Berkshire’sCorporatePerformancevs.theS&P500
AnnualPercentageChange
Year
inPer-Share
BookValueof
Berkshire
(1)
inS&P500
withDividends
Included
(2)
Relative
Results
(1)-(2)
1965 ................................................... 23.810.013.8
1966 ................................................... 20.3(11.7)32.0
1967 ................................................... 11.030.9(19.9)
1968 ................................................... 19.011.08.0
1969 ................................................... 16.2(8.4)24.6
1970 ................................................... 12.03.98.1
1971 ................................................... 16.414.61.8
1972 ................................................... 21.718.92.8
1973 ...................................................4.7 (14.8)19.5
1974 ...................................................5.5 (26.4)31.9
1975 ................................................... 21.937.2(15.3)
1976 ................................................... 59.323.635.7
1977 ................................................... 31.9(7.4)39.3
1978 ................................................... 24.06.417.6
1979 ................................................... 35.718.217.5
1980 ................................................... 19.332.3(13.0)
1981 ................................................... 31.4(5.0)36.4
1982 ................................................... 40.021.418.6
1983 ................................................... 32.322.49.9
1984 ................................................... 13.66.17.5
1985 ................................................... 48.231.616.6
1986 ................................................... 26.118.67.5
1987 ................................................... 19.55.114.4
1988 ................................................... 20.116.63.5
1989 ................................................... 44.431.712.7
1990 ...................................................7.4 (3.1)10.5
1991 ................................................... 39.630.59.1
1992 ................................................... 20.37.612.7
1993 ................................................... 14.310.14.2
1994 ................................................... 13.91.312.6
1995 ................................................... 43.137.65.5
1996 ................................................... 31.823.08.8
1997 ................................................... 34.133.4.7
1998 ................................................... 48.328.619.7
1999 ....................................................5 21.0(20.5)
2000 ...................................................6.5 (9.1)15.6
2001 ................................................... (6.2)(11.9)5.7
2002 ................................................... 10.0(22.1)32.1
2003 ................................................... 21.028.7(7.7)
2004 ................................................... 10.510.9(.4)
2005 ...................................................6.44.91.5
2006 ................................................... 18.415.82.6
2007 ................................................... 11.05.55.5
2008 ................................................... (9.6)(37.0)27.4
2009 ................................................... 19.826.5(6.7)
CompoundedAnnualGain–1965-2009 ....................... 20.3%9.3%11.0
OverallGain–1964-2009 .................................. 434,057%5,430%
Notes: Dataareforcalendaryearswiththeseexceptions:1965and1966,yearended9/30;1967,15monthsended
12/31.
Startingin1979,accountingrulesrequiredinsurancecompaniestovaluetheequitysecuritiestheyholdatmarket
ratherthanatthelowerofcostormarket,whichwaspreviouslytherequirement.Inthistable,Berkshire’sresults
through1978havebeenrestatedtoconformtothechangedrules.Inallotherrespects,theresultsarecalculatedusing
thenumbersoriginallyreported.
TheS&P500numbersare pre-tax whereastheBerkshirenumbersare after-tax.IfacorporationsuchasBerkshire
weresimplytohaveownedtheS&P500andaccruedtheappropriatetaxes,itsresultswouldhavelaggedtheS&P500
inyearswhenthatindexshowedapositivereturn,butwouldhaveexceededtheS&P500inyearswhentheindex
showedanegativereturn.Overtheyears,thetaxcostswouldhavecausedtheaggregatelagtobesubstantial.
2BERKSHIREHATHAWAYINC.
TotheShareholdersofBerkshireHathawayInc.:
Ourgaininnetworthduring2009was$21.8billion,whichincreasedtheper-sharebookvalueofboth
ourClassAandClassBstockby19.8%.Overthelast45years(thatis,sincepresentmanagementtookover)
bookvaluehasgrownfrom$19to$84,487,arateof20.3%compoundedannually.*
Berkshire’srecentacquisitionofBurlingtonNorthernSantaFe(BNSF)hasaddedatleast65,000
shareholderstothe500,000orsoalreadyonourbooks.It’simportanttoCharlieMunger,mylong-timepartner,
andmethat all ofourownersunderstandBerkshire’soperations,goals,limitationsandculture.Ineachannual
report,consequently,werestatetheeconomicprinciplesthatguideus.Thisyeartheseprinciplesappearonpages
89-94andIurgeallofyou–butparticularlyournewshareholders–toreadthem.Berkshirehasadheredtothese
principlesfordecadesandwillcontinuetodosolongafterI’mgone.
Inthisletterwewillalsoreviewsomeofthebasicsofourbusiness,hopingtoprovidebothafreshman
orientationsessionforourBNSFnewcomersandarefreshercourseforBerkshireveterans.
HowWeMeasureOurselves
Ourmetricsforevaluatingourmanagerialperformancearedisplayedonthefacingpage.Fromthestart,
CharlieandIhavebelievedinhavingarationalandunbendingstandardformeasuringwhatwehave–orhave
not–accomplished.Thatkeepsusfromthetemptationofseeingwherethearrowofperformancelandsand then
paintingthebull’seyearoundit.
SelectingtheS&P500asourbogeywasaneasychoicebecauseourshareholders,atvirtuallynocost,can
matchitsperformancebyholdinganindexfund.Whyshouldtheypayusformerelyduplicatingthatresult?
AmoredifficultdecisionforuswashowtomeasuretheprogressofBerkshireversustheS&P.Thereare
goodargumentsforsimplyusingthechangeinourstockprice.Overanextendedperiodoftime,infact,thatis
thebesttest.Butyear-to-yearmarketpricescanbeextraordinarilyerratic.Evenevaluationscoveringaslongasa
decadecanbegreatlydistortedbyfoolishlyhighorlowpricesatthebeginningorendofthemeasurement
period.SteveBallmer,ofMicrosoft,andJeffImmelt,ofGE,cantellyouaboutthatproblem,sufferingastheydo
fromthenosebleedpricesatwhichtheirstockstradedwhentheywerehandedthemanagerialbaton.
TheidealstandardformeasuringouryearlyprogresswouldbethechangeinBerkshire’sper-shareintrinsic
value.Alas,thatvaluecannotbecalculatedwithanythingclosetoprecision,soweinsteaduseacrudeproxyfor
it:per-sharebookvalue.Relyingonthisyardstickhasitsshortcomings,whichwediscussonpages92and93.
Additionally,bookvalueatmostcompaniesunderstatesintrinsicvalue,andthatiscertainlythecaseat
Berkshire.Inaggregate,ourbusinessesareworthconsiderablymorethanthevaluesatwhichtheyarecarriedon
ourbooks.Inourall-importantinsurancebusiness,moreover,thedifferenceishuge.Evenso,CharlieandI
believethatourbookvalue–understatedthoughitis–suppliesthemostusefultrackingdeviceforchangesin
intrinsicvalue.Bythismeasurement,astheopeningparagraphofthisletterstates,ourbookvaluesincethestart
offiscal1965hasgrownatarateof20.3%compoundedannually.
*Allper-sharefiguresusedinthisreportapplytoBerkshire’sAshares.FiguresfortheBsharesare
1/1500th ofthoseshownforA.
3Weshouldnotethathadweinsteadchosen marketprices asouryardstick,Berkshire’sresultswould
lookbetter,showingagainsincethestartoffiscal1965of22%compoundedannually.Surprisingly,thismodest
differenceinannualcompoundingrateleadstoan801,516%market-valuegainfortheentire45-yearperiod
comparedtothebook-valuegainof434,057%(shownonpage2).Ourmarketgainisbetterbecausein1965
Berkshiresharessoldatanappropriatediscounttothebookvalueofitsunderearningtextileassets,whereas
todayBerkshiresharesregularlysellatapremiumtotheaccountingvaluesofitsfirst-classbusinesses.
Summedup,thetableonpage2conveysthreemessages,twopositiveandonehugelynegative.First,
wehaveneverhad any five-yearperiodbeginningwith1965-69andendingwith2005-09–andtherehavebeen
41ofthese–duringwhichourgaininbookvaluedidnotexceedtheS&P’sgain.Second,thoughwehavelagged
theS&Pinsomeyearsthatwerepositiveforthemarket,wehaveconsistentlydonebetterthantheS&Pinthe
elevenyearsduringwhichitdeliverednegativeresults.Inotherwords,ourdefensehasbeenbetterthanour
offense,andthat’slikelytocontinue.
Thebigminusisthatourperformanceadvantagehasshrunkdramaticallyasoursizehasgrown,an
unpleasanttrendthatis certain tocontinue.Tobesure,Berkshirehasmanyoutstandingbusinessesandacadreof
trulygreatmanagers,operatingwithinanunusualcorporateculturethatletsthemmaximizetheirtalents.Charlie
andIbelievethesefactorswillcontinuetoproducebetter-than-averageresultsovertime.Buthugesumsforge
theirownanchorandourfutureadvantage,ifany,willbeasmallfractionofourhistoricaledge.
WhatWeDon’tDo
Longago,Charlielaidouthisstrongestambition:“AllIwanttoknowiswhereI’mgoingtodie,soI’ll
nevergothere.”ThatbitofwisdomwasinspiredbyJacobi,thegreatPrussianmathematician,whocounseled
“Invert,alwaysinvert”asanaidtosolvingdifficultproblems.(Icanreportaswellthatthisinversionapproach
worksonalessloftylevel:Singacountrysonginreverse,andyouwillquicklyrecoveryourcar,houseand
wife.)
HereareafewexamplesofhowweapplyCharlie’sthinkingatBerkshire:
•CharlieandIavoidbusinesseswhosefutureswecan’tevaluate,nomatterhowexcitingtheir
productsmaybe.Inthepast,itrequirednobrillianceforpeopletoforeseethefabulousgrowth
thatawaitedsuchindustriesasautos(in1910),aircraft(in1930)andtelevisionsets(in1950).But
thefuturethenalsoincludedcompetitivedynamicsthatwoulddecimatealmostallofthe
companiesenteringthoseindustries.Eventhesurvivorstendedtocomeawaybleeding.
JustbecauseCharlieandIcanclearlyseedramaticgrowthaheadforanindustrydoesnotmean
wecanjudgewhatitsprofitmarginsandreturnsoncapitalwillbeasahostofcompetitorsbattle
forsupremacy.AtBerkshirewewillstickwithbusinesseswhoseprofitpicturefordecadesto
comeseemsreasonablypredictable.Eventhen,wewillmakeplentyofmistakes.
•Wewillneverbecomedependentonthekindnessofstrangers.Too-big-to-failisnotafallback
positionatBerkshire.Instead,wewillalwaysarrangeouraffairssothatanyrequirementsforcash
wemayconceivablyhavewillbedwarfedbyourownliquidity.Moreover,thatliquiditywillbe
constantlyrefreshedbyagusherofearningsfromourmanyanddiversebusinesses.
WhenthefinancialsystemwentintocardiacarrestinSeptember2008,Berkshirewasa supplier
ofliquidityandcapitaltothesystem,notasupplicant.Attheverypeakofthecrisis,wepoured
$15.5billionintoabusinessworldthatcouldotherwiselookonlytothefederalgovernmentfor
help.Ofthat,$9billionwenttobolstercapitalatthreehighly-regardedandpreviously-secure
Americanbusinessesthatneeded– withoutdelay –ourtangiblevoteofconfidence.Theremaining
$6.5billionsatisfiedourcommitmenttohelpfundthepurchaseofWrigley,adealthatwas
completedwithoutpausewhile,elsewhere,panicreigned.
4Wepayasteeppricetomaintainourpremierfinancialstrength.The$20billion-plusofcash-
equivalentassetsthatwecustomarilyholdisearningapittanceatpresent.Butwesleepwell.
•Wetendtoletourmanysubsidiariesoperateontheirown,withoutoursupervisingand
monitoringthemtoanydegree.Thatmeanswearesometimeslateinspottingmanagement
problemsandthatbothoperatingandcapitaldecisionsareoccasionallymadewithwhichCharlie
andIwouldhavedisagreedhadwebeenconsulted.Mostofourmanagers,however,usethe
independencewegrantthemmagnificently,rewardingourconfidencebymaintaininganowner-
orientedattitudethatisinvaluableandtooseldomfoundinhugeorganizations.Wewouldrather
sufferthevisiblecostsofafewbaddecisionsthanincurthemanyinvisiblecoststhatcomefrom
decisionsmadetooslowly–ornotatall–becauseofastiflingbureaucracy.
WithouracquisitionofBNSF,wenowhaveabout257,000employeesandliterallyhundredsof
differentoperatingunits.Wehopetohavemanymoreofeach.ButwewillneverallowBerkshire
tobecomesomemonoliththatisoverrunwithcommittees,budgetpresentationsandmultiple
layersofmanagement.Instead,weplantooperateasacollectionofseparately-managedmedium-
sizedandlargebusinesses,mostofwhosedecision-makingoccursattheoperatinglevel.Charlie
andIwilllimitourselvestoallocatingcapital,controllingenterpriserisk,choosingmanagersand
settingtheircompensation.
•WemakenoattempttowooWallStreet.Investorswhobuyandsellbaseduponmediaoranalyst
commentaryarenotforus.Insteadwewant partners whojoinusatBerkshirebecausetheywish
tomakealong-terminvestmentina business theythemselvesunderstandandbecauseit’sonethat
followspolicieswithwhichtheyconcur.IfCharlieandIweretogointoasmallventurewitha
fewpartners,wewouldseekindividualsinsyncwithus,knowingthatcommongoalsandashared
destinymakeforahappybusiness“marriage”betweenownersandmanagers.Scalinguptogiant
sizedoesn’tchangethattruth.
Tobuildacompatibleshareholderpopulation,wetrytocommunicatewithourownersdirectly
andinformatively.Ourgoalistotellyouwhatwewouldliketoknowifourpositionswere
reversed.Additionally,wetrytopostourquarterlyandannualfinancialinformationonthe
Internetearlyonweekends,therebygivingyouandotherinvestorsplentyoftimeduringa
non-tradingperiodtodigestjustwhathashappenedatourmulti-facetedenterprise.(Occasionally,
SECdeadlinesforceanon-Fridaydisclosure.)Thesematterssimplycan’tbeadequately
summarizedinafewparagraphs,nordotheylendthemselvestothekindofcatchyheadlinethat
journalistssometimesseek.
Lastyearwesaw,inoneinstance,howsound-bitereportingcangowrong.Amongthe12,830
wordsintheannualletterwasthissentence:“Wearecertain,forexample,thattheeconomywill
beinshamblesthroughout2009–andprobablywellbeyond–butthatconclusiondoesnottellus
whetherthemarketwillriseorfall.”Manynewsorganizationsreported–indeed,blared–thefirst
partofthesentencewhilemakingnomentionwhatsoeverofitsending.Iregardthisasterrible
journalism:MisinformedreadersorviewersmaywellhavethoughtthatCharlieandIwere
forecastingbadthingsforthestockmarket,thoughwehadnotonlyinthatsentence,butalso
elsewhere,madeitclearweweren’tpredictingthemarketatall.Anyinvestorswhoweremisled
bythesensationalistspaidabigprice:TheDowclosedthedayoftheletterat7,063andfinished
theyearat10,428.
Givenafewexperienceswe’vehadlikethat,youcanunderstandwhyIpreferthatour
communicationswithyouremainasdirectandunabridgedaspossible.
************
Let’smovetothespecificsofBerkshire’soperations.Wehavefourmajoroperatingsectors,each
differingfromtheothersinbalancesheetandincomeaccountcharacteristics.Therefore,lumpingthemtogether,
asisstandardinfinancialstatements,impedesanalysis.Sowe’llpresentthemasfourseparatebusinesses,which
ishowCharlieandIviewthem.
5Insurance
Ourproperty-casualty(P/C)insurancebusinesshasbeentheenginebehindBerkshire’sgrowthandwill
continuetobe.Ithasworkedwondersforus.WecarryourP/Ccompaniesonourbooksat$15.5billionmore
thantheirnettangibleassets,anamountlodgedinour“Goodwill”account.Thesecompanies,however,are
worth far morethantheircarryingvalue–andthefollowinglookattheeconomicmodeloftheP/Cindustrywill
tellyouwhy.
Insurersreceivepremiumsupfrontandpayclaimslater.Inextremecases,suchasthosearisingfrom
certainworkers’compensationaccidents,paymentscanstretchoverdecades.Thiscollect-now,pay-latermodel
leavesusholdinglargesums–moneywecall“float”–thatwilleventuallygotoothers.Meanwhile,wegetto
investthisfloatforBerkshire’sbenefit.Thoughindividualpoliciesandclaimscomeandgo,theamountoffloat
weholdremainsremarkablystableinrelationtopremiumvolume.Consequently,asourbusinessgrows,sodoes
ourfloat.
Ifpremiumsexceedthetotalofexpensesandeventuallosses,weregisteranunderwritingprofitthat
addstotheinvestmentincomeproducedfromthefloat.Thiscombinationallowsustoenjoytheuseoffree
money–and,betteryet,get paid forholdingit.Alas,thehopeofthishappyresultattractsintensecompetition,
sovigorousinmostyearsastocausetheP/Cindustryasawholetooperateatasignificantunderwriting loss.
Thisloss,ineffect,iswhattheindustrypaystoholditsfloat.Usuallythiscostisfairlylow,butinsome
catastrophe-riddenyearsthecostfromunderwritinglossesmorethaneatsuptheincomederivedfromuseof
float.
Inmyperhapsbiasedview,Berkshirehasthebestlargeinsuranceoperationintheworld.AndIwill
absolutelystatethatwehavethebestmanagers.Ourfloathasgrownfrom$16millionin1967,whenweentered
thebusiness,to$62billionattheendof2009.Moreover,wehavenowoperatedatanunderwritingprofitfor
sevenconsecutiveyears.Ibelieveitlikelythatwewillcontinuetounderwriteprofitablyinmost–though
certainlynotall–futureyears.Ifwedoso,ourfloatwillbecost-free,muchasifsomeonedeposited$62billion
withusthatwecouldinvestforourownbenefitwithoutthepaymentofinterest.
Letmeemphasizeagainthatcost-freefloatis not aresulttobeexpectedfortheP/Cindustryasa
whole:Inmostyears,premiumshavebeeninadequatetocoverclaimsplusexpenses.Consequently,the
industry’soverallreturnontangibleequityhasformanydecadesfallenfarshortofthatachievedbytheS&P
500.OutstandingeconomicsexistatBerkshireonlybecausewehavesomeoutstandingmanagersrunningsome
unusualbusinesses.OurinsuranceCEOsdeserveyourthanks,havingaddedmanybillionsofdollarsto
Berkshire’svalue.It’sapleasureformetotellyouabouttheseall-stars.
************
Let’sstartatGEICO,whichisknowntoallofyoubecauseofits$800millionannualadvertising
budget(closetotwicethatoftherunner-upadvertiserintheautoinsurancefield).GEICOismanagedbyTony
Nicely,whojoinedthecompanyat18.Now66,Tonystilltap-dancestotheofficeeveryday,justasIdoat79.
Webothfeelluckytoworkatabusinesswelove.
GEICO’scustomershavewarmfeelingstowardthecompanyaswell.Here’sproof:SinceBerkshire
acquiredcontrolofGEICOin1996,itsmarketsharehasincreasedfrom2.5%to8.1%,againreflectingthenet
additionofsevenmillionpolicyholders.Perhapstheycontactedusbecausetheythoughtourgeckowascute,but
theyboughtfromustosaveimportantmoney.(Maybeyoucanaswell;call1-800-847-7536orgoto
www.GEICO.com.)Andthey’vestayedwithusbecausetheylikeourserviceaswellasourprice.
BerkshireacquiredGEICOintwostages.In1976-80weboughtaboutone-thirdofthecompany’s
stockfor$47million.Overtheyears,largerepurchasesbythecompanyofitsownsharescausedourpositionto
growtoabout50%withoutourhavingboughtanymoreshares.Then,onJanuary2,1996,weacquiredthe
remaining50%ofGEICOfor$2.3 billion incash,about50timesthecostofouroriginalpurchase.
6AnoldWallStreetjokegetsclosetoourexperience:
Customer:ThanksforputtingmeinXYZstockat5.Ihearit’supto18.
Broker:Yes,andthat’sjustthebeginning.Infact,thecompanyisdoingsowellnow,
thatit’sanevenbetterbuyat18thanitwaswhenyoumadeyourpurchase.
Customer:Damn,IknewIshouldhavewaited.
GEICO’sgrowthmayslowin2010.U.S.vehicleregistrationsareactuallydownbecauseofslumping
autosales.Moreover,highunemploymentiscausingagrowingnumberofdriverstogouninsured.(That’sillegal
almosteverywhere,butifyou’velostyourjobandstillwanttodrive...)Our“low-costproducer”status,
however,issuretogiveussignificantgainsinthefuture.In1995,GEICOwasthecountry’ssixthlargestauto
insurer;nowwearenumberthree.Thecompany’sfloathasgrownfrom$2.7billionto$9.6billion.Equally
important,GEICOhasoperatedatanunderwritingprofitin13ofthe14yearsBerkshirehasownedit.
IbecameexcitedaboutGEICOinJanuary1951,whenIfirstvisitedthecompanyasa20-year-old
student.ThankstoTony,I’mevenmoreexcitedtoday.
************
AhugelyimportanteventinBerkshire’shistoryoccurredonaSaturdayin1985.AjitJaincameinto
ourofficeinOmaha–andIimmediatelyknewwehadfoundasuperstar.(HehadbeendiscoveredbyMike
Goldberg,nowelevatedtoSt.Mike.)
WeimmediatelyputAjitinchargeofNationalIndemnity’ssmallandstrugglingreinsuranceoperation.
Overtheyears,hehasbuiltthisbusinessintoaone-of-a-kindgiantintheinsuranceworld.
Staffedtodaybyonly30people,Ajit’soperationhassetrecordsfortransactionsizeinseveralareasof
insurance.Ajitwritesbillion-dollarlimits–andthenkeepseverydimeoftheriskinsteadoflayingitoffwith
otherinsurers.Threeyearsago,hetookoverhugeliabilitiesfromLloyds,allowingittocleanupitsrelationship
with27,972participants(“names”)whohadwrittenproblem-riddenpoliciesthatatonepointthreatenedthe
survivalofthis322-year-oldinstitution.Thepremiumforthatsinglecontractwas$7.1billion.During2009,he
negotiatedalifereinsurancecontractthatcouldproduce$50billionofpremiumforusoverthenext50orso
years.
Ajit’sbusinessisjusttheoppositeofGEICO’s.Atthatcompany,wehavemillionsofsmallpolicies
thatlargelyrenewyearafteryear.Ajitwritesrelativelyfewpolicies,andthemixchangessignificantlyfromyear
toyear.Throughouttheworld,heisknownasthemantocallwhensomethingbothverylargeandunusualneeds
tobeinsured.
IfCharlie,IandAjitareeverinasinkingboat–andyoucanonlysaveoneofus–swimtoAjit.
************
OurthirdinsurancepowerhouseisGeneralRe.Someyearsbackthisoperationwastroubled;nowitis
agleamingjewelinourinsurancecrown.
UndertheleadershipofTadMontross,GeneralRehadanoutstandingunderwritingyearin2009,while
alsodeliveringusunusuallylargeamountsoffloatperdollarofpremiumvolume.AlongsideGeneralRe’sP/C
business,Tadandhisassociateshavedevelopedamajorlifereinsuranceoperationthathasgrownincreasingly
valuable.
LastyearGeneralRefinallyattained100%ownershipofCologneRe,whichsince1995hasbeena
key–thoughonlypartially-owned–partofourpresencearoundtheworld.TadandIwillbevisitingColognein
SeptembertothankitsmanagersfortheirimportantcontributiontoBerkshire.
7Finally,weownagroupofsmallercompanies,mostofthemspecializinginoddcornersofthe
insuranceworld.Inaggregate,theirresultshaveconsistentlybeenprofitableand,asthetablebelowshows,the
floattheyprovideusissubstantial.CharlieandItreasurethesecompaniesandtheirmanagers.
Hereistherecordofallfoursegmentsofourproperty-casualtyandlifeinsurancebusinesses:
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