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Carta a los accionistas 1993

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Carta a los accionistas de Berkshire Hathaway — 1993

BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Our per-share book value increased 14.3% during 1993. Over the last 29 years (that is, since present management took over) book value has grown from $19 to $8,854, or at a rate of 23.3% compounded annually. During the year, Berkshire’s net worth increased by $1.5 billion, a figure affected by two negative and two positive non- operating items. For the sake of completeness, I’ll explain them here. If you aren’t thrilled by accounting, however, feel free to fast-forward through this discussion:

  1. The first negative was produced by a change in Generally Accepted Accounting Principles (GAAP) having to do with the taxes we accrue against unrealized appreciation in the securities we carry at market value. The old rule said that the tax rate used should be the one in effect when the appreciation took place. Therefore, at the end of 1992, we were using a rate of 34% on the $6.4 billion of gains generated after 1986 and 28% on the $1.2 billion of gains generated before that. The new rule stipulates that the current tax rate should be applied to all gains. The rate in the first quarter of 1993, when this rule went into effect, was 34%. Applying that rate to our pre-1987 gains reduced net worth by $70 million.
  2. The second negative, related to the first, came about because the corporate tax rate was raised in the third quarter of 1993 to 35%. This change required us to make an additional charge of 1% against all of our unrealized gains, and that charge penalized net worth by $75 million. Oddly, GAAP required both this charge and the one described above to be deducted from the earnings we report, even though the unrealized appreciation that gave rise to the charges was never included in earnings, but rather was credited directly to net worth.
  3. Another 1993 change in GAAP affects the value at which we carry the securities that we own. In recent years, both the common stocks and certain common-equivalent securities held by our insurance companies have been valued at

market, whereas equities held by our non- insurance subsidiaries or by the parent company were carried at their aggregate cost or market, whichever was lower. Now GAAP says that all common stocks should be carried at market, a rule we began following in the fourth quarter of 1993. This change produced a gain in Berkshire’s reported net worth of about $172 million. 4. Finally, we issued some stock last year. In a transaction described in last year’s Annual Report, we issued 3,944 shares in early January, 1993 upon the conversion of $46 million convertible debentures that we had called for redemption. Additionally, we issued 25,203 shares when we acquired Dexter Shoe, a purchase discussed later in this report. The overall result was that our shares outstanding increased by 29,147 and our net worth by about $478 million. Per-share book value also grew, because the shares issued in these transactions carried a price above their book value. Of course, it’s per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business. Intrinsic value is a present-value estimate of the cash that can be taken out of a business during its remaining life. At most companies, the two values are unrelated. Berkshire, however, is an exception: Our book value, though significantly below our intrinsic value, serves as a useful device for tracking that key figure. In 1993, each measure grew by roughly 14%, advances that I would call satisfactory but unexciting. These gains, however, were outstripped by a much larger gain

  • 39% - in Berkshire’s market price. Over time, of course, market price and intrinsic value will arrive at about the same destination. But in the short run the two often diverge in a major way, a phenomenon I’ve discussed in the past. Two years ago, Coca-Cola and Gillette, both large holdings of ours, enjoyed market price increases that dramatically outpaced their earnings gains. In the 1991 Annual Report, I said that the stocks of these companies could not continuously overperform their businesses. From 1991 to 1993, Coke and Gillette increased their annual operating earnings per share by 38% and 37% respectively, but their market prices moved up only 11% and 6%. In other words, the companies overperformed their stocks, a result that no doubt partly reflects Wall Street’s new apprehension about brand names. Whatever the reason, what will count over time is the earnings performance of these companies. If they prosper, Berkshire will

también prosperarán, aunque no de forma gradual. Permítanme agregar una lección de la historia: Coca-Cola salió a bolsa en 1919. a 40 dólares por acción. A finales de 1920 el mercado, fríamente reevaluar las perspectivas futuras de Coca-Cola, había hecho caer las acciones en más del 50%, a 19,50 dólares. A finales de 1993, esa acción única, con dividendos reinvertidos, valía más de 2,1 millones de dólares. como Ben Graham dijo: “A corto plazo, el mercado es un voto máquina - que refleja una prueba de registro de votantes que requiere sólo dinero, no inteligencia o estabilidad emocional, pero a largo plazo correr, el mercado es una máquina de pesar.” Entonces, ¿cómo debería ser el rendimiento superior de Berkshire en el mercado? el año pasado ser visto? Claramente, Berkshire estaba vendiendo a un precio más alto. porcentaje de valor intrínseco a finales de 1993 que el caso a principios de año. Por otra parte, en un mundo de tipos de interés a largo plazo del 6% o 7%, el precio de mercado de Berkshire no era inapropiado si -y usted debe entender que esto es así- un enorme si: Charlie Munger, vicepresidente de Berkshire, y yo podemos alcanzar nuestro objetivo de larga data de aumentar el valor por acción de Berkshire valor intrínseco a una tasa media anual del 15%. no hemos se retiró de este objetivo. Pero recalcamos nuevamente, como lo hemos hecho por muchos años, que el crecimiento de nuestra base de capital supone un 15% objetivo cada vez más difícil de alcanzar. Lo que tenemos a nuestro favor es una creciente colección de buenas Empresas operativas de tamaño que poseen características económicas. que van desde buenos hasta fantásticos, dirigidos por gerentes cuyo desempeño va de fantástico a fantástico. No necesitas preocuparte por este grupo. El trabajo de asignación de capital que Charlie y yo hacemos en el empresa matriz, utilizando los fondos que nos entregan nuestros gestores, tiene un resultado menos seguro: no es fácil encontrar nuevos empresas y directivos comparables a los que tenemos. a pesar de esa dificultad, Charlie y yo disfrutamos de la búsqueda y estamos Estamos felices de informar de un éxito importante en 1993.

Zapato DexterWhat we did last year was build on our 1991 purchase of H.

H. Brown, a superbly-run manufacturer of work shoes, boots and other footwear. Brown has been a real winner: Though we had high hopes to begin with, these expectations have been considerably exceeded thanks to Frank Rooney, Jim Issler and the talented managers who work with them. Because of our confidence in Frank’s team, we next acquired Lowell Shoe, at the end of 1992. Lowell was a long-established manufacturer of women’s and nurses’ shoes, but its business needed some fixing. Again, results have surpassed our expectations. So we promptly jumped at the chance last year to acquire Dexter Shoe of Dexter, Maine, which manufactures popular-priced men’s and women’s shoes. Dexter, I can assure you, needs no fixing: It is one of the best-managed companies Charlie and I have seen in our business

lifetimes. Harold Alfond, who started working in a shoe factory at 25 cents an hour when he was 20, founded Dexter in 1956 with $10,000 of capital. He was joined in 1958 by Peter Lunder, his nephew. The two of them have since built a business that now produces over 7.5 million pairs of shoes annually, most of them made in Maine and the balance in Puerto Rico. As you probably know, the domestic shoe industry is generally thought to be unable to compete with imports from low-wage countries. But someone forgot to tell this to the ingenious managements of Dexter and H. H. Brown and to their skilled labor forces, which together make the U.S. plants of both companies highly competitive against all comers. Dexter’s business includes 77 retail outlets, located primarily in the Northeast. The company is also a major manufacturer of golf shoes, producing about 15% of U.S. output. Its bread and butter, though, is the manufacture of traditional shoes for traditional retailers, a job at which it excels: Last year both Nordstrom and J.C. Penney bestowed special awards upon Dexter for its performance as a supplier during 1992. Our 1993 results include Dexter only from our date of merger, November 7th. In 1994, we expect Berkshire’s shoe operations to have more than $550 million in sales, and we would not be surprised if the combined pre-tax earnings of these businesses topped $85 million. Five years ago we had no thought of getting into shoes. Now we have 7,200 employees in that industry, and I sing “There’s No Business Like Shoe Business” as I drive to work. So much for strategic plans. At Berkshire, we have no view of the future that dictates what businesses or industries we will enter. Indeed, we think it’s usually poison for a corporate giant’s shareholders if it embarks upon new ventures pursuant to some grand vision. We prefer instead to focus on the economic characteristics of businesses that we wish to own and the personal characteristics of managers with whom we wish to associate - and then to hope we get lucky in finding the two in combination. At Dexter, we did.

And now we pause for a short commercial: Though they owned a business jewel, we believe that Harold and Peter (who were not interested in cash) made a sound decision in exchanging their Dexter stock for shares of Berkshire. What they did, in effect, was trade a 100% interest in a single terrific business for a smaller interest in a large group of terrific businesses. They incurred no tax on this exchange and now own a security that can be easily used for charitable or personal gifts, or that can be converted to cash in amounts, and at times, of their own choosing. Should members of their families desire to, they can pursue varying financial paths without running into the

complicaciones que a menudo surgen cuando los activos se concentran en una negocio privado. Por razones fiscales y de otro tipo, las empresas privadas también suelen encontrar les resulta difícil diversificarse fuera de sus industrias. Berkshire, por el contrario, puede diversificarse con facilidad. Entonces, al cambiar su propiedad de Berkshire, los accionistas de Dexter resolvieron un problema de reinversión. Además, aunque Harold y Peter ahora tienen acciones no controladoras en Berkshire, en lugar de acciones controladoras acciones en Dexter, saben que serán tratados como socios y que seguiremos prácticas orientadas al propietario. Si eligen conservar sus acciones de Berkshire, su inversión resulta de la La fecha de fusión futura será exactamente paralela a mi propio resultado. desde que yo Tener un gran porcentaje de mi patrimonio neto comprometido de por vida para Acciones de Berkshire, y dado que la empresa no me emitirá ninguna de las dos acciones restringidas ni opciones sobre acciones: mi ecuación de pérdidas y ganancias siempre coincide con el de todos los demás propietarios. Además, Harold y Peter saben que en Berkshire podemos cumplir nuestras promesas: No habrá cambios de control o cultura en Berkshire durante muchas décadas por venir. Finalmente, y de de suma importancia, Harold y Peter pueden estar seguros de que lo harán dirigir su negocio, una actividad que les encanta, exactamente como lo hacían antes de la fusión. En Berkshire, no decirle a los bateadores de .400 cómo hacer swing. Lo que tenía sentido para Harold y Peter probablemente tenga sentido para algunos otros propietarios de grandes empresas privadas. Entonces, si tu Si tiene un negocio que podría encajar, déjeme saber de usted. Nuestro Los criterios de adquisición se establecen en el anexo de la página 22.

Fuentes de ganancias declaradas

La siguiente tabla muestra las principales fuentes de Berkshire. ganancias reportadas. En esta presentación, la amortización de Fondo de comercio y otros ajustes contables importantes del precio de compra no se imputan a las empresas específicas a las que pertenecen. aplican, sino que se agregan y se muestran por separado. esto El procedimiento le permite ver las ganancias de nuestros negocios a medida que habríamos sido reportados si no los hubiésemos comprado. he explicó en informes anteriores por qué esta forma de presentación parece que seamos más útiles para los inversores y gestores que uno que utilice GAAP, que requiere que los ajustes del precio de compra se realicen en un negocio por negocio. Las ganancias netas totales que mostramos en la tabla son, por supuesto, idénticas al total GAAP en nuestro estados financieros auditados. (000 omitidos)

La participación de Berkshire de ganancias netas (después de impuestos y Ganancias antes de impuestos intereses minoritarios) ---------------------- ------------------1993 1992 1993 1992

Operating Earnings: Insurance Group: Underwriting … $ 30,876 $(108,961) $ 20,156 $(71,141) Net Investment Income … 375,946 355,067 321,321 305,763 H. H. Brown, Lowell, and Dexter … 44,025* 27,883 28,829 17,340 Buffalo News … 50,962 47,863 29,696 28,163 Commercial & Consumer Finance 22,695 19,836 14,161 12,664 Fechheimer … 13,442 13,698 6,931 7,267 Kirby … 39,147 35,653 25,056 22,795 Nebraska Furniture Mart … 21,540 17,110 10,398 8,072 Scott Fetzer Manufacturing Group 38,196 31,954 23,809 19,883 See’s Candies … 41,150 42,357 24,367 25,501 World Book … 19,915 29,044 13,537 19,503 Purchase-Price Accounting & Goodwill Charges … (17,033) (12,087) (13,996) (13,070) Interest Expense** … (56,545) (98,643) (35,614) (62,899) Shareholder-Designated Contributions … (9,448) (7,634) (5,994) (4,913) Other … 28,428 67,540 15,094 32,798

Operating Earnings … 643,296 460,680 477,751 347,726 Sales of Securities … 546,422 89,937 356,702 59,559 Tax Accruals Caused by New Accounting Rules … --- --- (146,332) ---

Total Earnings - All Entities .. $1,189,718 $ 550,617 $688,121 $407,285

  • Includes Dexter’s earnings only from the date it was acquired, November 7, 1993. **Excludes interest expense of Commercial and Consumer Finance businesses. In 1992 includes $22.5 million of premiums paid on the early redemption of debt. A large amount of information about these businesses is given on pages 38-49, where you will also find our segment earnings reported on a GAAP basis. In addition, on pages 52-59, we have rearranged Berkshire’s financial data into four segments on a non- GAAP basis, a presentation that corresponds to the way Charlie and I think about the company. Our intent is to supply you with the financial information that we would wish you to give us if our positions were reversed.

”Look-Through” Earnings

We’ve previously discussed look-through earnings, which we believe more accurately portray the earnings of Berkshire than does our GAAP result. As we calculate them, look-through earnings consist of: (1) the operating earnings reported in the previous section, plus; (2) the retained operating earnings of major

investees that, under GAAP accounting, are not reflected in our profits, less; (3) an allowance for the tax that would be paid by Berkshire if these retained earnings of investees had instead been distributed to us. The “operating earnings” of which we speak here exclude capital gains, special accounting items and major restructuring charges. Over time, our look-through earnings need to increase at about 15% annually if our intrinsic value is to grow at that rate. Last year, I explained that we had to increase these earnings to about $1.8 billion in the year 2000, were we to meet the 15% goal. Because we issued additional shares in 1993, the amount needed has risen to about $1.85 billion. That is a tough goal, but one that we expect you to hold us to. In the past, we’ve criticized the managerial practice of shooting the arrow of performance and then painting the target, centering it on whatever point the arrow happened to hit. We will instead risk embarrassment by painting first and shooting later. If we are to hit the bull’s-eye, we will need markets that allow the purchase of businesses and securities on sensible terms. Right now, markets are difficult, but they can - and will - change in unexpected ways and at unexpected times. In the meantime, we’ll try to resist the temptation to do something marginal simply because we are long on cash. There’s no use running if you’re on the wrong road. The following table shows how we calculate look-through earnings, though I warn you that the figures are necessarily very rough. (The dividends paid to us by these investees have been included in the operating earnings itemized on page 8, mostly under “Insurance Group: Net Investment Income.”) Berkshire’s Share of Undistributed Berkshire’s Approximate Operating Earnings Berkshire’s Major Investees Ownership at Yearend (in millions)

1993 1992 1993 1992

Capital Cities/ABC, Inc. … 13.0% 18.2% $ 83(2) $ 70 The Coca-Cola Company … 7.2% 7.1% 94 82 Federal Home Loan Mortgage Corp. 6.8%(1) 8.2%(1) 41(2) 29(2) GEICO Corp. … 48.4% 48.1% 76(3) 34(3) General Dynamics Corp. … 13.9% 14.1% 25 11(2) The Gillette Company … 10.9% 10.9% 44 38 Guinness PLC … 1.9% 2.0% 8 7 The Washington Post Company .. 14.8% 14.6% 15 11 Wells Fargo & Company … 12.2% 11.5% 53(2) 16(2) Berkshire’s share of undistributed earnings of major investees $439 $298

Hypothetical tax on these undistributed investee earnings(4) (61) (42) Reported operating earnings of Berkshire 478 348 Total look-through earnings of Berkshire $856 $604 (1) Does not include shares allocable to the minority interest at Wesco (2) Calculated on average ownership for the year (3) Excludes realized capital gains, which have been both recurring and significant (4) The tax rate used is 14%, which is the rate Berkshire pays on the dividends it receives We have told you that we expect the undistributed, hypothetically-taxed earnings of our investees to produce at least equivalent gains in Berkshire’s intrinsic value. To date, we have far exceeded that expectation. For example, in 1986 we bought three million shares of Capital Cities/ABC for $172.50 per share and late last year sold one-third of that holding for $630 per share. After paying 35% capital gains taxes, we realized a $297 million profit from the sale. In contrast, during the eight years we held these shares, the retained earnings of Cap Cities attributable to them - hypothetically taxed at a lower 14% in accordance with our look-through method - were only $152 million. In other words, we paid a much larger tax bill than our look- through presentations to you have assumed and nonetheless realized a gain that far exceeded the undistributed earnings allocable to these shares. We expect such pleasant outcomes to recur often in the future and therefore believe our look-through earnings to be a conservative representation of Berkshire’s true economic earnings.

Taxes

As our Cap Cities sale emphasizes, Berkshire is a substantial payer of federal income taxes. In aggregate, we will pay 1993 federal income taxes of $390 million, about $200 million of that attributable to operating earnings and $190 million to realized capital gains. Furthermore, our share of the 1993 federal and foreign income taxes paid by our investees is well over $400 million, a figure you don’t see on our financial statements but that is nonetheless real. Directly and indirectly, Berkshire’s 1993 federal income tax payments will be about 1/2 of 1% of the total paid last year by all American corporations. Speaking for our own shares, Charlie and I have absolutely no complaint about these taxes. We know we work in a market-based economy that rewards our efforts far more bountifully than it does the efforts of others whose output is of equal or greater benefit to society. Taxation should, and does, partially redress this inequity. But we still remain extraordinarily well-treated. Berkshire and its shareholders, in combination, would pay a

much smaller tax if Berkshire operated as a partnership or “S” corporation, two structures often used for business activities. For a variety of reasons, that’s not feasible for Berkshire to do. However, the penalty our corporate form imposes is mitigated - though far from eliminated - by our strategy of investing for the long term. Charlie and I would follow a buy-and-hold policy even if we ran a tax-exempt institution. We think it the soundest way to invest, and it also goes down the grain of our personalities. A third reason to favor this policy, however, is the fact that taxes are due only when gains are realized. Through my favorite comic strip, Li’l Abner, I got a chance during my youth to see the benefits of delayed taxes, though I missed the lesson at the time. Making his readers feel superior, Li’l Abner bungled happily, but moronically, through life in Dogpatch. At one point he became infatuated with a New York temptress, Appassionatta Van Climax, but despaired of marrying her because he had only a single silver dollar and she was interested solely in millionaires. Dejected, Abner took his problem to Old Man Mose, the font of all knowledge in Dogpatch. Said the sage: Double your money 20 times and Appassionatta will be yours (1, 2, 4, 8 … . 1,048,576). My last memory of the strip is Abner entering a roadhouse, dropping his dollar into a slot machine, and hitting a jackpot that spilled money all over the floor. Meticulously following Mose’s advice, Abner picked up two dollars and went off to find his next double. Whereupon I dumped Abner and began reading Ben Graham. Mose clearly was overrated as a guru: Besides failing to anticipate Abner’s slavish obedience to instructions, he also forgot about taxes. Had Abner been subject, say, to the 35% federal tax rate that Berkshire pays, and had he managed one double annually, he would after 20 years only have accumulated $22,370. Indeed, had he kept on both getting his annual doubles and paying a 35% tax on each, he would have needed 7 1/2 years more to reach the $1 million required to win Appassionatta. But what if Abner had instead put his dollar in a single investment and held it until it doubled the same 27 1/2 times? In that case, he would have realized about $200 million pre-tax or, after paying a $70 million tax in the final year, about $130 million after-tax. For that, Appassionatta would have crawled to Dogpatch. Of course, with 27 1/2 years having passed, how Appassionatta would have looked to a fellow sitting on $130 million is another question. What this little tale tells us is that tax-paying investors will realize a far, far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same rate.But I suspect many Berkshire shareholders figured that out long ago. ## Insurance Operations

At this point in the report we’ve customarily provided you with a table showing the annual “combined ratio” of the insurance industry for the preceding decade. This ratio compares total insurance costs (losses incurred plus expenses) to revenue from premiums. For many years, the ratio has been above 100, a level indicating an underwriting loss. That is, the industry has taken in less money each year from its policyholders than it has had to pay for operating expenses and for loss events that occurred during the year. Offsetting this grim equation is a happier fact: Insurers get to hold on to their policyholders’ money for a time before paying it out. This happens because most policies require that premiums be prepaid and, more importantly, because it often takes time to resolve loss claims. Indeed, in the case of certain lines of insurance, such as product liability or professional malpractice, many years may elapse between the loss event and payment. To oversimplify the matter somewhat, the total of the funds prepaid by policyholders and the funds earmarked for incurred-but- not-yet-paid claims is called “the float.” In the past, the industry was able to suffer a combined ratio of 107 to 111 and still break even from its insurance writings because of the earnings derived from investing this float. As interest rates have fallen, however, the value of float has substantially declined. Therefore, the data that we have provided in the past are no longer useful for year-to-year comparisons of industry profitability. A company writing at the same combined ratio now as in the 1980’s today has a far less attractive business than it did then. Only by making an analysis that incorporates both underwriting results and the current risk-free earnings obtainable from float can one evaluate the true economics of the business that a property-casualty insurer writes. Of course, the actual investment results that an insurer achieves from the use of both float and stockholders’ funds is also of major importance and should be carefully examined when an investor is assessing managerial performance. But that should be a separate analysis from the one we are discussing here. The value of float funds - in effect, their transfer price as they move from the insurance operation to the investment operation - should be determined simply by the risk- free, long-term rate of interest. On the next page we show the numbers that count in an evaluation of Berkshire’s insurance business. We calculate our float - which we generate in exceptional amounts relative to our premium volume - by adding loss reserves, loss adjustment reserves and unearned premium reserves and then subtracting agent’s balances, prepaid acquisition costs and deferred charges applicable to assumed reinsurance.Our cost of float is determined by our underwriting loss or profit. In those years when we have had an

underwriting profit, which includes 1993, our cost of float has been negative, and we have determined our insurance earnings by adding underwriting profit to float income. (1) (2) Yearend Yield Underwriting Approximate on Long-Term Loss Average Float Cost of Funds Govt. Bonds

(In $ Millions) (Ratio of 1 to 2) 1967 profit $ 17.3 less than zero 5.50% 1968 profit 19.9 less than zero 5.90% 1969 profit 23.4 less than zero 6.79% 1970 $ 0.37 32.4 1.14% 6.25% 1971 profit 52.5 less than zero 5.81% 1972 profit 69.5 less than zero 5.82% 1973 profit 73.3 less than zero 7.27% 1974 7.36 79.1 9.30% 8.13% 1975 11.35 87.6 12.96% 8.03% 1976 profit 102.6 less than zero 7.30% 1977 profit 139.0 less than zero 7.97% 1978 profit 190.4 less than zero 8.93% 1979 profit 227.3 less than zero 10.08% 1980 profit 237.0 less than zero 11.94% 1981 profit 228.4 less than zero 13.61% 1982 21.56 220.6 9.77% 10.64% 1983 33.87 231.3 14.64% 11.84% 1984 48.06 253.2 18.98% 11.58% 1985 44.23 390.2 11.34% 9.34% 1986 55.84 797.5 7.00% 7.60% 1987 55.43 1,266.7 4.38% 8.95% 1988 11.08 1,497.7 0.74% 9.00% 1989 24.40 1,541.3 1.58% 7.97% 1990 26.65 1,637.3 1.63% 8.24% 1991 119.59 1,895.0 6.31% 7.40% 1992 108.96 2,290.4 4.76% 7.39% 1993 profit 2,624.7 less than zero 6.35% As you can see, in our insurance operation last year we had the use of $2.6 billion at no cost; in fact we were paid $31 million, our underwriting profit, to hold these funds. This sounds good - is good - but is far from as good as it sounds. We temper our enthusiasm because we write a large volume of “super-cat” policies (which other insurance and reinsurance companies buy to recover part of the losses they suffer from mega- catastrophes) and because last year we had no losses of consequence from this activity. As that suggests, the truly catastrophic Midwestern floods of 1993 did not trigger super-cat losses, the reason being that very few flood policies are purchased from private insurers. It would be fallacious, however, to conclude from this single- year result that the super-cat business is a wonderful one, or even

a satisfactory one. A simple example will illustrate the fallacy: Suppose there is an event that occurs 25 times in every century. If you annually give 5-for-1 odds against its occurrence that year, you will have many more winning years than losers. Indeed, you may go a straight six, seven or more years without loss. You also will eventually go broke. At Berkshire, we naturally believe we are obtaining adequate premiums and giving more like 3 1/2-for-1 odds. But there is no way for us - or anyone else - to calculate the true odds on super-cat coverages. In fact, it will take decades for us to find out whether our underwriting judgment has been sound. What we do know is that when a loss comes, it’s likely to be a lulu. There may well be years when Berkshire will suffer losses from the super-cat business equal to three or four times what we earned from it in 1993. When Hurricane Andrew blew in 1992, we paid out about $125 million. Because we’ve since expanded our super-cat business, a similar storm today could cost us $600 million. So far, we have been lucky in 1994. As I write this letter, we are estimating that our losses from the Los Angeles earthquake will be nominal. But if the quake had been a 7.5 instead of a 6.8, it would have been a different story. Berkshire is ideally positioned to write super-cat policies. In Ajit Jain, we have by far the best manager in this business. Additionally, companies writing these policies need enormous capital, and our net worth is ten to twenty times larger than that of our main competitors. In most lines of insurance, huge resources aren’t that important: An insurer can diversify the risks it writes and, if necessary, can lay off risks to reduce concentration in its portfolio. That isn’t possible in the super- cat business. So these competitors are forced into offering far smaller limits than those we can provide. Were they bolder, they would run the risk that a mega-catastrophe - or a confluence of smaller catastrophes - would wipe them out. One indication of our premier strength and reputation is that each of the four largest reinsurance companies in the world buys very significant reinsurance coverage from Berkshire. Better than anyone else, these giants understand that the test of a reinsurer is its ability and willingness to pay losses under trying circumstances, not its readiness to accept premiums when things look rosy. One caution: There has recently been a substantial increase in reinsurance capacity. Close to $5 billion of equity capital has been raised by reinsurers, almost all of them newly-formed entities. Naturally these new entrants are hungry to write business so that they can justify the projections they utilized in attracting capital.This new competition won’t affect our 1994 operations; we’re filled up there, primarily with business writtenen 1993. Pero ahora estamos viendo signos de deterioro de los precios. si esta tendencia continúa, nos resignaremos a una reducción muy volumen, manteniéndonos disponibles, aunque, para los grandes, comprador sofisticado que requiere una aseguradora súper cat con grandes capacidad y una capacidad segura de pagar pérdidas. En otras áreas de nuestro negocio de seguros, nuestra propiedad operación, dirigida por Rod Eldred; nuestro negocio de compensación laboral, encabezado por Brad Kinstler; nuestra operación de tarjetas de crédito, administrada por el familia Kizer; y el tradicional automóvil y general de National Indemnity negocio de responsabilidad civil, liderado por Don Wurster, lograron excelentes resultados. En combinación, estas cuatro unidades produjeron un importante beneficio técnico y flotación sustancial. En definitiva, tenemos un negocio de seguros de primera clase. Aunque sus resultados serán altamente volátiles, esta operación posee un valor intrínseco que excede su valor en libros por una gran cantidad - de hecho, mayor que el de cualquier otra empresa de Berkshire.

Inversiones en acciones ordinarias

A continuación enumeramos nuestras acciones comunes con un valor de más de 250 millones de dólares. Una pequeña porción de estas inversiones pertenece a filiales de las cuales Berkshire posee menos del 100%. 31/12/93 Mercado de costes de la empresa de acciones

(000 omitidos) 2,000,000 Ciudades capitales/ABC, Inc. … $ 345,000 $1,239,000 93.400.000 La Compañía Coca-Cola. … 1.023.920 4.167.975 13,654,600 Corporación Federal de Préstamos Hipotecarios para Vivienda. (“Freddie Mac”) … 307,505 681,023 34.250.000 GEICO Corp… 45.713 1.759.594 4,350,000 General Dynamics Corp… 94,938 401,287 24.000.000 La Compañía Gillette … 600.000 1.431.000 38.335.000 Guinness PLC … 333.019 270.822 1.727.765 Compañía del Washington Post. … 9.731 440.148 6,791,218 Wells Fargo & Compañía … 423,680 878,614 Considerando la similitud entre la lista de este año y la anterior, usted puede decidir que su manejo es irremediablemente comatoso. pero nosotros Sigo pensando que normalmente es una tontería separarse de un Interés en un negocio que sea comprensible y duradero. maravilloso. Intereses comerciales de ese tipo son sencillamente demasiado difíciles de reemplazar. Curiosamente, los directivos corporativos no tienen problemas comprender ese punto en el que se centran en un negocio que operar: una empresa matriz que posee una filial con excelente No es probable que la economía a largo plazo venda esa entidad independientemente de precio. “¿Por qué”, preguntaba el director general, “debería desprenderme de mi corona? ¿joya?” Sin embargo, ese mismo CEO, cuando se trata de administrar su negocio personal cartera de inversiones, despreocupadamente -e incluso impetuosamente-pasar de una empresa a otra cuando se les presenta no más de argumentos superficiales de su corredor para hacerlo. lo peor de Quizás esto sea: “No puedes arruinarte y obtener ganancias”. ¿puedes Imagine a un director ejecutivo usando esta línea para instar a su junta directiva a vender una estrella. filial? En nuestra opinión, lo que tiene sentido en los negocios también lo hace sentido en las acciones: un inversor normalmente debería tener una pequeña parte de un negocio destacado con la misma tenacidad que un propietario exhibiría si fuera dueño de todo ese negocio. Anteriormente mencioné los resultados financieros que podrían haber sido logrado invirtiendo $40 en The Coca-Cola Co. en 1919. En 1938, Más de 50 años después de la introducción de Coca-Cola, y mucho después la bebida se estableció firmemente como un ícono estadounidense, Fortune no una excelente historia sobre la empresa. En el segundo párrafo el El escritor informó: “Varias veces al año se publica un informe importante y serio. El inversor mira detenidamente y con profundo respeto el negocio de Coca-Cola. registro, pero lamentablemente llega a la conclusión de que está buscando demasiado tarde. Los espectros de saturación y competencia surgen ante él.” Sí, hubo competencia en 1938 y también en 1993. pero cabe destacar que en 1938 The Coca-Cola Co. vendió 207 millones cajas de refrescos (si su galón luego se convierte en el cajas de 192 onzas que se utilizan actualmente para medir) y en 1993 se vendió alrededor de 10,7 mil millones de cajas, un aumento de 50 veces en volumen físico de una empresa que en 1938 ya era dominante en su principal sector industria. Tampoco la fiesta terminó en 1938 para un inversor: aunque los 40 dólares invertidos en 1919 en una acción tenían (con dividendos) reinvertido) se convirtió en 3.277 dólares a finales de 1938, unos nuevos 40 dólares entonces invertido en acciones de Coca-Cola habría aumentado a 25.000 dólares a finales de año 1993. No puedo resistirme a una cita más de esa historia de Fortune de 1938: “Sería difícil nombrar una empresa comparable en tamaño a Coca-Cola. Cola y vender, como lo hace Coca-Cola, un producto sin cambios que puede apuntan a un récord de diez años parecido al de Coca-Cola”. en el 55 Años transcurridos desde entonces, la línea de productos de Coca-Cola se ha ampliado un poco, pero es notable lo bien que aún encaja esa descripción. Charlie y yo decidimos hace mucho tiempo que en toda una vida de inversión es demasiado difícil tomar cientos de decisiones inteligentes. eso El juicio se volvió cada vez más convincente a medida que la capital de Berkshire se ha multiplicado y el universo de inversiones que podrían afectar nuestros resultados se redujo drásticamente. Por lo tanto, adoptamos una estrategia que requería que seamos inteligentes, y no demasiado inteligentes

  • sólo unas pocas veces. De hecho, ahora nos conformaremos con un bien idea al año. (Charlie dice que es mi turno). La estrategia que hemos adoptado excluye nuestro siguiente estándar. Dogma de la diversificación.Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business

and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury.” Academics, however, like to define investment “risk” differently, averring that it is the relative volatility of a stock or portfolio of stocks - that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the “beta” of a stock - its relative volatility in the past - and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong. For owners of a business - and that’s the way we think of shareholders - the academics’ definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in 1973 - becomes “riskier” at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price? In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced “Mr. Market,” an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That’s true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly. In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. He may even prefer not to know the company’s name. What he treasures is the price history of its stock. In contrast, we’ll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company’s business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two. We don’t need a daily quote on our 100% position in See’s or H. H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?En nuestra opinión, el riesgo real que debe valorar un inversor es si sus ingresos agregados después de impuestos de una inversión (incluidos los que recibe en venta), a lo largo de su posible período de tenencia, darle al menos tanto poder adquisitivo como tenía para empezar, más una modesta tasa de interés sobre esa inicial estaca. Aunque este riesgo no se puede calcular con ingeniería

precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are:

  1. The certainty with which the long-term economic characteristics of the business can be evaluated;
  2. The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;
  3. The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;
  4. The purchase price of the business;
  5. The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing-power return is reduced from his gross return. These factors will probably strike many analysts as unbearably fuzzy, since they cannot be extracted from a data base of any kind. But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable. Just as Justice Stewart found it impossible to formulate a test for obscenity but nevertheless asserted, “I know it when I see it,” so also can investors - in an inexact but useful way - “see” the risks inherent in certain investments without reference to complex equations or price histories. Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market. Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power. Moreover, both Coke and Gillette have actually increased their worldwide shares of market in recent years. The might of their brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles. The average company, in contrast, does battle daily without any such means of protection. As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: “Competition may prove hazardous to human wealth.” The competitive strengths of a Coke or Gillette are obvious to even the casual observer of business. Yet the beta of their stocks is similar to that of a great many run-of-the-mill companies who possess little or no competitive advantage. Should we conclude

De esta similitud surge la fuerza competitiva de Coca-Cola y ¿Gillette no les aporta nada cuando se mide el riesgo empresarial? ¿O deberíamos concluir que el riesgo de poseer una parte de una empresa

  • sus acciones - está de alguna manera divorciada del riesgo a largo plazo inherente en sus operaciones comerciales? Creemos que ninguna de las conclusiones sentido y que equiparar beta con riesgo de inversión tampoco tiene sentido. sentido. El teórico criado en beta no tiene ningún mecanismo para diferenciar el riesgo inherente a, por ejemplo, un juguete de un solo producto Empresa que vende piedras para mascotas o aros de hula de otro juguete. empresa cuyo único producto es Monopoly o Barbie. Pero es bastante Es posible que los inversores ordinarios hagan tales distinciones si Tener una comprensión razonable del comportamiento del consumidor y de la Factores que crean fortaleza o debilidad competitiva a largo plazo. Evidentemente, todo inversor cometerá errores. Pero al limitar a unos pocos casos fáciles de entender, una cantidad razonablemente persona inteligente, informada y diligente puede juzgar la inversión riesgos con un grado útil de precisión. En muchas industrias, por supuesto, Charlie y yo no podemos determinar ya sea que estemos ante una “piedra mascota” o una “Barbie”. nosotros No podríamos resolver este problema, además, incluso si tuviéramos que gastar años estudiando intensamente esas industrias. A veces el nuestro Las deficiencias intelectuales se interpondrían en el camino de la comprensión, y en otros casos la naturaleza de la industria sería la barricada. Por ejemplo, una empresa que debe lidiar con negocios en rápido movimiento. La tecnología no se prestará a evaluaciones confiables de su economía a largo plazo. ¿Previmos hace treinta años lo que ocurriría en la fabricación de televisores o en la informática. industrias? Por supuesto que no. (Tampoco la mayoría de los inversores y gerentes corporativos que ingresaron con entusiasmo a esas industrias). Entonces, ¿por qué Charlie y yo deberíamos pensar ahora que podemos predecir el ¿El futuro de otras empresas en rápida evolución? Nos quedaremos en su lugar con los casos fáciles. ¿Por qué buscar una aguja enterrada en un pajar? cuando uno está sentado a plena vista? Por supuesto, algunas estrategias de inversión -por ejemplo, nuestra esfuerzos de arbitraje a lo largo de los años- requieren una amplia diversificación. Si existe un riesgo significativo en una sola transacción, el riesgo general debería reducirse haciendo de esa compra una de muchas compromisos independientes. Por lo tanto, usted puede comprar conscientemente un inversión arriesgada, una que de hecho tiene una posibilidad significativa de causando pérdida o lesión - si cree que su ganancia, ponderada para probabilidades, excede considerablemente su pérdida, comparativamente ponderado, y si puede comprometerse con una serie de similares, pero oportunidades no relacionadas. La mayoría de los capitalistas de riesgo emplean esto estrategia.Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet. Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific

businesses nevertheless believes it in his interest to be a long- term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know- nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb. On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly- priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices - the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: “Too much of a good thing can be wonderful.”

Corporate Governance

En nuestras reuniones anuales, alguien suele preguntar “¿Qué pasa con este lugar si te atropella un camión?” Me alegro que todavía estén haciendo la pregunta en este formulario. No pasará mucho tiempo antes de que La consulta se convierte en: “¿Qué pasa con este lugar si no te golpean?” ¿un camión?” En cualquier caso, estas preguntas me dan motivos para discutir El gobierno corporativo, un tema candente durante el año pasado. en En general, creo que los directores se han endurecido recientemente y que ahora los accionistas reciben un trato algo más como verdaderos propietarios que no hace mucho. Comentaristas en Sin embargo, el gobierno corporativo rara vez hace alguna distinción entre tres situaciones fundamentalmente diferentes de administrador/propietario que existen en empresas públicas. Aunque la responsabilidad legal de Los directores son idénticos en todos sus aspectos, su capacidad para efectuar cambios. difiere en cada uno de los casos. La atención suele recaer en lo primero. porque prevalece en el panorama empresarial. Desde Berkshire cae en la segunda categoría, sin embargo, y algún día caerá en En el tercero, discutiremos las tres variaciones. La primera situación en la junta directiva, y con diferencia la más común, es aquella en la que en la cual una corporación no tiene un accionista mayoritario. En ese caso, Creo que los directores deberían comportarse como si hubiera un solo ausente propietario, cuyo interés a largo plazo deberían intentar promover en todos formas adecuadas. Desafortunadamente, el término “largo plazo” les da a los directores muchas margen de maniobra. Si carecen de integridad o de capacidad de pensar De forma independiente, los directores pueden ejercer una gran violencia contra los accionistas. sin dejar de afirmar que actúan en su interés a largo plazo. pero asumir que la junta está funcionando bien y debe lidiar con un una gestión mediocre o peor. Los directores tienen entonces la responsabilidad de cambiar esa gestión, así como una sociedad inteligente haría el propietario si estuviera presente. Y si los administradores son capaces pero codiciososexagerar y tratar de profundizar demasiado en la opinión de los accionistas. bolsillos, los directores deben darse palmadas en las manos. En este caso sencillo, un director que ve algo que no le gusta debería intentar persuadir a los demás directores de su vistas. Si tiene éxito, la junta directiva tendrá la fuerza necesaria para tomar decisiones. el cambio adecuado. Supongamos, sin embargo, que el descontento director No puedo lograr que otros directores estén de acuerdo con él. Entonces debería sentir libre de dar a conocer sus opiniones a los propietarios ausentes. Directores Rara vez hago eso, por supuesto. El temperamento de muchos directores de hecho, sería incompatible con un comportamiento crítico de ese tipo. pero yo No veo nada inapropiado en tales acciones, suponiendo que los problemas sean serio. Naturalmente, el director quejoso puede esperar una vigorosa refutación de los directores no persuadidos, una perspectiva que debería disuadir al disidente de perseguir objetivos triviales o irracionales. causas. Para las juntas que acabamos de analizar, creo que los directores deberían ser relativamente pocos en número -digamos, diez o menos- y deberían provienen principalmente del exterior. Los miembros externos de la junta directiva deben establecer estándares para el desempeño del CEO y también debe reunirse periódicamente, sin su presencia, para evaluar su desempeño frente a esos estándares. Los requisitos para ser miembro de la junta directiva deben ser conocimientos de negocios, interés en el trabajo y orientación hacia el propietario. Con demasiada frecuencia, los directores se seleccionan simplemente porque son prominentes o agregan diversidad a el tablero. Esa práctica es un error. Además, los errores en La selección de directores es particularmente seria porque los nombramientos son tan difíciles de deshacer: el agradable pero vacío director nunca necesita preocuparse por la seguridad laboral. El segundo caso es el existente en Berkshire, donde el El propietario controlador es también el administrador. En algunas empresas, esto El acuerdo se ve facilitado por la existencia de dos clases de acciones. dotado de un poder de voto desproporcionado. En estas situaciones, Es obvio que la junta no actúa como agente entre propietarios. y la administración y que los directores no pueden efectuar cambios excepto mediante la persuasión. Por lo tanto, si el propietario/administrador es mediocre o peor - o es demasiado - poco puede hacer un director sobre ello excepto objeto. Si los directores no tienen conexiones con Si el propietario/administrador presenta un argumento unificado, es posible que tenga algunas efecto. Lo más probable es que no sea así. Si el cambio no llega y el asunto es lo suficientemente grave, los directores externos deberían dimitir. Su renuncia señalará sus dudas sobre la gestión y enfatizará que ningún extraño esté en condiciones de corregir la opinión del propietario/administrador. deficiencias. El tercer caso de gobernanza ocurre cuando existe una autoridad controladora. propietario que no participa en la gestión.This case, examples of which are Hershey Foods and Dow Jones, puts the outside directors in a potentially useful position. If they become unhappy with

ya sea la competencia o la integridad del gerente, pueden ir directamente al propietario (que también puede estar en la junta) e informar su insatisfacción. Esta situación es ideal para un exterior. director, ya que sólo necesita exponer su caso ante un único, presumiblemente propietario interesado, quien puede efectuar inmediatamente el cambio si el argumento es persuasivo. Aun así, el director insatisfecho sólo tiene eso curso de acción único. Si sigue insatisfecho con una cuestión crítica, no tiene más remedio que dimitir. Lógicamente, el tercer caso debería ser el más efectivo en asegurando una gestión de primera clase. En el segundo caso el propietario es no va a despedirse y, en el primer caso, los directores suelen Les resulta muy difícil lidiar con la mediocridad o el leve exceso de alcanzando. A menos que los directores descontentos puedan ganarse a la mayoría de junta directiva: una tarea social y logística incómoda, especialmente si El comportamiento de la gerencia es simplemente odioso, no atroz: sus manos están efectivamente vinculados. En la práctica, los directores atrapados en situaciones Los de este tipo suelen convencerse de que si se quedan cerca pueden hacer al menos algo de bien. Mientras tanto, la gestión continúa sin restricciones. En el tercer caso, el propietario no se juzga a sí mismo ni agobiados por el problema de conseguir una mayoría. el tambien puede asegurar que se seleccionen directores externos que aporten información útil cualidades al tablero. Estos directores, a su vez, sabrán que los buenos consejos que dan llegarán a los oídos adecuados, en lugar de siendo sofocado por una dirección recalcitrante. Si el control El propietario es inteligente y seguro de sí mismo, tomará decisiones en respecto de una gestión meritocrática y pro-accionista. Además -y esto es de vital importancia- puede fácilmente corregir cualquier error que cometa. En Berkshire operamos en el segundo modo ahora y lo haremos durante el mayor tiempo posible. mientras siga siendo funcional. Mi salud, permítanme añadir, es excelente. Para bien o para mal, es probable que me tengas como propietario/administrador. por algún tiempo. Después de mi muerte, todas mis acciones irán a parar a mi esposa, Susie. si ella me sobrevive, o a una fundación si muere antes que yo. En ningún caso los impuestos y legados exigirán la venta de cantidades consiguientes de acciones. Cuando mis acciones se transfieren a mi esposa o al fundación, Berkshire entrará en el tercer modo de gobernanza, yendo adelante con un propietario y con una gestión que debe realizar para ese propietario. En preparación Para ese momento, Susie fue elegida miembro de la junta hace unos años, y En 1993, nuestro hijo, Howard, se unió a la junta. Estos miembros de la familia No serán directivos de la empresa en el futuro, pero sí Representar el interés mayoritario en caso de que me sucediera algo.Most of our other directors are also significant owners of Berkshire stock, and each has a strong owner-orientation. All in all, we’re prepared for “the truck.”

Shareholder-Designated Contributions About 97% of all eligible shares participated in Berkshire’s 1993 shareholder-designated contributions program. Contributions made through the program were $9.4 million and 3,110 charities were recipients. Berkshire’s practice in respect to discretionary philanthropy

  • as contrasted to its policies regarding contributions that are clearly related to the company’s business activities - differs significantly from that of other publicly-held corporations. There, most corporate contributions are made pursuant to the wishes of the CEO (who often will be responding to social pressures), employees (through matching gifts), or directors (through matching gifts or requests they make of the CEO). At Berkshire, we believe that the company’s money is the owners’ money, just as it would be in a closely-held corporation, partnership, or sole proprietorship. Therefore, if funds are to be given to causes unrelated to Berkshire’s business activities, it is the charities favored by our owners that should receive them. We’ve yet to find a CEO who believes he should personally fund the charities favored by his shareholders. Why, then, should they foot the bill for his picks? Let me add that our program is easy to administer. Last fall, for two months, we borrowed one person from National Indemnity to help us implement the instructions that came from our 7,500 registered shareholders. I’d guess that the average corporate program in which employee gifts are matched incurs far greater administrative costs. Indeed, our entire corporate overhead is less than half the size of our charitable contributions. (Charlie, however, insists that I tell you that $1.4 million of our $4.9 million overhead is attributable to our corporate jet, The Indefensible.) Below is a list showing the largest categories to which our shareholders have steered their contributions. (a) 347 churches and synagogues received 569 gifts (b) 283 colleges and universities received 670 gifts (c) 244 K-12 schools (about two-thirds secular, one- third religious) received 525 gifts (d) 288 institutions dedicated to art, culture or the humanities received 447 gifts (e) 180 religious social-service organizations (split about equally between Christian and Jewish) received 411 gifts (f) 445 secular social-service organizations (about 40% youth-related) received 759 gifts (g) 153 hospitals received 261 gifts (h) 186 health-related organizations (American Heart Association, American Cancer Society, etc.) received 320 gifts

Three things about this list seem particularly interesting to me. First, to some degree it indicates what people choose to give money to when they are acting of their own accord, free of pressure from solicitors or emotional appeals from charities. Second, the contributions programs of publicly-held companies almost never allow gifts to churches and synagogues, yet clearly these institutions are what many shareholders would like to support. Third, the gifts made by our shareholders display conflicting philosophies: 130 gifts were directed to organizations that believe in making abortions readily available for women and 30 gifts were directed to organizations (other than churches) that discourage or are opposed to abortion. Last year I told you that I was thinking of raising the amount that Berkshire shareholders can give under our designated- contributions program and asked for your comments. We received a few well-written letters opposing the entire idea, on the grounds that it was our job to run the business and not our job to force shareholders into making charitable gifts. Most of the shareholders responding, however, noted the tax efficiency of the plan and urged us to increase the designated amount. Several shareholders who have given stock to their children or grandchildren told me that they consider the program a particularly good way to get youngsters thinking at an early age about the subject of giving. These people, in other words, perceive the program to be an educational, as well as philanthropic, tool. The bottom line is that we did raise the amount in 1993, from $8 per share to $10. In addition to the shareholder-designated contributions that Berkshire distributes, our operating businesses make contributions, including merchandise, averaging about $2.5 million annually. These contributions support local charities, such as The United Way, and produce roughly commensurate benefits for our businesses. We suggest that new shareholders read the description of our shareholder-designated contributions program that appears on pages 50-51. To participate in future programs, you must make sure your shares are registered in the name of the actual owner, not in the nominee name of a broker, bank or depository. Shares not so registered on August 31, 1994 will be ineligible for the 1994 program. A Few Personal Items Mrs. B - Rose Blumkin - had her 100th birthday on December 3, 1993. (The candles cost more than the cake.) That was a day on which the store was scheduled to be open in the evening. Mrs. B, who works seven days a week, for however many hours the store operates, found the proper decision quite obvious: She simply postponed her party until an evening when the store was closed. Mrs. B’s story is well-known but worth telling again.She came to the United States 77 years ago, unable to speak English and

devoid of formal schooling. In 1937, she founded the Nebraska Furniture Mart with $500. Last year the store had sales of $200 million, a larger amount by far than that recorded by any other home furnishings store in the United States. Our part in all of this began ten years ago when Mrs. B sold control of the business to Berkshire Hathaway, a deal we completed without obtaining audited financial statements, checking real estate records, or getting any warranties. In short, her word was good enough for us. Naturally, I was delighted to attend Mrs. B’s birthday party. After all, she’s promised to attend my 100th. * * * * * * * * * * * * Katharine Graham retired last year as the chairman of The Washington Post Company, having relinquished the CEO title three years ago. In 1973, we purchased our stock in her company for about $10 million. Our holding now garners $7 million a year in dividends and is worth over $400 million. At the time of our purchase, we knew that the economic prospects of the company were good. But equally important, Charlie and I concluded that Kay would prove to be an outstanding manager and would treat all shareholders honorably. That latter consideration was particularly important because The Washington Post Company has two classes of stock, a structure that we’ve seen some managers abuse. All of our judgments about this investment have been validated by events. Kay’s skills as a manager were underscored this past year when she was elected by Fortune’s Board of Editors to the Business Hall of Fame. On behalf of our shareholders, Charlie and I had long ago put her in Berkshire’s Hall of Fame. * * * * * * * * * * * * Another of last year’s retirees was Don Keough of Coca-Cola, although, as he puts it, his retirement lasted “about 14 hours.” Don is one of the most extraordinary human beings I’ve ever known - a man of enormous business talent, but, even more important, a man who brings out the absolute best in everyone lucky enough to associate with him. Coca-Cola wants its product to be present at the happy times of a person’s life. Don Keough, as an individual, invariably increases the happiness of those around him. It’s impossible to think about Don without feeling good. I will edge up to how I met Don by slipping in a plug for my neighborhood in Omaha: Though Charlie has lived in California for 45 years, his home as a boy was about 200 feet away from the house where I now live; my wife, Susie, grew up 1 1/2 blocks away; and we have about 125 Berkshire shareholders in the zip code. As for Don, in 1958 he bought the house directly across the street from mine. He was then a coffee salesman with a big family and a small income.The impressions I formed in those days about Don were a factor in my decision to have Berkshire make a record $1 billion

investment in Coca-Cola in 1988-89. Roberto Goizueta had become CEO of Coke in 1981, with Don alongside as his partner. The two of them took hold of a company that had stagnated during the previous decade and moved it from $4.4 billion of market value to $58 billion in less than 13 years. What a difference a pair of managers like this makes, even when their product has been around for 100 years.

Frank Rooney did double duty last year. In addition to leading H. H. Brown to record profits - 35% above the 1992 high - he also was key to our merger with Dexter. Frank has known Harold Alfond and Peter Lunder for decades, and shortly after our purchase of H. H. Brown, told me what a wonderful operation they managed. He encouraged us to get together and in due course we made a deal. Frank told Harold and Peter that Berkshire would provide an ideal corporate “home” for Dexter, and that assurance undoubtedly contributed to their decision to join with us. I’ve told you in the past of Frank’s extraordinary record in building Melville Corp. during his 23 year tenure as CEO. Now, at 72, he’s setting an even faster pace at Berkshire. Frank has a low-key, relaxed style, but don’t let that fool you. When he swings, the ball disappears far over the fence. The Annual Meeting This year the Annual Meeting will be held at the Orpheum Theater in downtown Omaha at 9:30 a.m. on Monday, April 25, 1994. A record 2,200 people turned up for the meeting last year, but the theater can handle many more. We will have a display in the lobby featuring many of our consumer products - candy, spray guns, shoes, cutlery, encyclopedias, and the like. Among my favorites slated to be there is a See’s candy assortment that commemorates Mrs. B’s 100th birthday and that features her picture, rather than Mrs. See’s, on the package. We recommend that you promptly get hotel reservations at one of these hotels: (1) The Radisson-Redick Tower, a small (88 rooms) but nice hotel across the street from the Orpheum; (2) the much larger Red Lion Hotel, located about a five-minute walk from the Orpheum; or (3) the Marriott, located in West Omaha about 100 yards from Borsheim’s, which is a twenty-minute drive from downtown. We will have buses at the Marriott that will leave at 8:30 and 8:45 for the meeting and return after it ends. An attachment to our proxy material explains how you can obtain the card you will need for admission to the meeting. With the admission card, we will enclose information about parking facilities located near the Orpheum. If you are driving, come a little early. Nearby lots fill up quickly and you may have to walk

a few blocks. As usual, we will have buses to take you to Nebraska Furniture Mart and Borsheim’s after the meeting and to take you from there to downtown hotels or the airport later. Those of you arriving early can visit the Furniture Mart any day of the week; it is open from 10 a.m. to 5:30 p.m. on Saturdays and from noon to 5:30 p.m. on Sundays. Borsheim’s normally is closed on Sunday but will be open for shareholders and their guests from noon to 6 p.m. on Sunday, April 24. In past trips to Borsheim’s, many of you have met Susan Jacques. Early in 1994, Susan was made President and CEO of the company, having risen in 11 years from a $4-an-hour job that she took at the store when she was 23. Susan will be joined at Borsheim’s on Sunday by many of the managers of our other businesses, and Charlie and I will be there as well. On the previous evening, Saturday, April 23, there will be a baseball game at Rosenblatt Stadium between the Omaha Royals and the Nashville Sounds (which could turn out to be Michael Jordan’s team). As you may know, a few years ago I bought 25% of the Royals (a capital-allocation decision for which I will not become famous) and this year the league has cooperatively scheduled a home stand at Annual Meeting time. I will throw the first pitch on the 23rd, and it’s a certainty that I will improve on last year’s humiliating performance. On that occasion, the catcher inexplicably called for my “sinker” and I dutifully delivered a pitch that barely missed my foot. This year, I will go with my high hard one regardless of what the catcher signals, so bring your speed-timing devices. The proxy statement will include information about obtaining tickets to the game. I regret to report that you won’t have to buy them from scalpers. Warren E. Buffett March 1, 1994 Chairman of the Board

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