Shortly before the tender offer was mailed, Stanton had asked me at what price BPL would sell its holdings. I answered $11.50, and he
said, “Fine, we have a deal.” Then came Berkshire’s letter, offering an eighth of a point less. I bristled at Stanton’s behavior and didn’t tender.
That was a monumentally stupid decision.
I purchased BPL’s first shares of Berkshire in December 1962, anticipating more closings and more
repurchases. The stock was then selling for $7.50, a wide discount from per-share working capital of $10.25 and
book value of $20.20. Buying the stock at that price was like picking up a discarded cigar butt that had one puff
remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure
was enjoyed, however, no more could be expected.
Jack Ringwalt, the owner of NICO, was a long-time friend who wanted to sell to me – me, personally. In
no way was his offer intended for Berkshire. So why did I purchase NICO for Berkshire rather than for BPL? I’ve
had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal
If BPL had been the purchaser, my partners and I would have owned 100% of a fine business, destined to
form the base for building the company Berkshire has become. Moreover, our growth would not have been impeded
for nearly two decades by the unproductive funds imprisoned in the textile operation. Finally, our subsequent
acquisitions would have been owned in their entirety by my partners and me rather than being 39%-owned by the
legacy shareholders of Berkshire, to whom we had no obligation. Despite these facts staring me in the face, I opted
to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision
that eventually diverted $100 billion or so from BPL partners to a collection of strangers.
Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a
1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned
that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains
in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben
Graham had taught me that technique, and it worked.
But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only
to a point. With large sums, it would never work well.
Forget what you know about buying fair businesses at wonderful
prices; instead, buy wonderful businesses at fair prices.
The year 1972 was a turning point for Berkshire (though not without occasional backsliding on my part –
remember my 1975 purchase of Waumbec). We had the opportunity then to buy See’s Candy for Blue Chip Stamps,
a company in which Charlie, I and Berkshire had major stakes, and which was later merged into Berkshire.
See’s was a legendary West Coast manufacturer and retailer of boxed chocolates, then annually earning
about $4 million pre-tax while utilizing only $8 million of net tangible assets. Moreover, the company had a huge
asset that did not appear on its balance sheet: a broad and durable competitive advantage that gave it significant
pricing power. That strength was virtually certain to give See’s major gains in earnings over time. Better yet, these
would materialize with only minor amounts of incremental investment. In other words, See’s could be expected to
gush cash for decades to come.
The family controlling See’s wanted $30 million for the business, and Charlie rightly said it was worth that
much. But I didn’t want to pay more than $25 million and wasn’t all that enthusiastic even at that figure. (A price
that was three times net tangible assets made me gulp.) My misguided caution could have scuttled a terrific
purchase. But, luckily, the sellers decided to take our $25 million bid.
To date, See’s has earned $1.9 billion pre-tax, with its growth having required added investment of only
$40 million. See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that,
in turn, have themselves produced large distributable profits. (Envision rabbits breeding.) Additionally, through
watching See’s in action, I gained a business education about the value of powerful brands that opened my eyes to
many other profitable investments.
Even with Charlie’s blueprint, I have made plenty of mistakes since Waumbec. The most gruesome was
Dexter Shoe. When we purchased the company in 1993, it had a terrific record and in no way looked to me like a
cigar butt. Its competitive strengths, however, were soon to evaporate because of foreign competition. And I simply
didn’t see that coming.
Consequently, Berkshire paid $433 million for Dexter and, rather promptly, its value went to zero. GAAP
accounting, however, doesn’t come close to recording the magnitude of my error. The fact is that I gave Berkshire
stock to the sellers of Dexter rather than cash, and the shares I used for the purchase are now worth about $5.7
billion. As a financial disaster, this one deserves a spot in the Guinness Book of World Records.
We’ve also suffered financially when this mistake has been committed by companies whose shares
Berkshire has owned (with the errors sometimes occurring while I was serving as a director). Too often CEOs seem
blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than
the intrinsic value of the business you receive.
Today Berkshire possesses (1) an unmatched collection of businesses, most of them now enjoying
favorable economic prospects; (2) a cadre of outstanding managers who, with few exceptions, are unusually devoted
to both the subsidiary they operate and to Berkshire; (3) an extraordinary diversity of earnings, premier financial
strength and oceans of liquidity that we will maintain under all circumstances; (4) a first-choice ranking among
many owners and managers who are contemplating sale of their businesses and (5) in a point related to the
preceding item, a culture, distinctive in many ways from that of most large companies, that we have worked 50
years to develop and that is now rock-solid.
First and definitely foremost, I believe that the chance of permanent capital loss for patient Berkshire
shareholders is as low as can be found among single-company investments. That’s because our per-share
intrinsic business value is almost certain to advance over time.
This cheery prediction comes, however, with an important caution: If an investor’s entry point into
Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares
have occasionally reached – it may well be many years before the investor can realize a profit. In other
words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire
is not exempt from this truth.
Purchases of Berkshire that investors make at a price modestly above the level at which the company
would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s
directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our
view, that is an essential criterion for repurchases that is often ignored by other managements.)
For those investors who plan to sell within a year or two after their purchase, I can offer no assurances,
whatever the entry price. Movements of the general stock market during such abbreviated periods will
likely be far more important in determining your results than the concomitant change in the intrinsic value
of your Berkshire shares. As Ben Graham said many decades ago: “In the short-term the market is a voting
machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors –
amateurs and professionals alike – border on lunacy.
Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire
shares only if you expect to hold them for at least five years. Those who seek short-term profits should look
Another warning: Berkshire shares should not be purchased with borrowed money. There have been three
times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to
this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a
satisfactory holding for investors. But it could well be a disastrous choice for speculators employing
I believe the chance of any event causing Berkshire to experience financial problems is essentially zero.
We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets
to the unprepared. Berkshire played an important role as a “first responder” during the 2008-2009
meltdown, and we have since more than doubled the strength of our balance sheet and our earnings
potential. Your company is the Gibraltar of American business and will remain so.
Financial staying power requires a company to maintain three strengths under all circumstances: (1) a large
and reliable stream of earnings; (2) massive liquid assets and (3) no significant near-term cash
Here’s how we will always stand on the three essentials. First, our earnings stream is huge and comes from
a vast array of businesses. Our shareholders now own many large companies that have durable competitive
advantages, and we will acquire more of those in the future. Our diversification assures Berkshire’s
continued profitability, even if a catastrophe causes insurance losses that far exceed any previously
Next up is cash. At a healthy business, cash is sometimes thought of as something to be minimized – as an
unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as
oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
American business provided a case study of that in 2008. In September of that year, many long-prosperous
companies suddenly wondered whether their checks would bounce in the days ahead. Overnight, their
financial oxygen disappeared.
At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September
and early October, we supplied $15.6 billion of fresh money to American businesses.
Finally – getting to our third point – we will never engage in operating or investment practices that can
result in sudden demands for large sums. That means we will not expose Berkshire to short-term debt
maturities of size nor enter into derivative contracts or other business arrangements that could require large
Some years ago, we became a party to certain derivative contracts that we believed were significantly
mispriced and that had only minor collateral requirements. These have proved to be quite profitable.
Recently, however, newly-written derivative contracts have required full collateralization. And that ended
our interest in derivatives, regardless of what profit potential they might offer. We have not, for some
years, written these contracts, except for a few needed for operational purposes at our utility businesses
The reason for our conservatism, which may impress some people as extreme, is that it is entirely
predictable that people will occasionally panic, but not at all predictable when this will happen. Though
practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension
on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you
must be prepared for whatever it does.
A CEO who is 64 and plans to retire at 65 may have his own special calculus in evaluating risks that have
only a tiny chance of happening in a given year. He may, in fact, be “right” 99% of the time. Those odds,
however, hold no appeal for us. We will never play financial Russian roulette with the funds you’ve
entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is
madness to risk losing what you need in pursuing what you simply desire.
Despite our conservatism, I think we will be able every year to build the underlying per-share earning
power of Berkshire. That does not mean operating earnings will increase each year – far from it. The U.S.
economy will ebb and flow – though mostly flow – and, when it weakens, so will our current earnings. But
we will continue to achieve organic gains, make bolt-on acquisitions and enter new fields. I believe,
therefore, that Berkshire will annually add to its underlying earning power.
In some years the gains will be substantial, and at other times they will be minor. Markets, competition,
and chance will determine when opportunities come our way. Through it all, Berkshire will keep moving
forward, powered by the array of solid businesses we now possess and the new companies we will
purchase. In most years, moreover, our country’s economy will provide a strong tailwind for business. We
are blessed to have the United States as our home field.
The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be
dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big.
I think Berkshire will outperform the average American company, but our advantage, if any, won’t be
Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources
will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At
that time our directors will need to determine whether the best method to distribute the excess earnings is
through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value,
massive repurchases will almost certainly be the best choice. You can be comfortable that your directors
will make the right decision.
No company will be more shareholder-minded than Berkshire. For more than 30 years, we have annually
reaffirmed our Shareholder Principles (see page 117), always leading off with: “Although our form is
corporate, our attitude is partnership.” This covenant with you is etched in stone.
We have an extraordinarily knowledgeable and business-oriented board of directors ready to carry out that
promise of partnership. None took the job for the money: In an arrangement almost non-existent elsewhere,
our directors are paid only token fees. They receive their rewards instead through ownership of Berkshire
shares and the satisfaction that comes from being good stewards of an important enterprise.
The shares that they and their families own – which, in many cases, are worth very substantial sums – were
purchased in the market (rather than their materializing through options or grants). In addition, unlike
almost all other sizable public companies, we carry no directors and officers liability insurance. At
Berkshire, directors walk in your shoes.
To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a nonexecutive
Chairman. My only reason for this wish is to make change easier if the wrong CEO should ever
be employed and there occurs a need for the Chairman to move forcefully. I can assure you that this
problem has a very low probability of arising at Berkshire – likely as low as at any public company. In my
service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre
CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.)
Choosing the right CEO is all-important and is a subject that commands much time at Berkshire board
meetings. Managing Berkshire is primarily a job of capital allocation, coupled with the selection and
retention of outstanding managers to captain our operating subsidiaries. Obviously, the job also requires the
replacement of a subsidiary’s CEO when that is called for. These duties require Berkshire’s CEO to be a
rational, calm and decisive individual who has a broad understanding of business and good insights into
human behavior. It’s important as well that he knows his limits. (As Tom Watson, Sr. of IBM said, “I’m no
genius, but I’m smart in spots and I stay around those spots.”)
My successor will need one other particular strength: the ability to fight off the ABCs of business decay,
which are arrogance, bureaucracy and complacency. When these corporate cancers metastasize, even the
strongest of companies can falter. The examples available to prove the point are legion, but to maintain
friendships I will exhume only cases from the distant past.
In their glory days, General Motors, IBM, Sears Roebuck and U.S. Steel sat atop huge industries. Their
strengths seemed unassailable. But the destructive behavior I deplored above eventually led each of them to
fall to depths that their CEOs and directors had not long before thought impossible. Their one-time
financial strength and their historical earning power proved no defense.
Only a vigilant and determined CEO can ward off such debilitating forces as Berkshire grows ever larger.
He must never forget Charlie’s plea: “Tell me where I’m going to die, so I’ll never go there.” If our noneconomic
values were to be lost, much of Berkshire’s economic value would collapse as well. “Tone at the
top” will be key to maintaining Berkshire’s special culture.
Todd 和 Ted 已經在波克夏投資團隊多年，他們倆會幫助CEO評估併購事項
Investments will always be of great importance to Berkshire and will be handled by several specialists.
They will report to the CEO because their investment decisions, in a broad way, will need to be
coordinated with Berkshire’s operating and acquisition programs. Overall, though, our investment
managers will enjoy great autonomy. In this area, too, we are in fine shape for decades to come. Todd
Combs and Ted Weschler, each of whom has spent several years on Berkshire’s investment team, are firstrate
in all respects and can be of particular help to the CEO in evaluating acquisitions.
All told, Berkshire is ideally positioned for life after Charlie and I leave the scene. We have the right
people in place – the right directors, managers and prospective successors to those managers. Our culture,
furthermore, is embedded throughout their ranks. Our system is also regenerative. To a large degree, both
good and bad cultures self-select to perpetuate themselves. For very good reasons, business owners and
operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind
and permanent home.
I would be remiss if I didn’t salute another key constituency that makes Berkshire special: our shareholders.
Berkshire truly has an owner base unlike that of any other giant corporation. That fact was demonstrated in
spades at last year’s annual meeting, where the shareholders were offered a proxy resolution:
RESOLVED: Whereas the corporation has more money than it needs and since the owners unlike
Warren are not multi billionaires, the board shall consider paying a meaningful annual dividend on
The sponsoring shareholder of that resolution never showed up at the meeting, so his motion was not
officially proposed. Nevertheless, the proxy votes had been tallied, and they were enlightening.
Not surprisingly, the A shares – owned by relatively few shareholders, each with a large economic interest
– voted “no” on the dividend question by a margin of 89 to 1.
The remarkable vote was that of our B shareholders. They number in the hundreds of thousands – perhaps
even totaling one million – and they voted 660,759,855 “no” and 13,927,026 “yes,” a ratio of about 47 to 1.
Our directors recommended a “no” vote but the company did not otherwise attempt to influence
shareholders. Nevertheless, 98% of the shares voting said, in effect, “Don’t send us a dividend but instead
reinvest all of the earnings.” To have our fellow owners – large and small – be so in sync with our
managerial philosophy is both remarkable and rewarding.
I am a lucky fellow to have you as partners.