General Electric on September 30. If our fleet was connected to form a single train, the engine would be in Omaha and the caboose in Portland, Maine.
At yearend, 97% of our railcars were leased, with about
Here's the earnings recap for this sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
|
|
2013 |
|
|
|
|
(in millions) |
|
|
|
|
||||
Berkadia (our 50% share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ |
74 |
$ |
122 |
|
|
$ |
80 |
|
||
Clayton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
706 |
|
|
558 |
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|
|
|
416 |
|
CORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
55 |
|
|
49 |
|
|
|
|
42 |
|
Marmon ' Containers and Cranes . . . . . . . . . . . . . . . . . . . . . . . |
|
192 |
|
|
238 |
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|
|
|
226 |
|
Marmon ' Railcars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
546 |
|
|
442 |
|
|
|
|
353 |
|
XTRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
172 |
|
|
147 |
|
|
|
|
125 |
|
Net financial income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
341 |
|
|
283 |
|
|
|
|
322 |
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|
|
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|
|
|
|
|
|
|
|
|
$ |
2,086 |
$ |
1,839 |
|
|
$ |
1,564 |
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* Excludes capital gains or losses
19
Investments
Below we list our fifteen common stock investments that at yearend had the largest market value. We exclude our Kraft Heinz holding because we are part of a control group and account for it on the 'equity' method.
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12/31/15 |
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Percentage of |
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Company |
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Shares** |
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Company |
Owned |
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Cost* |
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Market |
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(in millions) |
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151,610,700 |
American Express Company . . . . . . . . . . . . . . . . . |
15.6 |
$ |
1,287 |
$ |
10,545 |
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46,577,138 |
AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
0.8 |
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1,283 |
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1,603 |
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|||||
7,463,157 |
Charter Communications, Inc. . . . . . . . . . . . . . . . . |
6.6 |
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|
1,202 |
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|
1,367 |
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400,000,000 |
The |
9.3 |
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1,299 |
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17,184 |
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18,513,482 |
DaVita HealthCare Partners Inc. . . . . . . . . . . . . . . |
8.8 |
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843 |
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1,291 |
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|||||
22,164,450 |
Deere & Company . . . . . . . . . . . . . . . . . . . . . . . . . |
7.0 |
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1,773 |
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1,690 |
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|||||
11,390,582 |
The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . |
2.7 |
|
|
654 |
|
|
2,053 |
|
|||||
81,033,450 |
International Business Machines Corp. . . . . . . . . . |
8.4 |
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13,791 |
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11,152 |
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|||||
24,669,778 |
Moody's Corporation . . . . . . . . . . . . . . . . . . . . . . . |
12.6 |
|
|
248 |
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|
2,475 |
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55,384,926 |
Phillips 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
10.5 |
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|
4,357 |
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|
4,530 |
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|||||
52,477,678 |
The Procter & Gamble Company . . . . . . . . . . . . . . |
1.9 |
|
|
336 |
|
|
4,683 |
*** |
|||||
22,169,930 |
Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
1.7 |
|
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1,701 |
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1,896 |
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101,859,335 |
U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
5.8 |
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3,239 |
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4,346 |
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63,507,544 |
2.0 |
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3,593 |
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3,893 |
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||||||
500,000,000 |
Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . |
9.8 |
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12,730 |
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27,180 |
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Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
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10,276 |
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16,450 |
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Total Common Stocks Carried at Market . . . . . . . . |
|
$ |
58,612 |
$ |
112,338 |
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*This is our actual purchase price and also our tax basis; GAAP 'cost' differs in a few cases because of write- ups or
**Excludes shares held by pension funds of Berkshire subsidiaries.
***Held under contract of sale for this amount.
Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment ' and one we value highly.
20
Productivity and Prosperity
Earlier, I told you how our partners at Kraft Heinz root out inefficiencies, thereby increasing output per hour of employment. That kind of improvement has been the secret sauce of America's remarkable gains in living standards since the nation's founding in 1776. Unfortunately, the label of 'secret' is appropriate: Too few Americans fully grasp the linkage between productivity and prosperity. To see that connection, let's look first at the country's most dramatic example ' farming ' and later examine three
In 1900, America's civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually.
Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of
Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers ('human input'). Today about three million people work on farms, a tiny 2% of our
It's easy to look back over the
For the moment, however, let's move on to three stories of efficiencies that have had major consequences for Berkshire subsidiaries. Similar transformations have been commonplace throughout American business.
'In 1947, shortly after the end of World War II, the American workforce totaled 44 million. About 1.35 million workers were employed in the railroad industry. The revenue
By 2014, Class I railroads carried 1.85 trillion
Another startling statistic: If it took as many people now to move freight as it did in 1947, we would need well over three million railroad workers to handle present volumes. (Of course, that level of employment would raise freight charges by a lot; consequently, nothing close to today's volume would actually move.)
21
Our own BNSF was formed in 1995 by a merger between Burlington Northern and Santa Fe. In 1996, the merged company's first full year of operation, 411 million
'A bit more than a century ago, the auto was invented, and around it formed an industry that insures cars and their drivers. Initially, this business was written through traditional insurance agencies ' the kind dealing in fire insurance. This
And then some American ingenuity came into play: G. J. Mecherle, a farmer from Merna, Illinois, came up with the idea of a captive sales force that would sell the insurance products of only a single company. His baby was christened State Farm Mutual. The company cut commissions and expenses ' moves that permitted lower prices ' and soon became a powerhouse. For many decades, State Farm has been the runaway volume leader in both auto and homeowner's insurance. Allstate, which also operated with a direct distribution model, was long the
In the early 1930s, another contender, United Services Auto Association ('USAA'), a
The direct distribution method of USAA, as it happened, incurred lower costs than those enjoyed by State Farm and Allstate and therefore delivered an even greater bargain to customers. That made Leo and Lillian Goodwin, employees of USAA, dream of broadening the target market for its direct distribution model beyond military officers. In 1936, starting with $100,000 of capital, they incorporated Government Employees Insurance Co. (later compressing this mouthful to GEICO).
Their fledgling did $238,000 of auto insurance business in 1937, its first full year. Last year GEICO did $22.6 billion, more than double the volume of USAA. (Though the early bird gets the worm, the second mouse gets the cheese.) GEICO's underwriting expenses in 2015 were 14.7% of premiums, with USAA being the only large company to achieve a lower percentage. (GEICO is fully as efficient as USAA but spends considerably more on advertising aimed at promoting growth.)
With the price advantage GEICO's low costs allow, it's not surprising that several years ago the company seized the number two spot in auto insurance from Allstate. GEICO is also gaining ground on State Farm, though it is still far ahead of us in volume. On August 30, 2030 ' my 100th birthday ' I plan to announce that GEICO has taken over the top spot. Mark your calendar.
GEICO employs about 34,000 people to serve its 14 million policyholders. I can only guess at the workforce it would require to serve a similar number of policyholders under the agency system. I believe, however, that the number would be at least 60,000, a combination of what the insurer would need in direct employment and the personnel required at supporting agencies.
22
'In its electric utility business, our Berkshire Hathaway Energy ('BHE') operates within a changing economic model. Historically, the survival of a local electric company did not depend on its efficiency. In fact, a 'sloppy' operation could do just fine financially.
That's because utilities were usually the sole supplier of a needed product and were allowed to price at a level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a utility was the only business that would automatically earn more money by redecorating the boss's office. And some CEOs ran things accordingly.
That's all changing. Today, society has decided that
BHE acquired its Iowa utility in 1999. In the year before, that utility employed 3,700 people and produced 19 million
The safety record of our Iowa utility is also outstanding. It had .79 injuries per 100 employees in 2015 compared to the rate of 7.0 experienced by the previous owner in the year before we bought the operation.
In 2006 BHE purchased PacifiCorp, which operated primarily in Oregon and Utah. The year before our purchase PacifiCorp employed 6,750 people and produced 52.6 million
Those outstanding performances explain why BHE is welcomed by regulators when it proposes to buy a utility in their jurisdiction. The regulators know the company will run an efficient, safe and reliable operation and also arrive with unlimited capital to fund whatever projects make sense. (BHE has never paid a dividend to Berkshire since we assumed ownership. No
* * * * * * * * * * * *
The productivity gains that I've just spelled out ' and countless others that have been achieved in America
' have delivered awesome benefits to society. That's the reason our citizens, as a whole, have enjoyed ' and will continue to enjoy ' major gains in the goods and services they receive.
To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.
We need shed no tears for the capitalists (whether they be private owners or an army of public shareholders). It's their job to take care of themselves. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average ' an index fund of sorts ' soared from 66 to 11,497, with its component companies all the while paying
23
A
When
The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming.
The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving
Important Risks
We, like all public companies, are required by the SEC to annually catalog 'risk factors' in our
Berkshire operates in more industries than any company I know of. Each of our pursuits has its own array of possible problems and opportunities. Those are easy to list but hard to evaluate: Charlie, I and our various CEOs often differ in a very major way in our calculation of the likelihood, the timing and the cost (or benefit) that may result from these possibilities.
Let me mention just a few examples. To begin with an obvious threat, BNSF, along with other railroads, is certain to lose significant coal volume over the next decade. At some point in the future ' though not, in my view, for a long time ' GEICO's premium volume may shrink because of driverless cars. This development could hurt our auto dealerships as well. Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them. To date, renewables have helped our utility operation but that could change, particularly if storage capabilities for electricity materially improve. Online retailing threatens the business model of our retailers and certain of our consumer brands. These potentialities are just a few of the negative possibilities facing us ' but even the most casual follower of business news has long been aware of them.
None of these problems, however, is crucial to Berkshire's
24
Every day Berkshire managers are thinking about how they can better compete in an
There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a 'successful' (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business.
The probability of such mass destruction in any given year is likely very small. It's been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we've had a few close calls but avoided catastrophic destruction. We can thank our government ' and luck! ' for this result.
Nevertheless, what's a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. 'Innovation' has its dark side.
There is no way for American corporations or their investors to shed this risk. If an event occurs in the U.S. that leads to mass devastation, the value of all equity investments will almost certainly be decimated.
No one knows what 'the day after' will look like. I think, however, that Einstein's 1949 appraisal remains apt: 'I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.'
* * * * * * * * * * * *
I am writing this section because we have a proxy proposal regarding climate change to consider at this year's annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats.
It seems highly likely to me that climate change poses a major problem for the planet. I say 'highly likely' rather than 'certain' because I have no scientific aptitude and remember well the dire predictions of most 'experts' about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.
This issue bears a similarity to Pascal's Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah's Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.
It's understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or
25
Think back to 1951 when I first became enthused about GEICO. The company's average
Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans involved in accidents. But these increased costs have been promptly matched by increased premiums. So, paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than one doing $23 billion.
Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather- related events covered by insurance. As a consequence, U.S.
As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a
The Annual Meeting
Charlie and I have finally decided to enter the 21st Century. Our annual meeting this year will be webcast worldwide in its entirety. To view the meeting, simply go to https://finance.yahoo.com/brklivestream at 9 a.m. Central Daylight Time on Saturday, April 30th. The Yahoo! webcast will begin with a half hour of interviews with managers, directors and shareholders. Then, at 9:30, Charlie and I will commence answering questions.
This new arrangement will serve two purposes. First, it may level off or modestly decrease attendance at the meeting. Last year's record of more than 40,000 attendees strained our capacity. In addition to quickly filling the CenturyLink Center's main arena, we packed its overflow rooms and then spilled into two large meeting rooms at the adjoining Omaha Hilton. All major hotels were sold out notwithstanding Airbnb's
Our second reason for initiating a webcast is more important. Charlie is 92, and I am 85. If we were partners with you in a small business, and were charged with running the place, you would want to look in occasionally to make sure we hadn't drifted off into
Viewers can also observe our
Shareholders planning to attend the meeting should come at 7 a.m. when the doors open at CenturyLink Center and start shopping. Carrie Sova will again be in charge of the festivities. She had her second child late last month, but that did not slow her down. Carrie is unflappable, ingenious and expert at bringing out the best in those who work with her. She is aided by hundreds of Berkshire employees from around the country and by our entire home office crew as well, all of them pitching in to make the weekend fun and informative for our owners.
26
Last year we increased the number of hours available for shopping at the CenturyLink. Sales skyrocketed ' so, naturally, we will stay with the new schedule. On Friday, April 29th you can shop between noon and 5 p.m., and on Saturday exhibits and stores will be open from 7 a.m. until 4:30 p.m.
On Saturday morning, we will have our fifth International Newspaper Tossing Challenge. Our target will again be a Clayton Home porch, located precisely 35 feet from the throwing line. When I was a teenager ' in my one brief flirtation with honest labor ' I delivered about 500,000 papers. So I think I'm pretty good at this game. Challenge me! Humiliate me! Knock me down a peg! The papers will run 36 to 42 pages, and you must fold them yourself (no rubber bands allowed).
The competition begins at 7:15, when contestants will make preliminary tosses. The eight throws judged most accurate ' four made by contestants 12 or under, and four made by the older set ' will compete against me at 7:45. The young challengers will each receive a prize. But the older ones will have to beat me to take anything home.
And be sure to check out the Clayton home itself. It can be purchased for $78,900, fully installed on land you provide. In past years, we've made many sales on the meeting day. Kevin Clayton will be on hand with his order book.
At 8:30 a.m., a new Berkshire movie will be shown. An hour later, we will start the
Your venue for shopping will be the
We will have a new and very special exhibit in the hall this year: a
Brooks, our
A GEICO booth in the shopping area will be staffed by a number of the company's top counselors from around the country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend the savings on our other products.
27
Be sure to visit the Bookworm. It will carry about 35 books and DVDs, among them a couple of new titles. Andy Kilpatrick will introduce (and be glad to sign) the latest edition of his
We will also have a new,
My friend, Phil Beuth, has written Limping on Water, an autobiography that chronicles his life at Capital Cities Communications and tells you a lot about its leaders, Tom Murphy and Dan Burke. These two were the best managerial duo ' both in what they accomplished and how they did it ' that Charlie and I ever witnessed. Much of what you become in life depends on whom you choose to admire and copy. Start with Tom Murphy, and you'll never need a second exemplar.
Finally, Jeremy Miller has written Warren Buffett's Ground Rules, a book that will debut at the annual meeting. Mr. Miller has done a superb job of researching and dissecting the operation of Buffett Partnership Ltd. and of explaining how Berkshire's culture has evolved from its BPL origin. If you are fascinated by investment theory and practice, you will enjoy this book.
An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential you will need for admission to both the meeting and other events. Airlines have sometimes jacked up prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City vs. Omaha. The drive between the two cities is about 21 2 hours, and it may be that Kansas City can save you significant money, particularly if you had planned to rent a car in Omaha. The savings for a couple could run to $1,000 or more. Spend that money with us.
At Nebraska Furniture Mart, located on a
To obtain the Berkshire discount at NFM, you must make your purchases between Tuesday, April 26th and Monday, May 2nd inclusive, and also present your meeting credential. The period's special pricing will even apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. During 'Berkshire Weekend' NFM will be open from 10 a.m. to 9 p.m. Monday through Friday, 10 a.m. to 9:30 p.m. on Saturday and 10 a.m. to 8 p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is hosting a picnic to which you are all invited.
At Borsheims, we will again have two
28
We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore, shareholder prices will be available from Monday, April 25th through Saturday, May 7th. During that period, please identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement showing you own our stock.
On Sunday, in the mall outside of Borsheims, Norman Beck, a remarkable magician from Dallas, will bewilder onlookers. On the upper level, we will have Bob Hamman and Sharon Osberg, two of the world's top bridge experts, available to play bridge with our shareholders on Sunday afternoon. I will join them and hope to have Ajit and Charlie there also.
My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met Ariel when she was nine and even then I was unable to score a point against her. Now, she's a junior at Princeton, having already represented the United States in the 2012 Olympics. If you don't mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill Gates and I will lead off and try to soften her up.
Gorat's will again be open exclusively for Berkshire shareholders on Sunday, May 1st, serving from 1 p.m. until 10 p.m. To make a reservation at Gorat's, call
We will again have the same three financial journalists lead the
From the questions submitted, each journalist will choose the six he or she decides are the most interesting and important. The journalists have told me your question has the best chance of being selected if you keep it concise, avoid sending it in at the last moment, make it
An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the insurance specialist will be Cliff Gallant of Nomura Securities. Questions that deal with our
Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough, for sure, and that's the way we like it.
All told we expect at least 54 questions, which will allow for six from each analyst and journalist and for 18 from the audience. (Last year we had 64 in total.) The questioners from the audience will be chosen by means of 11 drawings that will take place at 8:15 a.m. on the morning of the annual meeting. Each of the 11 microphones installed in the arena and main overflow room will host, so to speak, a drawing.
29
While I'm on the subject of our owners' gaining knowledge, let me remind you that Charlie and I believe all shareholders should simultaneously have access to new information that Berkshire releases and, if possible, should also have adequate time to digest and analyze it before any trading takes place. That's why we try to issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday. We do not follow the common practice of talking
* * * * * * * * * * * *
For good reason, I regularly extol the accomplishments of our operating managers. They are truly
Equally important, however, are the 24 men and women who work with me at our corporate office. This group efficiently deals with a multitude of SEC and other regulatory requirements, files a
They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt with the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and french fries (smothered in Heinz ketchup, of course) for lunch. No CEO has it better; I truly do feel like tap dancing to work every day. In fact, my job becomes more fun every year.
In 2015, Berkshire's revenues increased by $16 billion. Look carefully, however, at the two pictures on the facing page. The top one is from last year's report and shows the entire Berkshire
Can you imagine another very large company ' we employ 361,270 people worldwide ' enjoying that kind of employment stability at headquarters? At Berkshire we have hired some wonderful people ' and they have stayed with us. Moreover, no one is hired unless he or she is truly needed. That's why you've never read about 'restructuring' charges at Berkshire.
On April 30th, come to Omaha ' the cradle of capitalism ' and meet my gang. They are the best.
February 27, 2016 |
Warren E. Buffett |
|
Chairman of the Board |
30